Business Context and Reporting Period
Simon Property Group, Inc. and Simon Property Group, L.P. filed a combined, unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The REIT owns, develops and manages malls, outlet centers and other retail destinations. At quarter-end, it had interests in 207 U.S. income-producing properties and a 21.2% stake in Klépierre. Simon owned approximately 86.8% of the Operating Partnership; the partnership conducts substantially all business and holds substantially all assets and debt.
Financial Performance and Position
Amounts below are in U.S. dollars; financial statement figures reported in thousands are rounded to millions.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $1,409m | $1,404m | $4,197m | $4,111m |
| Operating income | $717m | $690m | $2,157m | $2,053m |
| Consolidated net income | $642m | $593m | $1,989m | $1,585m |
| Net income attributable to common stockholders | $556m | $514m | $1,724m | $1,374m |
| Diluted earnings per share | $1.80 | $1.65 | $5.57 | $4.41 |
| Funds from operations (FFO), non-GAAP | $1,086m | $1,035m | $3,173m | $2,905m |
| Diluted FFO per share | $3.05 | $2.89 | $8.90 | $8.09 |
- Operating trends: Nine-month portfolio NOI grew 4.1%; comparable property NOI grew 2.3%. U.S. malls and Premium Outlets occupancy was 95.5%, up 0.2 percentage points year over year; sales per square foot increased 4.5% to $650 and average base rent rose 2.8% to $53.88.
- Cash flow: Nine-month operating cash flow was $2,751m, compared with $2,719m. Investing activities used $209m, including $586m of capital expenditures, partly offset by $429m of capital distributions from unconsolidated entities. Financing activities used $3,328m; cash decreased $787m to $696m.
- Debt and liquidity: Mortgages and unsecured indebtedness totaled $23,678m at September 30, down from $24,632m at December 31, 2017. The effective weighted-average borrowing rate was 3.32%; floating-rate debt was 3.5% of consolidated debt. The company reported $6.4bn of available borrowing capacity under its credit facilities, net of commercial paper and other usage. Commercial paper outstanding was $997m, with a 2.16% weighted-average rate and weighted-average maturity of December 3, 2018.
- Other balance-sheet items: Total assets were $31,080m; total liabilities were $26,984m. Common stock dividends were $2.00 per share in Q3 and $5.90 per share for the nine months.
Material Changes Versus Prior Period
- Nine-month revenue increased 2.1%, operating income 5.1%, and diluted FFO per share 10.0% year over year. Nine-month diluted EPS rose from $4.41 to $5.57; this comparison includes significant nonrecurring items in both years.
- Nine-month net income included $144.9m of net gains, primarily from dispositions, and a $35.6m noncash gain on the contribution of an Aeropostale licensing interest for additional ABG interests. Puerto Rico business-interruption proceeds contributed $17.0m of income.
- The 2017 comparison included a $128.6m loss on early extinguishment of debt and a $21.5m gain on sale of marketable securities. In 2018, Simon’s share of Aventura Mall refinancing charges reduced income by $12.5m.
- The company acquired the remaining 50% interest in The Outlets at Orange for 475,183 Operating Partnership units, valued at approximately $84.1m, and opened Denver Premium Outlets. It also announced a joint venture with Macerich to develop Los Angeles Premium Outlets, targeted to open in fall 2021.
Outlook, Commentary, Risks and Unusual Items
- Management expected positive operating cash flow in 2018 and said cash, operating cash flow and available facilities were sufficient for debt maturities and capital needs through year-end. The filing provides no clear full-year earnings or FFO guidance value.
- Management estimated its share of costs for development, redevelopment and expansion projects under construction at approximately $0.7bn, generally expected to be funded from operating cash flows. It cited a target stabilized return on invested capital of 7%–10% for such projects and expected approximately $217m of its share of international development costs for 2018.
- Key stated risks include retail-market weakness, loss or insolvency of major tenants, leasing and rental-rate pressure, substantial indebtedness and access to capital, interest- and foreign-exchange-rate changes, joint-venture and development risks, natural disasters, insurance availability and cybersecurity. Management reported compliance with debt covenants and no material change to previously disclosed risk factors.
- Joint-venture mortgage guarantees were $215.5m, with a stated $10.8m right of recovery from partners. Management said current legal proceedings were not expected to have a material adverse effect. The filing also disclosed $782.8m of undiscounted future payments on long-term ground leases, with lease-accounting adoption planned for 2019.
- The HBS joint venture intended to sell its Kaufhof department-store interest; closing was expected in Q4 2018. Simon expected to retain an 11.7% interest in the remaining venture.
Important Facts for Investors to Verify
- Reconcile reported EPS and FFO growth for disposition gains, the ABG noncash gain, insurance proceeds and the prior-year debt-extinguishment charge; FFO is a non-GAAP measure.
- Track occupancy, sales per square foot, comparable NOI and new-lease economics for evidence that operating momentum is continuing.
- Review the near-term commercial-paper maturity, debt maturities, borrowing costs and available facility capacity.
- Monitor capital spending and returns on development projects, along with the HBS transaction and other joint-venture exposures and guarantees.
- Assess whether cash generation can support dividends, redevelopment and debt service if retail conditions weaken; dividends remain subject to Board discretion.