Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Can Amazon Save the Simon Property Group from Oblivion?

Strangely, Amazon (NASDAQ: AMZN) could save the mall operator Simon Property Group (NYSE: SPG) from oblivion.

To explain, Amazon and Simon are discussing the conversion of 63 JC Penney (OTCMKTS: JCPNQ) and 11 Sears stores into e-commerce distribution hubs, The Wall Street Journal claims. Both department store chains have filed for Chapter 11 bankruptcy, The Real Deal reports.

Amazon could rent the department store buildings from Simon at a discount, The Real Deal speculates. Conversely, Simon Property and Brookfield Property Partners (NASDAQ: BPY) are contemplating an acquisition of JC Penney, The Real Deal claims.

Could Simon Property Buy JC Penney?

Brookfield, another mall operator, and Simon need JC Penney operating to collect enough rent to stay in business, retail consultant Soozan Baxter claims. Simon owns 63 JC Penney stores and Brookfield owns 99 JC Penney locations.

Penney’s plans to close 154 of the 860 stores it operated before bankruptcy this summer, CNBC estimates. The coronavirus closed all 860 JC Penney stores in March, but they reopened 500 of those locations in March. Hence, I estimate Penney’s needs to dispose of 360 stores.

To elaborate, JC Penney is an “anchor tenant.” An anchor tenant is a big retailer that attracts enough foot traffic to keep a mall in business.

Can Simon Property Make Money from Dead Malls?

Predictably it looks as if Simon Property (SPG) is leaving the mall business. To explain, I think Simon could hope to convert malls into distribution centers for e-commerce with Amazon’s help.

For instance, Simon, could rent the old JC Penney store to Amazon and the empty Sears to Walmart (NYSE: WMT), Kroger (NYSE: KR), (NASDAQ: OSTK), or Wayfair (NYSE: W). In addition, Uber (NYSE: UBER), GrubHub (NYSE: GRUB), Reef Technology, or Kroger could convert the mall food court into a “ghost kitchen.”

To explain, a ghost kitchen is a facility that cooks delivery-only food. GrubHub, for example, could pick meals up from the mall ghost kitchen and deliver them to local diners. The New Yorker reports several companies; including Reef Technology and CloudKitchens owned by Uber founder Travis Kalanick, are developing dark or ghost kitchens.

What to do with a Dead Mall?

Beyond ghost kitchens, delivery companies such as UPS (NYSE: UPS) or FedEx (NYSE: FDX) could convert the old Sears into a local fulfillment center. To explain, a semi-tractor drops a trailer off at the local fulfillment center. The employees empty the trailer and load the merchandise into vans for delivery.

In addition, Amazon could allow consumers to pick up orders from the mall locations or accept returns at the old JC Penney store. Plus, Amazon (AMZN) could open an Amazon Go, Amazon Go Grocery, or Whole Foods store in the old Sears location.

Another interesting possibility is rent-an-office. To explain, Simon could convert an old Neiman Marcus store into socially distanced cubicles. Simon Properties could rent the cubicles to professionals whose offices are closed.

Thus, an account manager or engineer whose office is gone could have a place to work away from the spouse and the kids. Unlike WeWork, rent-an-office will be socially distanced rather than shared. Moreover, WeWork could be a good tenant for Simon Properties, The RealDeal claims SoftBank (OTCMKTS: SFTBY) is investing another $1.1 billion in the ailing office-sharing venture.  

Hence, there are many potential uses for dead malls. Therefore, mall owners such as Simon Property (SRG) and Brookfield could have far more value than most people assume.

Can Simon Property Survive without Anchor Stores?

Simon Property (NYSE: SPG) needs to find something to do with malls because it manages 325 shopping centers. IE Business School Professor Enrique Dans estimates Simon’s malls contain 22 million square meters of retail space.

Simon needs to find something to do with those malls because retailers are dying like flies and not paying rent. For instance, CNBC alleges Simon is suing Gap Inc. (NYSE: GAP) in an effort to collect unpaid rent.

In particular, major department store owners including Sears, JC Penney (JCP), Neiman Marcus, and Lord & Taylor have declared bankruptcy. In addition, Nordstrom (NYSE: JWN) is closing department stores and experimenting with smaller locations outside the mall.

Thus Simon Property faces a future without traditional anchor stores. To increase the pain, coronavirus closed movie theaters – another mall fixture. Theater owner AMC Entertainment Holdings Inc. (NYSE: AMC)is close to bankruptcy.

The Overnight Retail Apocalypse

Hence, Simon will need to find new anchor businesses, or a new business model fast.

Simon Property is in danger because its management thought they had several years or a decade to replace dying department stores. Remember, Amazon, Walmart (NYSE: WMT), and Costco (NASDAQ: COST) were killing department stores before coronavirus.

Now, Simon Property faces an overnight retail apocalypse. Instead of JC Penney closing in 2025; as everybody expected, JC Penney is dying in 2020. Coronavirus is killing Penney’s by keeping its customers, people over 60, stuck at home.

 Fortunately, Simon Property is reacting fast by trying to get control of Penney’s before a destructive owner, such as a hedge fund, takes over. Simon could be afraid that a hedge fund that could rent old Penney’s stores to tenant it does want, such as a homeless shelter or a recycling center.

Is Simon Property Making Money?

Simon Property (SPG) needs fast action because it is making less money. For example, Simon’s quarterly operating income fell from $776.88 million on 31 December 2019 to $654.87 million on 31 March 2020 to $450.87 million on 30 June 2020.

Similarly, Simon’s quarterly revenues fell from $1.489 billion on 31 December 2019 to $1.353 billion on 31 March 2020 to $1.062 billion on 30 June 2020. Plus, Simon Properties’ quarterly common net income fell from $510.19 million on 31 December 2019 to $437.61 million on 31 March 2020 to $254.21 million on 30 June 2020.

Notably, Simon can still make some money. For instance, Simon’s quarterly gross profit fell from $1.230 billion on 31 December 2019 to $1.106 billion on 31 March 2020 to $860.12 million on 30 June 2020.

Simon Property is making money but its revenues, gross profit, and income are shrinking. I think Simon faces declining revenues and a future with less money.

To explain, Stockrow estimates SPG’s revenue growth shrank by 6.85% in the first quarter of 2020 and 23.99% in the second quarter of 2020. Hence, Simon’s revenues could soon fall by almost 25%.

Simon’s Cash Flow Collapses

I believe Simon (NYSE: SPG) is in trouble because its cash flow is collapsing. Dramatically, Simon’s quarterly operating cash flow fell from $959.63 million on 31 December 2019 to $741.30 million on 31 March 2020 to $73 million on 30 June 2020.

Moreover, Simon’s quarterly ending cash flow fell from $3.725 billion on 31 March 2020 to -$419 million on 30 June 2020. However, SPG’s quarterly ending cash rose from $2.978 billion on 31 December 2020.

I think Simon Property Group can survive because it has cash. In fact, Simon had $3.306 billion in cash and short-term investments on 30 June 2020. That amount fell from $3.725 billion on 31 March 2020 and $669.37 million on 31 December 2019.

Simon Property can survive

I suspect Simon has the cash to survive but that survival will be rough. I predict Simon needs to dramatically change its business model to survive.

Notably, Simon’s management is trying to change its business model fast to keep money by leasing to a cash-rich company; Amazon (AMZN). Amazon had $71.391 billion in cash and short-term investments on 30 June 2020.

Amazon has the cash to convert old Sears and Lord & Taylor stores into fulfillment centers or supermarkets. For example, Amazon could demolish a parking garage or a dead movie theater to make room for a new loading dock.

Simon Property’s Coronavirus Opportunity

I think it will take enormous amounts of work and money to convert malls from retail to light industrial space. Thus, one battle Simon and Amazon could face is popular opposition to locating industrial facilities such as ghost kitchens and fulfillment centers in suburban and urban areas.

However, I think many municipalities are desperate for jobs and tax revenue because of coronavirus. Consequently, local governments that will normally oppose light industry will welcome fulfillment centers just to have some jobs and tax revenue in town.

It is a great time to convert malls into urban or suburban industrial parks. Hence, Simon Properties’ management is smart to partner with Amazon now.

Is Simon Property a good stock?

Simon Property Group (NYSE: SPG) stock price has collapsed in 2020. Mr. Market paid $145.09 for SPG on 2 January 2020 and $64.87 on 20 August 2020.

I predict Simon’s stock price will fall further in 2020 as investors realize the scope of the Retail Apocalypse. Yet I consider Simon Property a good income stock and a value investment despite the share collapse.

To explain, Simon Property Group paid a $1.30 quarterly dividend on 9 July 2020. Notably, that dividend fell from $2.10 on 28 February 2020.

Thus, Simon Property is a great dividend stock with a good management eam. To elaborate, Simon’s management took the smart step of reducing the dividend. Cutting the dividend gives the company more cash, but it can lower the share price by driving away some investors.

In the final analysis, I consider Simon Property Group (SPG) a value investment because it has cash and pays a great dividend. More importantly, the company has a realistic opportunity to change its business model.

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