Just finished updating my SPG Retail Mall REIT 2Q19 CF Excel SS, so I thought I might pass along.
SPG's price chart kinda looks like a downhill ski course since February or so this year, when it was trading in the low $180 range, but closed Friday under $148. So with this kind of price decline, one might reasonably expect a 2Q19 financial report to show deterioration of cash flows, a scramble to sell off poorly performing investment assets and redeployment of the net cash produced into something else. But if you thought that, you'd be wrong.....way wrong.
Virtually all of SPG's cash flow metrics I trend and track improved for 2Q19. Here are some (all are Rolling 4Q or R4Q)
All of these 3 metrics are increasing in tandem. Here revenue growth over any 4Q period grows in lockstep with Operational Cash Flows closely followed by dividend growth. This kind of trending does not occur by accident or good fortune. Its managed this way.
Here the interest expense as a percent of [CFFO + Interest] continues to decline, down to about 17%, which is where the best regulated utilities reside and some of the industrials. This is EXTREMELY unusual for a REIT. REITs have to distribute most of their cash and so much generally finance new investing activities (CapEx), thus will have an interest expense typically in the 23% to 27% range. The payout ratio was rising but has settled back to 74% - 75% range over the last two R4Q periods, Again, this is good for a REIT.
Managerial efficiency, or Net CFFO/Revenue, shows how much...or little....management can generate in Operational Cash for each dollar of Revenue. This tends to be industry specific, as some industry's overhead and operational expenses are higher than others. Most Retail REITs I've ever tracked run in the 50% to 60% range, such as FRT at 53% and KIM at 52% over trailing 4Q.
This chart shows how much of the REIT's Investing Activities (CFFI) are paid with operational cash AFTER all distributions. SPG hasn't been under 100% on anyy R4Q period since 2Q16. Again, this is very unusual for a REIT. Now part of this is due to SPG's extensive use of limited partnerships. But that's why its important to subtract distributions from CFFO in determining this percentage. Most Retail REITs will be able to cover 50% to 75% of CFFI. Over the past 4Q FRT covered 83% and KIM 92%. And FWIW, most HC REITs can only cover about 10% to 30% of CFFI with net CFFO over most 4Q periods.
This last chart really speaks the loudest on the long term trend over R4Q periods, It measures the rate of CFFI spent and the resulting CFFO growth such investing generates, both per share. This chart tells us a couple of things....SPG has maturing assets that it is spending less on over time while the net operational cash these investment assets are generating is continuing to increase. This is pure management.
What does the future hold for large mall REITs like SPG? I don't know nor does anyone else. Gobbs of speculation, the result of which is around a 20% drop in SPG's stock price in 6-7 months. But this I do know....SPG's cash flow trending is stellar....it just don't get much better. Will it remain so positive as it's been? Have no idea. But as long as management continues, their results are tough to argue with. And at a current yield of 5.4%...well....if you're an income investor, you decide.
Terrific analysis Bruce. Thanks very much.
I really struggle with SPG because things look good if we can extrapolate the recent past into the future. But I wonder about a few things. First, M* has their trailing 12 month financial leverage at 10.68. Seems a bit high for comfort.
The big question I ask myself is, do I want to own SPG through a recession? The yield curve and the seeming unlikeliness of a happy resolution of the trade war before the election makes me ponder that one with a bit more urgency.
With the new round(s) of tariffs at 10% (possibly rising to 25%) and being felt by the consumer instead of absorbed by supply chains, all else equal it should slow the economy unless Peter Navarro is sent back to the minors in a hurry. I've read that clothing for females is likely to be impacted big time. It seems to me that women shopping at malls are an important part of mall traffic, even at Class A malls. Will they take the price increases without missing a beat?
And then if retail takes another big hit from trade, can the retailers handle it or will we be looking at a cascade of bankruptcies in the next recession? The following links address REITs like Simon possibly becoming lenders of last resort to retailers to keep the stores open, as Simon and GGP apparently already did with Aeropostale a few years back, but that was in a decent economy.
Mall landlords consider lending to retailers - Bloomberg
Mall Landlords Weigh Becoming Lenders to Blunt Retail Apocalypse
I guess the way I would characterize my feelings are that the risks seem to have risen, even for SPG, especially given the seeming unlikeliness of a near term trade war resolution. At some price, SPG will incorporate a satisfactory margin of safety for these factors. What is that price? I don't know, but I'm thinking lower. I just don't feel the need to be a hero here.
Because of my lily-livered nature faced with a potential recession and bear market, I have recently sold WFC, most of my CBRL, and a small position in SPG and gone a bit more defensive at the margin. I may be wrong, but I can't manage my returns. I can only manage the amount and kinds of risks I take.
At any point over the past 26 years of their existence, I'm sure SPG management has faced all manner of market, interest rate, economic, trade, credit, competition, regulatory, consumer and all other manner of threats and forward challenges, and today is no different. The purpose of developing long term CF trending is not to extrapolate it in the assumption it will keep doing what it's been doing, but to show unambiguously how well or poorly management has performed in the past. Over time and through multiple conditions, it is a measure of management. No one knows the future....NO ONE, whatever they may be trying to sell. What we do know with great accuracy is management's performance, which is the single best predictor of how they will fare in future quarters, whatever the threats.
Now, to be sure, a future trade war via tariffs and embargos is a threat to future performance....and I'd guess a long bull market is wary of this combination. Fine, be wary. In the meantime, our household requires income, and SPG has been providing it and I see nothing in their cash flow trending suggesting they will do other than continue to provide it.
Woops...forgot to speak to your concern about debt.
The Debt-to-whatever ratio is interesting but really doesn't tell you anything. What is relevant is the trend in how much the company is spending on operational debt as measured by their Interest Expense as reported on the Income Statement. And what is yet more relevant is the trend in how much of their operational cash is being used to pay the interest expense I've found this to be the best predictor of dividend increases. SPG uses a lot of JV partnerships and other non-controlling interest capital for reasons that I'm sure are beneficial to the REIT. I don't show the chart, but over the past 10 years, 12% to 15% of SPG's distributions have been to Non-Controlling interests. Retail analysts may treat this 3rd party capital as 'debt'. I subtract out the distributions to NCI's from CFFO along with any preferred dividends, as these will be paid first....at least that's the conservative assumption I make prior to doing CF ratios.
First, I'd like to make clear that I appreciate your work and your analysis, Bruce. My intent was not to criticize or otherwise disrespect it or you.
I just thought that I would add the dialogue that goes on in my head as it might be of interest to some. And then again they might think I'm full of it. That's fine, I'm okay with that.
The one thing I know is me. While some optimize for the good times, I optimize for the bad times, knowing that that is when I run the risk of heading for the hills and screwing up a good strategy. I'm sure I give up some returns in the good times, but I need to do it because of my personality and such.
I am not trying to say SPG won't be a good investment. I am just saying that I wanted to reduce my economically sensitive exposure and I didn't want to sell MSFT or AMZN, so I lightened up on a few that were a bit further down my list.
Not in any way trying to be a jerk or challenge your excellent analysis. Just, as the kids say, trying to keep it real by being honest about my thought process.
Thanks for the response, and I appreciate your view. There is ALWAYS more than one view, and well reason ones need to be heard....and your's is certainly well reasoned.
Thanks to both of you for this discussion. SPG has ben on my watch list for quite a while. I haven't bought it yet because I am pessimistic about retail in general and malls specifically.
I think most are torn by your concern. I can think of absolutely no viable reason why SKT is priced under $15 today. It makes absolutely no sense....at least that I can see. Their Cash Flow Statement, just like SPG, is about as strong as any you'll see among REITs today.....and SKT carries today a current yield of 10.1`%?!?!?! What is wrong with that picture??
There are only two reasons for this that I can think of.....
1. Like you, the potential buy side is unsure and concerned about the long term effect of e-commerce on traditional retail outlets, even though there is little evidence showing a negative effect on certain retail outlets....at least any significant negative effect on their operational cash. But images of abandoned Sears, Macys and JC Penny stores are filling up the financial news channels and the shorts have got their megaphones turned all the way up. All brick-n-mortar retail, regardless of what is being retailed, is finding itself sucked down this vortex of nervous perception....including even those retailers who sell stuff probably very few would ever buy on-line, such as Dollar Tree (DLTR), which over the past 3 months has dropped in price from around $110 to $95.
2. There really is a cliff looming ahead and all B&M retail stores are going to have to sharply curtail all operations, with most going out of business within XXX months and those few remaining will be withered-up shadows of their former selves.
The market is currently behaving as though number 2 is going to come to pass
I've got 500 shares in a taxable account with a basis of about $28. I could use the loss, so I think I'll sell and rebuy 1,000 shares in 31 days.