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Is Simon Property’s Premium Valuation Justified?

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Price-to-FFO multiple

Simon Property Group (SPG) can be best evaluated by its price-to-FFO (price-to-funds from operations) multiple. 

While Simon Property’s trailing-12-month price-to-FFO ratio is 15.0x, its competitors Equity Residential (EQR), GGP (GGP), and Kimco Realty (KIM) have trailing-12-month price-to-FFO ratios of 19.5x, 13.1x, and 10.6x, respectively, meaning SPG is trading at a discount to Equity Residential but at a premium to GGP and Kimco Realty.

Since the price-to-FFO ratio considers depreciation and other adjustments, it’s suitable for valuing REITs. The ratio’s significance is the same as the PE ratio for companies belonging to other industries.

Meanwhile, Simon Property’s forward-12-month price-to-FFO ratio is 14.2x, whereas Equity Residential’s, GGP’s, and Kimco Realty’s ratios are 19.8x, 13.8x, and 11.4x, respectively.

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EV-to-EBITDA multiple

Another appropriate valuation multiple for valuing REITs such as Simon Property is the EV-to-EBITDA (enterprise value-to-EBITDA) multiple, as the capital-intensive telecommunications industry has high depreciation and amortization and varying degrees of debt and operating leases. The EV-to-EBITDA multiple neutralizes these factors. They show what investors are willing to pay for the next four quarters of a stock’s estimated EBITDA.

Simon Property’s trailing-12-month EV-to-EBITDA multiple is 18.4x, and its forward 12-month EV-to-EBITDA multiple is 17.7x. In comparison, Equity Residential, GGP, and Kimco Realty have forward EV-to-EBITDA multiples of 20.1x, 14.7x, and 14.6x, respectively, meaning SPG is trading at a discount to Equity Residential and at a premium to GGP and Kimco Realty.

Simon Property’s forward dividend yield of 4.53% is higher than Equity Residential’s and GGP’s yields of 3.33% and 4.22%, respectively. Moreover, looking at its expansion and redevelopment initiatives, which are already paying off in the form of rising base minimum rent and leasing spreads, the company’s prospects look bright and justify its premium valuation to peers GGP and Kimco Realty.

Simon Property makes up 7.8% of the SPDR Dow Jones REIT ETF (RWR).

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