Analysts on Wall Street talk to each other about where a stock should or could head shortly, especially when earnings season starts, as their reputations often hang on the power of their predictions and projections for a stock's valuation. Today, most of Wall Street's biggest names have cornered one real estate stock.
The Federal Reserve (the Fed) has made markets aware of potential interest rate cuts for 2024, and the FedWatch tool at the CME Group (NYSE: CME) suggests that these rates will likely hit the market in May rather than March of this year.
These analysts have spotted a potential breakout in the industry, affecting some names better than others. One such name is Simon Property Group (NYSE: SPG).
Bears had discounted the retail space in real estate as an unnecessary location now that most commerce occurs online via platforms like Amazon.com Inc. (NASDAQ: AMZN) and Shopify Inc. (NYSE: SHOP). Simon Property (which owns malls) saw its price slashed by as much as 50% from its $170-per-share high in 2021. Today, the story changes.
Mechanics at play
A resilient wave of consumer discretionary spending has enabled Simon Property Group properties to soar.
But don't just take the consumer's word for it; here are some KPIs (key performance indicators) investors look for in the real estate sector.
One of them is occupancy, as it gives you a gauge of the demand trends that properties are experiencing today.
For Simon, this stands at 95.2% as of its latest quarter, up from 94.5% a year prior. Secondly, FFO (funds from operations) is the equivalent of earnings per share in stock for these REITs.
That metric also jumped by 9.2% over the past 12 months, which is attractive growth for a stock operating in an industry that does not tend to attract a lot of growth historically but rather a "slow and steady" approach to these figures.
The "cap rate," which is fancy for real estate dividend yields, can give you a lot of insight into how a property is valued in the market relative to historical norms. You can measure this by looking at Simon's 5.5% dividend yield, which beats the U.S. inflation rate and is above the risk-free 3.9% yield in government 10-year bonds.
Relative to the broader Vanguard Real Estate ETF (NYSEARCA: VNQ), this is an attractive deal, considering that the rest of the REITs pay a 3.8% dividend. Only America's favorite REIT, Realty Income (NYSE: O), comes close by giving shareholders a 5.7% yield. Still, it's missing many better factors that Simon didn't skip out on.
Value in plain sight
Simon Property stock trades at 94% of its 52-week high, meaning traders have rewarded this stock with bullish momentum lately. At the same time, Realty Income is discounted at 78% of its 52-week high, which fits Wall Street’s definition of a bear market (a 20% or more decline from 52-week highs).
Because mall valuations can tie into how much revenue and ancillary income they generate, investors and analysts who focus on the sector have spotted a long-term trend that is here to stay and has been picking up shares of stock lately to drive it higher.
Understanding that when you buy a REIT, your returns are derived from the equity appreciation in the portfolio, here's a big clue. Simon takes the podium on a price-to-book basis, which is how much markets are willing to pay today for the underlying equity value of a stock.
Realty Income stock commands a P/B multiple 1.2x, which aligns with most of the industry average. In the case of Simon, markets have valued the stock at 13.5x P/B, and it must be expensive for a reason. The reason is simple: earnings are growing at above-average rates, and analysts have noticed.
At The Goldman Sachs Group (NYSE: GS), analysts boosted the price target for the stock to $161.0 a share, implying a 16.6% upside from today's prices. Piper Sandler (NYSE: PIPR) followed suit with its boost to $172 a share, pushing for a jump of 24.6% from where the stock trades today.
