Simon Property Group, Inc. — Q3 2017 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2017, with comparisons to 2016. Simon is a REIT that owns, develops and operates shopping malls, outlet centers and other retail properties; substantially all business is conducted through Simon Property Group, L.P. At quarter-end, Simon owned approximately 86.8% of the Operating Partnership.
Financial and operating performance
- Revenue: Q3 revenue was $1.404 billion, up 3.4% year over year; nine-month revenue was $4.111 billion, up 2.5%. Growth reflected higher minimum rent and tenant reimbursements, among other items.
- Profit: Q3 operating income was $690.1 million versus $676.2 million; net income attributable to common stockholders was $513.8 million versus $504.7 million, and diluted EPS was $1.65 versus $1.61. For nine months, operating income rose to $2.053 billion from $2.020 billion, while net income attributable to common stockholders fell to $1.374 billion from $1.441 billion; diluted EPS declined to $4.41 from $4.61.
- Margins and property measures: Calculated operating margin was approximately 49.2% in Q3 (49.8% in Q3 2016) and 49.9% for nine months (50.4% in 2016). Nine-month portfolio NOI grew 4.8%; comparable property NOI grew 3.6%. U.S. malls and Premium Outlets sales per square foot increased 3.1% to $622 and average base rent per square foot rose 3.3% to $52.42, while occupancy decreased 100 basis points to 95.3%.
- FFO: Reported FFO was $1.035 billion for Q3, up 6.1%, and $2.905 billion for nine months, up 0.9%. Diluted FFO per share was $2.89 for Q3 and $8.09 for nine months, versus $2.70 and $7.97, respectively. FFO is a non-GAAP measure and includes the 2017 debt-extinguishment loss.
- Cash flow: Nine-month operating cash flow was $2.719 billion, up from $2.533 billion. Investing used $366.8 million and financing used $2.404 billion. Cash and equivalents were $508.4 million at September 30, down $51.7 million from year-end 2016.
- Debt and liquidity: Mortgages and unsecured indebtedness totaled $23.410 billion, up from $22.977 billion at December 31, 2016. The effective weighted-average borrowing rate was 3.23%; floating-rate debt was 5.7% of consolidated debt and weighted-average maturity was 7.2 years. Available capacity under credit facilities was $5.9 billion. The company reported covenant compliance.
- Capital returns: Nine-month stockholder dividends and limited-partner distributions totaled approximately $1.9 billion; Simon also repurchased $396.2 million of shares. The Q4 2017 dividend was declared at $1.85 per share.
Changes, outlook and material items
- Reported nine-month EPS declined despite higher operating income and FFO. Factors included a $128.6 million loss on early debt redemption and the absence of significant 2016 gains from property acquisitions and dispositions. Lower interest expense, stronger operating performance and a $21.5 million gain from marketable-security sales partly offset these items.
- Management expected positive operating cash flow for 2017 and stated that cash and available facilities were sufficient for debt maturities and capital needs through year-end. Approximately $1.0 billion was Simon’s share of costs for development, redevelopment and expansion projects under construction; targeted stabilized returns were 7%–10%. No formal full-year EPS or FFO guidance is provided in the supplied filing text.
- Hurricane Maria significantly damaged two Puerto Rico properties. Simon said it could not yet reliably estimate the damage and anticipated a Q4 impairment charge, expected to be offset by an insurance recovery; the filing provides no clear estimate of the impairment. Florida and Texas hurricane impacts were described as limited, with $1 million deductibles recorded for property damage.
- The Opry Mills excess-insurance dispute remained under appeal. A 2016 judgment awarded $204.1 million in damages, including $50 million previously paid; Simon said recovery was probable but gave no assurance of success.
- Other disclosed risks include tenant bankruptcies and retail-sector weakness, leasing and occupancy pressure, substantial indebtedness, interest-rate and foreign-exchange movements, joint-venture exposures, natural disasters and access to capital. Management reported increased tenant bankruptcies compared with 2016.
Important facts for investors to verify
- Subsequent disclosures on Puerto Rico property damage, impairment recognition and insurance-recovery timing and amount.
- Whether occupancy declines and higher tenant bankruptcies affect rent collections, leasing spreads and comparable NOI.
- Near-term refinancing needs and liquidity following the maturity of commercial-paper borrowings, which totaled $995.1 million and matured through December 18, 2017.
- Outcome and collectability of the Opry Mills insurance judgment and any resulting financial-statement treatment.
- How recurring operating performance compares with reported earnings after the debt-extinguishment charge and other gains or unusual items.