Pat McKeough responds to many requests from members of his Inner Circle for specific advice on specific investments as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle. This week we had a question from an Inner Circle member on one of the largest real estate investment trusts (REITs) in the United States. Simon Property Group operates shopping malls and community/lifestyle centres which are smaller than typical malls. The REIT operates on three continents and is growing steadily by acquisition and the development of new properties. Pat examines the potential risks and rewards of this aggressive growth strategy. Q: Hello Pat: I would like your opinion on Simon Property Group. Thanks. A: Simon Property Group (symbol SPG on New York; www.simon.com), is a major U.S. real estate investment trust (REIT) that owns, develops and manages malls, premium outlets and community/lifestyle centres. Simon owns or has interests in 325 retail properties in North America, Europe and Asia with over 241 million square feet of leasable area. The trust’s malls typically contain at least one department store as an anchor tenant or a combination of department and big box retailers with a variety of smaller stores connecting them. Additional stores are usually located along the perimeter of the parking area. The premium outlets generally contain a variety of designer and outlet stores located in open-air shopping centres. They are generally near major cities or tourist destinations. Simon’s community/lifestyle centres are designed to serve neighborhoods. They are unenclosed and smaller than typical malls, with a focus on convenience. Supermarkets, discount retailers or drugstores are usually the anchor tenants.
Major acquisition and joint venture expand Simon’s presence in Europe
Simon continues to grow by acquisition. In March 2012, it paid $2.0 billion for a 28.7% stake in Klepierre SA, a French REIT with 270 shopping centres in 13 countries. This was Simon’s biggest deal since its $2.3-billion purchase of U.S.-based Prime Outlets Acquisition Co. in August 2010. In June 2013, Simon agreed to pay $570 million to form a 50% joint venture with McArthurGlen Group, Europe’s leading owner, developer and manager of designer outlets. Under this deal, Simon will become a 50% partner in McArthurGlen’s property management and development firm. The agreement also includes an interest in six of McArthurGlen’s upscale designer outlets in Austria, Italy, the Netherlands, the U.K. and Canada. Simon expects to spend at least $1 billion in each of the next three years to remodel and expand its malls and develop new ones. So far in 2013, it has opened outlet centres in Phoenix; Tokyo; Toronto; St. Louis; and Busan, South Korea. In the three months ended June 30, 2013, Simon’s revenue rose 4.1%, to $1.24 billion from $1.19 billion a year earlier. Cash flow per unit increased 11.6%, to $2.11 from $1.89. The units yield 3.0%. In the Inner Circle Q&A, Pat looks at the cash flow outlook for Simon Property Group. He also examines the added risk of this REIT’s growth-by-acquisition strategy. He concludes with his clear buy-hold-sell advice on this real estate investment trust. (Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.) COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members If you invest in REITS, do you prefer the ones that specialize in shopping malls, those that focus on office and industrial buildings, or those that hold residential properties? What is the main advantage you get from having REITs in your portfolio?
