Simon Says: Beware Mall Operators

Simon Property Group, a the largest shopping mall owner and operator in the U.S., said on Monday that its second quarter results improved 15 percent, with adjusted results topped the Street's forecasts.

Such strong results, paired as they were with a fairly optimistic outlook, seems counterintuitive, given the current state of the retail environment. Sales at mall-based outlets have been hit the hardest as consumers tighten their belts, and a spate of retailers -- Linens 'n' Things, The Sharper Image, Steve and Barry's, to name a few -- have even filed for bankruptcy.

It seems only natural that the pain would trickle down to the property owners.

Don't let Simon's results get your hopes up for retail REITs. The company's very large portfolio of properties is not only broadly diversified in terms of properties and geography, it also holds some of the most desirable retail space around. Many are consistently in demand regardless of the economy, and house high-end tenants less likely to live and die on trends in consumer spending.

Even for Simon, cracks are starting to show. In the second quarter, occupancy at its malls fell 0.2 percent, to 91.8 percent, while occupancy at its outlet centers was down 1.1 percent, to 98.3 percent.

Still, Simon commands enough leverage to raise rents to compensate for a few empty stores; average mall rent rose 6.3 percent, to $38.81 per square foot, while rent in its outlet centers rose 6.2 percent, to $26.66 per square foot.

Competitors like Weingarten Realty Investors, General Growth Properties, Kimco Realty Corp., and Tanger Factory Outlet Centers -- all of which report results later this week -- are unlikely to be so lucky.

by Liz Gunnison