Business context and reporting period
Simon Property Group, Inc. and Simon Property Group, L.P. filed a combined, unaudited Form 10-Q for the three months ended March 31, 2017. Simon is a REIT; substantially all operations and debt are held by the Operating Partnership. The business owns, develops and manages U.S. and international malls, outlet centers and other retail properties. At quarter-end it had interests in 206 U.S. income-producing properties and retail properties internationally, plus a 20.5% stake in Klépierre.
Financial and operating results
Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $1,345.8 | $1,336.7; up 0.7% |
| Operating income | $676.7 | $684.9; down 1.2% |
| Operating margin | 50.3% | 51.2% |
| Consolidated net income | $551.1 | $563.8 |
| Net income attributable to common stockholders | $477.7 | $481.0 |
| Diluted earnings per share | $1.53 | $1.55 |
| Funds from operations (FFO) | $985.0 | $951.8; up 3.5% |
| Diluted FFO per share | $2.74 | $2.63 |
| Cash from operating activities | $785.7 | $720.5 |
| Cash and cash equivalents | $513.4 | $560.1 at Dec. 31, 2016 |
| Total debt | $23.15 billion | $22.98 billion at Dec. 31, 2016 |
Operating performance improved on key property measures: portfolio NOI grew 5.6% and comparable-property NOI grew 3.8%. U.S. mall and Premium Outlet occupancy was 95.6%, unchanged year over year; average base minimum rent rose 4.4% to $51.87 per square foot. Total sales per square foot increased 0.3% to $615. The Mills occupancy declined 70 basis points to 97.7%.
Changes versus the prior comparable period
- Revenue growth reflected higher minimum rent and tenant reimbursements; comparable minimum rents rose $18.7 million, or 2.4%.
- Operating income declined as operating expenses rose faster than revenue. Depreciation and amortization increased $10.2 million.
- Interest expense fell $21.0 million, helping offset lower income from unconsolidated entities and the absence of prior-year gains.
- Q1 2016 included $22.7 million of gains from property consolidation and dispositions and a $36.2 million pre-tax gain on sales of multifamily investments. These items contributed to lower reported 2017 net income and EPS; management cited improved core operations and lower interest expense as offsets.
- Operating cash flow increased to $785.7 million from $720.5 million, while investing cash outflow narrowed to $175.3 million from $195.3 million. Financing cash outflow increased to $657.1 million from $421.3 million, including higher distributions and $151.7 million of share and unit repurchases.
Liquidity, debt and capital
Debt comprised $15.4 billion of senior unsecured notes, $6.6 billion of mortgage debt and borrowings under revolving facilities and commercial paper. The effective weighted-average borrowing rate was 3.40%, versus 3.76% a year earlier; floating-rate debt was 4.4% of consolidated debt. Available borrowing capacity under credit facilities was $6.2 billion at March 31. The company reported compliance with debt covenants.
On March 17, the $4.0 billion revolving credit facility was amended and extended, with initial maturity moved to June 30, 2021 and a one-year extension option. Commercial paper outstanding was $953.6 million, with maturities through June 26, 2017. Management said cash, facilities and commercial paper availability were sufficient for debt maturities and capital needs through 2017.
Q1 common dividends were $1.75 per share, up from $1.60 a year earlier; the board declared a $1.75 dividend for Q2 2017. The company repurchased 870,692 shares at an average $174.22 per share. Development, redevelopment and expansion projects under construction represented approximately $1.7 billion of the company’s share of costs; management cited a targeted stabilized return on invested capital of 7–10%.
Outlook, commentary and risks
- Management expected positive operating cash flow for 2017 and believed operating cash would generally cover operating expenses, debt service, recurring capital expenditures and REIT-related distributions. The filing does not provide a clear full-year earnings or FFO forecast.
- Management attributed stronger comparable NOI to leasing and property fundamentals. It reported favorable U.S. mall and Premium Outlet opening/closing leasing spreads of 13.0%.
- Material risks include retail-sector weakness, tenant bankruptcies or lost anchor tenants, leasing and occupancy pressures, substantial indebtedness and capital-market access, interest and foreign-exchange movements, development and joint-venture risks, and international exposure. Management reported no material change in previously disclosed risk factors.
- Opry Mills excess-insurance litigation remains unresolved: a jury verdict set damages at $204.1 million, including $50.0 million previously paid, and appeals are pending. Management believes recovery is probable but gives no assurance of success.
- The Operating Partnership guaranteed $411.2 million of joint-venture mortgage debt, with a stated $87.3 million right of recovery from partners. No material adverse effect from ordinary-course legal proceedings was expected.
- Management identified potential revenue presentation and timing effects from new lease-accounting guidance, while stating it did not expect the revenue-recognition standard to have a significant overall impact. The lease standard’s impact remained under evaluation.
Important facts for investors to verify
- Whether NOI, occupancy, rents and leasing spreads continue to support growth, particularly given the decline in The Mills occupancy and modest sales-per-square-foot growth.
- Debt maturities, commercial-paper refinancing and available liquidity; confirm that reported facility capacity remains available after borrowings and other commitments.
- Execution and funding of the approximately $1.7 billion development and redevelopment program, and whether projects achieve targeted returns.
- Progress and potential recovery in the Opry Mills insurance appeals; the claimed recovery is not assured.
- Performance of joint ventures and international investments, including the outstanding partner-recovery exposure on guaranteed debt.
- Dividend sustainability and capital allocation, including continued repurchases, against cash flow, debt obligations and REIT distribution requirements.