On May 17, we downgraded our long-term recommendation on the
retail real estate investment trust,
Simon Property Group Inc.
), to Neutral from Outperform. The recommendation was lowered to
reflect the gradual fall in consumer spending leading to pressure
on revenue growth in the near term.
Why the Downgrade?
Though Simon Property beat the Zacks Consensus Estimate on
revenues and FFO (funds from operations) in the first quarter of
2013, we anticipate the current unsettled economic environment to
remain a cause of concern in the near term. At such times
consumers become cautious and their spending decreases. This
affects the sales volume of retailers, which in turn, weighs upon
rent increment. Moreover, tenant bankruptcy increases leading to
a fall in occupancy.
Further, Simon Property's significant development pipeline
increases the operational risks in the current unsettled market,
exposing the company to rising construction costs, entitlement
delays, and lease-up risks. In addition, excess retail space in a
number of its markets and the rise in consumer purchases through
catalogs and the Internet could hurt the demand for its
However, Simon Property's geographic and product diversity
provides a significant competitive edge. Also, the company has a
strong balance sheet with adequate liquidity. Yet we
believe that these positives have already been factored at the
Nevertheless, Simon Property's first-quarter 2013 FFO beat the
Zacks Consensus Estimate by an average surprise of 1.99%. The
results were primarily driven by an increase in overage revenues
and occupancy. Additionally, rise in tenant sales per square foot
was the other highlights.
Moreover, following the release of first-quarter results, the
Zacks Consensus Estimate for 2013 marginally moved up (by 0.3%)
to $8.61 per share. The Zacks Consensus Estimate for 2014 has,
however, nudged up nearly 0.9% to $9.33 per share. The stock now
has a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Better performing REITs include
Equity One Inc
Kite Realty Group Trust
), all of which carry a Zacks Rank #2 (Buy).
Note: 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.
EQUITY ONE INC (EQY): Free Stock Analysis
KITE REALTY GRP (KRG): Free Stock Analysis
MACERICH CO (MAC): Free Stock Analysis Report
SIMON PROPERTY (SPG): Free Stock Analysis
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