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Is Simon Property Group a Retiree's Dream?

[Updated: Oct 08, 2020 ] May 20, 2020 by Matthew DiLallo
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Simon Property Group (NYSE: SPG) has a long history of rewarding income-focused investors like retirees. Since its initial public offering in 1993, the mall-owning retail REIT has paid out more than $31 billion in dividends. Even better, it has increased its payout at least once a year since the financial crisis.

However, a few headwinds have emerged in recent years that could impact the company's ability to maintain its dividend. Because of that, Simon Property Group's payout -- which currently yields a dreamy 16% -- might not be a safe option for retirees. Here's a look at the factors a retiree should consider before buying this REIT stock in hopes of locking in a lucrative retirement income stream.

A one-two punch to the dividend

Simon Property has been battling against the retail apocalypse for the past several years. Many retailers have gone out of business while countless others have shuttered locations. These store closings have increased vacancy rates for most retail centers. On a positive note, Simon has weathered this storm better than most -- its occupancy level has held up relatively well, as it was 94% at the end of March. However, that's down from 95.1% at the end of 2019 and 95.6% at the end of 2018.

Unfortunately, the environment for brick-and-mortar retailers -- and Simon Property Group -- has gone from bad to worse this year due to the COVID-19 outbreak. Simon Property temporarily closed its entire U.S. portfolio to help slow the spread, impacting its tenants' ability to generate sales. Because of that, many retailers stopped paying rent in April.

While Simon Property has started reopening many of its malls, some of its tenants might never open their stores again due to the impact the closure had on their financial situation.

Taking matters into its own hands

Simon Property has taken several steps to ensure it survives the current rough patch for retail. For example, it has enhanced its liquidity to navigate through these challenging times following the COVID-19 outbreak. It's also working with tenants to support them so that they can reopen their businesses when health conditions allow.

Simon Property is also taking action to mute the impact the retail apocalypse is having on its financial results. It has scooped up some of the retail apocalypse's casualties by acquiring them out of bankruptcy so that they can continue paying rent in its malls. It partnered with fellow mall owner Brookfield Property (NASDAQ: BPY) (NASDAQ: BPYU) to acquire both Aeropostale and Forever 21 and reposition them for long-term success.

Meanwhile, the company has also been investing heavily to redevelop many of its properties by transforming former department stores into retail, entertainment, and mixed-use centers. It had more than 30 projects underway at the beginning of this year, representing over $1.8 billion of investment. These redevelopments, which include adding residential, office, and hotel properties to many of its retail centers, will help maximize the value of its real estate and diversify its revenue stream beyond retail.

Unfortunately, it did recently suspend about $1 billion of those projects to help preserve its liquidity as a result of COVID-19. While it can restart those projects when market conditions improve, the delay will impact its ability to offset continued retail closures.

Too risky for a dream retirement

Simon Property Group's dividend yield is easy to dream on, considering how high it is these days. However, given the issues facing the retail sector, that payout likely isn't sustainable. The company warned as much on its first-quarter call. While Simon made it clear that it will not be one of the more than 175 companies that either suspend or reduce their dividend by more than 50%, it will likely cut its payout in the near term. Because of that, it's not the best stock for retirement-focused investors if their primary objective is to have a steady income stream.

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Matthew DiLallo owns shares of Brookfield Property Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.