Company Reports

The REIT sector in the US offers many companies that should see relatively stable cashflow growth over the next several years. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years with many reaching historical levels of net operating income growth, the REIT sector underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that is due to the sector’s negative correlation with interest rates, as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. Still, we still view many of companies in the US REIT sector as being undervalued as the companies should continue to produce solid long-term growth.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Despite a rally over the past two months, we still view the US REIT sector as being undervalued. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors led combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years, with many reaching historical levels of net operating income growth, the REIT sector has underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that the cause has been due to the sector's negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. We believe that US REITs will continue to see share price movements that are inverse of interest rate movements.

Simon Property Group reported second-quarter results that were relatively in line with our estimates, leading us to reaffirm our $156 fair value estimate for the no-moat company. Occupancy improved 10 basis points sequentially to 95.6%, above our estimate of 95.0% for the quarter. Minimum rent improved 3.0%, better than our estimate of 2.0% minimum rent growth, and North America property net operating income increased 5.2%, better than our estimate of 4.2% NOI growth. While income from retail investments was only $6.5 million in the quarter, that is relatively in line with our $12 million estimate and is significantly better than the $83 million loss reported in the first quarter. Simon reported funds from operations of $2.90 per share in the second quarter, slightly below our $2.97 estimate and just 0.9% above the $2.88 figure the company reported in the second quarter of 2023.

The US REIT sector remains significantly undervalued, in our perspective. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past two years, with many REITs reaching historical levels of net operating income growth, the sector has underperformed the broader equity markets over the past two years. We believe that the cause has been the sector’s negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, we don’t believe that higher rates significantly change our fair value estimates for the sector. Additionally, interest rates are down from the October 2023 highs, and REIT share prices have generally inversely followed the movements of the US 10-year Treasury.

First-quarter results for Simon Property Group were mixed compared with our estimates, though we didn't see anything that would materially change our $156 fair value estimate for the no-moat company. Occupancy declined 30 basis points sequentially to 95.5%, though the first quarter typically sees a modest decline, and the reported figure was smaller than our estimate of an 80-basis-point drop. Minimum rents improved 3.0% year over year, better than our estimate of 2.0% higher rents. Simon reported same-store net operating income growth of 3.7%, relatively in line with our estimate. However, it reported an $83 million loss on NOI from other retail investments, below our estimate of a $12 million profit, though we will note that the loss includes one-time charges of $18.9 million related to Sparc Group and a $14.3 million charge related to the JCPenney investment. Simon reported funds from operations of $3.56 per share in the first quarter. However, that figure includes a gain on sale of $303.9 million, or $0.81 per share, related to the company selling its remaining share in Authentic Brands Group. Excluding that gain, FFO was only a penny better than the $2.74 figure the company reported in the first quarter of 2023 and $0.16 below our $2.91 estimate due to the retail investment losses and charges in the quarter.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Simon Property Group’s fourth-quarter results beat our estimates, giving us confidence in our $151 fair value estimate for the no-moat company. Occupancy sequentially increased 60 basis points to 95.8%, slightly better than our estimate of a 40-basis-point sequential gain. Minimum rents increased 3.1% year over year, also slightly better than our estimate of 2.0% growth. Simon reported same-store net operating income growth of 7.3% for the fourth quarter, which beat our estimate of 3.1% growth. The company reported funds from operations, or FFO, of $3.69 per share in the quarter, well above our estimate of $3.29. However, Simon reported a $117.4 million gain on the sale of a partial ownership interest in the Authentic Brands Group investment, resulting in a one-time gain of $0.31 per share. Excluding that one-time gain, Simon would have reported $3.38 per share, which is still slightly better than our estimate.

Simon Property Group reported third-quarter results that were slightly better than we anticipated, giving us confidence in our $151 fair value estimate for the no-moat company. Occupancy improved 50 basis points sequentially to 95.2%, better than our estimate of a 10 basis-point improvement. Minimum rent increased 2.9% year over year, better than our estimate of 2.0% growth. As a result, same-store net operating income grew 4.2% in the third quarter. The company's NOI from retail investments produced $46.0 million in the third quarter, which is down from the $87.5 million figure the company's investments produced in the third quarter of 2022 but is relatively in line with the $50.2 million NOI produced in the second quarter of 2023. Simon reported funds from operations of $3.20 per share, which is above the $2.93 figure the company reported in the third quarter of 2022 and above our $2.98 estimate for the quarter. However, Simon also reported a noncash gain on sale of $118.1 million in the quarter, which increased FFO by $0.32 per share. Removing the one-time gain, third-quarter FFO was slightly below both 2022 and our estimate for the quarter.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Second-quarter results for no-moat Simon Property Group were mixed compared with our estimates, though we didn't see anything in the quarter that would materially change our $150 fair value estimate. Occupancy improved 30 basis points sequentially to 94.7%, relatively in line with our 94.6% estimate, and was up 80 basis points year over year. Minimum rent grew 3.1% year over year, better than our estimate of 2.0% growth, and led to same-store net operating income growth of 3.7% that beat our estimate of 2.4% same-store NOI growth for the second quarter. The company's retail investments only produced NOI of $50.2 million in the second quarter, which is down from the $116.5 million the company reported in the second quarter of 2022 but up significantly from the $54.6 million loss the company reported in the first quarter of 2023. As a result of lower retail income, Simon reported comparable funds from operations of $2.88 per share that was $0.05 lower than our $2.93 estimate, $0.03 lower than the second quarter of 2022, but $0.14 better than the first quarter of 2023.

Simon Property Group reported mixed first-quarter results compared with our estimates, though we don’t see anything in the quarter that would change our $150 fair value estimate for the no-moat company. Occupancy declined 50 basis points sequentially due to typical mall seasonality but was up 110 basis points year over year. Minimum rent grew 3.1% year over year, leading to portfolio net operating income growth of 3.9% that was in line with our estimate. However, Simon’s various retail investments produced a $54.6 million NOI loss in the first quarter, which marks the first quarter where Simon has lost money on its investments over the past several years. While the loss is larger than we forecast, management says that its retail investments face significant seasonality and that a first-quarter loss was already accounted for in management’s 2023 guidance. Simon reported comparable funds from operations, or FFO, of $2.74 per share, which was below our estimate of $2.95 due to lower retail investment income in the quarter.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Fourth-quarter results for Simon Property Group were slightly better than we anticipated, which gives us confidence in our $154 fair value estimate for the no-moat company. Occupancy improved 40 basis points sequentially and 150 basis points year over year to 94.9%, which is only 40 basis points below the 95.3% occupancy figure the company reported in the fourth quarter of 2019. Minimum rent grew 2.3% year over year in the fourth quarter. As a result, portfolio net operating income, or NOI, grew 6.3% in the fourth quarter, which was slightly better than our estimate of 4.5% growth. While total company NOI fell 1.7%, it includes less lease termination income, which is a sign that the portfolio’s tenants are healthier today compared with a year ago, and less retail investment income, though the $125 million reported this quarter was in line with our expectations. Simon reported comparable funds from operations, or FFO, of $3.15 per share in the fourth quarter, which is nine cents higher than our $3.06 estimate and four cents higher than the $3.11 figure reported in the fourth quarter of 2021.

Simon Property Group, the largest mall real estate investment trust, manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon's portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

Simon Property Group reported third-quarter results that were in line with our expectations, leading us to reaffirm our $160 fair value estimate for the no-moat company. Occupancy improved 60 basis points sequentially, ahead of our estimate of flat growth, and 170 basis points year over year to 94.5%. Minimum rent paid per square foot increased 1.7% year over year, leading to same-store net operating income growth of 2.3% in the third quarter. While Simon's NOI from retail investments fell to $87.5 million from $140.4 million in the third quarter of 2021, this quarter's result was in line with our estimate of $85 million retail NOI. As a result, total NOI for Simon fell 0.3% year over year, in line with our estimate. The company reported comparable funds from operations of $2.97 per share in the third quarter, a penny better than our estimate and 5 cents better than the $2.92 figure reported in the third quarter of 2021.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Second-quarter results for no-moat Simon Property Group were in line with our expectations, leading us to reaffirm our $160 fair value estimate. Occupancy improved 60 basis points sequentially to 93.9%, ahead of our estimate of 92.9% occupancy in the quarter. Domestic property same-store net operating income grew 3.6% year over year, better than our estimate of 2.5%, and total portfolio NOI, which includes international properties, grew an even higher 4.6%. However, total NOI fell 1.9% as the company recorded less income from its retailer investments and a lower level of lease termination income compared with a year ago. While the $116.5 million in NOI the company recorded in retailer investments is lower than the $195.8 million in the second quarter of 2021, we view it as a positive, given that it has rebounded from just $47.4 million in the first quarter of 2022. Simon reported comparable funds from operations of $2.96 per share in the second quarter, relatively in line with our $2.93 estimate and the $2.92 figure the company recorded in the second quarter of 2021 after removing a $0.32 noncash gain related to a deferred tax liability reversal.