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Analyst Blog

On Mar 14, 2014, we issued an updated research report on Simon Property Group, Inc. (SPG - Analyst Report), a retail real estate investment trust (REIT).

On Jan 31, continuing its ride on the growth trajectory, Simon Property came up with a solid operating performance during 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-ago quarter figure. The improvement was primarily driven by an increase in revenues and occupancy rate. The company also hiked its quarterly dividend payout by 4.17%.

Going forward, we believe that the company’s spin-off decision bodes well as it would help increased utilization of resources for expanding its global portfolio of larger malls, mills and premium outlets. With the economy showing signs of recovery, spending power of richer consumers is improving and the company seems to gain leverage from this trend. Moreover, Simon Property’s same-day delivery deal with Deliv promises solid prospects. Through this deal, the company would leverage its nationwide real estate properties – mall and retail outlets – and use them as distribution centers.

However, Simon Property’s significant development and redevelopment pipeline increases its operational risks, exposing the company to rising construction costs, entitlement delays and lease-up risks. Moreover, with a gradual reduction in the Fed’s support, interest rates are expected to increase, which may in turn hurt the rate-sensitive business of the company in the long run.

Over the last 30 days, the Zacks Consensus Estimate for 2014 FFO per share moved north by 2 cents to $9.57. Also, it climbed 4 cents to $10.34 for 2015 FFO per share. Consequently, the stock currently has a Zacks Rank #2 (Buy).

Stocks That Warrant a Look

Other better-ranked stocks in the retail REIT industry include General Growth Properties, Inc (GGP - Snapshot Report), Federal Realty Investment Trust (FRT - Analyst Report) and National Retail Properties, Inc. (NNN - Snapshot Report). All these stocks carry the same rank as Simon Property.

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

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