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, 2019. Simon is a REIT whose business is conducted principally through the Operating Partnership. The company owns, operates, develops and manages malls, Premium Outlets, The Mills and other retail properties. At quarter-end, it owned or held interests in 206 U.S. income-producing properties and 29 international outlet properties, and held a 21.9% stake in Klépierre.
Financial and operating performance
Amounts below are in U.S. dollars; financial figures are rounded to millions except per-share data.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,397 | $1,385 | $2,850 | $2,779 |
| Operating income before other items | $681 | $728 | $1,426 | $1,433 |
| Net income attributable to Simon common stockholders | $495 | $547 | $1,044 | $1,168 |
| Diluted EPS | $1.60 | $1.77 | $3.38 | $3.77 |
| FFO per diluted share (non-GAAP) | $2.99 | $2.98 | $6.04 | $5.85 |
- Lease income increased to $1,299 million in Q2 and $2,579 million in the first half. Comparable lease income rose 2.2% in Q2 and 1.2% for the six months.
- First-half net cash from operating activities was $1,888 million, compared with $1,837 million in 2018. Investing activities used $302 million; capital expenditures were $403 million. Cash and cash equivalents ended June at $480 million, down $35 million from year-end.
- At June 30, mortgages and unsecured indebtedness totaled $23.325 billion, including $6.8 billion of mortgage debt. The effective weighted-average borrowing rate was 3.34%; variable-rate debt was 3.5% of consolidated debt. Debt’s weighted-average remaining term was 6.0 years.
- Available borrowing capacity under the revolving facilities was approximately $5.9 billion, net of borrowings, commercial paper and letters of credit. Commercial paper outstanding was $1.4 billion at a 2.47% weighted-average rate and a September 19, 2019 weighted-average maturity.
- Portfolio NOI grew 1.6% in Q2 and 1.7% for the first half; comparable-property NOI grew 2.0% and 1.8%, respectively. U.S. Malls and Premium Outlets total-portfolio occupancy was 94.4%, versus 94.7% a year earlier; average base rent rose 1.3% to $54.52 per square foot and sales per square foot rose 3.5% to $669.
Material changes versus the prior comparable period
- Q2 revenue increased modestly, but operating income before other items and net income attributable to common stockholders declined. Higher depreciation and amortization, home and regional office costs, and other expense more than offset lease growth and lower interest expense.
- First-half diluted EPS fell $0.39 to $3.38. Management attributed the decrease mainly to 2018 disposition gains of $144.9 million, a 2018 non-cash investment gain of $35.6 million, lower lease-settlement and international-investment income in 2019, partly offset by improved operations, a $68.0 million insurance-broker lawsuit settlement, a $15.6 million investment-sale gain and lower interest expense.
- FFO per diluted share increased despite lower GAAP EPS, reflecting the impact of prior-year gains and other items excluded or adjusted in FFO. FFO is a non-GAAP measure and is not a substitute for GAAP income or cash flow.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow in 2019 and said cash, operating cash generation and available facilities were sufficient to address debt maturities and capital needs through 2019. It anticipated operating cash flow would generally cover operating costs, debt service, recurring capital spending and REIT distributions.
- The company reported approximately $1.7 billion as its share of projected costs for development, redevelopment and expansion projects under construction, generally expected to be funded from operating cash flow. Its expected share of international development costs for 2019 was approximately $232 million. Management targets stabilized project returns of 7%–10%.
- The board declared a Q3 2019 common dividend of $2.10 per share. The Q2 dividend was $2.05 per share, compared with $1.95 in Q2 2018. Future dividends and distributions remain subject to board discretion and financial conditions.
- Unusual items included the $68.0 million settlement with the former insurance broker related to Opry Mills flood damage, $7.6 million of first-half Puerto Rico hurricane business-interruption proceeds, the $15.6 million gain on a multifamily investment sale, and mark-to-market losses on equity investments. First-half 2018 included significant disposition gains and a non-cash investment gain.
- Risks identified include retail-sector and economic weakness, tenant insolvency or vacancies, rental-rate pressure, substantial indebtedness and capital-market access, interest and foreign-exchange movements, joint-venture exposures, development execution, natural disasters, insurance and environmental matters. The company reported compliance with debt covenants, no material change to previously disclosed risk factors, and no material adverse effect expected from current legal proceedings. It guaranteed $216.1 million of joint-venture mortgage debt, with a stated right of recovery for $10.8 million.
- Management said disclosure controls were effective at a reasonable-assurance level and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether occupancy declines, particularly at U.S. properties and The Mills, persist and how they affect comparable NOI, rents and tenant sales.
- The refinancing and liquidity plan for $1.4 billion of commercial paper with a September 2019 weighted-average maturity, alongside scheduled debt maturities and the company’s leverage.
- How much reported earnings depend on one-time settlements, insurance proceeds, asset dispositions and fair-value changes, versus recurring property operations and FFO.
- Progress, remaining funding needs and realized returns on the approximately $1.7 billion share of projects under construction, and whether operating cash flow continues to support capital spending and distributions.
- Developments at equity-method investments, including Klépierre and HBS, plus joint-venture guarantees, ground-lease liabilities and other contingencies.