Simon Likely to Cut Dividend This Summer

Simon Property Group (SPG) reported earnings on May 11. Management disclosed few specifics, dodging questions about how much rent was collected in April and the status of its pending acquisition of Taubman.

However, CEO David Simon did provide general expectations for the dividend.

Based on what management knows today, it sounds like Simon expects by the end of June to reduce its dividend by up to 50% but will continue making its payments in cash (rather than stock).

REITs are required to pay out at least 90% of their taxable income to shareholders annually in the form of dividends.

Waiting another month will help give Simon a better idea of what its 2020 taxable income could be, which will guide the dividend decision.

Our outlook on Simon hasn't changed following its earnings report, and we expect to maintain our Unsafe rating on the REIT's dividend.

From a rent collection standpoint, malls and outlet centers are particularly challenged compared to freestanding retail space since individual tenants do not control whether or not they can reopen their doors for business.

Tanger (SKT), an outlet center REIT, reported that just 12% of rent was collected in April (all tenants were offered rent deferrals).

Simon's figures may be somewhat better but are likely well below the 50% to 70% collection rates posted by most shopping center REITs, which did not need to close all of their operations.

And looking further out, the COVID-19 pandemic has potential to accelerate the retail revolution and weigh on Simon's business for a long time. Please see our April 25 note for more details on how this crisis is impacting Simon.

The company remains financially healthy, though. Liquidity is solid given the REIT's near-term commitments, even if rent collections remain abysmal for several months.

At the end of March, Simon had $4.1 billion of cash on hand and $4.6 billion of available borrowing capacity through its credit facility.

Only $900 million of unsecured debt matures this year, and after reducing its spending plans by $1 billion, Simon expects to need just $160 million to complete development and redevelopment projects under construction.

All of Simon's debt covenants remain well above their required levels as well. And although Simon's A credit rating from Standard & Poor's will likely be downgraded, the REIT should still retain an investment-grade rating.

Simon started reopening some of its properties in early May and hopes to have about half of its U.S. portfolio opened within the next week.

However, local politicians are pushing back in different states. And while some people are stir crazy, others remain fearful of contracting the virus and are unlikely to visit previously crowded spaces such as malls. 

Simon is implementing various new health and safety procedures to address these concerns, but it's hard to imagine a swift return of consumer confidence.

Current shareholders should decide if they still believe in the long-term value proposition of malls, and if they are willing to wait (with soon to be a smaller dividend) on what could be a multiyear recovery period if everything goes well (both with malls and Simon's redevelopment projects).

As we said in April, your guess is as good as ours regarding Simon's short-term performance, especially as REIT investor sentiment remains unusually volatile due to the pandemic. 

As conservative investors with fairly concentrated portfolios (20-30 holdings), we prefer to invest in businesses with safer payouts and clearer paths to growing in value in the years ahead. The fast-changing nature of the retail sector has never helped with those objectives.

Mr. Simon's peculiar attempt on the earnings call to disassociate the company from malls suggests he isn't very optimistic about their long-term future either.