Simon Property Group 4Q16 Earnings Call Notes

David E. Simon

I could go on a 400 word diatribe, but I wont

“Moving on from our results, now could be the time on the call where I could go into a lengthy philosophical discussion on the popular misconceptions about the mall business, created by the never-ending current public narrative. And I could counter that by pointing that we have 434 department stores in our portfolio, and only one is vacant, and how in the recently announced department store closing, we have only one closure in our portfolio, or how we have added more than 275 sit-down or quick-service restaurants, more than 20 entertainment concepts, and more than 80 big box tenants across our portfolio over the last four, five years, or how we’ve added mixed use components to our centers in the last several years, we have built 10 hotels and residents representing nearly 3,000 units, or how according to a recent survey a Generation Z members, a group that outsizes Millennials, 70% of those surveyed visit the mall at least once a month and visit more than four stores during the visit, or how the consumers still like to shop in stores, because they want to touch and feel the products before they make a final decision, or how online retail sales have grown to less than 10% of total retail sales, and that the retailers who occupy our centers represent approximately two-thirds of those total online sales, or how leading e-commerce retailers, like Warby Parker, Blue Nile, UNTUCKit, Shinola, among others, are opening physical stores, because the inherent advantage a physical location provides as well as being a natural extension to the digital world, or how basket sizes are higher, return rates are lower in stores compared to online purchases, and margins are much higher in the store than they are in the Internet, or how emerging brands like GUIDEBOAT, NIC+ZOE, Peloton, to name a few, continue to see the mall as the launch pad to build their brand awareness, as a result of the significant traffic they experience being at the mall, much like Apple or Microsoft did several years ago, or how we are making all these changes and enhancements to our center, even though Congress has tilted the scale towards e-commerce by not implementing the Marketplace Fairness Act, which not requiring the sales and use tax to be paid by consumers who buy products online, even though they are required to do so under existing laws. But I could do that, but I won’t, because we’ve talked about that all before”

Aero management team was able to generate more cash flow because they weren’t worried about beating comps

“I’ll tell you a fascinating thing that I’ve learned at Aéro – with the Aéro investment. So and it’s just the dynamic of Wall Street, retailers, chasing Internet sales, there is a whole philosophical discussion that will take too long on this call to do. But one thing at Aéro that I learned is that that management team could produce higher level of profitability, higher gross margins if they didn’t have the Wall Street constraint on worrying about comp NOI or comp sales growth i.e. they could generate more cash flow because they’re not worried about posting a comp sales number that’s below market expectations.”

Retail is a dog eat dog world now

“We did experience less store closures last year than we did in 2015, the way we had suggested we would, that’s why our occupancy went up, but I’m not going to sugarcoat it, retail environment is not – it’s not robust, it’s doggy dog right now.”

We’d like to see retailers dedicate more funds to improving the store environment

“Well I think, it all depends upon what point are they in their financial equation. Look, I think – and again, this is more philosophical, but what we’d like to see from the retail community is a dedication back to improving the store environment. We think a lot of the capital that has been put forward has been to chase Internet sales, a lot of that has been done through promotional efforts. And between that and the promotions required to get them to buy online between the cost of shipping and the returns, it’s not a great model for them.”

Leveraged buyouts have been a bigger problem than the internet for our retailers

“Let’s talk about the casino business. You could say the gaming could all go online. But if you’re Steve Wynn, you build the best product, you have the best service, and lo and behold, people show up, they gain, they participate, they stay there, and he gets great returns on equity. He has got unbelievable conviction and he puts his money where his mouth is. We need that in our business. What’s hurt our business in retail, frankly, is that there has been too many leverage buyouts with too much debt, and we all know no matter how good a retailer you are, you’re going to run into ebbs and flows. And lo and behold, when you run into that scenario, you’ve got a balance sheet that can’t withstand it. I can’t tell you how much pressure is because of that as opposed to because of the Internet. We can go chapter and verse, and what that also does means they don’t invest in the stores.”