The mall REIT (real estate investment trust) sector suffered greatly in 2020 because of the coronavirus pandemic and the steps taken to slow its spread. The group has started to come back to life in 2021, but there are still lingering impacts from the hit taken last year. So as mall landlords like Simon Property Group (NYSE: SPG) continue to report improving results, it's appropriate to pay extra attention to the bad news even in overall good quarters. Simon's second quarter contained one piece of really bad news, but how bad was it?
Good things are happening
When the government forced nonessential businesses to shut down and asked people to practice social distancing in 2020, malls wound up taking a massive hit. Without customers, some tenants even refused to pay rent, a move that ended up with REIT Simon Property Group taking The Gap to court. Even when such drastic measures weren't needed, landlords were forced to grant rent concessions and make other aggressive moves to help support occupancy levels.
But so far, 2021 has been a much better year. In fact, when Simon reported first-quarter earnings this year, it increased its full-year guidance. However, the really notable piece of that change was that it drastically improved the low end of its guidance range. To put a number on that, the low end was improved by $0.20 per share, while the top end was improved by a more modest $0.05 per share. That notably unbalanced change suggested that management felt the worst had passed.
When second-quarter earnings came around, Simon again increased guidance, this time by an equal amount on the top and bottom ends of the range. However, it noted that the updated guidance for the full year would end up being just 5% below 2019 levels. To be fair, there's some one-time items in that, but it's still fairly impressive.
The dividend, meanwhile, was increased after the first quarter and then again after the second quarter. So far this year, the dividend has advanced a huge 15%. Yes, the dividend was cut 40% in 2020, so there's still a long way to go before Simon hits the high watermark here. However, the mall landlord clearly appears to have turned the corner.
And yet, there was one piece of news in the second quarter that was really, really terrible: Simon's releasing spread was -21.8%.
Is it time to worry now?
There's no point sugarcoating things: That is a bad number. It basically means new leases are being signed at drastically lower levels than the ones they replaced. But you need to understand what the number really represents before you jump to conclusions about how bad it is.
For starters, Simon reports its releasing spread looking back 12 months. Think about that time period for a second -- it basically goes back to the worst parts of the pandemic downturn. At that point, the REIT was working with tenants to help them remain afloat. One notable push was to lower the base rent for a tenant in exchange for an increase in the percentage rent Simon would collect. Essentially, that means the landlord would get a bigger piece of sales if and when customers returned.
That trend has stuck around and may be one of the lingering impacts of the pandemic here. But as customers start shopping again, Simon's upside benefit is larger even though the lower base rent level makes the leasing spread look worse. You can call that a mixed blessing, but so far it doesn't appear to be holding Simon's performance back.
But there's another thing to consider about that 12-month lookback: It only goes back 12 months -- anything older falls out. For example, if Simon released a vacant anchor store that had been empty for 16 months, it wouldn't show up quite right in that releasing figure.
Indeed, anchor locations usually have very low rental rates, especially ones that have been in place for a long time. Re-leasing that space might actually mean a material uptick in the rent received for that space. CEO David Simon offered a rough example during Simon Property Group's second-quarter earnings conference call: