In an improving leasing environment in the retail real estate industry, Simon Property Group’s (SPG Quick QuoteSPG - Free Report) portfolio of premium assets in the United States and abroad, the adoption of omnichannel retailing and balance sheet strength position it well for growth. This retail REIT behemoth enjoys wide exposure to retail assets across the United States. Additionally, its presence in international markets is likely to encourage sustainable long-term growth compared with its domestically focused peers.

Simon Property’s adoption of an omnichannel strategy and successful tie-ups with premium retailers have paid off well. Its online retail platform, coupled with an omnichannel strategy, is likely to be accretive to its long-term growth. It is also focused on helping digital brands enhance their brick-and-mortar presence.

Further, SPG’s efforts to explore the mixed-use development option, which has gained immense popularity in recent years, have enabled it to tap growth opportunities in areas where people prefer to live, work, play, stay and shop. Going forward, an improving leasing environment is likely to benefit this retail REIT’s properties at premium locations. We expect the company’s 2024 total revenues to increase 3.2% on a year-over-year basis.

In the first quarter of 2024, it signed 259 new leases and 611 renewal leases (excluding mall anchors and majors, new development, redevelopment and leases with terms of one year or less) with a fixed minimum rent across its U.S. Malls and Premium Outlets portfolio. This comprised roughly 3.6 million square feet, of which 2.8 million square feet were related to consolidated properties.

Given the favorable retail real estate environment, this leasing momentum is expected to continue in the upcoming quarters. As of Mar 31, 2024, the ending occupancy for the U.S. Malls and Premium Outlets portfolio came in at 95.5%, up 110 basis points from 94.4% as of Mar 31, 2023. We project the 2024 year-end occupancy for this portfolio to be 95.7%.

To enhance its portfolio, Simon Property has been focusing on premium acquisitions and transformative redevelopments and has invested billions in transforming its properties. Moreover, the company capitalized on buying recognized retail brands in bankruptcy. With the brands generating a decent amount from digital sales, investments in them seem strategic for SPG.

Simon Property is making efforts to bolster its financial flexibility. This enabled the company to exit the first quarter of 2024 with $11.2 billion of liquidity. As of Mar 31, 2024, Simon Property’s total secured debt to total assets was 17%, while the fixed-charge coverage ratio was 4.3, ahead of the required level.

Moreover, the company enjoys a corporate investment-grade credit rating of A- (stable outlook) from Standard and Poor's and a senior unsecured rating of A3 (stable outlook) from Moody’s. With solid balance sheet strength and available capital resources, it remains well-poised to tide over any mayhem and bank on growth opportunities.

Solid dividend payouts are the biggest enticements for REIT investors, and Simon Property is committed to boosting shareholder wealth. Concurrent with the first-quarter 2024 earnings release, the company increased the dividend payment to $2.00 per share from $1.95 paid out earlier. This marked a hike of 2.6% from the prior dividend payment and a year-over-year increase of 8.1%.

This retail REIT has increased its dividend 11 times in the last five years. Given the company’s solid operating platform, opportunities for growth and decent financial position compared with the industry, this dividend rate is expected to be sustainable over the long run.

Shares of this Zacks Rank #3 (Hold) company have risen 2.7% in the past six months against its industry’s decline of 5.4%. Analysts seem bullish on SPG, with the Zacks Consensus Estimate for 2024 funds from operations (FFO) per share being revised upward over the past week to $12.73.

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With the pandemic's impact waning, mall traffic has rebounded significantly. However, given the convenience of online shopping, it is likely to continue to be a popular choice among customers. Consequently, this is likely to adversely impact the market share for brick-and-mortar stores and affect retail REITs, including Simon Property.

A high interest rate environment is a concern for Simon Property. Elevated rates imply high borrowing costs for the company, which will affect its ability to purchase or develop real estate.

The company has a substantial debt burden, and its share of total debt as of Mar 31, 2024 was approximately $31.74 billion. For 2024, our estimate implies a year-over-year rise of 4.5% in the company’s interest expenses. Moreover, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.

Stocks to Consider

Some better-ranked stocks from the retail REIT sector are Kite Realty Group Trust (KRG Quick QuoteKRG - Free Report) and Acadia Realty Trust (AKR Quick QuoteAKR - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for KRG’s 2024 funds from operations (FFO) per share has been revised a cent northward over the past two months to $2.05.

The consensus estimate for AKR’s current-year FFO per share has been revised a cent upward over the past two months to $1.28.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.