Simon Property Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Simon is a REIT that owns, develops and manages malls, Premium Outlets and The Mills. At quarter-end, it owned or held interests in 208 U.S. income-producing properties and had international property and joint-venture interests. Unless otherwise stated, amounts below are USD.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1,320.1 million | $1,234.7 million | $3,885.5 million | $3,573.7 million |
| Operating income | $657.6 million | $607.6 million | $1,959.1 million | $1,730.1 million |
| Consolidated net income | $492.5 million | $297.0 million | $1,472.5 million | $1,175.5 million |
| Net income attributable to common stockholders | $420.0 million | $252.0 million | $1,255.1 million | $1,000.2 million |
| Diluted EPS | $1.36 | $0.81 | $4.04 | $3.22 |
| FFO per diluted share (non-GAAP) | $2.54 | $1.90 | $7.46 | $6.43 |
Revenue rose 6.9% in Q3 and 8.7% year to date. Operating income increased 8.2% and 13.2%, respectively. Nine-month FFO increased 15.7%; Q3 FFO increased 33.3%. FFO is a non-GAAP measure and includes an $80.2 million securities-sale gain in 2015; the 2014 comparison included a $127.6 million debt-extinguishment loss and Washington Prime results net of spin-off costs.
Margins: Operating margin was approximately 49.8% in Q3 2015 versus 49.2% in Q3 2014, and 50.4% for the first nine months of 2015 versus 48.4% in 2014. These are calculated as operating income divided by revenue.
Cash flow and liquidity: Nine-month operating cash flow was $2,218.8 million, investing cash flow was negative $1,272.4 million, and financing cash flow was negative $701.8 million. Cash increased $244.6 million to $856.9 million. The company reported $4.6 billion of available capacity under its revolving credit facilities at September 30. Management said it expected positive operating cash flow for 2015 and believed available cash and facilities were sufficient for debt maturities and capital needs through year-end.
Debt and balance sheet: Mortgages and unsecured indebtedness totaled $22.629 billion, up from $20.853 billion at December 31, 2014; total assets were $30.641 billion and total liabilities $25.495 billion. The effective weighted average borrowing rate was 4.11%, down from 4.41% at year-end 2014; floating-rate debt was 9.5% of consolidated debt. The company had $803.6 million of commercial paper outstanding, maturing from October through December 2015, and $6.5 billion of mortgage debt. It reported compliance with debt covenants.
Material changes and operating performance
- Management reported portfolio NOI growth of 7.3% for the first nine months and comparable NOI growth of 3.8% for U.S. Malls, Premium Outlets and The Mills. These are non-GAAP operating measures.
- Comparable minimum rent increased 5.2% in Q3 and 4.1% year to date. Average base rent per square foot for U.S. Malls and Premium Outlets rose 4.9% to $48.57; sales per square foot increased 0.5% to $616.
- U.S. Malls and Premium Outlets occupancy declined 80 basis points year over year to 96.1%, which management attributed primarily to tenant bankruptcy activity. Average releasing payments were 18.4% above expiring payments.
- Interest expense declined $20.1 million in Q3 and $66.1 million year to date. In 2015, Simon issued $1.1 billion of fixed-rate notes at 2.50% and 3.50% and repaid or redeemed $693.5 million of higher-rate notes.
- Other income for the first nine months included an $80.2 million gain on sale of marketable securities and an $8.3 million gain on sale of European pre-development interests. Simon also recorded $16.3 million of gains from dispositions of unconsolidated property interests.
- In January 2015, Simon acquired The Mills at Jersey Gardens and University Park Village for $677.9 million cash and assumed $405.0 million of mortgage debt. It also established or funded joint ventures, including transactions with Sears and Hudson’s Bay Company (HBC).
Outlook, commentary, risks and unusual items
- The filing gives no explicit full-year earnings or FFO guidance. Management estimated its share of development and redevelopment projects under construction at approximately $2.4 billion, with expected stabilized returns generally of 8%–12%; it expected to fund these projects primarily with operating cash flow.
- The board declared a fourth-quarter 2015 common dividend of $1.60 per share, following $1.55 per share paid in Q3. Future dividends remain subject to board determination, operating results, cash availability, reserves and REIT requirements.
- Simon’s jury verdict in the Opry Mills insurance dispute was $204.1 million, including $50.0 million previously paid by the primary insurer. The court had also ruled additional coverage was available, but damages and other recoveries remained subject to ongoing litigation. Management considered recovery probable but gave no assurance of success.
- Joint-venture mortgage guarantees totaled $346.6 million, with a stated $104.0 million right of recovery from partners. Certain property mortgages are cross-defaulted and cross-collateralized. Management described ordinary-course litigation as not expected to materially affect results.
- Key disclosed risks include tenant bankruptcies and rent collection, retail-sector and economic conditions, leasing and occupancy, financing availability and interest rates, property development execution, foreign exchange exposure, joint-venture risks, insurance coverage and maintaining REIT status. Management reported no material change in the risk factors from its 2014 Form 10-K.
- Results are interim and may be affected by seasonal factors. The company also noted it had early adopted updated discontinued-operations guidance; its 2014 comparison includes the Washington Prime spin-off and related discontinued operations.
Important facts for investors to verify
- Reconcile GAAP earnings and FFO growth for the securities-sale gain, prior-year debt-extinguishment loss, spin-off items and property disposition gains.
- Track occupancy, tenant bankruptcies, sales per square foot, rent growth and leasing spreads for evidence that operating trends remain durable.
- Review upcoming commercial-paper maturities, debt maturities and refinancing needs, available facility capacity, borrowing costs and covenant compliance.
- Monitor progress, remaining funding requirements and returns for the development pipeline and joint ventures, including the HBC and Sears transactions.
- Follow the Opry Mills insurance litigation and any resulting recognized recovery; the verdict and management’s expectation do not assure collection.
- Assess distributions and share repurchases alongside capital commitments, cash flows and debt levels; Simon had authorized up to $2.0 billion of repurchases over 24 months and had repurchased 1.90 million shares by September 30.