Simon Property Group, Inc. (SPG) reported second-quarter 2014 funds from operations (:FFO) of $2.16 per share, which came 2 cents ahead of the Zacks Consensus Estimate and a nickel above the year-ago quarter figure. The quarterly FFO includes the Washington Prime Group Inc. (WPG) spin-off related transaction cost of 10 cents per share.

The 2.4% year-over-year improvement in quarterly FFO per share was primarily driven by a notable rise in base minimum rent and total sales per square feet as well as occupancy rate. Moreover, this retail real estate investment trust (:REIT) hiked its 2014 FFO per share guidance.

Total revenue during the reported quarter increased 8.9% year over year to $1.18 billion. This was primarily attributable to a notable rise in minimum rent and tenant reimbursement revenues. However, it missed the Zacks Consensus Estimate of $1.27 billion.

Quarter in Detail

Minimum rental revenues climbed 8.0% year over year to $728.5 million, while revenues from tenant reimbursements increased 11.0% year over year to $342.3 million.

For the U.S. Malls and Premium Outlets portfolio, occupancy rose 140 basis points (bps) year over year to 96.5% at the end of the second quarter. Total sales per square feet moved up by 5.4% to $608. Encouragingly, base minimum rent per square feet climbed 10.7% year over year to $45.83 and releasing spread increased 590 bps to 20.0%.

During the quarter, Simon Property accomplished the spin-off of Washington Prime Group. This independent public company’s portfolio includes 98 retail assets, including the strip center business, that were previously under Simon Property’s ownership.

Also, Simon Property started construction on three projects – Chicago Premium Outlets in IL, The Fashion Centre at Pentagon City in VA and Shisui Premium Outlets in Japan. At the end of the second quarter, Simon Property has redevelopment and expansion projects in progress at 32 assets across U.S., Asia and Mexico.

Simon Property exited second-quarter 2014 with cash and cash equivalents of $1.7 billion, up from $1.0 billion at the end of first-quarter 2014.

2014 Outlook Increase

Simon Property increased its 2014 FFO per share outlook in the range of $9.01 – $9.11, from $8.96 – $9.06 guided earlier. The new range is lower than the Zacks Consensus Estimate of $9.14 for the same.

Dividend Update

Concurrent with its earnings release, Simon Property declared the quarterly dividend of $1.30 per share. The dividend will be paid on Aug 29, 2014 to shareholders of record as of Aug 15.

Our Viewpoint

Although Simon Property’s FFO per share came above the estimates, the revenue miss is surely discouraging. Moreover, though the spin-off was a strategic fit for the long term for this Zacks Rank #5 (Strong sell) stock, a dilution impact on earnings from such a move is unavoidable in the near term. However, we expect the company to perform better in the quarters ahead on the back of an improving economy, job growth and spending of the richer consumers.

We now look forward to the results of other REITs such as Mack-Cali Realty Corp. (CLI) and SL Green Realty Corp. (SLG) that are scheduled to report this week.

Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.

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