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Simon's Yield Above 5%: Safe Income Or Value Trap?

Apr. 14, 2018 11:49 PM ETSimon Property Group, Inc. (SPG)36 Comments


  • Simon Property Group's share price continues to fall, and the yield is now above 5%.
  • This article reviews the business, the negative market narratives (i.e. rising interest rates, increasing online shopping), the financial realities, Simon's valuation, and the M&A environment.
  • We conclude with our views on how to "play" Simon Property Group in the current market environment.

Retail REITs have significantly underperformed the rest of the market as rising interest rate fears and growing Internet competition weigh heavily on brick-and-mortar retail properties. This article reviews the current state of one retail REIT in particular, Simon Property Group (NYSE:SPG), and then concludes with our views on whether it’s safe to add shares of this depressed high-yielder (+5%) or if it’s just a dangerous value trap to be avoided.

The Business:

Simon owns, manages and develops retail real estate. It’s a member of the S&P 100, and its current market cap is approximately $54 billion. It’s organized as a real estate investment trust (“REIT”), and it generates the majority of its operating income (79.9%) from premium outlet malls, with the remainder from “The Mills” (11.1%) and international (9.0%).

The Narrative:

Simon’s share price has significantly underperformed the market (as shown in the following chart) due in large part to two very negative narratives.

For starters, because Simon is a REIT, it must pay out 90% of its income as dividends for tax reasons, and this means it relies on borrowing to fund growth. The problem is that the cost of borrowing has been rising, and it is expected to keep rising, as interest rates are on an upward trajectory. This higher cost of borrowing has thoroughly spooked a lot of investors as they’ve been shunning REITs like Simon, in favor of other less interest-rate-sensitive market sectors. And in particular, the fed’s minutes released this week showed discussions of a “slightly steeper” rate of future rate hikes, thereby causing SPG to sell-off ever further in recent days.

Secondly, there is a frightening narrative that Internet retailers (such as Amazon (NASDAQ:AMZN)) are going to put all brick-and-mortal retailers our of businesses. And this narrative has been powerful as Amazon’s business continues

This article was written by

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Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Analyst’s Disclosure: I am/we are short SPG Puts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. 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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