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Simon Property Group Stock Has Fallen Too Far


  • Simon Property Group's enterprise value has fallen more than those of other mall REITs over the past few months.
  • Simon is now valued at a 10%-11% cap rate, which seems like an excessive discount, even factoring in the short-term headwinds it faces.
  • I still prefer Macerich stock, due to the higher quality and densification potential of its properties, the optionality inherent in its debt structure, and its position as a buyout candidate.

In recent years, investors interested in the U.S. mall REIT sector have had to choose between paying a premium for sector leader Simon Property Group (NYSE:SPG) or seeking a higher yield from riskier peers: either mid-tier mall owners or REITs with top-tier mall portfolios but higher leverage like Macerich (MAC) and Taubman Centers (TCO).

The whole landscape has been upended in 2020, though. In February, Simon agreed to purchase all of Taubman's common stock for $52.50 per share. (The Taubman family will continue to own a 20% minority stake in the business.) And in March, the rapid spread of COVID-19 led most states to impose stay-at-home orders, forcing malls to close.

This caused mall REIT stocks (which had already been struggling in recent years) to plunge. Not surprisingly, shares of highly-levered Macerich have fallen more than Simon Property Group stock. That said, Simon's enterprise value has actually fallen further than that of Macerich, because equity makes up a much larger proportion of the former's capital structure.

As a result, Simon Property Group's valuation now implies a double-digit cap rate based on 2019 NOI. Simon also trades at a slight discount to Macerich on that basis. At such a bargain price, Simon Property Group is definitely worth a look for long-term investors with moderate-to-high risk tolerance, notwithstanding the extreme short-term pressure it faces from COVID-19. Nevertheless, I continue to see Macerich stock as more attractive.

An uncertain near-term outlook

The COVID-19 pandemic has created two major short-term problems for mall REITs. The most immediate problem comes from tenants skipping rent. Mall owners have been quite concerned about this risk. In late March, Taubman Centers sent a letter to tenants emphasizing that "All Tenants will be expected to meet their Lease obligations" notwithstanding the temporary closure of the REIT's malls. Taubman reasoned

This article was written by

Adam Levine-Weinberg is a value investor who has been researching and writing about stocks for Seeking Alpha and The Motley Fool since 2011. He graduated from Swarthmore College in 2007, received an M.A. in Political Science from the University of Chicago in 2009, and received his CFA charter in 2017. He is always on the hunt for irrationally beaten-down stocks, particularly in the aerospace, retail, real estate, and auto sectors.

Analyst’s Disclosure: I am/we are long MAC. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (195)

Great article, but I'm confused. Macerich is described as being higher leverage but their 3/31 equity is $2.7 billion with total assets of $9.3 billion compared to SPG equity of $2.5 billion with total assets of $34 billion. What am I missing?
GAAP book value assets do not reflect actual asset values.
Adam Levine-Weinberg CFA profile picture
Thanks. As Ryan said, book value is basically an irrelevant statistic for REITs. Many properties appreciate over time, but under GAAP the companies are required to depreciate the value of buildings/improvements. Over time, the divergence between GAAP and market value can be quite massive.
People are starting to realize that some of these 'precautions' are pretty silly and sometimes even dangerous. Two teenage boys died in China after doing their running tests while wearing N95 masks. Wearing masks while exercising is now banned in schools in China. Tragic that such things had to happen.
erniem profile picture
I you believe that masks are silly and dangerous, we are all in trouble.
Shaduc profile picture
Yesterday, I hung out at an optical shop in TST, Hong KOng.
As soon as we left his shop, the older shop owner put on a face mask, I w/o one on walked on the street
I live in China. The first few weeks of reopening were slow but the malls are now packed. People are working out in the gym. Wait till July in Europe and USA. Its a lot more fun to walk around the mall than to browse amazon on your phone for 3 hours looking at stuff by yourself.
Adam Levine-Weinberg CFA profile picture
I hope that's possible, but the COVID-19 outbreak was much better controlled in China than in the U.S. (and many parts of Europe, for that matter).
tonor profile picture
I disagree Simon trades at a 10%-11% cap rate. NOI is resetting down dramatically. Using this new reality, I’d put Simon’s implied cap rate in the 6%-8% range.

Let’s not forget Macerich failed to sell Queens Center, a top 5 Macerich property, after marketing it broadly when the economy was strong. Mall valuations have been weakening for years and Covid-19 has accelerated this trend.

Don’t believe published mall NAVs. They are crumbling, especially when subtracting the ever-rising cost of redevelopment spending need to keep the properties relevant.
Aspiring Penguin profile picture
many people failed to see this, hence they went long SPG at $160 a share and got creamed.

stock market is forward looking, not backward. hard concept to grasp for some...

An implied cap rate is based on in-place NOI.

On what basis do you figure a drop of 20 - 45% in NOI permanently?

A-mall valuations really have not weakened until very recently, and obviously the Taubman pricing did reset the market.
tonor profile picture
To share the progression of a same store 2020 NOI forecast for Simon by Green Street Advisors:

February 2020 forecast = +1.3%
March 2020 forecast = -1.0%
April 2020 forecast = -40.0% (yes minus forty percent)

Maybe Green Street is being harsh. I think they are in the ballpark. Permanently, I don't expect NOI to return to peak levels. Peak years for the best malls were 2017 and 2018, NOI turned negative at many in 2019 despite a decent economy and strong consumer. This year is turning into a horror movie, and I don't see mall REITs including Simon striking great new and renewal lease deals in 2020 to drive a big 2021 NOI spike. Green Street pegs SPG's 2019-2022 NOI decline at 20%, though I believe they are too optimistic rents not paid in 2020 will be collected in 2021.

Cascading department store closures, including Nordstrom shutting 15% of its mall locations forever, are turning more former A malls into Bs. These malls will never recover and the decline in NOI is permanent.
Thank you for your articles!
According to the data, the pandemic hit the low-income people more seriously. I wonder if it means that the MAC malls' customers are less affected? So pandemic will hit MAC lighter than others?
Thanks again!
Adam Levine-Weinberg CFA profile picture
@D.King I wouldn't count on that. Many of MAC's malls get plenty of business from low and middle income people. More importantly, it's not clear when malls will be able to reopen without major social distancing restrictions. Even when they do open, there will remain a risk that they would have to close again if the pandemic gets worse. I think 2020 is likely to be a very rough year for all mall REITs -- but that's already reflected in the stock prices.
Your research and comments imply a successful closing of the SPG - Taubman deal in July. Taubman would certainly want to close in this environment. Why then are the TCO pfs trading at a substantial discount to par?
Adam Levine-Weinberg CFA profile picture
It's not that big a discount. It just seems like a typical discount based on the risk that the deal doesn't close.
Can you expand on your NOI decline estimate, and how that translates into FFO? Seems like we're coming off high FFO multiples pre-COVID.

FFO decline and multiple contraction means these are likely fairly valued, not undervalued.

Social distancing means less revenue per rentable SF for the foreseeable future, which would compress rents across tenants - what do you think?
Aspiring Penguin profile picture
"FFO decline and multiple contraction means these are likely fairly valued, not undervalued."

yes. And need to consider the possibility that mall properties are permanently impaired, even after corona passes.

I do not see a good future for malls, movie theaters, and office REIT's. tickers such as BPY and SPG are a strong sell / avoid.
Just like all instances in human history this virus propagated downturn will clear out the "underbrush". Cash poor companies with sickly balance sheets will struggle to gasp for o2.
For the companies that are perpetual winners and industry leaders this is just a mosquito bite when you remove your myopic view. The big REIT's that have been through this before will be fine. Investing in them now is what separates the rich from the rat racers. If you cant see through the media driven hysteria and realize by next yr we will only be talking about the aftermath as stocks rally hard to close to pre-virus levels than you're missing the proverbial boat. .... If this was caused by an underlying financial disease like the subprime crisis I'd concede my bullish perspective. BUT it wasn't. It was driven by media hysteria for a disease that yielded a low mortality rate yet caused us to roll up the sidewalks and ultimately actually temporarily believe human behavior will actually change (it wont). Ppl will always want to go and be out and about shopping and doing social things that involve physical interaction. Sorry Bezos....Amazon is strong, but brick and mortar will not become obsolete. BUY SPG & the like now if you think their balance sheet is healthy enough, because come next yr you'll be rewarded.
Long-time AMZN investor and very recent SPG investor. Not a zero-sum game between them. People can enjoy shopping online from the best retailer run by the best CEO in the world while also enjoying shopping and eating in the best malls run by the best mall CEO in the world. I’m betting on the continued success of both of these top-shelf businesses, different as they may be.
Adam Levine-Weinberg CFA profile picture
Now we have an actual confirmed list of Nordstrom closures, courtesy of CNBC: www.cnbc.com/...
Marel profile picture
MAC malls are in there
Adam Levine-Weinberg CFA profile picture
Yeah, there are three. Chandler Fashion Center, Freehold Raceway Mall, and FlatIron Crossing.
LifeLongMetsFan profile picture
I refuse to believe that SPG went frm an almost irrefutable SWAN to nosediving knife in just a month or two. SPG had plans to move on frm brick and mortal investment properties prior shut-down. Does anyone have info. on these plans?
erniem profile picture
Well, I bought SPG around Mar.23, and that was certainly the right time to. I'm not adding more shares at today's prices.
Biological profile picture
This is fascinating:

"Brookfield Aims to Invest $5 Billion to Shore Up Troubled Retailers," WSJ, 7th May.


Mall owner Brookfield Asset Management Inc. plans to devote $5 billion to shoring up retailers hit by the coronavirus pandemic, a bet on a beaten-down sector that could also help keep its rent payments rolling in.

The initiative will be aimed at taking noncontrolling stakes in retail businesses with prepandemic revenue of $250 million or more whose sales have plummeted as stores have been forced to close and consumers have remained on lockdown.

The Canadian investment giant said it plans to finance the program using money from its balance sheet and existing funds and investment strategies. It may also raise additional institutional capital for the program.

The retail-investment program, which was reported earlier by The Wall Street Journal, will be run by Ron Bloom, vice chairman of Brookfield’s private-equity group. Mr. Bloom, a former restructuring banker at Lazard Ltd., is best known for his role leading the U.S. government’s auto task force during the financial crisis.

Being a tenant of Brookfield won’t be a requirement for investment, according to people familiar with the matter. Still, providing rescue financing for retailers could be a roundabout way for Brookfield to inject capital into its malls whose rent rolls have been battered during the pandemic. Shares of Brookfield Property REIT Inc., which had fallen by nearly half from the beginning of March through Wednesday’s close, climbed by more than 6% after the Journal reported on the plans.

Known for its contrarian investing style, Brookfield already has placed a large wager on bricks-and-mortar retail through its real-estate business. In August 2018, the firm closed a deal to buy the two-thirds of real-estate investment trust GGP Inc. it didn’t already own. The transaction valued the 125-property portfolio, mostly comprised of malls, at around $15 billion." [continues]

Of course, SPG was already doing that....on a lesser scale.

BAM might as well add MAC to BPY.....
Biological profile picture
Think of much more than $5 billion as BAM has co-investors, funds, industry players, pensions, endowments, PE, etc. I see BAM as a catalyst for perhaps another $15 billion of capital to be invested in this thesis/program.
The author has written very bullish articles on M.
The problem with SPG is that it is NOT discounting numerous bankruptcies of stores like M.
Lord and Taylor is in liquidation while Neiman is in reorganization .
JC Penney is sure to follow,but what will happen to the mall space in general if M and stores like M follow Neiman.
Mall owners like SPG will then have no other choice but to lower lease rates.
Adam Levine-Weinberg CFA profile picture
Malls will continue evolving as they always have. Some of the best "malls" aren't indoors and don't have any department stores.

In any case, I do think Macy's will survive and that it can be extremely successful with a smaller number of locations.
The landlord with the best real estate doesn’t go under just because a few or even many tenants become no longer viable. There are enough great businesses such as Apple, Microsoft, Tesla, Nike, and Lululemon to preserve the demand for Simon’s top-shelf retail outlets. Simon will pivot as needed, and investors at today’s prices are likely to be rewarded in the long term.
SRG collected 54% of rents from non Sears/Kmart tenants. That is considerably better than Forbes at 19%. We will find out about MAC next week, but I don't know why MAC would collect less than SRG. STORE collected in the neighbourhood of mid 60% and made concessions for another 30%plus of outstanding rents for the next two months. It's hard to know where MAC will come in and I don't have a view on SPG either.

As for a takevoer, the Ontario Teacher's Pension Plan ("OTTP"), with 200B in assets and 16% of common outstanding of MAC is the natural buyer and is currently the largest shareholder. The OTTP needs long lived assets, has deep pockets capable of providing funding moving forward and would presumably keep existing management in place (thereby providing incentives for management to make deal). The OTTP has been involved with MAC since 1998 in my review of the documents.

Incidentally, SRG also sold income generating assets at a 5.5% cap rate according to today's press release. I don't know which ones, and I think that SRG's properties are generally better than the market appreciates, but MAC's are better still on average.
The issue is the type of property MAC owns, not the quality. Seritage has more open-air properties than Macerich, and those collected more rent. I fully expect Macerich’s April rents to come in well below 54%.

As for Ontario, good point, and I am not a REIT tax lawyer, but I am pretty sure foreign owners cannot own more than 49% of a US REIT without it losing the tax advantages.
Brookfield is Canadian and bought GGP. I don't know if GGP remains a REIT. Even still, 21% tax is not too bad.
Good point, but the Brookfield REIT that I think primarily owns former GGP is a US REIT, yes? Brookfield has such a spider's web of entities that I doubt Brookfield Canadian owns more than 49% of former GGP but like I say I do not claim this with confidence.

The issue with paying corporate tax for a REIT is that you are going to seriously reduce the price a foreign buyer could pay for the company. That may be less of an issue at the price Macerich trades at today.
As a retired shopping mall executive of 38 years and having worked at Simon for a period of time, I can assure you that Simon malls are not becoming doctor’s offices as a SA reader opines. Yes, Macerich, Simon, and several others are and will continue to feel the pain of Covid with decreased traffic, CH11/CH 7 closing of retailers along with those that are on the brink, and rules and regs that were not present prior to the virus.

Do not underestimate the social ability of humans. Sitting in front of a computer all day at the expense of human contact will just never be a reality.

That said, B&M represents a gathering place for people. This will never change. Any readers that suggest malls are a thing of the past have no basis for statements of this nature and clearly do not understand how people enjoy the total shopping experience- restaurants, entertainment, people watching...

Obviously, Amazon forged the path for online shopping, and yes it has been gaining steam for years and no doubt was boosted big time by Covid.

People in general, especially women who are the predominant regional mall shoppers like the social environment of a mall regardless if it is in a smaller population or outside NYC.

Malls will never be in the physical numbers they were over the years I was in the business- too many malls still out there and too few retailers. However, moving forward the 800 lb gorilla will survive this and a couple others in the enclosed mall arena.

My guess is a closure of non-performing properties that were already on the bubble will continue but a consolidated and more focused product will emerge all in less than 24 months.
Adam Levine-Weinberg CFA profile picture
@Woodman45 Well said! I agree.
Get me the heck out of this house!!! Broadway Plaza is looking pretty good from my kitchen table.
@Woodman45 - Agree entirely. Thanks for commenting. That said, it’s a long, grueling task ahead for the likes of SPG. Many clothing establishments are stocked with seasonal merchandise inappropriate for an upcoming summer/fall season. Liquidation will be costly. For locations with previously closed, or closing, Sears it’ll be a further challenge. Frankly, a 25% vacancy plus rent reductions may prove untenable. Botton line, avoid large enclosed mall investments but enjoy the above standard destination. Just say’in . . .
Adam, any thoughts on Nordstrom vis-a-vis Macerich? Seems they got hit a bit harder than their exposure would have predicted on a purely prorata basis.
Adam Levine-Weinberg CFA profile picture
@Ryan WW Santa Monica Place seems to be struggling a bit following the big investment in Westfield Century City. But it's great real estate -- maybe a mall is no longer the best use case. Ground floor retail and offices above? Who knows?

FlatIron and Freehold were not that surprising. They are mid-tier properties for Macerich, and Nordstrom has stores in much better malls not far away. Chandler also wasn't that shocking in retrospect, as Scottsdale Fashion Square is centrally located in the Phoenix area and clearly the dominant mall of the region.

It hurts to lose those four stores, but I think there will be highly profitable opportunities to repurpose the Santa Monica location in particular. MAC could also benefit from share gains at Washington Square and Broadway Plaza from the closure of nearby Nordstrom stores.
None of those are close to Broadway Plaza. But the Nordies there would make a killer Luxury Apt complex. It is humungous with very high ceilings. I think they'll need to do what they did to Macy's in BP - downsize and give a bunch of the space to smaller experiential retail.
Actually you're right the SPG pleasanton property is close enough...
Hello. Has anyone seen the Nordstrom store closing list they announced this week. Thanks
Yes - Macerich was hit a bit harder than most.
Adam Levine-Weinberg CFA profile picture
@jack420 San Juan, Puerto Rico; Hurst, Tex.; Happy Valley, Ore.; Broomfield, Colo.; Chandler, Ariz.; Freehold, N.J.; Annapolis, Md.; Richmond, Va.; Miami and Naples, Fla.; Santa Monica, Riverside, Escondido, Sacramento, Pleasanton, and Montclair, Calif.

Can't confirm the authenticity of this list. I also saw Westfarms (Hartford metro area) mentioned previously, but that turned out to be inaccurate.

I believe 3 of the 16 centers are owned by SPG (North East Mall in Hurst; Dadeland Mall in Miami, and Stoneridge Shopping Center in Pleasanton). Mall of San Juan and Waterside Shops (Naples) are both Taubman properties.

There are also four MAC malls on the list (Santa Monica Place, FlatIron Crossing in Broomfield, Chandler Fashion Center, and Freehold Raceway Mall).

Westfield and Brookfield each own two of the others and the last 3 are not REIT-owned.
@Ryan WW
How may MAC Nordstrom stores are closing?
Fuji Investment Corporation profile picture
Have SPG shareholders vote on Taubman deal? Does it require a vote? If so we should struck that ridiculous double down deal
PennyPlanSupporter profile picture
SPG has to keep up with maintenance and all of the other expenses but the income is collapsing due to bankrupting retailers who must liquidate.

There is no end in sight to this. Customers belong to Jeff Bezos now.

The current stock price is 10x what it will likely be by next Easter.
Aspiring Penguin profile picture
SPG looks like an interesting long trade at low $40's, and short at anything above $65-70.

I suspect SPG will trade in a range for a while, with lots of vol. It can be an ok trading stock.

long term, yes, I expect SPG will head downwards.
Adam Levine-Weinberg CFA profile picture
Tenants that were selling undifferentiated goods that could be found on Amazon were never going to survive anyway. Top-tier malls thrive as showcases for unique brands that offer products people want. There are always some tenants that were powerful brands a decade or two ago but have lost their luster and not yet gone out of business. I do expect an air pocket of sorts over the next couple of years as failing brands close stores at an accelerated rate. But for the best malls, there will be plenty of other up-and-coming brands ready to expand 2-3 years from now.
Really great point here Adam. And in Asia, I have observed that top brands that started online are now starting to open physical stores. These brands become the new tenants and thrive with physical space. Even Tesla and Apple need physical space to show off their cool products.
Aspiring Penguin profile picture
If spg's main tenant base was comprised of the likes of Walmart, Target, Whole Foods, etc and have some productive storage operation for Amazon warehouses to top it off, then I would entertain the idea of SPG investment.

SPG has a crap ton of exposure to some of the crappiest companies on earth - namely Macy's, JCP, J crew, L Brands, etc.

will SPG survive? maybe. But why invest in a company that's just barely going to survive lol. invest in companies of future and strength.
Adam Levine-Weinberg CFA profile picture
I think you are vastly underestimating the allure of top-tier malls for successful brands. The fact that some of their tenants are on the way out might make for short-term turbulence, but there will be plenty of replacements available -- not right now, but certainly within 2-3 years.

I also believe that the threat from department stores closing is dramatically overstated. The question is not who's going to take a 200K square foot storefront. (The answer to that is obvious: nobody.) It's what can you do with all the land occupied by a 200K square foot storefront and associated parking. Anchor stores are typically paying less than $1 million in annual rent and in major metro areas the land value alone could be $20 million, $30 million, $40 million, or more.
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