The Trend Still Appears to be a Friend of Simon Property Group

Mall traffic is predicted to grow, which may be a long-term tailwind for SPG stock 

Shares of Simon Property Group (NYSE:SPG) fell as much as 7% after the company delivered fourth-quarter earnings after the closing bell on February 7. And as has been the case with many equities this earnings season, investors are punishing the real estate investment trust for what was considered soft guidance.  

That’s the only reason I can see for investor reaction. The report itself was good. On key metric funds from operation (FFO), the company reported $3.09 per share well above analysts’ expectations for $2.90 per share.  

However, it is likely to be the last quarter of “easy comps” for the company. At least initially, investors seem to believe that the future will not be as strong for Simon Property Group. For example, occupancy rates while rising to 93.4% (which beat expectations for 92.9%) are still below pre-pandemic levels.  

However, there’s another sentiment that this is just another example of a pattern where the company will under promise but overdeliver. If that’s the case then SPG stock may be trading at a discount.  

Of course, the truth may be somewhere in-between. And before you decide to take a position in SPG stock, let’s look at the bigger picture.  

A Case of Mistaken Identity  

Looking at message boards, it’s not difficult to find bearish sentiment about the future of malls. However, according to the CBRE Group, foot traffic in the mall sector is above pre-pandemic levels. And stores are reporting double-digit sales growth. 

That certainly is not what you might expect when you hear about the rash of “smash-and-grab" incidents taking place across the country. And I’m sure that depending on where you live, a real estate investment trust (REIT) that is heavily invested in shopping malls and commercial property may look like a difficult bet.  

But we’re not one to argue with data. And, in this case, it sets up a bullish picture for SPG stock. 

Besides, Simon Property Group has become more than malls. The company started buying some distressed assets. Specifically, the company purchased a significant stake in J.C. Penney after the latter filed for bankruptcy in 2020. And through its joint venture, SPARC, Simon has licensing ventures in Forever 21, Lucky Brand, and Brooks Brothers.  

Plus, the company has investments in two other ventures ABG and Rue Gilt Groupe (RGG). And the important story for investors is that all of these additional platform investments are reporting positive net operating income (NOI). 

What About That Dividend? 

REITs are obligated to return a significant percentage of their earnings to shareholders. Simon has typically done this in the form of a dividend. However, after the dividend went down substantially in 2020 for understandable reasons, the company has not raised it to 2019 levels. This is despite the fact that the company’s free cash flow is now back to 2019 levels.  

For its part, the company points out that it increased its dividend substantially in 2021. And the current dividend increase is being issued out of an abundance of caution.  

SPG Stock is a Long-Term Play 

There was a lot of caution on the company’s earnings call. And I can understand why. I’m also a believer that, in many cases, when management is telling you something you’d do well to listen.  

I’m not reflexively a fan of real estate investment trusts (REITs). But I am a fan of best-in-class REITs. And that’s what you get with Simon Property Group. This is why I believe that it’s okay to buy SPG stock for the long term. With that said, it’s hard not to believe that SPG stock is fairly priced at the moment.