I didn't think shares of Simon Property Group (NYSE:SPG) would continue to decline since my previous article, but they did and are now lower by -10.01%. I am certainly surprised as shares of SPG have now declined by -29.05% in 2022 as there haven't been many places to hide during the market decline. Over the past decade, e-Commerce has gone mainstream, and everywhere I look, there is an Amazon (AMZN) Prime truck on the side of the road. The facts are that e-Commerce in the United States only accounted for 15.3% of the retail sales in 2021 and is projected to account for 16.7% in 2022.
SPG owns, develops, and manages mixed-use destinations, which consist of traditional malls, premium outlets, and The Mills. While the perception is that traditional retail is dying, it's an incorrect notion, and SPG's properties are still well in demand. It's too early to call a bottom in the markets or in SPG, but the recent price action looks as if shares are trying to establish a bottom. One of the most important things to think about when it comes to SPG is moats. In many areas, there isn't an overwhelming demand for additional malls or shopping destinations. Malls are capital intensive and, most importantly, take an enormous amount of land and need to be in prime locations. SPG has one of the hardest moats to penetrate and is considered to have the Crème de la Crème of shopping destinations within its portfolio. After comparing SPG to others in the space, it looks inexpensive, and now could be a great time to add shares to an income-producing portfolio.
When looking at SPG's chart, I am stunned. I decided to compare its YTD share decline to the following companies and funds:
YTD SPY has declined by -13.07%, while VNQ is down -12.86%. O, KIM, NNN, and REG have all outperformed these ETFs as their share declines have ranged from -2.6% to -9.22%. What's surprising is that SPG is well below these REITs and ETFs. SPG is the 10th largest holding in VNQ as it represents 2.18% of VNQ's holdings. Shares of SPG look to be oversold by the chart, but just because the chart is ugly, it doesn't mean that SPG is being treated unfairly.
There are three main metrics that I look at when comparing a REIT to its peer group, the share price to Funds From Operations (FFO), the EBITDA to Total Debt ratio, and the FFO coverage ratio on the dividend. Funds from operations or (FFO) represent the actual cash generated from the REIT's operation. It is a widely used ratio for valuation purposes as it has become the primary earning metric in REITs. FFO = Net Income + Depreciation and Amortization + Loss on Sales of Asset - Gain on Sales of Assets + Interest Income. When it comes to REITs, you want to see the FFO coverage ratio rather than going by the EPS.
SPG generates $11.74 in FFO per share, placing its Price to FFO at 9.69x. This is the lowest in its peer group by quite a bit. NNN, KIM, O, REG, and FRT have an FFO range of 14.35x to 19.48x. The average Price to FFO among these 6 REITs is 15.72x. SPG looks to be trading at a steep discount to its peers on this metric.
The EBITDA to total debt ratio when evaluating REITs provides the best way to assess the debt level of REITs. Almost every company taps the debt markets to fund its growth, but not all debt levels are equal. One company could have $10 billion in debt but generates $2 billion in EBITDA, while another has $2 billion in debt but only generates $100 million of EBITDA. Looking at the EBITDA to Total Debt ratio allows an investor to see how many years of EBITDA it would take to eliminate the company's total debt and determine if the debt load is manageable or a liability that makes the company uninvestable.
SPG and the peer group have a fairly tight range on the EBITDA to Total Debt metric ranging from 4.91x to 7.94x. The average EBITDA to Total Debt ratio is 6.61x, and SPG falls just above the average at 6.94x. SPG has the largest debt load with $25.67 billion in total debt, but it also generates the largest amount of EBITDA with $3.7 billion in the TTM. Based on the amount of EBITDA generated and SPG falling just above the group's average, I am not worried about their total debt level.
I am looking at SPG as an income investment with prospects for capital appreciation. My main investment goal is reliable income, so I need to make sure that SPG's FFO provides an adequate dividend coverage ratio. SPG is the largest yielding REIT in the group as its dividend yield is 5.98%. SPG is currently paying out 57.92% of its FFO to shareholders through its quarterly dividend. This is an outstanding payout ratio, especially since the yield is 5.98%. SPG has an FFO coverage ratio of 1.73x, which is the 2nd largest in the group. The group's range is 1.34x to 1.91x, with an average of 1.56x. SPG's coverage ratio is well above the group's average, and there is more than enough FFO generated to pay the current dividend and provide future increases. For an income investor, this is important because you want to invest in companies with a good buffer to mitigate the chances for dividend decreases.
Based on the chart and these metrics, SPG looks oversold. Nothing is standing out as to why shares have slid so unproportionally to their peers. Total revenue grew by 4.51% ($55.9 million) YoY in Q1 2022. FFO also grew by 8.68% ($81.1 million) YoY in Q1. SPG isn't seeing its FFO or revenue decline YoY and is working its way back to pre-pandemic levels in these areas also. This is more validation, in my opinion, that shares have sold off too much.
SPG was an incredible dividend growth stock pre-pandemic. In Q1 of 2012, SPG's quarterly dividend was $0.89 per share. SPG provided shareholders with 20 quarterly increases through Q1 2020 as it paid $2.10 on its quarterly dividend prior to the pandemic shutting down the country. Over an 8-year period, SPG grew its quarterly dividend by 135.96% as it increased by $1.21 per share.
SPG postponed its dividend in Q2 2020 due to uncertainty. Instead of paying a dividend in May as in prior years, SPG paid its Q2 dividend in July at a reduced rate. The quarterly dividend declined by $0.80 per share or -38.1%. Shareholders received $1.30 per share in July when dividends for SPG resumed. After 4 quarterly dividends at $1.30 per share, SPG has provided its 4th quarterly dividend increase since raising its dividend in Q2 2021. Since the dividend was reduced, SPG has grown its quarterly dividend from $1.30 to $1.70 for an increase of $0.40 or 30.77%.
When I look at SPG's dividend history, I am fairly confident that management will do everything it can to restore its dividend to pre-pandemic levels and reward shareholders with a dividend that continues to grow after that occurs. SPG was a strong dividend growth stock, and while the retail sector has been hit hard, SPG has some of the country's best properties in its portfolio while revenue and FFO seem to be growing once again. SPG is now paying $6.80 per share, which is a forward yield of 5.98%. Its dividend is completely secure with an FFO coverage ratio of 1.73x, and there is no reason the quarterly dividend can't get back to $2.10 over the next 2-3 years.
On the Q1 earnings call, management provided strong commentary on the dividend and returning capital to shareholders. SPG announced a 21% YoY increase to its dividend as $1.70 would be paid in Q2 per share. Since SPG went public, it will have paid $37 billion in dividends after the Q2 dividend is paid on June 30th. When you think about income investments, this is exactly what you want to read as $37 billion coming back to shareholders in the form of dividends is special.
The other component of returning capital to shareholders is buybacks. The board of directors has authorized a new common stock repurchase program for up to $2 billion, effective on May 16. SPG indicated that their stock was trading around a 10x FFO multiple during the conference call, which is significantly under the 15x FFO multiple shares have historically traded at. If you go back to my valuation charts, SPG is now trading at a 9.69x multiple for its FFO, so shares have slightly declined since the earnings call, but the peer average was 15.72x. Management stated that SPG's historical level had been around 15x for the FFO multiple, which is in line with the current peer group average. Obviously, they disagree with the current share price and have authorized $2 billion for buybacks. I agree with SPG, and I think shares are undervalued.
I must agree with management that shares are undervalued, and 15x FFO seems like a more appropriate multiple. Shares of SPG have continued to decline, but the chart indicates that a bottom may have been established. While we won't know for sure until some time passes, now looks to be a great opportunity to start a position of dollar cost average as shares are yielding 5.98%. Management is growing the dividend once again and has allocated $2 billion to buybacks. I plan to finally add SPG to my portfolio as it looks to be trading at an incredible value.
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This article was written by
I am focused on growth and dividend income. My personal strategy revolves around setting myself up for an easy retirement by creating a portfolio which focuses on compounding dividend income and growth. Dividends are an intricate part of my strategy as I have structured my portfolio to have monthly dividend income which grows through dividend reinvestment and yearly increases. Feel free to reach out to me on Seeking Alpha or https://dividendincomestreams.substack.com/
Disclosure: I/we have a beneficial long position in the shares of O, SPG either through stock ownership, options, or other derivatives. 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.
Additional disclosure: I put in the disclosure that I own SPG. I did this because I own Realty Income (O) and I can't check off multiple boxes on the disclose. I do not own SPG at the time of writing this article but by the time it publishes there is a very strong possibility I will own shares. If I don't own shares when this is published I plan on being a shareholder of SPG within 72 hours.
Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fit into their portfolio parameters.