ITEM 1. BUSINESS
BACKGROUND
Simon Property Group, L.P. (the "Simon Operating Partnership") is a Delaware limited partnership that is engaged primarily in the ownership, development, management, leasing, acquisition and expansion of income-producing properties, primarily regional malls and community shopping centers. The Simon Operating Partnership is a subsidiary of Simon DeBartolo Group, Inc. (the "Company"), a self-administered real estate investment trust ("REIT"). The Simon Operating Partnership was formed to acquire the shopping center and real estate business of Melvin and Herbert Simon, and certain of the affiliates (collectively, the "Simons"). On August 9, 1996, the Company merged with DeBartolo Realty Corporation (the "Merger"). As a result of the Merger, the Simon Operating Partnership became a subsidiary of Simon DeBartolo Group, L.P. ("SDG, LP"), and SDG, LP became a subsidiary and the primary operating partnership of the Company. The Simon Operating Partnership is managed by SDG, LP and the Company.
In addition, the Simon Operating Partnership owns a preferred stock and non-controlling common stock interest in M.S. Management Associates, Inc. (the "Management Company") which manages regional malls and community shopping centers not wholly owned by the Simon Operating Partnership and certain other properties and also engages in certain property development activities. The Management Company also holds substantially all of the voting stock of DeBartolo Properties Management, Inc. ("DPMI"), which provides architectural design, construction and other services to the properties which SDG, LP owns or holds an interest in as well as certain other regional malls and community shopping centers owned by third parties. SDG, LP, however, holds substantially all the economic interest in DPMI.
GENERAL
As of December 31, 1996, the Simon Operating Partnership owned or held interests in a diversified portfolio of 124 income-producing properties, including 63 enclosed regional malls, 54 community shopping centers, three specialty retail centers, three mixed-use properties and one value-oriented super-regional mall, located in 30 states (the "Properties"). Regional malls, community centers and the remaining portfolio comprised 79.5%, 8.7%, and 11.8%, respectively, of total rent revenues and tenant reimbursements in 1996. The Properties contain an aggregate of approximately 64.7 million square feet of GLA, of which 38.9 million square feet is owned by the Simon Operating Partnership ("Owned GLA"). Approximately 2,200 different retailers occupy approximately 7,000 stores in the Properties.
As of December 31, 1996, mall and freestanding Owned GLA was 87.2% leased in the regional malls and 92.4% for Owned GLA in the community shopping centers. In addition, the Simon Operating Partnership has interests in four properties under construction in the United States, and five parcels of land held for development containing an aggregate of approximately 274 acres (collectively, the "Development Properties", and together with the Properties, the "Simon Portfolio Properties").
OPERATING STRATEGIES
The Simon Operating Partnership's primary business objectives are to increase cash generated from operations per unit of partnership interest in the Simon Operating Partnership ("Unit") and the value of the Simon Operating Partnership's Properties and operations. As used in this report, the term Units does not include units of partnership interest entitled to preferential distributions of cash ("Preferred Units.") The Simon Operating Partnership plans to achieve these objectives through a variety of methods discussed below, although no assurance can be made that such objectives will be achieved.
Leasing. The Simon Operating Partnership pursues an active leasing strategy, which includes aggressively marketing available space; renewing existing leases at higher base rents per square foot; and continuing to sign leases that provide for percentage rents and/or regular or periodic fixed contractual increases in base rents.
Management. Drawing upon the expertise gained through management of approximately 77.8 million square feet of retail and mixed-use Properties, the Simon Operating Partnership seeks to maximize cash flow through a combination of an active merchandising program to maintain its shopping centers as inviting shopping destinations, continuation of its successful efforts to minimize overhead and operating costs, coordinated marketing and promotional activities, and systematic planning and monitoring of results.
Strategic Expansions and Renovations. A key objective of the Simon Operating Partnership is to increase the profitability and market share of the Simon Portfolio Properties through the completion of strategic renovations and expansions. In 1996, the Simon Operating Partnership completed construction and opened three expansion and/or renovation projects at Greenwood Plus in Greenwood, Indiana; Muncie Mall in Muncie, Indiana; and College Mall in Bloomington, Indiana.
The Simon Operating Partnership has a number of renovation and/or expansion projects currently under construction. In addition, preconstruction development continues on a number of project expansions, renovations and anchor additions. The Simon Operating Partnership expects to commence construction on many of these projects in the next 12 to 24 months.
Development. Development activities are an ongoing part of the Simon Operating Partnership's business. The Simon Operating Partnership opened a regional mall, a specialty retail center, and a value-oriented super- regional mall during 1996. The new regional mall is the 1.0 million square foot Cottonwood Mall in Albuquerque, New Mexico. The new specialty retail center is the 60,000 square foot Tower Shops in Las Vegas, Nevada and the value-oriented super-regional mall is the 1.3 million square foot Ontario Mills in Ontario, California. Cottonwood Mall is anchored by Dillard's, Foley's, JCPenney, Mervyn's and Montgomery Ward. Ontario Mills' anchors include: AMC Theatres, Burlington Coat Factory, JCPenney, Sports Authority and Marshall's, with a Dave & Busters under construction.
Development activities are ongoing at several other locations including:
*A 235,000 square foot phase II expansion of the Forum Shops at Caesars in Las Vegas, in which the Simon Operating Partnership has a 55% ownership interest, is scheduled to open in August 1997. The costs of the phase II project are being funded with a portion of the $184 million two-tranche financing facility which closed on February 23, 1996. The loan bears interest on a weighted average basis at LIBOR plus 137 basis points and matures in February 2000.
*The Source, a 730,000 square foot value-oriented retail and entertainment development project in Westbury (Long Island), New York, is expected to open in August 1997. This new $150 million development will adjoin an existing Fortunoff store. The Simon Operating Partnership has a total equity investment of $25.3 million in this 50%- owned joint venture project. Construction financing of $120 million closed on this property in July 1996. The loan initially bears interest at LIBOR plus 170 basis points and matures on July 16, 1999.
*Arizona Mills, a 1,230,000 square foot retail development project in Tempe, Arizona, broke ground on August 1, 1996. This $184 million value-oriented super-regional mall is expected to open in November 1997. In January 1997, the joint venture closed on a five-year $145 million construction loan with interest at LIBOR plus 150 basis points. The Simon Operating Partnership had an $13.5 million equity investment through December 31, 1996 and a 25% ownership interest in this joint venture development.
*Grapevine Mills, a 1,480,000 square foot retail development project in Grapevine (Dallas/Fort Worth), Texas, broke ground on July 10, 1996. This $202 million value-oriented super-regional mall development project is expected to open in October 1997. A commitment has been obtained for a four-year $157 million construction loan (plus a one- year extension) with an initial interest rate of LIBOR plus 165 basis points. The Simon Operating Partnership has a $14 million equity commitment on this 37.5%-owned joint venture project, and made its initial contribution of $7.9 million in January 1997.
*The Shops at Sunset Place, a destination-oriented retail and entertainment project containing approximately 500,000 square feet of GLA is scheduled to open in 1998 in South Miami, Florida. The Simon Operating Partnership owns 75% of this $143 million project. The Simon Operating Partnership expects to have construction financing for the majority of the development costs of this project in place during the second quarter of 1997.
In addition, the Simon Operating Partnership is in the preconstruction development phase on two new community center projects, each of which is immediately adjacent to an existing regional mall in the Company's portfolio. Lakeline Plaza, a 50%-owned joint venture development project in Austin, Texas, is scheduled to open in 1998. This approximately $39 million development is projected to open with 391,000-square-feet of GLA. Muncie Plaza, a wholly-owned project, is scheduled to open in Muncie, Indiana, in 1998. This approximately $15 million development is projected to open with 200,000-square-feet of GLA.
The Simon Operating Partnership also has direct or indirect interests in five other parcels of land held for development in four states totaling approximately 274 acres. Management believes the Simon Operating Partnership is well positioned to pursue future development opportunities as conditions warrant.
Acquisitions. During 1996, the Simon Operating Partnership also acquired additional ownership in two existing regional malls, Ross Park Mall and North East Mall. The Simon Operating Partnership now holds 100% of the ownership in Ross Park Mall, and together with SDG, LP, the partnerships hold 100% of North East Mall. It is expected that any future acquisitions will be executed by SDG, LP, the primary operating partnership of the Company.
COMPETITION
The Simon Operating Partnership believes that it has a competitive advantage in the retail real estate business as a result of (i) its use of innovative retailing concepts, (ii) its management and operational expertise, (iii) its extensive experience and relationship with retailers and lenders and (iv) the size and diversity of its Properties. Management believes that the Company's Portfolio Properties, in which the Simon Portfolio Properties are a part, are the largest, as measured by GLA, of any publicly traded REIT, with more regional malls than any other publicly traded REIT. For these reasons, management believes the Simon Operating Partnership to be the leader in the industry.
All of the Simon Portfolio Properties are located in developed areas. With respect to certain of such Properties, there are other properties of the same type within the market area. The existence of competitive properties could have a material effect on the Simon Operating Partnership's ability to lease space and on the level of rents the Simon Operating Partnership can obtain.
There are numerous commercial developers, real estate companies and other owners of real estate that compete with the Simon Operating Partnership in its trade areas. This results in competition for both acquisition of prime sites (including land for development and operating properties) and for tenants to occupy the space that the Simon Operating Partnership and its competitors develop and manage.
ENVIRONMENTAL MATTERS
Substantially all of the Simon Portfolio Properties have been subjected to Phase I or similar environmental audits (which involve only a review of records and visual inspection of the property without soil sampling or ground water analysis) by independent environmental consultants since April 1988. Most of these audits have been conducted since January 1, 1990. The Phase I environmental audits are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed properties and surrounding properties. The environmental audits have not revealed, nor is management aware of, any environmental liability that management believes will have a material adverse effect on the financial condition or results of operations of Simon Operating Partnership. No assurance can be given that existing environmental studies reveal all potential environmental liabilities, that any previous owner, occupant or tenant did not create any material environmental condition not known to management, that the current environmental condition of the Simon Portfolio Properties will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties, or that future uses or condition (including, without limitation, changes in applicable environmental laws and regulations or the interpretation thereof) will not result in imposition of environmental liability.
Management believes that the Simon Portfolio Properties are in compliance, in all material respects, with all Federal, state and local environmental laws, ordinances and regulations (see Item 3. Legal Proceedings). Management is unaware of any instances in which it would incur significant environmental costs if any or all properties were sold, disposed of or abandoned.
EMPLOYEES
The Company, SDG, LP, the Simon Operating Partnership and its affiliates employ approximately, 7,400 persons at various centers and offices throughout the United States. Approximately 675 of such employees are located at the their headquarters in Indianapolis, Indiana, and approximately 3,950 of all employees are part-time.
INSURANCE
The Company, SDG, LP and the Simon Operating Partnership have comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its properties. Management believes that such insurance provides adequate coverage.
HEADQUARTERS
The executive offices of the Company, SDG, LP, the Simon Operating Partnership and its affiliates are located at National City Center, 115 West Washington Street, Indianapolis, Indiana 46204, and its telephone number is (317) 636-1600.
EXECUTIVE OFFICERS OF THE COMPANY
The Company is the sole general partner of the Simon Operating Partnership. The following table sets forth certain information with respect to the executive officers of the Company as of December 31, 1996.
Name Age Position
Melvin Simon (1) 70 Co-Chairman
Herbert Simon (1) 62 Co-Chairman David Simon (1) 35 Chief Executive Officer Richard S. Sokolov 47 President and Chief Operating Officer Randolph L. Foxworthy 52 Executive Vice President - Corporate Development William J. Garvey 58 Executive Vice President - Property Development James A. Napoli 50 Executive Vice President - Leasing John R. Neutzling 44 Executive Vice President - Property Management James M. Barkley 45 General Counsel; Secretary Stephen E. Sterrett 41 Treasurer
(1) Melvin Simon is the brother of Herbert Simon and the father of David Simon.
Set forth below is a summary of the business experience of the executive officers of the Company. The executive officers of the Company serve at the pleasure of the Board of Directors and have served in such capacities since the completion of the Company's initial public offering ("IPO"), with the exception of Mr. Richard Sokolov who has been President, Chief Operating Officer and a director since the Merger. For biographical information of Melvin Simon, Herbert Simon, David Simon, and Richard Sokolov, see Item 10 of this report.
Mr. Foxworthy is the Executive Vice President - Corporate Development of the Company. He served as a Director of the Company from the IPO until the Merger. Mr. Foxworthy joined Melvin Simon & Associates, Inc. ("MSA") in 1980 and has been an Executive Vice President in charge of Corporate Development of MSA since 1986 and has held the same position with the Company since the IPO.
Mr. Garvey is the Executive Vice President - Property Development of the Company. Mr. Garvey, who was Executive Vice President and Director of Development at MSA, joined MSA in 1979 and held various positions with MSA.
Mr. Napoli is the Executive Vice President - Leasing of the Company. Mr. Napoli also served as Executive Vice President and Director of Leasing since he joined MSA in 1989.
Mr. Neutzling holds the position of Executive Vice President - Property Management of the Company. Mr. Neutzling has also been an Executive Vice President of MSA since 1992 overseeing all property and asset management functions. He joined MSA in 1974 and has held various positions with MSA.
Mr. Barkley serves as the Company's General Counsel and Secretary. Mr. Barkley holds the same position for MSA. He joined MSA in 1978 as Assistant General Counsel for Development Activity.
Mr. Sterrett serves as the Company's Treasurer. He joined MSA in 1989 and has held various positions with MSA.
ITEM 2.
ITEM 2. PROPERTIES
SIMON PORTFOLIO PROPERTIES
The 124 Properties are located in 30 states throughout the United States, with concentrations in Indiana, Illinois, and Texas (See Note 2 to the consolidated financial statements contained in Item 14 for a complete listing of the Properties). The Properties generally consist of two types: regional malls and community shopping centers. Regional malls contain two or more anchors and a wide variety of smaller stores ("Mall" stores) located in enclosed malls connecting the anchors. Additional stores ("Freestanding" stores) are usually located along the perimeter of the parking area. The 63 regional malls in the Properties range in size from approximately 210,000 to 1.4 million square feet of GLA, with 58 regional malls over 400,000 square feet. These regional malls contain in the aggregate over 6,000 occupied stores, including over 240 anchors which are mostly national retailers. As of December 31, 1996, regional malls (including specialty retail centers, and retail space in the mixed-use Properties) represented 75.3% of the GLA, 69.4% of Owned GLA and 79.0% of total annualized base rent of the Properties.
Community shopping centers are typically not enclosed and are generally smaller than regional malls. Most of the 54 community shopping centers in the Properties range in size from approximately 100,000 to 400,000 square feet of GLA. Community shopping centers generally are of two types: (i) traditional community centers, which focus primarily on value-oriented and convenience goods and services, are usually anchored by a supermarket, drugstore or discount retailer and are designed to service a neighborhood area; and (ii) power centers, which are designed to serve a larger trade area and contain at least two anchors that are usually national retailers among the leaders in their markets and occupy more than 70% of the GLA in the center. As of December 31, 1996, community shopping centers represented 18.4% of the GLA, 21.4% of Owned GLA and 14.2% of the total annualized base rent of the Properties.
The Simon Operating Partnership also has an interest in three specialty retail centers, three mixed-use Properties and one value-oriented super regional mall. The specialty retail centers contain approximately 530,000 square feet of GLA and do not have anchors; instead, they feature retailers and entertainment facilities in a distinctive shopping environment and location. The three mixed-use Properties range in size from approximately 500,000 to 982,000 square feet of GLA. One of these Properties is a regional mall with a connected office building, and two are located in mixed-use developments and contain primarily office space. Ontario Mills is the value-oriented super regional mall. Ontario Mills contains over 1.3 million square feet of GLA, including six anchors, one of which is under construction.
As of December 31, 1996, approximately 87.2% of the Mall and Freestanding Owned GLA in regional malls, specialty retail centers and the retail space in the mixed use Properties was leased and approximately 92.4% of Owned GLA in the community shopping centers was leased.
Of the 124 Properties, 99 are owned 100% by the Simon Operating Partnership and the remainder are held as joint venture interests (the "Joint Venture Properties"). The Simon Operating Partnership is the managing or co- managing general partner of all but three Joint Venture Property partnerships. In addition, the Simon Operating Partnership owns the land at 95 of the 124 Properties, while the remaining 29 are leased in whole or in part. See Note 12 to the consolidated financial statements contained in Item 14 for additional information on ground leases.
LAND HELD FOR DEVELOPMENT
The Simon Operating Partnership has direct or indirect ownership interests in five parcels of land held for development, containing an aggregate of 273.5 acres located in four states, and, through the Management Company, interest in a mortgage on a parcel of land held for development containing approximately 134 acres. Management believes that the Simon Operating Partnership's significant base of commercially zoned land, together with the Simon Operating Partnership's status as a fully integrated real estate firm, gives it a competitive advantage in future development activities over other commercial real estate development companies in its principal markets.
The Management Company has granted options to the Simon Operating Partnership (for no additional consideration) to acquire for a period of ten years (expiring December 2003) the Management Company's interest in three parcels of land held for development, as indicated in footnote (1) to the above table, at a price equal to the actual cost incurred to acquire and carry such properties from their acquisition by the Management Company to the exercise date of the option. The Management Company may not sell its interest in any parcel subject to option through December 1998 without the consent of the Simon Operating Partnership. After such period, if the Management Company notifies the Simon Operating Partnership that it desires to sell its interest in a parcel, the Simon Operating Partnership has 30 days to exercise its option, after which time the option expires as to such parcel. If the Simon Operating Partnership does not exercise its option and the Management Company has not sold the parcel within one year from such notice, the Management Company must again give the Simon Operating Partnership the right to purchase the Management Company's interest in such parcel before it sells its interest by giving the Simon Operating Partnership notice of such intent to sell, following which notice the Simon Operating Partnership again has 30 days to elect to purchase the Management Company's interest at a price calculated as described above.
The Management Company also holds indebtedness secured by 134 acres of land held for development, Lakeview at Gwinnett ("Lakeview") in Gwinnett County, Georgia, in which the Simons hold a 64% partnership interest. In addition, the Management Company holds unsecured debt owed by the Simons as partners of this partnership. The Management Company has an option to acquire the Simons' partnership interests in Lakeview for one dollar in the event the requisite partner consents to such transfers are obtained. The Management Company is required to fund certain operating expenses and carrying costs of the partnership that are owed by the Simons as partners thereof (the "Advances"). The Management Company has granted to the Simon Operating Partnership the option to acquire (i) the Simons' partnership interest(s) and the secured debt or (ii) the property, if the Management Company forecloses the secured indebtedness, for one dollar plus the amount of all Advances plus the amount of the outstanding secured and unsecured debt.
JOINT VENTURES
The Simon Operating Partnership is a joint venture partner with a major pension fund in twelve existing community shopping centers and one regional mall. With certain exceptions, such pension fund has a right of first refusal subject to certain conditions to enter into joint ventures with the Simon Operating Partnership for the development of future power centers.
The Simon Operating Partnership has also entered into an agreement which gives the outside partner the right to sell its ownership interest in Rolling Oaks Mall to the Simon Operating Partnership in exchange for Units based on the fair market value of the ownership interest at the time of the exchange. This right expires on January 1, 2002.
MORTGAGE FINANCING ON PROPERTIES
The following table sets forth certain information regarding the mortgages and other debt encumbering the Properties. All mortgage and property related debt is nonrecourse, although certain of the Unitholders have guaranteed a portion of the property related debt in the aggregate amount of $398.9 million.
MORTGAGE AND OTHER DEBT ON SIMON PORTFOLIO PROPERTIES (DOLLARS IN THOUSANDS) ANNUAL INTEREST FACE AMOUNT DEBT MATURITY PROPERTY NAME RATE @ 12/31/96 SERVICE DATE - ------------------------ --------- --------- ------- --------
CONSOLIDATED PROPERTIES:
Anderson Mall (1) 6.74% $ 19,000 $1,281 (2) 12/15/03 Barton Creek Square 8.10% 63,549 5,867 12/30/99 Battlefield Mall 7.50% 50,724 4,765 06/01/03 Bloomingdale Court (3) 8.75% 29,009 2,538 (2) 12/01/00 Cielo Vista Mall (4) 9.25% (5) 56,329 5,665 05/01/07 Cielo Vista Mall 8.13% 2,323 376 07/01/04 College Mall (6) 7.00% 43,429 3,563 07/01/04 Crossroads Mall 7.75% 41,440 3,212 (2) 07/31/02 Eastgate Consumer Mall - (7) 25,429 - (2) 12/31/98 East Towne Mall - (8) 55,000 - (2) 09/29/98 Eastland Mall - (7) 30,000 - (2) 11/01/97 Forest Mall (9) 6.74% 12,800 863 (2) 12/15/03 Forest Plaza (3) 8.75% 16,904 1,518 (2) 12/01/00 Forest Village Park (1) 6.16% 20,600 1,269 (2) 12/15/03 Fox River Plaza (3) 8.75% 12,654 1,107 (2) 12/01/00 Golden Ring Mall (9) 6.74% 29,750 2,005 (2) 12/15/03 Greenwood Park Mall (6) 7.00% 36,374 2,984 07/01/04 Hutchinson Mall (9) 8.44% 11,523 973 (2) 10/01/02 Ingram Park Mall 8.10% 49,107 4,533 12/01/99 Ingram Park Mall 9.63% 7,000 674 (2) 11/01/99 Irving Mall (4) 9.25% (5) 43,375 4,363 05/01/07 Jefferson Valley Mall - (10) 50,000 - (2) 01/12/00 La Plaza Mall 8.25% 50,526 4,677 12/30/99 Lake View Plaza (3) 8.75% 22,169 1,940 (2) 12/01/00 Lincoln Crossing (3) 8.75% 997 87 (2) 12/01/00 Lincolnwood Town Center - (11) 63,000 - (2) 01/31/98 Longview Mall (1) 6.16% 22,100 1,361 (2) 12/15/03 Markland Mall (9) 6.74% 10,000 675 (2) 12/15/03 Matteson Plaza (3) 8.75% 11,159 976 (2) 12/01/00 McCain Mall (4) 9.25% (5) 26,304 2,646 05/01/07 Midland Park Mall (9) 6.31% 22,500 1,420 (2) 12/15/03 Miller Hill Mall (9) 6.74% 34,500 2,325 (2) 12/15/03 Muncie Mall (9) 6.74% 24,000 1,618 (2) 12/15/03 Muncie Mall (9) 6.99% 20,000 1,398 12/15/03 North East Mall 10.00% 22,442 2,475 09/01/00 North Riverside Park Plaza 9.38% 4,117 452 09/01/02 North Riverside Park Plaza 10.00% 3,668 420 09/01/02 North Towne Square (9) 6.31% 23,500 1,483 (2) 12/15/03 O'Hare International Center 7.50% (12) 27,500 2,063 12/31/13 Regency Plaza (3) 8.75% 1,878 164 (2) 12/01/00 Riverway - (13) 85,571 - (2) 12/31/98 Riverway - (13) 45,879 - (2) 12/31/98 Ross Park Mall 6.14% 60,000 3,684 08/15/98 South Park Mall (1) 7.25% 24,748 1,791 (2) 06/15/03 St. Charles Towne Plaza (3) 8.75% 30,887 2,703 (2) 12/01/00 Sunland Park Mall 8.63% (5) 40,149 3,773 01/01/26 The Forum Shops at Caesars - (14) 100,000 - (2) 02/23/00 The Forum Shops at Caesars - (15) 22,716 - (2) 02/23/00 Tippecanoe Mall(6) 8.45% 47,556 4,647 07/01/04 Towne East Square (6) 7.00% 57,419 4,711 07/01/04 Towne West Square (1) 6.16% 40,250 2,479 (2) 12/15/03 Trolley Square 5.81% 19,000 1,104 (2) 07/23/00(16) Trolley Square - (7) 3,500 - (2) 07/23/00 Trolley Square - (7) 4,641 - (2) 07/23/00 Valle Vista Mall (4) 9.25% (5) 34,837 3,504 05/01/07 West Ridge Mall 8.00% 50,005 4,529 06/01/99 West Ridge Plaza (3) 8.75% 4,612 404 (2) 12/01/00 White Oaks Mall 7.70% 16,500 1,271 (2) 03/01/98 White Oaks Plaza (3) 8.75% 12,345 1,080 (2) 12/01/00 Windsor Park Mall 8.00% 8,951 811 05/01/12 Windsor Park Mall 8.00% 6,009 544 06/01/00 TOTAL PLEDGED PROPERTY --------- INDEBTEDNESS 1,812,254 --------- Unsecured Revolving Credit Facility - (17) 230,000 - (2) 09/27/99 TOTAL INDEBTEDNESS- --------- CONSOLIDATED (18) 2,042,254 =========
JOINT VENTURE PROPERTIES:
Circle Centre - (19) 60,000 - (2) 12/05/03 Cobblestone Court (20) 7.22% 6,180 446 (2) 11/30/05 Crystal Court (20) 7.22% 3,570 258 (2) 11/30/05 Fairfax Court (20) 7.22% 10,320 745 (2) 11/30/05 Gaitway Plaza (20) 7.22% 7,350 531 (2) 11/30/05 Lakeline Mall - (21) 68,515 - (2) 05/16/99 Ontario Mills - (22) 77,637 - (2) 05/07/99 Ridgewood Court (20) 7.22% 7,980 576 (2) 11/30/05 Royal Eagle Plaza (20) 7.22% 7,920 572 (2) 11/30/05 Seminole Towne Center 6.88% 70,500 4,850 (2) 12/27/05 Smith Haven Mall 7.86% 115,000 9,039 06/01/06 The Tower Shops - (23) 15,749 - (2) 03/13/99 The Plaza At Buckland Hills 7.22% 17,680 1,276 (2) 11/30/05 (20) The Source - (24) 62,032 - 07/16/01 The Yards Plaza (20) 7.22% 8,270 597 (2) 11/30/05 Village Park Plaza (20) 7.22% 8,960 647 (2) 11/30/05 West Town Corners (20) 7.22% 10,330 746 (2) 11/30/05 Westland Park Plaza (20) 7.22% 4,950 357 (2) 11/30/05 Willow Knolls Court (20) 7.22% 6,490 469 (2) 11/30/05 TOTAL INDEBTEDNESS-EQUITY --------- (25) $ 569,433 =========
(1) Loans secured by these five properties are cross-collateralized and cross-defaulted. The aggregate principal amount of the loans is $126,698, with an annual debt service of $8,181 and weighted average interest rate of 6.46%. Four of the loans have interest rate reset provisions available on 12/15/98 and mature 12/15/2003. The remaining loan matures on 6/15/2003. During the term of these loans, there is amortization of a portion of the principal amount. (2) Requires monthly payments of interest only. Fixed-rate debt will reflect an amount for annual debt service. (3) These 10 properties are cross-defaulted. (4) On December 31, 1996, these four properties were cross-collateralized and cross-defaulted. On January 31, 1997, the Simon Operating Partnership closed on a restructure of these loans, which included; repaying the Irving Mall loan, paying $21,000 to remove the contingent interest feature on the three remaining loans and paying down a total of $3,900 on two other Property loans with the same lender. (5) Lender also participates in a percentage of gross revenues above a specified base. (6) Loans secured by these four properties are cross-collateralized and cross-defaulted. The aggregate principal amount of the loans is $184,778, with an annual debt service of $15,905 and interest rate of 7.0%, except for Tippecanoe Mall, which bears interest at 8.45%. During the term of these loans, there is amortization of a portion of the principal amount. (7) LIBOR + 1.50%. (8) LIBOR + 1.125%. (9) Loans secured by these eight properties are cross-collateralized and/or cross-defaulted. The aggregate principal amount of the loans is $188,573, with an annual debt service of $12,760, and a weighted average interest rate of 6.77%. Eight of these loans have interest reset provisions available on 12/15/98 and mature 12/15/2003. The remaining loan will mature 10/1/2002. During the term of these loans, there is amortization of a portion of the principal amount. (10) LIBOR + 0.55% with LIBOR capped at 8.7% through maturity. (11) LIBOR + 1.25%. (12) In 1998, the lender will begin participating in a percentage of gross revenues after deduction of debt service, tenant improvement costs and leasing commissions. (13) LIBOR + 1.375%, LIBOR capped at 5.0% through maturity. (14) LIBOR + 1.00%. (15) LIBOR + 1.8125%. (16) The earliest date on which the lender may call the bonds is 7/23/2000. (17) SDG, LP and the Simon Operating Partnership are co-borrowers on this $750,000 unsecured revolving credit facility, which currently bears interest at LIBOR + 0.90% and provides for different pricing based upon SDG, LP's investment grade rating. LIBOR is initially capped at 7.5%; however, if LIBOR should equal or exceed 8.75% between monthly reset dates, then LIBOR will be capped at 8.5% for that period only. As of 12/31/96, $510,000 was available, with an additional $10,000 reserved under a letter of credit. (18) Includes minority interest partners' share ($60,850) of total consolidated indebtedness. (19) On February 18, 1997 the loan was refinanced at LIBOR +.44% with a maturity of 1/31/2004 and an initial reset date of 1/31/2001. The rate at 12/31/96 was LIBOR + 0.7%. (20) Rate is fixed at 7.22% through December 1998 and thereafter the rate is the greater of 7.22% or 2.0% over the then current yield of a six month treasury bill selected by the lender. (21) LIBOR + 0.375%. (22) LIBOR + 2.75%. (23) LIBOR + 2.00%. (24) LIBOR + 1.70%. (25) Includes joint venture partners' share ($376,123) of total equity indebtedness.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Roel Vento et al v. Tom Taylor et al. An affiliate of the Company 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 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, tortuous 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. The Company is seeking to overturn the award and has appealed the verdict. Although the Company is optimistic that it may be able to reverse or reduce the verdict, there can be no assurance thereof. Management, based upon the advice of counsel, believes that the ultimate outcome of this action will not have a material adverse effect on the Company and affiliates.
Browning- Ferris Industries of Illinois, et al. v. Richard Ter Maat, et al. v. Craig J. Cain, et al., Case No. 92 C 20259. On April 4, 1994, a third- party action was filed by Richard Ter Maat and five other parties (collectively referred to as "Third Party Plaintiffs") named as defendants in the above referenced litigation, which had begun in 1992, against Machesney Park Associates (a "Subsidiary") and approximately 74 other parties (collectively referred to as "Third-Party Defendants"). That third-party action alleged generally that the Third-Party Defendants are liable under the Comprehensive Environmental response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. section 9601 et seq., and under Illinois statutory and common law for certain response costs expended and to be expended by Third-Party Plaintiffs in connection with the claims asserted by Browning-Ferris Industries of Illinois and approximately 20 other parties (collectively referred to as "Plaintiffs") against the Third-Party Plaintiffs. In the original lawsuit, Plaintiffs sought reimbursement of response costs they allegedly incurred and will incur in response to the release or threat of release of hazardous substances from the M.I.G./Dewane Landfill located one mile east of the City of Belvidere, in Boone County, Illinois (the "Site"), and declaratory judgment on liability against Defendants for such response costs. To date, the Plaintiffs have alleged response costs in excess of $5.0 million in connection with the Site.
In February 1996, the Subsidiary settled this pending litigation by the payment of $40,000 to the original Plaintiffs. Pursuant to that settlement, the Simon Operating Partnership agreed that it would take part in a nonbinding arbitration or mediation at sometime in the future to allocate expenses incurred in remediating the Site. No such arbitration or mediation has yet been instituted. Management, based upon the advice of counsel, believes that the ultimate outcome of this action will not have a material adverse effect on the Simon Operating Partnership.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for the Simon Operating Partnership's Units or Preferred Units. The following table sets forth for the periods indicated, the distributions declared on the Units: Declared Distribution 1995 ------------ ----------- 1st Quarter $0.4925 2nd Quarter $0.4925 3rd Quarter $0.4925 4th Quarter $0.4925
----------- 1st Quarter $0.4925 2nd Quarter $0.4925 3rd Quarter $0.1515 (1) 4th Quarter $0.4925
(1) Represents a distribution declared in the third quarter of 1996 related to the Merger, designated to align the time periods of distribution payments of the merged entities.
On January 23, 1997, the Simon Operating Partnership declared a distribution of $0.4925 per Unit payable on February 21, 1997 to Unitholders of record on February 7, 1997. The current annual distribution rate is $1.97 per Unit. As the holder of the Preferred Units, the Company is entitled to preferential distributions of cash equal to the dividends payable on its outstanding shares of preferred stock. The Company and SDG, LP held all of the Units of the Simon Operating Partnership as of March 27, 1997.
UNREGISTERED SALES OF EQUITY SECURITIES
On October 4, 1996, the Simon Operating Partnership exercised its option to acquire the remaining 30% limited partnership interest in North East Mall owned by the Simons in exchange for 472,410 Units, as well as the Simons' 50% general partnership interest which the Simon Operating Partnership acquired for nominal consideration. The Simons had previously contributed to Simon Operating Partnership in exchange for Units, the right to receive distributions relating to its 50% general partnership interest. The Units are convertible on a one-for-one basis into common stock of the Company. The Units issued to the Simons were not registered under the Securities Act of 1933, as amended (the "Act") in reliance on the exemptions provided by Section 4(2) of the Act and the rules and regulations promulgated thereunder.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the Simon Operating Partnership and combined historical financial data of Simon Property Group (the "Predecessor"). The financial data should be read in conjunction with the financial statements and notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations. Other data management believes is important in understanding trends in the Simon Operating Partnership's business is also included in the table.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected Financial Data, and all of the financial statements and notes thereto included elsewhere herein. 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 the Simon Operating Partnership 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; and environmental/safety requirements.
OVERVIEW
During 1994, 1995 and 1996, the Simon Operating Partnership acquired several other properties through purchase, acquisition and merger, and, as result of changes in controlling interest, changed the way it accounted for several properties (using either the consolidated method of accounting or the equity method of accounting for noncontrolled joint venture entities) (the "Property Transactions"). Following is a listing of such transactions. Effective April 1, 1994, the Simon Operating Partnership began including The Forum Shops at Caesars ("Forum") as a consolidated property due to the Simon Operating Partnership's ability to demonstrate control. On September 1, 1994, the Simon Operating Partnership consolidated 15 properties as a result of the merger of MSA Realty Corporation into the Company. During December 1994, the Simon Operating Partnership acquired a 100% interest in Independence Center, Orange Park Mall, Broadway Square and University Mall (Florida). On February 23, 1995, the Simon Operating Partnership acquired an additional 50% interest in White Oaks Mall and began accounting for the property using the consolidated method of accounting. On August 1, 1995, the Simon Operating Partnership purchased the remaining 50% ownership in Crossroads Mall and subsequently began accounting for the property using the consolidated method of accounting. On September 25, 1995, the Simon Operating Partnership acquired the remaining 55% ownership in East Towne Mall and subsequently began accounting for the property using the consolidated method of accounting. On April 11, 1996, the Simon Operating Partnership acquired the remaining 50% economic ownership interest in Ross Park Mall and subsequently began accounting for the property using the consolidated method of accounting. (See the "Liquidity and Capital Resources" discussion for additional information regarding these transactions.)
RESULTS OF OPERATIONS
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
Total revenue increased $38.2 million, or 6.9%, in 1996 as compared to 1995. Of this increase, $37.7 million is attributable to the Property Transactions. The remaining increase includes net increases in minimum rent, lease settlements and miscellaneous income of $9.3 million, $1.8 million and $2.4 million, respectively, partially offset by a net decrease in tenant reimbursements of $11.8 million. The minimum rent increase results from increases of $1.42 and $0.40 in average base minimum rents per square foot for regional mall stores and community shopping centers, respectively. Regional mall store leases executed during 1996 were $6.30 per square foot greater than leases expiring; community shopping center leases were $2.08 greater. Total operating expenses increased $28.6 million, or 9.4%, in 1996 as compared to 1995. Of this increase, $18.6 million is the result the Property Transactions. The remaining $10.0 million increase is primarily the result of a net increase in depreciation and amortization ($8.9 million). Interest expense increased $12.3 million, or 8.2%, to $162.5 million for 1996 as compared to $150.2 million for 1995. Of this increase, $15.4 million is attributable to the Property Transactions. In addition, the Simon Operating Partnership realized incremental interest expenses in 1996 related to borrowings used to acquire additional ownership interests in and/or make equity investments in unconsolidated joint venture properties of $4.9 million. Offsetting these increases were interest savings realized as a result of restructuring the Simon Operating Partnership's credit facilities, from the proceeds of the Company's 6,000,000 common share offering on April 19, 1995, and from the proceeds of the Series A preferred stock offering, which were used to paydown debt (described under "Financing and Debt"). Income (loss) from unconsolidated entities increased from $1.4 million in 1995 to $5.2 million in 1996, primarily resulting from an increase in the Simon Operating Partnership's share of the Management Company income ($4.8 million), partially offset by a decrease in its share of income from partnerships and joint ventures ($1.0 million). The increase in Management Company income is primarily the result of the Management Company's losses in 1995 related to the settlement of a mortgage receivable ($3.9 million) and the liquidation of a partnership investment ($1.0 million). Extraordinary losses of $3.7 million in 1996 and $3.3 million in 1995 result from costs associated with the refinancing or early extinguishment of debt. Preferred Unit requirements increased by $6.6 million in 1996 as a result a full year's distributions on the 8.125% Series A convertible preferred stock issued on October 27, 1995, as compared to approximately two months of distributions in 1995. Net income available to Unitholders decreased from $96.7 million in 1995 to $89.1 million in 1996, for the reasons discussed above.
Year Ended December 31, 1995 vs. Year Ended December 31, 1994
Total revenue increased $80.0 million, or 16.9%, in 1995. Of this increase, $72.8 million is attributable to the 1995 Property Transactions, and the full-year impact in 1995 of the 1994 Property Transactions. The remaining increase is primarily the result of an increase in minimum rent revenue resulting from increases of $1.25 and $0.18 in average base minimum rents per square foot for regional mall stores and community shopping centers as evidenced by leasing spreads for regional mall store and community shopping center leases executed during 1995 over those leases expiring in 1995 of $5.38 and $1.22 per square foot, respectively. These increases are partially offset by a decrease in overage rent resulting primarily from static sales in the portfolio and a decline of $1.8 million in overage rent at Texas border properties due to the devaluation of the Mexican peso. Management expects these properties to return to their prior performance level, as they have done historically after previous peso devaluations. Total operating expenses increased $43.1 million, or 16.6%, in 1995. Of this increase, $37.9 million, or 87.9%, is the result of the Property Transactions. Other than increases from the Property Transactions, total operating expenses experienced an increase of only 2.0%, attributable to increased depreciation and amortization derived from an increase in investment properties. Interest expense, excluding prior year nonrecurring interest expense, increased a net of $27.2 million, or 22.2%, to $150.2 million for 1995 as compared to $123.0 million for 1994. Of this increase, $26.5 million, or 97.4% is the result of the Property Transactions. Interest savings were realized as a result of restructuring the Simon Operating Partnership's credit facilities and from the proceeds of the Company's 6,000,000 common share offering on April 19, 1995. The net gain on the sale of assets in 1995 resulted from a gain of $2.4 million on the sale of a minority partnership interest in land previously held for development in Denver, Colorado, partially offset by a loss of $0.5 million on the sale of an equity investment in Arborland Mall. Income (loss) from unconsolidated entities increased from a loss of $0.1 million in 1994 to income of $1.4 million in 1995, resulting from an increase in the Simon Operating Partnership's share of income from partnerships and joint ventures, partially offset by an increase in its share of losses of the Management Company. The Simon Operating Partnership's share of income from partnerships and joint ventures improved $4.1 million from $1.0 million in 1994 to $5.1 million in 1995. This increase is primarily attributable to gains from sales of peripheral property ($3.4 million) and the change to accounting for North East Mall using the equity method of accounting ($1.7 million). The Simon Operating Partnership's share of the Management Company's results declined $2.6 million from an allocated net loss of $1.1 million for 1994 to an allocated net loss of $3.7 million for 1995. This decrease is the result of the Management Company's losses related to the settlement of a mortgage receivable and the liquidation of a partnership investment in 1995, partially offset by a $1.6 million increase in the Management Company's operating income. Extraordinary items of $3.3 million in 1995 and $18.0 million in 1994 result from costs associated with the refinancing of debt. The Preferred Unit requirement in 1995 was $1.5 million as a result of the Company's issuance of $100 million of 8 1/8% Series A convertible preferred stock on October 27, 1995. The proceeds were contributed to the Simon Operating Partnership in exchange for Preferred Units with terms identical to the preferred stock issued by the Company. Net income available to Unitholders increased from $42.3 million in 1994 to $96.7 million in 1995, for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Simon Operating Partnership's balance of cash and cash equivalents was $50.0 million, not including its proportionate share of cash held by the joint venture properties and the Management Company. In addition to its cash balance, the Simon Operating Partnership as a co-borrower with SDG, LP has a $750 million unsecured revolving credit facility which had $510 million available after outstanding borrowings and letters of credit at December 31, 1996. In December 1995, a shelf registration statement for $500 million of nonconvertible investment grade debt securities of the Simon Operating Partnership became effective. As of December 31, 1996, no securities have been issued from this registration statement.
Financing and Debt. The Simon Operating Partnership's ratio of debt-to- market capitalization was 39.8% and 44.9% at December 31, 1996 and 1995, respectively.
On February 23, 1996, the Simon Operating Partnership borrowed the initial $100.0 million tranche of a $184.0 million two-tranche loan facility for Forum and retired the existing $89.7 million mortgage debt for Forum. The initial funding bears interest a LIBOR plus 100 basis points and matures in February 2000. The remaining proceeds are being used to provide funds for the approximately 250,000-square-foot phase II expansion of this property.
On April 11, 1996, the Simon Operating Partnership drew $115 million on its revolving credit facility. The funds were used primarily to finance the acquisition of the remaining economic ownership interest in Ross Park Mall ($44 million) and to retire a portion of the property's debt ($54 million).
On June 28, 1996, the Simon Operating Partnership obtained an additional $200 million unsecured revolving credit facility. The facility bore interest at LIBOR plus 132.5 basis points and had a maturity date of August 1998. Terms for the facility were identical to the existing revolving credit facility.
On September 10, 1996, the Simon Operating Partnership loaned $112 million to SDG, LP to retire the secured line of credit which DRC and its operating partnership had in effect prior to the Merger, which bore interest at LIBOR plus 175 basis points.
On September 27, 1996, the Company completed a $200 million public offering of 8,000,000 shares of 8 3/4% Series B cumulative redeemable preferred stock, generating net proceeds of approximately $193 million. The Company contributed the proceeds of such offering to SDG, LP, in exchange for Preferred Units in SDG, LP, which used the net proceeds to repay $142.8 million of outstanding mortgage indebtedness, loaned $34.4 million to the Simon Operating Partnership which used such amount to reduce amounts outstanding under its credit facilities, $12.1 million for the acquisition of the remaining ownership of North East Mall in Hurst, Texas, and the remainder for working capital.
On September 27, 1996, SDG, LP, as co-borrower with the Simon Operating Partnership, obtained a $750 million unsecured three-year credit facility (the "Credit Facility"), with an option to extend, which initially bears interest at LIBOR plus 90 basis points. The Simon Operating Partnership borrowed $323 million under this Credit Facility to retire the outstanding borrowings under its two unsecured credit facilities, which bore interest at LIBOR plus 132.5 basis points. In addition, the Credit Facility contains a $150.0 million competitive bid feature, which can further reduce interest costs. The Credit Facility increased available capital by $150 million.
On November 21, 1996, the Securities and Exchange Commission declared effective a shelf registration statement filed by the SDG, LP to provide for the offering, from time to time, of up to $750 million in aggregate principal amount of nonconvertible investment-grade unsecured debt securities (the "Notes"). Securities issued under this shelf registration are guaranteed by the Simon Operating Partnership. On November 26, 1996, SDG, LP completed the sale of $250 million of Notes. The Notes bear interest semiannually at 6.875% and mature on November 15, 2006. The net proceeds of $247.5 million were used primarily to reduce SDG, LP's overall interest rates by retiring a $62 million mortgage loan on Boynton Beach Mall and loaning $165 million to the Simon Operating Partnership, which used $57 million to retire the construction loan relating to Cottonwood Mall and $108 million to reduce the outstanding balance on the Credit Facility, with the remainder going into working capital. The Simon Operating Partnership is currently finalizing the allocation of $300 million of this shelf registration to a Medium-Term Note Program, although management has no immediate plans to issue securities under the program.
On December 6, 1996, SDG, LP completed a $100 million private placement of putable asset trust securities ("PATS"). The PATS bear interest at 6.75% and mature on November 15, 2003. The PATS are guaranteed by the Simon Operating Partnership. Proceeds from the placement were advanced to the Simon Operating Partnership and used to reduce outstanding borrowings on the Credit Facility.
At December 31, 1996, the Simon Operating Partnership had consolidated debt of $2,042.3 million, of which $1,326.5 million is fixed-rate debt and $715.8 million is variable-rate debt. As of December 31, 1996, the Simon Operating Partnership had interest rate protection agreements related to $394.1 million of variable-rate debt.
On January 31, 1997, the Simon Operating Partnership completed a refinancing transaction involving debt on four consolidated properties. The transaction consisted of the payoff of one loan totaling $43.4 million, the buyout of the contingent interest feature on the remaining three loans for $21 million, a principal reduction of $3.9 million to be applied to two of the properties, and a restatement of the interest amount on the three remaining loans. This transaction was funded using the Credit Facility.
Scheduled principal payments of mortgage indebtedness over the next five years is $1,254.0 million, with $788.3 million thereafter.
Acquisition Activity. Prior to April 11, 1996, the Simon Operating Partnership held a 50% joint venture interest in Ross Park Mall in Pittsburgh, Pennsylvania. On April 11, 1996, the Simon Operating Partnership acquired the remaining economic ownership interest. The purchase price included approximately $44.0 million in cash and the assumption of the joint venture partner's share of existing debt ($57.0 million). The purchase price in excess of the net assets acquired of $49.1 million was allocated to investment properties. Effective April 11, 1996, the property is being accounted for using the consolidated method of accounting. It was previously accounted for using the equity method of accounting. In addition, the remaining 11% ownership in Ross Park Mall was acquired by the Simon Operating Partnership on January 21, 1997.
On August 9, 1996, the Company acquired the national shopping center business of DRC. Pursuant to the Merger, the Company acquired all the outstanding common stock of DRC (55,712,529 shares), at an exchange ratio of 0.68 share of the Company's common stock for each share of DRC common stock (the "Exchange Ratio"). A total of 37,873,965 shares of the Company's common stock was issued by the Company to the DRC shareholders. DRC and the acquisition subsidiary merged. DRC became a 99.9% subsidiary of the Company. This portion of the transaction was valued at approximately $923.2 million, based upon the number of DRC shares of common stock acquired (55,712,529), the Exchange Ratio and the last reported sales price of the Company's common stock on August 9, 1996 ($24.375). In connection therewith, SPG changed its name to Simon DeBartolo Group, Inc. and DRC changed its name to SD Property Group, Inc.
In connection with the Merger, the general and limited partners of the Simon Operating Partnership contributed 49.5% (47,442,212 Units) of the total outstanding Units in the Simon Operating Partnership to the operating partnership of DRC, DeBartolo Realty Partnership, L.P. ("DRP, LP"), in exchange for 47,442,212 Units of partnership interest in DRP, LP, whose name was changed to Simon DeBartolo Group, L.P. The Company retained a 50.5% partnership interest (48,400,641 Units) in the Simon Operating Partnership but assigned its rights to receive distributions of profits on 49.5% (47,442,212 Units) of the outstanding Units of partnership interest in the Simon Operating Partnership to SDG, LP. The limited partners of DRP, LP approved the contribution made by the partners of the Simon Operating Partnership and simultaneously exchanged their 38.0% (34,203,623 Units) partnership interest in DRP, LP, adjusted for the Exchange Ratio, for a smaller partnership interest in SDG, LP. The exchange of the limited partners' 38.0% partnership interest in DRP, LP for Units of SDG, LP has been accounted for as an acquisition of minority interest by the Company and is valued based on the estimated fair value of the consideration issued (approximately $566.9 million). The Units of SDG, LP may under certain circumstances be exchangeable for common stock of the Company on a one-for-one basis. Therefore, the value of the acquisition of the DRP, LP limited partners' interest acquired was based upon the number of DRP, LP Units exchanged (34,203,623), the Exchange Ratio and the last reported sales price per share of the Company's common stock on August 9, 1996 ($24.375). The limited partners of the Simon Operating Partnership received a 23.7% partnership interest in SDG, LP (37,282,628 Units) for the contribution of their 38.9% partnership interest in the Simon Operating Partnership (37,282,628 Units) to SDG, LP. The interests transferred by the partners of the Simon Operating Partnership to DRP, LP have been appropriately reflected at historical costs.
It is currently expected that subsequent to the first anniversary of the date of the Merger, reorganizational transactions will be effected so that SDG, LP will directly own all of the assets and partnership interests now owned by the Simon Operating Partnership. However, there can be no assurance that such reorganizational transactions will be so effected.
The Merger resulted in the addition of 49 regional malls, 11 community centers and one mixed-use property. These properties included 47,052,267 square feet of retail space GLA and 558,636 of office GLA. Of these properties, 40 regional malls, 10 community centers and the mixed-use property are being accounted for using the consolidated method of accounting. The remaining properties are being accounted for using the equity method of accounting, with the exception of West Town Mall, which is accounted for using the cost method of accounting.
Prior to October 4, 1996, the Simon Operating Partnership held the right to receive 50% of the partnership results of North East Mall in Hurst, Texas. On October 4, 1996, in connection with the settlement of certain outstanding litigation, SDG, LP acquired for $12.1 million an additional 20% limited partnership interest in North East Mall. At the same time, the Simon Operating Partnership exercised its option to acquire the remaining 30% limited partnership interest in North East Mall owned by the Simons in exchange for 472,410 Units in the Simon Operating Partnership, as well as the Simons' 50% general partnership interest. The Simons had previously contributed the right to receive distributions relating to its 50% general partnership interest to the Simon Operating Partnership, in exchange for Units. As a result of these transactions, the Simon Operating Partnership owns 80% of North East Mall and accounts for it using the consolidated method of accounting. SDG, LP owns the remaining 20%.
See Note 3 to the consolidated financial statements for details of 1995 and 1994 acquisition activity.
Development Activity. Development activities are an ongoing part of the Simon Operating Partnership's business. The Simon Operating Partnership opened a regional mall, one specialty retail center and one value-oriented super- regional mall during 1996. The new regional mall is the 1.0 million square foot Cottonwood Mall in Albuquerque, New Mexico, which opened on July 31. The new specialty retail center is the 60,000 square foot Tower Shops in Las Vegas, Nevada, which opened in November. The value-oriented super-regional mall is the 1.3 million square foot Ontario Mills, which opened in Ontario, California, on November 14. Other than Cottonwood Mall, which is wholly-owned and accounted for using the consolidated method of accounting, the Simon Operating Partnership has joint venture partners on each of the projects recently opened and accounts for them using the equity method of accounting.
Construction also continues on the following projects:
* The Source, a 730,000 square foot value-oriented retail and entertainment development project in Westbury (Long Island), New York, is expected to open in August 1997. This new $150 million development will adjoin an existing Fortunoff store. The Simon Operating Partnership has a total equity investment of $25.3 million in this 50%-owned joint venture project. Construction financing of $120 million closed on this property in July 1996. The loan initially bears interest at LIBOR plus 170 basis points and matures on July 16, 1999.
* Arizona Mills, a 1,230,000 square foot retail development project in Tempe, Arizona, broke ground on August 1, 1996. This $184 million value-oriented super-regional mall is expected to open in November 1997. In January 1997, the joint venture closed on a five-year $145 million construction loan with interest at LIBOR plus 150 basis points. The Simon Operating Partnership had an $13.5 million equity investment through December 31, 1996 and a 25% ownership interest in this joint venture development.
* Grapevine Mills, a 1,480,000 square foot retail development project in Grapevine (Dallas/Fort Worth), Texas, broke ground on July 10, 1996. This $202 million value-oriented super-regional mall development project is expected to open in October 1997. A commitment has been obtained for a four-year $157 million construction loan (plus a one-year extension) with an initial interest rate of LIBOR plus 165 basis points. The Simon Operating Partnership has a $14 million equity commitment on this 37.5%- owned joint venture project, and advanced its initial contribution of $7.9 million in January 1997.
* The Shops at Sunset Place, a destination-oriented retail and entertainment project containing approximately 500,000 square feet of GLA is scheduled to open in 1998 in South Miami, Florida. The Simon Operating Partnership owns 75% of this $143 million project. The Simon Operating Partnership expects to have construction financing for the majority of the development costs of this project in place during the second quarter of 1997.
In addition, the Simon Operating Partnership is in the preconstruction development phase on two new community center projects, each of which is immediately adjacent to an existing regional mall in the Company's portfolio. Lakeline Plaza, an approximately $39 million development, is scheduled to open in Austin, Texas, in 1998. The Simon Operating Partnership has a 50% ownership interest in this 391,000 square foot joint venture development project. Muncie Plaza, a $15 million development project, is scheduled to open in Muncie, Indiana, in 1998. This 200,000 square foot development project is wholly- owned.
Strategic Expansions and Renovations. A key objective of the Simon Operating Partnership is to increase the profitability and market share of its portfolio properties through the completion of strategic renovations and expansions. In 1996, the Simon Operating Partnership completed construction and opened three expansion and/or renovation projects; Greenwood Plus in Greenwood, Indiana; Muncie Mall in Muncie, Indiana; and College Mall in Bloomington, Indiana.
The Simon Operating Partnership currently has one major expansion project under construction, and is in the preconstruction development stage with an additional major expansion project. The aggregate cost of the projects is approximately $240 million.
*A 235,000 square foot phase II expansion of Forum in Las Vegas, in which the Simon Operating Partnership has a 55% ownership interest, is scheduled to open in August 1997. The costs of the phase II project are being funded with a portion of the $184 million two-tranche financing facility which closed on February 23, 1996. The loan bears interest on a weighted average basis at LIBOR plus 137 basis points and matures in February 2000.
*A 200,000 square foot small shop expansion of North East Mall, in Hurst, Texas, which includes a renovation, is scheduled for completion in 1999. This project includes the addition of Nordstrom and a second level of small shops.
The Simon Operating Partnership has a number of smaller renovation and/or expansion projects currently under construction including the following, aggregating approximately $30 million:
Expected Date of Completion Property Name Property Location -------------- ------------------------ ------------------------------ March 1997 Smith Haven Mall Lake Grove (Long Island), NY April 1997 St. Charles Towne Center Waldorf (Washington, D.C.), MD August 1997 Orange Park Mall Jacksonville, FL October 1997 Alton Square Alton, IL November 1997 East Towne Mall Knoxville, TN
In addition, preconstruction development continues on a number of project expansions, renovations and anchor additions at additional properties. The Simon Operating Partnership expects to commence construction on many of these projects in the next 12 to 24 months.
It is anticipated that these projects will be financed principally with access to debt and equity markets, existing corporate credit facilities and cash flow from operations.
Capital Expenditures. Capital expenditures were $211.3 million, $135.4 million and $252.5 million for the periods ended December 31, 1996, 1995 and 1994, respectively. 1996 1995 1994 ------- ------- ------- New Developments $ 63.7 $ 29.7 $ 2.9 Renovations and Expansions 66.2 38.9 22.7 Tenant Allowances--Retail 21.5 17.2 10.1 Tenant Allowances--Offices 6.1 4.3 2.5 Capital Expenditures Recoverable from Tenants 6.7 8.0 3.2 Acquisitions 43.9 32.5 205.2 Other 3.2 4.8 5.9 ------- ------- ------- Total $ 211.3 $ 135.4 $ 252.5 ======= ======= =======
Distributions. The Simon Operating Partnership declared distributions in 1996 aggregating $1.63 per Unit and $1.97 per Unit in 1995. This included a distribution of $0.1515 per Unit on August 9, 1996, in connection with the Merger, designated to align the time periods of distribution payments of the merged companies. On January 23, 1997, the Simon Operating Partnership declared a distribution of $0.4925 per Unit. The current annual distribution rate is $1.97 per Unit. For federal income tax purposes, 64% of the 1996 distributions and 25% of the 1995 distributions represented a return of capital. Future distributions will be determined based on actual results of operations and cash available for distribution.
Capital Resources. 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 Unitholders. 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 by the Company.
Management continues to actively review and evaluate a number of individual property and portfolio acquisition opportunities. Management believes that funds on hand, amounts available under the Credit Facility, together with the ability to issue Units and the Company's ability to issue shares of common stock, provide the means to finance certain acquisitions. No assurance can be given that the Simon Operating Partnership 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. It is expected that any future acquisition will be executed by SDG, LP.
Investing and Financing Activities. Cash used in investing activities for the year ended December 31, 1996, was $176.3 million, including approximately $44 million for the acquisition of the remaining economic ownership interest in Ross Park Mall, capital expenditures and development related costs of $151.8 million including $40.4 million, $34.9 million, $11.1 million and $6.9 million at Cottonwood Mall, Forum, Muncie Mall, and The Shops at Sunset Place, respectively. In addition, investments in unconsolidated joint ventures totaling approximately $57.3 million includes $21.4 million, $15.0 million, $13.5 million and $3.2 million in equity contributions made to The Source, Ontario Mills, Arizona Mills and The Tower Shops, respectively, to fund development activity. These expenditures are partially offset by cash received from unconsolidated entities of $35.8 million, which includes a $28.3 million return of equity from Smith Haven Mall, and $38.6 million of note repayments received from M.S. Management Associates.
Cash used in financing activities for the year ended December 31, 1996 was $41.3 million as compared to $14.1 million in 1995. This increase is primarily the result of an increase in partnership distributions ($35.4 million), and net proceeds from sales of common and preferred stock in 1995 ($242.4 million), partially offset by advances from SDG, LP ($259.4 million). The increase in distributions is primarily the result of special distributions paid in connection with the Merger ($14.5 million), the addition of the Preferred Units ($9.6 million), and additional Units issued in the comparative periods. The annual distribution rate has remained at $1.97 per Unit in both periods.
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 the Simon Operating Partnership 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 the Simon Operating Partnership 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 the Simon Operating Partnership's exposure to increases in costs and operating expenses resulting from inflation.
However, inflation may have a negative impact on some of the Simon Operating Partnership'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.
OTHER
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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements contained in Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company is the sole general partner of the Simon Operating Partnership. The information required by this item is incorporated herein by reference to the Company's definitive Proxy Statement for its annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A and is included under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I hereof.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Company's definitive Proxy Statement for its annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the Company's definitive Proxy Statement for its annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the Company's definitive Proxy Statement for its annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Report of Independent Public Accountants
Simon Property Group, L.P. Consolidated Balance Sheets as of December 31, 1996 and 1995
Simon Property Group, L.P. Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
Simon Property Group, L.P. Consolidated Statements of Changes in Partners' Equity (Deficit) for the years ended December 31, 1996, 1995 and 1994
Simon Property Group, L.P. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
Notes to Financial Statements
(2) Financial Statement Schedule
Report of Independent Public Accountants
Schedule III _ Schedule of Real Estate and Accumulated Depreciation
Notes to Schedule III
(3) Exhibits
The Exhibit Index attached hereto is hereby incorporated by reference to this Item.
(b) Reports on Form 8-K
None.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Simon DeBartolo Group, Inc.:
We have audited the accompanying consolidated balance sheets of SIMON PROPERTY GROUP, L.P. (a Delaware limited partnership) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, partners' equity (deficit) and cash flows for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simon Property Group, L.P. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Indianapolis, Indiana February 18, 1997
BALANCE SHEETS Simon Property Group, L.P. Consolidated
(Dollars in thousands, except per unit amounts)
December 31, ---------------------- 1996 1995 ASSETS: ---------- ---------- Investment properties, at cost $2,467,779 $2,162,161 Less - accumulated depreciation 238,167 152,817 ---------- ---------- 2,229,612 2,009,344 Cash and cash equivalents 50,009 62,721 Tenant receivables and accrued revenue, net 136,496 144,400 Notes receivable from Management Company 63,978 102,522 Investment in partnerships and joint 139,711 117,332 ventures, at equity Deferred costs, net 84,295 81,398 Other assets 45,370 30,985 Minority interest 9,712 7,734 ---------- ---------- Total assets $2,759,183 $2,556,436 ---------- ----------
LIABILITIES: Mortgages and other notes payable $2,042,254 $1,980,759 Advances from Simon DeBartolo Group, L.P. 259,382 -- Accounts payable and accrued expenses 113,027 113,131 Accrued distributions -- 48,594 Cash distributions and losses in partnerships 17,106 54,120 and joint ventures, at equity Investment in Management Company and 18,519 20,612 affiliates Minority interest 12,128 -- Other liabilities 42,139 19,582 ---------- ---------- Total liabilities 2,504,555 2,236,798 ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 13)
LIMITED PARTNERS' EQUITY INTEREST, 0 and 37,282,628 units outstanding, respectively, at redemption value (Note 10) -- 908,764
PARTNERS' EQUITY (DEFICIT) (Notes 3 and 10):
Preferred units, 4,000,000 units authorized, issued and outstanding 99,923 99,923
General Partner, 958,429 and 58,360,195 units outstanding, respectively 1,601 135,710
Special Limited Partner, 95,356,834 and 0 units outstanding, respectively 158,458 --
Adjustment to reflect Limited Partners' equity interest at redemption value -- (822,072)
Unamortized restricted stock award (5,354) (2,687) ---------- ---------- Total partners' equity (deficit) 254,628 (589,126) ---------- ---------- Total liabilities and partners' equity (deficit) $2,759,183 $2,556,436 ========== ==========
The accompanying notes are an integral part of these statements.
STATEMENTS OF OPERATIONS Simon Property Group, L.P. Consolidated
(Dollars in thousands, except per unit amounts)
For the Year Ended December 31, ------------------------------- 1996 1995 1994 --------- --------- --------- REVENUE: Minimum rent $ 339,120 $ 307,857 $ 255,716 Overage rent 23,300 23,278 25,463 Tenant reimbursements 194,507 192,994 163,588 Other income 34,977 29,528 28,909 --------- --------- --------- Total revenue 591,904 553,657 473,676 --------- --------- --------- EXPENSES: Property operating 104,643 96,851 85,672 Depreciation and amortization 108,435 92,739 75,945 Real estate taxes 55,597 53,941 44,502 Repairs and maintenance 25,361 24,614 22,940 Advertising and promotion 21,119 18,888 17,000 Provision for credit losses 2,991 2,858 3,417 Other 12,937 12,630 9,902
Total operating expenses 331,083 302,521 259,378
OPERATING INCOME 260,821 251,136 214,298 --------- --------- --------- INTEREST EXPENSE 162,485 150,224 122,980 NON-RECURRING INTEREST EXPENSE -- -- 27,184 --------- --------- --------- INCOME BEFORE MINORITY INTEREST 98,336 100,912 64,134
MINORITY INTEREST (2,748) (2,681) (3,759)
GAIN ON SALE OF ASSETS, NET 88 1,871 -- --------- --------- --------- INCOME BEFORE UNCONSOLIDATED ENTITIES 95,676 100,102 60,375
INCOME (LOSS) FROM UNCONSOLIDATED ENTITIES 5,223 1,403 (67) --------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEMS 100,899 101,505 60,308
EXTRAORDINARY ITEMS (3,723) (3,285) (17,980) --------- --------- --------- NET INCOME 97,176 98,220 42,328
PREFERRED UNIT REQUIREMENT 8,125 1,490 -- --------- --------- --------- NET INCOME AVAILABLE TO UNITHOLDERS $ 89,051 $ 96,730 $ 42,328 ========= ========= ========= NET INCOME AVAILABLE TO UNITHOLDERS ATTRIBUTABLE TO: General Partner $ 31,125 $ 57,781 $ 23,377 Limited Partners 57,926 38,949 18,951 --------- --------- --------- $ 89,051 $ 96,730 $ 42,328 EARNINGS PER UNIT: ========= ========= ========= Income before extraordinary items $ 0.97 $ 1.08 $ 0.71 Extraordinary items (0.04) (0.04) (0.21) --------- --------- --------- Net income $ 0.93 $ 1.04 $ 0.50 ========= ========= =========
The accompanying notes are an integral part of these statements.
STATEMENTS OF CASH FLOWS Simon DeBartolo Group, Inc. Consolidated
(Dollars in thousands)
For the Year Ended December 31, --------------------------------- 1996 1995 1994 ---------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 85,255 $ 59,271 $ 23,377 Adjustments to reconcile net income to net cash provided by operating activities_ Depreciation and amortization 143,582 101,262 83,196 Loss on extinguishments of debt 3,521 3,285 17,980 Gain on sale of assets, net (88) (1,871) -- Limited partners' interest in Operating Partnership 45,887 38,949 18,951 Straight-line rent (3,502) (1,126) (4,326) Minority interest 4,300 2,681 3,759 Equity in income of unconsolidated entities (9,545) (1,403) 67 Changes in assets and liabilities_ Tenant receivables and accrued revenue (6,422) 5,502 (3,908) Deferred costs and other assets (12,756) (14,290) 1,099 Accounts payable, accrued expenses and other liabilities (13,768) 2,076 (12,172) ---------- --------- --------- Net cash provided by operating activities 236,464 194,336 128,023 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (56,069) (32,547) (227,312) Capital expenditures (195,833) (98,220) (42,765) Cash from Merger and consolidation of joint ventures, net of Merger costs 37,053 4,346 8,924 Decrease in restricted cash 1,474 -- -- Proceeds from sale of assets 399 2,550 -- Investments in unconsolidated entities (62,096) (77,905) (1,056) Distributions from unconsolidated entities 36,786 6,214 5,842 Investments in and advances to/(from) Management Company 38,544 (27,117) (10,405) ---------- --------- --------- Net cash used in investing activities (199,742) (222,679) (266,772) ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common and preferred stock, net 201,704 242,377 106,773 Minority interest distributions (5,115) (3,680) (2,148) Distributions to shareholders (166,640) (104,785) (67,279) Distributions to limited partners (90,763) (72,941) (53,432) Mortgage and other note proceeds, net of transaction costs 1,293,582 456,520 405,430 Mortgage and other note principal payments (1,267,902) (531,566) (256,081) ---------- --------- --------- Net cash provided by (used in) financing activities (35,134) (14,075) 133,263
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,588 (42,418) (5,486)
CASH AND CASH EQUIVALENTS, beginning of period 62,721 105,139 110,625
---------- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 64,309 $ 62,721 $ 105,139 ========== ========= =========
The accompanying notes are an integral part of these statements.
SIMON PROPERTY GROUP, L.P. NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1. ORGANIZATION
Simon DeBartolo Group, Inc. (the "Company"), formerly known as Simon Property Group, Inc., is a self-administered and self-managed real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. On August 9, 1996, the Company acquired the national shopping center business of DeBartolo Realty Corporation ("DRC"), The Edward J. DeBartolo Corporation and their affiliates as the result of the Merger described in Note 3.
As of December 31, 1996, Simon Property Group, L.P. ("SPG, LP" or the "Simon Operating Partnership") was a subsidiary partnership of Simon DeBartolo Group, L.P. ("SDG, LP"). The Simon Operating Partnership, 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 December 31, 1996, the Simon Operating Partnership owns or holds an interest in 124 income-producing properties, which consist of 63 regional malls, 54 community shopping centers, three specialty retail centers, three mixed-use properties and one value-oriented super-regional mall in 30 states (the "Properties"). The Simon Operating Partnership also owns interests in two specialty retail centers and two value-oriented super-regional malls five parcels of land held for future development. The Simon Operating Partnership also holds substantially all of the economic interest in M.S. Management Associates, Inc. (the "Management Company"). See Note 7 for a description of the activities of the Management Company.
The Simon Operating Partnership is subject to risks incidental to the ownership and operation of commercial real estate. These include, among others, the risks normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness of tenants, competition for tenants, changes in tax laws, interest rate levels, the availability of financing, and potential liability under environmental and other laws. Like most retail properties, the Simon Operating Partnership's regional malls and community shopping centers rely heavily upon anchor tenants. As of December 31, 1996, 131 of the approximately 438 anchor stores in the Properties were occupied by JCPenney Company, Inc., Sears Roebuck & Co. and Dillard Department Stores, Inc. An affiliate of JCPenney Company, Inc. is a limited partner in the Simon Operating Partnership. In addition, the Chief Operating Officer of Dillard Department Stores, Inc. is a director of the Company.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Simon Operating Partnership include the accounts of all entities owned or controlled by the Simon Operating Partnership. All significant intercompany amounts have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reported periods. Actual results could differ from these estimates.
Properties which are wholly-owned ("Wholly-Owned Properties") or owned less than 100% and are controlled by the Simon Operating Partnership ("Minority Interest Properties") have been consolidated. 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 14.7% to 50.0% ownership interests ("Joint Venture Properties") and the investment in the Management Company (see Note 7) 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.
Effective April 1, 1994, the Simon Operating Partnership demonstrated its ability to control the operating activities of The Forum Shops at Caesars ("Forum"). Subsequent to April 1, 1994, Forum is included in the accompanying financial statements using the consolidated method of accounting. Prior to the demonstration of control, Forum was reflected in the accompanying financial statements using the equity method of accounting.
Effective July 1, 1995, the Simon Operating Partnership relinquished its ability to solely direct certain activities related to the control of North East Mall. As a result, the Property was no longer consolidated.
Net operating results of the Simon Operating Partnership are allocated after preferred distributions (see Note 10), based on its partners' ownership interests. The Company's direct and indirect weighted average ownership interest in the Simon Operating Partnership during 1996, 1995 and 1994 was 61.0%, 60.3% and 55.6%, respectively. At December 31, 1996 and 1995, the Company's ownership interest was 60.8% and 61.0%, respectively.
The following schedule identifies each Property included in the accompanying consolidated financial statements and the method of accounting utilized for each Property as of December 31, 1996:
CONSOLIDATED METHOD:
Regional Malls - ------------------ Alton Square North Towne Square Northwoods Mall Amigoland Mall Heritage Park Mall Orange Park Mall Anderson Mall Hutchinson Mall Prien Lake Mall Barton Creek Square Independence Center Ross Park Mall Battlefield Mall Ingram Park Mall St. Charles Towne Broadway Square Irving Mall Center Century Mall Jefferson Valley Mall South Park Mall Charles Towne Square La Plaza Mall Southgate Mall Cielo Vista Mall Lincolnwood Town Southtown Mall College Mall Center Sunland Park Mall Cottonwood Mall Longview Mall Tippecanoe Mall Crossroads Mall Machesney Park Mall Towne East Square East Towne Mall Markland Mall Towne West Square Eastgate Consumer Mall McCain Mall University Mall Eastland Mall Memorial Mall (Arkansas) Forest Mall Midland Park Mall University Mall Forest Village Park Miller Hill Mall (Florida) Mall Mounds Mall Valle Vista Mall Fremont Mall Muncie Mall West Ridge Mall Golden Ring Mall North East Mall White Oaks Mall Greenwood Park Mall Wichita Mall Windsor Park Mall
Specialty Retail Mixed-Use Centers Properties - ------------------ -------------- The Forum Shops at O'Hare Caesars International Center Trolley Square Riverway
Community Centers - ------------------ Arvada Plaza Greenwood Plus New Castle Plaza Aurora Plaza Griffith Park Plaza North Ridge Plaza Bloomingdale Court Hammond Square North Riverside Park Bridgeview Court Ingram Plaza Plaza Brightwood Plaza Lake Plaza Northland Plaza Bristol Plaza Lake View Plaza Northwood Plaza Buffalo Grove Towne Lincoln Crossing Park Plaza Center Maplewood Square Regency Plaza Celina Plaza Markland Plaza St. Charles Towne Cohoes Commons Martinsville Plaza Plaza Countryside Plaza Marwood Plaza Teal Plaza East Towne Commons Matteson Plaza Tippecanoe Plaza Eastland Plaza Memorial Plaza Wabash Village Forest Plaza Mounds Mall Cinema West Ridge Plaza Fox River Plaza White Oaks Plaza Wood Plaza
EQUITY METHOD:
Regional Malls Community Centers Value-Oriented Super-Regional Mall - ------------------ ------------------ ------------------ Circle Centre Cobblestone Court Ontario Mills Lakeline Mall Crystal Court Rolling Oaks Mall Fairfax Court Mixed-Use Property Seminole Towne Center Gaitway Plaza ------------------ Smith Haven Mall Plaza at Buckland The Fashion Centre at Hills, The Pentagon City Ridgewood Court Royal Eagle Plaza Specialty Retail Village Park Plaza Center West Town Corners ------------------ Westland Park Plaza The Tower Shops Willow Knolls Court Yards Plaza, The
The deficit minority interest balance in the accompanying Consolidated Balance Sheets represents outside partners' interests in the net equity of certain Properties. Deficit minority interests were recorded when a partnership agreement provided for the settlement of deficit capital accounts before distributing the proceeds from the sale of partnership assets and/or from the intent (legal or otherwise) and ability of the partner to fund additional capital contributions.
3. MERGERS AND REAL ESTATE ACQUISITIONS AND DEVELOPMENTS
Mergers
DRC. On August 9, 1996, the Company acquired the national shopping center business of DRC (the "Merger") for an aggregate value of $3.0 billion. The acquired portfolio consisted of 49 regional malls, 11 community centers and one mixed-use Property. These Properties included 47,052,267 square feet of retail space gross leasable area ("GLA") and 558,636 of office GLA. Pursuant to the Merger, the Company acquired all the outstanding common stock of DRC (55,712,529 shares), at an exchange ratio of 0.68 share of the Company's common stock for each share of DRC common stock (the "Exchange Ratio"). A total of 37,873,965 shares of the Company's common stock was issued by the Company, to the DRC shareholders. DRC and the acquisition subsidiary merged. DRC became a 99.9% subsidiary of the Company and changed its name to SD Property Group, Inc. This portion of the transaction was valued at approximately $923,179, based upon the number of DRC shares of common stock acquired (55,712,529 shares), the Exchange Ratio and the last reported sales price of the Company's common stock on August 9, 1996 ($24.375). In connection therewith, the Company changed its name to Simon DeBartolo Group, Inc.
In connection with the Merger, the general and limited partners of SPG, LP contributed 49.5% (47,442,212 units of partnership interest) of the total outstanding units of partnership interest ("Units") in SPG, LP to the operating partnership of DRC, DeBartolo Realty Partnership, L.P. ("DRP, LP") in exchange for 47,442,212 Units of partnership interest in DRP, LP, whose name was changed to Simon DeBartolo Group, L.P. ("SDG, LP"). The Company retained a 50.5% partnership interest (48,400,641 Units) in SPG, LP but assigned its rights to receive distributions of profits on 49.5% (47,442,212 Units) of the outstanding Units of partnership interest in SPG, LP to SDG, LP. The limited partners of DRP, LP approved the contribution made by the partners of SPG, LP and simultaneously exchanged their 38.0% (34,203,623 Units) partnership interest in DRP, LP, adjusted for the Exchange Ratio, for a smaller partnership interest in SDG, LP. The exchange of the limited partners' 38.0% partnership interest in DRP, LP for Units of SDG, LP has been accounted for as an acquisition of minority interest by the Company and is valued based on the estimated fair value of the consideration issued (approximately $566,900). The Units of SDG, LP may under certain circumstances be exchangeable for common stock of the Company on a one-for-one basis. Therefore, the value of the acquisition of the DRP, LP limited partners' interest acquired was based upon the number of DRP, LP Units exchanged (34,203,623), the Exchange Ratio and the last reported sales price per share of the Company's common stock on August 9, 1996 ($24.375). The limited partners of SPG, LP received a 23.7% partnership interest in SDG, LP (37,282,628 Units) for the contribution of their 38.9% partnership interest in SPG, LP (37,282,628 Units) to SDG, LP. The interests transferred by the partners of SPG, LP to DRP, LP have been appropriately reflected at historical costs.
Upon completion of the Merger, the Company became a general partner of SDG, LP with 36.9% (57,605,796 Units) of the outstanding partnership Units in SDG, LP and became through SD Property Group, Inc. the managing general partner of SDG, LP with 24.3% (37,873,965 Units in SPG, LP) of the outstanding partnership Units in SDG, LP. The Company remained the sole general partner of SPG, LP with 1% of the outstanding partnership Units (958,429 Units) and 49.5% interest in the capital of SPG, LP, and SDG, LP became the special limited partner in SPG, LP with 49.5% (47,442,212 Units) of the outstanding partnership Units in SPG, LP and an additional 49.5% interest in the profits of SPG, LP. SPG, LP did not acquire any interest in SDG, LP. Upon completion of the Merger, the Company directly and indirectly owned a controlling 61.2% (95,479,761 Units) partnership interest in SDG, LP.
For financial reporting purposes, the completion of the Merger resulted in a reverse acquisition by the Company, using the purchase method of accounting, directly or indirectly, of 100% of the net assets of DRP, LP for consideration valued at $1.5 billion, including related transaction costs. The purchase price has been allocated to the fair value of the assets and liabilities of DRP, LP at December 31, 1996. Certain assumptions were made which management of the General Partners believes are reasonable. Final adjustments to the purchase price allocation were not completed at December 31, 1996. While no material changes to the allocation are anticipated, changes will be recorded in 1997.
Although the Company was the accounting acquirer, SDG, LP (formerly DRP, LP) became the primary operating partnership through which the future business of the Company will be conducted. As a result of the Merger, the Company's initial operating partnership, SPG, LP, became a subsidiary of SDG, LP with 99% of the profits allocable to SDG, LP and 1% of the profits allocable to the Company. Cash flow allocable to the Company's 1% profit interest in SDG, LP is absorbed by public company costs and related expenses incurred by the Company. However, because the Company was the accounting acquirer and, upon completion of the Merger, acquired majority control of SDG, LP; SPG, LP is the predecessor to SDG, LP for financial reporting purposes. Accordingly, the financial statements of SDG, LP for the post-Merger periods reflect the reverse acquisition of DRP, LP by the Company using the purchase method of accounting and for all pre-Merger comparative periods, and the financial statements of SDG, LP reflect the financial statements of SPG, LP as the predecessor to SDG, LP for financial reporting purposes.
It is currently expected that subsequent to the first anniversary of the date of the Merger, reorganizational transactions will be effected so that SDG, LP will directly own all of the assets and partnership interests now owned by SPG, LP. However, there can be no assurance that such reorganizational transactions will be so effected.
MSA Realty Corporation ("MSAR"). On September 1, 1994, the Company issued an additional 1,799,945 shares of common stock in conjunction with the merger of MSAR. Each outstanding share of MSAR common stock as of August 31, 1994, was converted into 0.31 shares of the Company's common stock. The acquisition price, including related transaction costs, was $48,031. The Company's investment in MSAR was contributed to the Simon Operating Partnership for 1,799,945 Units, which increased the Company's ownership of the Simon Operating Partnership by 1.0% to 56.4%. As a result of the acquisition, the Simon Operating Partnership now owns 100% of fourteen centers in which it previously held a 50% interest and substantially all of the ownership interest in one community shopping center in which it held a minority interest. In addition, the Simon Operating Partnership obtained a noncontrolling 50% interest in a regional mall. This transaction was accounted for using the purchase method of accounting. The purchase price in excess of the net assets acquired of $26,507 was allocated to investment properties. The Simon Operating Partnership's interest in the assets and liabilities of these centers prior to this transaction is reflected at predecessor cost. Subsequent to September 1, 1994, each of the Properties involved in this merger was accounted for using the consolidated method of accounting.
Acquisitions and Developments
Independence Center. On December 1, 1994, the Simon Operating Partnership acquired Independence Center in Independence, Missouri. Included in the purchase are approximately 47 acres of undeveloped land adjacent to the mall. Under the terms of the sale, the Simon Operating Partnership paid $51,413, including transaction costs, funded through the use of the Simon Operating Partnership's credit facilities.
Broadway Square, Orange Park Mall and University Mall. On December 29, 1994, the Simon Operating Partnership acquired Broadway Square in Tyler, Texas; Orange Park Mall in Jacksonville, Florida; and University Mall in Pensacola, Florida. Under the terms of the sale, the Simon Operating Partnership paid $153,874, including transaction costs, funded through the use of the Simon Operating Partnership's credit facilities. Included in the purchase price were approximately 14 acres and 10 acres of undeveloped land adjacent to Orange Park Mall and University Mall, respectively.
White Oaks Mall. At the time of the Company's initial public offering in December 1993, the Teacher's Retirement System of the State of Illinois ("TRS") held an option to put its 50% general and limited partnership interests in White Oaks Mall in Springfield, Illinois, to the Simon Operating Partnership. TRS exercised this option on January 23, 1995, and the purchase closed February 23, 1995. The Units which TRS received upon exercise of the options were exchanged for 2,022,247 shares of common stock of the Company. The Simon Operating Partnership now owns 77% of White Oaks Mall. The issuance of the additional shares increased the Company's ownership interest in the Simon Operating Partnership by 1.0% to 57.6%. The White Oaks Mall transaction, valued at $45,000, was accounted for using the purchase method of accounting. The purchase price in excess of the net assets acquired of $10,905 was allocated to investment properties. The Simon Operating Partnership's interest in the assets and liabilities of this Property prior to this transaction is reflected at predecessor cost. Effective February 23, 1995, White Oaks Mall was being accounted for in the accompanying consolidated financial statements using the consolidated method of accounting. It was previously accounted for using the equity method of accounting.
Crossroads Mall. Prior to July 31, 1995, the Simon Operating Partnership held a 50% joint venture interest in Crossroads Mall in Omaha, Nebraska. On July 31, 1995, the Simon Operating Partnership acquired the remaining 50% ownership in the Property from Melvin Simon, Herbert Simon, and certain of their affiliates (collectively, the "Simons") in exchange for 120,000 Units. The acquisition was reflected at predecessor cost. Concurrent with the acquisition, a debt restructuring was completed which included the issuance of 1,200,000 shares of common stock of the Company to the lender (New York State Teachers' Retirement System) in exchange for a $30,000 reduction of the outstanding loan balance which included accrued interest. In addition, the effective interest rate on the remaining balance of $41,400 was reduced from 10.5% to 7.75%. The loan matures on July 31, 2002. Effective July 31, 1995, Crossroads Mall was included in the accompanying consolidated financial statements using the consolidated method of accounting. It was previously accounted for using the equity method of accounting.
The Shops at Sunset Place. On August 15, 1995, the Simon Operating Partnership acquired for $11,406 a controlling 75% joint venture interest in a redevelopment project to be named "The Shops at Sunset Place" in South Miami, Florida, using borrowings from its unsecured revolving credit facility. The Simon Operating Partnership began construction on this 500,000 square foot development property in November 1996, and it is scheduled for completion in 1998. The Simon Operating Partnership expects to have construction financing for the majority of the development costs of this project in place before the end of the second quarter of 1997. This project is included in the accompanying consolidated financial statements using the consolidated method of accounting.
East Towne Mall. Prior to September 25, 1995, the Simon Operating Partnership held a 45.0% joint venture interest in East Towne Mall in Knoxville, Tennessee. On September 25, 1995, the Simon Operating Partnership acquired the remaining interest for $18,500 and the assumption of 55% of the $75,000 of existing mortgage debt. In connection with the transaction, the Simon Operating Partnership refinanced the $75,000 mortgage. These transactions were funded through a new loan of $55,000 and $38,500 in borrowings from the Simon Operating Partnership's unsecured revolving credit facility. The transaction was accounted for using the purchase method of accounting. The purchase price in excess of the net assets acquired of $21,982 was allocated to investment properties. Effective September 25, 1995, East Towne Mall was included in the accompanying consolidated financial statements using the consolidated method of accounting. It was previously accounted for using the equity method of accounting.
The Source. On December 22, 1995, a joint venture, in which the Simon Operating Partnership has a noncontrolling 50% joint venture interest acquired a development project located in Westbury (Long Island), New York, for $30,253. This transaction was initially financed using borrowings from the Simon Operating Partnership's unsecured revolving credit facility. When construction financing of $120,000 closed on this property in July 1996, the Simon Operating Partnership was repaid its $27,500 loan. The construction loan carries interest at LIBOR plus 170 basis points and matures on July 16, 2001. Construction commenced in February 1996 and this 730,000 square foot value- oriented retail center development is expected to open in August 1997. This joint venture is being accounted for using the equity method of accounting.
Smith Haven Mall. On December 28, 1995, a joint venture in which the Simon Operating Partnership owns a noncontrolling 25% interest, purchased Smith Haven Mall, a 1.3 million square foot regional mall located in Lake Grove (Long Island), New York, for $221,000. The Simon Operating Partnership's contribution of $55,725 to the purchase price of $221,000 was financed using borrowings from the Simon Operating Partnership's unsecured revolving credit facility. On June 17, 1996, the joint venture closed on a $115,000 interest- only mortgage maturing June 1, 2006. Subsequently, the Simon Operating Partnership received a reimbursement of $28,256 of its contribution. This joint venture is being accounted for using the equity method of accounting.
Ross Park Mall. Prior to April 11, 1996, the Simon Operating Partnership held a 50% joint venture interest in Ross Park Mall in Pittsburgh, Pennsylvania. On April 11, 1996, the Simon Operating Partnership acquired the remaining economic ownership interest. The purchase price included approximately $44,000 cash and the assumption of the joint venture partner's share of existing debt ($57,000). The purchase price in excess of the net assets acquired of $49,074 was allocated to investment properties. Effective April 11, 1996, the property is being accounted for using the consolidated method of accounting. It was previously accounted for using the equity method of accounting.
Cottonwood Mall. Cottonwood Mall opened on July 31, 1996, in Albuquerque, New Mexico. This 1.0 million square foot regional mall is wholly-owned by the Simon Operating Partnership. The development costs were financed through a $60,000 construction loan, which bore interest at the lower of the prime rate plus 25 basis points or LIBOR plus 200 basis points and had a scheduled maturity of February 1, 1999. On November 26, 1996, using proceeds from the sale of the Notes (See Note 8) the Simon Operating Partnership retired the entire $57,000 outstanding balance.
North East Mall. Prior to October 4, 1996, the Simon Operating Partnership held the right to receive 50% of the Partnership results of North East Mall in Hurst, Texas. On October 4, 1996, in connection with the settlement of certain outstanding litigation, the SDG, LP acquired for $12,100 an additional 20% limited partnership interest in North East Mall. At the same time, the Simon Operating Partnership exercised its option to acquire the remaining 30% limited partnership interest in North East Mall owned by the Simons in exchange for 472,410 Units in the Simon Operating Partnership, as well as the Simons' 50% general partnership interest. The Simons had previously contributed the right to receive distributions relating to its 50% general partnership interest to the Simon Operating Partnership, in exchange for Units. As a result of these transactions, the Simon Operating Partnership owns 80% of North East Mall and accounts for it using the consolidated method of accounting. SDG, LP owns the remaining 20%.
Mills Developments. On December 29, 1995, the Simon Operating Partnership entered into arrangements with The Mills Corporation to develop value-oriented super-regional malls in Ontario (Los Angeles), California; Grapevine (Dallas/Fort Worth), Texas; and Tempe (Phoenix), Arizona. Ontario Mills, a 25%- owned, 1.3 million square foot super-regional mall, opened on November 14, 1996, in Ontario, California. The Simon Operating Partnership financed its $15,000 equity commitment for this project in 1996. Grapevine Mills, a 37.5%- owned, 1.5 million square foot development project, broke ground on July 10, 1996, and is expected to open in October 1997. The Simon Operating Partnership has a $14,000 equity commitment on this $211,000 development project. Arizona Mills, a 25%-owned, 1.2 million square foot development project, broke ground on August 1, 1996, and is expected to open in November 1997. The Simon Operating Partnership has a $13,500 equity investment in this $183,000 development project. These projects are being accounted for using the equity method of accounting.
Joint Venture Property Openings. The Simon Operating Partnership opened two new Joint Venture Properties during 1996. Ontario Mills, described above, opened on November 14, 1996, and the Tower Shops in Las Vegas, Nevada opened in November 1996. The Simon Operating Partnership has a noncontrolling 50.0% ownership interest in this approximately 60,000 square foot specialty retail center. These properties are being accounted for using the equity method of accounting.
The Simon Operating Partnership also opened three new regional malls during 1995. Circle Centre opened on September 8, 1995, in Indianapolis, Indiana. The Simon Operating Partnership has a 14.7% ownership interest in this approximately 800,000 square foot regional mall. Seminole Towne Center opened on September 22, 1995, in Sanford, Florida. The Simon Operating Partnership has a 45.0% ownership interest in this approximately 1.1 million square foot regional mall. Lakeline Mall opened on October 18, 1995, in Austin, Texas. The Simon Operating Partnership has a noncontrolling 50.0% ownership interest in this approximately 1.1 million square foot regional mall. Each of these regional malls is being accounted for using the equity method of accounting.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment Properties
Investment properties are recorded at the lower of cost (predecessor cost for Properties acquired from the Simons) or net realizable value. Net realizable value of investment properties for financial reporting purposes is reviewed for impairment on a Property-by-Property basis whenever events or changes in circumstances indicate that the carrying amount of investment properties may not be recoverable. Impairment of investment properties is recognized when estimated undiscounted operating income is less than the carrying value of the Property. To the extent an impairment has occurred, the excess of carrying value of the Property over its estimated net realizable value will be charged to income. The Simon Operating Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 121 (Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of) on January 1, 1996. The adoption of this pronouncement had no impact on the accompanying consolidated financial statements. Investment properties include costs of acquisition, development, construction, tenant allowances and improvements, interest and real estate taxes incurred during construction, certain capitalized improvements and replacements, and certain allocated overhead.
Depreciation on buildings and improvements is provided utilizing the straight-line method over an estimated original useful life of 10 to 45 years, resulting in an average composite life of approximately 30 years. Depreciation on tenant allowances and improvements is provided utilizing the straight-line method over the term of the related lease.
Certain improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. All other repair and maintenance items are expensed as incurred.
Capitalized Interest
Interest is capitalized on projects during periods of construction. Interest capitalized by the Simon Operating Partnership during 1996, 1995 and 1994 was $5,156, $1,515 and $1,586, respectively.
Deferred Costs
Deferred costs consist primarily of financing fees incurred to obtain long- term financing, costs of interest rate protection agreements, and internal and external leasing commissions and related costs. Deferred financing costs, including interest rate protection agreements, are amortized on a straight-line basis over the terms of the respective loans or agreements. Deferred leasing costs are amortized on a straight-line basis over the terms of the related leases. Deferred costs consist of the following:
DECEMBER 31, --------------------
1996 1995 -------- -------- Deferred financing costs $ 59,968 $ 68,042
Leasing costs and other 94,103 88,094 -------- -------- 154,071 156,136 Lessaccumulated amortization 69,776 74,738 -------- -------- Deferred costs, net $ 84,295 $ 81,398 ======== ========
Included in interest expense in the accompanying Consolidated Statements of Operations is amortization of deferred financing costs of $8,418, $8,523 and $7,251 for 1996, 1995 and 1994, respectively.
Revenue Recognition
The Simon Operating Partnership, as a lessor, has retained substantially all of the risks and benefits of ownership of the investment Properties and accounts for its leases as operating leases. Minimum rents are accrued on a straight-line basis over the terms of their respective leases. Overage rents are recognized when earned.
Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenditures are incurred.
Allowance for Credit Losses
A provision for credit losses is recorded based on management's judgment of tenant creditworthiness. The activity in the allowance for credit losses during 1996, 1995 and 1994 was as follows:
Provision Balance at for Accounts Balance Beginning Credit Written at End of Year Ended of Year Losses Off Year ---------- --------- -------- --------- December 31, l996 $ 4,259 $ 2,991 $(1,027) $ 6,223 ======= ======= ======== ======= December 31, l995 $ 2,943 $ 2,858 $(1,542) $ 4,259 ======= ======= ======== ======= December 31, l994 $ - $ 3,417 $ (474) $ 2,943 ======= ======= ======== =======
Income Taxes
As a partnership, the allocated share of income or loss for each year is included in the income tax returns of the partners, accordingly, no accounting for income taxes is required in the accompanying consolidated financial statements. State and local taxes are not material.
Taxable income of the Simon Operating Partnership for the year ended December 31, 1996, is estimated to be $100,228 and was $100,915 and $44,683 for the years ended 1995 and 1994, respectively. Reconciling differences between book income and tax income primarily result from timing differences consisting of (i) depreciation expense, (ii) prepaid rental income and (iii) straight-line rent. Furthermore, the Simon Operating Partnership's share of income or loss from the affiliated Management Company is excluded from the tax return of the Simon Operating Partnership.
Per Unit Data
The net income per Unit is based on the weighted average number of Units outstanding during the period. The weighted average number of Units used in the computation for 1996, 1995 and 1994 was 95,913,460; 92,666,469; and 84,509,597, respectively. The stock options outstanding under the Stock Option Plan (see note 10) and the Units entitled to preferential distributions of cash ("Preferred Units") have not been considered in the computations of per Unit data, as they did not have a dilutive effect.
It is the Simon Operating Partnership's policy, to accrue distributions when they are declared. The Simon Operating Partnership declared distributions in 1996 aggregating $1.63 per Unit. The 1996 distributions include a $0.1515 distribution on August 9, 1996, in connection with the Merger, designated to align the time periods of distribution payments of the merged entities. The current annual distribution rate is $1.97 per Unit. The following is a summary of distributions per Unit declared in 1996 and 1995, which represented a return of capital measured using generally accepted accounting principles:
FOR THE YEAR ENDED DECEMBER 31,
Distributions per Unit 1996 1995 ------- ------- From book net income $ 0.93 $ 1.04 Representing return of capital 0.70 0.93
Total distributions $ 1.63 $ 1.97
On a federal income tax basis, 64% of the 1996 distributions and 25% of the 1995 distributions represented return of capital.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, all highly liquid investments purchased with an original maturity of 90 days or less are considered as cash and cash equivalents. Cash equivalents are carried at cost, which approximates market value. Cash equivalents generally consist of commercial paper, bankers acceptances, Eurodollars, repurchase agreements and Dutch auction securities.
Cash paid for interest, net of any amounts capitalized, during 1996, 1995 and 1994 were $161,133, $142,345 and $140,106 respectively. The 1994 amount includes a $27,184 nonrecurring interest charge.
Noncash Transactions
The following is a summary of significant non-cash transactions.
As described in Note 2, effective April 1, 1994, the Simon Operating Partnership reflected Forum using the consolidated method of accounting.
As described in Note 3, on September 1, 1994, the Simon Operating Partnership issued 1,799,945 Units in conjunction with the merger of MSAR. On February 23, 1995, the Simon Operating Partnership issued 2,022,247 Units in connection with the acquisition of an additional joint venture interest in White Oaks Mall. On July 31, 1995, the Simon Operating Partnership issued 120,000 Units in exchange for the Simons' 50% interest in Crossroads Mall. The Company issued 1,200,000 shares of common stock in connection with the reduction of the outstanding loan and accrued interest at Crossroads Mall. Effective October 4, 1996, the Simon Operating Partnership reflected North East Mall using the consolidated method of accounting.
Accrued and unpaid distributions as of December 31, 1996 and 1995 were $0 and $47,104, respectively. Accrued and unpaid distributions at December 31, 1995, included $1,490 on the Preferred Units.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications have no impact on net operating results previously reported.
5. INVESTMENT PROPERTIES
Investment properties consist of the following:
DECEMBER 31,
1996 1995 ----------- ----------- Land $ 312,683 $ 283,722 Buildings and improvements 2,131,475 1,860,203 ----------- ----------- Total land, buildings and improvements 2,444,158 2,143,925
Furniture, fixtures and equipment 23,621 18,236 ----------- ----------- Investment properties at cost 2,467,779 2,162,161 Less-accumulated depreciation 238,167 152,817 ----------- ----------- Investment properties at cost, net $ 2,229,612 $ 2,009,344 =========== ===========
Building and improvements include $74,500 and $40,676 of construction in progress at December 31, 1996 and 1995, respectively.
6. INVESTMENT IN PARTNERSHIPS AND JOINT VENTURES
Summary financial information of partnerships and joint ventures accounted for using the equity method and a summary of the Simon Operating Partnership's investment in and share of income from such partnerships and joint ventures follows.
DECEMBER 31,
BALANCE SHEETS 1996 1995 ASSETS: ---------- ---------- Investment properties at cost, net $1,328,600 $1,156,066 Cash and cash equivalents 41,270 52,624 Tenant receivables 37,067 35,306 Other assets 54,981 32,626 ---------- ---------- Total assets $1,461,918 $1,276,622 ========== ========== LIABILITIES AND PARTNERS' EQUITY: Mortgages and other notes payable $ 569,433 $ 410,652 Accounts payable, accrued expenses and other liabilities 161,552 127,322 ---------- ---------- Total liabilities 730,985 537,974 Partners' equity 730,933 738,648 ---------- ---------- Total liabilities and partners' equity $1,461,918 $1,276,622 ========== ========== THE SIMON OPERATING PARTNERSHIP'S SHARE OF: Total assets $ 340,449 $ 290,802 ========== ========== Investment in partnerships and joint ventures, at $ 139,711 $117,332 equity Cash distribution and losses in partnerships and joint ventures, at equity (17,106) (54,120) ---------- ---------- Partners' equity $ 122,605 $ 63,212 ========== ==========
FOR THE YEAR ENDED DECEMBER 31,
STATEMENTS OF OPERATIONS 1996 1995 1994
REVENUE: --------- --------- --------- Minimum rent $ 110,221 $ 83,905 $ 92,380 Overage rent 3,890 2,754 3,655 Tenant reimbursements 53,909 39,500 45,440 Other income 10,206 13,980 10,131 --------- --------- --------- Total revenue 178,226 140,139 151,606
OPERATING EXPENSES: Operating expenses and other 68,421 46,466 55,949 Depreciation and amortization 41,839 26,409 26,409 --------- --------- --------- Total operating expenses 110,260 72,875 82,358 --------- --------- --------- OPERATING INCOME 67,966 67,264 69,248 INTEREST EXPENSE 30,823 28,685 38,124 EXTRAORDINARY ITEMS (1,314) (2,687) -- --------- --------- --------- NET INCOME 35,829 35,892 31,124 THIRD-PARTY INVESTORS' SHARE OF NET INCOME 31,717 30,752 30,090 --------- --------- --------- THE SIMON OPERATING PARTNERSHIP'S SHARE OF NET INCOME $ 4,112 $5,140 $1,034 ========= ========= =========
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 interests held by each general or limited partner or joint venturer, primarily due to partner preferences.
7. INVESTMENT IN MANAGEMENT COMPANY
The Simon Operating Partnership holds 80% of the outstanding common stock, 5% of the outstanding voting common stock, and all of the preferred stock of the Management Company. The remaining 20% of the outstanding common stock of the Management Company (representing 95% of the voting common stock) is owned directly by Melvin, Herbert and David Simon. The Management Company, including its consolidated subsidiaries, provides management, leasing, development, accounting, legal, marketing and management information systems services to 33 Minority Interest and Joint Venture Properties, Melvin Simon & Associates, Inc. ("MSA"), and certain other nonowned properties. Because the Simon Operating Partnership exercises significant influence over the financial and operating policies of the Management Company, it is reflected in the accompanying statements using the equity method of accounting.
In connection with the Merger, the Management Company purchased 95% of the voting stock (665 shares of common stock) of DeBartolo Property Management, Inc. ("DPMI"), a DRC management company, for $2,500 in cash. DPMI provides architectural, design, construction and other services primarily to the Properties. During 1996, DPMI formed a captive insurance company, which provided property damage and general liability insurance to certain DeBartolo Properties in 1996. SDG, LP paid a total of $2,383 to this wholly-owned subsidiary of the Management Company for insurance coverage during 1996. The Management Company accounts for both DPMI and the captive insurance company using the consolidated method of accounting.
During 1995, the Simon Operating Partnership advanced a net of $27,500 to the Management Company, which bears interest at 11%. The proceeds were used to acquire a $27,500 mortgage note due from The Source, in which the Simon Operating Partnership has a noncontrolling 50% interest. In July 1996, the joint venture which owns The Source closed on a $120,000 construction loan and retired the mortgage note. The Management Company in turn repaid the Simon Operating Partnership the $27,500 advanced in 1995. The Management Company also liquidated in 1995 its interest in a partnership investment which held a 9.8-acre parcel of land in Rosemont, Illinois. The sale of that parcel resulted in a loss of $958 to the Management Company. Further, an undeveloped two-acre parcel of land in Washington, D.C., for which the Management Company held a mortgage, was sold in December 1995. The Management Company forwarded $11,000 of the net proceeds from this sale to the Simon Operating Partnership in January 1996 to reduce its outstanding loan balance. The Management Company recorded a loss in 1995 in connection with this transaction of $3,949.
Management, development and leasing fees charged to the Simon Operating Partnership and SDG, LP relating to Minority Interest Properties were $6,916, $5,353 and $2,352 for the years ended December 31, 1996, 1995 and 1994, respectively. Architectural, contracting and engineering fees charged to the Simon Operating Partnership and SDG, LP for 1996 were $21,650. Fees for services provided by the Management Company to MSA were $4,000, $4,572 and $7,239 for the years ended December 31, 1996, 1995 and 1994, respectively, and are included in cost-sharing income and other in the Management Company's Statements of Operations.
At December 31, 1996 and 1995, total notes receivable and advances due from the Management Company and consolidated affiliates were $63,978 and $102,522, respectively. Unpaid interest income receivable from the Management Company at December 31, 1996 and 1995, was $0 and $84, respectively. All preferred dividends due from the Management Company were paid by December 31, 1996 and 1995. Interest and preferred dividend receivables, if any, are reflected in tenant receivables and accrued revenue in the accompanying Consolidated Balance Sheets.
Summarized consolidated financial information of the Management Company, accounted for using the equity method, and a summary of the Simon Operating Partnership's investment in and share of income (loss) from the Management Company follows.
DECEMBER 31,
BALANCE SHEETS 1996 1995 ASSETS: --------- --------- Current assets $ 69,708 $ 40,964 Undeveloped land and mortgage notes 16,177 45,769 Other assets 24,378 13,813 --------- --------- Total assets $ 110,263 $ 100,546 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT: Current liabilities $ 46,690 $ 18,435 Notes payable and advances due to Simon 63,978 102,522 Operating Partnership at 11%, due 2008 SDG, LP Advances and minority interest in DPMI 17,601 -- --------- --------- Total liabilities 128,269 120,957 Shareholders' deficit (18,006) (20,411) --------- --------- Total liabilities and shareholders' deficit $ 110,263 $ 100,546 ========= ========= THE SIMON OPERATING PARTNERSHIP'S SHARE OF: Total assets $ 96,316 $ 80,437 ========= ========= Shareholders' deficit $ (18,519) $(20,612) ========= =========
FOR THE YEAR ENDED DECEMBER 31,
STATEMENTS OF OPERATIONS 1996 1995 1994 REVENUE: --------- --------- --------- Management fees $ 20,529 $ 20,106 $ 18,587 Architectural, contracting and engineering fees 35,546 -- -- Development and leasing fees 10,611 15,451 9,683 Cost-sharing income and other 11,979 7,561 10,077 --------- --------- --------- Total revenue 78,665 43,118 38,347
EXPENSES: Operating expenses and costs of construction 60,508 31,163 27,944 Depreciation 2,852 2,275 1,406 Interest 6,232 7,694 8,623 --------- --------- --------- Total expenses 69,592 41,132 37,973 --------- --------- --------- OPERATING INCOME 9,073 1,986 374 LOSS ON DISPOSITION OF ASSETS -- (4,907) -- --------- --------- --------- NET INCOME (LOSS) 9,073 (2,921) 374 PREFERRED DIVIDENDS 1,400 1,400 1,400 --------- --------- --------- NET INCOME (LOSS) AVAILABLE FOR COMMON SHAREHOLDERS $ 7,673 $ (4,321) $ (1,026) ========= ========= ========= THE SIMON OPERATING PARTNERSHIP'S SHARE OF NET INCOME (LOSS) $ 2,093 $ (3,737) $ (1,101) INTERCOMPANY PROFIT ELIMINATION 982 -- -- --------- --------- --------- THE SIMON OPERATING PARTNERSHIP'S SHARE OF NET INCOME (LOSS) $ 1,111 $ (3,737) $ (1,101) ========= ========= =========
The Simon Operating Partnership manages all of its wholly owned properties. SDG, LP manages all Wholly-Owned Properties and substantially all of the Minority Interest and Joint Venture Properties that were owned by DRC prior to the Merger. Accordingly, they reimburse the Administrative Services Partnership ("ASP"), a subsidiary of the Management Company, for costs incurred, including management, leasing, development, accounting, legal, marketing, and management information systems. Substantially all employees (other than direct field personnel) are employed by ASP which is owned 1% by the Simon Operating Partnership and 99% by the Management Company. The Management Company's Statements of Operations report costs net of amounts reimbursed by the Simon Operating Partnership. Common costs are allocated based on payroll and related costs. In management's opinion, allocations under the cost-sharing arrangement are reasonable. The Simon Operating Partnership and SDG, LP's share of allocated common costs was $29,262, $21,874 and $15,619 for 1996, 1995 and 1994, respectively.
Amounts receivable from the Simon Operating Partnership and SDG, LP under the cost-sharing arrangement and management contracts were $3,288 and $1,175 at December 31, 1996 and 1995, respectively.
8. INDEBTEDNESS
Mortgages and other notes payable consist of the following:
DECEMBER 31,
1996 1995 ---------- ---------- FIXED-RATE DEBT
Mortgages and other notes payable, net $1,326,518 $1,232,360 ---------- ---------- Total fixed-rate debt 1,326,518 1,232,360
VARIABLE-RATE DEBT
Mortgages and other notes payable, net $ 485,736 $ 530,000 Credit facility 230,000 196,000 Construction loan -- 22,399 ---------- ---------- Total variable-rate debt 715,736 748,399 ---------- ---------- Total mortgages and other notes payable $2,042,254 $1,980,759 ========== ==========
Fixed-Rate Debt
Mortgage Loans & Other Notes. The fixed-rate mortgage loans and other notes bear interest ranging from 5.81% to 10.00% (weighted average of 7.75%), require monthly payments of principal and/or interest and have various due dates through 2026 (average maturity of 6.8 years). Certain of the Properties are pledged as collateral to secure the related mortgage note. The fixed and variable mortgage notes are nonrecourse but have partial guarantees by affiliates of approximately $398,906. Certain of the Properties are cross- defaulted and cross-collateralized as part of a group of properties. Under certain of the cross-default provisions, a default under any mortgage included in the cross-defaulted package may constitute a default under all such mortgages and may lead to acceleration of the indebtedness due on each property within the collateral package. Certain of the Properties are subject to a provision in which the lender participates in a percentage of gross revenues above a specified base or after deduction of debt service and various expenses. Contingent interest incurred under these arrangements was $1,645, $1,929 and $1,527 for the years ended December 31, 1996, 1995 and 1994, respectively. Certain of the Properties are subject to financial performance covenants relating to debt-to-market capitalization, minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") ratios and minimum equity values.
$500,000 Shelf Registration. SPG, LP has a $500,000 debt shelf registration which became effective December 1995. At December 31, 1996, no securities have been issued under this registration statement.
Variable-Rate Debt
Mortgages and Other Notes. The variable-rate mortgage loans and other notes bear interest ranging from 6.05% to 7.59% (weighted average of 6.66% at December 31, 1996) and are due at various dates through 2000 (average maturity of 2.2 years). Certain of the Properties are subject to the collateral, cross- default and cross-collateral agreements, participation agreements or other covenants relating to debt-to-market capitalization, minimum EBITDA ratios and minimum equity values.
Credit Facility. On September 27, 1996, the SPG, LP and SDG, LP obtained a $750,000 three-year unsecured facility (the "Credit Facility") which has a one-year extension available at the option of SPG, LP and SDG, LP. The Credit Facility bears interest at LIBOR plus 90 basis points and is guaranteed by SPG, LP and SDG, LP. The maximum and average amounts outstanding during 1996 under the Credit Facility were $438,000 and $292,350, respectively. The Credit Facility is primarily used for funding acquisition, renovation and expansion and predevelopment opportunities. At December 31, 1996, the Credit Facility had an interest rate of 6.43%, with $510,000 available after outstanding borrowings and letters of credit. The Credit Facility contains financial covenants relating to a market capitalization value, minimum EBITDA and unencumbered EBITDA ratios and minimum equity values.
Debt Maturity and Other
As of December 31, 1996, scheduled principal repayments on indebtedness were as follows:
1997 $ 40,777 1998 357,873 1999 457,261 2000 383,457 2001 14,585 Thereafter 788,301 ---------- Total mortgages and other notes payable $2,042,254 ==========
Certain mortgages and notes payable may be prepaid but are generally subject to a prepayment of a yield-maintenance premium.
The unconsolidated partnerships and joint ventures have $569,433 and $410,652 of mortgages and other notes payable at December 31, 1996 and 1995, respectively. The Simon Operating Partnership's share of this debt was $193,310 and $167,644 at December 31, 1996 and 1995, respectively. This debt becomes due in installments over various terms extending into 2006, with interest rates ranging from 6.03% to 8.20% (weighted average rate of 7.14% at December 31, 1996). The debt matures $0 in 1997, $0 in 1998, $221,900 in 1999, $119 in 2000, $64,252 in 2001 and $283,162 thereafter.
Net extraordinary losses of $3,723, $3,285 and $17,980 for the years ended December 31, 1996, 1995 and 1994, respectively, were incurred, resulting from the early extinguishment or refinancing of debt.
6 7/8% Unsecured Notes. Nonconvertible investment-grade unsecured debt securities (the "Notes") were issued by SDG, LP on November 21, 1996. The Notes pay interest semiannually, mature in 2006, and contain leverage ratios and minimum EBITDA and unencumbered EBITDA ratios. The Notes were issued under SDG, LP's $750,000 shelf registration which became effective in November 1996, of which $500,000 remains available. Notes issued under this shelf registration are guaranteed by Simon Operating Partnership.
6 3/4% Putable Asset Trust Securities (PATS). The $100,000 of PATS, issued by SDG, LP in December 1996, pay interest semiannually and mature in 2003. These securities contain leverage ratios and minimum EBITDA and unencumbered EBITDA ratios and are guaranteed by Simon Operating Partnership.
On January 31, 1997, the Simon Operating Partnership completed a refinancing transaction involving debt on four Properties. The transaction consisted of the payoff of one loan totaling $43,375, the buyout of the contingent interest feature on all four loans for $21,000 and a restatement of the interest amount on the three remaining loans. This transaction was funded using the Credit Facility.
Interest rate Protection Agreements
The Simon Operating Partnership has entered into certain interest rate protection agreements, in the form of "cap" or "swap" arrangements, with respect to the majority of its variable-rate mortgages and other notes payable. Cap arrangements, which effectively limit the amount by which variable interest rates may rise, have been entered into for $394,079 principal amount of debt and cap LIBOR at rates ranging from 5.0% to 8.7% through the related debt's maturity. Costs of the caps ($7,792) are amortized over the life of the agreements. The unamortized balance of the cap arrangements was $3,343 as of December 31, 1996. The Simon Operating Partnership's hedging activity as a result of interest swaps and caps resulted in interest savings of $1,553 and $3,528 for the years ended December 31, 1996 and 1995, respectively. This did not materially impact the Simon Operating Partnership's weighted average borrowing rate.
Fair Value of Financial Instruments
SFAS No. 107 requires disclosure about fair value for all financial instruments. The carrying value of variable-rate mortgages and other loans and interest rate protection agreements represents their fair values. The fair value of fixed-rate mortgages and other notes payable was approximately $1,752,000 and $1,375,000 at December 31, 1996 and 1995, respectively. The fair value of the interest rate protection agreements at December 31, 1996 and 1995, was $3,158 and $3,900, respectively. At December 31, 1996 and 1995, the estimated discount rates were 7.25% and 7.00%, respectively.
Advances from SDG, LP
Net advances due SDG, LP of $259,382 result from debt and equity instruments issued by SDG, LP for which a portion of the proceeds were advanced to the Simon Operating Partnership to retire mortgages and other notes payable and amounts outstanding under the Credit Facility. The Simon Operating Partnership has recognized interest costs based on the terms of the instruments issued by SDG, LP.
9. RENTALS UNDER OPERATING LEASES
The Simon Operating Partnership receives rental income from the leasing of retail and mixed-use space under operating leases. Future minimum rentals to be received under noncancelable operating leases for each of the next five years and thereafter, excluding tenant reimbursements of operating expenses and percentage rent based on tenant sales volume, as of December 31, 1996, are as follows:
1997 $ 292,871 1998 275,085 1999 249,075 2000 219,372 2001 186,613 Thereafter 696,959 ---------- $1,919,975 ==========
Approximately 2.64% of future minimum rents to be received are attributable to leases with JCPenney Company, Inc., an affiliate of a limited partner in the Simon Operating Partnership.
10. PARTNERS' EQUITY
In January 1995, the Company filed a shelf registration with the Securities and Exchange Commission covering 15,000,000 shares of common stock. In April 1995, 6,000,000 of these shares were sold in an underwritten offering. In May 1995, the underwriters closed on a portion (241,854 shares) of the over- allotment option granted them in connection with the above offering. Proceeds from these transactions were contributed to the Simon Operating Partnership in exchange for 6,241,854 Units and subsequently were used to repay debt.
On February 10, 1995, one of the Simon Operating Partnership's limited partners exchanged its 212,114 Units for 212,114 shares of common stock.
On October 27, 1995, the Company completed a $100,000 private placement of 4,000,000 shares of Series A preferred stock. Dividends on the preferred stock are paid quarterly at the greater of 8.125% per annum or the dividend rate payable under the underlying common stock. The holders of the preferred stock have the right to convert the preferred stock into common stock after two years at an initial conversion ratio equal to 0.9524. The Company may redeem the preferred stock after five years upon payment of premiums that decline to $25.00 per share over the following seven years. The holders of the preferred stock are entitled to vote on all matters submitted to a vote of holders of common stock, based on the number of shares of common stock into which the preferred stock can be converted. The Company contributed the proceeds to the Simon Operating Partnership in exchange for Preferred Units. The Simon Operating Partnership pays a preferred distribution to the Company equal to the dividends paid on the preferred stock.
On December 21, 1995, a limited partner in the Simon Operating Partnership exchanged 121,348 Units for 121,348 shares of common stock.
On September 27, 1996, the Company completed a $200,000 public offering (the "Preferred Offering") of 8,000,000 shares of Series B cumulative redeemable preferred stock, generating net proceeds of approximately $193,000. Dividends on the preferred stock are paid quarterly in arrears at 8.75% per annum. The Company may redeem the preferred stock any time on or after September 29, 2006, at a redemption price of $25.00 per share, plus accrued and unpaid dividends. The redemption price (other than the portion thereof consisting of accrued and unpaid dividends) is payable solely out of the sale proceeds of other capital shares of the Company, which may include other series of preferred shares. The Company contributed the proceeds to SDG, LP in exchange for Preferred Units. SDG, LP pays a preferred distribution to the Company equal to the dividends paid on the preferred stock. SDG, LP advanced a portion of the proceeds ($34,400) to the Simon Operating Partnership which used the advanced proceeds to reduce outstanding debt.
Exchange Rights
The former limited partners in the Simon Operating Partnership had the right at any time after December 1994 to exchange all or any portion of their Units for shares of common stock of the Company on a one-for-one basis or cash, as selected by the Company's Board of Directors. If the Company had selected to use cash, the Company could cause the Simon Operating Partnership to redeem the Units. The amount of cash to be paid if the exchange right was exercised and the cash option was selected would have been based on the trading price of the Company's common stock at that time. In the periods when the Simon Operating Partnership did not control whether cash would be used to settle the limited partners' exchange rights, the limited partners' equity interest was excluded from partners' equity and was reflected in the consolidated balance sheet at redemption value.
In connection with the merger, the Simon Operating Partnership agreement was amended eliminating the exchange right provision. Accordingly, the limited partners' equity interest in the Simon Operating Partnership has been included as partners' equity at historical carrying value. Previous transfers of limited partners' equity interest from partners' equity have been reversed. This reversal occurred in the financial statements of the Simon Operating Partnership, effective August 9, 1996.
11. STOCK OPTION PLANS
The Company and the Simon Operating Partnership adopted an Employee Stock Plan (the "Employee Plan"). The Company also adopted a Director Stock Option Plan (the "Director Plan" and, together with the Employee Plan, the "Stock Option Plans") for the purpose of attracting and retaining eligible officers, directors and employees. The Company has reserved for issuance 4,595,000 shares of common stock under the Employee Plan and 100,000 shares of common stock under the Director Plan. If stock options granted in connection with the Stock Option Plans are exercised at any time or from time to time, the partnership agreement requires the Company to sell to the Simon Operating Partnership, at fair market value, shares of the Company's common stock sufficient to satisfy the exercised stock options. The Company also is obligated to purchase Units for cash in an amount equal to the fair market value of such shares.
Employee Plan
The Employee Plan is currently administered by the Company's Compensation Committee (the "Committee"). During the ten-year period following the adoption of the Employee Plan, the Committee may, subject to the terms of the Employee Plan and in certain instances subject to board approval, grant to key employees (including officers and directors who are employees) of the Simon Operating Partnership or its "affiliates" (as defined in the Employee Plan) the following types of awards: stock options (including options with a reload feature), stock appreciation rights, performance units and shares of restricted or unrestricted common stock. Awards granted under the Employee Plan become exercisable over the period determined by the Committee. The exercise price of an option may not be less than the fair market value of the shares of the common stock on the date of grant. The options vest 40% on the first anniversary of the date of grant, an additional 30% on the second anniversary of the grant date and become fully vested three years after the grant date. The options expire ten years from the date of grant.
Director Plan
Directors of the Company who are not also employees of the Company or its "affiliates" (as defined in the Director Plan) participate in the Director Plan. Under the Director Plan, each eligible director is automatically granted options ("Director Options") to purchase 5,000 shares of common stock upon the director's initial election to the Board of Directors and 3,000 shares of common stock upon each reelection of the director to the Board of Directors. The exercise price of the options is equal to 100% of the fair market value of the Company's common stock on the date of grant. Director Options become exercisable on the first anniversary of the date of grant or at such earlier time as a "change in control" of the Company occurs and will remain exercisable through the tenth anniversary of the date of grant (the "Expiration Date"). Prior to their Expiration Dates, Director Options will terminate 30 days after the optionee ceases to be a member of the Board of Directors.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires entities to measure compensation costs related to awards of stock-based compensation using either the fair value method or the intrinsic value method. Under the fair value method, compensation expense is measured at the grant date based on the fair value of the award. Under the intrinsic value method, compensation expense is equal to the excess, if any, of the quoted market price of the stock at the grant date over the amount the employee must pay to acquire the stock. Entities electing to measure compensation costs using the intrinsic value method must make pro forma disclosures of net income and earnings per Unit as if the fair value method had been applied. The Simon Operating Partnership has elected to account for stock-based compensation programs using the intrinsic value method consistent with existing accounting policies and, therefore, the standard will not have an effect on the consolidated financial statements. The impact on pro forma net income and earnings per Unit as a result of applying the intrinsic value method was not material.
Information relating to the Stock Option Plans from January 1, 1994 through December 31, 1996 is as follows:
DIRECTOR PLAN EMPLOYEE PLAN
OPTION OPTION OPTIONS PRICE PER OPTIONS PRICE PER SHARE SHARE
------- -------- --------- -------- SHARES UNDER OPTION AT JANUARY 1, 1994 25,000 $ 22.25 735,000 $ 22.25
Granted 15,000 27.00 1,363,272 23.44 - 25.25
Exercised - - - -
Forfeited - - (28,125) 23.44 ------- -------- --------- -------- SHARES UNDER OPTION AT 40,000 22.25 - 2,070,147 22.25 - DECEMBER 31, 1994 27.00 25.25
Granted (1) 15,000 24.94 - -
Exercised - - (6,876) 23.44
Forfeited - - (49,137) 23.44 - 25.25 ------- -------- --------- -------- SHARES UNDER OPTION AT $22.25 - $22.25 - DECEMBER 31, 1995 55,000 27.00 2,014,134 25.25
Granted (1) 40,000 24.37 - -
Exercised (5,000) 24.75 (367,151) 24.88 - 30.75
Forfeited - - (24,000) 23.44 - 25.25 ------- -------- --------- -------- SHARES UNDER OPTION AT $22.25 - $22.25 - DECEMBER 31, 1996 90,000 27.38 1,622,983 25.25 ======= ======== ========= ======== OPTIONS EXERCISABLE AT DECEMBER 31, 1996 (1) 50,000 $ 24.59 1,496,117 $ 22.97 ======= ======== ========= ======== SHARES AVAILABLE FOR GRANT AT DECEMBER 31, 1996 5,000 1,597,990 ======= =========
(1) Option price represents average price.
Stock Incentive Program
In October 1994, under the Employee Plan of the Company and the Simon Operating Partnership, the Company's Compensation Committee approved a five- year stock incentive program (the "Stock Incentive Program"), under which restricted stock award shares have been granted to certain employees at no cost. The outstanding restricted stock award shares vest in four installments of 25% each on January 1 of each year following the year in which the restricted shares are awarded. The cost of restricted stock awards, based on the stock's fair market value at the determination dates, is charged to partners' equity and subsequently amortized against earnings of the Simon Operating Partnership over the vesting period.
In March 1995, an aggregate of 1,000,000 shares of restricted stock was allocated to 50 executives, subject to the performance standards and other terms of the Stock Incentive Program. During 1996 and 1995, 200,030 and 144,196 shares of common stock, respectively, were granted under the Stock Incentive Program. Approximately $2,084 and $918 relating to this program were amortized in 1996 and 1995, respectively.
12. EMPLOYEE BENEFIT PLANS
The Simon Operating Partnership and affiliated entities currently maintains a tax-qualified retirement 401(k) savings plan. Under the plan, eligible employees can participate in a cash or deferred arrangement permitting them to defer up to a maximum of 12% of their compensation, subject to certain limitations. Participants' salary deferrals are matched at specified percentages, and one plan provides annual contributions of 3% of eligible employees' compensation. The Simon Operating Partnership contributed $2,123, $1,716 and $1,628 to the plans in 1996, 1995 and 1994, respectively.
Except for the 401(k) plan, the Company offers no other postretirement or postemployment benefits to its employees.
13. COMMITMENTS AND CONTINGENCIES
Litigation
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., a 99%-owned subsidiary of the Company, and DeBartolo Properties Management, Inc., and the plaintiffs are 27 former employees of the defendants. In the complaint, the plaintiffs allege 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 Merger. Plaintiffs assert that the defendants' refusal to issue them approximately 661,000 shares of DRC common stock, which is equivalent to approximately 450,000 shares of common stock of the Company computed at the 0.68 Exchange Ratio used in the Merger, constitutes a breach of contract and a breach of the implied covenant of good faith and fair dealing under Ohio law. Plaintiffs seek 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, and pretrial proceedings have just commenced. The Company is of the opinion that it has meritorious defenses and accordingly intends to defend this action vigorously. While it is difficult for the Company to predict the outcome of this litigation at this stage based on the information known to the Company to date, the Company does not expect this action will have a material adverse effect on the Company.
Roel Vento et al. v. Tom Taylor et al. An affiliate of the Simon Operating Partnership 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 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, tortuous 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. The Simon Operating Partnership is seeking to overturn the award and has appealed the verdict. Although the Simon Operating Partnership is optimistic that it may be able to reverse or reduce the verdict, there can be no assurance thereof. Management, based upon the advice of counsel, believes that the ultimate outcome of this action will not have a material adverse effect on the Company or the Simon Operating Partnership.
The Company or the Simon Operating Partnership currently are 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 the Company's or the Simon Operating Partnership's financial position or results of operations.
Financing Commitments
The Simon Operating Partnership has agreed to equity funding commitments of $14,000 and $31,103 relating to the construction of Grapevine Mills and The Source, respectively. The Simon Operating Partnership had satisfied $24,241 of its commitment on The Source at December 31, 1996.
Lease Commitments
As of December 31, 1996, a total of 25 of the Properties are subject to ground leases. The termination dates of these ground leases range from 1998 to 2087. These ground leases generally require payments by the Simon Operating Partnership of a fixed annual rent, or a fixed annual rent plus a participating percentage over a base rate. Ground lease expense including contingent rent incurred by the Simon Operating Partnership for the years ended December 31, 1996, 1995 and 1994, was $7,497, $6,700 and $5,808, respectively.
Future minimum lease payments due under such ground leases for each of the next five years ending December 31 and thereafter are as follows:
1997 $ 3,806 1998 3,799 1999 3,805 2000 3,815 2001 3,710 Thereafter 141,495 --------- $ 160,430 ========= Environmental Matters
Substantially all of the Properties have been subjected to Phase I environmental audits. Such audits have not revealed nor is management aware of any environmental liability that management believes would have a material adverse impact on the Simon Operating Partnership's financial position or results of operations. Management is unaware of any instances in which it would incur significant environmental costs if any or all Properties were sold, disposed of or abandoned.
Other
The Simon Operating Partnership's partner in Rolling Oaks Mall has the right to transfer its ownership interest to the Simon Operating Partnership in exchange for Units based on the fair market value of the ownership interest at the time of the exchange. This right expires on January 1, 2002. Rolling Oaks Mall is a Joint Venture Property accounted for using the equity method of accounting.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly 1996 and 1995 data is as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- -------- Total revenue $139,444 $143,761 $146,396 $162,303 $591,904 Operating income 61,073 63,051 63,001 73,696 260,821 Income before extraordinary items 21,801 21,937 20,396 28,640 92,774 Net income available to Unitholders 21,536 21,937 17,866 27,712 89,051 Net income before extraordinary items per Unit 0.23 0.23 0.21 0.30 0.97 Net income per Unit $ 0.23 $ 0.23 $ 0.19 $ 0.29 $ 0.93
Total revenue $129,490 $130,765 $138,042 $155,360 $553,657 Operating income 58,865 58,115 64,191 69,965 251,136 Income before extraordinary items 22,207 23,528 26,946 27,334 100,015 Net income available to Unitholders 22,207 23,280 24,310 26,933 96,730 Net income before extraordinary items per Unit 0.26 0.25 0.28 0.29 1.08 Net income per Unit $ 0.26 $ 0.25 $ 0.25 $ 0.28 $ 1.04
Primarily due to the cyclical nature of earnings to Unitholders, the sum of the quarterly earnings per Unit in 1996 varies from the annual earnings per Unit.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, L.P. BY: SIMON DEBARTOLO GROUP, INC., GENERAL PARTNER
By /s/ David Simon ----------------- David Simon Chief Executive Officer
March 30, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ David Simon Chief Executive Officer and March 30, 1997 - ----------------- Director (Principal David Simon Executive Officer)
/s/ Herbert Simon Co-Chairman of the Board of March 30, 1997 - ----------------- Directors Herbert Simon
/s/ Melvin Simon Co-Chairman of the Board of - ----------------- Directors March 30, 1997 Melvin Simon
/s/ Richard Sokolov President, Chief Operating - ------------------- Officer and Director March 30, 1997 Richard Sokolov
/s/ Edward J. DeBartolo, Jr. Director March 30, 1997 - ---------------------------- Edward J. DeBartolo, Jr.
/s/ M. Denise DeBartolo York Director March 30, 1997 - ---------------------------- M. Denise DeBartolo York
/s/ Birch Bayh Director March 30, 1997 - -------------- Birch Bayh
/s/ William T. Dillard, II Director March 30, 1997 - -------------------------- William T. Dillard, II
/s/ G. William Miller Director March 30, 1997 - --------------------- G. William Miller
/s/ Fredrick W. Petri Director March 30, 1997 - --------------------- Fredrick W. Petri
/s/ Terry S. Prindiville Director March 30, 1997 - ------------------------ Terry S. Prindiville
/s/ J. Albert Smith Director March 30, 1997 - ------------------- J. Albert Smith
/s/ Philip J. Ward Director March 30, 1997 - ------------------ Philip J. Ward
/s/ Stephen E. Sterrett Treasurer (Principal March 30, 1997 - ----------------------- Financial Officer) Stephen E. Sterrett
/s/ Dennis L. Cavanagh Senior Vice President, March 30, 1997 - ---------------------- Financial Services Dennis L. Cavanagh (Principal Accounting Officer)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Simon DeBartolo Group, Inc.:
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of SIMON PROPERTY GROUP, L.P. included in this Form 10-K, and have issued our report thereon dated February 18, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule is the responsibility of Simon Property Group, L.P.'s management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP Indianapolis, Indiana February 18, 1997
SIMON PROPERTY GROUP, L.P. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1996
SCHEDULE III
SIMON PROPERTY GROUP, L.P.
NOTES TO SCHEDULE III AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(1) Reconciliation of Real Estate Properties:
The changes in real estate assets for the years ended December 31, 1996 and 1995 are as follows:
1996 1995
Balance, beginning of year $2,143,925 $1,887,122 Acquisitions 56,069 32,547 Improvements 182,516 73,097 Disposals (19,579) (12,722) Consolidation 81,227 163,881 Balance, close of year 2,444,158 $2,143,925
The aggregate net book value for federal income tax purposes as of December 31, 1996 was $2,026,759.
(2) Reconciliation of Accumulated Depreciation:
The changes in accumulated depreciation and amortization for the years ended December 31, 1996 and 1995 are as follows:
1996 1995
Balance, beginning of year $ 147,341 $68,222 Depreciation expense 94,094 79,126 Disposals (10,774) (7) Balance, close of year $ 230,661 $ 147,341
Depreciation of Simon Property Group, L.P.'s investment in buildings and improvements reflected in the statements of operations is calculated over the estimated original lives of the assets as follows:
Buildings - typically 35 years Improvements - shorter of lease term or useful life
(3) Initial cost represents net book value at December 20, 1993.
(4) Not developed/constructed by the Simons. The date of construction represents acquisition date.
INDEX TO EXHIBITS
Exhibits
2.1 Agreement and Plan of Merger among the Company, Sub and DRC, dated as of March 26, 1996, as amended (included as Annex I to the Prospectus/Joint Proxy Statement filed as part of Form S-4 of Simon Property Group, Inc. (Registration No. 333-06933) 3.1 Third Amended and Restated Agreement of Limited Partnership of Simon Property Group, L.P. (Incorporated by Reference to Exhibit 10.1.2 of the Company's Form S-4 (Registration No. 333-06933)) *4.1 Secured Promissory Note and Open-End Mortgage and Security Agreement from Simon Property Group, L.P. in favor of Principal Mutual Life Insurance Company (Pool 1). *4.2 Secured Promissory Note and Open-End Mortgage and Security Agreement from Simon Property Group, L.P. in favor of Principal Mutual Life Insurance Company (Pool 2). ****4.3 Credit Agreement dated as of September 27, 1996 among the Operating Partnership and Morgan Guaranty Trust Company of New York, Union Bank of Switzerland and Chase Manhattan Bank as Lead Agents. ****10.1 Restated Indemnity Agreement dated as of August 9, 1996 between the Company and its directors and officers. (Previously filed as Exhibit 10.8) *10.2 Noncompetition Agreement dated as of December 1, 1993 between the Company and each of Melvin Simon and Herbert Simon. *10.3 Noncompetition Agreement dated as of December 1, 1993 between the Company and David Simon. *10.4 Restriction and Noncompetition Agreement dated as of December 1, 1993 among the Company and the Management Companies. *10.5 Simon Property Group, L.P. Employee Stock Plan. *10.6 Simon DeBartolo Group, Inc. Director Stock Option Plan. *10.7 Option Agreement to acquire the Excluded Retail Properties. (Previously filed as Exhibit 10.10.) *10.8 Option Agreement to acquire the Excluded PropertiesLand. (Previously filed as Exhibit 10.11.) *10.9 Registration Rights Agreement dated as of December 1, 1993 between the Company, certain Limited Partners and certain other parties. (Previously filed as Exhibit 10.12.) *10.10 Option Agreements dated as of December 1, 1993 between the Management Company and Simon Property Group, L.P. (Previously filed as Exhibit 10.20.) *10.11 Option Agreement dated as of December 1, 1993 to acquire Development Land. (Previously filed as Exhibit 10.22.) *10.12 Option Agreement dated December 1, 1993 between the Management Company and Simon Property Group, L.P. (Previously filed as Exhibit 10.25.) *10.13 Option Agreement dated December 1, 1993 between Simon Enterprises, Inc. and Simon Property Group, L.P. (Previously filed as Exhibit 10.26.) *10.14 Lock-Up Agreement dated December 20, 1993 between MSA and Simon Property Group, L.P. (Previously filed as Exhibit 10.27.) ***10.15 Operating Agreement of Summit Mall Company, L.L.C. dated February 23, 1995. ****10.16 Indemnity Agreement by and between the Company and its new Directors, dated as of August 9, 1996 ****10.17 Subscription Agreement by and between Day Acquisition Corp., and the Purchaser (as defined in this Exhibit) ****10.18 Registration Rights Agreement (the "Agreement"), dated as of August 9, 1996, by and among the "Simon Family Members" (As defined in the Agreement), SPG, Inc., JCP Realty, Inc., Brandywine Realty, Inc., and the Estate of Edward J. DeBartolo Sr., Edward J. DeBartolo, Jr., Marie Denise DeBartolo York, and the Trusts and other entities listed on Schedule 2 of the Agreement, and any of their respective successors-in-interest and permitted assigns. 21.1 List of Subsidiaries of the Simon Operating Partnership. Attached 23.1 Consent of Arthur Andersen LLP. Attached ****99.1 Agreement dated November 13, 1996 between Simon DeBartolo Group, Inc. and Simon DeBartolo Group, L.P. (Incorporated by reference to Amendment No. 3 of Form S-3 filed by Simon DeBartolo Group, L.P. and Simon Property Group, L.P. on November 20, 1996 under Registration No. 333-11491)
* Incorporated by reference to the exhibit numbered as indicated that was filed with the Company's Form 10-K for the fiscal year ended December 31, 1993.
** Incorporated by reference to the exhibit numbered as indicated that was filed with the Company's Form 10-K for the fiscal year ended December 31, 1994.
*** Incorporated by reference to the exhibit numbered as indicated that was filed with the Company's Form 10-K for the fiscal year ended December 31, 1995.
**** Incorporated by reference to the exhibit numbered as indicated that was filed with the Company's Form 10-K for the fiscal year ended December 31, 1996.
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF SIMON PROPERTY GROUP, L.P.
Name of Subsidiary Jurisdiction - ------------------ ------------
Charles Mall Company Limited Partnership Maryland East Towne Mall Company Limited Partnership Tennessee Forestville Associates Maryland Golden Ring Mall Company Limited Partnership Indiana Jefferson Valley Mall Limited Partnership Delaware Knoxville Developers Limited Partnership Indiana M.S. Management Associates (Indiana), Inc. Indiana M.S. Management Associates, Inc. Delaware Northwoods Development Company Illinois Pentagon City Developers Limited Partnership Indiana Simon MOA Management Company, Inc. Indiana Simon Property Group Administrative Services Partnership Delaware Simon Property Group (Illinois), L.P. Illinois Simon Property Group (Texas), L.P. Texas
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our reports, included in this Form 10-K, into Simon Property Group, L.P.'s previously filed Registration Statement File No. 33-98364.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana, April 10, 1997