UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
SIMON PROPERTY GROUP, INC. SPG REALTY CONSULTANTS, INC.
-------------------------- ----------------------------
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Delaware Delaware
-------- --------
(State of incorporation (State of incorporation
or organization) or organization)
001-14469 001-14469-01
--------- ------------
(Commission File No.) (Commission File No.)
046268599 13-2838638
--------- ----------
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
National City Center National City Center
115 West Washington Street, 115 West Washington Street,
Suite 15 East Suite 15 East
Indianapolis, Indiana 46204 Indianapolis, Indiana 46204
--------------------------- ---------------------------
(Address of principal (Address of principal
executive offices) executive offices)
(317) 636-1600 (317) 636-1600
-------------- --------------
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of August 7, 1999, 170,276,561 shares of common stock, par value $0.0001 per
share, 3,200,000 shares of Class B common stock, par value $0.0001 per share,
and 4,000 shares of Class C common stock, par value $0.0001 per share of Simon
Property Group, Inc. were outstanding, and were paired with 1,734,805.61 shares
of common stock, par value $0.0001 per share, of SPG Realty Consultants, Inc.
================================================================================
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1: Financial Statements - Introduction 3
Simon Property Group, Inc. and SPG Realty Consultants, Inc.:
Combined Condensed Balance Sheets as of June 30, 1999
and December 31, 1998 4
Combined Condensed Statements of Operations for the
three-month and six-month periods ended June 30, 1999
and 1998 5
Combined Condensed Statements of Cash Flows for the
six-month periods ended June 30, 1999 and 1998 6
Simon Property Group, Inc.:
Consolidated Condensed Balance Sheets as of June 30,
1999 and December 31, 1998 7
Consolidated Condensed Statements of Operations for
the three-month and six-month periods ended June 30,
1999 and 1998 8
Consolidated Condensed Statements of Cash Flows for
the six-month periods ended June 30, 1999 and 1998 9
SPG Realty Consultants, Inc.:
Consolidated Condensed Balance Sheets as of June 30,
1999 and December 31, 1998 10
Consolidated Condensed Statements of Operations for
the three-month and six-month periods ended June 30,
1999 and 1998 11
Consolidated Condensed Statements of Cash Flows for
the six-month periods ended June 30, 1999 and 1998 12
Notes to Unaudited Condensed Financial Statements 13
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3: Qualitative and Quantitative Disclosure About Market Risk 29
PART II - OTHER INFORMATION
Items 1 through 6 30
SIGNATURE 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - INTRODUCTION
The following unaudited financial statements of Simon Property Group,
Inc. and its paired-share affiliate, SPG Realty Consultants, Inc., are provided
pursuant to the requirements of this Item. In the opinion of management, all
adjustments necessary for fair presentation, consisting of only normal recurring
adjustments, have been included. The financial statements presented herein have
been prepared in accordance with the accounting policies described in Simon
Property Group, Inc. and SPG Realty Consultants, Inc.'s combined annual report
on Form 10-K for the year ended December 31, 1998 and should be read in
conjunction therewith.
As described in Note 2 to the financial statements, Corporate Property
Investors, Inc. was acquired by Simon DeBartolo Group, Inc. as of the close of
business on September 24, 1998. Although Simon DeBartolo Group, Inc. became a
subsidiary of Corporate Property Investors, Inc., the shareholders of Simon
DeBartolo Group, Inc. became majority holders of the outstanding common stock of
Corporate Property Investors, Inc. Accordingly, Simon DeBartolo Group, Inc. is
the predecessor to Simon Property Group, Inc. for accounting and reporting
purposes. In connection with the acquisition, Corporate Property Investors, Inc.
and Corporate Realty Consultants, Inc. were renamed "Simon Property Group, Inc."
and "SPG Realty Consultants, Inc.", respectively. See Note 1 to the financial
statements for a description of the basis of presentation of the following
unaudited financial statements.
3
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
1999 1998
------------ ------------
ASSETS:
Investment properties, at cost $ 12,398,346 $ 11,850,014
Less-- accumulated depreciation 908,950 722,371
------------ ------------
11,489,396 11,127,643
Goodwill, net 41,356 58,134
Cash and cash equivalents 145,020 129,195
Tenant receivables and accrued revenue, net 235,432 218,581
Notes and advances receivable from Management Company and affiliate 128,441 115,378
Investment in partnerships and joint ventures, at equity 1,077,868 1,306,753
Investment in Management Company and affiliates 14,452 10,037
Other investment 52,289 50,176
Deferred costs and other assets 236,140 228,965
Minority interest 34,365 32,138
------------ ------------
$ 13,454,759 $ 13,277,000
============ ============
LIABILITIES:
Mortgages and other indebtedness $ 8,274,608 $ 7,973,372
Accounts payable and accrued expenses 421,219 415,186
Cash distributions and losses in partnerships and joint ventures, at equity 30,901 29,139
Other liabilities 87,222 95,131
------------ ------------
Total liabilities 8,813,950 8,512,828
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
LIMITED PARTNERS' INTEREST IN THE OPERATING PARTNERSHIPS 1,010,032 1,015,634
PREFERRED STOCK OF SUBSIDIARY 339,463 339,329
SHAREHOLDERS' EQUITY:
CAPITAL STOCK OF SIMON PROPERTY GROUP, INC.:
Series A convertible preferred stock, 209,249 shares authorized,
53,271 and 209,249 issued and outstanding, respectively 68,073 267,393
Series B convertible preferred stock, 5,000,000 shares authorized,
4,844,331 issued and outstanding 450,523 450,523
Common stock, $.0001 par value, 400,000,000 shares authorized,
and 170,252,399 and 163,571,031 issued and outstanding, respectively 17 16
Class B common stock, $.0001 par value, 12,000,000 shares authorized, 3,200,000
issued and outstanding 1 1
Class C common stock, $.0001 par value, 4,000 shares authorized, issued and
outstanding -- --
CAPITAL STOCK OF SPG REALTY CONSULTANTS, INC.:
Common stock, $.0001 par value, 7,500,000 shares authorized,
1,734,563.99 and 1,667,750.31 issued and outstanding, respectively -- --
Capital in excess of par value 3,268,615 3,083,213
Accumulated deficit (469,916) (372,313)
Unrealized gain on long-term investment 1,657 126
Unamortized restricted stock award (27,656) (19,750)
------------ ------------
Total shareholders' equity 3,291,314 3,409,209
------------ ------------
$ 13,454,759 $ 13,277,000
============ ============
The accompanying notes are an integral part of these statements.
4
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
REVENUE:
Minimum rent $ 276,394 $ 186,474 $ 550,243 $ 370,934
Overage rent 14,586 10,701 28,026 20,483
Tenant reimbursements 139,555 91,811 276,838 181,971
Other income 23,471 21,389 44,992 37,244
--------- --------- --------- ---------
Total revenue 454,006 310,375 900,099 610,632
--------- --------- --------- ---------
EXPENSES:
Property operating 72,003 50,479 140,507 100,258
Depreciation and amortization 89,765 58,313 179,525 116,618
Real estate taxes 44,123 28,764 91,043 58,959
Repairs and maintenance 16,976 11,655 36,888 23,550
Advertising and promotion 14,854 8,621 29,552 16,722
Provision for credit losses 2,951 733 4,794 3,455
Other 6,691 6,584 14,249 12,177
--------- --------- --------- ---------
Total operating expenses 247,363 165,149 496,558 331,739
--------- --------- --------- ---------
OPERATING INCOME 206,643 145,226 403,541 278,893
INTEREST EXPENSE 142,734 92,510 283,856 184,420
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 63,909 52,716 119,685 94,473
MINORITY INTEREST (3,688) (2,154) (5,503) (3,596)
LOSSES ON SALES OF ASSETS, NET (9,308) (7,219) (9,308) (7,219)
INCOME TAX BENEFIT OF SRC 3,374 -- 3,374 --
--------- --------- --------- ---------
INCOME BEFORE UNCONSOLIDATED ENTITIES 54,287 43,343 108,248 83,658
INCOME FROM UNCONSOLIDATED ENTITIES 13,051 171 26,478 4,980
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 67,338 43,514 134,726 88,638
EXTRAORDINARY ITEMS (43) 7,024 (1,817) 7,024
--------- --------- --------- ---------
INCOME BEFORE ALLOCATION TO LIMITED PARTNERS 67,295 50,538 132,909 95,662
LESS:
LIMITED PARTNERS' INTEREST IN THE OPERATING PARTNERSHIPS 12,710 15,737 25,665 29,579
PREFERRED DIVIDENDS OF SUBSIDIARY 7,334 -- 14,668 --
--------- --------- --------- ---------
NET INCOME 47,251 34,801 92,576 66,083
PREFERRED DIVIDENDS (8,789) (7,334) (19,160) (14,668)
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 38,462 $ 27,467 $ 73,416 $ 51,415
========= ========= ========= =========
BASIC EARNINGS PER COMMON PAIRED SHARE:
Income before extraordinary items $ 0.22 $ 0.21 $ 0.44 $ 0.42
Extraordinary items -- 0.04 (0.01) 0.04
--------- --------- --------- ---------
Net income $ 0.22 $ 0.25 $ 0.43 $ 0.46
========= ========= ========= =========
DILUTED EARNINGS PER COMMON PAIRED SHARE:
Income before extraordinary items $ 0.22 $ 0.21 $ 0.44 $ 0.42
Extraordinary items -- 0.04 (0.01) 0.04
--------- --------- --------- ---------
Net income $ 0.22 $ 0.25 $ 0.43 $ 0.46
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
5
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
For the Six Months
Ended June 30,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 92,576 $ 66,083
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization 185,013 120,915
Extraordinary items 1,817 (7,024)
Losses on sales of assets, net 9,308 7,219
Limited partners' interest in the Operating Partnerships 25,665 29,579
Preferred dividends of Subsidiary 14,668 --
Straight-line rent (9,063) (4,091)
Minority interest 5,503 3,596
Equity in income of unconsolidated entities (26,478) (4,980)
Income tax benefit of SRC (3,374) --
Changes in assets and liabilities--
Tenant receivables and accrued revenue (1,475) 4,507
Deferred costs and other assets (5,292) (1,866)
Accounts payable, accrued expenses and other liabilities (3,926) (817)
----------- -----------
Net cash provided by operating activities 284,942 213,121
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (99,254) (243,355)
Capital expenditures (201,238) (126,776)
Cash from acquisitions and consolidation of joint ventures, net 10,812 4,387
Change in restricted cash -- 2,591
Net proceeds from sales of assets 53,953 46,087
Investments in unconsolidated entities (32,173) (6,554)
Distributions from unconsolidated entities 163,542 113,426
Investments in and advances to Management Company and affiliate (13,063) (17,045)
----------- -----------
Net cash used in investing activities (117,421) (227,239)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net 1,853 92,350
Minority interest distributions, net (8,142) (6,326)
Preferred dividends of Subsidiary (14,668) --
Preferred dividends and distributions to shareholders (192,734) (126,698)
Distributions to limited partners (64,821) (63,727)
Mortgage and other note proceeds, net of transaction costs 1,091,808 1,485,545
Mortgage and other note principal payments (964,992) (1,373,360)
----------- -----------
Net cash provided by (used in) financing activities (151,696) 7,784
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,825 (6,334)
CASH AND CASH EQUIVALENTS, beginning of period 129,195 109,699
=========== ===========
CASH AND CASH EQUIVALENTS, end of period $ 145,020 $ 103,365
=========== ===========
The accompanying notes are an integral part of these statements.
6
SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
1999 1998
------------ ------------
ASSETS:
Investment properties, at cost $ 12,390,785 $ 11,816,325
Less-- accumulated depreciation 907,741 710,012
------------ ------------
11,483,044 11,106,313
Goodwill, net 41,356 58,134
Cash and cash equivalents 142,236 127,626
Tenant receivables and accrued revenue, net 234,710 217,798
Notes and advances receivable from Management Company and affiliate 128,441 115,378
Note receivable from SRC Operating Partnership -- 20,565
Investment in partnerships and joint ventures, at equity 1,073,057 1,303,251
Investment in Management Company and affiliates 14,452 10,037
Other investment 52,289 50,176
Deferred costs and other assets 236,058 227,713
Minority interest 34,365 32,138
------------ ------------
$ 13,440,008 $ 13,269,129
============ ============
LIABILITIES:
Mortgages and other indebtedness $ 8,273,822 $ 7,972,381
Notes payable to SRC Operating Partnership (Interest at 8%, due 2008) 6,008 17,907
Accounts payable and accrued expenses 420,757 411,259
Cash distributions and losses in partnerships and joint ventures, at equity 30,901 29,139
Other liabilities 86,021 95,326
------------ ------------
Total liabilities 8,817,509 8,526,012
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
LIMITED PARTNERS' INTEREST IN THE SPG OPERATING PARTNERSHIP 1,004,975 1,009,646
PREFERRED STOCK OF SUBSIDIARY 339,463 339,329
SHAREHOLDERS' EQUITY:
Series A convertible preferred stock, 209,249 shares authorized,
53,271 and 209,249 issued and outstanding, respectively 68,073 267,393
Series B convertible preferred stock, 5,000,000 shares authorized,
4,844,331 issued and outstanding 450,523 450,523
Common stock, $.0001 par value, 400,000,000 shares authorized,
and 170,252,399 and 163,571,031 issued and outstanding, respectively 17 16
Class B common stock, $.0001 par value, 12,000,000 shares authorized, 3,200,000
issued and outstanding 1 1
Class C common stock, $.0001 par value, 4,000 shares authorized, issued and
outstanding -- --
Capital in excess of par value 3,254,203 3,068,458
Accumulated deficit (468,757) (372,625)
Unrealized gain on long-term investment 1,657 126
Unamortized restricted stock award (27,656) (19,750)
------------ ------------
Total shareholders' equity 3,278,061 3,394,142
------------ ------------
$ 13,440,008 $ 13,269,129
============ ============
The accompanying notes are an integral part of these statements.
7
SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
REVENUE:
Minimum rent $ 276,260 $ 186,474 $ 549,659 $ 370,934
Overage rent 14,586 10,701 28,026 20,483
Tenant reimbursements 139,583 91,811 276,840 181,971
Other income 27,038 21,389 48,294 37,244
--------- --------- --------- ---------
Total revenue 457,467 310,375 902,819 610,632
--------- --------- --------- ---------
EXPENSES:
Property operating 71,846 50,479 140,180 100,258
Depreciation and amortization 89,738 58,313 179,217 116,618
Real estate taxes 44,102 28,764 90,887 58,959
Repairs and maintenance 16,953 11,655 36,879 23,550
Advertising and promotion 14,854 8,621 29,552 16,722
Provision for credit losses 2,949 733 4,779 3,455
Other 6,747 6,584 14,429 12,177
--------- --------- --------- ---------
Total operating expenses 247,189 165,149 495,923 331,739
--------- --------- --------- ---------
OPERATING INCOME 210,278 145,226 406,896 278,893
INTEREST EXPENSE 145,488 92,510 284,058 184,420
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 64,790 52,716 122,838 94,473
MINORITY INTEREST (3,688) (2,154) (5,503) (3,596)
LOSSES ON SALES OF ASSETS (4,188) (7,219) (4,188) (7,219)
--------- --------- --------- ---------
INCOME BEFORE UNCONSOLIDATED ENTITIES 56,914 43,343 113,147 83,658
INCOME FROM UNCONSOLIDATED ENTITIES 12,608 171 24,925 4,980
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 69,522 43,514 138,072 88,638
EXTRAORDINARY ITEMS (43) 7,024 (1,817) 7,024
--------- --------- --------- ---------
INCOME BEFORE ALLOCATION TO LIMITED PARTNERS 69,479 50,538 136,255 95,662
LESS:
LIMITED PARTNERS' INTEREST IN THE SPG OPERATING PARTNERSHIP 14,258 15,737 27,540 29,579
PREFERRED DIVIDENDS OF SUBSIDIARY 7,334 -- 14,668 --
--------- --------- --------- ---------
NET INCOME 47,887 34,801 94,047 66,083
PREFERRED DIVIDENDS (8,789) (7,334) (19,160) (14,668)
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 39,098 $ 27,467 $ 74,887 $ 51,415
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary items $ 0.23 $ 0.21 $ 0.45 $ 0.42
Extraordinary items 0.00 0.04 (0.01) 0.04
--------- --------- --------- ---------
Net income $ 0.23 $ 0.25 $ 0.44 $ 0.46
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary items $ 0.23 $ 0.21 $ 0.44 $ 0.42
Extraordinary items 0.00 0.04 -- 0.04
--------- --------- --------- ---------
Net income $ 0.23 $ 0.25 $ 0.44 $ 0.46
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
8
SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
For the Six Months
Ended June 30,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,047 $ 66,083
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization 184,705 120,915
Extraordinary item 1,817 (7,024)
Losses on sales of assets 4,188 7,219
Limited partners' interest in the SPG Operating Partnership 27,540 29,579
Preferred dividends of Subsidiary 14,668 --
Straight-line rent (9,065) (4,091)
Minority interest 5,503 3,596
Equity in income of unconsolidated entities (24,925) (4,980)
Changes in assets and liabilities--
Tenant receivables and accrued revenue (1,435) 4,507
Deferred costs and other assets (6,439) (1,866)
Accounts payable, accrued expenses and other liabilities (5,231) (817)
----------- -----------
Net cash provided by operating activities 285,373 213,121
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (99,254) (243,355)
Capital expenditures (198,958) (126,776)
Cash from acquisitions and consolidation of joint ventures, net 10,812 4,387
Change in restricted cash -- 2,591
Net proceeds from sales of assets 42,000 46,087
Investments in unconsolidated entities (32,338) (6,554)
Note payment from the SRC Operating Partnership 20,565 --
Distributions from unconsolidated entities 163,463 113,426
Investments in and advances to Management Company and affiliate (13,063) (17,045)
----------- -----------
Net cash used in investing activities (106,773) (227,239)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common, net 1,253 92,350
Minority interest distributions, net (8,142) (6,326)
Preferred dividends of Subsidiary (14,668) --
Preferred dividends and distributions to shareholders (192,734) (126,698)
Distributions to limited partners (64,821) (63,727)
Note payable to the SRC Operating Partnership (11,899) --
Mortgage and other note proceeds, net of transaction costs 1,091,808 1,485,545
Mortgage and other note principal payments (964,787) (1,373,360)
----------- -----------
Net cash provided by (used in) financing activities (163,990) 7,784
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,610 (6,334)
CASH AND CASH EQUIVALENTS, beginning of period 127,626 109,699
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 142,236 $ 103,365
=========== ===========
The accompanying notes are an integral part of these statements.
9
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
1999 1998
-------- ------------
ASSETS:
Investment properties, at cost $ 7,561 $ 33,689
Less-- accumulated depreciation 1,209 12,359
-------- --------
6,352 21,330
Cash and cash equivalents 2,784 1,569
Note receivable from SPG Operating Partnership (Interest at 8%, due 2008) 6,008 17,907
Tenant receivables 721 783
Investments in joint ventures, at equity 4,811 3,502
Other 83 1,510
-------- --------
$ 20,759 $ 46,601
======== ========
LIABILITIES:
Mortgages and other indebtedness $ 786 $ 991
Mortgage payable to the SPG Operating Partnership -- 20,565
Other liabilities 1,663 3,990
-------- --------
Total liabilities 2,449 25,546
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 10)
LIMITED PARTNERS' INTEREST IN THE SRC OPERATING PARTNERSHIP 5,057 5,988
SHAREHOLDERS' EQUITY:
Common stock, $.0001 par value, 7,500,000 shares authorized,
1,734,563.99 and 1,667,750.31 issued and outstanding, respectively -- --
Capital in excess of par value 29,519 29,861
Accumulated deficit (16,266) (14,794)
-------- --------
Total shareholders' equity 13,253 15,067
-------- --------
$ 20,759 $ 46,601
======== ========
The accompanying notes are an integral part of these statements.
10
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
REVENUE:
Minimum rent $ 306 $ 1,165 $ 1,444 $ 1,947
Tenant reimbursements 39 258 210 470
Other income 436 251 866 322
------------- ------------- ------------- -------------
Total revenue 781 1,674 2,520 2,739
------------- ------------- ------------- -------------
EXPENSES:
Property operating 267 553 706 1,094
Depreciation and amortization 27 235 308 464
Administrative and other 262 1,000 836 1,216
------------- ------------- ------------- -------------
Total operating expenses 556 1,788 1,850 2,774
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 225 (114) 670 (35)
INTEREST EXPENSE (1,107) (338) (3,824) (676)
LOSS ON SALES OF ASSETS, NET (5,120) -- (5,120) --
INCOME TAX BENEFIT 3,374 123 3,374 190
------------- ------------- ------------- -------------
LOSS BEFORE UNCONSOLIDATED ENTITIES (2,628) (329) (4,900) (521)
INCOME FROM UNCONSOLIDATED ENTITIES 443 127 1,553 274
------------- ------------- ------------- -------------
LOSS BEFORE ALLOCATION TO LIMITED PARTNERS (2,185) (202) (3,347) (247)
LESS -- LIMITED PARTNERS' INTEREST IN
THE SRC OPERATING PARTNERSHIP 1,548 -- 1,875 --
------------- ------------- ------------- -------------
NET LOSS $ (637) $ (202) $ (1,472) $ (247)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.37) $ (0.36) $ (0.86) $ (0.44)
============= ============= ============= =============
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 1,733,423.99 558,678.00 1,711,765.34 558,692.00
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
11
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
For the Six Months
Ended June 30,
--------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,472) $ (247)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Depreciation and amortization 308 464
Loss on sales of assets, net 5,120 --
Limited partners' interest in SRC Operating Partnership (1,875) --
Straight-line rent 2 --
Equity in income of unconsolidated entities (1,553) (274)
Income tax benefit (3,374) (190)
Changes in assets and liabilities--
Tenant receivables and other assets 631 152
Other liabilities 176 (30)
-------- --------
Net cash provided by (used in) operating activities (2,037) (125)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (509) (584)
Investments in unconsolidated entities -- (2,833)
Net proceeds from sales of assets 11,953 --
Note payment from the SPG Operating Partnership 11,899 --
Distributions from unconsolidated entities 79 18,507
-------- --------
Net cash provided by investing activities 23,422 15,090
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net 600 3
Distributions to shareholders -- (537)
Mortgage and other note proceeds, net of transaction costs -- 2,408
Mortgage and other note principal payments (20,770) (18,570)
-------- --------
Net cash used in financing activities (20,170) (16,696)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,215 (1,731)
CASH AND CASH EQUIVALENTS, beginning of period 1,569 4,147
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,784 $ 2,416
======== ========
The accompanying notes are an integral part of these statements.
12
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts
and where indicated as in billions)
NOTE 1 - BASIS OF PRESENTATION
The accompanying combined consolidated financial statements include
Simon Property Group, Inc. ("SPG") and subsidiaries and its paired-share
affiliate SPG Realty Consultants, Inc. ("SRC" and together with SPG, the
"Companies") and its subsidiary. All significant intercompany amounts have been
eliminated. The combined balance sheets and statements of operations and cash
flows reflect the purchase of Corporate Property Investors, Inc. ("CPI") and
related transactions (the "CPI Merger") as of the close of business on September
24, 1998. Operating results prior to the completion of the CPI Merger represent
the operating results of Simon DeBartolo Group, Inc. and subsidiaries ("SDG"),
the predecessor to SPG for financial reporting purposes.
The accompanying consolidated financial statements for SPG include the
accounts of SPG and its subsidiaries. All significant intercompany amounts have
been eliminated. SPG's primary subsidiary is Simon Property Group, L.P. (the
"SPG Operating Partnership"), formerly known as Simon DeBartolo Group, L.P.
("SDG, LP"). The balance sheets and statements of operations and cash flows
reflect the purchase of CPI as of the close of business on September 24, 1998.
Operating results prior to the CPI Merger represent the operating results of
SDG.
The accompanying consolidated financial statements of the paired share
affiliate, SRC, include the accounts of SPG Realty Consultants, L.P. (the "SRC
Operating Partnership"). Because the cash contributed to SRC and the SRC
Operating Partnership in exchange for shares of common stock and units of
partnership interests ("Units"), in connection with the CPI Merger represented
equity transactions, SRC, unlike CPI, is not subject to purchase accounting
treatment. The separate statements of SRC represent the historical results of
Corporate Realty Consultants, Inc. ("CRC"), the predecessor to SRC, for all
periods presented.
The SRC Operating Partnership and the SPG Operating Partnership are
hereafter referred to as the "Operating Partnerships" and, together with the
Companies, as "Simon Group".
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reported periods.
Actual results could differ from these estimates.
Outstanding common shares of SPG are paired with 1/100th of a common
share of SRC (together "Paired Shares"). SPG is a self-administrated and
self-managed, paired-share real estate investment trust ("REIT"), and is engaged
primarily in the ownership, operation, management, leasing, acquisition,
expansion and development of real estate properties, primarily regional malls
and community shopping centers. As of June 30, 1999, Simon Group owned or held
an interest in 241 income-producing properties in the United States, which
consisted of 153 regional malls, 76 community shopping centers, four specialty
retail centers, five office and mixed-use properties and three value-oriented
super-regional malls in 35 states (the "Properties"), and one asset in Europe.
Simon Group also owned interests in one regional mall, one value-oriented
super-regional mall, three community centers and one outlet center currently
under construction and thirteen parcels of land held for future development. In
addition, Simon Group holds substantially all of the economic interest in M.S.
Management Associates, Inc. (the "Management Company" -See Note 7). Simon Group
holds substantially all of the economic interest in, and the Management Company
holds substantially all of the voting stock of, DeBartolo Properties Management,
Inc. ("DPMI"), which provides architectural, design, construction and other
services to substantially all of the Properties, as well as certain other
regional malls and community shopping centers owned by third parties. The
Companies owned 72.4% and 71.6% of the Operating Partnerships at June 30, 1999
and December 31, 1998, respectively.
Properties which are wholly-owned or owned less than 100% and are
controlled by the Operating Partnerships are accounted for using the
consolidated method of accounting. Control is demonstrated by the ability of the
general partner to manage day-to-day operations, refinance debt and sell the
assets of the partnership without the consent of the limited partner and the
inability of the limited partner to replace the general partner. Investments in
partnerships and joint ventures which represent noncontrolling ownership
interests and the investment in the Management Company are accounted for using
the equity method of accounting. These investments are recorded initially at
cost and subsequently adjusted for net equity in income (loss) and cash
contributions and distributions.
13
Net operating results of the Operating Partnerships are allocated to
the Companies based first on the Companies' preferred unit preference, if
applicable, and then on their remaining ownership interests in the Operating
Partnerships during the period. The Companies' remaining weighted average
ownership interests in the Operating Partnerships for the three-month and
six-month periods ended June 30, 1999 were 72.4% and 72.1%, respectively. SPG's
remaining weighted average ownership interest in the SPG Operating Partnership
for the three-month and six-month periods ended June 30, 1998 were 63.6% and
63.5%, respectively. Prior to the CPI Merger, SRC owned its assets directly.
SRC is taxed as a C Corporation, and thus is subject to income taxes on
its earnings. SRC follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". The valuation allowance related to SRC's tax accounts is
adjusted as necessary based on management's expectations of SRC's ability to
utilize its tax benefit carryforwards.
NOTE 2 - CPI MERGER
For financial reporting purposes, as of the close of business on
September 24, 1998, the CPI Merger was consummated pursuant to the Agreement and
Plan of Merger dated February 18, 1998, among SDG, CPI and CRC.
Pursuant to the terms of the CPI Merger, a subsidiary of CPI merged
with and into SDG with SDG continuing as the surviving company. SDG became a
majority-owned subsidiary of CPI. The outstanding shares of common stock of SDG
were exchanged for a like number of shares of CPI. Beneficial interests in CRC
were acquired for $14,000 in order to pair the common stock of CPI with 1/100th
of a share of common stock of CRC, the paired share affiliate.
Immediately prior to the consummation of the CPI Merger, the holders of
CPI common stock were paid a merger dividend consisting of (i) $90 in cash, (ii)
1.0818 additional shares of CPI common stock and (iii) 0.19 shares of 6.50%
Series B convertible preferred stock of CPI per share of CPI common stock.
Immediately prior to the CPI Merger, there were 25,496,476 shares of CPI common
stock outstanding. The aggregate value associated with the completion of the CPI
Merger was approximately $5.9 billion including transaction costs and
liabilities assumed.
To finance the cash portion of the CPI Merger consideration, $1.4
billion was borrowed under a new senior unsecured medium term bridge loan (the
"Merger Facility"), which bears interest at a base rate of LIBOR plus 65 basis
points and matures in three mandatory amortization payments (on June 22, 1999,
March 24, 2000 and September 24, 2000) (See Note 8). An additional $237,000 was
also borrowed under the SPG Operating Partnership's existing $1.25 billion
unsecured revolving credit facility (the "Credit Facility"). In connection with
the CPI Merger, CPI was renamed "Simon Property Group, Inc." and CPI's paired
share affiliate, CRC was renamed "SPG Realty Consultants, Inc." In addition SDG
and SDG, LP were renamed "SPG Properties, Inc.", and "Simon Property Group,
L.P.", respectively.
Upon completion of the CPI Merger, SPG transferred substantially all of
the CPI assets acquired, which consisted primarily of 23 regional malls, one
community center, two office buildings and one regional mall under construction
(other than one regional mall, Ocean County Mall, and certain net leased
properties valued at approximately $153,100) and liabilities assumed (except
that SPG remains a co-obligor with respect to the Merger Facility) of
approximately $2.3 billion to the SPG Operating Partnership or one or more
subsidiaries of the SPG Operating Partnership in exchange for 47,790,550 limited
partnership interests and 5,053,580 preferred partnership interests in the SPG
Operating Partnership. The preferred partnership interests carry the same rights
and equal the number of preferred shares issued and outstanding as a direct
result of the CPI Merger. Likewise, the net assets of SRC, with a carrying value
of approximately $14,755, were transferred to the SRC Operating Partnership in
exchange for partnership interests.
The Companies accounted for the merger between SDG and the CPI merger
subsidiary as a reverse purchase in accordance with Accounting Principles Board
Opinion No. 16. Although paired shares of the former CPI and CRC were issued to
SDG common stock holders and SDG became a substantially wholly owned subsidiary
of CPI following the CPI Merger, CPI is considered the business acquired for
accounting purposes. SDG is considered the acquiring company because the SDG
common stockholders became majority holders of the common stock of SPG. The
value of the consideration paid by SDG has been allocated to the estimated fair
value of the CPI assets acquired and liabilities assumed which resulted in
goodwill of $42,518, as adjusted. Goodwill is being amortized over the estimated
life of the Properties acquired, which is 35 years. Accumulated amortization of
goodwill as of June 30, 1999 and December 31, 1998 was $1,162 and $414,
respectively. Purchase accounting will be finalized when SPG completes and
implements its combined operating plan, which is expected to occur by the third
quarter of 1999.
SDG, LP contributed $14,000 cash to CRC and $8,000 cash to the SRC
Operating Partnership on behalf of the SDG common stockholders and the limited
partners of SDG, LP to obtain the beneficial interests in common stock of CRC,
which were paired with the shares of common stock issued by SPG, and to obtain
Units in the SRC Operating Partnership so that the limited partners of SDG, LP
would hold the same proportionate interest in the SRC Operating Partnership that
they hold in SDG, LP. The cash contributed to CRC and the SRC Operating
Partnership in exchange for an ownership interest therein have been
appropriately
14
accounted for as capital infusion or equity transactions. The assets and
liabilities of CRC have been reflected at historical cost. Adjusting said assets
and liabilities to fair value would only have been appropriate if the SDG
stockholders' beneficial interests in CRC exceeded 80%.
PRO FORMA
The following unaudited pro forma summary financial information
excludes any extraordinary items and combines the consolidated results of
operations of SPG and SRC as if the CPI Merger had occurred as of January 1,
1998, and was carried forward through June 30, 1998. Preparation of the pro
forma summary information was based upon assumptions deemed appropriate by
management. The pro forma summary information is not necessarily indicative of
the results which actually would have occurred if the CPI Merger had been
consummated at January 1, 1998, nor does it purport to represent the results of
operations for future periods.
SIX MONTHS ENDED
JUNE 30, 1998
----------------
Revenue $820,931
================
Net income before allocation to limited partners (1) 125,211
================
Net income available to common shareholders 63,828
================
Net income per Paired Share (1) $ 0.39
================
Net income per Paired Share - assuming dilution $ 0.39
================
Weighted average number of Paired Shares of common stock outstanding 163,904,309
================
Weighted average number of Paired Shares of common stock outstanding -
assuming dilution 164,293,510
================
(1) Includes a net gain on the sales of assets of $38,075, or $0.17 on a
basic earnings per Paired Share basis.
NOTE 3 - RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1999 presentation. These
reclassifications have no impact on the net operating results previously
reported.
NOTE 4 - PER SHARE DATA
Basic earnings per share is based on the weighted average number of
shares of common stock outstanding during the period and diluted earnings per
share is based on the weighted average number of shares of common stock
outstanding combined with the incremental weighted average shares that would
have been outstanding if all dilutive potential common shares would have been
converted into shares at the earliest date possible. The weighted average number
of shares used in the computation for the three-month periods ended June 30,
1999 and 1998 was 173,342,399 and 111,954,695, respectively. The weighted
average number of shares used in the computation for the six-month periods ended
June 30, 1999 and 1998 was 171,176,534 and 110,825,745, respectively. The
diluted weighted average number of shares used in the computation for the
three-month periods ended June 30, 1999 and 1998 was 173,609,740 and
112,381,667, respectively. The diluted weighted average number of shares used in
the computation for the six-month periods ended June 30, 1999 and 1998 was
171,394,895 and 111,214,946, respectively.
Combined basic and diluted earnings per share is presented in the
financial statements based upon the weighted average number of Paired Shares
outstanding, giving effect to the CPI Merger as of the close of business on
September 24, 1998. Management believes this presentation provides the
shareholders with the most meaningful presentation of earnings for a single
interest in the combined entities.
Both series of convertible preferred stock issued and outstanding
during the comparative periods did not have a dilutive effect on earnings per
share. Paired Units held by limited partners in the Operating Partnerships may
be exchanged for Paired Shares, on a one-for-one basis in certain circumstances.
If exchanged, the paired Units would not have a dilutive effect. The increase in
weighted average shares outstanding under the diluted method over the basic
method in every period presented for the Companies is due entirely to the effect
of outstanding stock options. Basic earnings and diluted earnings were the same
for all periods presented.
NOTE 5 - CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, during the six
months ended June 30, 1999 was $270,937 as compared to $186,614 for the same
period in 1998. Accrued and unpaid distributions were $873 and $3,428 at June
30, 1999 and December 31,
15
1998, respectively, and represented distributions payable on SPG's 6.5% Series A
Convertible Preferred Stock. See Notes 6 and 9 for information about non-cash
transactions during the six months ended June 30, 1999.
NOTE 6 - OTHER ACQUISITIONS, DISPOSALS AND DEVELOPMENT
During the first six months of 1999 Simon Group acquired the remaining
ownership interests in four Properties for a total of approximately $147,500,
including the assumption of approximately $48,500 of mortgage indebtedness.
These purchases were funded primarily with borrowings from the Credit Facility.
Each of the Properties purchased were previously accounted for using the equity
method of accounting and are now accounted for using the consolidated method of
accounting.
On April 15, 1999, Simon Group sold the Three Dag Hammarskjold office
building and land (the former headquarters of CPI) in New York, New York for
$21,253, resulting in a loss of $5,155. The SRC Operating Partnership, which
owned the building, used its $11,753 portion of the net proceeds primarily to
repay the remaining $10,565 mortgage payable to the SPG Operating Partnership.
The SPG Operating Partnership used its portion of the net proceeds along with
the note repayment from the SRC Operating Partnership to pay down the
outstanding balance on the Credit Facility. Also in the second quarter of 1999,
one community shopping center was sold for $4,200, resulting in a loss of
$4,188. In addition, on June 18, 1999, Simon Group sold its partnership
interests in the management company of the Charles Hotel in Cambridge,
Massachusetts and related land, resulting in a gain of $35. The net proceeds of
approximately $28,500 were used to reduce the outstanding borrowings on the
Credit Facility.
In January of 1999, The Shops at Sunset Place opened in South Miami,
Florida. Simon Group owns a noncontrolling 37.5% interest in this 510,000
square-foot destination-oriented retail and entertainment project.
NOTE 7 - INVESTMENT IN UNCONSOLIDATED ENTITIES
PARTNERSHIPS AND JOINT VENTURES
Summary financial information of Simon Group's investment in
partnerships and joint ventures accounted for using the equity method of
accounting and a summary of Simon Group's investment in and share of income from
such partnerships and joint ventures follow:
June 30, December 31,
BALANCE SHEETS 1999 1998
---------- ------------
Assets:
Investment properties at cost, net $4,191,102 $4,290,795
Cash and cash equivalents 150,062 173,778
Tenant receivables 135,109 140,579
Other assets 122,128 103,481
---------- ----------
Total assets $4,598,401 $4,708,633
========== ==========
Liabilities and Partners' Equity:
Mortgages and other indebtedness $3,000,058 $2,861,589
Accounts payable, accrued expenses and other liabilities 200,390 227,677
---------- ----------
Total liabilities 3,200,448 3,089,266
Partners' equity 1,397,953 1,619,367
---------- ----------
Total liabilities and partners' equity $4,598,401 $4,708,633
========== ==========
Simon Group's Share of:
Total assets $1,759,605 $1,910,021
========== ==========
Partners' equity $ 455,768 $ 568,998
Add: Excess Investment (See below) 591,199 708,616
---------- ----------
Simon Group's Net Investment in Joint Ventures $1,046,967 $1,277,614
========== ==========
16
For the Three For the Six
Months Ended Months Ended
---------------------- ----------------------
June 30, June 30,
---------------------- ----------------------
STATEMENTS OF OPERATIONS 1999 1998 1999 1998
--------- --------- --------- ---------
REVENUE:
Minimum rent $ 125,359 $ 106,881 $ 252,492 $ 197,562
Overage rent 4,679 4,988 8,521 7,810
Tenant reimbursements 60,080 44,782 119,686 86,658
Other income 9,036 5,534 17,757 11,220
--------- --------- --------- ---------
Total revenue 199,154 162,185 398,456 303,250
Operating Expenses:
Operating expenses and other 71,329 56,866 142,613 107,503
Depreciation and amortization 36,335 31,835 71,065 61,625
--------- --------- --------- ---------
Total operating expenses 107,664 88,701 213,678 169,128
--------- --------- --------- ---------
Operating Income 91,490 73,484 184,778 134,122
Interest Expense 49,928 46,501 97,216 85,178
Extraordinary Losses -- 42 -- 42
--------- --------- --------- ---------
Net Income 41,562 26,941 87,562 48,902
Third Party Investors' Share of Net Income 25,813 17,207 53,515 34,030
--------- --------- --------- ---------
Simon Group's Share of Net Income $ 15,749 $ 9,734 $ 34,047 $ 14,872
Amortization of Excess Investment (See below) (5,606) (3,417) (11,663) (5,402)
========= ========= ========= =========
Income from Unconsolidated Entities $ 10,143 $ 6,317 $ 22,384 $ 9,470
========= ========= ========= =========
As of June 30, 1999 and December 31, 1998, the unamortized excess of
Simon Group's investment over its share of the equity in the underlying net
assets of the partnerships and joint ventures ("Excess Investment") was $591,199
and $708,616, respectively. This Excess Investment is being amortized generally
over the life of the related Properties. Amortization included in income from
unconsolidated entities for the three-month periods ended June 30, 1999 and 1998
was $5,606 and $3,417, respectively. Amortization included in income from
unconsolidated entities for the six-month periods ended June 30, 1999 and 1998
was $11,663 and $5,402, respectively.
The net income or net loss for each partnership and joint venture is
allocated in accordance with the provisions of the applicable partnership or
joint venture agreement. The allocation provisions in these agreements are not
always consistent with the ownership interest held by each general or limited
partner or joint venturer, primarily due to partner preferences.
THE MANAGEMENT COMPANY
The Management Company, including its consolidated subsidiaries,
provides management, leasing, development, accounting, legal, marketing and
management information systems services to five wholly-owned Property, 25 non
wholly-owned Properties, Melvin Simon & Associates, Inc., and certain other
nonowned properties. Certain subsidiaries of the Management Company provide
architectural, design, construction, insurance and other services primarily to
certain of the Properties. The Management Company also invests in other
businesses to provide other synergistic services to the Properties. Simon
Group's share of consolidated net income (loss) of the Management Company, after
intercompany profit eliminations, was $2,908 and ($6,146) for the three-month
periods ended June 30, 1999 and 1998, and was $4,094 and ($4,490) for the
six-month periods ended June 30, 1999 and 1998, respectively.
NOTE 8 - DEBT
At June 30, 1999, Simon Group had consolidated debt of $8,274,608, of
which $6,369,823 was fixed-rate debt and $1,904,785 was variable-rate debt.
Simon Group's pro rata share of indebtedness of the unconsolidated joint venture
Properties as of June 30, 1999 was $1,250,367. As of June 30, 1999, Simon Group
had interest-rate protection agreements related to $687,999 of its consolidated
indebtedness. The agreements are generally in effect until the related
variable-rate debt matures. Simon Group's hedging activity did not materially
impact interest expense in the comparative periods.
In January of 1999, Simon Group retired the $21,910 mortgage on North
East Mall, which bore interest at 10% and had a stated maturity of September,
2000, using cash from working capital. The paydown included a $1,774 prepayment
charge, which
17
was recorded as an extraordinary loss. In June of 1999, a new $17,709 mortgage
was placed on North East Mall bearing interest at 6.74%, with a stated maturity
of May 2002. The net proceeds were added to working capital.
On February 4, 1999, the SPG Operating Partnership completed the sale
of $600,000 of senior unsecured notes. These notes included two $300,000
tranches. The first tranche bears interest at 6.75% and matures on February 4,
2004 and the second tranche bears interest at 7.125% and matures on February 4,
2009. The SPG Operating Partnership used the net proceeds of approximately
$594,000 primarily to retire the $450,000 initial tranche of the Merger Facility
and to pay $142,000 on the outstanding balance of the Credit Facility.
18
NOTE 9 - SHAREHOLDERS' EQUITY
The following table summarizes the changes in the Companies'
shareholders' equity since December 31, 1998.
SPG SPG Common SRC Common Unrealized Capital in Unamortized Total
Preferred Stock Stock Gain on Excess of Accumulated Restricted Shareholders'
Stock Investment (1) Par Value Deficit Stock Award Equity
--------- ---------- ---------- -------------- ----------- ------------ ------------ -------------
Balance at December 31, 1998 $ 717,916 $ 17 $ 0 $ 126 $3,083,213 $ (372,313) $ (19,750) $3,409,209
Conversion of 155,978 shares of
Series A Preferred Stock into
5,926,440 Paired Shares (2) (199,320) 1 199,319 --
Common stock issued as dividend
(153,890 Paired Shares) (2) 4,030 4,030
Stock incentive program (523,050
Paired Shares, net of 13,273 (13,273) --
forfeitures)
Amortization of stock incentive 5,367 5,367
Stock options exercised (77,988
Paired Shares) 1,906 1,906
Adjustment to the limited
partners' interests in the
Operating Partnerships (33,126) (33,126)
Distributions (190,179) (190,179)
--------- ------- ------ --------- ---------- ----------- ---------- ----------
Subtotal 518,596 18 -- 126 3,268,615 (562,492) (27,656) 3,197,207
Comprehensive Income:
Unrealized gain on investment (1) 1,531 1,531
Net income 92,576 92,576
--------- ------- ------ --------- ---------- ----------- ---------- ----------
Total Comprehensive Income -- -- -- 1,531 -- 92,576 -- 94,107
========= ======= ====== ========= ========== =========== ========== ==========
Balance at June 30, 1999 $ 518,596 $ 18 $ 0 $ 1,657 $3,268,615 $ (469,916) $ (27,656) $3,291,314
========= ======= ====== ========= ========== =========== ========== ==========
(1) Amounts consist of the Companies' pro rata share of the unrealized gain
resulting from the change in market value of 1,408,450 shares of common
stock of Chelsea GCA Realty, Inc. ("Chelsea"), a publicly traded REIT,
which Simon Group purchased on June 16, 1997. The investment in Chelsea is
being reflected in the accompanying consolidated condensed balance sheets
as other investment.
(2) On February 26, 1999, 150,000 shares of SPG's Series A Convertible
Preferred stock were converted into 5,699,304 Paired Shares. On March 1,
1999 another 152,346 Paired Shares were issued to the holders of the
converted shares in lieu of the cash dividends allocable to these preferred
shares. Additionally, on May 10, 1999 another 5,978 shares of SPG's Series
A Convertible Preferred stock were converted into 227,136 Paired Shares,
with another 1,544 Paired Shares issued in lieu of the cash dividends
allocable to those preferred shares. At June 30, 1999, 53,271 shares of
Series A Convertible Preferred stock remained outstanding.
19
THE SIMON PROPERTY GROUP 1998 STOCK INCENTIVE PLAN
At the time of the CPI Merger, Simon Group adopted The Simon Property
Group 1998 Stock Incentive Plan (the "1998 Plan"). The 1998 Plan provides for
the grant of equity-based awards during the ten-year period following its
adoption, in the form of options to purchase Paired Shares ("Options"), stock
appreciation rights ("SARs"), restricted stock grants and performance unit
awards (collectively, "Awards"). Options may be granted which are qualified as
"incentive stock options" within the meaning of Section 422 of the Code and
Options which are not so qualified. In March of 1999, 533,696 Paired Shares of
restricted stock were awarded to executives related to 1998 performance. As of
June 30, 1999, 1,810,275 Paired Shares of restricted stock, net of forfeitures,
were deemed earned and awarded under the 1998 Plan. Approximately $2,654 and
$3,100 relating to these programs were amortized in the three-month periods
ended June 30, 1999 and 1998, respectively and approximately $5,367 and $4,447
relating to these programs were amortized in the six-month periods ended June
30, 1999 and 1998, respectively. The cost of restricted stock grants, which is
based upon the stock's fair market value at the time such stock is earned,
awarded and issued, is charged to shareholders' equity and subsequently
amortized against earnings of Simon Group over the vesting period.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LITIGATION
Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. On September
3, 1998, a complaint was filed in the Court of Common Pleas in Cuyahoga County,
Ohio, captioned Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. The
plaintiffs are all principals or affiliates of The Richard E. Jacobs Group, Inc.
("Jacobs"). The plaintiffs alleged in their complaint that the SPG Operating
Partnership engaged in malicious prosecution, abuse of process, defamation,
libel, injurious falsehood/unlawful disparagement, deceptive trade practices
under Ohio law, tortious interference and unfair competition in connection with
the SPG Operating Partnership's acquisition by tender offer of shares in RPT, a
Massachusetts business trust, and certain litigation instituted in September,
1997, by the SPG Operating Partnership against Jacobs in federal district court
in New York, wherein the SPG Operating Partnership alleged that Jacobs and other
parties had engaged, or were engaging in activity which violated Section 10(b)
of the Securities Exchange Act of 1934, as well as certain rules promulgated
thereunder. Plaintiffs in the Ohio action are seeking compensatory damages in
excess of $200,000, punitive damages and reimbursement for fees and expenses.
Simon Group moved to dismiss certain of plaintiffs' claims. On March 31, 1999,
the Ohio trial court dismissed the claims for malicious prosecution and abuse of
process as to all plaintiffs other than Jacobs Group, Inc. On May 7, 1999, the
trial court dismissed the claim of Jacobs Group, Inc. for abuse of process. On
May 21, 1999, SPG Operating Partnership filed its answer to the complaint and
asserted counterclaims against Jacobs Group, Inc. for tortious interference with
prospective business relations and contracts, unfair competition, breach of
fiduciary duty and breach of contract seeking damages in excess of $425,000. On
July 28, 1999, United States Court of Appeals, Second Circuit, reversed the
trial court's previously-imposed sanction against the SPG Operating Partnership.
It is difficult to predict the ultimate outcome of this action and there can be
no assurance that the SPG Operating Partnership will receive a favorable
verdict. Based upon the information known at this time, in the opinion of
management, it is not expected that this action will have a material adverse
effect on Simon Group.
Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. On October
16, 1996, a complaint was filed in the Court of Common Pleas of Mahoning County,
Ohio, captioned Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. The
named defendants are SD Property Group, Inc., an indirect 99%-owned subsidiary
of SPG, and DeBartolo Properties Management, Inc., a subsidiary of the
Management Company, and the plaintiffs are 27 former employees of the
defendants. In the complaint, the plaintiffs alleged that they were recipients
of deferred stock grants under the DRC Plan and that these grants immediately
vested under the DRC Plan's "change in control" provision as a result of the DRC
Merger. Plaintiffs asserted that the defendants' refusal to issue them
approximately 661,000 shares of DRC common stock, which is equivalent to
approximately 450,000 Paired Shares computed at the 0.68 exchange ratio used in
the DRC Merger, constituted a breach of contract and a breach of the implied
covenant of good faith and fair dealing under Ohio law. Plaintiffs sought
damages equal to such number of shares of DRC common stock, or cash in lieu
thereof, equal to all deferred stock ever granted to them under the DRC Plan,
dividends on such stock from the time of the grants, compensatory damages for
breach of the implied covenant of good faith and fair dealing, and punitive
damages. The complaint was served on the defendants on October 28, 1996. The
plaintiffs and the defendants each filed motions for summary judgment. On
October 31, 1997, the Court entered a judgment in favor of the defendants
granting their motion for summary judgment. The plaintiffs have appealed this
judgment and the matter is pending. While it is difficult to predict the
ultimate outcome of this action, based on the information known to date, it is
not expected that this action will have a material adverse effect on Simon
Group.
Roel Vento et al v. Tom Taylor et al. An affiliate of Simon Group is a
defendant in litigation entitled Roel Vento et al v. Tom Taylor et al., in the
District Court of Cameron County, Texas, in which a judgment in the amount of
$7,800 has been
20
entered against all defendants. This judgment includes approximately $6,500 of
punitive damages and is based upon a jury's findings on four separate theories
of liability including fraud, intentional infliction of emotional distress,
tortious interference with contract and civil conspiracy arising out of the sale
of a business operating under a temporary license agreement at Valle Vista Mall
in Harlingen, Texas. Simon Group appealed the verdict and on May 6, 1999, the
Thirteenth Judicial District (Corpus Christi) of the Texas Court of Appeals
issued an opinion reducing the trial court verdict to $3,384 plus interest.
Simon Group intends to file a petition for a writ of certiorari to the Texas
Supreme Court requesting that they review and revise the determination of the
Appellate Court. Management, based upon the advice of counsel, believes that the
ultimate outcome of this action will not have a material adverse effect on Simon
Group.
Simon Group currently is not subject to any other material litigation
other than routine litigation and administrative proceedings arising in the
ordinary course of business. On the basis of consultation with counsel,
management believes that these items will not have a material adverse impact on
Simon Group's financial position or results of operations.
NOTE 11 - RELATED PARTY TRANSACTIONS
Until April 15, 1999, when the Three Dag Hammarskjold building was
sold, the SRC Operating Partnership received a substantial amount of its rental
income from the SPG Operating Partnership for office space under lease. During
the period prior to the CPI Merger, such rent was received from CPI.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities("SFAS 133"). SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
SFAS 133 will be effective for Simon Group beginning with the 2001
fiscal year and may not be applied retroactively. Management does not expect the
impact of SFAS 133 to be material to the financial statements. However, SFAS 133
could increase volatility in earnings and other comprehensive income.
On April 3, 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up
Activities, which is effective for fiscal years beginning after December 15,
1998. The Companies have assessed the impact of this pronouncement and
determined the impact to be immaterial to the financial statements.
NOTE 13 - PENDING ACQUISITION
On February 25, 1999 Simon Group entered into a definitive agreement
with New England Development Company ("NED") to acquire and assume management
responsibilities for NED's portfolio of up to 14 regional malls aggregating
approximately 10.6 million square feet of GLA. The purchase price for the
portfolio is approximately $1.7 billion. On April 15, 1999, Simon Group executed
a letter of intent to form a joint venture to acquire the portfolio, with Simon
Group's initial ownership to be approximately 50%. The joint venture intends to
complete the purchase of ten of such regional malls in August of 1999 and up to
four more by the end of 1999.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Simon Group to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, which will, among other things, affect
demand for retail space or retail goods, availability and creditworthiness of
prospective tenants, lease rents and the terms and availability of financing;
adverse changes in the real estate markets including, among other things,
competition with other companies and technology; risks of real estate
development and acquisition; governmental actions and initiatives; substantial
indebtedness; conflicts of interests; maintenance of REIT status; risks related
to the "year 2000 issue"; and environmental/safety requirements.
OVERVIEW
For financial reporting purposes, as of the close of business on
September 24, 1998, the operating results include the CPI Merger described in
Note 2 to the financial statements. As a result, the 1999 consolidated results
of operations include an additional 17 regional malls, two office buildings (one
of which was sold on April 15, 1999, as described below) and one community
center, with an additional six regional malls being accounted for using the
equity method of accounting.
The following Property acquisitions, sales and opening (the "Property
Transactions"), also impacted Simon Group's consolidated results of operations
in the comparative periods. On January 26, 1998, Simon Group acquired 100% of
Cordova Mall in Pensacola, Florida for approximately $87.3 million. In March of
1998, Simon Group opened the approximately $13.3 million Muncie Plaza in Muncie,
Indiana. On May 5, 1998, Simon Group acquired the remaining 50.1% interest in
Rolling Oaks Mall for 519,889 shares of SPG's common stock, valued at
approximately $17.2 million. Effective June 1, 1998, Simon Group sold The
Promenade for $33.5 million. Effective June 30, 1998, Simon Group sold Southtown
Mall for $3.3 million. On December 7, 1998, Simon Group obtained a controlling
90% interest in The Arboretum, a community center in Austin, Texas for
approximately $40.5 million. On January 29, 1999, Simon Group acquired the
remaining 15% ownership interests in Lakeline Mall and Lakeline Plaza for
approximately $21.8 million. On February 26, 1999 Simon Group acquired the
remaining 50% ownership interests in Century III Mall for approximately $57.0
million. On April 15, 1999, Simon Group sold the Three Dag Hammarskjold office
building and land (the former headquarters of CPI) in New York, New York for
$21.3 million. On May 20, 1999, Simon Group sold Cohoes Commons for $4.2
million. (See Liquidity and Capital Resources for additional information on 1999
acquisitions and dispositions.)
RESULTS OF OPERATIONS
For the Three Months ended June 30, 1999 vs. the Three Months Ended June 30,
1998
Total revenue increased $143.6 million or 46.3% for the three months
ended June 30, 1999, as compared to the same period in 1998. This increase is
primarily the result of the CPI Merger ($120.6 million) and the Property
Transactions ($10.2 million). Excluding these items, total revenues increased
$12.9 million or 4.1%, primarily due to a $10.5 million increase in minimum rent
and a $6.0 million increase in tenant reimbursements. The 5.6% comparable
increase in minimum rent results from increased occupancy levels and the
replacement of expiring tenant leases with renewal leases at higher minimum base
rents, while the $6.0 million increase in tenant reimbursements is offset by a
similar increase in recoverable expenses.
Total operating expenses increased $82.2 million or 49.8% for the three
months ended June 30, 1999, as compared to the same period in 1998. This
increase is primarily the result of the CPI Merger ($68.3 million) and the
Property Transactions ($7.1 million). Excluding these transactions, total
operating expenses increased $6.8 million or 4.1%, primarily due to a $6.0
million increase in recoverable expenses, which is offset by an increase in
tenant reimbursements, as described above.
Interest expense increased $50.2 million, or 54.3% for the three months
ended June 30, 1999, as compared to the same period in 1998. This increase is
primarily a result of the CPI Merger ($42.9 million), the Property Transactions
($4.1 million), and additional interest ($1.0 million) on indebtedness incurred
by the SPG Operating Partnership, the net proceeds of which were used to retire
mortgage indebtedness on one of the joint venture Properties and to pay down the
Credit Facility. Excluding these transactions, interest expense increased $2.2
million.
22
The $3.4 million income tax benefit in 1999 represents SRC's pro rata
share of the SRC Operating Partnership's current year losses and the realization
of tax carryforward benefits for which a valuation allowance was previously
provided.
Income from unconsolidated entities increased from $0.2 million in 1998
to $13.1 million in 1999, resulting from a $3.8 million increase in income from
unconsolidated partnerships and joint ventures and a $9.1 million increase in
income from the Management Company. The increase in income from unconsolidated
partnerships and joint ventures is primarily due to the CPI Merger ($3.1
million).
The $7.0 million extraordinary gain in 1998 is the result of a gain on
forgiveness of debt ($5.2 million) and the write-off of the premium on such
indebtedness ($1.8 million).
Income before allocation to limited partners was $67.3 million for the
three months ended June 30, 1999, as compared to $50.5 million for the same
period in 1998, reflecting an increase of $16.8 million, primarily for the
reasons discussed above. Income before allocation to limited partners was
allocated to the Companies based on the Companies' direct ownership of Ocean
County Mall and certain net lease assets, and the Companies' preferred Unit
preference and weighted average ownership interest in the Operating Partnerships
during the period. In addition, SRC recognizes an income tax provision (benefit)
on its pro rata share of the earnings (losses) of the SRC Operating Partnership.
Preferred distributions of subsidiary represent distributions on
preferred stock of SPG Properties, Inc. (formerly "Simon DeBartolo Group, Inc."
prior to the CPI Merger), a 99.999% owned subsidiary of SPG.
For the Six Months ended June 30, 1999 vs. the Six Months Ended June 30, 1998
Total revenue increased $289.5 million or 47.4% for the six months
ended June 30, 1999, as compared to the same period in 1998. This increase is
primarily the result of the CPI Merger ($237.2 million) and the Property
Transactions ($17.3 million). Excluding these items, total revenues increased
$35.0 million or 5.7%, primarily due to a $21.6 million increase in minimum rent
and a $13.0 million increase in tenant reimbursements. The 5.8% comparable
increase in minimum rent results from increased occupancy levels and the
replacement of expiring tenant leases with renewal leases at higher minimum base
rents, while the $13.0 million increase in tenant reimbursements was offset by
an increase in recoverable expenses.
Total operating expenses increased $164.8 million or 49.7% for the six
months ended June 30, 1999, as compared to the same period in 1998. This
increase is primarily the result of the CPI Merger ($138.1 million) and the
Property Transactions ($11.3 million). Excluding these transactions, total
operating expenses increased $15.4 million or 4.6%, primarily due to a $14.9
million increase in recoverable expenses, which was offset by an increase in
tenant reimbursements, as described above.
Interest expense increased $99.4 million, or 53.9% for the six months
ended June 30, 1999, as compared to the same period in 1998. This increase is
primarily a result of the CPI Merger ($84.4 million), the Property Transactions
($6.6 million), and additional interest ($2.0 million) on indebtedness incurred
by the SPG Operating Partnership, the net proceeds of which were used to retire
mortgage indebtedness on one of the joint venture Properties and to pay down the
Credit Facility and incremental interest on borrowings under the Credit Facility
to acquire a noncontrolling joint venture interest in twelve regional malls and
two community centers (the "IBM Properties") in February 1998 ($2.2 million).
Excluding these transactions, interest expense increased $4.2 million.
The $3.4 million income tax benefit in 1999 represents SRC's pro rata
share of the SRC Operating Partnership's current year losses and the realization
of tax carryforward benefits for which a valuation allowance was previously
provided.
Income from unconsolidated entities increased from $5.0 million in 1998
to $26.5 million in 1999, resulting from a $12.9 million increase in income from
unconsolidated partnerships and joint ventures and a $8.6 million increase in
income from the Management Company. The increase in income from unconsolidated
partnerships and joint ventures is primarily due to the CPI Merger ($8.8
million) and the IBM Properties ($3.3 million).
The $1.8 million extraordinary loss in 1999 is the result of
refinancing mortgage indebtedness. The $7.0 million extraordinary gain in 1998
is the result of a gain on forgiveness of debt ($5.2 million) and the write-off
of the premium on such indebtedness ($1.8 million).
Income before allocation to limited partners was $132.9 million for the
six months ended June 30, 1999, as compared to $95.7 million for the same period
in 1998, reflecting an increase of $37.2 million, primarily for the reasons
discussed above. Income before allocation to limited partners was allocated to
the Companies based on the Companies' direct ownership of Ocean County Mall and
certain net lease assets, and the Companies' preferred Unit preference and
weighted average
23
ownership interest in the Operating Partnerships during the period. In addition,
SRC recognizes an income tax provision (benefit) on its pro rata share of the
earnings (losses) of the SRC Operating Partnership.
Preferred distributions of subsidiary represent distributions on
preferred stock of SPG Properties, Inc. (formerly "Simon DeBartolo Group, Inc."
prior to the CPI Merger), a 99.999% owned subsidiary of SPG.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, Simon Group's balance of cash and cash equivalents
was approximately $145.0 million. In addition to its cash balance, Simon Group
had a borrowing capacity on the Credit Facility of $926.0 million available
after outstanding borrowings at June 30, 1999. Simon Group also has access to
public equity and debt markets. The SPG Operating Partnership has a debt shelf
registration statement under which $250 million in debt securities may be
issued.
Management anticipates that cash generated from operating performance
will provide the necessary funds on a short- and long-term basis for its
operating expenses, interest expense on outstanding indebtedness, recurring
capital expenditures, and distributions to shareholders in accordance with REIT
requirements. Sources of capital for nonrecurring capital expenditures, such as
major building renovations and expansions, as well as for scheduled principal
payments, including balloon payments, on outstanding indebtedness are expected
to be obtained from: (i) excess cash generated from operating performance; (ii)
working capital reserves; (iii) additional debt financing; and (iv) additional
equity raised in the public markets.
On February 26, 1999, 150,000 shares of SPG's Series A Convertible
Preferred stock were converted into 5,699,304 Paired Shares. On March 1, 1999,
another 152,346 Paired Shares were issued to the holders of the converted shares
in lieu of the cash dividends allocable to these preferred shares. Additionally,
on May 10, 1999 another 5,978 shares of SPG's Series A Convertible Preferred
stock were converted into 227,136 Paired Shares, with another 1,544 Paired
Shares issued in lieu of the cash dividends allocable to those preferred shares.
At June 30, 1999, 53,271 shares of Series A Convertible Preferred stock remained
outstanding.
Sensitivity Analysis
Simon Group's future earnings, cash flows and fair values relating to
financial instruments are dependent upon prevalent market rates of interest,
such as LIBOR. Based upon consolidated indebtedness and interest rates at June
30, 1999, a 1% increase in the market rates of interest would decrease future
earnings and cash flows by approximately $13.4 million per year, and would
decrease the fair value of debt by approximately $670 million. A 1% decrease in
the market rates of interest would increase future earnings and cash flows by
approximately $14.0 million per year, and would increase the fair value of debt
by approximately $870 million.
Financing and Debt
At June 30, 1999, Simon Group had consolidated debt of $8,275 million,
of which $6,370 million is fixed-rate debt bearing interest at a weighted
average rate of 7.3% and $1,905 million is variable-rate debt bearing interest
at a weighted average rate of 5.9%. As of June 30, 1999, Simon Group had
interest rate protection agreements related to $688 million of consolidated
variable-rate debt. Simon Group's interest rate protection agreements did not
materially impact interest expense or weighted average borrowing rates for the
six months ended June 30, 1999 or 1998.
Scheduled principal payments of the Companies' share of consolidated
indebtedness over the next five years is $3,918 million, with $4,216 million
thereafter. Simon Group's combined ratio of consolidated debt-to-market
capitalization was 54.8% and 51.2% at June 30, 1999 and December 31, 1998,
respectively.
In January of 1999 Simon Group retired the $22 million mortgage on
North East Mall, which bore interest at 10% and had a stated maturity of
September, 2000, using cash from working capital. The paydown included a $1.8
million prepayment charge, which was recorded as an extraordinary loss. In June
of 1999, a new $17.7 million mortgage was placed on North East Mall bearing
interest at 6.74%, with a stated maturity of May 2002. The net proceeds were
added to working capital.
On February 4, 1999, the SPG Operating Partnership completed the sale
of $600 million of senior unsecured notes. These notes included two $300 million
tranches. The first tranche bears interest at 6.75% and matures on February 4,
2004 and the second tranche bears interest at 7.125% and matures on February 4,
2009. The SPG Operating Partnership used the net proceeds of approximately $594
million primarily to retire the $450 million initial tranche of the Merger
Facility and to pay $142 million on the outstanding balance of the Credit
Facility.
24
Acquisitions
Management continues to actively review and evaluate a number of
individual property and portfolio acquisition opportunities. Management believes
that funds on hand, and amounts available under the Credit Facility, together
with the net proceeds of public and private offerings of debt and equity
securities are sufficient to finance likely acquisitions. No assurance can be
given that Simon Group will not be required to, or will not elect to, even if
not required to, obtain funds from outside sources, including through the sale
of debt or equity securities, to finance significant acquisitions, if any.
During the first six months of 1999 Simon Group acquired the remaining
ownership interests in four Properties for a total of approximately $147.5
million, including the assumption of approximately $48.5 million of mortgage
indebtedness. These purchases were funded primarily with borrowing from the
Credit Facility. Each of the Properties purchased were previously accounted for
using the equity method of accounting and are now accounted for using the
consolidated method of accounting.
Dispositions
On April 15, 1999, Simon Group sold the Three Dag Hammarskjold office
building and land (the former headquarters of CPI) in New York, New York for
$21.3 million, resulting in a loss of $5.2 million. The SRC Operating
Partnership, which owned the building, used its $11.8 million portion of the net
proceeds primarily to repay the remaining $10.6 million mortgage payable to the
SPG Operating Partnership. The SPG Operating Partnership used its portion of the
net proceeds along with the note repayment from the SRC Operating Partnership to
pay down the outstanding balance on the Credit Facility.
Also in the second quarter of 1999, one community shopping center was
sold for $4.2 million, resulting in a loss of $4.2 million. In addition, Simon
Group sold its partnership interests in the management company of the Charles
Hotel in Cambridge, Massachusetts and related land, resulting in a minimal gain.
The net proceeds of approximately $28.5 million, were used to reduce the
outstanding borrowings on the Credit Facility.
Portfolio Restructuring. In addition to the Property sales described
above, Simon Group is continuing to evaluate the potential sale of its remaining
non-retail holdings, along with a number of retail assets that are no longer
aligned with Simon Group's strategic criteria. If these assets are sold,
management expects the sale prices will not differ materially from the carrying
value of the related assets.
Development, Expansions and Renovations. Simon Group is involved in
several development, expansion and renovation efforts.
In January of 1999, The Shops at Sunset Place, a 510,000 square-foot
destination-oriented retail and entertainment project, opened in South Miami,
Florida. Simon Group owns 37.5% of this approximately $150 million specialty
center.
Construction also continues on the following projects, which have an
aggregate construction cost of approximately $720 million, of which Simon
Group's share is approximately $395 million:
o Concord Mills, a 37.5%-owned value-oriented super regional mall
project, containing approximately 1.4 million square feet of GLA,
is scheduled to open in September of 1999 in Concord (Charlotte),
North Carolina.
o The Mall of Georgia, an approximately 1.6 million square foot
regional mall project, is scheduled to open in August of 1999.
Adjacent to the regional mall, The Mall of Georgia Crossing is an
approximately 441,000 square-foot community shopping center
project, which is also scheduled to open in August of 1999. Simon
Group is funding 85% of the capital requirements of the project.
Simon Group has a noncontrolling 50% ownership interest in each of
these development projects after the return of its equity and a 9%
return thereon.
o In addition to Mall of Georgia Crossing, two other new community
center projects are under construction: The Shops at North East
Mall and Waterford Lakes Town Center at a combined 1,261,000
square feet of GLA, which are each scheduled to open in November
of 1999.
o Orlando Premium Outlets marks Simon Group's first project to be
constructed in the partnership with Chelsea GCA Realty. This
433,000 square-foot upscale outlet center is scheduled for
completion in the summer of 2000 in Orlando, Florida.
A key objective of Simon Group is to increase the profitability and
market share of its Properties through strategic renovations and expansions.
Simon Group's share of projected costs to fund all renovation and expansion
projects in 1999 is
25
approximately $400 million, which includes approximately $150 million incurred
in the first six months of 1999. It is anticipated that the cost of these
projects will be financed principally with the Credit Facility, project-specific
indebtedness, access to debt and equity markets, and cash flows from operations.
Simon Group currently has nine major expansion and/or redevelopment projects
under construction and in the preconstruction development stage with targeted
1999 completion dates. Included in combined investment properties at June 30,
1999 is approximately $330 million of construction in progress, with another
$300 million in the unconsolidated joint venture investment properties.
Distributions. The Companies declared a distribution of $0.505 per
Paired Share in each of the first two quarters of 1999. The current annual
distribution rate is $2.02 per Paired Share. Future common stock distributions
will be determined based on actual results of operations and cash available for
distribution. In addition, preferred distributions of $65.54 per share of SPG's
Series A preferred stock and $3.25 per share of SPG's Series B preferred stock
were declared during the first six months of 1999.
INVESTING AND FINANCING ACTIVITIES
Cash used in investing activities for the six months ended June 30,
1999 of $117.4 million is primarily the result of $201.2 million of capital
expenditures; acquisitions of $99.3 million; $32.2 million of investments in
unconsolidated joint ventures; and $13.1 million of investments in and advances
to the Management Company, partially offset by distributions from unconsolidated
entities of $163.5 million; net proceeds from the sales of assets of $54.0
million; and cash of $10.8 million from the consolidations of Haywood Mall,
Century III Mall, Lakeline Mall and Lakeline Plaza. Capital expenditures
includes development costs of $14.8 million, renovation and expansion costs of
approximately $158.5 million and tenant costs and other operational capital
expenditures of approximately $27.9 million. Acquisitions includes $69.0
million, $24.0 million and $6.3 million for the remaining interests in Haywood
Mall, Century III Mall and Lakeline Mall and Plaza, respectively. Investments in
unconsolidated joint ventures is primarily $11.5 million in Florida Mall and
$11.2 million in Orlando Premium Outlots. Distributions from unconsolidated
entities includes $44.9 million, $33.1 million, $27.4 million and $14.4 million
derived primarily from incremental borrowings on Gwinnett Place, Town Center at
Cobb, Westchester Mall and Concord Mills, respectively. Net proceeds from the
sales of assets is made up of $28.5 million, $21.3 million and $4.2 million from
the sales of the partnership interests in the management company of the Charles
Hotel and related land, the Three Dag Hammarskjold office building and Cohoes
Center, respectively. The $13.1 million investment in the Management Company is
primarily to fund an additional investment in Groupe BEG, which represents Simon
Group's interests in retail real estate in Europe.
Cash used in financing activities for the six months ended June 30,
1999 was $151.7 million and primarily includes net distributions of $278.5
million, partially offset by net borrowings of $126.8 million.
EBITDA--EARNINGS FROM OPERATING RESULTS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION
Management believes that there are several important factors that
contribute to the ability of Simon Group to increase rent and improve
profitability of its shopping centers, including aggregate tenant sales volume,
sales per square foot, occupancy levels and tenant costs. Each of these factors
has a significant effect on EBITDA. Management believes that EBITDA is an
effective measure of shopping center operating performance because: (i) it is
industry practice to evaluate real estate properties based on operating income
before interest, taxes, depreciation and amortization, which is generally
equivalent to EBITDA; and (ii) EBITDA is unaffected by the debt and equity
structure of the property owner. EBITDA: (i) does not represent cash flow from
operations as defined by generally accepted accounting principles; (ii) should
not be considered as an alternative to net income as a measure of operating
performance; (iii) is not indicative of cash flows from operating, investing and
financing activities; and (iv) is not an alternative to cash flows as a measure
of liquidity.
Total EBITDA for the Properties increased from $591.3 million for the
six months ended June 30, 1998 to $838.9 million for the same period in 1999,
representing a 41.9% increase. This increase is primarily attributable to the
CPI Merger ($197.5 million), the IBM Properties ($14.4 million) and the other
Properties opened or acquired during 1998 and 1999 ($7.9 million), partially
offset by a decrease from Properties sold in the comparative periods ($2.3
million). Excluding these items, EBITDA increased $30.2 million, or 5.1%,
resulting from aggressive leasing of new and existing space and increased
operating efficiencies. During this period operating profit margin decreased
slightly from 64.7% to 64.6%.
FFO-FUNDS FROM OPERATIONS
FFO, as defined by the National Association of Real Estate Investment
Trusts, means the consolidated net income of Simon Group and its subsidiaries
without giving effect to depreciation and amortization, gains or losses from
extraordinary items, gains or losses on sales of real estate, gains or losses on
investments in marketable securities and any provision/benefit for income taxes
for such period, plus the allocable portion, based on Simon Group's ownership
interest, of funds from operations of unconsolidated joint ventures, all
determined on a consistent basis in accordance with generally accepted
26
accounting principles. Management believes that FFO is an important and widely
used measure of the operating performance of REITs which provides a relevant
basis for comparison among REITs. FFO is presented to assist investors in
analyzing performance. Simon Group's method of calculating FFO may be different
from the methods used by other REITs. FFO: (i) does not represent cash flow from
operations as defined by generally accepted accounting principles; (ii) should
not be considered as an alternative to net income as a measure of operating
performance or to cash flows from operating, investing and financing activities;
and (iii) is not an alternative to cash flows as a measure of liquidity.
The following summarizes FFO of Simon Group and reconciles combined
income before extraordinary items to FFO for the periods presented:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands)
FFO of Simon Group $ 170,573 $ 115,957 $ 328,528 $ 224,864
========= ========= ========= =========
Reconciliation:
Income Before Extraordinary Items $ 67,338 $ 43,514 $ 134,726 $ 88,638
Plus:
Depreciation and amortization from combined
consolidated Properties 89,544 58,082 179,081 116,161
Simon Group's share of depreciation and
amortization and extraordinary items from
unconsolidated affiliates 20,761 16,304 41,291 31,108
Loss on the sale of real estate 9,308 7,219 9,308 7,219
Less:
Minority interest portion of depreciation,
amortization and extraordinary items (255) (1,828) (2,050) (3,594)
Preferred dividends (including preferred
dividends of a subsidiary) (16,123) (7,334) (33,828) (14,668)
--------- --------- --------- ---------
FFO of Simon Group $ 170,573 $ 115,957 $ 328,528 $ 224,864
========= ========= ========= =========
FFO Allocable to the Companies $ 125,099 $ 73,719 $ 239,359 $ 142,734
========= ========= ========= =========
PORTFOLIO DATA
The following operating statistics give effect to the CPI Merger for
1999 only. Statistics include all Properties except Charles Towne Square,
Richmond Town Square, The Shops at Mission Viejo, and the redevelopment area at
Irving Mall, which are all undergoing extensive redevelopments.
Aggregate Tenant Sales Volume. For the six months ended June 30, 1999
compared to the same period in 1998, total reported retail sales at mall and
freestanding GLA owned by Simon Group ("Owned GLA") in the regional malls
increased $1,753 million or 41.7% from $4,200 million to $5,953 million,
primarily as a result of the CPI Merger ($1,408 million), increased productivity
of our existing tenant base and an overall increase in occupancy. Retail sales
at Owned GLA affect revenue and profitability levels because they 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.) the
tenants can afford to pay.
Occupancy Levels. Occupancy levels for Owned GLA at mall and
freestanding stores in the regional malls increased from 87.0% at June 30, 1998,
to 88.4% at June 30, 1999. Owned GLA has increased 13.5 million square feet from
June 30, 1998, to June 30, 1999, primarily as a result of the CPI Merger (12.4
million).
Average Base Rents. Average base rents per square foot of mall and
freestanding Owned GLA at regional malls increased 13.2%, from $23.10 at June
30, 1998 to $26.15 at June 30, 1999.
27
INFLATION
Inflation has remained relatively low during the past four years and
has had a minimal impact on the operating performance of the Properties.
Nonetheless, substantially all of the tenants' leases contain provisions
designed to lessen the impact of inflation. Such provisions include clauses
enabling Simon Group to receive percentage rentals based on tenants' gross
sales, which generally increase as prices rise, and/or escalation clauses, which
generally increase rental rates during the terms of the leases. In addition,
many of the leases are for terms of less than ten years, which may enable Simon
Group to replace existing leases with new leases at higher base and/or
percentage rentals if rents of the existing leases are below the then-existing
market rate. Substantially all of the leases, other than those for anchors,
require the tenants to pay a proportionate share of operating expenses,
including common area maintenance, real estate taxes and insurance, thereby
reducing Simon Group's exposure to increases in costs and operating expenses
resulting from inflation.
However, inflation may have a negative impact on some of Simon Group's
other operating items. Interest and general and administrative expenses may be
adversely affected by inflation as these specified costs could increase at a
rate higher than rents. Also, for tenant leases with stated rent increases,
inflation may have a negative effect as the stated rent increases in these
leases could be lower than the increase in inflation at any given time.
YEAR 2000 COSTS
Simon Group has undertaken a project to identify and correct problems
arising from the inability of information technology hardware and software
systems to process dates after December 31, 1999. This Year 2000 project
consists of two primary components. The first component focuses on Simon Group's
key information technology systems (the "IT Component") and the second component
focuses on the information systems of key tenants and key third party service
providers as well as imbedded systems within common areas of substantially all
of the Properties (the "Non-IT Component"). Key tenants include the 20 largest
base rent contributors and anchor tenants with over 25,000 square feet of GLA.
Key third party service providers are those providers whose Year 2000 problems,
if not addressed, would be likely to have a material adverse effect on Simon
Group's operations.
The IT Component of the Year 2000 project is being managed by the
information services department of Simon Group who have actively involved other
disciplines within Simon Group which are directly impacted by an IT Component of
the project. The Non-IT Component is being managed by a steering committee of 25
employees, including senior executives of a number of Simon Group's departments.
In addition, outside consultants have been engaged to assist in the Non-IT
Component.
STATUS OF PROJECT THROUGH JULY 31, 1999
IT Component. Simon Group's primary operating, financial
accounting and billing systems and Simon Group's standard primary
desktop software have been determined to be Year 2000 ready. Simon
Group's information services department has also completed its
assessment of other "mission critical" applications within Simon Group
and is currently implementing solutions to those applications in order
for them to be Year 2000 ready. It is expected that the implementation
of these mission critical solutions will be complete by September 30,
1999.
Non-IT Component. The Non-IT Component includes the following
phases: (1) an inventory of Year 2000 items which are determined to be
material to Simon Group's operations; (2) assigning priority to
identified items; (3) assessing Year 2000 compliance status as to all
critical items; (4) developing replacement or contingency plans based
on the information collected in the preceding phases; (5) implementing
replacement and contingency plans; and (6) testing and monitoring of
plans, as applicable.
Phase (1) and Phase (2) are complete and Phase (3) is in
process. The assessment of compliance status of key tenants is
approximately 90% complete, the assessment of compliance status of key
third party service providers is approximately 91% complete, the
assessment of compliance status of critical inventoried components at
the Properties is approximately 90% complete and the assessment of
compliance status of non-critical inventoried components at the
Properties is approximately 90% complete. Simon Group expects to
complete Phase (3) by August 31, 1999. The development of contingency
or replacement plans (Phase (4)) is scheduled to be completed by August
31, 1999. Development of such plans is ongoing. Implementation of
contingency and replacement plans (Phase (5)) is ongoing and will
continue throughout 1999 to the extent Year 2000 issues are identified.
Testing is in process. Testing of critical inventoried components is
scheduled to be completed by September 30, 1999.
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Costs. Simon Group estimates that it will spend approximately $1.5
million in incremental costs for its Year 2000 project. This amount is being
incurred over a period that commenced in January 1997 and is expected to end in
September 1999. Costs incurred through June 30, 1999 are estimated at
approximately $600 thousand, including approximately $100 thousand in the
six-month period ended June 30, 1999. Such amounts are expensed as incurred.
These estimates do not include the costs expended by Simon Group following the
1996 merger with DeBartolo Realty Corporation for software, hardware and related
costs necessary to upgrade its primary operating, financial accounting and
billing systems, which allowed those systems to, among other things, become Year
2000 compliant.
Risks. The most reasonably likely worst case scenario for Simon Group
with respect to the Year 2000 problems would be disruptions in operations at the
Properties. This could lead to reduced sales at the Properties and claims by
tenants which would in turn adversely affect Simon Group's results of
operations.
Simon Group has not yet completed all phases of its Year 2000 project
and Simon Group is dependent upon key tenants and key third party suppliers to
make their information systems Year 2000 compliant. In addition, disruptions in
the economy generally resulting from Year 2000 problems could have an adverse
effect on Simon Group's operations.
PENDING ACQUISITION
As described in Note 13 to the financial statements, on February 25,
1999 Simon Group entered into a definitive agreement with NED to acquire and
assume management responsibilities for NED's portfolio of up to 14 regional
malls aggregating approximately 10.6 million square feet of GLA. The purchase
price for the portfolio is approximately $1.7 billion. On April 15, 1999, Simon
Group executed a letter of intent to form a joint venture to acquire the
portfolio, with Simon Group's initial ownership to be approximately 50%. The
joint venture intends to complete the purchase of ten of such regional malls in
August of 1999 and up to four more by the end of 1999.
SEASONALITY
The shopping center industry is seasonal in nature, particularly in the
fourth quarter during the holiday season, when tenant occupancy and retail sales
are typically at their highest levels. In addition, shopping malls achieve most
of their temporary tenant rents during the holiday season. As a result of the
above, earnings are generally highest in the fourth quarter of each year.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to Item 2 of this Form 10-Q under the caption
"Liquidity and Capital Resources".
29
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
None.
Item 4: Submission of Matters to a Vote of Security Holders
The Annual Meeting of the stockholders of Simon Property
Group, Inc. and SPG Realty Consultants, Inc. was held on May 12, 1999.
The matters submitted to the stockholders for a vote included (a) the
election of 7 directors to the Board of Directors; and (b) the
ratification of the appointment of Arthur Andersen LLP as independent
accountants for the fiscal year ending December 31, 1999.
The following table sets forth the results of voting on these matters.
Number of Number of
Number of Votes Abstentions/
Votes AGAINST/ Broker
Matter FOR WITHHELD Non-Votes
------ --------- --------- ------------
Election of Directors:
Robert E. Angelica.................................. 124,659,940 5,231,826 --
Birch Bayh.......................................... 124,517,323 5,374,443 --
Hans C. Mautner..................................... 124,655,844 5,235,922 --
G. William Miller................................... 124,622,023 5,269,743 --
J. Albert Smith, Jr. ............................... 124,653,679 5,238,087 --
Pieter S. van den Berg.............................. 124,660,340 5,231,426 --
Phillip J. Ward .................................... 124,663,231 5,228,535 --
Ratification of Appointment of Arthur Andersen LLP.. 128,508,839 87,582 1,295,345
Members of the Board of Directors whose term of office as a director
continued after the Annual Meeting other than those elected are Melvin Simon,
Herbert Simon, David Simon, Richard S. Sokolov, Frederick W. Petri and M. Denise
DeBartolo York.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Management And Portfolio Agreement Among Simon
Property Group, Inc., Simon Property Group, L.P., Ned
Management Limited Partnership, and Wellspark
Management LLC Dated as of February 22, 1999.
(b) Reports on Form 8-K
One Form 8-K were filed during the current period.
On May 20, 1999 under Item 5 - Other Events,
SPG reported that it made available additional
ownership and operational information concerning the
Companies, the Operating Partnerships, and the
properties owned or managed as of March 31, 1999, in
the form of a Supplemental Information Package. A
copy of the package was included as an exhibit to the
8-K filing.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
/s/ John Dahl
-------------------------------
John Dahl,
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
Date: August 12, 1999
31