Shares of retail real estate investment trust (REIT),
Simon Property Group
), rose 2.2% during Friday's regular trading session on the NYSE
following the disclosure of its plan to spin off the strip center
business and smaller enclosed malls into a publicly traded REIT.
The move will help Simon Property to increase focus on the larger
retail properties, namely malls, mills and premium outlets.
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Currently referred to as "SpinCo", this new unit will initially
enjoy an ownership or will have stake in 54 strip centers and 44
malls. These malls reap annual net operating income of $10
million or less. The properties span 53 million square feet in
total and are located across 23 U.S. states. Moreover, these
assets enjoy considerable occupancy levels (as of Sep 30, 2013,
occupancy of SpinCo's strip centers and malls were 94.2% and
The move is a win-win situation for both Simon Property and
SpinCo. Simon Property can increase utilization of resources for
growing its global portfolio of larger malls, mills and premium
outlets. With the economy showing signs of recovery, spending of
the richer consumers is improving and the company seems to
leverage on this trend.
The spin-off would lead to a rise in Simon Property's sales per
square foot, net operating income (NOI) growth as well as
occupancy. Moreover, the company's current annualized dividend of
$4.80 per share will be maintained and thereafter will likely
grow in tandem with growth in funds from operations (FFO) and
For SpinCo, the move will help to unleash the potential of strip
centers and malls that will be owned by it. In fact, this
spin-off unit will also likely benefit from its diversified
portfolios, flexible balance sheet and significant scale.
Along with a low leveraged balance sheet, SpinCo will expectedly
gain from its relationship with Simon Property and could utilize
the managerial expertise of the latter in its board as well.
Simon property's President and Chief Operating Officer, Richard
Sokolov, will serve as Chairman of SpinCo while Chairman and
Chief Executive Officer of Simon Property, David Simon, will be
the director of the spun off unit.
Notably, significant investments in SpinCo's assets have already
been made in recent times to attract and expand key anchor
Wal-Mart Stores Inc.
Bed Bath & Beyond Inc.
Ulta Salon, Cosmetics & Fragrance, Inc.
) among others. Further, a pipeline of around $300 million of
future development and redevelopment projects has been
In the initial year, SpinCo's FFO is projected to be around $300
million or 80 cents per share while dividend is estimated to be
no less than 50 cents per share, which is around 100% of its
estimated taxable income.
When and How
The filing of the initial Form 10 information statement with SEC
is expected to be made before the year-end, while the disclosure
regarding the SpinCo executive management team is expected to
come up in first-quarter 2014. Finally, the transaction is
targeted to be accomplished in the second quarter of 2014.
The spin-off would take place by a distribution of SpinCo common
shares/limited partnership units through a pro-rata special
distribution to Simon Property shareholders/Simon Property
Group's limited partnership unit holders.
At present, Simon Property carries a Zacks Rank #3 (Hold).
FFO, a widely accepted and reported measure of the
performance of REITs is derived by adding depreciation,
amortization and other non-cash expenses to net income.