Simon Property Group, Inc.

views updated

Simon Property Group, Inc.

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

Public Company
Incorporated: 1960 as Melvin Simon & Associates
Employees: 6,300
Sales: $1.41 billion (1998)
Stock Exchanges: New York
Ticker Symbol: SPG
SICs: 6798 Real Estate Investment Trusts; 6552 Real Estate Developers; 1542 Building Contractors

Simon Property Group, Inc. is a self-administered, self-managed real estate investment trust (REIT). With ownership or interest in more than 240 properties and a total market capitalization of $17 billion, the Indianapolis, Indiana-based company is the largest REIT in the world. Through subsidiary partnerships, Simon owns, develops, manages, leases, and expands retail properties in 35 states, totaling approximately 180 million square feet of gross leasable area. Simon’s properties—primarily shopping malls, community shopping centers, and specialty and mixed-use properties—attract more than 1.6 billion shopping visits yearly. Since its initial public offering in December 1993, the company has more than tripled in size.

Starting Small in the 1960s

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

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

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

A New Direction in the 1980s: Moving Back Downtown

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

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

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

Something for Everyone in the 1990s

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

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

Company Perspectives:

Simon Property Group is about building shareholder value in the retail real estate business. It’s about providing retailers with world class venues in which they can build lasting and mutually beneficial relationships with their customers. And it’s about providing our shareholders with consistent and reliable performance. As a real estate investment trust (REIT), we provide an opportunity for investors to participate in the ownership of commercial real estate. As the world’s largest retail real estate investment trust, we are committed to use our vast resources and marketing expertise to serve our constituents—shoppers, retailers, investors and other strategic partners. Our vision is to be the industry’s unquestioned leader. We accomplish this by developing new retail properties, enhancing the performance of our existing portfolio, growing our company through acquisitions, and creating new revenue opportunities from the millions of customers that pass through our doors every year.

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

IPO and Subsequent Consolidation

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

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

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

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

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

Other strategic alliances followed. At the beginning of 1998, the company announced that it would partner with PepsiCo, Inc. to develop a nationwide “Teen Affinity Program.” The program, designed to drive teen brand loyalty, positioned Simon to benefit from the Pepsi “GeneratioNext” campaign and gave Pepsi exclusive vending rights in all Simon mall common space. A subsequent deal with Microsoft and the AIM Smart Corporation provided shoppers with free Internet access, email, and in-mail interactive shopping services. Another 1997 alliance, with AmeriCash, SMARTALK, and Diebold, served to develop an inaugural Electronic Concierge ATM Network, which offers shoppers access to cash, prepaid phone cards, and gift certificates.

Looking Ahead: International and Domestic Expansion

In the six years following its IPO, Simon Property Group more than tripled in size, growing revenues from $406 million to $1.4 billion. Further expansion was underway by the end of 1998, with 5,000,000 square feet of new development projects under construction in Atlanta, Orlando, Charlotte, North Carolina, and Hurst, Texas. Grand openings for the new projects were planned for 1999 and 2000. Renovations and expansions of seven existing properties in the Simon portfolio were also scheduled for completion during the same time frame.

In addition to continued domestic growth, the early years of the 21st century should see the Simon empire expand into new geographic markets. In 1998, the company made its entry into the European retail real estate market when it joined with two other investment firms—Argo II and Harvard Private Capital Group, Inc.—to acquire 44 percent ownership in the Paris-based real estate developer, lessor, and manager, Groupe BEG, S.A. The agreement was structured to allow Simon, Argo, and Harvard to gain controlling interest in BEG over a period of time. Meanwhile, it’s association with BEG should allow Simon to take advantage of already-formed relationships with major European retailers, and provide opportunities for future growth in the market. “Simon’s investment in Groupe BEG enables our company to seek growth and consolidation opportunities in the European market which is fundamentally strong,” said David Simon in a June 4, 1998 press release, adding “Our expansion into the European marketplace represents an opportunity to generate revenue and additional FFO and potentially enhances our position as solution providers to retailers expanding into international markets.”

The company’s marketing arm, Simon Brand Ventures, was also poised to move in new directions as the century drew to a close. In early 1999, the company announced a partnership with Time Inc. Custom Publishing, a division of Time Inc. The partnership was formed to produce a national lifestyle magazine targeted to mall shoppers, the first publication of its kind. The planned magazine, named S, would be published monthly and would contain national and local lifestyle features, announcements and coverage of mall-specific events, promotions, and special offerings. Circulation was expected to run approximately 2.2 million copies per month.