Simon Property Group and Macerich: Great Re-Opening Plays?
By: Armchair Banker
Tags: Covid 19, Shopping, Investing, Amazon, E Commerce Business

Macerich owned mall Tysons Corner. Image Courtesy: Visit Fairfax

The COVID vaccine is being distributed to hospitals faster than predicted. Many cities and states are already starting to open up. Many, including myself, predict that around March society will begin to normalize. As society normalizes and the economy reopens, many investors are betting on sectors like travel, shopping, dining, and tourism. These sectors got battered due to the pandemic.

The COVID-19 pandemic and the year 2020 will definitely be in the history books. This pandemic has changed our lives. Some things will come back to normal while others will never be the same. Some business trends, that were already on their way, will only accelerate. Trends like automation, e-commerce, and blockchain will further accelerate. So why am I talking about two shopping mall REITs?

Here is my take on retail and e-commerce. Even before the pandemic, e-commerce was challenging traditional retailers. Many retailers like Borders and JC Penny were either struggling or declared bankruptcy. E-commerce growth has skyrocketed during the pandemic. As many cities have shut down due to COVID, people have depended on e-commerce for shopping. Companies like Instacart, Shopify, Etsy, Wayfair, and Amazon have seen their profits soar. I believe that e-commerce growth will only soar. But in terms of physical retail space, I believe that net lease, grocery-anchored retail, and high-end shopping malls will continue to thrive. I also believe that retailers/malls that offer an “experience” (like restaurants, bars, and entertainment areas) will survive. Basically, retailers that operate as “lifestyle centers” are the ones that’ll be successful in the future.

These were the reasons why I like both Simon Property Group and Macerich. Both of these REITs have a few features I prefer. These features include:

Serving, for the most part, high-end clientele

Located in high-income neighborhoods

They serve as entertainment/community centers rather than just a place to go shopping

Simon Property Group (NYSE: SPG)

Simon Property Group is the world’s largest shopping mall operator. SPG also has the largest market cap in terms of mall REITs with a market cap of $28 billion. What I like about Simon Property Group are:

International presence: The company has shopping malls around the world. The majority of the firm’s international presence is in Asia. As Asia has handled the pandemic much better than the West, many more people in the region are going out and shopping. Having a presence in Asia has helped the firm reduce its risk from the US economic downturn due to the pandemic. Simon also owns 20.3% of Klepierre, the second largest shopping mall REIT in Europe based in Paris. In this sense, Simon Property Group is a truly global shopping mall REIT based in the US.

Not just shopping malls: Simon Property Group malls are more than a place to shop. These malls are like “lifestyle/entertainment/community” centers. Many of these malls are also places for people to spend leisure time with family and loved ones.

Good financials: COVID definitely affected the firm’s financials. The firm’s Funds From Operation (FFO) fell from $3.05 to $2.05 between Q3 2019 and Q3 2020. But even during the pandemic, Simon’s base minimum rent grew by 2.9% YoY in its premium outlet division. Occupancy is still at 91.3%. The company also still gives an impressive 6.1% dividend yield. Brad Thomas, veteran REIT analyst and author of the book intelligent REIT investor, is a believer in the firm and owns SPG stock.

Getting ready for a post-retail world: Simon Property Group and Amazon have come to an agreement to convert some of its former JC Penny stores into Amazon fulfillment centers. Simon Property Group understands the power of Amazon and wants to hedge its business by converting some of its valuable real estate to Amazon fulfillment centers. Many of Simon Property Group’s malls are located right along major interstate highways and is very valuable real estate. Amazon can benefit a lot from having part of SPG’s real estate be fulfillment centers, giving SPG the chance to benefit from the e-commerce boom.

Macerich Group (NYSE:MAC)

What I like about Macerich Group include:

Not just shopping malls: Malls owned by Macerich are lifestyle centers. Many malls owned by Macerich are smart enough to have high-end restaurants and bars so that people come not just to shop but to relax and have a good time. Tysons Corner, for example, a shopping mall located in the Washington, D.C. suburbs (northern Virginia), also has high-end restaurants and bars for people to enjoy and have a good time. Many retailers like Barnes and Noble, Tesla (yes, they have a Tesla dealership), and Microsoft are places for people to experience a modern lifestyle. Tysons Corner’s original developer Lerner Enterprises has built office buildings and apartments that directly connect to Tysons Corner. This means that Tysons Corner is not just a shopping mall but has become a community where people work, live, and have a good time.

Serving high-end clientele: Many of Macerich’s malls are located in urban areas in the US and specifically located in neighborhoods with high median incomes. Going back to the Tysons Corner example, along with your usual retailers, stores like Gucci, Prada, Louis Vitton, and other luxury retailers occupy space in the mall.

I am a bit concerned about Macerich’s financials. I am especially concerned about the company’s debt levels. The company’s debt to equity ratio is a whopping 232.1%. The return on equity is -0.4%. Still, many investors are showing confidence in the firm. Sales have rebounded to 92% of 2019 levels by September. Tech investor and hedge fund manager Philipe Laffont of Coatue Management just purchased $85.24k worth of Macerich stock.

There are still a few concerns I have about these 2 REITs. My main concern is international shoppers. Over the years the US has been a mecca for international shoppers. Newly minted millionaires from emerging economies, especially from China, have been flocking to the US to do their shopping. Chinese shoppers in the US spend approximately $7200 per shopper. Major mall REITs in the US have been putting out the red carpet for these shoppers. But international travel has decreased significantly due to the pandemic. It will take some time for international travel to recover. Also, due to the decline of US-China relations, many rich Chinese will be hesitant to come to America. Instead, they will pick luxury destinations like London, Paris, and Singapore. Many luxury retailers are increasingly flocking to Shanghai, making it unnecessary for the newly minted rich Chinese to shop abroad. This will be a big challenge for the US luxury malls, which have been betting on foreign shoppers to help boost revenue.

Overall, I believe that shopping malls will have to reinvent themselves. Malls that operate as “entertainment centers” that include bars, pubs, clubs, and high-end restaurants are the ones that will succeed in the future. Also, luxury shopping will be minimally affected by e-commerce. For the rich, shopping is more like something fun to do rather than a necessity. For this reason, shopping malls that primarily serve luxury clientele will also be successful.

Overall, retail REITs are a high-risk investment. E-commerce is decimating the sector and COVID has only accelerated this trend. But I do believe that Simon Property Group and Macerich are positioned themselves for the post-retail/shopping mall world. By catering to luxury shoppers and turning their malls into entertainment centers, I believe that both Simon and Macerich can be great contrarian and re-opening plays.

This is not investment advice. I am not an investment advisor. Please consult a professional before investing. Investing involves risk.

Merry Christmas!!!

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