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Buy Simon Property Group, Better Potential Return And Less Downside Risk Than Most Triple Net Lease REIT

Hampstead Investor profile picture
Hampstead Investor


  • Property forms a large component of my investment allocation at about 20%.
  • In a rising rate environment, I have slightly reduced this allocation but also switch towards REITs with lower sensitivity to interest rates.
  • I focus on REITs that have lower distribution ratio and can generate higher internal growth.
  • SPG is high quality, delivers 5-6% internal growth and has just increased its dividend. I see a total return of over 11%without any external growth.


This article will not cover SPG in details. Rather it explains the rationale to switch out of high distribution triple-lease REIT that relies on external growth towards names like SPG (NYSE:NYSE:SPG) or even fallen angels. We estimate this strategy will provide better return and less downside risk.

In this article, we compare the total return of a buy and hold investor.

SPG can deliver 11% total return (without external growth) and has a downside risk of about 15% if rate rise by 1% (1.4 years of returns).

In comparison, Realty Income (NYSE:O) can only deliver a 7-8% return (without external growth) and has a much greater downside risk of about 30% if rate rise by 1% (4.5 years of returns).

What are the components of total return in a REIT

For a buy and hold investor, the total return is the future dividend stream.

The key drivers are the dividend, dividend coverage, and the potential growth. Seeing the total return as being the dividend plus the dividend growth is a good rule of thumb.

The sustainability of the dividend growth matters a lot. This article will compare the sustainability of the dividend growth of SPG vs. Realty Income which both offer similar dividend yield.

How Sustainable is the dividend growth: SPG vs. Realty Income

Realty Income: limited potential dividend growth from external acquisition

Triple-net lease REITs rely on external acquisition to deliver 50-70% of their dividend growth. At their current dividend yield, external acquisition are barely or no longer accretive.

Dividend growth, for a name like Realty Income, will fall toward the 2 - 2.5% range which can be generated organically. This will reduce the potential total return to the 7 - 8% range (dividend yield plus 2-2.5% growth) from the 10% range (dividend yield plus 5% growth). Some elements

This article was written by

Hampstead Investor profile picture
Extensive management and investment experience in fixed income capital markets and energy sector

Analyst’s Disclosure: I am/we are long SPG, CBL, KLPEF, HMSNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (17)

Actionable Conclusion profile picture
Does entry price have any bearing on the equation?

For me, I simply look for what has been on my radar, and what has been beaten down most in price.

I saw mention of O/VTR/SPG.

Of those three, VTR is the only one remotely close to its 5yr low. I posit that the seasoned REIT investor is ignoring the noise, and picking up VTR at multi year lows.

I did just that. I will do the same if SPG does the same.

There are many REITs in many sectors, some worthy of investment. Patiently wait for the prices to come to you. Just one mans approach...

PS. Sometimes low entry price can be deceiving... CBL and WPG come to mind. Yield can be deceiving too. Avoid the high cost o capital, low quality properties, bad locations, and poor mgt too... regardless of the cost or yield.
Other Side Of Trade profile picture
So, CBL is less risky than O. Oh.
Hampstead Investor profile picture
Dum-Dum, for a large allocation I find Simon much safer than o. Speculatively, I buy cbl. O, with it's deep / enthusiastic is risky I this type of environment
Hampstead Investor profile picture
jraskib, tks. i don't know much about srg but a 10 bagger in a reit which is not particularly distressed sounds like a tiny probability or even plain silly.... with reit, you should be happy with 7 - 8 type return, recent price fall open the possibility to get a few points more

as to cbl, almost everybody hates it, it trades cheaply on a nav basis so i write puts from time to time for tiny amount
HI: thanks for the article. SPG looks very good! But you have also CBL! How come? Isn't it doomed?
One more question: any thoughts on SRG? Buffet bought SRG, and also there was an article in Barron's that in about10 years SRG woud be 10x bagger, although it might have some problems meanwhile, if (or when) SHLD goes BK. But eventual result would be same 10x!
Hampstead Investor profile picture
Hi Robert, Hammerson is a large REIT allocation for me and they seem to continue to deliver on targets/plan. as a positive they are small enough to be an acquisition target as well. I agree it is very difficult to compare European and US Reit. European Reit debt is assessed against Net Asset Value done on a quarterly basis compared to historical cost (1 element of higher implied leverage), the 2nd aspect is that European REIT tend to have asset in large/relatively more expensive city meaning that the NAV is made of more land (vs. building) which does not depreciate and thus should have a lower FFO yield (maybe you have example as well in the US : a REIT focussed on Manhattan and SanF Francisco will have a much lower FFO yield than Realty Income that buys many plots in new subarban development where land and planning permission are cheap)
They will get bigger with Intu. I don't think they would be acquisition target then. Good point - land vs. building, but unfortunately I can't "materialize" (count with) it, but it makes sense. I was quite surprised when I saw quite weak rental income relative to asset value - this may be the reason.
Hampstead Investor profile picture
Robert, as a heads-up, Hammerson just confirms an approach by Klepierre at 615p per share. So potential to get a nice premium in the 630/640 post negotitiation I would think.
Oh yes!, I just read the news - I wondered why "my" Klepierre is down -3%. I luckily bought a half of intended Hammerson position before dividend. I wonder if Klepierre will go higher with their offer.
Hi HI :-), thanks for the article. I can see you are long HMSNF, how do you assess the stock at current prices? I have been looking at 2017 annual report and it seem to me, regardless of (or should I rather say thanks to) the market sentiment, that we are are approaching interesting entry price (would like to see it under 420GBp, but we are so close already ...).

And second question: I am always quite confused when comparing EU vs US REITs. For example: SPG long term debt to asset around 0.76 - much higher than most European REITs. Interest rates: much higher, yet FFO, payout ratio looking better. Could you say something about that?
I’m looking to buy SPG, O and VTR, good buys at these levels? I understand rates may push these lower but is a lot of the rate news already baked in?
Hampstead Investor profile picture
Boston987, I just bought SPG at those levels which I find attractive on a long-term basis.
I dislike realty income in this rates environment, I think the inability to grow dividend meaningfully can put the stock price under great pressure (see the article!)
I don't follow VTR, if you don't have access to investment banking research, maybe the guys at Hoya Capital have written something on it.
Thanks for the info, I like SPG quite a bit and will do some additional research on the others.
SPG superior to O
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