Analyst says spurned Simon still has plenty of potential

January 22, 2011

Simon Property Group Inc. used multibillion-dollar buyouts to become the nation’s largest public real estate company. So should investors be worried its last two acquisition bids have gone bust?

Not according to Rich Moore, a veteran analyst with RBC Capital Markets in suburban Cleveland. He doesn’t anticipate any more megadeals in the immediate future, but still expects Simon to remain an enticing growth stock.

“Simon is 100-percent fine without doing any transactions,” Moore said.

Not only does the Indianapolis company have the financial firepower “to handle anything bad that is thrown at them,” he said. It also has a great collection of fortress properties largely shielded from the risk of new competition.

Simon is best known for its 161 U.S. regional malls, many of them dominant shopping destinations in high-population areas where it would be almost impossible for a rival developer to build a competing enclosed mall.

“Once you have got someone inside that mall, you have a captive audience for the better part of the day,” Moore said.

It’s no surprise, then, that growing national retailers are clamoring for slots in the best malls. The increased demand at a time few new malls are being built—and those that are take as long as a decade to complete—likely will cause rents to rise faster than inflation, Moore believes.

But he said it’s Simon’s outlet malls that may have the most oomph, in part because chains are flocking to open in outlet centers.

“Retailers have come to the opinion that value is in, and probably will stay in,” Moore said.

Simon last August completed the acquisition of New Jersey-based Prime Outlets, a deal that increased its U.S. portfolio of outlet centers from 42 to 63.

Moore said the nation has about 150 quality outlet centers and has room for another 100—a demand Simon and rivals are racing to fill. Simon is in discussions to build a 350,000-square-foot outlet center in Galveston, Texas, and last fall broke ground on a 380,000-square-foot center in Merrimack, N.H.

Simon turned away

The company’s growth push hasn’t been without hitches, however. In May, Simon withdrew its $6.5 billion bid to acquire Chicago-based General Growth Properties Inc. out of bankruptcy court, saying an unfavorable court ruling had made the deal too expensive.

And this month, Simon abandoned its quest to buy London-based Capital Shopping Centres Group Plc for $4.5 billion after Capital refused to give it access to financial records.

The Prime purchase also spawned antitrust concerns—an issue sure to arise again as Simon becomes ever larger. To mollify the Federal Trade Commission, Simon last fall agreed to sell an Ohio center and modify leases that restricted tenants in Chicago and Orlando, Fla., markets from opening stores in nearby projects. The Indianapolis company previously had excluded another outlet center from the deal, apparently for antitrust reasons.

Moore figures such scrutiny will be par for the course in future Simon deals. For now, that likely won’t be an issue, he said, since shopping center operators that were able to withstand the financial crisis likely feel emboldened to retain their independence and reject takeover overtures.

Simon brass, for their part, haven’t lost their swagger. At a real estate conference at New York’s Waldorf Astoria in November, CEO David Simon pointed out repeatedly that “our performance speaks for itself.”

Indeed, the five-year total return for Simon Property Group Inc. is 49 percent, compared with 12 percent for the S&P 500.

At the conference, David Simon highlighted that the company managed to keep profit at existing properties flat through the Great Recession, and now it’s rising again.

“You read and hear about regional malls in a recession—that they’re going out of business, and the Internet, and yada, yada, yada,” Simon said.

But he said the truth is, this slump was less severe for his industry than the one that hit in the early 1990s, shutting down access to capital for a good two years.

“This was a six-month shutdown, and certain people couldn’t make it through a six-month shutdown, which is staggering to me,” Simon said.

He added: “The bottom line is, for a big real estate company, we feel really good about where we are today.”•


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