Will Mall Traffic Blues Further Impact Simon Property Group?

Retail REITs are not in the pink of health, as mall traffic continues to suffer due to the rapid shift in customers' shopping preferences, with e-retail taking precedence. In fact, with e-commerce gaining market share from the brick-and-mortar stores, retailers are compelled to reconsider their footprint and eventually opt for store closures, while others unable to cope with competition have been filing bankruptcies.

This environment has also resulted in tenants demanding substantial lease concessions, which, however, mall landlords find unjustified. As such, retail REITs like Simon Property Group Inc. SPG, GGP Inc. GGP, Kimco Realty Corp. KIM, Macerich Company MAC and others have felt the heat, and the companies' share prices have been suffering for the past 12 months.

However, not all are equally likely to fall behind. In fact, among those, reputed retail REIT — Simon Property Group — has been making concerted efforts focused on overhauling its properties, aiming premium acquisitions and transformative redevelopments, and increasingly adopting omni-channel strategies. These will help the company counter the retail blues and make its shopping malls more alluring.

In April, Simon Property announced the company's transformational redevelopment plans for the former Sears stores, at five major locations. This move will help the retail REIT draw more traffic to these malls in order to benefit the existing retailers.

The properties included in the refurbishment plan are Brea Mall (Brea, CA), Burlington Mall (Burlington, MA), Midland Park Mall (Midland, TX), Ocean County Mall (Toms River, NJ), and Ross Park Mall (Pittsburgh, PA). Enhancements to the properties include entertainment, fitness, restaurants and dining pavilions, residential, hotel and office, as well as new retail brands.  

In fact, over the past five years, this retail REIT invested more than $5 billion in development projects, and further intends to invest substantially for development and redevelopment projects. Such initiatives are expected to draw more traffic at the company's properties.

Moreover, at the end of first-quarter 2018, Simon Property had redevelopment and expansion projects, including the addition of new anchors, in progress at 28 properties across the United States, Canada and Asia. The company has also resorted to micro-retail modeling that offers store units ranging from 20-200 square feet of space. With such a huge pipeline, the company is poised to effectively leverage the improving spending habits of wealthier customers amid improving economy.

Also, total portfolio net operating income growth for first-quarter 2018 came in at 4.8%. This reflected increase in operating income from comparable properties, as well as additions from new development, redevelopment, expansion and acquisitions. As such, the company managed to surpass expectations in the first quarter and also raised its outlook for 2018.

In addition, Simon Property boasts a strong and improving balance sheet. At the end of first-quarter 2018, the company had more than $7.0 billion of liquidity. This comprised cash on hand, including its share of joint-venture cash, and available capacity under the company's revolving credit facilities.

Furthermore, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Simon Property remains committed to that. The company has steadily raised its dividend over the past years, increasing from $3.50 in 2011 to the present annualized rate of $7.80 per share.

Nevertheless, though Simon Property is putting in every effort to enhance the value of its assets, implementation of such measures requires a decent upfront cost. This would, therefore, limit any robust growth in its near-term profit margins.

Additionally, rise in interest rate remains another concern as this might restrict the company's ability to refinance existing debt and increase the interest cost on new debt. This might impact the company's financial results and dividend payout.

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