filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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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., or Simon, is a Delaware 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. REITs will generally not be liable for federal corporate income taxes as long as they continue to distribute not less than 100% of their taxable income. Simon Property Group, L.P., or the Operating Partnership, is our majority-owned partnership subsidiary that owns all of our real estate properties and other assets. In this discussion, the terms "we", "us" and "our" refer to Simon, the Operating Partnership, and its subsidiaries.
We own, develop and manage retail real estate properties, which consist primarily of malls, Premium Outlets®, and The Mills®. As of September 30, 2015, we owned or held an interest in 208 income-producing properties in the United States, which consisted of 109 malls, 69 Premium Outlets, 14 Mills, three lifestyle centers, and 13 other retail properties in 37 states and Puerto Rico. We opened two Premium Outlets in October 2015 and have three outlets and two other significant retail projects under development. In addition, we have redevelopment and expansion projects, including the addition of anchors, big box tenants, and restaurants, underway at 30 properties in the U.S. Internationally, as of September 30, 2015, we had ownership interests in nine Premium Outlets in Japan, three Premium Outlets in South Korea, two Premium Outlets in Canada, one Premium Outlet in Mexico, and one Premium Outlet in Malaysia. As of September 30, 2015, we had a noncontrolling ownership interest in a joint venture that holds five outlet properties in Europe and one outlet property in Canada. Of the five properties in Europe, two are located in Italy and one each is located in Austria, the Netherlands, and the United Kingdom. Additionally, as of September 30, 2015, we owned a 20.3% 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 16 countries in Europe.
We generate the majority of our revenues from leases with retail tenants including:
base minimum rents,
overage and percentage rents based on tenants' sales volumes, and
recoverable expenditures such as property operating, real estate taxes, repair and maintenance, and advertising and promotional expenditures.
Revenues of our management company, after intercompany eliminations, consist primarily of management fees that are typically based upon the revenues of the property being managed.
We invest in real estate properties to maximize total financial return which includes both operating cash flows and capital appreciation. We seek growth in earnings, funds from operations, or FFO, and cash flows by enhancing the profitability and operation of our properties and investments. We seek to accomplish this growth through the following:
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.
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 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, net operating income, or NOI, and comparable property NOI (NOI for properties owned and operating in both periods under comparison) to be key measures of operating performance that are not specifically defined by accounting principles generally accepted in the United States, or GAAP. We use these measures internally to evaluate the operating performance of our portfolio and provide a basis for comparison with other real estate companies. Reconciliations of these measures to the most comparable GAAP measure are included below in this discussion.
Results Overview
Diluted earnings per common share increased $1.40 during the first nine months of 2015 to $4.62 from $3.22 for the same period last year. The increase in diluted earnings per common share was primarily attributable to:
improved operating performance and core business fundamentals in 2015 and the impact of our acquisition and expansion activity,
decreased interest expense in 2015 of $66.1 million, or $0.18 per diluted share,
increased consolidated lease settlement activity of $25.3 million, or $0.07 per diluted share,
a non-cash gain on Klépierre's acquisition of Corio N.V., or Corio, of $206.9 million, or $0.57 per diluted share,
a 2015 gain of $80.2 million, or $0.22 per diluted share, from the sale of marketable securities, and
a 2015 non-cash gain of $16.3 million, or $0.05 per diluted share, due to the disposition of our interests in two unconsolidated properties,
partially offset by the loss of $29.3 million ($67.5 million from operations net of $38.2 million of transaction expenses), or $0.08 per diluted share ($0.18 from operations net of $0.10 of transaction expenses), from the spin-off of WP Glimcher Inc. (formerly known as Washington Prime Group Inc.), or Washington Prime,
a 2014 gain on acquisitions and dispositions of $154.2 million, or $0.43 per diluted share, primarily related to Klépierre's sale of a portfolio of 126 retail galleries of which our share of the gain was $136.5 million, or $0.38 per diluted share, and
a loss on extinguishment of debt in 2014 of $127.6 million, or $0.35 per diluted share.
Core business fundamentals during the first nine months of 2015 improved compared to the first nine months of 2014, primarily driven by higher tenant sales and strong leasing activity. Portfolio NOI grew by 7.3% for the nine month period in 2015 over the prior year period. Comparable property NOI also grew 3.8% for our portfolio of U.S. Malls, Premium Outlets, and The Mills. Total sales per square foot, or psf, increased 0.5% from $613 psf at September 30, 2014 to $616 psf at September 30, 2015, for our U.S. Malls and Premium Outlets. Average base minimum rent for U.S. Malls and Premium Outlets increased 4.9% to $48.57 psf as of September 30, 2015, from $46.29 psf as of September 30, 2014. Releasing spreads remained positive in our U.S. Malls and Premium Outlets, as we were able to lease available square feet at higher rents than the expiring rental rates on the same space, resulting in a releasing spread (based on total tenant payments — base minimum rent plus common area maintenance) of $11.00 psf ($70.78 openings compared to $59.78 closings) as of September 30, 2015, representing an 18.4% increase over expiring payments. Ending occupancy for our U.S. Malls and Premium Outlets was 96.1% as of September 30, 2015, as compared to 96.9% as of September 30, 2014, a decrease of 80 basis points primarily as a result of tenant bankruptcy activity announced in the first quarter of 2015.
Our effective overall borrowing rate at September 30, 2015 on our consolidated indebtedness decreased 31 basis points to 4.11% as compared to 4.42% at September 30, 2014. This reduction was primarily due to a decrease in the effective overall borrowing rate on fixed rate debt of 30 basis points (4.41% at September 30, 2015 as compared to 4.71% at September 30, 2014). At September 30, 2015, the weighted average years to maturity of our consolidated indebtedness was 5.6 years as compared to 6.2 years at December 31, 2014. Our financing activities for the nine months ended September 30, 2015 included:
Acquiring two properties — Jersey Gardens in Elizabeth, New Jersey (renamed The Mills at Jersey Gardens) and University Park Village in Fort Worth, Texas, subject to existing fixed-rate mortgage loans of $350.0 million and $55.0 million, respectively, which mature on November 1, 2020 and May 1, 2028 and bear interest at 3.83% and 3.85%, respectively.
Increasing our Euro denominated borrowings by $704.9 million (U.S. dollar equivalent) on the multi-currency tranche of the Operating Partnership's $4.0 billion unsecured revolving credit facility, or Credit Facility.
Increasing our borrowings under the Operating Partnership's global unsecured commercial paper note program, or the Commercial Paper program, by $410.0 million through the issuance of U.S. dollar denominated notes.
Issuing $500.0 million of senior unsecured notes at a fixed interest rate of 2.50% with a maturity date of September 1, 2020 and $600.0 million of senior unsecured notes at a fixed interest rate of 3.50% with a maturity date of September 1, 2025 on August 17, 2015.
Redeeming at par or repaying at maturity $693.5 million of senior unsecured notes with fixed rates ranging from 5.10% to 5.75%.
United States Portfolio Data
The portfolio data discussed in this overview includes the following key operating statistics: ending occupancy, average base minimum rent per square foot, and total sales per square foot for our domestic assets. We include acquired properties in this data beginning in the year of acquisition and remove disposed properties in the year of disposition. The Washington Prime properties have been removed from the portfolio data for all periods presented. For comparative purposes, we separate the information related to The Mills from our other U.S. operations. We also do not include any properties located outside of the United States.
The following table sets forth these key operating statistics for:
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, 2015 | September 30, 2014 | %/Basis Points Change (1) | ||||
| U.S. Malls and Premium Outlets: | ||||||
| Ending Occupancy | ||||||
| Consolidated | 96.4% | 97.0% | –60 bps | |||
| Unconsolidated | 95.4% | 96.5% | –110 bps | |||
| Total Portfolio | 96.1% | 96.9% | –80 bps | |||
| Average Base Minimum Rent per Square Foot | ||||||
| Consolidated | $47.11 | $44.90 | 4.9% | |||
| Unconsolidated | $52.89 | $50.22 | 5.3% | |||
| Total Portfolio | $48.57 | $46.29 | 4.9% | |||
| Total Sales per Square Foot | ||||||
| Consolidated | $604 | $599 | 0.9% | |||
| Unconsolidated | $658 | $664 | –0.9% | |||
| Total Portfolio | $616 | $613 | 0.5% | |||
| The Mills: | ||||||
| Ending Occupancy | 98.6% | 98.2% | +40 bps | |||
| Average Base Minimum Rent per Square Foot | $26.78 | $25.14 | 6.5% | |||
| Total Sales per Square Foot | $570 | $534 | 6.7% |
(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 Sales per Square Foot. Total sales include total reported retail tenant sales on a trailing 12-month basis at owned GLA (for mall stores with less than 10,000 square feet) in the malls and The Mills and all reporting tenants in the Premium Outlets. Retail sales at owned GLA affect revenue and profitability levels because sales determine the amount of minimum rent that can be charged, the percentage rent realized, and the recoverable expenses (common area maintenance, real estate taxes, etc.) that tenants can afford to pay.
Current Leasing Activities
During the nine months ended September 30, 2015, we signed 643 new leases and 1,226 renewal leases (excluding mall anchors and majors, new development, redevelopment, expansion, downsizing and relocation) with a fixed minimum rent across our U.S. Malls and Premium Outlets portfolio, comprising approximately 5.8 million square feet, of which 4.5 million square feet related to consolidated properties. During the comparable period in 2014, we signed 626 new leases and 1,243 renewal leases with a fixed minimum rent, comprising approximately 5.9 million square feet, of which 4.4 million square feet related to consolidated properties. The average annual initial base minimum rent for new leases was $54.01 per square foot in 2015 and $59.14 per square foot in 2014 with an average tenant allowance on new leases of $37.47 per square foot and $37.35 per square foot, respectively.
International Property Data
The following are selected key operating statistics for our Premium Outlets in Japan. The information used to prepare these statistics has been supplied by the managing venture partner.
| September 30, 2015 | September 30, 2014 | %/Basis Points Change | ||||
| Ending Occupancy | 99.8% | 98.8% | +100 bps | |||
| Total Sales per Square Foot | ¥100,557 | ¥93,365 | 7.70% | |||
| Average Base Minimum Rent per Square Foot | ¥4,956 | ¥4,916 | 0.81% |
Results of Operations
In addition to the activity discussed above in the "Results Overview" section, the following acquisitions, openings, and dispositions of consolidated properties affected our consolidated results from continuing operations in the comparative periods:
On January 15, 2015, we acquired a 100% interest in Jersey Gardens (renamed The Mills at Jersey Gardens) in Elizabeth, New Jersey and University Park Village in Fort Worth, Texas, properties previously owned by Glimcher Realty Trust.
On January 30, 2014, we acquired the remaining 50% interest in the previously unconsolidated Arizona Mills from our joint venture partner.
On January 10, 2014, we acquired one of our partner's interests in a portfolio of ten properties, seven of which we had previously consolidated.
During 2014, we disposed of three retail properties.
In addition to the activities discussed above and in "Results Overview," the following acquisitions, dispositions and openings of joint venture properties affected our income from unconsolidated entities in the comparative periods:
During the third quarter of 2015, we closed on our previously announced joint venture with Hudson's Bay Company, or HBC, whereby we have an 8.2% noncontrolling interest in a joint venture to which HBC contributed 42 of its properties in the U.S. Later in the third quarter of 2015, the joint venture acquired an additional 41 properties in Germany concurrently with HBC's acquisition of Galeria Holding, the parent company of Germany's leading department store, Kaufhof, as further discussed in Note 5 of the condensed notes to the consolidated financial statements. All of the joint venture's properties have been leased to affiliates of HBC.
On August 13, 2015, we and our partner opened Gloucester Premium Outlets, a 370,000 square foot outlet center. We have a 50% noncontrolling interest in this new center.
On July 9, 2015, through a European joint venture, we and our partner opened Vancouver Designer Outlet, a 242,000 square foot outlet center. We have a 45% noncontrolling interest in this new center.
During the second quarter of 2015, we formed a joint venture with Sears Holdings, or Sears, whereby we have a 50% noncontrolling interest in a joint venture in which Sears contributed 10 of its properties located at our malls.
During the nine months ended September 30, 2015, we disposed of our interests in two retail properties.
On October 30, 2014, we and our partner, Calloway Real Estate Investment Trust, opened Premium Outlets Montreal in Canada, a 365,000 square foot outlet center serving the Greater Montreal area. We have a 50% noncontrolling interest in this new center.
On August 14, 2014, we and our partner opened Twin Cities Premium Outlets, a 409,000 square foot outlet center. We have a 35% noncontrolling interest in this new center.
On July 31, 2014, we and our partner, Tanger Factory Outlet Centers, opened Charlotte Premium Outlets, a 399,000 square foot outlet center. We have a 50% noncontrolling interest in this new center.
On April 16, 2014, Klépierre disposed of a portfolio of 126 properties located in France, Spain, and Italy.
On April 10, 2014, through a European joint venture, we acquired an additional 22.5% noncontrolling interest in Ashford Designer Outlet, increasing our ownership interest in this property to 45%.
On January 10, 2014, as discussed above, we acquired one of our partner's redeemable interests in a portfolio of ten properties, seven of which were consolidated and three of which were unconsolidated prior to the transaction. The three unconsolidated properties remained unconsolidated following the transaction.
For the purposes of the following comparison between the three and nine months ended September 30, 2015 and 2014, the above transactions are referred to as the property transactions. In the following discussions of our results of operations, "comparable" refers to properties we owned and operated in both of the periods under comparison.
Three months ended September 30, 2015 vs. Three months ended September 30, 2014
Minimum rents increased $48.2 million during 2015, of which the property transactions accounted for $11.2 million of the increase. Comparable rents increased $37.0 million, or 5.2%, primarily attributable to an increase in base minimum rents.
Tenant reimbursements increased $22.6 million, due to a $4.1 million increase attributable to the property transactions and a $18.5 million, or 5.6%, increase in the comparable properties primarily due to annual fixed contractual increases related to common area maintenance and real estate tax recoveries.
Total other income increased $17.6 million, principally as a result of a $20.3 million increase in lease settlement income, partially offset by a $3.0 million decrease in interest and dividend income.
Property operating expense increased $9.1 million, due to a $2.4 million increase related to the property transactions, and a $6.7 million increase in comparable property activity as a result of inflationary cost increases.
Real estate taxes increased $16.8 million, of which the property transactions accounted for $4.9 million, with the remaining $11.9 million increase primarily caused by higher tax estimates in 2015.
The (recovery of) provision for credit losses decreased $2.1 million due to a decrease in tenant bankruptcies and an increase in recoveries as compared to 2014.
Home and regional office costs decreased $3.5 million primarily related to higher capitalized costs as a result of our development and redevelopment activity.
Other expenses increased $6.9 million primarily due to an increase in legal costs and professional fees and a favorable net foreign currency revaluation impact on foreign currency denominated assets and liabilities during the 2014 period.
Interest expense decreased $20.1 million primarily due to the net impact of our financing activities during 2014 and 2015 and the reduction in our effective overall borrowing rate as previously discussed.
During the quarter ended September 30, 2014, we recorded a loss on extinguishment of debt of $127.6 million as a result of the tender offers and redemption.
Income and other taxes decreased $2.9 million primarily due to taxes related to certain of our international investments and a decrease in state income taxes.
Income from unconsolidated entities increased $12.6 million primarily due to favorable results of operations and financing activity of joint venture properties as well as our acquisition and development activity.
During the quarter ended September 30, 2014, we recorded a gain of $17.7 million related to our disposal of two retail properties.
Net income attributable to noncontrolling interests increased $27.5 million due to an increase in the net income of the Operating Partnership.
Nine months ended September 30, 2015 vs. Nine months ended September 30, 2014
Minimum rents increased $119.0 million during 2015, of which the property transactions accounted for $32.8 million of the increase. Comparable rents increased $86.2 million, or 4.1%, primarily attributable to an increase in base minimum rents.
Tenant reimbursements increased $59.4 million, due to a $17.0 million increase attributable to the property transactions and a $42.3 million, or 4.5%, increase in the comparable properties primarily due to annual fixed contractual increases related to common area maintenance and real estate tax recoveries.
Total other income increased $120.8 million, principally as a result of the following:
an $80.2 million gain on the sale of marketable securities in the second quarter of 2015,
a $25.3 million increase in lease settlement income,
a $9.6 million increase attributable to dividend income,
an $8.3 million gain on the sale of our interests in certain pre-development projects in Europe, and
$4.5 million of net other activity,
partially offset by a $7.1 million decrease in land sale activity.
Property operating expense increased $21.1 million, due to a $7.7 million increase related to the property transactions, and a $13.4 million increase in comparable property activity as a result of inflationary cost increases.
Real estate taxes increased $36.5 million, of which the property transactions accounted for $10.2 million, with the remaining increase primarily caused by higher tax estimates in 2015.
Home and regional office costs decreased $8.5 million primarily related to higher capitalized costs in 2015 as a result of our development and redevelopment activity and higher personnel costs, including one-time items related to the spin-off of Washington Prime during 2014.
Other expenses increased $11.6 million primarily due to an increase in legal costs and professional fees and costs associated with our first quarter acquisition activity in 2015, partially offset by a favorable net foreign currency revaluation impact on foreign currency denominated assets and liabilities.
Interest expense decreased $66.1 million primarily due to the net impact of our financing activities during 2014 and 2015 and the reduction in our effective overall borrowing rate as previously discussed.
During 2014, we recorded a loss on extinguishment of debt of $127.6 million as a result of the tender offers and redemption that occurred during the third quarter of 2014.
Income and other taxes decreased $6.6 million primarily due to taxes related to certain of our international investments.
Income from unconsolidated entities increased $34.8 million primarily due to favorable results of operations and financing activity of joint venture properties as well as our acquisition and development activity.
During the nine months ended September 30, 2015, we disposed of our interests in two unconsolidated retail properties resulting in a gain of $16.3 million and we recorded a non-cash gain on Klépierre's acquisition of Corio of
$206.9 million as discussed in Note 3 of the accompanying Condensed Notes to Consolidated Financial Statements. During the nine months ended September 30, 2014, we recorded a gain related to Klépierre's sale of a portfolio of 126 properties and our disposal of two retail properties. Additionally, we acquired the remaining 50% interest in Arizona Mills from our joint venture partner. The property was previously accounted for under the equity method and we recognized a non-cash gain upon consolidation of this property. The aggregate gain recognized on these transactions was $154.2 million.
Discontinued operations decreased $29.3 million as the first nine months of 2014 included approximately five months of our ownership of the Washington Prime properties, whereas 2015 did not include any ownership of those properties. Results for 2014 include $38.2 million in transaction costs related to the Washington Prime spin-off.
Net income attributable to noncontrolling interests increased $72.0 million due to an increase in the net income of the Operating Partnership.
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 only 9.5% of our total consolidated debt at September 30, 2015. We also enter into interest rate protection agreements to manage our interest rate risk. We derive most of our liquidity from positive net cash flow from operations and distributions of capital from unconsolidated entities that totaled $3.0 billion during the nine months ended September 30, 2015. In addition, the Credit Facility, the Operating Partnership's $2.75 billion supplemental unsecured revolving credit facility, or Supplemental Facility, and the Commercial Paper program provide alternative sources of liquidity as our cash needs vary from time to time. Borrowing capacity under these credit facilities may be increased as discussed further below.
Our balance of cash and cash equivalents increased $244.6 million during the first nine months of 2015 to $856.9 million as of September 30, 2015 as further discussed in "Cash Flows" below.
On September 30, 2015, we had an aggregate available borrowing capacity of $4.6 billion under the Credit Facility and Supplemental Facility, net of outstanding borrowings of $1.3 billion and letters of credit of $37.1 million. For the nine months ended September 30, 2015, the maximum aggregate amount outstanding under the two credit facilities was $1.8 billion and the weighted average amount outstanding was $1.2 billion. The weighted average interest rate was 0.76% for the nine months ended September 30, 2015. Further, on October 6, 2014, the Operating Partnership entered into the global Commercial Paper program and on March 2, 2015, increased the maximum aggregate program size from $500.0 million to $1.0 billion as further discussed below.
We and the Operating Partnership have historically had access to public equity and 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 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. We may also, from time to time, access the equity capital markets to accomplish our business objectives. We believe we have sufficient cash on hand and availability under the Credit Facility, the Supplemental Facility, and the Commercial Paper program to address our debt maturities and capital needs through 2015.
Cash Flows
Our net cash flow from operating activities and distributions of capital from unconsolidated entities for the nine months ended September 30, 2015 totaled $3.0 billion. In addition, we had net proceeds from our debt financing and repayment activities of $1.4 billion in 2015. These activities are further discussed below under "Financing and Debt." During the first nine months of 2015, we or the Operating Partnership also:
funded the acquisition of two properties, acquired the land and existing structure anchored to one of our wholly owned properties, funded an additional equity stake in Klépierre, funded the acquisition of our joint venture interest in ten assets that are adjacent to our existing properties, funded our portion of a joint venture development project, and funded the purchase of a noncontrolling interest in a joint venture, the aggregate cash portion of which was $1.4 billion,
paid stockholder dividends and unitholder distributions totaling $1.6 billion,
funded consolidated capital expenditures of $772.9 million (including development and other costs of $114.3 million, redevelopment and expansion costs of $522.2 million, and tenant costs and other operational capital expenditures of $136.4 million),
funded investments in unconsolidated entities of $233.4 million,
funded the repurchase of our common stock and the purchase of limited partner units of $505.7 million, and
received proceeds on the sale of marketable securities of $454.0 million.
In general, we anticipate that cash generated from operations will be sufficient to meet operating expenses, monthly debt service, recurring capital expenditures, and dividends to stockholders necessary to maintain our REIT qualification on a long-term basis. In addition, we expect to be able to generate or obtain capital for nonrecurring capital expenditures, such as acquisitions, major building redevelopments and expansions, as well as for scheduled principal maturities on outstanding indebtedness, from:
excess cash generated from operating performance and working capital reserves,
borrowings on our 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 2015, and we consider these projected cash flows in our sources and uses of cash. These cash flows are principally derived from rents paid by our retail tenants. A significant deterioration in projected cash flows from operations could cause us to increase our reliance on available funds from our credit facilities, curtail planned capital expenditures, or seek other additional sources of financing as discussed above.
Financing and Debt
Unsecured Debt
At September 30, 2015, our unsecured debt consisted of $13.7 billion of senior unsecured notes of the Operating Partnership, net of discounts, $1.3 billion outstanding under the Credit Facility, $240.0 million outstanding under an unsecured term loan, and $803.6 million outstanding under the Commercial Paper program. The September 30, 2015 balance on the Credit Facility included $1.1 billion (U.S. dollar equivalent) of Euro-denominated borrowings and $185.8 million (U.S. dollar equivalent) of Yen-denominated borrowings. At September 30, 2015, the outstanding amount under the Commercial Paper program was $803.6 million, of which $193.6 million was related to U.S. dollar equivalent of Euro-denominated notes. Foreign currency denominated borrowings under both the Credit Facility and Commercial Paper program are designated as net investment hedges of a portion of our international investments.
On September 30, 2015, we had an aggregate available borrowing capacity of $4.6 billion under the Credit Facility and the Supplemental Facility. The maximum aggregate outstanding balance under the two credit facilities during the nine months ended September 30, 2015 was $1.8 billion and the weighted average outstanding balance was $1.2 billion. Letters of credit of $37.1 million were outstanding under the two credit facilities as of September 30, 2015.
The Credit Facility's initial borrowing capacity of $4.0 billion may be increased to $5.0 billion during its term and provides for borrowings denominated in U.S. Dollars, Euros, Yen, Sterling, Canadian Dollars and Australian Dollars. Borrowings in currencies other than the U.S. Dollar are limited to 75% of the maximum revolving credit amount, as defined. The initial maturity date of the Credit Facility is June 30, 2018 and can be extended for an additional year to June 30, 2019 at our sole option. The base interest rate on the Credit Facility is LIBOR plus 80 basis points with an additional facility fee of 10 basis points.
On March 2, 2015, the Operating Partnership amended and extended the Supplemental Facility. The initial borrowing capacity of $2.0 billion has been increased to $2.75 billion, may be further increased to $3.5 billion during its term, will initially mature on June 30, 2019 and can be extended for an additional year to June 30, 2020 at our sole option. The base interest rate on the amended Supplemental Facility was reduced to LIBOR plus 80 basis points and the additional facility fee was reduced to 10 basis points. The Supplemental Facility provides for borrowings denominated in U.S. Dollars, Euro, Yen, Sterling, Canadian Dollars and Australian Dollars.
On August 17, 2015, the Operating Partnership issued $500.0 million of senior unsecured notes at a fixed interest rate of 2.50% with a maturity date of September 1, 2020 and $600.0 million of senior unsecured notes at a fixed interest rate of 3.50% with a maturity date of September 1, 2025. Proceeds from the unsecured notes offering were used to repay debt and for general corporate purposes.
On March 2, 2015, the Operating Partnership increased the maximum aggregate program size of its Commercial Paper program from $500.0 million to $1.0 billion, or the non-U.S. dollar equivalent thereof. The Operating Partnership may
issue unsecured commercial paper notes, denominated in U.S. dollars, Euros and other currencies. Notes issued in non-U.S. currencies may be issued by one or more subsidiaries of the Operating Partnership and are guaranteed by the Operating Partnership. Notes will be sold under customary terms in the U.S. and Euro commercial paper note markets and will rank (either by themselves or as a result of the guarantee described above) pari passu with the Operating Partnership's other unsecured senior indebtedness. Our Commercial Paper program is supported by our Credit Facility and Supplemental Facility and if necessary or appropriate, we may make one or more draws under either the Credit Facility or Supplemental Facility to pay amounts outstanding from time to time on the Commercial Paper program. At September 30, 2015, we had $803.6 million outstanding under the Commercial Paper program, comprised of $610.0 million outstanding in U.S. dollar denominated notes and $193.6 million (U.S. dollar equivalent) of Euro denominated notes with weighted average interest rates of 0.27% and 0.06%, respectively. The borrowings mature on various dates from October 2, 2015 to December 22, 2015.
During the nine months ended September 30, 2015, we redeemed at par or repaid at maturity $693.5 million of senior unsecured notes with fixed rates ranging from 5.10% to 5.75%.
Mortgage Debt
Total mortgage indebtedness was $6.5 billion and $6.2 billion at September 30, 2015 and December 31, 2014, respectively.
On January 15, 2015, we acquired two properties — Jersey Gardens in Elizabeth, New Jersey (renamed The Mills at Jersey Gardens) and University Park Village in Fort Worth, Texas, subject to existing fixed-rate mortgage loans of $350.0 million and $55.0 million, respectively. The loans mature on November 1, 2020 and May 1, 2028 and bear interest at 3.83% and 3.85%, respectively.
Covenants
Our unsecured debt agreements contain financial and other non-financial covenants. If we were to fail to comply with these covenants, after the expiration of the applicable cure periods, the debt maturity could be accelerated or other remedies could be sought by the lender including adjustments to the applicable interest rate. As of September 30, 2015, we were in compliance with all covenants of our unsecured debt.
At September 30, 2015, we or our subsidiaries are the borrowers under 40 non-recourse mortgage notes secured by mortgages on 54 properties, including five separate pools of cross-defaulted and cross-collateralized mortgages encumbering a total of 21 properties. Under these cross-default provisions, a default under any mortgage included in the cross-defaulted pool may constitute a default under all mortgages within that pool and may lead to acceleration of the indebtedness due on each property within the pool. Certain of our secured debt instruments contain financial and other non-financial covenants which are specific to the properties which serve as collateral for that debt. If the borrower fails to comply with these covenants, the lender could accelerate the debt and enforce its right against their collateral. At September 30, 2015, the applicable borrowers under these non-recourse mortgage notes were in compliance with all covenants where non-compliance could individually, or giving effect to applicable cross-default provisions in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.
Summary of Financing
Our consolidated debt, adjusted to reflect outstanding derivative instruments, and the effective weighted average interest rates as of September 30, 2015 and December 31, 2014, consisted of the following (dollars in thousands):
| Debt Subject to | Adjusted Balance as of September 30, 2015 | Effective Weighted Average Interest Rate | Adjusted Balance as of December 31, 2014 | Effective Weighted Average Interest Rate | |||||||||
| Fixed Rate | $ | 20,497,791 | 4.41 | % | $ | 19,424,456 | 4.63 | % | |||||
| Variable Rate | 2,131,263 | 1.23 | % | 1,428,537 | 1.43 | % | |||||||
| | | | | | | | | | | | | | |
| $ | 22,629,054 | 4.11 | % | $ | 20,852,993 | 4.41 | % | ||||||
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| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Contractual Obligations
There have been no material changes to our outstanding capital expenditure and lease commitments previously disclosed in our 2014 Annual Report on Form 10-K.
In regards to long-term debt arrangements, the following table summarizes the material aspects of these future obligations on our consolidated indebtedness as of September 30, 2015, for the remainder of 2015 and subsequent years thereafter (dollars in thousands) assuming the obligations remain outstanding through initial maturities, including applicable exercise of available extension options:
| 2015 | 2016 - 2017 | 2018 - 2019 | After 2019 | Total | ||||||||||||
| Long Term Debt (1) | $ | 824,919 | $ | 5,920,882 | $ | 4,655,395 | $ | 11,217,764 | $ | 22,618,960 | ||||||
| Interest Payments (2) | 234,125 | 1,553,750 | 1,089,022 | 2,617,428 | 5,494,325 |
(1)
Represents principal maturities only and, therefore, excludes net premiums of $10,094.
(2)
Variable rate interest payments are estimated based on the LIBOR rate at September 30, 2015.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist primarily of our investments in joint ventures which are common in the real estate industry and are described in Note 5 of the condensed notes to consolidated financial statements. Our joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint venture debt is secured by a first mortgage, is without recourse to the joint venture partners, and does not represent a liability of the partners, except to the extent the partners or their affiliates expressly guarantee the joint venture debt. As of September 30, 2015, the Operating Partnership guaranteed joint venture-related mortgage indebtedness of $346.6 million (of which we have a right of recovery from our joint venture partners of $104.0 million). Mortgages guaranteed by us are secured by the property of the joint venture which could be sold in order to satisfy the outstanding obligation and which has an estimated fair value in excess of the guaranteed amount. We may elect to fund cash needs of a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans, although such fundings are not typically required contractually or otherwise.
Acquisitions and Dispositions
Buy-sell, marketing rights, and other exit mechanisms are common in real estate partnership agreements. Most of our partners are institutional investors who have a history of direct investment in retail real estate. We and our partners in our joint venture properties may initiate these provisions (subject to any applicable lock up or similar restrictions). If we determine it is in our stockholders' best interests for us to purchase the joint venture interest and we believe we have adequate liquidity to execute the purchase without hindering our cash flows, then we may initiate these provisions or elect to buy our partner's interest. If we decide to sell any of our joint venture interests, we expect to use the net proceeds to reduce outstanding indebtedness or to reinvest in development, redevelopment, or expansion opportunities.
Acquisitions. On January 15, 2015, we acquired a 100% interest in Jersey Gardens (renamed The Mills at Jersey Gardens) in Elizabeth, New Jersey, and University Park Village in Fort Worth, Texas, properties previously owned by Glimcher Realty Trust, for $677.9 million of cash and the assumption of existing mortgage debt of $405.0 million.
On April 10, 2014, through a European joint venture, we acquired an additional 22.5% noncontrolling interest in Ashford Designer Outlet, increasing our ownership interest in this property to 45%.
On January 30, 2014, we acquired the remaining 50% interest in Arizona Mills from our joint venture partner, as well as approximately 39 acres of land in Oyster Bay, New York, for approximately $145.8 million, consisting of cash consideration and 555,150 units of the Operating Partnership. Arizona Mills is subject to a mortgage which was $166.9 million at the time of the acquisition. The consolidation of this previously unconsolidated property resulted in a remeasurement of our previously held interest to fair value and a corresponding non-cash gain of $2.7 million in the first quarter of 2014. We now own 100% of this property.
On January 10, 2014, we acquired one of our partner's interests in a portfolio of ten properties for approximately $114.4 million, seven of which were previously consolidated.
Dispositions. We continue to pursue the disposition of properties that no longer meet our strategic criteria or that are not a primary retail venue within their trade area.
During the first nine months of 2015, we disposed of our interests in two unconsolidated retail properties. The aggregate gain recognized on these transactions was approximately $16.3 million.
Joint Venture Formation Activity
On April 13, 2015, we announced a joint venture with Sears, whereby Sears contributed 10 of its properties located at our malls to the joint venture in exchange for a 50% noncontrolling interest in the joint venture. We contributed $114.0 million in cash in exchange for a 50% noncontrolling interest in the joint venture. Sears or its affiliates are leasing back each of the 10 properties from the joint venture. The joint venture has the right to recapture not less than 50% of the space leased to Sears to be used for purposes of redeveloping and releasing the recaptured space. We will provide development, leasing and management services to the joint venture for any recaptured space. On July 7, 2015, we separately invested approximately $33.0 million in exchange for 1,125,760 common shares of Seritage Growth Properties, or Seritage, a public REIT recently formed by Sears. Seritage now holds Sears' interest in the joint venture.
On July 22, 2015, we closed on our previously announced joint venture with HBC, to which HBC contributed 42 properties in the U.S. and we committed to contribute $100.0 million for improvements to the properties contributed by HBC in exchange for a noncontrolling interest in the newly formed joint venture. As of September 30, 2015, we have funded $1.0 million of this commitment. On September 30, 2015, HBC announced it had closed on the acquisition of Galeria Holding, the parent company of Germany's leading department store, Kaufhof. In conjunction with the closing, the joint venture acquired 41 Kaufhof properties in Germany from HBC. All of the joint venture's properties have been leased to affiliates of HBC. We contributed an additional $178.5 million to the joint venture upon closing of the Galeria Holding transaction. Our noncontrolling interest in the joint venture is approximately 8.2%. Our share of net income was not significant for the quarter ended September 30, 2015.
Development Activity
New Domestic Developments, Redevelopments and Expansions. During 2015, construction began on the following properties:
A 355,000 square foot upscale outlet center located in Columbus, Ohio, which is scheduled to open in June 2016. We own a 50% noncontrolling interest in this project. Our estimated share of the cost of this project is $47.5 million.
Clarksburg Premium Outlets, a 392,000 square foot project, located in Clarksburg, Maryland, which is scheduled to open in October 2016. We own a 66% noncontrolling interest in this project. Our estimated share of the cost of this project is $124.8 million.
The Shops at Clearfork, a 545,000 square foot project located in Fort Worth, Texas, which is scheduled to open in February 2017. We own a 45% noncontrolling interest in this project. Our estimated share of the cost of this project is $101.6 million.
During 2015, the following Premium Outlets opened:
Gloucester Premium Outlets, a 370,000 square foot project located in Gloucester, New Jersey, opened on August 13, 2015. We own a 50% noncontrolling interest in this project. Our share of the cost of this project was approximately $61.4 million.
Tucson Premium Outlets, a 366,000 square foot project, opened on October 1, 2015. We own a 100% interest in this project. The cost of this project was approximately $95.0 million.
Tampa Premium Outlets, a 441,000 square foot project, opened on October 29, 2015. We own a 100% interest in this project. The cost of this project was approximately $129.2 million.
On April 23, 2015, we announced a partnership with Swire Properties Inc. and Whitman Family Development to jointly develop the approximately 500,000 square foot shopping center component of Brickell City Centre, a mixed-use development in downtown Miami. We own a 25% interest in the retail component of this project, which is scheduled to open in September 2016. Our share of the estimated cost of this project is approximately $100.0 million.
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, and restaurants, are underway at 30 properties.
Our share of the costs of all new development and redevelopment projects currently under construction is approximately $2.4 billion. We expect to fund these capital projects with cash flows from operations. Our estimated stabilized return on invested capital typically ranges between 8-12% for all of our new development, expansion and redevelopment projects.
International Development Activity. We typically reinvest net cash flow from our international joint ventures to fund future international development activity. We believe this strategy mitigates some of the risk of our initial investment and our exposure to changes in foreign currencies. We have also funded most of our foreign investments with local currency-denominated borrowings that act as a natural hedge against fluctuations in exchange rates. Our consolidated net income exposure to changes in the volatility of the Euro, Yen, Won, and other foreign currencies is not material. We expect our share of international development costs for 2015 will be approximately $133 million, primarily funded through reinvested joint venture cash flow and construction loans.
The following table describes these new development and expansion projects as well as our share of the estimated total cost as of September 30, 2015 (in millions):
| Property | Location | Gross Leasable Area (sqft) | Our Ownership Percentage | Our Share of Projected Net Cost (in Local Currency) | Our Share of Projected Net Cost (in USD) | Projected Opening Date | ||||||||||
| New Development Projects: | ||||||||||||||||
| Provence Designer Outlets | Miramas, France | 269,000 | 90 | % | EUR 104,111 | $ | 117.2 | Mar. - 2017 | ||||||||
| Vancouver Designer Outlets | Vancouver (British Columbia), Canada | 242,000 | 45 | % | CAD 70.2 | $ | 56.5 | Opened Jul. - 2015 | ||||||||
| Expansions: | ||||||||||||||||
| Yeoju Premium Outlets Phase 2 | Gyeonggi Province, South Korea | 265,400 | 50 | % | KRW 79,361 | $ | 71.8 | Opened Feb. - 2015 | ||||||||
| Shisui Premium Outlets Phase 2 | Shisui (Chiba), Japan | 130,000 | 40 | % | JPY 2,895 | $ | 24.1 | Opened Apr - 2015 |
Dividends and Stock Repurchase Program
We paid a common stock dividend of $1.55 per share in the third quarter of 2015. Our Board of Directors declared a cash dividend for the fourth quarter of 2015 of $1.60 per share of common stock payable on November 30, 2015 to stockholders of record on November 16, 2015. We must pay a minimum amount of dividends to maintain our status as a REIT. Our future dividends and future distributions of the Operating Partnership will be determined by the Board of Directors based on actual results of operations, cash available for dividends and limited partner distributions, cash reserves as deemed necessary for capital and operating expenditures, and the amount required to maintain our status as a REIT.
On April 2, 2015, our Board of Directors authorized us to repurchase up to $2.0 billion of our common stock over the next twenty-four months as market conditions warrant. We may repurchase the shares in the open market or in privately negotiated transactions. Through September 30, 2015, we have repurchased 1,903,340 shares at an average price of $180.19 per share as part of this program.
Forward-Looking Statements
Certain statements made in this section or elsewhere in this report may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and other factors. Such factors include, but are not limited to: our ability to meet debt service requirements, the availability and terms of financing, changes in our credit rating, changes in market rates of interest and foreign exchange rates for foreign currencies, changes in value of investments in foreign entities, the ability to hedge interest rate and currency risk, risks associated with the acquisition, development, expansion, leasing and management of properties, general risks related to retail real estate, the liquidity of real estate investments, environmental liabilities, international, national, regional and local economic conditions, changes in market rental rates, security breaches that could compromise our information technology or infrastructure or personally identifiable data of customers of our retail properties, trends in the retail industry, relationships with anchor tenants, the inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise, risks relating to joint venture properties, the intensely competitive market environment in the retail industry, costs of common area maintenance, risks related to international activities, insurance costs and coverage, the loss of key management personnel, terrorist activities, changes in economic and market conditions and maintenance of our status as a REIT. We discussed these and other risks and uncertainties under the heading "Risk Factors" in our 2014 Annual Report on Form 10-K. We may update that discussion in subsequent periodic reports, but 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 comparable property NOI. We believe that these non-GAAP measures are helpful to investors because they are widely recognized measures of the performance of REITs and provide a relevant basis for comparison among REITs. We also use these measures internally to measure the operating performance of our portfolio.
We determine FFO based on the definition set forth by the National Association of Real Estate Investment Trusts, or NAREIT, as consolidated net income computed in accordance with GAAP:
excluding real estate related depreciation and amortization,
excluding gains and losses from extraordinary items and cumulative effects of accounting changes,
excluding gains and losses from the sales or disposals of previously depreciated retail operating properties,
excluding impairment charges of depreciable real estate,
plus the allocable portion of FFO of unconsolidated entities accounted for under the equity method of accounting based upon economic ownership interest, and
all determined on a consistent basis in accordance with GAAP.
We have adopted NAREIT's clarification of the definition of FFO that requires us to include the effects of nonrecurring items not classified as extraordinary, cumulative effect of accounting changes, or a gain or loss resulting from the sale of, or any impairment charges related to, previously depreciated retail operating properties.
We include in FFO gains and losses realized from the sale of land, outlot buildings, marketable and non-marketable securities, and investment holdings of non-retail real estate. We also include in FFO the impact of foreign currency exchange gains and losses, legal expenses, transaction expenses and other items required by 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 alternatives to consolidated net income determined in accordance with GAAP as a measure of operating performance, and
are not alternatives to cash flows as a measure of liquidity.
The following schedule reconciles total FFO to consolidated net income and diluted net income per share to diluted FFO per share.
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| (in thousands) | |||||||||||||
| Funds from Operations | $ | 918,686 | $ | 689,381 | $ | 2,704,773 | $ | 2,338,550 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Change in FFO from prior period | 33.3% | –14.1% | 15.7% | 1.2% | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Consolidated Net Income | $ | 492,496 | $ | 296,963 | $ | 1,679,457 | $ | 1,175,534 | |||||
| Adjustments to Arrive at FFO: | |||||||||||||
| Depreciation and amortization from consolidated properties | 285,490 | 277,936 | 861,570 | 915,040 | |||||||||
| Our share of depreciation and amortization from unconsolidated entities, including Klépierre | 143,747 | 135,131 | 395,815 | 410,848 | |||||||||
| Gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net | — | (17,717 | ) | (223,266 | ) | (154,484 | ) | ||||||
| Net income attributable to noncontrolling interest holders in properties | (839 | ) | (750 | ) | (2,138 | ) | (1,720 | ) | |||||
| Noncontrolling interests portion of depreciation and amortization | (895 | ) | (869 | ) | (2,726 | ) | (2,729 | ) | |||||
| Preferred distributions and dividends | (1,313 | ) | (1,313 | ) | (3,939 | ) | (3,939 | ) | |||||
| | | | | | | | | | | | | | |
| FFO of the Operating Partnership (A) (B) (C) | $ | 918,686 | $ | 689,381 | $ | 2,704,773 | $ | 2,338,550 | |||||
| FFO allocable to limited partners | 131,790 | 100,286 | 389,777 | 339,171 | |||||||||
| | | | | | | | | | | | | | |
| Dilutive FFO allocable to common stockholders (A) (B) (C) | $ | 786,896 | $ | 589,095 | $ | 2,314,996 | $ | 1,999,379 | |||||
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| Diluted net income per share to diluted FFO per share reconciliation: | |||||||||||||
| Diluted net income per share | $ | 1.36 | $ | 0.81 | $ | 4.62 | $ | 3.22 | |||||
| Depreciation and amortization from consolidated properties and our share of depreciation and amortization from unconsolidated entities, including Klépierre, net of noncontrolling interests portion of depreciation and amortization | 1.18 | 1.14 | 3.47 | 3.64 | |||||||||
| Gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net | — | (0.05 | ) | (0.63 | ) | (0.43 | ) | ||||||
| | | | | | | | | | | | | | |
| Diluted FFO per share (A) (B) (C) | $ | 2.54 | $ | 1.90 | $ | 7.46 | $ | 6.43 | |||||
| | | | | | | | | | | | | | |
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| Basic and Diluted weighted average shares outstanding | 309,417 | 310,772 | 310,333 | 310,713 | |||||||||
| Weighted average limited partnership units outstanding | 51,817 | 52,873 | 52,251 | 52,709 | |||||||||
| | | | | | | | | | | | | | |
| Basic and Diluted weighted average shares and units outstanding | 361,234 | 363,645 | 362,584 | 363,422 | |||||||||
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(A)
Includes FFO of the Operating Partnership related to the Washington Prime properties, net of transaction expenses, of $108.0 million for the nine months ended September 30, 2014. Includes Diluted FFO per share related to Washington Prime properties, net of transaction expenses, of $0.30 for the nine months ended September 30, 2014. Includes Diluted FFO allocable to common stockholders of $92.4 million for the nine months ended September 30, 2014 related to the Washington Prime properties, net of transaction expenses.
(B)
Includes FFO of the Operating Partnership related to a gain on sale of marketable securities of $80.2 million, or $0.22 per diluted share, for the nine months ended September 30, 2015. Includes Diluted FFO allocable to common stockholders of $68.6 million for the nine months ended September 30, 2015.
(C)
FFO of the Operating Partnership includes a loss on extinguishment of debt of $127.6 million, or $0.35 per diluted share, for the three and nine months ended September 30, 2014. Diluted FFO allocable to common stockholders includes a loss on extinguishment of debt of $109.1 million for the three and nine months ended September 30, 2014.
The following schedule reconciles consolidated net income to NOI and sets forth the computations of comparable property NOI.
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| (in thousands) | |||||||||||||
| Reconciliation of NOI of consolidated properties: | |||||||||||||
| Consolidated Net Income | $ | 492,496 | $ | 296,963 | $ | 1,679,457 | $ | 1,175,534 | |||||
| Discontinued operations | — | — | — | (67,524 | ) | ||||||||
| Discontinued operations transaction expenses | — | — | — | 38,163 | |||||||||
| Income and other taxes | 3,658 | 6,589 | 13,440 | 20,078 | |||||||||
| Interest expense | 229,654 | 249,780 | 692,801 | 758,945 | |||||||||
| Income from unconsolidated entities | (68,221 | ) | (55,631 | ) | (203,289 | ) | (168,473 | ) | |||||
| Loss on extinguishment of debt | — | 127,573 | — | 127,573 | |||||||||
| Gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net | — | (17,717 | ) | (223,266 | ) | (154,242 | ) | ||||||
| | | | | | | | | | | | | | |
| Operating Income | 657,587 | 607,557 | 1,959,143 | 1,730,054 | |||||||||
| Depreciation and amortization | 289,360 | 281,661 | 873,243 | 849,369 | |||||||||
| | | | | | | | | | | | | | |
| NOI of consolidated properties | $ | 946,947 | $ | 889,218 | $ | 2,832,386 | $ | 2,579,423 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Reconciliation of NOI of unconsolidated entities: | |||||||||||||
| Net Income | $ | 189,470 | $ | 160,896 | $ | 581,729 | $ | 499,867 | |||||
| Interest expense | 147,333 | 147,817 | 443,396 | 449,512 | |||||||||
| Gain on sale or disposal of assets and interests in unconsolidated entities | — | — | (35,779 | ) | — | ||||||||
| Income from operations of discontinued joint venture interests | — | — | — | (5,079 | ) | ||||||||
| | | | | | | | | | | | | | |
| Operating Income | 336,803 | 308,713 | 989,346 | 944,300 | |||||||||
| Depreciation and amortization | 145,351 | 147,946 | 435,615 | 442,141 | |||||||||
| | | | | | | | | | | | | | |
| NOI of unconsolidated entities | $ | 482,154 | $ | 456,659 | $ | 1,424,961 | $ | 1,386,441 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total consolidated and unconsolidated NOI from continuing operations | $ | 1,429,101 | $ | 1,345,877 | $ | 4,257,347 | $ | 3,965,864 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Change in total NOI from continuing operations from prior period | 6.2% | 7.2% | 7.3% | 8.8% | |||||||||
| Adjustments to NOI: | |||||||||||||
| NOI of discontinued consolidated properties | — | — | — | 169,828 | |||||||||
| NOI of discontinued unconsolidated properties | — | — | — | 17,445 | |||||||||
| | | | | | | | | | | | | | |
| Total NOI of our portfolio | $ | 1,429,101 | $ | 1,345,877 | $ | 4,257,347 | $ | 4,153,137 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Change in NOI from prior period | 6.2% | –1.4% | 2.5% | 4.4% | |||||||||
| Add: Our share of NOI from Klépierre | 52,086 | 51,440 | 138,747 | 171,506 | |||||||||
| Less: Joint venture partners' share of NOI from continuing operations | 253,199 | 235,205 | 744,467 | 712,870 | |||||||||
| Less: Joint venture partner's share of NOI from discontinued operations | — | — | — | 12,998 | |||||||||
| | | | | | | | | | | | | | |
| Our share of NOI | $ | 1,227,988 | $ | 1,162,112 | $ | 3,651,627 | $ | 3,598,775 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Change in our share of NOI from prior period | 5.7% | –2.8% | 1.5% | 3.3% | |||||||||
| Total NOI of our portfolio | ** $** | ** 1,429,101** | $ | 1,345,877 | ** $** | ** 4,257,347** | $ | 4,153,137 | |||||
| NOI from non comparable properties (1) | 220,386 | 187,368 | 723,843 | 749,324 | |||||||||
| | | | | | | | | | | | | | |
| Total NOI of comparable properties (2) | $ | 1,208,715 | $ | 1,158,509 | $ | 3,533,504 | $ | 3,403,813 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Increase in NOI of U.S. Malls, Premium Outlets, and The Mills that are comparable properties | 4.3% | 3.8% | |||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
(1)
NOI excluded from comparable property NOI relates to Washington Prime properties, international properties, other retail properties, TMLP properties, any of our non-retail holdings and results of our corporate and management company operations, NOI of U.S. Malls, Premium Outlets, and The Mills not owned and operated in both periods under comparison and excluded income noted in footnote 2 below.
(2)
Excludes lease termination income, interest income, land sale gains, straight line rent, above/below market rent adjustments, and the impact of significant redevelopment activities.
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