SPG - Simon Property Group
SUMMARY
The fair value is estimated at $121.67, based on applicable assumptions as of September 1, 2022. Our base case includes moderate growth in the US but no growth in Europe given geopolitical and energy risks. Growth in Asia will be mixed, but since SPG’s exposure is not significant, we assumed a meager growth. See the assumptions below.
We believe that the Retail REIT sector is generally undervalued. Numerous market observations have shown the resiliency of retail, ongoing positive absorption rate, and low rate of construction in the past few years. All these factors support the expectation of rent growth in the coming quarters. The demand for high-quality retail space has remained strong, evidenced by the high occupancy rates of SPG’s properties which are primarily high-quality assets in prime locations.
Our bull case scenario indicates a price of $156.83 per share. This is contingent upon the following two events playing out and in the absence of any other adverse events: 1) the energy crisis in Europe is resolved with no significant damage to the economy; and 2) inflationary forces are curbed with inflation on the right trajectory by Q4-2022.
The share price under our bear case valuation is at $107.99, which is higher than the current share price.
OVERVIEW of SPG REIT:
With a market cap of $34 billion, SPG is the second largest REIT in the Retail REIT property sector of ‘FRSE Nareit All Equity REIT Index’, after Realty Income Corporate (~$41 billion market cap). In the index, SPG is categorized under ‘Regional Malls’. SPG categorizes its properties into three major groups: 1) Malls (both open-air and indoor); 2) Premium Outlets (primarily open-air); and 3) The Mills (located in prime locations in larger metropolitan areas).
SPG is a self-administered and self-managed REIT incorporated in 1960s with IPO in December 1993. It owns properties in the US, Canada, Europe, and Asia. The ownership is direct as well as indirect through joint ventures and ownership of the shares of a publicly traded company (Klépierre- headquartered in Paris, France - ownership of ~24%). Properties owned by the REIT as at Q2-2022 comprised 94 Malls, 69 Premium Malls, 14 Mills, 6 Lifestyle Centers, and 15 other specialty centers. In addition to the ownership of properties, management has invested in retailers by either purchusaing intellectual properties (Eddie Bauer) entitling them to royalties, or purchasing assets of distressed retailers at discount (J.C. Penny).
SPG has years of experience in developing retail properties with approximately $1 billion in land value to be developed over the next decade with a yield of 7 to 10%. This aspect of the business is specifically appealing because of the expected tightness in the supply of retail space.
Simon Property Group, Inc. is the majority owner of Simon Property Group, L.P. with 87.4% interest. All of the operations are conducted through the LP, including the payment of the expenses of the Inc. The results of the LP are consolidated in Inc., which includes the revenues and the disclosures in the notes. As such, in our calculations, we adjusted for the 87.4% ownership of the Inc. since that represents the shareholder’s ownership in the operations.
Retail REIT Property Sector:
As of Aug 2022, there are 31 retail REITs in Nareit’s index, comprising 16 Shopping Centers REITS, three Regional Malls REITs, and 12 Free Standing REITs. The total Retail REIT market capitalization as of Aug 31, 2022, was $170 billion.
Overall, the retail REIT has been slightly under pressure since 2008 due to the accelerated adoption of e-commerce. Around 2016, a number of factors contributed to further pressure on retail. Fears of a financial downturn and competition from e-commerce were among the top contributors. Eventually, COVID shutdowns brought everything to a halt. See the chart below for a comparison between Retail, Residential, Office, and Industrial.
Methodology and Results
The REIT has multiple investments: 1) investment in US properties that are consolidated with either 100% ownership or majority ownership with control (“US Consolidated Properties”); 2) 80% investment in TRG, a real estate company that owns properties mostly in Asia; 3) investment in Klepierre, a French publicly traded company; 4) Other investments which include ownership in retailers and intellectual properties. For US Consolidated Properties, we used two methods for valuation: a) NOI for the next four quarters using a cap rate of 7% which we believe is more representative of current circumstances (the latest published cap rate is an average of 4.8%, but we believe this is unrealistic since it does not incorporate the recent rate hikes and expectations for more); and b) Discounted cash flow modeled in Argus, using a discount rate of 8.5% and the terminal cap rate of 6.5%. See the files attached for detailed assumptions.
For assets 2, 3, and 4 mentioned above, we used direct capitalization method (TRG), market comparison of public companies (Klepierre), and dividend discount model (other investments), respectively.
Land is valued at $1 billion as per management’s estimate. Cash is taken as the amount disclosed on 10Q.
Debt and preferred shares are incorporated in the calculation.
Accounts receivable, accounts payable, other assets and liabilities offset each other, or they are accounting-driven values (not cash-basis).
See image below for assumptions for cap rates and discount rates.We used the information in 10K and 10Q to reconstruct the portfolio in Argus. In doing so, we created dummy tenants whose specifications corresponded with the lease expires indicated in the SEC filings. We employed the same methodology for debt.
Argus export reports for asset valuation:
