Simon Property Group Inc. (SPG), a leading real estate investment trust (REIT), reported its fiscal 2010 second quarter fund from operations (FFO) of $1.38 per share, which exceeded the Zacks Consensus Estimate by 4 cents. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
We cover below the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
Total revenues during the reported quarter increased to $933.6 million from $903.6 million in the year-ago period. Total revenues during the reported quarter were well ahead of the Zacks Consensus estimate of $923.0 million.
Occupancy in the regional malls and premium outlet centers combined portfolio was 93.1% at quarter end, compared with 92.3% in the year-ago period. Comparable sales in the combined portfolio increased to $474 per square foot, compared with $456 in the prior-year quarter. Average rent per square foot in the combined portfolio increased marginally to $38.62 from $38.49 in the year-ago period.
Read our full coverage on this earnings report: Simon Property Tops Estimates
Estimate Revisions: Overview
Fiscal earnings estimates have been a mixed bag for Simon Property since the earnings release, meaning that analysts are cautious about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 30 days, fiscal 2010 earnings estimates were raised by 5 analysts out of 20 covering the stock, while 3 have lowered the same. For fiscal 2011, 6 out of the 20 analysts covering the stock have revised their estimates upward, while 8 have lowered the same. This indicates no clear directional movement for the fiscal year earnings.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 have increased 2 cents from $5.37 to $5.39 since the earnings announcement. For fiscal 2011, earnings estimates have decreased by a penny to $6.29. This is discouraging news for the company.
The long-term earnings estimate picture for Simon Property is neutral. Simon Property is the largest publicly traded retail real estate company in North America with assets in almost all retail distribution channels.
Furthermore, the company’s international presence gives it a more sustainable long-term growth story than its domestically focused peers. The geographic and product diversity of the company insulate it from market volatility to a great extent and provides a steady source of income.
However, we are skeptical about the overall retail industry, as the fortunes of retail landlords are largely driven by consumer spending. With the reduction in disposable income and lower consumer discretionary spending due to the challenging macroeconomic environment, the company is under severe stress to maintain profitability.
Currently, we maintain our Neutral rating on Simon Property with a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1-3 months.