Businessman riding a rising graph arrow. Digital illustration.
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Today mall REIT juggernaut, Simon Property Group (SPG) boosted its quarterly dividend from $2.00 to $2.05 per share, a 5.1% increase year-over-year. Over the last few years, Simon and the other mall REIT peers have under-performed due to continued retail pressure associated with eCommerce.
While many retail REITs are struggling to maintain their cash flow, Simon has several advantages that have allowed the company to continue to grow profits and dividends.
Malls are unique because they include anchor department stores that draw traffic to their properties. While many of Simon’s peers have struggled to back-fill vacated Sears, JC Penney, or BonTon boxes, Simon has used its scale and cost of capital advantages to grow shareholder value.
For Simon, scale has a tremendous competitive advantage. With a massive portfolio of over 230 Class A malls in North America, Europe, and Asia totaling over 190 million square feet of retail space, Simon is insulated from tenant bankruptcies because of limited concentration. In addition, Simon has global exposure with millions of square feet, and this means that it can be “almost scientific” with its capital allocation strategies.
In addition to scale, Simon has access to the low-cost of capital in the REIT industry. Simon is one of a handful of A-rated REITs and its credit metrics are rock-solid (approximately $7 billion of liquidity as of Q1-19). The company ended the quarter with strong credit profile metrics, including Net debt to NOI of 5.1x and Fixed charge coverage of 5.1x.
This war chest of capital means that Simon has enough to pay for its entire development backlog (more than 30 properties underway in the U.S., Canada, Asia and Europe). Simon’s share of the costs of all new development and redevelopment projects under construction at quarter-end was more than $1.4 billion.
Simon also reaffirmed its previous financial guidance and continues to estimate net income to be within a range of $7.30 to $7.40 per diluted share and that Funds from Operations (a REIT earnings metric) will be within a range of $12.30 to $12.40 per diluted share. In a press release, David Simon, Chairman and CEO said,
“Our growing development and redevelopment pipeline, combined with our A-rated balance sheet, sets us apart and allows us to continue to strengthen our platforms with a focus on the future.”
With over $1.5 billion in cash flow after dividends, Simon has plenty of cash flow to reinvest in new deals or its own stock. The company announced that its Board of Directors authorized a new common stock repurchase program purchase up to $2 billion of its common stock over the next 24 months.
On the earnings call, in reference to the number of retail store closures, David Simon explained, “most bad news is behind us” and this appears to be a key take away (the company reaffirmed FFO will be within a range of $12.30 to $12.40 per share). He added, “there is nobody that loves cash flow more than me”.
Perhaps the biggest signal telegraphed on Simon’s first quarter report card is the 5.1% dividend increase. As Josh Peters (author of The Ultimate Dividend Playbook) once wrote, “the safest dividend is the one that’s just been raised”.
I own shares in SPG.
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