Is it time to load the truck on Simon Property Group?
*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed or registered financial expert. Please see a financial advisor before making investment decisions.
Simon Property Group (NYSE: SPG) is a mall REIT that owns and develops many upscale and high-quality retail properties, specifically malls. With the stock plummeting 70% from its 2019 highs, many investors wonder if the company's shares are a value play or a value trap. With a PE of 8.66 according to Google, the company seems like it's still making a profit. Plus, its 15% dividend yield is what makes this stock attractive to dividend investors.
With COVID-19 prompting the closure of many public places, with malls included, Simon's tenants are struggling to pay rent let alone survive. One of Simon's tenents, Cheesecake factory, said that they won't be able to pay rent because of the pandemic. While retailers and restaurants can source revenues from online orders, landlords only have one source of income, rent.
For Simon, because they acquired Forever 21, at least they have some way of making revenue if ever their tenets choose not to pay rent, but the revenue from Forever 21 is very little compared to the amount of money the company earns from rent.
To prepare for COVID-19 and a worst-case scenario, Simon Property Group extended its revolving credit facility, giving them $6 billion in additional funds available. With low-interest rates, borrowing from the credit facility will be cheap. Also, by halting construction, Simon saves money by reducing development costs for the time being.
The large credit facility, the low-interest rates, and the depressed valuations of asset prices during the era of COVID-19 can help Simon make strategic acquisitions while its competitors are struggling to stay afloat. During the pandemic, Simon has initiated a buy out of Taubman Centers (NYSE: TCO) for a huge premium compared to its share price in February. With many landlords with great properties struggling to stay afloat, Simon could potentially acquire them. Also, since Simon seems to be interested in acquiring struggling retailers (mainly because of its acquisition of Forever 21), if tenants are struggling and are in desperate need of help, Simon could allocate some resources to acquire and restructure them.
With fears of a dividend cut from dividend investors, some investors might say that by continuing to borrow from its credit facility, they can pay the dividend for a few years (from my calculations, around two years). While there is a great argument for the company to cut its dividend, with talks of reopenings by various state governments and even the Federal Government, Simon might be able to operate like normal once again. If the pandemic lasts longer than expected, then there is a greater risk of a dividend cut.
If Simon's management believes that their shares are really cheap and want to capitalize on the low share prices, it can cut the dividend and use that cash to boost buybacks. That's what Welltower did during the pandemic. This strategy can help boost the share price (and even cause a short squeeze).
Overall, Simon Property Group is an intriguing stock for value investors. With all the uncertainty, those that are able to accurately predict how the company and the economy will do in the near future will have the upper hand. The great management team that Simon Property Group gives me hope that they'll emerge from the mini-recession as a big winner.
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