Many investors are afraid to put their money into anything having to do with the retail industry, and who could blame them? However, mall real estate investment trust Simon Property Group (SPG -1.28%) is in a league of its own. Here are nine reasons why.
1. Some of the best malls in the industry
One of my favorite investment strategies is to focus on the stocks of companies that own assets that are either irreplaceable or that would be difficult for competitors to replicate. For example, properties like local strip malls or budget hotels are a dime a dozen, so it's easy for competitors to enter the market and construct competitive assets.
Image source: Getty Images.
On the other hand, Simon owns some of the most valuable and unique mall properties in the entire world. In a 2018 ranking based on analysis by Boenning & Scattergood, Simon owns five of the 10 most valuable malls in the United States. The analysis estimates that Simon's Sawgrass Mill mall in Florida is worth $4.1 billion, Fashion Show Mall in Las Vegas is worth about $3.1 billion, and Forum Shops at Caesars in Las Vegas is worth $2.8 billion, just to name a few. That's a big barrier to entry for would-be competitors.
2. Enormous financial flexibility
As the largest non-telecommunications REIT in the entire stock market, Simon Property Group is a massive company. It also has a tremendous amount of financial flexibility to pursue opportunities and add value to its properties. At the end of the second quarter, Simon had more than $6.8 billion of available liquidity and low debt ratios. That's more than the entire market capitalizations of several Simon rivals.
3. Simon's long-term vision is about more than retail
Unlike many mall operators, which view the downfall of once-great department store operators like Sears as a major challenge, Simon sees it as one of its biggest opportunities.
Specifically, a big part of Simon's strategy going forward is to convert its malls into "mixed-use" centers that incorporate non-retail elements like office space, hotels, apartments, and more. And the space vacated by certain department store tenants gives the company a blank canvas to do so.
In addition, Simon is also adding non-retail elements to its properties by building additions, such as the recently announced AC Hotel that is scheduled to open at the Sawgrass Mills mall in 2020.
4. Simon's outlet business has a dominant market share
Tanger Factory Outlet Centers (SKT -0.52%) is the only pure-play outlet shopping REIT, but Simon has the largest share of the outlet market by a large margin. In fact, there are eight U.S. outlet operators with more than 1 million square feet of outlet space, and Simon owns about two-thirds of the total square footage of the group.
5. Simon treats its tenants like partners
Simon goes above and beyond what most mall owners do in order to ensure their tenants are successful. In addition to adding non-retail elements to boost traffic at its properties, Simon invests a lot of money and resources to help boost retailers' sales. Just to name one recent example, Simon developed a new omnichannel-focused online retail portal for its Premium Outlets retailers.
6. Simon's revenue is growing despite the retail climate
It's no secret that the brick-and-mortar retail space hasn't exactly been a strong point of the economy recently. High-profile bankruptcies from companies like Toys R Us, Sears, and others, as well as massive store closures from many other retailers have left many malls with widespread vacancies.
That's why it's even more impressive that Simon has been able to continue to grow its revenue. In the second quarter of 2019, retailers in Simon's portfolio reported retail sales growth of 3.5% over the preceding 12 months. Because of this strength, Simon's same-store net operating income has continually increased, leasing spreads have been impressive, and occupancy has remained at high levels.
7. Simon's dividend is massive and growing
Simon recently increased its dividend to $2.10 per quarter, which gives the stock a 5.3% annualized yield as of this writing. What's more, Simon has a solid track record of dividend increases, and with a well-covered payout -- roughly 68% of 2019 funds from operations (FFO), there's no reason to believe things will change anytime soon.
SPG Dividends Paid (TTM) data by YCharts
8. Thanks to retail headwinds, Simon's stock is cheaply valued
To be clear, Simon is not in the same predicament that many other mall operators are. As I've discussed, the company's retailers continue to experience sales growth and Simon's rental income continues to grow as a result.
However, the stock is valued as it if were facing serious trouble. As of July 31, Simon trades for less than 13 times its expected 2019 FFO -- that's an extremely cheap valuation for an industry leader with no major signs of trouble.
9. Simon invests in retailers -- often at rock-bottom prices
Rental income from its tenants is how Simon aims to make the bulk of its income, but the company has other ways that could end up being potentially lucrative. In addition to having a venture capital division (Simon Ventures), the company also loves to invest in distressed retailers and essentially partner in their turnaround.
For example, in 2016 Simon teamed up with General Growth Properties to acquire the Aeropostale brand out of bankruptcy court. Not only did this prevent 160 of the company's Simon-based stores to become vacant, but it also allowed Simon to pick up a valuable brand at a fire-sale price. Simon also has invested in Authentic Brands Group -- owner of Juicy Couture, Nautica, and other names -- and there are rumors that Simon could be considering an investment in Forever 21.
To sum up...
Simon is a unique mall REIT. It hasn't been affected by retail industry headwinds nearly as much as its peers, and it continues to take active steps to ensure that its properties will stay occupied and full of shoppers. At an extremely cheap valuation, Simon could be worth a closer look before the market wises up and acknowledges what this business is really worth.
