Retail

The biggest US mall owner Simon says still looking to salvage other distressed retailers

Key Points
  • "We're acquiring inventory at or below cost," Simon Chief Executive David Simon said, explaining the company's acquisition strategy during a conference call with analysts. "There's profit in there." 
  • "We continue to look for other opportunities," he said. 
  • Simon said Monday it collected roughly 73% of its rents from retailers in July, with about 91% of its tenants back open for business today amidst the coronavirus pandemic. 
Simon Property Group CEO David Simon
Anjali Sundaram | CNBC

Simon Property Group Chief Executive David Simon said Monday that the company is still looking to salvage additional distressed retailers, having already made bids for bankrupted Lucky Brand, Brooks Brothers and J.C. Penney. 

"We're acquiring inventory at or below cost," Simon said, explaining the company's acquisition strategy during a conference call with analysts. "There's profit in there." 

"We continue to look for other opportunities," he said. "We are doing our fair share for trying to keep this world as normal as we can." 

As an example, the CEO noted that saving Brooks Brothers from a total liquidation would save around 4,000 jobs alone. 

"I don't buy into this analysis you guys have gotten that we're buying into these retailers to pay us rent," he said. 

Simon Property shares were falling around 1% in after-hours trading, having closed the day up more than 5%. A report late Sunday said Simon has been in talks with Amazon to open warehouses at some shuttered Sears and J.C. Penney department stores had boosted the company's stock price Monday. 

So far this year, more than 40 retailers have filed for bankruptcy. CEO Simon likened the trend rippling through the retail industry to the early '90s, when there were more lasting impacts after a wave of bankruptcies including the rise of e-commerce, more than the period after the Great Recession, where trends bounced back to normal relatively sooner. 

"We're anticipating more of a durational impact here," he said. "This is not your grandmother's recession ... we're dealing with a lot more bankruptcies." 

Profit drops as coronavirus shuttered malls

Even though Simon has the balance sheet to pursue transactions, its revenue and earnings declined in the latest period. 

For the quarter ended June 30, Simon Property said its net income fell to $254.2 million, or 83 cents a share, from $495.3 million, or $1.60 per share, a year ago. Revenue declined 24% to $1.06 billion. 

Analysts were expecting the mall owner to earn 98 cents per share on revenue of $1.14 billion, according to Refinitiv estimates. 

Funds from operations — a metric used by real estate investment trusts, which excludes certain costs such as depreciation — fell to $2.12 per share. 

Simon's retail properties in the U.S. were closed for about 10,500 shopping days during the fiscal second quarter because of the Covid-19 crisis. 

The largest U.S. mall owner said it collected roughly 73% of its rents from retailers in July, with about 91% of its tenants back open for business as coronavirus lockdown measures have eased

It said it collected about 51% of its contractual rent billed for April and May combined, and roughly 69% in June. It said these percentages have not been adjusted for any rent abatements that were granted to tenants to offer some relief. 

In June, Simon Property sued one of its biggest tenants, Gap Inc., for failing to pay more than $65.9 million in rent and other charges. 

"We've still got retailers we need to deal with," David Simon said. "Certain tenants haven't paid rent. They have contracts they are obligated to, but certain tenants haven't paid." 

Simon said the company has "generally been encouraged by the shopper response," as they reopen. 

Analysts, meanwhile, were impressed with the rent collection percentages compared with some of Simon's peers in the mall space. 

"Importantly, most of the properties are open and rent collections have trended in the right direction following the openings," RBC Capital Markets analyst Wes Golladay said in a note to clients. 

As of June 30, Simon Property said its occupancy rate was at 92.9%, down from 94.4% a year ago. It said base minimum rent per square foot was $56.02, up 2.8% from a year ago. 

It ended the quarter with $8.5 billion of liquidity, including $3.6 billion of cash and $4.9 billion of available capacity under its revolving credit facilities and a term loan. 

Simon Property shares have fallen about 55% this year, as of Monday's market close. The company has a market value of $20 billion. 

Find the full earnings release from Simon here

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Big mall owners are looking to do deals to salvage bankrupt retailers