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Here's How Simon Property (SPG) Looks Ahead of Q2 Earnings

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Simon Property Group (SPG - Free Report) is scheduled to report second-quarter 2020 earnings on Aug 10, after market close. The company’s quarterly results will likely display declines in both revenues and funds from operations (FFO) per share.

In the last reported quarter, this Indianapolis, IN-based retail real estate investment trust (REIT) delivered a negative surprise of 4.14% in terms of FFO per share. Results reflected a decrease in leasing spread per square foot at the company’s U.S. malls and Premium Outlets.

In addition, over the trailing four quarters, the company exceeded the Zacks Consensus Estimate on two occasions, met in one and missed in the other, the average surprise being 0.87%. This is depicted in the graph below:

Simon Property Group, Inc. Price and EPS Surprise

 

Simon Property Group, Inc. Price and EPS Surprise

Simon Property Group, Inc. price-eps-surprise | Simon Property Group, Inc. Quote

Let’s see how things have shaped up for this announcement.

Factors at Play

Simon Property enjoys a wide exposure to different retail assets, including premium malls, lifestyle centers and other retail properties across the United States. Hence, with the relaxation of the shelter-in-place orders in certain states, this retail REIT is expected to have benefitted from its superior assets in premium locations. During the second quarter the company continued to reopen its properties for business.

In fact, as of May 11, it reopened 77 of its U.S. retail properties in markets where local and state orders have been lifted, and retail restrictions have been eased. Moreover, as of the same date, 12 of Simon Property's Designer properties and international Premium Outlets reopened. Such efforts are expected to have helped the company to sail through the crisis.

Making further progress with the reopening of properties, Simon Property announced on Jun 29 that it already reopened 199 of its 204 U.S. retail properties across 37 states. These properties denote more than 95% of the company’s property net operating income (NOI).

Apart from these, 30 of Simon Property's Designer properties and international Premium Outlets have been open. These include all of its international Premium Outlets located in Asia as well as Designer Outlets in Continental Europe, with almost all retail stores open.

Hence, with more than 18,000 stores across the company's U.S. portfolio being reopened and many tenants witnessing higher-than-expected conversion rates and sales, cash flow generation at its properties are expected to have not been concerning.

Furthermore, in response to the pandemic and its impact on business, Simon Property substantially reduced all non-essential corporate spending and property operating expenses. This is anticipated to have reduced the company’s operating expenses, alleviating pressure from its bottom line.  

However, the retail real estate market had already been bearing the brunt of declining traffic, store closures and retailer bankruptcies, and the pandemic has only added to its woes. In the April-June quarter, the escalating number of coronavirus cases forced several retailers to close stores. Some retailers also reduced their store hours, while many others kept the e-retail operations running, as consumers have been increasingly opting for online purchases to avoid gathering in public spaces.

Per a report from CBRE Group (CBRE - Free Report) , the overall retail availability rate in second-quarter 2020 expanded 3 basis points to 6.4%, while retail properties witnessed their first quarterly decline in net absorption since early 2011. Neighborhood, community & strip centers witnessed the majority of the decrease in net absorption.

Simon Property too is not immune to move-outs, store closures and retailer bankruptcies. The choppy retail real estate environment is anticipated to have continued hindering its growth momentum in the June-end quarter, as secular industry headwinds have been casting a pall on industry fundamentals.

In addition, the headwinds translated to financial stress on retail tenants, impacting their ability to pay rent. This is expected to have marred Simon Property’s ability to recognize revenues in terms of rent collection and lease income. In fact, probable write-off of operating lease receivables is expected to have reduced lease income.

In fact, the Zacks Consensus Estimate for second-quarter lease income is pegged at $1.16 million and indicates a decline of 7.4% from the prior quarter’s reported figure.

Moreover, the consensus estimate for second-quarter revenues is currently pinned at $1.21 billion, indicating a decline of 13.2% year over year.

Lastly, Simon Property’s activities during the April-June quarter were inadequate to gain analyst confidence. The Zacks Consensus Estimate for the FFO per share moved 2.9% south over the past month and is currently pinned at $2.31. The figure also suggests a 22.7% decline from the year-ago quarter.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a beat in terms of FFO per share for Simon Property this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Simon Property currently carries a Zacks Rank #4 (Sell) and has Earnings ESP of -7.67%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

We also look forward to the earnings releases of other retail REITs like Taubman Centers, Inc. and The Macerich Company (MAC - Free Report) , both of which are scheduled to release earnings next week.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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