Simon Property Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Simon is a REIT that owns, develops and manages retail real estate, primarily malls, Premium Outlets and The Mills. It conducts substantially all operations through its majority-owned Operating Partnership. Unless noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $1,357.2 | $1,320.1 | $4,009.3 | $3,885.5 |
| Operating income | $676.2 | $657.6 | $2,020.3 | $1,959.1 |
| Consolidated net income | $587.9 | $492.5 | $1,679.1 | $1,679.5 |
| Net income attributable to common stockholders | $504.7 | $420.0 | $1,441.1 | $1,432.1 |
| Diluted earnings per share | $1.61 | $1.36 | $4.61 | $4.62 |
| Funds from operations (FFO, non-GAAP) | $976.0 | $918.7 | $2,880.7 | $2,704.8 |
| Diluted FFO per share | $2.70 | $2.54 | $7.97 | $7.46 |
Revenue increased 2.8% in Q3 and 3.2% year to date. Operating margin was approximately 49.8% for Q3 and 50.4% for the nine-month period, broadly unchanged from the comparable 2015 periods. Q3 diluted EPS rose 18.4%; nine-month EPS was down slightly. Nine-month FFO increased 6.5%, while diluted FFO per share increased 6.8%.
Cash flow, debt and liquidity
- Operating cash flow was $2,532.8 for the first nine months, compared with $2,218.8 in 2015. Investing activities used $761.8; financing activities used $1,657.4. Cash rose $113.6 to $814.7.
- Debt was $23,078.5 at September 30, 2016, versus $22,416.7 at year-end 2015. Mortgage debt was approximately $6.6 billion. The effective average borrowing rate was 3.61%, down from 3.88% at year-end 2015; 5.0% of consolidated debt was floating rate.
- Available borrowing capacity under revolving credit facilities was $5.9 billion, net of facility borrowings, commercial paper and letters of credit. Commercial paper outstanding was $982.7 million and generally matured October–December 2016.
- Management reported compliance with debt covenants. Nine-month dividends and distributions to common stockholders and unitholders totaled approximately $1.8 billion; the common dividend was $1.65 per share for Q3.
Operating trends and material changes
- Management reported nine-month portfolio NOI growth of 7.3% and comparable-property NOI growth of 3.5%. U.S. malls and Premium Outlets occupancy was 96.3%, up 0.2 percentage points year over year; average base minimum rent rose 4.5% to $50.76 per square foot.
- Sales per square foot for U.S. malls and Premium Outlets fell 2.0% to $604. Releasing spreads remained positive: new tenant payments were 10.9% above expiring payments. Overage rent declined, which management attributed to lower tenant sales and higher overage breakpoints.
- Comparable rents increased 3.6% in Q3 and 5.2% year to date. Higher rents and redevelopment activity contributed to growth; acquisitions, dispositions and newly consolidated European outlet properties also affected comparisons.
- Simon acquired a 50% interest in The Shops at Crystals, invested in Aéropostale-related joint ventures, and consolidated additional European outlet interests. These changes generated non-cash remeasurement gains, including $29.3 million in Q3 and $41.4 million year to date. The company also reported gains on asset dispositions.
Outlook, risks and contingencies
- Management expected positive operating cash flow for 2016 and said cash, operating cash flow and available credit should cover debt maturities and capital needs through year-end. It expects operating cash flow to fund ordinary expenses, debt service, recurring capital expenditures and REIT-related distributions.
- Development, redevelopment and expansion projects under construction represented approximately $1.9 billion of Simon’s share of projected costs. Management targets stabilized returns of 7%–10% on new development, expansion and redevelopment projects. These are expectations, not guarantees.
- The Board declared a Q4 2016 dividend of $1.65 per share. Future dividends remain subject to Board discretion, liquidity, financial performance, capital needs and REIT requirements.
- Risks identified include retail and tenant conditions, tenant bankruptcies and rent collection, financing availability and interest rates, foreign exchange, development and leasing execution, joint-venture exposures, insurance, cybersecurity, and international economic and political conditions, including the U.K.’s vote to leave the EU.
- In the Opry Mills flood-insurance dispute, a court entered a $204.1 million judgment in April 2016, inclusive of $50 million previously paid. Simon said recovery was probable but gave no assurance of success in ongoing efforts to recover additional losses and consequential damages.
- The Operating Partnership guaranteed $376.2 million of joint-venture mortgage debt; it reported a right of recovery from partners for $76.5 million. Management stated that current legal proceedings were not expected to materially harm financial condition, liquidity or results.
Important facts for investors to verify
- Whether tenant sales weakness and lower overage rent persist, given the 2.0% decline in portfolio sales per square foot.
- How much reported earnings and FFO growth depends on non-cash remeasurement gains, asset sales and other unusual items, versus recurring property operations.
- Commercial paper refinancing and upcoming maturities, interest-rate exposure, and continued access to credit facilities.
- Actual spending, opening schedules and realized returns on the development and redevelopment pipeline.
- Outcome and timing of the Opry Mills insurance litigation and any effect on cash flow or reported earnings.
- Performance and funding requirements of joint ventures, including Aéropostale and HBS; FFO and NOI are non-GAAP measures and may not be comparable across REITs.