Here’s a Big Reason to Like Simon Property Group Other Than Real Estate

Simon Property Group (SPG) reported Q4 2022 results Monday that were better than expected. But, unfortunately, the retail REIT also said that it sees its funds from operations (FFO) in 2023 would be below Wall Street’s estimate of $12.12 a share. 

Its FFO was $3.15 a share in the fourth quarter, one cent better than the Zacks consensus estimate and four cents higher than Q4 2021. On the top line, its revenue was $1.40 billion, $33 million better than analyst expectations, and 5.6% higher than a year earlier. 

Like many businesses in this mixed-message economy, there’s some good stuff going on at Simon and some not-so-good. 

Remember that there’s a big reason for investing in SPG stock other than its real estate. Here’s why you ought to think twice before passing on the REIT.

It’s Made a Lot of Retail Bets

When Simon made its first investment in a struggling retailer in September 2016 -- it acquired bankrupt teen apparel retailer Aeropostale with General Growth Properties, Authentic Brands Group, Hilco Capital, and Gordon Brothers for $243 million -- a lot of investors thought it was throwing good money after bad. 

At the time, Aeropostale had 240 stores in the U.S. At the time of the acquisition with its partners, Fortune reported that CEO David Simon felt Aeropostale had the potential to be a 500-store chain. 

“Right now we’re looking at around 500 stores,” Simon said. “We expect every one of those stores to be profitable.” He added: “The fact of the matter is we found out there’s a lot more store profitability out there than we thought.”

How’s Aeropostale doing more than six years later? It has 800 locations worldwide. Simon’s share of the investment in Aeropostale was a low $33 million. 

Since then, the partnership between Authentic Brands and Simon has acquired floundering brands needing a lifeline, including Nautica, Lucky Brand, Forever 21, Brooks Brothers, Eddie Bauer, and Reebok. 

In the fall of 2020, Simon suggested in its Q3 2020 conference call that its SPARC Group joint venture with Authentic Brands would deliver a billion dollars profit from buying poorly operated, financially unstable retail brands. 

How Have the Bets Played Out?

So far, the results have been mixed, but the future remains bright. 

In 2022, its net operating income from Other Platform Investments – including SPARC Group, J.C. Penney (I’ll get to that in a moment), Authentic Brands Group, and Rue Gilt Groupe -- fell by 33% to $355 million. Forever 21’s business greatly suffered from inflation in 2022. 

So did J.C. Penney’s, which I’ve yet to mention. 

Simon and Brookfield Asset Management (BAM) acquired the troubled department store out of bankruptcy in December 2020 for $1.75 billion. The partners invested $300 million (Simon’s share was 41.67%) and assumed $500 million of its debt. In addition, Wells Fargo provided a $1 billion asset-based loan facility.

When the retailer entered bankruptcy protection in May 202o, it had more than 800 stores. The owners planned to cut that to 600, with 160 and its distribution centers sold to J.C. Penney’s former lenders. 

So, the SPARC Group paid $243 million for Aeropostale, $286 million for Nautica, Forever 21 for $81 million, Lucky Brand Jeans for $140 million, and Brooks Brothers for $325 million. In 2021, it acquired a sixth brand in Eddie Bauer, but no terms were disclosed. My guess is $230 million, less than Brooks Brothers but more than Lucky Brand. 

That’s $1.33 billion for six businesses generating approximately $8.6 billion annual sales. 

A Bigger Piece of 2 Pies

As part of Simon’s Q4 2022 conference call, the company said it transferred its share in the Eddie Bauer licensing joint venture in return for more equity in Authentic Brands. As a result, it now owns 12%.

This alone could turn out to be a gold mine. 

ABG owns more than 40 brands that generate more than $24 billion in annual revenue worldwide. In January 2022, Authentic Brands pulled its IPO, selling 25% of its business to two private equity firms for $2.75 billion. Simon’s share in the licensing company could be worth as much as $1.5 billion. 

While there are many moving parts, from where I sit, the moves are gaining traction for Simon. Ultimately, David Simon believes this will deliver real value for shareholders. 

I would agree. 

Simon essentially has two non-real estate pies. 

The first is its investments in the five retailers other than Eddie Bauer held by SPARC and its stake in J.C. Penney. The second pie is its 12% ownership in Authentic Brands. 

The latter is valued at $1.5 billion. As for the former, if you value the $8.6 billion in sales at 0.45x sales as the markets are doing with Abercrombie & Fitch (ANF), that’s an additional $3.9 billion, of which Simon owns 50%, or an additional $1.95 billion. 

Together, the two pies could be worth $1 billion in gains between September 2016 and February 2023. 

I’d say that’s a big reason to own SPG stock.

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