Business context and reporting period
Simon Property Group, Inc. and Simon Property Group, L.P. filed a combined unaudited Form 10-Q for the three months ended March 31, 2016. Simon is a REIT; substantially all operations and debt are held by the Operating Partnership. The business owns, develops and manages retail real estate. At quarter-end, it owned or held interests in 208 U.S. income-producing properties and a portfolio of international outlet and designer outlet properties, as well as a 20.3% interest in Klépierre.
Financial performance and position
| Metric | Q1 2016 | Comparable period or date |
|---|---|---|
| Total revenue | $1.337 billion | $1.216 billion, Q1 2015 |
| Operating income | $684.9 million | $599.2 million, Q1 2015 |
| Operating margin | About 51.2% | About 49.3%, Q1 2015 |
| Net income attributable to common stockholders | $481.0 million | $539.1 million, Q1 2015 |
| Diluted earnings per share | $1.55 | $1.73, Q1 2015 |
| Funds from operations (FFO) | $951.8 million; diluted FFO per share $2.63 | $830.7 million; $2.28, Q1 2015 |
| Net cash from operating activities | $720.5 million | $674.8 million, Q1 2015 |
| Cash and cash equivalents | $805.1 million | $701.1 million, December 31, 2015 |
| Mortgages and unsecured indebtedness | $23.0 billion | $22.4 billion, December 31, 2015 |
| Total assets / total liabilities | $31.4 billion / $25.9 billion | At March 31, 2016 |
Operating cash flow less net investing outflow of $195.3 million and net financing outflow of $421.3 million resulted in a $103.9 million increase in cash. Investing outflows included $189.0 million of capital expenditures and $104.5 million invested in unconsolidated entities. Stockholder dividends and unitholder distributions totaled $580.3 million; preferred distributions were additional.
At March 31, consolidated debt had a 3.76% effective weighted-average interest rate and a 6.1-year weighted-average term to maturity. Floating-rate debt was 5.7% of total debt. Available borrowing capacity under the credit facilities was $5.1 billion, and the company reported compliance with debt covenants. The board declared a $1.60-per-share second-quarter dividend.
Material changes versus the prior period
- Revenue increased about 9.9% and operating income about 14.3%; portfolio NOI rose 7.8% and comparable-property NOI rose 5.1%.
- Net income attributable to common stockholders fell about 10.8%, and diluted EPS declined 10.4%. The principal comparison was a $206.9 million non-cash gain in Q1 2015 related to Klépierre’s acquisition of Corio. Lower interest expense and stronger property operations partly offset that prior-year gain.
- Comparable rents rose $51.4 million, or 6.9%; tenant reimbursements increased $26.5 million, or 7.9%. Overage rent declined $10.0 million, attributed to lower tenant sales and higher overage breakpoints.
- U.S. mall and Premium Outlet occupancy was 95.6%, down 20 basis points year over year; average base rent per square foot increased 4.4% to $49.70, while sales per square foot declined 1.3% to $613. Releasing spreads were positive at 17.5%.
- The company began consolidating two European designer outlet properties after obtaining control of an entity, recording a $12.1 million non-cash remeasurement gain. It also issued $1.35 billion of fixed-rate notes, repaid $373.1 million of mortgages and redeemed $163.3 million of 6.10% notes.
Outlook, commentary, risks and unusual items
Management expected positive operating cash flow in 2016 and stated that cash on hand and available facilities should cover debt maturities and capital needs through year-end. It expected operating cash flow to support normal expenses, debt service, recurring capital expenditures and REIT distributions. No specific earnings or FFO guidance was provided. The company reported approximately $2.0 billion as its share of costs for development, redevelopment and expansion projects under construction, targeting stabilized returns of 8%–12%; expected 2016 international development costs were approximately $159 million.
In April 2016, after quarter-end, Simon and a partner acquired The Shops at Crystals in Las Vegas for approximately $1.1 billion; Simon’s interest is 50% and noncontrolling. Also after quarter-end, the Supplemental Facility capacity was increased from $2.75 billion to $3.50 billion, with an option to increase it further to $4.25 billion.
An Opry Mills flood-insurance dispute remained unresolved: in April 2016 the court entered final judgment of $204.1 million, including $50.0 million previously paid. Simon said it believed recovery was probable but gave no assurance of success, and continued to pursue additional amounts including consequential damages. The company also guaranteed $308.8 million of joint-venture mortgage debt, with stated recovery rights from partners of $76.5 million. Management said ordinary-course proceedings were not expected to materially adversely affect financial condition, liquidity or results.
Risks identified include retail-sector and tenant conditions, rent collection and anchor-tenant relationships, access to and cost of financing, interest and foreign-exchange rates, development and leasing execution, joint-venture exposures, real-estate liquidity, insurance coverage, and cybersecurity. Management reported no material change to previously disclosed risk factors and concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of the earnings decline reflects the absence of the prior-year Corio gain, and how sustainable are the reported NOI and FFO increases?
- Whether lower tenant sales, weaker overage rent and slightly lower occupancy persist, and how leasing spreads translate into future cash rent and tenant costs.
- Near-term refinancing and liquidity exposure, including the $975.4 million commercial-paper balance maturing in June 2016 and scheduled 2016 debt principal of approximately $2.19 billion.
- The status, timing and collectability of the Opry Mills judgment and any additional insurance recovery.
- Capital requirements, completion schedules and realized returns for the development pipeline, including the post-quarter Crystals acquisition.
- Potential calls on liquidity from joint ventures, guarantees and redeemable noncontrolling interests.