Business context and reporting period
Simon Property Group, Inc. (SPG) is a self-managed REIT focused on owning, developing and managing malls, Premium Outlets and The Mills. This Form 10-K covers the fiscal year ended December 31, 2015; the filing also presents fourth-quarter results. At year-end, SPG owned or held interests in 209 U.S. income-producing properties and operated internationally through joint ventures and a 20.3% stake in Klépierre.
Financial and operating results
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $5.266 billion | $4.871 billion | +8.1% |
| Operating income | $2.669 billion | $2.385 billion | +11.9% |
| Net income attributable to common stockholders | $1.824 billion | $1.405 billion | +29.8% |
| Diluted earnings per share | $5.88 | $4.52 | +$1.36 |
| FFO (non-GAAP) | $3.571 billion | $3.235 billion | +10.4% |
| Diluted FFO per share (non-GAAP) | $9.86 | $8.90 | +10.8% |
| Cash provided by operating activities | $3.025 billion | $2.730 billion | +10.8% |
| Cash and cash equivalents at year-end | $701 million | $612 million | +$89 million |
| Consolidated debt | $22.502 billion | $20.853 billion | +$1.649 billion |
2015 consolidated and unconsolidated portfolio NOI grew 7.1%; comparable NOI for U.S. Malls, Premium Outlets and The Mills rose 3.7%. Average base rent for U.S. Malls and Premium Outlets increased 4.1% to $48.96 per square foot, while sales per square foot edged up 0.1% to $620. Ending occupancy declined 100 basis points to 96.1%, primarily attributed to tenant bankruptcies. The Mills occupancy was 98.5%, up 10 basis points.
Operating cash flow was $3.025 billion. Investing activities used $1.463 billion, including $1.021 billion of capital expenditures; financing activities used $1.473 billion. The effective weighted-average interest rate on consolidated debt was 3.88%, down from 4.41%; 9.4% of consolidated debt was floating rate. SPG reported $4.6 billion of available capacity under its revolving facilities and expected liquidity to cover debt maturities and capital needs through 2016. Total equity was $5.216 billion, down from $5.952 billion.
Material changes versus the prior comparable period
- Revenue, operating income, common-stockholder net income and FFO increased year over year. Minimum rents rose $180.1 million, including $124.4 million of comparable rent growth; tenant reimbursements rose $83.2 million.
- Results benefited from improved property operations, acquisitions and expansion activity, $68.9 million lower interest expense, an $80.2 million gain on marketable securities, and gains from asset transactions. A $206.9 million non-cash gain arose from Klépierre’s Corio acquisition and share issuance.
- These gains were partly offset by a $121.0 million loss on early debt extinguishment. GAAP earnings comparisons also reflect the 2014 Washington Prime spin-off and differing gains and discontinued-operation results; 2014 included five months of Washington Prime operations.
- SPG acquired The Mills at Jersey Gardens and University Park Village, opened three outlet centers (including a joint venture), and increased redevelopment and expansion spending. Consolidated capital expenditures rose to $1.021 billion from $797 million.
- Debt increased, while the effective borrowing rate declined. Annual common dividends increased to $6.05 per share from $5.15; a $1.60 quarterly dividend was declared for early 2016.
Outlook, risks, contingencies and unusual items
- Management expected positive operating cash flow in 2016 and stated that cash and committed credit capacity were sufficient for debt maturities and capital needs through 2016. The filing provides no formal earnings-per-share guidance.
- SPG’s share of development and redevelopment projects under construction was approximately $2.1 billion; management’s typical estimated stabilized return on invested capital was 8%–12%. Expected 2016 international development costs were approximately $160 million.
- Key risks include retailer distress and bankruptcy, anchor-store closures, e-commerce competition, leasing and redevelopment execution, substantial debt and refinancing access, interest-rate and foreign-currency exposure, joint-venture partner and guarantee exposure, REIT qualification, environmental liabilities, insurance limitations and cyber incidents.
- SPG reported a jury verdict of $204.1 million in its Opry Mills excess-insurance litigation, inclusive of $50 million previously paid by the primary insurer. The court also found potential recovery of prejudgment interest and certain legal fees; recovery remained subject to pending litigation, with no assurance of collection.
- In January 2016, SPG amended its first-, second- and third-quarter 2015 reports to record the $206.9 million Klépierre-related non-cash gain. Management concluded disclosure controls for those interim periods were not effective because of a control-design deficiency; additional procedures were implemented and the deficiency was reported remediated and tested at year-end. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2015.
- Ernst & Young issued unqualified opinions on the financial statements and internal controls. SPG stated it was in compliance with its unsecured debt covenants at year-end.
Important facts for investors to verify
- How much of earnings and FFO growth reflects recurring property operations versus the Corio gain, securities gain, disposition gains and debt-extinguishment charge.
- Whether occupancy stabilizes and comparable rents, tenant sales and comparable NOI continue to grow, particularly given retailer bankruptcies and anchor exposure.
- The schedule and refinancing plan for the $2.9 billion of consolidated principal maturities shown for 2016, and the ongoing effect of leverage on liquidity and investment capacity.
- Whether the reported remediation of interim disclosure controls is sustained, and whether future equity-method investee transactions are recorded on time.
- The ultimate recoveries, costs and timing in the Opry Mills insurance case, as well as exposure under joint-venture guarantees and development commitments.