Will Simon Property Group Survive?

Will Simon Property Group Survive? SPG is America’s premier shopping mall operator. The company owns 168 properties, providing business space to a variety of enterprises including dining, shopping and entertainment outlets.

It generates most of its revenues from rents arising from its operations as a self-administered real estate investment trust.

The business is involved in all aspects of real estate management, including leasing, acquisition, development and expansion of the properties on its portfolio.

Will A Commercial Real Estate Collapse Hurt SPG?

There’s no doubt that the commercial retail estate sector has had to re-evaluate core aspects of its business model to survive the Covid-19 pandemic.

Changes to supply chains and delivery options have hit the shop floor, not to mention the disruption caused by social distancing measures and other health and safety initiatives caused by the coronavirus.

And businesses not classified as essential have struggled to pay rents, with many ultimately succumbing to bankruptcy.

But SPG’s malls are multi-purpose outlets, housing both retail and entertainment businesses, and these diversified offerings are expected to better navigate the Covid-19 storm than their pure play rivals.

Nevertheless, Black Friday 2020 saw footfall down 52% at malls across the US, a significant indicator that the industry is under pressure.

SPG estimates that because of the government-mandated changes arising from the pandemic, it has lost 13,500 shopping days since the outbreak of the crisis in March.

Is SPG A Good Investment?

At this point in time, it’s always difficult to talk about any company in the retail sector without constantly wheeling back to the issue of the coronavirus crisis and its future implications. This is particularly true when it comes to judging SPG’s investment worth and price movement.

To begin with, SPG was hit hard by the initial Covid-related sell-off in late-February through mid-March. SPG saw a TTM high of $142.24 back in February 2020, and clocked in lows of $44.01 on the 2nd of April that same year.

Fast-forward to the present day, and SPG has recovered substantially its former high price level. But how you view this recovery, and where you think the price will go from here, will depend on several factors.

First, how healthy is SPG’s core income generating business? If you look at the company’s latest published figures, it claims to have collected a total of $3.52 billion from a possible $3.9 billion of Net Billed Rents from Q2 2020 through Q4 2020. This would make up 90% of rents already collected, a high percentage without doubt. 

However, and perhaps unusually, SPG is not including Deferrals Agreed and Abatements Granted in these figures. If you do include these numbers, as is generally the practice in the sector, you find that that 90% is recalculated as $[3,520 – (410 +341)]M out of $3,909M, which comes out at a more modest 70%.

Is this still good? It’s certainly an improvement on what the business was pulling in during the run-up to Q2 2020, when it was banking only about 50% of total rental income. And in the present climate this seems to be OK.

But remember, some commercial rental property firms were failing with 100% of rent collected. Nothing is guaranteed. So you’d need to be wary to gauge your entire future price estimates on rent collected figures alone.

Second, collected rent might appear to be the bottom line for SPG, but the total amount of rent that is generated is informed by two key metrics: occupancy rate and average base rent.

The spectre of the Covid-19 pandemic looms large over the established brick-and-mortar businesses, as the list of closures and bankruptcies of retail operators continues to grow.

However, SPG completely bucked the trend here. The company already had high occupancy rates of 95.1% at the end of 2019, and yet with the onset on the coronavirus in the interim, the business has only suffered a drop of a few percentage points to 91.3% in December 2020.

This is excellent news, as high occupancy rates signal other positive outcomes for the company. For mall providers like SPG, it means retail businesses – the lifeblood of SPG’s operations – are more likely to move into shopping space where there’s already a high concentration of others retailers – no-one wants to be trading in a “ghost mall”, after all.

Furthermore, high occupancy means more predictable cash flows, and less time and resources spent on re-populating those empty units.

Third, the average base rent that SPG made has actually increased during the Covid-19 crisis, up over 2% from year’s end 2019 to year’s end 2020. This could be down to the beneficial leasing agreements SPG negotiates with tenants, a sign of good management practice and strategy that has reaped rewards at a time when letting demand has fallen.

So, Will SPG Stock Go Up?

SPG missed its revenue and FFO numbers when it released its earning figures recently. The misses were not huge: just short of $20M on a revenue of $1.13B, and a miss of $0.06 on an actual FFO of $2.17.

But, taking into consideration the current state of its business operations, and assuming that the Covid-19 recovery continues as optimistically expected, SPG is still a buy.

Will SPG Survive?

SPG hasn’t been hit anywhere near as badly as many other companies working in the retail property sector. It has made it this far, and there’s nothing on the radar that might suggest that won’t continue.

However, customer behavior is a critical concern to mall operators like SPG. As the pandemic recedes, the question of whether consumers will flock back to their old ways is on the table. But the fact that SPG has weathered the bad times of late, even just a modest improvement in market conditions should see it profit.

Yes, SPG will survive. It may very well even thrive.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.