2023-11-03 12:44:21 ET
Summary
- Simon Property Group is currently paying out a 6.5% dividend yield that's 168% covered by fiscal 2023 third quarter FFO.
- The REIT has a healthy liquidity profile and manageable debt maturities.
- FFO for the third quarter beat analyst consensus, with the outlook for the full year increased to set the backdrop for a possible dividend raise.
I've been an investor in Simon Property Group ( SPG ) for most of this year, attracted to a dividend yield that has moved to healthy highs on the back of common shares that have lost 32% of their value since the Fed embarked on its campaign to bring CPI inflation back down to its target. The mall REIT's property portfolio, liquidity profile, and debt maturities also offer reasons for strong investor confidence against broad economic forecasts for a US recession in 2024 and what JPMorgan's ( JPM ) Jamie Dimon described as the most dangerous period the world has faced in decades. SPG held cash and equivalents of $770 million at the end of its fiscal 2023 third quarter, up nearly $170 million from the year-ago balance.
Simon's net debt of $31.41 billion came at a weighted average interest rate of 3.61% , markedly lower than the current Fed's funds rate of 5.25% to 5.50%. This also came with an unsecured interest coverage of 6x, a fixed charge coverage of 4.5x, and a weighted average years to maturity of 6.9 years. The REIT will see $4.1 billion of this come due next year, around 13% of its total. Bears would be right to flag that its cost of funds will be pulled upwards as these maturities are refinanced at higher rates. The refinancing of 11 property mortgages of $960 million closed year-to-date was completed at a weighted average rate of 6% , hence, the REIT's broader FFO generation profile could possibly face a progressive pull downward as debts face maturity and are refinanced.
Revenue, FFO, And Dividend Coverage
Simon reported a terrific third quarter with revenue of $1.41 billion growing by 6.8% over its year-ago period and beating analyst consensus by $140 million. This growth came as occupancy at its US malls and premium outlets advanced 50 basis points sequentially to 95.2% from 94.7% at the end of the second quarter. Third quarter base minimum rent per square foot at $56.41 also grew by roughly 14 cents over the second quarter and by $1.61 from $54.80 a year ago. These factors helped drag revenue up as domestic property net operating income moved up 4.2% over its year-ago period and with portfolio NOI moving up 4.3%.
Simon's FFO came in at $1.2 billion, around $3.20 per share, up from $2.93 per share in the year-ago period and beating consensus for FFO of $2.97 per share. The REIT last declared a quarterly cash dividend of $1.90 per share , unchanged from its prior distribution and for a 6.5% annualized forward yield. This means Simon can cover its quarterly distribution by 168%, around a 59% payout ratio. Simon expects FFO per share for its full year to come in between $12.15 to $12.25, up from a prior range of $11.85 to $11.95. The Series J preferreds ( SPG.PR.J ) have traded down in recent weeks to now swap hands around $5 above their $50 par value and offer a 7.6% yield on cost.
Valuation And Sentiment As Interest Rate Hikes End
Simon's current dividend yield is elevated when looked at over the last decade with the REIT currently trading for 9.5x times the lower end of its full-year 2023 FFO. This is at least 16% lower than its peer group median as shareholders eye a return of the quarterly distribution back to a pre-pandemic payout of $2.10 per share. Critically, Simon holds roughly $8.8 billion of liquidity and the REIT presents a compelling investment opportunity with its strong balance sheet set against Class A malls that are set to see steady growth over the next decade even as the broader mall universe looks to retrench.
Simon's high-quality malls and outlets are located in dense population centers with high incomes and with domestic or international tourist appeal. I'm in the commons for the dividends and diversification with Simon being the more investable mall REIT versus its close peer Macerich ( MAC ). The REIT has been buying back shares, purchasing roughly 1.27 million shares of its common stock for $140 million. This came as Simon signed more than 970 leases for roughly 4.3 million square feet in the third quarter. Year to date Simon has signed more than 3,500 leases for 15 million square feet and currently has 1,100 deals in the pipeline that will drive an incremental $400 million of revenue. This positive backdrop comes as the Fed looks set to keep rates unchanged again at its next meeting in December with the market only pricing in a 20% chance of a 25 basis points hike. I remain long the commons and will look to add to my position in the coming months.
For further details see:
Simon Property Group's 6.5% Yield Is A Compelling Buy