Simon Property Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Simon is a REIT focused on retail real estate. At quarter-end, it owned or held interests in 313 U.S. income-producing properties and international outlet centers, plus a 28.9% stake in Klépierre.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $1,215.1 million | $1,119.0 million; up 8.6% |
| Operating income | $557.7 million | $516.7 million; up 7.9% |
| Operating margin | 45.9% | 46.2% |
| Consolidated net income | $334.5 million | $781.8 million |
| Net income attributable to common stockholders; diluted EPS | $283.1 million; $0.91 | $645.4 million; $2.18 |
| Funds from operations (FFO); diluted FFO per share | $741.9 million; $2.05 | $648.7 million; $1.82 |
| Net cash from operating activities | $550.5 million | $573.0 million |
| Cash and cash equivalents | $830.0 million | $1,184.5 million at Dec. 31, 2012 |
| Mortgages and unsecured indebtedness | $22.57 billion | $23.11 billion at Dec. 31, 2012 |
- Revenue growth reflected acquisitions and other property transactions, as well as improved comparable operations. Comparable U.S. malls and Premium Outlets NOI grew 4.8%; management’s share of portfolio NOI increased 15.3%.
- U.S. malls and Premium Outlets occupancy rose to 94.7% from 93.6%; average base minimum rent increased 3.0% to $41.05 per square foot, and sales per square foot rose 5.3% to $575.
- Interest expense increased $26.9 million to $285.0 million. The effective overall borrowing rate was 5.02% at quarter-end, versus 5.19% a year earlier.
- Cash declined by $354.6 million during the quarter. Net cash used in investing activities was $12.2 million and net cash used in financing was $892.8 million. Capital expenditures were $199.9 million; common dividends and unitholder distributions totaled $416.3 million.
- Available capacity under revolving credit facilities was $4.6 billion, net of borrowings and letters of credit. Secured indebtedness was $7.9 billion. The filing reports covenant compliance.
Material changes and unusual items
- Common-stockholder income and EPS fell sharply year over year, principally because Q1 2012 included a $488.7 million non-cash gain from remeasuring previously held interests after gaining control of properties in the Mills transaction. Q1 2012 also included a $22.4 million impairment charge and a $28.8 million gain on sale of the Italian GCI interest.
- Q1 2013 included an aggregate $20.8 million gain on community-center transactions. Excluding the prior-year transaction effects, operating fundamentals improved; FFO increased 14.4% year over year.
- Minimum rent increased $75.8 million, including $54.2 million from property transactions; comparable rents rose $21.6 million, or 3.2%. Other income declined $19.8 million, partly due to lower loan interest and lease settlement income.
- The company redeemed or repaid $429.5 million of senior unsecured notes and repaid a $240 million mortgage using a new unsecured term loan. Total debt decreased from year-end.
Outlook, risks and contingencies
- Management expected positive operating cash flow in 2013 and said cash and facility availability were sufficient for debt maturities and capital needs through 2013. No specific earnings or FFO guidance was provided.
- For 2013, management expected its share of domestic renovation and expansion costs to be approximately $1.0 billion and international development costs to be approximately $120 million. It cited typical stabilized returns of 10%–12% for development, expansion and renovation projects. Projects were underway at 44 U.S. properties.
- The company paid a common dividend of $1.15 per share in Q1 and declared another $1.15 per share, payable May 31, 2013. Future dividends remain subject to results, available cash, reserves and REIT requirements.
- Opry Mills excess insurers denied a claim for up to $150 million of additional restoration and business-interruption proceeds. The company said recovery was probable, but provided no assurance of success.
- Risks include refinancing and interest-rate exposure, retail tenant and economic conditions, development execution, joint-venture obligations and foreign currency movements. Certain mortgage pools are cross-defaulted and cross-collateralized. The company reported $84.3 million of guaranteed joint-venture mortgage debt.
- Management stated that interim results may not indicate full-year results because of seasonal factors. Disclosure controls were assessed as effective at a reasonable assurance level; no material changes in internal control were reported.
Important facts for investors to verify
- Reconcile the large year-over-year GAAP earnings decline with the prior-period Mills remeasurement gain; assess recurring results using GAAP and the company’s non-GAAP FFO definitions.
- Track comparable NOI, occupancy, rent growth and tenant sales, and distinguish portfolio growth from acquisitions and other property changes.
- Review debt maturities, available credit capacity, borrowing costs and cross-default exposure, including debt held in joint ventures.
- Monitor execution and funding of the planned $1.0 billion domestic redevelopment and expansion program and the expected international development spending.
- Follow the Opry Mills insurance litigation and any resulting recovery; the claimed additional proceeds are not assured.