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Is SPG the Best Mall REIT?

Jul 20, 2020 by Marc Rapport

Simon Property Group (NYSE: SPG) has the breadth and depth that makes a pretty solid argument that it's the best of the small universe of mall-oriented real estate investment trusts (REITs) for investors looking for a stock market buy-and-hold in that space.

Even though the Indianapolis-based company just slashed its dividend by 38%, it's still paying $1.30 per share, and at a pandemic-pounded price of $63.98 on July 11, it could be a bargain. That's still a yield of more than 7.5%, and even after bouncing back from a 52-week low of $42.25 as COVID-19 slammed mall doors shut in March, that's still a long way off the 52-week high of $164.86 for a profitable operation with lots of hard assets.

Simon says it's also been able to reopen nearly all of its 204 malls, with the rest expected to be open soon. But it's not going to be smooth sailing, as many of its major tenants are reeling from the effects of the deepening bite of e-commerce into brick-and-mortar sales that was only intensified by stay-at-home orders and social distancing mandates and fears.

So why is it still at the head of its class?

Major properties in major markets

Well, they point out they're the only real estate company in the S&P 100 index of the largest cap companies. Their portfolio includes several of the most valuable shopping center properties around, including Sawgrass Mills in Sunrise, Florida; The Fashion Show on the Las Vegas Strip; Phipps Plaza in Atlanta's upscale Buckhead neighborhood; and its largest, the 3- million-square-foot King of Prussia mall near Philadelphia. And Simon's Premium Outlets command some two-thirds of that market nationwide.

The company's dominance is not only deep but it's widening. A significant presence in international markets -- including Japan, Korea, Malaysia, Italy, France, Spain, Germany, and the U.K. -- provides geographic diversification, a good thing to have as different countries recover from COVID-19 at their own pace.

That's one kind of diversification. Another kind is buying the companies whose stores are struggling in Simon and others' properties. Simon and Brookfield Properties (NASDAQ: BPY) are widely reported to be exploring that idea with J.C. Penney (OTCMKTS: JCPNQ).

Simon also is in its third year of a $4 billion plan to add "new lifestyle experiences" to its shopping centers. That includes wellness centers, trendy restaurants, boutiques, big-brand hotels, and residential options.

"As a global leader, we focus on what's new, now, and next, investing in destinations that generate excitement, discovery, and build strong communities," CEO and chairman David Simon said when that initiative was announced in May 2018.

"The world of retail is ever-changing, and Simon is thriving," Simon said then.

Staying liquid while businesses dry up

With a market cap of $23 billion, about $3.5 billion in cash, and $5 billion available from a term loan and revolving credit facilities, Simon does appear to have the liquidity to execute on that vision and deep enough pockets to ride out the coronavirus storm with some aplomb.

However, the same is not so true of its vast base of tenants, many of whom are brand names now going through bankruptcy, closing stores, and not paying rent. Coresight Research has predicted 20,000 to 25,000 closures this year alone, with 55% to 60% of them in U.S. malls.

Simon itself has sued The Gap (NYSE: GPS) -- whose stores also include Banana Republic, Old Navy, and Athleta -- over $66 million in unpaid rent and other costs. That company has 391 stores occupying space in Simon properties. (Simon itself, in fact, has been reported to miss some debt payments of its own.)

Occupying the top seat could be a hot seat

The commercial real estate business is seeing the first of what could be a wave of such actions, which also could include challenges over co-tenancy clauses and force majeure provisions, which hold that rent must be paid no matter what.

According to the company's first quarter supplementary report, Simon's occupancy was 95.1% at the end of 2019 and 94% at the end of the first quarter this year. Leasing spread per square foot was actually up 4.6% year over year to $2.80, and reported retailer sales per square foot were $673 for the trailing 12 months ending March 31, 2020, up 2.1%.

How those numbers hold up will say much about Simon's attractiveness as a buy-and-hold or buy-and-sell. Compared to its most direct competitors -- including Taubman Centers (NYSE: TCO), which is now taking Simon to task over the latter's decision to pull out of a deal to buy the Detroit-based REIT -- Simon Property Group can still claim the top spot in a class full of troubled players.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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