The malls that Simon Property Group (NYSE:SPG) owns are starting to reopen again after being shut down by the government in an attempt to contain the spread of COVID-19. That's very good news, but the hit this real estate investment trust (REIT) is suffering through isn't over yet -- and that's on top of a big pre-existing headwind.
Although many of its peers have cut dividends, Simon has yet to discuss its dividend plans. But CEO David Simon has provided a big hint about what's coming.
Compounding the problem
Coming into 2020, mall-owning real estate investment trusts were dealing with the so-called retail apocalypse. A bit of a hyperbolic term, it describes the store closures and bankruptcies that have swept through the retail industry as shoppers have increasingly used the internet to buy things. The bigger story here is that some retailers haven't managed to keep pace with customer preferences, either in terms of technology or the store environments and product assortments they offer. Not surprisingly, these retailers have fallen out of favor. Many have also taken on too much debt, limiting their ability to deal with the situation.
That's a terrible combination, and a lot of once-proud names, like Sears, have found themselves seeking out bankruptcy court protection. Retailers going under is not a good thing for mall REITs. The best-case scenario is that the retailer closes a few underperforming stores and looks for rent concessions to help itself get back on its feet. The worst case is that it permanently shuts its doors. That said, the retail apocalypse has been a slow-moving, multi-year process. Well located malls, like the type that Simon owns, have been dealing with it in relative stride.
But COVID-19 has upended that story. As the government shuttered non-essential businesses and asked people to practice social distancing, retailers and the malls in which they operate were shuttered. Many retailers, already struggling to adjust to changing customer trends, haven't been paying rent, or have asked for rent concessions. Malls looking to reopen, meanwhile, are facing increased cleaning costs and likely reduced traffic levels. It's very bad out there for mall landlords right now. In fact, Simon is even suing one of its largest tenants over unpaid rent bills.
Dividends are getting cut
It shouldn't be surprising with that backdrop that mall REITs are having a hard time today. Notably, CBL (OTC:CBL), which was crumbling under a heavy debt load before COVID-19, appears to be on the verge of bankruptcy today. However, even better-positioned peers are taking drastic action to shore up their finances, notably including cutting dividends. For example, Macerich (NYSE:MAC), with a focused portfolio of high-quality assets, trimmed its payout from $0.75 per quarter per share to $0.50. That's a 33% cut -- but it's not as simple as that. The company also intends to pay $0.40 per share of that in the form of stock. So the cash dividend that investors will receive is just $0.10 a share. The income impact is a huge 87%-per-share hit for investors that were counting on the dividend to help pay living expenses.
Tanger Factory Outlet Centers (NYSE:SKT), which offered retailers two months of rent deferral with no questions asked, went even further and suspended its dividend. The REIT is looking to help its tenants muddle through the closures so they can come back more quickly, which should help build goodwill between Tanger and retailers. It hopes that this will help it bring the dividend back sooner rather than later, but at this point, investors will get nothing for the foreseeable future.
Simon and Taubman Centers have both bucked the trend here, with neither making a dividend move yet. Taubman is in the process of being acquired by Simon, so it makes sense that the two would follow a similar path. That said, during Simon's first-quarter 2020 earnings conference call, CEO David Simon threw out some very big hints in his prepared remarks:
Let me turn to the dividend. The Board will declare a second quarter dividend before the end of June and that dividend will be paid in cash. We expect to pay out at least 100% of our taxable income in 2020 in cash. As a point of reference, there have been over 175 public companies who have either suspended or reduced their common stock dividend by 50% or more. We will not be one of those companies.
Parsing this a little bit, the first takeaway is that the CEO is telling investors to expect a dividend cut to be announced in June. It seems like, at the time of the first-quarter earnings conference call, he believed the cut would be 50% or less. That said, Simon didn't offer up any details on April rent collections, but -- based on the lawsuit with a key tenant and the dismal collection rates of peers -- it's highly likely that Simon chose that 50% figure very purposefully. Investors should probably go in expecting a 50% cut, with anything less than that viewed as a pleasant surprise.
Bad news, but not terrible
Clearly no dividend investor wants to see a company they own cut its dividend. But if Simon is able to limit the cut to 50%, it is actually doing pretty well relative to peers. In addition, Simon intends to pay its dividend all in cash, so a deeper cut won't be hidden behind a dividend payment paid partially in shares (though the company did use this approach during the 2008-09 recession). And despite the near-term negatives here, the CEO was pretty upbeat about the long-term future of malls during the conference call. Although that won't help investors deal with a 50% dividend haircut, it does suggest that the long-term future may be better than investors fear. All in all, even as investors await bad dividend news, Simon Property Group still looks like the cleanest shirt in a dirty industry.