Simon Property Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Simon is a REIT focused on owning, developing and managing malls, Premium Outlets and other retail properties. It reported 207 U.S. income-producing properties and international outlet interests. Unless otherwise stated, amounts below are consolidated.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,315.4 million | $1,349.1 million | $2,652.1 million | $2,565.3 million |
| Operating income | $659.2 million | $702.4 million | $1,344.1 million | $1,301.6 million |
| Net income attributable to common stockholders | $455.4 million | $472.9 million | $936.4 million | $1,012.1 million |
| Diluted earnings per share | $1.45 | $1.52 | $3.01 | $3.26 |
| FFO per diluted share | $2.63 | $2.63 | $5.27 | $4.92 |
| Cash provided by operating activities | — | $1,694.0 million | $1,483.3 million |
Operating margin, calculated as operating income divided by revenue, was approximately 50.1% in Q2 2016 versus 52.1% a year earlier, and 50.7% for the first half of both years. First-half portfolio NOI grew 7.6% and comparable property NOI grew 4.1%. U.S. mall and Premium Outlet occupancy was 95.9%, down 0.2 percentage points year over year; average base rent rose 4.9% to $50.43 per square foot, while sales per square foot fell 2.1% to $607. Leasing spreads were 14.8% above expiring tenant payments.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $884.3 million, versus $701.1 million at year-end 2015. Total assets were $31.38 billion and total equity was $5.32 billion.
- Mortgages and unsecured indebtedness were $22.92 billion, up from $22.42 billion at December 31, 2015. The effective weighted-average borrowing rate was 3.74%, down from 3.88% at year-end; floating-rate debt was 3.1% of total consolidated debt.
- Available borrowing capacity under the revolving facilities was $6.2 billion. Commercial paper outstanding was $910.4 million at a 0.55% weighted-average rate, with maturities from July 1 to September 22, 2016. The company said it had sufficient liquidity to address debt maturities and capital needs through 2016.
- First-half financing included $7.44 billion of debt proceeds and $7.30 billion of repayments. The company paid approximately $1.2 billion in common dividends and limited-partner distributions and invested $383.5 million in consolidated capital expenditures.
Changes, unusual items and management outlook
- Q2 revenue declined 2.5% year over year; first-half revenue increased 3.4%. Minimum rents rose, but lower overage rent and other income weighed on Q2. The prior-year period included an $80.2 million gain from selling marketable securities.
- First-half diluted EPS fell to $3.01 from $3.26. Management attributed the comparison principally to prior-year gains, including the $206.9 million non-cash gain associated with Klépierre’s acquisition of Corio and the $80.2 million securities gain. Lower interest expense and improved core operations partly offset these items.
- First-half FFO per diluted share increased 7.1% to $5.27. Management reported stronger leasing activity and comparable operating performance; first-half interest expense decreased $30.0 million.
- Simon declared a Q3 2016 dividend of $1.65 per common share, up from $1.60 in Q2. No full-year earnings or FFO guidance is provided in the supplied filing text. Management expected positive operating cash flow in 2016 and stated that operations generally should fund recurring expenses, debt service, recurring capital spending and REIT distributions.
- The company reported approximately $2.1 billion as its share of costs for development, redevelopment and expansion projects under construction, targeting stabilized returns on invested capital of 8%–10%. It also estimated 2016 international development costs of approximately $156 million.
- The filing identifies Brexit as a risk to European and U.K. markets, property and investment values, and currency exposure. It also cites retail-sector and tenant risks, financing and interest-rate risks, development and joint-venture risks, and potential environmental and cybersecurity exposures.
- Opry Mills flood-insurance litigation remained pending. A court entered a $204.1 million judgment in April 2016, inclusive of $50 million already paid by the primary insurer. Simon said recovery was probable but gave no assurance of collection; additional consequential damages were also being pursued.
- Simon said it was in compliance with debt covenants and that current legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable assurance level.
Key facts for investors to verify
- Whether the improvement in comparable NOI, rents and leasing spreads continues, given lower sales per square foot and slightly lower occupancy.
- Near-term refinancing and liquidity needs, particularly the commercial-paper maturities and the company’s ability to maintain access to credit markets.
- How much of reported earnings reflects recurring property operations versus asset-sale, investment and remeasurement gains.
- Timing, collectability and accounting treatment of the Opry Mills insurance judgment and any additional recovery.
- Capital requirements and returns for the development pipeline, and exposure to Brexit-related market and foreign-exchange volatility.