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Earlier this month Simon Property Group rocked the retail community not only with its announcement that it had bid $3.6 billion for a stake in Taubman Centers, but also that the price it was paying was a 51% premium, according to Morningstar (per Bloomberg). This price spoke volumes about the value these assets have for Simon as well as the industry as a whole, according to analyst Kevin Brown, as it suggests that class A mall REITs in general are undervalued.

Essentially, this analysis rewrites retail's script of the last several years in which the asset class has been mainly playing defense, and not always successfully.

Others, such as Chris Needham, principal at Gaspee Real Estate Partners, have come to a similar conclusion. "Taubman Centers' $3.6 billion bid for Simon Property Group suggests there is significant upside in US malls," he tells GlobeSt.com, provided certain strategies are put into play.

Repurposing larger vacancies into smaller spaces can demand more rent which will in turn increase value significantly, Needham says. "Over the past few years, we've seen several 'dead' malls come back to life with a variety of different uses.

For instance, fitness and medical retailers are snatching up vacancies in local malls and centers, Needham says. "These uses weren't always a welcome addition in the past. Now they are paying high rents and driving more people to the centers. These uses are breathing life into malls when most people feared they would become a thing of the past."

A Cash Deal

The transaction does have its financial drawbacks, however, namely the fact that it was funded almost exclusively in cash despite the alleged willingness of Taubman to accept Simon Property shares, says Scott Crowe, chief investment strategist at CenterSquare Investment Management.

"This transaction, while relatively small in the scheme of Simon Property Group as a whole, erodes the quality of [its] balance sheet at a period of time where they will need to spend a significant amount of capital revamping their mall assets with mixed-use potential to generate alternative sources of revenue and foot traffic," Crowe tells GlobeSt.com.

That said, Crowe and his colleague portfolio manager Patrick Wilson do believe that the price Simon Property Group paid for Taubman was a fair one. "There is no denying both the quality of the Taubman portfolio as well as the opportunity to densify many of their assets which are located in great catchment areas with enviable surrounding demographics," Wilson said.

Precious Redevelopment Capital

But there will be costs ahead for Simon that could make this acquisition more expensive than originally anticipated. Simon Property Group appears to have paid a steep price by levering up its balance sheet at a time when redevelopment capital has become very precious, according to Crowe.

"Simon Property Group's asset base, like most enclosed malls in the US, will need to diversify their offering to consumers and create a better sense of place," he says. "Unfortunately, prior to the Taubman bid, on the Q4 2019 earnings call David Simon stated that given the size and scale of Simon Property Group's portfolio of assets, 'even when we look at just our non-retail real estate, I mean, to get to the NOI of over 5% is going to take a lot of work'".

This further sheds light on the intense amount of time and capital that will become necessary to reposition such a large asset base of traditional retail to remain relevant in a world where e-commerce continues to gain retail market share and is showing no signs of slowing, Crowe concludes.

The Inevitability of Repositioning

And there is little question that repositioning will be part and parcel of any US mall's survival strategy going forward.

"Simon appears to be picking up a set of quality assets for a decent price but at the end of the day, it's all about reconfiguring malls to be a place where people can have 'experiences' that are worth the trip," Patrick Dinardo, a partner at Sullivan & Worcester, tells GlobeSt.com.

"Simon is a great operator and this acquisition adds more facilities with decent occupancy rates to its stable of centers, but I'm sure they also have a plan to reposition the assets that they are acquiring."