Simon Property Group: The Big Reopening
Summary
- As of May 5, Simon Property Group has reopened 59 properties and is planning to reopen another 18 properties within the next week.
- The Taubman acquisition is expected to close as initially planned.
- Taubman's earnings release provided useful information on its Asian business in terms of what to expect once a mall reopens.
- Two months later, Taubman's Asia tenant sales and customer traffic are approaching 2019 levels. Can this be extrapolated to the US? If so, this is very bullish.
- Simon Property Group notes that shopper response to reopenings has been very positive, and initial traffic has been better than expected.
My core investment in the mall space has traditionally been through Simon Property Group (NYSE:SPG). I am still very bullish over the long term and have a high degree of confidence that SPG will survive and, eventually, thrive. This is due to its strong balance sheet, high-quality properties (with increasing emphasis on mixed-use environments) and international diversification, among other things. That said, one has to be mindful of the challenges in customer-facing businesses over the next few quarters. In my previous article on SPG, dated March 13, 2020, I had mentioned the following:
SPG's success is ultimately a function of the success of its tenants, who need to be in a healthy situation to pay rent. I am not sure how retailer business interruption insurance enters the equation, but the more this situation drags on, the higher the pain. How will the market react if a city in the US goes into lockdown (like in Italy) or if stores, restaurants, bars, theaters, etc are forced to close for weeks as part of local or nationwide containment efforts?
My message back then was to take advantage of the sell-off, but with caution. Back then, the US was assessing various containment options, and we hadn't gone through a lockdown. Today, after many weeks of nationwide lockdowns, there are some encouraging signs as cities start to reopen. However, the same cautious message still holds. A medical problem ultimately requires a medical solution.
As of May 5, SPG has reopened 59 properties and is planning to reopen another 18 properties within the next week. It has created a dedicated web page with reopening updates, which I encourage readers to visit. According to the company:
Shopper response to our reopenings has been very positive. Initial traffic has been better than expected
Unfortunately, the situation is far from "business as usual". This was also picked up by CNBC. For example, SPG will be providing free CDC-approved masks and hand sanitizing packets, and will make free temperature testing available using infrared thermometers. Business hours will be limited to allow for cleaning overnight, and high-touch areas (escalators, food court tables, door knobs, electronic directories, etc.) will be regularly sanitized. Even though these initiatives are absolutely necessary, one must wonder whether this really an environment shoppers want to go to? We can debate all day on this topic, however, in Taubman Centers' (TCO) Q1 2020 earnings release, we learnt some important information from TCO's Asian business regarding a road map/indicative time frame towards normality. Please note, SPG has agreed to acquire TCO (an 80% stake in Taubman Realty Group Limited Partnership for ~$3.6 billion in cash). Technically, the deal is still pending, but a preliminary proxy was filed a few days ago suggesting the deal is on track to close.
In the earnings release, TCO mentioned the following in the COVID-19 update section:
In Asia, the company’s three centers experienced varying levels of disruption due to COVID-19. CityOn.Xi’an was closed for about a month and reopened on February 29. CityOn.Zhengzhou was closed for 10 days and reopened on February 27. Starfield Hanam (Hanam, South Korea) never closed. In China, only theatres and children’s entertainment tenants, representing on average about 10 percent of the space, remains restricted. Since reopening, both CityOn.Xi’an and CityOn.Zhengzhou have increased their traffic and sales. Total mall tenant sales and customer traffic at both centers upon reopening were down nearly 90 percent year-over-year. Now, two months later, both are approaching 2019 levels. At Starfield Hanam, both traffic and sales have fully recovered.
In other words, upon reopening, it was a disaster (tenant sales and customer traffic were down ~90%). I was expecting something like this. Two months later, tenant sales and customer traffic are approaching 2019 levels. I was not expecting something like this. The key question is whether we can extrapolate this to the US? Will tenant sales and customer traffic at US malls approach 2019 level two months after reopening? To be honest, my initial assumption was 6-9 months. If it's closer to what TCO experienced in Asia, SPG will skyrocket much faster than I thought. As always, time will tell.
It is important to note that before the coronavirus, SPG was firing on all cylinders. It is the best in the mall space, virtually by any measure.
- Sales PSF consistently on the rise, with roughly 1/3rd of properties producing sales PSF in the ~$900 zone (international properties are doing even better than the US, in the +$1,000 zone).
- Occupancy consistently high (95% zone) despite anchor replacements, retail bankruptcies and the so-called retail apocalypse.
- Debt is the lowest in the space and will remain low even following the TCO acquisition.
- Comparable property NOI continued its upward trend.
- Consistent dividend growth with a high dividend coverage ratio.
At the start of the crisis, my view was that enclosed malls would be the last to recover within the retail real estate spectrum, and that's why I was prioritizing investing in beaten-down open-air, grocery-anchored properties through companies like Brixmor Property Group (BRX). Let's see how quickly enclosed malls bounce back. Another name in the mall space I believe in is Macerich (MAC), which owns an urban trophy portfolio that will stand the test of time.
In any case, be cautious and disciplined, as it will be a rough and volatile ride. For example, mall owner Nate Forbes says April was bad, May will be worse, as his company collected just 19% of rents in April and expects that number to drop further in May. These are horrible results, and one must not be shocked if SPG decides to temporarily suspend the dividend until the storm is over. The company plans to report Q1 2020 results after the market closes on May 11, 2020. Stay tuned.
This article was written by
Analyst’s Disclosure: I am/we are long SPG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am also long MAC.
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Comments (93)
Those properties most indebted will not survive.
Others like SPG will survive , but will be forced to offer discounts on rents.
Be patient and wait for lower prices on SPG before accumulating
Paul
Long SPG
