Simon Property Group (SPG)

Why "Retail REIT" Is Not One Trade

The retail apocalypse happened. It just happened to other people's malls. Simon Property Group ended 2025 with its US Malls and Premium Outlets 96.4% occupied, retailer sales running at $799 per square foot, and base minimum rent of $60.97 per square foot, up 4.7% on the year. That is not a structurally challenged landlord's portfolio; retailers cannot afford to leave these centres.

The lesson for anyone screening the sector is that "retail REIT" describes a property type, not a trade. A-quality malls and premium outlets, the centres where sales productivity justifies premium rents, have spent a decade pulling away from B and C malls, where anchor departures and falling footfall feed a self-reinforcing decline: tenants leave, co-tenancy clauses trigger rent cuts, capital for refurbishment dries up, more tenants leave. Simon sits almost entirely on the right side of that divide. The portfolio is 212 US properties across 38 states and Puerto Rico, concentrated in exactly the kind of dominant regional centres that captured the tenant demand leaking out of weaker malls. Outside that it holds interests in 42 international properties, owns 22.2% of Klépierre, the listed Paris shopping-centre group, and in October 2025 bought in the last 12% of the Taubman portfolio it did not already own.

That divergence is why averaging cap rates or occupancy across "retail" produces nonsense. Nareit put the implied cap rate on listed retail REITs at 6.2% in Q1 2026, against 5.9% for all equity REITs, but that aggregate blends the whole quality spectrum. Dominant A-quality enclosed malls change hands nearer 6.5-8.0%; B and C centres are marked at 9-12% and some find no buyer at any price. Keep straight which way a cap rate runs, because it is a price rather than a return: the wide number is wide because the market expects that income to shrink or to swallow capital before it can be collected. Our cap rates guide covers why a single retail number misleads.

The Three-Legged Health Check

Occupancy alone tells you less about a mall than about almost any other property type. A landlord can hold occupancy by cutting rents or backfilling with temporary tenants while renewal spreads quietly collapse. So the health check needs three legs, and Simon publishes all of them:

• Occupancy, 96.4%. Above the 95% strong threshold we screen at. The space is let.
• Retailer sales, $799 per square foot (trailing twelve months), up 8.1% from $739. This is the productivity leg, and the one occupancy misses. High sales per square foot mean tenants are making money in the space, which is what ultimately funds the rent.
• Base minimum rent, $60.97 per square foot, up 4.7% year on year. The landlord is converting tenant productivity into rent growth.

The relationship between the second and third legs is the occupancy-cost intuition. Rent is a cost the tenant pays out of sales, so rent can only outgrow sales for so long before tenants start failing leases or walking away at renewal. In 2025 the two ran the right way round: tenant sales up 8.1% against rent up 4.7%, so the rent got cheaper relative to what the space earns. Reverse that and the model is borrowing from its tenants.

One qualification on the rent leg, because this is where mall metrics mislead. Base minimum rent is the contractual figure. It is struck before any fit-out allowance or rent-free period, so on its own it cannot tell you whether a renewal was won on price or bought with concessions. What separates the two is net effective rent, the rent left after those inducements are spread over the term, and mall landlords rarely publish it. The public check is whether NOI keeps up: domestic property NOI grew 4.4% in 2025 against rent's 4.7%, close enough that the rent line looks real. A rent line pulling steadily away from NOI is the tell.

Two FFO Numbers, and Why Simon Reports Both

Simon gives you two headline per-share earnings figures, and in 2025 they pointed in opposite directions. Real Estate FFO, the company's own measure of what the property portfolio earns, was $12.73 per share, up 4.0% from $12.24. Reported FFO, on the Nareit definition every equity REIT publishes, was $12.34 and fell 5% from $12.99. Same company, same twelve months, one line up and the other down. All of that divergence sits outside the malls.

Real Estate FFO is reported FFO with three non-property items taken out, and knowing which they are is the whole exercise. In 2025 they netted to $0.39 a share: $106 million of mark-to-market losses on listed equity holdings, $67 million of losses on disposing of or revaluing equity interests, and running the other way a $25 million contribution from Other Platform Investments, stripped out because it is not rent. The mark-to-market line is the big one, and it says nothing about a mall. In 2024 the same three items ran the opposite way, and a $386 million revaluation gain is why reported FFO was the higher figure that year.

Other Platform Investments, Simon's stakes in retail operating businesses and other non-property ventures, is small in the annual total and violent inside it. It added $24.6 million, or $0.07 a share, across 2025. The fourth quarter alone contributed $55.5 million, or $0.15, which means the first nine months lost about $31 million. Retail operating businesses earn their year in the holiday quarter, so the line is Q4-heavy by construction and a single quarter of it tells you nothing.

The practical rule: frame Simon on Real Estate FFO and treat OPI as a swing item to monitor rather than capitalise. A quarter where reported FFO beats on the back of a revaluation says little about the malls. Just remember Real Estate FFO is Simon's own line, not a sector standard, so a peer's headline FFO is not the same measure until you make the same adjustments. Management's FY2026 guidance is framed on it, $13.00 to $13.25 per share, which at the midpoint implies roughly 3% growth (2.1% at the bottom of the range, 4.1% at the top). The FFO vs AFFO guide covers why company-defined variants need this kind of reading before any peer comparison.

The A-Rated Balance Sheet Is the Moat

Simon ran FY2025 at 5.0x net debt to EBITDA on the company's basis, the conservative end of the 5.0-6.0x range we treat as normal for investment-grade equity REITs. The ratings agencies agree: S&P has Simon at A, Moody's at A3. Single-A ratings are rare anywhere in the REIT sector, and in retail property they are close to unique.

Why it matters: mall economics are capital-hungry. Anchor redevelopment, food-hall additions, and mixed-use build-outs all chew through capital, and the weaker competitor down the road fails precisely when capital markets are tightest. An A-rated borrower can fund redevelopment and acquisitions through the part of the cycle when B-mall owners are handing keys back to lenders. Simon can keep investing in its centres when competitors cannot, and that is how the quality gap widens.

On distributions, Simon paid $8.55 per share across 2025, having lifted the quarterly rate twice during the year, and has raised it again since. Against Real Estate FFO of $12.73 that is a payout of about 67%. Read it as rough comfort rather than a screening pass. The 70-85% payout band people screen on is set against AFFO, and AFFO has no agreed definition: Nareit defines FFO, nobody defines AFFO, and the split between maintenance and growth capital that produces it is each company's own call. Malls in particular eat capital that FFO never sees, tenant allowances and leasing commissions above all, and those sit outside NOI as well, since NOI is struck before capital. So the real cushion is thinner than 67% suggests, and 67% is not the same animal as a peer's AFFO payout.

What the Screening Shows

Against the REIT Sector Primer thresholds and the screening checklist:

• Occupancy: 96.4% in US malls and premium outlets. Above the 95% strong threshold. Pass.
• Organic growth: domestic property NOI +4.4% in FY2025, base minimum rent +4.7%, tenant sales +8.1%. Pass, and in the right order.
• Leverage: 5.0x net debt to EBITDA, bottom of the 5.0-6.0x normal band, with A/A3 ratings. Pass, comfortably.
• Payout: roughly 67% of Real Estate FFO ($8.55 on $12.73). Healthy, but this is an FFO-basis figure and the 70-85% screen is an AFFO one, so it flatters. Indicative only.
• Earnings quality: reported FFO fell 5% while Real Estate FFO rose 4%, on revaluations rather than rent. Normalise before comparing any quarter. Watch, not a fail.

Nothing here screens as stressed. The open questions are forward-looking rather than balance-sheet questions: whether tenant sales keep pace with 4-5% rent growth, and whether the 2026 guidance of $13.00-$13.25 proves conservative or tight.

Key Risks Specific to Simon

Tenant credit is the cyclical one. A consumer downturn shows up first in retailer sales per square foot, then in watchlist tenants, then in occupancy. Simon's quality portfolio gives it the longest fuse in the retail sector, but the fuse still burns in a recession, and percentage-rent and renewal economics soften before the headline occupancy figure moves. The three-legged check exists precisely so you see it coming.

Structural e-commerce pressure has not gone away; it has been segmented. The A-mall thesis holds as long as physical flagship and outlet formats remain where brands choose to invest. A renewed shift of marketing and distribution spend away from physical retail would hit even productive centres, and the international portfolio adds currency and local-consumer exposure on top.

And OPI cuts both ways. Investing in retail operating businesses gives Simon information and occasionally opportunistic stakes in retailers, but it puts operating-company risk inside a property vehicle. The year's pattern, nine months of losses rescued by the holiday quarter, shows how dependent that line is on a few weeks of trading. If OPI grows as a share of earnings, earnings quality drifts toward retail-operating cyclicality and away from contractual rent.