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Simon Property Says Pay Up, Or Meet Me In Court - Investors Should Rejoice

Jun. 04, 2020 2:24 PM ETSimon Property Group, Inc. (SPG)212 Comments


  • The retail industry was already experiencing a lot of change before coronavirus, and the current crisis leads to new issues at weaker retailers, and at weak retail REITs.
  • The economy is, however, reopening, and it looks like things could get back to normal over the next 1-2 years.
  • Thanks to a very strong balance sheet and massive liquidity, Simon Property could survive an apocalyptic scenario where no rent gets paid for years.
  • Simon Property suing Gap sends a very interesting message to the REIT's shareholders.
  • Looking for a portfolio of ideas like this one? Members of Cash Flow Kingdom get exclusive access to our model portfolio. Get started today »

Article Thesis

Simon Property Group (NYSE:SPG) is a leading retail REIT that owns a wide array of high-end malls. The current pandemic is hurting the world's economy a lot, but headwinds are already waning, and the retail industry will likely not suffer as much as previously feared.

Simon Property's high-end assets should continue to do well in the future, despite the fact that e-commerce is hurting some retailers a lot. Thanks to strong cash flows and a clean balance sheet with massive liquidity, Simon Property has been able to weather the current crisis quite well so far. Long-term oriented investors should benefit from meaningful share price appreciation over the coming years, and Simon Property also has a lot of income generation potential in the future.

Bull and bear, bullish & bearish, Simon Property Group stock market bulls Source: Seeking Alpha's image bank

The Coronavirus Pandemic Hits An Industry That Was Already Struggling

The rise of cases of COVID-19, and the lockdown measures that were necessary to combat the pandemic, have hurt brick and mortar retailers substantially over the last three months. The industry was already having issues before the pandemic emerged, however, as a shift towards online shopping hurt margins and sales at traditional brick and mortar heavyweights such as Macy's (M), Kohl's (KSS), and other department store companies, just to name a few.

Not all retailers were struggling before the crisis, however, as some had reported great sales track records, despite the fact that sales at online competitors continued to rise. The second group includes retailers such as Ulta Beauty (ULTA), AutoZone (AZO), and many more.

The closing of brick and mortar shops around the country due to the pandemic will hurt those companies the most that have the weakest balance sheets. At the same time, not all retail landlords are impacted to the same degree. Landlords such as Realty Income (

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This article was written by

Jonathan Weber profile picture
Jonathan Weber holds an engineering degree and has been active in the stock market and as a freelance analyst for many years. He is an active author on Seeking Alpha since 2014.    
According to Tipranks, Jonathan is among the top 1% of bloggers (as of August 1, 2023). 

Jonathan is interested in income stocks and value stocks primarily but does also follow some growth stocks. 

If you want to reach out to Jonathan, you can send a direct message here on Seeking Alpha.


I work together with Darren McCammon on his Marketplace Service Cash Flow Club.

Analyst’s Disclosure: I am/we are long SPG, 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 (212)

Pooh_Lover profile picture
I live in Florida. Cases seem to be spiking in Florida. I've noticed it and I don't like it but this isn't a post about that. This is just an observation I've made when I went out yesterday in Tampa, which is not where I live. This county has gotten hit relatively hard lately.

First I can say that where I went 80% of people were wearing masks. The restaurant I went to for lunch was not crowded but their were people there. The local mall, a Westfield one, was PACKED. We just happened to have to drive by this place on our way home and I was shocked with the amount of vehicles in the parking lot with traffic literally backed up a mile down the road. This is a typical closed in mall. The weather was typical Florida although not quite as humid as usual this time of year.

What I saw yesterday reaffirmed by long position in SPG, which is the strongest of all malls. I also would feel better if cases down here weren't going vertical. I hope death rates don't spike because of it. My opinion is these new cases aren't necessarily nursing homes like in the beginning hence the mortality rates will be much lower but a death is a death and although my politics are right I still don't like seeing anybody going through this.

TL:dr People are living their lives in Florida despite cases spiking although masks are being worn in large numbers.
Darren McCammon profile picture
Rates are probably increasing due to people going out to beaches, and other places over Memorial weekend and since. If you are going for herd immunity, you actually want a steady flow of the young and healthy to get infected. Not enough to overwhelm hospitals, but enough that come the period of greatest risk (winter 2020 - 2021) you already have a lot of people who have gotten it, recovered, and thus are hopefully relatively immune to and not transmitting the infection. Though the politicians can't say it, I think this the best out of a number of poor choices outcome, we are now going for.
Jonathan Weber profile picture

Thanks for your comment! Fits to what I have heard from others as well
MyLivePortfolio.Com profile picture
If you're ever in a business where you have to use litigation against YOUR OWN CUSTOMERS, you are in the wrong business. On top of that, the inflated value people are ASSUMING mall properties are today is a false analysis. Malls are not dead but SPG will be when they have to sell off their malls at pennies on the dollar!
MyLivePortfolio.Com profile picture
@Jonathan Weber sorry that wasn't directed at you
cachinga profile picture
@MyLivePortfolio.Com Litigation is simply today's language of I mean it and now you can't ignore me.
Retired Securities Attorney profile picture
I think that the strategy SPG should take depends upon an analysis of the GPS lease rates relative to current fair rental values (minus, of course, releasing costs, including lost rental income). I do not see any reason in the February 1, 2020 financials indicating that GAP would have difficulty paying the accrued rent. www.sec.gov/...
Granted, recent looting caused some substantial changes in this relationship.
How much depends on many factors of which we are unaware. (how many stores were looted, current re-rental values, the costs of repairing the damages, who is responsible for the repairs, how long would they take, lost income during the repairs, etc.)
Making my best, somewhat educated, guesses (I have experience as a landlord of multiple properties), I would actively pursue collection and eviction litigation against GAP and be very difficult in negotiating any settlement other than payment in full right now plus, of course, interest and costs.
Of course my guesses (especially on the current rental market) could be wrong.
It also bears repeating a point made by Jonathon Weber: The other tenants are watching and their future behavior will be influence by how SPG plays its hand. In my opinion, SPG cannot afford to cave.
Jonathan Weber profile picture
@Retired Securities Attorney

I think they don't really want to get rid of GPS, but would indeed make sense to compare how much they would make when releasing the space!
@Retired Securities Attorney

All the retailers and mall REIT's soared following the looting, which made zero sense. It's being mentioned by both retail tenants and industry analysts as yet another negative facing the industry.

Widespread property loss and destruction, forcing continued closures and in extreme cases rebuilding, combined with utterly ineffective or absent law enforcement, is yet another nail in the coffin for the brick and mortar value proposition.

Have you told Jeff Bezos that he needs to stop his brick-and-mortar retail expansion quickly? You better get in front of him before he opens too many more B&M stores.
I think this is the most relevant quote from GPS's last earnings call transcript:

"because of the current environment, we're actually using this opportunity to talk through really virtually almost every property and lease with every landlord to see if we can get after whether it's rent, the lease term or whether we would actually just close the store."

GPS management doesn't emphasize a legal argument, except elsewhere when they say that they'll leverage cotenancy clauses wherever they can. They sound pretty bold. And this is coming from one of SPG's financially stronger tenants, which can actually afford to pay its rent.

I get the impression that GPS would be completely fine with eviction for many, if not most of their mall-based stores, especially those of the GAP brand.
Good luck to Gap if they think they can be a successful retailer without stores in Taubman, Macerich, Brookfield or Simon’s malls.

Not to mention that what they presumably are referring to are their Gap and Banana Republic stores, which are not terribly productive anyway. Is a quality landlord really going to feel threatened if Gap threatens to close down its legacy, center-court Gap location? Or will they be excited?
nylitigator profile picture
GPS is SPG’s largest tenant by base annual rent with 3.2 million square feet of rental space.

JCP is SPG’s second largest anchor tenant with 10.2 million square feet of rental space.

JCP is already in bankruptcy and will be closing 240 stores in its first round of closures. More closures are possible.

GPS - based on its latest report - is in terrible financial shape.

Anyone who thinks that other mall tenants are not in as bad, if not worse, financial straits as GPS is fooling themselves. There is going to be a domino effect of financially troubled tenants; in fact let’s look at SPG’s largest tenants besides GPS.

L Brands - already announced closings of 250 Victoria’s Secret and Bath & Body works stores in its first round of closings. The possible sale of L Brands was canceled.

Forever 21 - already bankrupt and in one of the worst financial moves imaginable - SPG decided to invest in them. I’m sure the rent is just flowing in...

Abercrombie & Fitch - financial problems.
American Eagle Outfitters - financial problems.

Now look at SPG’s largest Anchor Tenants:

1. Macy’s
2. Sears
3. JCP

Do I really need to analyze the financial strength of those 3? I’ve got one in bankruptcy, one barely on life support and one whose yearly business plan involves shuttering stores.

The leverage is with GPS. SPG can not afford to lose millions of square feet of rental space and expect to re-lease that space quickly or at anywhere near an equivalent rent. You can be sure that GPS is aware of that fact and will use it to its advantage.

There are going to be a flood of mall tenant bankruptcies over the next 12 months. The brick & mortar retail landscape is not a sunny one. I think that SPG is going to be compelled to make significant rent concessions with a number of its tenants in the near term. Vacant space is poison for malls and there just are not the tenants ready to take the place of all the potential near term lost tenants.
Without a presence in upscale, shiny malls Gap will have to transition to an online-only presence. They might as well just start the orderly liquidation of their business at that point.
I know SPG's current shareholders believe riots and the looting and burning of SPG's malls to be bullish. So this should be good for another few percentage points up on Monday:


There's a huge protest/riot planned for the DC area as well. More across the nation. So bullish. SPG will move inventory in a big way, even from closed stores! It's an incredibly efficient distribution model, that doesn't even require employees.
Jonathan Weber profile picture
Not bullish I'd say, but those damages should be insured
I really don' see how this is good for SPG, in fact it was the reason why I sold my shares. GAP is not stupid. The road to a trial is a very long one and they realize that by not paying they may get a discount on a liability because they could always threaten total bankruptcy or reorganization, (which would put the entire litigation and payment on hold). I don't think the leverage in this situation is with SPG.

They would go into bankruptcy to avoid paying $66 M in rent? With a $4.6 B equity market cap? This is not a serious threat.
Assessing the Div profile picture
Interesting piece. Thanks!

It´s been a couple of nice days for us $SPG longs!
Jonathan Weber profile picture
@Assessing the Div

Glad you liked it! And true, SPG rallied a lot!
EliasMouawad profile picture
@Jonathan Weber Still waiting for the div cut then i will buy more.
Long SPG
Simon Properties better be careful about what they wish for. Meeting your customers in court might result in a bankruptcy court meeting. Too much pressure, and the other debtors may bring a claim against them. This kind of threat sounds like something a recent law school graduate would make.
Darren McCammon profile picture
Such a result would put SPGs operating lease position very high on the stack for any recovery in GAP's (GPS) bankruptcy and allow them to re-lease the locations to another tenant. It's not that scary a downside.
Pooh_Lover profile picture
@Darren McCammon Normally yes but that's a heck of a lot of empty space to fill. They'll pay. They can't be that dumb.
Darren McCammon profile picture
Most likely outcome is GPS and SPG come to a negotiated settlement where GPS equity or preferred are used to pay SPG its back rent in full.
Keep it Country profile picture
Great article. Thank you. I have been buying RIOCF. Its a Toronto based multi use REIT that pays a monthly 8+% dividend.
Jonathan Weber profile picture

Thanks, glad you liked it! Will take a look at RIOCF!
Keep it Country profile picture
RIOCF is similar to FRT but trades at lower multiple and pays higher divy.
BULRUN100 profile picture
@HPBunker is short MAC your shorts are showing player.

Going by the price charts in this article, I could have captured the MAC upside versus the S&P by simply buying SSO. I could have completely eliminated the idiosyncratic risk of investing in a highly leveraged mall REIT, but still made the same gains.
Comment from MAC post 😂

Why would I would want to buy MAC, ever, when a 2x leveraged ETF provides the same upside without the nearly incalculable added risk of buying a single stock with a future as cloudy as that of MAC?
Jonathan Weber profile picture

Buying 2 times or even more highly levered ETFs can be quite risky.
BULRUN100 profile picture
@jonathan Weber That's HPBunker dumbass statement.
BULRUN100 profile picture
comments filled with SHORTS getting there ASSES handed to them. Move ON!
Jonathan Weber profile picture

Seems some would have liked SPG to suffer more.
Zen Money profile picture
* THEIR, not there.
bengalesq profile picture
Nice but I sold today at $89. Maybe I buy at $73 next.
Jonathan Weber profile picture

Share price gains have been sizeable during the last couple of days, but maybe that will continue
Pooh_Lover profile picture
@bengalesq Purely technically speaking, SPG should see $70's again. Not sure you'll get 73 but it's very possible. RSI is overbought. I believe we hit 100 and above but a short consolidation to fill the gap is probable.
Not paying rent is Gap's way of saying share the pain. Does Simon really want hundreds of stores to close in their malls? Of course not, at least right now. In case you have been asleep brick and mortar stores are suffering even in Class A centers Ask yourself the question - who is Simon going to replace these vacancies with? In today's economy no one is jumping to sign a lease. While SPG may have the legal rights on their side, trust me, they are holding their breath. Look for a quiet compromise where Gap either gets a discounted rent or can repay over a long period of time. To do otherwise would be for SPG to shoot themselves in the foot.
BULRUN100 profile picture
@hcarlpast Gap is not a high quality tenant I think that's why they're taking this strong stance it should be obvious.
Pooh_Lover profile picture
@hcarlpast I think you're wanted on the WPG or PEI or CBL boards because you're confusing SPG with a crappy mall. Any store that is even close to profitable for Gap is either in a Simon, Taubman or Macerich mall. They will be paying their rent and they will like it....or they will be gone. And when I say gone they will be out of business because if they have no presence in those three companies they will have no sales. Enjoy your short because it's not going very well for you right now and I'm happy about it.

"Gap is not a high quality tenant I think that's why they're taking this strong stance it should be obvious."

GPS is SPG's #1 in-line tenant. Which SPG in-line tenants are high quality now, anyway? I can think of AAPL, TSLA, and LULU. That's hardly enough to fill a mall.

SPG rental income has fallen hard, probably by 70-80%. Some of that will be deferred, and some of it's gone forever.

I don't think SPG can meet its debt to assets covenant on a rental income drop of 40% or more. Much less if they borrow ~$4 billion to buy TCO at $52.50 per share.

People who stress their liquidity are missing the point. Liquidity is not NOI, and their debt covenants are based on a 7% cap rate using NOI. Just sitting there with half empty malls, spending down their cash on hand doesn't help them meet debt covenants.

Does anyone disagree with those calculations? No one else on this site even seems interested in exploring the issue of SPG debt covenants. Just like the PEI crowd who was stunned when management said, "Oh and by the way, we expect to breach our debt covenants in the next few months". That was before the lockdown.
BULRUN100 profile picture
A lot other so called experts coming around now, including Cramer who said just weeks ago "Can they survive"? I laughed at the time while locking in a 15-20% div and a 2-3 bagger. With trading my SPG real Cost Bases is $38 finally looks like the trading will be in the past as it moves up to $120-130 by year end. Long SPG MAC
Pooh_Lover profile picture
@BULRUN100 Yeah a lot of these companies that looked out of business two weeks ago with dividend yields over 10% have come back to life. Glad I own them and glad I got in when I did. If you're betting on America you're betting on a lot of these value stocks. Then again, a different age group seems to think an internet company where you can sign documents online is worth 100 pe 2026 earnings with 50 times sales. Gimme a break. Can't wait til that bubble pops. These tech guys will soon get FOMO'd into value when we're up 100% and AMZN is up 5.
Jonathan Weber profile picture

Share price being that low back then indeed was quite unreasonable, great buying opportunity.
Pooh_Lover profile picture
How are you guys short feel getting your faces ripped off? More to come. Momentum buyers stepping in. Technicals say next stop $100+ with 200 day in it's site. At that price it's time to reconsider.
MistNight profile picture
Today I sold SPG pocketing the expected divs of 95% occupancy of 5yrs ✌🏼
Jonathan Weber profile picture

You don't think there is more upside potential?
SilverSun profile picture
I think it is a good move. I think there will be chances to reenter much sooner than 5 yrs.
Jonathan Weber profile picture

Seems possible, but I don't think it is guaranteed.
kingRIG2.0 profile picture
To the moon Simon, I mean Alice, Best in Class always rises to the top, love my SPG at $40 lol lol lol lol $$$$$$
Jonathan Weber profile picture

Nice buying that low!
BULRUN100 profile picture
@KingVRX never hit $40
Pooh_Lover profile picture
@BULRUN100 lol I was thinking the same thing but didn't want to call them out.
hawkeyec profile picture
Suing and collecting are two different things. You can't get blood out of a stone and with very weak traffic in the malls a lot of these tenants might just say, "yeah right, sue me." Protracted litigation favors the tenant who is trying to buy time. I'm not ready to cheer yet.
Jonathan Weber profile picture

Agree on not being able to get blood out of a stone. But GPS is not anywhere near bankruptcy, they can pay.
hawkeyec profile picture
@Jonathan Weber

Agreed. But I can also see how they would be trying to conserve cash and this may actually be a cheap way to buy time. The thing I'm most concerned with is that even in the great reopening many firms in malls will open slowly. If, say, a third of the store fronts in a mall do not open soon, people will be less likely to visit what has opened. The whole point of malls is the concentration of buying opportunity. I suspect few will visit malls just to go to one store. Too much trouble. And with social distancing still going on, the fun social aspect of shopping will be less practical. A lot of the folks I shop with have gotten pretty good at selling and delivering on-line so I take advantage of the free shipping and the bargains. Malls just not that cool right now.
SPG is ready to rumble with GPS!

Given that Gap is the largest inline tenant for Simon with about 412 leases and 3.4% of rent it's not surprising that Simon has filed a lawsuit seeking payment. In today's Gap conf call it was surprising that not one analyst mentioned the lawsuit and nothing was said about it in the prepared remarks. (I guess they figured David was listening.) But with $1.1 billion in cash it's unlikely that Gap will get away with not paying $66M in rent since they are not filing bankruptcy. (If they don't want to pay cash Simon might take 10M shares of GPS in lieu...)

I view this as a brilliant "Domino" play by Simon. Go after the largest problem tenant and set a precedent and the rest should fall in line, or risk expensive time consuming litigation as well. This is also important because they are a slightly higher % of TCO's tenant base. So it's a two-fer for Simon if they win and then close on TCO as they will also collect that....

Clearly Gap is trying to use this as an opportunity to renegotiate with one of their largest landlords, but they will have to wait until lease expiration to do so. It's a real contract and you don't break it without consequences. And you can bet Simon will have an elephant's memory when it's renegotiation time. There is a reason Gap has so many stores in SPG malls (and TCO malls) - they are the most productive malls.

Free advice to Gap - say you're sorry and pay your rent (and late fees and legal fees) ask for forgiveness and move on. Optimize your own business and then re-evaluate each lease as it comes up for renewal and close under-performers then.

As to TCO I expect it to close, maybe at a slight discount. This is still an accretive deal, but it stings to overpay. Over time even if it's an over market purchase it won't really matter as these are top quality properties and just a portion of the portfolio which are essentially irreplaceable that will eventually be re-tenanted (or redeveloped) with even stronger tenants and become even more valuable over time in Simon's capable hands.

Not sure how long this will all take but confident SPG will come out of this bigger and stronger than before and resume the upgrading of the malls and tenants which will result in an upward trajectory of value and dividend increases. Buy at this level and collect double digit dividends. When the smoke clears and all the unknowns are known it won't be this price anymore....
@user 7310991

Excerpted from AEO's most recent earnings call transcript:

"We ended the first quarter with 1,093 wholly-owned stores. Stores remain central to our go-to-market strategy, but we clearly intend to reassess the optimal physical footprint for each of our brands coming out of COVID. In all likelihood our future store count and fixed cost base will be materially lower than in the past. We have significant flexibility in our lease portfolio to execute on this change.

At the end of the first quarter, our average remaining lease tenure was under four years and almost half of our leases expire by the end of 2021, including three quarters of our C mall locations. In addition to enabling closures, we expect this flexibility to strengthen our negotiating position for leases we decide to renew."

This is a real problem for SPG. It extends far beyond GPS, to almost all their tenants. There is leverage to be gained in these negotiations (for mall tenants) from what is soon to be a very large number of mall vacancies.

Simon owns a tiny number of C malls, and owns malls that are likely to be amongst AEO’s most productive. Retailers closing stores is not going to disproportionately hurt Simon. If anything, they should benefit, as the remaining stores will be each retailers’ most productive and should be better merchandised and presented.
Tudor Invest Holdings profile picture
@user 7310991

$1.1 billion in cash - and still do not want to pay rent.
I say "go and get them"

If GPS just waits for this to pass, they have nothing to worry about in California for the next 12 months:


Bad news for SPG though.
That bill’s text would exclude Gap, as it is publicly-traded, amongst other reasons.

Moreover, I cannot imagine that law, if passed, is not subject to an immediate court injunction until litigation is complete. And I cannot see how large portions (if any) of the bill would withstand judicial scrutiny. I know people love to hate landlords, but it is a very dangerous precedent for a state to give a one-sided option to destroy a contract with no penalty. Where would that end?
Jonathan Weber profile picture
@Ryan WW

I also think that this is not applicable to GPS, rather for small family-owned restaurants etc, not corporations with multi-billion dollar market caps.
@Jonathan Weber

"I also think that this is not applicable to GPS, rather for small family-owned restaurants etc, not corporations with multi-billion dollar market caps."

That's a factual question. Do you know the answer? This is California, so there's no reason to expect a logical outcome.
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