Simon Property Group, Inc. — Q3 2012 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2012; financial statements are unaudited. Simon owns, develops and manages retail real estate, primarily malls, Premium Outlets, The Mills and community/lifestyle centers. At quarter-end it owned or held interests in 320 U.S. income-producing properties and international outlet centers, and held a 28.9% stake in European shopping-center company Klépierre. Unless noted otherwise, dollar amounts below are in millions.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $1,228.6 | $1,074.4 | $3,535.7 | $3,135.1 |
| Operating income | $561.0 | $483.6 | $1,597.9 | $1,402.1 |
| Consolidated net income | $306.4 | $333.8 | $1,349.1 | $804.0 |
| Net income attributable to common stockholders | $254.9 | $274.0 | $1,115.8 | $658.5 |
| Diluted EPS | $0.84 | $0.93 | $3.71 | $2.24 |
| FFO per diluted share (non-GAAP) | $1.99 | $1.71 | $5.70 | $4.97 |
Revenue grew about 14% in Q3 and 13% year to date; operating income grew about 16% and 14%, respectively. Operating margin was approximately 45.7% in Q3 versus 45.0%, and 45.2% year to date versus 44.7%. Q3 common-stockholder income and EPS declined, while year-to-date earnings and EPS increased.
- Operating cash flow for the first nine months was $1,827.1, up from $1,499.1. Investing activities used $3,744.0 and financing activities provided $1,570.9. Cash declined $345.9 to $452.7.
- At September 30, total debt was $22,569.6, compared with $18,446.4 at December 31, 2011. The effective weighted-average borrowing rate was 5.15%; floating-rate debt was 10.3% of consolidated debt after swaps. Reported debt growth partly reflects the Mills transaction bringing property-level debt onto the consolidated balance sheet.
- Liquidity included $3.7 billion of available capacity on revolving facilities, in addition to cash. Management said it expected positive operating cash flow in 2012 and believed cash and facility availability were sufficient for maturities and capital needs through year-end.
- Common dividends and unitholder distributions totaled $1,084.5 in the first nine months. The company paid $1.05 per share for Q3 and announced $1.10 per share payable November 30, 2012.
Material changes and drivers
- Core U.S. malls and Premium Outlets improved: comparable-property NOI increased 4.7% in Q3 and 5.3% year to date. Total portfolio occupancy was 94.6%, up 80 basis points year over year; average base minimum rent rose 3.8% to $40.33 per square foot, and sales per square foot rose about 9% to $562.
- Growth also reflected acquisitions and consolidation activity. The Mills transaction added interests in 26 properties, with nine newly consolidated; the company also acquired its Klépierre stake. These transactions increased rents and expenses, including depreciation and interest.
- Year-to-date 2012 results included a $488.7 noncash gain from remeasuring previously held interests in properties consolidated in the Mills transaction, partly offset by a $22.4 impairment charge. Total net gain from acquisitions, sales, disposals and impairment was $491.9, versus $92.1 in 2011. These items materially affect GAAP earnings comparisons.
- Q3 2011 included a $78.3 net gain, mainly from acquiring control of a previously unconsolidated mall; Q3 2012 recorded a $2.9 net loss on property disposals. This helps explain why Q3 EPS fell despite stronger operating results.
Outlook, risks and unusual items
- Management expected positive operating cash flow in 2012 and anticipated funding routine needs and REIT distributions from operations. A deterioration in tenant-related cash flows could increase reliance on credit facilities, require capital-spending cuts or prompt additional financing.
- The company expected approximately $700 of its share of 2012 renovation and expansion costs, versus $265 in 2011, and estimated stabilized returns of 8%–12% on new development, expansion and renovation projects. International development costs for 2012 were estimated at approximately $135.
- Opry Mills reopened in March 2012 after flood restoration. Excess insurers denied additional claims of up to $150 for restoration and business-interruption losses; litigation continued. Management believed recovery was probable but gave no assurance of success.
- Management identified risks including tenant financial distress and retail-sector conditions, financing availability and interest rates, foreign exchange, development and acquisition execution, joint-venture risks, insurance coverage, and maintaining REIT status. It reported compliance with debt covenants at quarter-end; certain mortgage pools have cross-default and cross-collateralization provisions.
- After quarter-end, Simon sold its investments in Capital Shopping Centres Group and Capital & Counties Properties for approximately $327.0 on October 23, 2012.
Important facts for investors to verify
- How much earnings and FFO growth came from recurring operations versus the Mills-related noncash gain, acquisitions and changes in consolidation?
- Whether occupancy, tenant sales, rents and comparable-property NOI growth remain durable, and how leasing costs and tenant allowances affect returns.
- Debt maturities, refinancing needs, facility availability and the impact of higher consolidated debt following the Mills transaction.
- Progress and cost outcomes for planned development and renovation projects, including the stated 8%–12% stabilized-return expectation.
- Outcome and timing of the Opry Mills insurance litigation and any proceeds recovered.