Given the ongoing shift toward online shopping, a lot of investors have given up on malls. Indeed, Simon Property Group's (NYSE:SPG) stock is down some 40% from its 2016 highs. It also ended up cutting its dividend nearly 40% during pandemic-hit 2020. And you still might want to buy this real estate investment trust (REIT) now. Why? It looks like things are starting to get better, which history suggests will be a big win for investors.
Too much hype
When it comes to malls, the big story is that consumers are shifting to the internet. That's the underpinning of the hyperbolic retail apocalypse theme. Only there's more nuance here than meets the eye. While it is true that online shopping is expanding at the expense of physical retail, the retailers facing the biggest problems are the ones that haven't kept pace with consumer trends and that have allowed themselves to get over leveraged. In other words, it is weak financial performance and too much debt that has really taken most retailers down.
Malls remain an important way for companies to reach consumers. For example, Chico's FAS (NYSE:CHS) summed it up in a recent shareholder presentation, saying, "Stores continue to be a strategic asset. Digital sales are typically higher in markets where we have a retail presence." Yes, this clothing retailer is looking to shut down less productive stores over time, but that's so it can focus on its most productive and best-positioned locations. That's the real story behind the mall right now.
Which is why it's so important that Simon owns a collection of around 200 or so enclosed malls and factory outlet centers. Largely speaking, they are located in population-dense regions with substantial average incomes. These are highly productive assets that customers want to visit and tenants want to be in. Now, add in one of the strongest balance sheets in the mall sector and Simon looks to have the staying power to survive both the retail apocalypse and the coronavirus pandemic. And while there will be more weak malls that close across the entire sector, that will make Simon's portfolio even more attractive in a reverse networking effect.
Why not wait?
All of that said, Simon's stock is up around 50% so far in 2021. Wouldn't it make sense for investors to await a pullback after such an impressive run? That's possible, but it could also leave you missing out on a long-term trend if the price doesn't drop or if you are afraid to jump in because Wall Street is facing a bear market. Remember, Simon is still well off its multi-year highs, and good things are already starting to happen.
For example, during Simon's first quarter 2021 conference call, management noted that sales were above pre-pandemic levels. That's despite the fact that foot traffic is still a bit subdued, though improvement since the worst of 2020 has been notable. In fact, Simon actually increased its full-year 2021 projections after it reported earnings. The update was modest at the top end of the range ($0.05 per share), but material at the low end ($0.20 per share), suggesting that Simon is growing increasingly more confident about the future.
That, in turn, helps explain why the REIT announced a nearly 8% dividend increase in late June. However, there's more to understand here. For example, during this retail downturn Simon has made a point of augmenting its business via a strategic acquisition and targeted investments, with partners, in retailers. In other words, management is looking to ensure it comes out the other side of this difficult period as a better company. That's the same playbook it used during the 2007 to 2009 recession.
That's the real story here and why you shouldn't wait to jump in. During the so-called "Great Recession," Simon's dividend went from $0.90 per share per quarter to $0.60. But once the REIT was past the worst of it, the dividend increased from $0.60 per share per quarter to $2.10 between 2010 and 2020 before cutting it in mid-2020 by a similar percentage as in the late 2000s. History may not repeat itself but it often rhymes, and if that track record is anywhere near close to what the future holds, dividend investors could be in for a long run of dividend growth here. And since that trend is already taking shape, you don't want to miss out by waiting too long and potentially missing the long-term opportunity.
A work in progress
While it would be unfair to suggest that Simon's stock is going to be a rocket ship no matter what happens in the broader market, recent results and its own history suggest that an important turn for the better has taken shape. You could watch from the sidelines and hope for a better price, but that may not come. Even if it does, you may not have the fortitude to jump aboard in a bear market. If you buy now and focus on the dividend recovery, past results hint strongly that you'll be happy you did.