This is a quick valuation of Simon Property (SPG). It’s the first REIT I looked at.
Stock Performance
$18 billion in market value. In 2008, Simon distributed $852 million in dividends.
What It Does
From 2008 AR:
“Simon Property Group, Inc. [..] own, develop, and manage retail real estate properties in five retail real estate platforms: regional malls, Premium Outlet Centers®, The Mills®, community/lifestyle centers, and international properties. As of December 31, 2008, we owned or held an interest in 324 income producing properties in the United States, which consisted of 164 regional malls, 70 community/lifestyle centers, 16 additional regional malls and four additional community centers acquired as a result of the 2007 acquisition of The Mills Corporation, or the Mills acquisition, 40 Premium Outlet Centers, 16 The Mills, and 14 other shopping centers or outlet centers in 41 states plus Puerto Rico. [..] We also own interests in four parcels of land held in the United States for future development. In the United States, we have one new property currently under development aggregating approximately 400,000 square feet which will open during 2009. Internationally, we have ownership interests in 52 European shopping centers (located in France, Italy, and Poland); seven Premium Outlet Centers located in Japan, one Premium Outlet Center located in Mexico, one Premium Outlet Center located in Korea, and one shopping center located in China. Also, through joint venture arrangements we have ownership interests in the following properties under development internationally: a 24% interest in two shopping centers in Italy, a 40% interest in a Premium Outlet Center in Japan, and a 32.5% interests in three additional shopping centers under construction in China.
We generate the majority of our revenues from leases with retail tenants including: Base minimum rents; Overage and percentage rents based on tenants' sales volume; and Recoveries of substantially all of our recoverable expenditures, which consist of property operating, real estate taxes, repair and maintenance, and advertising and promotional expenditures.”
It’s one of the largest REITs and a Fortune 500.
How It Makes Money
As you can see in the above I/S 2008, it develops and maintains shopping malls and earns rents from retailers.
A further breakdown of revenue source in the U.S. as follows:
Now look at the B/S:
Net investment properties ($19 billion) are almost 100% financed on debt ($18 billion), around $4 billion of which rolls over each year (see C/F statements in the later part).
Funding details as follows:
Weighted average financing cost is about 5.12% in 2008.
There’s additional debt taken by unconsolidated JVs.
The B/S composition leads me to the C/F statements:
You can say that it’s highly leveraged, with a strong operating cash flow.
A Quick Valuation
So here’s the story: Simon develops malls, financing all by mortgage and earning rents on them. The value is generated thru the race between ROA and funding cost (think bank).
The 2008 CF from operations was $1.6 billion after paying $1 billion interest on mortgages. CapEx 2008 was $874 million (see below).
So that in 2008 Simon generated $2.6 billion on invested properties of $19 billion, and ROA was roughly 2.6/19 =14%. Financing cost was a little above 5%. Net return was 14% – 5% = 9%. Not too bad.
An justification of the market value: on $1.6 billion CF from operations in 2008, if assuming 10% required rate of return and 2% growth, we have a P/CF of 12X, which leads to a market value of 1.6*12 = $19.2 billion, or 6% above the current market value of $17.9 billion. Remember that such valuation assumes Simon continues to financing all its properties thru debts.
There’s however risks. First is the financing cost. If mortgage rate increases by 1%, it takes away $200 million or about 12% from cash flow. Could Simon increase rents accordingly? Second, consumer spending, hence retailer income, is still depressed.
Simon’s 10Q of 2Q09 is showing both:
Funding cost was up around 0.5%..
..and rents are deteriorating.
Revenue of 1H09 was flat.
Conclusion
It seems to me that at the current state of economy Simon’s return does not justify the risks.
Alas, Mr. market thinks otherwise. At this moment, it is up 3.65% today.
Whatnots
- REITs seems having a special tax treatment: only paying corporate income taxes after dividends (see link here)
- Insignificant amount of preferred, convertibles on the B/S.
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