Author Topic: SPG - Simon Property Group  (Read 12429 times)

Gregmal

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SPG - Simon Property Group
« on: January 27, 2020, 03:37:06 PM »
Simon Property SPG $141.63

Large cap value hidden in plain sight, buying today at 2012 share prices and a crisis level valuation. Fully liquid shares. Buy it and forget about it.

Completely safe and well covered 5.8% current yield with projected growth

Indisputable industry leader with a top notch management team capable of not only navigating the waves but staying ahead of the competition and establishing new trends

Absurdly low cost of capital, just raised $3,5B of 15+ year notes at 2.6%

Diligent manager of the balance sheet with recent refinancing of sr secured notes and active share repurchase program. Total annual capital returned to shareholders approaching 8%.

Compelling JV structured to mitigate companies expose to pure development risks

Global footprint and in house operations/relationship managers streamline much of the process and creates cost savings relative to peers with piece meal real estate operations.

Malls, Malls, Malls, is valid, just not here. Simon boasts a 95% occupancy rate and is known for the quality of its locations. Baby has largely been thrown out with the bathwater. Simon could lose ALL of it’s top 5 anchor tenants AND have 75% of ‘20+’21 leases expire without renewal with little to no impact on its current profile or ability to repurchase stock or pay out the current dividend.

Essentially the mall Armageddon thesis is playing out and probably somewhere in the 7th or 8th inning. Simon has not only navigated the crisis but grown. They’ve continued to improve SS NOI and FFO, nearly DOUBLING their dividend per share during the 6 year Mall Apocalypse starting in 2013 without the undertaking of an unhealthy payout ratio.

Simon is currently trading at a historically low P/FFO, lower in fact than in did at any point during the GFC

Coronavirus is just latest excuse for people to hit the bid.

I own shares. This is not investment advice. Yada Yada


EDIT: Whoops. Like a lot of threads lately, Sanjeev, you'll need to move this one.
« Last Edit: July 27, 2020, 05:23:38 PM by Parsad »


Spekulatius

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Re: SPG- Simon Property Group
« Reply #1 on: January 27, 2020, 03:50:46 PM »
TCO is cheap too, their properties seem just as good as SPG, however their balance sheet is worse. Does it matter though - if malls go the way of bowling alleys, they are both screwed.

In my opinion, we are not in 7-8th inning, we are in the 2-3rd. Online sales are growing to 12%+ this year and are just getting started imo. I would not be surprised if we are at 50% we tweet 2030 and 2035. That means they many malls will either have to disappear or will have to fundamentally change. My guess is also they the privet to restaurants may not work, with the pivot to takeout. Some of the malls can be reconfigured to community centers or work life places, but there just too much mLl space to go around to keep everything productive. It is also questionable to me they after all this reinvestment needed, the total rents of the new mLl hybrids will really be higher than they were before the conversion. So all this capital recycling may just be a defensive move may not improve cash flows much.

My vote is that it’s a value trap.
Life is too short for cheap beer and wine.

Gregmal

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Re: SPG- Simon Property Group
« Reply #2 on: January 27, 2020, 04:05:05 PM »
I dont think everything is going to turn into a bowling alley. There is a clear difference between dust bowl locations with 60% occupancy rates and failing anchors, and top tier locations in high traffic corridors centered around bustling communities and work/residential facilities. Mid-high 90's occupancy rates with the type of tenant diversification SPG has speaks for itself.

Retailers will not all go online and call it a day. They won't all just go sell on Amazon either. If a physical store makes money, they have little to no reason to shut it down. If anything that approach is counter productive. A lot of retailers still make money, you're just seeing a transition period where the mid tier down to the bottom, who lose money get killed. The rest will adjust and rents will have to rerate. But at the same time, much of this has been taking place for years already. As has been noted on some of the calls, if anything, the push out of B and C creates more demand for prime space in A.

Anyone thinking this space is just going to evaporate needs to go check out the new mega mall at the Meadowlands.

People love the SRG's and the HHCs of the world, but frankly, IMO SPG has those same type of opportunities available to it, with a better management team, and lower cost of capital. They have plenty of levers to pull, and at the current valuation really dont need much of anything to go wonderfully right.

I'd also add, that due to Simons market position and expertise, it is possible for most mall companies to fail and still have this thing standing tall. Not to mention that there has been some activity in the space; COBF favorite Brookfield has been making moves here for a few years now. Which is not to say I wholeheartedly agree with them, but I do think some smart folks see avenues to reposition this space, and the narrative that basically every player here will be wiped out is bogus. Simon is hands down the best, and from these levels, should be A-OK if not better.

« Last Edit: January 27, 2020, 04:18:57 PM by Gregmal »

cherzeca

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Re: SPG- Simon Property Group
« Reply #3 on: January 27, 2020, 05:08:40 PM »
6 year low.

BG2008

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Re: SPG- Simon Property Group
« Reply #4 on: January 28, 2020, 07:45:49 AM »
If anyone want my unsolicited opinion, well too late. 

If I were to own a mall, it would be Simon's.  Since having a kid, my wife and I have been spending a lot of time at the mall.  We noticed that there is a lot more "fly by night" operators now.  Yes, the occupancy is high at 95%, but the quality has gone down by quite a bit.  At the Roosevelt Field Mall on Long Island, you are starting to see coin stores, Catholic stores, etc.  What used to be a nice looking Abercrombie (okay, by comparison) with nice corporate designs etc is now just shelves with very little tenant improvement.  It's not as nice of an user experience.  This mall used to have a wait list to get in and now has several locations that are permanently dark.  I second what Spek says about being in the 2-3rd inning of a brick&mortar to e-commerce transition, it is tough.  We are also at sub 4% unemployment and you are seeing these qualitative issues pop up.  What happens in a recession and retailer go out of business en mass?  One of the problems with Malls that is a bit different than multi-family, office, or warehouse.  If you have 20% vacancy in a 10 story building, it is likely confined to 2 floors.  No one else in the building will care.  But if your mall has a 20% vacancy, it is very dreary.  Malls are synergistic animals.  They need energy and a sense of buzz.  Once that is gone, it kind of spirals.  Once a place is not fun/cool to hang out, the retailers take notice and get out and puts the place into a spiral.   

I have noticed that many digital native brands do take on real estate.  They are starting to notice that you need in store experiences to try on products.  Look at Warby Parker and the mattress stores.  Ironically, Best Buy is doing quite well, Apple, Samsung, and Microsoft have all adopted a brick and mortar strategy.  It makes sense to try on a new product in your hands if you are plucking down $999 for a new iPhone.  Ironically, the speed of innovation of electronics actually necessitates brick and mortar interaction.  That was not something that I anticipated.

What about re-development opportunities?  I have come to appreciate malls parcels as great development parcels.  Increasingly, you are seeing Multi-family and hotels being built on Mall outparcels.  This makes a ton of sense as Malls are generally the best located real estate.  My issue with this optionality (a big part of Brookfield's thesis) is that Simon is great at what they do "leasing retail real estate".  It's their DNA just like value investing is in our DNA.  I am trying hard to learn tech and software, but at this moment, I am just okay.  Once in a while, I can spot an obvious bargain.  Development is a whole different game.  You need 15-20% IRR on projects to justify a transition to a mixed use location.  Look at HHC, they have a $110-$120mm G&A that is trending to $75mm after a cost cut.  That's the kind of organization that you need and the NPV will be some figure that is discounted deeply to reflect the development risk.  The problem with Simon is that each location is different and distinct and they only have a mall to work with. Meaning, HHC benefits from having a lot of sites in one town.  SRG and Simon will only have their core 100 acres.  Unless they have been zoned for re-development, it is hard to create that kind of density, local government buy-in, etc.  There is benefit to scale and experience in a local region.  But if your development sites are spread over hundreds of location, you have to "get up to speed" on every single location.  It's too hard for me.  BAM's involvement with malls is actually the main reason why I never invested in BAM.  BPY's acquisition of some NYC retail and some malls made me scratch my head. 

Anyways, another useless, unsolicited a-hole opinion from me regarding malls.  But Simon is absolutely the best operator in this space and they own the best trophy assets without a doubt. 

kab60

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Re: SPG- Simon Property Group
« Reply #5 on: January 28, 2020, 09:45:16 AM »
Really appreciate you bringing up the topic. I keep looking at these plays, and optically most of these players look cheap, but I'm scared by the combination of high financial leverage and operating leverage. Whenever I'm intriged by the mall carnage I go back to Alliance Data Systems or retailers that I think will do fine despite Amazon etc.

I think lots of retailers will thrive in this environment, but I also don't see online shopping slowing down. ADS is hit by mall exposure but with wayyy less financial leverage and a more variable cost structure - plus, they're sort of good co/bad co and unlike the mall REITS there's little risk they have to spend most of their cash flows just to keep the status quo.

cherzeca

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Re: SPG- Simon Property Group
« Reply #6 on: January 28, 2020, 12:23:00 PM »
OT, but relevant imo. I look at bricks and mortar's relationship to digital as morphing into a win/win rather than a zero sum game eventually...meaning that Warby Parker had to go retail because people want to see the glasses on their faces now!, not when they get them in mail.  AMZN selling books in actual stores!  bricks and mortar has to become more "entertainment" oriented...fun to get out of the house to shop, but it will.  the interesting dynamic I see is with AMC.  the one digital killer is streaming, and yet Netflix took over the old Paris theater on 57th st (NYC). I can see DIS/Netflix etc buying AMC (DOJ seeking to kill old settlement decree that prevents downstream movies/theaters consolidation).  whether we are in 3rd inning or 7th inning of mall disintegration, I think there are opportunities to find deep value in bricks and mortar.  unless we are all a simulation, in which case...

Gregmal

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Re: SPG- Simon Property Group
« Reply #7 on: January 28, 2020, 01:40:08 PM »
No worries Bill, we love unsolicited a-hole opinions. Disruptive music in the echo chamber is always appreciated.


A few points/comments.

As a real estate junkie, I would challenge anyone to thoroughly scroll through the Simon portfolio. It is stunning and just a truly spectacular collection of premier assets in largely prime location. Something to admire and certain not anything that would fall into the category of "I wouldn't own it at any price"...so theres that.

Balance sheet is robust. Name another RE company capable of raising cash at 2.6%?

There are major differences between Simon and others that came before it. There is also the fact that so many others have come before it and these guys are best in the biz management; surely they have taken note and learned from the Sears and the Macys of the world. But, for comparisons sake..

Sears/Seritage- Simon has better locations, better management, better balance sheet. Profitability is not in question. They also dont have to worry about running a retail business. As for redevelopment? Let me again say, 2.6%/ 15 years. Buffett and many others like Seritage, but for the life of me I can not find an argument to like SRG and not like Simon better.

Macy's- Same arguments as above. Simon doesnt have to worry about running retail. They dont have to worry about winding down and eliminating thousands of jobs. All the locations(generally speaking) with Simon are good, not so for Macy's.

Howard Hughes- HHC is definitely better positioned than the above two, but again, whats their cost of capital?

Regarding specific types of redevelopment? I think this is overblown. If Seritage can reposition old Sears stores into residential than so can Simon, but with more attractive locations and cheaper capital. Howard Hughes will have some reliance on retail, so if retail is a goner, it will hurt them too. They have better layout for office, but who says you cant take a prime location mall and add office? I am also probably more bearish on office than I am retail. Hughes IMO has an edge with residential. But you cant make the argument(after scouring the SPG portfolio) that you couldn't take most of those locations and sell 1/2/3 br condos. Almost all of Simons locations would support high end residential.

Stuff like this is truly exciting:

For example, at Northgate Mall in Seattle, Washington, we are re-imagining this 60-year-old center to include NHL Seattle’s Corporate Headquarters and practice facility, one million square feet of Class A office, over 1,000 residential units
and approximately 375 hotel rooms, all served by a new mass transit solution. This current retail-only shopping mall will be completely transformed upon our completion.


Nobody has better dirt than Simon, nobody has better overall locations, nobody has higher quality tenants and nobody is better managed. Thats the pitch. I mean look, even Brookfield, who has tried to build another Simon, basically ended up only buying Simons junk. Even if, as noted, tenant quality goes down, cash is still cash. Yes, in a market assigning multiples, you'll suffer short term in terms of how you're rated if the tenant quality dampens, but at the same time, you're getting paid(and paid exceptionally well) to wait and the mix of short term or less than 12m leases is like 2-3% of total revenue. Easy come, easy go.



BG2008

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Re: SPG- Simon Property Group
« Reply #8 on: January 28, 2020, 02:07:31 PM »
No worries Bill, we love unsolicited a-hole opinions. Disruptive music in the echo chamber is always appreciated.


A few points/comments.

As a real estate junkie, I would challenge anyone to thoroughly scroll through the Simon portfolio. It is stunning and just a truly spectacular collection of premier assets in largely prime location. Something to admire and certain not anything that would fall into the category of "I wouldn't own it at any price"...so theres that.

Balance sheet is robust. Name another RE company capable of raising cash at 2.6%?

There are major differences between Simon and others that came before it. There is also the fact that so many others have come before it and these guys are best in the biz management; surely they have taken note and learned from the Sears and the Macys of the world. But, for comparisons sake..

Sears/Seritage- Simon has better locations, better management, better balance sheet. Profitability is not in question. They also dont have to worry about running a retail business. As for redevelopment? Let me again say, 2.6%/ 15 years. Buffett and many others like Seritage, but for the life of me I can not find an argument to like SRG and not like Simon better.

Macy's- Same arguments as above. Simon doesnt have to worry about running retail. They dont have to worry about winding down and eliminating thousands of jobs. All the locations(generally speaking) with Simon are good, not so for Macy's.

Howard Hughes- HHC is definitely better positioned than the above two, but again, whats their cost of capital?

Regarding specific types of redevelopment? I think this is overblown. If Seritage can reposition old Sears stores into residential than so can Simon, but with more attractive locations and cheaper capital. Howard Hughes will have some reliance on retail, so if retail is a goner, it will hurt them too. They have better layout for office, but who says you cant take a prime location mall and add office? I am also probably more bearish on office than I am retail. Hughes IMO has an edge with residential. But you cant make the argument(after scouring the SPG portfolio) that you couldn't take most of those locations and sell 1/2/3 br condos. Almost all of Simons locations would support high end residential.

Stuff like this is truly exciting:

For example, at Northgate Mall in Seattle, Washington, we are re-imagining this 60-year-old center to include NHL Seattle’s Corporate Headquarters and practice facility, one million square feet of Class A office, over 1,000 residential units
and approximately 375 hotel rooms, all served by a new mass transit solution. This current retail-only shopping mall will be completely transformed upon our completion.


Nobody has better dirt than Simon, nobody has better overall locations, nobody has higher quality tenants and nobody is better managed. Thats the pitch. I mean look, even Brookfield, who has tried to build another Simon, basically ended up only buying Simons junk. Even if, as noted, tenant quality goes down, cash is still cash. Yes, in a market assigning multiples, you'll suffer short term in terms of how you're rated if the tenant quality dampens, but at the same time, you're getting paid(and paid exceptionally well) to wait and the mix of short term or less than 12m leases is like 2-3% of total revenue. Easy come, easy go.

Greg,

Agree with most of what you're saying.  I just think time may or may not be your friend and I think I can buy it cheaper when the economy hits the skids.  That's literally my playbook.  So interesting situation, just not tomorrow. 

BG2008

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Re: SPG- Simon Property Group
« Reply #9 on: January 28, 2020, 02:10:05 PM »
BTW, Howard Hughes is selling most of their retail assets except for the Seaport and Downtown Summerlin (outdoor lifestyle center, not enclosed malls).  They are even selling stuff that are brand new that they just built within the last few years.