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Spgstock9/9/2023 Recall that redevelopment projects involve redeveloping space previously leased out to tenants like Sears at low rents and re-leasing the space to new tenants like Dick’s Sporting Goods at much higher rents. That definition allowed the company to include redevelopment projects, which naturally had high leasing spreads. The Opening Rate is the initial cash Rent PSF for spaces leased during the trailing 12-month period, and includes new leases, renewals, amendments and relocations (including expansions and downsizings) Then in 2019, the company changed the definition as follows: That definition made the most intuitive sense. The Open / Close Spread is a measure that compares opening and closing rates on all spaces, including spaces greater than 10,000 square feet except for mall anchors, mall majors, mall freestanding and mall outlots. SPG has had a history of changing their definition of leasing spread over the years. In general, the leasing spread shows the difference between expiring rents and new rents on signed leases. “Leasing spread” has historically been an important financial metric in the retail REIT industry. There is a saying that when a company changes the definition for a financial metric, investors must pay attention as it may be hiding weakness in the underlying business. Yet I make the case that the stock remains deceivingly risky here, and I highlight the ever-changing definitions of a key financial metric. I will later discuss why this guidance should give investors some pause, considering the mall REIT business model.Īt recent prices, the stock is trading at 12x FFO, with the prospects for continued growth due to boosts in occupancy rates. Looking forward, SPG guided for FFO of $11.70 per share at the high end, which is assuming comparable NOI growth of up to 2%. Occupancy increased to 93.4%, an arguably healthy level as the company comes out of the pandemic. SPG recorded $11.94 in FFO per share, up substantially from $9.11 per share in 2020 but still down from $12.37 per share in 2019. Net operating income grew 31.5% year over year: SPG closed out 2021 with solid earnings results, based both on the easy 2020 comparables and also based on 2019 pre-pandemic results. The stock has fallen 15% since I rated the stock a sell, and I am changing my rating to “hold” primarily based on the long-term time span of my bearish view. While SPG has recovered strongly from pandemic lows both from a fundamental and stock price perspective, the stock still remains lower than where it traded a decade prior. I rate shares with an avoid rating as I expect the stock to underperform the broader market over the long term. I also discuss the potential implications for the company outright removing a financial metric which it had disclosed every quarter for many years. Yet my long term view of class A malls suggests that financial struggles may be on the horizon, even if they are not necessarily evident today. Is it time to buy the stock? There are plenty of reasons to be optimistic in the near term, including low-hanging fruit from increasing occupancy, and potential near-term catalysts such as restoring the dividend to pre-pandemic levels. I am referring not only to the stock price, but also to the underlying fundamentals. Simon Property Group ( NYSE: SPG) has rebounded from the pandemic.
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