For decades, one of the favorite pastimes of many younger Americans was to hang out at the local shopping mall. Dubbed "cathedrals of consumption" by sociologist George Ritzer, these massive shopping centers provided an indoor escape for many to pass the time as they browsed the latest fashion items or hung out with friends.
However, with the internet making it cheaper to shop online and today's generation of millennials favoring spending money on experiences instead of "stuff," mall visits have steadily declined.
Those dual market forces are having a significant impact on traditional brick-and-mortar retailers, which were enduring apocalyptic conditions before the COVID-19 outbreak caused things to go from bad to worse. Many retailers couldn't afford to pay their rent, which had a major impact on mall landlords like Simon Property Group (NYSE: SPG).
While times are certainly challenging for the sector and mall real estate investment trusts (REITs) like Simon Property, that doesn't necessarily mean the shopping mall is dead. Instead, Simon and others are transforming malls to meet the needs of today's real estate market.
Here's a look at that transformation and other factors investors need to know about this leading REIT.
Simon Property Group company profile
Simon Property Group is a retail REIT focused on operating regional malls and outlet centers. As of mid-2020, the company had interests in 235 properties comprising 191 million square feet in North America, Asia, and Europe. It also held a 22.4% ownership interest in Klepierre, a publicly traded, Paris-based real estate company that owns shopping centers in 15 European countries. The company's properties feature premier shopping, dining, entertainment, and mixed-use destinations.
Simon Property has also partnered with fellow mall owner Brookfield Property Partners (NASDAQ: BPY) (NASDAQ: BPYU) and global brand development, marketing, and entertainment company Authentic Brands Group (ABG) to acquire several retailers out of bankruptcy. They aim to reposition these retailers for success in today's environment. The trio has acquired Aeropostale and Forever 21.
Meanwhile, Simon and ABG took control of Brooks Brothers and Lucky Brand, while Simon and Brookfield rescued J.C. Penney (OTC: JCPN.Q) in a deal that could ultimately include ABG.
The bulk of Simon Property Group's revenue comes from lease income. In 2019, the REIT collected $5.2 billion in rent, 91% of its total revenue. The rest came from management fees and other revenue (2%) and other income (7%), including dividends, interest, gains on land sales, and parking.
Simon Property Group news
Like with many retail REITs, the COVID-19 outbreak significantly impacted Simon Property's operations in 2020. The company temporarily closed all its U.S. properties in mid-March to help slow the spread of coronavirus. That had a devastating impact on many of its tenants, which couldn't generate sales, leaving several unable to pay their rent. Quite a few filed for bankruptcy, while others refused to pay rent (causing Simon to take legal action) or worked out deferral agreements with Simon.
By late June, the company had reopened 199 of its 204 U.S. retail properties, allowing many of its tenants to generate sales and resume rental payments. However, the company did have to reduce its dividend by 38.1% to match its payout level with expected cash flows.
Even before COVID-19, many of Simon Property's tenants struggled due to more consumers shopping online. Many retailers had closed stores or declared bankruptcy, which left Simon with vacant space. The company redeveloped several empty storefronts by adding new retail and entertainment spaces and other property types such as hotels. It had projects at more than 30 properties underway at the beginning of 2020, at an expected cost of about $1.8 billion. However, the company suspended or eliminated $1 billion of development projects because of COVID-19. As of the middle of 2020, it only had $140 million of remaining projects left to fund by the end of 2021.
Simon had also previously hoped to extend its mall transformation program by acquiring fellow retail REIT Taubman Centers (NYSE: TCO), which it agreed to purchase for $3.6 billion in February 2020. It planned to turn many of Taubman's 26 super-regional shopping centers in the U.S. and Asia into innovative shopping and entertainment properties. However, Simon abandoned that deal because of the pandemic's impact on in-person shopping and entertainment experiences.
In short, COVID-19 has put Simon Property at a bit of a crossroads. The mall REIT had initially envisioned transforming many of its malls into destination shopping, dining, and entertainment hubs to offset the retail apocalypse's impact on traditional retailers. However, with COVID-19 not only accelerating that trend but also causing similar damage to dining and entertainment companies, it's unclear when the company will revive its redevelopment program.
That's causing Simon Property Group to start considering alternative options for some of its vacant space. For example, Simon reportedly held talks with e-commerce giant Amazon (NYSE: AMZN) about using some of its former anchor department store space like that once occupied by Sears and J.C. Penney as fulfillment centers. Such an arrangement would enable Simon to repurpose this space and generate some rental revenue while providing Amazon with closer proximity to its customers to improve delivery speeds.
In addition to having new options for its properties, Simon also has a strong balance sheet, which gives it the flexibility to endure these challenging times and invest in new opportunities when they materialize. It's in an elite group of REITs with A-rated credit, which increases its access to lower-cost funding. Simon took advantage of that flexibility during the downturn by issuing low-cost debt to bolster its liquidity so that it had $3.6 billion of cash on hand at the end of June 2020.
Simon Property Group stock price
The combination of the retail apocalypse and COVID-19 has put significant pressure on Simon Property Group's share price in recent years.