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Simon Says It Made ‘Mistakes’ With Its Retail Brands But Is Now Reinvesting

Shopping mall giant Simon Property Group plans to put more money into at least one of the retail brands it owns after it says its retailers underperformed in 2022.

Simon Property Group bought JCPenney out of bankruptcy in 2020 as part of a joint venture.

Simon CEO David Simon said on the REIT's fourth-quarter earnings call Monday evening that the brands, including JCPenney and Forever 21, were affected by macroeconomic headwinds and by mistakes the company made.

“2021 was a great year for our retailers, however in 2022, Forever 21 and JCPenney were affected by inflationary pressures and consumers reducing their spend,” Simon said on the earnings call.

The REIT bought the two brands out of bankruptcy through joint ventures with Brookfield and Authentic Brands Group in 2020: Forever21 in February of that year and JCPenney that October. Both brands experienced declining performance in 2022, which SPG attributed to poor planning after they had an "extraordinarily profitable" year in 2021.

“We did make the mistake of thinking ’21 would repeat, and obviously you had all the volatility from a macro point of view in ’22 with huge increases in interest rates, huge increase in price of food and energy cost that the consumer was [whipsawed], and we felt the impact of that," Simon said. 

Simon said that for Forever21, the hiring of CEO Winnie Park in January 2022 has helped to “rectify those mistakes.”

The company plans to put more money into JCPenney to help it recover, Simon said. In addition to owning part of the retail brand, Simon also has JCPenney as an anchor tenant at 54 shopping centers, making it the REIT's second-largest tenant by square footage.

“We are actually reinvesting in that company," Simon said of JCPenney. 

Simon reported a net income of $673.8M in the fourth quarter, compared to $503.2M in Q4 2021, according to SPG's earnings filings. The REIT's portfolio saw improvement in its operating metrics last year: Occupancy stood at 94.9%, a 1.5% increase, and its rent per SF was $55.13, a 2.3% increase.  

Simon also announced on the earnings call it increased its ownership of Authentic Brands Group, which also owns part of JCPenney and Forever 21, along with Brooks Brothers, Aéropostale and other brands. The company is valued at $1.5B, Simon said.

Simon said that although the company has faced some bumps from the retail brands it owns, its international portfolio has become a "hidden jewel." Its 35 international outlets saw a 5.8% net operating income increase in the last three months of 2022.

A rendering of Simon Property Group's final phase of its redevelopment of the Northshore Mall.

The mall REIT has been active in its international development pipeline, in October opening the Fukaya-Hanazono Premium Outlets, a 296K SF luxury outlet in Fukaya City, Japan. The company also plans to open a second luxury outlet in Normandy, France, this year.

In its domestic portfolio, Simon said that the company completed 14 redevelopment projects in 2022 and is pushing forward with redevelopments in Miami, Seattle, Jacksonville, Florida, and Palo Alto, California.

In June, the retail REIT announced plans to expand four of its properties across the nation including 160K SF of new shops and two hotels at Woodbury Common Premium Outlets in New York. Around the same time, the company  made plans to build a 300K SF luxury outlet in Nashville in a joint venture with Adventurous Journeys Capital Partners

"In addition, we expect to begin construction on six to eight mixed-use projects, all of this will be funded with our internally generated cash flow," Simon said.

Simon said that moving into the new year, he believes that most tenants are positioned favorably, and that more permanent tenants are expected to occupy space starting in mid-2023.

"We feel really good about our retailers," Simon said. "I ask my leasing folks all the time if there is any pullback on demand. It has not really happened, and we feel really good about that."