UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number 1-12618
SIMON DeBARTOLO GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 35-1901999
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
115 West Washington Street
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-1600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of August 1, 1997, 94,472,639 shares of common stock, par value $0.0001 per
share, 3,200,000 shares of Class B common stock, par value $0.0001 per share
and 4,000 shares of Class C common stock, par value $0.0001 were outstanding.
<PAGE> 01
SIMON DeBARTOLO GROUP, INC.
FORM 10-Q
INDEX
Part I - Financial Information Page
Item 1: Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of
Operations for the three-month and six-month
periods ended June 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash
Flows for the six-month periods ended June
30, 1997 and 1996 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2: Management's Discussion and
Analysis of Financial Condition and Results
of Operations 13
Part II - Other Information
Items 1 through 6 19
Signatures 20
<PAGE> 02
<TABLE>
SIMON DeBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per share amounts)
June 30, December 31,
1997 1996
<S> <C> <C>
ASSETS:
Investment properties, at cost $ 5,446,684 $ 5,301,021
Less _ accumulated depreciation 358,928 279,072
----------- -----------
5,087,756 5,021,949
Cash and cash equivalents 44,946 64,309
Restricted cash 33,414 6,110
Tenant receivables and accrued revenue, net 165,375 166,119
Notes and advances receivable from
Management Company and affiliate 90,209 75,452
Investment in partnerships and joint
ventures, at equity 403,090 394,409
Other investments 50,000 --
Deferred costs and other assets 143,871 138,492
Minority interest 27,773 29,070
----------- -----------
Total assets $ 6,046,434 $ 5,895,910
=========== ===========
LIABILITIES:
Mortgages and other indebtedness $ 3,928,662 $ 3,681,984
Accounts payable and accrued expenses 177,064 170,203
Cash distributions and losses in
partnerships and joint ventures, at equity 19,264 17,106
Investment in Management Company and
affiliates 6,658 8,567
Other liabilities 63,996 72,876
----------- -----------
Total liabilities 4,195,644 3,950,736
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
LIMITED PARTNERS' INTEREST IN THE OPERATING
PARTNERSHIP 605,841 640,283
SHAREHOLDERS' EQUITY:
Series A convertible preferred stock,
4,000,000 shares authorized, issued and
outstanding 99,923 99,923
Series B cumulative redeemable preferred
stock, 9,200,000 shares authorized,
8,000,000 issued and outstanding 192,989 192,989
Common stock, $.0001 par value, 374,796,000
shares authorized, 94,452,615 and
93,676,415 issued and outstanding at June
30, 1997 and December 31, 1996,
respectively 9 9
Class B common stock, $.0001 par value,
12,000,000 shares authorized, 3,200,000
issued and outstanding 1 1
Class C common stock, $.0001 par value,
4,000 shares authorized, issued and
outstanding -- --
Capital in excess of par value 1,206,641 1,189,919
Accumulated deficit (236,423) (172,596)
Unamortized restricted stock award (18,191) (5,354)
----------- -----------
Total shareholders' equity 1,244,949 1,304,891
----------- -----------
Total liabilities, limited partners'
interest and shareholders' equity $ 6,046,434 $ 5,895,910
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 03
<TABLE>
SIMON DeBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
For the Three For the Three
Months Ended Months Ended
June 30, June 30,
--------------------- --------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Minimum rent $ 149,354 $ 81,484 $297,373 $159,938
Overage rent 10,049 5,784 17,564 10,751
Tenant reimbursements 74,208 47,241 150,031 94,226
Other income 11,444 9,251 22,501 18,289
--------- --------- -------- --------
Total revenue 245,055 143,760 487,469 283,204
EXPENSES:
Property operating 41,357 25,759 84,025 50,606
Depreciation and amortization 44,129 26,635 87,483 51,307
Real estate taxes 24,589 14,535 49,350 28,364
Repairs and maintenance 7,597 5,468 17,546 12,541
Advertising and promotion 6,687 4,703 11,900 8,897
Provision for credit losses 1,850 254 2,825 1,751
Other 4,391 3,355 8,179 5,614
--------- --------- -------- --------
Total operating expenses 130,600 80,709 261,308 159,080
--------- --------- -------- --------
OPERATING INCOME 114,455 63,051 226,161 124,124
INTEREST EXPENSE 67,076 40,568 134,994 79,134
--------- --------- -------- --------
INCOME BEFORE MINORITY INTEREST 47,379 22,483 91,167 44,990
MINORITY INTEREST (741) (672) (2,225) (1,175)
GAIN ON SALE OF ASSET, NET (17) -- 20 --
--------- --------- -------- --------
INCOME BEFORE UNCONSOLIDATED ENTITIES 46,621 21,811 88,962 43,815
INCOME FROM UNCONSOLIDATED ENTITIES 1,792 2,157 2,513 3,985
--------- --------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS 48,413 23,968 91,475 47,800
EXTRAORDINARY ITEMS (1,467) -- (24,714) (265)
--------- --------- -------- --------
INCOME OF THE OPERATING PARTNERSHIP 46,946 23,968 66,761 47,535
LESS--LIMITED PARTNERS' INTEREST IN THE
OPERATING PARTNERSHIP 15,588 8,525 20,764 16,907
--------- --------- -------- --------
NET INCOME 31,358 15,443 45,997 30,628
PREFERRED DIVIDENDS (6,407) (2,031) (12,813) (4,062)
--------- --------- -------- --------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 24,951 $ 13,412 $ 33,184 $ 26,566
========= ========= ======== ========
EARNINGS PER COMMON SHARE:
Income before extraordinary items $0.27 $0.23 $0.50 $0.45
Extraordinary items (0.01) -- (0.16) --
--------- --------- -------- --------
Net income $0.26 $0.23 $0.34 $0.45
========= ========= ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 04
<TABLE>
SIMON DeBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
For the Six Months
Ended June 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,997 $ 30,628
Adjustments to reconcile net income to net
cash provided by operating activities_
Limited partners' interest in the Operating Partnership 20,764 16,907
Extraordinary items 24,714 265
Equity in income of unconsolidated entities (2,513) (3,985)
Gain on sale of assets, net (20) --
Minority interest 2,225 1,175
Depreciation and amortization 90,961 55,303
Straight-line rent (3,461) 506
Changes in assets and liabilities_
Tenant receivables and accrued revenue 7,104 5,889
Deferred costs and other assets (8,370) (3,171)
Accounts payable, accrued expenses and other liabilities (5,347) (12,883)
-------- --------
Net cash provided by operating activities 172,054 90,634
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition -- (43,941)
Capital expenditures (142,327) (51,578)
Cash from consolidation of joint venture -- 1,695
Increase in restricted cash (27,304) --
Proceeds from sale of assets 599 --
Investments in and advances to unconsolidated entities (39,887) (9,123)
Distributions from unconsolidated entities 19,211 32,937
Other investing activities (55,400) --
-------- --------
Net cash used in investing activities (245,108) (70,010)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock, net 5,920 (62)
Minority interest distributions (1,792) (2,770)
Distributions to shareholders (109,824) (61,104)
Distributions to limited partners (60,822) (36,723)
Mortgage and other indebtedness proceeds,
net of transaction costs 590,798 230,085
Mortgage and other indebtedness principal payments (349,589) (147,215)
Other refinancing transaction (21,000) --
-------- --------
Net cash provided by (used in) financing activities 53,691 (17,789)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,363) 2,835
CASH AND CASH EQUIVALENTS, beginning of period 64,309 62,721
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 44,946 $ 65,556
======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 05
SIMON DeBARTOLO GROUP, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands)
Note 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"). On August 9, 1996 (the "Merger Date"), the Company
acquired, through merger (the "Merger") the national shopping center business
of DeBartolo Realty Corporation ("DRC") (See Note 4).
Simon DeBartolo Group, L.P. ("SDG, LP") is a subsidiary partnership of the
Company. Simon Property Group, L.P. ("SPG, LP") is a subsidiary partnership of
SDG, LP and of the Company. SDG, LP and SPG, LP are hereafter collectively
referred to as the "Operating Partnership." Prior to the Merger Date,
references to the Operating Partnership refer to SPG, LP only. The Company,
through the 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 June 30, 1997, the Operating Partnership owned or held an interest in 186
income-producing properties, consisting of 113 regional malls, 65 community
shopping centers, three specialty retail centers, four mixed-use properties and
one value-oriented super-regional mall in 33 states (the "Properties"). The
Operating Partnership also owns interests in six properties under construction,
six parcels of land held for future development and substantially all of the
economic interest in M.S. Management Associates, Inc. (the "Management Company"
- - See Note 7). The Company owned 61.6% and 61.4% of the Operating Partnership
as of June 30, 1997 and December 31, 1996, respectively.
Note 2 - Basis of Presentation
The accompanying consolidated condensed financial statements are
unaudited; however, they have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the disclosures required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring matters) necessary for a fair presentation of the consolidated
condensed financial statements for these interim periods have been included.
The results for the interim period ended June 30, 1997 are not necessarily
indicative of the results to be obtained for the full fiscal year. These
unaudited consolidated condensed financial statements should be read in
conjunction with the December 31, 1996 audited financial statements and notes
thereto included in the Simon DeBartolo Group, Inc. Annual Report on Form 10-K.
The accompanying consolidated condensed financial statements of the
Company include all accounts of the Company, its wholly-owned qualified REIT
subsidiaries and the Operating Partnership. All significant intercompany
amounts have been eliminated. The accompanying consolidated condensed
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 the Company's assets,
liabilities, revenues and expenses during the reported periods. Actual results
could differ from these estimates.
Properties which are wholly-owned or owned less than 100% and are
controlled by the Operating Partnership have been consolidated. The Operating
Partnership's equity interests in certain partnerships and joint ventures which
represent noncontrolling 14.7% to 50.0% ownership interests and the investment
in the Management Company are accounted for under 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. In addition, the Operating Partnership held a 2% noncontrolling
ownership interest in West Town Mall, which is accounted for using the cost
method of accounting. On July 10, 1997, the Operating Partnership acquired an
additional 48% interest in West Town Mall. Effective July 10, 1997, the
property is being accounted for using the equity method of accounting (See
note 12).
Net operating results of the Operating Partnership are allocated to the
Company based first on the Company's preferred unit preference and then on its
remaining ownership interest in the Operating Partnership during the period.
The Company's remaining weighted average ownership interest in the Operating
Partnership for the three-month periods ended June 30, 1997 and 1996 was 61.6%
and 61.1%, respectively. The Company's remaining weighted average ownership
interest in the Operating Partnership for the six-month periods ended June 30,
1997 and 1996 was 61.5% and 61.1%, respectively.
<PAGE> 06
Note 3 - Reclassifications
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1997 presentation.
Note 4 -The Merger
On August 9, 1996, the Company acquired the national shopping center
business of DRC for an aggregate value of approximately $3.0 billion. The
acquired portfolio consisted of 49 regional malls, 11 community centers and 1
mixed-use Property. These Properties included 47,052,267 square feet of retail
space gross leasable area ("GLA") and 558,636 square feet of office GLA. The
Merger was accounted for using the purchase method of accounting. 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 one regional mall, which is accounted for
using the cost method of accounting.
Pro Forma
The following unaudited pro forma summary financial information combines
the consolidated results of operations of the Company as if the Merger had
occurred as of January 1, 1996, and was carried forward through June 30, 1996.
Preparation of the pro forma summary information was based upon assumptions
deemed appropriate by the Company. The pro forma summary information is not
necessarily indicative of the results which actually would have occurred if the
Merger had been consummated at January 1, 1996, nor does it purport to
represent the future financial position and results of operations for future
periods.
Six Months
Ended June 30,
1996
Revenue $ 461,536
============
Income of the Operating Partnership 79,541
============
Net income available to common shareholders 48,838
============
Net income per common share $ 0.51
Weighted average number of shares of common stock ============
outstanding 96,349,166
============
Note 5 - Cash Flow Information
Cash paid for interest, net of amounts capitalized, during the six months
ended June 30, 1997 was $136,657, as compared to $75,908 for the same period in
1996. All accrued distributions had been paid as of June 30, 1997 and December
31, 1996.
Note 6 - Per Share Data
Per share data is based on the weighted average number of shares of common
stock outstanding during the period. The weighted average number of shares of
common stock used in the computation for the three-month periods ended June 30,
1997 and 1996 was 97,592,662 and 58,560,225, respectively. The weighted
average number of shares of common stock used in the computation for the six-
month periods ended June 30, 1997 and 1996 was 97,286,874 and 58,471,201,
respectively. Units of ownership in the Operating Partnership ("Units") may
be exchanged for shares of common stock of the Company on a one-for-one basis
in certain circumstances. Additionally, shares of the Company's Series A
preferred stock are convertible into common stock of the Company. The
outstanding stock options, Units and shares of Series A preferred stock have
not been included in the computations of per share data as they did not have a
dilutive effect. The Company's Series B preferred stock is not convertible
into common stock.
<PAGE> 07
Note 7 - Investment in Unconsolidated Entities
Partnerships and Joint Ventures
Summary financial information of partnerships and joint ventures accounted
for using the equity method of accounting and a summary of the Operating
Partnership's investment in and share of income from such partnerships and
joint ventures follow:
June 30, December 31,
BALANCE SHEETS 1997 1996
Assets: ---------- ----------
Investment properties at cost, net $2,018,421 $1,887,555
Cash and cash equivalents 62,563 61,267
Tenant receivables 65,996 58,548
Other assets 56,714 69,365
---------- ----------
Total assets $2,203,694 $2,076,735
========== ==========
Liabilities and Partners' Equity:
Mortgages and other indebtedness $1,274,586 $1,121,804
Accounts payable, accrued expenses and
other liabilities 155,606 213,394
---------- ----------
Total liabilities 1,430,192 1,335,198
Partners' equity 773,502 741,537
---------- ----------
Total liabilities and partners' equity $2,203,694 $2,076,735
========== ==========
The Operating Partnership's Share of:
Total assets $ 651,677 $ 602,084
========== ==========
Partners' equity $ 156,868 $ 144,376
Add: Excess Investment (See below) 226,958 232,927
---------- ----------
Operating Partnership's net Investment
in Joint Ventures $ 383,826 $ 377,303
========== ==========
For the three For the six months
months ended ended
June 30, June 30,
------------------- -------------------
STATEMENTS OF OPERATIONS 1997 1996 1997 1996
-------- -------- -------- --------
Revenue:
Minimum rent $ 53,749 $ 25,876 $106,204 $ 53,840
Overage rent 1,623 927 3,314 1,689
Tenant reimbursements 24,346 13,380 49,578 27,448
Other income 5,666 1,653 7,363 6,422
-------- -------- -------- --------
Total revenue 85,384 41,836 166,459 89,399
Operating Expenses:
Operating expenses and other 30,121 15,282 60,915 32,849
Depreciation and amortization 17,062 9,916 35,061 20,586
-------- -------- -------- --------
Total operating expenses 47,183 25,198 95,976 53,435
-------- -------- -------- --------
Operating Income 38,201 16,638 70,483 35,964
Interest Expense 20,489 6,287 41,578 14,134
Extraordinary Losses 324 - 1,182 -
-------- -------- -------- --------
Net Income 17,388 10,351 27,723 21,830
Third Party Investors' Share of
Net Income 13,083 8,676 20,377 18,698
-------- -------- -------- --------
The Operating Partnership's Share
of Net Income $ 4,305 $ 1,675 $ 7,346 $ 3,132
Amortization of Excess Investment
(See below) (3,062) - (5,969) -
-------- -------- -------- --------
Income from Unconsolidated
Entities $ 1,243 $ 1,675 $ 1,377 $ 3,132
======== ======== ======== ========
As of June 30, 1997 and December 31, 1996, the unamortized excess of the
Operating Partnership's investment over its share of the equity in the
underlying net assets of the partnerships and joint ventures ("Excess
Investment") was approximately $226,958 and $232,927, respectively. This
Excess Investment, which resulted primarily from the Merger, is being amortized
<PAGE> 08
generally over the life of the related Properties. Amortization included in
income from unconsolidated entities for the three-month and six-month periods
ended June 30, 1997 was $3,062 and $5,969, respectively.
The net income or net loss for each partnership and joint venture is
allocated in accordance with the provisions of the applicable partnership or
joint venture agreement. The allocation provisions in these agreements are not
always consistent with the ownership interest held by each general or limited
partner or joint venturer, primarily due to partner preferences.
The Management Company
The Management Company, including its consolidated subsidiaries, provides
management, leasing, development, accounting, legal, marketing and management
information systems services to 33 non-wholly owned Properties, Melvin Simon &
Associates, Inc., and certain other nonowned properties. Certain subsidiaries
of the Management Company provide architectural, design, construction,
insurance and other services primarily to certain of the Properties. The
Management Company also invests in other businesses to provide other
synergistic services to the Properties. The Operating Partnership's share of
consolidated net income of the Management Company, after intercompany profit
eliminations, was $549 and $482 for the three-month periods ended June 30, 1997
and 1996, respectively, and was $1,136 and $853 for the six-month periods ended
June 30, 1997 and 1996, respectively.
Note 8 - Other Investment
On June 16, 1997, the Operating Partnership purchased 1,408,450 shares of
common stock of Chelsea GCA Realty, Inc. ("Chelsea"), a publicly traded REIT,
for $50,000 using borrowings from the Operating Partnership's Credit Facility
(See below). The shares purchased represent approximately 9.2% of Chelsea's
outstanding common stock. In addition, the Operating Partnership and Chelsea
announced that they have formed a strategic alliance to develop and acquire
manufacturer's outlet shopping centers with 500,000 square feet or more of GLA
in the United States. The investment in Chelsea is being reflected in the
accompanying consolidated condensed balance sheets in other investments.
Note 9 - Debt
On January 31, 1997, the Operating Partnership completed a refinancing
transaction involving debt on four consolidated Properties. The transaction
consisted of the payoff of one loan totaling $43,375, a restatement of the
interest rate on the three remaining loans, the acquisition of the contingent
interest feature on all four loans for $21,000, and $3,904 of principal
reductions on two additional loans. This transaction, which was funded using
the Credit Facility (See below), resulted in an extraordinary loss of $23,247,
including the write-off of deferred mortgage costs of $2,247.
On April 14, 1997, the Operating Partnership obtained improvements to its
$750,000 unsecured revolving credit facility (the "Credit Facility"), which has
an initial maturity of September 1999, subject to an automatic one-year
extension. The Credit Facility agreement was amended to reduce the interest
rate from LIBOR plus 0.90% to LIBOR plus 0.75%. In addition, the Credit
Facility's competitive bid feature, which has further reduced interest costs,
was increased from $150,000 to $300,000.
On May 15, 1997, the Operating Partnership established a Medium-Term Note
("MTN") program. On June 24, 1997, the Operating Partnership completed the
sale of $100,000 of notes under the MTN program. The notes sold bear interest
at 7.125% and have a stated maturity of June 24, 2005. The net proceeds of
approximately $99,000 from this sale were used primarily to pay down the Credit
Facility.
Also on May 15, 1997, the Operating Partnership refinanced approximately
$140,000 in existing debt on The Forum Shops at Caesar's. The new debt
consists of three classes of notes totaling $180,000, with $90,000 bearing
interest at 7.125% and $90,000 bearing interest at LIBOR plus 0.30%,
all of which mature on May 15, 2004. Approximately $40,000 of the borrowings
were placed in escrow to pay for construction costs required in connection with
the expansion of this project, which is scheduled to open on August 28, 1997.
As of June 30, 1997, $28,539 remains in escrow, which is reflected in
restricted cash in the accompanying consolidated condensed balance sheet.
On June 5, 1997, the Operating Partnership closed a $115,000 construction
loan for The Shops at Sunset Place. The loan initially bears interest at LIBOR
plus 1.25% and matures on June 30, 2000, with two one-year extensions
available, contingent upon certain conditions and subject to extension fees.
On June 30, 1997, the Operating Partnership closed an unsecured loan which
bears interest at LIBOR plus 0.75% and matures on September 29, 1998. The
proceeds were used to retire an existing $55,000 mortgage on East Towne Mall,
which bore interest at LIBOR plus 1.125%.
<PAGE> 09
At June 30, 1997, the Operating Partnership had consolidated debt of
$3,928,662, of which $2,938,157 was fixed-rate debt and $990,505 was variable-
rate debt. The Operating Partnership's pro rata share of indebtedness of the
unconsolidated joint venture Properties as of June 30, 1997 and December 31,
1996 was $498,726 and $448,218, respectively. As of June 30, 1997 and December
31, 1996, the Operating Partnership had interest-rate protection agreements
related to $476,575 and $524,561 of its pro rata share of indebtedness,
respectively. The agreements are generally in effect until the related
variable-rate debt matures. As a result of the various interest rate
protection agreements, interest savings were $473 and $359 for the three months
ended June 30, 1997 and 1996, respectively, and $1,086 and $812 for the six-
month periods ended June 30, 1997 and 1996, respectively.
Note 10 - Shareholders' Equity
The following table summarizes the changes in the Company's shareholders'
equity since December 31, 1996.
<TABLE>
Capital in Unamortized Total
Preferred Common Excess of Accumulated Restricted Shareholders'
Stock Stock Par Value Deficit Stock Award Equity
<C> <C> <C> <C> <C> <C> <C>
Balance at --------- ------ ---------- ---------- ----------- -------------
December 31, 1996 $ 292,912 $ 10 $1,189,919 $(172,596) $ (5,354) $1,304,891
Stock options
exercised (218,229
shares) 4,950 4,950
Other common stock
issued (50,422
shares) 1,527 1,527
Stock incentive
program (507,549
shares) 15,861 (15,861) --
Amortization of
stock incentive 3,024 3,024
Transfer out of
limited partners'
interest in the
Operating
Partnership (5,616) (5,616)
Net income 45,997 45,997
Distributions (109,824) (109,824)
Balance at --------- ------ ---------- ---------- ----------- -------------
June 30, 1997 $ 292,912 $ 10 $1,206,641 $(236,423) $ (18,191) $1,244,949
========= ====== ========== ========== =========== =============
</TABLE>
Stock Incentive Programs
Under the terms of the Company's Stock Incentive Programs (the "Plans"),
eligible executives receive restricted stock, subject to performance standards,
vesting requirements and other terms of the Plans. On March 26, 1997, the
compensation committee of the board of directors of the Company approved the
issuance of 507,549 shares under the Plans. As of June 30, 1997, there were
total of 850,890 shares issued under the Plans, with 391,870 shares remaining
available for issuance, subject to applicable performance standards and other
terms of the Plans. The value of shares issued under the Plans is being
amortized pro-rata over their respective four-year vesting periods.
Approximately $3,024 and $1,042 have been amortized for the six-month periods
ended June 30, 1997 and 1996, respectively.
<PAGE> 10
Note 11 - 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 stock
incentive plan (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 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 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.
The Company currently is not subject to any other material litigation
other than routine litigation and administrative proceedings arising in the
ordinary course of business. On the basis of consultation with counsel,
management believes that these items will not have a material adverse impact on
the Company's financial position or results of operations.
Note 12 - Significant Subsequent Events
Series C Preferred Shares
On July 9, 1997 the Company sold 3,000,000 shares of 7.89% Series C
Cumulative Step-Up Premium RateSM Preferred Stock (the "Series C Preferred
Shares") in a public offering at $50.00 per share. Beginning October 1, 2012,
the rate increases to 9.89% of the liquidation preference per annum. The
Series C Preferred Shares are not redeemable prior to September 30, 2007.
Beginning September 30, 2007, the Series C Preferred Shares may be redeemed at
the option of the Company in whole or in part, at a redemption price of $50.00
per share, plus accrued and unpaid distributions, if any, thereon. The
redemption price of the Series C Preferred Shares may only be paid from the
sale proceeds of other capital stock of the Company, which may include other
classes or series of preferred stock. Additionally, the Series C Preferred
Shares have no stated maturity and are not subject to any mandatory redemption
provisions, nor are they convertible into any other securities of the Company.
The Company contributed the net proceeds of this offering of approximately
$146,000 to the Operating Partnership in exchange for preferred units, the
economic terms of which are substantially identical to the Series C Preferred
Shares. The Operating Partnership used the proceeds to increase its ownership
interest in West Town Mall (See below), to pay down the Credit Facility and for
general working capital purposes.
West Town Mall
On July 10, 1997, the Operating Partnership acquired a 48% interest in
West Town Mall in Knoxville, Tennessee for $69,930. This transaction increased
the Operating Partnership's ownership of West Town Mall to 50%. Effective July
10, 1997, the property is being accounted for using the equity method of
accounting. It was previously accounted for using the cost method.
<PAGE> 11
Debt Securities Offering
On July 17, 1997, the Operating Partnership completed a $250,000 public
offering of two tranches of its seven-year and twelve-year non-convertible
senior unsecured debt securities (the "Notes"). The first tranche was for
$100,000 at 6 3/4% with a maturity of July 15, 2004. The second tranche was for
$150,000 at 7% with a maturity of July 15, 2009. The Notes pay interest
semi-annually, are guaranteed by SPG, LP, and contain covenants relating to
minimum leverage, EBITDA and unencumbered EBITDA ratios. The Notes were
issued under the Operating Partnership's $750,000 debt shelf registration.
Dadeland Mall
On August 8, 1997, an affiliate of the Operating Partnership
acquired a 50% interest in a trust that owns Dadeland Mall, a 1.4
million square foot super-regional mall in Miami, Florida. Dadeland
Mall is a dominant mall in its trade area with small shop sales of $649
per square foot in 1996 and leased and committed occupancy of 94%. A
portion of the purchase price was paid in the form of 658,707 shares of
the Company's common stock. The remaining portion of the purchase price
was financed using borrowings from the Credit Facility. This joint
venture will be accounted for using the equity method of accounting.
Shelf Registration
On August 13, 1997, SDG, LP filed a shelf registration statement with the
SEC to provide for the offering, from time to time, of up to $1,000,000
aggregate public offering price of unsecured debt securities of SDG, LP.
The net proceeds of such offerings may be used to fund acquisition or
development activity, retire existing debt or for any other purpose deemed
appropriate by the SDG, LP. Any securities issued under this registration
would be guaranteed by SPG, LP, although management has no immediate plans to
issue securities under the program.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the 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
The financial results reported subsequent to August 9, 1996 reflect the
Merger of the Company and DRC, in accordance with the purchase method of
accounting utilized to record the transaction, valued at approximately $3.0
billion. The Merger resulted in the addition of 49 regional malls, 11
community centers and 1 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 one regional mall, which is accounted for
using the cost method of accounting.
In addition, the Operating Partnership acquired additional interest in two
regional malls and opened one regional mall during the comparative periods (the
"Property Transactions"). The following is a description of such transactions.
On April 11, 1996, the Operating Partnership acquired the remaining 50%
economic ownership interest in Ross Park Mall in Pittsburgh, Pennsylvania, and
subsequently began accounting for the Property using the consolidated method of
accounting. On July 31, 1996, the Operating Partnership opened Cottonwood Mall
in Albuquerque, New Mexico. The Operating Partnership owns 100% of this
regional mall and accounts for it using the consolidated method of accounting.
On October 4, 1996, the Operating Partnership acquired the remaining interest
in North East Mall and subsequently began accounting for the Property using the
consolidated method of accounting.
Results of Operations
For the Three Months Ended June 30, 1997 vs. the Three Months Ended June 30,
1996
Total revenue increased $101.3 million or 70.5% for the three months ended
June 30, 1997, as compared to the same period in 1996. This increase is
primarily the result of the Merger ($91.9 million) and the Property
Transactions ($7.5 million). Excluding these transactions, total revenues
increased $1.8 million, which includes a $1.6 million increase in minimum rent,
a $0.9 million increase in overage rent, and a $1.1 million increase in tenant
reimbursements, partially offset by a $1.8 million decrease in other income.
The $1.6 million increase in minimum rents results from increased occupancy
levels and the replacement of expiring tenant leases with renewal leases at
higher minimum base rents. The $1.8 million decrease in other income is
primarily the result of an adjustment recorded in the prior year to reflect the
collectability of notes receivable ($2.0 million).
Total operating expenses increased $49.9 million, or 61.8%, for the three
months ended June 30, 1997, as compared to the same period in 1996. This
increase is primarily the result of the Merger ($48.3 million) and the Property
Transactions ($3.6 million).
Interest expense increased $26.5 million, or 65.3% for the three months
ended June 30, 1997, as compared to the same period in 1996. This increase is
primarily as a result of the Merger ($25.7 million) and the Property
Transactions ($1.6 million).
Income of the Operating Partnership was $46.9 million for the three months
ended June 30, 1997, as compared to $24.0 million for the same period in 1996,
reflecting an increase of $23.0 million, for the reasons discussed above, and
was allocated to the Company based on the Company's preferred unit preference
and ownership interest in the Operating Partnership during the period.
<PAGE> 13
Preferred distributions increased by $4.4 million to $6.4 million in 1997
as a result of the Company's issuance of $200 million of 8 3/4% Series B
cumulative redeemable preferred stock on September 27, 1996.
For the Six Months Ended June 30, 1997 vs. the Six Months Ended June 30, 1996
Total revenue increased $204.3 million or 72.1% for the six months ended
June 30, 1997, as compared to the same period in 1996. This increase is
primarily the result of the Merger ($185.8 million) and the Property
Transactions ($18.7 million). Excluding these transactions, total revenues
decreased $0.3 million, which includes a $3.3 million increase in minimum rent,
a $0.7 million increase in overage rent, and a $1.7 million increase in tenant
reimbursements, partially offset by a $6.0 million decrease in other income.
The $3.3 million increase in minimum rents results from increased occupancy
levels, the replacement of expiring tenant leases with renewal leases at higher
minimum base rents, and a $1.3 million increase in rents from tenants operating
under license agreements. The $6.0 million decrease in other income is
primarily the result of an adjustment recorded in the prior year to reflect the
collectability of notes receivable ($2.0 million) and decreases in lease
settlement income ($2.2 million) and interest income ($1.7 million).
Total operating expenses increased $102.2 million, or 64.3%, for the six
months ended June 30, 1997, as compared to the same period in 1996. This
increase is primarily the result of the Merger ($96.0 million) and the Property
Transactions ($9.7 million).
Interest expense increased $55.9 million, or 70.6% for the six months
ended June 30, 1997, as compared to the same period in 1996. This increase is
primarily as a result of the Merger ($51.7 million) and the Property
Transactions ($5.7 million).
The $24.7 million loss from extraordinary items in 1997 is the result of
the acquisition of the contingent interest feature on four loans for $21.0
million and write-off of mortgage costs associated with early extinguishments
of debt.
Income of the Operating Partnership was $66.8 million for the six months
ended June 30, 1997, as compared to $47.5 million for the same period in 1996,
reflecting an increase of $19.2 million, for the reasons discussed above, and
was allocated to the Company based on the Company's preferred unit preference
and ownership interest in the Operating Partnership during the period.
Preferred distributions increased by $8.8 million to $12.8 million in 1997
as a result of the Company's issuance of $200 million of 8 3/4% Series B
cumulative redeemable preferred stock on September 27, 1996.
Liquidity and Capital Resources
As of June 30, 1997, the Operating Partnership's balance of unrestricted
cash and cash equivalents was $44.9 million. In addition to its cash balance,
the Operating Partnership has a $750 million Credit Facility with approximately
$379 million available after outstanding borrowings and letters of credit.
Subsequent to June 30, 1997, net reductions of $180 million have been made to
the Credit Facility, including paydowns from the net proceeds of the Series C
Preferred Shares offering which were contributed by the Company in exchange for
preferred units and from the net proceeds of the Notes offering, partially
offset bynd a borrowing to finance the acquisition of Dadeland Mall (See below).
Consequently, as of August 11, 1997, the amount of borrowing availability under
the Credit Facility was approximately $559 million. The Company and the
Operating Partnership also have access to public equity and debt markets through
various shelf registrations.
Acquisitions. On June 16, 1997, the Operating Partnership purchased
1,408,450 shares of common stock of Chelsea GCA Realty, Inc. ("Chelsea"), a
publicly traded REIT, for approximately $50 million using borrowings from the
Credit Facility. The shares purchased represent approximately 9.2% of
Chelsea's outstanding common stock. In addition, the Operating Partnership and
Chelsea announced that they have formed a strategic alliance to develop and
acquire manufacturer's outlet shopping centers with 500,000 square feet or more
of GLA in the United States.
On July 10, 1997, the Operating Partnership acquired a 48% interest
in West Town Mall in Knoxville, Tennessee for $69.9 million. This transaction
increased the Operating Partnership's ownership of West Town Mall to 50%.
Effective July 10, 1997, the property is being accounted for using the equity
method of accounting. It was previously accounted for using the cost method.
On August 8, 1997, an affiliate of the Operating Partnership
acquired a 50% interest in a trust that owns Dadeland Mall, a 1.4
million square foot super-regional mall in Miami, Florida. Dadeland
Mall is a dominant mall in its trade area with small shop sales of $649
per square foot in 1996 and leased and committed occupancy of 94%. A
portion of the purchase price was paid in the form of 658,707 shares of
the Company's common stock. The remaining portion of the purchase price
was financed using borrowings from the Credit Facility. This joint
venture will be accounted for using the equity method of accounting.
<PAGE> 14
Financing and Debt. The Company's ratio of consolidated debt-to-market
capitalization was 42.2% at June 30, 1997.
At June 30, 1997, the Operating Partnership had consolidated debt of
$3,929 million, of which $2,938 million was fixed-rate debt and $991 million
was variable-rate debt. The Operating Partnership's pro rata share of
indebtedness of the unconsolidated joint venture Properties as of June 30, 1997
and December 31, 1996 was $499 million and $448 million, respectively. As of
June 30, 1997 and December 31, 1996, the Operating Partnership had interest-
rate protection agreements related to $477 million and $525 million of its pro
rata share of indebtedness, respectively. The agreements are generally in
effect until the related variable-rate debt matures.
On April 14, 1997, the Operating Partnership obtained improvements to its
Credit Facility. The Credit Facility agreement was amended to reduce the
interest rate from LIBOR plus 0.90% to LIBOR plus 0.75%. In addition, the
Credit Facility's competitive bid feature, which has further reduced interest
costs, was increased from $150 million to $300 million.
On May 15, 1997, the Operating Partnership established a Medium-Term Note
("MTN") program. On June 24, 1997, the Operating Partnership completed the
sale of $100 million of notes under the MTN program. The notes sold bear
interest at 7.125% and have a stated maturity of June 24, 2005. The net
proceeds of this sale were used primarily to pay down the Credit Facility.
Additionally, on May 15, 1997, the Operating Partnership refinanced
approximately $140 million in existing debt on The Forum Shops at Caesar's.
The new debt consists of three classes of notes totaling $180 million, with $90
million bearing interest at 7.125% and the other $90 million bearing interest
at LIBOR plus 0.30%, all of which will mature on May 15, 2004. Approximately
$40 million of the borrowings were placed in escrow to pay for construction
costs required in connection with the development of the expansion of this
project, which is scheduled to open on August 28, 1997. As of June 30, 1997,
$28.5 million remains in escrow.
On June 5, 1997, the Operating Partnership closed a $115 million
construction loan for The Shops at Sunset Place. The loan initially bears
interest at LIBOR plus 1.25% and matures on June 30, 2000, with two one-year
extensions available.
On June 30, 1997, the Operating Partnership closed an unsecured loan which
bears interest at LIBOR plus 0.75% and matures on September 29, 1998. The
proceeds were used to retire an existing $55 million mortgage on East Towne
Mall, which bore interest at LIBOR plus 1.125%.
On July 9, 1997 the Company sold 3,000,000 shares of 7.89% Series C
Cumulative Step-Up Premium RateSM Preferred Stock (the "Series C Preferred
Shares") in a public offering at $50.00 per share. Beginning October 1, 2012,
the rate increases to 9.89% of the liquidation preference per annum. The
Series C Preferred Shares are not redeemable prior to September 30, 2007.
Beginning September 30, 2007, the Series C Preferred Shares may be redeemed at
the option of the Company in whole or in part, at a redemption price of $50.00
per share, plus accrued and unpaid distributions, if any, thereon. The
redemption price of the Series C Preferred Shares may only be paid from the
sale proceeds of other capital stock of the Company, which may include other
classes or series of preferred stock. Additionally, the Series C Preferred
Share have no stated maturity and are not subject to any mandatory redemption
provisions, nor are they convertible into any other securities of the Company.
The Company contributed the net proceeds of this offering of approximately
$146,000 to the Operating Partnership in exchange for preferred units, the
economic terms of which are substantially identical to the Series C Preferred
Shares. The Operating Partnership used the net proceeds for the purchase of
additional ownership interest in West Town Mall, to pay down the
Credit Facility and for general working capital purposes.
On July 17, 1997, the Operating Partnership completed a $250 million
public offering, of two tranches of its seven-year and twelve-year non-
convertible senior unsecured debt securities (the "Notes"). The first tranche
was for $100 million at 6 3/4% with a maturity of July 15, 2004. The second
tranche was for $150 million at 7% with a maturity of July 15, 2009. The
Notes pay interest semi-annually, are guaranteed by SDG, LP and SPG, LP, and
contain covenants relating to minimum leverage, EBITDA and unencumbered EBITDA
ratios. The Notes were issued under the Operating Partnership's $750 million
debt shelf registration. Up to $150 million in additional debt securities may
be issued under this registration.
In addition, on August 13, 1997, SDG, LP filed a shelf registration
statement with the SEC to provide for the offering, from time to time, of up to
$1 billion aggregate public offering price of unsecured debt securities of
SDG, LP. The net proceeds of such offerings may be used to fund acquisition or
development activity, retire existing debt or for any other purpose deemed
appropriate by the SDG, LP. Any securities issued under this registration
would be guaranteed by SPG, LP, although management has no immediate plans to
issue securities under the program.
Development, Expansions and Renovations. The Operating Partnership is
involved in several development, expansion and renovation efforts.
In March 1997, the Operating Partnership opened Indian River Commons, a
265,000 square foot community shopping center in Vero Beach, Florida. This 50%-
owned joint venture is accounted for using the equity method of accounting.
Construction also continues on the following development projects: The
Source, an approximately $150 million value-oriented retail and entertainment
development project containing 730,000 square feet of GLA, is expected to open
<PAGE> 15
in September 1997 in Westbury (Long Island), New York. Arizona Mills, an
approximately $190 million retail development project containing 1.2 million
square feet of GLA, is expected to open in November 1997 in Tempe, Arizona.
Grapevine Mills, an approximately $200 million retail development project
containing approximately 1.4 million square feet of GLA, is expected to open in
October 1997 in Grapevine (Dallas/Fort Worth), Texas. The Shops at Sunset
Place, an approximately $150 million destination-oriented retail and
entertainment project containing approximately 500,000 square feet of GLA, is
scheduled to open in 1998 in South Miami, Florida.
In addition, the Operating Partnership has begun construction on two new
community center projects at an aggregate cost of approximately $50 million.
Muncie Plaza, a wholly-owned project, is scheduled to open in April of 1998 in
Muncie, Indiana. Lakeline Plaza, a 50%-owned joint venture project, is
scheduled to open in two phases in May and November of 1998 in Austin, Texas.
Each of these projects is immediately adjacent to existing regional mall
Properties.
A key objective of the Operating Partnership is to increase the
profitability and market share of its Properties through the completion of
strategic renovations and expansions. The Operating Partnership currently has
a number of expansion projects under construction and in the preconstruction
development stage. The Operating Partnership's share of the projected costs to
fund these projects for the year 1997 is approximately $300 million. It is
anticipated that the cost of these projects will be financed principally with
the Credit Facility, project-specific indebtedness, access to debt and equity
markets, and cash flows from operations. Included in investment properties at
June 30, 1997 is $213.5 million of construction in progress.
Distributions. During the first quarter of 1997, the Company paid a
distribution of $0.4925 per share to shareholders of record on February 7,
1997. On each of May 6, 1997 and July 28, 1997, the Company declared
distributions of $0.505 per share of common stock, an increase of $.0125 per
share over the previous distributions. Future common stock distributions will
be determined based on actual results of operations and cash available for
distribution. In addition, preferred dividends of $1.0156 per Series A
preferred share and $1.0938 per Series B preferred share were paid during the
first six months of 1997.
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 shareholders
in accordance with tax requirements applicable to REITs. 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 sold in
the public markets.
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, and
securities which may be issued under existing debt and equity shelf
registrations are sufficient to finance likely acquisitions. No assurance can
be given that the Company 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.
Investing and Financing Activities
Cash flows from investing activities for the six months ended June 30,
1997 included, $142.3 million of capital expenditures, which included
construction costs of $35.6 million, including $15.0 million at The Shops at
Sunset Place and $9.2 million for the acquisition of the land for the
construction of North East Plaza. Also included in capital expenditures is
renovation and expansion costs of approximately $81.4 million and tenant costs
and other operational capital expenditures of approximately $25.3 million. The
$27.3 million net increase in restricted cash relates primarily to an escrow
for costs associated with the expansion of Forum. In addition, investments in
and advances to unconsolidated entities of $39.9 million included $14.8
million, $14.0 million and $6.2 million to the Management Company, Grapevine
Mills and The Source, respectively. Other investing activities includes $50
million for the purchase of Chelsea stock and $5.4 million to purchase bonds.
Cash flows from financing activities for the six months ended June 30,
1997 included distributions of $170.6 million, net borrowings of $241.2 million
primarily used to fund development and other investment activity, and $21.0
million for the acquisition of a contingent interest feature on four mortgage
loans.
EBITDA-Earnings from Operating Results before Interest, Taxes,
Depreciation and Amortization
Management believes that there are several important factors that
contribute to the ability of the Operating Partnership to increase rent and
improve profitability of its shopping centers, including aggregate tenant sales
volume, sales per square foot, occupancy levels and tenant costs. Each of
these factors has a significant effect on EBITDA. Management believes that
EBITDA is an effective measure of shopping center operating performance
<PAGE> 16
because: (i) it is industry practice to evaluate real estate properties based
on operating income before interest, taxes, depreciation and amortization,
which is generally equivalent to EBITDA; and (ii) EBITDA is unaffected by the
debt and equity structure of the property owner. EBITDA: (i) does not
represent cash flow from operations as defined by generally accepted accounting
principles; (ii) should not be considered as an alternative to net income as a
measure of operating performance; (iii) is not indicative of cash flows from
operating, investing and financing activities; and (iv) is not an alternative
to cash flows as a measure of liquidity.
Total EBITDA for the Properties increased from $232.0 million for the six
months ended June 30, 1996 to $419.2 million for the same period in 1997,
representing a growth rate of 80.7%. This increase is primarily attributable
to the Merger ($177.0 million) and the Properties opened during 1996 and 1997
($19.9 million). During this period, operating profit margin increased from
62.3% to 64.1%.
FFO-Funds from Operations
FFO, as defined by the National Association of Real Estate Investment
Trusts ("NAREIT"), means the consolidated net income of the Operating
Partnership and its subsidiaries without giving effect to depreciation and
amortization, gains or losses from extraordinary items, gains or losses on
sales of real estate, gains or losses on investments in marketable securities
and any provision/benefit for income taxes for such period, plus the allocable
portion, based on the Operating Partnership's ownership interest, of funds from
operations of unconsolidated joint ventures, all determined on a consistent
basis in accordance with generally accepted accounting principles. Management
believes that FFO is an important and widely used measure of the operating
performance of REITs which provides a relevant basis for comparison among
REITs. FFO is presented to assist investors in analyzing the performance.
FFO: (i) does not represent cash flow from operations as defined by generally
accepted accounting principles; (ii) should not be considered as an alternative
to net income as a measure of operating performance or to cash flows from
operating, investing and financing activities; and (iii) is not an alternative
to cash flows as a measure of liquidity.
The following summarizes FFO of the Operating Partnership and reconciles
net income of the Operating Partnership to FFO for the periods presented:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In thousands)
FFO of the Operating Partnership $ 93,285 $ 50,532 $181,224 $ 99,212
======== ======== ======== ========
Reconciliation:
Income of the Operating
Partnership before extraordinary
items $ 48,413 $ 23,968 $ 91,475 $ 47,800
Plus:
Depreciation and amortization
from consolidated Properties 43,774 26,501 87,086 51,038
The Operating Partnership's share
of depreciation, and
amortization from unconsolidated
affiliates 9,152 2,918 18,010 5,950
Less:
Gain on the sale of real estate
17 N/A (20) N/A
Minority interest portion of
depreciation, amortization and
extraordinary items (1,664) (824) (2,514) (1,514)
Preferred dividends (6,407) (2,031) (12,813) (4,062)
-------- -------- -------- --------
FFO of the Operating Partnership $ 93,285 $ 50,532 $181,224 $ 99,212
======== ======== ======== ========
FFO allocable to the Company $ 57,416 $ 30,892 $111,408 $ 60,619
======== ======== ======== ========
<PAGE> 17
Portfolio Data
Operating statistics give effect to the Merger and are based upon the
business and Properties of the Operating Partnership and DRC on a combined
basis for all periods presented. The purpose of this presentation is to
provide a more comparable set of statistics on the portfolio as a whole. The
following statistics exclude Ontario Mills and Charles Towne Square. Ontario
Mills is a new value-oriented super-regional mall which management believes is
not comparable to the remaining Properties. The Operating Partnership intends
to create a separate reporting category for its Mills Properties in 1997,
following the expected openings of Grapevine Mills and Arizona Mills. The
Operating Partnership is converting Charles Towne Square into a community
center.
Aggregate Tenant Sales Volume. For the six months ended June 30, 1997
compared to the same period in 1996, total reported retail sales for mall and
freestanding stores at the regional malls for GLA owned by the Operating
Partnership ("Owned GLA") increased 4.2% from $2,785 million to $2,902 million.
Total reported sales for all stores at the community shopping centers for Owned
GLA decreased 2.4% from $668 million to $652 million. Retail sales at Owned
GLA affect revenue and profitability levels because they determine the amount
of minimum rent that can be charged, the percentage rent realized, and the
recoverable expenses (common area maintenance, real estate taxes, etc.) the
tenants can afford to pay.
Occupancy Levels. Occupancy levels for regional malls increased 1.8% to
85.2% at June 30, 1997 as compared to 83.4% at June 30, 1996 . Occupancy
levels for community shopping centers increased from 91.8% at June 30, 1996 to
92.4% at June 30, 1997. Total GLA has increased 3.9 million square feet from
June 30, 1996 to June 30, 1997, primarily as a result of the July 1996 opening
of Cottonwood Mall, the November 1996 openings of Ontario Mills, the Tower
Shops and Indian River Mall, and the March 1997 opening of Indian River
Commons, partially offset by the March 1997 sale of Bristol Plaza.
Average Base Rents. Average base rents per square foot of mall and
freestanding stores at regional mall Owned GLA increased 3.8%, from $20.18 at
June 30, 1996 to $20.94 as of June 30, 1997. In community shopping centers,
average base rents per square foot of Owned GLA increased 4.2%, from $7.44 to
$7.75 during this same period.
Inflation
Inflation has remained relatively low during the past three 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 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 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 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 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.
<PAGE> 18
Part II - Other Information
Item 1: Legal Proceedings
None.
Item 4: Submission of Matters to a vote of Security Holders:
The Company's annual meeting of shareholders was held on May 14, 1997.
During this meeting the following matters were voted on: Birch Bayh was
elected as a director by the holders of the Company's Common Stock, Class
B Common Stock, Class C Common Stock and Series A Preferred Stock, voting
together as a single class, with 93,465,854 votes in favor, 2,032,086
abstentions and no votes against or broker non-votes. The holder of the
Company's Class B Common Stock voted all 3,200,000 shares for the election
as director of Melvin Simon, Herbert Simon, David Simon and Richard
Sokolov. The holders of the Company's Class C Common Stock, voting
separately, voted all 4,000 shares for the election as director of Edward
J. DeBartolo, Jr. and Marie Denise DeBartolo York. The holders of the
Company's Common Stock, Class B Common Stock, Class C Common Stock and
Series A Preferred Stock, voting together as a single class, also ratified
the selection of Arthur Andersen LLP as auditors for 1997, with 95,366,384
votes in favor, 57,345 against, 74,211 abstentions and no broker non-
votes.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
One Form 8-K was filed during the current period.
On May 22, 1997 under Item 5 - Other Events, the Company
reported that it made available additional ownership and
operational information concerning the Company, the Operating
Partnership, and the Properties owned or managed as of March
31, 1997, in the form of a Supplemental Information Package. A
copy of the package was included as an exhibit to the 8-K
filing.
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMON DEBARTOLO GROUP, INC.
Date: August 13, 1997 /s/ Stephen E. Sterrett
-----------------------
Stephen E. Sterrett
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: August 13, 1997 /s/ John Dahl
-----------------------
John Dahl,
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
<PAGE> 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such condensed
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 44,946
<SECURITIES> 0
<RECEIVABLES> 165,375<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 5,446,684
<DEPRECIATION> 358,928
<TOTAL-ASSETS> 6,046,434
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 3,928,662
0
292,912
<COMMON> 9
<OTHER-SE> 952,028
<TOTAL-LIABILITY-AND-EQUITY> 6,046,434<F3>
<SALES> 0
<TOTAL-REVENUES> 487,469
<CGS> 0
<TOTAL-COSTS> 261,308
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,825
<INTEREST-EXPENSE> 134,994
<INCOME-PRETAX> 91,475
<INCOME-TAX> 91,475
<INCOME-CONTINUING> 91,475
<DISCONTINUED> 0
<EXTRAORDINARY> (24,714)
<CHANGES> 0
<NET-INCOME> 45,997
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
<FN>
<F1>Receivables are stated net of allowances and also include accrued revenues.
<F2>The Company does not report using a classified balance sheet.
<F3>Also includes Limited Partners' interest in the Operating Partnership
of $605,841.
</FN>
</TABLE>
