By Darlene Bremer
Copley Place
Boston, MA
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The basic principles upon which Simon Property Group was established are
innovation and the importance of relationships. Through the development of long-term
partnerships with retailers, financing sources, other real estate companies, municipalities and the
investment community, the Indianapolis-based company has become the largest owner and operator of regional malls in the U.S., enabling it to maintain its properties in a first-class manner, produce profitable financial results, and acquire the assets of companies such as Rodamco North America, N.V.
Founded in 1960, Simon Property Group (NYSE: SPG) was originally known as Melvin Simon
& Associates. The company initially developed small, community shopping centers, with the first property opening in Bloomington, IN, in 1960. Simon went public in 1993 with an initial public
offering (IPO) raising $839.9 million—the largest REIT IPO at that time.
Over the ensuing years, Simon Property Group has amassed a portfolio of 249 properties in
36 states, eight properties in Europe and Canada, and more than 186 million square feet of gross leasable space. In addition, the company’s properties attract more than 100 million shoppers who make 2 billion shopping visits each year.
“Growth of the company has been greatly fueled by acquisition, providing Simon with a concentration of high-quality assets in its portfolio,” says Matthew Ostrower, analyst at Morgan Stanley.
Simon Property Group is generally considered to be one of the industry’s most innovative organizations. Its high-quality properties help the company to secure attractive tenants and high levels of customer traffic. Over the past decade, prominent properties developed, owned and managed by the company include The Mall of America in Minneapolis, The Forum Shops at Caesars in Las Vegas, and The Fashion Centre at Pentagon City in Arlington, VA.
Let’s Make a Mega Deal
In 1995, Simon launched a strategy to upgrade the overall quality of its regional mall portfolio. Over the past seven years, Simon has spent approximately $13.7 billion on acquisitions, and $2 billion on building new malls and redeveloping existing franchise locations. The goal has been to build a high-quality portfolio of malls with a stable cash flow.
The Fashion Centre at Pentagon City
Arlington, VA
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High-profile assets added to the company’s portfolio through acquisition include Lenox Square and Phipps Plaza in Atlanta, Roosevelt Field in Long Island, NY, Town Center at Boca Raton in Boca Raton, FL, South Shore Plaza near Boston, and The Westchester in White Plains, NY.
However, all of these deals pale in comparison to the three-way mega deal that dramatically altered the retail landscape. In May 2002, Simon Property partnered with The Rouse Company (NYSE: RSE) and Westfield America Trust to acquire the assets of Rodamco North America, N.V. (RNA) in the largest retail real estate acquisition to date. Simon’s share of the transaction was approximately $1.6 billion.
In the deal, Simon Property added nine regional malls to its portfolio, and assumed 100 percent ownership of its four existing RNA ventures. David Simon, chief executive officer of Simon Property, says the deal enabled the company to increase its market presence in Boston and continue to enhance the quality of its portfolio through the addition of such prominent assets as Copley Place in Boston, The Galleria in Houston and SouthPark Mall in Charlotte.
“We view the Rodamco transaction as a very positive step for us in our strategy of adding market-dominant assets to our portfolio,” says Simon. “The nine regional malls added in the deal generate sales in excess of $500 per square foot, and we are very pleased to partner with Rouse and Westfield in this transaction, which was immediately accretive to earnings.”
The analyst community has also responded favorably to the workings of the deal. “Simon Property received attractive pricing for the assets involved in the Rodamco transaction, enabling the company to further upgrade the quality of its portfolio at a reasonable price,” Morgan Stanley’s Ostrower says. “I believe this has already enhanced the company’s valuation to some degree.
SouthPark Mall
Charlotte, NC
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The Numbers Tell All
Simon Property Group now owns more than 29 percent of the malls in the U.S. that generate more than $250 million in annual retail sales. “This is the core of the Simon strategy—to own the best malls in the best markets,” says Simon.
One of the company’s hallmarks is the stability of its cash flow stream. The vast size of its real estate portfolio and the wide geographic distribution and diverse tenant base within the malls themselves, soundly position the company to withstand changes in economic cycles.
Net income available to common shareholders increased from $67.7 million for the first six months of 2001 to $203.2 million for the same period in 2002. For the six months ended June 30, 2002, the company’s diluted funds from operations (FFO) increased 11 percent from its June 30, 2001 level of $285 million to $316.3 million. On a per share basis, the increase was 9.2 percent from $1.53 per share in 2001, to $1.67 per share on June 30, 2002. In addition, the company’s current total market capitalization as of June 30, 2002 was $21.7 billion.
“The second quarter of 2002 was one of the busiest in our history,” says Simon. The company completed the Rodamco deal, sold its joint venture interests to Chelsea Property Group, Inc. (NYSE: CPG) and The Mills Corporation (NYSE: MLS) at significant gains, refinanced its corporate credit facility, was added to the S&P 500 Index, and issued 9 million shares of common stock. “This positive corporate activity and the stability that continues to be demonstrated by our mall portfolio puts us in a good position financially.”
The Galleria
Houston, TX
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Separating Simon from the Competition
“Simon’s sheer size allows the company to use its high-quality assets as leverage to help improve their medium-quality malls and attract more upscale retailers,” Ostrower says. The company, according to Ostrower, is also among the most active in the industry in branding their assets and creating nationwide name recognition. “Its scale provides the company with the financial capacity to make the necessary investments in large-scale advertising and brand efforts.”
In addition, Simon Property Group’s operations provide the company with diversified geographic and tenant exposure, which reduces risks during economic slowdowns, according to Jim Sullivan, senior real estate analyst for Prudential Financial. “The size of the company’s balance sheet means it has excellent access to public market capital, and now that it is listed in the S&P 500 Index, the company also has a broader appeal to more institutional investors who are attracted to companies with higher market capitalizations,” he says.
Size, however, is not the only factor that separates the company from its competition and makes it a desirable investment. “The company’s valuation makes it an attractive investment,” Ostrower says. The mall sector, Morgan Stanley believes, is trading below historic norms on a valuation basis despite the sector’s above-average fundamentals. “This means that Simon is making more money than its peers, while office and apartment REITs are currently experiencing negative revenue growth,” he explains.
Ostrower adds that Simon is a good choice for investors interested in either stable fundamentals or dividend income. “Simon makes a good defensive investment with its steady, consistent growth at a moderate pace over time.”
Simon Property Group is also a sound investment, according to Sullivan, based on the company’s full complement of skills in acquisition, development and redevelopment functions, which allows the company to add value to its assets and generate faster internal growth. “Simon should be an attractive investment for people who are interested in a strong dividend yield, company size and liquidity,” Sullivan says.
Fashion Valley Mall
in San Diego, CA
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Philosophies and Goals
Simon Property Group has a long history of maintaining high levels of integrity in conducting its operations and believes in the importance of trust, honesty and reliability, while maintaining that all-important competitive edge. “In dealing with our retail tenants, Simon works diligently to maintain these beneficial relationships to ensure the long-term growth and success of our company and our retailers,” says Simon.
Simon adds that the company’s strategy for continuing to achieve superior financial performance rests on owning a portfolio of high-quality, market-dominant assets and in being the most valuable provider of real estate to its retailer partners. “We will continue to enhance our portfolio through the timely and financially sound redevelopment of existing properties, pursuing selected new development opportunities, acquiring additional high-quality, market-dominant assets, and maintaining sufficient financial flexibility to withstand varied economic cycles,” he says.
Another element of the company’s growth strategy is the generation of new income streams. Simon Property Group is taking advantage of modern media systems and technologies and is using two recent initiatives to increase its advantages over the competition and provide its retailers with marketing and integrated resources.
David Simon
“We view the Rodamco transaction as a very positive step for us
in our strategy of adding market-dominant assets to our portfolio.”
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The first program, Simon Brand Ventures, is a business-to-business consumer program that provides Simon partners with direct access to the 100 million shoppers who visit Simon malls each year. Among the companies that have participated in Simon Brand Ventures promotions are Visa, Pepsi, Ford and Microsoft. Vehicles for reaching shoppers include large advertising displays placed throughout many of Simon’s top malls, as well as product demonstrations and other various displays and booths. Marketing directors are available at every mall location to assist Simon’s retailer partners with live events and promotions, mall advertising displays, event-related leasing, interactive destination marketing and consumer research.
The second initiative, Simon Business Network, is a business-to-business program that connects the company’s customers to vendors that perform a nearly infinite variety of jobs. “Simon Business Network is a one-stop, integrated resource for construction, cleaning, remodeling, repairing, maintenance, security, and more,” Simon explains. The network uses aggregated economy of scale to buy products and services from a list of more than 80 preferred, pre-qualified vendors at competitive prices. Part of the network program includes Total Facility Support, which provides services including janitorial, HVAC maintenance and repair, electrical repair, landscaping, construction, security and more. “Simon Business Network’s Total Facility Support program providers offer on-site, on-time experts that are always available to fulfill our customers’ needs,” says Simon. And because Total Facility Support providers are nationwide, they handle all store and business needs, not only those in Simon malls, but in other shopping centers, free-standing locations and community centers.
The Simon Business Network also offers the Total Security Connection, which is comprised of professional security companies that offer a full range of protective and investigative services to Simon Property Group’s portfolio nationwide. Total Security providers understand the needs of the retailer and other real estate businesses, as well as the specific needs of each geographical area. The available security providers are pre-screened and pre-qualified to handle security in a consumer-focused business where safety, courtesy and professionalism are imperative.
Ready for the Future
With an average of more than 20 years experience each, Simon’s management team is well regarded throughout the industry for its pioneering approach to new retail concepts, its efficient management style, and its excellent tenant relationships. Innovation, whether in negotiating leases with retailers, partnering to make opportunistic acquisitions, or developing new income streams, continues to be the major factor driving the company’s growth.
“Our strategy of focusing on high-quality, market-dominant properties has laid the foundation for our company’s success. The popularity and resiliency of the regional mall, as well as the stability of the cash flow stream produced by our portfolio, should continue to allow us to profitably grow our company in 2002 and beyond,” says Simon.
Darlene Bremer, a frequent contributor to Real Estate Portfolio, is a freelance writer based in Solomons, MD.
