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SPG > SEC Filings for SPG > Form 10-Q on 8-May-2013All Recent SEC Filings

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Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this report.


Simon Property Group, Inc., or Simon Property, is a Delaware corporation that operates as a self-administered and self-managed real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. REITs will generally not be liable for federal corporate income taxes as long as they continue to distribute not less than 100% of their taxable income. Simon Property Group, L.P., or the Operating Partnership, is our majority-owned partnership subsidiary that owns all of our real estate properties and other assets. In this discussion, the terms "we", "us" and "our" refer to Simon Property, the Operating Partnership, and its subsidiaries.

We own, develop and manage retail real estate properties, which consist primarily of malls, Premium Outlets®, The Mills®, and community/lifestyle centers. As of March 31, 2013, we owned or held an interest in 313 income-producing properties in the United States, which consisted of 160 malls, 63 Premium Outlets, 64 community/lifestyle centers, 13 Mills, and 13 other shopping centers or outlet centers in 38 states and Puerto Rico. We have reinstituted redevelopment and expansion initiatives and have renovation and expansion projects, including the addition of anchors and big box tenants, currently underway at 44 properties in the U.S. Internationally, as of March 31, 2013, we had ownership interests in eight Premium Outlets in Japan, two Premium Outlets in South Korea, one Premium Outlet in Mexico, and one Premium Outlet in Malaysia. Additionally, as of March 31, 2013, we owned a 28.9% equity stake in Klépierre SA, or Klépierre, a publicly traded, Paris-based real estate company, which owns, or has an interest in, more than 260 shopping centers located in 13 countries in Europe.

We generate the majority of our revenues from leases with retail tenants including:

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º base minimum rents,

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º overage and percentage rents based on tenants' sales volume, and

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º recoverable expenditures such as property operating, real estate taxes, repair and maintenance, and advertising and promotional expenditures.

Revenues of our management company, after intercompany eliminations, consist primarily of management fees that are typically based upon the revenues of the property being managed.

We invest in real estate properties to maximize total financial return which includes both operating cash flows and capital appreciation. We seek growth in earnings, funds from operations, or FFO, and cash flows by enhancing the profitability and operation of our properties and investments. We seek to accomplish this growth through the following:

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º attracting and retaining high quality tenants and utilizing economies of scale to reduce operating expenses,

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º expanding and re-tenanting existing highly productive locations at competitive rental rates,

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º selectively acquiring or increasing our interests in high quality real estate assets or portfolios of assets,

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º generating consumer traffic in our retail properties through marketing initiatives and strategic corporate alliances, and

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º selling selective non-core assets.

We also grow by generating supplemental revenues from the following activities:

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º establishing our malls as leading market resource providers for retailers and other businesses and consumer-focused corporate alliances, including: payment systems (such as handling fees relating to the sales of bank-issued prepaid cards), national marketing alliances, static and digital media initiatives, business development, sponsorship, and events,

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º offering property operating services to our tenants and others, including waste handling and facility services, and the provision of energy services,

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º selling or leasing land adjacent to our properties, commonly referred to as "outlots" or "outparcels," and

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º generating interest income on cash deposits and investments in loans, including those made to related entities.

We focus on high quality real estate across the retail real estate spectrum. We expand or renovate properties to enhance profitability and market share of existing assets when we believe the investment of our capital meets our risk-reward criteria. We selectively develop new properties in markets we believe are not adequately served by existing retail outlets.

We routinely review and evaluate acquisition opportunities based on their ability to enhance our portfolio. Our international strategy includes partnering with established real estate companies and financing international investments with local currency to minimize foreign exchange risk.

To support our growth, we employ a three-fold capital strategy:

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º provide the capital necessary to fund growth,

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º maintain sufficient flexibility to access capital in many forms, both public and private, and

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º manage our overall financial structure in a fashion that preserves our investment grade credit ratings.

We consider FFO, net operating income, or NOI, and comparable property NOI (NOI for properties owned and operating in both periods under comparison) to be key measures of operating performance that are not specifically defined by accounting principles generally accepted in the United States, or GAAP. We use these measures internally to evaluate the operating performance of our portfolio and provide a basis for comparison with other real estate companies. Reconciliations of these measures to the most comparable GAAP measure are included below in this discussion.

Results Overview

Diluted earnings per common share decreased $1.27 during the first three months of 2013 to $0.91 from $2.18 for the same period last year. The decrease in diluted earnings per share was primarily attributable to:

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º a 2012 gain due to the acquisition of a controlling interest, sale or disposal of assets and interests in unconsolidated entities, and impairment charge on investment in unconsolidated entities, net of $494.8 million, or $1.39 per diluted share, primarily driven by a non-cash gain of $488.7 million resulting from the remeasurement of our previously held interest to fair value for those properties in which we now have a controlling interest,

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º increased interest expense in 2013 as discussed below,

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º partially offset by a 2013 gain due to the disposal of all of our interests in four community centers of $20.8 million, or $0.06 per diluted share,

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º improved operating performance and core business fundamentals in 2013 and the impact of our acquisition and expansion activity.

Core business fundamentals during the first three months of 2013 improved compared to the first three months of 2012, primarily driven by higher tenant sales and strong leasing activity. Our share of portfolio NOI grew by 15.3% for the three month period in 2013 over the prior year period. Comparable property NOI also grew 4.8% for our portfolio of U.S. malls and Premium Outlets. Total sales per square foot, or psf, increased 5.3% from $546 psf at March 31, 2012 to $575 psf at March 31, 2013 for theU.S. malls and Premium Outlets. Average base minimum rent for U.S. malls and Premium Outlets increased 3.0% to $41.05 psf as of March 31, 2013, from $39.87 psf as of March 31, 2012. Releasing spreads remained positive in the U.S. malls and Premium Outlets as we were able to lease available square feet at higher rents than the expiring rental rates on the same space, resulting in a releasing spread (based on total tenant payments - base minimum rent plus common area maintenance) of $7.00 psf ($59.11 openings compared to $52.11 closings) as of March 31, 2013, representing a 13.4% increase over expiring payments. Ending occupancy for the U.S. malls and Premium Outlets was 94.7% as of March 31, 2013, as compared to 93.6% as of March 31, 2012, an increase of 110 basis points.

Our effective overall borrowing rate at March 31, 2013 decreased 17 basis points to 5.02% as compared to 5.19% at March 31, 2012. This decrease was primarily due to a decrease in the effective overall borrowing rate on fixed rate debt of 29 basis points (5.33% at March 31, 2013 as compared to 5.62% at March 31, 2012) combined with a

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decrease in the effective overall borrowing rate on variable rate debt of 25 basis points (1.22% at March 31, 2013 as compared to 1.47% at March 31, 2012), offset in part by a shift in our debt portfolio to fixed rate debt from variable rate debt (which currently has a lower rate). At March 31, 2013, the weighted average years to maturity of our consolidated indebtedness was 6.0 years as compared to 5.9 years at December 31, 2012. Our financing activities for the three months ended March 31, 2013, included the redemption at par or repayment at maturity of $429.5 million of senior unsecured notes with fixed rates ranging from 5.30% to 6.00% and a repayment of $145.0 million on our $4.0 billion unsecured revolving credit facility, or Credit Facility.

United States Portfolio Data

The portfolio data discussed in this overview includes the following key operating statistics: ending occupancy, average base minimum rent per square foot, and total sales per square foot for our domestic assets. We include acquired properties in this data beginning in the year of acquisition and remove properties sold in the year disposed. For comparative purposes, we separate the information related to community/lifestyle centers and The Mills from our other U.S. operations. We also do not include any properties located outside of the United States.

The following table sets forth these key operating statistics for:

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º properties that are consolidated in our consolidated financial statements,

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º properties we account for under the equity method of accounting as joint ventures, and

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º the foregoing two categories of properties on a total portfolio basis.

                                            March 31,     March 31,     %/Basis Points
                                              2013          2012          Change(1)
U.S. Malls and Premium Outlets:
Ending Occupancy
Consolidated                                     94.6%         93.6%           +100 bps
Unconsolidated                                   95.3%         93.5%           +180 bps
Total Portfolio                                  94.7%         93.6%           +110 bps
Average Base Minimum Rent per Square
Consolidated                               $     38.84   $     37.86               2.6%
Unconsolidated                             $     49.00   $     47.93               2.2%
Total Portfolio                            $     41.05   $     39.87               3.0%
Total Sales per Square Foot
Consolidated                               $       556   $       529               5.1%
Unconsolidated                             $       658   $       630               4.4%
Total Portfolio                            $       575   $       546               5.3%
The Mills:
Ending Occupancy                                 97.3%         96.5%            +80 bps
Average Base Minimum Rent per Square
Foot                                       $     22.81   $     21.93               4.0%
Total Sales per Square Foot                $       516   $       491               5.1%
Community/Lifestyle Centers:
Ending Occupancy                                 93.9%         93.1%            +80 bps
Average Base Minimum Rent per Square
Foot                                       $     14.33   $     13.78               4.0%

   º (1)

º Percentages may not recalculate due to rounding. Percentage and basis point changes are representative of the change from the comparable prior period.

Ending Occupancy Levels and Average Base Minimum Rent per Square Foot. Ending occupancy is the percentage of gross leasable area, or GLA, which is leased as of the last day of the reporting period. We include all company owned space except for mall anchors and mall majors in the calculation. Base minimum rent per square foot is the average base minimum rent charge in effect for the reporting period for all tenants that would qualify to be included in ending occupancy.

Total Sales per Square Foot. Total sales include total reported retail tenant sales on a trailing 12-month basis at owned GLA (for mall stores with less than 10,000 square feet) in the malls and all reporting tenants at the Premium

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Outlets and The Mills. Retail sales at owned GLA affect revenue and profitability levels because sales determine the amount of minimum rent that can be charged, the percentage rent realized, and the recoverable expenses (common area maintenance, real estate taxes, etc.) that tenants can afford to pay.

Current Leasing Activities

During the three months ended March 31, 2013, we signed 233 new leases and 446 renewal leases with a fixed minimum rent (excluding mall anchors and majors, new development, redevelopment, expansion, downsizing and relocation) across our U.S. malls and Premium Outlets portfolio, comprising approximately 1.9 million square feet of which 1.4 million square feet related to consolidated properties. During the comparable period in 2012, we signed 276 new leases and 517 renewal leases, comprising approximately 2.7 million square feet of which 2 million square feet related to consolidated properties. The average annual initial base minimum rent for new leases was $43.71 psf in 2013 and $40.80 psf in 2012 with an average tenant allowance on new leases of $40.30 psf and $44.86 psf, respectively.

     International Property Data

      The following are selected key operating statistics for our Premium
Outlets in Japan. The information used to prepare these statistics has been
supplied by the managing venture partner.

                                             March 31,     March 31,     %/Basis point
                                               2013          2012           Change
Ending Occupancy                                  99.4%         99.9%           -50 bps
Total Sales per Square Foot                 ¥    89,298   ¥    89,875            -0.64%
Average Base Minimum Rent per Square Foot   ¥     4,808   ¥     4,828            -0.41%

Results of Operations

In addition to the activity discussed above in the "Results Overview" section, the following acquisitions, openings, and dispositions of consolidated properties affected our consolidated results from continuing operations in the comparative periods:

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º During the first quarter of 2013, we disposed of our interest in one community center.

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º During 2012, we disposed of one mall, two community centers and six of our non-core retail properties.

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º On December 4, 2012, we acquired the remaining 50% noncontrolling interest in two previously consolidated outlet properties located in Livermore, California, and Grand Prairie, Texas, which opened on November 8, 2012 and August 16, 2012, respectively.

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º On June 14, 2012, we opened Merrimack Premium Outlets, a 410,000 square foot outlet center located in Hillsborough County, serving the Greater Boston and Nashua markets.

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º On March 29, 2012, Opry Mills re-opened after completion of the restoration of the property following the significant flood damage which occurred in May 2010.

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º On March 22, 2012, we acquired; through an acquisition of substantially all of the assets of The Mills Limited Partnership, or TMLP, additional interests in 26 joint venture properties, in a transaction we refer to as the Mills transaction. Nine of these properties became consolidated properties at the acquisition date.

In addition to the activities discussed above and in "Results Overview," the following acquisitions, dispositions and openings of joint venture properties affected our income from unconsolidated entities in the comparative periods:

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º During the first quarter of 2013, we acquired rights to the remaining interests in three community centers and subsequently disposed of our interests in those properties.

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º During 2012, we disposed of our interests in three non-core retail properties and one mall.

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º On December 31, 2012, we contributed The Shops at Mission Viejo, a wholly-owned property, to a newly formed joint venture in exchange for an interest in Woodfield Mall, a property contributed to the same joint venture by our joint venture partner.

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º •
º On October 19, 2012, we opened Tanger Outlets in Texas City, a 350,000 square foot upscale outlet center located in Texas City, Texas. This new center is a joint venture with Tanger Factory Outlet Centers, Inc. in which we have a 50% noncontrolling interest.

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º On June 4, 2012, we acquired a 50% interest in a 465,000 square foot outlet center located in Destin, Florida.

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º As discussed above, on March 22, 2012, we acquired additional interests in 26 joint venture properties in the Mills transaction. Of these 26 properties, 16 remain unconsolidated.

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º On March 14, 2012, we acquired a 28.7% equity stake in Klépierre. On May 21, 2012, Klépierre paid a dividend, which we elected to receive in additional shares, increasing our ownership to approximately 28.9%.

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º On January 9, 2012, we sold our entire ownership interest in Gallerie Commerciali Italia, S.p.A, or GCI, a joint venture which at the time owned 45 properties located in Italy to our venture partner, Auchan S.A.

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º On January 6, 2012, we acquired an additional 25% interest in Del Amo Fashion Center.

For the purposes of the following comparison between the three months ended March 31, 2013 and 2012, the above transactions are referred to as the property transactions. In the following discussions of our results of operations, "comparable" refers to properties we owned and operated in both of the periods under comparison.

Three Months Ended March 31, 2013 vs. Three Months Ended March 31, 2012

Minimum rents increased $75.8 million during 2013, of which the property transactions accounted for $54.2 million of the increase. Comparable rents increased $21.6 million, or 3.2%, primarily attributable to a $21.3 million increase in base minimum rents. Overage rents increased $10.0 million, or 36.2%, as a result of the property transactions and an increase in tenant sales in 2013 compared to 2012 at the comparable properties of $6.6 million.

Tenant reimbursements increased $32.6 million, due to a $22.8 million increase attributable to the property transactions and a $9.8 million, or 3.3%, increase in the comparable properties primarily due to annual increases related to common area maintenance and real estate tax reimbursements.

Total other income decreased $19.8 million, principally as a result of the following:

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º an $8.3 million decrease in interest income related to the repayment of related party loans and loans held for investment,

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º a $7.6 million decrease in lease settlement income due to a higher number of terminated leases in the first quarter of 2012,

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º a $4.8 million decrease in financing and other fee revenue earned from joint ventures net of eliminations,

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º partially offset by a $0.9 million increase of net other activity.

Depreciation and amortization expense increased $31.5 million primarily due to the additional depreciable assets related to the property transactions.

Real estate tax expense increased $11.0 million primarily due to an $8.0 million increase related to the property transactions.

Repairs and maintenance expense increased $4.1 million primarily as a result of increased snow removal costs compared to the prior year period.

Interest expense increased $26.9 million primarily due to an increase of $20.6 million related to the property transactions. The remainder of the increase resulted from borrowings on the Euro tranche of the Credit Facility, and the issuance of unsecured notes in the first and fourth quarters of 2012. These increases were partially offset by decreased interest expense related to the repayment of $536.2 million of mortgages at 19 properties in 2012, the payoff of $429.5 million of unsecured notes in 2013 and $231.0 million of unsecured notes in 2012, and the repayment of $145.0 million on the US tranche of the Credit Facility in the first quarter of 2013.

Income and other taxes increased $11.2 million due to withholding taxes on dividends from certain of our international investments and an increase in state income taxes.

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Income from unconsolidated properties increased $23.9 million primarily due to the increase in ownership in the joint venture properties acquired as part of the Mills transaction and the 2012 acquisition of an equity stake in Klépierre, and favorable results of operations from the portfolio of joint venture properties.

During the first quarter of 2013, we acquired rights to the remaining interests in three unconsolidated community centers and subsequently disposed of those properties. Additionally, we disposed of our interest in another community center. The aggregate gain recognized on these transactions was approximately $20.8 million. During the first quarter of 2012, we disposed of our interest in GCI for a gain of $28.8 million and acquired a controlling interest in nine properties previously accounted for under the equity method in the Mills transaction which resulted in the recognition of a non-cash gain of $488.7 million. In addition, we recorded an other-than-temporary impairment charge of $22.4 million on our remaining investment in SPG-FCM Ventures, LLC, or SPG-FCM, which holds our investment in TMLP, representing the excess of carrying value over the estimated fair value.

Net income attributable to noncontrolling interests decreased $85.1 million primarily due to a decrease in the net income of the Operating Partnership.

Liquidity and Capital Resources

Because we own primarily long-lived income-producing assets, our financing strategy relies primarily on long-term fixed rate debt. We minimize the use of floating rate debt and enter into floating rate to fixed rate interest rate swaps. Floating rate debt currently comprises only 7.5% of our total consolidated debt at March 31, 2013, as adjusted to reflect outstanding interest rate swaps. We also enter into interest rate protection agreements to manage our interest rate risk. We derive most of our liquidity from leases that generate positive net cash flow from operations and distributions of capital from unconsolidated entities that totaled $749.2 million during the three months ended March 31, 2013. In addition, the Credit Facility and the $2.0 billion supplemental unsecured revolving credit facility, or Supplemental Facility, provide alternative sources of liquidity as our cash needs vary from time to time. Borrowing capacity under each of these facilities can be increased at our sole option as discussed further below.

Our balance of cash and cash equivalents decreased $354.6 million during the first three months of 2013 to $830.0 million as of March 31, 2013 as further discussed under "Cash Flows" below.

On March 31, 2013, we had an aggregate available borrowing capacity of $4.6 billion under the Credit Facility and the Supplemental Facility, net of outstanding borrowings of $1.4 billion and letters of credit of $45.1 million. For the three months ended March 31, 2013, the maximum amount outstanding under the Credit Facility and Supplemental Facility was $1.6 billion and the weighted average amount outstanding was $1.5 billion. The weighted average interest rate was 1.06% for the three months ended March 31, 2013.

We and the Operating Partnership have historically had access to public equity and long term unsecured debt markets and access to secured debt and private equity from institutional investors at the property level.

Our business model and status as a REIT requires us to regularly access the debt markets to raise funds for acquisition, development and redevelopment activity, and to refinance maturing debt. We may also, from time to time, access the equity capital markets to accomplish our business objectives. We believe we have sufficient cash on hand and availability under the Credit Facility and the Supplemental Facility to address our debt maturities and capital needs through 2013.

Loan to SPG-FCM

As discussed in Note 5 to the condensed notes to consolidated financial statements, the loan to SPG-FCM was extinguished in the Mills transaction. During the three month period ended March 31, 2012, we recorded approximately $2.0 million in interest income (net of inter-entity eliminations), related to this loan.

Cash Flows

Our net cash flow from operating activities and distributions of capital from unconsolidated entities for the three months ended March 31, 2013 totaled $749.2 million. In addition, we had net repayments from our debt financing and repayment activities of $473.3 million in 2013. These activities are further discussed below under "Financing and Debt." During the first three months of 2013, we or the Operating Partnership also:

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º paid stockholder dividends and unitholder distributions totaling $416.3 million,

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º •
º paid preferred stock dividends and preferred unit distributions totaling $1.3 million,

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º funded consolidated capital expenditures of $199.9 million (includes development and other costs of $29.2 million, renovation and expansion costs of $108.4 million, and tenant costs and other operational capital expenditures of $62.3 million), and

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º funded investments in unconsolidated entities of $15.7 million and loans to related parties of $18.4 million.

In general, we anticipate that cash generated from operations will be sufficient to meet operating expenses, monthly debt service, recurring capital expenditures, and dividends to stockholders necessary to maintain our REIT qualification on a long-term basis. In addition, we expect to be able to generate or obtain capital for nonrecurring capital expenditures, such as acquisitions, major building renovations and expansions, as well as for scheduled principal maturities on outstanding indebtedness, from:

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º excess cash generated from operating performance and working capital reserves,

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º borrowings on our credit facilities,

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º additional secured or unsecured debt financing, or

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º additional equity raised in the public or private markets.

We expect to generate positive cash flow from operations in 2013, and we consider these projected cash flows in our sources and uses of cash. These cash flows are principally derived from rents paid by our retail tenants. A . . .

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