Commercial Real Estate and Public Companies and Simon Property Group and Banking & Finance and Investing and David Simon and Real Estate & Retail

Simon chasing title of state's most valuable company

January 7, 2012
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No wonder Simon Property Group Inc.’s board last year practically let CEO David Simon write his own paycheck.

His massive new compensation plan—which includes a $120 million long-term bonus—is a drop in the bucket compared with the wealth the company has been creating in recent years, even as the overall market zigs and zags.

Simon Property shares in 2011 posted a total return of 34 percent. Its three-year total return was 171 percent, and its five-year return stands at 54 percent. In contrast, an investor who put money into an S&P 500 index fund five years ago actually lost money, even with dividends reinvested.

Just in the past year, Simon’s market capitalization ballooned from $35.1 billion to $45.7 billion. It’s now nipping at the heels of Eli Lilly and Co. for the title of the state’s most valuable company. As Simon shares have marched higher, Lilly shares have languished, leaving the pharmaceutical company with a market value of $46.2 billion.

It all seems improbable, given the carnage in commercial real estate in the wake of the financial crisis. But many analysts say Simon, the nation’s biggest mall owner, has largely dodged the problems, in part by keeping debt modest, and is uniquely positioned to prosper for years to come.
 

Simon Simon

Why the optimism? For starters, the company has a strong concentration of luxury malls, which have held up far better than run-of-the-mill shopping centers. Retailers still covet locations in ritzy properties and are willing to pay a premium for them. Demand is so strong, in fact, that Simon is expanding and upgrading some of its high-end malls (including The Fashion Mall at Keystone)—a relatively low-risk route to higher earnings.

“With a large and very high quality regional mall portfolio, Simon has built long-term tenant relationships that are difficult to replicate,” RBC Capital Markets Rich Moore said in an Oct. 26 report.

He said the company now is leveraging those relationships as it grows its “flourishing” outlet mall business by developing new locations in the United States and internationally.

Other analysts are similarly upbeat. “Simon ... firing on all cylinders,” Stifel Nicolaus analyst Nathan Isbee wrote this fall. Added Jefferies analyst Omotayo Okusanya: “The run is not over.”

Naturally, not everyone is caught up in the euphoria. Seeking Alpha contributor Wayne Gorsek said in a Dec. 26 post that he is short-selling the stock—a bet that the shares will fall in price. Gorsek said the runup in Simon shares to nearly $130 has left the company with an “insane” valuation. He thinks the economy is going to get dramatically worse, likely sending the stock into a free fall.

But those who have placed faith in David Simon, 50, have been richly rewarded so far. When he became CEO in 1995, the company’s stock market capitalization was a mere $2.3 billion. It’s risen 20-fold since.

Which helps explain why the board last year was so eager to lock Simon into his new long-term deal, which keeps him at the helm through mid-2019. The pact includes a one-time award of long-term-incentive units—worth $120 million at the current share price—that begin vesting in six years.

“David Simon is widely recognized as the leading CEO in our industry and one of the top executives in corporate America,” the company said in a statement after it finalized the deal. “The board believes it is in the best interest of ... shareholders to secure Mr. Simon’s continued service as CEO for at least the next eight years.”

Herb Simon still selling

One reason Gorsek is cool on Simon shares is the continued selling by insiders—most notably Herb Simon, chairman emeritus of the company’s board. Trading records show one of his trusts has unloaded nearly $45 million in stock since the share sales began in early November.

It’s not clear why Simon, owner of the Indiana Pacers, is casting off shares. He did not respond by IBJ’s deadline to a message left with his assistant.

Until the recent spate of sales, Herb Simon, 77, a co-founder of the company, kept a tight grip in the stock. And he still is a huge Simon shareholder, with a stake worth many times what he sold.•

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