After falling practically 40% to this point this yr as a consequence of financial issues, Simon Property Group (SPG) seems intriguing primarily based on its valuation, profitability, and dividend-growth potential. I’m bullish on the inventory.
Shaped in 1993, SPG is an actual property funding belief specializing in retail properties primarily in america. The corporate’s objective is for its properties to be the premier vacation spot for high-end retailers and their clients.
In response to its newest filings, Simon owns or holds an curiosity in 199 income-producing properties in america, which comprised 69 Premium Retailers, 95 malls, 14 Mills, six way of life facilities, and 15 different retail properties positioned in 37 states and Puerto Rico.
The corporate additionally owns an 80% non-controlling curiosity within the beforehand publicly traded Taubman Realty Group, which it acquired in late 2020. Lastly, Simon has a 22.4% fairness stake in Klépierre SA (KLPEF), a publicly-traded, Paris-based actual property firm that has an curiosity in purchasing facilities positioned throughout 14 European international locations.
With a market capitalization of practically $36.7 billion, Simon is the second most respected retail U.S.-based REIT, solely behind Realty Revenue (O).
Simon Property Group’s Financials are Enhancing
The previous two years have been very turbulent for Simon. Within the midst of 2020, the corporate suffered considerably due to the pandemic as retail places have been quickly closed. SPG took benefit of the frenzy on the time to accumulate Taubman Realty Group, whose shares have been buying and selling at depressed ranges on the time.
With retail places recovering final yr and the corporate unlocking working efficiencies with its stake in Taubman, Simon’s FFO per share neared its pre-pandemic ranges at $11.94. For context, FFO per share in Fiscal 2019 was $12.04.
Getting into Fiscal 2022, the corporate retained sturdy momentum. In its Q1-2021 outcomes, whole revenues got here in at $1.3 billion, 4.5% increased than the comparable interval final yr. Elevated revenues have been pushed by the continued restoration in retail actual property, assertive leasing momentum, and lofty occupancy ranges. Consequently, FFO per share superior 12.1% to $2.78.
Notably, portfolio NOI, which includes home properties, worldwide properties, and Simon’s funding in Taubman Realty Group, rose 8.8% in comparison with the prior-year interval.
Thus, Simon’s big buyout of Taubman continues to be confirmed fairly accretive to the corporate’s across-the-board efficiency. Moreover, occupancy superior to 93.3% in comparison with 90.8% final yr.
Following a better-than-expected opening to Fiscal 2022, administration boosted its prior full-year outlook, now anticipating FFO/share to be in a variety of $11.60 to $11.75, up from $11.50 to $11.70 beforehand.
Additional, the corporate not too long ago raised its dividend for a fifth consecutive quarter to a quarterly charge of $1.70, marking a 3% improve sequentially, or a 21.4% improve year-over-year.
Lastly, the board licensed a brand new share repurchase program, permitting administration to purchase again as a lot as $2 billion value of inventory over the subsequent 24 months.
Issues Stay Regardless of Enhancing Financials
Whereas the inventory recovered final yr as a consequence of its healed financials, new issues have arisen. With inflation at the moment hovering at 41-year excessive ranges, traders have turn into more and more anxious about shoppers’ future buying energy. Spending on shopper discretionaries may decline if value will increase get out of hand relative to the underlying wage development.
Moreover, with supply-chain bottlenecks persisting, retail places have struggled to keep up wholesome stock ranges, disrupting gross sales circulate.
Containership charges stay close to file ranges, which signifies that delivery has additionally turn into loopy costly, additional pressuring retailers’ margins. If retailers battle, SPG could expertise hurdles with sustaining sturdy occupancy and rental assortment ranges.
Is SPG Inventory Moderately Valued?
The midpoint of administration’s steering means that Simon will ship FFO/share near $11.68 in Fiscal 2022. Following the inventory’s ongoing decline, the P/FFO a number of has now declined to about 8.4x.
Moreover, the present quarterly dividend per share charge of $1.70 implies an annualized charge of $6.80, which in flip implies a dividend yield of seven% on the inventory’s present value ranges.
For my part, each these metrics counsel that potential traders have a moderately large margin of security towards additional inventory declines. The huge yield alone may offset inventory value losses and even deter traders from dumping the inventory decrease.
Moreover, the present annualized dividend charge and the midpoint of administration’s steering place the payout ratio at 58%. Thus, a sixth consecutive sequential improve is just not unlikely, together with the corporate’s upcoming earnings report. Such a hike ought to additional increase traders’ confidence within the inventory.
Wall Avenue’s Tackle SPG Inventory
Turning to Wall Avenue, Simon Property Group has a Reasonable Purchase consensus ranking primarily based on seven Buys and 7 Holds assigned prior to now three months. At $145.43, the common SPG inventory forecast implies 49% upside potential.
The Takeaway – The Execs Outweigh the Cons
Simon Property Group’s efficiency took successful throughout the pandemic, however its restoration has been moderately swift. Regardless of the latest issues, the corporate’s steering factors towards near-record profitability for this yr.
With shares showing fairly valued, the hefty dividend yield offering a large margin of security, and the chance for payouts to develop shifting ahead, I’m bullish on the inventory.
