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Simon Property Shows Stability in Fundamentals

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On Jun 03, 2014, we issued an updated research report on Simon Property Group, Inc. (SPG - Free Report) , a retail real estate investment trust (REIT).

On Apr 22, riding on the growth trajectory, Simon Property came up with the announcement of a solid operating performance for first-quarter 2014, with funds from operations (FFO) of $2.38 per share, 6.25% ahead of the Zacks Consensus Estimate and 16.1% above the year-ago quarter figure, primarily driven by an increase in revenues and occupancy rate. Also, the hike in its quarterly dividend increased investors’ confidence.

Recently, the company accomplished the spin off of Washington Prime Group, and has cut its outlook for full-year 2014. While the spin-off move comes with an upfront cost for Simon Property, we believe that the company can now increase utilization of resources for expanding its global portfolio of larger malls, mills and premium outlets and effectively leverage on improving the spending habits of wealthier customers with the economy showing signs of recovery.

Also, the company’s ongoing efforts to enhance customers shopping experience are noteworthy. Initiatives like re-launching its brand and marketing programs as well as installing Electric Vehicle at its shopping centers are expected to strengthen its relationship with customers and tenants, and drive traffic.

However, Simon Property’s significant redevelopment pipeline increases its operational risks, exposing the company to rising construction costs, entitlement delays and lease-up risks. In addition, a rise in interest rates is anticipated in the long run, may raise the company’s interest expense and thus remains a concern. Moreover, the upfront expense of the spin-off is unavoidable.

Over the last 60 days, the Zacks Consensus Estimate for 2014 and 2015 FFO per share declined by 4.4% and 2.2% to $9.17 and $10.14, respectively. Consequently, the stock currently has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Other better-ranked stocks in the retail REIT industry include Retail Properties of America, Inc. (RPAI - Free Report) , Rouse Properties, Inc. and Acadia Realty Trust (AKR - Free 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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