Simon Property Group Earnings: Solid Property NOI Growth Offset by Losses From Retail Investments

Simon Property Group SPG reported mixed first-quarter results compared with our estimates, though we don’t see anything in the quarter that would change our $150 fair value estimate for the no-moat company. Occupancy declined 50 basis points sequentially due to typical mall seasonality but was up 110 basis points year over year. Minimum rent grew 3.1% year over year, leading to portfolio net operating income growth of 3.9% that was in line with our estimate. However, Simon’s various retail investments produced a $54.6 million NOI loss in the first quarter, which marks the first quarter where Simon has lost money on its investments over the past several years. While the loss is larger than we forecast, management says that its retail investments face significant seasonality and that a first-quarter loss was already accounted for in management’s 2023 guidance. Simon reported comparable funds from operations, or FFO, of $2.74 per share, which was below our estimate of $2.95 due to lower retail investment income in the quarter.

Despite first-quarter FFO coming in slightly below our estimate, we don’t anticipate making any material changes to our model. Management raised the low end of its 2023 FFO guidance range by 10 cents to a new range of $11.80 to $11.95, suggesting the first quarter was stronger than management had anticipated. The midpoint of management’s new guidance of $11.88, which is slightly above our estimate of $11.84 for 2023, suggests that the remaining three quarters will average $3.05, which is above our estimates for the next three quarters. Therefore, while we may adjust our model to account for lower sales in future first quarters, we will likely offset that reduction with stronger retail sales in the other three quarters. Therefore, we continue to have a positive view on Simon’s retail investments and the future of Simon’s class A mall portfolio.