Realty Income Vs. Simon Property Group: Graham's Wisdom Favors Realty Income

seekingalpha01:18

I'm puzzled/alarmed by the yield spread between AAA bonds and Treasury rates, currently near a record thin level in at least 10 years.In confusing times, I always go back to timeless principles.This ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2485417065?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1975241686/image_1975241686.jpg","is_english":true,"pubTime":"2024-11-22 01:18","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2485417065","market":"sh","top_or_hot":-1,"title":"Realty Income Vs. Simon Property Group: Graham's Wisdom Favors Realty Income","media":"seekingalpha","content":"<div>\n<p>I'm puzzled/alarmed by the yield spread between AAA bonds and Treasury rates, currently near a record thin level in at least 10 years.In confusing times, I always go back to timeless principles.This ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739365-realty-income-vs-simon-property-group-grahams-wisdom-favors-realty-income\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Realty Income Vs. Simon Property Group: Graham's Wisdom Favors Realty Income</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nRealty Income Vs. Simon Property Group: Graham's Wisdom Favors Realty Income\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-22 01:18 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739365-realty-income-vs-simon-property-group-grahams-wisdom-favors-realty-income><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I'm puzzled/alarmed by the yield spread between AAA bonds and Treasury rates, currently near a record thin level in at least 10 years.In confusing times, I always go back to timeless principles.This ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739365-realty-income-vs-simon-property-group-grahams-wisdom-favors-realty-income\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4080","symbol_name":"零售业房地产投资信托","start_time":0,"source_url":"https://seekingalpha.com/article/4739365-realty-income-vs-simon-property-group-grahams-wisdom-favors-realty-income","article_id":"2485417065","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1975241686/image_1975241686.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485417065","pubTimestamp":1732209529,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"I'm puzzled/alarmed by the yield spread between AAA bonds and Treasury rates, currently near a record thin level in at least 10 years.In confusing times, I always go back to timeless principles.This a","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4080":"零售业房地产投资信托","BK4231":"零售房地产信托","BK4585":"ETF&股票定投概念","SPG":"西蒙地产","O":"Realty Income Corp","BK4588":"碎股"},"translate_title":"房地产收入与西蒙地产集团：格雷厄姆的智慧有利于房地产收入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"O":0.9,"SPG":0.9},"content_text":"I'm puzzled/alarmed by the yield spread between AAA bonds and Treasury rates, currently near a record thin level in at least 10 years.In confusing times, I always go back to timeless principles.This article examines O and SPG following Benjamin Graham’s principles for picking defensive stocks.O is a far better fit to Graham’s framework than SPG.It features lower valuation yet provides better consistency and financial strength than SPG.   filo O and SPG stock: Previous thesis and new developments I last covered Realty Income (NYSE:O) about two months (on Oct. 1, 2024, to be exact). That article was titled \"Realty Income And Interest Rate Cuts: 3 Reasons I Disagree With The Crowd.\" In that article, I rated the stock as a Hold and explain why I'm not as bullish as the prevailing sentiment for the following considerations: Traditional wisdom shared among REIT investors is that rate cuts are good for REIT stocks. I agree in general but hold three key reservations when applying this wisdom to O under current conditions. Despite recent rate cuts, its yield spread remains near historical lows, indicating an unfavorable return/risk ratio. As for Simon Property Group (NYSE:SPG), I last covered it back in July 2024. That article was titled \"Simon Property Group: Wall Street Ratings Underestimate Risks.\" In that article, I also rated the stock as a Hold due to the following concerns regarding its dividends: Wall Street analysts have a bullish rating on SPG stock. I think such a rating substantially underestimates the underlying risks. SPG's generous dividends are a main draw here and have been a key source of its total return. Looking ahead, I see limited dividend growth and the potential for dividend cuts in the case of a downturn. Since the publication of those analyses, there have been several new catalysts evolving around both companies. Given the sensitivity of REIT stocks to interest rates, the remainder of this article will detail the potential impacts from the leading factor on my mind: The change of interest rates. The combination of the Donald Trump victory in the presidential election and new inflation data have led me to reassess the odds of continued easing in the next 1~2 years. As a reflection of such reassessment, 10-year Treasury rates increased noticeably after the election’s conclusion, as you can see from the following screenshot. Seeking AlphaSuch higher yield of risk-free Treasury bonds has raised a red flag on my radar. In particular, the next chart shows the yield spread between AAA corporate bonds and 10-year Treasury Rates in the past 10 years. As seen, the higher Treasury rates have pushed the yield spread to be as low as 0.77%, among the thinnest levels in at least 10 years. This red flag has motivated me to reexamine O and SPG, especially their valuation when benchmarked against bonds rates and also their financial strength. My reexamination will largely follow the wisdom of Benjamin Graham. Next, I will detail why such this reexamination has led me to upgrade my rating on O to Buy from my earlier hold thesis and reiterate my earlier Hold rating on SPG. FREDGraham on Rates One of the key insights I’ve learned from Benjamin Graham was that equity valuation should be interpreted under the context of bond rates. More specifically, his book, The Intelligent Investor, made the following recommendations: Our basic recommendation is that the stock portfolio, when acquired, should have an overall earnings/price ratio—the reverse of the P/E ratio—at least as high as the current high-grade bond rate. This would mean a P/E ratio no higher than 13.3 against an AA bond yield of 7.5%. The difference is, of course, today’s AAA bonds are a lot lower than those in Graham’s days. As seen in the chart below, Moody’s seasoned AAA bond rates hover around 4.95% currently, which could support a P/E ratio of around 20x following Graham’s above wisdom for large and defensive stocks like O and SPG. With the background, I will move on to examine the valuation for both in more detail. FREDO and SPG: Valuation benchmarked against AAA rates For O stock, its P/CFO (aka P/FFO ratio) is 13.95x as of this writing. In this article, I consider P/CFO or P/FFO ratio as the equivalent of P/E for REIT stocks. This P/CFO ratio translates into an FFO yield of more than 7.1%, far above the AAA bond rates of 4.95% mentioned above. Seeking AlphaAdmittedly, the FFO yield for SPG stock is also comfortably above the AAA bond rates of 4.95%. To wit, the P/CFO ratio for SPG stock is 15.6x as seen. This P/CFO ratio translates into an FFO yield of 6.4%, about 140 basis points above the current AAA bond rates. However, O’s valuation is far more attractive on a quantitative basis than SPG’s. To start, O’s FFO yield spread relative to AAA bond rates is a lot thicker than SPG’s (about 210 basis points vs. SPG’s 140). Second, also note that O’s current P/CFO ratio is also lower than its long-term historical average (13.95x vs. 17.65x) while SPG’s is the opposite (15.66x vs. 13.95x). Next, you will see that O also offers far better financial strength and consistency on top of the attractiveness of its valuation. Graham on defensive stocks Of course, an attractive valuation is only the starting point of a sound investment. Graham never meant (and neither do I) to encourage investors to buy every REIT stock with an FFO yield higher than AAA bond yields. His above valuation guideline should only be applied to \"defensive stocks.\" As also detailed in his book, these stocks should pass the following tests:   Is the company large, prominent, and conservatively financed? The specific metrics to look for are stable financial strength, consistent capital structure, and a long record of continuous dividend payments.  Especially the dividend record. Graham emphasized countless times the importance of dividend records. He thinks “a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company’s quality rating.\"  Has the company demonstrated an adequate level of earnings growth in the past? For defensive investors, a minimum increase of at least one third in per-share earnings in the past 10 years is adequate enough. This translates into an annual growth rate of ~2.9%.   I consider both SPG and O as large and prominent companies. Both of them are well-established players with a focus in the retail real estate sector. Thus, these two stocks are my starting points to looking into this sub-sector (and I assumed the same for many other REIT investors.) O owns single-tenant and standalone commercial properties (more than 13,000 of them as of this writing in all 50 states plus many overseas countries/regions). SPG also owns/manages a vast network of regional malls and outlets both in the U.S. and also globally. As of this writing, it has interests in 195 properties in the U.S. and Puerto Rico and also 31 assets abroad. However, O is far superior to SPG when checked again other items on Graham’s list. To start, it has a far more consistent dividend track than SPG. As a member of the dividend champion group, O has been growing dividends consistently for 26 years as seen in the chart below. In contrast, SPG has to cut its dividend recently and resumed growing its dividends only about two years ago. In terms of growth, O has been growing its dividend payouts at a CAGR of 4~5% in the long term, easily exceeding the minimum requirement of 2.99% in Graham’s mind. In contrast, SPG’s growth is more erratic. SPG’s dividend growth rates have been a negative 0.5% on average in the past five years and about 5.13% on average in the past three years. Seeking AlphaGraham also prefers companies that are more conservatively financed. On this front, O is also the better fit to his framework. To be more explicit, the chart below shows how different O and SPG’s current financial strengths are. Overall, O just maintains a much more conservative debt profile than SPG. For example, O has a total debt to equity ratio of 68.94%, a reasonable level of leverage in my view. In contrast, SPG, on the other hand, carries a substantially higher debt burden, reflected in its 780.79% total debt to equity ratio. Additionally, O's debt to free cash flow ratio of 11.19 (which means it can pay off all its debt with its current cash flow in about 11 years) in comparison to SPG's ratio of 15.18x. Finally, O's long-term debt to total capital ratio of 39.87% is again far lower than SPG's 85.05%, further highlighting O's more conservative capital structure. Seeking AlphaOther risks and final thoughts There are a few other risks worth mentioning before closing. For O, its debt remains very manageable as argued above, but investors should keep an eye on this front. Its total debt increased substantially recently (e.g., by about 30% in the second quarter from the year-ago figure). The increase was largely due to the acquisition of Spirit Realty. Investors should monitor if the synergistic benefits could offset the impacts from the increased debt burden going forward. For SPG, its use of leverage is a double-edged sword. I’ve been focusing on the negative side above. On the positive side, its more aggressive use of leverage helps to boost its return on equity tremendously. As you can see from the following table, its ROE hovers around 81% (vs. O’s 2.51%). Due to its heavier leverage, in case of aggressive rate cuts, I expect SPG to benefit more than O. Also note that its return on total capital is also much higher than O (6.54% vs. 2.35%). Finally, the demand for brick-and-mortal malls like those in SPG’s portfolio has been recovery. The COVID-19 outbreak ravaged the retail estate sector. But occupancy for SPG has been recovery nicely after that. For example, its occupancy rate dialed in at 95.6% at the midpoint of 2024, almost a whole percentage above the year-earlier period (94.7%).  All told, my verdict is that O offers a more favorable return/risk profile than SPG per Graham’s wisdom. To recap, O features a more attractive valuation than SPG both in absolute P/FFO ratios and also relative to bond rates. Yet, O also features better consistency and financial strength than SPG at the same time. Seeking Alpha","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485417065"}