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Here's How Simon Property (SPG) Looks Ahead of Q4 Earnings

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Simon Property Group (SPG - Free Report) is scheduled to report fourth-quarter and full-year 2020 results on Feb 8, after the bell. 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) reported a negative surprise of 8.9% in terms of FFO per share. Results reflected the coronavirus pandemic’s adverse impact on the company’s domestic and international operations.

In the last four quarters, the company exceeded the Zacks Consensus Estimate on one occasion and missed in the other three. It has a trailing four-quarter negative surprise of 5.23%, on average. 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

The retail real estate market had already been battling dwindling traffic issues, store closures and retailer bankruptcies, and then the pandemic had added to its woes. However, per a report from CBRE Group (CBRE - Free Report) , solid holiday spending helped total retail sales in the fourth quarter which remained above the first-quarter pre-pandemic level. In fact, the immunization process roll-out and additional fiscal stimulus has supported consumer sentiment.

Retail sales which grew 3.9% year on year in the fourth quarter to $1.64 trillion. Though non-store retailers have been witnessing decent sales activity, there was higher-than-expected physical store shopping during this holiday season, which is encouraging for the retail real estate market.

The total retail availability rate remained sequentially unchanged at 6.6% in the fourth quarter but expanded 40 basis points year on year owing to the pandemic. Particularly, the power center segment reported the largest increase year on year. Moreover, rates have varied widely in terms of geography, with the suburban areas and tier II cities outperforming higher density urban areas.

Fourth-quarter net absorption of 7.1 million square feet marked the first quarterly gain since the onset of the health crisis in the first quarter of 2021. Except power centers, every property type recorded positive net absorption. In fact, amid significant e-commerce penetration and store closures, power centers have been affected. However, because of COVID-associated restrictions, total retail completions plummeted nearly 60% year on year during the fourth quarter.

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

Moreover, the pandemic-led headwinds translated to financial stress on retail tenants, impacting their ability to pay rent, affecting the company’s ability to recognize revenues in terms of rent collection and lease income.

However, the REIT has a wide exposure to different retail assets, including premium malls, lifestyle centers and other retail properties across the United States. Hence, the reopening of the retail sector in several parts of the nation came as a relief. This is because, with more reopening of stores, tenants stand in a better position to generate revenues and meet their rent payments.

Therefore, the pressure on the retail landlord is likely to have reduced to some extent and its rent-collection figures are expected to have improved. Furthermore, focus on controlling expenses is likely to have partly alleviated pressure on the bottom line during the quarter to be reported.

Also, the fourth quarter was remarkable for this retail REIT as it completed the acquisition of Taubman Centers, Inc., adding a number of premier retail assets to the company’s portfolio late in December. Per the agreement, the retail REIT through its operating partnership acquired all of Taubman Centers Inc.’s common stock for $43 per share in cash. The total consideration for the buyout was $3.4 billion and included redemption of preferred shares.

Furthermore, amid the retail apocalypse, adoption of an omni-channel strategy and successful tie-ups with premium retailers has been a saving grace for Simon Property. Also, last December, the company teamed up with Mango to assist the latter’s growth strategy in the United States with the launch of stores in 2021. The move came as Simon is now focused on tapping growth opportunities by assisting digital brands enhance their brick-and-mortar presence. Further, in November, the company collaborated with Narvar to facilitate easy drop-off returns for retail brands. Specifically, the service lets consumers make quick drop-off returns from roughly two dozen brands at a participating Simon location.

The Zacks Consensus Estimate for fourth-quarter lease income is pegged at $1.04 billion and indicates a decline of 23.3% from the prior-year quarter’s reported figure. Also, the consensus estimate for quarterly revenues is currently pinned at $1.14 billion, suggesting a decline of 23.1% year over year. Occupancy of its total portfolio is expected to be 91% in the quarter.

Lastly, Simon Property’s activities during the October-December quarter were inadequate to gain analyst confidence. The Zacks Consensus Estimate for the FFO per share moved nearly 1% south in the past month and is currently pinned at $2.21. The figure also suggests a 25.3% decline from the year-ago quarter.

For the full year, the Zacks Consensus Estimate for FFO per share has been revised marginally downward to $9.17 over the past month. The figure also indicates a 23.8% decline year on year on revenues of $4.62 billion.

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 #3 and has Earnings ESP of -0.43%.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Rexford Industrial Realty, Inc. (REXR - Free Report) , slated to release fourth-quarter earnings on Feb 10, has an Earnings ESP of +2.13% and carries a Zacks Rank of 2, at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Healthpeak Properties, Inc. (PEAK - Free Report) , scheduled to report earnings figures on Feb 9, has an Earnings ESP of +4.40% and holds a Zacks Rank of 3 at present.

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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