Simon Property Group Stock: This Price Is Just Plain Silly (NYSE:SPG)

It’s easy to find high quality bargains when the entire market is down, but not so much when the market rallies, as it has been doing for the past few weeks. However, I’ve always believed that it’s a market for stocks rather than the stock market, and that value can be had in bull and bear markets alike.

This brings me to Simon Property Group (NYSE:SPG), which still trades well below its 52-week highs on negative investor sentiment. In this article, I highlight what makes SPG a high-yielding buy at present, so let’s get started.

Why SPG?

Simon Property Group is an S&P 100 company and is the largest retail-focused REIT in the U.S. It owns over 200 properties, about half of which are primarily Class A U.S. Malls with the rest comprising of Premium Outlets and International/Mills/Lifestyle Centers. In addition, SPG owns an 80% interest in Taubman, which carries a premier portfolio of malls and outlet centers across the U.S.

SPG continues to demonstrate solid results, with domestic property NOI increasing by 3.6% YoY and total portfolio NOI rising by 4.6% YoY during the second quarter. When we look at the entire first half, domestic property NOI increased by 5.6% and portfolio NOI rose by 6.7%, despite tumultuous economic events such as the war in Ukraine, soaring inflation, and rising interest rates.

Also encouraging, occupancy was 93.9% during the second quarter, up 210 basis points from 91.8% in the prior year period, and tenant sales per square foot reached another record, at $746 per square foot for malls and outlets combined. SPG is also becoming a more efficient enterprise, as occupancy costs represented just 12.1% of rental revenue during the second quarter, the lowest level in 7 years.

Some may think of SPG as being a stodgy mall operator that’s primarily geared towards clothing stores that are subject to threats from e-commerce. However that’s simply not the case as it has a meaningful exposure to the more e-commerce resistant outlet centers.

Moreover it opened 33 non-traditional specialty tenant spaces last year, and is working on opening another 40 this year, and its targeting mixed-use retail as well, which includes luxury hotels, restaurants, medical centers, and corporate offices, where customers can literally work, live, and play.

In addition, SPG has so far found success in leveraging its position as a leading landlord to become a brand investor. This is reflected by SPG’s SPARC investment with Authentic Brands now being worth over $1 billion. While e-commerce remains a long-term threat, I believe a more nuanced omnichannel strategy is a more realistic one for retailers, especially those seeking a foothold in high quality destinations that SPG possesses. This is reflected by very strong tenant demand for SPG’s location and by Morningstar, as noted in its recent analyst report:

While we believe that online sales will continue to grow at a significant spread over brick and mortar, we also believe physical retail sales growth will still be positive over the next decade. Retailers are becoming more selective with their physical locations, opting to locate storefronts in the highest-quality assets that Simon owns while closing stores in lower-quality malls. Additionally, many e-tailers are beginning to open stores in Class A malls to take advantage of the high foot traffic, as a physical presence provides additional marketing, a showroom for products they want to highlight, and another source of sales.

Meanwhile, SPG is just one of a handful of REITs to have an A- rated balance sheet. It also recently raised its quarterly dividend by $0.05 to $1.75, representing a 16.7% increase from last year. The dividend is well-protected by a 60% payout ratio based on management’s FFO per share guidance of $11.70 to $11.77 for the full year.

Lastly, SPG trades rather cheaply at the current price of $112.84 with a forward P/FFO of 9.6, sitting well below its normal P/FFO of 14.9x. Sell side analysts have a consensus Buy rating with an average price target of $126.50, translating to a potential one-year 18% total return including dividends. Total returns could be even greater should SPG return anywhere close to the aforementioned normal valuation.

Investor Takeaway

While some investors may be concerned about the retail sector in general, I believe Simon Property Group is a high-quality REIT that’s well-positioned to weather current storms. It has a strong focus on high-end and outlet retail, two of the more e-commerce resistant retail subsectors.

In addition, it’s becoming more efficient, and is finding ways to grow its top line by becoming a brand investor, as well as by increasing exposure to mixed-use retail. I believe that SPG’s current valuation more than adequately compensates investors for the risks involved, and looks attractive for potentially strong total returns.