The COVID-19 crisis has been particularly hard on the real estate investment trust (REIT) sector, with mortgage REITs, mall/retail REITs, and lodging REITs hit particularly hard. Of all the mall REITs, Simon Property Group (NYSE:SPG) is probably the best run and has managed to navigate the crisis and remain profitable.
That said, revenue and earnings are down 30% and the company still has a litigation headache with its failed merger with Taubman Centers (NYSE:TCO).
So is Simon Property Group stock a buy?
Properties are reopening (with a few exceptions)
Simon recently reported second-quarter earnings, with a 24% drop in revenue to $1.1 billion. Funds from operations (FFO) -- a rough equivalent of net income for REITs -- was $746.5 million, down 30% from the same period last year. FFO per share fell from $2.99 to $2.12. Simon estimated that the COVID-19-related hit to earnings was about $1.13 per share, which was offset by $0.36 per share in cost reduction.
Simon began reopening U.S. properties in early May and was fully reopened by July 10. However, on July 15, California issued new restrictions requiring the company to close seven properties in the state. Occupancy was 92.9% on June 30, 2020, and as of Aug. 7, 91% of Simon's tenants were open and operating. Overall, tenants reported a sharp drop in sales volume, but that has been improving. In May, tenant sales were running about 50% below last year, and by June tenants were reporting revenue down 20% from the comparable period last year. Rent collections are improving as well, with the company collecting 51% of April and May rents, 69% of June rent, and 73% in July. Finally, Simon has liquidity of $8.5 billion, which comprises $3.6 billion in cash on hand and $4.9 billion of capacity on the revolving credit agreement.
Mergers, failed mergers, and buyouts to negotiate
Simon has also been active on the mergers and acquisitions front. While the canceled Taubman deal is in litigation, Simon recently agreed to buy struggling retailers Brooks Brothers and Lucky Brand via a joint venture. While it is unusual for a REIT to buy a struggling retailer, it isn't unheard of; Kimco Realty bought supermarket chain Albertsons and that investment turned out well.
The Taubman situation is still a potential $3.6 billion outlay if Simon loses in court and Taubman is awarded specific performance (which would require Simon to purchase 80% of the stock as agreed). This is a bit of a wild card, and the most likely outcome will be a renegotiation at a lower price.
Dividend plans suggest Simon is attractively priced
Simon paid a dividend of $1.30 per share in the second quarter and will declare a common stock dividend for the third quarter before the end of the third quarter. The company also declared that it intends to pay at least $6 in dividend payouts per share in 2020, subject to board approval. The second-quarter per-share dividend of $1.30 works out to be a 61% payout ratio, using the $2.12 per-share FFO.
Last year, Simon paid $8.30 per share in dividends, which was 69% of FFO per share, so Simon is definitely being a bit conservative. Using the $6 yearly dividend and the stock's current trading price, Simon is trading at a 9.2% dividend yield. If you look at Simon's pre-COVID-19 dividend yield going back 10 years, it has been much lower than the current 9% yield. Certainly, on that metric, Simon appears attractively priced.
The bigger question for the mall REITs is whether the retail customers it relies on will come back at pre-pandemic levels, or if they will prefer to stick with online shopping. This will ultimately depend on where the pandemic goes from here.
Mall REITs were already struggling before COVID-19. Investors are probably going to be reluctant to give them the benefit of the doubt until we get clarity on back-to-school sales and what that implies for the holiday shopping season. The Taubman situation will continue to weigh on the stock as well.
That said, longer-term investors are certainly in a position to pick up one of the marquee mall REITs at an attractive dividend yield.