Real estate investment trusts (REITs) have struggled over the past year as rising interest rates have soured investor sentiment on the real estate market. Since REITs generally have high dividend yields, they often move up and down with changes in interest rates. As fears are spreading over commercial real estate, some REITs have struggled as investors fear dividend cuts.
Simon Property Group (SPG -0.26%) is a high-yielding REIT. Is the dividend safe?
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Simon is the premier mall and outlet REIT
Simon Property Group is a REIT that primarily owns shopping malls and outlet centers. As of the end of 2022, it owned and operated 94 shopping malls, 69 Premium Outlets, 14 Mills, six lifestyle centers, and 13 other retail properties in the U.S. and Puerto Rico.
Simon also owns an 80% interest in Taubman Centers. In addition, Simon has an interest in 34 properties overseas and holds a stake in French retailer Klepierre.
Like most REITs, Simon Property Group was negatively affected by the COVID-19 pandemic. The company's properties were shut down during the lockdowns, and many of Simon's primary tenants were forced into bankruptcy. Occupancy fell and still has yet to recover to its pre-pandemic level of 95.1%.
At the end of March 2023, occupancy stood at 94.4%. Base rent increased 3.1% on a year-over-year basis to $55.81 per square foot. Sales per square foot hit a record, rising to $683.
Simon Property has refinanced its 2023 debt maturities already
The knock on REITs is that rising interest rates will negatively affect their financing costs. Simon has about $25 billion in long-term debt, but the interest rate on that debt is quite low at 3.22%, and most of that is at fixed rates.
Simon refinanced $1.3 billion in maturing 2023 debt in the first quarter and has about $6 billion in maturing debt between 2024 and 2025. The REIT doesn't face any sort of financing cliff that is bedeviling the office sector.
On the first-quarter 2023 earnings conference call, Simon guided for 2023 funds from operations per share to come in between $11.70 and $11.95. REITs tend to use funds from operations to describe earnings because they are a more accurate representation of cash flows than earnings per share, as calculated under generally accepted accounting principles (GAAP).
GAAP earnings require companies to deduct depreciation and amortization from revenue to arrive at net income. Depreciation and amortization is a noncash charge, which means the company doesn't write a check for it. For this reason, REITs will tend to look expensive on a price-to-earnings multiple, so price-to-FFO is a better multiple to use.
The dividend is well covered
Simon pays a quarterly dividend of $1.85, which was recently increased from $1.80. This gives the company an annual dividend of $7.40, which is more than amply covered by Simon's 2023 FFO-per-share forecast of $11.70 to $11.95. The payout ratio (which is the dividend divided by earnings) works out to be 63%, which is quite low for a REIT, since they are required to distribute 90% of their earnings as dividends.
At current levels, Simon is trading at a price-to-FFO ratio of 10, a good number for a high-quality REIT. Simon raised $1.3 billion of 20-year senior debt this year at 5.67%, which is a highly attractive interest rate, indicating the market is not worried about Simon's debt load.
With a dividend yield of 6.5%, Simon is an attractive REIT for an income investor.
