Company Reports

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Simon Property Group’s fourth-quarter results beat our estimates, giving us confidence in our $151 fair value estimate for the no-moat company. Occupancy sequentially increased 60 basis points to 95.8%, slightly better than our estimate of a 40-basis-point sequential gain. Minimum rents increased 3.1% year over year, also slightly better than our estimate of 2.0% growth. Simon reported same-store net operating income growth of 7.3% for the fourth quarter, which beat our estimate of 3.1% growth. The company reported funds from operations, or FFO, of $3.69 per share in the quarter, well above our estimate of $3.29. However, Simon reported a $117.4 million gain on the sale of a partial ownership interest in the Authentic Brands Group investment, resulting in a one-time gain of $0.31 per share. Excluding that one-time gain, Simon would have reported $3.38 per share, which is still slightly better than our estimate.

Simon Property Group reported third-quarter results that were slightly better than we anticipated, giving us confidence in our $151 fair value estimate for the no-moat company. Occupancy improved 50 basis points sequentially to 95.2%, better than our estimate of a 10 basis-point improvement. Minimum rent increased 2.9% year over year, better than our estimate of 2.0% growth. As a result, same-store net operating income grew 4.2% in the third quarter. The company's NOI from retail investments produced $46.0 million in the third quarter, which is down from the $87.5 million figure the company's investments produced in the third quarter of 2022 but is relatively in line with the $50.2 million NOI produced in the second quarter of 2023. Simon reported funds from operations of $3.20 per share, which is above the $2.93 figure the company reported in the third quarter of 2022 and above our $2.98 estimate for the quarter. However, Simon also reported a noncash gain on sale of $118.1 million in the quarter, which increased FFO by $0.32 per share. Removing the one-time gain, third-quarter FFO was slightly below both 2022 and our estimate for the quarter.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Second-quarter results for no-moat Simon Property Group were mixed compared with our estimates, though we didn't see anything in the quarter that would materially change our $150 fair value estimate. Occupancy improved 30 basis points sequentially to 94.7%, relatively in line with our 94.6% estimate, and was up 80 basis points year over year. Minimum rent grew 3.1% year over year, better than our estimate of 2.0% growth, and led to same-store net operating income growth of 3.7% that beat our estimate of 2.4% same-store NOI growth for the second quarter. The company's retail investments only produced NOI of $50.2 million in the second quarter, which is down from the $116.5 million the company reported in the second quarter of 2022 but up significantly from the $54.6 million loss the company reported in the first quarter of 2023. As a result of lower retail income, Simon reported comparable funds from operations of $2.88 per share that was $0.05 lower than our $2.93 estimate, $0.03 lower than the second quarter of 2022, but $0.14 better than the first quarter of 2023.

Simon Property Group reported mixed first-quarter results compared with our estimates, though we don’t see anything in the quarter that would change our $150 fair value estimate for the no-moat company. Occupancy declined 50 basis points sequentially due to typical mall seasonality but was up 110 basis points year over year. Minimum rent grew 3.1% year over year, leading to portfolio net operating income growth of 3.9% that was in line with our estimate. However, Simon’s various retail investments produced a $54.6 million NOI loss in the first quarter, which marks the first quarter where Simon has lost money on its investments over the past several years. While the loss is larger than we forecast, management says that its retail investments face significant seasonality and that a first-quarter loss was already accounted for in management’s 2023 guidance. Simon reported comparable funds from operations, or FFO, of $2.74 per share, which was below our estimate of $2.95 due to lower retail investment income in the quarter.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Fourth-quarter results for Simon Property Group were slightly better than we anticipated, which gives us confidence in our $154 fair value estimate for the no-moat company. Occupancy improved 40 basis points sequentially and 150 basis points year over year to 94.9%, which is only 40 basis points below the 95.3% occupancy figure the company reported in the fourth quarter of 2019. Minimum rent grew 2.3% year over year in the fourth quarter. As a result, portfolio net operating income, or NOI, grew 6.3% in the fourth quarter, which was slightly better than our estimate of 4.5% growth. While total company NOI fell 1.7%, it includes less lease termination income, which is a sign that the portfolio’s tenants are healthier today compared with a year ago, and less retail investment income, though the $125 million reported this quarter was in line with our expectations. Simon reported comparable funds from operations, or FFO, of $3.15 per share in the fourth quarter, which is nine cents higher than our $3.06 estimate and four cents higher than the $3.11 figure reported in the fourth quarter of 2021.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Simon Property Group reported third-quarter results that were in line with our expectations, leading us to reaffirm our $160 fair value estimate for the no-moat company. Occupancy improved 60 basis points sequentially, ahead of our estimate of flat growth, and 170 basis points year over year to 94.5%. Minimum rent paid per square foot increased 1.7% year over year, leading to same-store net operating income growth of 2.3% in the third quarter. While Simon's NOI from retail investments fell to $87.5 million from $140.4 million in the third quarter of 2021, this quarter's result was in line with our estimate of $85 million retail NOI. As a result, total NOI for Simon fell 0.3% year over year, in line with our estimate. The company reported comparable funds from operations of $2.97 per share in the third quarter, a penny better than our estimate and 5 cents better than the $2.92 figure reported in the third quarter of 2021.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Second-quarter results for no-moat Simon Property Group were in line with our expectations, leading us to reaffirm our $160 fair value estimate. Occupancy improved 60 basis points sequentially to 93.9%, ahead of our estimate of 92.9% occupancy in the quarter. Domestic property same-store net operating income grew 3.6% year over year, better than our estimate of 2.5%, and total portfolio NOI, which includes international properties, grew an even higher 4.6%. However, total NOI fell 1.9% as the company recorded less income from its retailer investments and a lower level of lease termination income compared with a year ago. While the $116.5 million in NOI the company recorded in retailer investments is lower than the $195.8 million in the second quarter of 2021, we view it as a positive, given that it has rebounded from just $47.4 million in the first quarter of 2022. Simon reported comparable funds from operations of $2.96 per share in the second quarter, relatively in line with our $2.93 estimate and the $2.92 figure the company recorded in the second quarter of 2021 after removing a $0.32 noncash gain related to a deferred tax liability reversal.

Simon Property Group reported first-quarter property fundamentals that beat our expectations, but its bottom-line missed our expectations. Still, we didn’t see anything in the quarter that would materially alter our $160 fair value estimate for the no-moat company. Portfolio occupancy sequentially fell 10 basis points to 93.3%, though occupancy typically falls in the first quarter as temporary holiday tenants vacate, and the reported figure is far better than the 110-basis-point decline we had anticipated. Simon reported sales per square foot growth of 19% to a company-record $734, which is better than our estimate of 7% growth, and is now well ahead of the $693 per square foot figure reported in the fourth quarter of 2019. Higher occupancy and percentage rent derived from higher sales drove same-store net operating income growth of 7.5% that beat our 6.3% estimate. Additionally, occupancy cost fell to 12.3% in the first quarter, the lowest it has been in over seven years. This suggests that Simon’s tenants are very healthy at the moment, which should attract more tenants to the properties to help the portfolio reach the 94.5% level we think it should return to and also allow the company to continue pushing positive re-leasing spreads as management marks rents up to market as leases come due.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

While fourth-quarter results were slightly ahead of our expectations for no-moat Simon Property Group, we don’t anticipate changing our $154 fair value estimate given 2022 guidance came in below our estimates. Occupancy improved 60 basis points sequentially to 93.4% in the fourth quarter, which continues the company’s recovery from the pandemic lows. Sales growth across Simon’s tenants was strong in the quarter, up 34% over the fourth quarter of 2020 and up 8% over the fourth quarter of 2019. Comparable property net operating income was up 22.4% thanks to tenants repaying owed rent, while total company net operating income was up 46.8% given the company’s acquisition of Taubman and various investments in retailers. As a result, fourth-quarter funds from operations came in at $3.09 for Simon, 10 cents above our $2.99 estimate for the quarter and 92 cents above the $2.17 figure the company reported in the fourth quarter of 2020.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Third-quarter results for no-moat Simon Property Group were slightly ahead of our expectations, though we didn't see anything in the quarter that would lead to a material change to our $149 fair value estimate. Occupancy improved for the second straight quarter, up 100 basis points sequentially to 92.8%. Re-leasing spreads saw another large decline, with new rents 22.3% lower than expiring rents, though that is slightly better than the 25.2% drop we had anticipated. Domestic property net operating income improved 24.5% year over year, mainly due to malls being fully open in 2021, whereas many were closed for periods in the third quarter of 2020.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.