US mall investors see hope with Simon deal, vaccine news

New York

THERE'S finally some good news for US mall owners, whose shares have taken a beating during the Covid-19 pandemic.

Landlords are getting a boost after Simon Property Group Inc and Taubman Centers Inc settled their takeover dispute - a deal that creates a company with a greater focus on high-end properties, which are better able to survive the pandemic and broader shift towards e-commerce. Upbeat news on vaccine developments also sent mall owners' stocks higher on Monday.

"Malls aren't going away - at least the top ones," Alexander Goldfarb, an analyst at Piper Sandler & Co, said by phone. "Taubman's malls, in Simon's hands, is definitely a winning combo."

Just before a trial was to start this week, Simon, one of the country's largest mall landlords, reached an agreement to buy Taubman for a lower price than the one the companies agreed to in February. In the new deal, Simon will pay US$43 a share in cash for its smaller rival, down from the initial bid of US$52.50 made just before the pandemic struck the US.

Simon shares jumped 7.3 per cent to US$80.13 at 1:06 pm in New York, Taubman advanced 8.3 per cent to US$42.75 and other mall owners also gained, including Brookfield Property Partners LP and Macerich Co.

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A Bloomberg index of regional mall owners had plunged almost 50 per cent this year through Friday.

Malls had been struggling before Covid-19, with many shuttering over the past decade as e-commerce gained favour among consumers, but the pandemic accelerated the pain. Tenants who lost revenue have withheld rent, and major chains such as Neiman Marcus and JC Penney have gone bankrupt.

Crushed by mounting debt, landlords Pennsylvania Real Estate Investment Trust and CBL & Associates Properties Inc, which own mostly lower-end malls, have also sought protection from creditors.

"The issue with malls has more to do with debt, less so than tenants," Mr Goldfarb said. "Covid has showed that malls with too much debt will struggle to survive."

In contrast, Simon has a strong balance sheet and access to unsecured debt, which provides it flexibility to reinvest in its properties and charge tenants higher rents, he said. That will help the company navigate the pandemic better than others.

The deal, set to be completed by early next year, would give Simon control of Taubman's 21 US malls, including super-upscale centers such as New Jersey's Mall at Short Hills and the Beverly Center in Los Angeles.

"It's a big deal for Simon because they are going to finally capture prized malls they've been looking at for years," said Lindsay Dutch, an analyst at Bloomberg Intelligence.

"For high-quality malls, there will be opportunities to fill vacancies, and Simon has the balance sheet and capital to do that. They clearly believe in the future of brick-and-mortar."

The reduced price has benefits for both companies, too, Mr Goldfarb said. Simon would save more than US$700 million compared with the original price, and Taubman gets to avoid prolonged, costly litigation, he said.

Mall owners now have to contend with Covid-19 cases that are spiking across the US, threatening new lockdowns in some areas. But positive news from vaccine trials - with three companies saying they've produced shots that are showing in studies to be more than 90 per cent effective - is providing some optimism.

"Shopping is one of our national hobbies and will continue to be," said Bill Smead, chief investment officer and portfolio manager at Smead Capital Management, which holds Simon and Macerich shares. "People need people. That's what the malls have going for them. It's a place to go be around people."

Even as it works to buy Taubman, Simon may abandon 11 malls with high vacancy rates and US$1.4 billion in commercial mortgage-backed securities debt, according to researchers at Kroll Bond Rating Agency.

Four of the malls, with more than US$400 million in debt, are already in the process of being repossessed by lenders, according to monthly filings by the loan servicers. The other seven properties are at high risk because of vacant space formerly occupied by department store anchor tenants.

"Just because Simon is a strong operator doesn't mean they're going to continue with a losing proposition," Mike Brotschol, a managing director with Kroll's credit profile unit, said in an interview.

"Malls have been struggling for several years. Now that we're in a pandemic, it's really going to be the tipping point for many of them that are on the bubble." BLOOMBERG