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Simon Property Group Is Preparing Its Balance Sheet for Armageddon

Dana Blankenhorn

Shopping centers continue to die, leaving behind vast swaths of undeveloped parking lots. This undiscovered country makes Simon Property Group (NYSE:SPG), the largest owner of shopping malls in the United States, worthy of investment.

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But if that doesn’t excite you, take time to consider the dividend, $8.40 over the last year with a yield of 5.6%. That’s what you get with a real estate investment trust. These companies are required to give you their earnings.

While best known for owning giant malls like the 110-acre Roosevelt Field on Long Island, Simon’s focus these days is on outlet malls. It competes there with Tanger Factory Outlet Centers (NYSE:SKT). Both stocks have been losers for years as the e-commerce boom rolls on.

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Where is the hope in buying companies like this? It’s in the real estate.

Redevelopment

Just because yesterday’s shopping mall of department-store anchors, small shops on air-conditioned walks and acres of surrounding parking is dying, the land isn’t necessarily worthless.

Simon Property Group has 20 projects underway right now, aimed at transforming its malls into destinations with hotels, or sporting venues with poker and e-sports.

The REIT is in a good position to be a developer because it has a low ratio of debt to equity and can easily cover its debt payments. It has $7 billion in liquidity and $1.5 billion in retained cash flow. It has the cash to buy out more troubled rivals and to rebuild its own holdings. Its budget for such work now comes to over $1 billion per year.

From a technical perspective, the stock is a bargain right now. As InvestorPlace’s Vince Martin notes, the shares are at a five-year low. The $32 billion in assets are highly tangible, many of them desirable suburban locations. You have a balance sheet prepared for Armageddon with a yield better than AT&T (NYSE:T).

What else would an income investor need?

The Bear Case

There is a bear case to be made on Simon.

It starts with the stock price, which is down 20% over the last five years. Dividend returns are barely keeping up with the deterioration. Long-term technical indicators say “sell it.”

Then there’s management. Its big move this century has been to expand into outlet malls. Tanger, which is more heavily into outlet malls than Simon, has lost more than half its value over the last five years. The strategy of moving into outlets looks unsound. The real estate is less valuable, and the merchandise is all moving online.

There may be more questionable decisions on the way. CEO David Simon told his July conference call the company is looking to buy out some tenants, the chain stores closing in retailing’s Armageddon. That worked three years ago with Aeropostale. If Simon is going to become a retailer, and not a mall operator, that means it’s a riskier play. This adds to the bear case.

The Bottom Line on Simon Property Group

Simon Property Group is distressed merchandise, but it will pay you to own it.

At its Dec. 12 opening price of $145.58, it’s selling at trailing price-to-earnings ratio of 19.4, despite having one of the best dividends around.

If you’re the kind of investor who likes to buy when everyone around you is screaming “sell,” then hold for up to 5 years on hopes of an uptick, Simon Property Group is your kind of deal. It’s a good speculation for an income investor with a long-term view. That’s why many stock sites are now filled with punters screaming “buy, buy, buy.”

They might be right.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

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