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| High-Dividend
REIT Profile: Simon Property Group (SPG) |
Published: August 17, 2004
Editor's Note: The analysis below represents only a small portion
of Carla Pasternak's recently-completed 20-page special report --
"REITs You Can Trust: Three High-Yielding REITs with Safe
Dividends." Act today and we'll send you this in-depth research
report, plus three additional reports, plus one full year of our
High-Yield Investing newsletter all for just $149 per year. Visit the
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In the meantime, we hope you enjoy today's sneak peak at a
high-dividend REIT (Real Estate Investment Trust) that should deliver a
steady income stream for years to come:
With 250 malls in 37 states and Canada, Simon Property Group (SPG) is
the largest shopping center owner in the U.S. The company is also the
largest publicly traded retail REIT in North America (based on total
market capitalization). As one of the first REITs to be included in the
S&P 500 Index, Simon enjoys a high profile in the industry.
Simon dominates the premium retail real estate market, controlling about
a third of all U.S. malls that generate at least $250 million in annual
sales. All told, Simon's malls house roughly 20,000 storefronts that
contain nearly 200 million square feet of leasable retail space.
Regional malls account for over 90% of its portfolio, while community
shopping centers and other properties make up the balance.
Throughout its 44-year history, Simon has grown by aggressively
acquiring large, strategically located malls in major cities. In 2002,
Simon acquired upscale malls Copley Place in Boston, Florida Mall in
Orlando and The Galleria in Houston. In addition, its recently-announced
purchase of Chelsea Property Group (CPG) will enable it to extend its
reach into the premium outlet center market.
The company, which owns 48 retail properties in Europe, enjoys a widely
diversified geographic and tenant base. Its locations are anchored by
leading national retailers such as Home Depot (HD), Staples (SPLS),
Target (TGT), and Bed, Bath & Beyond (BBBY). Since no one tenant
accounts for more than 5% of rental income, the risk of lease default or
bankruptcy is limited.
Simon’s management has tried to compliment its strategy of growth by
acquisition by generating additional income from its existing
properties. Although rental income still accounts for a major portion of
sales, additional business services are now becoming a larger part of
the firm's revenue stream. These services now account for 5% of total
revenue, compared to less than 1% a couple of years ago.
Simon Brand Ventures, the mall owner’s marketing arm, capitalizes on
shoppers who make approximately 2 billion visits to Simon malls each
year. It provides nationwide product promotions for such clients as
Coca-Cola (KO), Visa and Cingular Wireless, among others. Many
promotions target teens and women, the firm's two largest market
segments. Meanwhile, Simon Business Network uses the company’s
influence with its retail vendors to secure low-cost contracts with
suppliers of facility management services, such as PCL Construction and
Canon copiers (CAJ).
Dividend -- Simon pays an attractive annual dividend of $2.60 per
share, which equates to a yield of roughly 5%. The company has been
paying dividends at increasing rates since 1994. In the past three
years, the firm has boosted its dividend an average of +6% a year.
Meanwhile, the shares have continued to appreciate rapidly. The stock's
total returns (dividends plus share price increases) have averaged a
stunning +30% a year over the past three years--well ahead of the
overall market. In addition, Simon offers a Dividend Reinvestment Plan
that allows shareholders to compound their investment over time.
Performance -- High occupancy rates of over 90% in Simon’s
malls have allowed the company to raise rents on expired leases an
average +20% over time. Rental increases on existing properties,
combined with the strategic purchase of malls with above-average sales
per square foot, have contributed to double-digit earnings growth in the
past three years. Profit margins have strengthened from 40% to 42% over
that same time period, helped by greater economies of scale from
acquisitions. As a result, revenues have grown an average of +7% a year
throughout the past three years, yet company earnings have grown at an
even faster +11% clip, reaching $1.53 per share in 2003. Meanwhile,
funds from operations (FFO), an important measure of profitability for
REITs, have also risen at a steady +7% clip a year over the past three
years, reaching $4.04 per share in 2003.
Simon is also in excellent financial health. With $11 billion in debt,
the company boasts a reasonable debt-to-total-capitalization (total
capitalization = market cap plus debt) ratio of just 50%. Meanwhile,
with floating rate debt less than 20% of total debt and an interest
coverage ratio of 2.3 times, the company has little to fear as interest
rates rise.
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Outlook -- Double-digit rent increases on expired leases and
higher tenant sales, of which Simon receives a percentage fee, should
drive strong internal growth in the years ahead. Meanwhile, strategic
acquisitions will also continue to boost earnings. After accounting for
the Chelsea acquisition, which is slated to close in late 2004, the
company estimates that it will post 2004 earnings of $1.64 to $1.68 a
share and FFO of $4.31 to $4.35 a share. That translates to an average
+8% gain in earnings and +7% rise in FFO. In other words, the firm's
slow and steady growth should continue this year as well.
Valuation -- Trading at roughly 12 times this year's projected
FFO, Simon’s shares trade at a slight discount to the typical firm in
the real estate industry. Based on its above-average growth prospects of
+7%, Simon also sports a low PEG ratio of 1.7, compared to the industry
norm of 2.25. By this measure, which takes into account the firm’s
steady growth prospects, Simon’s shares are significantly undervalued.
Looking ahead, Simon’s dividends will surely rise along with its
profits, and these higher dividends should push shares of SPG nicely
higher in the coming years.
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Please Note: The above article was merely a
small excerpt from an issue of our premium income newsletter -- High-Yield
Investing. In each issue Carla Pasternak presents
a wealth of information and timely investment ideas to help you earn a
steady income stream from your investments. To receive a
complimentary three-week trial or to learn more about our High-Yield
Investing service, please visit the following link: http://www.StreetAuthority.com/subscribe.asp#hy |
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