Simon Property Group Inc.

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Simon Property Group Inc.

225 West Washington Street
Indianapolis, Indiana 46204-3420
U.S.A.
Telephone: (317) 636-1600
Fax: (317) 263-2318
Web site: http://www.simon.com

Public Company
Incorporated: 1960 as Melvin Simon & Associates
Employees: 4,700
Sales: $3.17 billion (2005)
Stock Exchanges: New York
Ticker Symbol: SPG
NAIC: 525930 Real Estate Investment Trusts

Simon Property Group Inc. is the largest mall developer in the United States. Simon is a self-administered, self-managed real estate investment trust (REIT), which is a company that must distribute more than 90 percent of its taxable income to its shareholders each year. Simon has ownership or interest in more than 280 properties in the United States—as well as dozens in Europe, a handful in Japan, and one in Mexico—and boasts a total market capitalization of $46 billion. Simon's properties include traditional enclosed shopping malls, outlet malls, and lifestyle centers, which offer a combination of specialty retail stores, entertainment, and sit-down restaurants, often in an open-air setting. Since its initial public offering (IPO) in the early 1990s, the company's revenues have grown exponentially.

STARTING SMALL IN 1960

The shopping mall empire that is Simon Property Group began in 1960, when Melvin Simon, a leasing agent for an Indiana real estate firm, asked his brothers Herbert and Fred to leave New York and join him in Indiana. With a degree in accounting from the City College of New York, Simon had enlisted in the U.S. Army and been stationed at Fort Benjamin Harrison's Army Finance Center near Indianapolis, Indiana. After his military discharge, he remained in the Indianapolis area, took a job as a leasing agent, and set about learning the real estate business. Soon, he realized that there was a promising future in developing retail shopping centers. Petitioning his brothers for assistance, Simon founded Melvin Simon & Associates (MSA) and began his career as a developer.

The Simon brothers' first developments were small, open-air plazas, usually including a grocery store or drug store as an anchor. The company's first wholly owned shopping plaza opened in Bloomington, Indiana, in August 1960 and was followed rapidly by four similar centers in the Indianapolis area. Within a short period, the Simons' reputation as good managers attracted larger retail tenants, such as Sears and Woolworth's. Signing leases with major retailers made the company more attractive to the bank, and the brothers were able to borrow enough capital to cover construction costs for ongoing projects and still have enough to finance new projects. The company's first developments outside of Indiana came when the S.S. Kresge Company signed deals with MSA to develop four of the first Kmart department stores in the Midwest—in Indiana, Illinois, and Michigan. On the heels of these developments came a deal for developing three properties in Colorado, including the company's first fully-enclosed shopping mall, University Mall in Fort Collins. Opened in 1964, this enclosed mall was built around an existing Montgomery Ward store. Working with the Montgomery Ward representatives allowed MSA to develop a pivotal relationship with a major retailer—the first of many.

The Simons brought their enclosed-mall concept back to Indiana later in 1964, opening the first two enclosed malls in Indiana, in Anderson and Bloomington. The company continued to expand in the coming few years, adding an average of 1,000,000 square feet of retail space each year. By 1967, MSA owned and operated more than 3,000,000 square feet. The size of Simon's individual properties was also becoming more ambitious as the company grew. In 1975, MSA opened Towne East Square in Wichita, Kansas, the first enclosed mall with more than 1,000,000 square feet. The company made an improvement in its corporate structure around the same time. In the mid-1970s, MSA formed a separate management division charged with tending to its existing properties. The newly formed division provided marketing and technical services, quality control, and landscaping and design assistance to ensure a degree of consistent managerial and operational quality throughout the Simon portfolio.

MOVING BACK DOWNTOWN

Much of MSA's early success was based on a changing demographic. As suburban areas grew in popularity, more and more urban dwellers left the cities and moved into outlying areas. Retail, in the form of community plazas and enclosed malls, followed these suburbanites into their new neighborhoods, making it easier and more convenient for them to shop near their homes than to travel to downtown retailers. A lack of parking in many cities' downtown areas and the resulting hassle for shoppers contributed to the trend toward mall shopping.

By the late 1970s, hundreds of downtowns across America were in decline, as both residents and businesses moved into outlying areas, leaving city interiors all but empty. In the early 1980s, Simon, which was by that time opening three or more enclosed malls each year, turned its attentions to urban redevelopment. The company was asked to become involved in three redevelopment projects in Midwestern cities with declining downtowns. One of the cities was Simon's home base, Indianapolis. After more than ten years in the planning stage and almost three years in construction phases, Simon's downtown Indianapolis project, Circle Centre, opened. This 800,000-square-foot shopping and entertainment complex, which included a 3,000-car parking garage, gave downtown Indianapolis a much-needed boost and reaffirmed Simon's commitment to urban redevelopment.

MSA's success with urban redevelopment in Indianapolis and other cities led the Simons to consider a slightly different project: mixed-use properties. Based on the theory that sites located right next to large metropolitan areas could be used for retail, business, and residential construction, MSA began its first mixed-use project in Arlington, Virginia. Joining forces with a New York development firm, MSA developed an 800,000-square-foot retail complex, coupled with a Ritz-Carlton hotel and a 160,000 square foot office building. The company also began planning a similar site in Jersey City, New Jersey, which would include not only retail and office space, but hotels, apartments, condos, a marina, and other recreational facilities.

COMPANY PERSPECTIVES

Simon Property Group is the largest publicly traded Real Estate Investment Trust (REIT) in North America and the country's largest owner, developer and manager of high quality retail real estate. We operate from four major platforms—regional malls, Premium Outlet centers, community/lifestyle centers, and international shopping centers. Within these platforms, nearly all retail distribution channels are represented—from neighborhood shopping centers to power centers to Premium Outlet centers to mega-town centers and super-regional malls. Our strategy is to have a significant presence in each of these elements of the retail real estate spectrum since all of these channels have appeal to our retailers and consumers.

In the early 1990s, MSA broke new ground in retail real estate development again when they began to rethink the concept of the traditional enclosed shopping mall. The Simons reasoned that by marrying the shopping experience with a range of entertainment options, they could attract more visitors who would stay for longer periods of time. In addition to retail shops—the malls' bread and butter—MSA began to include amusement arcades and interesting architectural and design features. "We try to make malls for everybody," explained Herb Simon in a 1998 interview for Northwest Airlines World Traveler. "If the older population, teenagers and families can feel very comfortable there, then the more successful the mall is going to be. It becomes a destination, rather than just a place to go buy a pair of pants and leave," he reasoned.

One of the first examples of Simon's entertainment-shopping hybrid was the Forum Shops at Caesars in Las Vegas, developed in partnership with the Gordon Company of Los Angeles. Built between Caesars Palace and the Mirage hotels, this development was designed to re-create a Roman street, complete with robotic animated statues, fountains, and simulated Mediterranean sky. It opened in May 1992. In August 1992, MSA followed its Las Vegas development with perhaps its best-known project, the Mall of America. This vast, 4.2-million-square-foot entertainment and retail complex, developed in partnership with the Triple Five Corporation, was located near the Minneapolis/St. Paul airport. The Mall of America included the four anchor stores of Bloomingdale's, Macy's, Nordstrom, and Sears; more than 500 specialty shops; a seven-acre family theme park; an 18-hole miniature golf course; and an entertainment section complete with a 14-screen cinema, eight nightclubs, and a walk-through aquarium.

The beginning of the 1990s also saw the addition of Melvin Simon's oldest son David to the family business. With an MBA from Columbia University and a background as a Wall Street investment banker, David entered MSA as its executive vice-president and chief financial officer, becoming president and chief executive officer in 1994. Under David Simon's guidance, the company began an aggressive renovation program designed to upgrade several of the older properties in the Simon portfolio. Beginning in 1992, the company began enhancing several properties each year, by expansion of existing space and/or remodeling entrances and common areas. In addition to its renovation program, Simon implemented three discrete management programs designed to, respectively, target emerging retail concepts; collaborate with onsite mall management to increase operational efficiency; and audit individual mall security programs.

IPO AND SUBSEQUENT CONSOLIDATION

Melvin Simon & Associates took the majority of its assets to Wall Street at the close of 1993 through the formation of Simon Property Group (SPG). SPG's $840 million IPO was at that time the largest in U.S. history, and the company began trading on the New York Stock Exchange under the ticker symbol SPG.

The remainder of the 1990s was characterized by mergers, acquisitions, and strategic partnerships for SPG, following the national industry trend toward consolidation. In 1996, Simon announced its merger with DeBartolo Realty Corp. The newly combined Simon DeBartolo Group owned 7 percent of all regional malls in the United States and managed or owned almost 200 properties in 33 states, making it the largest public retail real estate company in North America. The following year, Simon expanded its portfolio yet again with the acquisition of the Retail Property Trust, a private Massachusetts business trust that owned ten enclosed malls and one community center. Another merger took place in 1998, this time with Corporate Property Investors (CPI), a privately held New York City-based REIT. The CPI merger added 23 malls and four office buildings to the Simon portfolio, making the company larger than its next four competitors combined. These two acquisitions also gave Simon an even stronger presence in several major metropolitan markets, including New York, Chicago, Los Angeles, Boston, Atlanta, and Pittsburgh.

KEY DATES

1960:: Melvin Simon, along with brothers Herbert and Fred, founds Melvin Simon & Associates (MSA).
1964:: MSA opens its first fully-enclosed shopping mall, University Mall in Fort Collins, Colorado.
1992:: MSA opens high-end Forum Shops at Caesars in Las Vegas; opens Mall of America in Minnesota.
1993:: MSA goes public with $840 million IPO, forming Simon Property Group (SPG).
1994:: David Simon, son of Melvin, becomes president and chief executive officer of Simon Property Group (SPG).
1996:: SPG merges with DeBartolo Realty Corp, becoming Simon DeBartolo Group.
1997:: Acquires the Retail Property Trust; forms partnership with Chelsea GCA Realty, Inc.
1998:: SPG merges with Corporate Property Investors (CPI); drops DeBartolo from its name.
2000:: SPG and several other large mall developers jointly create MerchantWired Inc.
2002:: SPG joins Westfield America Trust and Rouse Co. to buy out Rodamco North America NV.
2003:: SPG fails in its bid to take over Taubman Centers Inc.

At the same time Simon was building its portfolio through mergers and acquisitions, the company was also exploring growth options via strategic alliances. By developing partnerships with other REITs, Simon was able to pursue joint-venture projects, tapping other companies' areas of expertise, sharing project costs, and expanding smoothly into new markets. The first such partnership began in 1997 with the New Jersey-based Chelsea GCA Realty, Inc., known for developing outlet malls. In 1998, the Simon/Chelsea partnership announced plans to develop two outlet sites, in Houston and Orlando. Simon also partnered with the Virginia-based Mills Corporation to develop four specialty retail projects in Texas, California, Arizona, and North Carolina. In addition, Simon teamed up with New York-based DLJ Real Estate Capital Partners and Ohio-based Madison Marquette to acquire and develop entertainment-oriented projects. At the close of 1998, Simon announced a new 50-50 partnership with the Macerich Company of Santa Monica, California, formed to acquire a portfolio of 12 existing malls in eight states. In 1998, the company also dropped the "DeBartolo," from its name, reverting back to Simon Property Group, when Edward DeBartolo resigned from the company's board.

In 1998, the company entered a period of international expansion. Simon entered the European retail real estate market when it joined with two other investment firms—Argo II and Harvard Private Capital Group, Inc.—to acquire 44 percent ownership in the Paris-based real estate developer, lessor, and manager, Groupe BEG, S.A. The agreement was structured to allow Simon, Argo, and Harvard to gain controlling interest in BEG over a period of time. "Simon's investment in Groupe BEG enables our company to seek growth and consolidation opportunities in the European market which is fundamentally strong," said David Simon in a June 4, 1998, press release. Over the next several years, Simon acquired stakes in dozens of retail centers in France, Italy, and Poland, as well as making inroads in Asian markets.

NEW MARKETING VENTURES

In 1997, Simon created an innovative marketing initiative, Simon Brand Ventures (SBV), which was designed to capitalize on economies of scale. By leveraging the combined buying power of the company's customers and retailers, SBV's ultimate goal was to provide Simon's shoppers and retail tenants with products, benefits, and discounts that no other mall could provide. Toward this end, the Merchant Services arm of Simon Brand Ventures set about establishing "preferred customer" relationships with vendors, enabling Simon's retailers to purchase services, supplies, and products at below-market rates. By the end of 1998, the company had established more than 20 such relationships with vendors supplying a wide range of services, from waste removal to customer traffic analysis.

At the same time, SBV implemented new ways to reward Simon shoppers and thereby inspire brand loyalty. One of the first initiatives was the MALLPeRKS program, which rewarded shoppers with one point for every dollar spent in a Simon mall tenant shop. Shoppers were able to use their accumulated points to purchase retail items at reduced prices. MALLPeRKS, the shopping center industry's only national customer loyalty plan, met with promising response in its first year. By the end of 1998, more than 2,000,000 shoppers were enrolled in the program. In a similar initiative, Simon Brand Ventures partnered with VISA to create a MALL V.I.P. credit card that offered users a 2 percent rebate on purchases in over 400 malls across the nation and a 1 percent rebate on purchases made elsewhere.

Viewing its 200-plus properties not just as retail centers but also as a potential medium for advertisements, in 1998 Simon Brand Ventures launched a program to use kiosks, benches, and other community spaces within malls to display advertisements. With more than 100 million consumers visiting Simon malls multiple times in a given year, and with those consumers in the frame of mind for making purchases, Simon concluded that mall advertisements would be extremely effective. Simon's advertising initiative came at the start of a period when advertisers were scrambling for new ways of reaching consumers; the advent of digital video recorders, for example, made the traditional model of television advertising outmoded.

The following year, Simon Brand Ventures began an unusual campaign to increase consumer awareness of the Simon brand, using television commercials and new signage at its properties. While many analysts doubted that consumers would choose a mall based on its developer, Simon hoped to improve business for its tenants—and therefore for itself—as well as raising its profile among investors. In a 1999 article for the Indianapolis Business Journal, Simon's vice-president of corporate marketing, Shari Simon, declared, "What Microsoft is to computers, I want Simon to be to shopping."

SURGING AHEAD IN SPITE OF MISSTEPS

At the turn of the new century, Simon sought to capitalize on technology that had once been perceived as a serious threat to mall developers: Internet shopping. As retailers struggled to predict the impact of online shopping on their bricks-and-mortar stores, Simon executives explored ways to capitalize on Internet trends while also benefiting their mall tenants. The company created a new unit, Clixnmortar.com, to investigate innovative retail technologies and particularly to find ways to integrate the Internet with traditional shopping. Before such integration could take place, however, shopping malls had to be wired for broadband Internet access. In 2000, Simon and several other large mall developers joined forces to create a new company, MerchantWired Inc., that would handle technology upgrades at hundreds of malls nationwide. MerchantWired set out to give mall stores high-speed access to improve their transfers of data, speed up credit card and other transactions, and allow customers to incorporate online shopping with bricks-and-mortar shopping. In spite of the widespread need for broadband access in malls, however, MerchantWired lost money, and by 2002 Simon and its MerchantWired partners were looking for a buyer.

In addition to exploring emerging technologies, Simon continued conducting the kinds of traditional business deals that had fueled its dramatic growth. While some of those deals added millions to Simon's bottom line, others went awry, embroiling the company in protracted legal battles. In early 2002, Simon and two of its competitors, Westfield America Trust and Rouse Co., joined forces to buy out another mall developer, Rodamco North America NV. Simon paid $980 million in cash to acquire stakes in 13 of Rodamco's 35 retail properties; the other companies bought the remainder of Rodamco's holdings.

Another attempt to join forces with Westfield to acquire a rival did not fare as well. In late 2002, Simon launched what proved to be a lengthy battle to take over Taubman Centers Inc., a Bloomfield Hills, Michigan-based developer. Taubman rejected the $900 million takeover bid, claiming that Taubman family members and their allies held enough shares to block the takeover. Simon disputed this claim and filed a lawsuit challenging Taubman. In January 2003, Westfield joined Simon, and the two companies raised the offer for a Taubman buyout. Among Taubman's many defenses against the takeover was the lobbying of the Michigan legislature to pass a law helping the state's corporations fight off hostile takeovers. While a federal judge ruled in Simon's favor in the lawsuit, the Michigan lawmakers passed legislation that effectively allowed the Taubman family to block the takeover. After a yearlong effort and estimated expenditures of $10 million, Simon abandoned its attempted buyout.

Around the same time, Simon Property Group was again involved in a high-profile legal dispute, this time with fellow owners of the Mall of America, the Triple Five Corporation (owned by the Ghermezian family). Simon was the managing partner of the massive Minnesota mall when it increased its ownership stake in 1999 by acquiring an additional 27.5 percent from a third party. The purchase of that percentage from Teachers Insurance & Annuity Association–College Retirement Equity Fund (TIAA-CREF) gave Simon 50 percent ownership of the mall. In 2003 a federal judge ruled that Simon had to sell the 27.5 percent back to the Ghermezians—who would then become the managing partner of the mall—because Simon had conducted the deal in an underhanded, covert manner, violating its fiduciary duty. An appeals ruling in 2005 confirmed the spirit of that ruling, though Simon was compelled to sell only half of the 27.5 percent to the Ghermezians.

Regardless of the obstacles Simon encountered, the company managed strong growth and double-digit increases in its stock price for the first several years of the twenty-first century. Simon's forecast for the coming years involved continued international expansion; in 2005 the company became the first retail developer in the United States to develop malls in China. On the domestic front, Simon planned to focus less on acquisitions and more on improving the value of its current holdings. The company unveiled a plan in 2005 to forge partnerships to develop nonretail properties—such as condominiums or hotels—on land adjacent to its shopping centers. CEO David Simon described the plan as "asset intensification" in a July 11, 2005, Indianapolis Business Journal article. Richard Sokolov, Simon's chief operating officer, echoed that strategic viewpoint in a 2006 WWD article, stating, "Our focus right now is just making each of our properties the best that it can be."