2023-12-02 02:56:46 ET
Summary
- Simon Property Group is rated buy today, sharing the consensus from SA analysts and Wall Street.
- This REIT known for managing malls has shown earnings and revenue growth, a 6.27% dividend yield, and dividend growth.
- Rising debt and falling equity, along with recession risk and overvaluation on price-to-book-value, are some offsetting factors.
Company Snapshot
Having been one of those 90s kids who frequented the mall often during family weekend activities, one name I would always remember was the name Simon .
And no, I'm not talking about the game "Simon says."
If you know about real estate property trusts (REITs) , you know that they pool a lot of capital and invest it in multiple properties with the goal of earning rent. As a investor, REITs present a way to own a piece of the action without buying the mall yourself directly.
With that said, Simon Property Group ( SPG ) came across my radar today and I thought it would be a great stock to cover on Seeking Alpha, considering that it is now the busiest holiday mall shopping season of the year and malls are a relevant topic. With that said, its primary money maker is rental income from the stores and restaurants leasing space in its properties, so its success is tied to the business success of those establishments too.
Some relevant facts about this Indiana-based company are that it is engaged in the ownership of premier shopping, dining, entertainment and mixed-use destinations and also is an S&P100 company . It has properties across North America, Europe and Asia.
Total Rating Score
Based on the score total in the above matrix, I am rating this stock a buy today.
Based on the consensus today on Seeking Alpha, it appears my sentiment is shared by the consensus from Wall Street and SA analysts:
Rating Methodology
My simplified and straightforward 8-point approach focuses on just a few core areas such as revenue and earnings growth, dividend income opportunity, undervaluation opportunity, a share price presenting a value-buying potential, and identifying a key risk of the company as well as its potential impact to an investor.
Top-Line Revenue YoY Growth
I am looking for any positive revenue growth on a YoY basis, and here is what I found:
From the most recent income statement , we can see Q3 top-line revenue was $1.41B vs $1.31B in the quarter a year prior, a nearly 8% YoY growth. Also, important to note is that since March 2023 revenue has been on a growth trend.
Looking forward, one item I think will benefit this type of business and the stable rental income it produces is an increase in the occupancy rate. According to its Q3 earnings release , "occupancy was 95.2% at September 30, 2023, compared to 94.5% at September 30, 2022, an increase of 70 basis points."
In addition, rent per square foot has also gone up. According to the company's release, "base minimum rent per square foot was $56.41 at September 30, 2023, compared to $54.80 at September 30, 2022, an increase of 2.9%.
Further future growth opportunity I think will come from development of more properties, particularly beyond the US. The following from the Q3 release also highlighted a key development project overseas that Simon has a major stake in, which I think eventually will add to the rental income:
During the quarter, construction started on Jakarta Premium Outlets ® , the first Premium Outlet ® Center in Indonesia. The 300,000 square foot upscale outlet is projected to open in February 2025. Simon owns 50% of this project.
Net Income YoY Growth
I am looking for any positive net income growth on a YoY basis, and here is what I found:
The company achieved $595MM in Q3 2023 vs $540MM in Q3 2022, a 10% YoY growth. It has also been on a growth trend since March 2023.
In looking closer into this category, what I found is that although both operating expenses and interest expenses have gone up, at the same time revenue growth made up for it and drove net income.
I think this is sustainable going forward and revenue will overcome expenses as both occupancy rates and rent per square foot have increased, and new developments are on the way, while at the same time interest expense is probably at its peak considering the Fed is not expected to raise rates again at its next meeting, according to the probability score by CME Fedwatch.
Supporting my thesis is the data above from the Q3 presentation , showing spikes in both operating and interest expense, while at the same time revenue growth helped drive positive net income growth for those 3-month and 9-month periods shown.
Dividend 10 Year Growth
I am looking for dividend 10 year growth trends, and here is what I found:
The stock went from an annual dividend of $4.37 in 2013 to $6.90 in 2022, a 58% growth over 10 years. The dividend took a dip in 2020 but recovered again nicely by 2022 as the chart shows, another sign of this company's capital strength.
Important to note from its Q3 presentation, and adding to my forward-looking confidence going into 2024, is that the company "declared a quarterly common stock dividend of $1.90 for the fourth quarter of 2023.. an increase of 5.6% YoY. "
In addition, I should mention liquidity strength. According to the company, "Simon had approximately $8.8B of liquidity consisting of $1.4B of cash on hand.. and $7.4B under its revolving credit facilities."
So, for a dividend investor like myself, for a 1000-share investment let's say my portfolio could project $1,900 in quarterly cashflow from just the dividend income alone. My analogy is that it's like owning a piece of their rental income without having to take out property loans and developing the building or buying it myself.
Dividend Yield Above Average
I am looking for a dividend yield above its sector average, and here is what I found:
The following compares the dividend yield of 4 peers in the mall owner space, and these companies are some of the largest mall owners in the US, according to Statista data, with Simon being the largest.
Of this peer comparison, Simon's dividend yield of 6.27% (as of this article writing) beats its peers shown, and presents an attractive dividend opportunity for someone buying the stock now.
Since the dividend was just raised recently this fall, another share price dip could drive that yield even higher, so that is something to consider in terms of buying now or waiting for the next price dip to occur.
What could trigger that price dip is an earnings miss in Q4, or financial media hyping up recession talk and causing the market bears to come out.
P/E Valuation vs Average
I am looking for an undervaluation opportunity when it comes to price-to-earnings , and here is what I found:
Using valuation data from Seeking Alpha, I found that its forward P/E ratio is 19.25 , about 44% below the sector average.
I would consider this a justified valuation because despite the spike in share price lately when tying back to the financials I discussed there was also a modestly good increase in both revenue and earnings lately. For this reason I will call it an undervaluation opportunity.
P/B Valuation vs Average
I am looking for an undervaluation opportunity when it comes to price-to-book value , and here is what I found:
For this metric I will use the available data which is the TTM P/B ratio of 13.76 , which is over 912% above the sector average.
As for what is driving this multiple, if you look at the balance sheet this company's equity has declined about 10% on a YoY basis while the price chart shows the share price spiking lately above the moving average. So, I will call it overvalued since the market is paying a nearly 14x premium on declining book value. It would be justified if both the share price and the equity went up as well.
Share Price vs 200-day Average
My portfolio strategy prefers dip-buying opportunities when the share price falls below the 200-day simple moving average , so here is what I found:
The dip-buying opportunity earlier this fall is now behind us as the share price has rallied well past its 200-day simple moving average shown, to hover around $125 (as of this article writing).
I think the rally was fueled by the company beating its Q3 earnings estimates by $0.23, and showing 8-10% YoY growth both in top and bottom line results.
At the same time, thinking like a value investor I would not add to my portfolio at this price but would wait for it to retreat again closer to the 200-day average or below, considering that it is now over 10% above its moving average.
Key Risk
As an investor and analyst I find it relevant to analyze risk as well, for this type of business that is very debt-intensive and also recessionary since its mall tenants sell mostly to consumers and will struggle to pay the rent if there is a drop in mall traffic and spending, the two risks with this business to consider are the debt levels / interest expenses as well as the recession risk.
The first thing to mention is two major rating agencies are rating this company's debt with a stable outlook for now.
In looking at the balance sheet , the long-term debt as of Sept 2023 jumped to $24.7B, from $23.7B a year prior, roughly a $1B increase or 4%.
At the same time, the income statement is impacted by net interest expense of $212.2B this September vs $187.9B the September prior, a nearly 13% YoY increase which concerns me.
As for recession risk that could impact consumer spending at malls, and therefore affect Simon's tenants ability to pay their leases, here is what two major media outlets said about that this week.
A November 30th article in Forbes cautioned that recession risk could stem from rising credit card delinquencies emerging:
Credit card delinquencies are rising, according to data from the New York Federal Reserve . The new report shows how overall the level of newly delinquent credit card borrowers has doubled more than doubled to 2% in the first quarter of this year up from 0.9% a year earlier.
A December 1st article in Reuters highlighted the risk posed by unemployment trends:
Unemployment is rising, nearing a closely-watched 'Sahm rule' threshold, that has shown historically a recession is underway when the three-month rolling average unemployment rate rises half a point above the low of the prior 12 months.
So, the evidence shows that there is at least a moderate risk of recession coupled with rising debt and interest expenses affecting this company, so at this time my sentiment on risk is somewhat in the middle.
Wrap-Up
To summarize, in today's note when looking at all the categories mentioned holistically I am bullish on this stock and the drivers of this are growth in revenue, earnings, and dividends, along with the opportunity to snag a 6.2% dividend yield.
At the same time, the current share price seems a bit on the pricey side, and the price-to-book valuation appears unjustifiable. Along with that, I am middle-of-the-road on risk as there is not yet a definitive recession or the inability of this company to cover its rising debt just yet.
This holiday season will be critical for its mall tenants to drive sales, and be able to pay rent and keep their leases, which is good for Simon and its investors. What I think also helps is the geographic diversification of Simon's properties, and global penetration, which also reduces the risk of one or two properties who are struggling.
For further details see:
Simon Property Group: Buy Rating Fed By +6% Dividend Yield And Earnings Growth