Simon Property Group (SPG) is the winner in the Big Mall Shakeout.
But has it won anything worth having? Sometimes the last player standing is just the last to hear the music stopping.
It is a strange historical fact, but the amount of net warehouse space in the U.S. actually peaked three decades ago. The rise of containerization, bar codes, and back-end computer systems to track shipments meant that products no longer had to sit in warehouses waiting for distribution, and that retailers could finally track back from the sales floor to the factory.
A similar event is happening right now. The amount of net retail space has peaked. SPG has a lot of white elephants on its hands.
How many? Green Street Advisors estimates that 10% of America's roughly 1,000 enclosed malls will fail in the next 10 years. Co-Star sees over 200 malls with at least 250,000 square feet each that have vacancy rates over 35%. Deadmalls.com claims to track such problems, but it is under-reporting the problem -- I know of at least four malls just in the Atlanta metro area that aren't on its list and that are in various stages of disappearing.
Over the Christmas holidays, The Atlantic had a fascinating piece detailing this value destruction, much of which Jeff Jordan gave us here at Seeking Alpha. Vacancy rates are up to 40% for regional malls, 20% for community centers, and rents are flat, yet SPG's market cap keeps rising.
Why? Co-Star credits Simon and its recapitalized rival, General Growth Properties, with backing away from the space, even dropping mortgages on failing properties. Simon failed to take its rival out of bankruptcy in 2010. Bill Ackman has backed away from trying to put the two companies together.
But that still leaves Simon with a ton of underperforming real estate. The company's yield of 2.74% is nothing special, yet the company has tripled in value since 2009. Its profit margin took a big hit in 2012, and while it's still throwing off tons of cash, you have to ask: For how long?
Sure, some malls will be reinvented. The Windcrest Mall in San Antonio is now the home of Rackspace (RAX), an Internet service provider. Some malls can be reborn by taking on new anchor tenants, as Cobb Center near Atlanta was reborn with help from Costco (COST) and restaurants serving a major arts center nearby. There is huge opportunity in re-imagining old mall properties with a mix of residential, offices, and small-scale retailing -- new downtowns for the suburbs.
But making that happen will take both capital and imagination. In the near term, I can't see any reason to buy this company, and lots of reason to think about going short on it. How do y'all feel?