Simon Property Group (NYSE: SPG) Cuts Dividend: Mallpocalypse Now?

It’s safe to say that the short term impact of the global pandemic on the commercial retail sector has been devastating. With malls forced to shut down for an extended period of time and more and more consumers shifting towards online shopping, times are tough for major mall owners. Simon Property Group Inc. (NYSE:SPG), which is the biggest mall owner in the U.S., is facing an array of serious issues that will ultimately determine the fate of many retail businesses.

The company, which is structured as a real estate investment trust (REIT), is required to pay out at least 90% of its net profits to shareholders in the form of dividends. It recently announced a dividend cut of 38% to $1.30/share, which tells us a lot about how the company is doing financially at this time. Although other REITs have slashed dividends even more than Simon Property Group, many investors are wondering if this is the beginning of the end for the big mall owners in America. On the other hand, value investors love to pick up shares of companies in distress that could have upside, and Simon Property Group fits the bill. Although the company possesses a large portfolio of valuable properties, it might be facing too many problems to make it through the pandemic unscathed.

Here are a few of the reasons why this company had to cut its dividend and what problems they will need to solve in order to survive the mallpocalypse.

Preserving Capital

Dividend investors never like to hear that one of their stocks is reducing its dividend payout, but Simon Property Group essentially had no choice. The brick and mortar retail industry were struggling mightily before the global pandemic hit, and now companies that own malls are being forced to take drastic measures in order to preserve capital. The good news about this dividend cut is that Simon Property Group was one of the last mall owners to reduce shareholder payouts and that it is only a temporary reduction.

This company’s balance sheet is strong, which means that they should have enough cash to survive until social distancing subsides and foot traffic on their properties increases. In the press release for the dividend cut, the company mentioned that it maintains a strong liquidity position of $8.5 billion with $3.5 billion of cash on hand. Although it’s concerning to see a dividend cut, things are a lot worse for other major mall REITs. If Simon can survive this rough patch, it does have the potential to thrive yet again.

Concerning Headlines

If you follow Simon Property Group or have considered investing in it, you’ve probably noticed all of the recent negative headlines. The company is currently in a heated legal battle with Taubman Centers (NYSE:TCO), a rival it was going to acquire prior to the pandemic. Should a court deem it necessary for Simon to proceed with the acquisition at the initial price, it would be forced to pay out $3.6 billion which would certainly cause additional financial stress. You also have news about major tenants like Gap (NYSE:GPS) and L Brands (NYSE:LB) withholding rent payments for the period in which their stores were closed. Simon has already pursued litigation to recoup those funds, but it remains to be seen if that loss of cash flow is permanent or not.

The company is also looking at the acquisition of J.C. Penney Co., one of the mall owner’s top anchor tenants. It’s worrying to see this because J.C. Penney has declared bankruptcy and might be telling us that Simon’s rent-collection business model is running into big trouble. However, it’s not all bad news for Simon Property Group. At this time, 199 out of its 204 U.S. retail properties are open. With that said, the second wave of COVID-19 could cause some of the properties to close down again which would certainly be a negative for Simon Property Group.

Upside Exists

We’ve mentioned a lot of downsides related to Simon Property Group, and the company faces a monumental challenge in the coming months to reduce its financial damages. However, you can’t deny that there is an upside for this stock if management is able to weather the storm and avoid the mallpocalypse. Keep in mind that the stock is down over 50% from its 52-week high and has a healthy balance sheet. Most of Simon’s properties are A-rated and generated more than $80 billion in sales globally prior to the pandemic. As mall REITs go, Simon Property Group is one of the best, but don’t underestimate the massive risks it faces in the short-term if you are thinking about buying.