Simon Property CEO: Malls don't need department stores

Dive Brief:

Sears on Thursday got permission to hold going-out-of-business sales at 142 unprofitable stores from United States bankruptcy Judge Robert Drain of the Southern District of New York. The company's bankruptcy is fueling a process of store closures that has been underway for some time, forcing shopping centers to find new anchors.
But Simon Property Group CEO David Simon on Thursday called that an opportunity — and possibly the end of the traditional mall anchor. He told analysts, "maybe our industry got just too carried away with having all these big department store boxes," according to a transcript from Seeking Alpha. "As we transition to the smaller, more appropriately sized group, and there'll be centers that lose in that and ... we may have one or two that [we] were nervous about, the reality is the rest of that center, and we will get a better and bigger benefit, I think we'll get healthier, and we're starting to see that."
Meanwhile, Seritage Properties, the real estate investment trust (REIT) established in 2015 with a slate of Sears properties and run by former Sears CEO Eddie Lampert, in an Oct. 15 Securities and Exchange Commission filing said it would lose some $84 million ($49 million annual base rent plus $35 million of property-related expenses that Sears pays) from 82 Sears tenants that remain in its "master lease." But the REIT also said "based on leases signed today and the remaining lease up of current projects in the wholly-owned portfolio … we project ... annualized rental income of over $195 million (assuming zero rent from Sears Holdings)" not including over 20 million square feet of wholly-owned property and mixed-use densification projects in the pipeline.

Dive Insight:

In his remarks on Thursday, Simon asked that the downfall of Sears be kept in perspective, and not just viewed as a pesky knot for property developers to worry at.

More generally, he said that the era of a mall anchored by a massive anchor retailer may be over. "[T]he mall of the future doesn't need ... it depends on the mall, but doesn't need the department stores," Simon said. "[W]e've had department store closings in the portfolio. ... [W]hat we've seen, which is actually encouraging, is that the in-line sales are actually getting the benefit of the department store closures. And we're also seeing some of the other department stores pick that business up. So at the end of the day, like I said, maybe our industry got just too carried away with having all these big department store boxes."

Still, many smaller, already underperforming malls anchored by Sears Holdings stores will be hit hard by the closures approved on Thursday, including 77 Sears and 65 Kmart locations, according to a note from Fitch emailed to Retail Dive.

In his remarks, Simon acknowledged that, noting that for various properties, the change could be troublesome, nerve-racking, beneficial or not applicable. But for many malls, smaller stores, including e-commerce pure-players, will increasingly define them, he said. "The best way I can say that is the store experience and the store requirement is back, and that shouldn't be underappreciated," he said. "They all want stores. Period, end of story."

"[W]e're putting Sears in our rearview mirror. Okay? So what we're trying to explain – and there are a lot of moving boxes and obviously, the whole situation is a tragic, frankly," he said. "It's a tragic set of events that a company that's been around for so long is in this state of affairs. ...It wasn't that long ago, 10, 12 years ago, that 300,000 people worked at Sears."

Of 33 stores that are closed or are closing at the end of the year, Simon controls 22 and another five in a joint venture with Seritage. "Of the 17 that we have unmitigated control, Sears will no longer exist in 2019," Simon said. "They will either be torn down, redeveloped, re-leased, but they'll be in our rearview mirror."

The closures present the company with a "unique opportunity," he also said, for investors and the community. "We're going to redevelop this," he said. "We're going to generate positive momentum with the properties due to this. We're going to reinvest in the communities. We're going to be able to drive traffic now from this box."