Real estate investment trust (REIT) and mall giant Simon Property Group (SPG 1.07%) was one of the hardest-hit retail operators at the start of the pandemic. After a rough 2020, things took a positive turn in 2021 as in-store shopping returned and its malls returned to normal operations. Simon Property Group's share prices shot up 233% from March 2020 lows. But as omicron, the newest COVID-19 variant, makes its way across the country, there's concern it could crush Simon Property Group once again.
Mandates are gone, but closures are still happening
While most federal or state mandates requiring business closures are long gone, many businesses are still closing their doors as omicron, now the dominant strain of the novel coronavirus, spreads like a wildfire. New York Apple stores have shut down temporarily, as have Broadway and the Radio City Rockettes, with many other retailers, restaurants, and entertainment venues in major cities following suit.
Vaccinations are helping curb the severity of symptoms, but they aren't helping combat the spread of omicron. Confirmed cases are reaching record highs, motivating people to once again stay indoors, which equates to reduced foot traffic and sales for retailers across the board.
Not great news for Simon
According to a study conducted by Morning Consult, roughly 63% of the surveyed adults were comfortable shopping in a mall as of December 2021, a notable jump from initial lows of 23% from May 2020. But despite the increase in consumer confidence, it seems omicron is still impacting consumer choices. In-store retail shopping the Saturday before Christmas was down 26.3% when compared to the Saturday before Christmas 2019 according to Sensormatic Solutions' recent data, with shoppers having a preference for open-air shopping centers and outlet malls over the indoor shopping malls Simon specializes in.
Malls were already considered a risky asset class prior to the pandemic given the growth and long-term trend favoring e-commerce. Continued pressure from new coronavirus variants and new lockdowns definitely isn't helpful for the company or other retail REITs. Occupancy for Simon's portfolio has declined from 94% in March 2020 with base minimum rents per square foot of $55.76 to 92.8% occupancy and base minimum rents of $53.91 in the third quarter of 2021. In 2021, Simon let go of two malls after falling behind on payments, a strategic move to cut losses and move on from the non-recourse loans. But it's not all bad news.
Net income for Q3 2021 was roughly 25% higher than the third quarter of 2019. Funds from operations (FFO) were also up 2.6% when compared to this same period. This is largely thanks to the companies expansion plan, which included bailing out several retailers and acquiring Brooks Brothers and Taubman Centers in 2020. . This has helped reopen several malls for which the retailers were anchor tenants, while also expanding its portfolio and revenues despite impacts from covid. The fourth quarter of 2021 and the full-year earnings report will help determine how greatly the new variant is impacting its business, but despite short-term headwinds, the company is faring well.
The future for Simon
Malls aren't dying, rather they are changing. Preferences for in-person shopping seem to be shifting toward more open-air shopping malls compared to indoor centers meaning there's an opportunity for Simon to further grow their portfolio to accommodate these changes and expand even further into more outlet and open-air malls. Given Simon's global presence, it's in the perfect position to benefit as the leading provider of high-end malls for the long term. It just has some unpleasant short-term challenges to overcome. Investors shouldn't necessarily shy away from Simon today, but definitely be aware of the risks and volatility that exist within the company today as it continues to ride out the coronavirus pandemic and find its place in the growing world of e-commerce.