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BEHIND THE NEWS: Simon's new strategy: Go beyond retail realm

July 11, 2005

Early this year, Simon Property Group Inc. CEO David Simon started dropping hints on Wall Street about a major new company strategy.

"We really can't tell you about it yet," he said at an investment conference in March, a comment that piqued the curiosity of the roomful of analysts.

Simon Property officials still aren't falling over themselves to lay out the plan; a company spokesman declined to make someone available for an interview. However, during recent conference calls and investor conferences, David Simon has progressively shed the secrecy, detailing plans to add a host of nonretail uses on available land adjacent to the company's malls and shopping centers.

The company is poring through its huge portfolio for opportunities to add condos and apartments, hotels and other uses, reaping profits from land that now sits vacant or serves as excess parking.

David Simon said the company is focusing on what he calls "asset intensification" after expanding swiftly in recent years through acquisition.

"One of the things we've wanted to do is go back and look at all the real estate we have and make sure that we are uncovering all the hidden value in that," Simon explained at a June conference.

Simon President Richard Sokolov said during a conference call in late April that company officials "have a systematic program under way where we are evaluating every one of our existing retail projects and every one of our new retail projects" for non-retail development opportunities.

The new mind-set already is shaping the company's central Indiana presence. Late last month, Simon announced it was teaming with Indianapolis-based Gershman Brown & Associates to create Hamilton Town Center, a 950,000-square-foot open-air project in Noblesville that will blend retail with residential and a hotel.

Simon generally won't build nonretail projects on its own, company officials and analysts say. Under a typical arrangement, it forms a partnership with an experienced developer, sells the land into the partnership, then receives an ongoing stream of income.

Analysts say they're bullish on the strategy, though they caution that zoning fights could bog down some efforts to develop adjacent to existing malls. They also say it's premature to count on non-retail projects as a significant contributor to profits.

"We expect Simon to carefully evaluate the success of initial projects before this program becomes an integral component of the company's development program," James Sullivan, an analyst with Prudential Equity Group, said in a report.

Perhaps, but Simon officials sound as though they're revving up to make nonretail development their fifth core business-joining regional malls, community shopping centers, upscale outlet malls and international retail projects.

Residential, in particular, complements retail, they say. Top malls are so dominant they're like "town centers"-a stature that adds to demand for nearby housing. At the same time, such malls typically sit in areas that are essentially built out, shutting out new residential development.

"It's very hard to quantify, but we do think our real estate offers unique [opportunities]-basically locations you cannot replicate-and they're large parcels," David Simon said at a June conference.

Surging stock

Anyone who bailed out of Simon stock early this year, thinking it couldn't possibly surge even higher, left a lot of money on the table.

The company's shares, which rose 182 percent in the five years that ended in December, have tacked on another 15 percent so far this year. On July 6, they hit an all-time high of $74.42.

Helping fuel the giant real estate investment trust's recent gains was a $1 billion bond sale it pulled off in early June at interest rates ranging from 4.6 percent to 5.1 percent, analysts said.

"Real estate investing is all about cost of capital," Legg Mason analyst David Fick said in a report, "and very few REITs could raise $1 billion of balance sheet capacity at about 5 percent."

Unloading shares

Denise DeBartolo York, a member of Simon's board since 1996, has been unloading company shares at a torrid rate since early March, raising more than $76 million, regulatory filings show.

The selling spree leaves her with little or no remaining Simon stock, according to the filings. In total, she sold more than 1.1 million shares, many of them acquired by exercising stock options.

It's not clear why she sold. Simon spokesman Les Morris said he didn't know, and York, 54, did not respond to a message left at the Youngstown, Ohio, headquarters of DeBartolo Corp. York serves as chairwoman of DeBartolo, which owns the San Francisco 49ers football team.
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