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Simon Says: What's Next for the King of Malls?

04/22/2020 5:00 am EST

Focus: REITS

Hilary Kramer

Editor, GameChangers

Fifteen weeks ago, Simon Property Group Inc. (SPG) was the king of mall stocks — and trading at $145 a share, observes Hilary Kramer, growth and income expert and editor of Trading Desk.

The Simon family effectively built the modern suburban shopping center. They own more American malls in richer neighborhoods than anyone else.

Here in the depths of a pandemic, all Simon shopping centers have been shut down for a month and that 5% yield has bloomed beyond 15% on expectations of a dividend cut ahead.

I suspect the Simon family will conserve as much cash as it can while waiting for surviving tenants to start paying rent again and refill empty stores. They’ve already laid off 30% of their staff and cut CEO David Simon’s pay to zero.

If more is needed, a dividend cut is not out of the question, but I think it’s less likely than the stock’s massive decline suggests. Simon just extended its primary $4 billion credit line to capture another $2 billion in liquidity with an option to borrow another $7 billion as needed.

That’s a lot of debt and much of it will go to replenish the balance sheet after the company spent $3.6 billion to buy out its primary rival right before the COVID-19 crisis hit. But here’s the crucial detail — none of it is due before 2022 at the earliest.

It’s going to take massive bank failures to call in that debt before those malls reopen. In the meantime, Simon only pays $350 million a year in interest, so that’s what it takes to avoid default. We’re looking at a company that raked in $5.7 billion in rent last year and turned more than $2 billion of it into profit.

The layoffs ensure that even if 85% of the company’s tenants never pay rent again, the banks get paid. After that, new stores can come in and stalled revenue wheels will start turning.

And even if cash to fund the dividend falters for a quarter or two, Simon has been creative at finding ways to make up the gap. Back in 2009, management cut what was then a healthy $0.90 distribution by 35% and briefly paid up to 90% of it in stock.

Shareholders got equity instead of cash. If you need cash, a repeat scenario can be a concern. But if you simply want to lock in long-term wealth, even a return to the dark days of 2009 may not be so awful.

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