Simon Property Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Simon is a REIT that owns, develops and manages malls, Premium Outlets, The Mills and other retail properties. It reported 206 U.S. income-producing properties and interests in 28 international outlet properties. The filing combines Simon and its majority-owned Operating Partnership, which conducts substantially all of the business.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $1,452.8 million | $1,394.2 million |
| Operating income before other items | $750.3 million | $701.9 million |
| Consolidated net income | $631.9 million | $715.5 million |
| Net income attributable to common stockholders | $548.5 million | $620.7 million |
| Diluted earnings per share | $1.78 | $2.00 |
| FFO | $1,081.9 million | $1,026.3 million |
| Diluted FFO per share | $3.04 | $2.87 |
| Net cash provided by operating activities | $837.3 million | $843.5 million |
Revenue increased 4.2%; operating income margin, calculated from reported figures, was approximately 51.6%, versus 50.3%. GAAP net income and EPS fell, while FFO and diluted FFO per share increased. Interest expense was $198.7 million, down from $205.5 million.
At March 31, 2019, cash and cash equivalents were $436.8 million, down from $514.3 million at year-end. Total mortgages and unsecured indebtedness were $23.2 billion, compared with $23.3 billion at December 31, 2018. The effective weighted-average borrowing rate was 3.35%; floating-rate debt was 3.5% of consolidated debt. Available borrowing capacity under revolving facilities was approximately $6.1 billion, after outstanding facility borrowings, commercial paper and letters of credit. Commercial paper outstanding was $1.3 billion, at a 2.58% weighted-average rate and with a weighted-average maturity of July 3, 2019. The company reported compliance with debt covenants.
Cash used in investing activities was $113.6 million, including $216.8 million of capital expenditures. Cash used in financing activities was $801.3 million, including approximately $730.7 million of common distributions and dividends. The quarterly common dividend was $2.05 per share.
Changes versus the prior-year quarter
- Reported EPS declined $0.22. The principal comparison factor was $135.3 million of net gains recorded in Q1 2018, primarily from property dispositions, including foreclosure of a property in satisfaction of a $200 million non-recourse mortgage.
- Q1 2019 included a $68.0 million settlement with a former insurance broker, a $15.6 million gain on sale of a multifamily investment, and $4.4 million of Puerto Rico hurricane business-interruption proceeds. These were partly offset by lower lease-settlement income and lower distributions from an international investment than in Q1 2018.
- Portfolio NOI grew 1.7%, and comparable-property NOI grew 1.6%. U.S. Malls and Premium Outlets total sales per square foot rose 3.1% to $660; occupancy increased to 95.1% from 94.6%, and average base minimum rent rose 1.5% to $54.34 per square foot.
- Capital expenditures increased to $216.8 million from $172.8 million. Debt issuance proceeds and repayments were both substantial; net debt repayments were approximately $60.7 million.
Outlook, commentary and risks
- Management expected positive operating cash flow in 2019 and believed cash, revolving facilities and the commercial-paper program would be sufficient for 2019 maturities and capital needs. The filing does not provide a numerical full-year earnings or FFO forecast.
- Management cited strong leasing activity and solid core fundamentals. It reported favorable leasing spreads: opening tenant payments averaged $66.00 per square foot versus $51.83 for closing leases, a 27.3% increase.
- The company had approximately $1.4 billion of its share of development, redevelopment and expansion projects under construction and targeted stabilized returns of 7%–10%. Expected 2019 international development costs were approximately $179 million.
- Key disclosed risks include retail-sector weakness, tenant or anchor bankruptcies, rent and occupancy pressure, leasing and redevelopment execution, substantial indebtedness and access to capital, interest and foreign-exchange movements, joint-venture exposure, natural disasters, insurance availability, and regulatory or tax changes. Management said current legal proceedings were not expected to have a material adverse effect.
- Lease accounting adoption resulted in recognition of a $524.0 million right-of-use asset and corresponding lease liability at January 1, 2019. The company also noted that adoption affected capitalization of leasing costs and contributed to higher home and regional office costs.
Important facts for investors to verify
- Reconcile the $68.0 million insurance-broker settlement and other one-time income items to recurring operating performance and FFO.
- Review the commercial-paper maturity and refinancing plan, debt maturities, and the conditions underlying reported $6.1 billion of available borrowing capacity.
- Assess whether occupancy, sales per square foot, rents and leasing spreads remain supportive of NOI growth, including the weaker occupancy trend at The Mills.
- Track development and redevelopment spending, project completion timing and realized returns against management’s 7%–10% target.
- Review distribution sustainability alongside operating cash flow, capital requirements and REIT distribution obligations; interim results may be seasonal and are not necessarily indicative of full-year results.