Business context and reporting period
Simon Property Group, Inc. (SPG), a REIT owning, developing and managing retail properties, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Its portfolio included 335 U.S. properties and international shopping-center interests. Interim results may not indicate full-year performance because of seasonality.
Financial and operating results
Amounts are in millions of dollars, except per-share and property statistics.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $1,040.9 | $933.6 | $2,060.7 | $1,858.6 |
| Operating income | $467.6 | $415.5 | $918.5 | $842.4 |
| Operating margin, approximate | 44.9% | 44.5% | 44.6% | 45.3% |
| Net income attributable to common stockholders | $205.1 | $152.5 | $384.5 | $161.9 |
| Diluted earnings per share | $0.70 | $0.52 | $1.31 | $0.56 |
| Funds from operations (FFO), total | $583.0 | $487.7 | $1,153.6 | $813.2 |
| Diluted FFO per share | $1.65 | $1.38 | $3.26 | $2.32 |
- Six-month operating cash flow was $898.0 million, versus $777.2 million. Cash and cash equivalents were $789.7 million at June 30, down $7.0 million from year-end 2010.
- Capital expenditures, net, were $163.5 million for the six months. Net cash used in financing was $1,052.0 million, including $667.6 million of debt principal payments and $567.3 million of distributions to common stockholders and limited partners.
- Consolidated debt was $17.014 billion, down from $17.474 billion at December 31, 2010. The effective weighted average borrowing rate was 5.52%, versus 5.58% at year-end. Floating-rate debt was approximately 12% of consolidated debt.
- The company reported $9.6 billion of senior unsecured notes and $860 million drawn on its $3.9 billion revolving facility; available capacity, net of borrowings and letters of credit, was approximately $3.0 billion. Secured debt was $6.5 billion.
- For U.S. regional malls and Premium Outlets, total portfolio occupancy was 93.5% (up 40 basis points year over year), average base rent was $39.70 per square foot (up 2.8%), and sales were $513 per square foot (up 9.4%).
Material changes versus the prior comparable period
- Second-quarter revenue increased 11.5%; six-month revenue increased 10.9%. Management attributed rent and reimbursement growth partly to property transactions and partly to stronger comparable-property performance. Comparable minimum rents rose 2.5% in Q2 and 2.7% for the six months.
- Six-month common-stockholder income and diluted EPS rose substantially, but comparison is affected by the $165.6 million debt-extinguishment charge recorded in 2010. Management also cited improved operations, acquisitions and lower interest expense. Interest expense fell $32.8 million for the six months.
- FFO increased 19.5% in Q2 and 41.9% for the six months. FFO is a non-GAAP measure and should not be treated as operating cash flow or a liquidity measure.
- Acquired properties, including the 2010 Prime outlet-center acquisition, contributed to revenue growth and higher depreciation and amortization. The company sold Prime Outlets—Jeffersonville for $134 million in June 2011 and recorded a $6.6 million gain.
- Portfolio trends were mixed: Mills occupancy declined 10 basis points and Mills regional mall occupancy declined 60 basis points, while sales per square foot rose in both categories. International Premium Outlet comparable sales in yen fell 4.7%; Italian occupancy improved, while Italian base rent per square foot declined 2.5%.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow in 2011 and said cash on hand and revolving-credit availability were sufficient for debt maturities and capital needs through 2012. No specific full-year earnings or FFO guidance was provided.
- SPG expected approximately $350 million of its 2011 domestic renovation and expansion costs, versus approximately $124 million in 2010, and approximately $100 million of international development costs. Estimated stabilized returns on new development, expansion and renovation projects were 8%–12%.
- The company expected to fund recurring needs and REIT distributions from operations, with financing or equity markets available for acquisitions, major projects and scheduled maturities. A deterioration in tenant cash flows could increase reliance on the credit facility, constrain capital spending or require other financing.
- Opry Mills, a 50%-owned joint venture property, remained under reconstruction after 2010 flood damage; reopening was expected in spring 2012. Insurers had paid $50 million, but excess carriers disputed up to $150 million of additional coverage. SPG reported pending litigation and said recovery was probable, without assurance.
- In July 2011, SPG acquired ABQ Uptown for $86 million and disclosed a one-time CEO retention award valued at $120.3 million, to be expensed over eight years. These occurred after the reporting date.
- Key risks include tenant bankruptcy or rent collection weakness, retail and economic conditions, access to financing and interest-rate changes, development and redevelopment execution, foreign exchange, joint ventures, insurance coverage and maintaining REIT status. The filing reported no significant change to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring comparable-property operations versus acquisitions, dispositions and the prior-year debt-extinguishment charge.
- Whether occupancy, sales and rent trends persist, particularly in Mills properties and international markets.
- Debt maturities, covenant headroom, revolving-credit availability and the company’s ability to refinance on acceptable terms.
- The timing, cost and expected returns of planned redevelopment and development spending, and whether projects remain within budget.
- The outcome and potential financial effect of the Opry Mills insurance dispute, and the expense and dilution implications of the CEO retention award.