Simon Property Group is one of the premier shopping center operators in the world. The firm looks to own, develop, and manage high quality shopping and entertainment destinations. The company is also looking to transition its high value real estate assets into mixed used destinations. Here, the company will not only provide shopping, dining, and entertainment options, but also residential and office experiences. As of its latest annual shareholder filing, Simon owns properties in 37 states and Puerto Rico.
COVID-19 has had a disproportionate impact on the overall retail industry and Simon Property Group. The fear of contracting the virus along with nationwide closures have significantly reduced traffic to Simon’s properties. As a result, it supply chains have been dramatically altered throughout the 2020 fiscal year. In addition, COVID-19 has indirectly impacted Simon, through higher adoption rates and usage of online channels. As consumers are now forced to purchased discretionary goods and services online, COVID-19 has only exacerbated an already negative influence on the retail industry overall. This has indirectly impacted the supply chains of Simon through large retail bankruptcies, lower rental income, and subsequent lower profits. As a self-administered and self-managed real estate investment trust, the firm is also required to pay 90% of its profits to shareholders in the form of dividend in exchange for tax benefits. This REIT characterization has ultimately hindered Simon’s ability to properly reinvest in its supply chain to combat the influences of COVID 19. As a real estate developer, Simon relies heavily on construction supply chains in order to develop and advance its property value (Kaufmann,2000). Due to the influences above, the overall development supply chain has been gravely hampered.
To begin, Simon Property Group is a self-administered and self-managed REIT. Its main product is real estate. As a real estate developer, the company must constantly reinvest in its properties to attract tenants, attract customers, and increase its property values. In order to do, the company engages with a diverse and broad array of supplies and contractors who provide both material and labor needed to redevelop their properties. COVID-19 has created significantly headwinds in the redevelopment opportunities of Simon for several reasons. For one, the pandemic has impacted their supply chain operations simply due to construction delays and material acquisition. Depending on the quality and grade of construction materials, many of these materials are imported from overseas countries. For example, contractors may require a certain grade of marble or granite for a high-end shopping center that can only be imported from France. In other instances, contractor may have initiated a contract prior to the pandemic to purchase a predetermined amount of materials from China. This is common in the construction supply chain as the contractors can guarantee or “lock-in†their supply of materials while the business selling the product can “lock-in†revenues and profits (Bhattacharjee,2000). However, due to COVID-19 and admittedly trade wars, material shipments have been heavily delayed. Due to these supply chain disruptions, construction schedules, timelines, and budget were all subsequently delayed. The cost of these delays often flow to Simon who is overseeing these projects.
Manpower restrictions as a result of COVID-19 have also disrupted the supply chain of Simon. In many instances, Simon has elected to do tenant improvement work to enhance an aspect of their property. In order to entice high quality tenants, Simon will often provide tenant allowances where the company essentially pays for the changes made to an area for the tenant. In certain instances, the retail box is too small to allow for proper social distancing between workers. As a result, inefficiencies occur as only a certain amount of works can engage with the property at a given time. This ultimately disrupts the timing and budgets throughout the supply chain.
To combat the supply chain issues above, Simon has made multiple changes. For one, the firm raised nearly $1 billion in the capital markets through a combination of debt and equity issuances. Here, the company is looking to increase its liquidity to navigate an uncertain future. The firm also raised the capital to avoid violating some its debt covenants with lenders. Simon typically uses leverage in the form of debt to purchase and redevelop its properties. In exchange for this debt, the lending institutions always demand that certain thresholds be met. If not, the company can be held in “default†of the loan. These loan covenants include provisions related to debt to equity ratios, debt service coverage ratios, and liquidity ratios. Of its publicly traded peers, Simon, due in part the capital raise mentioned above, has some of the best coverage ratios in its industry. As of its last quarterly filing that company has slightly over $1B in cash. Its credit rating, even in the midst of the pandemic is still rated investment grade. As a result of its quality balance sheet and strong cash position, the company can navigate many of the COVID-19 supply chain disruptions (Agrawal, 2009).
The company is also looking to use legal remedies for contractors and tenants who are not holding their end of their contracts. For one, the company has taken legal action to void certain contracts due to a “force majeure†clause in their agreements. Through this clause, Simon can void contracts, due to an unforeseeable circumstance that prevented them from fulfilling the contract. In certain jurisdictions in the United States, the company has won legal action and was able to void certain contracts.
As it relates to alternative responses, I would look to sell non-performing assets. As a shopping center REIT, pending bankruptcies, changing consumer purchasing behavior, and online competition have been a headwind for the entire industry. Shopping centers located in bad locations where consumers don’t frequent should be sold. I understand that many of these prices will be at valuations lower than purchases, but the overall supply chain savings should be worthwhile to the organization. For one, the firm does not need to invest free cash flow into the non-performing property. It’s operations and general administration expense will be reduced. By taking the proceeds and paying off the debt, the firms leverage position will be reduced as well. This will also allow to firm to focus on its best locations with its best future prospects. Likewise, the firm can use a portion of sales proceeds to strengthen its supply chain, contractor network, and overall business operations. I would also look to pivot away from an emphasis on retail and look to diversify into other real estate asset classes such as office, industrial and residential (Alvarado, 2001). Here, I believe retail and residential assets have natural synergies. Many young adults are electing to move into the city. They want to be around and interact with other young individuals. Shopping centers are a natural gathering spot, and bring people together for shopping, dinning and entertainment experiences. By marrying the two, the firm can first raise rental rates on properties, it will have a captive consume living in a residential space, and if done properly, will raise property values (Mahajan, 1985).
As noted above, the supply chain disruptions due to COVID-19 have had adverse financial impact on the firm overall. From a revenue perspective, tenants are bother unable and unwilling to pay rent due to the pandemic. The company is therefore forced to grant temporary rent deferrals and in some extreme cases rent abatements. This lack of rental income strains the supply chain of Simon as less funds are available for real estate redevelopment activity. The real estate redevelopment activity that is already on-going is often delayed due the reasons mentioned above. These delays cause further pressure on the supply chain and Simon’s financials. In order to company this change, the company must therefore access the equity and debt markets to bolster its liquidity position. As noted above, in order to save money, I would first sell non-performing assets, diversity my asset base, and bolster my supply chain through asset sale proceeds.
To conclude, the retail industry supply chain and Simon overall are under enormous pressure. Store closures, changing purchasing behavior, construction delays, bankruptcies, and the unwillingness of customer to pay rent all contribute to the strain. The company has reacted gallantly be raising capital, taking legal action against those who don’t uphold their contract, and suspending redevelopment activity. All of this is combined with an investment grade balance sheet and a strong liquidity position. As COVID-19 passes, Simon is well positions to participate in the pending recovery.
References:
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2. Alvarado UY, Kotzab H (2001) Supply chain management: The integration of logistics in marketing. Ind Market Manag 30(2):163–198
3. Bhattacharjee S, Ramesh R (2000) A multi-period profit maximizing model for retail supply chain management: An integration of demand and supply-side mechanisms. Eur J Oper Res 122: 584–601
4. Kaufmann, P. J., Donthu, N. and Brooks, C. M. (2000)) ‘Multi-unit retail site selection processes: Incorporating opening delays and unidentified competition’, Journal of Retailing, Vol. 76, No. 1.
5. Kumar, V. and Karande, K. (2000) ‘The effect of retail store environment on retailer performance’, Journal of Business Research, Vol. 49, No. 2
6. Mahajan, V., Sharma, S. and Srinivas, D. (1985) ‘An application of portfolio analysis for identifying attractive retail locations’, Journal of Retailing, Vol. 61, No. 4
