![]() ![]() ![]() I know there are all sorts of headlines about supply chain issues. My money is on the latter, but let us examine the earnings outlook. If SPG is not particularly risky, that leaves two potential reasons why it might trade at such a low FFO multiple: Weak/declining earnings or mispricing. Well, if we examine credit default swap pricing, we can see that SPG’s CDS measured risk spiked up during the initial COVID lockdown because nobody knew what would happen to malls but has since come back down and now sits quite tight with investment grade consumer discretionary.īasically, SPG’s debt investors are showing SPG as having risk commensurate of a company with a fairly strong balance sheet. One should note, however, that SPG’s common market price declines largely occurred since January of 2022, so perhaps something happened recently that made it suddenly much riskier. The 3.8% debt is a bit higher because it has a maturity date in 2050.Įven in the post-COVID world, SPG has been able to issue debt via its subsidiaries at very favorable terms with the latest issuance in January of 2022 with a 2.65% coupon and 10-year maturity. Shown below is their senior debt with coupons ranging from 1.91% to 3.8%. SPG has consistently been able to issue debt at very low coupons and long maturities. Credit default swap movement since issuance.SPG debt investors do not seem to see abnormal risk. Equity investors have a wide range of factors to focus on whereas debt investors have fixed upside and are thereby laser focused on the risk. When a company is in trouble it will often be reflected in debt pricing before equity pricing. Mismatch between debt pricing and equity pricing Overall, I view the multiple as far too low relative to the fundamental strength and see significant upside. Balance sheet and debt pricing imply lower than normal risk, and the retail environment is generally stable to good. In fact, I see significant growth to FFO per share due to a series of fundamental tailwinds creating a highly favorable leasing environment which is allowing SPG to significantly improve occupancy and start to ratchet up lease rates. In analyzing the fundamentals, however, I don’t see either of those in the base case scenario. The Buy ThesisĪt 8X forward FFO and 9.2X forward AFFO compared to a REIT average of about 15X and 17X, respectively, SPG is priced for either declining earnings or extreme risk. It has gotten unreasonably cheap and I see it as a great buying opportunity. Simon Property Group ( NYSE: SPG) has fallen substantially more than the market in the 2022 downdraft and yet its fundamentals have outperformed.
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