Simon Property Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Simon is a self-managed REIT focused on malls, Premium Outlets and The Mills. At quarter-end, it owned or held interests in 209 U.S. income-producing properties and additional international properties.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1.216 billion | $1.157 billion | +5.1% |
| Operating income | $599.2 million | $561.0 million | +6.8% |
| Operating margin | 49.3% | 48.5% | +0.8 percentage points |
| Consolidated net income | $425.5 million | $401.1 million | +6.1% |
| Net income attributable to common stockholders | $362.2 million | $341.6 million | +6.0% |
| Diluted EPS | $1.16 | $1.10 | +$0.06 |
| Funds from Operations (FFO) | $830.7 million | $865.3 million | -4.0% |
| Diluted FFO per share | $2.28 | $2.38 | -$0.10 |
| Cash from operating activities | $674.8 million | $661.5 million | +$13.3 million |
Comparable property NOI for U.S. Malls, Premium Outlets and The Mills increased 3.5%; management reported its share of portfolio NOI up 2.9%. U.S. Malls and Premium Outlets sales per square foot rose 1.6% to $621, and average base rent increased 4.5% to $47.59 per square foot. Ending occupancy declined 60 basis points to 95.8%, which the company attributed to recently announced tenant bankruptcies.
At March 31, total assets were $30.3 billion, cash and cash equivalents were $833.7 million, and mortgages and unsecured indebtedness totaled $21.7 billion, up from $20.9 billion at year-end. The effective average borrowing rate was 4.31%, down from 4.66% a year earlier; floating-rate debt was 11.0% of consolidated debt. The company reported $5.2 billion of available borrowing capacity under its two revolving facilities, net of borrowings and letters of credit.
Material changes and notable items
- Interest expense fell $22.1 million year over year, supporting earnings growth; management cited financing activity and lower borrowing rates.
- The 2014 comparison included $41.5 million of income from the Washington Prime properties, spun off in May 2014. That discontinued-operations income did not recur in Q1 2015. The company also reported a 2014 $2.9 million acquisition/disposal gain that did not recur.
- FFO declined 4.0%; the 2014 figure included $88.4 million of FFO related to the Washington Prime properties. FFO is a non-GAAP measure and is not equivalent to operating cash flow.
- Simon acquired The Mills at Jersey Gardens and University Park Village in January for $677.9 million cash and assumed $405.0 million of mortgage debt. Cash acquisitions in the quarter totaled $682.4 million; capital expenditures were $229.2 million.
- Currency translation adjustments contributed to a $90.8 million decline in accumulated other comprehensive income during the quarter, principally from foreign currency movements.
Outlook, risks and contingencies
- No specific earnings or FFO guidance is provided in the filing. Management expected positive operating cash flow in 2015 and stated it believed available cash and credit sources were sufficient for 2015 debt maturities and capital needs.
- Development and redevelopment projects under construction represented approximately $2.1 billion of Simon’s share of costs. The company estimated stabilized returns of 8%–12% for new development, expansion and redevelopment projects. Three U.S. Premium Outlets were scheduled to open in 2015.
- A proposed Hudson’s Bay Company joint venture was expected to close in Q2 2015. Simon committed $100 million for property improvements and could contribute up to an additional $178.5 million. A Sears-related joint venture and a $33 million investment in Seritage Growth Properties were announced after quarter-end.
- The board declared a Q2 2015 dividend of $1.50 per share, versus $1.40 paid in Q1. On April 2, 2015, it authorized up to $2.0 billion of common-stock repurchases over 24 months.
- In the Opry Mills flood-insurance litigation, a court ruled that up to $150 million of additional excess coverage was available; insurers sought permission to appeal, and a damages trial was scheduled for July 2015. Recovery was considered probable by management, but not assured.
- Simon reported compliance with applicable debt covenants. Joint-venture mortgage guarantees totaled $335.3 million, with $129.0 million of stated rights of recovery from partners. The filing identifies retail and tenant credit conditions, financing and interest rates, foreign exchange, development execution, and joint-venture risks among factors that could affect results.
Key facts for investors to verify
- How occupancy and tenant bankruptcies affect leasing, rent collections and comparable NOI after quarter-end.
- Whether the announced Hudson’s Bay and Sears transactions close as planned, and their ultimate capital requirements and returns.
- Execution, remaining funding needs and realized returns for the $2.1 billion development and redevelopment pipeline.
- Debt maturities, refinancing costs and liquidity usage, including the short-dated commercial paper outstanding at quarter-end.
- Progress and potential recovery in the Opry Mills insurance litigation; the filing does not establish the timing or amount of any recovery.