Simon Property Group, Inc. — Q2 2012 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2012. Simon is a REIT focused on retail properties, including malls, outlet centers and community/lifestyle centers. At quarter-end, it owned or held interests in 325 U.S. properties and international outlet centers, and held a 28.9% stake in Klépierre.
Financial and operating results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $1.188 billion | $1.041 billion | $2.307 billion | $2.061 billion |
| Operating income | $521.4 million | $467.6 million | $1.037 billion | $918.5 million |
| Operating margin | 43.9% | 44.9% | 45.0% | 44.6% |
| Net income attributable to common stockholders | $215.4 million | $205.1 million | $860.9 million | $384.5 million |
| Diluted EPS | $0.71 | $0.70 | $2.87 | $1.31 |
| Funds from operations (FFO) | $688.8 million | $583.0 million | $1.337 billion | $1.154 billion |
| Diluted FFO per share | $1.89 | $1.65 | $3.71 | $3.26 |
- Q2 revenue rose 14.1%; six-month revenue rose 12.0%. For the first half, comparable U.S. mall and Premium Outlet NOI increased 5.6%; portfolio sales per square foot rose 9.9% to $554, and occupancy increased 60 basis points to 94.2%.
- First-half net income and EPS included a $494.8 million net gain related primarily to the Mills transaction’s non-cash remeasurement gain. Management estimated the gain added $1.37 to diluted EPS. Excluding this unusual gain, reported EPS growth is substantially less pronounced.
- Six-month operating cash flow was $1.199 billion, up from $898.0 million. Investing activities used $3.386 billion, principally reflecting $3.691 billion of acquisitions; financing activities provided $2.027 billion. Cash declined $160.2 million to $638.5 million.
- At June 30, mortgages and other indebtedness totaled $22.467 billion, versus $18.446 billion at year-end 2011. The increase principally reflects the Mills transaction, which brought $2.6 billion of property-level debt onto the consolidated balance sheet. Secured debt was $8.0 billion. Effective overall borrowing rate was 5.22%, down from 5.52% a year earlier; weighted-average debt maturity was 6.1 years.
- Cash plus available capacity under revolving facilities provided substantial stated liquidity: cash was $638.5 million and undrawn facility capacity was $3.9 billion. Management reported compliance with debt covenants and said it believed resources were sufficient for debt maturities and capital needs through 2012.
Material changes and notable items
- The March Mills transaction involved acquiring additional interests in 26 properties; nine previously unconsolidated properties were consolidated. It generated a $488.7 million non-cash remeasurement gain and a $22.4 million impairment charge on the remaining SPG-FCM investment.
- Simon acquired approximately 28.7% of Klépierre for about $2.0 billion, later increasing its stake to 28.9%, and sold its GCI interest for $375.8 million in cash, recognizing a $28.8 million gain.
- Simon issued $1.75 billion of fixed-rate senior notes at 2.15%, 3.375% and 4.75%, and completed a $1.2 billion common-stock offering. It also entered a new $2.0 billion supplemental revolving facility.
- Interest expense rose $44.0 million in Q2 and $54.0 million in the first half, primarily from acquired property debt and new borrowings; this partly offset improved operating performance.
Outlook, risks and contingencies
- Management expected positive operating cash flow in 2012, but gave no specific earnings or FFO forecast in the provided filing text. It planned approximately $750 million of its share of U.S. renovation and expansion costs in 2012, versus $265 million in 2011, and about $135 million of international development costs.
- The company identified risks including retail tenant financial distress, economic and rental-market changes, financing availability and interest rates, foreign exchange movements, development and acquisition execution, and joint-venture exposure.
- Opry Mills reopened in March 2012 after flood repairs. Insurers had paid $50 million, while excess carriers disputed up to $150 million of additional restoration and business-interruption coverage. Simon said recovery was considered probable, but success was not assured.
- Simon reported ordinary-course litigation that it did not expect to materially affect its financial position or results. It also guaranteed $101.6 million of joint-venture debt. Certain property mortgages are cross-defaulted and cross-collateralized.
- The company noted that interim results may not indicate full-year results because of seasonal operations. The filing reported no significant change to previously disclosed risk factors.
Important facts for investors to verify
- How much of first-half earnings growth reflects recurring operations versus the $488.7 million Mills remeasurement gain and other transaction items.
- Debt and liquidity effects of acquisitions, including the Mills debt consolidation, and the company’s ability to fund planned redevelopment and development spending.
- Whether leasing, occupancy, sales and comparable NOI trends persist, particularly given higher tenant allowances on new leases.
- Outcome and timing of the Opry Mills excess-insurance litigation and the collectability of any recovery.
- Currency, joint-venture and property-level covenant exposures, including cross-default provisions and the $101.6 million of guaranteed joint-venture debt.