Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SPG > SEC Filings for SPG > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for SIMON PROPERTY GROUP INC /DE/

Form 10-Q for SIMON PROPERTY GROUP INC /DE/


7-Aug-2014

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.

Overview

Simon Property Group, Inc., or Simon, 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, the Operating Partnership, and its subsidiaries.

We own, develop and manage retail real estate properties, which consist primarily of malls, Premium Outlets®, and The Mills®. As of June 30, 2014, we owned or held an interest in 208 income-producing properties in the United States, which consisted of 115 malls, 66 Premium Outlets, 13 Mills, and 14 other shopping centers or outlet centers in 37 states and Puerto Rico. We have several Premium Outlets under development and have redevelopment and expansion projects, including the addition of anchors and big box tenants, underway at more than 30 properties in the U.S., Asia, and Mexico. Internationally, as of June 30, 2014, we had ownership interests in nine Premium Outlets in Japan, three Premium Outlets in South Korea, one Premium Outlet in Canada, one Premium Outlet in Mexico, and one Premium Outlet in Malaysia. As of June 30, 2014, we had noncontrolling ownership interests in five outlet properties in Europe through our joint venture with McArthurGlen. Of the five properties, two are located in Italy and one each is located in Austria, the Netherlands, and the United Kingdom. Additionally, as of June 30, 2014, 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, shopping centers located in 13 countries in Europe.

On May 28, 2014, as further discussed in Note 3, we completed the spin-off of our interests in 98 properties comprised of substantially all of our strip center business and our smaller enclosed malls to Washington Prime Group Inc., or Washington Prime, an independent, publicly traded REIT. The historical results of operations of the Washington Prime properties as well as the related assets and liabilities are presented as discontinued operations in the accompanying consolidated financial statements.

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

º •
º base minimum rents,

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

º •
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:

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

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

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

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

º •
º selling selective non-core assets.

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

º •
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


Table of Contents

bank-issued prepaid cards), national marketing alliances, static and digital media initiatives, business development, sponsorship, and events,

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

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

º •
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 redevelop 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:

º •
º provide the capital necessary to fund growth,

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

º •
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 increased $0.40 during the first six months of 2014 to $2.41 from $2.01 for the same period last year. The increase in diluted earnings per share was primarily attributable to:

º •
º improved operating performance and core business fundamentals in 2014 and the impact of our acquisition and expansion activity,

º •
º decreased interest expense in 2014 as further discussed below,

º •
º increased lease settlement and land sale activity as further discussed below, and

º •
º a 2014 gain on acquisitions and disposals primarily related to Klépierre's sale of a portfolio of 126 retail galleries of which our share was $136.5 million, or $0.38 per diluted share,

º •
º partially offset by 2013 gains on disposals and a gain on the acquisition of a controlling interest in an outlet center of $88.8 million, or $0.25 per diluted share, and

º •
º transaction expenses related to the spin-off of Washington Prime of $38.2 million, or $0.10 per diluted share.

Core business fundamentals during the first six months of 2014 improved compared to the first six months of 2013, primarily driven by strong leasing activity. Our share of portfolio NOI grew by 6.5% for the six month period in 2014 over the prior year period. Comparable property NOI also grew 5.5% for our portfolio of U.S. Malls, Premium Outlets, and The Mills. Total sales per square foot, or psf, decreased 0.6% from $612 psf at June 30, 2013 to $608 psf at June 30, 2014 for the U.S. Malls and Premium Outlets primarily as a result of the addition of incremental square footage. Total sales volume reported by all of our tenants, excluding anchors, increased 3.1% on a trailing twelve month basis. Average base minimum rent for U.S. Malls and Premium Outlets increased 4.3% to $45.83 psf as of June 30, 2014, from $43.94 psf as of June 30, 2013. 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 $11.06 psf ($66.28 openings compared to $55.22 closings) as of June 30, 2014, representing a 20.0% increase over expiring payments. Ending


Table of Contents

occupancy for the U.S. Malls and Premium Outlets was 96.5% as of June 30, 2014, as compared to 96.1% as of June 30, 2013, an increase of 40 basis points.

Our effective overall borrowing rate at June 30, 2014 on our consolidated indebtedness decreased 41 basis points to 4.58% as compared to 4.99% at June 30, 2013. This decrease was primarily due to a decrease in the effective overall borrowing rate on fixed rate debt of 43 basis points (4.88% at June 30, 2014 as compared to 5.31% at June 30, 2013). At June 30, 2014, the weighted average years to maturity of our consolidated mortgage indebtedness was 4.2 years as compared to 5.4 years at December 31, 2013. Our financing activities for the six months ended June 30, 2014, included the redemption at par or repayment at maturity of $716.1 million of senior unsecured notes with fixed rates ranging from 4.90% to 6.75%, a net repayment of $300.0 million on our $4.0 billion unsecured revolving credit facility, or Credit Facility, and repayment of $1.1 billion in mortgage notes unencumbering two properties.

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 disposed properties in the year of disposition. The Washington Prime properties have been removed from the portfolio data for all periods presented. For comparative purposes, we separate the information related to 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:

º •
º properties that are consolidated in our consolidated financial statements,

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

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

                                                                       %/Basis Points
                                       June 30, 2014   June 30, 2013     Change (1)
U.S. Malls and Premium Outlets:
Ending Occupancy
Consolidated                               96.9%           96.2%          +70 bps
Unconsolidated                             95.5%           95.5%             -
Total Portfolio                            96.5%           96.1%          +40 bps
Average Base Minimum Rent per Square
Foot
Consolidated                              $44.46          $42.03            5.8%
Unconsolidated                            $49.66          $49.82           -0.3%
Total Portfolio                           $45.83          $43.94            4.3%
Total Sales per Square Foot
Consolidated                               $596            $598            -0.3%
Unconsolidated                             $650            $666            -2.3%
Total Portfolio                            $608            $612            -0.6%
The Mills:
Ending Occupancy                           98.0%           97.9%          +10 bps
Average Base Minimum Rent per Square
Foot                                      $24.78          $23.17            6.9%
Total Sales per Square Foot                $529            $519             2.1%


--------------------------------------------------------------------------------
   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, mall majors, mall freestanding and mall outlots 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.


Table of Contents

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 The Mills and all reporting tenants in the Premium Outlets. 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 six months ended June 30, 2014, we signed 402 new leases and 939 renewal leases (excluding mall anchors and majors, new development, redevelopment, expansion, downsizing and relocation) with a fixed minimum rent across our U.S. Malls and Premium Outlets portfolio, comprising approximately 4.2 million square feet of which 3.0 million square feet related to consolidated properties. During the comparable period in 2013, we signed 456 new leases and 752 renewal leases, comprising approximately 3.5 million square feet of which 2.5 million square feet related to consolidated properties. The average annual initial base minimum rent for new leases was $56.14 per square foot in 2014 and $49.36 per square foot in 2013 with an average tenant allowance on new leases of $36.79 per square foot and $35.12 per square foot, 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.

                                               June 30,   June 30,   %/Basis point
                                                 2014       2013        Change
   Ending Occupancy                             99.5%      99.4%        +10 bps
   Total Sales per Square Foot                 ¥91,869    ¥89,935        2.2%
   Average Base Minimum Rent per Square Foot    ¥4,913     ¥4,838        1.6%

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:

º •
º On January 30, 2014, we acquired the remaining 50% interest in the previously unconsolidated Arizona Mills from our joint venture partner.

º •
º On January 10, 2014, we acquired one of our partner's redeemable interests in a portfolio of ten properties, seven of which we had previously consolidated.

º •
º On October 10, 2013, we re-opened the redeveloped The Shops at Nanuet, a 750,000 square foot open-air, state-of-the-art main street center located in Nanuet, New York.

º •
º On May 30, 2013, we acquired a 390,000 square foot outlet center located near Portland, Oregon.

º •
º On April 4, 2013, we opened Phoenix Premium Outlets in Chandler, Arizona, a 360,000 square foot upscale outlet center.

º •
º During 2013, we disposed of two malls, four community centers, and two non-core retail properties.

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:

º •
º On April 16, 2014, Klépierre disposed of a portfolio of 126 properties located in France, Spain, and Italy as further discussed in Note 5.

º •
º On April 10, 2014, we acquired an additional 22.5% noncontrolling interest in Ashford Designer Outlet, increasing our ownership interest in this property to 45%.


Table of Contents

º •
º On January 10, 2014, as discussed above, we acquired one of our partner's redeemable interests in a portfolio of ten properties, seven of which were consolidated and three were unconsolidated prior to the transaction. The three unconsolidated properties remained unconsolidated following the transaction.

º •
º On October 16, 2013, we acquired noncontrolling interests in portions of four Designer Outlets, which include Parndorf (Vienna, Austria), La Reggia (Naples, Italy), Noventa di Piave (Venice, Italy), and Roermond (Roermond, Netherlands), through our joint venture with McArthurGlen.

º •
º On August 29, 2013, we and our partner, Shinsegae Group, opened Busan Premium Outlets, a 360,000 square foot outlet located in Busan, South Korea.

º •
º On August 22, 2013, we and our partner, Woodmont Outlets, opened St. Louis Premium Outlets, a 350,000 square foot outlet center. We have a 60% noncontrolling interest in this new center.

º •
º On August 2, 2013, through our joint venture with McArthurGlen, we acquired a 22.5% noncontrolling interest in Ashford Designer Outlet located in Kent, UK.

º •
º On August 1, 2013, we and our partner, Calloway Real Estate Investment Trust, opened Toronto Premium Outlets in Canada, a 360,000 square foot outlet center serving the Greater Toronto area.

º •
º On April 19, 2013, we and our partner, Mitsubishi Estate Co., LTD., opened Shisui Premium Outlets, a 230,000 square foot outlet center located in Shisui (Chiba), Japan.

For the purposes of the following comparison between the six months ended June 30, 2014 and 2013, 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 June 30, 2014 vs. Three months ended June 30, 2013

Minimum rents increased $53.8 million during 2014, of which the property transactions accounted for $10.2 million of the increase. Comparable rents increased $43.6 million, or 6.8%, primarily attributable to an increase in base minimum rents.

Tenant reimbursements increased $34.9 million, due to a $5.5 million increase attributable to the property transactions and a $29.4 million, or 10.2%, increase in the comparable properties primarily due to annual fixed contractual increases related to common area maintenance and additional marketing recoveries as a result of costs incurred during our property rebranding initiative.

Total other income increased $5.9 million, principally as a result of a $4.3 million increase in land sale activity.

Advertising and promotion increased $10.6 million primarily as a result of costs incurred during our property rebranding initiative.

Provision for (recovery of) credit losses increased $2.9 million as a result of increased reserves due to an increase in tenant bankruptcies and a decrease in recoveries as compared to 2013. The 2014 expense is in line with longer term historical levels.

Home and regional office costs increased $8.0 million primarily related to higher personnel costs including one-time items related to the spin-off of Washington Prime.

Interest expense decreased $11.3 million primarily due to the net impact of the financing activities and reduction in the effective overall borrowing rate as previously discussed.

Income and other taxes decreased $2.3 million primarily due to a decrease in state income taxes.

During the quarter ended June 30, 2014, we recorded a gain of $133.9 million related to Klépierre's sale of a portfolio of 126 properties. During the quarter ended June 30, 2013, we disposed of our interest in one mall and recorded a gain on the acquisition of an outlet center resulting in an aggregate gain of $68.1 million.

Discontinued operations decreased $15.4 million due to the 2014 period including approximately two months ownership of the Washington Prime properties, whereas the 2013 period included three full months of ownership. In 2014, we also incurred $38.2 million in transaction costs related to the Washington Prime spin-off.


Table of Contents

Net income attributable to noncontrolling interests increased $10.3 million due to an increase in the net income of the Operating Partnership.

Six months ended June 30, 2014 vs. Six months ended June 30, 2013

Minimum rents increased $103.2 million during 2014, of which the property transactions accounted for $20.5 million of the increase. Comparable rents increased $82.7 million, or 6.4%, primarily attributable to an increase in base minimum rents.

Tenant reimbursements increased $66.8 million, due to a $7.8 million increase attributable to the property transactions and a $59.0 million, or 10.5%, increase in the comparable properties primarily due to utility reimbursements, annual fixed contractual increases related to common area maintenance and additional marketing recoveries as a result of costs incurred during our property rebranding initiative.

Total other income increased $23.5 million, principally as a result of a $10.1 million increase in lease settlement income and a $11.1 million increase in land sale activity.

Property operating expense increased $10.0 million primarily as a result of increased utility expenses partially due to the harsh winter.

Repairs and maintenance expense increased $5.5 million primarily due to increased snow removal costs compared to the prior year.

Advertising and promotion increased $14.1 million primarily as a result of costs incurred during our property rebranding initiative.

Provision for (recovery of) credit losses increased $5.3 million as a result of increased reserves due to an increase in tenant bankruptcies and a decrease in recoveries as compared to 2013. The 2014 expense is in line with longer term historical levels.

Home and regional office costs increased $8.4 million primarily related to higher personnel costs including one-time items related to the spin-off of Washington Prime.

Other expenses increased $3.5 million primarily due to increased legal and professional fees.

Interest expense decreased $28.4 million primarily due to the net impact of the financing activities and reduction in the effective overall borrowing rate as previously discussed.

Income and other taxes decreased $8.6 million primarily due to taxes related to certain of our international investments and a decrease in state income taxes.

During the six months ended June 30, 2014, we recorded a $133.9 million gain related to Klépierre's sale of a portfolio of 126 properties. Additionally, we acquired the remaining 50% interest in Arizona Mills from our joint venture partner. The property was previously accounted for under the equity method and we recognized a non-cash gain upon consolidation of this property. The aggregate gain recognized on these transactions was $136.5 million. During the six months ended June 30, 2013, we disposed of our interest in one community center, one mall, one retail property and recorded a gain on the acquisition of an outlet center. The aggregate gain recognized on these transactions was approximately $74.7 million.

Discontinued operations decreased $29.7 million due to the 2014 period including approximately five months ownership of the Washington Prime properties, whereas the 2013 period included six full months of ownership. The 2013 activity also includes a $14.2 million gain on the disposal of three strip centers held within a joint venture portfolio of Washington Prime properties. Additionally, on February 28, 2014 one strip center was sold by that same joint venture for a gain of $0.2 million. In 2014, we also incurred $38.2 million in transaction costs related to the Washington Prime spin-off.

Net income attributable to noncontrolling interests increased $18.4 million due to an increase in the net income of the Operating Partnership.

Liquidity and Capital Resources

Because we own long-lived income-producing assets, our financing strategy relies primarily on long-term fixed rate debt. Floating rate debt currently comprises only 8.0% of our total consolidated debt at June 30, 2014. We also enter into interest rate protection agreements to manage our interest rate risk. We derive most of our liquidity from positive net


Table of Contents

cash flow from operations and distributions of capital from unconsolidated entities that totaled $1.6 billion during the six months ended June 30, 2014. 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 from continuing operations decreased $25.2 million during the first six months of 2014 to $1.7 billion as of June 30, 2014 as further discussed under "Cash Flows" below.

On June 30, 2014, we had an aggregate available borrowing capacity of $5.1 billion under the two credit facilities, net of outstanding borrowings of $871.7 million and letters of credit of $41.8 million. For the six months ended June 30, 2014, the maximum amount outstanding under the two credit facilities was $1.2 billion and the weighted average amount outstanding was $923.0 million. The weighted average interest rate was 1.08% for the six months ended June 30, 2014.

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 2014.

Cash Flows

Our net cash flow from operating activities and distributions of capital from unconsolidated entities for the six months ended June 30, 2014 totaled $1.6 billion. In addition, we had net repayments from our debt financing and . . .

  Add SPG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SPG - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.