SPG - Simon Property Group

[Gregmal]

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.

 

Well Spek, I guess they agreed with you!

 

https://seekingalpha.com/news/3539970-simon-property-to-buy-controlling-stake-in-taubman-for-3_6b-in-cash

[rogermunibond]

If you're a luxury brand name looking for exposure to high end US retail, SPG has a near monopoly on the best malls.

 

 

[Gregmal]

Good piece on the deal

 

https://seekingalpha.com/article/4322883-simon-property-group-acquires-taubman-why-this-is-game-changer

[Gregmal]

So this one has been smoked but I'm beginning to get more comfort with perhaps where things go in a "bad" scenario. Given a little bit of an assumption based on prior actions, is it theoretically more than a little likely that should many retailers get severely distressed, that Simon ends up owning a good chunk of retail businesses? So the hit to rent happens, but you also have a royalty/equity stake in the future of these businesses. Not dissimilar to Amazon/Ebay take chunks of fees down from any seller using their platform. The future or retail, whatever it may be, is impossible to exist, without Simon. Lenders will have to work with them, they are almost too big to fail. Should be interesting. Ive been adding reasonably last couple weeks.

[BG2008]

Greg,

 

I hope you're right.  I haven't touched malls since I tried to sell 3 of them during 2008.  My life and my bank accounts have thanked me for not getting involved. 

[Gregmal]

https://seekingalpha.com/news/3581908-simon-property-pulls-plug-on-taubman-deal

 

Dodging a bullet. The acquisition itself, in a vacuum, was probably a good move. However you dont often get a mulligan like this, so I'll take it, even though I dont like companies that typically do shit like this. Interesting though that TCO apparently took no precautions or made efforts to stem financial bleeding. Now that will cost them.

[Guest cherzeca]

bad Taubman lawyering to agree to disproportionate impact in the MAC

[Spekulatius]

Isn’t TCO a short here? They have tons of debt. Also some of their assets are in JV in South Korea, which probably limits their cash flow access.

[fareastwarriors]

Property Owner Simon Sees Buying Tenants as a Way to Boost Malls

 

Biggest U.S. shopping-center owner joins Brookfield Property Partners in exploring a bid for J.C. Penney

 

https://www.wsj.com/articles/property-owner-simon-sees-buying-tenants-as-a-way-to-boost-malls-11592913601

[rb]

First the retailers are spinning out their real estate into REITs to "unlock" value, now you have REITS buying retailers? This is mad.

[Gregmal]

I think the spinning out of RE is obviously operating from weakness. On the other end, the beauty of owning real estate, especially high quality dirt like Simon does, is the optionality of its usages. These guys, mainly SPG and BAM will now likely just do the PE thing and buy out the business operations for peanuts, squeeze every dime they can out of them, and in doing so, buy themselves much needed time to repurpose a lot of the locations. Will be interesting to watch unfold.

[Haasje]

I just had the pleasure of interviewing Andrew Walker (Yet Another Value Blog) and he gets into the merger agreement. Thought it's probably appropriate to post a link

 

video:

 

podcast:

https://specialsituations.libsyn.com/

 

 

[lnofeisone]

First the retailers are spinning out their real estate into REITs to "unlock" value, now you have REITS buying retailers? This is mad.

 

I think they are doing anything and everything from letting leases lapse and use that time to repurpose. Per WSJ - "For malls that have already lost an anchor tenant, losing another one could trigger cotenancy clauses. These clauses allow smaller tenants in the mall to pay a reduced rent if, for example, two anchor tenants close their stores. If these spaces aren’t occupied within a set period, say 18 months, other tenants may also be allowed to terminate their lease without penalty."

 

Standard PE book hasn't worked out well for Sears, Toys R Us, etc. I'd have to see more out of SPG/BAM that would really differentiate them and make them successful in this game.

 

[Gregmal]

https://seekingalpha.com/news/3587147-simon-property-gains-6_7-after-resuming-quarterly-dividend

 

$1.30 per share for Q2. Expects to pay out AT LEAST $6 for FY 2020.

[Gregmal]

https://seekingalpha.com/news/3587491-simon-may-see-redevelopment-opportunity-in-j-c-penney-analyst-says

 

On the money.

[ratiman]

I just had the pleasure of interviewing Andrew Walker (Yet Another Value Blog) and he gets into the merger agreement. Thought it's probably appropriate to post a link

 

video:

 

podcast:

https://specialsituations.libsyn.com/

That was a good conversation. He's a good guest.

[ratiman]

I don't know if this is the right place to post this but has CV been a huge benefit to struggling retailers? Before CV, the mall or landlord said "pay your rent, no negotiating." After CV the landlords are in a weak negotiating position and are forced to negotiate with even the weakest tenants unless they want  a half empty mall. I'm thinking of retailers like DXL Group (DXLG) that before CV were struggling but after CV have some room to negotiate with landlords. Companies like Starbucks, on the other hand, aren't in a great negotiating position because Starbucks can't legitimately threaten to shut down locations that are still highly profitable. Landlords are in a better position to demand full rent from Starbucks, especially if the location is easy to rent. Harder to release a strip mall location if half the current tenants are forced out.

[Gregmal]

Just took down $2B, including a tranche of 2050 notes @3.8% and 2030s @2.65. Also supposedly making a bid for Lucky.

[Gregmal]

LOL now going after Brooks Brothers. A personal favorite brand. Say what you will about the sector, but these guys definitely seem to be playing offense.

 

I'd also add, that while there are plenty of Pier 1's out there, the issue with a lot of these retailers isn't sales or profitability, its waayyyy tooo much debt, usually the result of being private equitied a few too many times.

[Spekulatius]

LOL now going after Brooks Brothers. A personal favorite brand. Say what you will about the sector, but these guys definitely seem to be playing offense.

 

I'd also add, that while there are plenty of Pier 1's out there, the issue with a lot of these retailers isn't sales or profitability, its waayyyy tooo much debt, usually the result of being private equitied a few too many times.

 

They are not playing offense, they kick the cans down the road. A lot this retailers like Brooks won’t exist 10 years from now, but SPG can’t afford to have vacant spaces in their malls so they have to keep zombies alive.

 

The whole thesis that malls can become office spaces, experience Locations and Restaurant rows get covitzt. They are screwed, imo.

 

I think I will see the Roosevelt mall in LI getting gutted out in the next 20 years, just to name one example.

[Gregmal]

LOL now going after Brooks Brothers. A personal favorite brand. Say what you will about the sector, but these guys definitely seem to be playing offense.

 

I'd also add, that while there are plenty of Pier 1's out there, the issue with a lot of these retailers isn't sales or profitability, its waayyyy tooo much debt, usually the result of being private equitied a few too many times.

 

They are not playing offense, they kick the cans down the road. A lot this retailers like Brooks won’t exist 10 years from now, but SPG can’t afford to have vacant spaces in their malls so they have to keep zombies alive.

 

The whole thesis that malls can become office spaces, experience Locations and Restaurant rows get covitzt. They are screwed, imo.

 

I think I will see the Roosevelt mall in LI getting gutted out in the next 20 years, just to name one example.

 

How arent they operating from a position of strength? Name one other landlord currently making acquisitions? Name another landlord currently raising capital, at will, at 2-4% rates going out to 2050? What should they be doing, buying companies pre-bankruptcy or propping shit up like BAM is doing?

 

While the narrative you mention is popular, and currently whats driving the share price, its already been debunked, not only by the above, but by the clear and unmistakable fact that we've already seen what happened once they government gets out of the way. Restaurants and experience oriented operations and not dead, or "covitzed". Not even close, once people are allowed to go back they flock there in droves. Which is why you are seeing, even still now, post Covid, quality restaurants trading hands at sub 5 cap rates. The biggest short term risk is the government forcing shutdowns. The largest mistake in fact was shutting things down, because it gave everyone from Joe Schmoe to Gap a semi legitimate excuse to stop paying their bills. But Simon, as they've shown, can weather that. Q2 payout was $1.30, with that being the minimum for 3&4.

[K2SO]

 

They are not playing offense, they kick the cans down the road.

 

Bingo.

 

This strategy might work. I actually think there's a good chance it will because I'm an old school guy and I think that physical retail will hang around a lot longer than people expect (still need to get fitted in person for that Brooks Brothers shirt and suit).

 

BUT with landlords entering the space, they are introducing a whole new element of risk into their business model, and it's risk that I don't want if I'm a real estate investor (hard to argue that a company that owns a bunch of retailers is still a fixed income proxy).

 

They might get lucky and flip these companies coming out of a shallow recession but they are introducing a whole new element of downside risk that I don't want to be a part of. This reminds me of Nortel lending money to customers in the late 90's in order to keep showing sales growth. It's a move made out of desperation and could go horribly wrong.

 

[shhughes1116]

LOL now going after Brooks Brothers. A personal favorite brand. Say what you will about the sector, but these guys definitely seem to be playing offense.

 

I'd also add, that while there are plenty of Pier 1's out there, the issue with a lot of these retailers isn't sales or profitability, its waayyyy tooo much debt, usually the result of being private equitied a few too many times.

 

They are not playing offense, they kick the cans down the road. A lot this retailers like Brooks won’t exist 10 years from now, but SPG can’t afford to have vacant spaces in their malls so they have to keep zombies alive.

 

The whole thesis that malls can become office spaces, experience Locations and Restaurant rows get covitzt. They are screwed, imo.

 

I think I will see the Roosevelt mall in LI getting gutted out in the next 20 years, just to name one example.

 

How arent they operating from a position of strength? Name one other landlord currently making acquisitions? Name another landlord currently raising capital, at will, at 2-4% rates going out to 2050? What should they be doing, buying companies pre-bankruptcy or propping shit up like BAM is doing?

 

While the narrative you mention is popular, and currently whats driving the share price, its already been debunked, not only by the above, but by the clear and unmistakable fact that we've already seen what happened once they government gets out of the way. Restaurants and experience oriented operations and not dead, or "covitzed". Not even close, once people are allowed to go back they flock there in droves. Which is why you are seeing, even still now, post Covid, quality restaurants trading hands at sub 5 cap rates. The biggest short term risk is the government forcing shutdowns. The largest mistake in fact was shutting things down, because it gave everyone from Joe Schmoe to Gap a semi legitimate excuse to stop paying their bills. But Simon, as they've shown, can weather that. Q2 payout was $1.30, with that being the minimum for 3&4.

 

I think Gregmal is right on target here. 

 

Don't get me wrong, I think SPG is playing some defense here.  If these retailers stop paying rent and vacate their stores, SPG is going to have some co-tenancy issues, in addition to not collecting rent from the vacant space.  I suspect the cost of these potential/future co-tenancy issues is far greater than the cost of picking up these retailers from bankruptcy.  Apparel and soft goods are not sexy businesses, and they certainly aren't lucrative.  But, after stripping out the debt through bankruptcy, most of these retailers are break-even or slightly profitable, after paying their rent.  So SPG picks them up from bankruptcy, keeps them in operation (likely at break-even or slightly profitable, after the rent is paid), keeps the space occupied so SPG can collect rent AND prevent co-tenancy issues.  And in the future, when the economy is in better shape, I'll bet SPG spins them off or sells them to recoup their investment. 

 

I think think there is one other overlooked benefit here.  When SPG takes over the retailers and their distribution operations, there is the opportunity to restructure the distribution operations to better leverage mall space as a "last-mile distribution hub".  Using some mall space as a "last-mile distribution hub" will speed up delivery to home, occupy additional space at the mall (generating additional rent) and possibly reduce the amount of space currently needed at larger distribution centers.  I see this as a way for malls to fight back against Amazon, using their centrally-located A and B malls to provide last-mile distribution points.  Existing space, existing loading docks, and prime locations puts them in a great position to do this. 

 

I'll add one underlying thought/assumption, which informs my thoughts above.  I have used Amazon (and Amazon Prime) for a long time.  I like it.  But even after many years of using it, it still only occupies a very small percentage of my retail spending, and that percentage is not growing.  Most of the retail spending I do is in-person.  This is approach is typical amongst my friends and colleagues.  In light of this, I tend to think that malls and Amazon will co-exist long into the future, with certain purchases more likely on Amazon, and certain purchases more likely in malls.   

 

 

[Gregmal]

Yes, exactly. Further, I think folks are greatly overestimating their focus and concerns with respect to buying these retailers. You're talking about a $50B EV juggernaut who can raise capital at 3% spending 8 to low 9 figures, almost always with a JV partner(s), through an SPE. Even if Simon was taking these companies down themselves, the figures are rounding errors.

 

I can also see this eventually resulting in "Simon exclusive" brands, either only available at Simon locations, possibly driving traffic growth, or giving optionality on the licensing. And to a degree, yes, if they kick the can down the road, while, mind you, continuing to make money, for 10 years, this is a home run because thats more than enough time to continue to gradually reposition and redevelop a good chunk of their locations.

 

And another point, the "death of brick and mortar" is just the latest infatuation. PCs were supposed to be goners following the GFC; Dell and HP were going bust. Heck even Eastman Kodak is still around. People just like stories and narratives. But the businesses hang around quite a long time, and the top performing locations(heck even Blockbuster) will stay around even longer. In fact they rely more and more on their best locations to stay afloat. If all or most of those locations happen to be at Simon locations, well, the "death of retail" doesnt really matter very much.

[fareastwarriors]

 

Mall owner Simon and Authentic Brands make $305 million bid for bankrupt Brooks Brothers, aiming to keep over 125 stores open

 

 

https://www.cnbc.com/2020/07/23/mall-owner-simon-and-authentic-brands-bid-305-million-for-brooks-brothers.html

 

A company known as Sparc LLC, which is comprised of the U.S. mall owner Simon Property Group and the apparel-licensing firm Authentic Brands Group, is making a $305 million bid for bankrupted Brooks Brothers.

 

The offer, still subject to better and higher bids and court approval, is to keep at least 125 of Brooks Brothers’ stores open for business.