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Simon Property (SPG) to Grow on Portfolio Revamp Efforts

Zacks Equity Research

Simon Property Group’s SPG constant efforts to enhance its portfolio through transformative redevelopments and acquisitions were reflected in its second quarter earnings. The company exited the quarter with various redevelopment and expansion projects in progress at 25 properties across the U.S. and Canada and its share of costs was around $1.3 billion.

The company raised its full-year 2017 FFO per share guidance and projects it to be in the range of $11.14-$11.22. This was mainly driven by improved property performance and growth in revenues.

The company has been actively restructuring its portfolio and is aiming at strategic acquisitions. It recently opened the Norfolk Premium Outlets in Norfolk, VA and Genting Highlands Premium Outlets, its second Premium Outlet Center in Malaysia. The move marks the company’s effort to enhance its portfolio with premium properties in vibrant locations.

The company’s focus on global expansion augurs well for long-term growth. Its ownership stake in Klépierre gives it access to premium retail assets in the high barrier-to-entry markets of Europe. We believe this geographical diversification cushions Simon Property from market volatility and helps it post a decent performance.

As noted above, Simon Property has an active redevelopment and expansion pipeline, comprising high-end projects, on national and international levels. This increases operational risks, exposing the company to escalating construction costs, entitlement delays and lease-up risks.

Such ventures and initiatives come at a point when mall traffic has been shrinking due to a shift in shopping patterns, with online shopping taking precedence over in-store purchase. As a result, demand for retail real estate space has been diminishing, of late, as changing shopping patterns are compelling retailers to reconsider their footprint, and eventually opt for store closures or file bankruptcies.

While Simon Property has been striving to counter the pressure through various initiatives, the implementation of such measures requires a decent upfront cost. This, in turn, will limit any robust growth in the company’s near-term profit margins.

Moreover, the stock has lost 11.4% year to date, underperforming 1.7% growth recorded by the industry it belongs to. The stock currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

A few better-ranked stocks in the REIT space include American Asset Trust, Inc. AAT, Regency Centers Corp. REG and Liberty Property Trust LPT. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here..

While American Asset Trust and Regency Centers have expected long-term growth rates of 5.9% and 7.7% respectively, Liberty Property Trust has expected long-term growth rate of 6%.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. 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.

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