Business context and reporting period
Simon Property Group, Inc. is a self-managed REIT that owns, develops and manages retail properties. This unaudited Form 10-Q covers the three months ended March 31, 2010, compared with the three months ended March 31, 2009, and reports balance-sheet amounts against December 31, 2009. At quarter-end, the company had interests in 318 U.S. income-producing properties and retail properties in Europe and Asia.
Key financial metrics
Dollar amounts are in millions except per-share data. Figures are rounded.
| Metric | Q1 2010 | Q1 2009 or comparison |
|---|---|---|
| Total revenue | $925.1 | $918.5 |
| Operating income | $426.9 | $364.2 |
| Interest expense | $264.0 | $226.0 |
| Loss on extinguishment of debt | $165.6 | — |
| Consolidated net income | $20.8 | $146.2 |
| Net income attributable to common stockholders | $9.4 | $106.8 |
| Diluted earnings per share | $0.03 | $0.45 |
| FFO; diluted FFO per share | $325.6; $0.94 | $476.8; $1.61 |
| Cash provided by operating activities | $448.4 | $434.8 |
| Net cash used in investing activities | $(39.3) | $(165.2) |
| Net cash used in financing activities | $(1,040.1) | $(144.8) |
| Cash and cash equivalents at period-end | $3,326.6 | $898.3 |
At March 31, 2010, total assets were $25.0 billion, total liabilities $19.5 billion, and total equity $5.1 billion. Mortgages and other indebtedness totaled $17.9 billion, down from $18.6 billion at December 31, 2009. Cash declined $631.1 million from year-end, principally as the company used cash to reduce debt; $39.8 million of quarter-end cash related to gift card programs was not considered available for general working capital. The company reported approximately $3.2 billion of available capacity under its revolving credit facility, after borrowings and letters of credit.
Material changes versus the prior comparable period
- Revenue increased $6.6 million, while operating income rose $62.7 million. Lower property operating costs, depreciation and credit-loss expense contributed to the improvement.
- Common-stockholder income fell $97.4 million and diluted EPS declined $0.42. Management attributed the EPS decline primarily to the $165.6 million tender-offer-related debt extinguishment loss, which reduced EPS by approximately $0.48.
- FFO declined 31.7%; management cited the debt extinguishment charge and approximately $0.17 per diluted FFO share of dilution from shares issued in 2009.
- Operating cash flow increased $13.6 million. Financing outflows were substantially higher, including net debt repayments, the tender-offer premium and distributions.
- U.S. regional mall and Premium Outlet portfolio occupancy was 92.2%, up 10 basis points year over year; average base rent rose 3.2% to $38.72 per square foot, while comparable sales remained $467 per square foot. Mills regional mall rent and sales per square foot declined 4.6% and 5.1%, respectively. European shopping-center occupancy fell 310 basis points to 95.4%.
Debt, liquidity, outlook and risks
- The Operating Partnership issued $2.25 billion of senior notes in January, with maturities in 2015, 2020 and 2040, and used the proceeds plus cash to repurchase approximately $2.3 billion of notes with shorter maturities. It also repaid a $300 million note and $281.6 million of mortgage loans. The company recorded the $165.6 million tender-related loss.
- Quarter-end consolidated debt had an effective weighted-average interest rate of 5.67%; floating-rate debt was approximately 9.7% of consolidated debt. The company stated a policy of keeping floating-rate debt at or below 15%–25% of total debt.
- Management said cash and credit-facility availability were sufficient for debt maturities and capital needs through 2011. It expected 2010 operating cash flow to cover operating costs, debt service, recurring capital expenditures and REIT-required distributions. These are management expectations, not earnings guidance; the filing provides no specific EPS or FFO forecast.
- Planned 2010 spending included approximately $70 million of the company’s share of domestic renovation and expansion costs and $64 million of international development costs. Management had substantially reduced development spending in response to economic conditions.
- The company expected a second-quarter 2010 sale of its interest in Simon Ivanhoe, which owns seven centers in France and Poland; its estimated share of the gain was approximately $300 million, subject to closing conditions and regulatory approvals. It also expected to acquire 22 Prime Outlets centers for approximately $0.7 billion, subject to closing conditions, with a summer 2010 closing anticipated.
- A $632 million loan to SPG-FCM matured June 7, 2010, with two one-year extensions available. The filing does not establish whether extensions would be exercised.
- Principal risks cited include tenant distress and rent collection, access to financing and debt service, interest and foreign-exchange rates, retail and local economic conditions, acquisitions and development, joint-venture exposure, and maintaining REIT status. The company reported $44.3 million of joint-venture debt guarantees. It reported no material new litigation developments or significant changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Simon Ivanhoe sale closed and whether the expected gain and proceeds were realized.
- Whether the Prime Outlets acquisition closed, its final consideration and financing, and its subsequent operating contribution.
- How the $632 million SPG-FCM loan was repaid, extended or otherwise resolved at maturity.
- Whether liquidity and refinancing capacity remained adequate against scheduled debt maturities, including the large 2010–2015 obligations disclosed in the filing.
- Whether tenant collections, occupancy, rent trends and Mills regional mall performance improved or deteriorated after quarter-end.
- How reported FFO and cash available for distributions compare with GAAP earnings and capital requirements; FFO is a non-GAAP measure and is not a substitute for operating cash flow.