21
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, 1998
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 Identification No.)
organization)
115 West Washington Street
Indianapolis, Indiana 46204
(Address of principal executive (Zip Code)
offices)
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 11 , 1998, 110,508,997 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>
<TABLE>
SIMON DeBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per share amounts)
June 30, December 31,
1998 1997
<S> <C> <C> <C>
ASSETS:
Investment properties, at cost $7,063,621 $6,867,354
Less - accumulated depreciation 558,504 461,792
--------- ---------
6,505,117 6,405,562
Cash and cash equivalents 103,365 109,699
Restricted cash 5,962 8,553
Tenant receivables and accrued revenue, net 189,344 188,359
Notes and advances receivable from Management
Company and affiliate 110,854 93,809
Investment in partnerships and joint ventures,
at equity 760,450 612,140
Investment in Management Company and affiliates 0 3,192
Other investment 56,338 53,785
Deferred costs and other assets 175,500 164,413
Minority interest 25,885 23,155
--------- -----------
Total assets $7,932,815 $7,662,667
========= ============
LIABILITIES:
Mortgages and other indebtedness $5,228,015 $5,077,990
Accounts payable and accrued expenses 247,680 245,121
Cash distributions and losses in partnerships
and joint ventures, at equity 23,870 20,563
Investment in Management Company and affiliates 973 0
Other liabilities 82,059 67,694
---------- -----------
Total liabilities 5,582,597 5,411,368
--------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
LIMITED PARTNERS' INTEREST IN THE OPERATING
PARTNERSHIP 734,554 694,437
SHAREHOLDERS' EQUITY:
Series B cumulative redeemable preferred stock,
9,200,000 shares authorized, 8,000,000 issued
and outstanding 192,989 192,989
Series C cumulative redeemable preferred stock,
3,000,000 shares authorized, issued and
outstanding 146,206 146,072
Common stock, $.0001 par value, 375,796,000
shares authorized, and 110,474,134 and
106,439,001 issued and outstanding,
respectively 11 10
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 0 0
Capital in excess of par value 1,620,877 1,491,908
Accumulated deficit (323,923) (263,308)
Unrealized gain on long-term investment 4,051 2,420
Unamortized restricted stock award (24,548) (13,230)
--------- -----------
Total shareholders' equity 1,615,664 1,556,862
---------- ----------
Total liabilities, limited partners' interest
and shareholders' equity $7,932,815 $7,662,667
========== ============
The accompanying notes are an integral part of
these statements.
<Page 02>
SIMON DeBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
REVENUE:
Minimum rent $186,474 $149,354 $370,934 $297,373
Overage rent 10,701 10,049 20,483 17,564
Tenant reimbursemes 91,811 74,208 181,971 150,031
Other income 21,389 11,444 37,244 22,501
Total revenue 310,375 245,055 610,632 487,469
EXPENSES:
Property operating 50,479 41,357 100,258 84,025
Depreciation and amortization 58,313 44,129 116,618 87,483
Real estate taxes 28,764 24,589 58,959 49,350
Repairs and maintenance 11,655 7,597 23,550 17,546
Advertising and promotion 8,621 6,687 16,722 11,900
Provision for credit losses 733 1,850 3,455 2,825
Other 6,584 4,391 12,177 8,179
Total operating expenses 165,149 130,600 331,739 261,308
OPERATING INCOME 145,226 114,455 278,893 226,161
INTEREST EXPENSE 92,510 67,076 184,420 134,994
INCOME BEFORE MINORITY INTEREST 52,716 47,379 94,473 91,167
MINORITY INTEREST (2,154) (741) (3,596) (2,225)
GAINS (LOSSES) ON SALES OF ASSETS (7,219) (17) (7,219) 20
INCOME BEFORE UNCONSOLIDATED
ENTITIES 43,343 46,621 83,658 88,962
INCOME FROM UNCONSOLIDATED ENTITIES 171 1,792 4,980 2,513
INCOME BEFORE EXTRAORDINARY ITEMS 43,514 48,413 88,638 91,475
EXTRAORDINARY ITEMS 7,024 (1,467) 7,024 (24,714)
INCOME OF THE OPERATING PARTNERSHIP 50,538 46,946 95,662 66,761
LESS--LIMITED PARTNERS' INTEREST IN
THE OPERATING PARTNERSHIP 15,737 15,588 29,579 20,764
NET INCOME 34,801 31,358 66,083 45,997
PREFERRED DIVIDENDS (7,334) (6,407) (14,668) (12,813)
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $27,467 $24,951 $51,415 $33,184
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary items $0.21 $0.27 $0.42 $0.50
Extraordinary items
0.04 (0.01) 0.04 (0.16)
Net income $0.25 $0.26 $0.46 $0.34
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary items $0.21 $0.27 $0.42 $0.50
Extraordinary items 0.04 (0.01) 0.04 (0.16)
Net income $0.25 $0.26 $0.46 $0.34
The accompanying notes are an integral part of these statements.
<Page 03>
SIMON DeBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
For the Six Months Ended June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $66,083 $45,997
Adjustments to reconcile net income to
net cash provided
by operating activities-
Depreciation and amortization 120,915 90,961
Extraordinary items (7,024) 24,714
(Gains) losses on sales of assets, net 7,219 (20)
Limited partners' interest in
Operating Partnership 29,579 20,764
Straight-line rent (4,091) (3,461)
Minority interest 3,596 2,225
Equity in income of unconsolidated
entities (4,980) (2,513)
Changes in assets and liabilities-
Tenant receivables and accrued revenue 4,517 7,104
Deferred costs and other assets (1,866) (8,370)
Accounts payable, accrued expenses and
other liabilities 1,235 (5,347)
------------- --------------
Net cash provided by operating
activities 215,183 172,054
------------ ---------------
<Page 04>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (245,296) 0
Capital expenditures (126,897) (142,327)
Change in restricted cash 2,591 (27,304)
Cash from acquisitions 4,387 0
Net proceeds from sales of assets 46,087 599
Investments in unconsolidated entities (23,599) (25,130)
Distributions from unconsolidated
entities 130,471 19,211
Investments in and advances to
Management Company (17,045) 14,757
Other investing activity 0 (55,400)
------------- ----------------
Net cash used in investing activities (229,301) (245,108)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock,
net 92,350 5,920
Minority interest distributions, net (6,326) (1,792)
Distributions to shareholders (126,698) (109,824)
Distributions to limited partners (63,727) (60,822)
Mortgage and other note proceeds, net
of transaction costs 1,485,545 590,798
Mortgage and other note principal
payments (1,373,360) (349,589)
Other refinancing transaction 0 (21,000)
------------- --------------
Net cash provided by financing
activities 7,784 53,691
------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (6,334) (19,363)
CASH AND CASH EQUIVALENTS, beginning
of period 109,699 64,309
------------ --------------
CASH AND CASH EQUIVALENTS, end of
period $103,365 $44,946
=========== ==============
The accompanying notes are an integral part of these statements.
<Page 05>
SIMON DeBARTOLO GROUP, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands, except per share amounts)
Note 1 - Organization
Simon DeBartolo Group, Inc. (the "Company") is a self-administered
and self-managed real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended. Simon DeBartolo Group, L.P.
(the "Operating Partnership") is a subsidiary partnership of the
Company. 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, 1998, the Operating
Partnership owned or held an interest in 216 income-producing
properties, which consisted of 131 regional malls, 75 community shopping
centers, three specialty retail centers, four mixed-use properties and
three value-oriented super-regional malls in 34 states (the
"Properties"). The Operating Partnership also owned interests in one
specialty retail center and one value-oriented super-regional mall under
construction, an additional two community centers in the final stages of
preconstruction development and eight parcels of land held for future
development. In addition, the Operating Partnership holds substantially
all of the economic interest in M.S. Management Associates, Inc. (the
"Management Company" - See Note 7). The Operating Partnership also holds
substantially all of the economic interest in, and the Management
Company holds substantially all of the voting stock of, DeBartolo
Properties Management, Inc. ("DPMI"), which provides architectural,
design, construction and other services to substantially all of the
Portfolio Properties, as well as certain other regional malls and
community shopping centers owned by third parties. The Company owned
63.9% of the Operating Partnership at both June 30, 1998 and December
31, 1997.
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, 1998 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, 1997 audited financial statements and
notes thereto included in the Simon DeBartolo Group, Inc. Annual Report,
as amended, on Form 10-K/A .
<Page 06>
The accompanying consolidated condensed financial statements of the
Company include all accounts of the Company, its wholly-owned qualified
REIT subsidiaries, the Operating Partnership and the Operating
Partnership's subsidiaries. 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 and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and 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 are accounted for using the
consolidated method of accounting. 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 75.0% ownership
interests and the investment in the Management Company 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.
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, 1998 and 1997 was 63.6% and 61.5%, respectively. The Company's
remaining weighted average ownership interest in the Operating
Partnership for the six-month periods ended June 30, 1998 and 1997 was
63.5% and 61.5%, respectively.
<Page 07>
Note 3 - Reclassifications
Certain reclassifications of prior period amounts have been made in
the financial statements to conform to the 1998 presentation. These
reclassifications have no impact on the net operating results previously
recorded.
Note 4 - Acquisitions and Development
On January 26, 1998, the Operating Partnership acquired Cordova
Mall in Pensacola, Florida for approximately $87,300, which included the
assumption of a $28,935 mortgage, which was later retired, and the
issuance of 1,713,016 units of ownership interest in the Operating
Partnership ("Units"), valued at approximately $55,500. This 874,000
square-foot regional mall is wholly-owned by the Operating Partnership.
On January 30, 1998, the Operating Partnership acquired additional
15% ownership interests in Lakeline Mall and Lakeline Plaza for 191,634
Units valued at approximately $6,300. On April 30, 1998 the Operating
Partnership acquired additional 10% ownership interests in Lakeline Mall
and Lakeline Plaza for 127,756 Units valued at approximately $4,200. On
July 31, 1998, the Operating Partnership acquired additional 5%
ownership interests in both Lakeline Mall and Lakeline Plaza for $2,100
in cash. These acquisitions increased the Operating Partnership's
ownership interest in each of these Properties to a noncontrolling 80%.
On February 27, 1998, the Operating Partnership, in a joint venture
partnership with The Macerich Company ("Macerich"), acquired a portfolio
of twelve regional malls and two community centers (the "IBM
Properties") comprising approximately 10.7 million square feet of GLA at
a purchase price of $974,500, including the assumption of $485,000 of
indebtedness. The Operating Partnership and Macerich, as noncontrolling
50/50 partners in the joint venture, were each responsible for one half
of the purchase price, including indebtedness assumed and each assumed
leasing and management responsibilities for six of the regional malls
and one community center. The Operating Partnership funded its share of
the cash portion of the purchase price using borrowings from a new $300,000
unsecured revolving credit facility, which bore interest at LIBOR plus
0.65% and had a maturity of August 27, 1998. This facility was
subsequently retired as described in Note 8.
In March of 1998, the Operating Partnership opened the
approximately $13,300 Muncie Plaza in Muncie, Indiana. The Operating
Partnership owns 100% of this 196,000 square-foot community center. In
addition, phase I of the approximately $34,000 Lakeline Plaza opened in
April 1998 in Austin, Texas. Phase II of this 360,000 square-foot
community center is scheduled to open in 1999. Each of these new community
centers is adjacent to an existing regional mall in the Company's portfolio.
On April 15, 1998, the Operating Partnership purchased the
remaining 7.5% ownership interest in Buffalo Grove Towne Center for
$255. This 134,000 square-foot community center is in Buffalo Grove,
Illinois.
<Page 08>
Effective May 5, 1998, in a series of transactions, the Operating
Partnership acquired the remaining 50.1% interest in Rolling Oaks Mall
for 519,889 shares of the Company's common stock, valued at
approximately $17,176. The Operating Partnership issued 519,889 Units to
the Company as consideration for the shares of common stock.
Effective June 1, 1998, the Operating Partnership sold The
Promenade for $33,500. The sale has been accounted for as an adjustment to the
allocation of the purchase price for the SCA Properties (See below). Effective
June 30, 1998, the Operating Partnership sold Southtown Mall for $3,250 and
recorded a $7,219 loss on the transaction.
On June 4, 1998, the Operating Partnership, Argo II, an investment
fund established by J.P. Morgan and The O'Connor Group, and Harvard
Private Capital Group ("Harvard") announced that they have collectively
committed to acquire a 44 percent ownership position in Groupe BEG, S.A.
("BEG"). BEG is a fully integrated retail real estate developer, lessor
and manager headquartered in Paris, France. The Operating Partnership,
and its affiliated Management Company have contributed $15,000 of equity
capital for a noncontrolling 22% ownership interest and are committed to an
additional investment of $37,500 over the next 12 to 18 months. The
agreement with BEG is structured to allow the Operating Partnership,
Argo II and Harvard to collectively acquire a controlling interest in BEG
over time.
Pro Forma
On September 29, 1997, the Operating Partnership completed its cash
tender offer for all of the outstanding shares of beneficial interests
of The Retail Property Trust ("RPT"), a private REIT. RPT owned 98.8% of
Shopping Center Associates ("SCA"), which owned or had interests in
twelve regional malls and one community center, comprising approximately
twelve million square feet of GLA in eight states (the "SCA
Properties"). Following the completion of the tender offer, the SCA
portfolio was restructured. The Operating Partnership exchanged its 50%
interests in two SCA Properties to a third party for similar interests
in two other SCA Properties, in which it had 50% interests, with the
result that SCA then owned interests in a total of eleven Properties.
Effective November 30, 1997, the Operating Partnership also acquired the
remaining 50% ownership interest in another of the SCA Properties. In
addition, an affiliate of the Operating Partnership acquired the
remaining 1.2% interest in SCA. Additionally, on February 2, 1998, the
Operating Partnership sold the community center for $9,550. Also in
1998, as described above, the Operating Partnership sold The Promenade,
another SCA Property. At the completion of these transactions, the
Operating Partnership owns 100% of eight of the nine SCA Properties, and
a noncontrolling 50% ownership interest in the remaining Property. Final
adjustments to the purchase price allocation were not completed at June
30, 1998. While no material changes to the allocation are anticipated,
additional changes will be recorded in 1998.
The following unaudited pro forma summary financial information
excludes any extraordinary items and combines the consolidated results
of operations of the Company as if the RPT acquisition had occurred as
of January 1, 1997, and was carried forward through June 30, 1997.
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 RPT acquisition had been consummated at
January 1, 1997, nor does it purport to represent the results of
operations for future periods.
<Page 09>
Six Months Ended June 30, 1997
Revenue $ 558,532
========================
Net income of the Operating Partnership $ 85,038
========================
Net income available to common shareholders $ 44,425
========================
Net income per share $ 0.45
========================
Net income per share - assuming dilution $ 0.45
========================
Weighted average number of shares of common
stock outstanding 98,782,357
========================
Weighted average number of shares of common
stock outstanding - assuming dilution 99,157,613
Note 5 - Cash Flow Information
Cash paid for interest, net of amounts capitalized, during the six
months ended June 30, 1998 was $186,614, as compared to $132,889 for the
same period in 1997. All accrued distributions had been paid as of June
30, 1998 and December 31, 1997. See Notes 4 and 9 for information about
non-cash transactions during the six months ended June 30, 1998.
Note 6 - Per Share Data
In accordance with SFAS No. 128 (Earnings Per Share), basic
earnings per share is based on the weighted average number of shares of
common stock outstanding during the period and diluted earnings per
share is based on the weighted average number of shares of common stock
outstanding combined with the incremental weighted average shares that
would have been outstanding if all dilutive potential common shares
would have been converted into shares at the earliest date possible. The
weighted average number of shares of common stock used in the
computation for the three-month periods ended June 30, 1998 and 1997 was
111,954,695 and 97,520,174, respectively. The weighted average number of
shares of common stock used in the computation for the six-month periods
ended June 30, 1998 and 1997 was 110,825,745 and 97,248,027,
respectively. The diluted weighted average number of shares used in the
computation for the three-month periods ended June 30, 1998 and 1997 was
112,381,667 and 97,363,839, respectively. The diluted weighted average
number of shares used in the computation for the six-month periods ended
June 30, 1998 and 1997 was 111,214,946 and 97,623,283, respectively.
<Page 10>
Units held by limited partners in the Operating Partnership may be
exchanged for shares of common stock of the Company on a one-for-one
basis in certain circumstances and therefore are not dilutive. The
Company's 4,000,000 shares of Series A preferred stock have not been
considered in the computations of diluted earnings per share for any of
the periods presented, as they did not have a dilutive effect. On
November 11, 1997 these shares were converted into 3,809,523 shares of
common stock of the Company. Accordingly, the increase in weighted
average shares outstanding under the diluted method over the basic
method in every period presented for the Company is due entirely to the
effect of outstanding options under the Company's Employee Plan and
Director Plan. Basic and diluted earnings were the same for all periods
presented.
<Page 11>
Note 7 - Investment in Unconsolidated Entities
Partnerships and Joint Ventures
In March 1998, the Operating Partnership transferred its 50%
ownership interest in The Source, an approximately 730,000 square-foot
regional mall, to a newly formed limited partnership in which it has a
50% ownership interest, with the result that the Operating Partnership
now owns an indirect noncontrolling 25% ownership interest in The
Source. In connection with this transaction, the Operating Partnership's
partner in the newly formed limited partnership is entitled to a
preferred return of 8% on its initial capital contribution, a portion of
which was distributed to the Operating Partnership. The Operating
Partnership applied the distribution against its investment in The
Source.
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 1998 1997
Assets:
Investment properties at cost, net $ 3,838,289 $ 2,880,094
Cash and cash equivalents 94,019 101,582
Tenant receivables 98,891 87,008
Other assets 91,976 71,548
------------ --------------
Total assets $ 4,123,175 $ 3,140,232
============ ==============
Liabilities and Partners' Equity:
Mortgages and other indebtedness $ 2,487,967 $ 1,888,512
Accounts payable, accrued expenses and
other liabilities 187,562 212,543
------------ -------------
Total liabilities 2,675,529 2,101,055
Partners' equity 1,447,646 1,039,177
------------ --------------
Total liabilities and partners' equity $ 4,123,175 $ 3,140,232
============ ==============
The Operating Partnership's Share of:
Total assets $ 1,537,286 $ 1,082,232
============ ==============
Partners' equity $ 444,197 $ 297,866
Add: Excess Investment (See below) 292,383 293,711
------------ -------------
The Operating Partnership's Net
Investment in Joint Ventures $ 736,580 $ 591,577
<Page 12>
For the three For the six months
months ended ended
June 30, June 30,
STATEMENTS OF OPERATIONS 1998 1997 1998 1997
Revenue:
Minimum rent $106,881 $ 53,749 $197,562 $106,204
Overage rent 4,988 1,623 7,810 3,314
Tenant reimbursements 44,782 24,346 86,658 49,578
Other income 5,534 5,666 11,220 7,363
-------- -------- -------- --------
Total revenue 162,185 85,384 303,250 166,459
Operating Expenses:
Operating expenses and other 56,866 30,121 107,503 60,915
Depreciation and amortization 31,835 17,062 61,625 35,061
Total operating expenses 88,701 47,183 169,128 95,976
Operating Income 73,484 38,201 134,122 70,483
Interest Expense 46,501 20,489 85,178 41,578
Extraordinary Losses 42 324 42 1,182
-------- -------- -------- --------
Net Income 26,941 17,388 48,902 27,723
Third Party Investors' Share of
Net Income 17,207 13,340 34,030 20,377
-------- -------- -------- --------
The Operating Partnership's
Share of Net Income $ 9,734 $ 4,048 $ 14,872 $ 7,346
Amortization of Excess
Investment (See below) (3,417) (3,062) (5,402) (5,969)
======== ======== ======== ========
Income from Unconsolidated
Entities $ 6,317 $ 986 $ 9,470 $ 1,377
As of June 30, 1998 and December 31, 1997, 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 $292,383 and $293,711, respectively. This
Excess Investment, which resulted primarily from the Company's August 9,
1996 acquisition, through merger (the "DRC Merger"), of the national
shopping center business of DeBartolo Realty Corporation ("DRC"), is
being amortized generally over the life of the related Properties.
Amortization included in income from unconsolidated entities for the
three-month periods ended June 30, 1998 and June 30, 1997 was $3,417 and
$3,062, respectively. Amortization included in income from
unconsolidated entities for the six-month periods ended June 30, 1998
and June 30, 1997 was $5,402 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.
<Page 13>
The Management Company
The Management Company, including its consolidated subsidiaries,
provides management, leasing, development, accounting, legal, marketing
and management information systems services to one wholly-owned
Property, 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 (loss) of the Management Company, after
intercompany profit eliminations, was ($6,146) and $806 for the three-
month periods ended June 30, 1998 and 1997, respectively, and was
($4,490) and $1,136 for the six-month periods ended June 30, 1998 and
1997, respectively.
Note 8 - Debt
On June 18, 1998, the Operating Partnership refinanced a $33,878
mortgage on regional mall Property and recorded a $7,024 extraordinary gain
on the transaction, including debt forgiveness of $5,162 and the write-
off of a premium of $1,862. The new mortgage, which totals $35,000,
bears interest of 7.33% and matures on June 18, 2008. The retired
mortgage bore interest at 9.25% with a maturity of January 1, 2011.
On June 22, 1998, the Operating Partnership completed the sale of
$1,075,000 of senior unsecured debt securities. The issuance included
three tranches of senior unsecured notes as follows (1) $375,000 bearing
interest at 6.625% and maturing on June 15, 2003 (2) $300,000 bearing
interest at 6.75% and maturing on June 15, 2005 and (3) $200,000 bearing
interest at 7.375% and maturing on June 15, 2008. This offering also
included a fourth tranche of $200,000 of 7.00% Mandatory Par Put
Remarketed Securities ("MOPPRS") due June 15, 2028, which are subject to
redemption on June 16, 2008. The premium received relating to the MOPPRS
if aoorixunatekt $5,302 is being amortized over the life of the debt
securities. The net proceeds of approximately $1,062,000 were combined
with approximately $40,000 of working capital and used to retire and
terminate the $300,000 unsecured revolving credit facility (See Note 4)
and to reduce the balance of the Operating Partnership's $1,250,000 unsecured
revolving credit facility (the "Credit Facility") to $27,000. The Credit
Facility has an initial maturity of September 1999 with an optional one-year
extension. The debt retired had a weighted average interest rate of 6.29%.
The Operating Partnership has obtained a commitment from The Chase
Manhattan Bank, as administrative agent, for a $1,400,000 unsecured line
of credit (the "Facility") in connection with the Operating
Partnership's pending merger with Corporate Property Investors ("CPI")
(the "CPI Merger") (See Note 12). The Facility, which is scheduled to
close in conjunction with the CPI Merger, will bear interest at LIBOR
plus 65 basis points and will mature at the following intervals (i)
$450,000 on the nine-month anniversary of the closing (ii) $450,000 on
the eighteen-month anniversary of the closing and (iii) $500,000 on the
two-year anniversary of the closing. The Facility will be subject to
covenants and conditions substantially identical to those of the Credit
Facility.
<Page 14>
At June 30, 1998, the Operating Partnership had consolidated debt
of $5,228,015, of which $4,569,953 was fixed-rate debt and $658,062 was
variable-rate debt. The Operating Partnership's pro rata share of
indebtedness of the unconsolidated joint venture Properties as of June
30, 1998 and December 31, 1997 was $1,097,292 and $770,776,
respectively. As of June 30, 1998 and December 31, 1997, the Operating
Partnership had interest-rate protection agreements related to $674,279
and $380,379 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, consolidated interest
savings were $179 and $1,086 for the six months ended June 30, 1998 and
1997, respectively.
<Page 15>
Note 9 - Shareholders' Equity
The following table summarizes the changes in the Company's shareholders'
equity since December 31, 1997.
</TABLE>
<TABLE>
Unrealized
Gain on Capital in Unamortized Total
Preferred Common Investment Excess of Par Accumulated Restricted Stock Shareholders'
Stock Stock (1) Value Deficit Award Equity
Balance at
<C> <C> <C> <C> <C> <C> <C>
December 31, 1997 $339,061 $ 11 $ 2,420 $ 1,491,908 $(263,308) $ (13,230) $ 1,556,862
Common stock issued to the
public (2,957,335 shares) 1 91,412
91,413
Common stock issued in
connection with
acquisition
(519,889 shares) 17,176 17,176
Stock options exercised
(35,449 shares) 863 863
Stock incentive program
(487,498 shares, net of
forfeitures) 15,765 (15,765) --
Other common stock issued,
net (34,962 shares) 1,138 1,138
Amortization of stock
incentive 4,447 4,447
Adjustment to the limited
partners' interest in the
Operating Partnership 2,615 2,615
Distributions (126,698) (126,698)
Other 134 134
--------- ------ ---------- ------------ ----------- --------------- ------------
Subtotal 339,195 12 2,420 1,620,877 (390,006) (24,548) 1,547,950
Comprehensive Income:
Unrealized gain on
investment (1) 1,631 1,631
Net income 66,083 66,083
--------- ------ ---------- ---------- ---------- ------------- -----------
Total Comprehensive Income
1,631 66,083 67,714
--------- ------ ---------- ------------ ---------- ------------- ------------
Balance at
June 30, 1998 $ 339,195 $ 12 $ 4,051 $ 1,620,877 $(323,923) $ (24,548) $ 1,615,664
(1) Amounts consist of the Company's pro rata share of the unrealized
gain resulting from the change in market value of 1,408,450 shares of
common stock of Chelsea GCA Realty, Inc., a publicly traded REIT,
which the Operating Partnership purchased on June 16, 1997. The
investment in Chelsea is being reflected in the accompanying
consolidated condensed balance sheets in other investments.
<Page 16>
Stock Incentive Programs
In March 1995, an aggregate of 1,000,000 shares of restricted stock
was granted to 50 executives, subject to the performance standards,
vesting requirements and other terms of the Stock Incentive Program.
Prior to the DRC Merger, 2,108,000 shares of DRC common stock were
deemed available for grant to certain designated employees of DRC, also
subject to certain performance standards, vesting requirements and other
terms of DRC's stock incentive program (the "DRC Plan"). In April 1998,
492,478 shares were awarded to executives relating to 1997 performance.
Through June 30, 1998, 1,279,592 shares of common stock of the Company,
net of forfeitures, were deemed earned and awarded under the Stock
Incentive Program and the DRC Plan. Approximately $3,100 and $1,519
relating to these programs were amortized in the three-month periods
ended June 30, 1998 and 1997, respectively and approximately $4,447 and
$3,024 relating to these programs were amortized in the six-month
periods ended June 30, 1998 and 1997, respectively. The cost of
restricted stock grants, based upon the stock's fair market value at the
time such stock is earned, awarded and issued, is charged to
shareholders' equity and subsequently amortized against earnings of the
Operating Partnership over the vesting period.
Common Stock Issuances
During the second quarter, the Company issued 2,957,335 shares of
its common stock in private offerings generating combined net proceeds
of approximately $91,412. The net proceeds were contributed to the
Operating Partnership in exchange for a like number of Units. The
Operating Partnership used the net proceeds for general working capital
purposes.
Note 10 - 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 DPMI, and the plaintiffs are 27
former employees of the defendants. In the complaint, the plaintiffs
alleged 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 DRC Merger. Plaintiffs
asserted 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 DRC Merger, constituted a breach of contract
and a breach of the implied covenant of good faith and fair dealing
under Ohio law. Plaintiffs sought 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. The
plaintiffs and the Company each filed motions for summary judgment. On
October 31, 1997, the Court entered a judgment in favor of the Company
granting the Company's motion for summary judgment. The plaintiffs have
appealed this judgment and the matter is pending. While it is difficult
for the Company to predict the ultimate outcome of this action, based on
the information known to the Company to date, it is not expected that
this action will have a material adverse effect on the Company.
<Page 17>
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. The Company's appeal is pending.
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 11 - New Accounting Pronouncement
During the second quarter of 1998, the Financial Accounting
Standards Board ("FASB") released EITF 98-9, which clarified its position
relating to the timing of recognizing contingent rent. The Company has
adopted this pronouncement prospectively, beginning May 22, 1998, which
did not materially impact the quarterly financial statements. Management
has determined that adopting EITF 98-9 retroactively would not have had a
material impact on the financial statements, nor does management expect the
adoption to have a material impact on the 1998 annual financial statements.
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 will be effective for the Company beginning with the 1999
fiscal year and may not be applied retroactively. Management does not expect
the impact of Statement 133 to be material to the financial statements.
However, the Statement could increase volatility in earnings and other
comprehensive income.
Note 12 - Proposed Merger with Corporate Property Investors
On February 19, 1998, the Company and Corporate Property Investors
("CPI") signed a definitive agreement to merge the two companies. The
merger is expected to be completed during September of 1998 and
is subject to approval by the shareholders of the Company as well as
customary regulatory and other conditions. A majority of the CPI
shareholders have already approved the transaction. Under the terms of
the agreement, the shareholders of CPI will receive, in a reverse
triangular merger, consideration valued at $179 for each share of CPI
common stock held consisting of $90 in cash, $70 in the Company's common
stock and $19 worth of 6.5% convertible preferred stock. The common
stock component of the consideration is based upon a fixed exchange
ratio using the Company's February 18, 1998 closing price of $33 5/8 per
share, and is subject to a 15% symmetrical collar based upon the price
of the Company's common stock determined at closing. In the event the
Company's common stock price at closing is outside the parameters of the
collar, an adjustment will be made in the cash component of
consideration. The total purchase price, including indebtedness which
would be assumed, is estimated at $5.8 billion. In anticipation of the
merger, on July 31, 1998, CPI, with the Operating Partnership's assistance,
completed the sale of its General Motors office building in New York, New York
for approximately $800,000.
<Page 18>
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. 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; changes in the real estate and retailing
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
On September 29, 1997, the Operating Partnership completed its cash
tender offer for all of the outstanding shares of beneficial interests
of The Retail Property Trust ("RPT"). RPT owned 98.8% of Shopping Center
Associates ("SCA"), which owned or had interests in twelve regional
malls and one community center, comprising approximately twelve million
square feet of GLA in eight states. Following the completion of the
tender offer, the SCA portfolio was restructured. The Operating
Partnership exchanged its 50% interests in two SCA properties to a third
party for similar interests in two other SCA properties, in which it had
50% interests, with the result that SCA then owned interests in a total
of eleven properties. Effective November 30, 1997, the Operating
Partnership also acquired the remaining 50% ownership interest in
another of the SCA properties. In addition, an affiliate of the
Operating Partnership acquired the remaining 1.2% interest in SCA. On
February 2, 1998, the Operating Partnership sold the community center
for $9.6 million and on June 1, 1998, the Operating Partnership sold The
Promenade for $33.5 million. At the completion of these transactions,
the Operating Partnership directly or indirectly now owns 100% of eight
of the nine SCA properties, and 50% of the remaining property.
In addition, the following Property opening and ownership
acquisitions (the "Property Transactions"), collectively, had a notable
impact on the Operating Partnership's results of operations in the
comparative periods. On August 29, 1997, the Operating Partnership
opened the 55%-owned, $89 million phase II expansion of The Forum Shops
at Caesar's. On December 30, 1997, the Operating Partnership acquired
100% of The Fashion Mall at Keystone at the Crossing, a 651,671 square-
foot regional mall, along with an adjacent 29,140 square-foot community
center, in Indianapolis, Indiana for $124.5 million. On January 26,
1998, the Operating Partnership acquired 100% of Cordova Mall in
Pensacola, Florida for approximately $87.3 million. (See "Liquidity and
Capital Resources" for additional information regarding the Cordova Mall
acquisition.)
<Page 19>
Results of Operations
For the Three Months Ended June 30, 1998 vs. the Three Months Ended June
30, 1997
Total revenue increased $65.3 million or 26.7% for the three months
ended June 30, 1998, as compared to the same period in 1997. This
increase is primarily the result of the RPT acquisition ($38.1 million),
the Property Transactions ($13.8 million) and approximately $2.7 million
realized from marketing initiatives throughout the portfolio from the
Company's new strategic marketing division, Simon Brand Ventures
("SBV"). Excluding these items, total revenues increased $10.8 million,
primarily due to a $3.0 million increase in minimum rent and an $8.1
million increase in other income. The minimum rent increase results from
increased occupancy levels and the replacement of expiring tenant leases
with renewal leases at higher minimum base rents. The $8.1 million
increase in other income is primarily the result of a $6.3 million
increase in interest and dividend income, including a $5.0 million
dividend received from DPMI.
Total operating expenses increased $34.5 million, or 26.5%, for the
three months ended June 30, 1998, as compared to the same period in
1997. This increase is primarily the result of the RPT acquisition
($20.4 million) and the Property Transactions ($9.2 million). Excluding
these transactions, total operating expenses increased $4.9 million,
primarily due to a $3.2 million increase in depreciation and
amortization and a $1.9 million increase in repairs and maintenance.
Interest expense increased $25.4 million, or 37.9% for the three
months ended June 30, 1998, as compared to the same period in 1997. This
increase is primarily a result of the RPT acquisition ($18.2 million),
the Property Transactions ($4.0 million), and incremental interest on
borrowings under the Credit Facility to acquire the IBM Properties ($3.8
million) and the Chelsea stock ($0.7 million). Excluding these
transactions, interest expense has decreased $1.3 million, primarily
resulting from a decrease in the weighted average interest rates on
consolidated indebtedness and reductions in indebtedness from capital
raised in common and preferred stock offerings.
The $7.2 million loss on the sale of an asset in 1998 is the result
of the July 1, 1998, sale of Southtown Mall for $3.3 million.
Income (loss) from unconsolidated entities decreased from $1.8
million in 1997 to $0.2 million in 1998, resulting from a decrease in
the Operating Partnership's share of income from the Management Company
($7.0 million), partially offset by an increase in its share of income
from partnerships and joint ventures ($5.3 million). The decrease in
Management Company income includes a $5.0 million dividend declared by
DPMI, substantially all of which went to the Operating Partnership, and
a $2.4 million increase in salaries and wages, including the vesting of
the restricted stock awards. The increase in the Operating Partnership's
share of income from partnerships and joint ventures is primarily the
result of the unconsolidated joint-venture Properties opened or acquired
since June 30, 1997 ($6.8 million) including $4.2 million from the IBM
Properties.
<Page 20>
The $7.0 million extraordinary gain in 1998 is the result of a gain
on forgiveness of debt of $5.2 and the write-off of the premium on such
indebtedness $1.8 million.
Income of the Operating Partnership was $50.5 million for the three
months ended June 30, 1998, as compared to $46.9 million for the same
period in 1997, reflecting an increase of $3.6 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.
For the Six Months Ended June 30, 1998 vs. the Six Months Ended June 30,
1997
Total revenue increased $123.2 million or 25.3% for the six months
ended June 30, 1998, as compared to the same period in 1997. This
increase is primarily the result of the RPT acquisition ($74.5 million),
the Property Transactions ($24.2 million) and approximately $6.2 million
realized from SBV marketing initiatives. Excluding these items, total
revenues increased $18.2 million, primarily due to a $7.4 million
increase in minimum rent and a $10.5 million increase in other income.
The minimum rent increase results from increased occupancy levels and
the replacement of expiring tenant leases with renewal leases at higher
minimum base rents. The increase in other income includes a $7.8 million
increase in interest and dividend income, including a $5.0 million
dividend received from DPMI.
Total operating expenses increased $70.4 million, or 27.0%, for the
six months ended June 30, 1998, as compared to the same period in 1997.
This increase is primarily the result of the RPT acquisition ($40.7
million) and the Property Transactions ($14.9 million). Excluding these
transactions, total operating expenses increased $14.8 million,
primarily due to an $9.2 million increase in depreciation and
amortization, a $2.2 million increase in advertising and promotion and a
$2.1 million increase in repairs and maintenance.
Interest expense increased $49.4 million, or 36.6% for the six
months ended June 30, 1998, as compared to the same period in 1997. This
increase is primarily as a result of the RPT acquisition ($37.0 million)
and the Property Transactions ($8.7 million), and incremental interest
on borrowings under the Credit Facility to acquire the IBM Properties
($5.1 million) and the Chelsea stock ($1.4 million). Excluding these
transactions, interest expense has decreased $2.8 million, primarily
resulting from a decrease in the weighted average interest rates on
consolidated indebtedness and reductions in indebtedness from capital
raised in common and preferred stock offerings.
The $7.2 million loss on the sale of an asset in 1998 is the result
of the July 1, 1998, sale of Southtown Mall for $3.3 million.
<Page 21>
Income (loss) from unconsolidated entities increased from $2.5
million in 1997 to $5.0 million in 1998, resulting from an increase in
the Operating Partnership's share of income from partnerships and joint
ventures ($8.1 million), partially offset by a decrease in its share of
income from the Management Company ($5.6 million). The increase in the
Operating Partnership's share of income from partnerships and joint
ventures is primarily from the unconsolidated joint-venture Properties
opened or acquired since June 30, 1997 ($9.3 million) including $5.1
million from the IBM Properties. The decrease in Management Company
income includes a $5.0 million dividend declared by DPMI substantially
all of which went to the Operating Partnership.
The $7.0 million extraordinary gain in 1998 is the result of a gain
on forgiveness of debt of $5.2 and the write-off of the premium on such
indebtedness $1.8 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 $95.7 million for the six
months ended June 30, 1998, as compared to $66.8 million for the same
period in 1997, reflecting an increase of $28.9 million, primarily 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.
New Accounting Pronouncement
During the second quarter of 1998, the Financial Accounting
Standards Board released EITF 98-9, which clarified its position
relating to the timing of recognizing contingent rent. The Operating
Partnership has adopted this pronouncement prospectively, beginning May
22, 1998, which did not materially impact the quarterly financial
statements. Management has determined that adopting EITF 98-9
retroactively would not have had a material impact on the financial
statements, nor does management expect the adoption to have a material
impact on the 1998 annual financial statements. Management estimates the
negative impact on earnings for the third quarter of 1998 to be
approximately $6.0 million.
Liquidity and Capital Resources
As of June 30, 1998, the Operating Partnership's balance of
unrestricted cash and cash equivalents was $103.4 million. In addition
to its cash balance, the Operating Partnership has a $1.25 billion
unsecured revolving credit facility (the "Credit Facility") which had
$1,221.8 million available after outstanding borrowings and letters of
credit at June 30, 1998. The Company and the Operating Partnership also
have access to public equity and debt markets. The Company has an equity
shelf registration statement currently effective, under which $950
million in equity securities may be issued, and the Operating
Partnership has a debt shelf registration statement currently effective,
under which $850 million in debt securities may be issued.
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 REIT requirements. 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.
<Page 22>
Sensitivity Analysis
The Operating Partnership's future earnings, cash flows and fair
values relating to financial instruments is dependent upon prevalent
market rates of interest, such as LIBOR. Based upon consolidated
indebtedness and interest rates at June 30, 1998, a 1% increase in the
market rates of interest would decrease future earnings and cash flows
by approximately $3.1 million per year, and would decrease the fair
value of debt by approximately $706 million. A 1% decrease in the market
rates of interest would increase future earnings and cash flows by
approximately $3.5 million per year, and would increase the fair value
of debt by approximately $968 million.
Financing and Debt
At June 30, 1998, the Operating Partnership had consolidated debt
of $5,228 million, of which $4,570 million is fixed-rate debt bearing
interest at a weighted average rate of 7.27% and $658 million is
variable-rate debt bearing interest at a weighted average rate of 6.47%.
As of June 30, 1998, the Operating Partnership had interest rate
protection agreements related to $542.4 million of consolidated variable-
rate debt. The Operating Partnership's hedging activity as a result of
these interest rate protection agreements resulted in net interest
costs of $14 thousand for the three months ened June 30, 1998 compared
to interest savings of $473 thousand for the same period in 1997.
Interest savings were $179 thousand and $1,086 thousand for the six months
ended June 30, 1998 and 1997, respectively. The Operating Partnership's
hedging activities did not materially impact its weighted average borrowing
rates.
Scheduled principal payments of consolidated indebtedness over the
next five years is $1,744 million, with $3,486 million thereafter, which
excludes the $2 million net discount on indebtedness. The Company's
ratio of consolidated debt-to-market capitalization was 46.0% at both
June 30, 1998 and December 31, 1997.
On June 22, 1998, the Operating Partnership completed the sale of
$1.075 billion of senior unsecured debt securities. The issuance
included three tranches of senior unsecured notes as follows (1) $375
million bearing interest at 6.625% and maturing on June 15, 2003 (2)
$300 million bearing interest at 6.75% and maturing on June 15, 2005 and
(3) $200 million bearing interest at 7.375% and maturing on June 15,
2018. This offering also included a fourth tranche of $200 million of
7.00% Mandatory Par Put Remarketed Securities due June 15, 2028, which
are subject to redemption on June 16, 2008. The net proceeds of
approximately $1.062 billion were combined with $40 million of working
capital and used to retire and terminate the Operating Partnership's
$300 million unsecured revolving credit facility and to reduce the
balance of the Operating Partnership's Credit Facility to $27 million.
The Credit Facility has an initial maturity of September 1999,which the
Operating Partnership may, at its option, extend for up to one-year.
The debt retired had a weighted average interest rate of 6.29%.
<Page 23>
On June 18, 1998, the Operating Partnership refinanced a $33.9
million mortgage on regional mall Property and recorded a $7.0 million
extraordinary gain, including debt forgiveness of $5.2 million and the
write-off of a premium of $1.8 million. The new mortgage, which totals
$35 million, bears interest of 7.33% and matures on June 18, 2008. The
retired mortgage bore interest at 9.25% with a maturity of January 1,
2011.
The Operating Partnership has obtained a commitment from The Chase
Manhattan Bank, as administrative agent, for a $1.4 billion unsecured
line of credit (the "Facility") in connection with the pending CPI
Merger. The Facility, which is scheduled to close in conjunction with
the CPI Merger, will bear interest at LIBOR plus 65 basis points and
will mature at the following intervals (i) $450 million on the nine-
month anniversary of the closing (ii) $450 million on the eighteen-month
anniversary of the closing and (iii) $500 million on the two-year
anniversary of the closing. The Facility will be subject to covenants
and conditions substantially identical to those of the Credit Facility.
During the second quarter, the Company issued 2,957,335 shares of
its common stock in private offerings generating aggregate net proceeds
of approximately $91.4 million. The net proceeds were contributed to the
Operating Partnership in exchange for a like number of Units. The
Operating Partnership used the net proceeds for general working capital
purposes.
Acquisitions and Dispositions
Management continues to actively review and evaluate a number of
individual property and portfolio acquisition opportunities. Management
believes that funds on hand, and amounts available under the Credit
Facility, together with the net proceeds of public and private offerings
of debt and equity securities 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.
On January 26, 1998, the Operating Partnership acquired Cordova
Mall in Pensacola, Florida for approximately $87.3 million, which
included the assumption of a $28.9 million mortgage, which was later
retired, and the issuance of 1,713,016 Units, valued at approximately
$55.5 million. This 874,000 square-foot regional mall is wholly-owned by
the Operating Partnership.
On January 30, 1998, the Operating Partnership acquired additional
15% ownership interests in Lakeline Mall and Lakeline Plaza for Units
valued at approximately $6.3 million. On April 30, 1998 the Operating
Partnership acquired additional 10% ownership interests in Lakeline Mall
and Lakeline Plaza for 127,756 Units valued at approximately $4.2
million. On July 31, 1998, the Operating Partnership acquired another 5%
ownership of both Lakeline Mall and Lakeline Plaza for $2.1 million in
cash. These acquisitions have increased the Operating Partnership's
ownership interest in each of these Properties to a noncontrolling 80%.
<Page 24>
On February 27, 1998, the Operating Partnership, in a joint venture
partnership with Macerich, acquired a portfolio of twelve regional malls
and two community centers comprising approximately 10.7 million square
feet of GLA at a purchase price of $974.5 million, including the
assumption of $485.0 million of indebtedness. The Operating Partnership
and Macerich, as noncontrolling 50/50 partners in the joint venture,
were each responsible for one half of the purchase price, including
indebtedness assumed and each assumed leasing and management
responsibilities for six of the regional malls and one community center.
The Operating Partnership funded its share of the cash portion of the
purchase price using borrowings from a new $300 million unsecured revolving
credit facility, which bore interest at LIBOR plus 0.65% and had a maturity of
August 27, 1998.
On April 15, 1998, the Operating Partnership purchased the
remaining 7.5% ownership interest in Buffalo Grove Towne Center for $255
thousand.
Effective May 5, 1998, in a series of transactions, the Operating
Partnership acquired the remaining 50.1% interest in Rolling Oaks Mall
for 519,889 shares of the Company's common stock, valued at
approximately $17.2 million. The Operating Partnership issued 519,889
Units to the Company as consideration for the shares of common stock.
Effective June 1, 1998, the Operating Partnership sold The
Promenade for $33.5 million. No gain or loss was recognized on this
transaction. Effective June 30, 1998, the Operating Partnership sold
Southtown Mall for $3.5 million and recorded a $7.2 million loss on the
transaction.
Portfolio Restructuring. As a continuing part of the Operating
Partnership's long-term strategic plan, management is evaluating the
potential sale of the Operating Partnership's non-retail holdings, along
with a number of retail assets that are no longer aligned with the
Operating Partnership's strategic criteria.
Development, Expansions and Renovations. The Operating Partnership
is involved in several development, expansion and renovation efforts.
In March 1998, the Operating Partnership opened the approximately
$13.3 million Muncie Plaza in Muncie, Indiana. The Operating Partnership
owns 100% of this 196,000 square foot community center. In addition,
phase I of the approximately $34 million Lakeline Plaza opened in April
1998 in Austin, Texas. Phase II of this 360,000 square-foot community center
is scheduled to open in 1999. Each of these new community centers is adjacent
to an existing regional mall in the Operating Partnership's portfolio.
<Page 25>
Construction continues on the following development projects: The
Shops at Sunset Place, an approximately $150 million destination-
oriented retail and entertainment project containing approximately
510,000 square feet of GLA is scheduled to open in December 1998 in
South Miami, Florida and Concord Mills, an approximately $218 million,
50%-owned value-oriented super regional mall project, is scheduled to
open in the fall of 1999 in Concord (Charlotte), North Carolina.
In addition, the Operating Partnership is in the final stages of
predevelopment on Houston Premium Outlets in Houston, Texas and The
Shops at North East Plaza in Hurst, Texas. Houston Premium Outlets is
the Operating Partnership's first project in its joint venture
partnership with Chelsea GCA to develop premium manufacturers' outlet
shopping centers. This 50%-owned 462,000 square foot center is scheduled
to begin construction in August 1998 and open in September 1999. The
Shops at North East Plaza is a 320,000 square-foot community center
project adjacent to North East Mall. This wholly-owned project is
scheduled to begin construction this fall, with a fall 1999 opening
date.
On June 4, 1998, the Operating Partnership, Argo II, an investment
fund established by J.P. Morgan and The O'Connor Group, and Harvard
Private Capital Group ("Harvard") announced that they have collectively
committed to acquire a 44 percent ownership position in Groupe BEG, S.A.
("BEG"). BEG is a fully integrated retail real estate developer, lessor
and manager headquartered in Paris, France. The Operating Partnership,
through and affiliated Management Company, have contributed $15.0 million
of equity capital for its noncontrolling 22% ownership interest and are
committed to an additional investment of $37.5 million over the next 12
to 18 months, subject to certain financial and other conditions. The
agreement with BEG is structured to allow the Operating Partnership,
Argo II and Harvard to collectively gain a controlling interest in BEG
over time.
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's
share of projected costs to fund all renovation and expansion projects
in 1998 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. The Operating Partnership currently has 18
expansion and/or redevelopment projects under construction and in the
preconstruction development stage with targeted 1998 completion dates
and an additional five with 1999 completion dates. Included in
consolidated investment properties at June 30, 1998 is approximately
$243 million of construction in progress, with another $80.3 million in
the unconsolidated joint venture investment properties.
Distributions. During 1998, on each of January 23, April 23, and
July 22, the Company declared distributions of $0.5050 per share of
common stock payable to shareholders of record on February 6, 1998, May
8, 1998 and August 6, 1998, respectively. All of such dividends have
been paid. The current annual distribution rate is $2.02 per share of
common stock. Future common stock distributions will be determined based
on actual results of operations and cash available for distribution. In
addition, preferred dividends of $1.0938 per Series B preferred share
and $1.9725 per Series C preferred share were paid during the first six
months of 1998.
<Page 26>
Investing and Financing Activities
In March 1998, the Operating Partnership transferred its 50%
ownership interest in The Source, an approximately 730,000 square-foot
regional mall, to a newly formed limited partnership in which it has a
50% ownership interest, with the result that the Operating Partnership
now owns an indirect noncontrolling 25% ownership interest in The
Source. In connection with this transaction, the Operating Partnership's
partner in the newly formed limited partnership is entitled to a
preferred return of 8% on its initial capital contribution, a portion of
which was distributed to the Operating Partnership. The Operating
Partnership applied the distribution against its investment in The
Source.
Cash used in investing activities for the six months ended June 30,
1998 of $227.2 million is primarily the result of acquisitions of $243.4
million, $126.8 million of capital expenditures and $17.0 million of
investments in and advances to the Management Company, partially offset
by the net proceeds of $46.1 million from the sales of Sherwood Gardens,
The Promenade and Southtown Mall and net distributions from
unconsolidated entities of $106.9 million, which includes $52.1 million
associated with the refinancing of Randall Park Mall and $33.4 million
from The Source transactions described above. The $17.0 million
investment in the Management Company is primarily the $15.0 million
investment in Group BEG described earlier. Acquisitions include $240.3
million for the acquisition of the IBM Properties and $2.7 million for
the acquisition of Cordova Mall. Capital expenditures include
development costs of $32.9 million, including $25.9 million at The Shops
at Sunset Place. Also included in capital expenditures is renovation and
expansion costs of approximately $72.3 million, including $16.4 million, and
$5.8 million at Prien Lake Mall and Richardson Square, respectively, and
tenant costs and other operational capital expenditures of approximately $21.6 million.
Cash flows from financing activities for the six months ended June
30, 1998 was $7.8 million and includes net proceeds from sales of common
stock of $92.4 million and net borrowings of $112.2 million primarily
used to fund 1998 acquisition and development activity, partially offset
by distributions of $196.8 million.
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 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.
<Page 27>
Total EBITDA for the Properties increased from $419.2 million for
the six months ended June 30, 1997 to $591.3 million for the same period
in 1998, representing a 41.1% increase. This increase is primarily
attributable to the RPT acquisition ($59.7 million), the IBM Properties
($27.9 million) and the other Properties opened or acquired during 1997
and 1998 ($54.3 million). During this period operating profit margin
increased from 64.1% to 64.7%. Excluding the newly opened or acquired
Properties, operating profit margin would be 64.5%.
FFO-Funds from Operations
FFO, as defined by the National Association of Real Estate
Investment Trusts, 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. The Operating Partnership's method of
calculating FFO may be different from the methods used by other REITs.
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.
<Page 28>
The following summarizes FFO of the Operating Partnership and
reconciles income of the Operating Partnership before extraordinary
items to FFO for the periods presented:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
(In thousands)
FFO of the Operating
Partnership $115,957 $ 93,285 $224,864 $181,224
======== ======== ======== ========
Reconciliation:
Income of the Operating
Partnership before
extraordinary items $ 43,514 $ 48,413 $ 88,638 $ 91,475
Plus:
Depreciation and amortization
from consolidated Properties 58,082 43,774 116,161 87,086
The Operating Partnership's
share of depreciation and
amortization and
extraordinary items from
unconsolidated affiliates 16,304 9,152 31,108 18,010
Loss on the sale of real
estate 7,219 -- 7,219 --
Less:
Gain on the sale of real
estate -- 17 -- (20)
Minority interest portion of
depreciation, amortization
and extraordinary items (1,828) (1,664) (3,594) (2,514)
Preferred dividends (7,334) (6,407) (14,668) (12,813)
-------- -------- -------- --------
FFO of the Operating
Partnership $115,957 $ 93,285 $224,864 $181,224
======== ======== ======== ========
FFO allocable to the Company $ 73,719 $ 57,416 $142,734 $111,408
Portfolio Data
The following statistics exclude Charles Towne Square, Richmond
Town Square and Mission Viejo Mall, which are all undergoing extensive
redevelopments. The value-oriented super-regional mall category consists
of Arizona Mills, Grapevine Mills and Ontario Mills.
Aggregate Tenant Sales Volume. For the six months ended June 30,
1998 compared to the same period in 1997, total reported retail sales at
mall and freestanding GLA owned by the Operating Partnership ("Owned
GLA") in the regional malls and value-oriented super-regional malls, and
all reporting tenants at community shopping centers increased $1,298
million or 44.7% from $2,902 million to $4,200 million, primarily as a
result of the RPT acquisition, the IBM Properties and other Property
additions to the portfolio ($1,210 million), increased productivity of
our existing tenant base and an overall increase in occupancy. 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.
<Page 29>
Occupancy Levels. Occupancy levels for Owned GLA at mall and
freestanding stores in the regional malls increased from 85.2% at June
30, 1997, to 87.0% at June 30, 1998. Occupancy levels for value-oriented
super-regional malls was 95.1% at June 30, 1998. Occupancy levels for
community shopping centers decreased from 92.4% at June 30, 1997, to
90.5% at June 30, 1998. Owned GLA has increased 17.4 million square feet
from June 30, 1997, to June 30, 1998, primarily as a result of the RPT
acquisition, the acquisition of the IBM Properties, Cordova Mall,
Dadeland Mall, The Fashion Center at Keystone at the Crossing and the
openings of Arizona Mills, Grapevine Mills, The Source, Muncie Plaza and
Lakeline Plaza, partially offset by the sales The Promenade and
Southtown Mall.
Average Base Rents. Average base rents per square foot of mall and
freestanding Owned GLA at regional malls increased 10.3%, from $20.94 at
June 30, 1997 to $23.10 for the same period in 1998. Average base rents
per square foot of Owned GLA at value-oriented super-regional malls was
$16.12 at June 30, 1998 and average base rents of Owned GLA in the
community shopping centers decreased 3.6%, from $7.75 at June 30, 1997
to $7.47 for the same period in 1998.
<Page 30>
Inflation
Inflation has remained relatively low during the past few 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.
Year 2000 Costs
Management continues to assess the impact of the year 2000 Issue on
its reporting systems and operations. The Year 2000 Issue exists because
many computer systems and applications abbreviate dates by eliminating
the first two digits of the year, assuming that these two digits would
always be "19". Unless corrected, this shortcut would cause problems
when the century date occurs. On that date, some computer programs may
misinterpret the date January 1, 2000 as January 1, 1900. This could
cause systems to incorrectly process critical financial and operational
information, or stop processing altogether.
To help facilitate the Operating Partnership's continued growth,
substantially all of the computer systems and applications in use in its
home office in Indianapolis have been, or are in the process of being,
upgraded and modified. The Operating Partnership is of the opinion that,
in connection with those upgrades and modifications, it has addressed
applicable Year 2000 Issues as they might affect the computer systems
and applications located in its home office. The Operating Partnership
continues to evaluate what effect, if any the Year 2000 Issue might have
at its portfolio properties. The Operating Partnership anticipates that
the process of reviewing this issue at the portfolio properties and the
implementation of solutions to any Year 2000 Issue which it may discover
will require the expenditure of sums which the Operating Partnership
does not expect to be material. Management expects to have all systems
appropriately modified before any significant processing malfunctions
could occur and does not expect the Year 2000 Issue will materially
impact the financial condition or operations of the Operating
Partnership.
<Page 31>
Definitive Merger Agreement
On February 19, 1998, the Company and Corporate Property Investors
("CPI") signed a definitive agreement to merge the two companies. The
merger is expected to be completed in September of 1998 and is
subject to approval by the shareholders of the Company as well as
customary regulatory and other conditions. A majority of the CPI
shareholders have already approved the transaction. Under the terms of
the agreement, the shareholders of CPI will receive, in a reverse
triangular merger, consideration valued at $179 for each share of CPI
common stock held consisting of $90 in cash, $70 in the Company's common
stock and $19 worth of 6.5% convertible preferred stock. The common
stock component of the consideration is based upon a fixed exchange
ratio using the Company's February 18, 1998 closing price of $33 5/8 per
share, and is subject to a 15% symmetrical collar based upon the price
of the Company's common stock determined at closing. In the event the
Company's common stock price at closing is outside the parameters of the
collar, an adjustment will be made in the cash component of
consideration. The total purchase price, including indebtedness which
would be assumed, is estimated at $5.8 billion. In anticipation of the merger,
on July 31, 1998, CPI, with the Operating Partnership's assistance, completed
the sale of its General Motors office building in New York, New York for
approximately $800 million.
Seasonality
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 32>
Part II - Other Information
Item 1: Legal Proceedings
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Two Forms 8-K were filed during the current period.
On May 28, 1998 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, 1998, in the form of a
Supplemental Information Package. A copy of the package
was included as an exhibit to the 8-K filing.
On June 9, 1998 under Item 5 - Other Events, the
Company made available additional information regarding
significant recent developments which had occurred in
1998, certain information about the Company's pending
merger with Corporate Property Investors ("CPI"),
including the risks associated with such merger, and
descriptions of both CPI and Corporate Realty
Consultants, Inc. ("CRC").
<Page 33>
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 14, 1998 /s/ John Dahl
========================
John Dahl,
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer
<Page 34>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summsry financial information extracted from SEC Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 103,365
<SECURITIES> 0
<RECEIVABLES> 189,344
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 7,063,621
<DEPRECIATION> 558,504
<TOTAL-ASSETS> 6,505,117
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 5,228,015
0
339,195
<COMMON> 12
<OTHER-SE> 2,707,953
<TOTAL-LIABILITY-AND-EQUITY> 7,932,815<F2>
<SALES> 0
<TOTAL-REVENUES> 610,632
<CGS> 0
<TOTAL-COSTS> 328,284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,455
<INTEREST-EXPENSE> 184,420
<INCOME-PRETAX> 88,638
<INCOME-TAX> 88,638
<INCOME-CONTINUING> 88,638
<DISCONTINUED> 0
<EXTRAORDINARY> 7,024
<CHANGES> 0
<NET-INCOME> 66,083
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
<FN>
<F1>The Company does not report using a classified balance sheet.
<F2>Includes limited partners' interest in the Operating Partnership of $734,554.
</FN>
</TABLE>
