A Yield-Chintzy REIT

 | Mar 15, 2013 | 1:00 PM EDT  | Comments
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Earlier this week, a board member at Simon Property Group (SPG) -- a real estate investment trust that owns a number of malls and other shopping centers -- purchased 1,500 shares at an average of $159.99 apiece, according to a Form 4 filed with the SEC. Director Larry Glasscock's total direct stake now comes to a little over 5,300 shares, meaning this purchase has significantly ramped up his holdings.

Here, as always, it's instructive to look at insider purchases, as it is theoretically irrational to build up company-specific risk unless one believes the company has bright enough prospects as to outweigh the benefits of diversification. Indeed, studies have generally shown a small outperformance effect for insider purchases.

Turning to the macroeconomic environment for Simon Property, last month U.S. retail sales rose vs. January after seasonal adjustments, and the numbers looked good even when excluding autos and spiking gas prices. This came on the heels of Simon's 22% year-over-year jump in funds from operations (the preferred bottom-line metric for REITs) in its fourth-quarter report. FFO came to $830 million for the quarter. For all of 2012, Simon recorded a 16% rise in FFO to $7.98 per share, and has guided 2013 to between $8.40 and $8.50 per share. This places the stock at 20x its trailing FFO, and about 19x the internal estimates for the current year.

In general, income investors often favor REITs, since this status allows companies to receive preferential tax status if they distribute a large share of its pretax income to shareholders. However, that's not quite the case with Simon: Its most recent dividend payment implies an annual yield of 2.9%. That's about even with yields on traditional income stocks, and in some cases lower than that.

Another retail REIT, Macerich (MAC), pays a yield of 3.7%, even though it's a significantly smaller company in terms of market capitalization. Very high yields are also possible in non-retail REITS, though often the firms are heavily exposed to mortgages or other less desirable industries.

In any case, we do like how Simon's business looks, and certainly the insider purchase should be taken as a good sign. But, in our view -- and despite its REIT status -- investors seeking high yields should clearly pass on this stock. The dividend, even if it rises a bit in the next year, simply isn't competitive with yields of more traditional income stocks.

Also, the stock's FFO multiple doesn't appear particularly attractive, and Simon isn't expecting much growth here, even despite healthy signs in the broader economy. It may be more effective to look at retailers directly -- such as big-box discount chains like Target (TGT) and Wal-Mart (WMT), whose earnings multiples are in the teens. Dollar stores trade at a slight premium to that level, but they've continued to record impressive growth rates, so they also may be worth a look.

-- Written by Matt Doiron

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