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Simon Property Scales 52-Week High on Investors' Optimism

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Shares of Simon Property Group Inc. (SPG - Free Report) crafted a 52-week high, touching $183.08 on Aug 31. The stock pulled back to end the trading session at $183.03.

The share price of this retail REIT has appreciated 15.7% over the past year, outperforming the 14.1% increase registered by the industry during the same period.



 

Growth Drivers

The U.S. economy is gaining strength, and consumer spending continues to be robust amid tax cuts and tighter labor market which is pushing up wages. This is evident from the recently-released retail sales figure for July that marked growth of 0.5%, higher than the consensus estimate of 0.1%.

Not only sales at non-store retailers increased in the month, but gains were also noticed across eight out of 13 categories, including a rebound in sales at clothing stores, improvement in sales at bars and restaurants, as well as growth in sales at department stores. This healthy environment paints an encouraging picture for the retail real estate industry also.

In fact, although declining mall traffic resulting from the e-commerce boom, store closures and retailer bankruptcies has wreaked havoc in the past quarters for retail REITs like Simon Property, Kimco Realty Corp. (KIM - Free Report) , Macerich Company (MAC - Free Report) and Taubman Centers, Inc. (TCO - Free Report) , retail landlords are now making efforts to boost their asset productivity by trying to grab attention from new and productive tenants, and disposing the non-productive ones. The companies are avoiding heavy dependence on apparel and accessories, and rather expanding their dining options, opening movie theaters, offering recreational facilities and opening fitness centers.

Particularly, over the past five years, Simon Property invested billions in development and redevelopment projects and further, in May 2018, the company announced the launch of a $4+ billion investment plan to transform its properties. These transformational plans included addition of hotels, restaurants, residences and luxury stores. Such initiatives are expected to create value and drive footfall at the company’s properties.

Most recently, in a bid to boost footfall at its properties, the company welcomed two chef-driven concept restaurants at Roosevelt Field — Simon Property’s expansive retail destination for fashion, discovery and community at Long Island. (Read more: Simon Property Adds Two Restaurants to Roosevelt Field)

In addition, it is exploring mixed-use development option which has gained immense popularity in recent years. Such developments lower the distance between housing, workplaces, retail businesses, and other amenities and destinations. Hence, such developments enable companies to grab the attention of people who prefer to live, work and play in the same area — a trend that drove development in several other cities in the United States.

Moreover, in July, Simon Property reported second-quarter 2018 funds from operations (FFO) of $2.98 per share, which surpassed the Zacks Consensus Estimate of $2.91. Results highlighted increase in base minimum rent per square foot and leasing spread per square foot at its U.S. malls and Premium Outlets. The company also raised its outlook for 2018 and announced a dividend hike.

Upsurge to Continue?

Simon Property enjoys a wide exposure to retail assets across the United States. In addition, the company’s international presence fosters sustainable long-term growth as compared with its domestically focused peers.

The company has been active in restructuring its portfolio and is aiming at premium acquisitions and transformative redevelopments. In fact, at the end of the second quarter, Simon Property had redevelopment and expansion projects, including the addition of new anchors, in progress at several properties across the United States, Canada, Europe and Asia. The company has also resorted to micro-retail modeling that offers store units ranging from 20-200 square feet of space. With such a huge pipeline, the company is well poised to effectively leverage the improving spending habits of wealthier customers amid improving economy.

Simon Property has a strong and improving balance sheet. At the end of second-quarter 2018, the company had more than $7 billion of liquidity. This comprised cash on hand, including its share of joint-venture cash and available capacity under the company’s revolving credit facilities.

Finally, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Simon Property remains committed to that. Concurrent with its second-quarter 2018 earnings release, the company announced a quarterly dividend of $2.00 per share, denoting an increase of 2.6% sequentially and 11.1% year over year. In fact, the company has steadily raised its dividend over the past years, increasing from $3.50 in 2011 to the present annualized rate of $8.00 per share.

Also, the trend in estimate revisions of current-year FFO per share indicates a favorable outlook for the company, with the Zacks Consensus Estimate for the same being revised to $12.09 from $12.03 over the last 60 days. Given its progress on fundamentals, the stock is likely to experience a favorable trend in price, going forward.

Nevertheless, the implementation of such measures requires a decent upfront cost and therefore, would limit any robust growth in its near-term profit margin. Also, rate hike has added to its woes.

The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

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