Back in March, I purchased 46 shares of Simon Property Group. While I am optimistic about Simon, I feel like it needs close monitoring since it is a highly indebted company. I did a write up analyzing their debt and liquidity needs for the year, which provided some reassurance. Now that Q1 is over, I want to follow up on their debt situation, and see how the mall closures have impacted their operating income. Below are some of the highlights from the SPG Q1 2020 earnings call.
Q1 Income Statement
Now to dig into my favorite part, the financial statements! The table below shows the key income statement lines, comparing Q1 of this to last year. Revenue is down compared to 2019, however it is interesting that lease income is not contributing too much to the lower sales. The 10-K lists the various reasons that “other income” is lower in Q1 2020 compared to 2019, but I’m not going through that here.
Operating expenses were slightly lower, it would be interesting to see what Q2 expenses look like since it will capture more of SPG’s scaling back of operations. Interest expense is lower, due to lowering of variable rate debt rates and refinancing of other debts.
Finally we can see that the net income dropped, and that the business earned $0.35 less than this time last year. All in all, the Q1 income statement looks good given the circumstances, but Q2 results will sure to be uglier.
| Q1 2020 | Q1 2019 | |
| Total Revenue | 1,353,360 | 1,452,834 |
| Lease Income | 1,262,232 | 1,289,058 |
| Operating Expense | 698,491 | 707,813 |
| Interest Expense | 187,627 | 198,733 |
| Net Income | 437,605 | 548,475 |
| EPS | 1.43 | 1.78 |
Current Balance Sheet
The balance sheet of SPG is something I want to keep close tabs on. While I’m not too worried about Simon’s debt load, the possibility of large operating losses requiring them to access credit is a bigger concern. First, the cash flow statement shows that Simon gained $6.45B in proceeds from debt, while repaying $3B of debts. This must be refinancing a credit facility, or paying off a bond that came due. Elsewhere in the 10-K, Simon reports they drew $3.75B from their credit facility for operating liquidity. Given the proceeds of this credit line, SPG’s cash balance at the end of the quarter was $3.724B compared to $670M at the end of 2019. Next, the total debt increased from $24B to $27.5B this quarter. To satisfy the finance nerd in me, the breakdown of SPG’s debt is as follows:
- $3.0 billion outstanding under the $4.0 billion unsecured revolving credit facility
- $875.0 million outstanding under the $3.5 billion unsecured supplemental credit facility
- $1.0 billion outstanding under the $2.0 billion global unsecured commercial paper note program
- Unsecured debt consisted of $15.8 billion of senior unsecured notes (bonds)
- Total mortgage indebtedness was $6.9 billion
Based on these figures, it appears Simon has plenty lines of credit to tap into if need be. Finally, the 10-K also reported that SPG is in compliance to all of their debt covenants.
COVID Response
As the COVID crisis unfolded, Simon claims to be one of the first companies to voluntarily close all of their properties. Recently SPG has been opening properties back up with added precautions. Currently, 77 of Simon’s U.S. malls have reopened. Within the latest 10-K, Simon outlined their business response to weather COVID19:
- Significantly reduced all non-essential corporate spending
- Significantly reduced property operating expenses, including discretionary marketing spend
- Implemented a temporary furlough of certain corporate and field employees due to the closure of SPG’s properties
- Suspended more than $1.0 billion of redevelopment and new development projects
- David Simon, the CEO and President elected to reduce his base salary to zero and deferred his approved 2019 bonus until the market conditions improve
- Implemented a temporary decrease to the base salary of certain of its salaried employees ranging from 10% to 30%
- The Board of Directors agreed to temporarily suspend payment to the independent directors of their board service cash retainer fees
In my view, these measures seem rational, and it is good to see the CEO and board eliminate their compensation. That is to say, I will be curious to see how these spending cuts affect the operating results next quarter.
Dividend Payout
One topic of interest is what SPG will do with their dividend. Simon paid a quarterly dividend of $2.10 in Q1. Interestingly, SPG has declared they will pay a Q2 dividend, however they did not say how much it would be. As a capital allocator, I would hope they would only pay a dividend if they had the operating cash flows to support it. I do not mind if they need to temporarily reduce or suspend their dividend payments, however many people are very demanding of their dividends.
Looking Forward
During the SPG conference call, David Simon did say that he expects positive cash flow this year. This is reassuring, since most people are assuming they are going to run a deficit with retailers not paying rent. But of course, we don’t really know how things will pan out. Simon did mention that some retailers have negotiated delays in rent payments. The company did not specify how many retailers they have negotiated with, or how many retailers have failed to pay rent. Therefore number of rent collected in a key figure. It appears Simon does not want to speak too specifically about this so retailers don’t use it as an excuse to not pay rent because X% of retailers haven’t paid. SPG communicated its firm position that retailers signed a contract to pay rent and must uphold that.
Since SPG closed its properties only a week or so before the end of the quarter, Q2 should be more revealing of how this crisis has impacted the company. The occupancy at the end of Q1 was down 1.1%, amounting to a total occupancy of 94%. This occupancy level seems very strong, but it is definitely something to monitor in the coming quarters. If this crisis persists, it could take a while for retailer bankruptcies to shake out.
Conclusion
All in all, I think this quarter’s results were pretty positive given the situation, and given how beat up this stock is. In the coming quarters, it will be important to keep track of the occupancy, lease revenue, operating income, and how they are deploying their credit facilities. While it is very possible SPG suffers through more pain, I am still optimistic on its fundamentals looking a few years out.