Simon Property Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unless noted, dollar amounts are in millions. Simon is a REIT focused on malls, outlet centers and related retail properties. At quarter-end, it owned or held interests in 208 U.S. income-producing properties and had international property investments and a 28.9% stake in Klépierre.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,234.7 | $1,146.9 | $3,573.7 | $3,292.7 |
| Operating income | $607.6 | $548.5 | $1,730.1 | $1,560.9 |
| Consolidated net income | $297.0 | $367.3 | $1,175.5 | $1,102.3 |
| Net income attributable to common stockholders | $252.0 | $311.7 | $1,000.2 | $934.7 |
| Diluted EPS | $0.81 | $1.00 | $3.22 | $3.01 |
| Operating cash flow | Not presented by quarter | $1,932.2 | $1,928.9 | |
| FFO, a non-GAAP measure | $689.4 | $802.8 | $2,338.6 | $2,310.9 |
| Diluted FFO per share | $1.90 | $2.21 | $6.43 | $6.38 |
Revenue rose 7.7% in Q3 and 8.5% year to date; operating income increased about 10.8% in both comparisons. Calculated operating margin was approximately 49.2% in Q3 2014 versus 47.8% in Q3 2013, and 48.4% year to date versus 47.4%. Q3 common-stockholder income and EPS were lower, despite higher operating income, primarily reflecting a $127.6 million debt-extinguishment loss and the absence of Washington Prime discontinued-operation income. Nine-month EPS increased 7.0%; FFO rose 1.2% year to date but fell 14.1% in Q3.
- Cash and debt: Cash and cash equivalents were $818.0 at September 30, down from $1,691.0 at December 31, 2013. Consolidated debt was $21,202.4, down from $22,669.9; mortgages accounted for $6.3 billion. The effective weighted-average borrowing rate was 4.42%, versus 4.80% at year-end 2013.
- Available liquidity: $5.2 billion of borrowing capacity remained under revolving facilities, net of borrowings and letters of credit. Management said cash and facility availability were sufficient for debt maturities and capital needs through 2014.
- Cash uses: Nine-month investing cash outflow was $591.4 and financing cash outflow was $2,239.7. Distributions to stockholders and limited partners totaled approximately $1.4 billion; consolidated capital expenditures were $467.1.
Operating trends and material changes
- Management reported 8.8% growth in its share of portfolio NOI and 5.4% growth in comparable NOI for U.S. Malls, Premium Outlets and The Mills for the first nine months. Comparable NOI growth was 5.3% in Q3.
- U.S. Malls and Premium Outlets occupancy rose to 96.9% from 96.3%; average base rent increased 4.4% to $46.29 per square foot. Sales per square foot was nearly flat at $613 versus $614.
- On May 28, Simon spun off 98 properties—substantially all strip centers and smaller enclosed malls—to Washington Prime Group. The filing presents those historical results as discontinued operations. Simon retained approximately $1.0 billion of proceeds from debt issued in connection with the spin-off and entered into management and transition-services arrangements.
- Debt refinancing included a $1.3 billion senior-note offering at a weighted-average coupon of 3.64%, used in part to tender for $1.322 billion of older notes and redeem $250 million of 7.875% notes. The refinancing generated the $127.6 million extinguishment loss. Simon also repaid $934.5 million of other senior notes and approximately $1.1 billion of mortgage debt.
- Simon agreed to acquire Jersey Gardens and University Park Village for $1.09 billion, subject to and concurrent with the expected first-quarter 2015 closing of Washington Prime’s acquisition of Glimcher. The filing also reports acquisitions, property dispositions and new outlet openings.
Outlook, risks and unusual items
- Management expected positive operating cash flow in 2014 and said operating cash generation should generally cover operating costs, debt service, recurring capital expenditures and REIT-required distributions. Nonrecurring capital needs may be funded through cash, credit facilities, debt or equity. No specific full-year earnings or FFO guidance is provided in the supplied filing text.
- Simon paid a Q3 common dividend of $1.30 per share; the board declared a Q4 dividend of $1.30 per share. Future dividends remain subject to results, available cash, reserves and REIT requirements.
- Unusual items include the $127.6 million debt-extinguishment loss, $38.2 million of Washington Prime spin-off transaction costs, and $154.2 million of nine-month gains on acquisitions and asset or investment dispositions. The Klépierre portfolio sale contributed a significant gain.
- Simon was pursuing litigation to recover up to $150 million of additional insurance proceeds for Opry Mills flood losses. Management believed recovery was probable but gave no assurance of success. The company also disclosed $226.2 million of guaranteed joint-venture mortgage debt, with an $80.5 million right of recovery from partners.
- Management cited risks including financing and interest-rate access, retail-sector and tenant conditions, leasing and property development, joint ventures, foreign exchange, cybersecurity, insurance and REIT qualification. It reported compliance with debt covenants and no material change to previously disclosed risk factors.
Key facts investors should verify
- Reconcile Q3 and year-to-date earnings and FFO trends, including the debt-extinguishment loss, spin-off-related discontinued operations and transaction costs.
- Assess post-spin-off comparable NOI, occupancy, leasing spreads, tenant sales and the effect of property acquisitions, sales and new developments.
- Review debt maturities, refinancing savings, the remaining $5.2 billion facility availability and the planned funding of the $1.09 billion Glimcher-related property acquisition.
- Evaluate cash distributions against operating cash flow and capital spending, and confirm whether management’s 2014 liquidity expectations were met.
- Track the Opry Mills insurance litigation, joint-venture guarantees and the eventual terms and closing of the pending property acquisition.
FFO, NOI and comparable NOI are non-GAAP measures; the company cautions that these measures are not substitutes for GAAP earnings or operating cash flow and may not be comparable across REITs.