Simon Property Group (SPG 0.05%) got slammed hard by government efforts to slow the spread of the coronavirus in 2020. With things getting back to normal in 2021, the real estate investment trust's (REIT) business rebounded strongly. Guidance for 2022 suggests that the rebound is over, but this could just be a pause as the company gets its business back on a more normal path.
The bad news, the good news, and the new news
When the pandemic started to spread around the world in 2020, nonessential businesses were forcibly shut, people were asked to work from home, travel declined, and people practiced social distancing. Basically, malls were no-go zones. Weak retailers went bankrupt or asked for rent concessions, with some forcing landlords to fight in court for rents they were owed. It was a very ugly period, and Simon cut its dividend.
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As part of its effort to help struggling retailers, Simon agreed to rent concessions. Often this meant lowering base rents in exchange for a percentage of the retailer's sales. This gave the retailers breathing room when they needed it and provided Simon a way to benefit if business improved. Business did pick up throughout 2021 and the mall REIT had a great year. The dividend was increased three times, though it is still below pre-cut levels, and its funds from operations (FFO) increased by more than 30%. The $11.94 per share in FFO the REIT posted handily bested the guidance of $9.75 offered up at the start of 2021.
In fact, 2021 FFO was almost all the way back to the $12.04 per share Simon earned in 2019, before the pandemic. So there was reason for investors to expect a positive outlook for 2022, even if it wasn't likely to be as robust as 2021 turned out to be. But Simon's guidance was a bit restrained, with the company projecting FFO between $11.50 and $11.70 per share. Even the high end of that guidance represents a pullback from 2021's $11.94.
How to think about the future
Clearly, Simon's business has recovered strongly, so expecting another year like 2021 isn't reasonable. However, a decline in FFO isn't exactly good news. The problem partly comes down to percentage rents, which in some cases were simply temporary adjustments. While Simon would like to capture as much of that rent as possible, it probably won't be able to do so as these amendments fall off and it works out new base-rent levels.
In addition to this, the company had a number of one-time items in 2021 that boosted its net income by $0.50 per share. That included gains related to licensing ventures, given that Simon used the downturn to buy distressed retailers. One-time items were one of the big reasons the REIT beat its original guidance in 2021 but by nature won't recur in 2022. Put this together with the percent-of-sales issue above and the guidance for 2022 starts to look more attractive.
NYSE: SPG
Key Data Points
In fact, you might even argue that the slight decline is totally reasonable. That said, CEO David Simon described 2022 as a transition year during Simon Property Group's fourth-quarter analyst call. The main reason being that it has to work through short-term leases that are expiring and try to turn them into longer term leases. And, even though occupancy has recovered to 93.4%, it can take six to nine months to get a new tenant into a space because of the development work that needs to be done. In other words, the business is still recovering and the process will probably take at least another year to complete.
Don't get too upset
No shareholder likes to see a company project a drop in its results, but businesses ebb and flow over time. Right now is a particularly volatile period for Simon, but it appears to be holding up reasonably well. At the end of the day, 2021 was no more indicative of its long-term performance than was 2020. While 2022 is probably going to be more typical of historical performance, even this year won't be "normal." But, if everything goes as planned, Simon is still moving in a positive direction with its business. Investors should be pleased with that underlying trend and not get too caught up with the top-level numbers here.
