Do as Simon Says
Posted on: April 2, 2009 - Email Article - Printable Version
Among the battered real estate industry there are a few REITs that are situated to take advantage of the carnage and profit in the long run. Simon Property Group [SPG: 85.65, +1.47 (+1.75%)] is going to be poised to snatch up properties at rock bottom prices from sellers who simply want to pay down their enormous debt loads.With a market cap of $7.59 billion, SPG is the largest public real estate company in the United States. As of December 31, 2008, SPG owned or held an interest in 324 income-producing properties in the U.S. It owns, operates and develops its portfolio of properties with an emphasis on high quality retail real estate. SPG operates from five retail platforms: Regional malls, Premium Outlet Centers, The Mills, community/lifestyle centers, and international properties. As of December 31, 2008, the breakdown of percentage of owned property was: Regional Malls- 58.3%, Premium Outlet Centers- 10.7%, The Mills- 19.6%, Community/lifestyle centers- 9.2%, and other properties- 2.2%. SPG reported for the full year 2008 that diluted earnings per share decreased $0.08 or 4.1% to $1.87 from $1.95 in 2007. However, it also reported that consolidated total revenues increased $132.4 million or 3.6%. This increase in total revenues was mainly due to the full year effects of its 2007 openings and expansions.
The three main reasons why I think Simon will prevail are its consistently high occupancy rates, the poor conditions of competitors such as General Growth Properties [GGP: 15.84, +0.74 (+4.90%)], and strong growth in Funds From Operations (FFO).
Even in the midst of a tough retail environment, SPG has been able to maintain fairly steady occupancy rates. As you can see, even though all but The Mills are down year-over-year, they are not down nearly as much as some may have thought given the harsh economic climate for over a year now. Strong occupancy rates were accompanied in 2008 by stable rental rates which helped SPG to generate growth in operating results even with the pressures of the souring economy.
- Regional Malls: 92.4%, down 1.10%
- Premium Outlet Centers: 98.9%, down 0.80%
- The Mills: 94.5%, up 0.40%
- Mills Regional Malls: 87.4%, down 2.10%
- Community/Lifestyle Centers: 90.7%, down 3.40%
- European Shopping Centers: 98.4%, down 0.03%
- International Premium Outlet Centers: 99.9%, down 0.01%
Lots-O-Cash
SPG has a strong balance sheet with a lot of cash. As of December 31, 2008, it had approximately $774 million in cash. Going forward, SPG has specifically said it wants to expand within the US and more importantly, grow its international presence. In 2008, SPG opened three Premium Outlet centers internationally; one each in China, Japan and Italy. REITs such as General Growth became so highly leveraged that it now cannot afford to make its debt payments and has no cash on hand to do so. Because of this extreme leveraging, it is unable to get financing for more than a few weeks since the risk of not just default, but bankruptcy, is so large. If negotiations with bondholders and lenders to alter the terms of their bonds and loans does not work, the next best thing for these companies to do is sell assets. Simon has played it safe over the past forty-eight years and has ample cash to acquire assets at depressed prices from companies in dire need of cash. In addition to cash, it also has approximately $2.4 billion left on a $3.5 billion credit facility. (A note on the credit facility: Simon has closed a deal and issued 17.25 million shares at $31.50 and issued $650 million in senior notes due in 2019. It will use some of the proceeds to pay down part of this credit facility.) With the highest S&P credit rating among regional mall operators of A-, the company has easy access to capital.
Steady FFO Growth
Funds From Operations, or FFO, is a figure used specifically by REITs to define their cash flows from operations. It takes Net Income, adds back in Depreciation and Amortization and subtracts Gains or Losses from the Sale of Property. Since GAAP accounting requires Depreciation and Amortization be subtracted out it may reduce true earnings for REITs because the properties that the REIT owns may actually appreciate over time. It also subtracts out gains or losses on the sale of properties because these are one time charges that are not recurring and do not contribute to the REIT’s ongoing dividend paying capacity. SPG has averaged 10% growth in FFO since 2005. Going forward, this growth has the risk of decreasing due to the crisis spreading to commercial real estate. However, since SPG’s specializes in retail I think that the risk is lower. This may sound crazy, but if it has been able to weather the past twelve months of poor consumer confidence and spending, I think that the future is a bit brighter. I don’t necessarily need a ratio or a metric to tell me that maybe the light can be seen at the end of the tunnel. Rather, I need only go to my local mall (coincidentally owned by General Growth) and drive around for ten minutes trying to find a parking spot or visit any Simon owned mall in south Florida and do the same thing. Now, I realize that not everyone is purchasing items, but it is still traffic in the mall and in the stores. My high school soccer coach always said, “you can’t score unless you shoot the ball.” Well, you can’t buy things unless you go to the store. Consumers are out looking for bargains, and by the looks of the things, stores are giving them what they want.
SPG is looking toward the future and management is focusing on being around for another forty-eight years. The company’s diversified portfolio along with the several items above will help it continue to be the strongest player in the REIT sector.
-Patrick Dougherty
Disclosures: None
The Following Stocks Were Mentioned In This Article: GGP, SPG
Comments
Lotsa cash?
1. Why then are they floating new debt at 11%?
2. Why then did they replace 90% of the cash dividend with common stock?
3. Why then are they raising money via dilutive equity offerings?
No, Amigo, they don’t have a lot of cash. They are acting like things are pretty dog gone serious, if you ask me.
Bob,
I think your points are valid and would make more sense in normal market environment. However, as we know these are hardly normal economic times. That being said I think we need to look at events in a different light. 4 years ago if they replaced 90% of their dividend with stock then yes, I would be worried too. But in a time when cash is king and holding that cash is essential SPG is being responsible and trying to conserve cash now so that acquisitions can be made and return more to shareholders in the future. On the issue of the recent SEO, it is important to note that the initial offering was for 15M shares with a 2.25M over allotment option to the underwriter. Just so happens that the underwriter exercised this option and the SEO was for 17.25M shares. The market is the ultimate judge and since SPG was just trading at $40 (first time since mid-Feb) I think that the market saw the capital raises (including the $650M in debt) as a positive since it is extremely hard for companies right now to get the needed capital. The signs are out there that the market believes Simon will weather this and be stronger in the long term.
Also, it is essential to note that they had $774M in cash before these capital raises closed recently. So yes they do have a lot of cash, they are simply trying to get more of it. I would also hope that management is taking things seriously, that’s what they are getting paid to do.
I appreciate the comment but your points should be looked at in the context of the current market environment.
-Pat