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Elevator Pitch
I assign a Buy investment rating to Simon Property Group (NYSE:SPG). SPG is referred to as “the largest U.S. mall operator” by Reuters.
Simon Property Group has been increasing its quarterly dividend payout in the past quarters, and I expect SPG to continue paying out higher dividends until its quarterly dividend returns to the $2 per share level last seen prior to the pandemic. In my view, SPG’s shares should go up over time in tandem with rising dividends supported by a positive outlook, and this explains why I rate Simon Property Group as a Buy.
What Is Simon Property Group’s Recent Dividend Yield?
Simon Property Group declared quarterly dividends per share of $1.80, $1,75, $1.70, and $1.65, respectively, for the recent four quarters. This translates into to a dividend payout of $6.90 for the trailing 12-month period.
As such, SPG’s recent or trailing 12-month dividend yield is a reasonably appealing 5.9%. This is calculated based on Simon Property Group’s last done stock price of $117.53 as of November 14, 2022 and its $6.90 dividend for the last four quarters.
Why Did SPG’s Dividend Drop Before?
I highlighted Simon Property Group’s dividends for the preceding four quarters in the prior section, and it appears that SPG’s dividends have been rising on a quarter-to-quarter basis in the past year. But Simon Property Group’s historical quarterly dividend was actually much higher, before the World Health Organization or WHO declared that COVID-19 is a pandemic on March 11, 2020.
SPG announced a quarterly dividend of $2.10 per share for Q1 2020, when the company disclosed its Q4 2019 and FY 2019 financial results on February 4, 2020. In fact, Simon Property Group’s actual quarterly dividends per share for fiscal 2019 were all above $2.00.
On June 29, 2020, Simon Property Group revealed that the company would be lowering its dividend payout per share from $2.10 in the first quarter of 2020 to $1.30 for Q2 2020. SPG’s full-year dividend decreased by -28% from $8.30 for FY 2019 to $6.00 in FY 2020, before declining by another -3% to $5.85 for FY 2021.
As per S&P Capital IQ’s financial data, SPG’s FFO (Funds From Operations) and AFFO (Adjusted Fund From Operations) fell by -24% and -18%, respectively in FY 2020. Simon Property Group’s financial performance took a big hit due to the COVID-19 pandemic, and this explains why there was a drop in SPG’s dividend previously.
SPG Stock Key Metrics
It is necessary to review Simon Property Group’s key metrics for the most recent quarter as highlighted in its results press release, before one assesses the dividend outlook for SPG.
Q3 2022 was a great quarter for SPG judging by its performance on a number of key metrics.
Firstly, Simon Property Group’s base minimum rent for its property portfolio grew by +1.7% from $53.91 as of end-Q3 2021 to $54.80 as of end-Q3 2022. Q3 2022 marked the fourth consecutive quarter that SPG witnessed an increase in its base minimum rent.
Secondly, SPG’s portfolio occupancy rate expanded by +0.6 percentage points QoQ and +1.7 percentage points YoY to 94.5% as of the end of September 2022. Simon Property noted at its Q3 2022 results briefing that “hopefully, in ’23, we’ll get back to pre-COVID (occupancy) levels.” As a reference, the portfolio occupancy rates for Simon Property Group were 95.1% and 95.9% as of end-2019 and end-2018, respectively.
Thirdly, Simon Property Group also disclosed certain metrics at its most recent quarterly investor call that sent positive signals about its short-term and intermediate term outlook.
SPG mentioned that “the opening rate on our new leases has increased 10% since last year, or roughly $6 per lease.” Simon Property Group defines the opening rate “the initial cash Rent PSF (Per Square Foot) for spaces leased during the trailing 12-month period.”
Separately, Simon Property Group also stressed that “we expect to garner a lot of the percentage and overage rent to minimum rent as these leases roll.” Fixed rent leases and variable rent leases accounted for 79% and 21% of SPG’s total lease income for the first nine months of 2019, so there is room for Simon Property Group to increase its proportion of fixed rent leases going forward.
In summary, Simon Property Group’s key metrics suggest that SPG’s recent Q3 2022 performance was decent and its outlook is reasonably good.
Can The Dividend Return To $2?
The occupancy rate increase for Q3 2022, expectations of rising rental rates, and the potential to grow the percentage of fixed rent leases (as discussed in the preceding section) are supportive of higher cash flow and dividends for Simon Property Group in the future.
The outlook for SPG is bright.
In the short term, consumers are eager to return to physical malls, driven by easing pandemic restrictions. There has also been a shift in retailers’ expansion strategy from online to offline. SPG observed at its recent quarterly results call that “the flight toward bricks and mortar is real” as retailers discover that “returns on e-commerce just aren’t quite what everybody talks about.”
In the medium term, the pace of industry consolidation in the US shopping mall market has likely accelerated as a result of COVID-19 pandemic and the tough economic environment. This favors Simon Property Group which is well-positioned to gain market share as the biggest player in the industry.
Taking into account the above-mentioned factors, I expect Simon Property Group’s quarterly dividend per share to eventually return to $2.00. Specifically, my prediction is that SPG will increase its quarterly dividend back to $2.00 per share by 2024 at the latest.
As per financial data obtained from S&P Capital IQ, SPG’s AFFO payout ratio was 77% for fiscal 2019 and 71% in FY 2018, but its AFFO payout ratio declined significantly to as low as 53% for FY 2021.
Assuming that Simon Property Group’s AFFO payout ratio is able to recover to around 70%, SPG has to grow its AFFO per share to $11.42, before it can pay out a full-year dividend of $8.00 per share (or four quarterly dividends of $2.00). The consensus financial estimates (source: S&P Capital IQ) imply that Simon Property Group’s AFFO per share is expected to expand by +3.0% and +3.2% to $11.25 and $11.61 for FY 2023 and FY 2024, respectively.
As such, it is reasonable to expect SPG to pay out a quarterly dividend per share of $2 in 2024. Of course, Simon Property Group’s dividends can return to $2 much earlier, if its actual AFFO per share or AFFO payout ratio turn out to be better than expected.
Is SPG Stock A Buy, Sell, Or Hold?
I rate SPG as a Buy. Simon Property Group’s share price should continue to rise, as it gradually raises its quarterly dividend per share back to pre-pandemic levels above $2.
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