Will Simon Property's Efforts Suffice To Battle Retail Blues?

Simon Property Group Inc. (NYSE:SPG) has a diversified exposure to retail assets in the United States and abroad. Further, the company’s efforts to support omni-channel retailing, portfolio-restructuring initiatives and healthy balance sheet augur well for long-term growth.

However, as Simon Property is trying to counter the choppy retail real estate environment through various initiatives, these require upfront costs and thus, it is likely to limit any robust growth in the company's profit margins in the near term. Also, stiff competition from online sales and rise in interest rate pose challenges for the company.

Notably, Simon Property has been active in restructuring its portfolio, and is aimed at premium acquisitions and transformative redevelopments. In fact, at the end of the first quarter, it had redevelopment and expansion projects, including the addition of new anchors, in progress at 28 properties across the United States, Canada and Asia.

In May, Simon Property launched a $4+ billion of investment plan to transform its properties aimed at creating value and drive footfall at the company's properties. The transformational plans included addition of hotels, restaurants and luxury stores.

Also, later in May, Simon Property announced the continuation of its plan to recapture former Sears locations across its portfolio, transforming those into retail, fitness, dining and entertainment hubs.

In fact, earlier in April, Simon Property announced the company’s transformational redevelopment plans for the former Sears stores, at five major locations. The properties included in the refurbishment plan were Brea Mall (Brea, CA), Burlington Mall (Burlington, MA), Midland Park Mall (Midland, TX), Ocean County Mall (Toms River, NJ) and Ross Park Mall (Pittsburgh, PA). Enhancements to the properties included entertainment, fitness, restaurants and dining pavilions, residential, as well as new retail brands.

The company has also resorted to micro-retail modeling that offers store units ranging from 20-200 square feet of space. With such a huge pipeline, the company is well poised to effectively leverage the improving spending habits of wealthier customers amid improving economy.

Such initiatives are expected to draw more traffic at the company’s properties.

In addition, Simon Property boasts a strong and improving balance sheet. At the end of first-quarter 2018, the company had more than $7.0 billion of liquidity. This comprised cash on hand, including its share of joint-venture cash, and available capacity under the company’s revolving credit facilities.

Furthermore, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Simon Property remains committed to that. The company has steadily raised its dividend, over the past years, increasing from $3.50 in 2011 to the present annualized rate of $7.80 per share.

Nevertheless, with e-retail taking precedence, retail REITs continue to suffer as mall traffic has taken a beating. In fact, with e-commerce gaining market share from the brick-and-mortar stores, retailers are compelled to reconsider their footprint and eventually opt for store closures, while others unable to cope with competition have been filing bankruptcies.

This tepid environment has also resulted in tenants demanding substantial lease concessions, which, however, mall landlords find unjustified. As such, retail REITs like Simon Property, GGP Inc. (NYSE:GGP) , Kimco Realty Corp. (NYSE:KIM) , Macerich Company (NYSE:MAC) and others have felt the heat, and the companies’ share prices have been suffering for the past 12 months.

Further, though Simon Property is putting in every effort to enhance the value of its assets, implementation of such measures requires a decent upfront cost. This would, therefore, limit any robust growth in its near-term profit margins.

Rise in interest rate remains another concern as this might restrict the company’s ability to refinance existing debt and increase the interest cost on new debt. This, in turn, is feared to negatively impact the company’s financial results and dividend payout.

Shares of this Zacks Rank #3 (Hold) company have outperformed the industry it belongs to in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Simon Property has gained 6.2%, while the industry has rallied 4%. Also, the stock has seen the Zacks Consensus Estimate for 2018 funds from operations per share being revised marginally upward in a month’s time.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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