Herb and David Simon make $19M bet on Simon Property’s deflated stock

With Simon Property Group Inc. shares in a free fall last week, CEO David Simon and his uncle, Chairman Emeritus Herb Simon, purchased hundreds of thousands of shares on the open market for $19.1 million, regulatory filings show.

The purchases sent a resounding sign to Wall Street that they still have faith in the company. But it wasn’t enough to stop the historic plunge in Simon Property Group shares.

Since the start of 2020, Simon shares have lost 67.7% of their value—chopping $31 billion off the company’s market capitalization. The stock, which traded above $225 in 2016, closed Friday at $48.14.

The percentage drop this year is the second largest among Indiana’s 54 publicly traded companies, behind only Fort Wayne-based handbag maker Vera Bradley Inc. That firm, which on March 11 reported disappointing quarterly results and on March 20 shuttered its stores until April 2, has dropped 68.2%. (Here is a list of how all Indiana stocks have performed in 2020.)

To be sure, nearly all stocks have taken a beating as investors panic over fallout from the coronavirus pandemic. But the plunge in the shares of Simon, long one of central Indiana’s top-performing companies, has been on a uniquely shocking scale. By comparison, since the start of 2020, the S&P 500 has shed a comparatively modest 28.7%.

Regulatory filings show that last Tuesday, David Simon bought 150,000 shares for $9.1 million, or an average of $60.83 apiece. The next day, Simon Property Group co-founder Herb Simon, the owner of the Indiana Pacers, bought 188,572 shares for $9.9 million, or an average of $52.67 apiece.

On the same day as Herb Simon’s purchases, six directors—including former Anthem Inc. CEO Larry Glasscock, E&A Cos. Chairman Allan Hubbard, Indiana University Foundation CEO Dan Smith and Chase Bank Indiana Chairman Al Smith—also scooped up shares. In total, the eight insiders bought 372,358 shares for $20.8 million.

The filings publicly disclosing the purchases sent a strong signal from insiders that “we believe in this company,” said Alexander Goldfarb, managing director of Piper Sandler & Co. in New York.

But it wasn’t enough to stem the bleeding. The stock dropped 18% on Wednesday—the day Simon announced it was closing its 200 U.S. shopping centers until March 29—then rallied 20% on Thursday before falling 18% on Friday. For the week, it was down 46%.

“This market is purely driven by fear. But when we look back on this, it will look” well-timed, Goldfarb said of the insider purchases.

A Simon spokeswoman did not respond to IBJ’s requests to interview David Simon.

Goldfarb, who on Thursday lowered his price target on Simon shares from $150 to $100, said that while the coronavirus is hurting Simon, the investor reaction is way overblown.

“We continue to believe SPG has been overly penalized, along with many REITs, in this sell-off, and that their capital position remains stout and dividend amply covered,” he said in a report.

The company’s quarterly dividend is $2.10 per share, which gobbles up about $644 million in cash every three months. Because Simon’s shares have fallen so far, the dividend yield (calculated by dividing the annual cash dividend by its stock price) is a whopping 15.1%.

Goldfarb said that while the coronavirus crisis will trigger negotiations between Simon and tenants seeking to get back on their feet, Simon owns such a strong collection of market-dominant malls that it will hold most of the cards.

“We would expect that any accommodation will be via rent deferment versus outright relief,” Goldfarb said in his report. “Sure, some fiscally strapped retailers may achieve the latter, but it would likely come at the expense of other … landlord-friendly terms,” such as the right for Simon to kick out the retailer in favor of a better tenant.

Goldfarb said Simon will have an even stronger collection of properties once it completes the $3.6 billion purchase of Michigan-based Taubman Centers Inc., owner of 25 malls and outlet centers.

Simon announced the deal in February, before the coronavirus effectively shut down the nation. The deal doesn’t give Simon the option to walk away, and the company wouldn’t want to, anyway, Goldfarb said, since it has the financial might to move forward and the acquisition provides long-term benefits.

“The malls they are picking up, 10 of them are amazing. Simon will use the cash flow from the other 15 to invest in the top malls,” Goldfarb told IBJ. “They are picking up powerhouses,” such as International Plaza in Tampa, Florida, and The Mall at Short Hills in New Jersey.

Julian Lin, who runs the Best of Breed research service, said in a Thursday post on Seeking Alpha that the thrashing Simon has received shows a complete disconnect with reality.

“It appears that Wall Street looks at the temporary store closures due to coronavirus lockdowns as being the end of malls,” he said.

Yet Simon shares had been out of favor even before the virus outbreak—in large part because of concerns over the rise of online shopping. Analysts say the coronavirus-induced woes add to that angst.

“Retail’s recovery may take longer vs. other property types given the highly discretionary spending (restaurants/apparel) taking place in malls and the availability of substitutes (e.g. online delivery for food & clothing),” the investment firm Jefferies said in a report.

At the Raymond James Institutional Investors Conference on March 2, Simon Chief Financial Officer Brian McDade acknowledged retail is changing but said some of that evolution is to Simon’s advantage.

For example, he said, when department stores ruled the retail world, they were able to secure mall slots for almost nothing, based on the premise that they would drive traffic to the smaller retailers.

“That’s completely flipped today,” he said. “Although the anchor stores are still continuing to hold on and basically paying no rent, the traffic is driven by the in-line tenants in the mall.

“And so what we’ve had the opportunity to do now is recapture these department stores and add incremental, exciting uses that we didn’t have the opportunity to do five, 10 years ago, when department stores were in a different position from a financial perspective. Candidly, it’s the single biggest opportunity that we’ve seen in our business in 25 years is to recapture this space and drive forward the use of our real estate to what consumers are looking for today.”