Simon also steered the REIT toward overseas expansion beginning in 1998. He was one of the first to take retail global by partnering with overseas developers. The company steadily built a portfolio that included ownership interests in 59 shopping centers in Europe and Asia at the end of 2007, with an additional five shopping centers under construction in China.

Simon Property brings management expertise and brand identity, while foreign partners contribute local expertise and relationships. "We have been very fortunate to be profitable in everything that we have done," Simon says. "That has given us confidence that we know how to underwrite the opportunities outside the United States."

Simon Property also has used its size to its advantage. It can negotiate lower prices with vendors, from janitorial services to security, helping to reduce costs. It can entice retailers seeking the best spaces to agree to open locations at other malls in its portfolio. Additionally, it has used economies of scale to squeeze more income from ancillary sales on site, such as advertising and gift cards, turning the mall into what Simon calls a "marketing medium."

Portfolio sat down with David Simon and listened to his thoughts about the REIT's success, the mall of the future, his career and what it will take to survive and thrive in today's economic climate.

Portfolio: Simon Property has had steady performance over the years: FFO grew at an annual compound growth rate of 10.4 percent from 2001 to 2007. How do you maintain this consistency despite your size?

Simon: Part of the answer is that we are exposed to retail real estate in several different formats. We also are geographically diverse. We are always trying to add to the cash flow of the properties. We have been pretty conservative when it comes to managing the balance sheet, so we have been able to grow a large company successfully for a number of years when others haven't.

Portfolio: How does Simon Property differentiate itself among other mall owners?

Simon: There is no one else today in our business of pure mall companies that has the same diversity of product as does Simon Property. We also are the largest landlord for a number of retailers, and our balance sheet clearly separates us. We have been investing internationally for a number of years and have had success there as well.

Portfolio: Why such a diverse mix of retail platforms (regional malls, premium outlet centers, the Mills, community/lifestyle centers and international)?

Simon: Retailers move across platforms. Therefore, the deeper the relationship we have with the retailer, the more opportunities we can find with them. We have been able to add value to each of these different kinds of product classes.

The Gap is a great example of this relationship. They have Banana Republics that go in the better regional malls. They have The Gap Outlet and Banana Republic Outlet businesses that go in our premium outlets. They have Old Navy that goes in the malls, community centers and the Mills products. When we're talking to The Gap, we can talk across all of their various divisions and also across all the real estate property types.

Portfolio: How does a strong balance sheet help you these days when capital is harder to find?

Simon: It gives us access to the equity capital market, secured financing and unsecured financing, joint venture partners, etc. You don't know where capital is going to be most available and where it will be the cheapest. However, you have got to have a sufficiently flexible capital structure that allows you to go get it where ever you can find it. You can't grow a business this size without the ability to access capital in all its different forms.

Portfolio: What do you say to investors worried about how a recession could affect retail REITs?

Simon: The mall product is very resilient. Retail is always changing and evolving. We're not the retailer; we're the real estate guy. Retailers come and go. Nor do we have the volatility of market rents like the office sector does. Office rents can go up and down like a yo-yo. Whereas, generally speaking, regional mall rents continue to appreciate in value given the difficulty in replicating the asset.

Portfolio: Simon Property has created a pipeline of more than $5 billion of projects in the U.S. and abroad scheduled to open over the next four to five years. Which property types are you emphasizing?

Simon: The big focus is on new outlet centers where we think demand makes sense. We have two under construction right now and a couple more on the drawing board. If the demand for space does not develop as rapidly as we expect, all it means for us is that our free cash flow will go up significantly. This will allow us to take advantage of other external opportunities.

Portfolio: Do you mean that free cash flow will increase because you wouldn't be investing as much in projects?

Simon: Exactly. If demand growth slows, we can put projects on hold. We are not overextended. We can build up our cash reserves to take advantage of external activities. It's a win-win either way.

Portfolio: The two projects in development are premium outlet properties. What is it about premium outlet properties that produce better returns?

Simon: The premium outlet product has changed. It now is closer to where people live, it has bigger critical mass and tenant demand is great. Additionally, it is a very profitable distribution vehicle for retailers. Historically, several brands used to sell through the department store chain; now they have gone full-price retail. This gives them another avenue to do that.

Portfolio: What opportunities or challenges do you face with your properties?

Simon: The bottom line is you have to continue to invest in your product. If you don't, your product can become obsolete. It's no different than a hotel or an office building. If you are not improving your tenant mix or if you are not reinvesting, you are likely to suffer as the demographics of your location change. We believe in the product, but it evolves.

Portfolio: With your father and uncles having started the company, how exposed were you to the real estate industry growing up? Did you always plan to go into the business, despite your years on Wall Street after business school?

Simon: You learn much of the business through osmosis. I certainly wasn't trained as a kid, but you get it from being around the product for a long time.

I could have stayed on Wall Street, but there was a need back home in 1990, when real estate was in a much worse situation than it is today. It wasn't clear what my choice would be, but family called, and we certainly wanted the company to maintain its position in the industry when there were a lot of companies under pressure at that time.

Portfolio: How did your experience at former investment banks First Boston and Wasserstein & Perella & Co. prepare you for the positions of CFO and CEO?

Simon: When you're in that position, you learn a lot, and you learn it fast. I did not specialize in real estate [on Wall Street]. I was a generalist and saw all sorts of companies in different industries. I think that broad experience helps you develop judgment and risk assessment abilities. There is no greater learning curve or background that anybody could ask for.

Portfolio: How has the mall concept changed since you came on board in 1990?

Simon: It changes all the time. You are always seeing new tenants, and you always want to bring those new tenants in. I'd say the biggest change has been the declining reliance on the department store over the last 20 years. The thinking was that four or five department stores were critical to a mall's success, but that no longer is the case. We are turning the mall into a marketing medium by making it more of a social, interactive place.

Portfolio: This seems to be reflected in your demolishing some department stores in favor of smaller stores?

Simon: The purchase of May Department Stores [in 2005] by Macy's created a number of opportunities. We tore down a couple of stores, put theatres and bookstores in some and outdoor life style centers in others. Others became Nordstroms. Those kinds of things are a win-win.

You must pay for the real estate at the right price, you've got to have the right plan, and you've got to be able to bring in the additional tenants. However, when you can do that, you are making money and taking the mall to the next level in terms of how it serves the marketplace.

Portfolio: What does the mall of the future look like?

Simon: Technology as part of the shopping experience will play a role. It could be as simple as when you are walking through the mall, you get pinged [on your phone via a text message] with what's on sale, or with a coupon or alerted as to who has new merchandise.

Those kinds of things are going to be an important part of the mall of the future. It also includes broadening the tenant mix. It can't just be apparel. It has to be restaurants, theatres, bookstores, Apple stores, electronics stores—to make it a place where you can do a lot of one-stop shopping.

Portfolio: The Simon gift card also seems to represent a new era: the branding of a mall operator.

Simon: What it shows is the power of the regional mall format and its power as a marketing medium. We don't sell anything. All we offer the customer is convenience and a nice package. It's not that they can use that card to buy Simon apparel. Yet, that business has grown in volume to more than $500 million last year because of our network of malls.

Portfolio: Simon Property Group has improved energy efficiency, reducing electricity usage 10 percent since 2004. In fact, the company also has won two NAREIT Leader in the Light awards, among other honors. How?

Simon: Most of it comes from sound business practices, understanding how to control temperature in the summer and the winter, of putting in energy management systems. We are also looking for alternative sources of energy. Right now we're examining solar very carefully.

However, for real estate, the big issue for all of us will be on improving our existing energy footprint.

Portfolio: Simon has completed more than $25 billion of acquisitions since its 1993 IPO. You have mentioned you see opportunities others do not. How so? How do you add value to deals?

Simon: The most important way is to ask, "How do we increase the cash flow of either a property or company?" We have to believe that when it's in our hands, we will be able to increase the revenues through better leasing, merchandise mix, marketing and the like—or be able to run it more efficiently because of our economies of scale. Then we outline the financing.

Portfolio: When the company bought The Mills Corporation in 2007 as part of a joint venture with Farallon, what made that deal immediately accretive?

Simon: They were very interesting properties, in good locations with a regional dominance, and good marketplaces. There was a lot of turmoil at the company. We thought we could add value to the cash flow by better leasing, management and marketing.

We can certainly cut out a lot of expenses. We overlaid that with how we were going to fund it, and it turned into an accretive transaction with a lot of future growth through redevelopment initiatives. You just can't replicate a number of locations that the Mills has.

Portfolio: Are there particular types of companies you are looking to buy or develop going forward?

Simon: We have had a lot of consolidation in the mall business. We probably still have another leg left to do. Certainly, I expect opportunities internationally for a number of companies through development, acquisition or a combination thereof.

One thing retail real estate companies have proven is that size matters. Economies of scale matter. Tenant relationships matter. And, typically size and quality are a pretty good combination that allows you to continue to pursue a lot of different opportunities.

Portfolio: What's driving your interest in overseas markets?

Simon: Overseas, the regional mall product is not prevalent, and consumerism is burgeoning. In retail real estate—consolidation and redevelopment opportunities aside—expecting a lot of new retail demand in the U.S. is just not realistic. We are not going to double the size of our company through development in the U.S. It's impossible.

Portfolio: What's behind succeeding overseas?

Simon: We have been fortunate. It's all the fundamentals of real estate: investing with the right people and in the right locations, as well as having the right anchor mix and understanding how business is done. Certainly, picking the right partner and understanding the business climate is extraordinarily important.

You have to be extra smart and careful when you go outside of the United States. Several companies—not just in real estate—have made some terrible mistakes leaving the friendly confines of home.

Portfolio: What do mall REITs need to do to remain competitive down the road?

Simon: I don't care what real estate you own, you have got to grow your cash flow. It's that simple. That is done primarily through management—running the business more efficiently, more effectively, or adding value to it. We all have to do that. I think the mall REITs certainly will be competitive versus other kinds of real estate opportunities.