$SPG Vertical Integration
Background
Friends in Atlanta, Boston and NH let me know that they are seeing strong traffic going into their local malls. All three locations discussed were owned by Simon Property Group (aka Simon Malls), which owns ~180 properties throughout the US. Some of these are self contained mini and mega malls (like Copley Place in Boston)…some are premium-strip mall style indoor or outdoor outlets (like the Forum Shops at Caesars)
I did some additional social investigation and looked at tagged locations on Instagram for a few of the other locations where I didn’t get firsthand reports. The screenshots below show photos…most of which have been taken in the past 24 hours. 24 hours folks.
I try not to pay too much attention to price action, but market sentiment is an important part of this trade. SPG is trading at $68 today… about 40-45% of their pre COVID 100-day DMA.
SPG had their earnings call on 8/10, so I went back and listened and also spent some time reading through their financials. These guys are still posting a profit., reporting a Basic and Diluted FFO (REIT-speak for EPS) per share of $2.12, about a 38% drop from last year, not bad for a global pandemic. Balance sheet wise, their current assets exceed their current liabilities by about $1.5B.
The Kicker
Beyond their survivability, SPG is now BUYING ACTUAL BRANDS in joint ventures. This is huge and represents a move toward vertical integration during an opportunistic time when they can partner up and buy companies like Lucky Brand and Brooks Brothers for cheap. https://seekingalpha.com/news/3605794-simon-property-authentic-snag-lucky-brand-for-140_1m
Risks
We don't have a viable vaccine or effective treatment or faster testing throughout 2021
We are about to place the straw on the camel's back that will force loads of Simon retailers to fold
The government assistance that just ended in July is likely to have a huge negative effect on retailers' ability to keep stores staffed and will not get renewed
These are serious risks to consider...but all signs are pointing to vaccine production inside of 2021...and it seems SPG has the cash to manage operating costs for a while if any retailers fold and stop paying rent.
Conclusion
Increased foot traffic in the malls is a good sign that the stores that have not yet closed in Simon Malls will not close, or at least not en masse. My money says that these guys have strong survivability through COVID without having to sell too many important assets.
With the price where it is today, I think this is another great recovery play to complement your RCL and LUV shares and calls.
This really isn’t a true social arb play, aside from the news of SPG buying brands…we're really just taking advantage of the knowledge that a vaccine…or more instantaneous testing…or effective at home treatment WILL come and will help this price skyrocket.
I know, I know...what type of psychopath buys a mall REIT in the middle of a pandemic? I feel a bit like these guys:
Position(s)
I own 1/21/22 $70 calls and plan to buy $80s as well once I close out some shorter term positions. The IV isn't bad either.
You can also just as confidently buy shares or short cash covered puts, but be ready for a bit of a dip if Phase III Results are negative for a few of the vax companies, or just take longer than expected.
I'll exit my position when the market ingests knowledge of successful phase III vaccine trials or any other COVID-killing event. Probably a 4-6 month play I'm guessing.