Simon Property Group’s (NYSE: SPG) performance has been improving continuously since the harsh days of the COVID-19 pandemic. Impressively, the company’s recovery has taken place rather swiftly, as its financials are set to approach their pre-pandemic levels this year. Combined with Simon’s ongoing dividend increases, its already attractive 6.2% yield, and the stock’s valuation likely bearing further upside, I remain bullish on the stock.
SPG’s Financials are Approaching Their Pre-Pandemic Levels
Being a retail REIT, Simon Property was adversely impacted during the pandemic. Year-to-date, however, the company has established very strong recovery momentum. In fact, based on the company’s performance during the first nine months of 2022, Simon Property Group is set to end the year with its financials approaching their pre-pandemic levels.
With foot traffic in malls resuming and retailers once again looking for prime locations to set shop, Simon achieved total revenues of $1.32 billion in its most recent Q3 results, indicating a 1.5% increase from the comparable period last year.
To be more specific, higher revenues were driven by the ongoing recovery in the retail real estate market, robust leasing momentum, and improving occupancy levels. In fact, occupancy was 94.5% at the end of the quarter compared to 92.8% at the end of Q2, suggesting a substantial increase of 170 basis points.
Simon is capitalizing on its improving rent revenues and operating metrics to drive higher profitability. Its portfolio’s net operating income (NOI), which includes its domestic properties, its overseas properties, and the acquired Taubman properties, rose by 3.2% compared to Q3 2021.
I like this number, but most importantly, I like the fact that it indicates that Taubman has been accretive to the company’s results. At the time, the market was somewhat skeptical of the buyout. Thus, seeing growing NOI, including the Taubman properties, should reassure investors of management’s confidence to allocate capital efficiently.
Finally, backed by SPG’s better-than-expected results, management boosted its prior outlook once again. They are now expecting SPG’s funds from operations per share (also known as FFO/share, the cash flow from a real estate company) to land in the range of $11.83 to $11.88 (up from $11.70 to $11.77 previously). At the midpoint, this is only 4.1% away from the company’s pre-pandemic FFO/share of $12.37 in Fiscal 2019.
Successive Dividend Hikes Attract Investor Attention
While Wall Street should be pleased by SPG posting solid growth in revenues and FFO/share, I believe what has actually driven the stock’s recent gains were its successive dividend hikes, which have likely captured investors’ attention.
Following Simon slashing its dividend amid the pandemic, the company has now increased it for seven sequential quarters. That’s quite an established trend already! Along with its Q3 results, the company raised its dividend for a seventh consecutive quarter to a quarterly rate of $1.80, celebrating a 2.9% increase sequentially, or a 9.1% increase year-over-year.
The question that arises now is whether these attention-drawing sequential increases can be sustained. Well, the $7.20 annualized dividend suggests a comfortable payout ratio of 61% at the midpoint of Simon’s updated guidance. Based on this, I would say there is a high chance that Simon’s will sustain these quarterly increases, possibly until the quarterly rate reaches its levels prior to the cut ($2.10/quarter).
Is SPG Stock Reasonably Valued?
Shares of Simon have rallied by 34% from their 52-week lows. That said, I believe that the stock remains modestly undervalued. At the midpoint of management’s FFO/share outlook, the current forward price/FFO stands at 9.75x, implying a significant discount from its peers’ average.
This is quite odd to me since Simon features multiple qualities, including market-leading rents per square foot, a diversified portfolio of properties, and skilled management with shareholder value creation in mind. I believe the stock can be priced at least modestly higher, at a price/FFO of 11x, and its hefty 6.2% yield should be a promising catalyst for this.
What is the Price Target for SPG Stock?
Regarding Wall Street’s view on Simon Property Group, the stock has attained a Moderate Buy consensus rating based on five Buys and seven Holds assigned in the past three months. At $119.80, the average SPG stock forecast implies that just 3.6% upside potential.
Takeaway: Returns Likely Overshadow the Underlying Risks
Wall Street appears to be conservative with Simon’s investment case, which is not unjustified given the underlying risks involved. Retail properties remain some of the least attractive ones in the real estate space, while the real estate market is currently facing increased pressure due to the rise in interest rates.
That said, Simon’s strong operating momentum is still improving. The ongoing improvement in its occupancy rates proves that Simon’s properties remain in high demand. With the company’s profits and dividends poised to advance higher based on the current trend of Simon’s financials, I believe that the potential returns from Simon likely outweigh the underlying risks.
