Simon Property Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Simon is a REIT focused on malls, Premium Outlets, The Mills and community/lifestyle centers. At quarter-end it owned or held interests in 313 U.S. income-producing properties and international outlet properties, plus a 28.9% stake in Klépierre.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1.237bn | $1.188bn | $2.452bn | $2.307bn |
| Operating income | $564.9m | $524.3m | $1.123bn | $1.041bn |
| Operating margin | 45.7% | 44.1% | 45.8% | 45.1% |
| Net income attributable to common stockholders | $339.9m | $215.4m | $623.1m | $860.9m |
| Diluted EPS | $1.10 | $0.71 | $2.01 | $2.87 |
| FFO (non-GAAP) | $766.3m | $688.8m | $1.508bn | $1.337bn |
| Diluted FFO per share | $2.11 | $1.89 | $4.16 | $3.71 |
For the first six months, cash provided by operating activities was $1.233bn, versus $1.199bn a year earlier. Investing activities used $117.7m, compared with $3.386bn in 2012, which included substantial acquisition activity. Financing activities used $1.204bn; cash declined $88.7m to $1.096bn.
At June 30, total assets were $32.015bn and mortgages and unsecured indebtedness were $22.688bn, down from $23.113bn at year-end 2012. Cash was $1.096bn. The company reported $4.6bn of available capacity under its revolving credit facilities, net of borrowings and letters of credit. Its effective weighted-average borrowing rate was 4.99%; weighted-average debt maturity was 5.8 years. The company said it was in compliance with debt covenants.
Material changes and operating trends
- Q2 revenue rose 4.1% year over year, and operating income rose 7.7%. For the first half, revenue rose 6.3% and operating income rose 7.8%.
- First-half common-stockholder net income and EPS fell year over year, largely because 2012 included a $488.7m noncash gain from remeasuring previously held interests in properties consolidated in the Mills transaction. The 2012 net gain line was $494.8m; the comparable 2013 line was $88.8m.
- Underlying property indicators strengthened: first-half comparable U.S. mall and Premium Outlet NOI increased 5.4%; total portfolio occupancy was 95.1%, up 90 basis points; sales per square foot rose 4.2% to $577; and average base minimum rent rose 3.6% to $41.41 per square foot.
- First-half FFO increased 12.8%. Management cited stronger tenant sales, leasing activity, acquisitions and expansion activity. First-half share of portfolio NOI grew 11.2%.
- During the first half, Simon acquired a Portland-area outlet center for $146.7m, opened Phoenix Premium Outlets, and recognized gains on property transactions. It also invested $38.7m in the initial phase of a proposed McArthurGlen partnership.
Outlook, capital allocation and risks
- No full-year earnings or FFO guidance is provided in the supplied filing text. Management expected positive operating cash flow in 2013 and said cash on hand and credit availability were sufficient for debt maturities and capital needs through 2013.
- Management expected to spend about $1.0bn on its share of 2013 domestic renovation and expansion projects and about $110m on international development. It estimated stabilized returns of 10%–12% on new development, expansion and renovation projects.
- The Board declared a $1.15-per-share common dividend payable August 30, 2013. Future dividends depend on operating results, available cash, reserves and REIT requirements.
- Risks identified include financing availability and interest rates, foreign exchange, retail-sector and economic conditions, tenant insolvency and rent collection, development and acquisition execution, joint-venture risks, environmental liabilities, insurance coverage and maintaining REIT status. Floating-rate debt represented 7.5% of consolidated debt after reflecting swaps.
- Simon was pursuing litigation over excess insurance coverage for Opry Mills flood damage. Insurers had paid $50m and denied additional coverage of up to $150m; management considered recovery probable but gave no assurance. Joint-venture mortgage guarantees totaled $142.7m, with stated partner recovery rights of $66.1m. Certain mortgage pools are cross-defaulted and cross-collateralized.
- The McArthurGlen transactions remained subject to customary closing conditions; the filing cautions that completion is not assured. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile the first-half EPS decline with the prior-year Mills-related noncash gain; assess recurring operating performance using GAAP and non-GAAP measures together.
- Review the assumptions and comparability of FFO, NOI and comparable-property NOI, which are non-GAAP measures.
- Check debt maturities, variable-rate exposure, credit-facility availability and cross-default provisions, as well as the amount and terms of joint-venture guarantees.
- Monitor execution and funding of planned development and redevelopment projects, and the closing status of the McArthurGlen transaction.
- Track the Opry Mills insurance litigation and any changes to management’s assessment of potential recovery.