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Morningstar | SPG Updated Forecasts and Estimates from 09 May 2019

Fundamental results for Simon Property Group came in ahead of our expectations for the first quarter. However, we don't anticipate any material changes to our $195 fair value estimate as nothing the company reported impacts our long-term outlook. Retail sales grew a solid 3.1%, a figure below the strong growth seen in 2018 but above any other quarter the company has reported since 2013. Occupancy increased 50 basis points year over year to 95.1% and was well ahead of our 94.2% assumption. Releasing spreads were up 27.3%, the highest single quarter in at least a decade, as the company converts vacant anchor space to smaller units that pay higher rent.

Despite the strong growth in sales, occupancy, and releasing spreads, rent per square foot grew only 1.5%, which led to comparable property net operating income growth of only 1.6% that was below our 1.9% assumption. Portfolio NOI growth was negatively impacted by significant bankruptcies in the quarter, a stronger dollar reducing tourism spend, and redevelopment disrupting operations. Total company NOI was ahead of what we expected as corporate and other sources of NOI were up 41% year over year, likely due to lease termination income resulting from the bankruptcies that are non-recurring in nature. Funds from operations beat our estimate by 7 cents with a reported $3.04. However, our forecasts for the next few quarters may be high given that the beat was driven by non-recurring income and the NOI disruptions will linger through the next few quarters. While it is disappointing to see the negative impact of bankruptcies on the cash flow of the company, we think the underlying fundamentals suggest that the rest of the portfolio is very healthy and we expect the disruption to be only short-term in nature as the company finds new tenants to fill the space created by bankrupt tenants.