What's in Store for Simon Property This Earnings Season?

Simon Property Group SPG is slated to report second-quarter 2024 results on Aug 5, after market close. The company's quarterly results are likely to display year-over-year growth in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Indianapolis, IN-based retail real estate investment trust (REIT) delivered a surprise of 27.1% in terms of FFO per share. Results reflected better-than-anticipated revenues, backed by a rise in the base rent per square foot and occupancy levels. However, higher interest expenses partly offset the upsides.

Over the preceding four quarters, Simon Property's FFO per share surpassed the Zacks Consensus Estimate on three occasions and missed on remaining period, the average surprise being 11%. This is depicted in the graph below:

U.S. Retail Real Estate Market in Q2

Per a Cushman & Wakefield CWK report, although gains in real income and employment continue to support consumer spending, the growth rate has decelerated and become more uneven in recent months.

On a year-over-year basis, the national retail vacancy rate remained unchanged at 5.3% in the second quarter. The vacancy rate was steady for the third consecutive quarter and was among the lowest rates since 2007.

Asking rents continue to increase in response to a tight market. In the second quarter, on average, the asking rents for shopping centers improved 3.8% year over year to $24.37 per square foot.

The second quarter witnessed a positive net absorption in the retail market, totaling 1.4 million square feet (msf) nationally. This marked a bounce back from its first negative reading over the past three years, recorded in the first quarter of 2024.

Since 2020, new retail construction has been minimal, and it has further retrenched due to high interest rates and other financing challenges.

Factors at Play

Simon Property is expected to benefit from its portfolio of premium retail assets across the United States and globally. As consumers increasingly favored in-person shopping experiences after the pandemic lull, it is likely that the demand for SPG's properties remained healthy during the second quarter.

The implementation of an omnichannel approach and successful partnerships with top-tier retailers are expected to yield significant returns for Simon Property. The exploration of mixed-use development, a concept that has garnered widespread popularity in recent years, is likely to have allowed SPG to seize growth prospects in locations where individuals desire to reside, work and enjoy recreational activities.

The Zacks Consensus Estimate for second-quarter lease income is pegged at $1.31 billion, up from $1.25 billion reported in the year-ago quarter. The consensus mark for other income stands at $91 million, up from $81 million reported in the prior-year quarter.

In addition, the consensus estimate for quarterly revenues is presently pegged at $1.43 billion, which indicates an increase of 4.4% year over year.

We also expect the company's solid balance sheet position to have supported its strategic expansions during the quarter to be reported.

However, growing e-commerce adoption may have cast a pall on SPG's performance in the to-be-reported quarter. We estimate the total portfolio ending occupancy to remain unchanged at 95.5% in the second quarter sequentially.

The consensus mark for management fees and other revenues stands at $33 million, marginally down from the prior-year quarter's reported figure of $33.5 million.

Also, elevated interest rates may have kept expenses higher in the to-be-reported quarter. We estimate a 1.8% year-over-year increase in interest expenses for the second quarter.

Simon Property's activities during the soon-to-be-reported quarter were not adequate to gain analysts' confidence. The Zacks Consensus Estimate for the second-quarter FFO per share of $2.92 has not been revised over the past month. However, it suggests a 1.4% increase year over year.

What Our Quantitative Model Predicts

Our proven model predicts a likely beat in terms of FFO per share for Simon Property this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an FFO beat, which is the case here.

Simon Property currently has an Earnings ESP of +0.44% and carries a Zacks Rank of 3.

Other Stocks That Warrant a Look

Here are two other stocks from the broader REIT sector — Hudson Pacific Properties HPP and Apple Hospitality REIT — that you may want to consider, as our model shows that these ,too, have the right combination of elements to report a surprise this quarter.

Hudson Pacific Properties, slated to release quarterly numbers on Aug 7, has an Earnings ESP of +4.35% and carries a Zacks Rank of 3 at present.

Apple Hospitality, scheduled to report quarterly numbers on Aug 5, has an Earnings ESP of +12.21% and carries a Zacks Rank of 2.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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