After falling nearly 40% so far this year due to economic concerns, Simon Property Group (SPG) looks intriguing based on its valuation, profitability, and dividend-growth potential. I am bullish on the stock.
Formed in 1993, SPG is a real estate investment trust specializing in retail properties primarily in the United States. The company’s goal is for its properties to be the premier destination for high-end retailers and their customers.
According to its latest filings, Simon owns or holds an interest in 199 income-producing properties in the United States, which comprised 69 Premium Outlets, 95 malls, 14 Mills, six lifestyle centers, and 15 other retail properties located in 37 states and Puerto Rico.
The company also owns an 80% non-controlling interest in the previously publicly traded Taubman Realty Group, which it acquired in late 2020. Finally, Simon has a 22.4% equity stake in Klépierre SA (KLPEF), a publicly-traded, Paris-based real estate company that has an interest in shopping centers located across 14 European countries.
With a market capitalization of nearly $36.7 billion, Simon is the second most valuable retail U.S.-based REIT, only behind Realty Income (O).
Simon Property Group’s Financials are Improving
The past two years have been very turbulent for Simon. In the midst of 2020, the company suffered substantially because of the pandemic as retail locations were temporarily closed. SPG took advantage of the frenzy at the time to acquire Taubman Realty Group, whose shares were trading at depressed levels at the time.
With retail locations recovering last year and the company unlocking operating efficiencies with its stake in Taubman, Simon’s FFO per share neared its pre-pandemic levels at $11.94. For context, FFO per share in Fiscal 2019 was $12.04.
Entering Fiscal 2022, the company retained robust momentum. In its Q1-2021 results, total revenues came in at $1.3 billion, 4.5% higher than the comparable period last year. Increased revenues were driven by the continued recovery in retail real estate, assertive leasing momentum, and lofty occupancy levels. Consequently, FFO per share advanced 12.1% to $2.78.
Particularly, portfolio NOI, which comprises domestic properties, international properties, and Simon’s investment in Taubman Realty Group, rose 8.8% compared to the prior-year period.
Thus, Simon’s giant buyout of Taubman continues to be proven quite accretive to the company’s across-the-board performance. Additionally, occupancy advanced to 93.3% compared to 90.8% last year.
Following a better-than-expected opening to Fiscal 2022, management boosted its prior full-year outlook, now anticipating FFO/share to be in a range of $11.60 to $11.75, up from $11.50 to $11.70 previously.
Further, the company recently raised its dividend for a fifth consecutive quarter to a quarterly rate of $1.70, marking a 3% increase sequentially, or a 21.4% increase year-over-year.
Finally, the board authorized a new share repurchase program, allowing management to buy back as much as $2 billion worth of stock over the next 24 months.
Concerns Remain Despite Improving Financials
While the stock recovered last year due to its healed financials, new concerns have arisen. With inflation currently hovering at 41-year high levels, investors have become increasingly worried about consumers’ future purchasing power. Spending on consumer discretionaries could decline if price increases get out of hand relative to the underlying wage growth.
Furthermore, with supply-chain bottlenecks persisting, retail locations have struggled to maintain healthy inventory levels, disrupting sales flow.
Containership rates remain near record levels, which means that shipping has also become crazy expensive, further pressuring retailers’ margins. If retailers struggle, SPG may experience hurdles with maintaining robust occupancy and rental collection levels.
SPG Stock is Reasonably Valued
The midpoint of management’s guidance suggests that Simon will deliver FFO/share close to $11.68 in Fiscal 2022. Following the stock’s ongoing decline, the P/FFO multiple has now declined to about 8.4x.
Additionally, the current quarterly dividend per share rate of $1.70 implies an annualized rate of $6.80, which in turn implies a dividend yield of 7% at the stock’s current price levels.
In my view, both these metrics suggest that prospective investors have a rather wide margin of safety against further stock declines. The massive yield alone could offset stock price losses and even deter investors from dumping the stock lower.
Additionally, the current annualized dividend rate and the midpoint of management’s guidance place the payout ratio at 58%. Thus, a sixth consecutive sequential increase is not unlikely, along with the company’s upcoming earnings report. Such a hike should further boost investors’ confidence in the stock.
Wall Street’s Take on SPG Stock
Turning to Wall Street, Simon Property Group has a Moderate Buy consensus rating based on seven Buys and seven Holds assigned in the past three months. At $145.43, the average SPG stock forecast implies 49% upside potential.
The Takeaway – The Pros Outweigh the Cons
Simon Property Group’s performance took a hit during the pandemic, but its recovery has been rather swift. Despite the most recent concerns, the company’s guidance points toward near-record profitability for this year.
With shares appearing reasonably valued, the hefty dividend yield providing a wide margin of safety, and the likelihood for payouts to grow moving forward, I am bullish on the stock.
