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Simon Property Aims Redevelopment, Buyouts: Will You Hold?

We updated our research report on Simon Property Group Inc. SPG on Apr 11, 2016.

This retail real estate investment trust recently revealed its plan to add a luxury hotel and residential tower to The Galleria in Houston. The move is part of a multi-year transformation project of this iconic property that is not only the largest shopping center in Texas but also the fourth largest in the U.S. (Read: Simon's Galleria Transformation to Include Hotel, Residences)

Moreover, in March, a venture of Simon Property and Invesco Ltd. IVZ inked a definitive deal to acquire The Shops at Crystals for around $1.1 billion from CityCenter Holdings, LLC, a venture between MGM Resorts International MGM and Infinity World Development Corp. The move marks an opportunity for Simon Property and its venture partner to add a high-quality asset in a thriving marketplace. (Read: Simon, Invesco to Buy Las Vegas Mall from MGM, Infinity)

On the earnings front, Simon Property came up with fourth-quarter 2015 funds from operations (“FFO”) of $2.40 per share, down by 7 cents from the figure in the year-ago quarter. Excluding debt extinguishment loss, adjusted FFO came in at $2.73 per share. The Zacks Consensus Estimate for the quarter was $2.44. Total revenue in the quarter increased 6.4% year over year to $1.38 billion. Further, the figure surpassed the Zacks Consensus Estimate of $1.35 billion.

Simon Property’s diversified exposure to retail assets in the U.S. and abroad, efforts to support omni-channel retailing, portfolio-restructuring initiatives and a healthy balance sheet augur well for future growth. Further, the company remains focused on increasing its shareholders’ value through dividend hikes. In 2015, the company paid a dividend of $6.05 per share, which marks a 5-year (2011–2015) compound annual growth rate of over 18%.

However, a large development pipeline increases this Zacks Rank #3 (Hold) stock’s operational risks. Moreover, apart from competing with other retail properties, Simon Property faces competition from alternative retail channels such as catalogs and e-Commerce websites. 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 and therefore, would limit growth in its profit margins in the near term. And any hike in the interest rate will pose as a challenge before Simon Property.

Finally, Simon Property is slated to release its first-quarter 2016 results before the market opens on Apr 26. Currently, the first-quarter FFO per share estimate is pegged at $2.54, representing a year-over-year increase of 11.6%.

Investors interested in the retail REIT industry may consider a better-ranked stock like General Growth Properties, Inc GGP which 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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