Anyone looking for a scoop on a prospective Amazon deal left disappointed. But the Simon Property Group earnings announcement and subsequent phone call did provide insight into what the pandemic looks like from a real estate perspective, and the view wasn’t exactly scenic.
Despite the excitement caused over the weekend by reports that Amazon was in talks with Simon about converting JC Penney and Sears locations to fulfillment centers, CEO David Simon didn’t take the bait when pressed by analysts, choosing instead to focus on the company’s current issues. By the numbers, America's largest mall operator reported net income for the second quarter at $254.2 million compared to $495.3 million a year ago. Funds from operations (FFO) was $746.5 million compared to $1.064 billion a year ago.
As expected, both domestic and international operations were hit hard by reduced lease income and ancillary property revenues as a result of the pandemic. As of Aug. 7, 91 percent of the tenants across the company's U.S. retail properties were open and operating. However, as Simon said bluntly on the call “some people are not paying their rent.” In April and May combined, the company collected approximately 51 percent of its rent. That rose to 69 percent for June and approximately 73 percent for July. Simon referred to July rent deferrals as minimal.
"Despite losing nearly 10,500 shopping days in our U.S. portfolio in the second quarter, we produced solid profitability and positive cash flow from operations,” Simon said. “We have generally been encouraged by the shopper response, particularly in certain locations, after reopening. These trends reinforce that our portfolio is an attractive destination for consumers. We remain committed to supporting our thousands of local and regional small businesses and restaurant entrepreneurs by granting rent abatements for the period they were closed. Our company is well-positioned through a combination of deep brand relationships, the best portfolio with a strong mix of geographic locations and product types and a strong balance sheet, to continue our leadership position in the retail real estate industry."
While Simon did not address the Amazon reports, he did provide some insight into the bid the company has placed for Brooks Brothers and Lucky Brand, which it has submitted with acquisition partner Authentic Brands Group. He said the inventory of both would be purchased at well below wholesale, and he expected to recoup the investment within a year if the deal closes.
“What we should talk about is the fact that we're saving, in the case of Brooks Brothers, 4,000 jobs,” Simon said on the earnings call. “OK? I mean, that's what we should talk about. I mean we're doing our fair share for trying to keep this world is as normal as we can…We're doing it because for one reason only and that’s because we believe in the brand, and we think we can make money. If we didn't believe in the brand, and we didn't think we could make money, we wouldn't do it. And those same people [critics of the deal] are probably the same people that told Amazon to stay just in the book business. There's just nothing out there that says you can't make smart investments outside of your core businesses, which is what we do.”
And while he was not pretending to predict the course of the pandemic, Simon was candid about the potential duration of the crisis the company and the rest of the retail industry find themselves in.
“I don't think it's going to be an immediate snap back, but then that doesn't mean our company can't do great work,” he said. “You know the important thing is in getting the country back, help the local communities and all that stuff, but it's going to take time. There's no doubt about it. And this is different. This is not your grandmother's recession. I mean, when you have GDP drop 34 percent, that's not normal. We're dealing with a lot more bankruptcies. And this is going to have a more of durational impact than what we've experienced probably since the early 90s.”