Simon Property Group SWOT Report


Summary

  • Simon Property Group is one REIT worthy of study by every dividend investor.
  • Simon is in the Standard & Poor’s 100 and has a rare REIT S&P credit rating of A.
  • Simon’s 250 properties include premier “Class A” malls, premium outlets and super regional malls across North America, Europe and Asia.

Introduction

Simon Property Group, Inc. (SPG) is the only real estate investment trust in the Standard & Poor’s 100. It’s one of only two REITs with an A credit rating from S&P. Its portfolio includes premier shopping, dining, entertainment and mixed-use destinations across North America, Europe, and Asia. 

Simon’s property portfolio is grouped into four platforms: (1) 116 malls in 32 U.S. states and Puerto Rico; (2) 78 Premium Outlets® in 29 U.S. states and Puerto Rico and 7 Outlet Marketplaces in six U.S. states; (3) The Mills®, 16 super regional malls in 13 U.S. states, purchased in 2007 from the Mills Corporation; and (4) 33 premium outlets in 13 countries outside the U.S.

SPG is introducing a fifth platform for eCommerce, Shop Premium Outlets® (SPO), designed to grow Simon retailers’ online and walk-in business.

Strengths

Simon has the industry’s strongest balance sheet. Financial strength, quality properties and great management make Simon the premier retail REIT.

  • Simon offers an industry-leading balance sheet and strong financial performance. March 31, 2019 occupancy was 95.1%; per square foot sales were $660 (up 3.1% for the trailing 12 months); base minimum rent was $54.34 PSF; the leasing spread (for new leases) was $14.17 PSF, up 27.3% for the TTM.
  • Simon’s size is a strength in financing, property development and talent recruitment. Of the 36 Retail Property REITs in the FTSE NAREIT All REITs Index, Simon is the largest by far at $53.8 billion in equity market capitalization. Only two others are over $10 billion: Realty Income (O) at $20.7 billion and Regency Centers Corporation (REG) at $11.4 billion. 
  • David Simon, 58, was SPG’s President from 1993-96, has been Chief Executive Officer since 1995 and Board Chair since 2007. He has been named among the world’s best CEOs by various organizations, including Barron’s and Harvard Business Review. In January, 2019, President and Chief Operating Officer Richard Sokolov was named Vice Chairman.

Weaknesses

Simon’s weaknesses are related to challenges facing all retailers. “Risk Factors” cited on pages 11-21 of their 2018 Annual Report Form 10-K include the general retail environment, the “relatively illiquid” nature of real estate investments, debt covenant restrictions and investment limitations caused by Simon’s REIT status.

  • Some investors avoid retail REITs because of shifting customer shopping preferences and the risk of geographic obsolescence as cities and suburbs experience growth and transition.
  • REITs are dependent on their lessees’ success. Simon’s counterparty risk is reflected in nearly 4,000 lease signings in 2018, including 130 new brands, 60 new restaurants and 20 new lifestyle/entertainment concepts.
  • Simon pioneered malls with “big box” anchor stores to draw traffic. This model once was a company strength, but now the mall concept is viewed as a weakness by many investors who see REITs with free standing properties as more attractive investments.

Opportunities

Simon has the management and financial strength to adapt to changing customer preferences and to keep property updated. Simon is now pioneering the redevelopment, or repurposing of malls facing the loss of big box anchors.

  • The decline in big stores coincides with growth in dining, entertainment, recreation and fitness, so Simon is repurposing some of their big store spaces and achieving higher leases per square foot. 
  • Simon is able to redesign some existing malls (or build new malls) as mixed-use destinations, including adjacent hotels and multi-family residential properties.
  • Simon’s new Shop Premium Outlets® initiative is an expansion of their VIP Shopper Club, tying together eCommerce with bricks and mortar by using apps to promote discounts and guide shoppers to Simon retailers.
  • Simon’s international presence is growing. The 2019 Q1 earnings call named several new premium outlet openings: a Querétaro, Mexico joint venture in 2019; Malaga, Spain in 2019; a Bangkok, Thailand JV in 2020; Cannock, England in 2020; and Normandie, France in 2021.

Threats

Simon faces the economic threat of bankruptcies and recessions; the competitive threat of online shopping and the growth of next day (or, in some cases) same day delivery; the regulatory threat of potential changes in tax or environmental policy; and the security threat of violence at heavily trafficked shopping areas (which encourages online shopping from home).

  • A major threat is bankruptcies among lessees. Recessions hurt lessees’ sales. Higher interest rates can limit lessees’ business expansion and impact Simon’s borrowing costs.
  • Online shopping is a threat to mall traffic. Simon faces added costs of repurposing mall properties (to accommodate mixed use, strategies, etc.) and developing new platforms (such as Shop Premium Outlets®).
  • REITs pay no U.S. federal income tax if they distribute at least 90% of taxable income in dividends. A change in the law could harm Simon’s ability to maintain its dividend level. Other potential regulatory threats include changes in environmental or property tax policies.
  • Customer traffic is increased by ease of access to attractive destinations, but these attractions also can be magnets for “bad actors” with malevolent intent to do physical damage. Both physical and cyber security are essential and they increase the cost of doing business.

Long term business outlook

Simon’s financial and management strength should enable it to adapt to the changing shopping environment. Simon is one of seven REITs in the Regional Mall sub-sector of the FTSE NAREIT All REITs Index. Simon’s $53.8 billion equity market capitalization accounts for 80.9% of the sub-sector’s $66.5 billion. 

From 2014 through 2018, Simon grew net income per share from $4.52 to $7.87, funds from operations from $8.90 to $12.13 and dividends from $5.15 to $7.90. Simon projects 2019 FFO to be $12.30 to $12.40 per share. The current quarterly dividend is $2.05, for an annual rate of $8.20. At a closing price of $174.46 on May 17, 2019, the dividend yield was 4.70%.

Disclosure: I am/we are long SPG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.