I Added Simon Property Group’s 5.4% Dividend Yield To My Shopping (NYSE:SPG)

I’ve been buying Simon Property Group (NYSE:SPG) over the last few months. The shopping mall and outlet center REIT last declared a quarterly cash dividend of $1.950 per share, a 2.6% sequential hike, and $7.8 per share annualized for a 5.4% yield. SPG has raised its dividend by a 3-year compound annual growth rate of 8.2%, but the distribution still sits roughly 7% below its pre-pandemic peak. The REIT generated a fiscal 2023 fourth-quarter FFO of $3.69 per share which covered its dividend by 189%, while this included investment gains of $0.31 per share from the partial sale of its Authentic Brands Group stake, the REIT is still comfortably covering its dividend.

SPG is guiding for full-year 2024 FFO to come in between $11.85 to $12.10 per share, down versus its 2023 figure of $12.51 per share and consensus of $12.20 per share. This guidance reflects net operating income growth of 3% albeit with headwinds from higher interest expenses driving at least 25 cents of increased net interest expense compared to 2023. SPG is currently trading hands for 12x the midpoint of its 2024 FFO guidance range, a healthy multiple that’s roughly in line with its sector median. Critically, SPG’s first-rate Class A mall property portfolio, $2 billion stock buyback program, and heavy free cash flow generation have set the REIT up for strong medium to long-term performance. The REIT stated during its fourth-quarter earnings call that its current dividend yield is outsized versus its historical average, hence, the outlook for a near-term dividend raise is muted versus buybacks. This is SPG stating they think they’re undervalued. The REIT has moved up since I last covered it and its preferred stock (NYSE:SPG.PR.J).

High-Quality Retail Assets And NOI Growth

It’s hard to overstate just how high-quality SPG’s properties are. The company owns Class A malls and premium outlets in some of the best locations in the US with occupancy of 95.8% at the end of the fourth quarter, up 90 basis points from its year-ago comp of 94.9% with its base minimum rent per square foot of $56.82 up 3.1% year-over-year. Market research from Coresight placed traffic at top-tier malls in 2022 increasing by 12% over pre-pandemic levels in 2019 as Class B and Class C malls continue to experience closures.

This dichotomy lies at the heart of SPG’s investability as peers like Pennsylvania Real Estate Investment Trust (OTC:PRETQ) would come to encapsulate the headwinds facing the industry from the marked rise of eCommerce. SPG faces rising rents and occupancy as sticky demand for physical retail and a flight to quality by retailers continue to drive a material improvement of the REIT’s earnings power. Cash from operations is now in line with its pre-pandemic level and set for further growth on the back of rising occupancy and guidance for domestic property NOI to grow by at least 3% in 2024. Domestic property NOI was up 7.3% in 2023 versus the prior year. The REIT reported a retailer sales per square foot of $743 for the trailing 12 months ended December 31, 2023, a dip of 1.3% versus 2022.

Credit Profile As Fed Gears Up For A Cut

SPG’s balance sheet is incredible, with cash and cash equivalents of $1.17 billion, up from $621 million a year ago. The REIT has access to $11 billion of liquidity, with $8.1 billion of this capacity available under its revolving credit facilities. This comes as SPG’s weighted average years to maturity of 7.2 years at the end of the fourth quarter was expanded out from 6.7 years at the end of the third quarter. SPG also purchased 1.3 million shares of its common stock at an average price of roughly $110 per share in 2023. The renewed share repurchase program is set to partially form a backstop for shareholder returns in 2024 as the market awaits cuts to base interest rates.

The most likely pathway, with a 35% probability, for Fed interest rate cuts this year as per the CME FedWatch Tool is for at least 50 basis points of reductions of base interest rates to 4.75% to 5.00%. However, the situation is fluid and inflation remaining even stickier could derail the hopes for any substantial rate cuts this year. SPG at its current 5.4% dividend yield and 12x multiple to 2024 FFO as the underlying demand for its spaces ramps up is attractive. The REIT signed 4,500 leases during 2023 of roughly 18 million square feet. New leases were signed at $74 per square foot, markedly higher than the REIT’s current average with renewals also higher than the average at $65 per square foot. This leasing momentum is expected to continue into 2024 as the current negative zeitgeist towards REITs looks set to change for the better in the second half of the year on rate cuts. I continue to be a buyer of SPG here.