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Is It Wise to Retain Simon Property (SPG) Stock Right Now?

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Given the recovery of the retail real estate industry, Simon Property Group’s (SPG - Free Report) portfolio of premium assets in the United States and abroad, the adoption of omnichannel retailing and balance sheet strength position it well for growth.

This retail REIT behemoth enjoys wide exposure to retail assets across the United States. Additionally, its presence in international markets is likely to encourage sustainable long-term growth compared with its domestically focused peers.

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, the company’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.

Going forward, an improving leasing environment is likely to benefit this retail REIT’s properties at premium locations. During the nine months ended Sep 30, 2022, SPG 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.

To enhance its portfolio, Simon Property has been focusing on premium acquisitions and transformative redevelopments and has invested billions in transforming its properties. 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 SPG.

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.

In addition, Simon Property’s current cash flow growth is projected at 44.90% compared with the 22.59% growth estimated for the industry. With strong financial footing and enough financial flexibility, the company is well-placed to capitalize on long-term growth opportunities.

Shares of this Zacks Rank #3 (Hold) stock have risen 18.9% in the past three months compared with its industry’s growth of 16.5%.

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However, the Zacks Consensus Estimate for the company’s 2022 funds from operations (FFO) per share has remained unchanged at $11.68 over the past month. Given the conveniences of online shopping, rising e-commerce adoption is still a concern for SPG. Online retailing will likely remain a popular choice among customers, adversely impacting the market share for brick-and-mortar stores.

Further, a hike in the interest rate is a concern for Simon Property. Rising rates imply higher borrowing costs for the company, which will affect its ability to purchase or develop real estate. Also, the dividend payout might become less attractive than the yields on fixed income and money market accounts.

Stocks to Consider

Some better-ranked stocks from the retail REIT sector are National Retail Properties (NNN - Free Report) and Tanger Factory Outlet Centers (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 National Retail Properties’ 2022 FFO per share has climbed up 12.3% over the past two months to $3.20.

The Zacks Consensus Estimate for Tanger Factory Outlet Centers’ 2022 FFO per share has moved marginally north over the past two months 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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