tionably one of the biggest burritos in the global mall industry. It owns or has an interest in 230 properties worldwide (162 of them in the US) amounting to 17.1 million sqm of gross leasable area (GLA) across three continents. It also has a majority interest in Taubman, which has 24 high-end centres in the US and Asia. First-quarter revenues came in at US$1.35 billion ($2.03 billion), up 4.2 per cent on the same quarter a year ago. Leasing revenue accounted for more than 90 per cent of the total, at us$1.25 billion. Base rent per square metre was up 3.1 per cent, year on year, and net income increased by a healthy 5.9 per cent, to US$451.8 million. Real estate investment trusts like Simon usually prefer to emphasise not net income, but rather a non-GAAP concept, funds from operations (FFO), which grew by a more anaemic 1.1 per cent, to US$1.026 billion. FFO is an important concept for retail property REITs because it takes net income and adds back in depreciation (and a few other tweaks), which under GAAP rules has to be subtracted using a standard formula. This makes FFO more reflective of the REIT’s true operating performance, since shopping centres and other properties often increase in value over time rather than depreciate. Operating stats also improve Occupancy at Simon’s domestic properties stands at 94.4 per cent and retailer sales per square metre for the trailing 12 months were US$8,166, up 3.3 per cent from the preceding 12-month period. Trouble behind the numbers Headline numbers can conceal a multitude of sins, however, and this time is no exception. One of the key issues facing Simon and other mall operators is that they are still joined at the hip to department store anchors. Seven of Simon’s top 10 anchors are mainstream department store chains, headed by Macy’s (97 stores) and JCPenney (53 stores). And one of the remaining three, Neiman Marcus, is basically an upscale apparel department store. The dependency on department store anchors remains treacherous for mall operators, considering that virtually every department store chain in America is thinning down its portfolio – most drastically and some while in and out of bankruptcy. Just in the past few years, both Macy’s and JCPenney have closed about one-third of their portfolios, mostly in suburban malls. To be sure, these department stores don’t pay a lot of rent but their purpose, from the mall owner’s perspective, is to attract pedestrian traffic, a job that in many cases they are falling down on. Mall owners will retort that they don’t really mind if department stores bite the dust because they can get back the space to slice and dice for smaller and higher rent-paying tenants. To some degree this is correct, but re-leasing that much space can be painstaking, difficult and time-consuming, and if the location is second- or third-tier then it can be a devil of a challenge. The pandemic made the going even tougher by accelerating the shift by traditional mall shoppers to e-commerce.  Issue number two is that despite increasing calls by retailers for flexibility in lease terms, the percentage of Simon’s leasing income attributable to variable rent (that is, rent that rises and falls based on sales performance rather than a fixed amount) has hardly budged. In the first quarter of this year, 18.8 per cent of Simon’s leasing income came from variable rent, compared with 18.1 per cent in all of 2019 and 18.6 per cent in 2017. If greater flexibility were being built into leases, one could reasonably expect to see the variable rent percentage increase over time. Issue number three is that the performance of the malls varies greatly according to the local market and between urban and suburban areas. Simon invests heavily in its top centres but there is an uncomfortable amount of rot in the suburbs that will need to be addressed over time. And issue number four is the e-commerce juggernaut. Enough said about that.  Asian properties are immunised… somewhat Simon’s Asian properties are primarily upscale factory outlet centres, of which there are 10 in Japan, four in South Korea, two in Malaysia and one in Thailand. Via its interest in Taubman, it also has a minority interest in two malls in China and two in South Korea. The Japan outlets are almost 100 per cent occupied and in Asia, generally, the factory outlet segment of the mall industry is way short of saturation. Indeed, the appetite for discounted brand product is huge, particularly as aspirational middle-class shoppers want an entry point into luxury brands that they cannot yet afford in mainstream boutiques. While demand has surged, supply is still limited. That’s good news for Simon, which also enters Asian markets with local joint-venture partners, partly to take advantage of local knowledge. The Asian centres, being factory outlet centres, are also immune to the problems that beset mainstream malls, particularly in the US. So there is still the potential for growth in Asia that Simon should be able to enjoy for years to come. Back home in the US, Simon has a struggle on its hands. But it is still well-positioned competitively because of its sheer size and the geographic diversity of its malls. At least there is that.