David Simon has made his money back in retail — now he’s looking for upside, although the inflationary climate might lead to some volatility first.
Simon Property Group has augmented its mall business in recent years, investing in retailers like J.C. Penney and the SPARC venture with Authentic Brands Group, which houses Brooks Brothers, Aéropostale, Lucky Brand, Forever 21 and more.
The investments have at times surprised, intrigued or worried analysts, but Simon, who is chairman, chief executive officer and president of the real estate company, stressed on Monday that it’s still a small, if high-profile, part of the business.
On a conference call with analysts going over second-quarter results, he stressed the investments have already paid for themselves.
“Based upon our cash distributions received, we have no cash equity investment in SPARC and J.C. Penney,” Simon said. “And in fact, we have parlayed our SPARC investment into our investment in ABG that is now worth over $1 billion.
“There will be a little more volatility from quarter-to-quarter when it comes to SPARC and J.C. Penney,” he said. “But please keep this in the proper perspective. It’s all upside from here.”
Simon said the retail investments have added to costs, including to launch new brands at J.C. Penney and integrate Reebok into the ABG platform. Sales have also softened at the value-oriented brands such as Aéropostale and Forever 21 as those consumers struggle with inflationary pressures.
All in all, the CEO said business was good and that his company was ready for any volatility.
“We are experienced at managing our business through volatile periods, including leveraging our existing platform for operating efficiencies, allocating capital appropriately, managing risks,” he said. “We are not over our skis in any aspect of our business.”
Simon’s second-quarter net income slipped to $496.7 million from $617.3 million — a drop that can be attributed to a $17.9 million noncash mark-to-market loss on equities in the most recent quarter and a noncash gain of $118.4 million from the reversal of a deferred tax liability a year ago.
Comparable funds from operations — a standard yardstick in real estate — inched up to $1.111 billion from $1.098 billion.
Occupancy at the company’s U.S. malls and premium outlets rose to 93.9 percent as of the end of the quarter on June 30, up from 91.8 percent a year ago.
During the first half, the company signed more than 2,200 leases for more than 7 million square feet, with about 40 percent of that coming from new deals.
“Our business is strong,” Simon crowed. “The higher-income consumer is in good shape. Brick-and-mortar stores are where the shoppers want to be. Outpacing e-commerce across the world and the broad retail spectrum, demand for our space is extremely strong. Worldwide retailers need to grow, and they’re doubling down on the US. International tourism is returning. Domestic tourism is strong.”