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Keeping its winning streak alive, retail real estate investment trust (REIT) – Simon Property Group, Inc. (SPG - Analyst Report) – came up with a solid operating performance during the fourth quarter 2013, with funds from operations (FFO) of $2.47 per share, 4 cents ahead of the Zacks Consensus Estimate and 18 cents above the year-go quarter figure.

The 7.9% year-over-year improvement in Simon Property’s quarterly FFO per share was primarily driven by an increase in revenues and occupancy rate. The company also hiked its quarterly dividend payout by 4.17%.

Total revenue during the reported quarter increased 5.3% year over year to $1.42 billion and also exceeded the Zacks Consensus Estimate of $1.37 billion. The increase in revenues was attributable to a rise in minimum rent, overage rental and tenant reimbursement revenues.

For full year 2013, Simon Property reported FFO per share of $8.85 per share on revenues of $5.17 billion. Results were higher than the prior-year FFO per share of $7.98 on revenues of $4.88 billion.

Quarter in Detail

During the reported quarter, minimum rental revenues climbed 5.1% year over year to $850.1 million, while overage rental revenues rose 4.2% year over year to $89.0 million. Moreover, revenues from tenant reimbursements increased 6.1% year over year to $383.1 million. However, the results were partly dwarfed by a 10.2% decrease in management fees and other revenues.

For the U.S. Malls and Premium Outlets portfolio, occupancy rose 80 basis points (bps) year over year to 96.1% at the end of the fourth quarter. Total sales per square feet moved north by 2.5% to $582. Encouragingly, base minimum rent per square feet climbed 4.0% year over year to $42.34 and releasing spread increased 600 bps to 16.8%.

Portfolio Activity

During the quarter, Simon Property closed the buyout of the ownership stake in four existing McArthurGlen Designer Outlets. In addition, the company owns an interest in the Ashford Designer Outlet in Kent, UK and Vancouver Designer Outlet (under construction), as well as a 50% ownership in McArthurGlen's management and development company.

On the other hand, Simon Property accomplished the sale of two community/lifestyle centers and two outlets during the quarter. The company also opened major redevelopments and expansions at a number of its properties.

Liquidity

Simon Property exited the year 2013 with cash and cash equivalents of $1.7 billion, up from $1.2 billion at the end of the prior year.

Dividend Hike

Concurrent with its earnings release, Simon Property increased the quarterly dividend by nearly 4.17% to $1.25 per share from $1.20 paid in the prior quarter. The dividend will be paid on Feb 28, 2014 to shareholders of record as of Feb 14.

2014 Outlook

Simon Property provided the guidance for full-year 2014. The company expects FFO per share in the range of $9.50 – $9.60. This is ahead of the current Zacks Consensus Estimate of $9.48 per share for 2014.

Spin Off

Simon Property came up with its plan to spin off its entire strip center business and 44 smaller enclosed malls into a publicly traded REIT. A Form 10 has already been filed in December and the company anticipates this transaction to be effective in the second quarter of 2014.

Our Viewpoint

We are encouraged by Simon Property’s strong quarterly results, which came on the back of its robust financial and operational performances. Moreover, we believe that the spin-off decision is a strategic fit as it would help Simon Property increase utilization of resources for expanding 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.

Further, Simon Property along with The Macerich Co. (MAC - Analyst Report) and Westfield Group partnered with same-day delivery company Deliv in recent times. The move follows a similar same-day delivery deal announced by General Growth Properties, Inc. (GGP - Snapshot Report). These mall operators are leveraging on their nationwide real estate properties – mall and retail outlets – and using them as distribution centers.

Nevertheless, the broader industry concerns restrain us from becoming extremely positive on the stock and it currently carries a Zacks Rank #3 (Hold). We now look forward to the results of Kimco Realty Corp. (KIM - Analyst Report), which is scheduled to report next week.

Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.
 

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