Is the mall really dead? Why Simon Property Group may be worth a closer look

There are few sectors that have been worse hit by the pandemic than shopping malls. Retailers were already in structural decline before the pandemic and this trend has accelerated since the onset of the pandemic. Add to this that business reopenings are still being halted across the US, and Simon Property Group - the largest mall operator in the US - may actually be primed to benefit.

Simon may come out the other side of this pandemic in a strong position given its already strong balance sheet to buy other mall operators like Taubman Centers and some of their tenants such as bankrupt retailers like Brooks Brothers and others struggling in the sector such as J.C. Penney.

The stock, down 46% this year vs 11% for the S&P, trades at just half the valuation of other mall REITs and also has a dividend yield just shy of 7%. Piper Sandler's Alexander Goldfarb sees Simon as among the top picks in the space given improving credit trends and rent payments. Add to this their ability to buy high quality competitors at a discount, and there is a chance that SPG could be the last man standing within the mall space.

The recent good news helped lift the stock a little as Simon renegotiated the deal to buy Taubman, managing to cut almost $800 million off the price, and the deal could bode well with a return to more normal business conditions.

As wall street analysts will tell you, the value in the stock derives from its superior cash flow management, valuable real estate, and its eagle eye when it comes to buying distressed assets. As Bill Smead at Smead Capital Management notes, "David Simon is a great buyer of straw hats in winter".

Simon's malls tend to contain inventory of far superior quality than straw hats however. Not only is Simon Apple's biggest landlord, but 80% of net operating income from their malls are rated in the 'high-end' category, with the Taubman deal adding further to this through the likes of the Beverly Center in LA. Simon have also boosted its retailers chances of surviving the pandemic through lowering and abating rents. This has of course pleased retailers, with 95% now having reopened.

And while yes, the structural decline of the malls has been seen and discussed for many years as the industry struggles amidst the rise of e-commerce, once Covid-19 abates, people will be more eager than ever to venture to the stores, go to the movies and eat out - all activities offered by Simon's malls.

Simon are well equipped to not only survive but to also take advantage of those malls and retailers incapable of remaining competitive. As a result, the pandemic is providing them with a great opportunity to further strengthen their position and emerge in 2021 an even stronger force within malls.

For many investors, the mere mention of malls is enough to make them run a mile. However, for those brave enough, Simon provides a unique opportunity - and one in which the dividend will likely pay for their patience.