Simon Property Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative figures are for Q1 2010 unless otherwise noted. Simon is a REIT that owns, develops, and manages retail real estate. At quarter-end, it held interests in 336 U.S. income-producing properties and shopping centers in Italy, Japan, South Korea, and Mexico.
Financial results
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $1,019.9 million | $925.1 million |
| Operating income | $450.9 million | $426.9 million |
| Operating margin | 44.2% | 46.1% |
| Consolidated net income | $219.7 million | $20.8 million |
| Net income attributable to common stockholders | $179.4 million | $9.4 million |
| Diluted EPS | $0.61 | $0.03 |
| FFO, a non-GAAP measure | $570.6 million | $325.6 million |
| Diluted FFO per share | $1.61 | $0.94 |
| Net cash from operating activities | $452.3 million | $448.4 million |
| Cash and cash equivalents at period-end | $636.1 million | $796.7 million at Dec. 31, 2010 |
| Consolidated debt | $17.2 billion | $17.5 billion at Dec. 31, 2010 |
Revenue increased 10.2% year over year, while operating income rose 5.6%; the approximate operating margin declined. The filing attributes much of the revenue increase to acquired properties, including the 2010 Prime outlet-center acquisition, and higher comparable rents and tenant reimbursements. Net income and EPS rose sharply in part because Q1 2010 included a $165.6 million debt-extinguishment loss. FFO increased 75.3%; the 2010 comparison also included that loss.
Operations and changes versus prior period
- For U.S. regional malls and Premium Outlets, total portfolio occupancy improved to 92.9% from 92.2%; average base minimum rent rose 1.4% to $39.26 per square foot; and sales per square foot increased 8.2% to $500.
- Comparable rents increased $18.4 million, or 3.2%. Overage rent rose 29.8%, which the company linked to higher tenant sales.
- Comparable property trends were mixed internationally: European center occupancy rose, but comparable sales per square foot fell 4.9% and base rent per square foot fell 10.5%. International Premium Outlet comparable sales fell 4.4%.
- Interest expense declined $15.8 million year over year. Depreciation and amortization increased $37.4 million, primarily reflecting assets acquired in the Prime transaction.
Cash, debt, liquidity, and capital allocation
- Cash from operations was $452.3 million; investing activities used $12.0 million and financing activities used $600.9 million. The company repaid $295.2 million of debt and paid $282.8 million in common dividends and limited-partner distributions.
- Consolidated debt was $17.2 billion, comprising $9.7 billion of senior unsecured notes, $853.7 million drawn on the revolving credit facility, and $6.6 billion of secured indebtedness. The effective weighted-average borrowing rate was 5.56%; floating-rate debt was 11.8% of consolidated debt.
- The $3.9 billion revolver had approximately $3.0 billion of available capacity after borrowings and letters of credit. Management said cash and revolver availability were sufficient for debt maturities and capital needs through 2012. The company reported compliance with applicable debt covenants.
- Joint ventures reported $16.0 billion of debt, generally secured and non-recourse to Simon; Simon reported $61.4 million of guarantees of joint-venture debt.
- Q1 capital expenditures were $59.7 million. Management expected about $350 million of its 2011 share of domestic renovation and expansion costs and about $100 million of international development costs. It projected an 8%–12% stabilized return on new development, expansion, and renovation projects.
Outlook, risks, and unusual items
- The filing does not provide specific earnings or FFO guidance. Management expected positive operating cash flow in 2011 and said operating cash flow should generally cover operating costs, debt service, recurring capital expenditures, and REIT-required distributions. It cautioned that weaker tenant cash flows could increase reliance on the revolver, lead to reduced capital spending, or require other financing.
- Simon paid a Q1 common dividend of $0.80 per share. Future dividends are subject to Board determination and operating results, available cash, and REIT requirements.
- Opry Mills, in which Simon has a 50% interest, remained closed following significant flood damage in 2010. Insurers had funded $50 million; excess carriers denied a claim for up to an additional $150 million. The joint venture obtained $120 million of additional financing and began rebuilding in April 2011, with reopening expected in 2012. Recovery through pending litigation was considered probable by management, but was not assured.
- Simon reported no significant change to the risk factors in its 2010 Form 10-K. Risks discussed include financing and interest-rate exposure, tenant bankruptcies or rent collection, retail and economic conditions, development and joint-venture risks, foreign exchange, insurance coverage, and maintaining REIT status. The quarter’s results may not indicate full-year performance because of seasonality.
Important facts for investors to verify
- How much of reported growth reflects acquired properties versus comparable-property performance, and whether occupancy and sales gains translate into sustained rent and cash-flow growth.
- The effect of the Q1 2010 debt-extinguishment charge on comparisons of net income, EPS, and FFO.
- Current status and expected recoveries, costs, and reopening timing for Opry Mills, including the insurance litigation and additional financing.
- Debt maturities, revolver availability, covenant compliance, and the scale and recourse terms of joint-venture debt and guarantees.
- Whether planned 2011 development spending and management’s projected stabilized returns are achieved; FFO is non-GAAP and is not a substitute for operating cash flow or liquidity.