Is Simon Property Group The Best Retail REIT?

In an industry so closely tied with U.S. financial health and consumer spending habits, retail Real Estate Investment Trusts often feel the impacts of a slow U.S. economy on both short and long time horizons.  Debt considerations, occupancy rates, and unemployment all weigh closely into the performance of retail-minded REITS, but favorable tax incentives and innovative structures can create uncorrelated growth opportunities with the rest of a balanced portfolio.

Within this landscape, Simon Property Group (NYSE:SPG) reigns as the largest player, with a market capitalization north of $40 billion and over fifty years in operation.  Incorporated in Delaware, the firm invests in, develops, owns, and manages primarily shopping-oriented properties throughout the globe.  Main areas of focus include regional malls, Premium Outlets, The Mills, and strip malls.  Simon operates or holds an interest in more than 300 of these facilities in the United States alone; they also have a presence in Mexico, Japan, South Korea, and Malaysia.

Ken-Heebner

Due to their REIT designation, Simon Property Group is obligated to distribute at least 90% of their taxable income to shareholders.  As such, SPG carries a dividend rate of $3.80 and yield of 2.7%.  For income investors, this means significant quarterly dividend gains, which can be reinvested for future growth.  Outside of dividend considerations, Simon Property’s recent stock performance has been rewarding to investors as well.  Trailing twelve month’s absolute return is clocked at 34.7%, clearly outshining the S&P500’s 9.7% and the Dow’s 13.9% (see which Wall Street trading legend is up 13% on his SPG position here).

Other notable participants in the Retail REIT space include General Growth Properties (NYSE:GGP), Kimco Realty (NYSE:KIM), and Macerich Company (NYSE: MAC), listed in decreasing market cap.  Smaller REIT companies have more of a regional focus, which can lead to area-specific considerations.  A larger, more-diversified retail REIT with a national presence could weather this recent economic downturn more effortlessly versus one that operates primarily in a troubled area such as California, Nevada, or Florida.  Simon seems to be the hedge fund favorite in the retail REIT space, appearing in 27 hedge funds’ portfolios, followed not-so-closely by 17 for Kimco Realty.

Earlier in the month, Simon Property Group announced a secondary equity offering totaling 8.5 million shares, priced at $137.00 (equating to $1.16 billion), as well as $1.75 billion in senior unsecured notes.  In other industries, such an offering could have investors groaning about dilution.  Fortunately, these types of offerings in the REIT space translate into immediate investment in other assets and properties.  This in turn increases FFO, or Funds From Operations, which is the preferred metric to use when calculating the earnings of a REIT (yes, even over EPS).  This partly explains why investors were hungry for an even larger offering of 8.25 million shares after an earlier announcement of 7 million shares on March 8th, 2012.  One such investor is Ken Heebner of Capital Growth Management; his holdings in SPG are worth north of $130 million, and over 15% of his portfolio is devoted to the REIT space. Billionare Jim Simons’ Renaissance Technologies initiated a brand new position in SPG during the fourth quarter (see Renaissance Tech’s top picks).

Keeping that metric in mind, the following are the latest reported fiscal year FFO/share calculations for the aforementioned comparables:  0.95 for GGP, 1.27 for KIM, and 2.79 for MAC.  SPG outshines the competition with a whopping 6.89 FFO/share.  Depending on how Simon intends to invest the money received in their offering, that number has an excellent chance of pushing even higher, depending on how accretive their acquisitions are, how long until they are generating cash flow, etc.  This is why you will often see a REIT’s stock price actually gain after the announcement of a capital-raising event.

As mentioned in their latest annual report for fiscal year 2011, SPG divested 45 shopping centers in Italy to their venture partner on January 9, 2012, contributing to a decline in international interests year-over-year.  However, the sale was quickly followed by an announcement to purchase a 28.7% equity stake in Klépierre, a Paris-based real estate company, which cost Simon $2 billion and closed in the middle of March.  By acquiring a share in Klépierre, Simon Property Group has increased their international operations to include shopping centers, retail properties, and office properties in France, Belgium, and Scandinavia.  The offering will provide a fresh capital infusion for both the operation of this project and future acquisitions.

Simon Property Group is poising itself for long-term national and international growth, and they stand as the largest and most diversified player in the retail REIT sector.  The recent purchase of Klépierre acts as affirmation of that growth, as does the recent declaration of a debt and equity offering. This is an impressive move in the current environment of stale lending and limited access to capital. The stock price reflects the bullish moves made by the company, as SPG is trading near its 52-week high of $145.10.  As such, we remain proponents of SPG and would recommend a buy entry on the next significant pullback from the current high.

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