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Why SPG Is Commanding a Premium in Comparison to Its Peers

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Choosing the correct multiple

About 90% of REIT’s income is paid out as dividends. Ratios like EPS and book value do not correctly reflect income and value from real estate, so these measures are of little help when valuing REITs.

Depreciation is a major portion of a REIT’s expenses. Ratios like price-to-FFO are more appropriate as the calculation of this ratio requires it to add back depreciation and makes the adjustments necessary to reflect a REIT’s income.

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Peer group price-to-FFO multiple

A close look at Simon Property’s trailing-12-month price-to-FFO multiple shows that the figure is in line with its historical valuation. SPG’s FFO per share ranged from $5.01 to $10.87 in 2016. The current price-to-FFO multiple is around ~14.5x. During the housing crisis, Simon Property experienced a low price-to-FFO multiple.

At this multiple, Simon Property Group stock is trading in line with most of its peers. Taubman Centers (TCO) is trading at a multiple of 16.0x. General Growth Properties (GGP) is trading at a multiple of 14.8x, Macerich (MAC) is trading at a multiple of ~16.0x, and Kimco Realty Corporation (KIM) is trading at a multiple of ~11.7x.

Simon Property trading at a premium

A higher price-to-FFO multiple for Simon Property means that it has the capacity to give a predictable return as well as consistent dividend yields to investors. Presently, SPG is offering a dividend yield of ~4.6%, higher than its peers General Growth Properties (GGP), Macerich (MAC), and Taubman Centers (TCO), which offer yields of ~3.8%, 4.5%, and ~4.2%, respectively.

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