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Why I Sold Simon Property Group - Again

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With nan pandemic successful nan rear position mirror, Simon Property Group (NYSE:SPG) is still trading good beneath pre-pandemic levels. The problem is that moreover arsenic nan institution moves beyond pandemic headwinds, nan aforesaid fears regarding e-commerce stay ever-present and are now being met pinch fears of a recession. The institution maintains a beardown equilibrium expanse and trades cheaply connected nan ground of costs from operations, but I expect nan institution to person to proceed backing redevelopment projects for nan indefinite early conscionable to counteract e-commerce headwinds. With nan banal now trading astatine a 5.8% dividend yield, nan risk-reward nary longer favors a bullish position.

SPG Stock Price

For a while successful precocious 2021, SPG had returned to pre-pandemic levels but has since fixed backmost immoderate of those gains.

ChartData by YCharts

I last covered SPG successful October where I explained why I was yet turning bullish again owed to valuation. With nan banal returning 23% since then, nan valuation proposition is nary longer arsenic attractive.

SPG Stock Key Metrics

SPG closed retired 2022 pinch $3.15 successful comparable FFO per stock successful nan 4th quarter, up marginally from $3.11 per stock successful 2021. For nan afloat year, comparable FFO stood astatine $11.87 per share, up 3.8% YOY. As typical, that full-year consequence came up of original guidance guidance, which was for up to $11.70 successful comparable FFO per share.

SPG saw coagulated comparable NOI maturation astatine its properties, but worldly weakness from “other level investments” which is chiefly made up of its finance successful retailers specified arsenic JCPenney.

NOI

2022 Q4 Supplemental

On nan conference call, guidance noted that OPI made up astir 5% of wide FFO.

On a agleam note, SPG delivered 2% YOY maturation successful mean guidelines rent - its 2nd consecutive 4th pinch sequential and YOY growth. As I discussed successful a prior article, SPG has changed and reduced financial disclosure complete nan past fewer years, including ceasing to disclose leasing spreads and changing their meaning for mean guidelines rents. It is bully to spot mean guidelines rents yet inclination successful nan correct direction, moreover if these results are still implying immoderate volatility either successful leasing spreads aliases possibly prime rent reductions.

operating metrics

2022 Q4 Supplemental

On nan call, guidance stated that leasing spreads person been positive, but without definitive disclosure and nan truth that mean guidelines rent is increasing somewhat beneath nan emblematic 2% to 3% yearly lease escalators that 1 would expect from people A promenade assets, it whitethorn beryllium excessively early to opportunity that nan institution is retired of nan woods. Investors tin beryllium hopeful that now that occupancy rates are backmost very adjacent to 95% that possibly nan institution whitethorn beryllium capable to yet show immoderate pricing power.

Looking ahead, SPG expects 2023 comparable FFO to travel successful astatine up to $11.95 per share, reflecting little than 1% YOY growth. That guidance incorporates expectations for 2% SS NOI maturation pinch a worldly effect from nan rising liking complaint environment. We tin spot beneath that SPG has galore indebtedness tranches coming up for maturity complete nan coming years that will apt request to beryllium refinanced astatine higher liking rates.

debt maturing

2022 Q4 Supplemental

Rising indebtedness costs are expected to effect FFO by astir $0.30 to $0.35 per share.

That 2% SS NOI maturation guidance is beneath nan aforementioned yearly lease escalators, truthful investors are correct for wondering astir nan puts and takes there. On nan call, guidance stated that it is chiefly owed to expanding operating expenses, specified arsenic information and housekeeping costs. The reside connected nan convention telephone seemed to connote that guidance seemed conservative. That so whitethorn beryllium existent considering that guidance is projecting level income growth. The anemic system whitethorn put downward unit connected sales, but nan reopening Chinese economy whitethorn thief bring backmost visitors which had antecedently been important for ft traffic.

Is SPG Stock A Buy, Sell, aliases Hold?

At caller prices, SPG was trading astatine only 10.3x guardant FFO. That whitethorn look inexpensive considering nan A- rated equilibrium expanse and portfolio chiefly made up of people A existent estate. But 1 mustn’t fto feelings get successful nan measurement of numbers. We tin spot beneath that statement estimates are mixed, projecting stagnant net complete nan adjacent 5 years.

consensus estimates

Seeking Alpha

Besides paying nan dividend, nan remaining free rate travel successful wide is spent towards redevelopment projects. While SPG has touted satisfactory yields connected those investments, nan company’s maturation successful caller years has not reflected specified ROI. I expect SPG to proceed investing heavy successful redevelopment projects complete nan coming decade arsenic it seeks to counteract nan headwinds imposed by e-commerce. Some investors whitethorn beryllium waiting for an extremity to nan “CapEx cycle,” but I be aware against specified hopes because absent finance successful redevelopment projects, what logic should investors person to dream for nan institution to not suffer from e-commerce complete nan agelong term? The statement is rather simple: e-commerce is much convenient than in-person shopping and oftentimes moreover cheaper owed to nan various shopping portals available. While location are definite items that whitethorn beryllium much resilient to e-commerce headwinds (like luxury goods), nan threat is alternatively successful nan smaller and higher consequence tenants which are highly limited connected ft traffic.

That intends that shareholders should attraction much connected nan 5.8% dividend output arsenic opposed to nan 9.7% FFO yield, arsenic it is not clear if nan retained rate travel will straight construe to rate travel growth. Perhaps SPG tin turn their dividend astatine a 3% to 4% clip moving forward, that whitethorn lead to adjacent to 10% yearly returns assuming nary aggregate compression.

Yet I cannot thief but proceed to be aware that location whitethorn beryllium a tipping constituent successful nan early astatine which constituent it becomes clear that nan promenade REIT business exemplary arsenic it stands is not viable. That is not to opportunity that malls will spell distant - but alternatively that location simply are excessively galore stores successful nan mall. I expect nan promenade of 10 years later to beryllium overmuch different than nan promenade of coming - pinch much restaurants and little mini container stores. I expect e-commerce to beryllium nan main culprit. This would show up successful nan fundamentals done rate travel declines - it would evidently beryllium very bearish if SPG is incapable to turn yearly rate flows successful spite of yearly lease escalators, leasing spreads, occupancy gains, and redevelopment projects. The deficiency of rate travel gains would connote anemic leasing spreads, prime rent reductions, aliases both. Given that nan institution for nan bulk of 2022 has already been lapping pandemic comps pinch humble results, 1 could make nan statement that we are already seeing specified pressures today.

Based connected that argument, it is difficult to spot a lawsuit for aggregate description , arsenic maturation is very improbable to accelerate further than 4%, if it tin moreover deed that level connected a sustainable basis. These aren’t business existent property successful which nan agelong word communicative is promising, but alternatively promenade existent property successful which wide sentiment remains pessimistic (again connected relationship of e-commerce headwinds). Even if it takes galore years earlier my anticipated tipping constituent takes place, I expect sentiment to stay antagonistic arsenic location is nary clear logic why e-commerce will not simply proceed chipping distant astatine unit marketplace share. I spot SPG banal arsenic being buyable chiefly erstwhile it becomes much profoundly undervalued. I antecedently purchased astatine a 7% dividend output and find specified a output - if not higher - to beryllium a much due level to see buying backmost into nan name. I person sold my position and do not expect re-entering nan banal until nan valuation proposition improves - moreover if nan institution does extremity up outperforming 2023 estimates.

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Editor: Naga



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