February 02, 2015 Simon Property Group Inc. (SPG-NYSE) Analyst Note NEUTRAL Current Recommendation Prior Recommendation Underperform Date of Last Change 09/11/2014 Current Price (01/30/15) $198.66 Target Price $209.00 SUMMARY Simon Property s fourth-quarter 2014 comparable FFO per share came in line with the Zacks Consensus Estimate. Results were aided by growth in comparable net operating income ( NOI ) as well as occupancy rates. The company also raised its quarterly dividend by $0.10 sequentially. Further, with the economy showing signs of recovery, spending power of richer consumers is improving and the company seems to leverage this trend. It has undertaken prudent initiatives like re-launching its brand and adopting several marketing programs, which are expected to drive more traffic at its malls and aid its top line. Yet, a large development pipeline increases the company s operational risk while anticipation of interest rate hikes in the medium-tolong term remains a concern for its financing costs. SUMMARY DATA 52-Week High $205.16 52-Week Low $150.62 One-Year Return (%) 30.92 Beta 0.70 Average Daily Volume (sh) 1,479,944 Shares Outstanding (mil) 311 Market Capitalization ($mil) $61,783 Short Interest Ratio (days) 3.63 Institutional Ownership (%) 96 Insider Ownership (%) 8 Annual Cash Dividend $5.60 Dividend Yield (%) 2.82 5-Yr. Historical Growth Rates Sales (%) 8.0 Earnings Per Share (%) 12.8 Dividend (%) 18.8 P/FFO using TTM FFO/Share 22.3 P/FFO using 2015 Estimate 20.5 P/FFO using 2016 Estimate 18.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Reit-Eqty Trust Zacks Industry Rank * 81 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 1,215 A 1,085 A 1,147 A 1,251 A 4,698 A 2014 1,315 A 1,182 A 1,235 A 1,297 A 5,029 A 2015 1,196 E 1,217 E 1,297 E 1,414 E 5,124 E 2016 5,654 E Funds From Operations (FFO) Per Share (FFO is operating earnings before non-recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $2.05 A $2.11 A $2.21 A $2.20 A $8.57 A 2014 $2.38 A $2.16 A $1.90 A $2.47 A $8.91 A 2015 $2.27 E $2.36 E $2.48 E $2.58 E $9.69 E 2016 $10.66 E Projected FFO/share growth - Next 5 Years % 7 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS Simon Property Posts In-Line Q4 FFO, Hikes Dividend Jan 30, 2015 Simon Property reported fourth-quarter 2014 comparable FFO of $2.47 per share and it came in line with the Zacks Consensus Estimate. The bottom line comfortably beat the prior-year quarter figure of $2.20 per share. The comparable FFO figures are arrived at after adjusting the loss on extinguishment of debt, and spinoff transaction expenses and adjustment related to WPG properties. The year-over-year improvement in quarterly FFO per share was primarily driven by growth in comparable net operating income ( NOI ) as well as occupancy rates. Total revenue in the quarter increased 3.7% year over year to $1.30 billion. However, it missed the Zacks Consensus Estimate of $1.35 billion. Quarter in Detail For the U.S. Malls and Premium Outlets portfolio, occupancy rose 100 basis points (bps) year over year to 97.1% at the end of the fourth quarter. Total sales per square feet moved up 6.4% to $619. Encouragingly, base minimum rent per square feet rose 11% year over year to $47.01 and releasing spread decreased 20 bps to 16.6%. Premium Outlets Montreal was opened during the quarter, where Simon Property owns 50% interest. Also, Simon Property started construction on projects at Phipps Plaza. This apart, construction activities are going on at projects including Roosevelt Field Mall, Del Amo Fashion Center, King of Prussia Mall, Woodbury Common Premium Outlets, Las Vegas North Premium Outlets, Livermore Premium Outlets and Chicago Premium Outlets. At the end of the fourth quarter, Simon Property had redevelopment and expansion projects in progress at 27 assets across the U.S. and Asia. Moreover, construction activities are going on at three premium outlets which are scheduled to open in 2015. Further in Jan 2015, Simon Property acquired two properties for an aggregate price of $1.09 billion. Simon Property exited fourth-quarter 2014 with cash and cash equivalents of $612 million, as compared to $818 million at the end of third-quarter 2014. 2015 Outlook Simon Property expects 2015 FFO per share in the range of $9.60 $9.70. Dividend Update Concurrent with its earnings release, Simon Property declared a quarterly dividend of $1.40 per share. Marking a 7.7% sequential and 12% year over increase, the latest dividend will be paid on Feb 27, 2015 to shareholders of record as of Feb 13. Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income. Equity Research SPG Page 2
VALUATION Shares of Simon Property currently trade at 20.5x the Zacks Consensus Estimate for 2015 FFO per share, which is at a 13.9% premium to the industry average. On a price-to-book basis, the shares trade at 9.9x, reflecting a significant premium to the industry average of 3.1x. Our 6-month target price of $209.00 equates to 21.6x the Zacks Consensus Estimate for 2015 FFO per share. Combined with a quarterly dividend of $1.40 per share, this price target implies an expected total return of 6.6% over that period. This is consistent with our Neutral recommendation on the shares. Also, Simon Property currently carries a Zacks Rank #3 (Hold). Key Indicators P/FFO F1 F2 Est. 5-Yr FFO Gr% P/CF 5-Yr High 5-Yr Low Simon Property Group Inc. (SPG) 20.5 18.6 7.0 24.3 22.3 21.9 11.9 Industry Average 18.0 16.9 5.5 18.7 20.0 23.3 11.6 S&P 500 16.1 15.1 10.7 16.1 18.6 19.4 12.0 General Growth Properties, Inc (GGP) 22.4 19.0 9.3 25.0 23.3 22.3 6.6 Brixmor Property Group Inc. (BRX) 13.8 13.1 6.6 13.9 15.1 13.7 12.2 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Simon Property Group Inc. (SPG) 9.9 9.9 4.0 23.9 3.6 2.9 22.4 Industry Average 3.1 3.1 3.1 14.6 1.9 4.1 19.7 S&P 500 5.1 9.8 3.2 24.8 NA 2.0 NA Equity Research SPG Page 3
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research SPG Page 4
OVERVIEW Headquartered in Indianapolis, IN, Simon Property Group Inc. is a leading publicly traded retail real estate company in the U.S., which is engaged in acquiring, owning and leasing a diverse portfolio of shopping malls. The company s real estate platforms in the U.S. consist of Malls, Premium Outlets, The Mills and other properties. Moreover, the company has ownership interests in properties outside the U.S. These properties are mainly owned through joint venture (JV) arrangements. As of Sep 30, 2014, Simon Property owned or had interests in 228 properties 112 malls, 68 Premium Outlets, 13 Mills and 15 other shopping centers or outlet centers positioned across 37 states and Puerto Rico. Moreover, the company has a global reach and as of the same date, it had ownership stake in 9 Premium Outlets in Japan, 3 Premium Outlets in South Korea, 1 Premium Outlet in Canada, 1 Premium Outlet in Mexico and 1 Premium Outlet in Malaysia. Additionally, the company had 28.9% interest in Klépierre, a publicly traded French real estate company that owns or has interest in shopping centers in 13 countries of Europe. REASONS TO BUY Simon Property enjoys a diversified exposure to retail assets across the U.S. Also, the company s international presence fosters more sustainable long-term growth as compared with its domestically focused peers. The company s ownership stake in Klépierre facilitates the expansion of its global footprint and offers access to premium retail assets in the high barrier-to-entry markets of Europe. We believe that diversification, with respect to both product and geography largely insulates Simon Property from market volatility and helps it to consistently post a decent performance. In order to strengthen its relationship with customers, Simon Property has been undertaking various initiatives lately. Accordingly, the company re-launched its brand and marketing programs. With the application of the Omni-channel strategy becoming increasingly popular among retailers, the company is initiating new programs and events for upgrading services and amenities provided to specific customers. In recent months, Simon Property has also partnered with other companies so as to provide enhanced facilities to its customers. These initiatives are expected to draw traffic at the company s properties, going forward. The company has been active in restructuring its portfolio and is aiming at accomplishing premium acquisitions and redevelopments, going forward. Despite the near-term negative impact of the spinoff, we believe that the move is likely to benefit Simon Property in the long term as the company can now increase utilization of resources for expanding its global portfolio of larger malls, mills and premium outlets. Subsequently, the company can effectively leverage the improving spending habits of wealthier customers, with the economy showing signs of recovery. Releasing spreads remained positive in the U.S. Malls and Premium Outlets as the company was able to lease the available space at higher rents than the expiring rental rates on the same space. Specifically, as of Sep 30, 2014, releasing spread came at $9.67 per square feet, reflecting a 17.3% hike over expiring payments. Encouragingly, as of the same date, ending occupancy for the U.S. Malls and Premium Outlets was 96.9%, up 60 basis points (bps) year over year. Finally, Simon Property remained focused on increasing its shareholders value through quarterly dividend hikes. Earlier this year, the company raised its quarterly dividend by 4%. A steady dividend payout facilitates the long-term strategy of the company to provide attractive risk-adjusted returns to stockholders. Such moves boost investors confidence in the stock. Equity Research SPG Page 5
REASONS TO SELL The anticipated rise in interest rate in the medium-to-long term remains a concern for Simon Property as this would restrict its ability to refinance existing debt while increasing the interest cost on new debt. This could adversely affect the company s financial results and consequently dent its dividend payout. Apart from competing with other retail properties, Simon Property faces competition from alternative types of retail such as catalogs and e-commerce websites. Notably, increasing consumer purchases through the Internet has emerged as a pressing concern for retail REITs. While the company is striving to counter such pressure through various initiatives, we believe that the implementation of such measures require a decent upfront cost and therefore, would limit any robust growth in its profit margins in the near term. Simon Property is dependent on the market s general economic conditions such as the level of consumer spending, seasonality, willingness of retailers to rent space in its shopping centers, tenant bankruptcies, economic downturn and consumer confidence. In the recent times, the closures and bankruptcies of tenants have been a cause of concern for Simon Property. Also, the company operates internationally and is thus exposed to currency fluctuation risks. Simon Property has an active redevelopment and expansion pipeline, comprising high-end projects, both on the national and international levels. This increases operational risks, exposing the company to rising construction costs, entitlement delays and lease-up risks. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SPG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1117 companies covered: Outperform - 15.8%, Neutral - 77.2%, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research SPG Page 6
Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. 11C Kalyan Nandy Moumita C. Chattopadhyay Sanjoy De NA Moumita C. Chattopadhyay Equity Research SPG Page 7