Shares of Simon Property (SPG - Free Report) have gained 11.4% in the past six months compared with its industry’s growth of 1.4%.
Last month, this Indianapolis, IN-based retail real estate investment trust (REIT) reported fourth-quarter 2022 comparable funds from operations (FFO) per share of $3.15, exceeding the Zacks Consensus Estimate by a penny. Moreover, the figure increased 1.3% year over year.
This performance was backed by a better-than-expected top line. Its results were aided by a healthy operating performance and growth in occupancy levels. This retail REIT behemoth issued its 2023 comparable FFO per share outlook in the range of $11.70-$11.95.
Analysts, too, seem bullish on this Zacks Rank #3 (Hold) stock. 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 month.
Image Source: Zacks Investment Research
Let us now decipher the factors behind the increase in the stock price.
Improving Leasing Environment: The increase in consumers’ preference for in-person shopping experience following the pandemic downtime has been driving the recovery in the retail real estate industry. Retailers continue to rent out more physical store spaces to meet this growing demand. As a result, Simon Property’s portfolio of premium assets in the United States and abroad has been experiencing solid leasing activity.
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.
Healthy Operating Performance: The occupancy for Simon Property’s U.S. Malls and Premium Outlets portfolio improved 150 basis points year over year to 94.9% as of Dec 31, 2022. Also, the base-minimum rent per square foot for this portfolio was $55.13 on Dec 31, 2022, rising from $53.91 as of Dec 30, 2021.
In the trailing 12 months ended Dec 31, 2022, the retailer sales per square foot touched another record high of $753 for the malls and the outlets combined. This reflected an increase of 5.6% year over year.
Focus on Omni-Chanel Strategy: 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 omni-channel strategy, is likely to be accretive to its long-term growth. 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.
Balance Sheet Strength: The company 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, which is well ahead of the required level. SPG also enjoys investment-grade credit ratings, giving it favorable access to the debt market.
SPG’s trailing 12-month return on equity (ROE) is 60.33% compared with the industry’s average of 6.01%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
With strong financial footing and enough financial flexibility, it is well-placed to capitalize on long-term growth opportunities.
Dividends: Solid dividend payouts remain the biggest enticement for REIT investors, and SPG has consistently raised its dividend rates. Concurrent with the third-quarter earnings release on Nov 1, 2022, SPG announced a 2.9% sequential hike in its fourth-quarter 2022 dividend to $1.80 per share. Prior to this, the company increased its third-quarter 2022 dividend to $1.75 per share from $1.70 paid earlier. Such efforts boost investors’ confidence in the stock.
Nonetheless, given the convenience of online shopping, it is likely to remain a popular choice among consumers, affecting the market share for brick-and-mortar stores. Also, interest rate hikes add to its concerns.
Some better-ranked stocks from the retail REIT sector are Federal Realty Investment Trust (FRT - Free Report) , Essential Properties Realty Trust (EPRT - Free Report) and Tanger Factory Outlet Centers (SKT - Free Report) , 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 current-year FFO per share is pegged at $6.45.
The Zacks Consensus Estimate for Essential Properties Realty Trust’s ongoing year’s FFO per share stands at $1.64.
The Zacks Consensus Estimate for Tanger Factory Outlet’s 2023 FFO per share is pegged at $1.84.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.