Simon Property Group, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Simon is a REIT whose operating partnership holds substantially all assets and conducts substantially all business; the two registrants’ consolidated results are substantially the same.
Business context
Simon owns, develops and manages retail and mixed-use destinations, primarily malls, Premium Outlets and The Mills. At year-end, it held interests in 206 U.S. income-producing properties and had international outlet and designer outlet investments, as well as a 21.3% stake in Klépierre. Revenue is mainly rent, tenant reimbursements and related property income.
Financial and operating performance
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $5.658 billion | $5.539 billion | Up 2.2% |
| Operating income before other items | $2.911 billion | $2.802 billion | Up 3.9%; 51.4% of revenue versus 50.6% |
| Consolidated net income | $2.822 billion | $2.245 billion | Up 25.7%; 2018 included substantial disposition-related gains |
| Net income attributable to common stockholders | $2.437 billion | $1.945 billion | Up 25.3% |
| Diluted earnings per share | $7.87 | $6.24 | Up 26.1% |
| FFO per diluted share (non-GAAP) | $12.13 | $11.21 | Up 8.2%; total FFO grew 7.6% |
| Cash from operating activities | $3.751 billion | $3.594 billion | Up 4.4% |
| Portfolio NOI (non-GAAP) | $6.464 billion | $6.232 billion | Up 3.7%; comparable-property NOI grew 2.3% |
U.S. malls and Premium Outlets occupancy rose to 95.9% from 95.6%; average base minimum rent increased 2.0% to $54.18 per square foot, and sales per square foot rose 5.3% to $661. The Mills’ occupancy decreased to 97.6% from 98.4%, while rent and sales per square foot increased.
For the fourth quarter, revenue was $1.461 billion, consolidated net income $833.2 million, net income attributable to common stockholders $712.8 million, and diluted EPS $2.30. Fourth-quarter 2017 figures were $1.428 billion, $659.8 million, $571.1 million and $1.84, respectively.
Balance sheet, liquidity and capital
- Cash and cash equivalents were $514.3 million at year-end, down from $1.482 billion; total assets were $30.686 billion and total equity $3.797 billion.
- Consolidated debt was $23.306 billion, down from $24.632 billion. The effective weighted-average borrowing rate increased to 3.35% from 3.25%; floating-rate debt was 3.5% of consolidated debt.
- Available borrowing capacity under the revolving credit facilities was approximately $6.6 billion after commercial paper, borrowings and letters of credit. Commercial paper outstanding was $758.7 million, with a weighted-average rate of 2.49% and maturity around February 20, 2019.
- Cash used in investing activities was $236.5 million and cash used in financing activities was $4.482 billion. Capital expenditures were $781.9 million, including redevelopment and expansion costs of $418.9 million. Dividends and unitholder distributions totaled approximately $2.8 billion.
- Common dividends were $7.90 per share for 2018, versus $7.15 in 2017. The board declared a first-quarter 2019 dividend of $2.05 per share.
Material changes, outlook and notable items
- Reported earnings benefited from $288.8 million of net gains, primarily from dispositions, a $35.6 million non-cash gain on the Aeropostale licensing venture contribution to Authentic Brands Group, and $17.9 million of Puerto Rico business-interruption insurance proceeds. The 2017 comparison included a $128.6 million debt-extinguishment loss.
- Simon acquired the remaining 50% interest in The Outlets at Orange for 475,183 partnership units and opened Denver Premium Outlets. It also sold its interest in HBS’s German department-store properties.
- Management expected positive operating cash flow in 2019 and believed available cash and credit capacity were sufficient for debt maturities and capital needs through 2019. It estimated its share of costs for development, redevelopment and expansion projects under construction at approximately $1.3 billion, with estimated stabilized returns generally of 6%–10%. Expected 2019 international development costs were approximately $180 million.
- A $600 million senior note matured and was repaid on February 1, 2019. A later settlement related to Opry Mills produced approximately $68 million for Simon, recorded as other income in first-quarter 2019. The board also authorized a new $2.0 billion share repurchase program through February 2021.
- Key risks include retailer bankruptcies and store closures, e-commerce competition, occupancy and rent pressure, significant debt and refinancing needs, interest-rate and currency exposure, joint-venture control and guarantees, REIT qualification and distribution requirements, environmental and climate risks, and uncertainty surrounding Brexit. The company reported compliance with debt covenants and stated current legal proceedings were not expected to materially affect results or liquidity.
Important facts for investors to verify
- How much of 2018’s earnings growth is recurring operating performance versus disposition and other non-cash or unusual gains.
- Whether occupancy, tenant sales, rent growth and leasing spreads remain resilient amid retailer closures and changing shopping patterns.
- The debt maturity and refinancing profile, including commercial paper and the effect of higher interest rates on borrowing costs and distributions.
- Whether development and redevelopment spending achieves projected returns without weakening liquidity or increasing leverage.
- The continuing cash-flow coverage of dividends and REIT distribution requirements, and the risks associated with joint ventures and international investments.