Dive Brief:

• Simon Property Group’s retail holdings swung to a Q1 net operating loss of $54.5 million from net operating income of $25.9 million in the year-ago period, according to a company press release.

• Some retailers did better than others, with the mall REIT’s investment in brand management firm Authentic Brands Group performing the best, CEO David Simon told analysts Tuesday. J.C. Penney is profitable but required investments in stores and its new beauty spaces, he said.

• Overall at the company, lease income in the quarter rose 3.3% to $1.2 billion, with funds from operations up 1% to $1 billion. Occupancy edged up 1.1% to 94.4%, with base minimum rent per square foot up 3.1% to $55.84. Reported retail tenant sales per square foot rose 3.3% to $759.

Dive Insight:

Simon’s retail portfolio — which includes stakes in the operations of J.C. Penney and Sparc Group, ABG, e-commerce company Rue Gilt Groupe and real estate investment and management company Jamestown — is a minority portion of its operation. David Simon emphasized that they are “not our core focus” and may not remain for long.

While small, the portfolio has nevertheless introduced the chronic uncertainties endemic to retail into the traditionally steady investment that is a REIT.  Those are even cloudier in the current macroeconomic climate. David Simon noted that its retailers are like most in the industry, and that the company expects them to be in the black in the second and third quarters, with the vast bulk of their annual results affected by the holidays.

“It does create a little volatility of earnings, for better or worse, and in this case, this quarter, it's worse,” he said, adding later, “We expect it to be profitable in Q2 and Q3, but the vast majority of it will be Q4, like all the other retailers.” 

Not only is the business at J.C. Penney and the Sparc retailers seasonal, but the Q1 year-over-year comparisons are also tough because in early 2022 pandemic-related stimulus funds were still supporting consumers’ ability to spend, he said. Sparc runs Aeropostale, Brooks Brothers, Forever 21, Lucky, Nautica, Reebok and Eddie Bauer, though earlier this year Simon Property Group traded its interest in Eddie Bauer for a stake in ABG.

“The retailer side of [the portfolio] has a little more exposure to the economy because you know, retail just does,” Simon said. “But I think they all in their own right have their own growth story. ... We’ve used our executive team here to leverage our capabilities, intellectual firepower, et cetera, to make those companies better, and I think we've done a pretty darn good job, and we've had good partners across the board. So we've done it in a very prudent way. And it's been very beneficial for us.”

The side track into operating retailers is worth it so far, given Simon Property Group’s relatively small investment, but the mall REIT may not hold on to them, he also said.

“I expect growth to continue to have more ups and downs,” he said. “It won't be a straight line, but I expect more growth from that category. At the same time, you know, 10 years from now, five years from now, we don't have to own any of these companies.”