3 Reasons You’ll Want To Own This High-Yield Blue Chip REIT

Posted On July 31, 2018 1:37 pm

REITs are often a great source of generous, safe, and growing income. And due to their low volatility nature, they are especially popular for conservative income investors, such as retirees looking to live off dividends. Simon Property Group (SPG) is one of my favorite blue chip REITs. That’s thanks to its world class management team and unbeatable collection of Class A malls that are not just surviving in the age of Amazon, but thriving. In fact, Simon has proven itself to be one of the best long-term income investments you could make over the decades.

  • 25 year SPG total return: 2,860% (14.5% annual total return)
  • 25 year S&P 500 total return: 884% (9.6% annual total return)

Best of all? There are three reasons why I expect it to generate similar returns over the coming decade. That makes this low risk sleep well at night or SWAN stock a great choice for income investors of all ages, and one I’m very happy to own myself.

The King Of Class A Malls Continues To Mint Money

Simon Property Group is the largest REIT in America by market cap and owns over 230 malls across the nation and around the world. Through joint ventures and partial equity stakes Simon has malls on three continents including Europe and fast growing emerging markets in Asia.

Unlike some of the struggling class D, C, and B malls that are closing in the US, Simon owns nothing but Class A malls, meaning it enjoys some of the highest sales per square foot in the industry; including compared to other class A mall operators like Macerich and General Growth Properties.

  • Simon Property Group: $646 (up 4.6% YOY)
  • Simon’s Top 75 Malls: $743
  • Macerich: $570
  • General Growth Properties: $562

Simon just reported very strong earnings, including 4.6% growth in sales per square foot, base rent up 3.3% and lease spreads of 10.7%. The lease spread is the most important metric for mall REIT investors. It’s how much higher new or renegotiated leases are compared to the old ones. In other words, it represents the pricing power Simon has over its tenants.

Thanks to its premier locations, as well as constant reinvestment into value added non retail features to its properties (like apartments, offices, and hotels) Simon has some of the strongest pricing power in the industry. In fact its lease spreads have been above 10% since 2012. This is what allows it to grow its funds from operation or FFO (REIT equivalent to free cash flow and what funds the dividend) at the fastest rate of any Mall REIT (about 8% for 2018 per management guidance). Given its enormous size that’s a testament to the quality and skill of the management team.

That management team is led by Chairman and CEO David Simon. Not just does Simon have 33 years of industry experience but he’s been named “one of the best CEOs in the world” no less than three times by Barron’s and the Harvard Business Review. Simon’s skill extends not just to US malls, but in investing overseas as well. For example Simon owns malls in Europe, China, South Korea, and recently announced a joint venture to build Class A malls in Thailand.

In total the REIT has $807 million in growth projects underway to continue growing its cash flow and its dividends (11.4% average dividend growth since 2012 including 11% in 2018). To fund that the REIT has $7 billion in total liquidity, including annual retained cash flow (FFO minus dividend) of nearly $1.5 billion. In other words, Simon has access to a mountain of low cost capital, including enough retained cash flow to fund its growth projects almost twice over.

In fact, Simon Property Group is so flush with cash that it is one of the few REITs that is buying back its deeply undervalued shares, which is further driving further FFO/share growth. Each of the shares it repurchases at current prices is equivalent to investing at a cash yield of 7.1%, which is just below the average of 8% it gets on opening or upgrading its existing properties. Or to put another way, SPG is one of the few REITs whose growth potential is 100% independent of fickle equity markets and who actually benefits from an undervalued share price.

Photo: “Money” by Cooperweb is licensed under CC BY

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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  1. Mat August 28, 2019 at 11:19 am

    Very nice analysis and great article. I love the way you write and the optimism coming from your researches.
    I have one question: you write that SPG has $7 billion liquidity. Can you explain how do you calculate it? I was looking at their current assets and they are much lower that that.
    Best regards

    • Dividend Sensei August 28, 2019 at 3:37 pm

      $6.8 billion liquidity per latest results. Liquidity is cash + remaining revolving borrowing power. SPG’s is the highest in the industry. They won’t actually use it all, it’s just financial flexibility.

      $1.5 billion in post dividend retained cash flow could fund all their growth efforts on its own ($5 billion development backlog). But they want to buy back shares at these low levels. In the first half of the year they bought back shares at a 1.5% annualized rate meaning 1.5% FFO/share growth from current buyback rate alone. Not impressive by corporate standards (some banks buying back at 12% annual rate) but in the slow growing REIT sector, where 3% to 4% FFO growth is the norm, a 1.5% boost from buybacks is significant. SPG just needs to grow 4% to 7% (historical rate) in order to deliver 11% to 18% CAGR total returns over the next five years. The huge development backlog, mountain of low cost liquidity and steady buybacks are more than enough to achieve that.

      • Mat September 1, 2019 at 1:46 pm

        Thank you for explanation. I am very impressed by results of SPG.
        I was reading somewhere that their return on invested capital is about 8%. Comparing to 3.5% of average cost of capital seems to be pretty decent.
        I have one question to you as an expert in this field: how is return on capital calculated / estimated? Is this average revenue growth from, lets say, last 5 years? Other way? I would like to simply check information that are available in different articles/sources.

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