Business context and reporting period
Simon Property Group, Inc. and Simon Property Group, L.P. filed a combined, unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Simon is a REIT; substantially all operations and debt are held by the Operating Partnership. Simon owned approximately 86.8% of the partnership. The company owns and operates malls, outlet centers and other retail properties; it had interests in 207 U.S. income-producing properties and international retail properties.
Financial and operating results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,361.5 million | $1,315.4 million | $2,707.3 million | $2,652.1 million |
| Operating income | $686.1 million | $659.2 million | $1,362.8 million | $1,344.1 million |
| Net income attributable to Simon common stockholders | $382.0 million | $455.4 million | $859.7 million | $936.4 million |
| Diluted earnings per share | $1.23 | $1.45 | $2.75 | $3.01 |
| FFO per diluted share (non-GAAP) | $2.47 | $2.63 | $5.20 | $5.27 |
| Net cash provided by operating activities | Not separately reported for the quarter | $1,809.6 million | $1,694.0 million |
Revenue rose 3.5% in Q2 and 2.1% for the first half year over year. Operating income increased 4.1% and 1.4%, respectively, while first-half net income attributable to common stockholders fell 8.2%. The $128.6 million second-quarter loss on early debt extinguishment materially reduced reported earnings; it was a non-cash adjustment in the cash-flow reconciliation. First-half FFO declined 1.8% year over year.
- Portfolio NOI grew 5.0% in Q2 and 5.3% for the first half; comparable-property NOI grew 4.4% and 4.1%, respectively.
- U.S. malls and Premium Outlets total-portfolio occupancy was 95.2%, down 0.7 percentage points year over year. Average base minimum rent rose 3.3% to $52.10 per square foot and sales per square foot rose 1.8% to $618.
- Cash and cash equivalents were $488.6 million at June 30, down $71.4 million from year-end 2016. Total assets were $31.0 billion; total equity was $4.3 billion.
- Mortgages and unsecured indebtedness totaled $23.4 billion, up from $23.0 billion at December 31, 2016. The effective weighted average borrowing rate was 3.26%, versus 3.39% at year-end; floating-rate debt was 7.0% of total debt.
- Available borrowing capacity under the credit facilities was $5.6 billion. The company reported covenant compliance. First-half shareholder dividends and partnership distributions totaled approximately $1.3 billion; Simon repurchased $396.2 million of stock.
Material changes, outlook and risks
- First-half EPS fell from $3.01 to $2.75. The prior-year period included gains from property sales and acquisitions; 2017 included the $128.6 million debt-extinguishment charge. Lower interest expense and improved property operations partly offset these effects.
- In June, the Operating Partnership issued $600 million of 2.63% notes due 2022 and $750 million of 3.38% notes due 2027, and redeemed $1.25 billion of 5.65% notes early. Commercial paper outstanding was $942.8 million, maturing through October 2, 2017.
- Management expected positive operating cash flow in 2017 and stated it believed cash and available facilities were sufficient for debt maturities and capital needs through 2017. It anticipated funding recurring needs and distributions from operating cash flows and planned to fund major projects through cash flow and other capital sources. No specific full-year earnings or FFO guidance is stated in the supplied filing text.
- Redevelopment and expansion work was underway at 25 properties; Simon’s share of costs for projects under construction was approximately $1.3 billion. Management’s target stabilized return on invested capital for development, expansion and redevelopment projects was 7–10%.
- Key stated risks include retail weakness, tenant bankruptcies or rent pressure, leasing and occupancy challenges, substantial indebtedness and capital-market access, interest and foreign-exchange movements, joint-venture exposure, development execution, insurance availability, and natural disasters.
- The Opry Mills flood-insurance dispute remained under appeal. A court judgment and jury verdict awarded $204.1 million, including $50 million already paid; Simon said recovery was probable but gave no assurance of success. The Operating Partnership guaranteed $219.2 million of joint-venture mortgage debt, with a stated $10.8 million right of recovery from partners.
- Management reported disclosure controls effective at a reasonable assurance level and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings and FFO pressure reflects the one-time debt-extinguishment charge versus recurring property performance.
- Whether occupancy weakness persists and whether rent growth and comparable NOI gains continue.
- Near-term refinancing and liquidity needs, including commercial-paper maturities and debt covenant headroom.
- Actual costs, timing and returns on the approximately $1.3 billion share of projects under construction.
- Outcome and timing of the Opry Mills insurance appeal and potential exposure under joint-venture guarantees.
- Effects of retailer distress, seasonal results and international operations on cash flow and distributions.