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 ofSeptember 30, 2022 , we owned or held an interest in 197 income-producing properties inthe United States , which consisted of 94 malls, 69Premium Outlets , 14 Mills, six lifestyle centers, and 14 other retail properties in 37 states andPuerto Rico . We also own an 80% noncontrolling interest in theTaubman Realty Group, LLC , or TRG, which has an interest in 24 regional, super-regional, and outlet malls in theU.S. andAsia . In addition, we have redevelopment and expansion projects, including the addition of anchors, big box tenants, and restaurants, underway at properties in theNorth America ,Europe andAsia . Internationally, as ofSeptember 30, 2022 , we had ownership in 33Premium Outlets and Designer Outlet properties primarily located inAsia ,Europe , andCanada . As ofSeptember 30, 2022 , 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 14 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 had a material negative impact on economic and market conditions around the world, and, notwithstanding the fact that vaccines are being administered inthe United States and elsewhere, the pandemic 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 at times 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. As a result of the COVID-19 pandemic and these measures, the Company has experienced and may continue to 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 and investments. As we developed and implemented our response to the impact of the COVID-19 pandemic and restrictions 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.
Results Overview
Diluted earnings per share and diluted earnings per unit decreased$0.84 during the first nine months of 2022 to$4.46 from$5.30 for the same period last year. The decrease in diluted earnings per share and diluted earnings per unit was primarily attributable to:
a non-cash gain in 2021 on acquisitions and disposals of
? two properties of
gain on the consolidation of one property of
share/unit, and net gains of
related to property insurance recoveries of previously depreciated assets,
? a non-cash pre-tax gain in 2021 on exchange of equity interests of
million, or
decreased income from unconsolidated entities of
diluted share/unit, the majority of which is due to unfavorable year-over-year
operations from our other platform investments as well as the reversal of a
? previously established deferred tax liability at Klépierre in 2021 resulting in
a non-cash gain, of which our share was
offset by improved operations and core fundamentals in our other unconsolidated
entities,
? unrealized losses in fair value of equity instruments of
decreased interest expense in 2022 of
? share/unit, primarily due to the early extinguishment of nine secured loans in
the fourth quarter of 2021, the disposition of three retail properties in 2021,
and the refinancing of two retail properties at lower interest rates in 2021,
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decreased tax expense in 2022 of
? share/unit, primarily due to unfavorable year-over-year operations from other
platform investments, and a
gain on exchange of equity interests transaction in 2021 noted above,
? charges on early extinguishment of debt of
share/unit, in 2021, and
? improved operations and core fundamentals, as discussed below.
Portfolio NOI increased 5.5% for the nine month period in 2022 over the prior year period primarily as a result of improved operations in our domestic and international portfolios compared to the prior year. Average base minimum rent forU.S. Malls and Premium Outlets increased 1.7% to$54.80 psf as ofSeptember 30, 2022 , from$53.91 psf as ofSeptember 30, 2021 . Ending occupancy for ourU.S. Malls and Premium Outlets increased 1.7% to 94.5% as ofSeptember 30, 2022 , from 92.8% as ofSeptember 30, 2021 . Our effective overall borrowing rate atSeptember 30, 2022 on our consolidated indebtedness increased 15 basis point to 3.12% as compared to 2.97% atSeptember 30, 2021 . This is primarily due to an increase in effective overall borrowing rate on variable rate debt of 155 basis points (3.57% atSeptember 30, 2022 compared to 2.02% atSeptember 30, 2021 ) due to increasing interest rates, partially offset by a decrease in the effective overall borrowing rate on fixed rate debt of 20 basis points (3.10% atSeptember 30, 2022 as compared to 3.30% atSeptember 30, 2021 ). The weighted average years to maturity of our consolidated indebtedness was 7.6 years and 7.8 years atSeptember 30, 2022 andDecember 31, 2021 , respectively.
Our financing activity for the nine months ended
decreasing our borrowings under the
? commercial paper note program, or the Commercial Paper program, by
million,
completing on
notes:
? and
repay
credit facility, or the Supplemental Facility, 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 . 39
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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.
September 30 ,
2022 2021 Change (1)
U.S. Malls and Premium Outlets :
Ending Occupancy
Consolidated 94.5% 92.9% 160 bps
Unconsolidated 94.5% 92.4% 210 bps
Total Portfolio 94.5% 92.8% 170 bps
Average Base Minimum Rent per Square Foot
Consolidated $ 53.58 $ 52.51 2.0%
Unconsolidated $ 58.12 $ 57.81 0.5%
Total Portfolio $ 54.80 $ 53.91 1.7%
U.S. TRG:
Ending Occupancy 94.5% 90.3% 420 bpsAverage Base Minimum Rent per Square Foot $ 61.11 $ 58.18 5.0% The Mills: Ending Occupancy 97.8% 97.0% 80 bps Average Base Minimum Rent per Square Foot $ 34.69 $
33.68 3.0%
(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.
Current Leasing Activities
During the nine months endedSeptember 30, 2022 , we signed 983 new leases and 1,116 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 6.9 million square feet, of which 5.2 million square feet related to consolidated properties. During the comparable period in 2021, we signed 734 new leases and 1,310 renewal leases with a fixed minimum rent, comprising approximately 7.0 million square feet, of which 5.5 million square feet related to consolidated properties. The average annual initial base minimum rent for new leases was$54.53 per square foot in 2022 and$55.28 per square foot in 2021 with an average tenant allowance on new leases of$52.11 per square foot and$54.00 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.September 30 ,
2022 2021 Change
Ending Occupancy 99.3 % 99.5 % -20 bps
Average Base Minimum Rent per Square Foot ¥ 5,563 ¥
5,498 1.18 %
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Results of Operations
The following acquisitions and dispositions of consolidated properties affected our consolidated results in the comparative periods:
? On
Outlets from a joint venture, resulting in the consolidation of this property.
? During the second quarter of 2022, we disposed of one retail property.
? During 2021, we disposed of three retail properties.
? During the first quarter of 2021, we consolidated one
in
The following acquisitions, dispositions and openings of equity method investments and properties affected our income from unconsolidated entities in the comparative periods:
? During the third quarter of 2022, we disposed of one retail property.
? During the fourth quarter of 2021, we disposed of our noncontrolling interest
in one retail property.
On
? consideration of
cash consideration of
approximately 10.4%.
? On
in
On
? property licensing ventures of Forever 21 and Brooks Brothers for additional
interests in ABG.
On
? licensing rights of Eddie Bauer. Our non-controlling interest in the licensing
venture is 49% and was acquired for cash consideration of
? On
foot center in
In the first quarter of 2021, we and our partner, ABG, both acquired additional
? 12.5% interests in the licensing and operations of Forever 21 for
bringing our interest to 50%. Subsequently the Forever 21 operations were
merged into
For the purposes of the following comparison between the three and nine months endedSeptember 30, 2022 and 2021, 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 increased$7.5 million , of which the property transactions accounted for a$5.0 million decrease. Comparable lease income increased$12.5 million , or 1.1%. Total lease income increased primarily due to an increase in fixed lease income of$31.1 million primarily due to an increase in fixed minimum lease consideration, partially offset by a decrease in variable lease income of$23.6 million .
Total other income increased
Property operating expenses increased
Interest expense decreased
During 2021, we recorded a loss on extinguishment of debt of
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During 2021, we recorded a non-cash gain on exchange of equity interests of
Income and other tax expense decreased$59.0 million due to the impact in 2021 on deferred tax expense as a result of the ABG transaction noted above, which had a non-cash tax impact of$47.9 million , and lower tax expense in 2022 on our share of operating results from our other platform investments.
Income from unconsolidated entities decreased
During 2022, we recorded a$17.3 million gain primarily related to the disposition of one unconsolidated property, partially offset by a loss on the disposal of certain assets by Klépierre. During 2021, we recorded a gain of$88.0 million related to the disposition of one consolidated property and gains of$21.0 million related to property insurance recoveries of previously depreciated assets.
Simon's net income attributable to noncontrolling interests decreased
Nine months ended
Lease income increased$106.2 million , of which the property transactions accounted for a$22.9 million decrease. Comparable lease income increased$129.1 million , or 3.7%. Total lease income increased primarily due to an increase in fixed lease income of$91.0 million primarily due to an increase in fixed minimum lease consideration, reduction in reserves for collectability and higher occupancy, and an increase in variable lease income of$15.2 million primarily related to higher consideration based on tenant sales. Total other income decreased$12.0 million , primarily due to a decrease in lease settlement income of$29.6 million , a$14.9 million gain from the sale of our interest in a multi-family residential property in 2021, and a$6.4 million non-cash dilution gain on a non-retail investment in 2021, partially offset by an$17.1 million increase in fee and other income, a$12.2 million increase related toSimon Brand Ventures and gift card revenues and a$9.6 million increase related to land sale activity.
Property operating expenses increased
Home and regional office costs increased
Other expense increased
Interest expense decreased
During 2021, we recorded a loss on extinguishment of debt of
During 2021, we recorded a non-cash gain on exchange of equity interests of
Income and other tax expense decreased$77.2 million due to the impact in 2021 on deferred tax expense as a result of the ABG transaction noted above, which had a non-cash tax impact of$47.9 million , and lower tax expense in 2022 on our share of operating results from our other platform investments. Income from unconsolidated entities decreased$127.8 million primarily due to unfavorable results of operations year over year from our other platform investments of$139.0 million , as well as the reversal in 2021 of a previously established deferred tax liability at Klépierre resulting in a non-cash gain, of which our share was$118.4 million , partially offset partially by favorable year over year results of operations across the properties in 2022.
During 2022, we recorded a
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related to the disposition of two consolidated properties and the impact from
the consolidation of one property that was previously unconsolidated, and gains
of $21.0 million related to property insurance recoveries of previously
depreciated assets.
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 5.9% of our total consolidated debt atSeptember 30, 2022 . 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$3.2 billion in the aggregate during the nine months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , theOperating Partnership has a$4.0 billion unsecured revolving credit facility, or Credit Facility, and the Supplemental Facility, and together with the Credit Facility, the Credit Facilities. The Credit 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$67.6 million during the first nine months of 2022 to$601.5 million as ofSeptember 30, 2022 as a result of the operating and financing activity, as further discussed in "Cash Flows" below. OnSeptember 30, 2022 , we had an aggregate available borrowing capacity of approximately$7.4 billion under the Credit Facilities, net of outstanding borrowings of$125.0 million and letters of credit of$10.0 million . For the nine months endedSeptember 30, 2022 , the maximum aggregate outstanding balance under the Credit Facilities was$1.2 billion and the weighted average outstanding balance was$171.2 million . The weighted average interest rate was 1.5% for the nine months endedSeptember 30, 2022 . 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 2022. Cash Flows Our net cash flow from operating activities and distributions of capital from unconsolidated entities for the nine months endedSeptember 30, 2022 totaled$3.2 billion . In addition, we had net repayments from our debt financing and repayment activities of$310.3 million , including all amounts outstanding under the Commercial Paper program, in 2022. These activities are further discussed below under "Financing and Debt." During the first nine months of 2022, we also:
? 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 the repurchase of
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,
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? 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 2022, 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
At
AtSeptember 30, 2022 , we had an aggregate available borrowing capacity of$7.4 billion under the Credit Facilities. The maximum aggregate outstanding balance under the Credit Facilities, during the nine months endedSeptember 30, 2022 was$1.2 billion and the weighted average outstanding balance was$171.2 million . Letters of credit of$10.0 million were outstanding under the Credit Facilities as ofSeptember 30, 2022 . The Credit Facility can be increased in the form of additional commitments in an aggregate not to exceed$1.0 billion , for a total aggregate size of$5.0 billion , subject to obtaining additional lender commitments and satisfying certain customary conditions precedent. Borrowings may be denominated inU.S. dollars, Euro, Yen, Pounds 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 Credit Facility isJune 30, 2024 . The Credit Facility can be extended for two additional six-month periods toJune 30, 2025 , at our sole option, subject to satisfying certain customary conditions precedent. Borrowings under the Credit Facility bear interest, at our election, at either (i) (x) for Term Benchmark Loans, the Adjusted Term SOFR Rate, the applicable Local Rate, the Adjusted EURIBOR Rate, or the Adjusted TIBOR Rate, (y) for RFR Loans, if denominated in Sterling, SONIA plus a benchmark adjustment and if denominated in Dollars, Daily Simple SOFR plus a benchmark adjustment, or (z) for Daily SOFR Loans, the Adjusted Floating Overnight Daily SOFR Rate, in each case of clauses (x) through (z) above, plus a margin determined by our corporate credit rating of between 0.650% and 1.400% or (ii) for loans denominated inU.S. Dollars only, the base rate (which rate is equal to the greatest of the prime rate, the federal funds effective rate plus 0.500% or Adjusted Term SOFR Rate for one month plus 1.000%) (the "Base Rate"), plus a margin determined by our corporate credit rating of between 0.000% and 0.400%. The Credit Facility includes a facility fee determined by our corporate credit rating of between 0.100% and 0.300% on the aggregate revolving commitments under the Credit Facility. Based upon our current credit ratings, the interest rate on the Credit Facility is SOFR plus 72.5 basis points, plus a spread adjustment to account for the transition from LIBOR to SOFR. The Supplemental Facility's 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, Pounds, Sterling, Canadian dollars and Australian dollars. Borrowings in currencies other than theU.S. dollar are limited to 100% of the maximum revolving credit amount, as defined. The initial maturity date of the Supplemental Facility isJanuary 31, 2026 and can be extended for an additional year toJanuary 31, 2027 at our sole option, subject to satisfying certain customary conditions precedent. Borrowings under the Supplemental Facility bear interest, at the Company's election, at either (i) (x) for Term Benchmark Loans, the Adjusted Term SOFR Rate, the applicable Local Rate, the Adjusted EURIBOR Rate, or the Adjusted TIBOR Rate, (y) for RFR Loans, if denominated in Sterling, SONIA plus a benchmark adjustment and if denominated in Dollars, Daily Simple SOFR plus a benchmark adjustment, or (z) for Daily SOFR Loans, the Adjusted Floating Overnight Daily SOFR Rate, in each case of clauses (x) through (z) above, plus a margin determined by our corporate credit rating of between 0.650% and 1.400% or (ii) for loans denominated inU.S. Dollars only, the base rate (which rate is equal to the greatest of the prime rate, the federal funds effective rate plus 0.500% or Adjusted Term SOFR Rate for one month plus 1.000%) (the "Base Rate"), plus a margin determined by our corporate credit rating of between 0.000% and 0.400%. The Supplemental Facility includes a facility fee determined by our corporate credit rating of between 0.100% and 0.300% on the aggregate revolving commitments under the Supplemental Facility. Based upon our current credit ratings, the interest rate on the Supplemental Facility is SOFR plus 72.5 basis points, plus a spread adjustment to account for the transition from LIBOR to SOFR.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
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markets and rank (either by themselves or as a result of the guarantee described
above) pari passu with the Operating 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. On September 30, 2022 , we had no outstanding balance
under the Commercial Paper program. These borrowings reduce amounts otherwise
available under the Credit Facilities.
On January 11, 2022 , the Operating Partnership completed the issuance of the
following senior unsecured notes: $500 million with a floating interest rate of
SOFR plus 43 basis points, and $700 million with a fixed interest rate of
2.650%, with maturity dates of January 11, 2024 and February 1, 2032 ,
respectively. The proceeds were used to repay $1.05 billion outstanding under
the Supplemental Facility on January 12, 2022 .
Mortgage Debt
Total mortgage indebtedness was
Covenants Our unsecured debt agreements contain financial covenants and other non-financial covenants. The Credit 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 Credit 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 ofSeptember 30, 2022 , we were in compliance with all covenants of our unsecured debt. AtSeptember 30, 2022 , our consolidated subsidiaries were the borrowers under 38 non-recourse mortgage notes secured by mortgages on 41 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 mortgage notes were to fail to comply with these covenants, the lender could accelerate the debt and enforce its rights against their collateral. AtSeptember 30, 2022 , 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 ofSeptember 30, 2022 andDecember 31, 2021 , consisted of the following (dollars in thousands): Effective Effective Adjusted Balance Weighted Adjusted Weighted as of Average Balance as of Average Debt Subject to September 30, 2022 Interest Rate(1) December 31, 2021 Interest Rate(1) Fixed Rate$ 23,125,275 3.09%$ 23,364,566 2.99% Variable Rate 1,515,095 3.30% 1,956,456 1.22%$ 24,640,370 3.10%$ 25,321,022 2.86%
(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 2021 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 September 30, 2022 , for the remainder of 2022 and subsequent years thereafter
(dollars
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in thousands), assuming the obligations remain outstanding through initial maturities, including applicable exercise of available extension options:
2022 2023-2024 2025-2026 After 2026 Total
Long Term Debt (1) $ 842,578 $ 4,643,178 $ 6,491,443 $ 12,743,689 $ 24,720,888
Interest Payments (2) 189,525 1,417,160 1,054,252 3,879,420 6,540,357
(1) Represents principal maturities only and, therefore, excludes net discounts
and debt issuance costs.
(2) Variable rate interest payments are estimated based on the applicable LIBOR
or SOFR rate at
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 ofSeptember 30, 2022 , theOperating Partnership guaranteed joint venture-related mortgage indebtedness of$122.7 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 2020, one of our properties located in
During the quarter endedSeptember 30, 2021 , we recorded a$3.5 million gain related to property insurance recovery of previously depreciated assets. This amount was recorded in gain on acquisition of controlling interest, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairments, net. During the third quarter of 2020, one of our properties located inLouisiana experienced property damage and business interruption as a result of Hurricane Laura. We wrote-off assets of approximately$11.1 million and recorded an insurance recovery receivable, and have received$27.5 million of insurance proceeds from third-party carriers. The proceeds were used for property restoration and remediation and reduced the insurance recovery receivable. During the quarter endedSeptember 30, 2021 , we recorded a$17.5 million gain related to property insurance recovery of previously depreciated assets. This amount was recorded in gain on acquisition of controlling interest, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairments, net. 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. OnJune 17, 2022 , we acquired an additional interest inGloucester Premium Outlets from a joint venture partner for$14.0 million in cash consideration, including a pro-rata share of working capital, resulting in the consolidation of this property. The property is subject to an$85.7 million 3.29% variable rate mortgage loan. We accounted for this transaction as an asset acquisition and substantially all of our investment has been determined to relate to investment property. 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 2022, we disposed of our interest in one consolidated retail property. The proceeds from this transaction were$59.0 million , resulting in a loss of$15.6 million . We also recorded a non-cash gain of$19.9 million related to the disposition of one unconsolidated retail property in satisfaction of its$99.6 million non-recourse mortgage loan. These are included in in gain on 46
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acquisition of controlling interest, sale or disposal of, or recovery on, assets and interest in unconsolidated entities and impairment, net in the accompanying consolidated statement of operations and comprehensive income. During 2021, we recorded non-cash net gains of$176.8 million primarily related to disposition activity which included the foreclosure of three consolidated retail properties in satisfaction of their respective$180.0 million ,$120.9 million and$100.0 million non-recourse mortgage loans. We also disposed of our interest in an unconsolidated property resulting in a gain of$3.4 million .
Joint Venture Formation and Other Investment Activity
OnOctober 11, 2022 , we announced a strategic partnership withJamestown , a global real estate investment and asset management firm, anticipated to close prior to the end of 2022. Upon closing, we will acquire a 50% non-controlling interest inJamestown .
During the first quarter of 2022,
OnJuly 1, 2021 , we contributed to ABG all of our interests in both the Forever 21 and Brooks Brothers intellectual property licensing ventures in exchange for additional interests in ABG. As a result, in the third quarter of 2021, we recognized a non-cash gain of$159.8 million representing the difference between fair value of the interests received and the carrying value of$102.7 million of our interests in the licensing ventures, less costs to sell. OnDecember 20, 2021 , we sold a portion of our interest in ABG, resulting in a pre-tax gain of$18.8 million . In connection with this transaction, we recorded taxes of$8.0 million . Subsequently we acquired additional interests in ABG for tax consideration of$100.0 million . AtDecember 31, 2021 , our noncontrolling interest in ABG was approximately 10.4%. OnJune 1, 2021 , we and our partner, ABG, acquired the intellectual property licensing rights of Eddie Bauer. Our non-controlling interest in the licensing venture is 49% and was acquired for cash consideration of$100.8 million . In the first quarter of 2021, we and our partner, ABG, each acquired additional 12.5% interests in the licensing and operations of Forever 21, our share of which was$56.3 million , bringing our interest to 50%. Subsequently the Forever 21 operations were merged intoSPARC Group . OnDecember 29, 2020 , we completed the acquisition of an 80% ownership interest in TRG, which has an ownership interest in 24 regional, super-regional, and outlet malls in theU.S. andAsia . Under the terms of the transaction, we, through theOperating Partnership , acquired all of Taubman Centers, Inc. common stock for$43.00 per share in cash. Total consideration for the acquisition, including the redemption of Taubman's$192.5 million 6.5% Series J Cumulative Preferred Shares and its$170.0 million 6.25% Series K Cumulative Preferred Shares, and the issuance of 955,705Operating Partnership units, was approximately$3.5 billion . Our investment includes the 6.38% Series A Cumulative Redeemable Preferred Units for$362.5 million issued to us.
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 inNorth America ,Europe andAsia . 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$891 million . Simon's share of remaining net cash funding required to complete the new development and redevelopment projects currently under construction is approximately$215 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 7-10% 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, 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 2022 or 2023 is$142 million , primarily funded through reinvested joint venture cash flow and construction loans. 47
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The following table describes these new development and expansion projects as well as our share of the estimated total cost as ofSeptember 30, 2022 (in millions): Gross Our Our Share of Our Share of Projected/Actual Leasable
Ownership Projected
Location Area (sqft) Percentage (in Local Currency) (in USD) (1) Date
New Development Projects:
Fukaya-Hanazono Premium Outlets Fukaya City, Japan 296,300 40% JPY 6,153 $ 42.6 Oct. - 2022
74% EUR 119.5 $ 117.1 Mar. - 2023
Expansion:
Busan Premium Outlet Phase 2 Busan, South Korea 194,000 50% KRW 72,933 $ 50.8 Oct. -
2024
Dividends, Distributions and Stock Repurchase Program
Simon paid a common stock dividend of$1.75 per share in the third quarter of 2022 and$5.10 per share for the nine months endedSeptember 30, 2022 . Simon paid common stock dividends of$5.50 per share for the nine months endedSeptember 30, 2021 .The Operating Partnership paid distributions per unit for the same amounts. OnNovember 1, 2022 , Simon's Board of Directors declared a quarterly cash dividend for the fourth quarter of 2022 of$1.80 per share, payable onDecember 30, 2022 to shareholders of record onDecember 9, 2022 .
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. OnMay 9, 2022 , Simon's Board of Directors authorized a common stock repurchase plan. Under the plan, Simon may repurchase up to$2.0 billion of its common stock during the two-year period commencing onMay 16, 2022 and ending onMay 16, 2024 in the open market or in privately negotiated transactions as market conditions warrant. During the nine months endedSeptember 30, 2022 , Simon purchased 1,830,022 shares at an average price of$98.57 per share. 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 the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained, and it is possible that the Company's 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: changes in economic and market conditions that may adversely affect the general retail environment; the inability to renew leases and relet vacant space at existing properties on favorable terms; an increase in vacant space at our properties; the potential loss of anchor stores or major tenants; the inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise; the intensely competitive market environment in the retail industry, including e-commerce; the inability to lease newly developed properties on favorable terms; our international activities subjecting us to risks that are different from or greater than those associated with our domestic operations, including changes in foreign exchange rates; changes in market rates of interest; risks associated with the acquisition, development, redevelopment, expansion, leasing and management of properties; general risks related to real estate investments, including the illiquidity of real estate investments; the impact of our substantial indebtedness on our future operations, including covenants in the governing agreements that impose restrictions on us that may affect our ability to operate freely; any disruption in the financial markets that may adversely affect our ability to access capital for growth and satisfy our ongoing debt service requirements; any change in our credit rating; the continuing transition of LIBOR to SOFR; our continued ability to maintain our status as a REIT; changes in tax laws or regulations that result in adverse tax consequences; risks relating to our joint venture properties, including guarantees of certain joint venture indebtedness; environmental liabilities; the conflict inUkraine ; natural disasters; the availability of comprehensive insurance coverage; the potential for terrorist activities; security breaches that could compromise our information technology or infrastructure; uncertainties regarding the impact of pandemics, epidemics or public health crises, and the associated governmental restrictions on our business, financial condition, results of operations, cash flow and liquidity; and the loss of key management personnel. The Company discusses these and other risks and uncertainties under the heading "Risk Factors" in its annual and quarterly periodic reports filed with theSEC . The Company may update that discussion in subsequent other periodic reports, but except as required by law, the Company undertakes no duty or obligation to update or revise these forward-looking statements, whether as a result of new information, future developments, or
otherwise.
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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, beneficial
interest of combined 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 are providing different components of NOI,
such as Portfolio NOI (a component of beneficial interest of combined NOI that
relates to the operational performance of our global real estate portfolio), to
provide investors with disaggregated information to further differentiate our
global real estate portfolio performance from corporate and other platform
investments.
We determine FFO based upon the definition set forth by the National 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 acquisition of controlling interest, 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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