Simon Property: A High Quality REIT During Inflationary Times (NYSE:SPG)
Simon Property Group (NYSE:SPG) is one of the most well run REITs in the public markets today. This day in age, with the markets as volatile as they have been, it is important for investors to focus on quality.
As you can see in the chart below, SPG shares have been hit particularly hard during the market sell-off we have been seeing.
Shares are down nearly 35% since November. Year-to-date shares are down 30% with the broader REIT sector (VNQ) along with the broader market (SPY) down 15%.
The broader market selling pressures have certainly attributed to SPG’s performance, but some of it is also related to the earnings results we are seeing from the retail sector in general. Earnings calls for Walmart (WMT), Target (TGT), and many other names have all cited increased pressures due to inflation, transportation costs, and employee costs.
Being the landlord, these things do not necessarily impact SPG the same way. Albeit the landlord wants to see their tenants perform well, but remember, SPG is looking to collect a rent check first and foremost.
During times of higher inflation, REITs have proved to be a sound investment for investors due to the fact they are not capital intensive businesses in need of raw materials or inventory that has increased in price.
Simon Property Group In A Class Of Its Own
SPG owns or has an interest in 232 properties comprising 186 million square feet in North America, Asia and Europe. The company also has an 80% interest in The Taubman Realty Group, or TRG, which owns 24 regional, super-regional, and outlet malls in the U.S. and Asia. Additionally, at March 31, 2022, SPG had a 22.4% ownership interest in Klépierre (OTCPK:KLPEF), a publicly traded, Paris-based real estate company, which owns shopping centers in 14 European countries.
The company continues to grow internationally as they currently have two new international development projects under construction in both Japan and France. The Japan construction is for Premium Outlets, which is expected to open in Fall of 2022. The France property is a Designer Outlet center, which SPG owns 74% of, is projected to be completed and open in Q1 2023.
Simon Property Group is far and away the largest mall REIT in its sector. Over the years, we have had a lot of negative attention surrounding malls and the closure of stores, so one would rightfully question whether investing in a mall REIT is a sound investment.
That is a great question, but SPG is unlike any other mall owner. Many of the malls that you have seen struggling to fill space or closing its doors, are lower class malls. Malls earn a class rating based on their sales per square foot.
Here is a look at the mall classification put out annually by Korpacz Realty Advisors.
These figures were prior to the pandemic, so they have come down, but even with the higher figures, SPG still maintains a class A portfolio with sales per square foot of $734. That puts them on the verge of an A+ portfolio.
Even through a pandemic, SPG has bounced back and is seeing strong demand across their portfolio.
As of Q1, the company reported sales of $1.3 billion, an increase of 4.5%. FFO for the quarter was $2.48 per share, an increase of 12.1% year over year.
Occupancy for the March 31, 2022 quarter was 93.3% up from 90.8% during the same time in 2021. NOI continues to climb with the company earning NOI of $1.3 billion for the portfolio as a whole, an 8.8% increase from prior year.
Simon’s Board of Directors declared a quarterly common stock dividend of $1.70 this month, which is an increase of 21.4%. The dividend will be payable on June 30, 2022 to shareholders of record on June 9, 2022.
Management reiterated their 2022 guidance, which they are expecting FFO between $11.60-$11.75 per share. Based on the current stock price, this equates to a forward P/FFO of 9.6x. Over the past five years, SPG has traded closer to a P/FFO of 13.7x, suggesting shares are very undervalued compared to recent history.
SPG remains a high-quality REIT that continues to perform well and grow their presence, regardless of the short-term pressures we are seeing in the stock. They continue to maintain a strong pipeline of new and redeveloped properties, adding in more mixed-use components as well.
As I mentioned earlier, the company is led by a strong management team, with David Simon at the helm. He has put his stamp on the company and has maintained a fortress balance sheet. SPG has an A-rated balance sheet (A-/A3), earning a low cost of capital which allows them a major advantage in the REIT sector.
In addition to a growing business that is expanding, you also get a dividend which currently yields 6.23% after the recent 21.4% dividend hike. Since cutting the dividend in Q2 of 2020, management has increased the dividend nearly 31% in two years.
At iREIT we rate shares of SPG a “STRONG BUY.”