Do you remember watching all the real estate infomercials in the 1990s? Some slick guy telling you he will teach you his secrets to making millions in real estate. I never fell for it, but some of my friends did succumb. If people ask me what kind of real estate I invest in, then the answer is pretty easy. I rely on real estate investment trusts (REITs) to diversify my dividend portfolio. This week I am taking a look at Simon Property Group (SPG) to see if they deserve a spot in my real estate empire.
Company Overview
Simon Property Group primarily invests in malls and shopping centers around the United States. Here is a partial overview from Wikipedia:
…engaged in the ownership, development and management of high-quality retail real estate, primarily regional malls, Premium Outlet Centers and community/lifestyle centers. Through its subsidiary partnership, it owns or has an interest in at least 380 properties in the United States comprising more than 258 million square feet of gross leasable area in 39 states, plus Puerto Rico. Simon Property Group also holds interests in 52 European shopping centers in France, Italy and Poland; five Premium Outlet Centers in Japan; one Premium Outlet Center in South Korea and one Premium Outlet Center in Mexico. It currently has ownership interests in some of the most high-profile shopping malls in the world…
Dividend History
Looking back over the dividend history, it is clear SPG started out slowly. The company began increasing dividends in 2001 and they have continued to ramp up. Between 2006 and 2007, the dividend growth rate was 10.6%. Rising from $3.04 to $3.36. This is the kind of dividend growth I want in my portfolio.
5-Year Performance
If you had invested in SPG 5 years ago, then you may think yourself a savvy investor. The stock price has grown 224% from $27.27 to $88.23 at the close today. The dividend has increased 53% from $2.20 to $3.36. The yield on cost on those original shares would net you 12.3% today.
10-Year Performance
If you had invested in SPG 10 years ago, then the results are still pretty darn good. The stock price has grown 387% from $18.12 to $88.23 at the close today. The dividend has increased 66% from $2.02 to $3.36. The yield on cost on those original shares would net you 18.5% today.
The Future
Simon Group is down from its 52 week high of $123.96 due to merger activity it undertook in early 2007, the real estate hysteria of 2007, and a write down of $26 million. The write down was a joint development with Toll Brothers. This is the only joint development between the two companies. Despite the share price decline, the company sits at a premium with a price-to-earnings of 37.
The good news for Simon Group is that it has been able to grow steadily over the past ten years. The dividend growth rate has been excellent over the past five years. They are aggressively going after acquisition targets and the company is expanding its portfolio to international markets. SPG has three projects under construction in Italy and four in China. I like where this company is headed. If they were an infomercial, then I would be getting out my wallet right now.
Disclosure: None.
Stocks used in this article:
(SPG: 72.64, -7.81%, Yield: 4.49%)
December 28th, 2007 at 6:37 pm
is the current dividend yield low compared to the past 10 years?
December 28th, 2007 at 7:02 pm
Yes, the yield has declined over the years as the dividend has increased, but the share price has shot up. The yield has been hovering around 4% for the last four years.
December 28th, 2007 at 7:46 pm
Jake-
You need to do a bit more homework on REITs, my friend. You make a few comments which give readers the impression that REITs are new to you. For example, you mentioned the P/E of the company when the appropriate metrics for comparison are P/FFO or P/AFFO. Reported earnings rarely tell you much about a REIT’s cheapness/richness. And if you want even more extreme property company “valuations” (p/e-based) check out some REOCs. Depreciation hides a lot of value creation on assets which actually appreciate in value over the years.
And a $26mm mark-down charge on a company this big really isn’t anything to write home about. The market value of this stock swings about $500mm on any given day absent any SPG-specific news.
This is a great company that appears to be trading cheap relative to its historic FFO valuation (vs current interest rates) and it trades at a reasonable discount to its (Green Street) NAV estimate (private market comps.)
Regards-
et (long SPG)
December 28th, 2007 at 8:14 pm
Thanks for your comments, et. You make a great point, I overlooked the fact I was comparing earnings instead of FFO. For those that don’t know, FFO is a better measure for REITS because it takes earnings and adds depreciation and amortization. This gives a better overview of the actual cash flow.
I will have to take issue with the $26mm. This did affect their earnings which was my point why the stock has declined. It affected FFO by around 11 cents.
December 29th, 2007 at 6:45 pm
prior to the real estate bubble in recent years, the yield was much higher. if the bursting of the bubble continues, spg price could continue tumbing until the yield is much higher.
December 29th, 2007 at 7:04 pm
It is still not clear to me that the real estate bubble extended to commercial real estate. SPG builds malls and shopping centers, then leases out the storefronts. I just don’t think the housing market will affect this market, but others will probably disagree.
Nevertheless, you are correct that the price could fall which is why I believe in dollar cost averaging into my investments over several years. For instance, I started buying Entertainment Properties Trust (EPR) in 2000 and I have continued to purchase about the same amount every month.
December 31st, 2007 at 7:22 pm
this blog may be read by people who are not prepared for the risk of losing 30%. “dividend investing” may mislead them into a false sense of security, but get shocked by massive losses. spg yields below treasury yields is no margin of safety
January 1st, 2008 at 9:28 am
if the economy goes into recession, consumer spending will drop. Retailers will make less money and Mall owner will have to lower the rents or push the retailers out of business. lower rents will result in lower income and lower valuations for REITs.
In the last Fortune magazine, one fund manager put the chance of recession at “north of 70%” as do many people who’s opinion I value, like chuck butler of everbank and bill gross of pimco.
January 1st, 2008 at 10:38 am
buffet,
I thought it was understood that I am an amateur and these are my opinions. Trying to hold me responsible for someone else’s decisions seems unfair. Anytime you invest in the stock market you stand to lose 100%. Each person must decide if they can tolerate that risk and hold themselves accountable for their decisions.
January 1st, 2008 at 10:41 am
Thanks for your comments, LOD. I realize there is a possibility for a recession. I find it hard to believe it will happen during a year where we will have a Presidential election.
As far as SPG, I think their focus on the global market and their high-quality holdings will ultimately sustain them. I don’t believe in dumping all your money in at once anyway. I utilize dollar cost averaging over several years in all my positions.