My core investment in malls is through Simon Property Group (SPG). I am also long other names in the space, including Macerich (MAC), as part of my “basket approach.” However, Simon is by far my largest position. Simon is different. For starters, it is the only mall REIT that has the financial flexibility to be creative (pursue strategic investments, M&A, etc.) and the balance sheet strength to survive any kind of environment (and, eventually, thrive). Among other things, I also like Simon’s high-quality properties (increasing emphasis on mixed-use environments) and international diversification, including a strategic stake (~22% ownership) in Klepierre. Klepierre is one of Europe’s leading mall owners, with 100 quality shopping centers (portfolio value €23.7Bn, 1.1Bn visits each year) spanning 13 countries (Netherlands, France, Germany, Belgium, Italy, Portugal, Spain, Norway, Sweden, Denmark, Poland, Czech Republic, Turkey).
SPG has been investing heavily in its properties (~$8Bn over the past 8 years) to create “the mixed-use destinations of the future” focusing on the “Live, Work, Play, Stay, Shop Experience”:
Some of the most exciting projects feature state-of-the-art residential opportunities and ultra-modern office and commercial spaces. SPG has earmarked an additional $5Bn of investments in its properties over the next 5 years (to include 4,500+ residential units, 1M+ square feet commercial office space and 1,500+ hotel rooms). In effect, SPG is investing $1Bn each year in its properties (to put things into perspective, this is more than the market cap of most of its mall peers) and I have no doubt that Simon’s centers will be highly sought-after, regardless of the trends in e-commerce and the so-called “retail apocalypse.” Physical and digital can and will co-exist.
Simon’s portfolio is diverse (generating $80B+ in global retailer sales) and features 3,000+ market leaders (Apple (NASDAQ:AAPL), Sephora, Lululemon (NASDAQ:LULU), etc.), the world’s leading collection of luxury brands (Dior, Chanel, Louis Vuitton, Balenciaga, etc.) as well as new Digital First concepts (Warby Parker, Casper, UNTUCKit, Peloton (NASDAQ:PTON), etc.). It is fair to say that successful retailers need to have a presence is Simon’s highly productive and proven centers. Simon’s reach serves each of the Top 10 markets in the U.S. as well as the largest tourist markets, including Honolulu, Las Vegas and Orlando. Internationally, Simon’s properties generate more than $20Bn in retailer sales.
Simon is not just a landlord. Simon also operates like a venture capital and private equity investment company. This is perhaps something that the market fails to realize. For example, Simon has a portfolio of strategic investments in location-based entertainment and lifestyle brands. Specifically, Simon has concluded investments in the following companies:
- Life Time Fitness is a leading healthy lifestyle brand that operates a chain of more than 145 athletic resort destinations.
- Soho House is a private members’ club for people working in the creative industries, with more than 20 clubs all over the world, as well as restaurants, workspaces and cinemas.
- Parm is a full-service, casual Italian-American restaurant chain that currently operates 4 New York locations.
- Allied Sports is a leading e-sports entertainment company with a global network of dedicated e-sports properties and content production facilities.
- Pinstripes is an experiential dining and entertainment concept featuring Italian American cuisine as well as bowling and bocce ball
In terms of e-commerce exposure, Simon combined its Shop Premium Outlets (SPO) marketplace with the highly successful Rue Gilt Groupe (RGG), creating a new multi-platform dedicated to digital value shopping. Online value shopping represents a $200Bn business opportunity, and this partnership will enhance Simon’s SPO platform and accelerate growth. The combined online sales from the platforms is poised to surpass $1Bn.
Simon also owns Simon Ventures, an early stage venture capital and growth equity fund (based in New York) focused on investing in next generation commerce and retail technology. Investments include:
Source: Simon Ventures
Some of these are well-known brands. You never know what the value of this portfolio might be in a few years.
What’s more, Simon does not shy away from investing in struggling retailers. It partnered with Authentic Brands and Brookfield Property Partners (BPY) to purchase Aeropostale in 2016, Forever 21 earlier this year and is now in talks to buy J. C. Penney (OTCPK:JCPNQ). Some might disagree with this approach (i.e., a landlord investing in its retailers). However, let us not lose sight of the fact that Simon and Brookfield have sales data of how Aeropostale, Forever 21, etc. have been performing in their properties over many years (decades). Filing for bankruptcy is sometimes a result of overdoing it with debt and aggressive growth, not necessarily a dying brand. In any event, the partnership between Simon, Brookfield and Authentic has one objective: make money.
It is clear that Simon is different compared to the typical REIT. In this article we touched upon some of the differentiating factors; e.g., strategic investments in Life Time Fitness and Soho House, Simon Ventures, ~22% ownership in Klepierre, the partnership with Brookfield and Authentic Brands, the e-commerce partnership with Rue Gilt Groupe, etc. That said, Simon also does the job of the traditional landlord better than its peers. Simon consistently invests large amounts in its properties to strengthen its portfolio, return capital to shareholders as well as consistently maintain a conservative balance sheet:
The strong balance sheet provides the ability to access capital from multiple sources (secured, unsecured, commercial paper). This is important, especially in these current challenging times.
Lastly, it is important to emphasize again that Simon has top notch properties, some of the best in the country. In 2018, CNBC wrote a piece entitled “America’s 10 most valuable malls are bringing in billions in sales. Here’s where they are.” Out of the 10 most valuable malls in the article, 5 belong to Simon (King of Prussia Mall, Forum Shops at Caesars, Woodbury Common Premium Outlets, Sawgrass Mills and Roosevelt Field Mall). In general, Simon’s properties consistently appear in the top shopping destination guides. Even though Simon owns more than 200 income-producing properties in the U.S., less than half (91 properties with sales psf in excess of $900 PSF) produce more than 70% of NOI. So yes, Simon is different. It has been named 8 times the “Most Admired Real Estate Company” by Fortune Magazine, 96% of properties are in Top 10 largest economies, Simon’s tenants generate more than $80Bn in sales globally (this is a huge platform) and Simon has distributed more than $32Bn in dividends since 1993. Prior to the coronavirus, Simon was cheap. As a result, the company started its share repurchase program in 2015.
Now, Simon is cheaper. I am buying more shares here (below $80). Yes, we might have a second wave of the coronavirus and yes, there will be headwinds from retailer bankruptcies, etc., but I am confident Simon will make it and thrive. I will refrain from talking about Simon cancelling the Taubman (NYSE:TCO) acquisition or Simon taking Gap (GPS) to court for unpaid rents, as these short-term events do not change the fundamental thesis.
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.
Additional disclosure: I am also long MAC
Originally published on Seeking Alpha