Simon Property Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Simon is a REIT whose retail property business is conducted primarily through Simon Property Group, L.P. The portfolio included 204 U.S. income-producing properties and interests in 31 international outlet properties.
Financial performance and position
Dollar amounts below are in millions, except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $1,061 | $1,417 | $3,476 | $4,267 |
| Operating income before other items | $404 | $705 | $1,510 | $2,131 |
| Net income attributable to common stockholders | $146 | $544 | $838 | $1,588 |
| Diluted earnings per share | $0.48 | $1.77 | $2.74 | $5.15 |
| Funds from operations (FFO) | $723 | $1,081 | $2,450 | $3,227 |
| Diluted FFO per share | $2.05 | $3.05 | $6.95 | $9.09 |
- Q3 revenue declined 25.1% year over year; nine-month revenue declined 18.5%. Lease income fell 24.1% in Q3 and 15.9% year to date, reflecting lower tenant sales-based rent and rent abatements, as well as reduced fixed lease income.
- Q3 operating income before other items was 38.1% of revenue, versus 49.8% a year earlier. Nine-month net income attributable to common stockholders fell 47.2%.
- Portfolio NOI, a non-GAAP measure, declined 22.4% in Q3 and 14.6% for the first nine months. Management reported U.S. mall and Premium Outlet occupancy of 91.4%, down 330 basis points year over year; average base minimum rent rose 2.9% to $56.13 per square foot.
- Cash from operations was $1.432 billion for the first nine months, down from $2.848 billion. Cash and equivalents were $1.082 billion at September 30, versus $669 million at year-end 2019. Tenant receivables and accrued revenue increased to $1.452 billion from $832 million.
- Debt totaled $25.140 billion, up from $24.163 billion at year-end 2019; mortgage debt was $6.9 billion. The effective weighted-average borrowing rate was 3.12%. The company reported $8.2 billion of available capacity under its credit facilities, net of specified outstanding amounts and letters of credit, and compliance with debt covenants.
- The Board declared a Q3 dividend of $1.30 per share, paid October 23, 2020. Dividends paid per share for the first nine months were $3.40, compared with $6.20 in 2019.
Material changes, outlook and risks
- COVID-19 effects: U.S. retail properties were closed beginning March 18 and reopened progressively. 203 of 204 domestic properties were open at September 30; all were open by October 7, though further closures remained possible. Rent deferrals, abatements and potential lease terminations continued. Management said the pandemic materially affected retail activity and rent collection; future effects were uncertain.
- Management cited reduced tenant sales and rent collections, lower Simon Brand Ventures and gift-card revenues, and weaker domestic and international property and retailer-investment results. Cost reductions partly offset these pressures. Reported nine-month results also included $98.2 million of impairment losses, including charges related to HBS and three joint-venture properties; the filing separately describes a $7.8 million net loss related to Klépierre asset impairments and dispositions.
- Simon drew $3.75 billion on facilities in March as a liquidity precaution and subsequently repaid portions. In July, the Operating Partnership issued $2.0 billion of senior notes with maturities in 2025, 2030 and 2050, and redeemed $500 million of notes and €375 million of notes at par. Commercial paper outstanding at quarter-end was $622.7 million, with a weighted-average maturity of November 21, 2020.
- Management expected positive operating cash flow in 2020 and said it believed available cash and borrowing capacity were sufficient for debt maturities and capital needs through year-end. It acknowledged that a severe or prolonged market disruption or deterioration in operating cash flow could require greater facility use, further capital-spending reductions or other financing. No numerical earnings guidance is provided in the supplied filing text.
- More than $1.0 billion of development and redevelopment projects had been suspended. Simon’s share of remaining funding for projects currently under construction was approximately $140 million.
- Taubman litigation: Simon terminated its merger agreement and sued Taubman; Taubman counterclaimed for specific performance or damages. An adverse final outcome could require Simon to complete the transaction or pay damages.
- Other risks include tenant bankruptcy and rent collectability, retail demand and e-commerce, occupancy and leasing conditions, property impairments, substantial indebtedness and access to capital, joint-venture exposures, and future public-health restrictions. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Subsequent rent collections, tenant arrears and the collectability assumptions behind the increased receivables balance.
- Whether occupancy, leasing spreads, tenant renewals and property NOI stabilize or deteriorate as pandemic restrictions and consumer behavior evolve.
- Available liquidity after commercial-paper maturities, debt service, dividends and remaining project commitments.
- Potential additional impairments in property and retailer investments, including the carrying value of Klépierre and other equity-method investments.
- Developments and potential financial exposure in the Taubman litigation, and whether suspended capital projects resume.