Shares of Simon Property Group (NWSE: SPG) unleashed a barrage of dividend increases, bolstering its bull. The world’s largest retail REIT continues to post improving financials following the pandemic, resulting in multiple dividend hikes recently. In fact, the company closed Fiscal 2023 with record FFO/share (funds from operations per share, a cash flow metric used by REITs), surpassing its pre-pandemic levels for the first time.
I believe the ongoing momentum will continue. That’s why I remain bullish on SPG stock.
Full Post-COVID Recovery Drives Dividend Hikes
After overcoming the challenges posed by the pandemic, which greatly affected retail REITs, including Simon Property, the company experienced a remarkable rebound in occupancy levels. This, coupled with increased rental rates, prompted Simon Property to achieve a complete recovery. Thus, the company successfully implemented a series of large dividend increases, demonstrating its resilience and financial strength post-pandemic.
To begin with, I believe it all starts with retailers feeling an increased sense of confidence in consumer spending over the last few quarters. Retailers’ optimism appears to be fueled by several indicators that point to a reassuring “soft landing” scenario. These include low unemployment and moderate inflation. As a result, SPG saw a significant increase in occupancy levels, which landed at 95.8% at the end of the year – a remarkable increase of 90 basis points compared to Fiscal 2022.
At the same time, seizing the strong demand for its properties, Simon pursued increasing rental rates, resulting in a base minimum rent (BMR) of $56.82 at the end of the year — a 3.1% increase from the previous year. This is one of the highest BMRs I have ever seen a retail REIT achieve, underscoring Simon Property Group’s high quality property portfolio.
The combination of increasing occupancy and record base minimum rent levels led to total revenues for the year coming in at $5.66 billion, up 7% year over year. Interestingly, this brings SPG remarkably close to its pre-pandemic Fiscal 2019 revenue of $5.67 billion, signaling a full post-pandemic recovery.
SPG’s bottom line results were even more impressive, with funds from operations per share (FFO/share) for the year landing at $12.51, up from last year’s $11.95 and setting a new 2019 record of $12.37.
To me, it’s very impressive that Simon Property’s profitability has recovered with such vigor, considering that most REITs out there are now feeling the negative effects of decades of high interest rates. Being the largest REIT in the space, Simon has nevertheless managed to leverage its high quality portfolio to maintain an attractive credit profile.
Notably, while the REIT’s average cost of debt has grown from a low of 3.03% in 2021 to 3.70% in 2023, it still remains at very competitive levels. Further, Simon’s weighted average yield to maturity stood at 7.2 years at the end of 2023, meaning the company is more or less insulated from potentially damaging refinancings in the medium term.
Seeing such a strong credit position and FFO/share reaching new highs, management felt confident about continuing its aggressive post-pandemic dividend increases. As you can see in the bar chart below, Simon cut its dividends to manage the underlying crisis after the pandemic hit. However, nine hikes have occurred so far, with the most recent increase to $1.95, bringing the three-month rate one step closer to its pre-pandemic level of $2.10.
It’s also worth noting that SPG’s payout ratio has improved significantly as its FFO/share reached new records in FY2023, but the dividend is still hovering below its 2019 levels. The company’s FFO payout ratio was 60% last year, down from 69% in 2019. I believe this should encourage management to continue raising its dividend comfortably in the coming quarters, which, combined with its already decent dividend yield of 5.4%, forms a compelling dividend growth case.
Another factor signaling that SPG can easily afford further dividend increases is that the REIT recently announced a $2 billion share buyback program. Not only does this imply notable excess cash generation, but it also suggests that management finds Simon’s current valuation attractive.
Is SPG stock a buy, according to analysts?
Wall Street’s view of Simon Property Group seems a bit more conservative. The retail real estate giant currently has a Moderate Buy consensus rating based on five Buys and eight Holds assigned in the past three months. At $150, the average SPG stock forecast implies only 4.5% upside potential.
If you’re looking for the right analyst to guide your decisions about buying and selling SPG stock, look no further than Caitlin Burrows, who represents Goldman Sachs (NYSE:GS). Her performance over a one-year timeframe has been outstanding, boasting an impressive average return of 34.17% per rating with a success rate of 100%. Click the image below to learn more.
The Takeaway
SPG’s strong post-COVID recovery, marked by increased occupancy levels and rising rental rates, paved the way for a series of dividend increases. The company ended Fiscal 2023 on a high note, with record FFO/share and an improved payout ratio, signaling that the ongoing dividend growth is likely to continue. This momentum, coupled with a robust credit profile and attractive dividend yield, forms a compelling investment case, reinforcing my bullish view on the stock.
Disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.