Simon Property (SPG) shares are down more than 16% year-to-date and much more sharply than the real estate sector’s 0.5% decline. The market is currently weighing high inflation against the company’s current and future profitability.
In addition, the Fed’s hawkish stance could create additional headwinds for Simon Property’s business and that of other operators. I’m bearish on this stock.
The company is an Indiana-based real estate investment trust focused on premium retail, hospitality, entertainment and mixed-use destinations in the United States and internationally.
The company owns these properties directly or through its subsidiary Taubman Centers, a Michigan-based real estate investment trust.
FY 2021
For full-year 2021, Simon Property reported the following improvements due to increased rented square meters (over 15 million), the completion of domestic redevelopment projects and the opening of new international retail locations:
• a 90.5% year-over-year increase in net income to $6.84 per diluted share
• a 31.1% year-over-year increase in cash from operations to $11.94 per diluted share
• a significant improvement in net operating income (NOI) in terms of domestic properties (up 12% YoY) and regional (up 22.3% YoY).
Financial Condition
Although the company posted good growth numbers in 2021, the company’s financial position is not healthy.
The company’s balance sheet shows an Altman Z-score of 1.08, indicating a state of distress, and the risk of the company’s bankruptcy in the years to come cannot be ruled out.
Outlook
The market fears that forthcoming monetary policy to combat record inflation could result in a significant slowdown in the economy, or even push us back into another recession.
In terms of the negative impact that the above scenario could have on the value of company assets, Simon Property and other commercial real estate operators are at great risk for the following reasons.
The higher cost of money will hurt demand for loans to support investment projects, and reduce growth prospects for Simon Property and other commercial real estate operators.
Tighter credit conditions weigh on private consumption and its shock to businesses, entertainment and hospitality, and other commercial activities will hurt rental profitability.
According to the University of Michigan, there is no reason to be optimistic about the world’s first economy whose gross domestic product depends on consumption for over 70%.
Neither about the current situation, in which consumers drastically lower their standard of living due to runaway inflation, nor about future consumption conditions.
Despite monetary tightening, inflation is likely to remain high in 2022, the organization added, which certainly won’t help Simon Property and other industry players become more attractive in terms of real returns from their business.
These factors are weighing on the company’s foreseeable future, prompting Simon Property to lower its guidance for earnings growth and operating cash flow in 2022.
Simon Property’s Forecast For 2022
Looking ahead to 2022, the company expects net income to range from $5.90 per diluted share to $6.10 per diluted share (down 13.74% year-over- year), while the median consensus estimate is $5.74 per diluted share.
The company also issued its forecast for cash from operations, estimating that it will range from $11.50 per diluted share to $11.70 per diluted share, down 3.7% to 2% compared to full-year 2021.
Profitability of Operations
The company’s profitability has deteriorated over the past three years and lags behind most of its peers.
Funds from operations have fallen 0.52% each year since 2019, while the industry median is up 1.46%.
Revenues have fallen 3.24% each year since 2019, while the industry median is up 5.33%.
EBITDA has fallen 4.34% each year since 2019, while the industry median is up 5.15%.
Downtrending Dividends
Given the deteriorating profitability and expectations of lower growth prospects, the company could decide to cut its dividend further, which could potentially act as an additional factor driving the stock price down.
The company currently pays quarterly dividends, with the most recent payment of $1.65 per common share issued on March 31, 2022.
The dividend has fallen 1.72% each year since 2019, while the industry median is up 1.25%.
Wall Street’s Take
Over the past three months, 11 Wall Street analysts have issued a 12-month price target for SPG. The company has a Moderate Buy consensus rating based on five Buys, six Holds, and zero Sells.
The average Simon Property (SPG) price target is $164.82, implying 24.7% upside potential.
Stock Statistics
Shares are changing hands at $132.21 as of the writing of this article for a market cap of $43.4 billion, a P/E ratio of 21.1, and a 52-week range of $111.30 to $171.12.
Conclusion
Given the weak financial position, declining profitability and uncertain outlook, the share price is expected to continue falling.
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