Simon Property Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Simon is a REIT whose retail portfolio includes malls, Premium Outlets and The Mills; substantially all business is conducted through Simon Property Group, L.P. The results reflect the severe disruption from COVID-19 and property closures.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $1.062 billion | $1.397 billion | $2.415 billion | $2.850 billion |
| Lease income | $1.014 billion | $1.299 billion | $2.276 billion | $2.579 billion |
| Operating income before other items | $451 million | $681 million | $1.106 billion | $1.426 billion |
| Consolidated net income | $291 million | $572 million | $796 million | $1.204 billion |
| Net income attributable to common stockholders | $254 million | $495 million | $692 million | $1.044 billion |
| EPS, basic and diluted | $0.83 | $1.60 | $2.26 | $3.38 |
| FFO (non-GAAP) | $746 million | $1.064 billion | $1.727 billion | $2.146 billion |
| Diluted FFO per share | $2.12 | $2.99 | $4.90 | $6.04 |
- Cash flow: Six-month operating cash flow was $814 million, down from $1.888 billion. Investing cash outflow was $349 million; financing provided $2.171 billion, principally reflecting debt issuance and borrowings. Cash and equivalents rose to $3.306 billion from $669 million at year-end.
- Debt and liquidity: Mortgages and unsecured indebtedness totaled $27.269 billion at June 30, up from $24.163 billion at year-end. Effective weighted average borrowing rate was 2.81%, versus 3.16% at year-end; floating-rate debt was 16.9% of consolidated debt. The company reported $4.9 billion available under credit facilities, net of borrowings, commercial paper and letters of credit, and said it was in compliance with debt covenants.
- Operating performance: Portfolio NOI declined 21.0% in Q2 and 10.7% for the first half year over year. U.S. Malls and Premium Outlets occupancy was 92.9%, down 150 basis points year over year; average base minimum rent rose 2.8% to $56.02 per square foot.
- Dividend: The board declared a Q2 cash dividend of $1.30 per share, payable July 24, 2020. A $458 million dividend payable was recorded at quarter-end. The first-quarter 2020 dividend was $2.10 per share.
Material changes versus prior-year periods
- Q2 lease income fell $285 million; comparable lease income declined 21.9%. For the first half, lease income decreased $303 million, with comparable lease income down 11.7%. Lower tenant sales and rent abatements drove much of the variable rent decline; fixed lease income also fell.
- Management attributed the first-half EPS decline of $1.12 primarily to COVID-related lower lease income, weaker other income and income from unconsolidated entities, and the absence of significant 2019 items. Prior-year comparisons included a $68 million insurance-broker lawsuit settlement and a $15.6 million gain on a residential investment sale.
- Operating expense reductions partially offset the revenue decline. First-half total operating expenses decreased $115 million, including lower property, advertising and office costs.
- First-half tenant receivables and accrued revenue increased substantially; the cash flow statement reflects a $624 million use of cash from the change in these balances.
Outlook, risks and unusual items
- COVID-19: Retail properties were closed an average of 51 days, or about 56% of Q2. By June 30, 199 domestic properties had reopened; all retail properties reopened by July 10, but seven California properties closed again July 15 following new restrictions. Management warned that further closures, tenant failures, reduced consumer traffic and rent collection uncertainty could materially affect results, cash flow and asset values.
- Rent deferrals or abatements had been agreed with a limited number of tenants. Abatements represented, in aggregate, less than 15% of Q2 lease income. Tenant discussions continued, and further deferrals, restructurings, abatements or lease terminations could follow. Revenue recognition depends on collectability assessments.
- To preserve liquidity, Simon drew $3.75 billion on facilities, cut costs and compensation, furloughed or reduced personnel, and suspended more than $1 billion of development and redevelopment projects. Management expected positive operating cash flow in 2020 and believed existing cash and borrowing capacity could meet needs through 2020, while acknowledging the pandemic’s ultimate effect was difficult to predict.
- After quarter-end, the Operating Partnership issued $2 billion of senior notes and repaid $2.5 billion of facility borrowings; it also redeemed $500 million of notes due September 2020 and €375 million of notes due October 2020. At June 30, $702 million of commercial paper had a weighted average maturity of July 20, 2020.
- Simon terminated its Taubman merger agreement and sued, seeking a declaration of Taubman’s alleged material adverse effect and breaches. An adverse final decision could require Simon to complete the transaction or pay damages.
- Forever 21-related joint ventures generated a $35 million pre-tax, non-cash bargain-purchase gain included in income from unconsolidated entities. Klépierre-related asset impairment and disposal losses were $7.8 million for the first half.
- No formal earnings guidance is provided in the supplied filing text. The company cautioned that forward-looking expectations are subject to substantial uncertainty, including pandemic developments, tenant solvency, rent collections, capital-market access, debt obligations, retail demand and property valuations.
Important facts for investors to verify
- Subsequent rent collections, tenant bankruptcies, rent abatements and the collectability of the elevated tenant receivables.
- Whether reopened properties remain open and how any renewed restrictions affect occupancy, sales, leasing and portfolio NOI.
- Liquidity and refinancing after the July note offering, debt repayments and redemptions, including remaining facility availability and upcoming maturities.
- The status and potential financial consequences of the Taubman litigation.
- Whether the $1.30 quarterly dividend and suspended development spending remain sustainable as cash flows and REIT distribution requirements evolve.