Shares of mall real estate investment trust (REIT) Simon Property Group (NYSE: SPG) have tumbled about 50% this year due to the impact COVID-19 has had on its tenants' ability to pay rent. That affected the company's cash flow, which forced it to suspend its dividend temporarily. While it recently reinstated its payout, the reset level is 38.1% below the previous rate.
On one hand, Simon's lower valuation and income stream -- the reset dividend implies a 7.5% yield -- make it seem attractive. However, it might not be the best option for investors seeking a bounce-back candidate in the retail REIT sector.
In my opinion, a better buy is leading shopping center REIT Federal Realty Investment Trust (NYSE: FRT). Here's why.
In mid-March, Simon closed all its retail properties in the U.S. -- which are mainly indoor regional malls and premium outlet shopping centers -- to help slow the spread of the COVID-19 outbreak. Because of that, its rental collection rates fell off a cliff, as it only received 51% of the rent it billed in April and May.
Receipts picked back up as the company reopened most of its malls, with its collection rate rising to 69% in June and 73% in July. Those numbers should keep improving as shoppers gain more confidence and start venturing out to malls, giving retailers the money to pay current and back rent.
Whereas Simon closed all its properties earlier this year, Federal kept its locations open and operating, since it primarily owns open-air shopping centers. Because of that, more of its tenants were able to generate sales, which gave them the funds to pay rent. Overall, it collected 68% of the rent it billed during the second quarter, which improved to 76% in July.
One beneficial factor during this period was that 75% of the company's shopping centers have grocery stores, essential businesses that remained open even as governments mandated other retailers close. Overall, 24% of the company's ABR comes from essential retailers like that (which paid a high percentage of their rent).
Meanwhile, another 21% of its ABR comes from office and residential tenants (which paid 96% and 98% of their rent, respectively, during the second quarter). That diversification away from nonessential retail such as clothing stores paid big dividends this year as it enabled Federal Realty to collect a much higher portion of the rent it billed.
More in-demand space
Simon owns many high-quality malls, in high demand by retailers. Overall, occupancy at its properties stood at 92.9% at the end of June. Meanwhile, the base minimum rent across its properties averages $56.02 per square foot, up 2.8% year over year. However, new leases averaged around the same rate as prior ones because of the pandemic and retail apocalypse. That trend seems likely to continue or worsen, given the number of mall tenants filing for bankruptcy this year. While Simon is working to offset that headwind by buying up bankrupt retailers, it won't save them all.
Contrast those metrics with Federal Realty's portfolio during the second quarter. It had a higher occupancy rate, at 93.7%. Further, new and renewal lease rates on comparable space have risen sharply over the past year from $25.64 per square foot to $28.55 per square foot. These numbers suggest its properties are in higher demand from tenants. That's somewhat due to its focus on essential retail, which not only weathered the pandemic much better but also faces less of a headwind from e-commerce. With higher occupancy and rent growth, Federal Realty's portfolio is more likely to grow its cash flow.
A better-positioned retail REIT
The headwinds facing Simon's malls are getting worse because of COVID-19 as more of its tenants are going bankrupt, which will likely keep the pressure on occupancy and rental rates. Because of that, the company reduced its dividend to reflect this reality. As these market forces remain, they could keep the pressure on Simon's stock price.
While Federal Realty isn't immune to those headwinds, it has weathered the storm much better, due to its focus on essential retailers like grocery stores and its diversification strategy of adding residential and office space to its properties. Those factors give Federal the "confidence this quarter to increase our dividend for the 53rd year, an industry record," according to comments by CEO Donald Wood. They also make it a better retail REIT buy for investors who are considering Simon.