Simon Property Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Simon is a REIT whose business is conducted primarily through Simon Property Group, L.P.; reported financial amounts below are consolidated and in U.S. dollars.
Business context
Simon owns, develops, and manages malls, Premium Outlets, The Mills, and other retail and mixed-use properties. At September 30, 2022, it owned or held interests in 197 U.S. income-producing properties and 33 international outlet and designer outlet properties. It also held an 80% interest in Taubman Realty Group and a 22.4% stake in Klépierre.
Financial and operating results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1.316 billion | $1.297 billion | $3.892 billion | $3.791 billion |
| Operating income before other items | $652.2 million | $612.3 million | $1.899 billion | $1.822 billion |
| Consolidated net income | $621.8 million | $778.6 million | $1.680 billion | $1.995 billion |
| Net income attributable to common stockholders; diluted EPS | $539.0 million; $1.65 | $679.9 million; $2.07 | $1.462 billion; $4.46 | $1.743 billion; $5.30 |
| FFO; diluted FFO per share | $1.099 billion; $2.93 | $1.176 billion; $3.13 | $3.207 billion; $8.54 | $3.327 billion; $8.85 |
Operating income margin was approximately 49.6% in Q3 2022 versus 47.2% in Q3 2021, and 48.8% for the nine months versus 48.1%. FFO and FFO per share are non-GAAP measures; the company cautions they are not substitutes for GAAP income or cash flow.
- Cash flow: Nine-month cash provided by operating activities was $2.834 billion, up from $2.752 billion. Investing activities used $364.1 million; financing activities used $2.403 billion. Cash and equivalents were $601.5 million at quarter-end, up from $533.9 million at December 2021.
- Debt and liquidity: Mortgages and unsecured indebtedness totaled $24.640 billion, down from $25.321 billion at year-end 2021. The company reported $7.4 billion of available revolving credit capacity, net of borrowings and letters of credit, and no commercial-paper balance. Its effective average borrowing rate was 3.10%, versus 2.86% at year-end 2021; 5.9% of consolidated debt was floating-rate. It reported compliance with debt covenants.
- Balance sheet: Total assets were $32.795 billion and total liabilities $28.759 billion. Equity was $3.477 billion.
- Property performance: U.S. Malls and Premium Outlets total portfolio occupancy increased to 94.5% from 92.8%; average base minimum rent per square foot rose 1.7% to $54.80. Portfolio NOI increased 5.5% for the nine-month period.
Changes versus prior comparable periods
- Q3 revenue rose 1.5%, while nine-month revenue increased 2.7%. Comparable lease income grew 1.1% in Q3 and 3.7% for the first nine months, supported by fixed rents, higher occupancy, and, year to date, higher tenant-sales-based rent.
- Q3 diluted EPS fell $0.42 to $1.65; nine-month diluted EPS declined $0.84 to $4.46. The year-over-year comparisons were affected by 2021 non-cash gains, including the $159.8 million ABG-related gain and property disposition and insurance-recovery gains. Lower income from unconsolidated entities and $63.4 million of nine-month unrealized equity-instrument losses also weighed on 2022 results.
- These effects were partly offset by lower interest and tax expense and improved property operations. Nine-month interest expense declined $41.9 million.
- Nine-month distributions to stockholders and limited partners were approximately $1.9 billion. Simon repurchased 1.83 million shares during the nine months at an average $98.57 per share, using $180.4 million of cash.
Outlook, commentary, and risks
No specific earnings or FFO guidance is provided in the supplied filing text. Management expected positive operating cash flow in 2022 and stated it believed cash on hand and committed credit facilities were sufficient to address debt maturities and capital needs through 2022. It expected operating cash flows to support ordinary expenses, debt service, recurring capital spending, and REIT distributions, while noting that disruption in capital markets could limit financing access.
Management reported approximately $891 million as its share of costs for development, redevelopment, and expansion projects under construction, with approximately $215 million of remaining net cash funding for projects then under construction. It targeted stabilized returns on invested capital of 7%–10%. A strategic partnership with Jamestown, announced October 11, 2022, was anticipated to close before year-end; it was not yet closed at the reporting date.
- Management said COVID-19 could continue to affect retail activity, rent collection, revenue recognition, and property valuations; the ultimate impact remained difficult to predict.
- Other disclosed risks include tenant bankruptcy or inability to collect rent, vacancies and anchor-tenant losses, competition including e-commerce, interest-rate and refinancing exposure, substantial indebtedness and covenants, capital-market access, foreign-exchange and international risks, joint-venture guarantees, natural disasters, insurance availability, and geopolitical events.
- Simon reported a $15.6 million loss on the disposition of one consolidated retail property and a $19.9 million non-cash gain related to an unconsolidated property disposition/foreclosure. It also wrote off development costs for a German project it no longer intended to pursue and cited increased legal fees.
- Ordinary-course litigation was disclosed; management did not believe current proceedings would materially adversely affect financial condition, liquidity, or results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether occupancy, rents, and comparable lease income continue to improve, and how tenant sales and rent collection evolve.
- Whether income from unconsolidated investments and other platform investments stabilizes after the year-over-year decline.
- Debt maturities, variable-rate exposure, borrowing costs, covenant headroom, and the availability of revolving credit and capital markets.
- Cash needs for distributions, share repurchases, and development commitments, including the status and funding of the Jamestown transaction.
- The sensitivity of reported earnings to non-cash gains and losses, equity-investment valuation changes, and other nonrecurring items; also compare GAAP results with non-GAAP FFO and NOI.