Simon Property Group: An Attractive Dividend
Simon Property Group (NYSE:SPG) has so far been able to withstand the pandemic onslaught, though its business has sufferred for obvious reasons. Dividend investors may easily be lured by the dividend yield that the largest mall REIT in the U.S. currently provides.
On March 18, just a few days before the pandemic-induced market bottom, the Indianapolis, Indiana-based mall operator announced that it would close all of its stores nationwide for at least 11 days. Simon Property Group had 133 properties about to close its doors to. A month and a half later, the mall REIT finally reopened a little more than 75% of its stores.
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Simon Property Group recently reported its performance for the first quarter that ended in March. At first glance, the company seemed unscathed for for the quarter, as the mall REIT registered only a 1.1% drop in its occupancy to 94% in its malls and premium outlets, with an increase of 2.6% in its rent at $55.76 per square foot per month. It seems most of the costs for Covid-19 damages are being footed by the retailers themselves, which are the REIT's clients.
However, Simon Property is not naive about the tumults that it will be facing moving forward as it slowly recovers from the nationwide lockdown and some of its clients begin to file for bankruptcy. Its Chairman collected no salary and deferred his bonus, while board directors experienced payment suspensions and salaried employees had to commit to salary cuts. Simon Property also drew nearly $4 billion in its credit facilities, raising its overall debt to $28 billion. This gives the company a more leveraged balance sheet with a debt-equity ratio of 10.
What is a little uncertain here is how Simon Property will manage to continuously grant its dividend payouts to its investors, especially after a critical report from Green Street Advisors reported that on average, strip mall owners were paid less than half of April's rent. The dividend of an REIT is directly tied to the rent income it collects.
To put things in perspective, Simon Property made $1.35 billion in revenue in the first quarter and was left with $438 million in profits after paying all expenses. The REIT then paid $645 million in dividends to its shareholders, a 147% payout ratio. The company has had an average payout ratio of 111% in the last five years.
Fears of dividend stability were moderately quenched late last month when Simon Property declared its dividend with a 38% cut from its February payout. With tight cash flowing through its business, investors may prefer to see Simon Property take more precautions in its payout strategy. Now with a forward dividend yield at 7.64%, one must think twice about whether an REIT providing this payout in the current environment can survive.
On the other hand, investors seem to be confident in Simon Property's chances, as its stock price has appreciated well over 60% since it bottomed in April. REIT investors need to be on the defensive in case the company cuts its dividend again moving forward.
Disclosure: No shares in Simon Property.
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This article first appeared on GuruFocus.
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