When it comes to mall REITs, there is Simon Property Group (NYSE: SPG), and then there's everyone else. With more than 200 properties, Simon is the largest mall operator in the U.S.
Some of Simon's properties are ultra-high-end malls, including those operated under The Mills brand name. The company owns five of the 10 most valuable mall properties in the United States, including the Fashion Show mall in Las Vegas and Sawgrass Mills in Florida. In addition, Simon has a dominant lead in the outlet shopping industry, with its Premium Outlets properties making up about two-thirds of the entire U.S. outlet market.
However, it's no secret that brick-and-mortar retail has been struggling for the past several years as e-commerce competition has led to once-great retailers like Sears and J.C. Penney filing for bankruptcy and many other mall-based retailers struggling to survive.
With Simon's share price down by more than 50% in 2020, is there value for long-term investors in this large retail REIT, or is this a stock that's simply cheap for a reason?
Retail was struggling before the pandemic, but Simon's properties have been strong
It is no secret that brick-and-mortar retailers have been struggling for years now. Retail bankruptcies and widespread store closures have been in the news on a regular basis, and e-commerce continues to capture more and more of the overall U.S. retail market.
This has hurt many mall operators, but Simon has been relatively unscathed by the "retail apocalypse." Simply put, Simon's strategy is to incorporate lots of non-retail elements like hotels, office spaces, and entertainment venues into its properties to create natural sources of foot traffic for its retail tenants. With more financial flexibility than its peers, Simon has spent billions on redeveloping its properties in recent years and plans to continue to do so.
Plus, while some mall-based retailers have gone bankrupt in recent years, Simon has chosen to use this as an opportunity. When department store tenants vacate, the company has used the space to add mixed-use elements to its malls. And Simon has actually acquired several bankrupt retail brands, mostly in partnership with other investors. Aeropostale and Forever 21 are the two biggest examples, and it has recently been reported that Simon has been in discussions to acquire J.C. Penney out of bankruptcy as well.
It appears Simon's strategy is working. In fact, in 2019 Simon reported that the average sales per square foot by its retail tenants increased by 4.8% year over year. Occupancy was more than 95% at the end of the year, and Simon's rental income has been steadily rising.
Simon Property Group in the COVID-19 pandemic
Of course, malls were one of the most affected types of real estate by the pandemic. In March, Simon was forced to close all of its U.S. properties, and while we haven't seen rent collection numbers yet, it's fair to assume that a significant portion of Simon's tenants didn't pay rent in April and May.
Simon drew $3.75 billion on its revolving credit line as the pandemic worsened and has more than $9 billion in liquidity. Plus, the company suspended or eliminated more than $1 billion in development projects, cancelled its pending acquisition of Taubman Centers (NYSE: TCO), and took several other steps to reduce cash burn.
While not all of Simon's properties are reopened yet, the majority are. We'll get a better look at the current state of the business in the company's second quarter earnings, but it's fair to assume that it could take some time to get back to normal traffic levels.
With the stock 50% lower in 2020, is Simon Property Group a buy?
First off, there's no reason to worry about Simon's ability to make it through the tough times. The company has a tremendous amount of liquidity, and it can easily handle a short-lived disruption in rent collection.
However, the COVID-19 pandemic isn't over yet, and there's no way of knowing how badly Simon's tenants will be affected by the interruption to their businesses. As the pandemic continues to unfold, it's fair to expect quite a roller coaster ride in Simon's stock price, and it could definitely fall if things go poorly.
Having said that, there could be quite a bit of value at the current price level for patient long-term investors. I finally decided to pull the trigger and add Simon to my own stock portfolio during the pandemic and am excited to watch the business return to normal over the coming years.