Simon Property Group (SPG) Dividend Cut

Simon Property Group (SPG) is another real estate investment trust or ‘REIT’ that has cut its dividend. It is a popular stock for those seeking income and dividend growth. The REIT was a dividend growth stock that has raised the dividend for ten consecutive years. This streak made it a Dividend Contender before the cut. It has over 64 thousand followers on Seeking Alpha. At the end of June, Simon Property Group announced a dividend cut of approximately (38%) from the last regular quarterly dividend of $2.10 per share. The new dividend is $1.30 per share. The market reacted favorably to the news since the cut was not as steep as announced by some other REITs.

However, the dividend cut was not surprising since Simon Property Group is a significant owner of retail malls and outlets across the U.S. The impact of COVID-19 has struck many tenants. Government restrictions and the requirement for ‘social distancing’ closed many malls, resulting in no sales at many businesses in these malls. In addition, some tenants, including large ones like Gap Inc (GPS), reportedly did not pay rent. Hence, a dividend cut by Simon Property Group was probably unavoidable due to lower revenue, income, and cash flow.

Overview of Simon Property Group

Simon is one of the largest REITs in the U.S. It is the largest operator of retail malls and outlet centers. Simon owns 204 retail properties in the U.S., including 106 malls, 69 Premium Outlets, 14 Mills, four lifestyle centers, and 11 other properties (at the end of 2019). Internationally, Simon also owns 29 Premium Outlets and Designer Outlet properties (at the end of 2019). Simon also owns a 22.2% equity stake in Klepierre SA or Klepierre, which owns or partially owns shopping centers in 15 countries in Europe.

Simon focuses on Class A malls or outlets in metropolitan areas. The high population density and locations tend to keep traffic coming to these malls. Class A malls have more sales per square foot than Class B or Class malls. Class A malls have sales of $500 per square foot or more. These malls tend to have higher quality retailers, restaurants, and entertainment options than Class B or Class C malls.

Simon has good operating metrics. Occupancy was 95.1% in U.S. Malls and Premium Outlets at the end of 2019. The Mills had an occupancy of 97%. The company states that occupancy at U.S. Malls and Premium Outlet Centers has been over 95% for the past eight years. Further, sales per square foot hit a record of $693 in 2019.

What is a Real Estate Investment Trust Anyway?

A real estate investment trust or ‘REIT’ is a corporation that owns, operates, or finances income-generating real estate. A REIT’s stock is usually publicly traded on stock exchanges. So, in this way, small investors can invest in the commercial real estate market without having large amounts of their capital.

To qualify as a REIT, a company must own real estate that generates income distributed to shareholders. Specifically, according to Investopedia, a REIT must

• Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
• Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
• Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
• Be an entity that’s taxable as a corporation
• Be managed by a board of directors or trustees
• Have at least 100 shareholders after its first year of existence 
• Have no more than 50% of its shares held by five or fewer individuals

Malls Were Closed and Retail Tenants Stressed

Simon Property Group closed all of its retail properties on March 18, 2020, in response to COVID-19. However, by May 11, 2020, Simon had reopened about 77 of its U.S retail properties.  This action occurred after state and local governments lifted restrictions. Additionally, 11 of the international Premium Outlets and Designer Outlet properties were reopened. Interestingly occupancy was down to 94%, suggesting that stores were permanently closing and not just temporarily shutting down due to government restrictions. Further, revenue and net income in Q1 2020 were lower than the prior-year in comparable periods. These poor numbers were an indicator that the second quarter would not be great. Recall that the great majority of temporary furloughs and closures were in April. In any case, Simon withdrew guidance for 2020.

However, when Simon provided an update and declared a dividend on June 29, 2020, Simon substantially reopened all of its U.S. and international properties. This action reportedly led to over 18,000 stores reopening in the U.S. This fact is a good sign and indicates that Q3 2020 may be better than Q2 2020. The specific statement from the company was:

Today, Simon’s Board of Directors declared a $1.30 per common share dividend, payable in cash, for the second quarter 2020.  The dividend will be payable on July 24, 2020 to shareholders of record at the close of business on July 10, 2020.  The Company expects to pay at least $6.00 per share in common stock dividends for 2020, in cash, subject to Board of Directors approval. 

The critical point here is that retail stores were closed or operating on a limited basis at many locations for two to three months. In turn, this meant that these stores had no sales and no cash flow, whether they were large chains or smaller individual stores. Simon’s tenants were likely trying to preserve liquidity and maintain a strong balance sheet to get through the mandated shutdowns. In turn, this probably led to lower revenue leading to the dividend cut by Simon Property Group.

Final Thoughts on Simon Property Group Dividend Cut

I am unsure when Simon will increase the dividend back to the earlier dollar value per share. Likely, retail tenants will still face months of challenges and a slow climb back to normal operations. This fact probably means that the dividend will remain at a lower level for at least a few more quarters. Notably, Simon cut the dividend in the last recession but afterward started increasing it again.

Keep in mind that there are a few more considerations for those interested in Simon. First, brick-and-mortar retailers are facing headwinds due to competition from e-commerce. Those headwinds will likely accelerate due to the COVID-19 pandemic. Some retailers will go bankrupt or will reduce their store count after the pandemic. Next, Simon is in the middle of a dispute with Taubman Centers (TCO). The long-term impact of this is not certain. With that said, Simon is well run, has high occupancy rates, and its portfolio of properties are mostly Class A malls in good locations.

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