tail tenants. That’s for the obvious reason that when Simon’s income goes up it is partly because his tenants contribute more in terms of rent and other occupancy costs. And so it was last year.  Of course, mall executives are quick to point out that they and their tenants have an alignment of interests, in that the success of the property depends on the success of the tenants. This is true, but it cannot disguise a natural tension between landlord and tenant that has persisted since the dawn of time: They both want to maximise income and that means getting something at the expense of the other. And right now it appears that the landlord is winning the little tug-of-war because the productivity of mall space is not increasing, but retailer occupancy costs are.  For his part, Simon was extra-buoyant about the company’s performance last year, particularly as December marked the 30th anniversary of SPG’s launch on the share market. He spelled it out for investors as follows: “In 2023, we generated record annual Funds From Operations of nearly US$4.7 billion, executed over [1.7 million sqm] of leases, delivered 13 significant redevelopment projects, and completed several major financing transactions that reinforced our industry-leading balance sheet.”  Occupancy in Simon’s US malls and factory outlet centres was up to 95.8 per cent, and average base rent per square metre was up 3.1 per cent on the year. It had revenues, mainly from leasing, of US$5.7 billion, an increase of 6.9 per cent from 2022. Portfolio net operating income was up 4.9 per cent and net income reached US$2.28 billion, an increase of 6.7 per cent.  What is not to like? From the perspective of retail and other tenants, sales productivity of mall space for one thing: tenant sales per square metre were down 1.3 per cent on the year, to just under US$8000. Note that these are non-anchor tenants and don’t include the 250 or so department stores that anchor many of the US malls. (Macy’s, JCPenney, Dillard’s and Nordstrom are Simon’s top anchors, accounting for 209 stores in Simon malls.) Since leases have built-in annual increases but the productivity of the leased space can fall just as well as it can rise, occupancy cost ratios (occupancy costs divided by sales) will tend to increase as sales fall, which they did last year. Of course, if rents were all of the ‘variable’ kind, that is, sliding up or down with sales so that both landlord and tenant could share the volatility inherent in retail activity, then those occupancy costs wouldn’t change a lot. (The percentage of Simon’s rental income attributable to variable rent is still less than 20 per cent.) It’s not simply Simon It isn’t just SPG. A similar pattern repeated itself across the top echelon of the US mall industry.  Macerich, which owns more than 40 large retail projects, including malls and town centres across the US, was not to be outdone by Simon’s 30th anniversary carry-on and kicked off its results presentation with a little trumpet-blowing of its own: “We finished the year having leased [390,000 sqm] of space, a 12 per cent increase over 2022, which was itself an extraordinary year of leasing activity; 2023 leasing represents a record high for Macerich dating back to our 1994 inception as a public company.”  So there you go, two companies both just having lived through historic years. For Macerich, portfolio occupancy ended the year at 93.6 per cent, up from 92.7 per cent. Average base rent per square metre reached US$6, up from US$5.86 in 2022. Leasing spreads (a measure of the difference between new lease rates and expiring ones) were up more than 17 per cent. Again though, tenant sales per square metre fell by 3.8 per cent. Accordingly, the average tenant occupancy cost ratio increased. CBL, another major US mall portfolio owner, has many properties in demographics that are inferior to its peers, and with lower occupancy (around 91 per cent). For CBL, gross rent per square metre actually fell by 1.0 per cent last year, but not as fast as tenant sales per square metre, which declined 4.4 per cent to US$39. How to fluff the numbers One of the saving graces for many public companies – including shopping-centre landlords and retailers – is that when you have seven or eight data points to report every quarter, you can gush about the good ones and de-emphasise or even hide the baddies. Thus, when sales fall, you will talk up an increase in gross profit, or when your borrowing costs increase and botch your bottom line, you can talk up your operating income, which sits above interest in the income statement.  Or better yet, you can talk up earnings before interest, taxes, depreciation and amortisation (EBITDA), an ingenious invention to avoid reporting the real costs of operating a business. It asks us to ignore the costs of replacing depreciated assets, the cost of debt, and working capital requirements, too. And if your EBITDA isn’t too hot either, you can always pull your ultimate rabbit out of the hat, ‘adjusted EBITDA’, which allows you to pretty much eliminate any cost you don’t like by ‘adjusting’ it out. (This is a special favourite of technology companies, which can go years without a profit and have to convince investors that they are sort of, kind of heading in the right direction.) Can you imagine how tiresome quarterly reporting might get without these kinds of accounting terms? This is not to take anything away from the achievements of mall owners: They provide high-quality, synergistic real-estate platforms for retailers, without which the latter would not be able to extend their store fleets. And that goes particularly for developing countries. Simon itself owns or has an interest in 22 retail projects in Asia, mostly factory outlet centres: two are in China, 10 are in Japan, two in Malaysia, seven in South Korea, and one in Thailand. The premium outlets in Japan are close to 100 per cent occupied and generate excellent productivity levels.  With the US at saturation point and Asian markets offering an insatiable demand for factory outlet retail, the continent is a significant growth pathway for Simon. If mall productivity continues to fall at home, that pathway will be increasingly valuable.