Simon Property Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results. Simon is a REIT focused on owning, developing and managing retail real estate. At quarter-end, it owned or held interests in 312 U.S. properties and had international outlet investments and a 28.9% interest in Klépierre.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $1.302 billion | $1.229 billion | $3.754 billion | $3.536 billion |
| Operating income | $600.6 million | $565.0 million | $1.723 billion | $1.606 billion |
| Net income attributable to common stockholders | $311.7 million | $254.9 million | $934.7 million | $1.116 billion |
| Diluted earnings per share | $1.00 | $0.84 | $3.01 | $3.71 |
| Funds from operations (FFO) | $802.8 million | $720.1 million | $2.311 billion | $2.057 billion |
| Diluted FFO per share | $2.21 | $1.99 | $6.38 | $5.70 |
Cash flow, nine months: Operating activities provided $1.929 billion, versus $1.827 billion in 2012. Investing activities used $397.2 million, compared with $3.744 billion used in 2012; financing activities used $1.617 billion, versus $1.571 billion provided. Cash and cash equivalents were $1.099 billion at September 30, down $85.2 million since year-end 2012.
Debt and liquidity: Mortgages and unsecured indebtedness totaled $22.730 billion, down from $23.113 billion at December 31, 2012. Mortgage debt was $8.1 billion. The effective weighted average borrowing rate was 4.91%; 8.9% of consolidated debt was floating rate. Available capacity under revolving credit facilities was $4.5 billion, net of borrowings and letters of credit. The company reported compliance with debt covenants.
Operating trends and changes versus prior periods
- Q3 revenue rose about 6% year over year; common-stockholder net income rose about 22%. For the first nine months, revenue rose about 6%, but common-stockholder net income and EPS declined, largely because 2012 included a $488.7 million non-cash gain from gaining control of nine Mills properties.
- Nine-month 2013 gains from acquisitions, sales and dispositions totaled $99.9 million, versus a net $491.9 million gain in the comparable 2012 period. The 2012 amount also reflected a $22.4 million impairment charge.
- Management reported improved tenant sales and leasing. Nine-month comparable NOI for U.S. malls and Premium Outlets increased 5.2%; company share of portfolio NOI increased 10.3%.
- For U.S. malls and Premium Outlets, occupancy increased to 95.5% from 94.6%, average base rent per square foot increased 3.5% to $41.73, and sales per square foot increased 3.0% to $579. Releasing spreads were 15.2% above expiring tenant payments.
- Overall results also reflected acquisitions, new outlet openings, dispositions and expansion activity. FFO increased 12.3% for the nine-month period; FFO is a non-GAAP measure and is not cash flow from operations.
Outlook, management commentary and risks
- Management expected positive operating cash flow in 2013 and believed cash on hand and credit-facility availability were sufficient for debt maturities and capital needs through year-end. It expected operating cash flow to support operating expenses, debt service, recurring capital expenditures and REIT distributions.
- Estimated 2013 share of development, redevelopment and expansion costs was approximately $1.1 billion domestically and $114 million internationally. Management estimated stabilized returns of 10%–12% on development, expansion and redevelopment projects.
- The board declared a $1.20-per-share dividend payable November 29, 2013, following a $1.15-per-share Q3 dividend. Future dividends remain subject to operating results, available cash, reserves and REIT requirements.
- After quarter-end, the Operating Partnership issued €750 million of 2.375% notes due 2020 on October 2. On October 16, Simon completed acquisitions of interests in four McArthurGlen outlet centers for €327.5 million, or approximately $444.1 million.
- Simon disclosed ordinary-course litigation and did not expect it to materially affect financial position or results. In the Opry Mills flood matter, excess insurers denied up to $150 million of additional coverage; Simon believes recovery is probable, but gave no assurance of success. Joint-venture mortgage guarantees totaled $179.2 million, with a stated $81.1 million right of recovery from partners.
- Forward-looking risks include financing availability and rates, retail and economic conditions, tenant credit, development and acquisition execution, joint ventures, foreign exchange, insurance and maintaining REIT status. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Assess recurring operating growth separately from gains, dispositions, acquisitions and other nonrecurring items, especially the large 2012 Mills-related gain.
- Review debt maturities, revolving-facility availability, interest-rate exposure and the effect of subsequent-period borrowing and acquisitions.
- Evaluate whether occupancy, rent, sales and leasing-spread trends support continued comparable-property NOI growth.
- Track the Opry Mills insurance litigation and the amount and terms of joint-venture guarantees.
- Compare projected development spending and expected returns with actual project costs, leasing and openings; consider that interim results may be seasonal.