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Simon Property (SPG) Stock Gains 13% QTD: Will the Trend Last?

Shares of Simon Property SPG, currently carrying a Zacks Rank #3 (Hold),  have gained 12.7% in the quarter-to-date period compared with its industry’s growth of 7.6%.

The company’s portfolio of premium retail assets in the United States and abroad, the adoption of omnichannel retailing, focus on mixed-use developments and robust balance sheet strength have enabled it to ride the growth curve so far.

Last month, this Indianapolis, IN-based retail real estate investment trust (REIT) reported third-quarter 2022 funds from operations (FFO) per share of $3.20, exceeding the Zacks Consensus Estimate of $2.98. Moreover, the figure increased 9.2% year over year. The performance was backed by better-than-anticipated revenues on healthy leasing activity.

For 2023, management raised its outlook for FFO per share in the range of $12.15-$12.25 from $11.85-$11.95 estimated earlier. This marks an increase of 30 cents per share at the midpoint.

Analysts, too, seem bullish on the company. The Zacks Consensus Estimate for the company’s 2023 funds from operations (FFO) per share indicates a favorable outlook as it has increased marginally upward over the past week to $12.04.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Let us now decipher the factors behind the increase in the stock price and upward estimate revisions for the FFO per share.

Demand for retail real estate has remained robust in recent quarters as retailers continue to rent more physical store space to meet this growing demand. As a result, Simon Property’s portfolio of premium assets in the United States and abroad is experiencing solid leasing activity, driving occupancy levels across its portfolio.

Notably, in the nine months ended Sep 30, 2023, the company signed 922 new leases and 1,440 renewal leases (excluding mall anchors and majors, new development, redevelopment and leases with terms of one year or less) with a fixed minimum rent across its U.S. Malls and Premium Outlets portfolio. The occupancy for Simon Property’s U.S. Malls and Premium Outlets portfolio improved 70 basis points year over year to 95.2% as of Sep 30, 2023.

Moreover, with the holiday season around the corner, there is increased enthusiasm among customers to visit malls and shop. To boost this demand and help shoppers find the perfect present this holiday season, SPG recently launched a team of free personal shoppers that will be supported by its new artificial intelligence-driven gift finding tool, "HolidAI".

The "helper elves" will be on-site and ready to assist shoppers with instant help from ChatGPT 4.0-powered technology that is connected to a customized database of retailer-specific gift ideas.

Given that the company has a significant number of leases lined up and continues to see solid broad-based demand from the retail community across several categories, it is well-poised to perform well in the quarters ahead.

Simon Property’s adoption of an omni-channel strategy and successful tie-ups with premium retailers have paid off well. Its online retail platform, coupled with an omnichannel strategy, is likely to be accretive to its long-term growth. The company is also focused on tapping its growth opportunities by assisting digital brands enhance their brick-and-mortar presence.

Further, its efforts to explore the mixed-use development option, which has gained immense popularity in recent years, has enabled it to tap the growth opportunities in areas where people prefer to live, work and play.

As part of such efforts, this November, Simon Property and Mercedes-Benz HPC North America LLC entered into a strategic relationship for the deployment of premium EV charging hubs in the United States and Canada in no less than 55 Simon retail properties. The centers will be utilized for Mercedes-Benz vehicle launches, vehicle displays and test-drive opportunities. Also, it will bring hundreds of construction jobs to the communities that they’re located in, making the move a strategic fit.

The company maintains a robust balance sheet position and had $8.8 billion of liquidity as of the end of the third quarter of 2023. The fixed-charge coverage ratio was 4.5 as of Sep 30, 2023, well ahead of the required level.

SPG also enjoys a corporate investment-grade credit rating of A- (stable outlook) from Standard and Poor's and a senior unsecured rating of A3 (stable outlook) from Moody’s, rendering it favorable access to the debt market. The company’s strong financial footing is likely to support its growth endeavors going forward.

Solid dividend payouts remain the biggest enticement for REIT investors, and SPG has remained committed to that even during the pandemic. Its latest dividend hike was announced concurrently with the second-quarter 2023 earnings release, whereby it raised the dividend payment to $1.90 per share from $1.85 paid out earlier, marking a 2.7% increase. Moreover, this retail REIT has increased its dividend 10 times in the last five years. Such efforts boost investors’ confidence in the stock.

Nonetheless, higher e-commerce adoption and limited consumers’ willingness to spend amid persistent macroeconomic uncertainty and high interest rates may pose near-term concerns for the company.

Stocks to Consider

Some better-ranked stocks from the retail REIT sector are TANGER INC SKT and Urban Edge Properties UE, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for TANGER INC’s current-year funds from operations (FFO) per share has moved marginally northward over the past month to $1.92.

The Zacks Consensus Estimate for Urban Edge Properties’ ongoing year’s FFO per share has been raised 1.7% over the past two months to $1.19.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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