Simon Property(SPG) Seeking Alpha·2024-11-14 10:17Fundamental Changes to the Mall Landscape - Malls are regaining popularity, especially among Gen Z, who value face-to-face interaction and view malls as social spaces rather than inconveniences [2][3] - Gen Z's preference for malls is supported by retailers like Shein and Skims, which believe in the mall product and are targeting younger consumers [4] - Occupancy rates at Simon Property Group (SPG) malls increased to 96.2% in Q3 2024, up from 95.2% in Q3 2023, indicating strong demand [4] - Base minimum rent per square foot rose to 56.41 in Q3 2023, reflecting higher demand for premium mall space [4] - Two major changes have improved mall fundamentals: significant reduction in mall space supply through demolition/conversion and increased demand for retail space [5] SPG's Financials, Earnings, and Leasing - SPG signed approximately 1,200 leases for 4 million square feet in Q3 2024, with 3,900 leases signed year-to-date for 15 million square feet, expected to generate over 737 for malls and premium outlets combined, indicating strong tenant performance [6] - Tenant occupancy cost, a measure of lease affordability relative to retailer income, is at a healthy 12.8%, signaling a normalized leasing environment [7] - SPG's net operating income (NOI) has fully recovered to pre-COVID levels, with dividends also rebounding to 12.80 and 12.04 and 10.83 [9] Valuation and Market Position - SPG is trading at a discounted valuation of 13X trailing FFO, compared to its historical average of 20X, despite strong fundamentals and growth prospects [10][13] - The S&P 500's trailing earnings multiple has risen from 20X to 29X over the past decade, while SPG's multiple has declined, creating a valuation gap [11][13] - SPG's real estate-derived FFO grew by 4.8% in Q3 2024 and 4.1% year-to-date, with a projected long-term growth rate of 4%-5% [19] - A fair value multiple of 18X real estate FFO suggests a target price of 214, representing 23% upside from current levels [20] Industry Leadership and Competitive Advantages - SPG is an industry leader with a track record of AFFO/share growth, a large market capitalization, and an investment-grade balance sheet (A-) [10] - The company has a well-diversified portfolio geographically, by tenant industry, and by product price point, enhancing its resilience to economic downturns [17] - SPG's leasing momentum is strong, with favorable lease terms including fewer co-tenancy clauses, fewer tenant renewal options, long lease terms, and escalators [6]