Simon Property Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance sheet compared with December 31, 2013. Unaudited. Simon is a self-managed REIT that owns, develops and manages retail properties, primarily malls and outlet centers. At quarter-end, it owned or held interests in 307 U.S. income-producing properties and international outlet and joint-venture investments. Management cautions that interim results may not indicate full-year performance because of seasonality.
Financial and operating results
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $1.315 billion | $1.215 billion; up 8.2% |
| Operating income | $615.9 million | $557.7 million |
| Consolidated net income | $401.1 million | $334.5 million |
| Net income attributable to common stockholders | $341.6 million | $283.1 million |
| Diluted EPS | $1.10 | $0.91 |
| FFO, non-GAAP | $865.3 million; $2.38 per diluted share | $741.9 million; $2.05 per diluted share |
| Cash from operating activities | $661.5 million | $550.5 million |
Operating income was about 46.8% of revenue, compared with about 45.9% a year earlier. FFO increased 16.6%. Total portfolio NOI rose 9.1%, while comparable U.S. Malls and Premium Outlets NOI increased 3.7%. For those U.S. properties, occupancy was 95.5% (up 80 basis points), average base rent was $42.77 per square foot (up 4.2%), and sales were $576 per square foot (up 0.2%). Releasing spreads were 19.5% above expiring tenant payments.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $1.013 billion, down $703.5 million from year-end. Investing activities used $227.5 million and financing activities used $1.137 billion; operating activities provided $661.5 million.
- Consolidated debt was $23.187 billion, down from $23.589 billion at December 31, 2013. Mortgage debt was $7.6 billion. Effective weighted-average borrowing rate was 4.70%, versus 5.02% at March 31, 2013; floating-rate debt represented 6.3% of consolidated debt. Average debt maturity was 5.8 years.
- Available capacity under the two revolving facilities was $5.1 billion, net of borrowings and letters of credit. The company reported $1.0 billion cash and stated it had sufficient cash and facility availability for maturities and capital needs through 2014.
- Net cash distributions of capital from unconsolidated entities were $124.7 million; together with operating cash flow, the company reported $786.1 million of operating cash flow and capital distributions. Stockholder dividends and unitholder distributions totaled approximately $454 million.
- Capital expenditures were $207.7 million, including $140.0 million for redevelopment and expansion. Development, investment and distributions contributed to cash uses; the quarter also included $1.810 billion debt issuance and $2.390 billion debt repayments.
Changes, transactions and outlook
- Revenue growth reflected higher minimum rent and tenant reimbursements, along with increased lease-settlement income and land-sale activity. Comparable rents increased 5.4%; comparable tenant reimbursements increased 9.8%.
- Interest expense fell $16.9 million, primarily reflecting financing activity and lower borrowing rates. Q1 2014 included a $2.9 million net gain from acquisition and asset transactions; Q1 2013 included $20.8 million of transaction gains, which partly offset year-over-year EPS growth.
- Operating and maintenance costs rose, partly because of higher utility and snow-removal costs during a harsh winter. Credit-loss provisions increased $2.5 million amid increased tenant bankruptcies.
- Simon acquired the remaining 50% of Arizona Mills and now owns the property outright; consolidation generated a $2.7 million non-cash remeasurement gain. It also acquired a partner’s redeemable interests in a ten-property portfolio for about $114.4 million.
- Management expected positive operating cash flow in 2014 and projected approximately $1.2 billion of its share of domestic development, redevelopment and expansion costs, plus approximately $173 million of international development costs. It cited typical stabilized returns of 10%–12% on development and redevelopment projects. No full-year EPS or FFO guidance is provided in the supplied filing text.
- The company planned to spin off interests in 98 properties, primarily strip centers and smaller enclosed malls, into Washington Prime Group, intended as a tax-free distribution. Management expected completion by the end of May 2014, subject to regulatory, listing, third-party and board approvals; the company could change or abandon the transaction before completion.
- After quarter-end, on April 7, the $4.0 billion credit facility was amended: capacity could rise to $5.0 billion, maturity was extended to June 30, 2018 (with a one-year extension option), and pricing was reduced to LIBOR plus 80 basis points with a 10-basis-point facility fee.
- The board declared a Q2 2014 common dividend of $1.30 per share, payable May 30 to holders of record May 16. Q1’s dividend was $1.25 per share.
Risks, contingencies and unusual items
- The filing cites risks including tenant insolvencies and bankruptcies, retail-market and economic conditions, financing availability, interest and foreign-exchange rates, development and redevelopment execution, joint ventures, insurance coverage and maintaining REIT status.
- For flood damage at Opry Mills, insurers had funded $50 million, but excess carriers denied a claim for up to an additional $150 million for restoration and business-interruption losses. Simon and its lenders were pursuing litigation; management believed recovery was probable but gave no assurance of success.
- Simon guaranteed $201.2 million of joint-venture mortgage debt, with a stated $84.8 million right of recovery from venture partners. Joint-venture debt is generally non-recourse except for express guarantees. Certain property mortgage pools are cross-defaulted and cross-collateralized.
- Management said it was in compliance with applicable debt covenants. It reported no material change in risk factors or market-risk assumptions from its 2013 Form 10-K, and disclosure controls were assessed as effective at a reasonable-assurance level.
Investor verification priorities
- Confirm completion and final terms, tax treatment, asset scope and financing effects of the proposed Washington Prime spin-off.
- Review comparable-property leasing, occupancy and NOI trends, and distinguish recurring operating growth from acquisitions, lease settlements and land sales.
- Track debt maturities, refinancing costs, facility availability, mortgage repayment activity and covenant compliance.
- Assess the outcome and recoverability of the Opry Mills insurance litigation and exposure under joint-venture guarantees and cross-default provisions.
- Verify the expected 2014 development spending, project opening schedules, returns and funding sources; the filing notes that interim results are seasonal and does not provide full-year EPS or FFO guidance.