Simon Property Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Simon is a REIT whose business is conducted primarily through Simon Property Group, L.P. It owns, develops, and manages retail and mixed-use properties. At quarter-end, it owned or held interests in 199 U.S. income-producing properties and 33 international outlet and designer outlet properties.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $1.296 billion | $1.240 billion; up 4.5% |
| Operating income before other items | $620.4 million | $604.6 million; up 2.6% |
| Net income attributable to common stockholders | $426.6 million; $1.30 per diluted share | $445.9 million; $1.36 per diluted share |
| Funds from operations (FFO) | $1.015 billion; diluted FFO per share $2.70 | $934.0 million; diluted FFO per share $2.48; FFO up 8.7% |
| Portfolio NOI | $1.312 billion | $1.206 billion; up 8.8% |
| Cash from operating activities | $791.9 million | $875.8 million |
| Cash and cash equivalents | $514.9 million at March 31 | $533.9 million at December 31, 2021 |
| Mortgages and unsecured indebtedness | $25.170 billion | $25.321 billion at December 31, 2021 |
- Lease income increased 5.5% overall; comparable lease income increased 6.3%, driven mainly by higher tenant-sales-based variable rent, reduced bad-debt reserves, and higher occupancy. Total revenue growth was partly offset by lower other income.
- Total portfolio occupancy for U.S. Malls and Premium Outlets rose to 93.3% from 90.8%. Average base minimum rent per square foot fell 3.4% to $54.14. Mills occupancy increased to 97.0% from 95.8%.
- Operating cash flow plus distributions of capital from unconsolidated entities totaled approximately $1.0 billion. Consolidated capital expenditures were $154.6 million, and investments in unconsolidated entities were $124.4 million.
- Available borrowing capacity under the revolving credit facilities was approximately $7.1 billion. The effective weighted-average borrowing rate was 2.93%; floating-rate debt was 5.6% of consolidated debt. The company reported covenant compliance.
Material changes and notable items
- Common-stockholder net income and EPS declined year over year, while FFO and portfolio NOI increased. Management attributed the EPS decline chiefly to a $93.1 million gain recorded in Q1 2021 on a property disposition and property consolidation, and $31.0 million of unrealized losses on equity instruments in Q1 2022. Higher income from unconsolidated entities and lower interest expense partly offset these effects.
- Income from unconsolidated entities increased $66.1 million, primarily reflecting improved year-over-year results across domestic, international, and other investment platforms. Interest expense decreased $16.9 million, partly reflecting prior-year loan extinguishments and property dispositions.
- Operating expenses increased, including a $16.2 million rise in home and regional office costs as operations returned to more normal conditions. Other expense rose $18.9 million, including a write-off of German development costs for a project no longer being pursued and higher legal fees.
- In January 2022, the Operating Partnership issued $500 million of floating-rate notes and $700 million of 2.65% fixed-rate notes; proceeds helped repay $1.05 billion drawn under its Supplemental Facility. Debt issuance and repayments resulted in net debt repayments of approximately $89.1 million during the quarter.
Outlook, risks, and contingencies
- Management expected positive operating cash flow in 2022 and believed cash, operating cash flow, and credit-facility and commercial-paper availability were sufficient for debt maturities and capital needs through 2022. It anticipated operating cash flow would generally support operating costs, debt service, recurring capital expenditures, and REIT distributions, while noting that COVID-19’s ultimate effects remained difficult to predict.
- Projects under construction represented approximately $768 million of Simon’s share of total costs, with approximately $296 million of remaining net cash funding; the company expected to fund these projects from operating cash flow. It targeted stabilized returns on invested capital of 7%–10%. Its share of estimated committed international development costs for projects expected to deliver in 2022 or 2023 was $156 million.
- After quarter-end, the board declared a Q2 2022 dividend of $1.70 per share, up from the $1.65 paid for Q1, and authorized a plan to repurchase up to $2.0 billion of common stock from May 16, 2022 through May 16, 2024. These are authorizations or declarations, not evidence of completed repurchases or future dividends.
- Key disclosed risks include COVID-19 and related effects on rent collection and property values; retail-market and e-commerce competition; tenant bankruptcies, vacancies, and lease renewals; substantial indebtedness, interest-rate and capital-market conditions; development and joint-venture risks; foreign currency exposure; the conflict in Ukraine; and natural disasters, insurance, environmental, and cybersecurity risks.
- The company reported ordinary-course litigation and said it did not believe current proceedings would materially adversely affect its financial condition, liquidity, or results. It guaranteed $155.5 million of joint-venture mortgage debt; the related collateral was estimated to exceed the guaranteed amount. Joint-venture debt is generally non-recourse except where guaranteed.
- Management stated that interim results may not indicate full-year performance because of seasonality. COVID-related rent deferrals or abatements and disputes over unpaid rent could affect lease income and collection estimates.
Important facts for investors to verify
- Whether occupancy gains translate into sustained rent growth, particularly given the decline in average U.S. Malls and Premium Outlets base rent per square foot.
- The quality and cash collection of tenant receivables, rent deferrals, and disputed or litigation-related rent balances.
- Debt maturities, refinancing costs, variable-rate exposure, and continued covenant compliance as interest rates and credit markets change.
- Actual cash funding and returns for development and redevelopment projects, including the German project write-off and international commitments.
- Subsequent execution of the announced $2.0 billion repurchase authorization and sustainability of the dividend in light of cash flow, capital needs, and REIT requirements.
- How much reported earnings and FFO depend on unconsolidated entities and other investment platforms, and whether their operating performance is sustainable.