Simon Property Group Inc (SPG): A Blue Chip REIT Down Over 20% Since July

Simon Property Group Inc (NYSE:SPG) has a Dividend Safety Score of 64, making its dividend one of the safest in the REIT industry and unlikely to be cut, at least in the short to medium-term. This is primarily thanks to two factors.

First, Simon Property Group’s low FFO payout ratio of just 62% means that its cash flows are more than adequate to pay the dividend with plenty of safety buffer.

As you can see, Simon Property Group has a good track record of maintaining a low payout ratio, which has stabilized in the low 60% range after moderately rising since 2012. The payout ratio remains at a reasonably healthy level.

However, just as important as a strong payout ratio is a strong balance sheet. A REIT that is over-leveraged may end up facing pressure from creditors or credit rating agencies to sacrifice the dividend in the name of repaying debts or maintaining its rating to have access to financing.

Source: Simply Safe Dividends

Now on an absolute basis, Simon Property Group has a lot of debt, as seen by its high debt / equity and net debt / EBIT ratios. However, remember that real estate is a highly capital intensive industry and the business model of the industry requires a REIT to take on debt to grow. Thus we need to look at Simon Property’s credit metrics in context with its industry.

Source: Morningstar

When we compare Simon Property Group’s leverage ratios to its peers we see that, though the debt load is high on an absolute basis, relative to its industry the balance sheet is actually quiet strong.

In fact, Simon Property’s cash flow is more than sufficient to service its debt obligations.  Combined with the fact that it is nowhere near breaching its debt covenants (which would likely result in a dividend cut), this explains why it has such a strong credit rating.

Barring a major recession and a secular decline in high-end mall real estate, Simon Property Group’s dividend looks quite safe.

Dividend Growth Analysis

Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.