Simon Property Group, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing combines Simon Property Group, Inc. and its majority-owned operating partnership; substantially all business and debt reside in the Operating Partnership. Unless noted, figures are consolidated and in U.S. dollars.
Business context
Simon is a REIT that owns, develops and manages shopping, dining, entertainment and mixed-use properties. At year-end, it owned or held interests in 207 U.S. income-producing properties, including 107 malls, 68 Premium Outlets and 14 Mills, plus international outlet and designer outlet properties. It also held a 21.0% interest in European property company Klépierre.
Financial and operating performance
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Total revenue | $5.539 billion | $5.435 billion | Up 1.9% |
| Operating income | $2.802 billion | $2.721 billion | Up 3.0%; operating margin was approximately 50.6% versus 50.1%, calculated from reported figures |
| Consolidated net income | $2.245 billion | $2.135 billion | Up 5.2% |
| Net income attributable to SPG common stockholders | $1.945 billion | $1.836 billion | Up 5.9% |
| Diluted earnings per share | $6.24 | $5.87 | Up $0.37 |
| FFO | $4.021 billion | $3.793 billion | Up 6.0%; diluted FFO per share rose to $11.21 from $10.49 |
| Operating cash flow | $3.594 billion | $3.373 billion | Up 6.6% |
| Investing cash flow | $(761) million | $(969) million | Primarily reflects property investment and capital spending |
| Financing cash flow | $(1.910) billion | $(2.545) billion | Included dividends/distributions and debt issuance and repayment activity |
| Cash and cash equivalents, year-end | $1.482 billion | $560 million | Up $922 million |
| Consolidated debt, year-end | $24.632 billion | $22.977 billion | Up $1.655 billion; reported face amount was $24.710 billion |
| Dividends per common share | $7.15 | $6.50 | Up 10.0%; Q4 dividend was $1.85 |
Q4 2017: Revenue was $1.428 billion versus $1.426 billion in Q4 2016; operating income was $749 million versus $701 million. Net income attributable to common stockholders was $571 million, or $1.84 per share, compared with $394 million, or $1.26 per share.
Property performance: Portfolio NOI increased 4.5% and comparable-property NOI increased 3.2%. U.S. Malls and Premium Outlets sales per square foot rose 2.3% to $628, and average base minimum rent rose 2.9% to $53.11 per square foot. Ending occupancy declined 120 basis points to 95.6%. The Mills occupancy was unchanged at 98.4%, while rent per square foot increased 6.6% to $30.98.
Material changes and unusual items
- Reported diluted EPS increased despite a $128.6 million loss on early debt extinguishment, equal to $0.36 per diluted share. The comparable 2016 debt-extinguishment loss was $136.8 million, or $0.38 per share.
- Management attributed earnings growth to stronger operations and investment activity, lower interest expense (down $48.2 million), $21.5 million of gains on marketable securities, and higher lease-settlement income. Comparisons were partly offset by 2016 gains on acquisitions and dispositions and multi-family investment sales.
- Minimum rents increased $81.5 million; comparable rents rose $51.3 million, or 1.6%. Overage rent fell $14.0 million. Credit-loss provision increased $4.0 million amid more tenant bankruptcies.
- Leasing spreads remained positive: opening rents exceeded closing rents by 11.4%, but new-lease tenant allowances increased to $50.53 per square foot from $39.29, while average initial base rent on new leases declined to $58.60 from $59.45.
- Hurricane Maria damaged two Puerto Rico properties. Simon recorded an approximately $19 million impairment offset by an insurance recovery receivable and said the losses were expected to be recoverable, apart from a $1 million deductible per occurrence. Damage in Florida and Texas was described as limited.
- In January 2018, a Tennessee appeals court reversed a prior ruling in Simon’s Opry Mills excess-insurance litigation, ruling the policy limit was $50 million. Simon said it intended to seek review; recovery beyond amounts already paid is uncertain.
Debt, liquidity and capital allocation
- Year-end consolidated debt was $24.6 billion; the effective weighted-average borrowing rate fell to 3.25% from 3.39%, and weighted-average maturity was 7.0 years. Floating-rate debt represented 4.6% of consolidated debt. Simon reported compliance with debt covenants.
- Available borrowing capacity under the revolving credit facilities was approximately $6.2 billion after outstanding borrowings, commercial paper and letters of credit. Commercial paper outstanding was $978.5 million and matured through March 15, 2018.
- Simon said cash on hand and available facilities were sufficient for debt maturities and capital needs through 2018. It expected positive operating cash flow in 2018 and generally expected operating cash to cover expenses, debt service, recurring capital expenditure and REIT distributions.
- Consolidated capital expenditures were $732 million in 2017, including $473 million for redevelopment and expansion. The company’s share of projects under construction was approximately $0.7 billion; management cited typical stabilized returns of 7%–10%. Expected 2018 international development costs were approximately $251 million.
- Common dividends and limited-partner distributions totaled approximately $2.6 billion in 2017. Simon repurchased 2.47 million shares at an average $164.87 per share and had approximately $1.0 billion of remaining repurchase authorization at year-end. The Board declared a $1.95 per-share dividend for Q1 2018.
Outlook, risks and controls
No specific 2018 earnings or FFO guidance is provided in the filing. Management cited expected positive operating cash flow, planned development spending and available liquidity. Key risks include retailer distress and bankruptcies, anchor-store closures, e-commerce competition, lower occupancy or rents, leasing costs, development returns, substantial debt and refinancing needs, interest rates, REIT qualification and distribution requirements, joint-venture control and guarantees, environmental exposure, cyber incidents, natural disasters and foreign-exchange and Brexit uncertainty. International operations represented approximately 5.1% of consolidated net income and 9.0% of NOI in 2017.
Ernst & Young issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2017.
Important facts for investors to verify
- Whether occupancy weakness persists and whether tenant sales, lease renewals and rent spreads support continued comparable NOI growth.
- How retailer bankruptcies, anchor closures and elevated tenant allowances affect leasing costs, credit losses and property cash flows.
- Debt maturities and refinancing progress, particularly near-term commercial paper and the 2018 maturity schedule; confirm the effect of the post-year-end facility amendment and note redemption.
- Actual insurance recoveries for the Puerto Rico hurricane losses and the outcome of the Opry Mills insurance appeal.
- Whether planned redevelopment and international development spending achieves expected returns without reducing liquidity or distributions.
- How the $128.6 million debt-extinguishment charge and other gains affect comparisons of recurring earnings and FFO.