Down 30%, is this mall still a buy?
Ait’s the S&P500 slightly higher after a very turbulent year for the broader index, some stocks are still struggling. Simon Real Estate Group (NYSE: SPG), the first real estate investment trust (REIT) for shopping centers, is one of them. Down 30% year-to-date, Simon’s stock is currently a steal, trading around 9 times its funds from operations (FFO). Still, growing concern over the future of shopping malls is giving investors pause and leading many to wonder if this REIT is still a worthwhile buy.
Malls don’t die, they just change
As a millennial, the mall wasn’t just a place to shop; it was an experience. It was a place to spend an afternoon, catch up with friends, exercise or watch the latest blockbuster movie.
As much as I love the nostalgic feeling malls give, they aren’t what they used to be. The ease of shopping online slowly led to a decline in foot traffic in malls, even before the pandemic. But COVID-19 has made malls even less appealing, with a growing number of consumers preferring outdoor malls to indoor malls.
So what does Simon, the nation’s largest mall and outlet operator, have to do? Pivot.
The era of reinvention
Many shopping center operators are changing their offerings to attract and retain long-term customers. They rent space to new stores and pop-ups rather than big box stores or national chains. They’re adding tech-focused amenities like smart locker rooms and expanding experiential offerings, including various food courts, and more restaurants, and even entertainment attractions like green spaces, museums, roller coasters, aquariums , etc.
Shopping centers are also exploring the idea of renting space for offices, industrial uses or hotels. At the end of 2020, Simon was in discussion with Amazon on potential opportunities for renting vacant space. Although nothing has materialized, it is a sign that Simon is more than willing to adjust his business model to meet the changing needs of his stores and his customers.
It is also adopting a proactive approach to better offer new features in its shopping centres. In the first quarter of 2022, Simon was actively redeveloping six shopping centers, one of which will include a 13-story Class A office tower in Atlanta.
There is a lot to do for Simon Property Group
Simon develops and owns Class A malls, which are newer malls with high-end amenities and tenants. Class A shopping centers are currently experiencing the lowest vacancy rates of any shopping center sub-group, with older Class C shopping centers having vacancy rates more than 3 times higher than shopping centers in class A. The REIT also benefits from owning a number of shopping malls, which are outdoor shopping malls.
High-growth markets in the Sunbelt and metropolitan suburbs are also seeing higher demand than slow-growing markets in the Midwest. Simon’s portfolio has exposure to both high and slow growth markets, with the majority of his portfolio being in markets that are seeing a greater return of foot traffic to malls than in other areas. Chicago; Austin, Texas and Atlanta — three markets where Simon owns property — have seen foot traffic return to baseline levels or exceed pre-pandemic traffic.
Florida, where it owns and operates 22 malls and outlet malls, saw net retail space uptake improve in about 24 of its markets, a positive sign that mall demand is picking up. return. Just under 43% of its net operating income (NOI) comes from the Sun Belt markets of California, Florida and Texas.
The portfolio’s occupancy rate increased 2.5% year-over-year, with 93.3% of its properties occupied in the first quarter. Although the minimum base rent or weighted rental rate for its properties has steadily declined from the previous year, it has increased quarter over quarter in another sign that things are picking up.
The company is extremely well funded, with $8.2 billion in cash and cash equivalents and a moderate 5.7 debt-to-EBITDA (earnings before tax, interest, depreciation and amortization) multiple, slightly above above the REIT average of 5.
Is Simon a buy?
Diminishing confidence in shopping malls and the stock market means that current prices for Simon Property Group are a crying bargain. Given that most REITs trade around 20-30 times their FFO, Simon is extremely undervalued at a price to FFO ratio of nine. Also, the dividend yield is 6.67% right now.
For investors looking for a bargain, I think Simon Property Group is a buy. Investors should be prepared for more volatility – a recession would certainly hurt malls. But long term, I think Simon is on track for an impressive recovery.
10 stocks we like better than Simon Property Group
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They just revealed what they think are the ten best stocks investors can buy right now…and Simon Property Group wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
View all 10 stocks
* Equity Advisor Returns as of April 27, 2022
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Liz Brumer-Smith has no position in the stocks mentioned. The Motley Fool holds positions and recommends Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.