On Dec 12, we reiterated our long-term Neutral recommendation on Simon Property Group, Inc. (SPG). The decision is based on this retail real estate investment trust’s (:REIT) strong third-quarter results, improving operating performance and shareholders’ wealth enhancement efforts.
However, the company’s significant development pipeline, rise in online shopping and a cut-throat competitive environment remain our concerns.
Keeping its winning streak alive, Simon Property posted strong quarterly results yet again in the third quarter, with funds from operations (:FFO) per share of $2.21, beating the Zacks Consensus Estimate and year-ago quarter figure by 5 cents and 22 cents, respectively. Increases in revenues and occupancy rate were the major drivers. Furthermore, Simon Property hiked its dividend and raised the full-year FFO outlook, thereby boosting investors’ confidence.
We believe that with assets in almost all retail distribution channels across the U.S., Simon Property is well poised to capitalize on improving market dynamics. Also, the company’s international presence gives it more sustainable long-term growth prospects than its domestically focused peers.
Additionally, Simon Property has been active in capitalizing on growth opportunities in some of the top global markets, with a focus on enhancing its Premium Outlets portfolio. The company is experiencing an improved trend in total sales per square foot and occupancy over the recent years. Moreover, releasing spreads remained positive in the U.S. malls and Premium Outlets.
However, Simon Property is dependent on the market’s general economic conditions for retail space. Presently, the cautious attitude of consumers has adversely affected the sales volume of many retail giants. This, in turn, remains a concern for Simon Property’s rental revenues and cut its ability to raise rents in the near term.
Also, Simon Property’s significant development pipeline increases its operational risks. Moreover, rise in consumer purchases through catalogs and the Internet could hurt the demand for its properties. In addition, the capital market volatility and anticipated rise in interest rate in the long term may dent the company’s ability to finance and refinance debts as well as its dividend payout.
Hence, we believe that the risk/reward profile for the stock is currently balanced and therefore, have reaffirmed our Neutral recommendation.
Over the last 30 days, the Zacks Consensus Estimate for 2013 FFO per share remained unchanged at $8.79 while the Zacks Consensus Estimate for 2014 moved north by a cent to $9.49. The stock currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Investors interested in REIT-Equity Trust – Retail industry may consider stocks like Ramco-Gershenson Properties Trust (RPT), Cedar Realty Trust, Inc. (CDR) and Retail Properties of America, Inc. (RPAI). All these stocks carry a Zacks Rank #2 (Buy).
Note:FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.