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Can Simon Property (SPG) Combat Mall Traffic Challenges?

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Mall traffic has been facing challenges due to a change 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.

This has become a pressing concern for the retail REITs like Simon Property Group Inc. (SPG - Free Report) , GGP Inc. , Kimco Realty Corp. (KIM - Free Report) and others.

In fact, over the past six months, the Zacks categorized REIT and Equity Trust – Retail industry incurred 6.3% loss compared with the S&P 500’s gain of 7.9%.



To beat the blues, Simon Property is making concerted efforts. The company recently disclosed the continuation of the enhancements at the Southdale Center in Edina, with the beginning of the construction on Homewood Suites by Hilton. This occurred with the ground breaking of the four-story, 146-room, all-suites hotel, which is expected to open by early fall 2018. The move comes as part of the company’s efforts in the evolution of the shopping, dining, entertainment and residential destination.

Additionally, the company joined forces with health and lifestyle company, Life Time, for changing consumer experience at Southdale, with a planned athletic resort. It would include rooftop pools and beach club in addition to broad spectrum of healthy living, entertainment amenities. Specifically, a three-level, 120,000 square-foot athletic resort will come up at the redeveloped space, where the current J. C. Penney Company, Inc. store is positioned. The resort is expected to open in early 2019. This move is aimed at eventually augmenting value of the Southdale Center. (Read more: Simon Property & Life Time to Create Athletic Resort)

In fact, over the last five years, the retail REIT invested over $5 billion in development projects and intends to spend around $1 billion each in 2017 and 2018. Several initiatives are likely to be taken by the company to improve the premier shopping, dining and entertainment destinations across the U.S. These include investing in various physical projects, renovation, interior enhancements, redevelopment, addition of new restaurants and eateries, mixed-use developments, among others. Such initiatives are expected to draw more traffic at the company’s properties.

Moreover, apart from enjoying a wide exposure to retail assets across the U.S., the company’s international presence fosters sustainable long-term growth as compared with its domestically focused peers. In fact, in April, the company’s joint venture with Shinsegae Group, known as Shinsegae Simon, opened Siheung Premium Outlets, the company’s fourth Premium Outlet Center in South Korea. Also, in Jun 2017, the company’s joint venture with Genting Plantations Berhad – Genting Simon – opened Genting Highlands Premium Outlets, its second Premium Outlet Center in Malaysia.

Further, Simon Property boasts a strong and improving balance sheet. In fact, during the first quarter, it was active in securing finances and was able to reduce borrowing cost. At the end of first-quarter 2017, the company’s liquidity was over $7 billion.

Nevertheless, a large development pipeline increases the company’s operational risks. Furthermore, though Simon Property is striving to counter mall traffic pressure through various initiatives, the implementation of such measures requires a decent upfront cost and therefore, is anticipated to limit any robust growth in its profit margins in the near term. Also, rate hike have added to its woes.

As such, Simon Property currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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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