Simon Property Group, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018. Simon is a REIT that owns, develops and manages shopping malls, outlet centers and other retail properties. It held interests in 206 U.S. income-producing properties and international properties; it also owned 21.1% of European shopping-center company Klépierre. Simon conducts substantially all business through its majority-owned Operating Partnership.
Financial and operating performance
- Revenue: Q2 revenue was $1.388 billion, up 2.0% from $1.362 billion. First-half revenue was $2.788 billion, up 3.0% from $2.707 billion.
- Profit: Q2 net income attributable to common stockholders was $547.0 million, or $1.77 per diluted share, versus $382.0 million, or $1.23, a year earlier. First-half net income was $1.168 billion, or $3.77 per diluted share, versus $859.7 million, or $2.75.
- Operating income and margin: Q2 operating income was $737.7 million (53.1% of revenue), versus $686.1 million (50.4%). First-half operating income was $1.440 billion (51.6%), versus $1.363 billion (50.3%).
- FFO: Diluted FFO per share was $2.98 for Q2, up from $2.47; first-half diluted FFO per share was $5.85, up from $5.20. FFO is a non-GAAP measure.
- Cash flow: First-half operating cash flow was $1.837 billion, versus $1.810 billion. Investing activities used $18.8 million and financing activities used $2.586 billion. Cash declined $768.1 million to $714.2 million. Cash flow from operations plus capital distributions from unconsolidated entities totaled approximately $2.2 billion.
- Debt and liquidity: Consolidated mortgages and unsecured indebtedness totaled $23.505 billion at June 30, down from $24.632 billion at year-end. The effective weighted-average borrowing rate was 3.32%, versus 3.25% a year earlier; floating-rate debt was 4.8% of consolidated debt. Available capacity under revolving facilities was approximately $6.2 billion. Commercial paper outstanding was $981.5 million, at a 2.02% weighted-average rate, with maturities through August 20, 2018. Simon reported compliance with debt covenants.
- Property metrics: U.S. Malls and Premium Outlets total-portfolio occupancy was 94.7%, down 0.5 percentage points year over year; average base rent rose 3.3% to $53.84 per square foot and sales per square foot rose 4.6% to $646. Comparable property NOI increased 2.3% and portfolio NOI increased 4.5% in the first half.
Material changes versus the prior comparable period
- Reported earnings benefited from $144.9 million of first-half net gains, primarily disposition-related, and a $35.6 million non-cash gain on exchanging the Aéropostale licensing venture interest for additional ABG interests.
- 2017 results included a $128.6 million loss on early extinguishment of debt, which did not recur in 2018. These items materially contributed to the reported year-over-year earnings increase.
- Management cited improved property operations, leasing activity, international investment distributions and acquisition/development activity. First-half comparable minimum rents rose 1.7%; overage rents rose 12.0%.
- Interest expense increased $6.7 million for the first half. The effective borrowing rate increased, particularly on variable-rate debt.
- Simon repurchased approximately 1.99 million shares in the first half for $307.3 million, at an average price of $154.56 per share. Dividends were $3.90 per share for the first half; a $2.00-per-share Q3 dividend was declared.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow in 2018 and said available cash and borrowing capacity were sufficient for debt maturities and capital needs through year-end. It expected operating cash flow generally to cover operating expenses, debt service, recurring capital expenditures and REIT distributions.
- Simon’s share of costs for development, redevelopment and expansion projects under construction was approximately $0.8 billion. Management targeted stabilized returns on invested capital of 7%–10% for such projects and expected approximately $219 million of its international development costs in 2018.
- The filing reported a $200 million non-recourse mortgage satisfied through foreclosure of a consolidated property, contributing to first-half disposition gains. Simon’s share of an Aventura Mall refinancing repayment charge and debt-cost write-off was $12.5 million.
- Joint-venture mortgage debt guaranteed by the Operating Partnership was $201.0 million; Simon reported a $10.8 million recovery right from partners. Other joint-venture debt is generally non-recourse, subject to stated guarantees and arrangements.
- Management said ordinary-course legal and regulatory proceedings were not expected to materially adversely affect financial condition, liquidity or results. It reported no material changes to previously disclosed risk factors. Cited risks include retail-market weakness, tenant insolvency or vacancies, leasing conditions, substantial indebtedness, capital-market access, interest and foreign-exchange rates, development execution, joint ventures, environmental matters, natural disasters and cybersecurity.
- The filing notes interim results may not indicate full-year results due to seasonality. Lease accounting changes were scheduled for adoption in 2019; the company was evaluating their impact. No formal full-year earnings guidance is stated in the provided filing text.
Important facts for investors to verify
- How much of earnings and FFO growth reflects recurring property operations versus disposition gains, the ABG non-cash gain, and the prior-year debt-extinguishment charge.
- Whether occupancy weakness persists and whether rent, sales and comparable NOI growth can continue.
- Commercial-paper refinancing and maturity management, including the near-term maturities reported at June 30, and the company’s use of revolving capacity.
- Returns, remaining funding needs and delivery progress for development and redevelopment projects, as well as exposure to joint-venture debt and guarantees.
- The effect of lease-standard adoption and future changes in interest rates, tenant credit, retail conditions and international currency exposure.