Simon Property Group, Inc. is a US$63b large-cap, real estate investment trust (REIT) based in Indianapolis, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of SPG is unique and it has to adhere to different requirements compared to other non-REIT stocks. In this commentary, I’ll take you through some of the things I look at when assessing SPG.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of SPG’s daily operations. For SPG, its FFO of US$3.8b makes up 81% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether SPG has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take SPG to pay off its debt using its income from its main business activities, and gives us an insight into SPG’s ability to service its borrowings. With a ratio of 16%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take SPG 6.21 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times SPG’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 4.6x, it’s safe to say SPG is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at SPG’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. SPG’s price-to-FFO is 16.88x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Simon Property Group can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- Future Outlook: What are well-informed industry analysts predicting for SPG’s future growth? Take a look at our free research report of analyst consensus for SPG’s outlook.
- Valuation: What is SPG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SPG is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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