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Simon Property Group Wants to Be More Than Just a Mall Operator

By Luis Sanchez CFA - Updated Aug 22, 2019 at 9:43AM

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With retailers struggling, the REIT is diversifying its real estate business.

The retail apocalypse is in full force. Last year, Sears Holdings filed for bankruptcy and is liquidating stores. Earlier this year, Dressbarn (owned by Ascena Retail Group) made the decision to close all its stores. And these are just two examples of the dozens of struggling retailers that have been closing thousands of stores or are on the brink of insolvency.

A major loser in all of this (other than the individual retailers) are the real estate companies owed rent and facing higher vacancy rates in the malls they operate. Among them is Simon Property Group (SPG 1.00%), a real estate investment trust (REIT) that operates 235 shopping centers around the world. While the company's business is holding up well, Simon is redeveloping much of its property to diversify its portfolio.

shopping mall retail

Image source: Getty Images.

"Densification"

As stores close and space becomes available at malls, real estate operators typically have just sought to replace the vacating tenants with new ones. While Simon still does this in most cases, it has been breaking the mold with what it calls "densification" projects to add new types of businesses at its malls.

Listed in Simon Property Group's press release for its second quarter 2019 earnings are more than 20 projects seeking to turn areas formerly occupied by retail stores into hotels, offices, and residences.

For example, the company announced it is bringing an eight-story Marriott hotel to its Sawgrass Mills shopping center near Miami. The 174-room European-styled hotel will feature a luxurious lounge with an upscale bar and restaurant and a 24-hour fitness center. The project is intended to appeal to a broad audience, including international visitors who sometimes visit the Sawgrass Mills mall for multiday shopping trips.

This isn't a small effort. Simon has 30 properties across its portfolio that are actively being redeveloped with an expected total cost of $1.7 billion. This includes redeveloping stores for new retail tenants, but a large chunk of these redevelopments are densification projects.

Bringing new technology and services to malls

There are other ways to upgrade malls for the 21st century. One way is through technology.

Simon Property Group has partnered with Apple Maps and Mappedin to make shopping center maps accessible on smartphones. The company has also rolled out service features including a parking reservation app, a Facebook Messenger bot, and electric vehicle charging stations. These features are designed to give consumers fewer excuses not to shop.

Another interesting push is in esports. Simon Property Group made a small investment in a company called Black Ridge Acquisition, which has signed agreements to acquire Allied Esports and the World Poker Tour. When asked about the investment on the company's recent earnings call, CEO David Simon noted that he would like to use malls as exhibition halls for esports events to drive traffic and sponsorship income. He didn't comment about the World Poker Tour, but perhaps there is an opportunity there as well.

The company isn't just investing to add features to its malls, it's fundamentally reshaping and upgrading the experience to fit the times. These initiatives could help make malls cool again and bring people back.

Modern shopping mall interior

Image source: Getty Images.

Tomorrow's malls

The mall of the future will look very different from the past if the recent moves at Simon Property Group are any indicator. The company is thinking creatively about improving what malls have to offer, trying to make lemonade from the industry's lemons. 

Vice Chairman Richard Sokolov said on the Q2 2019 earnings call:

"Yes, some people could look at the demise of certain anchors as a sign of impending doom. We look ... at it in the complete reverse as a significant opportunity, because we're now getting the ability to take that space and redevelop it with accretive returns on investment and higher rents."

Shareholders don't appear to have the same vision as the management team. Simon Property Group stock hasn't performed well lately, but this could turn out to be a good time to buy if the company successfully executes its vision of transforming itself into more than just a mall operator.

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