What Boosted Simon Property’s Net Operating Income in Q2?

Transforming properties into an entertainment hub

Simon Property (SPG) reported net operating income (or NOI) of $1.05 billion in the second quarter of 2018, which was a 4.9% increase YoY. Similarly, the NOI margin came in at 76.2%, depicting a ~220 basis-point YoY expansion. The expected upswing in the company’s NOI margin was mainly driven by higher base minimum rent and leasing spreads per square foot.

What Boosted Simon Property’s Net Operating Income in Q2?

Retail store operators and owners are encountering declining traffic and sales, as consumers are finding online shopping more lucrative and convenient. Therefore, Simon Property is trying to transform and develop its properties into entertainment hubs by renting more multiplexes, restaurants, and nightlife venues so that stores can stay open later and it can charge more in rent.

Also, the company is now focusing on developing premium properties in prime locations and near office and residential areas so that traffic remains strong. Additionally, Simon Property is renting more spaces to luxury retailers than to discount retailers, as they’re more resistant to e-commerce threats and attract wealthier customers.

All these efforts have been paying off well, as has been reflected in Simon Property’s recent quarterly results. In the second quarter, the company’s total sales per square foot and “base minimum rent per square foot” rose 4.5% and 3.3%, respectively, despite a fall of ten basis points in its occupancy rate. Apart from this, due to improved total sales per square foot and “base minimum rent per square foot,” the company’s occupancy cost as a percentage of sales fell by ten basis points to 12.9% from 13% as of June 30, 2017.

All this has helped the company’s total portfolio NOI register a YoY rise of 3.5% in the second quarter. For 2018, Wall Street expects NOI to come in at $4.53 billion.

Where competitors stand

Some of Simon Property’s primary competitors such as Equity Residential (EQR), Kimco Realty (KIM), and Taubman Centers (TCO) have also released their second-quarter results. Equity Residential, Kimco Realty, and Taubman Centers reported NOI of $421.9 million, $214.3 million, and $180.4 million, respectively.

Simon Property makes up ~8.1% of the Schwab U.S. REIT ETF (SCHH). Schwab’s broadly diversified portfolio provides investors with a cushion from macro headwinds.