Simon Property Group

Stock Analysis

Company Overview

Simon is a global leader in the ownership of premier shopping, dining, entertainment and mixed-use destinations and an S&P 100 company (Simon Property Group, NYSE: SPG). Its portfolio includes an interest in 207 properties: 106 traditional malls, 69 premium outlets, 14 Mills centers (a combination of a traditional mall, outlet center, and big-box retailers), four lifestyle centers, and 14 other retail properties. Simon’s portfolio averaged $693 in sales per square foot over the past 12 months. The company also owns a 21% interest in Klepierre, a European retail company with investments in shopping centers in 16 countries, and joint venture interests in 29 premium outlets across 11 countries.

My Investment Thesis

Key Performance Indicators:

• Cash Flow Growth — DCF method
• Consistent Dividend Growth
• Growing market Share — Revenues Growth
• EPS Growth
• Low Debt to Equity Ratio — Respective of the industry
• ROE, ROA, ROIC growth
• Owner’s Earnings Growth

Reasons to Buy

1. Portfolio Reconstruction. Amid retail apocalypse narrative, adoption of an omni-channel strategy and successful tie-ups with premium retailers has been a saving grace for Simon Property. The company had been restructuring its portfolio, aiming at premium acquisitions and transformative redevelopments. In fact, for the past years, the company has been investing in billions to transform its properties focused on creating value and drive footfall at the properties. Moreover, the company’s online retail platform, weaved with an omni-channel strategy, will likely be accretive to Simon Property’s long-term growth. Additionally, Simon Property is exploring the mixed-use development option, which has gained immense popularity in recent years as it helps catch the attention of people who prefer to live, work and play in the same area.
2. International Exposure. Simon Property enjoys a wide exposure to retail assets across the United States. Moreover, the company’s international presence fosters sustainable long-term growth as compared with its domestically focused peers. The company’s ownership stake in Klépierre facilitates the expansion of its global footprint, which gives it access to premium retail assets in the high barrier-to-entry markets of Europe. I believe that diversification, with respect to both product and geography will help it grow over the long-term.
3. Reopening the economy. With the relaxation of the shelter-in-place orders in the upcoming period and resumption of the economy, this retail REIT is poised to benefit from its superior assets in premium locations. As of May 11, the company has reopened 77 of its U.S. retail properties in markets where local and state orders have been lifted and retail restrictions have been eased. Moreover, as of the same date, 12 of Simon’s Designer and international Premium Outlets properties have reopened. Also, the federal stimulus is lessening the income impact of unemployment. Furthermore, in response to the pandemic and its impact on business, Simon Property has substantially reduced all non-essential corporate spending as well as property operating expenses. Such efforts are likely to help the company sail through the current crisis.
4. Acquisitions. Further, ABG, Simon Property and Brookfield Property Partners in February announced the acquisition of fast fashion retailer, Forever 21, which had filed for bankruptcy. The companies have struck a partnership, under which ABG and Simon Property will each own 37.5%, while Brookfield will own 25% of the intellectual property and operating businesses. Similar to that of the Aéropostale’s move earlier, the latest efforts are expected to aid Forever 21 stores continue operating across the United States and international territories. This LA-born brand is a global fashion retailer of women’s, men’s, and kid’s clothing, accessories, and footwear, as well as beauty.

Reasons To Sell

1. Move to online stores. With the shift in consumers’ preferences toward online channels for purchases, bankruptcies and store closures have emerged as pressing concerns over the recent years for retail REITs and Simon Property is not immune to these. Though the company’s been striving to counter this pressure through various initiatives, implementation of such measures requires a decent upfront cost and therefore, will limit any robust growth in profit margins in the near term.
2. Covid-19 pressures on physical retailers. Furthermore, the escalating number of coronavirus cases has forced several retailers to close stores, in order to contain the spread of the virus. Some retailers have also reduced store hours, while many others are keeping their e-retail operations running as consumers are now increasingly opting for online purchases. As a result, retail REITs, including Simon Property, which have already been battling store closures and bankruptcy issues, are feeling the impact. In an effort to reduce the spread of coronavirus in its communities, Simon Property also had to close its retail properties. In addition, given the financial stress on its tenants, rent collection is likely to suffer in the near term.
3. Redevelopment comes to a halt. In response to the pandemic and its impact on business, Simon Property has suspended or eliminated more than $1 billion of redevelopment and new development projects. However, for some redevelopment and new development projects in the United States and internationally that are nearing completion, construction continues. The company’s share of remaining required cash funding is roughly $160 million for these projects that are presently slated to be finished in 2020 or 2021. The contributions from its redevelopment and development efforts are likely to remain subdued for an extended time period.

Intrinsic Value Assessment

SPG’s average Free Cash Flow(FCF) over the past ten years is $2190.5. I conservatively expect SPG to grow their FCF at a rate of 5% and grow at a rate of 1.5% into perpetuity. NOTE: The FCF growth rate is only for conservative measures and to take into account the Covid-19 impact. The actual annual FCF growth rate for SPG over the past 10 years is 14.59%.

With these estimates in mind, SPG’s intrinsic value per share is $94.3 at a 111% annual discount rate. Based on the cash flows I have forecasted and a market price of $68.93, SPG may yield 14.16% annual return — Not taking dividends into account which has a forward yield of 7.54%.

Dividend Growth

Dividend Per Share History

Payout ratio History

Dividend Yield History

Revenues Growth

Simon Property’s first-quarter 2020 FFO per share of $2.78 is 8.6% lower than the year-ago quarter’s FFO of $3.04 per share. FFO (Funds from operations) is a measure of cash generated by by real estate investment trusts (REITs).

Further, the company generated revenues of $1.35 billion in the quarter, which also comes in 6.8% lower than the prior-year quarter reported revenues.

Per management, “Business was off to a good start in January and February”. However, things got jittery in March, with the coronavirus pandemic and the resultant store closures to contain its spread.

Nevertheless, as of May 11, the company has reopened 77 of its U.S. retail properties in markets, where local and state orders have been lifted and retail restrictions have been eased. Moreover, as of this date, 12 of Simon’s Designer and international Premium Outlets properties have reopened.

However, in light of the coronavirus pandemic and related setbacks, Simon Property has withdrawn its guidance for the full year issued on Feb 4.

Low Debt to Equity Ratio — Respective of the industry

Simon Property Group’s Short-Term Debt & Capital Lease Obligation for the quarter that ended in Mar. 2020 was $0 Mil. Simon Property Group’s Long-Term Debt & Capital Lease Obligation for the quarter that ended in Mar. 2020 was $28,075 Mil. Simon Property Group’s Total Stockholders Equity for the quarter that ended in Mar. 2020 was $2,182 Mil. Simon Property Group’s debt to equity for the quarter that ended in Mar. 2020 was 12.87.

SPG’s Debt-to-Equity is ranked lower than 99% of the 671 Companies in the REITs industry.

During the first quarter, the company made efforts to bolster its financial flexibility. Simon Property Group adds a $2.0B delayed draw term facility to an amended $4.0B senior multi-currency revolving credit facility. The aggregate amount of the facilities may be increased up to $7B.The revolving facility provides for borrowings in U.S. dollars, euro, yen, sterling, Canadian dollars, and Australian Dollars. The revolving facility will mature on June 30, 2024, and the term facility will mature on June 30, 2022. The maturity date of each facility may be extended for a period of up to one year. The company’s net-debt to Net Operating Income was 5.4, while fixed-charge coverage ratio was 5.1 as of Mar 31, 2020. Moreover, Simon Property currently enjoys investment grade credit ratings with A from S&P and A2 from Moody’s. With solid balance strength and available capital resources, the company remains well poised to navigate through current blues and capitalize on opportunities generating from market dislocations.

Notably, Simon Property had $8.7 billion of liquidity as of Mar 31, 2020. This comprised $4.1 billion of cash on hand, including its share of joint-venture cash, as well as $4.6 billion of available capacity under the revolving credit facilities and term loan, net of outstanding U.S. and Euro commercial paper.

A multi-currency note facility is credit facility which provides short- and medium-term Euro note loans to borrowers. — Investopedia

ROE Growth

Simon Property Group’s annualized net income attributable to common stockholders for the quarter that ended in Mar. 2020 was $1,750 Mil. Simon Property Group’s average Total Stockholders Equity over the quarter that ended in Mar. 2020 was $2,354 Mil. Therefore, Simon Property Group’s annualized ROE % for the quarter that ended in Mar. 2020 was 74.36%.

SPG’s ROE % is ranked higher than 99% of the 713 Companies in the REITs industry.

ROA Growth

Simon Property Group’s average Total Assets over the quarter that ended in Mar. 2020 was $32,676 Mil. Therefore, Simon Property Group’s annualized ROA % for the quarter that ended in Mar. 2020 was 5.37%.

SPG’s ROA % is ranked higher than 80% of the 720 Companies in the REITs industry.

ROIC Growth

Simon Property Group’s annualized return on invested capital (ROIC %) for the quarter that ended in Mar. 2020 was 8.81%.

As of today (2020–07–07), Simon Property Group’s WACC % is 6.06%. Simon Property Group’s ROIC % is 9.41%. Simon Property Group generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

Owner’s Earnings

Simon Property Group’s Owner Earnings per Share (TTM) ended in Mar. 2020 was $8.12. It’s Price-to-Owner-Earnings ratio for today is 8.49.

During the past 13 years, the highest Price-to-Owner-Earnings ratio of Simon Property Group was 37.90. The lowest was 5.75. And the median was 23.02.

SPG’s Price-to-Owner-Earnings is ranked higher than 66% of the 374 companies in the REITs industry.

IN SUMMARY

Simon Property enjoys market leadership with a stellar history of generating significant cash flows and a decent liquidity position. But, the choppy environment will likely prevail with dwindling footfall at retail properties amid social-distancing mandates and higher e-commerce adoption. Hence, rent collections, occupancy and pricing power are likely to be heavily impacted in the near term.