Please ensure Javascript is enabled for purposes of website accessibility

Buy This Stock Before Wall Street Wakes Up

By Reuben Gregg Brewer - May 21, 2021 at 7:38AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This out-of-favor REIT is already seeing business pick back up -- and it will only get better from here.

Mall landlord Simon Property Group (SPG 2.20%) is still down 18% from where it started out in 2020, and 36% from its recent highs in 2018. This at a time when the broader stock market, despite the recent pullback, is hovering near an all-time peak. There are compelling reasons to be worried, but also some very real reasons to believe that this real estate investment trust (REIT) is about to start rewarding investors again. Here's why you should take a deep dive here before the rest of Wall Street wakes up to the opportunity.

1. The mall is not going away

The growth of online shopping has some worried that physical shopping is on the way out. The problem with this narrative is that humans are social creatures and going shopping is something that many people just like to do. For evidence of that, mall REIT peer Tanger Factory Outlet Centers recently noted in its first quarterly 2021 earnings update that April foot traffic at its largely outdoor facilities was higher than in 2019. Clearly people are once again becoming comfortable shopping in person.  

A parent and child at a mall.

Image source: Getty Images.

Simon owns a mix of around 200 enclosed malls and outlet centers, so foot traffic patterns are a bit more nuanced. However, during Simon's first-quarter earnings conference call, CEO David Simon noted that sales in March 2021 were higher than they were in March 2019. While some of what's going on could be related to pent-up demand, the real takeaway is that the death of the mall has been greatly overstated.  

2. Getting better

While the mall concept remains strong, not every mall will (or should) survive. Retailers are getting increasingly selective in where they place stores, and malls located in densely populated and wealthy areas are more attractive. Malls in sparsely populated and less wealthy regions will likely have increasing problems attracting tenants. So will secondary malls that are older or not well maintained, even if they are in desirable regions. Simply put, retailers are focusing their efforts on the best locations.

This has led and will continue to lead the shakeout in the mall space as good malls survive and lesser malls close. But there's a silver lining for a company like Simon, which generally owns well-located and desirable malls. As the number of malls shrinks, the remaining malls become more valuable to retailers and to shoppers.

3. An attractive dividend

None of this is meant to downplay the very real difficulty posed by the coronavirus pandemic in 2020. The government mandated shutdown of non-essential businesses and social distancing left Simon with little choice but to cut its dividend. The dividend yield today is around 4.3%. That, however, is well above the 1.3% yield you would get from an S&P 500 Index fund or the 3.2% yield on offer from the average REIT, using Vanguard Real Estate ETF as a proxy. So, in today's market Simon is offering a fairly attractive yield.  

SPG Dividend Per Share (Quarterly) Chart

SPG Dividend Per Share (Quarterly) data by YCharts

However, the really interesting thing is that the dividend here is likely to grow in the future as business starts to pick up again. That is exactly what happened after the deep 2007 to 2009 recession, which also forced Simon to cut its dividend. Once the economy got back on its feet, dividends grew along with the company's improving business. Of course there's no way to tell if history will repeat itself, but it provides a very reliable template for investors to look back at.

4. A set up

Simon's malls would likely start to pick up again even if the landlord had done the bare minimum to survive. But it didn't just muddle through, like many of its peers. It strengthened its position, just like it did during the last recession. This time around it bought out a competitor with a strong portfolio of malls and invested, along with partners, in a collection of retailers. So as the mall sector recovers, Simon will be working from a better position than when the current headwinds began. 

It has also been working with many of its tenants to help them get through this period. That has often included inking leases with rent at least partially based on a percentage of sales. As sales come back, like they appear to be doing, these agreements could juice Simon's revenues. Offsetting this, however, is the fact that Simon is taking a strong stance on the leasing front and is willing to walk away from deals it doesn't think are fair. That could lead to a longer recovery time for occupancy levels, but lead to a stronger business over the long term given that leases often run for up to a decade. So any recovery lag from this firm negotiating position is likely to be well worth it for investors.  

Still time to jump aboard

Investors are already starting to see some light at the end of the tunnel here, noting that the stock has rebounded from the lows seen in 2020. However, there's still time to put some money to work because Simon's business rebound is still in the early stages. While conservative dividend investors might not want to jump into this turnaround story, more aggressive types should do a deep dive now -- before all of Wall Street realizes just how much upside potential there is in Simon's mall portfolio.

Reuben Gregg Brewer owns shares of Simon Property Group. The Motley Fool owns shares of and recommends Vanguard REIT ETF. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
$108.84 (2.20%) $2.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.