Simon Property Group, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017; balance sheet comparisons are with December 31, 2017. Simon is a REIT operating primarily through Simon Property Group, L.P., in which it held an 86.9% interest. The company owned or held interests in 206 U.S. income-producing properties and a portfolio of international outlet and designer outlet properties.
Key financial metrics
Amounts below are in millions of dollars except per-share data and operating statistics.
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $1,399.8 | $1,345.8 |
| Operating expenses | $697.9 | $669.1 |
| Operating income | $701.9 | $676.7 |
| Interest expense | $205.5 | $198.2 |
| Consolidated net income | $715.5 | $551.1 |
| Net income attributable to common stockholders | $620.7 | $477.7 |
| Diluted earnings per share | $2.00 | $1.53 |
| Funds from operations (FFO) | $1,026.3 | $985.0 |
| Diluted FFO per share | $2.87 | $2.74 |
| Net cash from operating activities | $843.5 | $785.7 |
- Revenue increased 4.0%; operating income increased 3.7%. GAAP net income rose 29.8%, but included a $135.3 million net gain, primarily from property disposition activity. Management attributed $0.38 of the $0.47 EPS increase to these gains.
- Portfolio NOI increased 4.8%; comparable property NOI increased 2.3%. U.S. Malls and Premium Outlets sales per square foot rose 4.2% to $641 and average base minimum rent rose 3.2% to $53.54.
- U.S. Malls and Premium Outlets occupancy was 94.6%, down 1.0 percentage point year over year. The Mills occupancy increased 0.6 percentage point to 98.3%.
- At March 31, cash was $367.2 million, down from $1,482.3 million at year-end. Total assets were $31.0 billion and mortgages and unsecured indebtedness were $23.6 billion, down from $24.6 billion at year-end.
- Available borrowing capacity under revolving credit facilities was approximately $6.3 billion, net of borrowings, commercial paper and letters of credit. The effective weighted average borrowing rate was 3.31%; floating-rate debt was 4.9% of consolidated debt. Mortgage debt was $6.7 billion.
- Financing cash outflow was $1.835 billion, reflecting $2.650 billion of debt repayments against $1.756 billion of debt proceeds, as well as distributions and $227.9 million of share repurchases. Investing cash outflow was $123.7 million, including $172.8 million of capital expenditures.
Material changes and management commentary
- Management cited stronger core operations, acquisition and expansion activity, and increases in lease settlements and distributions from an international investment as contributors to results. Higher interest expense partly offset growth.
- Management reported strong leasing activity, but fewer new and renewal leases were signed in Q1 2018 than in Q1 2017. New-lease initial base rent averaged $54.88 per square foot versus $67.01, while tenant allowances averaged $46.63 versus $46.05.
- Simon paid a $1.95-per-share Q1 dividend and declared the same rate for Q2 2018, payable May 31, 2018. Future distributions remain subject to board discretion, liquidity, results, capital needs and REIT requirements.
- Management expected positive operating cash flow in 2018 and stated it believed available cash and borrowing capacity were sufficient for debt maturities and capital needs through 2018. No specific earnings or FFO guidance was provided.
- Redevelopment and expansion work was underway at 28 properties; Simon’s share of costs for projects under construction was approximately $0.7 billion. Management targets stabilized returns of 7%–10% on development, expansion and redevelopment projects.
Risks, contingencies and unusual items
- The $135.3 million gain included foreclosure of a consolidated property in satisfaction of its $200 million non-recourse mortgage. Klépierre-related asset disposals also contributed a $13.4 million share of gain.
- In the Opry Mills insurance litigation, a Tennessee appeals court reversed a prior ruling and held that policy coverage was limited to $50 million, rather than the larger recovery sought. Simon was seeking Tennessee Supreme Court review; recovery of additional losses is uncertain.
- The Operating Partnership guaranteed $207.0 million of joint-venture mortgage debt. The company reported compliance with its material debt covenants.
- Management identified risks including retail-sector weakness, tenant bankruptcies and vacancies, rental-rate pressure, substantial indebtedness, access to capital, interest and foreign-exchange rates, joint-venture and development risks, insurance availability, natural disasters and REIT qualification. The filing reported no material changes to previously disclosed risk factors.
- Adoption of the new equity-investment accounting standard resulted in a $7.3 million cumulative-effect adjustment at January 1, 2018; a $3.0 million mark-to-market expense was recorded in Q1. Lease accounting changes were expected to take effect in Q1 2019; the company was evaluating their impact. Interim results may not indicate full-year performance due to seasonality.
Important facts for investors to verify
- How much of the earnings increase and reported FFO growth reflects recurring property operations versus the $135.3 million disposition-related gain and other elevated income items.
- Whether occupancy trends stabilize, and whether rent growth and sales gains continue to offset weaker occupancy and lower initial rents on new leases.
- Near-term refinancing and liquidity exposure, including commercial paper outstanding that matured through May 23, 2018, facility availability, and the debt repayment schedule.
- Developments in the Opry Mills insurance appeal and any resulting effect on potential recoveries or contingencies.