Dive Brief:

• Net operating income from Simon Property Group’s retail and brand interests, which include investments in J.C. Penney, Sparc Group, Authentic Brands Group and Rue Gilt Groupe, fell 35.4% to $125 million in the fourth quarter and 33.4% to $355 million for the year. Their contribution per share to the company’s funds from operations fell 39.5% in Q4 and 40.2% for the year. 

• During the quarter, the real estate investment trust traded its share in an Eddie Bauer licensing joint venture for a further stake in Authentic Brands Group, bringing its share of ABG to 12%, CEO David Simon told analysts during a conference call Monday. 

• Among the brands run by Sparc (which also include Aeropostale, Brooks Brothers, Eddie Bauer, Lucky, Nautica and Reebok), Forever 21 fared the worst last year, as its teenage customer base was hit hard by inflation, he said.

Dive Insight:

David Simon reiterated his optimism about the REIT’s retail ventures, though he noted that they didn’t escape the turmoil of last year, as the late-pandemic rally that lifted many retailers in 2021 went missing. He noted that the investments in retailers and brands have been minimal, and that overall the REIT is “pleased with the contribution” from them.

“But we did make the mistake of thinking '21 would repeat,” he also said. “And then obviously, you had a lot of volatility from a macro point in '22 with huge increases in interest rates, huge increase in price and food and energy costs. ... The consumer was whipsawed and we felt the impact. It's stabilized now, we believe.”

In 2021, many of Simon’s brands were “extraordinarily profitable,” and J.C. Penney in particular is enjoying “unbelievably profitable EBITDA,” Simon also said. Sparc is co-owned by Simon and ABG, while Simon shares ownership in J.C. Penney with Brookfield. A year ago the company brought on former Paper Source CEO Winnie Park to address self-inflicted problems at Forever 21, he said.

“We made some tactical mistakes at Forever 21. We brought in a new CEO to rectify those mistakes,” he said. “She's doing a terrific job.”

The retail side of Simon’s business is relatively small, and David Simon said the company has no plans to add to that portfolio. Overall in the fourth quarter, Simon Property Group’s comparable funds from operations rose 1.1% year over year to $1.18 billion, as net income attributable to common stockholders rose 33.9% to $673.8 million, according to a company press release. Domestic property net operating income rose 5.8% and portfolio net operating income rose 6.3%, per the release.

Still, the retail and brand operations were “down considerably,” and must improve if the company is going to reach its potential, according to UBS analysts led by Michael Goldsmith. That’s especially true given that the company faces rising costs, including higher interest expenses as $1.8 billion in debt matures this year, for example, UBS noted in emailed comments Tuesday.

“We believe for [Simon Property Group] to materially grow earnings, it will need all of its business segments to contribute,” Goldsmith said. “When its segments are not fully aligned, it considerably limits its earnings upside.”