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Simon Property (SPG) Shares Rally 31.6% QTD: Here's Why

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Shares of Simon Property Group (SPG - Free Report) have rallied 31.6% so far in the quarter, ahead of the industry’s increase of 16.5%.

Zacks Investment Research
Image Source: Zacks Investment Research

Analysts seem bullish on this Zacks Rank #3 (Hold) stock. The Zacks Consensus Estimate for the company’s 2022 funds from operations (FFO) per share indicates a favorable outlook as it has increased marginally upward over the past month to $11.68. Also, the FFO per share estimate for 2023 has moved up slightly to $12.11.

Let us now decipher the factors behind the increase in the stock price and upward estimate revisions for the FFO per share.

Recently, this Indianapolis, IN-based retail real estate investment trust (REIT) completed its earlier announced strategic partnership with Jamestown, a global real estate investment and management firm. In October 2022, Simon Property announced that it would acquire a 50% interest in Jamestown from the latter’s founding partners.

The partnership seems a strategic fit for SPG as it anticipates its stake in Jamestown to be accretive to earnings. With an experienced fund manager and a mixed-use operator and developer, Simon Property will have the scope to capitalize on the growing asset and investment management businesses.

Moreover, in November, SPG announced that Leap, the retail platform for modern brands, would open numerous stores at its properties. The move will help many digitally native brands to strategically expand as omnichannel retailers.

To begin with, Simon Property and Leap intend to open four stores between California and Florida. These are True Classic Tees in Los Angeles' Del Amo Fashion Center and ThirdLove, Sugarfina and Goodlife in Florida's Town Center at Boca Raton.

Also, in November, Nobu Hospitality and Simon Property celebrated the opening of Nobu Hotel & Restaurant Atlanta at the mixed-use development — Phipps Plaza — in Buckhead.

The increase in consumers’ preference for an in-person shopping experience following the pandemic downtime has been driving the recovery in the retail real estate industry. Retailers continue to rent out more physical store spaces to meet this growing demand. As a result, SPG’s portfolio of premium assets in the United States and abroad has been experiencing solid leasing activity.

During the nine months ended Sep 30, 2022, the company signed 983 new leases and 1,116 renewal leases (excluding mall anchors and majors, new development, redevelopment and leases with terms of one year or less) with a fixed minimum rent across its U.S. Malls and Premium Outlets portfolio.

The occupancy for Simon Property’s U.S. Malls and Premium Outlets portfolio improved 170 basis points year over year to 94.5% as of Sep 30, 2022. Also, the base-minimum rent per square foot for this portfolio was $54.80 as of Sep 30, 2022, rising from $53.91 as of Sep 30, 2021.

Simon Property’s adoption of an omnichannel strategy and successful tie-ups with premium retailers has paid off well. Its online retail platform, coupled with an omnichannel strategy, is likely to be accretive to its long-term growth. It is also focused on tapping growth opportunities by helping digital brands enhance their brick-and-mortar presence.

Further, SPG’s efforts to explore the mixed-use development option, which has gained immense popularity in recent years, have enabled it to tap growth opportunities in areas where people prefer to live, work and play. Moreover, the company capitalized on buying recognized retail brands in bankruptcy. With the brands generating a decent amount from digital sales, investments in them seem strategic for Simon Property.

Simon Property also maintains a solid balance sheet position with ample liquidity. It exited the third quarter of 2022 with $8.6 billion in liquidity and a fixed-charge coverage ratio of 5.0, ahead of the required level. The company also enjoys investment-grade credit ratings, giving it favorable access to the debt market.

SPG’s trailing 12-month return on equity (ROE) is 54.59% compared with the industry’s average of 6.27%. This reflects that the company is more efficient in using shareholders’ funds than its peers.

In addition, Simon Property’s current cash flow growth is projected at 44.90% compared with the 26.69% growth estimated for the industry. With strong financial footing and enough financial flexibility, it is well-placed to capitalize on long-term growth opportunities.

Solid dividend payouts remain the biggest enticements for REIT investors, and SPG has consistently raised its dividend rates. Concurrent with the third-quarter earnings release on Nov 1, 2022, SPG announced a 2.9% sequential hike in its fourth-quarter 2022 dividend to $1.80 per share. Before this, the company increased its third-quarter 2022 dividend to $1.75 per share from $1.70 paid earlier. Such efforts boost investors’ confidence in the stock.

Nonetheless, given the convenience of online shopping, it is likely to remain a popular choice among consumers, affecting the market share for brick-and-mortar stores. Also, interest rate hikes add to Simon Property’s concerns.

Stocks to Consider

Some better-ranked stocks from the retail REIT sector are American Assets Trust (AAT - Free Report) and Tanger Factory Outlet Centers, Inc. (SKT - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for American Assets Trust’s 2022 FFO per share has moved 2.2% north to $2.34 over the past month.
 
The Zacks Consensus Estimate for Tanger Factory Outlet Centers’ ongoing year’s FFO per share has been revised marginally upward over the past month to $1.81.

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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