Amid the recovery of the retail real estate industry, Simon Property Group’s SPG portfolio of premium assets in the United States and abroad, the adoption of omnichannel retailing and balance sheet strength position it well for growth.
This retail REIT behemoth enjoys wide exposure to retail assets across the United States. Additionally, its presence in international markets is likely to encourage sustainable long-term growth compared with its domestically focused peers.
Simon Property’s adoption of an omnichannel strategy and successful tie-ups with premium retailers has paid off well. Its online retail platform, coupled with an omnichannel strategy, is likely to be accretive to its long-term growth. It is also focused on tapping growth opportunities by helping digital brands enhance their brick-and-mortar presence.
Further, the company’s efforts to explore the mixed-use development option, which has gained immense popularity in recent years, have enabled it to tap growth opportunities in areas where people prefer to live, work and play. Going forward, an improving leasing environment is likely to benefit this retail REIT’s properties at premium locations.
In 2022, it signed 1,262 new leases and 1,517 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. Also, it has a significant number of leases lined up. In the fourth quarter of 2022, the retailer sales per square foot touched another record high of $753 for malls and outlets combined.
As of Dec 31, 2022, the occupancy for the U.S. Malls and Premium Outlets portfolio came in at 94.9%, up from the 93.4% witnessed as of Dec 31, 2021. The base minimum rent per square foot for the U.S. Malls and Premium Outlets portfolio was $55.13 as of Dec 31, 2022, rising from $53.91 as of Dec 31, 2021, reflecting an increase of 2.3%.
To enhance its portfolio, Simon Property has been focusing on premium acquisitions and transformative redevelopments and has invested billions in transforming its properties. Moreover, the company capitalized on buying recognized retail brands in bankruptcy. With the brands generating a decent amount from digital sales, investments in them seem strategic for SPG.
Simon Property also maintains a solid balance sheet position with ample liquidity. It exited 2022 with $7.8 billion of liquidity and a fixed-charge coverage ratio of 4.8, ahead of the required level. The company also enjoys investment-grade credit ratings, giving it favorable access to the debt market.
Recently, SPG closed a new $5-billion multi-currency unsecured revolving credit facility, replacing the existing $4-billion senior unsecured revolving credit facility. With strong financial footing and enough financial flexibility, the company is well-placed to capitalize on long-term growth opportunities.
Shares of this Zacks Rank #3 (Hold) stock have risen 21.0% in the past six months compared with its industry’s growth of 9.3%. However, the Zacks Consensus Estimate for the company’s 2023 funds from operations (FFO) per share has marginally moved down to $12.04 over the past week.
With the pandemic's impact waning, mall traffic has rebounded significantly. However, given the conveniences of online shopping, rising e-commerce adoption is still a concern for SPG. Online retailing is likely to remain a popular choice among customers, adversely impacting the market share for brick-and-mortar stores.
Further, a hike in the interest rate is a concern for Simon Property. Rising rates imply higher borrowing costs for the company, which would affect its ability to purchase or develop real estate.
The company has a substantial debt burden, and its share of total debt as of Dec 31, 2022 was approximately $31.5 billion. Our estimate for 2023 interest expenses stands at $884.5 million, implying a rise of 16.2% year over year. Moreover, the dividend payout might become less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the retail REIT sector are Federal Realty Investment Trust FRT and Essential Properties Realty Trust EPRT, 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 Federal Realty’s ongoing year’s FFO per share has been revised 0.8% upward over the past month to $6.45.
The Zacks Consensus Estimate for Essential Properties Realty’s 2023 FFO per share has been revised a cent upward over the past month to $1.64.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report