Over the past year, the US retail real estate sector has been filled with uncertainty. But improvements in economic fundamentals continue to drive a modest recovery. However, significant risks remain, with the most critical being the European crisis and uncertainty about fiscal policy. Now I believe that the recovery is set to continue due to a decline in interest rates in the US, with important implications for the economy and for investors.
About Simon Property:
Simon Property Group (SPG) is a real estate investment trust (REIT) that develops and leases retail real estate, specifically regional malls, shopping centers and strip malls. It is an S&P 100 company and a market leader in the global retail real estate industry. The company currently owns or has an interest in 382 retail real estate properties in North America and Asia, comprising 261 million square feet. Additionally, the company has a 29 percent interest in Klépierre, a publicly-traded Paris-based real estate company, which owns shopping centers in 13 European countries. The company is headquartered in Indianapolis, Indiana, and employs approximately 5,500 people in the US.
Stock price Performance:
The graph above shows the comparative stock price performance of Simon Property Group with its competitors, including General Growth Properties (GGP), Macerich Company (MAC), Vornado Realty Trust (VNO) and the Dow Jones Global REIT index. You can clearly see that the company's stock performed extremely well compared to most of its competitors and the sector index in a six-month period.
The graph above shows the company's revenues growth and its operating margins over the years. As you can see, a consistent growth in revenues is indicated by a linear line, with a CAGR of 5.22 percent over the five-year period. The operating margin of the company has increased from 41 percent to approximately 45.5 percent. The improvement in margins did not adversely affect the market share of the company. In fact, in recent quarters, the company has been stated to have improved its market share in the U.K. market and the international market.
The chart above shows a breakdown of the company's ROE into three parts including net margin, asset turnover and financial leverage. As you can see, the ROE is showing an increasing trend over the years, indicated by the linear trend line, and it is supported by net margins. The company has managed to increase its ROE by reducing its financial risk, which is reflected by the decreasing financial leverage ratio of the company, 9.02 in 2008 to 5.56 in 2012, which shows the financial strength of the company and gives positive indications to investors as well. The important point to be noted here is that despite an economic slowdown in the US market, the company managed to generate impressive margins, because of its huge investments outside the US.
The company has increasingly been making investments outside the US to take advantage of booming real estate markets abroad. It owns an interest in approximately 50 European shopping centers in France, Italy and Poland, six premium outlet centers in Japan, and one premium outlet center each in South Korea and Mexico. The company also has seven international development projects under construction: three in Italy and four in China. International expansion has also helped the company to hedge its risks against downturns in US real estate markets, as shown in the graph above.
New expansion plans:
Last month the company announced its plan to expand and enhance the Woodbury Common Premium Outlets with an investment of $170 million. Woodbury Common Premium Outlets is one of the most productive shopping destinations in the world with average sales in excess of $1,550/foot and annual sales exceeding $1.3 billion.
The most recent investment of the company is in the McArthurGlen Group. The company announced a joint venture with McArthurGlen, through which the company will invest $565 million in the European designer outlet operator. The company will gain a stake in six of McArthurGlen's properties and become a partner in the British company's property management and development business. The investment includes properties in Austria, Italy, the Netherlands, the United Kingdom and Canada.
The company has a strong portfolio and is somewhat shielded from cyclical effects by its larger tenants, which have long-term contracts of 5 to 10+ years. This is the reason you can see an increasing trend in revenues and profit margins despite the slowdown in the US economy. The company is also hedging its risks by expanding its operations in the international market as well. I believe the company will continue to offer an attractive total-return profile, given its strong cash flows and potential for above-average dividend growth over the next several years. Real estate fundamentals remain strong and are improving across all property sectors, locally as well as internationally, driven by modest improvement in demand, very little new supply and REITs' continued access to low-cost capital. I recommend for investors to invest in this stock.