Simon Property Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Simon is a REIT focused on retail real estate, including malls, outlet centers and community/lifestyle centers. At quarter-end it owned or held interests in 325 U.S. income-producing properties and international outlet properties, and had acquired a 28.7% stake in European property company Klépierre.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $1,119 million | $1,020 million; up 9.7% |
| Operating income | $516 million | $451 million; up 14.4% |
| Operating margin | 46.1% | 44.2% (calculated as operating income divided by revenue) |
| Consolidated net income | $782 million | $220 million |
| Net income attributable to common stockholders; diluted EPS | $645 million; $2.18 | $179 million; $0.61 |
| Funds from operations (FFO); diluted FFO per share | $649 million; $1.82 | $571 million; $1.61 |
| Operating cash flow | $573 million | $452 million |
- Revenue growth reflected higher rents and tenant reimbursements, improved comparable-property performance and portfolio changes. Comparable rents rose 3.6%; overage rent increased 61.5% as tenant sales improved.
- Retail operating indicators strengthened: total portfolio occupancy was 93.6%, up 60 basis points year over year; average base minimum rent was $39.87 per square foot, up 4.4%; and sales per square foot rose 11.2% to $546 for regional malls and Premium Outlets.
- Cash and cash equivalents were $881 million at March 31, up from $799 million at year-end. Net cash used in investing was $3.18 billion, principally reflecting acquisitions; financing provided $2.68 billion.
- Total mortgages and other indebtedness were $22.80 billion, versus $18.45 billion at year-end. The increase includes approximately $2.6 billion of property-level debt brought onto the balance sheet in the Mills transaction. The effective weighted-average borrowing rate was 5.19%, down from 5.56% a year earlier; floating-rate debt was 10.3% of consolidated debt.
- Available borrowing capacity was approximately $2.0 billion under the revolving credit facility and $740 million under the term loan. Simon reported compliance with debt covenants.
Material changes and unusual items
- Q1 diluted EPS included a net $494.8 million gain from acquisitions, asset sales/disposals and impairment charges, equal to $1.39 per diluted share. The principal component was a noncash $488.7 million remeasurement gain when the Mills transaction gave Simon control of nine previously unconsolidated properties; Simon also recorded a $22.4 million impairment charge on its remaining SPG-FCM investment.
- The March 22 Mills transaction involved additional interests in 26 properties, including consolidation of nine, and was valued at approximately $1.5 billion. Simon assumed/consolidated approximately $2.6 billion of property-level mortgage debt.
- Simon acquired its 28.7% Klépierre stake for approximately $2.0 billion. It issued $1.75 billion of senior notes at fixed rates of 2.15%, 3.375% and 4.75%, and raised $1.2 billion net through a common-stock offering; proceeds helped fund the Klépierre and Mills transactions.
- Simon sold its 49% interest in Gallerie Commerciali Italia for $375.8 million cash and recognized a $28.8 million gain. Opry Mills reopened on March 29 after flood remediation.
- Higher EPS substantially reflects the one-time gain; FFO, which excludes that gain under Simon’s stated calculation, increased 13.7% year over year.
Outlook, risks and contingencies
- Management expected positive operating cash flow in 2012 and said cash on hand and available credit were sufficient for debt maturities and capital needs through 2012. It anticipated operations would fund recurring needs and REIT-required distributions; acquisitions and other nonrecurring needs could be funded through cash, credit, debt or equity.
- Management expected approximately $800 million of Simon’s share of 2012 domestic renovation and expansion costs, compared with approximately $265 million in 2011, and estimated stabilized returns of 8%–12% for development, expansion and renovation projects. Estimated 2012 international development costs were approximately $130 million.
- The board declared a $1.00-per-share common dividend payable May 31, 2012; the Q1 dividend paid was $0.95 per share. Future dividends depend on results, available cash and REIT requirements.
- Opry Mills’ excess insurers denied coverage for up to $150 million of additional restoration and business-interruption proceeds beyond the $50 million already funded. Simon and its lenders were pursuing litigation; management believed recovery was probable but gave no assurance of success.
- Other stated risks include tenant distress and rent collection, retail and economic conditions, financing availability and interest/foreign-exchange rates, development and acquisition risks, joint ventures, insurance and environmental matters. Management reported no significant change to the risk factors in its 2011 Form 10-K and no material change in market-risk assumptions.
Important facts for investors to verify
- How much of reported earnings growth is recurring operating performance versus the $494.8 million transaction-related net gain; review FFO reconciliation and future results from newly consolidated properties.
- The Mills transaction’s final purchase-price allocation, property performance and effect of adding approximately $2.6 billion of property-level debt.
- Debt maturities, refinancing needs, available facility capacity and sensitivity to interest rates; the filing estimates $623.7 million of principal maturities for the remainder of 2012.
- Outcome and potential recovery from the Opry Mills excess-insurance litigation.
- Execution, costs and returns of the expanded renovation, development and international investment program, alongside tenant sales, occupancy and rent trends.