The shares of Simon Property Group (NYSE:SPG) have fallen over 50% so far in 2020. That's pushed the stock to its lowest point since the deep 2007-to-2009 recession. To put that another way, Simon is trading hands near 10-plus-year lows. Is this giant real estate investment trust (REIT) worth the risk? Or is the sharp drop a sign that mall landlords like Simon are dealing with headwinds that will change the shape of their businesses for years to come? The answer is probably yes to both questions. Here's what you need to know.
1. Big and diversified
Simon is the largest mall-focused real estate investment trust in the industry, with around 200 high-quality properties. That is materially more than peers Macerich (NYSE:MAC) and Taubman (NYSE:TCO), which own about 50 and 25 similarly well situated assets, respectively. However, there's more to the picture here than just the total number.
While Macerich and Taubman are focused on enclosed malls, Simon's portfolio is comprised of both enclosed malls and outlet centers. Moreover, it also has a number of properties in foreign markets. All in all, it is probably the most diversified mall REIT you can buy today. Companies get the same benefits from diversification as you do with your own portfolio, so this is a major point of differentiation in this industry niche.
2. A solid foundation
In addition to diversification, Simon also differentiates itself from its closest peers in another important way -- its balance sheet strength. The REIT's financial debt to equity ratio of about 1.4 times at the end of the second quarter was lower than that of both Macerich (1.8 times) and Taubman (3.9 times). Meanwhile, Simon covered its interest costs 3.6 times over, well more than Macerich (2 times) and Taubman (a troubling 0.3 times). Basically, Simon remains an industry leader with regard to financial strength, despite today's headwinds.
3. The hit
The first two points above are important today because COVID-19 has been a disaster for the retail sector, including for retail landlords like Simon. But here's the thing: The second quarter, a period that saw retail stores shut down by the government, was actually not as terrible as you might have expected for Simon. Yes, the REIT's funds from operations (FFO), which is like earnings for an industrial company, fell 30% year over year, but it remained solidly in positive territory at $2.12 per share. Macerich's FFO declined 55% and Taubman's dropped a little over 60%.
There's no question it's bad right now for mall owners, but Simon is holding up better than its most direct peers. And at this point, the vast majority of its properties are open for business again. It isn't collecting all of the rent it's due, but that's not unique to Simon. The REIT is working with tenants, and when it feels it has to, taking more aggressive actions to ensure it gets paid. In July, Simon collected 73% of rents -- which sounds terrible until you consider that this number was closer to 50% in April.
4. The future
So Simon is muddling through a difficult period, and appears to be doing better overall than its closest competitors. That's great, but it doesn't make the stock a buy. In fact, for really conservative investors, Simon is probably best avoided. However, if you can stand some uncertainty, there are a couple of reasons to consider buying Simon.
For example, while COVID-19 is an issue today, will it stop people from going to highly desirable malls forever? Early evidence suggests that's just not the case, since traffic at open malls has been improving (even if there's still a long way to go before traffic reaches pre-pandemic levels). Humans are inherently social, and shopping is a major pastime for a lot of people. Then there's the dividend, which Simon projects will be at least $6 per share in 2020. That's down from last year's tally of $8.10 per share, but still impressive when you consider that the company was basically shut down for months due to the coronavirus.
Meanwhile, Simon is taking some interesting steps to change with the times. For example, it has been working with partners to buy bankrupt retailers at discounted prices. Compared to Simon's mall business these investments are tiny, but they will help the retail ecosystem immensely. And it has been rumored to be in discussions with online retailer Amazon, which some would view as a mall killer. Those discussions could be about bringing fulfillment centers into Simon's malls, or Amazon opening up grocery stores in the facilities (an easier goal to achieve because of zoning issues). While the talks may not bear fruit, the fact that Simon is "talking to the enemy" highlights that it isn't sitting still as the industry changes around it. That willingness to change with the times has material value.
The cleanest dirty shirt
At the risk of being redundant, risk-averse investors should probably avoid Simon and the entire mall REIT sector. There is a lot of uncertainty today, and malls face major headwinds. However, if you are the type of investor who likes to buy when others are fearful, Simon looks like one of the best positioned mall owners in the industry. And despite the headwinds, it appears to be holding up reasonably well. It looks highly likely to muddle through, and perhaps even come out the other side better positioned than peers. For more aggressive investors, that could easily make this down-and-out stock worth owning.