As if the retail apocalypse weren't a big enough headwind for mall owners like Simon Property Group (NYSE:SPG), we now have social distancing and mandatory shutdowns in response to the COVID-19 pandemic. Thanks, coronavirus, for ruining people's lives, fortunes, and their weekend trip to the mall!
That's a little gallows humor about what is obviously a very serious and very big issue. It also gets to the core of the problem for mall owners like Simon right now: People aren't shopping in physical stores because they are sheltering in place to avoid catching and/or spreading the novel coronavirus.
Simon, however, took an early step to prepare for this -- and its ability to take that step helps highlights the company's strength in this time of retail uncertainty.
All malls are not created equal
Simon is the largest real estate investment trust (REIT) in the mall space. It owns over 200 enclosed malls and factory outlet centers. Online shopping has been an increasing problem for physical stores, with many of Simon's tenants either shutting locations or going out of business completely. This is the much-hyped retail apocalypse in action. But all malls aren't created equal -- and that's important here.
Simon happens to have one of the best collections of malls in the industry. They are, generally speaking, located near large and wealthy populations. That's helped the REIT maintain high sales per square foot averages (currently $693, up nearly 5% in 2019), sustain strong occupancy levels (roughly 95% at the end of last year), and keep its base rents per square foot up ($54.59 in 2019, roughly flat year over year). Basically, it owns malls that tenants want to be in -- and shoppers want to go to -- even as the retail landscape adjusts to changing consumer buying habits.
A key issue here is that Simon is investing in its malls to keep them up to date and -- just as important -- filled with desirable tenants. Unlike some other REIT sectors, running a mall is a very active and capital-intensive business, which plays to another strength at Simon: its balance sheet. Its debt-to-equity ratio and interest coverage are better than most of its peers. It easily had the wherewithal to deal with the impact of online shopping, even if it took some time and money to adjust.
And then it all fell apart
That, however, was before COVID-19 started to spread around the globe at an alarming rate. Many governments around the world, and locally within the United States, have asked (or ordered) that residents stop congregating in groups and/or just stay home. A mall is specifically meant to bring people together in one spot, so this is pretty bad news for Simon and its peers. In fact, many mall REITs have already announced dividend cuts. But they weren't in as strong a financial state as Simon.
To be fair, Simon may decide to preserve cash by trimming its dividend. That's what it did (temporarily) during the 2008-09 Great Recession, a period in which many thought the global financial system itself might come undone. But Simon is entering what is likely to be a recession in much stronger shape than its peers. And it just used that financial strength to give itself an even bigger cushion.
On March 16, the giant mall operator announced that it had inked a $6 billion revolving credit facility and term loan agreement with its lenders. That comes on top of roughly $3.5 billion in liquidity (including existing credit facilities) that it already had in place. In other words, as the COVID-19 crisis started to take shape, Simon ensured it had roughly $9.5 billion in liquidity that it could tap to help it muddle through.
What's interesting here is that Simon started 2019 with around $7 billion in liquidity, but used about half of that to buy a controlling stake competitor Taubman Centers (NYSE:TCO), which was in need of cash to keep its malls fresh. That Simon's lenders would come back so soon and in such troubling times with another round of financing speaks volumes about the mall owner's financial strength, asset quality, and highly respected management team. It also gives the mall owner a huge amount of leeway to deal with the downturn while continuing to invest in its operations (as best it can during a period where people are being asked to stay at home).
The value of this extra liquidity became clear just two days after the ink dried when Simon announced that it was shutting all of its U.S. malls. There's the obvious health angle here, but step back for a second and look a little deeper. Although every lease is different and Simon has thousands of leases, it is highly likely that the REIT's tenants won't be required to pay their full rent bills if Simon decides to shut a mall (even if there's some negotiation involved). In this way, Simon is basically using its balance sheet to give its tenants a bit of breathing room during what is likely to be a devastating event for many retailers. When the COVID-19 shutdowns eventually end, those retailers are likely to remember that Simon was a good partner and didn't use the desirability of its malls as leverage.
The cleanest dirty shirt in the retail laundry pile
In light of the COVID-19 impact, it is impossible to suggest that Simon's business is in great shape today. In fact, with all of its domestic malls shut, it is facing a rough period, financially speaking. But it is easily the best-positioned mall REIT in the hard-hit industry. That fact was on display when lenders gave it an extra $6 billion potential buffer just as the coronavirus pandemic was starting to pick up steam.
This REIT isn't an investment for the faint of heart, but if you own it, you can take some solace in knowing Simon has a better-than-average shot to make through this rough patch in stride.