Simon Property Group, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unaudited consolidated results. Simon is a REIT that owns, develops, and manages retail properties; at quarter-end it had interests in 318 U.S. income-producing properties and shopping centers in Europe and Asia.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $933.6 million | $903.6 million | $1,858.6 million | $1,822.1 million |
| Operating income | $415.5 million | $224.7 million | $842.4 million | $588.9 million |
| Net income (loss) attributable to common stockholders | $152.5 million | $(20.8) million | $161.9 million | $86.0 million |
| Diluted earnings per share | $0.52 | $(0.08) | $0.56 | $0.34 |
| Funds from operations (FFO), total | $487.7 million | $313.1 million | $813.2 million | $790.0 million |
| Diluted FFO per share | $1.38 | $0.96 | $2.32 | $2.53 |
FFO is a non-GAAP measure; Simon cautions that its calculation may not be comparable across REITs and that FFO is not cash flow from operations or a liquidity measure. Q2 operating income improved substantially in part because Q2 2009 included a $140.5 million impairment charge on the Liberty investment. First-half 2010 earnings also included a $165.6 million debt-extinguishment charge.
- Cash flow: First-half operating cash flow was $777.2 million, down from $887.6 million. Cash used in investing was $297.9 million; cash used in financing was $2.14 billion. Cash and equivalents fell $1.66 billion to $2.29 billion, primarily from debt reduction.
- Debt and interest: Consolidated debt was $17.07 billion at June 30, down from $18.63 billion at December 31, 2009. The effective weighted-average borrowing rate was 5.70%. Secured debt was $5.7 billion versus $6.6 billion at year-end. Floating-rate debt was approximately 11% of consolidated debt.
- Liquidity: Simon reported $3.3 billion of available capacity under its $3.85 billion revolving credit facility, net of $500 million outstanding and letters of credit. It stated that cash and facility availability were sufficient for debt maturities and capital needs through 2011.
- Distributions: Common dividend paid was $0.60 per share in Q2. First-half cash distributions to common stockholders and limited partners totaled $417.0 million.
Material changes and operating trends
- Revenue increased 3.3% in Q2 and 2.0% for the first half year over year. First-half comparable minimum rents rose 0.6%; management cited improved leasing and occupancy, partially offset by lower straight-line rents.
- U.S. regional mall and Premium Outlet portfolio occupancy increased to 93.1% from 92.3%; comparable sales per square foot rose 3.9% to $474. Average base rent increased 0.3% to $38.62 per square foot. The Mills and Mills regional mall metrics were mixed, with Mills regional mall rent and comparable sales declining.
- European shopping-center occupancy, comparable sales, and average base rent weakened year over year: 94.9% occupancy (down 110 basis points), sales down 6.8%, and rent down 11.9%. International Premium Outlet sales in Japan fell 1.1%.
- Operating expenses declined, including lower property operating costs and credit-loss provisions. Interest expense rose $54.9 million in the first half, mainly reflecting new note issuance and property debt, partly offset by repaid debt.
- Simon issued $2.25 billion of senior notes and used proceeds and cash to tender for approximately $2.3 billion of shorter-dated notes. It also repaid $792.8 million of mortgage loans, unencumbering three properties.
Outlook, risks, and unusual items
- Management expected positive operating cash flow for 2010 and anticipated that operating cash would cover operating costs, debt service, recurring capital expenditures, and REIT-required distributions. It expected to fund approximately $200 million of its share of domestic development, renovation, and expansion work and $59 million of international development costs. These are stated expectations, not earnings guidance.
- Management warned that tenants continue to face financial distress; a significant decline in operating cash flow could increase reliance on the credit facility, require reduced capital spending, or prompt additional financing. Other cited risks include financing availability and cost, interest and foreign-exchange movements, tenant bankruptcies, retail-sector and economic conditions, development risks, and joint-venture exposures.
- The planned acquisition of the remaining Prime outlet-center portfolio—21 centers, for approximately $0.7 billion in cash and units—was subject to financing-related closing conditions and FTC review. Simon said timing and the FTC outcome could not be predicted.
- After quarter-end, Simon and its partner sold their interests in Simon Ivanhoe, which owned seven centers in France and Poland. Simon reported expected gain of approximately $280 million; some proceeds were used to repay about $215 million of Euro-denominated credit-facility borrowings.
- Simon reported no material new litigation developments and no significant changes to the risk factors in its 2009 Form 10-K. Management concluded disclosure controls were effective at June 30, 2010.
Important facts for investors to verify
- How much of the earnings and FFO comparisons reflects recurring property performance versus the prior-year Liberty impairment, the 2010 debt-extinguishment charge, and asset-sale gains?
- Whether occupancy, tenant sales, rent trends, and collections continued to improve, particularly given weaker Mills regional mall and European results.
- Completion, consideration, financing, and FTC outcome for the remaining Prime outlet-center acquisition.
- Realized proceeds and gain from the Simon Ivanhoe sale, including final post-closing adjustments and use of proceeds.
- Debt maturities, refinancing needs, revolving-credit availability, and exposure to higher variable borrowing costs; the SPG-FCM related-party loan of $661.5 million matures in June 2011, with a one-year extension option.