Listening to Simon Property Group (SPG -1.43%) Chief Executive Officer David Simon is entertaining and informative. He doesn't mince words and tends to be frank, bringing explanations down to a level that is simple enough for industry outsiders to understand. So when he said, during Simon's second-quarter earnings conference call, that the real estate investment trust's (REIT's) stock was "ridiculously cheap," he was making a material statement. Here's why you should listen.
Buying at the right time
Much too often companies buy back their own shares when prices are high. There are factors, such as offsetting the dilution from stock option-based compensation, that help to drive this pattern. However, the vast majority of the time companies do buybacks when they are doing well, which is also when companies tend to have the most extra cash for share repurchases. It's usually not a great thing for investors when a company buys high.
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Simon Property Group's stock, however, is not trading at a particularly dear price. It is down almost 30% so far in 2022. It is down nearly 40% from its pre-pandemic highs in 2019. And it is down about 50% from its highs in late 2016. Some of this is clearly warranted, given the pandemic hit that resulted in a cut of almost 40% to the dividend in 2020.
CEO Simon, however, sees a business that is turning around, and he thinks the recovery isn't being fully recognized on Wall Street. That helps explain why the REIT repurchased more than 1.4 million shares in the second quarter. On the Q2 2022 earnings conference call, Simon offered a direct explanation: "So our stock is cheap, and we're going to keep buying stock back."
Things are getting better
What's interesting is that Simon's business is clearly strengthening. For example, occupancy is at 93.9%, up from 91.8% a year ago. Portfolio net operating income increased 4.6% year over year. And comparable funds from operations (FFO), an important metric in REIT performance, rose to $2.96 per share from $2.92.
The company signed over 1,300 leases in the second quarter. Average base minimum rent increased for the third quarter in a row. Sales volume at the company's malls rose 7%. And sales per square foot at the company's malls hit a record at $746. Simon's stock is unloved, but the business appears to be doing fairly well.
Stock buybacks, however, aren't the only way management is returning cash to investors. Simon has now increased the dividend five times since the dividend cut, bringing the quarterly payout to $1.75 per share. While that's still below the $2.10 per share before the cut, it is clear that the company is back on the dividend growth path. Note, too, that every share the company repurchases reduces the cost of the dividend it has to pay in the future, freeing up more cash for either dividends, stock buybacks, or capital investments.
On that last front, Simon has also restarted some projects that were stalled by the pandemic and even taken on some new ones. So this isn't just a turnaround play -- Simon is actively looking to expand. With so many positives today, it's little wonder the CEO thinks the stock is undervalued.
What could go wrong?
All of this good news should make Simon and its generous 6.2% dividend yield fairly attractive. However, investors need to understand that retail properties like the ones Simon owns are economically sensitive. So a recession, which is a very real concern today, could stall this REIT's strong performance.
However, even an economic downturn probably won't stop this mall owner's long-term growth. Note that it used the pandemic hit to invest in bankrupt retailers -- a move that has played out well for the REIT. In other words, it is actually coming out of the pandemic a stronger company, just like it managed to come out of the Great Recession a stronger company despite a dividend cut (to $0.60 per share per quarter from $0.90) then, as well. If you can stomach some near-term uncertainty, you might want to listen to David Simon and buy this ridiculously cheap high-yield REIT.
