Shares of real estate investment trust (REIT) Taubman Centers (TCO) shot higher by a massive 97% in February, according to data from S&P Global Market Intelligence, nearly doubling in price in just one month. By comparison, the S&P 500 Index fell by around 8%, driven lower by fears surrounding the spread of COVID-19. While the world has been focused on the coronavirus, there's clearly something big taking shape at enclosed-mall owner Taubman.
Taubman and its mall peers have been facing headwinds for a number of years now as consumer shopping has increasingly shifted online. Taubman owns some of the best located and highest quality malls around, but it still has been forced to deal with retailers going bankrupt and other lessees that are closing stores to rationalize their footprint.
It has been a rough time for mall owners like Tabuman, which have to keep spending to maintain and upgrade its assets or risk slowly becoming less desirable for lessees and consumers. So Taubman has been investing in its assets. That, however, requires money, and Taubman is highly leveraged. Continuing to spend heavily while also maintaining a sizable dividend was looking increasingly tenuous and the shares were deeply depressed as a result.
Seeing an opportunity to add great malls to its portfolio, mall giant Simon Property Group (SPG 1.52%) stepped in to buy Taubman on Feb. 10. Simon agreed to a premium of 51% to the price just prior to the announcement. The February gain was larger than that, however, because rumors of the deal had started to circulate before the announcement was actually made.
Simon has one of the strongest balance sheets in the mall REIT sector, so it should be able to support the spending needed to keep Taubman's malls in top shape. However, this is an all-cash deal, so investors in Taubman won't get a piece of Simon in exchange for their shares. It is unlikely that another suitor will be willing or able to outbid Simon, so Taubman shareholders should probably lock in the gain now since the stock is trading very close to the proposed acquisition price. Indeed, there is always a risk that an acquisition could fall apart, and COVID-19 concerns up that risk.
Investors in Taubman got some welcome news in February when Simon Property Group agreed to buy out its mall rival. There's really little upside to be gained from here. That said, if you lock in your gain and still want to own a mall REIT, it might make sense to use the current market swoon to buy shares of Simon, which is one of the best positioned mall REITs around. For reference, Simon was down 7% in February.