Simon Property Group, Inc. — FY 2009 Form 10-K
Reporting period: Year ended December 31, 2009. The filing also reports quarterly results; Q4 figures are identified below. Simon is a self-managed REIT that owns, develops and manages retail properties, primarily regional malls, outlet centers and community/lifestyle centers.
Business context and operating portfolio
- At year-end, the company owned or held interests in 321 U.S. income-producing properties and international shopping centers, primarily through joint ventures. U.S. properties represented approximately 244.9 million square feet of GLA; estimated 2009 retail sales at U.S. properties were approximately $58 billion.
- Portfolio leasing remained relatively high, but comparable tenant sales weakened. Total-portfolio regional mall occupancy was 92.1% (down 30 basis points); comparable sales per square foot fell 7.9% to $433. Domestic outlet occupancy was 97.9% (down 100 basis points), while outlet sales per square foot fell 1.8% to $500.
- Revenue is principally generated from minimum rents, sales-based overage rents, tenant expense recoveries and management-related fees.
Financial results and liquidity
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Total consolidated revenue | $3.775 billion | $3.783 billion |
| Operating income | $1.407 billion | $1.543 billion |
| Consolidated net income | $387.3 million | $599.5 million |
| Net income available to common stockholders | $283.1 million | $422.5 million |
| Diluted earnings per share | $1.05 | $1.87 |
| FFO allocable to Simon Property | $1.441 billion | $1.477 billion |
| Diluted FFO per share | $5.33 | $6.42 |
| Cash flow from operating activities | $1.721 billion | $1.636 billion |
| Cash flow from investing activities | $(419.0) million | $(1.022) billion |
| Cash flow from financing activities | $1.883 billion | $(342.1) million |
- Revenue was essentially flat year over year. Common-stockholder income declined about 33% and diluted EPS declined 43.9%; management attributed the earnings decline primarily to asset-sale losses and impairment charges.
- At December 31, cash and cash equivalents were $3.958 billion, total assets $25.948 billion and total equity $5.183 billion. Consolidated mortgages and other indebtedness totaled $18.630 billion, including $6.600 billion secured and approximately $12.021 billion unsecured. The effective weighted-average borrowing rate was 5.62%, versus 5.12% a year earlier.
- The company reported approximately $3.1 billion of available borrowing capacity under its new revolving facility at year-end. It reported compliance with unsecured debt covenants. The earnings-to-fixed-charges-and-preferred-dividends ratio was 1.26x, down from 1.40x.
- Scheduled consolidated debt principal maturities were $2.312 billion in 2010. The company said cash on hand and the new credit facility were sufficient to address debt maturities and capital needs through 2010.
- Common dividends declared were $2.70 per share in 2009, versus $3.60 in 2008; 2009 distributions were paid partly in stock and partly in cash. The board approved a $0.60-per-share cash dividend for the first quarter of 2010.
Material changes versus the prior period
- Minimum rents rose $24.9 million, but comparable minimum rents declined 0.1%; overage rents fell $15.3 million, or 15.3%, reflecting lower tenant sales. Cost-control initiatives reduced property operating expenses by $30.2 million and repairs and maintenance by $16.1 million.
- FFO declined 5.6% to $1.748 billion. Total portfolio regional mall average base rent increased 1.4% to $40.04 per square foot, while comparable regional mall sales fell 7.9%.
- Cash increased by $3.184 billion during 2009, supported by $1.642 billion of common-stock issuance proceeds and net financing cash inflows. The company issued 40.25 million common shares in public offerings; share issuance and stock-paid dividends contributed to per-share dilution.
- Capital expenditures on consolidated properties fell to $376 million from $874 million. No consolidated property acquisitions were completed in 2009; four consolidated properties were sold.
Outlook, management commentary, risks and unusual items
- Management expected positive operating cash flow in 2010, while cautioning that tenants continued to face financial stress. A significant deterioration in cash flow could lead to greater credit-facility use, reduced capital spending or other financing needs. No specific earnings or FFO guidance was provided in the supplied filing text.
- The company entered a definitive agreement to acquire 22 Prime Outlets centers for approximately $0.7 billion, subject to closing conditions, with a projected second-quarter 2010 closing. It also made a written offer to acquire General Growth Properties in a transaction valued at more than $10 billion; as of the filing date, no transaction had occurred and approvals and a definitive agreement remained outstanding.
- In February 2010, Simon and its partner agreed to sell their interests in seven French and Polish shopping centers for €715 million, subject to adjustments and approvals. Simon estimated its share of the gain at approximately $300 million. This was a pending transaction, not a completed 2009 sale.
- In January 2010, the Operating Partnership purchased approximately $2.3 billion of notes using cash and proceeds from a $2.25 billion note offering. The company expected a $165.6 million first-quarter 2010 charge from the tender offer.
- FY 2009 included $240.1 million in non-cash impairment charges, including a $140.5 million other-than-temporary impairment of the Liberty International investment, as well as property, land, development-cost and unconsolidated-investment impairments. Asset and joint-venture sales generated a net loss of $30.1 million. Management also cited approximately $0.21 per share of 2009 dilution from equity offerings and stock-paid dividends.
- Principal risks include substantial debt and refinancing needs, dependence on external capital markets, interest-rate and currency exposure, tenant bankruptcies and weaker consumer spending, occupancy and rent pressure, anchor-tenant closures, competition from other retail formats and e-commerce, joint-venture partner rights and guarantees, environmental liabilities, insurance limitations and maintaining REIT qualification.
- Ordinary-course legal proceedings were not expected by management to materially affect financial position or results. The filing states that disclosure controls and internal control over financial reporting were effective at December 31, 2009; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Debt maturity and refinancing exposure, especially the $2.312 billion of scheduled 2010 consolidated maturities, and the cost and terms of the replacement credit facility and 2010 note transactions.
- Whether cash generation, tenant collections, occupancy and sales recover sufficiently to support debt service, planned investment and REIT distributions.
- The quality and sustainability of FFO, including the effects of impairments, asset sales, equity issuance and the substantial gap between FFO and GAAP earnings.
- Closing status, final consideration and realized gain for the Prime Outlets acquisition and Simon Ivanhoe sale; separately assess the unresolved General Growth offer and its potential financing and dilution implications.
- Exposure to joint-venture debt and partner rights: Simon reported a $6.5 billion pro rata share of joint-venture indebtedness and $47.2 million of guarantees supporting joint-venture debt.
- Dividend policy and cash-versus-stock distributions, as future dividends depend on operating results, available cash and REIT requirements.
FFO is a non-GAAP measure and is not a substitute for GAAP net income or operating cash flow. Financial statements and MD&A are incorporated by reference to the company’s 2009 Annual Report to Stockholders.