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Simon’s Dividend Choice Could Mark New Trend

Simon Property Group’s surprising decision to pay out its fourth quarter dividend in the form of 90 percent stock instead of cash could trigger a new trend for retail REITs.

Simon made the announcement on Friday during its 2008 year-end results report. Paying dividends with stock makes it easier for REITs to deal with the freeze in the credit markets and provide a buffer against debt maturities, say analysts.

“This decision is a reflection of our conservative stance on capital allocation and liability management and is not in response to the current retail operating environment,” said Simon’s chairman and CEO David Simon in a prepared statement, during the call.

Simon is taking advantage of guidance recently handed down by the Internal Revenue Service. The ruling remains in effect through 2009.

If adopted for the remainder of the year, the company says, the stock dividend policy will allow Simon to retain $925 million in cash this year. Over the next two years, Simon faces approximately $3.7 billion in debt maturities, according to Jason Lail, senior real estate research analyst with SNL Financial LC, a Charlottesville, Va.-based research firm. The figure represents more than 20 percent of Simon’s total long-term debt of $18.0 billion. However, analysts warn, the move could also put off investors in the Indianapolis-based REIT, with a 242-million-square-foot retail portfolio. Indeed, the immediate reaction to the news was an 8 percent drop in its stock price as it fell to $41.38 per share on Friday. As of early Tuesday, the company’s stock was $43.34 per share and is down about 18 percent year-to-date in 2009.

It might also be difficult for Simon to determine what value to put on its stock dividend, possibly leading it to give away the company too cheaply, noted Joel Bloomer, an analyst with Morningstar.

“I would say the downsides [of this strategy] outnumber the up sides, but preserving capital has to be a priority right now,” Bloomer says.

Still, given the markets’ illiquidity preserving capital is probably a smart move, says Robert McMillan, industry analyst with New York City-based Standard & Poor’s Equity Research Services. Loans for commercial/multifamily transactions fell 53 percent in the third quarter of 2008, the most recent period for which data is available, to 116 deals from 247, according to the Mortgage Bankers Association.

“In this environment, who knows what’s going to happen tomorrow or next year, so I think you want to be as conservative as possible. It just makes sense to build up as much liquidity as you can,” McMillan says.

Simon’s desire to pay a portion of its dividend in stock will probably clear the way for other retail REITs to do so as well, says Bloomer. The strategy could have tainted a smaller REIT’s reputation in the eyes of its investors. However, Simon is the largest retail REIT and is generally considered among the stronger companies in the REIT sector. It is also traditionally the first retail REIT to report its quarterly and year-end results. As a result, many more retail REITs will announce similar moves in the coming weeks, predicts Rich Moore, an analyst with RBC Capital Markets.

--Elaine Misonzhnik

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