Source: Flickr user Prayitno
With the market hovering near correction territory, now is an excellent time to shop for great long-term stocks on sale. One of my favorite places to put my own money for the long haul is real estate investment trusts, and one of the best in the business is Simon Property Group (SPG -0.40%). Here's what you need to know about this retail real estate giant, and why it could be a smart addition to your portfolio.
What does Simon Property Group do?
Simon Property Group invests primarily in U.S.-based malls and outlet centers under the Premium Outlets brand name and owns 228 properties consisting of more than 188.6 million square feet of leasable space.
With a $56.2 billion common equity market cap as of this writing, Simon is the largest publicly traded REIT of any kind, and has a dominant lead in the retail REIT segment. In fact, Fortune magazine named Simon the most admired real estate company of 2015. Let's see if we can figure out why.
Reasons to like Simon Property Group
There are several reasons to like Simon Property Group as a long-term investment. For starters, consider its impressive growth, both recently and throughout its history.
During the second quarter of 2015, the company posted 14.2% year-over-year growth in comparable FFO (funds from operations), and it doesn't look like Simon is slowing down. Redevelopment or expansion projects valued at $2.3 billion are under way at 28 of the properties, and three new outlets are under construction. Over the past 20 years, Simon has grown its revenue by 774% thanks to its strategic acquisitions, development, and organic NOI growth.
Helping to facilitate this growth is the company's strong A/A2 (S&P/Moody's) credit rating, which allows the company access to plentiful, cheap capital to finance its operations. In fact, over the past year Simon has taken on $1.2 billion in new debt at an average interest rate of just 2.9%. Since 2010, the company has reduced the average interest on its debt from 5.43% to 4.39%, which has a lot to do with the accelerated growth of the past few years.
Even though it has lots of borrowing ability, Simon doesn't abuse its credit -- only 29% of the company's capitalization comes from debt, which provides a nice "safety net" in bad economic times.
Another reason to like Simon Property Group is its diverse revenue stream, which is particularly important in the retail real estate sector. After all, retailers do go bankrupt from time to time, and if one retailer makes up a large portion of a REIT's revenue, a bankruptcy could be devastating. Fortunately, Simon's revenue comes from more than 3,100 different tenants, and even the largest one makes up just 3.5% of the total rental income.
Finally, one of my favorite reasons to invest in Simon for the long term is its adaptability. In other words, the company does an excellent job of giving shoppers what they want. For example, modern-day consumers want more sit-down and fast-casual dining options while they shop, and in response Simon has added 75 new restaurants to its properties in the past three years alone. And many of Simon's malls have health clubs and upscale grocery stores such as Whole Foods Market and Fresh Market.
Shoppers want high-end grocery stores and better dining options, so Simon Property Group is making an effort to add more of both.
Simon invests a considerable amount of money ($400 million since 2010) on renovations and mall enhancements to keep up with the rapidly changing retail environment. Many of the company's malls offer free Wi-Fi, phone charging stations, valet parking, and shuttle services, just to name a few amenities. The point is that retail is changing rapidly, and Simon Property Group is prepared to change with it. As a result of Simon's efforts in recent years, its properties are more occupied, and are producing higher sales.
Performance
Over the years, Simon Property Group has delivered a market-beating performance:
In fact, Simon's returns over the past year, five years, 10 years, and since its 1993 IPO have all handily beat the S&P 500.
|
Time Period |
SPG Total Return |
Annualized |
S&P 500 Annualized Total Return |
|---|---|---|---|
|
1 year |
4.2% |
4.2% |
-2.3% |
|
5 years |
125.2% |
17.6% |
14.1% |
|
10 years |
234.7% |
12.8% |
6.8% |
|
Since 1993 IPO |
2,590% |
16.1% |
8.7% |
To put this kind of performance in perspective, consider that a $10,000 investment in Simon Property Group 22 years ago at its IPO would be worth approximately $260,000 today. Although past performance doesn't guarantee future investment results, Simon's disciplined business model and virtually unlimited access to capital create the potential for outstanding long-term returns like these.
For income investors, Simon also does a good job of increasing its dividend over time with an annualized 9.1% dividend growth rate over the past decade. So not only does Simon have a strong 3.5% dividend yield, but the income stream you receive should also keep up with inflation and then some.
Valuation
For comparison purposes, here's how Simon Property Group compares with other retail REITs in terms of price-to-FFO, which is the best measure of how "expensive" a REIT is. (Note: P/E is a flawed metric for evaluating REITs, since earnings calculations give an inaccurate picture of a REIT's profitability. For more information about valuing REITs, check out this article)
|
Company (Symbol) |
Share Price (As of 9/15/15) |
2015 FFO Guidance (Midpoint) |
Price/FFO (Midpoint) |
|---|---|---|---|
|
Simon Property Group (SPG) |
$181.49 |
$10.05 |
18.1 |
|
General Growth Properties (GGP) |
$25.29 |
$1.43 |
17.7 |
|
Kimco Realty (KIM) |
$23.38 |
$1.45 |
16.1 |
|
Realty Income (O) |
$45.88 |
$2.71 |
16.9 |
|
National Retail Properties (NNN) |
$35.12 |
$2.23 |
15.7 |
As you can see, Simon is actually on the high end of the valuation spectrum relative to its peers. However, I feel that the company deserves to trade at a premium. The strength, diversification, and access to capital, as well as the outstanding history of outperformance more than justify the higher share price.
As Warren Buffett says, it's better to own a great business at a fair price than a fair business at a great price. And Simon Property Group is a great business.
The bottom line
Just like any investment, Simon Property Group is not without risk. For example, if interest rates go up significantly, it will cost the company more to borrow money, eating into its profit margins. Or, there is always the risk of some of the company's major tenants going out of business.
However, I feel that the fantastic record of performance and stability more than justifies any risks you would take by owning the stock. Simon Property Group has rewarded its investors over its long history, and there's no reason to think it won't continue to do so.
