Business context and reporting period
Simon Property Group, Inc. and Simon Property Group, L.P. filed a combined unaudited Form 10-Q for the quarter ended March 31, 2020. Simon is a REIT focused on malls, outlet centers and other retail properties; it held interests in 204 U.S. properties and 30 international properties, and owned 22.4% of Klépierre. Results reflect the initial disruption from COVID-19, which led to U.S. property closures beginning March 18.
Financial and operating performance
- Revenue: $1.353 billion, down 6.8% from $1.453 billion. Lease income fell 1.4% to $1.262 billion; other income declined $83.3 million, largely because 2019 included a $68.0 million insurance-broker lawsuit settlement and a $15.6 million property-sale gain.
- Earnings: Operating income before other items was $654.9 million versus $745.0 million. Net income attributable to common stockholders was $437.6 million versus $548.5 million; diluted EPS was $1.43 versus $1.78. The filing reports FFO of $980.6 million, down 9.4%, and diluted FFO per share of $2.78 versus $3.04.
- Cash flow: Operating cash flow was $741.3 million versus $837.3 million. Investing cash outflow was $213.7 million; financing provided $2.528 billion. Cash and equivalents rose to $3.725 billion from $669.4 million at year-end, principally due to precautionary borrowing.
- Debt and liquidity: Mortgages and unsecured indebtedness totaled $27.553 billion, up from $24.163 billion at December 31, 2019. The effective weighted-average borrowing rate was 2.95%; floating-rate debt was 16.7% of consolidated debt. Available capacity under the credit facilities was approximately $4.6 billion at quarter-end. The company reported compliance with debt covenants.
- Operating indicators: Portfolio NOI declined 0.2%; comparable-property NOI was flat. U.S. malls and Premium Outlets occupancy fell to 94.0% from 95.1% year over year, while average base minimum rent increased 2.6% to $55.76 per square foot.
Material changes versus the prior comparable period
Lower earnings reflected the absence of the 2019 settlement and asset-sale gains, a $40.0 million decline in income from unconsolidated entities, and a $24.4 million year-over-year adverse swing in fair-value changes on equity instruments. Management cited COVID-19 disruption to retailer investments and international operations. Lower interest expense and tax expense partly offset these declines. The company also drew $3.75 billion under its facilities as a precautionary liquidity measure; quarter-end debt increased accordingly.
Outlook, management commentary and risks
- Management said the pandemic’s effect on operations and financial condition could not be reasonably estimated. As of March 31, all domestic properties and certain international properties and retailer investments were temporarily closed; by May 11, 77 U.S. retail properties had reopened, while many remained closed.
- The company reported rent deferrals and ongoing tenant discussions. It warned of possible lower rent collections, lease-income write-offs, lease restructurings or terminations, reduced sales-based rent and property impairment charges.
- Simon said it expected positive operating cash flow in 2020 and believed liquidity was sufficient for debt maturities and capital needs through 2020, while noting that a severe, prolonged market disruption or a significant cash-flow decline could require further spending cuts or financing.
- More than $1.0 billion of development projects were suspended. The board deferred its decision on the second-quarter common dividend; the filing provides no subsequent dividend amount. The $3.6 billion Taubman acquisition remained subject to closing conditions and shareholder approvals.
- Other disclosed risks include tenant insolvency, retail and e-commerce competition, substantial indebtedness, capital-market access, joint-venture exposure and uncertainty around reopening and consumer demand. Management stated current legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Subsequent rent collection rates, tenant concessions and the accounting treatment of deferred or unpaid rent.
- Reopening progress, property traffic, occupancy, tenant sales and comparable NOI after quarter-end.
- Cash availability, facility and commercial-paper balances, near-term maturities, covenant headroom and refinancing costs.
- The second-quarter dividend decision and any changes to distributions or capital spending.
- Taubman transaction status, consideration, financing and expected impact if completed.
- Potential impairment charges and further effects on joint ventures, retailer investments and property valuations.