On Sep 5, we reaffirmed our long-term Neutral recommendation on Simon Property Group, Inc. (SPG). The decision is based on this retail real estate investment trust’s (REIT) diversified portfolio, growth prospects, better-than-expected results and improving metrics. However, rise in online shopping, a cut-throat competitive environment and rising interest rates remain our concerns.
Why Neutral?
Consistent with its winning streak, Simon Property came up with a solid operating performance during the second quarter and easily outpaced funds from operations (FFO) estimates. Quarterly FFO per share was up 11.6% year over year and beat the Zacks Consensus Estimate by 1.93%, primarily due to an increase in minimum rent, overage rent and occupancy. Moreover, the company has raised its guidance for the year again.
We believe that with assets in almost all retail distribution channels across the U.S., Simon Property is well poised to capitalize on improving market dynamics. Also, the company’s international presence gives it more sustainable long-term growth prospects than its domestically focused peers.
Simon Property has been active in capitalizing on growth opportunities in some of the top global markets, with a focus on enhancing its Premium Outlets portfolio. The company is experiencing an improved trend in total sales per square foot and occupancy over the recent years. Moreover, releasing spreads remained positive in the U.S. malls and Premium Outlets.
However, the company’s significant development pipeline increases its operational risks. Moreover, rise in consumer purchases through catalogs and the Internet could hurt the demand for its properties. Moreover, the rising interest rates increase the company’s funding cost.
Hence, we believe that the risk/reward profile for the stock is currently balanced and therefore have reaffirmed our Neutral recommendation on the stock.
Over the last 30 days, the Zacks Consensus Estimate for 2013 FFO per share remained unchanged at $8.73 per share while the Zacks Consensus Estimate for 2014 moved north by a cent to $9.37 per share. The stock currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Other stocks in the related industry that are worth considering include Acadia Realty Trust (AKR), Cedar Realty Trust, Inc. (CDR) and Realty Income Corp. (O), all carrying a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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