Business Analysis
While lower quality retailers, such as those found in grade B and C malls have suffered in recent years, Simon Property Group’s exclusive focus on the high end of the market has helped it to continue growing despite the rise of e-commerce giants such as Amazon.com, Inc. (NASDAQ:AMZN).
Even more impressive is the fact that management, led by CEO David Simon (Harvard business review called him one of the world’s greatest CEOs in 2013), has been able to generate improving profitability and returns on invested capital in an environment where low interest rates have sent commercial real estate prices soaring.
With 31 years of industry experience, including being with Simon Property Group Inc (NYSE:SPG) since its 1993 IPO, Mr. Simon has proven to be one of the industry’s best capital allocators, generating 3,000% total returns over the past 23 years (five times better than the S&P 500).
Part of that is the REIT’s ability to locate attractive acquisition opportunities, which prove highly accretive to funds from operation per share (the equivalent of a REIT’s cash flow and what pays the dividend). Since Simon Property Group’s IPO in the early 1990s, the company has made over $40 billion of acquisitions, resulting in tremendous growth.
But Simon Property’s true competitive advantage lies not just in acquiring top quality malls in fast-growing regions. The key to staying ahead of industry headwinds (e.g. rising online shopping) and generating consistent growth throughout various interest rate and economic growth cycles is to focus on the quality of the customer experience within each mall.
For example, Simon Property Group has invested heavily into revitalization efforts of its properties ($3 billion in just the last five years). This helps to attract not just more shoppers, but customers with higher incomes that in turn attract superior anchor tenants such as Neiman Marcus, Bloomingdale’s, Lord & Taylor, and Saks Fifth Avenue. Take a look at the $300 million transformation the company made to its shopping center in Long Island.
The high end nature of its malls allows Simon Property Group to exert enviable pricing power, as represented by this year’s 4.5% increase in base rent it is charging its tenants in 2016. Yet despite the steep rent hike, occupancy at its properties remains at all-time highs (96.3%).
Better still, Simon Property Group’s vast diversification and long-term leases mean that it never faces a steep lease expiration cliff. As seen below, no single calendar year sees more than 8.6% of the company’s gross annual rental revenues expire. This staggering protects Simon Property Group from having to renew a large chunk of its leases or find many new clients in a down market. Occupancy rates and rent prices can remain more stable over time.
