As the Federal Reserve continues its tightening policy in order to quell outsized inflation, market strategists are beginning to worry about the state of the consumer. The consumer held up reasonably well this year thanks, in part, to a tight labor market and rising wages. That said, rising food and energy costs have the potential to limit discretionary spending, which would be felt by mall operators like Simon Property Group (SPG -0.21%).
Simon reported third-quarter earnings earlier this month, and it appears that fears of declining consumer spending have yet to materialize. Let's dig into the details.
Brick-and-mortar stores are growing faster than e-commerce
Simon Property Group is an owner and operator of shopping malls, premium outlets, and The Mills. As of Sept. 30, Simon owned or held an interest in 197 properties in the United States and Puerto Rico. The company also owns an 80% non-controlling stake in the Taubman Centers and a holding in European operator Klepierre SA.
On the earnings conference call, Chief Executive Officer David Simon reported that Simon's shopper "remains resilient" and that sales per square foot for its tenants rose 14% year over year, which is a record. He also said that while some retailers were experiencing some pressure, most of that was on the e-commerce side, not the brick-and-mortar side. This means that leasing rates are still holding up, despite any potential slowdown in retail overall. In the company's opinion, the return on investment for stores is better than it is on e-commerce.
Image source: Getty Images.
The reports of the death of brick-and-mortar retailers have been premature. Brick-and-mortar sales actually grew faster than e-commerce in 2021. However, this might have been pandemic-driven, as in-person shopping rebounded after 2020. That said, many shoppers prefer the experience of shopping malls, along with the other experiential offerings.
On the earnings conference call, an analyst asked about the difficulty some retailers are having with declining sales, and whether that would affect leasing spreads. Simon said that the company is not seeing any pullback in renewals or new leasing activity and that retailers are experiencing the most pressure on the e-commerce side. He believes that if retailers want to grow, they will have to invest in physical stores.
Guidance and dividends are increasing
This view was supported by some of the operating statistics in the earnings report. Occupancy increased from 92.8% in Q3 2021 to 94.5% in Q3 2022. Simon also increased guidance for the full year, increasing expected funds from operations to come in between $11.66 and $11.71 per share.
Funds from operations (FFO) are the way real estate investment trusts (REITs) generally describe their earnings. It excludes depreciation and amortization, which tend to understate the company's cash-generating ability. Simon also increased its quarterly dividend by 9.1% on a year-over-year basis to $1.80 a share.
At current levels, Simon Property Group is trading at 9.7 times guided FFO per share. This is an attractive multiple for a market leader. The dividend yield works out to 6.2%, which makes the REIT attractive for income investors who want stable income. So far the consumer remains resilient, which bodes well for Simon going forward.
