Simon Property Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; financial statements are unaudited. Simon is a REIT focused on owning, developing, and managing malls, Premium Outlets, and The Mills. It reported interests in 207 U.S. income-producing properties and additional international properties, plus a 20.3% stake in Klépierre.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1,349.1 million | $1,182.0 million | $2,565.3 million | $2,339.0 million |
| Operating income | $702.4 million | $561.5 million | $1,301.6 million | $1,122.5 million |
| Consolidated net income | $554.5 million | $477.5 million | $980.0 million | $878.6 million |
| Net income attributable to common stockholders | $472.9 million | $406.6 million | $835.1 million | $748.2 million |
| Diluted EPS | $1.52 | $1.31 | $2.69 | $2.41 |
| FFO, non-GAAP | $955.4 million | $783.8 million | $1,786.1 million | $1,649.2 million |
| Diluted FFO per share, non-GAAP | $2.63 | $2.16 | $4.92 | $4.54 |
- Revenue rose 14.1% in Q2 and 9.7% in the first half. Q2 other income included an $80.2 million gain on the sale of marketable securities; other income also included an $8.3 million gain on a European pre-development interest sale in the first half.
- Six-month net cash provided by operating activities was $1,483.3 million, versus $1,271.1 million in 2014. Cash and cash equivalents were $565.7 million at June 30, down from $612.3 million at December 31, 2014.
- Investing activities used $853.8 million, including $1,231.4 million of acquisitions and $489.0 million of capital expenditures, partly offset by $454.0 million of securities-sale proceeds and $583.6 million of capital distributions from unconsolidated entities. Financing activities used $676.1 million.
- Mortgages and unsecured indebtedness totaled $22.1 billion, up from $20.9 billion at year-end. The effective weighted average borrowing rate was 4.17%, down from 4.41% at year-end; floating-rate debt was 14% of consolidated debt. Management reported $4.5 billion of available capacity under its credit facilities, net of borrowings and letters of credit.
- Property fundamentals strengthened: first-half share of portfolio NOI increased 7.9% year over year; comparable U.S. Malls, Premium Outlets, and The Mills NOI increased 3.5%. U.S. Malls and Premium Outlets sales per square foot rose 2.0% to $620, and average base minimum rent rose 4.9% to $48.07. Portfolio occupancy declined 40 basis points to 96.1%, primarily attributed to tenant bankruptcies.
Material changes versus prior period
- First-half diluted EPS rose to $2.69 from $2.41. Management cited improved operations, acquisitions and expansions, lower interest expense, and the $80.2 million securities-sale gain, partly offset by the prior-year comparison with Klépierre’s $133.9 million disposal gain and the 2014 Washington Prime spin-off results and transaction costs.
- First-half interest expense declined $46.0 million. The company’s effective overall borrowing rate at June 30, 2015 was 4.17%, compared with 4.58% a year earlier.
- Simon acquired Jersey Gardens (renamed The Mills at Jersey Gardens) and University Park Village in January for $677.9 million cash plus assumption of $405.0 million of mortgage debt. It also invested $114.0 million for a 50% interest in a Sears property joint venture and increased its Klépierre stake to 20.3%.
- The Board authorized up to $2.0 billion of common-stock repurchases over 24 months; 1,903,340 shares were repurchased under the program in Q2 at an average $180.19 per share.
Outlook, commentary, risks, and contingencies
- Management expected positive operating cash flow in 2015 and believed available cash and borrowing capacity were sufficient for debt maturities and capital needs through 2015. No full-year EPS or FFO guidance is provided in the supplied filing text.
- Development and redevelopment projects under construction represented approximately $2.3 billion of Simon’s share of costs; management expected to fund these projects with operating cash flows and estimated stabilized returns of 8%–12%. Expected 2015 international development costs were approximately $114 million.
- The Board declared a Q3 2015 dividend of $1.55 per common share, payable August 31, 2015. Future dividends remain subject to results, available cash, reserves, and REIT requirements.
- Simon was in compliance with its unsecured and applicable secured debt covenants. Commercial paper outstanding was $803.0 million, with maturities from July 1 to September 25, 2015. Long-term debt principal obligations were $1.2 billion for the remainder of 2015.
- Simon was pursuing Opry Mills excess-insurance recovery, with up to $150 million of additional coverage at issue. A court ruled in Simon’s favor on coverage in Q1 2015; the damages trial began in July. Management said recovery was probable but gave no assurance of success.
- Joint-venture mortgage debt guaranteed by the Operating Partnership was $319.9 million, with a stated right of recovery from partners for $96.7 million. The filing identifies retail and tenant bankruptcy, financing and interest-rate exposure, foreign exchange, development and leasing execution, joint-venture risks, and economic conditions among relevant risks. Management reported no material change to the prior annual report’s risk factors.
- Results are subject to seasonal effects and the interim period is not necessarily indicative of full-year results. FFO and NOI are non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flow.
Investor verification priorities
- Separate recurring operating performance from one-time gains, particularly the $80.2 million securities gain and the prior-year Klépierre gain, when assessing earnings and FFO growth.
- Review debt maturities, short-term commercial paper refinancing, available facility capacity, and the effect of higher interest rates on the 14% floating-rate debt share.
- Monitor occupancy, tenant sales, rent growth, and bankruptcy-related leasing exposure, including whether the occupancy decline persists.
- Assess acquisition and development commitments, including the Sears and Hudson’s Bay joint ventures, and compare project costs and returns with management estimates.
- Track the Opry Mills insurance litigation and any change in the expected recovery or timing.