COVID-19 has upended the retail sector, with malls like the ones that real estate investment trust (REIT) Simon Property Group (NYSE:SPG) owns taking the brunt of the hit. The problem is that this economic downturn isn't like the ones that have come before it, and it is causing changes that could alter the retail environment forever. This is the one number to watch if you want to get a true feel for how Simon is managing through the hit.

The old numbers don't work today

Historically, there are a few key numbers that real estate investment trust investors would monitor to see how a landlord was doing. Things like funds from operations (FFO), which is like earnings for an industrial concern, are still relevant, but they are uniformly bad for retail-focused REITs like Simon. That's because of the efforts to slow the spread of the coronavirus, which shut non-essential businesses and reduced foot traffic by asking consumers to stay home. Yes, FFO is still important -- but there are bigger issues right now, including simple survival.

People walking in a busy enclosed mall

Image source: Getty Images.

On the survival front, investors should look at the balance sheet to see if a REIT has enough staying power to muddle through this rough patch. Simon is one of the best-positioned mall landlords in its peer group, with a debt-to-equity ratio lower than those of its closest peers.

However, there are major changes taking shape in the mall space, largely referred to as the "retail apocalypse." It's a bit of a hyperbolic term, but the crux is that online shopping is hurting the businesses of heavily leveraged retailers that haven't kept up with consumer shopping trends. That includes, but is not limited to, the rise of online shopping. Many retailers are going bankrupt and closing stores. COVID-19 has accelerated the pace of change, and tracking that change is what's really important right now. 

That brings up occupancy. Clearly, a mall full of tenants is a sign of a desirable asset that is far more likely to survive than a half-empty mall. However, this metric isn't useful right now because many tenants aren't paying rent as a result of the coronavirus. In fact, Simon is suing Gap over unpaid rent even though it is occupying space in the landlord's malls. It isn't the only tenant fighting over its contractual rent obligations, either. Simon, meanwhile, isn't providing information about how much rent it is collecting, which is a little disappointing, but there's nothing investors can do about it. But that leaves another number that may be more helpful than investors think: sales per square foot.

What's the trend?

Generally speaking, enclosed malls and outlet centers are "graded" based on how productive they are for tenants. That's basically what sales per square foot tells you. It's pretty simple: Good malls have high sales, lesser malls have low sales. Simon, on average, tends to own well located and desirable malls. In 2019, Simon's malls had sales per square foot of $693, up 5% year over year. That's a solid number in the industry, especially since the company owns roughly 200 malls, far more than most of its peers. 

Here's the thing: COVID-19 could drastically change the mall. It's still early days, and it's hard to say what will or won't happen just yet -- but if you watch sales per square foot, you'll get an idea of what's going on. For example, in the first quarter of 2020 Simon's sales per square foot number fell to $673. That was impacted by March when the hit from COVID-19 started to show up in the REIT's results. In February sales per square foot over the trailing 12 months was $703. 

Obviously, not having malls open was a massive hit to sales. The results in the second quarter will be dismal at best since malls were shut for most, if not all, of the quarter. But watching the metric will help show how malls are recovering, since a rising sales-per-square-foot number will indicate that sales are coming back. Flat or worse would suggest that Simon's portfolio is struggling to adjust. In the end, watching sales will give you a deeper insight into the fundamental value of Simon's portfolio than just about any other metric currently available. 

Watch and listen

Sales per square foot isn't perfect -- no number is. You have to look at it in conjunction with other metrics. Moreover, one or two quarters isn't enough information. But as the sequence builds it will provide investors as close to an inside look as possible at the value of Simon's assets in a world that has changed dramatically because of a global pandemic.

Historically, Simon has benefited from owning good malls. If COVID-19 changes that equation, then the REIT has some very big problems to deal with. If Simon's malls remain highly productive, then lessees and consumers will both keep showing up in droves.