NEW YORK Simon Property Group Inc (SPG.N), the largest owner of U.S. malls and outlet centers, reported a higher-than-expected quarterly profit on Monday, boosted by increased occupancy and rent, and the company raised its earnings forecast for the year.
Simon's malls and outlets include some of the highest-quality U.S. properties, where demand for space from retailers keeps growing. Weaker malls are feeling more acutely the effects of wary consumers and competition from online shopping.
Simon has been able to post higher results and lower its cost of capital by redeveloping its properties, including modernizing, adding store space and expanding parking facilities. Simon also is adding supermarkets, such as Wegmans to the Montgomery Mall in North Wales, Pennsylvania, and Fairway Market to The Shops at Nanuet, in Nanuet, New York.
"They're grinding it out one mall at a time, one project at a time, one opportunity at a time, but they do it very well," said Richard Imperiale, president of Uniplan Investment Counsel Inc, a fund that owns Simon shares. "They're good at basic blocking and tackling."
Simon's second-quarter funds from operations, an earnings measure for real estate investment trusts, rose 11.25 percent to $766.3 million, or $2.11 per share, from $688.8 million, or $1.89 per share, a year earlier.
Analysts had expected $2.07 per share, according to Thomson Reuters I/B/E/S.
FFO is closely watched because it usually excludes gains or losses from property sales and removes the effect of depreciation on earnings.
Simon, which is the only real estate company in the Standard & Poor's 100 index and owns or has an interest in 325 retail properties in North America and Asia, raised its full-year FFO forecast, excluding one-time items, to a range of $8.60 to $8.70 per share from $8.50 to $8.60. Analysts expected $8.68, according to Thomson Reuters I/B/E/S.
SALES KEEP RISING
Sales, rents and occupancy rose in the quarter, Simon said. Sales at tenants' stores at its U.S. core portfolio malls and outlet centers averaged $577 per square foot in the 12 months ended June 30, up 4.2 percent from the previous 12 months. Smaller rival Taubman Centers Inc (TCO.N) reported flat sales for the quarter.
Stronger sales attract tenants and eventually lead to higher rents. Landlords also take a share of tenants' sales.
Simon said the average base rent rose 3.6 percent to $41.41 in the quarter, and new leases called for rents that were 14.1 percent higher than those in leases that expired, up from a 10 percent increase in the year-earlier period.
Occupancy at Simon's malls and outlet centers rose to 95.1 percent from 94.2 percent a year earlier. Net operating income, which reflects how well properties owned for at least a year are being managed, rose 5.9 percent at its U.S. properties.
Simon's portfolio includes some of the most popular U.S. malls and outlets, including Roosevelt Field Mall and Woodbury Common Premium Outlets in New York, the Forum Shops at Caesars Palace in Las Vegas, and the Galleria in Houston. Its outlet business includes centers in Canada, Malaysia, Japan, Korea, and Mexico.
The company has a 28.7 percent stake in Klepierre SA (LOIM.PA), Europe's second-largest retail real estate owner. Earlier this month, Klepierre said it was targeting higher-than-expected cash flows this month as the European economy shows signs of stabilizing.
During the latest quarter, Simon formed a joint venture with European designer outlet mall company McArthurGlen Group.
Down the road, there may be some opportunities for the European mall owner and the European outlet owner, which has three outlets planned for France, to work together, David Simon, chief executive and chairman of Simon Property Group, said.
"Given the history of Klepierre in developing in France, there's no reason why some sort of cooperation wouldn't make sense for both companies," said Simon, who also is chairman of Klepierre's superadvisory board. "We'll certainly encourage it."
In afternoon trading, Simon shares were at $163.34, down 0.7 percent. The benchmark MSCI US REIT Index was also off 0.7 percent.
(Reporting by Ilaina Jonas; Editing by Maureen Bavdek, John Wallace and Leslie Adler)