Simon Property Group offers growth and income

A healthy earnings growth prospect warrants the REIT's premium valuation.

By Nov 21, 2012 10:33AM

Photodisc PhotolibraryBy Zacks Equity Research


Simon Property Group Inc. (SPG) reported impressive third quarter results late last month, which included a raised funds from operations guidance for the full year that sent earnings estimates higher.

With a year-to-date return of 16.7% and a dividend yield of 3.0%, this retail REIT (real estate investment trust) promises to be a solid pick for investors seeking both growth and income. Earnings for this Zacks #2 Rank ("buy") are presently expected to grow 13.8% in 2012 and 6.7% in 2013.


On October 25, Simon Property Group reported a jump of 14.3% in third-quarter revenues to $1.2 billion. Comparable sales in the regional malls and premium outlet centers increased 9.3% to $562 per square foot. Average rent per square foot in the combined portfolio increased 3.8% during the quarter to $40.33.


Funds from operations came in at $1.99 per share, surpassing the Zacks consensus estimate by 7 cents or 3.7%. This also compared favorably with year-ago funds from operations of $1.71 per share. Occupancy in the combined portfolio remained relatively high at 94.6%.


Outlook raised

With solid quarterly results, Simon Property Group increased its funds from operations guidance for 2012 to between $7.80 and $7.85 per share from its earlier projection of $7.60 – $7.70 per share.


The past 30 days have seen a number of upward revisions for 2012 and 2013. The Zacks Consensus Estimate for this year is up 1.2% to $7.84 per share as 12 of 17 estimates moved higher. For 2013, the Zacks Consensus Estimate is $8.37, which is up nearly 1% in 30 days as half of the 18 estimates moved upward.


Simon Property Group paid a dividend of $1.10 per share in the third quarter of 2012, which marked a 22.2% increase over the year-ago quarter. The current dividend payment affirms a yield of 3.0%.


Premium valuation

Simon Property Group's valuation metrics are at a premium on a price-to-earnings and price-to-sales basis. Shares are currently trading at a forward price-to-earnings ratio of 18.74 versus the peer group average of 18.21. On a price-to-sales basis, shares are trading at 9.66 versus 7.49 for the peer group average. A healthy earnings growth prospect warrants the premium valuation of the company.


Since April 21, 2011, Simon Property shares have consistently outperformed the S&P 500 index. The year-to-date return for the stock is noteworthy at 16.7% compared to an S&P 500 tally of 6.5%.


With a favorable supply/demand relationship, rising earnings estimates, robust growth projections and a healthy dividend yield, Simon Property offers an enticing upside potential going forward. In addition, a continued focus on some of the premium markets in major metropolitan areas bode well for its long-term growth.


Headquartered in Indianapolis, Indiana, Simon Property is the largest publicly traded retail real estate company in North America, engaged in acquiring, owning and leasing a diverse portfolio of shopping malls. The company currently owns or has ownership interests in 333 properties spanning 242 million square feet of gross leaseable space in North America, Europe, and Asia. The company presently has a market cap of $45.5 billion.


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