The economic shutdowns used to slow the spread of the coronavirus have upended the real estate investment trust (REIT) sector. Some niches have thrived, while others have languished. Today I'm looking at potentially buying stock in Simon Property Group (SPG 0.96%), which operates in the hard-hit mall space.
That's not as crazy as it seems. Here's why.
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I owned real estate investment trust Simon Property Group as 2020 started, believing it would be a survivor of the overhyped "retail apocalypse," the slow-moving shakeout taking place in the retail sector as retailers that didn't keep up with changing customer desires (including, but not limited to, online shopping) fell to the wayside. Compounding that problem, many retailers had taken on excessive leverage. Once-proud names were descending into bankruptcy, and others were downsizing their operations by closing stores.
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With roughly 200 well-located properties, split between enclosed malls and outlet centers, financially strong Simon was muddling through reasonably well. And then the coronavirus upended everything, turning a slow-moving trend into a real apocalypse by fast-forwarding what would have been years worth of change into months of upheaval. The turbulence isn't over yet, either, as a weak holiday shopping season at brick-and-mortar stores is likely to lead to another retail shakeout in early 2021.
Earlier in 2020, I managed to book some profits in a fairly large holding, so I chose to sell my Simon stake to create some offsetting capital losses. I also sold Tanger Factory Outlet Centers (SKT 2.81%). But I haven't actually lost my taste for mall REITs just yet, because I don't believe consumers have lost their taste for shopping at the mall. So I'm once again gearing up to jump into Simon.
Positive signs
The most positive thing I've read about malls recently came out of Tanger, which highlighted that its outdoor centers saw traffic decline just 2% year over year in the third quarter. Think about that: Despite a global pandemic and reduced operating hours, Tanger's largely outdoor properties basically drew just as many people this year as last. Meanwhile, during Simon's third-quarter 2020 earnings conference call, it highlighted that retailer demand for space in outlet centers has remained robust. These are not signs of a dying industry. Enclosed malls aren't doing as well because of health concerns, but humans are still inherently social, and shopping is still an important pastime.
Meanwhile, financially strong Simon isn't sitting still -- it is working to strengthen its position in the industry. That's included buying retailers out of bankruptcy and acquiring a peer with a great portfolio of malls. While some question the wisdom of investing in retailers, the key here is that the price is cheap -- and, perhaps most importantly, Simon is doing its buying with partners. One of those partners is an experienced hand in the retail sector that will basically oversee the day-to-day retail operations. Simon is really just providing the cash to help ensure the survival of key tenants. It has done the same thing before with Aeropostale. While Simon is using the downturn to get better, most of its peers are simply trying to survive, if they can.
That brings up the Chapter 11 bankruptcy protection filings of CBL & Associates and Pennsylvania REIT. These two heavily leveraged mall landlords needed to restructure their balance sheets, which is troubling. However, it speaks to the cleansing nature of big industry downturns. All malls are not of the same quality, and weaker malls and mall operators are going to go away. That is a great outcome for financially strong REITs and better-placed malls, which is basically a description of Simon's business. With fewer malls, the ones that remain will get more desirable for shoppers and for retailers.
And, equally important, the quick development of coronavirus vaccines suggests that the health-related headwinds will eventually end. There's no overnight solution -- it will take months, if not quarters, before vaccines are widely disseminated enough to have an impact on the direction of the coronavirus. But the world rallying together on this effort is a silver lining to today's dark clouds. I firmly believe that, at some point in the not-too-distant future, more-normal life is destined to resume. That will likely include people returning to the mall.
Only Simon
I noted that I came into 2020 owning Simon and Tanger, but I'm only looking at Simon right now. I think it will not only be a survivor, but that it will exit this downturn an even stronger player. It also offers exposure to both the enclosed and factory outlet spaces in one investment, whereas Tanger only owns outlets. Diversification is important to me, so that gives Simon the edge as I dip my toe back into the mall REIT space. There's still more trouble to come, so I'll be holding my nose as I press the buy button. But I just don't see the long-term future being as bleak as Wall Street seems to think it will be right now.
