With coronavirus cases soaring, retailers suffering, and local officials slowing or halting business reopenings across the U.S., it might seem like an odd time to invest in luxury shopping malls.
That’s what makes Simon Property Group (ticker: SPG), the largest mall operator in the U.S., worth a closer look. Simon might come through the pandemic in surprisingly good shape. It’s using its unusual financial strength to buy both other mall operators, like Taubman Centers (TCO), and tenants, such as bankrupt apparel retailers Brooks Brothers and Lucky Brand, which will operate in its key malls.
The stock is deeply discounted and is trading at about half the valuation of other mall real-estate investment trusts. And it has a dividend that yields almost 7%.
Piper Sandler’s Alexander Goldfarb says credit trends and rent payments are improving, and recent vaccine news makes Simon “among the top winners” of stocks he covers. “While tenant credit remains a concern, the winds are blowing in SPG’s favor.”
“We see SPG as the last man standing in the mall sector, able to mop up high-quality competitors at discounted prices in order to enhance its ownership of top-performing malls,” says Floris van Dijkum, an analyst at Compass Point Research & Trading.
There was some good news from Simon last week, after it renegotiated its deal to buy Taubman, with its 26 locations, cutting almost $800 million off the price and ending a potentially costly lawsuit. The deal, set to close this year or early in 2021, could line up well with a return to more normal business conditions.
Still, recent trends are bleak, as the pandemic again hits in-person shopping. Third-quarter profit and revenue disappointed Wall Street, with net income plunging 73% from the level a year earlier. Simon stock is down 46% this year, compared with the 11% gain in the S&P 500 index. But the shares spiked on news of the revised terms for Taubman and successful vaccine tests.
Like other businesses, Simon shuttered locations when state and local governments restricted activity to slow the spread of the coronavirus. By October, it had reopened its 204 locations, but recently again placed restrictions in hot spots like El Paso, Texas. CEO David Simon expressed his frustration in a recent conference call with analysts: “I think enclosed malls are being treated unfairly and inconsistently, but we deal with what we deal with.”
Key Data
Simon Property Group / SPG
E=Estimate; FFO=Funds from operations
Sources: FactSet; Bloomberg
Analysts and fund managers say that Simon’s value lies in its solid cash flows and valuable real estate—and its CEO’s flair for buying distressed assets. “David Simon is a great buyer of straw hats in winter,” says Bill Smead, whose Smead Capital Management owns $40 million worth of Simon shares.
While other mall-oriented REITs, like CBL & Associates Properties and Pennsylvania REIT, have filed for bankruptcy, Simon’s cash position, at $1.5 billion as of Sept. 30, means that it can continue to invest without taking on more debt, analysts say.
Funds from operations, or FFO, a key metric to gauge the health of real-estate investment trusts, totaled $723 million in the third quarter, or $2.05 a share. That came in lower than analyst estimates of $2.29, according to FactSet. Taking the pandemic into account, analysts have trimmed estimates for Simon’s full-year FFO. The average for 2020 is 16% lower than in April, at $9.61 a share, FactSet reports. The average for year-end 2021 is almost 18% lower, at $9.80.
Stifel analysts noted the company’s $9.7 billion of liquidity at the end of September, including $8.2 billion in revolving credit and a term loan. Liquidity is up from $8.5 billion at the end of June.
To boost its retailer-tenants’ chances of making it through the crisis, Simon has lowered and abated rents and put money aside for credit losses, shaving $270 million off net operating income in the third quarter. Retailers like the moves, and 95% have reopened, Simon says.
High-end, or A-rated, malls averaged $700 per square foot in tenant sales prepandemic, in line with average tenant sales at Simon malls, according to Compass Point Research & Trading.
Some 80% of Simon’s net operating income comes from the A-rated category. Simon owns 16 of the top 30 U.S. malls, including New York’s Roosevelt Field and Pennsylvania’s King of Prussia malls, as well as outlet centers, such as Woodbury Common, about an hour’s drive north of Manhattan. The $2.8 billion Taubman deal will add malls including Los Angeles’ Beverly Center and New Jersey’s Mall at Short Hills. Simon also happens to be Apple’s [AAPL] biggest landlord, says van Dijkum.
In hopes of rehabilitating them, Simon has been buying ailing retailers, such J.C. Penney (JCPNQ) in a partnership with Brookfield Property Partners (BPY). Through this year’s first nine months, Simon’s retailer investments lost $8.7 million, versus a gain of $22.5 million in 2019, largely because of store closings, according to a regulatory filing.
But David Simon told analysts that he expected the investments, and others like them, to be worth $1 billion over time, with a minimal outlay of capital—he said $50 million. There aren’t deals like them on the immediate horizon, he added, but that doesn’t rule out future investments.
Once the coronavirus is tamed, people will again shop in stores, attend movies, and eat in restaurants—all things offered at Simon malls. Until then, the nearly 7% dividend yield is “one heck of a great cash flow” for investors, Smead says.
Simon has weathered the crisis, David Simon told analysts, noting, “We’re pleased with the cash flow we’re generating…I want to thank my colleagues for busting their hump, and things are looking up.”
Write to Liz Moyer at [email protected]
