Simon Property Group (NYSE: SPG), the largest mall operator in the United States, recently reported its fourth-quarter and full-year 2020 results. And as you might expect, the numbers weren't great.
However, Simon's malls performed quite well in 2020, given the terrible retail environment, and not all of the numbers were bad. More importantly, Simon gave an encouraging outlook on the future and appears ready to get back into value-creation mode. Here's a rundown of what investors need to know.
2020 was a rough year for malls
Although Simon's malls fared better than some of its lower-quality peers, 2020 was a difficult time in the mall industry. One look at the company's full-year results tells the story. Simon's revenue dropped by 20% from 2019 levels, and although this was somewhat offset by expense reductions, Simon's net income for the year was nearly cut in half.
Funds from operations (FFO) -- the best gauge of a real estate investment trust's (REIT's) "earnings" -- declined from $4.27 billion in 2019 to $3.24 billion in 2020.
Simon collected 90% of its net billed rent for the second through fourth quarters, which leaves about $400 million in rental revenue still unaccounted for with deferral agreements and contractual adjustments. Occupancy at Simon's malls fell to 91.3% from more than 95% before the pandemic.
The news isn't all bad, however. In fact, a 90% rent collection rate is significantly better than most other retail REITs. Plus, Simon has $341 million of deferred rent, meaning that it will get paid eventually. Simon was also able to acquire rival mall operator Taubman at a discounted valuation, as well as retail brands Forever 21, Lucky Brand, Brooks Brothers, and J.C. Penney (FRA: JCPO) at bankruptcy-level prices.
While Simon cautions that it will take some time to build its business back to 2019 levels, the company expects a nice rebound in 2021. The company's guidance calls for FFO of $9.50 to $9.75 per share, which compares with $9.11 in 2020 (remember, the first quarter of 2020 was mostly business as usual).
In the company's earnings call, Simon said leasing activity is picking up, and many retailers are actively looking to open new stores. In the earnings call, Kohl's (NYSE: KSS), Primark, and Dick's Sporting Goods (NYSE: DKS) were specifically mentioned as retailers looking to expand at Simon properties. There are outlet properties under construction, as well as several redevelopment projects at the company's malls, including three hotels. As CEO David Simon said, "we're back to [being] focused on continuing to add improvements across our portfolio worldwide."
Simon is also very optimistic its retail investments will pay off tremendously in the long run. In fact, Forever 21 generated $75 million in EBITDA in 2020, which is even more than the $67 million Simon invested in the transaction. Simon's share of the profit is about $30 million, a pretty nice return on investment in the first pandemic-burdened year.
Finally, Simon is hoping to leverage its retail expertise and massive scale with a SPAC IPO. Simon Property Group Acquisition Holdings is set to go public in the near future and hopes to take a company public.
The Millionacres bottom line
Nobody was expecting Simon to report great numbers for 2020, but the company's positive outlook for 2021 and beyond was a pleasant surprise for many analysts and investors. The pandemic's effects aren't going to disappear from Simon's business overnight, but the light at the end of the tunnel is starting to become much more apparent.