Simon Property Group, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2022. Simon is a REIT focused on owning, developing, and managing malls, Premium Outlets, The Mills, and other retail and mixed-use properties. At quarter-end it owned or held interests in 198 U.S. income-producing properties, plus 33 international outlet properties; it also held an 80% interest in Taubman Realty Group and a 22.4% stake in Klépierre. Unless indicated otherwise, financial figures below are consolidated and in U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1,279.8 million | $1,254.1 million | $2,575.8 million | $2,494.1 million |
| Operating income before other items | $626.8 million | $604.7 million | $1,247.2 million | $1,209.3 million |
| Consolidated net income | $569.5 million | $705.9 million | $1,057.8 million | $1,216.3 million |
| Net income attributable to common stockholders | $496.7 million | $617.3 million | $923.4 million | $1,063.1 million |
| Diluted earnings per share | $1.51 | $1.88 | $2.81 | $3.24 |
| Funds from Operations (FFO) | $1,092.9 million | $1,216.9 million | $2,108.1 million | $2,150.8 million |
| Diluted FFO per share | $2.91 | $3.24 | $5.61 | $5.72 |
Q2 operating income before other items was about 49.0% of revenue, compared with 48.2% a year earlier. This is a simple calculation from reported figures, not a company-defined margin.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $1.893 billion, versus $1.878 billion in 2021. Investing activities used $226.6 million; financing activities used $1.659 billion. Cash ended the period at $541.2 million.
- Consolidated debt was $24.886 billion at June 30, down from $25.321 billion at December 31, 2021. It included $19.4 billion of senior unsecured notes and $5.4 billion of mortgage debt. Fixed-rate debt represented the majority; floating-rate debt was 5.9% of total consolidated debt.
- Available borrowing capacity under revolving facilities was approximately $7.3 billion, net of borrowings, commercial paper, and letters of credit. The filing states the company expected cash and facility availability to cover debt maturities and capital needs through 2022.
- The effective weighted-average interest rate on consolidated debt was 3.02% at June 30, 2022, compared with 2.86% at December 31, 2021. The company reported compliance with applicable debt covenants.
- Six-month capital expenditures were $309.3 million; investments in unconsolidated entities were $235.6 million. Cash dividends and unitholder distributions totaled approximately $1.3 billion.
Material changes versus prior periods
- Six-month lease income increased $98.7 million; comparable lease income rose 5.1%. The filing attributes growth to higher tenant sales, fixed minimum rent, improved occupancy, and lower collectability reserves.
- Portfolio NOI increased 6.7% for the first six months. U.S. Malls and Premium Outlets occupancy increased to 93.9% from 91.8%, while average base minimum rent decreased 0.8% to $54.58 per square foot.
- Despite higher revenue and operating income, six-month diluted EPS fell to $2.81 from $3.24. Key factors included lower income from unconsolidated entities, unrealized equity-instrument losses, and the absence of 2021 gains on asset transactions and a Klépierre tax-related gain. Lower interest and tax expense partly offset the decline.
- Q2 income from unconsolidated entities fell to $190.1 million from $348.5 million, chiefly reflecting weaker year-over-year results from other platform investments and the absence of the prior-year Klépierre deferred-tax-liability reversal.
- Ending occupancy improved, but average U.S. Malls and Premium Outlets base minimum rent declined. New-lease initial base rent averaged $54.87 per square foot in the first half, versus $61.64 in 2021.
Outlook, commentary, and risks
- Management expected positive operating cash flow in 2022 and said operating cash flow generally should cover operating costs, debt service, recurring capital expenditures, and REIT distributions. Management cautioned that COVID-19’s ultimate impact remained difficult to predict.
- Projects under construction represented approximately $810 million of Simon’s share of total costs, with about $231 million of remaining net cash funding to complete them. Management cited a target stabilized return on invested capital of 7%–10% for new development, expansion, and redevelopment projects.
- The board declared a third-quarter 2022 dividend of $1.75 per share, payable September 30, 2022. A May 2022 authorization permits up to $2.0 billion of repurchases through May 16, 2024; during the first half, Simon repurchased 1,424,096 shares at an average $101.20 per share.
- Unusual items included a $17.9 million loss primarily associated with a 2022 property disposition, a $12.4 million write-off of pre-development costs for a German project no longer being pursued, and $48.9 million of six-month unrealized losses on equity instruments.
- Risks cited include COVID-19 effects, retail and economic conditions, tenant bankruptcies and rent collection, vacancies and leasing terms, e-commerce competition, substantial debt and interest-rate changes, access to capital markets, joint-venture exposures, foreign currency, development execution, the conflict in Ukraine, environmental matters, and natural disasters. Management said current legal proceedings were not expected to materially adversely affect financial condition, liquidity, or results.
Important facts for investors to verify
- Whether occupancy gains translate into rent growth, particularly given lower average rent and lower initial rents on new leases.
- How income and cash distributions from unconsolidated entities and retail platform investments perform after the unusually strong comparison period in 2021.
- Debt refinancing costs and exposure to rising rates, including variable-rate borrowings and upcoming maturities.
- Tenant rent collection, receivables, and the potential impact of COVID-19 or tenant distress on lease income and property values.
- Remaining funding needs and delivery, cost, and return assumptions for development and redevelopment projects.
- Execution and capital allocation under the share-repurchase plan and the sustainability of dividends and distributions.