Business Context and Reporting Period
Simon Property Group, Inc. (SPG) and its operating partnership filed a combined Form 10-K for the fiscal year ended December 31, 2019. SPG is a REIT; substantially all operations, assets, and debt are held through Simon Property Group, L.P. The company owns, develops, and manages U.S. malls, Premium Outlets, The Mills, and other retail properties, alongside international outlet investments and a 22.2% stake in Klépierre.
At year-end, Simon owned or held interests in 204 U.S. income-producing properties and 29 international Premium Outlet and Designer Outlet properties. U.S. mall and Premium Outlet occupancy was 95.1%; The Mills occupancy was 97.0%.
Financial Performance and Key Metrics
Amounts below are in U.S. dollars; annual financial statement amounts are in millions unless stated otherwise.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $5,755.2 | $5,645.3 | Up 1.9% |
| Consolidated net income | $2,423.2 | $2,822.3 | Down 14.1% |
| Net income attributable to SPG common stockholders | $2,098.2 | $2,436.7 | Down 13.9% |
| Diluted earnings per share | $6.81 | $7.87 | Down $1.06 |
| FFO (non-GAAP) | $4,272.3 | $4,324.6 | Down 1.2% |
| Diluted FFO per share | $12.04 | $12.13 | Down $0.09 |
| Cash from operating activities | $3,807.8 | $3,750.8 | Up 1.5% |
| Cash used in investing activities | $1,076.7 | $236.5 | Outflow increased |
| Cash used in financing activities | $2,576.1 | $4,482.3 | Outflow decreased |
| Cash and cash equivalents at year-end | $669.4 | $514.3 | Up $155.0 |
| Consolidated debt | $24,163.2 | $23,305.5 | Up $857.7 |
| Total equity | $2,911.3 | $3,797.0 | Down $885.7 |
Operating income before other items was $2,907.8 million, versus $2,926.3 million in 2018. Interest expense declined to $789.4 million from $815.9 million. The effective weighted-average borrowing rate on consolidated debt fell to 3.16% from 3.35%; 3.5% of consolidated debt was floating-rate at year-end. Debt had a weighted-average maturity of 7.4 years.
Portfolio NOI increased 1.4%, as did comparable-property NOI. U.S. Malls and Premium Outlets reported sales of $693 per square foot, up 4.8%, and average base minimum rent of $54.59 per square foot, up 0.8%. Occupancy declined 0.8 percentage points to 95.1%. 2019 cash dividends were $8.30 per common share, compared with $7.90 in 2018.
For the fourth quarter, revenue was $1,488.6 million versus $1,462.0 million a year earlier. Consolidated net income was $590.4 million versus $833.2 million, and diluted EPS was $1.66 versus $2.30.
Material Changes Versus the Prior Comparable Period
- Lower 2019 EPS primarily reflected 2018 disposition gains of $288.8 million, compared with 2019 net gains of $14.9 million; a $116.3 million 2019 debt-extinguishment loss; and increased depreciation and amortization. Improved property operations, a $68.0 million insurance-broker settlement, lower interest expense, and other items partly offset these effects.
- Revenue rose, supported by lease income growth. Comparable lease income increased 1.0%; 2019 fixed lease income included the effect of adopting ASC 842.
- FFO declined modestly despite growth in portfolio NOI. FFO is a non-GAAP measure and includes the 2019 debt-extinguishment loss.
- Capital expenditures increased to $876.0 million from $781.9 million, principally reflecting higher redevelopment and expansion spending.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected positive operating cash flow in 2020 and stated it believed cash on hand, credit facilities, and the commercial paper program were sufficient for debt maturities and capital needs through 2020. Available borrowing capacity under the credit facilities was approximately $6.0 billion at year-end, net of borrowings, commercial paper, and letters of credit.
- Management expected its share of 2020 international development costs to be approximately $211 million. Its share of costs for development, redevelopment, and expansion projects under construction was approximately $1.8 billion; management said it expected to fund these projects with operating cash flows. Estimated stabilized returns on invested capital generally ranged from 7% to 10%.
- On February 9, 2020, Simon agreed to acquire Taubman Centers for $52.50 per share in cash, with approximately $3.6 billion of cash consideration expected to be funded from existing liquidity. The transaction was subject to customary closing conditions and required shareholder approvals.
- Material operating risks include retailer bankruptcies and store closures, e-commerce competition, occupancy and rent pressure, reliance on anchors, economic and consumer-spending conditions, and the cost and execution risks of redevelopment. Other disclosed risks include substantial debt and refinancing needs, interest and currency exposure, joint-venture dependence, environmental and natural-disaster exposure, cybersecurity, REIT qualification, and Brexit-related uncertainty.
- Unusual 2019 items included the $116.3 million loss on early debt redemption, a $47.2 million impairment of the HBS investment, and a $68.0 million share of proceeds from settlement of litigation over 2010 flood damage at Opry Mills. The filing states current legal proceedings were not expected to materially adversely affect financial condition, liquidity, or results.
- Consolidated debt was $24.2 billion; the Operating Partnership also guaranteed $214.8 million of joint-venture mortgage debt. Simon’s pro rata share of joint-venture indebtedness was reported as $7.2 billion and is distinct from consolidated debt. The filing reported compliance with applicable debt covenants at year-end.
Most Important Facts for Investors to Verify
- Whether occupancy, leasing spreads, sales per square foot, and comparable NOI continue to support rental income as retail tenants face closures and changing shopping patterns.
- The company’s ability to refinance or repay near-term maturities, including $1.3 billion of commercial paper included in 2020 scheduled debt maturities, and to maintain credit-facility availability and covenant compliance.
- The Taubman transaction’s approval, closing conditions, final financing, and effect on liquidity and leverage.
- Underlying earnings and FFO trends after separating recurring property performance from disposition gains, debt-extinguishment charges, impairment, and insurance-related proceeds.
- The returns and funding requirements for the substantial redevelopment pipeline, and any further impairment or capital needs at joint ventures such as HBS.