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This High-Yield Passive Income Play Is Building the Future

Simon Property Group (NYSE: SPG) cut its dividend by nearly 40% in 2020 as the coronavirus pandemic led to shuttered malls. Since that point, however, the dividend has been increased five times for a total increase of just about 35%. With its business getting back to normal, Simon is looking not only to reward shareholders for sticking around but it is also looking for ways to create even more long-term value. Here’s how.

Getting back to business

The core business of real estate investment trust (REIT) Simon Property Group is operating malls. It has both enclosed malls and factory outlet centers in its globally diversified portfolio of about 200 or so properties. During the early days of the pandemic, most of its malls were shut, leading to material concern about the company’s ability to cover its dividend. That’s why Simon chose to trim the payout.

Image source: Getty Images.

Although dividend investors tend to frown on dividend cuts, it was the right move for the company. However, at this point, the REIT is recovering quite strongly. For example, occupancy was strong at roughly 93.9% at the end of the second quarter, up from 91.8% in the year-ago period. And leasing momentum accelerated, according to management. Funds from operations (FFO) — a key performance metric for REITs — rose a solid 6.3% year over year in the first half of 2022. 

Simon isn’t exactly back to pre-pandemic form just yet. But the REIT is clearly moving in the right direction.

Building again

A key piece of the puzzle on that front is internal growth, which basically means development and redevelopment. In early June, Simon announced that it had big capital spending plans on this side of the business.

On the redevelopment front, Simon is going to expand its Woodbury Common Premium Outlets center in upstate New York. This property is a huge regional draw, attracting over 13 million people annually. It’s already a big property at around 911,000 square feet, but it will be increased by 160,000 square feet or roughly 17.5%. Additional parking and two new hotels are also a part of the mix. These projects will break ground in 2024.

Simon is undertaking ground-up construction of new properties in Los Angeles, Nashville, Tennessee, and Tulsa, Oklahoma. The LA and Tulsa properties were put on hold during the pandemic and will now restart. They are both expected to open in 2024. The Nashville investment is slated to start construction next year and sits near two other properties the company owns. All three of the new assets under construction are outlet centers.

It’s obviously too soon to judge the financial impact of these properties. However, the more important takeaway is that Simon has a pipeline of internal growth projects that will help it expand FFO beyond the recovery taking place within its current portfolio over the next three years or so. And that should translate to a welcome return to growth for this mall REIT.

Back to basics

The enormity of the impact of the coronavirus pandemic has made what would normally be a fairly regular construction update a very big deal. Essentially, Simon has announced that it has returned to business as usual. That should please even the most conservative dividend investors. If you are looking for a retail REIT, Simon, with a big 6.6% dividend yield, should probably be on your shortlist.

Reuben Gregg Brewer has positions in Simon Property Group. The Motley Fool recommends Simon Property Group. The Motley Fool has a disclosure policy.

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