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Simon Real Estate Group (New York Stock Exchange: SPG) is one of the best managed REITs in the public markets today. These days, with markets as volatile as they have been, it’s important for investors to focus on quality.

As you can see in the chart below, SPG shares were particularly hard hit during the selloff we saw.

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Shares are down almost 35% since November. Year-to-date, stocks are down 30%, with the broader REIT sector (VNQ) as well as the broader market (SPY) down 15%.

The broader market selling pressures have certainly been attributed to SPG’s performance, but some of that is also tied to the earnings results we’re seeing in the broader retail sector. Earnings calls for Walmart (WMT), Target (TGT) and many other names all cited increased pressures from inflation, transportation costs and labor costs.

As an owner, these things don’t necessarily have the same impact on SPG. Although the landlord wants to see his tenants perform well, but remember that SPG is all about collecting a rent check.

During times of high inflation, REITs have proven to be a sound investment for investors because they are not capital-intensive businesses that need raw materials or stocks that have risen in price.

Groupe Immobilier Simon in a class of its own

SPG owns or has an interest in 232 properties representing 186 million square feet in North America, Asia and Europe. The company also has an 80% stake in The Taubman Realty Group, or TRG, which owns 24 regional, super-regional and outlet malls in the United States and Asia. In addition, as of March 31, 2022, SPG held a 22.4% stake in Klépierre (OTCPK: KLPEF), a Paris-listed real estate company, which owns shopping centers in 14 European countries.

https://investors.simon.com/static-files/4ce019b8-fd79-4c41-a11e-8cbd7cad6323

GSP Q1-22 Supplementary

The company continues to expand internationally as it currently has two new international development projects under construction in Japan and France. The construction in Japan is for the Premium Outlets, which is expected to open in the fall of 2022. The France property is a Designer Outlet center, of which SPG owns 74%, is expected to be completed and open in the first quarter of 2023.

Simon Property Group is by far the largest shopping center REIT in its sector. Over the years, we’ve had a lot of negative attention surrounding malls and store closures, so one might legitimately wonder if investing in a mall REIT is a wise investment.

That’s a great question, but SPG is unlike any other mall owner. Most of the malls you’ve seen struggle to fill space or close their doors are lower class malls. Shopping centers get a class rating based on their sales per square foot.

Here is an overview of the ranking of shopping centers published each year by Korpacz Realty Advisors.

https://www.korpaczra.com/wp-content/uploads/2020/05/Korpacz-Mall-Classification-Results-2020.pdf

KORPACZ REAL ESTATE ADVISORS

Those numbers predated the pandemic, so they’ve come down, but even with higher numbers, SPG still maintains a Class A portfolio with sales per square foot of $734. This puts them on the edge of an A+ portfolio.

Even during a pandemic, SPG has rebounded and is seeing strong demand in its portfolio.

In the first quarter, the company reported sales of $1.3 billion, an increase of 4.5%. FFO for the quarter was $2.48 per share, a 12.1% year-over-year increase.

Occupancy for the March 31, 2022 quarter was 93.3% compared to 90.8% for the same period in 2021. The NOI continues to climb, with the company earning an NOI of $1.3 billion for the overall portfolio, an increase of 8.8% over the previous year.

Simon’s board declared a quarterly common stock dividend of $1.70 this month, an increase of 21.4%. The dividend will be payable on June 30, 2022 to shareholders of record on June 9, 2022.

Management reiterated its 2022 guidance that it expects FFO to be between $11.60 and $11.75 per share. Based on the current share price, this equates to a forward P/FFO of 9.6x. Over the past five years, SPG has traded closer to a P/FFO of 13.7x, suggesting the stock is significantly undervalued relative to recent history.

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FAST charts

Key takeaway for investors

SPG remains a high-quality REIT that continues to perform well and grow its presence, regardless of the short-term pressures we see on the stock. They continue to maintain a strong portfolio of new and redeveloped properties, also adding more mixed-use components.

As I mentioned earlier, the company is led by a strong management team, with David Simon at the helm. He stamped his mark on the company and maintained a strong balance sheet. SPG has an A-rated (A-/A3) balance sheet, earning a low cost of capital that gives it a major advantage in the REIT sector.

Along with a growing business that is expanding, you also get a dividend that is currently paying 6.23% after the recent dividend hike of 21.4%. Since the dividend cut in the second quarter of 2020, management has increased the dividend by almost 31% in two years.

At iREIT, we value SPG shares at “STRONG BUY.”