Simon Property Group, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Simon is a self-managed REIT that owns, develops, and operates retail properties. At quarter-end it owned or held interests in 338 U.S. income-producing properties and international retail centers.
Financial and operating results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $979.3 million | $924.9 million | $2,837.9 million | $2,747.0 million |
| Operating income | $397.8 million | $392.2 million | $1,240.2 million | $981.1 million |
| Consolidated net income | $280.5 million | $139.2 million | $486.4 million | $271.3 million |
| Net income attributable to common stockholders | $230.6 million | $105.5 million | $392.5 million | $191.6 million |
| Diluted EPS | $0.79 | $0.38 | $1.35 | $0.73 |
| Funds from operations (FFO) | $318.5 million | $473.1 million | $1,131.7 million | $1,263.1 million |
| Diluted FFO per share | $0.90 | $1.38 | $3.23 | $3.92 |
| Net cash from operating activities | Not separately presented by quarter | $1,285.5 million | $1,341.3 million |
Revenue increased 5.9% in the quarter and 3.3% year to date. Reported earnings included material, nonrecurring gains and charges: gains on acquisitions and asset or joint-venture disposals were $294.3 million in Q3 and $320.3 million year to date; debt-extinguishment losses were $185.1 million and $350.7 million, respectively. The 2009 nine-month comparison included a $140.5 million impairment charge. FFO declined despite higher GAAP earnings; it includes the 2010 debt-extinguishment losses and transaction expenses.
At September 30, cash and cash equivalents were $1.012 billion, down from $3.958 billion at year-end 2009, principally reflecting debt reduction. Total assets were $24.788 billion; mortgages and other indebtedness were $17.485 billion, down from $18.630 billion. The effective weighted-average borrowing rate was 5.60%, versus 5.62% at year-end 2009. Cash provided by operations was $1.285 billion; investing activities used $870.1 million and financing activities used $3.361 billion over nine months.
Changes and management commentary
- Retail operating indicators improved: comparable sales per square foot for U.S. regional malls and Premium Outlets rose 7.6% to $483; occupancy increased 80 basis points to 93.6%; and average base rent rose 0.9% to $38.69 per square foot.
- The company completed its approximately $2.3 billion acquisition of 21 Prime outlet centers, including $1.2 billion of assumed mortgage debt. It also sold its interest in Simon Ivanhoe, generating approximately $281 million in Simon’s share of the gain.
- Two unsecured-note tender offers and related refinancing generated $350.7 million of debt-extinguishment charges. Management said the transactions extended the weighted-average duration of senior unsecured notes from 6.8 to 7.5 years and slightly reduced their weighted-average interest rate.
- The company paid a $0.60-per-share common dividend in Q3. It expected operating cash flow to cover operating costs, debt service, recurring capital spending, and REIT-required distributions in 2010. Planned 2010 development, renovation, and expansion costs were approximately $200 million domestically and $60 million internationally.
Liquidity, risks, and contingencies
- Available capacity under the $3.9 billion revolving credit facility was approximately $3.0 billion after $852 million of borrowings and $33.3 million of letters of credit. Management stated cash and facility availability were sufficient for debt maturities and capital needs through 2011.
- Management targets floating-rate debt at 15%–25% of total debt; it was approximately 11.6% at quarter-end. Future access to debt and equity markets remains important to acquisitions, capital spending, and refinancing.
- Management noted that many retail tenants continued to experience financial distress. A significant deterioration in operating cash flows could increase reliance on the credit facility, require reduced capital spending, or prompt other financing.
- Opry Mills sustained significant flood damage and remained closed. Insurers had paid $50 million; excess carriers denied a claim for up to $150 million of additional restoration and business-interruption coverage. The company considered recovery probable but gave no assurance.
- The Operating Partnership had guaranteed $61.3 million of joint-venture debt. Its $651 million related-party loan to SPG-FCM bore LIBOR plus 275 basis points and matured June 8, 2011, with a one-year extension option.
- The filing describes ordinary-course litigation and states management did not expect it to have a material adverse effect. No significant changes to previously disclosed risk factors were reported. The interim results may not indicate full-year results because of seasonality.
Most important facts for investors to verify
- Separate recurring property performance from the Simon Ivanhoe and other disposal gains, debt-tender charges, and acquisition-related transaction costs when assessing earnings and FFO.
- Review the Prime acquisition’s contribution to results, assumed debt, and final purchase-price allocation.
- Assess debt maturities, refinancing access, interest-rate exposure, and the continued availability of the revolving credit facility.
- Monitor tenant health, occupancy, sales, rents, and collections, as well as Opry Mills insurance recovery and the SPG-FCM loan maturity.
- Evaluate cash available for dividends and planned development spending against the company’s reliance on capital markets and REIT distribution requirements.