Stock In The Spotlight: Simon Property Group

It is time for our weekly Stock In the Spotlight series, which will cover Simon Property Group (SPG) this week. SPG released their Q2 earnings this week, which we will discuss in more detail below.

Simon Property Group is the largest mall landlord in the United States and owns the best mall properties around. Often you hear the phrase, “Invest in quality.” That is exactly what SPG is, the best of breed. Simon Property Group is one of the largest REITs on the market today.

The company has endured a rough couple of years. The weakness in retail and rising bankruptcies and mall closures combined with a global pandemic have dropped shares of SPG from $168 at the start of 2019 to just $68.

There is no doubting that retail is a tough industry right now, but if anyone can survive it is Simon Property Groups. SPG has the best mall properties, a portfolio filled with Class A malls.

For those of you unfamiliar, malls are broken up between Class A through Class D malls based on sales per square foot.

Here is a look at the 2019 Korpacz Realty Advisors report that they publish each year showing what classifies each class of mall.

At the conclusion of 2019, SPG reported sales per square foot of $693, which was a 5% increase from prior year. As you can see, the company was on the verge of a Class A+ portfolio despite all the retail bankruptcies and weakness that had been in the news for the past few years.

The thing that got mixed up in the media and was poorly reported was how many of these mall closings and store closing sin malls were related to class C and class D malls. That is not where SPG operates.

Through the end of February, SPG reported sales per square foot of $703, but those numbers have obviously taken a tumble due to mall closures related to the pandemic. SPG started closing malls on March 18th.

Let’s take a look at the company’s latest financial results.

SPG Q2 2020 Financial Results

Here is a look at the company’s Q2 earnings.

As you can see, due to the pandemic the quarter was not one to remember, but the results were about as expected. Revenues, Operating Income, FFO was all down 20%+ due to mall closings.

However, investors today are not investing based on Q2 earnings thankfully, they are investing on future earnings. I know what the company is capable of with the strong leadership of CEO David Simon, and I see improvement already.

Rent collections have increased from 51% in April and May to 73% in July. As of the first week of August, the company reported that 91% of tenant stores were open and operating. Half of the remaining 9% that is closed is due to government imposed restrictions.

The other positive note I took out of the earnings call was the fact that in May, tenants reported that volumes were 50% from prior year, but in June that increased to 80% of prior year sales volume.

E-Commerce On The Rise

One major reason to shy from investing in SPG is due to the narrative that malls and brick and mortar stores are dying. The other to doubt SPG is due to the fact online sales and e-commerce has completely taken over the country.

Online sales and e-commerce will continue to take market share, but like you have heard before, there is still something about the “in-person experience.” However, stores have moved to a buy online pickup in store model, which still requires a store front.

There is no doubt malls will continue to be under pressure and you will see more malls close over the next few years. Due to the fact Simon Property owns the best of breed mall portfolio, retailers still need a store footprint, so they will look to SPG.

This could impact SPG in a positive ways with less retailers only looking for the best property locations. As we saw, sales per square foot were continuing to increase prior to the pandemic.

Valuation

As you can imagine, shares of SPG are trading at very cheap levels compared to recent 5-year history. This is not unexpected given how the company has been impacted and uncertainty surrounding retail.

Shares of SPG are trading at a Price to FFO or P/FFO of 6.2x compared to their 5-year average of 16.5x.

Dividend yield of the company is currently 7.67%, which is well above their 5-year average of 4.46%, even after their recent dividend cut.

Analysts expect 2021 FFO to be $10.44, which is a valuation in-line with where they are now.

I do not expect mall traffic to start improving for at least 12 months, but an investment in SPG is a play on best of breed, but primarily collecting a near 8% dividend while I wait for them to recover.

I always look for best of breed companies in beaten down industries that have an opportunity to recover. Plenty of risks come with an investment in SPG, so ensure you perform your due diligence before making any investment decisions.

Please comment below and let me know your thoughts on SPG.