Commercial Real Estate and Shopping Centers and Simon Property Group and Banking & Finance and Investing and Real Estate Investment Trust and Retail and Real Estate & Retail

Simon’s 20-year run has made investors a bundle

October 19, 2013

Guiding Simon Property Group Inc. through the financial crisis was tough for CEO David Simon. But weathering the early 1990s, right after Simon returned from a job on Wall Street to help save the family company, was even tougher.

By comparison, Simon said at an investor conference last month, the Great Recession “was child’s play. OK. That was real stress, right?”

Now is a fitting time to remember such pivotal moments because Simon Property Group is on the verge of completing its 20th year as a public company.

It’s been quite a ride—and an extraordinarily profitable one for investors. Since its December 1993 IPO, Simon has racked up a total return of 1,917 percent, compared with 435 percent for the S&P 500 during the same span, according to data provided by Kirr Marbach & Co.
 

Simon Simon

Simon now is the largest real estate company in the world and has a stock market value of $59 billion. That’s $6 billion more than Eli Lilly and Co., not that the hypercompetitive Simon has noticed.

“If I have a bigger market cap, that might get better Colts tickets,” the 52-year-old quipped at the investor conference.

Those early days were rough. David was only 29 when he came back to Indianapolis with the mission of instilling discipline in the sprawling company that his father Melvin and uncle Herb had built.

In the midst of a recession, Simon, as chief financial officer, refinanced hundreds of millions of dollars in debt, forced subordinates to justify their budgets, and slashed payroll.

The crisis soon passed, but Simon never has fallen back on the freewheeling ways of his dad and uncle. As a result, while every company stumbles now and then, Simon has a dazzling record of buying or improving existing malls and making acquisitions that ultimately pay off. Those deals made it the No. 1 player in the fast-growing outlet mall business and expanded its footprint around the globe.

“We have done roughly $33 billion in deals since 1993,” Simon said at the investor conference. “How many companies do you know that have been able to get $33 billion in deals done—none of which were dilutive—and at the end of the day improve their balance sheet from a non-rated company to an A-rated company?”

After such an impressive run for the company, the question now is whether it’s too late to jump aboard as an investor.

David Simon, to no surprise, sees opportunity, given Simon Property Group’s underperformance of late compared with the overall market. Shares are trading at about $157, down from $182 in May.

Simon and other real estate companies have suffered from the perception that higher interest rates would boost their borrowing costs. In addition, a host of mall retailers have reported smaller-than-expected increases in same-store sales.

But at the investor conference, David Simon pointed out that his company’s fortunes are not tethered to the sales of the shops that populate its malls. He noted that the list of Simon Property Group’s top 10 tenants today is almost entirely different from its list at the IPO.

“I hope I don’t have any of my friendly retailers here, but when they don’t produce, we are going to look to replace them,” often with a tenant paying higher rent, he said. “You can see that basically they’ve completely changed, yet we’re still standing.”

Another enticement for investors is Simon’s rich dividend—$4.60 per share on an annualized basis. The decline in the stock price has pushed the dividend yield up to nearly 3 percent.

Simon’s take on Internet retailing

Does the rapid rise in Internet retailing imperil the shopping mall? Simon says no, at least not for the stronger-performing malls that represent a big chunk of his company’s portfolio.

“I do think it will continue to obsolete some retail real estate,” Simon said of Internet retailing. “But at the end of the day … our good stuff is going to get better. And the retailers all have to be kind of omni-channel—they have to be in the physical environment.”

But the competition does force mall owners to raise their game, creating as pleasant a shopping environment as possible and providing technology that helps consumers find new merchandise and what’s on sale.

“We’ve got to schlep bags to their car if they need help,” he said. “We’ve got to do the service points that we’ve probably ignored in the past.”•

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