Strong Sales Growth Produces Healthy Retail Tenants for Simon in Q1

Simon Property Group reported first-quarter property fundamentals that beat our expectations, but its bottom-line missed our expectations. Still, we didn’t see anything in the quarter that would materially alter our $160 fair value estimate for the no-moat company. Portfolio occupancy sequentially fell 10 basis points to 93.3%, though occupancy typically falls in the first quarter as temporary holiday tenants vacate, and the reported figure is far better than the 110-basis-point decline we had anticipated. Simon reported sales per square foot growth of 19% to a company-record $734, which is better than our estimate of 7% growth, and is now well ahead of the $693 per square foot figure reported in the fourth quarter of 2019. Higher occupancy and percentage rent derived from higher sales drove same-store net operating income growth of 7.5% that beat our 6.3% estimate. Additionally, occupancy cost fell to 12.3% in the first quarter, the lowest it has been in over seven years. This suggests that Simon’s tenants are very healthy at the moment, which should attract more tenants to the properties to help the portfolio reach the 94.5% level we think it should return to and also allow the company to continue pushing positive re-leasing spreads as management marks rents up to market as leases come due.