Simon Property Group, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2023; comparisons are with Q3 and the first nine months of 2022. Simon is a REIT operating primarily through Simon Property Group, L.P. It owns, develops, and manages malls, outlet centers, and mixed-use properties, with additional investments in joint ventures and retail-related businesses. At quarter-end, it owned or held interests in 195 U.S. income-producing properties and 35 international outlet properties. Simon owned approximately 87% of the Operating Partnership.
Financial and operating highlights
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1,411 million | $1,316 million | $4,131 million | $3,892 million |
| Operating income before other items | $694 million | $652 million | $2,015 million | $1,899 million |
| Net income attributable to common stockholders | $594 million | $539 million | $1,532 million | $1,462 million |
| Diluted earnings per share | $1.82 | $1.65 | $4.68 | $4.46 |
| Diluted FFO per share (non-GAAP) | $3.20 | $2.93 | $8.82 | $8.54 |
Operating margin was approximately 49.2% in Q3 versus 49.6% a year earlier, and 48.8% for the nine-month periods in both years; calculated as operating income before other items divided by revenue. Portfolio NOI, a company-defined non-GAAP measure, increased 4.3% in Q3 and 4.0% for the first nine months.
- Cash flow: Nine-month operating cash flow was $2.894 billion versus $2.834 billion. Investing activities used $493 million, including $615 million of net capital expenditures. Financing activities used $2.254 billion. Cash and equivalents were $769 million at September 30, up from $622 million at year-end 2022.
- Debt and liquidity: Mortgages and unsecured debt totaled $24.917 billion, slightly below $24.960 billion at year-end 2022. Effective overall borrowing rate was 3.40%, up from 3.22% at year-end; floating-rate debt was 2.2% of consolidated debt. Available capacity under revolving credit facilities was approximately $7.3 billion, with $1.1 billion drawn and $58.6 million of letters of credit. No commercial paper was outstanding. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $32.965 billion and total equity was $3.410 billion at September 30, 2023, compared with $33.011 billion and $3.612 billion, respectively, at December 31, 2022.
- Property performance: U.S. Malls and Premium Outlets occupancy was 95.2%, up from 94.5%; average base minimum rent was $56.41 per square foot, up 2.9%. New-lease initial base rent averaged $68.22 per square foot versus $54.53 in the comparable period, while tenant allowances increased to $67.77 from $52.11 per square foot.
Material changes versus the prior comparable period
- Nine-month revenue rose 6.2%, primarily from higher fixed lease income and occupancy. Fixed lease income increased $203.6 million, partly offset by a $19.8 million decline in variable lease income tied to tenant sales.
- Nine-month common-stockholder income increased 4.8%, while diluted EPS rose from $4.46 to $4.68. Results included $194.6 million of non-cash gains on disposal, exchange, or revaluation of equity interests, including gains tied to dilution of SPARC Group and ABG interests.
- Interest expense increased $69.4 million for the nine months, primarily due to new U.S.-dollar bonds, credit-facility activity, and higher variable rates. The effective rate on variable-rate debt rose to 6.06% from 3.57% a year earlier.
- Income from unconsolidated entities declined $226.5 million for the nine months, principally because of weaker year-over-year results from other platform investments; stronger international joint-venture operations partially offset the decline.
- Simon acquired an additional 4% interest in Taubman Realty Group for approximately $199.6 million through issuance of 1.725 million Operating Partnership units, taking its ownership interest to 84%.
Outlook, management commentary, and risks
Management expects positive operating cash flow in 2023 and believes cash on hand and available credit can address debt maturities and capital needs through 2023. It expects operating cash flow generally to cover operating costs, debt service, recurring capital spending, and REIT distributions over the long term. The filing does not provide specific earnings or FFO guidance.
The company reported approximately $1.3 billion as its share of costs for development, redevelopment, and expansion projects under construction, with about $384 million of its share remaining to fund. It targets stabilized returns of 7%–10% on these projects. The fourth-quarter 2023 dividend was declared at $1.90 per share.
Key risks include economic weakness and inflation, tenant bankruptcies and leasing or collection pressure, e-commerce competition, interest-rate and capital-market changes, substantial indebtedness and covenant restrictions, joint-venture exposures, foreign-exchange risk, development execution, and real-estate-related risks including natural disasters and insurance availability. Management said current legal proceedings are not expected to materially affect financial condition, liquidity, or results. No material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective at a reasonable-assurance level.
Unusual items include the non-cash equity-interest gains noted above; Q3 income and other tax expense also included deferred taxes associated with dilution gains. The company recorded an $8.6 million share of impairment on a joint-venture property during 2023, partly offset by insurance proceeds. Interim results may not indicate full-year results because of seasonality.
Important facts for investors to verify
- How much of reported EPS growth and FFO performance reflects recurring property operations versus non-cash equity-interest gains and other unusual items.
- Whether weaker income from other platform investments continues, and the operating trajectory of joint ventures and TRG.
- Debt refinancing needs, borrowing costs, variable-rate exposure, and the assumptions behind reported liquidity and covenant compliance.
- Whether occupancy and rent gains persist, alongside higher tenant allowances and capital needs for leasing and redevelopment.
- Progress, remaining funding requirements, and expected returns on development and redevelopment projects.
- Potential effects of tenant credit stress, economic conditions, and other disclosed legal, insurance, and real-estate risks.