SIMON PROPERTY GROUP, INC. 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. is aDelaware 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, or the Internal Revenue Code. REITs will generally not be liable forU.S. federal corporate income taxes as long as they distribute not less than 100% of their REIT taxable income.Simon Property Group, L.P. is our majority-ownedDelaware partnership subsidiary that owns all of our real estate properties and other assets. According to theOperating Partnership's partnership agreement, theOperating Partnership is required to pay all expenses of Simon. Unless stated otherwise or the context otherwise requires, references to "Simon" meanSimon Property Group, Inc. and references to the "Operating Partnership" meanSimon Property Group, L.P. References to "we," "us" and "our" mean collectively Simon, theOperating Partnership and those entities/subsidiaries owned or controlled by Simon and/or theOperating Partnership . We own, develop and manage premier shopping, dining, entertainment and mixed-use destinations, which consist primarily of malls, Premium Outlets®, and The Mills®. As ofJune 30, 2020 , we owned or held an interest in 204 income-producing properties inthe United States , which consisted of 99 malls, 69Premium Outlets , 14 Mills, four lifestyle centers, and 18 other retail properties in 37 states andPuerto Rico . In addition, we have redevelopment and expansion projects, including the addition of anchors, big box tenants, and restaurants, underway at properties inthe United States ,Canada ,Asia andEurope . Internationally, as ofJune 30, 2020 , we had ownership in 31Premium Outlets and Designer Outlet properties primarily located inAsia ,Europe , andCanada . We also have one international outlet property under development. As ofJune 30, 2020 , we also owned a 22.4% 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 15 countries inEurope .
We generate the majority of our lease income from retail tenants including consideration received from:
? fixed minimum lease consideration and fixed common area maintenance (CAM)
reimbursements, and
variable lease consideration primarily based on tenants' sales, as well as
? reimbursements for real estate taxes, utilities, marketing and certain other
items.
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:
? attracting and retaining high quality tenants and utilizing economies of scale
to reduce operating expenses,
? expanding and re-tenanting existing highly productive locations at competitive
rental rates,
? selectively acquiring or increasing our interests in high quality real estate
assets or portfolios of assets,
? generating consumer traffic in our retail properties through marketing
initiatives and strategic corporate alliances, and
? selling selective non-core assets.
We also grow by generating supplemental revenues from the following activities:
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,
? offering property operating services to our tenants and others, including waste
handling and facility services, and the provision of energy services,
? selling or leasing land adjacent to our properties, commonly referred to as
"outlots" or "outparcels," and
? generating interest income on cash deposits and investments in loans, including
those made to related entities.
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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 outlet properties.
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:
? provide the capital necessary to fund growth,
? maintain sufficient flexibility to access capital in many forms, both public
and private, and
? manage our overall financial structure in a fashion that preserves our
investment grade credit ratings.
We consider FFO and net operating income, or NOI, and portfolio NOI to be key measures of operating performance that are not specifically defined by accounting principles generally accepted inthe 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.
COVID-19
OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus, or COVID-19, a global pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has already had a significant impact on economic and market conditions around the world in the first half of 2020 and continues to adversely impact economic activity in retail real estate. The impact of the COVID-19 pandemic continues to evolve and governments and other authorities, including where we own or hold interests in properties, have imposed measures intended to control its spread, including restrictions on freedom of movement, group gatherings and business operations such as travel bans, border closings, business closures, quarantines, stay-at-home, shelter-in-place orders, density limitations and social distancing measures. Governments and other authorities are in varying stages of lifting or modifying some of these measures, however certain governments and other authorities have already been forced to, and others may in the future, reinstate these measures or impose new, more restrictive measures, if the risks, or the tenants' and consumers' perception of the risks, related to the COVID-19 pandemic worsen at any time. Given the differing consumer demographics and responses to the pandemic and the characteristics and layout of certain properties, the impact of COVID-19 and these measures has been, and will continue be, greater on some properties than others. As a result of the COVID-19 pandemic and these measures, the Company may experience material impacts including changes in the ability to recognize revenue due to changes in our assessment of the probability of collection of lease income and asset impairment charges as a result of changing cash flows generated by our properties. As ofJune 30, 2020 , 199 of our domestic properties, certain of our retailer investments, and certain international properties had reopened. All of our retail properties were reopened as ofJuly 10th ; however, seven properties inCalifornia were subsequently closed onJuly 15th because of new restrictive governmental orders. On average, the Company's retail properties were closed 51 days or approximately 56% of the second quarter. As we developed and implemented our response to the impact of the COVID-19 pandemic and restriction intended to prevent its spread on our business, our primary focus has been on the health and safety of our employees, our shoppers and the communities in which we serve. We implemented a series of actions to reduce costs and increase liquidity in light of the economic impacts of the pandemic, including:
? 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 the Company's
"stay at home" orders; reduced certain corporate and field personnel and
implemented a temporary freeze on company hiring efforts,
? suspended more than
? elected to reduce his base salary to zero and deferred his approved 2019 bonus
until the market conditions in which the Company operates have improved,
implemented a temporary decrease to the base salary of certain of its salaried
? employees ranging from 10% to 30%, depending on each employee's compensation
level,
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? the Company's Board of Directors agreed to temporarily suspend payment to the
independent directors of their board service cash retainer fees, and
? drew
Results Overview
Diluted earnings per share and diluted earnings per unit decreased$1.12 during the first six months of 2020 to$2.26 from$3.38 for the same period last year. The decrease in diluted earnings per share and diluted earnings per unit was primarily attributable to:
a lawsuit settled with our former insurance broker in 2019 related to the
? significant flood damage sustained at Opry Mills in
or
? a gain in 2019 related to the disposition of our interest in a multi-family
residential investment of
decreased consolidated lease income of
? share/unit, comprised of decreased fixed lease income of
decreased variable lease income of
COVID-19,
decreased other income, excluding the two aforementioned 2019 transactions, of
?
decreased income from unconsolidated entities of
diluted share/unit, primarily due to year-over-year operations from retailer
? investments of
unfavorable domestic and international operations, all of which were impacted
by COVID-19 disruption, and
? an unrealized unfavorable change in fair value of equity instruments of
million, or
? decreased consolidated total operating expenses of
diluted share/unit, which was primarily related to COVID-19 disruption,
? decreased tax expense of
? decreased interest expense in 2020 of
share/unit.
Portfolio NOI decreased 10.7% for the six month period in 2020 over the piror year period. Average base minimum rent forU.S. Malls and Premium Outlets increased 2.8% to$56.02 psf as ofJune 30, 2020 , from$54.52 psf as ofJune 30, 2019 . Leasing spreads in ourU.S. Malls and Premium Outlets were relatively flat as we were able to lease available square feet at similar rents, resulting in an open/close leasing spread (based on total tenant payments - base minimum rent plus common area maintenance) of$0.26 psf ($62.95 openings compared to$63.21 closings) as ofJune 30, 2020 , representing a 0.4% decrease. Ending occupancy for ourU.S. Malls and Premium Outlets decreased 1.5% to 92.9% as ofJune 30, 2020 , from 94.4% as ofJune 30, 2019 , primarily due to 2019 tenant bankruptcy activity, partially offset by leasing activity. Our effective overall borrowing rate atJune 30, 2020 on our consolidated indebtedness decreased 53 basis points to 2.81% as compared to 3.34% atJune 30, 2019 . This decrease was primarily due to a decrease in the effective overall borrowing rate on variable rate debt of 206 basis points (0.95% atJune 30, 2020 as compared to 3.01% atJune 30, 2019 ), partially offset by an increase in the amount of our fixed rate debt. The weighted average years to maturity of our consolidated indebtedness was 6.8 years and 7.4 years atJune 30, 2020 andDecember 31, 2019 , respectively.
Our financing activity for the six months ended
amending and replacing in its entirety the
? entering into an unsecured credit facility comprised of (i) an amendment and
extension of the Credit Facility and (ii) a
facility, or Term Facility,
decreasing our borrowings under the
? commercial paper note program, or the Commercial Paper program, by
million,
? repaying
borrowing
? unsecured revolving credit facility, or Supplemental Facility, and together
with the Credit Facility and Term Facility, the Facilities, and subsequently repaying$125.0 million . 38 Table of Contents OnJuly 9, 2020 , theOperating Partnership completed the issuance of the following senior unsecured notes:$500.0 million with a fixed interest rate of 3.500%,$750 million with a fixed interest rate of 2.650%, and$750 million with a fixed interest rate of 3.800%, with maturity dates ofSeptember 2025 (the "2025" Notes"),June 2030 , andJune 2050 , respectively. The 2025 Notes were issued as additional notes under an indenture pursuant to which theOperating Partnership previously issued$600 million principal amount of 3.500% senior notes dueSeptember 2025 onAugust 17, 2015 . Proceeds from the unsecured notes offering funded the optional redemption at par of senior unsecured notes in July andAugust 2020 , as discussed below, and repaid a portion of the indebtedness under the Facilities.
On
On
On
United States Portfolio Data
The portfolio data discussed in this overview includes the following key operating statistics: ending occupancy, and average base minimum rent per square foot. 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 The Mills from our otherU.S. operations. We also do not include any information for properties located outsidethe United States .
The following table sets forth these key operating statistics for the combined
? properties that are consolidated in our consolidated financial statements,
? properties we account for under the equity method of accounting as joint
ventures, and
? the foregoing two categories of properties on a total portfolio basis.
June 30, June 30, %/Basis Points
2020 2019 Change (1)
U.S. Malls and Premium Outlets :
Ending Occupancy
Consolidated 93.0% 94.6% -160 bps
Unconsolidated 92.7% 93.9% -120 bps
Total Portfolio 92.9% 94.4% -150 bps
Average Base Minimum Rent per Square Foot
Consolidated $ 54.10 $ 52.91 2.2%
Unconsolidated $ 61.48 $ 58.74 4.7%
Total Portfolio $ 56.02 $ 54.52 2.8%
The Mills:
Ending Occupancy 95.3% 97.1% -180 bpsAverage Base Minimum Rent per Square Foot$ 34.11 $
32.87 3.8%
(1) 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 Reported Sales per Square Foot. Given all of ourU.S. retail properties were closed for approximately half of the quarter due to the COVID-19 pandemic, we are not presenting reported retail tenant sales per square foot as we do not believe the trends for the period are indicative of future operating results. 39 Table of Contents Current Leasing Activities
During the six months endedJune 30, 2020 , we signed 222 new leases and 503 renewal leases (excluding mall anchors and majors, new development, redevelopment and leases with terms of one year or less) with a fixed minimum rent across ourU.S. Malls and Premium Outlets portfolio, comprising approximately 2.7 million square feet, of which 2.5 million square feet related to consolidated properties. During the comparable period in 2019, we signed 464 new leases and 496 renewal leases with a fixed minimum rent, comprising approximately 3.0 million square feet, of which 2.3 million square feet related to consolidated properties. The average annual initial base minimum rent for new leases was$62.61 per square foot in 2020 and$63.25 per square foot in 2019 with an average tenant allowance on new leases of$50.62 per square foot and$52.12 per square foot, respectively.
Japan Data
The following are selected key operating statistics for ourPremium Outlets inJapan . The information used to prepare these statistics has been supplied by the managing venture partner. June 30, June 30, %/Basis Points 2020 2019 Change Ending Occupancy 99.3 % 99.9 % -60 bps
Average Base Minimum Rent per Square Foot ¥ 5,339 ¥
5,214 2.40 % Results of Operations
The following acquisitions and dispositions of consolidated properties affected our consolidated results in the comparative periods:
? On
adjacent to one of our properties from our joint venture partner.
? During the third quarter of 2019, we disposed of two retail properties.
The following acquisitions and openings of equity method investments and properties affected our income from unconsolidated entities in the comparative periods:
? On
center in
On
and liabilities of Forever 21, a retailer of apparel and accessories, out of
? bankruptcy. The interests were acquired through two separate joint ventures, a
licensing venture and an operating venture. Our noncontrolling interest in each
of the retail operations venture and in the licensing venture is 37.5%.
On
? Outlets, a 191,000 square foot center in
in this center.
In
? Group, formerly known as Aéropostale and
respectively, for
On
? cash and the
interest in Rue Gilt Groupe, or RGG, to create a new multi-platform venture
dedicated to digital value shopping.
? On
center in
For the purposes of the following comparison between the three and six months endedJune 30, 2020 and 2019, 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 or held interests in and operated in both of the periods under comparison.
Three months ended
Lease income decreased
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minimum lease and CAM consideration recorded on a straight-line basis of $113.7
million and reduced variable lease income of $171.4 million , primarily related
to lower consideration based on tenant sales and negative variable lease income.
Total other income decreased $42.9 million , primarily due to a $25.7 million
decrease related to Simon Brand Venture and gift card revenues, a $5.8 million
decrease related to a gain recorded in 2019 as a result of land contributions to
joint ventures for densification projects at two of our properties, a $4.3
million decrease in distributions from investments and lower business
interruption insurance proceeds received in connection with our two Puerto Rico
properties as a result of hurricane damages of $1.6 million , partially offset by
a $3.4 million gain related to the sale of outparcels.
Property operating expenses decreased $35.5 million primarily due to the closure
of properties as a result of the COVID-19 pandemic and restrictions intended to
prevent its spread and cost reduction efforts, as previously discussed.
Depreciation and amortization decreased $28.5 million , of which the property
transactions accounted for $2.6 million . The comparable properties accounted
for $25.9 million of the decrease primarily due to the acceleration of
depreciation in 2019 on a property upon initiation of a major redevelopment.
Advertising and promotion decreased $22.7 million primarily due to the closure
of properties as a result of the COVID-19 pandemic and restrictions intended to
prevent its spread and cost reduction efforts, as previously discussed.
Home and regional office costs expense decreased
Income and other tax expense decreased$7.1 million primarily as a result of a higher tax benefit due to larger losses on our share of operating results in the retail operations venture ofSparc Group as compared to 2019, and reduced withholding and income taxes related to certain of our international investments, partially offset by tax expense from a bargain purchase gain recorded as a result of the acquisition of our interest in Forever 21. Income from unconsolidated entities decreased$62.2 million primarily due to results of operations from our retailer investments, as well as unfavorable domestic and international operations, both of which were impacted by COVID-19 disruption, partially offset by a$35.0 million pre-tax non-cash bargain purchase gain recorded as a result of the acquisition of our interest in Forever 21. During 2020, we recorded a$7.8 million loss, net, related to the impairment and disposition of certain assets by Klépierre. During 2019, we recorded a$2.7 million gain related to Klépierre's disposition of certain shopping centers.
Simon's net income attributable to noncontrolling interests decreased
Six months ended
Lease income decreased$302.9 million , of which the property transactions accounted for$2.3 million of the decrease. Comparable lease income decreased$300.6 million , or 11.7%. Total lease income decreased primarily due to decreases in fixed minimum lease and CAM consideration recorded on a straight-line basis of$118.9 million and reduced variable lease income of$184.0 million , primarily related to lower consideration based on tenant sales and negative variable lease income. Total other income decreased$126.1 million , primarily due to a$68.0 million decrease related to a lawsuit settled with our former insurance broker in 2019 related to the significant flood damage sustained at Opry Mills inMay 2010 , a$26.2 million decrease related to Simon Brand Venture and gift card revenues, a$15.6 million gain on the 2019 sale of our interest in a multi-family residential property, a$5.8 million decrease related to a gain recorded in 2019 as a result of land contributions for densification projects at two of our properties, lower business interruption insurance proceeds received in connection with our twoPuerto Rico properties as a result of hurricane damages of$4.9 million , and a$4.8 million decrease in distributions from investments, partially offset by a$4.3 million gain related to the sale of outparcels. Property operating expenses decreased$41.4 million primarily due to the closure of properties as a result of the COVID-19 pandemic and restrictions intended to prevent its spread and cost reduction efforts, as previously discussed. Advertising and promotion decreased$26.3 million primarily due to the closure of properties as a result of the COVID-19 pandemic and restrictions intended to prevent its spread and cost reduction efforts, as previously discussed.
Home and regional office costs expense decreased
Income and other tax expense changed by$23.0 million primarily as a result of a higher tax benefit due to larger losses on our share of operating results in the retail operations venture ofSparc Group as compared to 2019, and reduced withholding and 41 Table of Contents
income taxes related to certain of our international investments, partially offset by tax expense from a bargain purchase gain recorded as a result of the acquisition of our interest in Forever 21.
Income from unconsolidated entities decreased$102.2 million primarily due to results of operations from our retailer investments, as well as unfavorable domestic and international operations, both of which were impacted by COVID-19 disruption, partially offset by a$35.0 million pre-tax non-cash bargain purchase gain recorded as a result of the acquisition of our interest in Forever 21. During 2020, we recorded a$7.8 million loss, net, related to the impairment and disposition of certain assets by Klépierre, offset by a$1.0 million gain related to the disposition of a shopping center by one of our joint venture investments. During 2019, we recorded a$2.7 million gain related to Klépierre's disposition of certain shopping centers.
Simon's net income attributable to noncontrolling interests decreased
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 comprised 16.9% of our total consolidated debt atJune 30, 2020 . We also enter into interest rate protection agreements from time to time 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$974.8 million in the aggregate during the six months endedJune 30, 2020 . The Facilities and the Commercial Paper program provide alternative sources of liquidity as our cash needs vary from time to time. Borrowing capacity under these sources may be increased as discussed further below. Our balance of cash and cash equivalents increased$2.6 billion during the first six months of 2020 to$3.3 billion as ofJune 30, 2020 primarily as a result of new borrowings under the Facilities, as a precautionary measure to maximize liquidity and to increase available cash on hand as previously discussed. OnJune 30, 2020 , we had an aggregate available borrowing capacity of approximately$4.9 billion under the Credit Facilities, net of outstanding borrowings of$3.9 billion and amounts outstanding under the Commercial Paper program of$702.3 million and letters of credit of$11.3 million . For the six months endedJune 30, 2020 , the maximum aggregate outstanding balance under the Credit Facilities was$3.9 billion and the weighted average outstanding balance was$2.3 billion . The weighted average interest rate was 1.10% for the six months endedJune 30, 2020 . Simon has historically had access to public equity markets and theOperating Partnership has historically had access to private and public long and short-term unsecured debt markets and access to secured debt and private equity from institutional investors at the property level. Our business model and Simon's status as a REIT require us to regularly access the debt markets to raise funds for acquisition, development and redevelopment activity, and to refinance maturing debt. Simon 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 Facilities and the Commercial Paper program to address our debt maturities
and capital needs through 2020. Cash Flows Our net cash flow from operating activities and distributions of capital from unconsolidated entities for the six months endedJune 30, 2020 totaled$974.8 million . In addition, we had net proceeds from our debt financing and repayment activities of$3.1 billion in 2020. These activities are further discussed below under "Financing and Debt." During the first six months of 2020, we also:
funded the acquisition of the ventures which purchased certain assets of
? Forever 21 and acquired additional interests in
aggregate cash portion of which was
? paid stockholder dividends and unitholder distributions totaling approximately
funded consolidated capital expenditures of
? development and other costs of
of
of
? funded investments in unconsolidated entities of
? funded investments in equity instruments of
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? received proceeds on the sale of equity instruments of
? funded the repurchase of
units of the
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 and/or distributions to partners necessary to maintain Simon's REIT qualification on a long-term basis. At this time, we do not expect the impact of COVID-19 to impact our ability to fund these needs for the foreseeable future; however its ultimate impact is difficult to predict. 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 the following, however a severe and prolonged disruption and instability in the global financial markets, including the debt and equity capital markets, may affect our ability to access necessary capital:
? excess cash generated from operating performance and working capital reserves,
? borrowings on the Credit Facilities and Commercial Paper program,
? additional secured or unsecured debt financing, or
? additional equity raised in the public or private markets.
We expect to generate positive cash flow from operations in 2020, 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 tenants. A significant deterioration in projected cash flows from operations, including one due to the impact of the COVID-19 pandemic and restrictions intended to restrict its spread, could cause us to increase our reliance on available funds from the Credit Facilities and Commercial Paper program, further curtail planned capital expenditures, or seek other additional sources of financing.
Financing and Debt
Unsecured Debt
AtJune 30, 2020 , our unsecured debt consisted of$15.9 billion of senior unsecured notes of theOperating Partnership ,$3.1 billion outstanding under theOperating Partnership's $4.0 billion unsecured revolving credit facility, or Credit Facility,$750.0 million outstanding under theOperating Partnership's $3.5 billion unsecured revolving credit facility, or Supplemental Facility, and$702.3 million outstanding under theOperating Partnership's global unsecured commercial paper note program, or Commercial Paper program. OnMarch 16, 2020 , theOperating Partnership replaced in its entirety its existing$4.0 billion unsecured revolving credit facility by entering into an unsecured credit facility comprised of (i) an amendment and extension of the Credit Facility and (ii) a$2.0 billion Term Facility. The Credit Facility and the Term Facility can be increased in the form of either additional commitments under the Credit Facility or incremental term loans under the Term Facility in an aggregate amount for all such increases not to exceed$1.0 billion , for a total aggregate size of$7.0 billion , in each case, subject to obtaining additional lender commitments and satisfying certain customary conditions precedent. Borrowings may be denominated inU.S. dollars, Euro, Yen, Sterling, Canadian dollars and Australian dollars. Borrowings in currencies other than theU.S. dollar are limited to 95% of the maximum revolving credit amount, as defined. The initial maturity date of the Term Facility and Credit Facility areJune 30, 2022 andJune 30, 2024 , respectively. Each of the Term Facility and Credit Facility can be extended for two additional six-month periods toJune 30, 2023 andJune 30, 2025 , respectively, at our sole option, subject to satisfying certain customary conditions precedent. The Term Facility is available via a single draw during the nine-month period followingMarch 16, 2020 . Borrowings under the Credit Facility bear interest, at theOperating Partnership's election, at either (i) LIBOR plus a margin determined by theOperating Partnership's corporate credit rating of between 0.650% and 1.400% or (ii) the base rate (which rate is equal to the greatest of the prime rate, the federal funds effective rate plus 0.500% or LIBOR plus 1.000%) (the "Base Rate"), plus a margin determined by theOperating Partnership's corporate credit rating of between 0.000% and 0.400%. The Credit Facility includes a facility fee determined by theOperating Partnership's corporate credit rating of between 0.100% and 0.300% on the aggregate revolving commitments under the Credit Facility. The Credit Facility contains a money market competitive bid option program that allows theOperating Partnership to hold auctions to achieve lower pricing for short-term borrowings. Borrowings under the Term Facility bear interest, at theOperating Partnership's election, at either (i) LIBOR plus a margin determined based on theOperating Partnership's corporate credit rating of between 0.725% and 1.600% or (ii) the base rate (equal to the greatest of the prime rate, the federal funds effective rate plus 0.500% or LIBOR plus 1.000%) plus a margin determined by theOperating Partnership's corporate credit rating of between 0.000% and 0.600%. The Term Facility includes a ticking fee equal to 0.100% of 43 Table of Contents
the unused term loan commitment under the Term Facility, which ticking fee shall commence accruing on the date that is forty-five days after the closing of the Term Facility. The Supplemental Facility's initial borrowing capacity of$3.5 billion may be increased to$4.5 billion during its term and provides for borrowings denominated inU.S. dollars, Euro, Yen, Sterling, Canadian dollars and Australian dollars. The initial maturity date of the Supplemental Facility isJune 30, 2022 and can be extended for an additional year toJune 30, 2023 at our sole option, subject to our continued compliance with the terms thereof. The base interest rate on the Supplemental Facility is LIBOR plus 77.5 basis points with a facility fee of 10 basis points. AtJune 30, 2020 , we had an aggregate available borrowing capacity of$4.9 billion under the Facilities. The maximum aggregate outstanding balance under the Facilities during the six months endedJune 30, 2020 was$3.9 billion and the weighted average outstanding balance was$2.3 billion . Letters of credit of$11.3 million were outstanding under the Facilities as ofJune 30, 2020 .The Operating Partnership also has available a Commercial Paper program of$2.0 billion , or the non-U.S. dollar equivalent thereof.The Operating Partnership may issue unsecured commercial paper notes, denominated inU.S. dollars, Euro and other currencies. Notes issued in non-U.S. currencies may be issued by one or more subsidiaries of theOperating Partnership and are guaranteed by theOperating Partnership . Notes are sold under customary terms in theU.S. and Euro commercial paper note markets and rank (either by themselves or as a result of the guarantee described above) pari passu with theOperating Partnership's other unsecured senior indebtedness. The Commercial Paper program is supported by the Credit Facilities and if necessary or appropriate, we may make one or more draws under either of the Credit Facilities to pay amounts outstanding from time to time on the Commercial Paper program. OnJune 30, 2020 , we had$702.3 million outstanding under the Commercial Paper program, fully comprised ofU.S. dollar-denominated notes with a weighted average interest rate of 0.24%. These borrowings have a weighted average maturity date ofJuly 20, 2020 and reduce amounts otherwise available under the Facilities. OnJuly 9, 2020 , theOperating Partnership completed the issuance of the following senior unsecured notes:$500.0 million with a fixed interest rate of 3.500%,$750 million with a fixed interest rate of 2.650%, and$750 million with a fixed interest rate of 3.800%, with maturity dates ofSeptember 2025 (the "2025" Notes"),June 2030 , andJune 2050 , respectively. The 2025 Notes were issued as additional notes under an indenture pursuant to which theOperating Partnership previously issued$600 million principal amount of 3.500% senior notes dueSeptember 2025 onAugust 17, 2015 . Proceeds from the unsecured notes offering funded the optional redemption at par of senior unsecured notes in July andAugust 2020 , as discussed below, and repaid a portion of the indebtedness under the Facilities.
On
On
On
Mortgage Debt
Total mortgage indebtedness was
Covenants Our unsecured debt agreements contain financial covenants and other non-financial covenants. The Facilities contain ongoing covenants relating to total and secured leverage to capitalization value, minimum earnings before interest, taxes, depreciation, and amortization, or EBITDA, and unencumbered EBITDA coverage requirements. Payment under the Facilities can be accelerated if theOperating Partnership or Simon is subject to bankruptcy proceedings or upon the occurrence of certain other events. 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 ofJune 30, 2020 , we were in compliance with all covenants of our unsecured debt. AtJune 30, 2020 , our consolidated subsidiaries were the borrowers under 46 non-recourse mortgage notes secured by mortgages on 50 properties and other assets, including two separate pools of cross-defaulted and cross-collateralized mortgages encumbering a total of five 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 that serve as collateral for that debt. If the applicable borrower under these non-recourse 44
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mortgage notes were to fail to comply with these covenants, the lender could accelerate the debt and enforce its rights against their collateral. AtJune 30, 2020 , the applicable borrowers under these non-recourse mortgage notes were in compliance with all covenants where non-compliance could individually or in the aggregate, giving effect to applicable cross-default provisions, have a material adverse effect on our financial condition, liquidity or results of operations. Summary of Financing
Our consolidated debt, adjusted to reflect outstanding derivative instruments,
and the effective weighted average interest rates as of
Effective Effective
Adjusted Balance Weighted Adjusted Weighted
as of Average Balance as of Average
Debt Subject to June 30, 2020 Interest Rate(1) December 31, 2019 Interest Rate(1)
Fixed Rate $ 22,659,561 3.49% $ 23,298,167 3.46%
Variable Rate 4,609,322 0.95% 865,063 2.61%
$ 27,268,883 2.81% $ 24,163,230 3.16%
(1) Effective weighted average interest rate excludes the impact of net discounts
and debt issuance costs.
Contractual Obligations
There have been no material changes to our outstanding capital expenditure and
lease commitments previously disclosed in the combined 2019 Annual Report on
Form 10-K of Simon and the Operating Partnership .
In regards to long-term debt arrangements, the following table summarizes the
material aspects of these future obligations on our consolidated indebtedness as
of June 30, 2020 , for the remainder of 2020 and subsequent years thereafter
(dollars in thousands), assuming the obligations remain outstanding through
initial maturities, including applicable exercise of available extension
options:
2020 2021 - 2022 2023 - 2024 After 2024 Total
Long Term Debt (1) (2) $ 2,181,216 $ 4,238,687 $ 5,506,563 $ 15,426,254 $ 27,352,720
Interest Payments (3) 381,015 1,349,207 1,030,464 3,514,936 6,275,622
(1) Represents principal maturities only and, therefore, excludes net discounts
and debt issuance costs.
(2) The amount due in 2020 includes
Commercial Paper program.
(3) Variable rate interest payments are estimated based on the LIBOR rate at June
30, 2020.
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 6 of the condensed notes to our 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 ofJune 30, 2020 , theOperating Partnership guaranteed joint venture-related mortgage indebtedness of$193.3 million . Mortgages guaranteed by theOperating Partnership 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.
Hurricane Impacts
During the third quarter of 2017, our two wholly-owned properties located inPuerto Rico experienced property damage and business interruption as a result of Hurricane Maria. Since the date of the loss, we have received$77.6 million of insurance proceeds from third-party carriers related to the two properties located inPuerto Rico , of which$46.5 million was used for property restoration and remediation and to reduce the insurance recovery receivable. During the three and six months endedJune 30, 2020 , we recorded$1.6 million and$2.7 million , respectively, as business interruption income. During the three and six months 45 Table of Contents endedJune 30, 2019 , we recorded$3.2 million and$7.6 million , respectively, as business interruption income. These amounts were recorded in other income in the accompanying consolidated statements of operations and comprehensive income.
Acquisitions and Dispositions
Buy-sell, marketing rights, and other exit mechanisms are common in real estate partnership agreements. Most of our partners are institutional investorswho 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. InJanuary 2020 , we acquired additional interests of 5.05% and 1.37% inSparc Group and ABG, respectively, for$6.7 million and$33.5 million , respectively. AtJune 30, 2020 , our noncontrolling equity method interests in the operations venture ofSparc Group and in ABG were 50.0% and 6.8%, respectively.
On
Dispositions. We may 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 six months of 2019, we disposed of our interests in one multi-family residential investment. Our share of the gross proceeds on this transaction was$17.3 million . Our share of the gain of$15.6 million is included in other income in the accompanying consolidated statement of operation and comprehensive income.
Joint Venture Formation and Other Investment Activity
OnFebruary 19, 2020 , we and a group of co-investors acquired certain assets and liabilities of Forever 21, a retailer of apparel and accessories, out of bankruptcy. The interests were acquired through two separate joint ventures, a licensing venture and an operating venture. Our noncontrolling interest in each of the retail operations venture and in the licensing venture is 37.5%. Our aggregate investment in the ventures was$67.6 million . In connection with the acquisition of our interest, the Forever 21 joint venture recorded a non-cash bargain purchase gain of which our share of$35.0 million pre-tax is included in income from unconsolidated entities in the consolidated statement of operations and comprehensive income. OnJune 10, 2020 , we exercised our contractual right to terminate theFebruary 10, 2020 , Agreement and Plan of Merger, or the Merger Agreement, with Taubman Centers, Inc., or TCO, a publicly heldMichigan corporation. We also filed an action in theCircuit Court for the 6th Judicial Circuit ofOakland County, Michigan against Taubman Centers, Inc. and TheTaubman Realty Group Limited Partnership (collectively, Taubman) requesting a declaration that Taubman had suffered a Material Adverse Event under the Merger Agreement and had breached covenants and representation in the Merger Agreement governing the operation of Taubman's business.
On
Development Activity
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, big box tenants, restaurants, as well as office space and residential uses are underway at properties inthe United States ,Canada ,Europe andAsia .
The Company has suspended more than
Construction continues on certain redevelopment and new development projects in theU.S. and internationally that are nearing completion. Our share of the costs of all new development, redevelopment and expansion projects currently under construction is approximately$700 million . Simon's share of remaining net cash funding required to complete the new development and redevelopment projects currently under construction is approximately$140 million . We expect to fund these capital projects with cash flows from operations. We seek a stabilized return on invested capital in the range of 8-10% for all of our new development, expansion and redevelopment projects. 46
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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, Peso, Won, and other foreign currencies is not material. We expect our share of estimated committed capital for international development projects to be completed with projected delivery in 2020 or 2021 is$111 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 ofJune 30, 2020 (in millions): Gross Our Our Share of Our Share of Projected Leasable
Ownership Projected
Location Area (sqft) Percentage (in Local Currency) (in USD) (1) Date
New Development Projects:
Málaga Designer Outlet Málaga, Spain 191,000 46% EUR 50.3 $ 56.5 Opened Feb. - 2020
Siam Premium Outlets Bangkok, Thailand 264,000 50% THB 1,654 $ 53.6 Opened Jun. - 2020
West Midlands Designer Cannock (West 197,000 20% GBP 26.5 $ 32.6 Feb. - 2021 Outlet Midlands), England
Expansions:
Gotemba Premium Outlets Gotemba, Japan 178,000 40% JPY 7,476 $ 69.4 Opened Jun. - 2020
Phase 4
3,219 $ 29.9 Aug. - 2020
Phase 5 Japan
Dividends, Distributions and Stock Repurchase Program
Simon paid a common stock dividend of
The
Operating Partnership paid distributions per unit for the same amounts. OnJune 29, 2020 , Simon's Board of Directors declared a quarterly cash dividend for the second quarter of 2020 of$1.30 per share, payable onJuly 24, 2020 to shareholders of record onJuly 10, 2020 . The distribution rate on units is equal to the dividend rate on common stock. In order to maintain its status as a REIT, Simon must pay a minimum amount of dividends. Simon's future dividends and theOperating Partnership's future distributions will be determined by Simon's Board of Directors, in its sole discretion, based on actual and projected financial condition, liquidity and results of operations, cash available for dividends and limited partner distributions, cash reserves as deemed necessary for capital and operating expenditures, financing covenants, if any, and the amount required to maintain Simon's status as a REIT. OnFebruary 13, 2017 , Simon's Board of Directors authorized a two-year extension of the previously authorized$2.0 billion common stock repurchase plan throughMarch 31, 2019 . OnFebruary 11, 2019 , Simon's Board of Directors authorized a new common stock repurchase plan. Under the new plan, Simon may repurchase up to$2.0 billion of its common stock during the two-year period endingFebruary 11, 2021 in the open market or in privately negotiated transactions as market conditions warrant. During the six months endedJune 30, 2020 , Simon purchased 1,245,654 shares at an average price of$122.50 per share. During the six months endedJune 30, 2019 , Simon purchased 1,092,957 shares at an average price of$165.84 per share, of which 46,377 shares at an average price of$164.49 per share as part of the previous program. As Simon repurchases shares under these programs, theOperating Partnership repurchases an equal number of units from Simon. Forward-Looking Statements Certain statements made in this section or elsewhere in this Quarterly Report on Form 10-Q 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, uncertainties and other factors. Such factors include, but are not limited to: uncertainties regarding the impact of the COVID-19 pandemic and governmental restrictions intended to prevent its spread on our tenants' businesses, financial condition, results of operations, cash flow and liquidity and our ability to access the capital markets, satisfy our debt service obligations and make distributions to our stockholders; the inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise; changes in economic and market conditions that may adversely affect the general retail environment; the intensely competitive market environment in the retail industry; changes to applicable laws or regulations or the interpretation thereof; risks associated with the acquisition, development, redevelopment, expansion, leasing and management of properties; the inability to lease newly developed properties and renew leases and relet space at existing properties on favorable terms; the potential loss of anchor stores or major tenants; decreases in market rental rates; the impact of our substantial indebtedness on our future operations; any disruption in the financial markets that may adversely affect our ability to access capital 47 Table of Contents
for growth and satisfy our ongoing debt service requirements; any change in our credit rating; changes in market rates of interest and foreign exchange rates for foreign currencies; general risks related to real estate investments, including the illiquidity of real estate investments; security breaches that could compromise our information technology or infrastructure; risks relating to our joint venture properties; our continued ability to maintain our status as a REIT; changes in tax laws or regulations that result in adverse tax consequences; changes in the value of our investments in foreign entities; our ability to hedge interest rate and currency risk; changes in insurance costs; the availability of comprehensive insurance coverage; natural disasters; the potential for terrorist activities; environmental liabilities; the loss of key management personnel; and the transition of LIBOR to an alternative reference rate. We discussed these and other risks and uncertainties under the heading "Risk Factors" in the combined 2019 Annual Report on Form 10-K of Simon and theOperating Partnership and in this report. We may update that discussion in subsequent other periodic reports, but, except as required by law, 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.
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 portfolio 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 upon the definition set forth by theNational Association of Real Estate Investment Trusts ("NAREIT") Funds From Operations White Paper - 2018 Restatement. Our main business includes acquiring, owning, operating, developing, and redeveloping real estate in conjunction with the rental of real estate. Gain and losses of assets incidental to our main business are included in FFO. We determine FFO to be our share of consolidated net income computed in accordance with GAAP:
? excluding real estate related depreciation and amortization,
? excluding gains and losses from extraordinary items,
excluding gains and losses from the sale, disposal or property insurance
? recoveries of, or any impairment related to, depreciable retail operating
properties,
? plus the allocable portion of FFO of unconsolidated joint ventures based upon
economic ownership interest, and
? all determined on a consistent basis in accordance with GAAP.
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:
? do not represent cash flow from operations as defined by GAAP,
? should not be considered as an alternative to net income determined in
accordance with GAAP as a measure of operating performance, and
? are not an alternative to cash flows as a measure of liquidity.
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The following schedule reconciles total FFO to consolidated net income and, for Simon, diluted net income per share to diluted FFO per share.
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