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Can Simon Property (SPG) Ride High on New Developments?

We uploaded our research report on Simon Property Group, Inc. SPG on May 12, 2016.

Last month, this retail real estate investment trust (“REIT”) reported first-quarter 2016 funds from operations (“FFO”) of $2.63 per share, up from $2.28 per share in the year-ago quarter. The Zacks Consensus Estimate for the quarter was $2.54. Growth in operating income and new developments & expansions aided the results.

Total revenue in the quarter increased 9.9% year over year to $1.34 billion. Further, the figure surpassed the Zacks Consensus Estimate of $1.26 billion.

Simon Property enjoys a diversified exposure to retail assets across the U.S. Also, the company’s international presence fosters sustainable long-term growth as compared with its domestically focused peers. Moreover, the company’s efforts to support omni-channel retailing and portfolio-restructuring initiatives augur well for the long term.

At the end of the first quarter, Simon Property had redevelopment and expansion projects in progress at 33 properties across the U.S. and Europe. The company has the capability to effectively leverage the improving spending habits of wealthier customers, with the economy showing signs of recovery. The company also has a solid and improving balance sheet.

However, there has been some moderation in a number of metrics in the first quarter. For the U.S. Malls and Premium Outlets portfolio, occupancy fell 20 basis points (bps) year over year to 95.6% at the end of the first quarter. Moreover, total sales per square foot moved down to $613 from $621, while releasing spread decreased 140 bps to 17.5%.

Also, apart from competing with the other retail properties, Simon Property faces competition from alternative retail channels such as catalogs and e-Commerce websites. Notably, increasing consumer purchases through the Internet has emerged as a pressing concern for retail REITs. While the company is striving to counter such pressure through various initiatives, we believe that the implementation of such measures require a decent upfront cost. In addition, a large development pipeline increases the company’s operational risks.

Over the past seven days, the Zacks Consensus Estimate for 2016 and 2017 remained unchanged at $10.84 and $11.73, respectively. The stock presently has a Zacks Rank #3 (Hold).

However, investors interested in the REIT sector can consider stocks like Retail Opportunity Investments Corp. ROIC, Retail Properties of America, Inc. RPAI and Urban Edge Properties UE. Each of these stocks carries a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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SIMON PROPERTY (SPG): Free Stock Analysis Report
RETAIL OPPURTUN (ROIC): Free Stock Analysis Report
URBAN EDGE PROP (UE): Free Stock Analysis Report
RETAIL PROPERTS (RPAI): Free Stock Analysis Report
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