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Shares of retail real estate investment trust (REIT), Simon Property Group (SPG - Analyst Report), rose 2.2% during Friday’s regular trading session on the NYSE following the disclosure of its plan to spin off the strip center business and smaller enclosed malls into a publicly traded REIT. The move will help Simon Property to increase focus on the larger retail properties, namely malls, mills and premium outlets.

Currently referred to as “SpinCo”, this new unit will initially enjoy an ownership or will have stake in 54 strip centers and 44 malls. These malls reap annual net operating income of $10 million or less. The properties span 53 million square feet in total and are located across 23 U.S. states. Moreover, these assets enjoy considerable occupancy levels (as of Sep 30, 2013, occupancy of SpinCo's strip centers and malls were 94.2% and 90.4%, respectively).

Win-Win Situation

The move is a win-win situation for both Simon Property and SpinCo. Simon Property can increase utilization of resources for growing its global portfolio of larger malls, mills and premium outlets. With the economy showing signs of recovery, spending of the richer consumers is improving and the company seems to leverage on this trend.

The spin-off would lead to a rise in Simon Property’s sales per square foot, net operating income (NOI) growth as well as occupancy. Moreover, the company’s current annualized dividend of $4.80 per share will be maintained and thereafter will likely grow in tandem with growth in funds from operations (FFO) and taxable income.

For SpinCo, the move will help to unleash the potential of strip centers and malls that will be owned by it. In fact, this spin-off unit will also likely benefit from its diversified portfolios, flexible balance sheet and significant scale.

Along with a low leveraged balance sheet, SpinCo will expectedly gain from its relationship with Simon Property and could utilize the managerial expertise of the latter in its board as well. Simon property's President and Chief Operating Officer, Richard Sokolov, will serve as Chairman of SpinCo while Chairman and Chief Executive Officer of Simon Property, David Simon, will be the director of the spun off unit.

Notably, significant investments in SpinCo’s assets have already been made in recent times to attract and expand key anchor tenants including Wal-Mart Stores Inc. (WMT - Analyst Report), Bed Bath & Beyond Inc. (BBBY - Analyst Report) and Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA - Snapshot Report) among others. Further, a pipeline of around $300 million of future development and redevelopment projects has been identified.

In the initial year, SpinCo’s FFO is projected to be around $300 million or 80 cents per share while dividend is estimated to be no less than 50 cents per share, which is around 100% of its estimated taxable income.

When and How

The filing of the initial Form 10 information statement with SEC is expected to be made before the year-end, while the disclosure regarding the SpinCo executive management team is expected to come up in first-quarter 2014. Finally, the transaction is targeted to be accomplished in the second quarter of 2014.

The spin-off would take place by a distribution of SpinCo common shares/limited partnership units through a pro-rata special distribution to Simon Property shareholders/Simon Property Group's limited partnership unit holders.

At present, Simon Property carries a Zacks Rank #3 (Hold).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.

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