Simon Property Group (SPG 1.40%), the largest real estate investment trust in the market, invests in retail properties -- particularly high-end malls and outlet centers. With the headwinds facing the retail industry, you might think Simon's properties might be struggling, but that simply isn't the case.
In fact, Simon produced some impressive growth during the third quarter, and it continues to develop new properties to drive even more value creation for its shareholders. Here's a rundown of Simon's earnings report and what could drive future gains for investors.
Image source: Getty Images. (Note: Image does not depict one of Simon Property Group's properties.)
First, a look at the numbers
Simon Property Group focuses on high-end malls as well as outlet centers, and as such, it has not been too adversely affected by the headwinds facing the retail sector. In fact, Simon's net income, revenue, and FFO all grew on a year-over-year basis on higher rental rates and leasing spreads.
|
Metric |
Q3 2017 |
Q3 2016 |
Change |
|---|---|---|---|
|
Net income |
$513.8 million |
$504.7 million |
1.8% |
|
Funds from operations (FFO) per share |
$2.89 |
$2.70 |
7% |
|
Total revenue |
$1.404 billion |
$1.357 billion |
3.5% |
|
Operating expenses |
$713.6 million |
$681.0 million |
4.8% |
Data source: Simon Property Group 3Q17 earnings report.
Simon's occupancy as of September 30, 2017, was a healthy 95.3%, and comparable property NOI growth came in at 3.6% -- impressive for a time when many aspects of the retail industry are struggling.
As a result of its strong performance, Simon raised its FFO guidance range slightly. Based on the midpoint of the range, the company is now expecting FFO to come in $0.015 higher than previously anticipated.
Key developments during the third quarter
Simon's primary growth engines are development of new properties and redevelopment of its existing portfolio. Although Simon owns a large number of high-end malls, its development efforts have largely shifted toward its Premium Outlets brand of outlet centers, as discount retail is one of the most e-commerce-resistant types.
During the third quarter, Simon opened one new shopping center and completed a large expansion to one of its outlet centers. In addition, the company is in the process of constructing two new outlet projects and is also investing in 31 redevelopment and expansion projects at a total cost of $1 billion. With over $6.5 billion in available liquidity, Simon has sufficient resources to ensure that its properties continue to offer better shopping experiences than those of peers.
In addition, Simon took advantage of the continued low-interest environment and lowered its overall borrowing costs with new loans at a weighted average interest rate of 3.12%.
A dividend increase -- again
Simon Property Group announced an increase in its quarterly dividend rate to $1.85, up from the most recent payment of $1.80. This is the third dividend increase announced by Simon over the past year -- the payout was raised from $1.65 to $1.75 in early 2017, and again to $1.80 for the August dividend payment.
The latest increase represents a 12.1% year-over-year dividend growth rate, and it translates to a 4.7% yield at the company's current stock price. Over the past five years, Simon Property Group has increased its dividend at a 11% annualized rate, and the latest increase shows that the company has no intention of slowing down.
In addition, the annualized dividend rate of $7.40 represents a payout ratio of just 66% of the company's expected 2017 FFO -- a rather low payout ratio for a REIT. In other words, this means Simon's FFO could drop by a third, and the company would still be earning enough to cover its dividend.
The bottom line on Simon's performance
While trends in the retail industry are certainly worth keeping an eye on, Simon Property Group's business looks to be doing just fine. With the trend toward bargain-conscious consumers, outlet shopping should be a pretty safe (and growing) area of retail, and as long as Simon keeps reinvesting in its higher-end properties, they'll maintain an advantage over the competition.
With strong growth, low vacancy, a low payout ratio, and a low valuation (14.1 times expected 2017 FFO), Simon Property Group looks like an interesting long-term value for income investors.
