Simon Property (SPG) operates as a retail property REIT in the U.S. financial sector. Besides owning shopping malls in America, it also has properties in Europe and Asia. The company announced strong second quarter earnings on July 24, 2012. Furthermore, SPG has improved its guidance for 2012 for the second time this year. Much of the company's growth potential is associated with the diverse geographical footprint that it maintains, and aggressively pursues. With this factor in mind, along with an attractive and sustainable dividend yield of 2.6%, we give the stock a buy rating.
Despite a stubbornly low interest rate environment, combined with high unemployment, and above all, a weak U.S. retail environment, the company surprised analysts with higher sales at its malls and outlet centers, as well as higher rents. The company was able to earn a bottom line of $0.71 on revenues of $1.19b. Revenues exceeded consensus analyst estimates by 3%, while EPS slightly missed estimates. The company's reported Funds from Operations (FFO) remained 4.4% above expectations.
SPG 2Q2012 Results
An increase in revenues for the second quarter was largely driven by a 15% surge in minimum rent and a 43% increase in overage rent, compared with the same quarter last year. The company also reported an increase of 16% YoY in its operating expenses; this surge was largely associated to a 6.5% increase in property operating, and a 20% increase in depreciation.
The company, during the second quarter, improved its operational efficiency, which is visible from the improvement in its occupancy and sales per square foot figures. During the second quarter, occupancy in company-owned malls increased 60bps over the last year to reach 94.2%. Sales per square foot increased by 10%, as compared to the previous year, to reach $554.
Solid Cash Flow Growth and Dividend Hike
The company posted Funds from Operations (FFO) of $688.8 million, or $1.89 per share, for the second quarter, against $583 million from the previous year; signaling an increase of 18%. The management announced a 5% sequential hike in its next quarter's shareholder distributions, with the resulting figure being $1.05 per share.
The current dividend coverage ratio for Simon Property comes out to be 1.8 times, meaning the company has sufficient ability to not only sustain this shareholder distribution, but also increase it in the coming quarters. The company has a history of dividend hikes. Since SPG has the ability to increase its dividends, as represented by its dividend coverage ratio, investors should expect further hikes.
SPG's management is actively pursuing overseas expansion. The company has, and is, growing its presence outside the U.S., particularly in Europe and Asia. It has invested $2 billion and bought a 28% stake in a European shopping center. With regards to its presence in Brazil, SPG has entered into a venture to develop three outlets. Also, construction continues in the company's Japanese and Korean upscale outlets.
Looking at the company's growth prospects, management has raised its guidance for 2012. With elevated Funds from Operations (FFO) of $7.6-$7.7 per diluted share, the company expects to earn $4.34 -$4.44 per share. "The primary factors contributing to this (forecast) are the strong operational performance and the impact of our recent investment activity," said CEO and Chairman David Simon. Consensus analyst estimates for its year-end Fund from Operations are $7.63 per share, while for earnings the estimates are $7.75.
The stock, which has seen a 23% price appreciation since the beginning of the year, is trading at a significant premium of 400%, with regards to its book value multiple, when compared to its major competitor, General Growth Properties (GGP).
In conclusion, after incorporating the year-end consensus FFO estimates, the dividend coverage ratio comes out to be 1.82 times, slightly more than its current dividend coverage ratio. The company's ability to pay dividends has increased, which means investors can expect a dividend hike in the coming quarters. SPG is benefiting from its geographical footprint as well, which is reflected in its growth prospects. Therefore, we recommend our investors to go long the stock, and enjoy both the stock's attractive dividend yield and growth prospects.