Simon Property Group: Strong 2021, but High Debt

Simon Property Group, Inc. (SPG) is a real estate investment trust that owns, acquires, and leases dining, shopping, entertainment, and mixed-use destinations. Its real estate portfolio consists of Premium Outlets, shopping malls, The Mills, and International Properties across North America, Europe, and Asia.

Investors looking to invest in defensive sectors in 2022 amid current geopolitical concerns and expectations of a tighter monetary policy should consider the energy sector, healthcare, and real estate. I am bearish on SPG stock due to the high level of debt and poor financial strength.

Simon Property Group’s Fourth Quarter and Full-Year 2021 Results

On February 7, 2022, Simon Property Group reported the latest financial results for the quarter and twelve months ended December 31, 2021.

SPG’s earnings increased in 2021 compared to 2020, which is a positive key factor for future stock price performance.

In Q4 2021, normalized FFO of $1.52 was a beat by $0.07, EPS GAAP of $1.53 was a beat by $0.10, and revenue of $1.33 billion was a beat by $63.18 million.

Quarterly results showed an increase to net income attributable to common stockholders of $503.2 million, or $1.53 per diluted share, compared to $271.5 million, or $0.86 per diluted share in 2020.

In REITs like Simon Property Group, funds from operations (FFO) is a very important financial metric that measures the amount of cash flow generated from a company’s business operations. FFO is calculated starting with net income and then adding depreciation expense, amortization expense, any losses on the sale of assets, and deducting any gains on the sale of assets and interest income.

FFO measures the operational efficiency and financial performance of a REIT.

For the latest quarter, Simon Property Group reported FFO of $1.160 billion, or $3.09 per diluted share, compared to $786.6 million, or $2.17 per diluted share, in the prior year, representing a strong 42.4% increase.

Positive news continues as Domestic property NOI (net operating income) increased 22.4%, and Portfolio NOI increased 33.6% compared to the prior-year period.

For a REIT, occupancy is another key statistic investors monitor for a simple reason. Higher occupancy leads to higher revenue.

The occupancy in Q4 2021 was 93.4% on December 31, 2021, compared to 91.3% on December 31, 2020, representing an increase of 210 basis points.

Yearly results were also very positive, ending with a net income of $2.25 billion, or $6.84 per diluted share, compared to $1.11 billion, or $3.59 per diluted share in 2020. FFO was $4.49 billion, or $11.94 per diluted share, higher than $3.24 billion, or $9.11 per diluted share in 2020, representing a 31.1% increase.

Domestic property net operating income increased 12.0% compared to 2020, another positive factor.

The company paid its fourth quarter 2021 common stock dividend of $1.65 per share on December 31, 2021, increasing its payout by 26.9% year-over-year. However, the dividend policy is unstable. In February 2020, the dividend was $2.10; then, it was cut to $1.30 in July 2020 and started increasing as of July 2021 to $1.40 and $1.50 in September 2021.

The company currently estimates net income to be within a range of $5.90 to $6.10 per diluted share, and FFO will be within a range of $11.50 to $11.70 per diluted share for the year ending December 31, 2022.

Fundamentals – Risks

The D/E ratio of ~7.8 is very high and is expected to harm profitability as the firm has issued a lot of new debt. In fact, in the past three years, it issued $2.2 billion of debt.

Other reasons of main concern are an operating margin that has been in a downtrend for the past few years and revenue per share that is yet to recover to its 2019 highs. The FFO payout ratio of Simon Property Group is 0.59, which is not too high but also doesn’t leave that much growth for dividend increases.

Valuation

SPG stock is relatively attractive based on its non-GAAP P/E ratio of 26.8x compared to the U.S. REITs industry average of 43.4x but also is overvalued based on its P/B ratio of 14.2x compared to the U.S. REITs industry average of 2.1x. The valuation is, therefore, mixed.

Wall Street’s Take

Simon Property Group has a Moderate Buy consensus based on eight Buy and four Hold ratings. The average Simon Property Group price target of $174.92 represents 21.9% upside potential.

Conclusion

Simon Property Group has delivered a strong Q4 and full-year 2021 earnings report. Its high debt level is a notable risk, and the revenue is not quite yet back at pre-COVID-19 levels.

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