Simon Property Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Simon owns, develops and manages retail properties, principally malls, Premium Outlets and The Mills. As of June 30, it held interests in 208 U.S. properties and a range of international outlet properties, and owned 28.9% of Klépierre. Unless stated otherwise, dollar amounts below are in millions.
Business context and key financial metrics
- Washington Prime spin-off: On May 28, Simon spun off interests in 98 properties, substantially all of its strip centers and smaller enclosed malls. Their results are classified as discontinued operations. Simon retained approximately $1.0 billion of debt proceeds in connection with the separation.
- Revenue and earnings: Q2 continuing-operations revenue was $1,182, up 8.9% from $1,085; operating income was $562, up 10.1% from $510. Net income attributable to common stockholders was $406.6 versus $339.9, and diluted EPS was $1.31 versus $1.10. For the six months, revenue was $2,339 versus $2,146, common-stockholder net income was $748.2 versus $623.1, and diluted EPS was $2.41 versus $2.01.
- Profit drivers and non-GAAP measures: Six-month FFO was $1,649, up 9.3%, and diluted FFO per share was $4.54 versus $4.16. Simon reported its share of portfolio NOI up 6.5% and comparable U.S. Malls, Premium Outlets and The Mills NOI up 5.5% for the six months. These are non-GAAP measures.
- Property operating indicators: At June 30, total U.S. Mall and Premium Outlet occupancy was 96.5%, up 40 basis points year over year; average base minimum rent was $45.83 per square foot, up 4.3%. Sales per square foot declined 0.6% to $608. Releasing spreads were 20.0% over expiring tenant payments.
- Cash flow and investment: Six-month operating cash flow was $1,271 versus $1,233. Capital expenditures, net, were $366; cash distributions from unconsolidated entities were $288. Cash and cash equivalents were $1,666 at June 30, down from $1,691 at year-end.
- Debt and liquidity: Mortgages and unsecured indebtedness totaled $21,901, down from $22,670 at December 31; mortgage debt was $6.3 billion. The effective overall borrowing rate was 4.58%, versus 4.99% a year earlier. Available capacity under revolving facilities was $5.1 billion, net of borrowings and letters of credit. Floating-rate debt was 8.0% of consolidated debt.
Material changes versus the prior comparable period
- Revenue and operating income increased, reflecting higher comparable rents and tenant reimbursements, acquisitions and expansion activity. Comparable minimum rents increased 6.4% for the six months; comparable tenant reimbursements increased 10.5%.
- Interest expense declined $28.4 for the six months, primarily due to financing activity and lower borrowing rates. Simon issued $1.2 billion of fixed-rate notes at 2.20% and 3.75%, and repaid or redeemed $716.1 of higher-rate unsecured notes. It also repaid $1.1 billion of mortgages on two properties.
- Reported earnings included a $133.9 gain related to Klépierre’s sale of 126 retail galleries and a $2.7 non-cash gain from consolidating Arizona Mills. The 2013 comparison included $74.7 of gains on acquisitions and disposals.
- Simon incurred $38.2 of Washington Prime spin-off transaction costs. Discontinued-operations revenue and income also declined because the 2014 period included only the period before the May 28 spin-off.
- Six-month total assets fell to $30,586 from $33,325 at year-end, principally reflecting the spin-off and removal of Washington Prime assets and liabilities. Stockholders’ equity declined to $5,233 from $5,849.
Outlook, commentary and risks
- Management expected positive operating cash flow for 2014 and stated it believed cash on hand and revolving-facility availability were sufficient for debt maturities and capital needs through 2014. The filing provides no specific full-year earnings or FFO guidance.
- Simon expected approximately $1.1 billion of its share of 2014 domestic development, redevelopment and expansion costs, generally funded from operating cash flow, and approximately $179 million of international development costs, primarily from joint-venture cash flow and construction loans. Estimated stabilized returns on development and redevelopment projects were 8%–12%.
- The Board declared a Q3 2014 common dividend of $1.30 per share. Future dividends remain subject to operating results, available cash, reserves and REIT requirements.
- Management cited risks including tenant bankruptcies, retail and economic conditions, financing availability, interest and foreign-exchange rates, development and joint-venture risks, and maintaining REIT status. Simon was in compliance with debt covenants at June 30.
- Simon and its lenders continued litigation seeking up to $150 million of additional insurance proceeds for Opry Mills flood losses; management believed recovery was probable but gave no assurance. The Operating Partnership guaranteed $229.1 million of joint-venture mortgage debt, with stated recovery rights of $90.3 million from venture partners.
- The filing notes that interim results may not indicate full-year performance because of seasonality. Ordinary-course litigation was not expected by management to materially affect financial position or results.
Important facts for investors to verify
- Separate recurring operating growth from the $133.9 Klépierre-related gain, other acquisition/disposition gains and $38.2 spin-off costs; review the non-GAAP FFO reconciliation.
- Assess the ongoing earnings, cash flow and management-fee effects of the Washington Prime separation, including the reduced property base and transition arrangements.
- Review debt maturities, refinancing needs, interest-rate exposure and the availability and terms of revolving facilities; confirm covenant compliance in subsequent filings.
- Track comparable NOI, occupancy, rents and tenant sales, particularly the contrast between rent and occupancy gains and the slight decline in sales per square foot.
- Monitor planned development spending, joint-venture funding and contingent exposures, including the Opry Mills insurance litigation and joint-venture debt guarantees.