Wednesday, September 13, 2006

SPG, Simon Property Group: Very nice but you paid too much.

A breathless article from Reuters talks about renewed interest in Retail Mall REITs, especially Simon Property Group (SPG). Two different analysts: David AuBuchon of A.G. Edwards and Murat Sensoy of SSgA/Tuckerman contend that Simon Property (nifty chart) is not overvalued but secretly and unfairly undervalued.

Well maybe, but probably not. Compared to bubbly specimens such as SL Green (SLG) or Alexandria Real Estate Equities (ARE) yielding 2.10% and 2.90% respectively; SPG at 3.5% is undervalued. A long term perspective about the price and yield of REITs, gives us no comfort. We have no historical basis for talking about REIT investment at such frothy valuations.

It is a situation that Ben Graham observed and warned about in his books. Many times over the years: a very solid desirable company trading at an overbought speculative price. With such a high price, everything that is positive, and a little more, is already baked in. It would be very hard to have a positive surprise and very easy to have a negative surprise at these prices.


At September 14, 2006 11:21 AM, Anonymous Anonymous said...

Of course you realize that neither the price chart or the dividend yield really tells you anything about the valuation of a REIT. You actually do have some historical precedents on their valuations. Relative to the real estate, REITs have traded significantly higher--- in '04 in the late 90's. Even on a spread to bonds (if you believe the dividend yield tells you much) REIT have been at least this "expensive" twice in the last 15 years.

At September 14, 2006 12:00 PM, Blogger Market Participant said...

REITs as asset class has to be separated from individual REITs.

There are many cheap and attractive REITs, however the price run up in big REITs listed in ICF is IMHO hopeless.

At September 14, 2006 2:58 PM, Anonymous Anonymous said...

Well, Simon trades in-line with the REIT universe, maybe even a little cheap. Relative to the malls, Simon is at the upper end. Again, the run in prices doesn't tell you anything. Malls have been growing earnings at 8-10%. Combine that with cap rate compression and its not hard to see how the stocks are up.


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