Simon Property (SPG, Financial), the $57.8 billion real estate investment trust (REIT), delivered its fourth-quarter and full-year 2016 results last week. The largest mall owner and operator grew its sales for 2016 by 3.2% to $5.44 billion and profits by 0.6% to $1.84 billion (1).
Further, Simon Property projects that its diluted earnings per share (EPS) for fiscal 2017 to be from $6.45 to $6.55 a share, compared to $5.88 a share in fiscal 2016.
Simon Property Group also stated that it expects its funds from operations (FFO) for fiscal 2017 to be in the range of $11.45 and $11.55 per share. In fiscal 2016, the REIT had $10.49 per share.
Simon Property shares climbed 3.4% while the broader Standard & Poor's 500 index ended with -0.09% change.
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"I am pleased with our strong fourth-quarter results, concluding another very successful and productive year for our company.
"In 2016, we opened three new centers, delivered four significant property transformations and completed several major financing transactions that reinforced our industry-leading balance sheet. We are also pleased to again announce an increase in our quarterly dividend to $1.75 per share, growth of 6.1% from last quarter and year-over-year increase of 9.4%." –Â David Simon, chairman and CEO
Total returns
Simon Property Group has underperformed the broader S&P 500 index in both the short and long term. According to Morningstar data, Simon Property had one- and five-year total returns of 1.9% and 9.9% compared to the S&P 500’s 22.8% and 13.7%.
Valuations
Simon Property Group also carried a premium in its share price compared to its peers. According to GuruFocus data, Simon Property had trailing price-earnings (P/E) ratio of 31.6 times (industry median 16), price-book (P/B) ratio of 13.7 times (industry median of 1) and price-sales (P/S) ratio of 10.7 times (industry median 7.3).
The largest mall operator also had a trailing dividend yield of 3.5% and 110% payout ratio accompanied by a five-year dividend growth rate of 14.2%.
Simon Property Group
Simon Property Group is an American commercial real estate company in the U.S. that was founded 24 years ago and now operates as the largest REIT by market capitalization.
Meanwhile, Simon Property Group LP, or the Operating Partnership, is Simon Property Group’s majority-owned partnership subsidiary that owns all of its real estate properties and other assets.
Simon Property Group owns, develops and manages retail real estate properties, which consist primarily of malls, Premium Outlets® and The Mills®.
As of Dec. 31, 2015, Simon Property owned or held an interest in 209 income-producing properties in the U.S., which consisted of 108 malls, 71 Premium Outlets, 14 Mills, four lifestyle centers and 12 other retail properties in 37 states and Puerto Rico.
Simon Property also had ownership interests Internationally. The REIT had interests in nine Premium Outlets in Japan, three Premium Outlets in South Korea, two Premium Outlets in Canada, one Premium Outlet in Mexico, and one Premium Outlet in Malaysia.
Simon Property also had a noncontrolling ownership interest in a joint venture that holds five outlet properties in Europe and one outlet property in Canada. Simon Property also owned a 20.3% equity stake in Klépierre SA, or Klépierre, a publicly traded, Paris-based real estate company, which in return owns, or has an interest in, shopping centers located in 16 countries in Europe.
Simon Property emphasizes its equity real estate investments while the REIT also provides secured financing to invest in equity or debt securities of other entities engaged in real estate activities.
Simon Property explained that given its REIT status requirement of handing out 90% of its taxable income, the REIT then regularly access the debt markets to raise the funds necessary to finance acquisitions, develop and redevelop properties, and refinance maturing debt.
Overall, Simon Property Group had five-year sales and profit growth and operating margin averages of 6%, 7% and 49% (3).
Cash, debt and book value
As of December, Simon Property had $560 million in cash and cash equivalents and $23 billion in mortgages and unsecured indebtedness representing a ratio to total equity of 4.6 times compared to 4.3 times in 2015.
Simon Property also had no goodwill nor intangibles and had a book value of $5.1 billion compared to $5.24 billion in 2015.
In addition, Simon Property also noted in its press release that it had over $7.0 billion of liquidity consisting of cash on hand, including its share of joint venture cash, and available capacity under its revolving credit facilities as of December 2016.
Cash flow
(10-Q, Simon Property Group; 2)
In the recent three-quarters – excluding fourth-quarter operations, Simon Property Group grew its cash flow from operations by 14% to $2.53 billion compared to the year-earlier three-quarter period. In addition, to increase cash inflow from deferred costs and other assets, Simon Property also experienced a 24.8% increase in distributions from unconsolidated entities for the period.
Capital expenditures were $577.2 million leaving Simon Property with $2 billion compared to $1.45 billion in the year prior.
Simon Property allocated 90.5%, or $1.8 billion, in several payouts and share repurchases such as distributions to noncontrolling interest holders in properties, preferred distributions of the Simon Property Group LP, preferred dividends and distributions to stockholders, distributions to limited partners.
On average, Simon Property Group provided 94.9% of its free cash flow as shareholder payouts including recent share repurchases from 2013 to 2015.
Simon Property also took in $111.1 million in proceeds from debt issuance, net payments and costs by the end of September.
Funds from operations
(10-K Filing and Press Release, Simon Property Group; *recent cash flow from operations not included)
Simon Property Group uses the non-GAAP measure funds from operations to evaluate its REIT operations and as could be observed in other REIT filings (4). Overall, Simon Property’s funds from operations had a five-year growth average of 7% from 2012 to 2016.
Conclusion
Several professionals are calling out that malls are dying in the U.S. Despite this widespread concern, Simon Property – as the largest mall operator in the world –Â seemed unperturbed and in fact delivered growth in its revenue and profits in the recent fiscal year.
As it turned out, part of being a REIT is the ability to have a leveraged balance sheet and deliver constant growth in its funds from operations, which Simon Property had demonstrated consistently over the years. Discounting the company’s unattractively leveraged balance sheet, the REIT seemed to deliver quality shareholder payouts in recent years, too.
(Simon Property Group share price of $185.33 per share and trailing P/E multiple of 31.6 times: GuruFocus)
Meanwhile, Simon Property received a couple of downgrades early in January from both SunTrust and Deutsche Bank to hold from buy. Deutsche Bank went on further and downgraded its share price target to $188 a share from $231.
Using Simon Property’s midpoint EPS goal in fiscal 2017 of $6.5 a share, multiplying this with the company’s five-year earnings multiple averages of 37 and applying a 20% margin would have given a value of $190 a share.
Simon Property is a hold with a target price of $190 a share.
Notes
(1) Simon Property Group is the largest mall real estate investment trust and the largest REIT by market capitalization according to Morningstar.
(2) Me: cash flow table (GAAP) not available in recent press release.
(3) Morningstar data and recent press release applied.
(4) 10-K: Simon Property Group determines funds from operations based on the definition set forth by the National Association of Real Estate Investment Trusts as consolidated net income computed in accordance with GAAP:
• Excluding real estate related depreciation and amortization.
• Excluding gains and losses from extraordinary items and cumulative effects of accounting changes.
• Excluding gains and losses from the sales or disposals of previously depreciated retail operating properties.
• Excluding impairment charges of depreciable real estate.
• Plus the allocable portion of FFO of unconsolidated entities accounted for under the equity method of accounting based upon economic ownership interest.
• All determined on a consistent basis in accordance with GAAP.
Disclosure: I do not have shares in the company mentioned.
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