Simon Property Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited interim results; the company cautions that seasonal operations mean interim results are not necessarily indicative of full-year performance.
Business context
Simon is a REIT that owns, develops and manages retail real estate, principally malls, Premium Outlets, The Mills and community/lifestyle centers. At September 30, 2011, it owned or held interests in 335 U.S. income-producing properties and shopping centers in Italy, Japan, South Korea and Mexico.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $1,074.4 million | $979.3 million | $3,135.1 million | $2,837.9 million |
| Operating income | $483.6 million | $397.8 million | $1,402.1 million | $1,240.2 million |
| Operating margin | 45.0% | 40.6% | 44.7% | 43.7% |
| Net income attributable to common stockholders | $274.0 million | $230.6 million | $658.5 million | $392.5 million |
| Diluted earnings per share | $0.93 | $0.79 | $2.24 | $1.35 |
| Funds from operations (FFO) | $606.2 million | $318.5 million | $1,759.8 million | $1,131.7 million |
| Diluted FFO per share | $1.71 | $0.90 | $4.97 | $3.23 |
Cash flow, nine months: Operating activities provided $1,499.1 million, compared with $1,285.5 million in 2010. Investing activities used $1,122.5 million, including $1,179.7 million for acquisitions and $299.4 million for capital expenditures. Financing activities used $597.5 million. Cash declined $220.9 million to $575.8 million.
Debt and liquidity: Mortgages and other indebtedness totaled $17.9 billion at September 30, 2011, versus $17.5 billion at year-end 2010. The effective weighted-average borrowing rate was 5.37%, down from 5.58% at year-end. Fixed-rate debt was $15.0 billion and variable-rate debt $2.9 billion. The company reported $2.1 billion of available capacity under its existing credit facility, net of borrowings and letters of credit. On October 5, 2011, it entered a new facility with initial capacity of $4.0 billion, expandable to $5.0 billion, and an initial maturity in 2015.
Operating indicators: U.S. regional mall and Premium Outlet portfolio sales per square foot rose 9.3% to $517; average base minimum rent per square foot increased 3.4% to $38.87; and occupancy increased 10 basis points to 93.9%. The Mills portfolio occupancy improved to 93.7%, while Mills regional mall occupancy fell 200 basis points to 88.1%.
Changes versus prior period and unusual items
- Nine-month revenue increased 10.5%; common-stockholder net income rose to $658.5 million from $392.5 million, and diluted EPS increased to $2.24 from $1.35.
- Management attributed improved results to stronger operating performance, acquisition activity and lower interest expense. The comparison also reflects significant nonrecurring items: 2011 included a $78.3 million net gain on acquisitions and asset dispositions, chiefly an $82.9 million noncash gain when the company gained control of King of Prussia. 2010 included a $350.7 million loss on debt extinguishment and a $320.3 million net gain on acquisitions and dispositions.
- Comparable minimum rents increased 2.9% in the first nine months; overage rents rose 40.4%, reflecting higher tenant sales and property transactions. Depreciation and amortization increased $82.0 million year over year, primarily due to the 2010 Prime Outlets acquisition.
- FFO is a non-GAAP measure. The filing cautions it is not cash flow from operations, a substitute for GAAP net income, or a liquidity measure.
Outlook, commentary and risks
- Management expected positive operating cash flow in 2011 and said cash on hand and credit availability were sufficient for debt maturities and capital needs through 2012. It anticipated operating cash flow would cover operating costs, debt service, recurring capital expenditures and REIT distributions; acquisitions and other nonrecurring needs could require additional financing.
- The company reinstituted redevelopment and expansion initiatives. It estimated 2011 renovation and expansion spending of approximately $350 million, versus $124 million in 2010, with expected stabilized returns of 8%–12%. It estimated its share of 2011 international development costs at approximately $80 million.
- After quarter-end, the board announced a regular dividend of $0.90 per share and a special dividend of $0.20 per share, both payable in December 2011.
- Opry Mills remained substantially closed following 2010 flood damage. Rebuilding had begun, with reopening expected in March 2012. Excess insurers denied up to $150 million of additional coverage; litigation was pending. Management believed recovery was probable but gave no assurance of success.
- Risks identified include tenant and retail-sector weakness, rent collection and occupancy, access to financing and debt service, interest and foreign-exchange movements, property development and acquisition risks, joint-venture exposures, and insurance coverage. The company reported compliance with debt covenants and no significant changes to the risk factors in its latest annual report.
Most important facts to verify
- How much of reported earnings and FFO growth reflects recurring property operations versus acquisition effects and gains, especially the King of Prussia remeasurement gain.
- Current credit-facility availability, debt maturities and refinancing needs, including the $651 million related-party loan to SPG-FCM due June 2012.
- Progress, reopening timing and insurance-litigation outcome for Opry Mills.
- Whether occupancy, rents and tenant sales trends—particularly the decline in Mills regional mall occupancy—persist or improve.
- Actual spending, completion timing and returns on the increased redevelopment and international development program.