While few of those are likely the type of high-quality malls that Simon focuses on, the point is there is limited ability for the firm to grow its U.S. malls (representing over 1 billion square feet of leasable space) could close. In 2017, Credit Suisse estimated that by 2022 about 20% to 25% of U.S. has 24 square feet of retail space per capita, two to 10 times that of other developed countries. In fact, Morningstar observes that the U.S. However, a potentially larger risk is that malls and tenants will continue to emphasize omnichannel shopping (mixing retail and online sales), which could result in physical store locations becoming less important in the future.īuilding new malls is incredibly expensive and time consuming as well, and in the U.S. Fortunately, management expects growth to accelerate in 20 and be among the highest in the industry. While Simon's premium-focused properties have strong enough sales and traffic to eventually allow management to replace weaker tenants with thriving ones, there is a transition period that can result in slower cash flow growth in any given year.įor example, due to having to replace many struggling tenants in 2019, management is guiding for just 2.9% cash flow per share growth this year, or less than half of 2018's impressive rate. If they end up closing stores, then Simon's occupancy rate could temporarily decline as it has to find replacement tenants. However, there are still risks that could still challenge the REIT and result in slower than expected future growth.įor one thing, Simon does have exposure to some struggling retailers, including top tenants The Gap, Abercrombie & Fitch, Ascena Retail, and L Brands. Simon has done an admirable job of adapting to fast-changing industry conditions over the decades. Management appears to have learned from its mistake of running the business with too much leverage during the financial crisis, reducing the risk of another dividend cut whenever the next recession happens. The firm's leverage ratio is the lowest in the industry, helping it achieve an "A" credit rating from Standard & Poor's. Simon's ability to self-fund its growth is supported by its conservative balance sheet. In early 2019 management authorized a new $2 billion share repurchase program (about 4% of SPG's market value), indicating that the firm likely plans to continue self-funding for the foreseeable future. If the REIT's share price gets too low, Simon can buy back some of its stock and thus further boost its cash flow per share growth. Simon's board first authorized share repurchases in 2015. In other words, Simon's growth potential does not hinge on a fickle equity market, and the firm is also one of the few REITs to have a buyback program. That means it's able to fund all its growth with reasonable amounts of low-cost debt and retained cash flow. However, Simon is one of the few REITs with a self-funding business model. Source: Simon Property Group Earnings Presentation The malls the company owns are also reasonably diversified by anchor tenants with Macy’s representing the biggest share of square footage (12.5% of the total). Simon Property Group’s largest tenant (The Gap) accounts for just 3.4% of its total rent for U.S. Specifically, Simon Property Group focuses exclusively on high-end and ultra-premium luxury properties (such as its “Mills properties”), with good diversification across the U.S. The REIT’s historical success has been due to management’s disciplined approach to slow but steady growth. The new spin-off REIT was named Washington Prime Group (WPG), and today Simon derives the vast majority of its profits from higher quality malls. The company spun off its weaker strip centers and smaller enclosed malls, which consisted of about a third of its properties but generated only 10% of its cash flow. In 2014 Simon refocused its portfolio on its top regional malls.
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