Simon Property Group, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing combines Simon Property Group, Inc. and its majority-owned Operating Partnership, which conducts substantially all of the business. Although the request identifies Q4 2016, this is an annual report; quarterly figures are noted separately below. Dollar amounts are U.S. dollars.
Business context
Simon is a REIT that owns, develops and manages retail real estate, primarily malls, Premium Outlets and The Mills. At year-end, it owned or held interests in 206 U.S. income-producing properties and international outlet and designer outlet properties. It had 27 U.S. redevelopment or expansion projects underway and four international outlet properties under development.
Financial and operating results
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $5.435 billion | $5.266 billion | +3.2% |
| Operating income | $2.721 billion | $2.669 billion | +1.9% |
| Consolidated net income | $2.135 billion | $2.139 billion | -0.2% |
| Net income attributable to common stockholders | $1.836 billion | $1.824 billion | +0.6% |
| Diluted earnings per share | $5.87 | $5.88 | -0.2% |
| FFO per diluted share (non-GAAP) | $10.49 | $9.86 | +6.4% |
| Cash provided by operating activities | $3.373 billion | $3.025 billion | +11.5% |
Operating margin was approximately 50.1% of revenue and consolidated net income was approximately 39.3% of revenue; these are simple calculations from reported figures. Portfolio NOI, a non-GAAP measure, rose 6.7%; comparable-property NOI increased 3.6%. U.S. mall and outlet occupancy improved to 96.8% from 96.1%, while total sales per square foot declined 1.0% to $614. Average base minimum rent per square foot rose 5.4% to $51.59. U.S. Mills occupancy was 98.4% and rent per square foot increased 7.1% to $29.07.
Q4 2016: Revenue was $1.426 billion, operating income $700.5 million, consolidated net income $455.6 million and diluted EPS $1.26. In Q4 2015, these were $1.381 billion, $709.7 million, $459.9 million and $1.27, respectively.
Debt, liquidity and capital
- Consolidated debt at face amount was $23.1 billion at year-end, up from $22.4 billion. Cash and cash equivalents were $560.1 million, down from $701.1 million.
- Available borrowing capacity under the credit facilities was approximately $6.2 billion, net of borrowings, commercial paper and letters of credit. Commercial paper outstanding was $953.7 million; credit-facility borrowings were $316.5 million.
- The effective weighted-average borrowing rate fell to 3.39% from 3.88%; variable-rate debt was 3.8% of consolidated debt. Weighted-average debt maturity was 7.4 years, compared with 5.9 years.
- Total equity was $4.960 billion, down from $5.216 billion. Operating cash flow exceeded investing outflows of $969.0 million and financing outflows of $2.545 billion; cash declined $141.1 million during the year.
- Common dividends totaled $6.50 per share for 2016, up from $6.05. The board declared a $1.75-per-share quarterly dividend for Q1 2017. Simon repurchased 1.41 million shares for approximately $255.3 million during 2016.
Material changes and unusual items
- Minimum rent increased $216.2 million, including $142.7 million growth in comparable rents; tenant reimbursements rose $49.2 million. Overage rent fell $32.6 million, attributed to lower tenant sales and higher overage breakpoints.
- Interest expense declined $66.1 million. However, an early redemption of $650 million of 10.35% notes generated a $136.8 million debt-extinguishment loss, reducing diluted EPS and FFO per share by $0.38.
- Prior-year results included a $206.9 million noncash gain tied to Klépierre’s acquisition of Corio and an $80.2 million gain on marketable securities. These items contributed to the slight year-over-year decline in GAAP diluted EPS despite improved operating fundamentals.
- 2016 included $84.6 million of net gains from acquisitions and disposals, including noncash remeasurement gains associated with obtaining control of European outlet properties. A separate $36.2 million after-tax gain arose from disposing of two multifamily investments.
- Simon wrote off $31.5 million of predevelopment costs after deciding not to proceed with the Copley residential tower, citing approval dynamics, construction pricing and increased residential supply.
- Four European designer outlet properties were consolidated during 2016 following changes in control. International operations represented approximately 6.1% of consolidated net income and 8.4% of NOI.
Outlook, risks and contingencies
Management expected positive operating cash flow in 2017 and stated that cash and available facilities were sufficient to address debt maturities and capital needs through 2017. It expected to fund its share of international development costs of approximately $179 million in 2017, primarily with reinvested joint-venture cash flow and construction loans. The filing does not provide specific 2017 earnings or FFO guidance. Management estimated stabilized returns of 7%–10% on new development, expansion and redevelopment projects; its share of projects then under construction was approximately $1.6 billion.
Principal risks include tenant distress, bankruptcies and anchor closures; e-commerce and other retail competition; leasing and redevelopment execution; substantial debt and refinancing or capital-market access; interest-rate and foreign-exchange exposure; joint-venture partner rights and guarantees; REIT qualification and distribution requirements; environmental and insurance exposures; cybersecurity; and possible effects of Brexit on European assets and currency exposure. Simon guaranteed $400.5 million of joint-venture mortgage debt, with stated recovery rights of $87.3 million from partners. Management said existing legal proceedings were not expected to materially adversely affect financial condition, liquidity or results. A judgment in the Opry Mills flood-insurance case was entered for $204.1 million, including $50 million previously paid; appeals remained possible, and recovery was not assured. The company stated it was in compliance with debt covenants.
Key investor verification points
- Review the drivers and sustainability of comparable NOI growth and occupancy gains, alongside weaker sales per square foot and lower overage rent.
- Separate recurring operating performance from debt-extinguishment charges, disposition gains and noncash acquisition or remeasurement gains when assessing earnings and FFO.
- Check the debt maturity schedule, near-term commercial-paper refinancing needs, covenant headroom and the assumptions behind stated available liquidity.
- Assess tenant concentration and exposure to department-store closures, bankruptcies, lease renegotiations and e-commerce competition.
- Track the Copley write-off, development spending and returns, European consolidation and currency exposure, joint-venture guarantees, and the unresolved Opry Mills insurance appeal.