Simon Property Is Improving Balance Sheet through Refinancing

High debt-to-equity ratio

At the end of the second quarter of 2018, Simon Property (SPG) had a debt-to-equity ratio of 7.06x, which was higher than the first-quarter level of 6.83x as well as the industry average of 0.97x. The company exited the quarter with $7 billion of liquidity, which consists of cash in hand, its share of joint venture cash, and available capacity under its revolving credit facilities.

Simon Property Is Improving Balance Sheet through Refinancing

However, Simon Property in its second-quarter 2018 earnings conference call stated that it is generating enough income to accommodate its financial obligations. Simon Property is working on several development projects to expand its business. As of June 30, 2018, it had as many as 23 ongoing expansion and redevelopment projects in progress across the United States, Europe, Asia, and Canada. These investments require capital, which Simon Property sources through debt. Thus, it is essential for the company to leverage its balance sheet optimally.

Refinancing activities

In the second quarter, Simon Property refinanced its debt effectively to lower its effective borrowing costs. It completed the refinancing of eight mortgage loans totaling $2.4 billion. The average weighted interest rate and term on these loans were 3.98% and 8.9 years, respectively.

The transaction helped it to slightly lower its weighted average interest rate on total mortgage loans on a quarter-over-quarter basis. As of June 30, the average interest rate on mortgage loans was 3.85% compared with 3.88% at the end of the first quarter of 2018.

The effectiveness of Simon Property’s debt management strategy is also evident in the fact that total interest expenses during the second quarter came at $206.6, slightly lower than the year-ago quarter’s level of $207.2 million.

Competitors such as National Retail Properties (NNN), GGP (GGP), and Kimco Realty (KIM) have debt-to-equity ratios of 0.82x, 1.56x, and 0.94x, respectively.

Simon Property makes up ~8.2% of the Real Estate Select Sector SPDR Fund ETF (XLRE).