The shares of real estate investment trust (REIT) Simon Property Group (SPG +0.48%) are down a painful 30% from their 2016 highs. So far, 2019 has been particularly difficult, with the mall owner down around 7%. That's while the broader REIT peer group, as measured by Vanguard REIT ETF, is up 25%.
But despite the obvious negative sentiment on Wall Street, Simon just did something huge that is a testament to both its size and its financial strength. Here's what you need to know.
An industry giant
One of the biggest problems that Simon is facing today is that it is the largest mall-owning REIT. Malls have been dealing with store closures both large (Sears) and small (Dress Barn) as online shopping has gained ground at the expense of physical stores. Although the so-called "retail apocalypse" is probably overhyped, it is a definite headwind for the landlords of retailers taking the biggest hit. It requires time, cost, and effort to take a vacant mall slot and release it. That's particularly true with regard to anchor tenants, which have cavernous spaces that are often being repurposed, at great cost, to expand experiential offerings and bring in service-focused businesses (which is called "densification" in industry jargon).
Image source: Getty Images.
Simon, however, has been doing pretty well lately despite the negative investor sentiment. For example, it has increased its dividend twice so far in 2019. And it expects funds from operations (FFO), which are basically earnings for REITs, to be up modestly in 2019 despite the ongoing headwinds in the retail space and the elevated cost of dealing with empty space. It's a further testament to the company's strength that occupancy -- currently at 94.4% -- remains strong, and rental rates and sales per square foot at its malls have been improving.
Still, stock investors don't appear to be all that impressed with the progress Simon is making. But there is one group of investors that seems to see a brighter future ahead for the mall owner.
That's a lot of cash
Simon recently sold "a little" debt through a bond issuance spread across three different maturities:
|
Size |
Interest Rate |
Maturity |
|---|---|---|
|
$1.00 billion |
2.00% |
2024 |
|
$1.25 billion |
2.45% |
2029 |
|
$1.25 billion |
3.25% |
2049 |
Data source: Simon Property Group.
The first thing to note here is that the total bond issuance was $3.5 billion, which is a huge number. That the bond market was willing to absorb such a large debt sale from a company in what stock investors consider a troubled industry says a great deal about Simon. The biggest highlight on this front is the $1.25 billion of 30-year bonds sold, which is a record for a REIT. Essentially, bond investors, who care about an issuer's ability to repay principal and cover interest costs, think this mall owner is on solid financial ground today. Otherwise, they wouldn't have been willing buyers -- especially for long-dated bonds.
Second, the interest rates on the debt were very low. That's partially a function of the current low-interest-rate environment, but it is also a statement to Simon's financial strength. If it were a material credit risk, bond buyers would have demanded higher yields. That said, the second-order effect here is that Simon has locked in low rates for a very long time. This, in turn, should reduce the company's interest expenses in the years ahead. That's a clear benefit as the company deals with the costs of repurposing empty space.
And third, the cash raised will allow the company to repay bonds coming due between 2020 and 2022 while also paying down a credit facility. Essentially, this bond sale is providing some breathing room on the balance sheet while Simon deals with the impact of the "retail apocalypse." Not only is it pushing out its maturities, it has freed up a credit line that it can tap as needed to pay the costs of transitioning along with the retail landscape.
All in all, stock investors should be very pleased with this opportunistic bond sale.
Everyone wins?
If you own Simon and are underwater, this bond sale should lift your spirits. Not only are there material benefits to the REIT, it shows that not everyone agrees with the dour view of Wall Street. The $3.5 billion bond sale is a strong show of support for one of the mall industry's largest names. Yes, the "retail apocalypse" is an issue. But Bond investors are looking out 30 years and saying Simon will make it through this rough patch just fine.
If you don't own the shares, but are looking at them, Simon's stock is down materially from recent highs and its yield is near the highest levels of the past decade. Taking the big-picture implications of this bond sale into consideration, it looks like a good risk/reward balance for long-term dividend investors seeking to live off the income they generate from their portfolios.
