Simon Property Group Offers Lower Than Expected 2023 Guidance

Sometimes, even when you do well on one scale, you disappoint on another. That’s the position of Simon Property Group after its earnings release and call for the fourth quarter of 2022.

The big disappointment, at least for some analysts on the call, was forward looking guidance of 2% growth in net operating income (NOI). Multiple analysts addressed the number.

Ronald Kamdem of Morgan Stanley asked about the source of the “sort of organic growth,” especially with occupancy having returned to 95%. He asked how much of that gain would likely be from rent increases and how much from increases in occupancy.

“Now if you remember last year, we said up to 2%,” said David Simon, chairman, chief executive officer, and president of Simon. “This year, we obviously blew past it. It was total for the domestic properties at clearly 5%, roughly 5%, 4.8%. So, we’re hopeful we’ll do better.”

And last year, yes, the projected NOI growth was 2% and even then analysts questioned the figure. Back then, Compass Point Research analyst Floris Van Dijkum said, “[B]asically, you have fixed bumps in your leases typically of around 3%. You don’t get it for all of them, but you’re a little bit shy of 3% maybe. But you know, all things, that are spare, but everything else stays the same, occupancy stays the same. You should get around 2.5% to 3% NOI growth.”

Simon said then that the company tries to be “cautious on that number” and repeated this theme again this year, saying, “But again, we’re in February, and we tend to be — try to be cautious on that number. But that’s really — and then there are increases in cost that we’re dealing with as well for us.”

However, this time the concern among analysts continued, as Vince Tibone of Green Street Advisors later noted that the 2% was “lower than average contractual bumps [to NOI]” which “seems to imply leasing economics aren’t great” and that it was “contrary to what you said on recent calls.” If there is a problem, that would potentially be a bellwether for retail.

Simon also admitted to some “mistakes.” One was budgeting sales flat from 2021 to 2022 and “a couple of brands [were] just extraordinarily profitable.”

While “2021 was a great year for our retailers… in 2022, Forever 21 and JCPenney were affected by inflationary pressures, and consumers reducing their spend.” The company, in joint ventures with Brookfield and Authentic Brands Group, had brought both the brands out of bankruptcy in 2020. CEO Simon also said there were “some tactical mistakes” with Forever 21, but they brought in a new CEO for that business.

On the numbers side, the REIT generated $2.136 billion in net income attributable to shareholders, down from $2.246 billion in 2021. Comparable FFO was $4.454 billion, up from $4.303 billion in 2021. In US malls and premium outlets, occupancy was 94.9%, up from the previous year’s 93.4%. Base minimum rent per square foot grew from $53.91 to $55.13.

Fourth quarter funds from operations saw a net gain of $0.25 per share, “principally from the sale of our interest in the Eddie Bauer license JV in exchange for additional equity ownership in Authentic Brands Group, Authentic,” Simon said. “We now own 12% of Authentic valued at approximately $1.5 billion.”

Shares on Tuesday were a little over 2% down over the previous day.