Simon Property Group (NYSE:SPG) might be up 10.1% over the past month but its full year performance has been underwhelming, rising just 3.3% for the year.
Investors have clearly heard management, who have made it abundantly clear that the cost of capital is making it hard to source attractive deals.
Without an arc of growth to rely upon, shareholders have stuck around for the attractive yield, which sits at 6.3%, though new buyers have not been jumping on board to drive SPG share price higher.
However one important investor has stepped up to the plate, and it could lead to good outcomes for existing shareholders.
What Makes Simon Property Stock Special?
Simon Property Group is no ordinary mall operator, though it does specialize in high-end malls. The REIT’s revenue streams are much more diversified and include a wide gamut of properties from lifestyle centers to offices and even hotels.
With malls increasingly under pressure from macroeconomic forces at this time, not least the ever growing pressure from e-commerce, Simon Property is more resilient than many of its mall-only focused rivals.
It’s also been a pioneer at embracing technology to integrate digital experiences into retail spaces with a view to enhancing shopper engagement. Evidence of this can be found in everything from digital concierge services to interactive directories.
The aim of this digitization is to personalize shopping experiences and ultimately to drive higher foot traffic which in turn should boost tenant sales.
Once it has demonstrated success in its strategy, management can roll out these initiatives internationally to the group’s properties in Europe, Asia and beyond. Indeed, the internationalization of the firm’s portfolio further diversifies revenues and makes the stock less susceptible to domestic economic headwinds.
In spite of the choppy environment, whether higher interest rates or rising consumer credit card debt, SPG financials have remained relative steady, but will they continue in that same vein?
SPG Financial Forecasts
One under-appreciated asset Simon Property Group enjoys is strong and longstanding relationships with luxury and high-end retailers, who frequently select SPG properties as preferred locations to display their brands. Although these are somewhat intangible, they result in a rapid tenant base when new properties are launched and hence faster revenue streams.
Speaking of which, revenues have been holding firm and even growing this past year. In the most recent quarter, revenues rose by 7.2% year-over-year, and that followed a prior quarter annualized increase of 7.0%.
SPG’s positioning attracts affluent shoppers and consistent foot traffic that sustains high occupancy rates and solid rental income, all of which are flowing through to the rising top line.
Earnings before interest and tax continues to impress also, generally ranging between $600 million and $700 million per quarter.
To shore up the balance sheet, SPG sold $1 billion in Senior Notes on November 6, 2023. With $769 million in cash on the books prior to the raise, it is a good move to boost liquidity, especially with $24.7 billion of long-term debt sitting on the balance sheet at a time when rates are rising and re-financings will inevitably come due.
Looking to the future, analysts expect revenues to generally hold firm around the $1.3 billion mark per quarter through 2025. Earnings per share are projected to eclipse $2 per share by end of 2025, hitting $2.08 to be precise.
With the financials looking sturdy, though not stellar, going forward what does it mean for valuation?
Is Simon Property Stock Undervalued?
The clearest signal to the markets that the firm is undervalued came from CEO David Simon who stated “we’re going to buy our stock back because, you know, it’s wildly accretive.”
Simon Property Group stock is undervalued by 5.5% according to the consensus estimate of 16 analysts, who have a price target of $129.88 per share.
Recent acceleration in revenue growth, though, has not been sufficient to move the needle much on a discounted cash flow forecast analysis that pegs fair value at closer to $112 per share.
Some concerns also arise around the payout ratio of the dividend which is 108% at this time, a level that would generally put into question that sustainability of the dividend.
Still, the company has a strong balance sheet, access to capital as demonstrated by its most recent raise, a diversified revenue stream and a track record of adapting to challenging economic environments. A good example of its flexibility can be found in its repurposing of vacant spaces into entertainment venues and even fitness centers to drive higher foot traffic.
Simon Property Group is no run-of-the-mill REIT. It offers a higher dividend than the average REIT by a margin of over 35% and it has demonstrated an adaptability to an increasingly tough commercial property landscape by turning vacant locations into attractive entertainment or fitness areas.
From a financial perspective, the company is expected to plateau on both the top and bottom lines over the next few years, so the reasons for investors to buy are largely attributed to the high dividend, which is somewhat at risk of an excessively high payout ratio.
Nonetheless, the balance sheet is solid and the company’s ability to raise capital is evident. So too does it seem that SPG is on sale with none other than the CEO declaring a share repurchase scheme is in the offing as it will be acretive to earnings.
Analysts are generally in agreement and assess upside of 5.5% to fair value, though a DCF forecast is less enthusiastic and sees downside risk at this time.
If you’re looking for a very solid REIT that has diversified revenues and international exposure with a proven track record of navigating challenging interest rate and macro environments, Simon Property Group fits the bill. It has an attractive yield and is likely to continue its payout in the near and likely medium term, just don’t expect a whole lot from its share price over those time horizons.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.