Dive Brief:
-
Simon Property Group has reduced its stake in Sparc Group — a 50-50 venture with Authentic Brands Group — to 33%, the mall REIT said on Monday.
-
The sale provided after-tax gains of $118.1 million in the third quarter, according to a company press release.
-
Sparc runs Forever 21, Brooks Brothers, Aéropostale, Eddie Bauer, Lucky Brand, Nautica and Reebok. Simon also co-owns J.C. Penney with rival Brookfield, and has stakes in e-commerce company Rue Gilt Groupe and real estate developer Jamestown.
Dive Insight:
Earlier this year Simon Property Group CEO David Simon noted that the retail business is less stable than the company’s core real estate enterprise and hinted that the company’s portfolio of retailers could be gone within five or 10 years.
In February, Simon Property Group disclosed it had sold off its interest in an Eddie Bauer licensing joint venture.
On Monday, David Simon said the retail holdings have been profitable and minimal, but that the REIT will “continue to harvest” and monetize those investments over time. In the second quarter, net operating income from that portfolio fell 47% year over year to $46 million.
“We understand that even this small amount of earnings that we get, in comparison to our total earnings power, is volatile,” he told analysts during a conference call. “People don't like the volatility.”
The Sparc retailers themselves don’t release their financial performance. According to recent filings, J.C. Penney’s profits have plummeted since its exit from bankruptcy, including in its most recent quarter, though it remains in the black.
Many Simon Property Group tenants, including the retailers it part-owns, cater to middle-income consumers. David Simon said that higher interest rates and inflation are leading many of those customers to be careful about spending.
“There's no question that that's having some impact, but the good news is you've got employment and you've got wage growth that is counterbalancing that. But they're definitely being more cautious,” he said. “So, that's not necessarily affecting that higher-income consumer to the extent that you might otherwise think. But it's clearly affecting the lower- or more moderate-income consumer ... they're being more cautious.”
That’s not affecting retailers’ growth plans very much, he also said.
At Simon’s North America properties, Q3 net operating income rose 4.2% to $1.3 billion, and from its international properties rose 6.3% to $75 million. Funds from operations rose to $1.2 billion from $1.1 billion a year ago.
The company’s retail tenants reported lower sales per square foot, falling 0.7% to $744 for the trailing 12 months ended Sept. 30, per its press release. But occupancy at its U.S. Malls and Premium Outlets rose 70 basis points to 95.2%, and base minimum rent per square foot rose 2.9% to $56.41.
"The core real estate segments continue to sustain momentum, while ancillary components including other platform investments ('OPI') weigh on growth," UBS analysts led by Michael Goldsmith said in a Monday client note.
