Simon Property Group (NYSE: SPG) is America’s largest retail REIT and shopping mall operation, it owns, develops and manages premier shopping, entertainment, dining, and mixed-use destinations, specializing in upscale properties of five types:
- Premium Outlet centers
- Regional malls
- The Mills
- Community/lifestyle centers
- International properties
SPG owns five out of the 10 most valuable REIT-owned malls and is the dominant player in the outlet sector.
Simon is structured as an umbrella partnership REIT, with virtually all business operated through its Operating Partnership (OP) subsidiary. SPG owns 87% of the OP, with the remaining 13% owned by limited partners. Simon and the OP are operated as a single business. Shares trade on the New York Stock Exchange.
SPG owns properties throughout the United States, Europe and Asia. It is headquartered in Indianapolis and has more than 5,000 employees. The REIT maintains a focus on high-end stores, opening it up to some criticism for failing to diversify beyond its area of concentration. SPG is a leader in efficient management of energy, but some analysts accuse it of lacking full transparency with regard to its workforce management and performance.
Recent Company Trends
SPG saw strong leasing activity in the first half of 2018. During the period, it renewed 514 leases, signed 507 new leases, disposed of one retail property, and acquired two European designer outlets. It also opened a premium outlet at the Edmonton International Airport. Minimum rents increased by $5.5 million, and comparable rents increased 1.6%.
In general, SPG had strong Q2 2018 operating and financial results, with emphasis on property redevelopment and acquisition. Sales per square foot at outlets and malls were $646, compared to $618 in the prior year period.
SPG has recently committed $4 billion to upgrade the customer experience at some of its most notable shopping centers, including ones in King of Prussia PA and Atlanta GA. Activity includes the development of residential components, restaurants, boutique hotels and wellness centers. The commitment seems to be well timed. Buxton, a consumer analytics firm, asserts that a successful retail development involves 70% food, 30% retail. One can conclude that shoppers need some coaxing to visit malls rather than shopping online, and experiential attractions fit the bill nicely.
As of the end of 2018 Q2, SPG investment properties had a book value of $18.58B, net of accumulated depreciation. Its investment portfolio was 94.7% occupied, with an average base minimum rent per square foot of $53.84 and total sales per square foot of $646. Leasing activity has increased year over year.
As of the end of 2017, SPG properties in the U.S. contained 182.3M of gross leasable area (GLA). It owned 107 malls, typically with at least one anchor property, with more than 13,200 occupied stores of which 500 were anchors. SPG also owned 68 Premium Outlets, containing a wide variety of manufacturer and designer stores in open-air centers near major metropolitan areas and tourist venues. The Mills consisted of 14 properties, combining outlet center, traditional mall, big box stores and entertainment destinations. In addition, SPG has U.S. interests in four lifestyle centers and 14 additional retail properties. In total, SPG wholly owned 134 properties and control another 13 joint ventures. It managed a total of 203 U.S. properties.
In 2018, SPG expects 538 inline- and freestanding-store lease expirations representing 1.6M square feet and 1.6% gross annual rental revenues. Four anchor store leases also expire in 2018.
Internationally, SPG had a 21% stake in Klepierre, a Paris-based publicly-owned real estate company with stakes in 16 countries. SPG had controlling interests in nine Designer Outlets throughout Europe, and a 14.6% stake in Value Retail PLC. It also has interests in properties located in Japan, South Korea, Mexico, Malaysia and Canada.
SPG owns 380 acres of land in North America for future development.
Simon has one of the strongest credit ratings among North American REITs, with a high rent/square foot, strong sales, and plenty of manoeuvrability within its debt covenants.
For the first half of 2018 versus the first half of 2017, SPG saw an increase in total revenues, operating expenses, cash flows and net income. Assets were up slightly, while liabilities and total equity decreased.
The following financials reflect activity through Q2 2018. on a trailing twelve-month basis where appropriate:
Simon Property Group REIT - Table 1
|Return on Assets||7.20%|
|Return on Equity||64.01%|
|Earnings per Share||$7.26|
|Dividend Per Share||$8.00|
|Free Cash Flow||2.87|
|Free Cash Flow/Net Income||1.27|
As of September 15, 2018
Simon Property Group REIT - Table 2
The biggest threat to Simon is rising interest rates. To that end, SPG has reduced its debt in the last year. Another threat is its lack of diversification into lower-tier properties that would suffer less during a recession. Nonetheless, SPG has considerable financial strength and excellent operational expertise. It also benefits from geographic diversification. It’s net operating income is bolstered by new development, expansion, redevelopment and acquisitions. Funds from operations and dividends look stronger for 2018 as well. For these reasons, Simon raised its 2018 outlook.
SPG is a giant retail REIT with strong financials and an attractive dividend yield. It is well-managed, internationally diversified and well-positioned in the premium retail sector. As long as interest rates don’t get too high, SPG appears to be a solid bet for the conservative investor.