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 Delawarecorporation 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, 2014, we owned or held an interest in 307 income-producing properties in the United States, which consisted of 156 malls, 66 Premium Outlets, 61 community/lifestyle centers, 13 Mills, and 11 other shopping centers or outlet centers in 38 states and Puerto Rico. We have several Premium Outletsunder development and have redevelopment and expansion projects, including the addition of anchors and big box tenants, underway at more than 25 properties in the U.S., Asia, and Mexico. Internationally, as of March 31, 2014, we had ownership interests in nine Premium Outletsin Japan, three Premium Outletsin South Korea, one Premium Outletin Canada, one Premium Outletin Mexico, and one Premium Outletin Malaysia. In 2013, we acquired noncontrolling interests in five operating properties in Europethrough our joint venture with McArthurGlen. Of the five properties, two are located in Italyand one each is located in Austria, the Netherlands, and the United Kingdom. Additionally, as of March 31, 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 December 13, 2013, we announced a plan to spin off our interests in 98 properties comprised of substantially all of our strip center business and our smaller enclosed malls into an independent, publicly traded REIT ( Washington Prime Group Inc., or Washington Prime). The spin-off is expected to be effectuated through a pro rata special distribution of all of the outstanding common shares of Washington Prime to holders of Simon Property common stock as of the distribution record date, and is intended to qualify as a tax-free distribution for U.S. federal income tax purposes. At the time of the separation and distribution, Washington Prime will own a percentage of the outstanding units of partnership interest of Washington Prime Group, L.P.that is approximately equal to the percentage of outstanding units of partnership interest of the Operating Partnership, or units, owned by Simon Property. The remaining units of Washington Prime Group. L.P. will be owned by limited partners of the Operating Partnership. We expect the transaction will become effective by the end of May 2014. The transaction is subject to certain conditions, including declaration by the U.S. Securities and Exchange Commissionthat Washington Prime's registration statement on Form 10 is effective, filing and approval of Washington Prime's listing application on the New York Stock Exchange, customary third party consents, and formal approval and declaration of the distribution by our Board of Directors, not all of which have occurred prior to the date of this filing. We may, at any time and for any reason until the proposed transaction is complete, abandon the spin-off or modify or change its terms.
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 attracting and retaining high quality tenants and utilizing economies
of scale to reduce operating expenses,
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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 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 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, 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.
Diluted earnings per common share increased
$0.19during the first three months of 2014 to $1.10from $0.91for 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
º a 2014 non-cash gain due to the acquisition of a controlling interest,
and sale or disposal of assets and interests in unconsolidated entities, net of
$2.9 million, or $0.01per diluted share, º º partially offset by a 2013 gain due to the sale or disposal of our
interests in four properties of
$20.8 million, or $0.06per diluted share. Core business fundamentals during the first three months of 2014 improved compared to the first three months of 2013, primarily driven by strong leasing activity. Our share of portfolio NOI grew by 9.1% for the three month period in 22
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2014 over the prior year period. Comparable property NOI also grew 3.7% for our portfolio of
U.S. Malls and Premium Outlets. Total sales per square foot, or psf, increased 0.2% from $575psf at March 31, 2013to $576psf at March 31, 2014for the U.S. Malls and Premium Outlets. Average base minimum rent for U.S. Malls and Premium Outletsincreased 4.2% to $42.77psf as of March 31, 2014, from $41.05psf as of March 31, 2013. Releasing spreads remained positive in the U.S. Malls and Premium Outletsas 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 $9.90psf ( $60.79openings compared to $50.89closings) as of March 31, 2014, representing a 19.5% increase over expiring payments. Ending occupancy for the U.S. Malls and Premium Outletswas 95.5% as of March 31, 2014, as compared to 94.7% as of March 31, 2013, an increase of 80 basis points. Our effective overall borrowing rate at March 31, 2014on our consolidated indebtedness decreased 32 basis points to 4.70% as compared to 5.02% at March 31, 2013. This decrease was primarily due to a decrease in the effective overall borrowing rate on fixed rate debt of 40 basis points (4.93% at March 31, 2014as compared to 5.33% at March 31, 2013) slightly offset by an increase in the effective overall borrowing rate on variable rate debt of two basis points (1.24% at March 31, 2014as compared to 1.22% at March 31, 2013). At March 31, 2014, the weighted average years to maturity of our consolidated indebtedness was 5.8 years as compared to 5.4 years at December 31, 2013. Our financing activities for the three months ended March 31, 2014, included the redemption at par or repayment at maturity of $716.1 millionof senior unsecured notes with fixed rates ranging from 4.90% to 6.75%, a net repayment of $300.0 millionon our $4.0 billionunsecured revolving credit facility, or Credit Facility, and repayment of $1.1 billionin mortgage notes unencumbering two properties, partially offset by $370.0 millionin new mortgage loan borrowings on six previously unencumbered properties which are expected to become part of the Washington Prime portfolio. 23
Table of Contents 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. 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: 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 March 31, 2014 March 31, 2013 Change (1) U.S. Malls and Premium Outlets: Ending Occupancy Consolidated 95.6% 94.6% +100 bps Unconsolidated 95.1% 95.3% -20 bps Total Portfolio 95.5% 94.7% +80 bps Average Base Minimum Rent per Square Foot Consolidated $40.63 $38.844.6% Unconsolidated $50.23 $49.002.5% Total Portfolio $42.77 $41.054.2% Total Sales per Square Foot Consolidated $556 $556- Unconsolidated $660 $6580.3% Total Portfolio $576 $5750.2% The Mills: Ending Occupancy 97.7% 97.3% +40 bps Average Base Minimum Rent per Square Foot $24.51 $22.817.5% Total Sales per Square Foot $530 $5162.6% Community/Lifestyle Centers: Ending Occupancy 94.5% 93.9% +60 bps Average Base Minimum Rent per Square Foot $14.72 $14.332.7%
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. 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 three months ended
March 31, 2014, we signed 229 new leases and 494 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 Outletsportfolio, comprising approximately 2.3 million square feet of which 1.8 million square feet related to consolidated properties. During the comparable period in 2013, we signed 233 new leases and 446 renewal leases, comprising approximately 1.9 million square feet of which 1.4 million square feet related to consolidated properties. The average annual initial base minimum rent for new leases was $54.20per square foot in 2014 and $43.71per square foot in 2013 with an average tenant allowance on new leases of $38.75per square foot and $40.30per square foot, respectively. 24
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The following are selected key operating statistics for our
March 31, March 31, %/Basis point 2014 2013 Change Ending Occupancy 99.3% 99.4% -10 bps Total Sales per Square Foot ¥92,198 ¥88,643 4.01%
Average Base Minimum Rent per Square Foot ¥4,883 ¥4,808 1.56%
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 September 27, 2013, we re-opened the redeveloped University Town
Plaza, a 580,000 square foot community center located in
Florida. 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 Outletsin 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
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 During the three months ended March 31, 2014, we disposed of our interest in one community center. º
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 noncontrolling interest in
Ashford Designer Outletlocated in Kent, UK.
Toronto Premium Outletsin Canada, a 360,000 square foot outlet center serving the Greater Torontoarea. 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. 25
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º During 2013, we increased our economic interest in three community
centers and subsequently disposed of our interests in those properties. We also disposed of our interest in three non-core retail properties.
For the purposes of the following comparison between the three months ended
March 31, 2014and 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
Minimum rents increased
Tenant reimbursements increased
$33.7 million, due to a $2.6 millionincrease attributable to the property transactions and a $31.1 million, or 9.8%, increase in the comparable properties primarily due to utility reimbursements and annual fixed contractual increases related to common area maintenance.
Total other income increased
º º a
$9.4 millionincrease in lease settlement income, º º a $7.5 millionincrease in land sale activity, and º º $1.4 millionof net other activity.
Property operating expense increased
Repairs and maintenance expense increased
Provision for credit losses increased
Other expenses increased
Interest expense decreased
$16.9 millionprimarily 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
During the three months ended
March 31, 2014, 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 gain upon consolidation of this property. Additionally, we disposed of our interest in one unconsolidated property. The aggregate gain recognized on these transactions was $2.9 million. During the three months ended March 31, 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.
Net income attributable to noncontrolling interests increased
Liquidity and Capital Resources
Because we own 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 may enter into floating rate to fixed rate interest rate swaps. Floating rate debt currently comprises only 6.3% of our total consolidated debt at
March 31, 2014. We also enter into interest rate protection agreements to manage our interest rate risk. We derive most of our liquidity from positive net cash flow from operations and distributions of capital from unconsolidated entities that totaled $786.1 millionduring the three months ended March 31, 2014. In addition, the Credit Facility and the $2.0 billionsupplemental 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. 26
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Our balance of cash and cash equivalents decreased
$703.5 millionduring the first three months of 2014 to $1.0 billionas of March 31, 2014as further discussed under "Cash Flows" below. On March 31, 2014, we had an aggregate available borrowing capacity of $5.1 billionunder the two credit facilities, net of outstanding borrowings of $873.7 millionand letters of credit of $41.7 million. For the three months ended March 31, 2014, the maximum amount outstanding under the two credit facilities was $1.2 billionand the weighted average amount outstanding was $973.2 million. The weighted average interest rate was 1.12% for the three months ended March 31, 2014.
We and the
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 three months ended
March 31, 2014totaled $786.1 million. In addition, we had net repayments from our debt financing and repayment activities of $579.5 millionin 2014. These activities are further discussed below under "Financing and Debt." During the first three months of 2014, we or the Operating Partnershipalso:
º funded the acquisition of one of our partner's remaining redeemable
interests in a portfolio of ten properties, acquired the remaining 50%
ownership interest in Arizona Mills from our joint venture partner,
and acquired an undeveloped land parcel, the aggregate cash portion of
$175.3 million, º º paid stockholder dividends and unitholder distributions totaling $454.0 million, º
º funded consolidated capital expenditures of
development and other costs of
$3.6 million, redevelopment and expansion costs of $140.0 million, and tenant costs and other operational capital expenditures of $64.1 million), and º º funded investments in unconsolidated entities of $45.9 millionand construction loans to joint ventures of $13.4 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 redevelopments and expansions, as well as for scheduled principal maturities on outstanding indebtedness, from:
º excess cash generated from operating performance and working capital
reserves, º º borrowings on our credit facilities, º º additional secured or unsecured debt financing, or º º additional equity raised in the public or private markets. We expect to generate positive cash flow from operations in 2014, 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 significant deterioration in projected cash flows from operations could cause us to increase our reliance on available funds from our credit facilities, curtail planned capital expenditures, or seek other additional sources of financing as discussed above. 27
Table of Contents Financing and Debt Unsecured Debt
March 31, 2014, our unsecured debt consisted of $14.4 billionof senior unsecured notes of the Operating Partnership, net of discounts, $657.4 millionoutstanding under the Operating Partnership'sCredit Facility, $216.4 millionoutstanding under the Operating Partnership'sSupplemental Facility, and $240.0 millionoutstanding under an unsecured term loan. At March 31, 2014, the Credit Facility had a capacity of $4.0 billionincluding a $2.0 billionmulti-currency tranche, an initial maturity of October 30, 2015, an interest rate of LIBORplus 95 basis points and an additional facility fee of 15 basis points. In addition, the Credit Facility provides for a money-market competitive bid option program that allows us to hold auctions to achieve lower pricing for short term borrowings. The entire balance on the Credit Facility at March 31, 2014consisted of Euro-denominated borrowings and the entire balance on the Supplemental Facility on such date consisted of Yen-denominated borrowings, both of which are designated as net investment hedges of our international investments. On March 31, 2014, we had an aggregate available borrowing capacity of $5.1 billionunder the two credit facilities. The maximum outstanding balance of the credit facilities during the three months ended March 31, 2014was $1.2 billionand the weighted average outstanding balance was $973.2 million. Letters of credit of $41.7 millionwere outstanding under the two credit facilities as of March 31, 2014. On April 7, 2014, the Operating Partnershipamended and extended the Credit Facility. The initial borrowing capacity of $4.0 billioncan now be increased to $5.0 billionduring its term and provides for borrowings denominated in U.S. Dollars, Euros, Yen, Sterling, Canadian Dollars and Australian Dollars. Borrowings in currencies other than the U.S. Dollar are limited to 75% of the maximum revolving credit amount, as defined.. The initial maturity date was extended to June 30, 2018and can be extended for an additional year at our sole option. The base interest rate on the amended Credit Facility was reduced to LIBORplus 80 basis points with the additional facility fee reduced to 10 basis points. The Supplemental Facility's borrowing capacity of $2.0 billioncan be increased at our sole option to $2.5 billionduring its term. The Supplemental Facility will initially mature on June 30, 2016and can be extended for an additional year at our sole option. As of March 31, 2014, the base interest rate on the Supplemental Facility was LIBORplus 95 basis points with an additional facility fee of 15 basis points. Like the Credit Facility, the Supplemental Facility provides for a money market competitive bid option program and allows for multi-currency borrowings. On January 21, 2014, the Operating Partnershipissued $600.0 millionof senior unsecured notes at a fixed interest rate of 2.20% with a maturity date of February 1, 2019and $600.0 millionof senior unsecured notes at a fixed interest rate of 3.75% with a maturity date of February 1, 2024. Proceeds from the unsecured notes offering were used to repay debt and for general corporate purposes.
During the three months ended
Total mortgage indebtedness was
$7.6 billionand $8.2 billionat March 31, 2014and December 31, 2013, respectively. During the three months ended March 31, 2014, we added $370.0 millionin new mortgage loans on six previously unencumbered properties which are expected to be part of the Washington Prime portfolio with a weighted average interest rate of 4.60%. On January 2, 2014, we repaid the $820.0 millionoutstanding mortgage at Sawgrass Mills originally maturing July 1, 2014and on February 28, 2014, we repaid the $269.0 millionoutstanding mortgage at Great Malloriginally maturing August 28, 2015. Covenants
Our unsecured debt agreements contain financial and other covenants. If we were to fail to comply with these covenants, after the expiration of the applicable cure periods, the debt maturity could be accelerated or other remedies could be sought by the lender including adjustments to the applicable interest rate. As of
March 31, 2014, we were in compliance with all covenants of our unsecured debt. 28
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March 31, 2014, we or our subsidiaries are the borrowers under 66 non-recourse mortgage notes secured by mortgages on 85 properties, including eight separate pools of cross-defaulted and cross-collateralized mortgages encumbering a total of 29 properties. Under these cross-default provisions, a default under any mortgage included in the cross-defaulted pool may constitute a default under all mortgages within that pool and may lead to acceleration of the indebtedness due on each property within the pool. Certain of our secured debt instruments contain financial and other non-financial covenants which are specific to the properties which serve as collateral for that debt. If the borrower fails to comply with these covenants, the lender could accelerate the debt and enforce its right against their collateral. At March 31, 2014, the applicable borrowers under these non-recourse mortgage notes were in compliance with all covenants where non-compliance could individually, or giving effect to applicable cross-default provisions in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.
Summary of Financing
Our consolidated debt, adjusted to reflect outstanding derivative instruments, and the effective weighted average interest rates as of
March 31, 2014and December 31, 2013, consisted of the following (dollars in thousands): Adjusted Balance Adjusted Balance Effective as of Effective as of Weighted Average December 31, Weighted Average Debt Subject to March 31, 2014 Interest Rate 2013 Interest Rate Fixed Rate $ 21,722,8664.93 % $ 21,826,2325.14 % Variable Rate 1,463,744 1.24 % 1,762,299 1.22 % $ 23,186,6104.70 % $ 23,588,5314.84 % Contractual Obligations
There have been no material changes to our outstanding capital expenditure and lease commitments previously disclosed in our 2013 Annual Report on Form 10-K.
In regards to long-term debt arrangements, the following table summarizes the material aspects of these future obligations on our consolidated indebtedness as of
2014 2015 - 2016 2017 - 2018 After 2018 Total Long Term Debt (1)
$ 384,837 $ 6,425,512 $ 5,653,272 $ 10,699,485 $ 23,163,106Interest Payments (2) 797,587 1,863,968 1,169,201 2,433,556 6,264,312
º Represents principal maturities only and therefore, excludes net premiums
º Variable rate interest payments are estimated based on the
LIBORrate at March 31, 2014. Off-Balance Sheet Arrangements Our off-balance sheet arrangements consist primarily of our investments in joint ventures which are common in the real estate industry and are described in Note 5 of the condensed notes to consolidated financial statements. Our joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint venture debt is secured by a first mortgage, is without recourse to the joint venture partners, and does not represent a liability of the partners, except to the extent the partners or their affiliates expressly guarantee the joint venture debt. As of March 31, 2014, the Operating Partnershipguaranteed joint venture related mortgage indebtedness of $201.1 million(of which we have a right of recovery from our venture partners of $84.8 million). Mortgages guaranteed by us are secured by the property of the joint venture which could be sold in order to satisfy the outstanding obligation and which has an estimated fair value in excess of the guaranteed amount. We may elect to fund cash needs of a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans, although such fundings are not typically required contractually or otherwise. 29
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Acquisitions and Dispositions
Buy-sell, marketing rights, and other exit mechanisms are common in real estate partnership agreements. Most of our partners are institutional investors who have a history of direct investment in retail real estate. We and our partners in our joint venture properties may initiate these provisions (subject to any applicable lock up or similar restrictions). If we determine it is in our stockholders' best interests for us to purchase the joint venture interest and we believe we have adequate liquidity to execute the purchase without hindering our cash flows, then we may initiate these provisions or elect to buy our partner's interest. If we decide to sell any of our joint venture interests, we expect to use the net proceeds to reduce outstanding indebtedness or to reinvest in development, redevelopment, or expansion opportunities. Acquisitions. On
January 30, 2014, we acquired the remaining 50% interest in Arizona Mills from our joint venture partner, as well as approximately 39 acres of land in Oyster Bay, New York, for approximately $145.8 million, consisting of cash consideration and 555,150 units of the Operating Partnership. Arizona Mills is subject to a mortgage which was $166.9 millionat the time of the acquisition. The consolidation of this previously unconsolidated property resulted in a remeasurement of our previously held interest to fair value and a corresponding non-cash gain of $2.7 millionin the first quarter of 2014. We now own 100% of this property. On January 10, 2014, we acquired one of our partner's redeemable interests in a portfolio of ten properties for approximately $114.4 millionsubject to a pre-existing contractual arrangement. The amount paid to acquire the interests in the seven properties which were previously consolidated was included in limited partners' preferred interest in the Operating Partnershipand noncontrolling redeemable interests in properties at December 31, 2013. During the second quarter of 2013, we signed a definitive agreement with McArthurGlen, an owner, developer, and manager of designer outlets, to form one or more joint ventures to invest in certain of its existing designer outlets, development projects, and its property management and development companies. In conjunction with that agreement, we purchased a noncontrolling interest in the property management and development companies of McArthurGlen, and a noncontrolling interest in a development property located in Vancouver, British Columbia. On August 2, 2013we acquired a noncontrolling interest in Ashford Designer Outletsin Kent, UK. On October 16, 2013we completed the remaining transactions contemplated by our previously announced definitive agreement with McArthurGlen by acquiring noncontrolling interests in portions of four existing McArthurGlen Designer Outlets- Parndorf ( Vienna, Austria), La Reggia ( Naples, Italy), Noventa di Piave ( Venice, Italy), and Roermond (Roermond, Netherlands). Our legal ownership interests in these entities range from 22.5% to 90%.
Dispositions. We continue to pursue the disposition of properties that no longer meet our strategic criteria or that are not a primary retail venue within their trade area.
During the first three months of 2014, we disposed of our interest in one unconsolidated retail property. The net gain on this disposal was
New Domestic Development. During the third quarter of 2013, we began construction on Charlotte Premium Outlets, a 400,000 square foot project located in Charlotte, North Carolina. We own a 50% noncontrolling interest in this project, which is a joint venture with Tanger Factory Outlet Centers, Inc. The center is expected to open in July of 2014. Our estimated share of the cost of this project is $48.0 million. In addition, during the third quarter of 2013, we began construction on Twin Cities Premium Outlets, a 410,000 square foot project located in Eagan, Minnesota. We own a 35% noncontrolling interest in this project. The center is expected to open in August of 2014. Our estimated share of the cost of this project is $38.0 million.
Domestic Expansions and Redevelopments. We routinely incur costs related to construction for significant redevelopment and expansion projects at our properties. Redevelopment and expansion projects, including the addition of anchors and big box tenants, are underway at more than 25 properties in the U.S.
We expect our share of development costs for 2014 related to new development, redevelopment or expansion initiatives to be approximately
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estimated stabilized return on invested capital typically ranges between 10-12% for all of our new development, expansion and redevelopment projects.
International Development Activity. We typically reinvest net cash flow from our international joint ventures to fund future international development activity. We believe this strategy mitigates some of the risk of our initial investment and our exposure to changes in foreign currencies. We have also funded most of our foreign investments with local currency-denominated borrowings that act as a natural hedge against fluctuations in exchange rates. Our consolidated net income exposure to changes in the volatility of the Euro, Yen, Won, and other foreign currencies is not material. We expect our share of international development costs for 2014 will be approximately
$173.0 million, primarily funded through reinvested joint venture cash flow and construction loans. The following table describes these new development and expansion projects as well as our share of the estimated total cost as of March 31, 2014(in millions): Our Share of Projected Our Share of Gross Our Net Cost Projected Net Leasable Ownership (in Local Cost Projected Opening Property Location Area (sqft) Percentage Currency) (in USD) Date New Development Projects: Montreal Montreal Premium (Quebec), Outlets Canada 360,000 50 % CAD 81.9 $ 74.1Oct. - 2014 Vancouver Vancouver (British Designer Columbia), Outlets Canada 242,000 45 % CAD 68.7 $ 62.2Apr. - 2015 Expansions: Premium Outlets Mexico Punta Norte City, Phase 3 Mexico 55,000 50 % MXN 67.1 $ 5.1Nov. - 2014 Toki Premium Gifu Outlets (Osaka), JPY Phase 4 Japan 72,000 40 % 1,502 $ 14.6Nov. - 2014 Yeoju Gyeonggi Premium Province, Outlets South KRW Phase 2 Korea 259,000 50 % 79,361 $ 74.4Mar. - 2015 Dividends We paid a common stock dividend of $1.25per share in the first quarter of 2014. Our Board of Directors declared a cash dividend for the second quarter of 2014 of $1.30per share of common stock payable on May 30, 2014to stockholders of record on May 16, 2014. We must pay a minimum amount of dividends to maintain our status as a REIT. Our dividends typically exceed our net income generated in any given year primarily because of depreciation, which is a non-cash expense. Our future dividends and future distributions of the Operating Partnershipwill be determined by the Board of Directors based on actual results of operations, cash available for dividends and limited partner distributions, cash reserves as deemed necessary for capital and operating expenditures, and the amount required to maintain our status as a REIT.
Certain statements made in this section or elsewhere in this report may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such factors include, but are not limited to: our ability to meet debt service requirements, the availability of financing, changes in our credit rating, changes in market rates of interest and foreign exchange rates for foreign currencies, the ability to hedge interest rate risk, risks associated with the acquisition, development and expansion of properties, general risks related to retail real estate, the liquidity of real estate investments, environmental liabilities, international, national, regional and local economic climates, changes in market rental rates, trends in the retail industry, relationships with anchor tenants, the inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise, risks relating to joint venture properties, intensely competitive market environment in the retail industry, costs of common area maintenance, risks related to international activities, insurance costs and coverage, terrorist activities, changes in economic and market conditions and maintenance of our status as a real estate investment trust. We discussed these and other risks and uncertainties under the heading "Risk Factors" in our most recent Annual Report on Form 10-K. We may update that discussion in subsequent Quarterly Reports on Form 10-Q, but otherwise we undertake no duty or obligation to update or revise these forward-looking statements, whether as a result of new information, future developments, or otherwise. 31
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Non-GAAP Financial Measures
Industry practice is to evaluate real estate properties in part based on performance measures such as FFO, diluted FFO per share, NOI and comparable property NOI. We believe that these non-GAAP measures are helpful to investors because they are widely recognized measures of the performance of REITs and provide a relevant basis for comparison among REITs. We also use these measures internally to measure the operating performance of our portfolio.
We determine FFO based on the definition set forth by the
º º excluding real estate related depreciation and amortization, º
º excluding gains and losses from extraordinary items and cumulative
effects of accounting changes,
º excluding gains and losses from the sales or disposals of previously
depreciated retail operating properties, º º excluding impairment charges of depreciable real estate, º
º plus the allocable portion of FFO of unconsolidated entities accounted
for under the equity method of accounting based upon economic ownership interest, and º º all determined on a consistent basis in accordance with GAAP.
We have adopted NAREIT's clarification of the definition of FFO that requires us to include the effects of nonrecurring items not classified as extraordinary, cumulative effect of accounting changes, or a gain or loss resulting from the sale of, or any impairment charges related to, previously depreciated retail operating properties.
We include in FFO gains and losses realized from the sale of land, outlot buildings, marketable and non-marketable securities, and investment holdings of non-retail real estate. You should understand that our computations of these non-GAAP measures might not be comparable to similar measures reported by other REITs and that these non-GAAP measures: º º do not represent cash flow from operations as defined by GAAP, º º should not be considered as alternatives to consolidated net income determined in accordance with GAAP as a measure of operating performance, and º º are not alternatives to cash flows as a measure of liquidity. 32
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The following schedule reconciles total FFO to consolidated net income and diluted net income per share to diluted FFO per share.
For the Three Months Ended March 31, 2014 2013 (in thousands) Funds from Operations
$ 865,333 $ 741,888Increase in FFO from prior period 16.6% 14.4% Consolidated Net Income $ 401,103 $ 334,468Adjustments to Arrive at FFO: Depreciation and amortization from consolidated properties 322,604
Our share of depreciation and amortization from unconsolidated entities, including KlÉpierre 147,256
Gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net
Net income attributable to noncontrolling interest holders in properties
Noncontrolling interests portion of depreciation and amortization
Preferred distributions and dividends (1,313)
FFO of the Operating Partnership
$ 865,333 $ 741,888FFO allocable to limited partners 124,878
Dilutive FFO Allocable to Simon Property
$ 740,455 $ 635,201
Diluted net income per share to diluted FFO per share reconciliation: Diluted net income per share
Gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net (0.01) (0.06) Diluted FFO per share
$ 2.38 $ 2.05Basic and Diluted weighted average shares outstanding 310,623
Weighted average limited partnership units outstanding 52,386
Diluted weighted average shares and units outstanding 363,009 362,052 33
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The following schedule reconciles consolidated net income to NOI and sets forth the computations of comparable property NOI.
For the Three Months Ended March 31, 2014 2013 (in thousands) Reconciliation of NOI of consolidated properties: Consolidated Net Income
$ 401,103 $ 334,468Income and other taxes 6,938 13,193 Interest expense 268,151 285,026 Income from unconsolidated entities (57,423)
Gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net (2,897) (20,767) Operating Income 615,872 557,689 Depreciation and amortization 326,461
NOI of consolidated properties
$ 942,333 $ 874,322Reconciliation of NOI of unconsolidated entities: Net Income $ 167,581 $ 153,314Interest expense 155,199
Loss from operations of discontinued joint venture interests - 320 Operating Income 322,780 301,120 Depreciation and amortization 156,077
NOI of unconsolidated entities
$ 478,857 $ 428,805Total consolidated and unconsolidated NOI from continuing operations $ 1,421,190 $ 1,303,127Adjustments to NOI: NOI of discontinued unconsolidated properties - (320) Total NOI of our portfolio $ 1,421,190 $ 1,302,807Change in NOI from prior period 9.1%
Add: Our share of NOI from KlÉpierre 66,876
Less: Joint venture partners' share of NOI 248,081 234,309 Our share of NOI
$ 1,239,985 $ 1,136,061Increase in our share of NOI from prior period 9.1%
Total NOI of our portfolio
$ 1,421,190 $ 1,302,807NOI from non comparable properties (1) 374,984
Total NOI of comparable properties (2)
$ 1,046,206 $ 1,009,060
Increase in NOI of
º NOI from non comparable properties includes the Mills, community/lifestyle
centers, international properties, other retail properties, The Mills
Limited Partnership properties, any of our non-retail holdings and results
of our corporate and management company operations, NOI of U.S. Malls and
excluded income noted in footnote 2 below.
º Comparable properties are U.S. malls and
both of the periods under comparison. Excludes lease termination income,
interest income, land sale gains and the impact of significant redevelopment activities. 34
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