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 and nine months ended September 30, 2019. Simon is a REIT whose business is conducted primarily through the Operating Partnership. The portfolio included interests in 204 U.S. income-producing properties and 29 international outlet properties, plus a 21.9% interest in Klépierre.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1,416.6 million | $1,404.0 million | $4,266.6 million | $4,183.3 million |
| Operating income before other items | $705.3 million | $722.8 million | $2,131.0 million | $2,155.8 million |
| Consolidated net income | $628.7 million | $642.2 million | $1,832.8 million | $1,989.2 million |
| Net income attributable to common stockholders | $544.3 million | $556.3 million | $1,588.1 million | $1,723.9 million |
| Diluted earnings per share | $1.77 | $1.80 | $5.15 | $5.57 |
| FFO; diluted FFO per share | $1,080.6 million; $3.05 | $1,086.3 million; $3.05 | $3,226.9 million; $9.09 | $3,173.2 million; $8.90 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $2,848.2 million | $2,751.2 million |
At September 30, 2019, cash and cash equivalents were $3.65 billion, compared with $514.3 million at year-end 2018. Mortgages and unsecured debt totaled $26.64 billion, up from $23.31 billion. The effective weighted-average borrowing rate was 3.21%; floating-rate debt was 3.1% of consolidated debt. Available borrowing capacity under the credit facilities was approximately $6.1 billion, net of commercial paper, revolver borrowings and letters of credit. Stockholders’ equity was $2.67 billion, versus $3.30 billion at year-end.
For the first nine months, investing activities used $586.1 million and financing activities provided $870.8 million. Capital expenditures were $622.7 million; cash dividends and distributions to common holders and limited partners totaled approximately $2.2 billion. The cash increase also reflected substantial debt issuance and refinancing activity.
Changes versus prior comparable period
- Nine-month revenue rose 2.0%, while operating income before other items fell about 1.2% and diluted EPS declined from $5.57 to $5.15. FFO increased 1.7% and diluted FFO per share rose from $8.90 to $9.09.
- Management attributed the EPS decline chiefly to larger 2018 disposition gains ($144.9 million versus $12.8 million in 2019), a $35.6 million noncash investment gain in 2018, lower lease-settlement activity and lower distributions from an international investment. 2019 items partly offsetting these comparisons included a $68.0 million insurance-broker lawsuit settlement, a $15.6 million gain on a multifamily investment disposition, and lower interest expense.
- Portfolio NOI increased 1.5% for the nine months; comparable-property NOI rose 1.7%. U.S. Malls and Premium Outlets sales per square foot increased 4.5% to $680, and average base minimum rent rose 1.2% to $54.55 per square foot. Occupancy declined 0.8 percentage points to 94.7%.
- Nine-month home and regional office costs increased $38.8 million, primarily because adoption of new lease accounting curtailed capitalization of leasing costs. Depreciation and amortization also rose $62.9 million.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow for 2019 and said existing cash and borrowing availability were sufficient for debt maturities and capital needs through year-end. It anticipated operating cash flow would generally fund operating costs, debt service, recurring capital expenditure and REIT distributions. No specific earnings or FFO guidance was provided.
- Approximately $1.8 billion was Simon’s share of costs for development, redevelopment and expansion projects under construction; management targeted stabilized returns on invested capital of 7%–10%. Expected 2019 international development costs were approximately $227 million. A 338,000-square-foot outlet project in Oklahoma began construction and was projected to open in spring 2021.
- On September 13, 2019, the Operating Partnership issued $3.5 billion of senior notes at fixed rates of 2.00%–3.25%, with 2024, 2029 and 2049 maturities. On October 7, it redeemed specified notes early and recorded a $116.2 million extinguishment loss in the fourth quarter. These were post-quarter events.
- On October 16, 2019, Simon contributed approximately $276.8 million of cash and Shop Premium Outlets assets for a 45% noncontrolling interest in Rue Gilt Groupe, a digital value-shopping venture.
- Management identified retail and tenant weakness, rent and occupancy pressure, competition, international and foreign-exchange exposure, substantial indebtedness, capital-market access, interest rates, joint-venture risks, natural disasters and other real-estate risks. LIBOR transition was specifically highlighted: about $580 million, or 2.2% of debt, was LIBOR-indexed at September 30, 2019.
- The company reported compliance with debt covenants and said ordinary-course legal proceedings were not expected to materially affect financial condition, liquidity or results. The $68.0 million Opry Mills insurance-broker settlement was recorded as other income. The filing noted no material changes in market-risk assumptions since year-end 2018.
Important facts for investors to verify
- Whether occupancy softness, particularly in unconsolidated properties and The Mills, persists and affects rent growth or tenant credit quality.
- How much reported earnings depend on settlements, dispositions, insurance recoveries and other nonrecurring items, versus recurring property performance and FFO.
- Debt maturities, refinancing costs and liquidity after the October 2019 redemptions; also verify the effect of the $116.2 million fourth-quarter extinguishment loss.
- Whether development and redevelopment spending achieves the targeted 7%–10% stabilized returns and remains within the projected cost and schedule.
- The performance and funding implications of joint ventures and newer investments, including Rue Gilt Groupe, HBS and Klépierre, and exposure to LIBOR transition and other market risks.