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 March 31, 1999
SPG PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State of incorporation or organization)
1-12618
(Commission File No.)
35-1901999
(I.R.S. Employer Identification No.)
National City Center
115 West Washington Street, Suite 15 East
Indianapolis, Indiana 46204
(Address of principal executive offices)
(317) 636-1600
(Registrant's telephone number, including area code)
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 [ ]
<Page 01>
SPG PROPERTIES, INC.
FORM 10-Q
INDEX
Part I - Financial Information Page
Item 1: Financial Statements
SPG Properties, Inc.:
Consolidated Condensed Balance Sheets
as of March 31, 1999 and December 31,
1998 3
Consolidated Condensed Statements of
Operations for the three-month
periods ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of
Cash Flows for the three-month
periods ended March 31, 1999 and 1998 5
Simon Property Group, L.P.:
Consolidated Condensed Balance Sheets
as of March 31, 1999 and December 31,
1998 6
Consolidated Condensed Statements of
Operations for the three-month
periods ended March 31, 1999 and 1998 7
Consolidated Condensed Statements of
Cash Flows for the three-month
periods ended March 31, 1999 and 1998 8
Notes to Unaudited Condensed
Financial Statements 9
Item 2: Management's Discussion and
Analysis of Financial Condition and
Results of Operations 19
Part II - Other Information
Items 1 through 6 25
Signature 26
<Page 02>
SPG PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per share amounts)
March 31, December 31,
1999 1998
ASSETS:
Investment in the SPG Operating Partnership $2,125,189 $ 2,108,291
COMMITMENTS AND CONTINGENCIES (See Note 11 to the
financial statements of the SPG Operating
Partnership)
SHAREHOLDERS' EQUITY:
Series B and C cumulative redeemable
preferred stock, 12,200,000 shares authorized,
11,000,000 issued and outstanding 339,352 339,329
Common stock, $.0001 par value, 400,000,000 shares
authorized, and 110,484,557 and 110,42,467 issued and
outstanding, respectively 11 11
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 2,230,373 2,176,267
Accumulated deficit (421,541) (387,656)
Unrealized gain (loss) on long-term investment (5,261) 89
Unamortized restricted stock award (17,746) (19,750)
========== ===========
Total shareholders' equity $2,125,189 $ 2,108,291
The accompanying notes are an integral part of these statements.
<Page 03>
SPG PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands)
For the
Three Months
Ended March 31,
1999 1998
REVENUE:
Minimum rent $ -- $ 184,460
Overage rent -- 9,782
Tenant reimbursements -- 90,160
Other income -- 15,855
---------- ----------
Total revenue -- 300,257
EXPENSES:
Property operating -- 49,779
Depreciation and amortization -- 58,305
Real estate taxes -- 30,195
Repairs and maintenance -- 11,895
Advertising and promotion -- 8,101
Provision for credit losses -- 2,722
Other -- 5,593
---------- ----------
Total operating expenses -- 166,590
OPERATING INCOME -- 133,667
INTEREST EXPENSE -- 91,910
---------- ----------
INCOME BEFORE MINORITY INTEREST -- 41,757
MINORITY INTEREST -- (1,442)
---------- ----------
INCOME BEFORE UNCONSOLIDATED ENTITIES -- 40,315
EQUITY IN INCOME OF THE SPG OPERATING PARTNERSHIP 30,862 --
INCOME FROM UNCONSOLIDATED ENTITIES -- 4,809
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 30,862 45,124
LESS: LIMITED PARTNERS' INTEREST IN THE SPG
OPERATING PARTNERSHIP -- 13,842
---------- ----------
NET INCOME 30,862 31,282
PREFERRED DIVIDENDS (7,334) (7,334)
---------- ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $23,528 $ 23,948
=========== ===========
The accompanying notes are an integral part of these statements.
<Page 04>
SPG PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
For the
Three Months
Ended March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $30,862 $ 31,282
Adjustments to reconcile net income to net cash
provided
by operating activities-
Depreciation and amortization -- 60,424
Limited partners' interest in SPG Operating
Partnership -- 13,842
Straight-line rent -- (1,676)
Minority interest -- 1,442
Equity in income of the SPG Operating Partnership (30,862)
Equity in income of unconsolidated entities -- (4,809)
Changes in assets and liabilities-
Tenant receivables and accrued revenue -- 10,654
Deferred costs and other assets -- (3,077)
Accounts payable, accrued expenses and other
liabilities -- 11,390
------- --------
Net cash provided by operating activities -- 119,472
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions -- (242,956)
Capital expenditures -- (61,199)
Cash from acquisitions and consolidation of joint
ventures, net -- 931
Change in restricted cash -- 3,022
Net proceeds from sale of assets -- 9,280
Investments in unconsolidated entities -- (3,644)
Distributions from unconsolidated entities -- 47,059
Distributions from the SPG Operating Partnership 64,747 --
Investments in and advances to Management Company
and affiliates -- (3,974)
------- -------
Net cash provided by (used in) investing
activities 64,747 (251,481)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common, net -- 494
Minority interest distributions, net -- (3,259)
Preferred dividends and distributions to
shareholders (64,747) (62,724)
Distributions to limited partners -- (31,377)
Mortgage and other note proceeds, net of
transaction costs -- 296,995
Mortgage and other note principal payments -- (75,822)
------- -------
Net cash provided by (used in) financing
activities (64,747) 124,307
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS -- (7,702)
CASH AND CASH EQUIVALENTS, beginning of period -- 109,699
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ -- $101,997
======== ========
The accompanying notes are an integral part of these statements.
<Page 05>
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands)
March 31, December 31,
1999 1998
----------- -------------
ASSETS:
Investment properties, at cost $12,003,316 $11,662,860
Less - accumulated depreciation 813,430 709,114
----------- -------------
11,189,886 10,953,746
Goodwill 57,304 58,134
Cash and cash equivalents 86,338 124,466
Tenant receivables and accrued revenue, net 231,248 217,341
Notes and advances receivable from Management
Company and affiliate 126,414 115,378
Note receivable from SRC Operating Partnership
(Interest at 7% and 16%, respectively, due 2013) 10,565 20,565
Investment in partnerships and joint ventures, at 1,218,743 1,303,251
equity
Investment in Management Company and affiliates 11,363 10,037
Other investment 39,261 50,176
Deferred costs and other assets 236,936 227,684
Minority interest 33,457 32,138
----------- -------------
Total assets $13,241,515 $13,112,916
=========== =============
LIABILITIES:
Mortgages and other indebtedness $8,262,734 $7,972,381
Notes payable to SRC Operating Partnership
(Interest at 8%, due 2008) 5,984 17,907
Accounts payable and accrued expenses 348,796 410,445
Cash distributions and losses in partnerships and
joint ventures, at equity 29,997 29,139
Other liabilities 77,279 95,243
----------- -------------
Total liabilities 8,724,790 8,525,115
COMMITMENTS AND CONTINGENCIES (Note 11)
PARTNERS' EQUITY:
Preferred units, 15,903,580 and 16,053,580 units
outstanding, respectively 865,587 1,057,245
General Partners, 167,900,953 and 161,487,017
units outstanding, respectively 2,663,622 2,540,660
Limited Partners, 64,177,009 and 64,182,157 units
outstanding, respectively 1,018,120 1,009,646
Unamortized restricted stock award (30,604) (19,750)
----------- -------------
Total partners' equity 4,516,725 4,587,801
----------- -------------
Total liabilities and partners' equity $13,241,515 $13,112,916
=========== =============
The accompanying notes are an integral part of these statements.
<Page 06>
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per
unit amounts)
For the
Three Months
Ended March 31,
------------------------
1999 1998
----------- -----------
REVENUE:
Minimum rent $270,607 $184,460
Overage rent 13,367 9,782
Tenant reimbursements 136,012 90,160
Other income 21,208 15,855
----------- -----------
Total revenue 441,194 300,257
----------- -----------
EXPENSES:
Property operating 67,850 49,779
Depreciation and amortization 88,578 58,305
Real estate taxes 46,268 30,195
Repairs and maintenance 19,802 11,895
Advertising and promotion 14,516 8,101
Provision for credit losses 1,794 2,722
Other 7,680 5,593
----------- -----------
Total operating expenses 246,488 166,590
----------- -----------
OPERATING INCOME 194,706 133,667
INTEREST EXPENSE 138,570 91,910
----------- -----------
INCOME BEFORE MINORITY INTEREST 56,136 41,757
MINORITY INTEREST (1,815) (1,442)
----------- -----------
INCOME BEFORE UNCONSOLIDATED ENTITIES 54,321 40,315
INCOME FROM UNCONSOLIDATED ENTITIES 12,317 4,809
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 66,638 45,124
EXTRAORDINARY ITEM (1,774) 0
----------- -----------
NET INCOME 64,864 45,124
PREFERRED UNIT REQUIREMENT (17,705) (7,334)
----------- -----------
NET INCOME AVAILABLE TO UNITHOLDERS $47,159 $37,790
NET INCOME AVAILABLE TO UNITHOLDERS
ATTRIBUTABLE TO:
Managing General Partner (SPG) $10,349 $ 0
General Partners (SPG Properties, Inc. and
SD Property Group, Inc.) 23,528 23,948
Limited Partners 13,282 13,842
----------- -----------
Net income $47,159 $37,790
BASIC EARNINGS PER UNIT:
Income before extraordinary item $0.21 $0.22
Extraordinary item -- --
----------- -----------
Net income $0.21 $0.22
DILUTED EARNINGS PER UNIT:
Income before extraordinary item $0.21 $0.22
Extraordinary item -- --
----------- -----------
Net income $0.21 $0.22
The accompanying notes are an integral part of these statements.
<Page 07>
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS
(Unaudited and dollars in thousands)
For the
Three Months
Ended March 31,
--------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -----------
Net income $64,864 $45,124
Adjustments to reconcile net income to net
cash provided
by operating activities-
Depreciation and amortization 91,181 60,424
Extraordinary item 1,774 0
Straight-line rent (4,833) (1,676)
Minority interest 1,815 1,442
Equity in income of unconsolidated entities (12,317) (4,809)
Changes in assets and liabilities-
Tenant receivables and accrued revenue (4,203) 10,654
Deferred costs and other assets (3,665) (3,077)
Accounts payable, accrued expenses and other (59,601) 11,390
liabilities
----------- -----------
Net cash provided by operating activities 75,015 119,472
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (30,300) (242,956)
Capital expenditures (100,478) (61,199)
Change in restricted cash 0 3,022
Cash from acquisitions 8,326 931
Net proceeds from sales of assets 0 9,280
Investments in unconsolidated entities (19,008) (3,644)
Note payment from the SRC Operating 10,000 0
Partnership
Distributions from unconsolidated entities 63,095 47,059
Investments in and advances to Management (11,036) (3,974)
Company and affiliates
----------- -----------
Net cash used in investing activities (79,401) (251,481)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partnership contributions, net 170 494
Partnership distributions (134,914) (94,101)
Minority interest distributions, net (3,545) (3,259)
Mortgage and other note proceeds, net of
transaction costs 913,529 296,995
Mortgage and other note principal payments (808,982) (75,822)
----------- -----------
Net cash provided by (used in) financing (33,742) 124,307
activities
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (38,128) (7,702)
CASH AND CASH EQUIVALENTS, beginning of period 124,466 109,699
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $86,338 $101,997
=========== ===========
The accompanying notes are an integral part of these statements.
<Page 08>
SPG PROPERTIES, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands, except per share amounts and where indicated as
in billions)
1. Organization
SPG Properties, Inc. ("SPG Properties"), formerly Simon DeBartolo
Group, Inc. ("SDG"), is a substantially wholly-owned subsidiary of Simon
Property Group, Inc. ("SPG"). SPG Properties and SPG are both self-
administered and self-managed real estate investment trusts ("REITs")
under the Internal Revenue Code of 1986, as amended. SPG Properties and
its substantially wholly-owned subsidiary SD Property Group, Inc., are
general partners of, and hold a noncontrolling partnership interest in,
Simon Property Group, L.P. (the "SPG Operating Partnership"), formerly
Simon DeBartolo Group, L.P. ("SDG, LP"), as of March 31, 1999 and
December 31, 1998. The SPG Operating Partnership is engaged in the
ownership, operation, management, leasing, acquisition, expansion and
development of real estate properties, primarily regional malls and
community shopping centers. SPG is the managing general partner of the
SPG Operating Partnership. Each share of common stock of SPG is paired
with a beneficial interest in 1/100th of a share of common stock of SPG
Realty Consultants, Inc. ("SRC" and together with SPG, the "Companies").
As of March 31, 1999, the SPG Operating Partnership owned or held
an interest in 241 income-producing properties, which consisted of 152
regional malls, 77 community shopping centers, four specialty retail
centers, five office and mixed-use properties and three value-oriented
super-regional malls in 35 states (the "Properties") and one asset in
Europe. The SPG Operating Partnership also owned interests in one
regional mall, one value-oriented super-regional mall, three community
centers and one outlet center currently under construction and eleven
parcels of land held for future development. In addition, the SPG
Operating Partnership holds substantially all of the economic interest
in M.S. Management Associates, Inc. (the "Management Company" -See Note
8 to the financial statements of the SPG Operating Partnership). The SPG
Operating Partnership 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 Properties, as well as certain other regional malls and
community shopping centers owned by third parties. SPG Properties owned
49.0% and 50.4% of the SPG Operating Partnership at March 31, 1999 and
December 31, 1998, 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 March 31, 1999 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 SPG Properties' December 31, 1998 audited financial
statements and notes thereto included in its Annual Report on Form 10-K.
The accompanying consolidated condensed financial statements of SPG
Properties include accounts of all entities owned or controlled by SPG
Properties. All significant intercompany amounts have been eliminated.
In connection with the CPI Merger, which was consummated as of the close
of business on September 24, 1998 (see the accompanying financial
statements of the SPG Operating Partnership), SPG became the managing
general partner of the SPG Operating Partnership. As a result, SPG
Properties no longer controls the SPG Operating Partnership, and
therefore the accompanying balance sheets as of March 31, 1999 and
December 31, 1998 reflect SPG Properties' interest in the SPG Operating
Partnership utilizing the equity method of accounting. Prior to the CPI
Merger, SPG Properties and subsidiary accounted for their interests in
the SPG Operating Partnership using the consolidated method of
accounting. The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect
the reported amounts of SPG Properties 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.
Net operating results of the SPG Operating Partnership are
allocated to its partners based first on their preferred unit preference
and then on their remaining weighted average ownership interest in the
SPG Operating Partnership during the period. SPG Properties' remaining
weighted average ownership interest in the SPG Operating Partnership for
the periods ended March 31, 1999 and 1998 was 49.9% and 63.4%,
respectively.
<Page 09>
Note 3 - Per Share Data
Because substantially all of the common stock of SPG Properties is
owned by SPG, SPG Properties does not report earnings per share.
Note 4 - Shareholders' Equity
The following table summarizes the changes in shareholders' equity
since December 31, 1998.
<TABLE>
<CAPTION>
All
Classes Capital in Unrealized Unamortized Total
Preferred of Common Excess of Accumulated Gain (Loss) on Resticted Shareholders'
Stock Stock Par Deficit Investment (1) Stock Award Equity
Balance at
<C> <C> <C> <C> <C> <C> <C>
December 31,1998 $ 339,329 $ 12 $2,176,267 $ (387,656) $ 89 $ (19,750) $2,108,291
Restricted stock
forfeitures
(7,910 shares) (42) 42 --
Amortization of
stock incentive 1,962 1,962
Preferred stock
accretion 23 23
Adjustment to
allocate net
equity of the SPG
Operating
Partnership 54,148 54,148
Distributions (64,747) (64,747)
-------- -------- --------- ---------- ----------- ---------- -------------
Subtotal 339,352 12 2,230,373 (452,403) 89 (17,746) 2,099,677
Comprehensive
Income:
Unrealized loss
on investment(1) (5,350) (5,350)
Net income 30,862 30,862
--------- -------- -------- ----------- ----------- ---------- ------------
Total
Comprehensive
Income -- -- -- 30,862 (5,350) -- 25,512
--------- -------- -------- ----------- ----------- ---------- ------------
Balance at March
31, 1999 $ 339,352 $ 12 $2,230,373 $ (421,541) $(5,261) $ (17,746) $2,125,189
========= ========= ========== =========== =========== ========== ============
</TABLE>
(1) Amounts consist of the unrealized loss resulting from the change in
market value of 1,408,450 shares of common stock of Chelsea GCA Realty,
Inc. ("Chelsea"), a publicly traded REIT, which the SPG Operating
Partnership purchased on June 16, 1997. The investment in Chelsea is
being reflected in the SPG Operating Partnership's consolidated
condensed balance sheets in other investments.
The footnotes summarizing the significant accounting policies of
and other matters pertinent to the SPG Operating Partnership follow and
should be read in conjunction with the financial statements and
footnotes of SPG Properties and subsidiary.
<Page 10>
SIMON PROPERTY GROUP, L.P.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands, except per Unit amounts and where indicated as in
billions)
1. Organization
Simon Property Group, L.P. (the "SPG Operating Partnership"), a
Delaware limited partnership, formerly known as Simon DeBartolo Group,
L.P. ("SDG, LP"), is a majority owned subsidiary of Simon Property Group
Inc. ("SPG"), a Delaware corporation. SPG is a self-administered and
self-managed real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"). Each share of common
stock of SPG is paired with a beneficial interest in 1/100th of a share
of common stock of SPG Realty Consultants, Inc., also a Delaware
corporation ("SRC"). Units of ownership interest ("Units") in the SPG
Operating Partnership are paired with a beneficial interest in 1/100th
of a Unit in SPG Realty Consultants, L.P. (the "SRC Operating
Partnership"). The SRC Operating Partnership is the primary subsidiary
of SRC.
The SPG 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 March 31, 1999, the SPG Operating
Partnership owned or held an interest in 241 income-producing
properties, which consisted of 152 regional malls, 77 community shopping
centers, four specialty retail centers, five office and mixed-use
properties and three value-oriented super-regional malls in 35 states
(the "Properties") and one asset in Europe. The SPG Operating
Partnership also owned interests in one regional mall, one value-
oriented super-regional mall, three community centers and one outlet
center currently under construction and eleven parcels of land held for
future development. In addition, the SPG Operating Partnership holds
substantially all of the economic interest in M.S. Management
Associates, Inc. (the "Management Company" -See Note 8). The SPG
Operating Partnership 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 Properties, as well as certain other regional malls and
community shopping centers owned by third parties. SPG owned 72.3% and
71.6% of the SPG Operating Partnership at March 31, 1999 and December
31, 1998, 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 March 31, 1999 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 SPG Operating Partnership's December 31, 1998
audited financial statements and notes thereto included in its Annual
Report on Form 10-K.
The accompanying consolidated condensed financial statements of the
SPG Operating Partnership include all accounts of all entities owned or
controlled by the SPG Operating Partnership. All significant
intercompany amounts have been eliminated. The accompanying consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles, which requires management to make
estimates and assumptions that affect the reported amounts of the SPG
Operating Partnerships' 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 SPG 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 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 SPG Operating Partnership are
allocated after preferred distributions, based on its partners' weighted
average ownership interests during the period. SPG's weighted average
direct and indirect ownership interest in the SPG Operating Partnership
for the three months ended March 31, 1999 and 1998 was 71.8% and 63.4%,
respectively.
<Page 11>
3. CPI Merger
For financial reporting purposes, as of the close of business on
September 24, 1998, the CPI Merger was consummated pursuant to the
Agreement and Plan of Merger dated February 18, 1998, among Simon
DeBartolo Group, Inc. ("SDG"), Corporate Property Investors, Inc.
("CPI"), and Corporate Realty Consultants, Inc. ("CRC").
Pursuant to the terms of the CPI Merger, a subsidiary of CPI merged
with and into SDG with SDG continuing as the surviving company. SDG
became a majority-owned subsidiary of CPI. The outstanding shares of
common stock of SDG were exchanged for a like number of shares of CPI.
Beneficial interests in CRC were acquired for $14,000 in order to pair
the common stock of CPI with 1/100th of a share of common stock of CRC,
the paired share affiliate.
Immediately prior to the consummation of the CPI Merger, the
holders of CPI common stock were paid a merger dividend consisting of
(i) $90 in cash, (ii) 1.0818 additional shares of CPI common stock and
(iii) 0.19 shares of 6.50% Series B convertible preferred stock of CPI
per share of CPI common stock. Immediately prior to the CPI Merger,
there were 25,496,476 shares of CPI common stock outstanding. The
aggregate value associated with the completion of the CPI Merger was
approximately $5.9 billion including transaction costs and liabilities
assumed.
To finance the cash portion of the CPI Merger consideration, $1.4
billion was borrowed under a new senior unsecured medium term bridge
loan, which bears interest at a base rate of LIBOR plus 65 basis points
and matures in three mandatory amortization payments (on June 22, 1999,
March 24, 2000 and September 24, 2000) (see Note 9). An additional
$237,000 was also borrowed under the SPG Operating Partnership's
existing $1.25 billion credit facility (the "Credit Facility"). In
connection with the CPI Merger, CPI was renamed "Simon Property Group,
Inc." CPI's paired share affiliate, Corporate Realty Consultants, Inc.,
was renamed "SPG Realty Consultants, Inc." In addition SDG and SDG, LP
were renamed "SPG Properties, Inc.", and "Simon Property Group, L.P.",
respectively.
Upon completion of the CPI Merger, SPG transferred substantially
all of the CPI assets acquired, which consisted primarily of 23 regional
malls, one community center, two office buildings and one regional mall
under construction (other than one regional mall, Ocean County Mall, and
certain net leased properties valued at approximately $153,100) and
liabilities assumed (except that SPG remains a co-obligor with respect
to the Merger Facility (see Note 9)) of approximately $2.3 billion to
the SPG Operating Partnership or one or more subsidiaries of the SPG
Operating Partnership in exchange for 47,790,550 limited partnership
interests and 5,053,580 preferred partnership interests in the SPG
Operating Partnership. The preferred partnership interests carry the
same rights and equal the number of preferred shares issued and
outstanding as a direct result of the CPI Merger.
SPG accounted for the merger between SDG and the CPI merger
subsidiary as a reverse purchase in accordance with Accounting
Principles Board Opinion No. 16. Although paired shares of the former
CPI and CRC were issued to SDG common stock holders and SDG became a
substantially wholly owned subsidiary of CPI following the CPI Merger,
CPI is considered the business acquired for accounting purposes. SDG is
considered the acquiring company because the SDG common stockholders
hold a majority of the common stock of SPG, post-merger. The value of
the consideration paid by SDG has been allocated to the estimated fair
value of the CPI assets acquired and liabilities assumed which resulted
in goodwill of $58,134, as adjusted. Goodwill is being amortized over
the estimated life of the properties of 35 years. Purchase accounting
will be finalized when the SPG Operating Partnership completes and
implements its combined operating plan, which is expected to occur by
the third quarter of 1999.
SDG, LP contributed $14,000 cash to CRC and $8,000 cash to the SRC
Operating Partnership on behalf of the SDG common stockholders and the
limited partners of SDG, LP to obtain the beneficial interests in common
stock of CRC, which were paired with the shares of common stock issued
by SPG ("Paired Shares"), and to obtain Units in the SRC Operating
Partnership so that the limited partners of SDG, LP would hold the same
proportionate interest in the SRC Operating Partnership that they hold
in SDG, LP. The cash contributed to CRC and the SRC Operating
Partnership on behalf of the partners of SDG, LP was accounted for as a
distribution to the partners.
<Page 12>
Pro Forma
The following unaudited pro forma summary financial information
excludes any extraordinary items and reflects the consolidated results
of operations of the SPG Operating Partnership as if the CPI Merger had
occurred as of January 1, 1998, and was carried forward through March
31, 1998. Preparation of the pro forma summary information was based
upon assumptions deemed appropriate by management. The pro forma summary
information is not necessarily indicative of the results which actually
would have occurred if the CPI Merger had been consummated at January 1,
1998, nor does it purport to represent the results of operations for
future periods.
Three Months Ended March 31, 1998
Revenue $ 401,505
=============
Net income (1) $ 85,485
=============
Net income available to Unitholders $ 67,023
=============
Net income per Unit (1) $ 0.30
=============
Net income per Unit - assuming dilution $ 0.30
=============
Weighted average number of Units
outstanding 220,874,697
=============
Weighted average number of Units
outstanding - assuming dilution 221,261,920
(1) Includes a net gain on the sales of assets of $44,311, or $0.20 on
a basic earnings per Unit basis.
Note 4 - Reclassifications
Certain reclassifications of prior period amounts have been made in
the financial statements to conform to the 1999 presentation. These
reclassifications have no impact on the net operating results previously
reported.
Note 5 - Per Unit Data
Basic earnings per Unit is based on the weighted average number of
Units outstanding during the period and diluted earnings per Unit is
based on the weighted average number of Units outstanding combined with
the incremental weighted average Units that would have been outstanding
if all dilutive potential Units would have been converted into Units at
the earliest date possible. The weighted average number of Units used in
the computation for the three-month periods ended March 31, 1999 and
1998 was 227,879,830 and 173,084,147, respectively. The diluted weighted
average number of Units used in the computation for the three-month
periods ended March 31, 1999 and 1998 was 228,061,703 and 173,471,294,
respectively. Both series of convertible preferred Units issued and
outstanding during the comparative periods did not have a dilutive
effect on earnings per Unit. The increase in weighted average Units
outstanding under the diluted method over the basic method in every
period presented for the SPG Operating Partnership is due entirely to
the effect of outstanding stock options. Basic earnings and diluted
earnings were the same for all periods presented.
Note 6 - Cash Flow Information
Cash paid for interest, net of amounts capitalized, during the
three months ended March 31, 1999 was $125,245 as compared to $80,690
for the same period in 1998. Accrued and unpaid distributions were $196
and $3,428 at March 31, 1999 and December 31, 1998, respectively, and
represented distributions payable on the Series A Convertible Preferred
Units. See Notes 7 and 10 for information about non-cash transactions
during the three months ended March 31, 1999.
Note 7 - Other Acquisitions and Development
On January 29, 1999, the SPG Operating Partnership acquired the
remaining 15% ownership interests in Lakeline Mall and Lakeline Plaza
for $6,300 cash from existing working capital. In addition, on March 1,
1999, the SPG Operating Partnership acquired the remaining 50% ownership
interest in Century III Mall for $57,000. The purchase price of the
Century III Mall interest included the assumption of $33,000 of mortgage
indebtedness, with the remainder financed through the Credit Facility.
Each of these Properties were previously accounted for using the equity
method of accounting and are now accounted for using the consolidated
method of accounting.
In January of 1999, The Shops at Sunset Place opened in South
Miami, Florida. The SPG Operating Partnership owns a noncontrolling
37.5% interest in this 510,000 square-foot destination-oriented retail
and entertainment project.
<Page 13>
Note 8 - Investment in Unconsolidated Entities
Partnerships and Joint Ventures
Summary financial information of the SPG Operating Partnership's
investment in partnerships and joint ventures accounted for using the
equity method of accounting and a summary of the SPG Operating
Partnership's investment in and share of income from such partnerships
and joint ventures follow:
March 31, December 31,
BALANCE SHEETS 1999 1998
Assets:
Investment properties at cost, net $ 4,164,696 $ 4,265,022
Cash and cash equivalents 151,609 171,553
Tenant receivables 139,323 140,579
Other assets 111,587 126,112
------------ -----------
Total assets $ 4,567,215 $ 4,703,266
Liabilities and Partners' Equity:
Mortgages and other indebtedness $ 2,805,733 $ 2,861,589
Accounts payable, accrued expenses and
other liabilities 176,278 223,631
------------ -----------
Total liabilities 2,982,011 3,085,220
Partners' equity 1,585,204 1,618,046
------------ ------------
Total liabilities and partners' equity $ 4,567,215 $ 4,703,266
SPG Operating Partnership's Share of:
Total assets $ 1,786,580 $ 1,905,459
============ ============
Partners' equity $ 541,231 $ 565,496
Add: Excess Investment (See below) 647,515 708,616
SPG Operating Partnership's Net
Investment in Joint Ventures $ 1,188,746 $ 1,274,112
For the three
months ended
March 31,
STATEMENTS OF OPERATIONS 1999 1998
Revenue:
Minimum rent $127,133 $ 90,681
Overage rent 3,842 2,822
Tenant reimbursements 59,606 41,876
Other income 7,438 5,686
-------- --------
Total revenue 198,019 141,065
Operating Expenses:
Operating expenses and other 71,307 50,637
Depreciation and amortization 34,730 29,790
Total operating expenses 106,037 80,427
Operating Income 91,982 60,638
Interest Expense 47,288 38,677
------- --------
Net Income 44,694 21,961
Third Party Investors' Share of Net Income
27,506 16,823
-------- --------
SPG Operating Partnership's Share of Net
Income $ 17,188 $ 5,138
Amortization of Excess Investment (See
below) (6,057) (1,985)
======== ========
Income from Unconsolidated Entities $ 11,131 $ 3,153
As of March 31, 1999 and December 31, 1998, the unamortized excess
of the SPG Operating Partnership's investment over its share of the
equity in the underlying net assets of the partnerships and joint
ventures ("Excess Investment") was $647,515 and $708,616, respectively.
This Excess Investment is being amortized generally over the life of the
related Properties. Amortization included in income from unconsolidated
entities for the three-month periods ended March 31, 1999 and 1998 was
$6,057 and $1,985, respectively.
<Page 14>
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 one wholly-owned
Property, 41 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 SPG Operating Partnership's
share of consolidated net income of the Management Company, after
intercompany profit eliminations, was $1,186 and $1,656 for the three-
month periods ended March 31, 1999 and 1998, respectively.
Note 9 - Debt
At March 31, 1999, the SPG Operating Partnership had consolidated
debt of $8,262,734, of which $6,376,548 was fixed-rate debt and
$1,886,186 was variable-rate debt. The SPG Operating Partnership's pro
rata share of indebtedness of the unconsolidated joint venture
Properties as of March 31, 1999 was $1,156,594. As of March 31, 1999 and
December 31, 1998, the SPG Operating Partnership had interest-rate
protection agreements related to $937,999 of its consolidated
indebtedness. The agreements are generally in effect until the related
variable-rate debt matures. The SPG Operating Partnership's hedging
activity did not materially impact interest expense for the three months
ended March 31, 1999 or 1998.
In January of 1999, the SPG Operating Partnership retired the
$21,910 mortgage on North East Mall using cash from working capital. The
paydown included a $1,774 prepayment charge, which was recorded as an
extraordinary loss.
On February 4, 1999, the SPG Operating Partnership completed the
sale of $600,000 of senior unsecured notes. These notes include two
$300,000 tranches. The first tranche bears interest at 6.75% and matures
on February 4, 2004 and the second tranche bears interest at 7.125% and
matures on February 4, 2009. The SPG Operating Partnership used the net
proceeds of approximately $594,000 primarily to retire the $450,000
initial tranche of the Merger Facility and to pay $142,000 on the
outstanding balance of the Credit Facility.
<Page 15>
Note 10 - Partners' Equity
The following table summarizes the changes in Partners' equity
since December 31, 1998.
<TABLE>
<CAPTION>
Managing Unamortized Total
Preferred General General Limited Restricted Partners'
Units Partner Partners Partners Stock Award Equity
Balance at December
<C> <C> <C> <C> <C> <C>
31, 1998 $1,057,245 $751,948 $1,788,712 $1,009,646 $ (19,750) $4,587,801
Managing General
Partner
Contributions
(36,500 Units) 852 852
Conversion of
150,000 Series A
Preferred Units
into 5,699,304
Units (2) (191,681) 191,167 (514)
Units issued as
dividend (152,346
Units) (2) 3,972 3,972
Stock incentive
program (525,786
Units, net of
forfeitures) 13,562 (42) (13,567) (47)
Amortization of
stock incentive 2,713 2,713
Units converted to
cash (5,148 Units) (134) (134)
Other 23 (208) (185)
Adjustment to
allocate net equity
of the SPG
Operating
Partnership (84,906) 54,148 30,758 --
Distributions (17,705) (24,152) (57,413) (32,412) (131,682)
---------- -------- ---------- ---------- ---------- ----------
Subtotal 847,882 852,235 1,785,405 1,007,858 (30,604) 4,462,776
Comprehensive
Income:
Unrealized loss on
investment (1) (2,545) (5,350) (3,020) (10,915)
Net income 17,705 10,349 23,528 13,282 64,864
Total Comprehensive
Income 17,705 7,804 18,178 10,262 -- 53,949
-------- -------- -------- -------- -------- --------
Balance at March 31,
1999 $ 865,587 $860,039 $1,803,583 $1,018,120 $ (30,604) $4,516,725
</TABLE>
(2) Amounts consist of the unrealized loss resulting from the change in
market value of 1,408,450 shares of common stock of Chelsea GCA Realty,
Inc. ("Chelsea"), a publicly traded REIT, which the SPG Operating
Partnership purchased on June 16, 1997. The investment in Chelsea is
being reflected in the accompanying consolidated condensed balance
sheets in other investments.
(3) On February 26, 1999, 150,000 Series A Convertible Preferred Units
were converted into 5,699,304 Units, with 59,249 Series A Convertible
Preferred Units remaining outstanding. Additionally, on March 1, 1999,
another 152,346 Units were issued to the holders of the converted Units
in lieu of the cash dividends allocable to these preferred Units.
The Simon Property Group 1998 Stock Incentive Plan
At the time of the CPI Merger, the SPG Operating Partnership
adopted `The Simon Property Group 1998 Stock Incentive Plan' (the "1998
Plan"). The 1998 Plan provides for the grant of equity-based awards
during the ten-year period following its adoption, in the form of
options to purchase Paired Shares ("Options"), stock appreciation rights
("SARs"), restricted stock grants and performance unit awards
(collectively, "Awards"). Options may be granted which are qualified as
"incentive stock options" within the meaning of Section 422 of the Code
and Options which are not so qualified. In March of 1999, 533,696 shares
of restricted stock were awarded to executives related to 1998
performance. As of March 31, 1999, 1,813,011 Paired Shares of restricted
stock, net of forfeitures, were deemed earned and awarded under the 1998
Plan. Approximately $2,713 and $1,347 relating to these programs were
amortized in the three-month periods ended March 31, 1999 and 1998,
respectively. The cost of restricted stock grants, which is based upon
the stock's fair market value at the time such stock is earned, awarded
and issued, is charged to Partners' equity and subsequently amortized
against earnings of the SPG Operating Partnership over the vesting
period.
<Page 16>
Note 11 - Commitments and Contingencies
Litigation
Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. On
September 3, 1998, a complaint was filed in the Court of Common Pleas in
Cuyahoga County, Ohio, captioned Richard E. Jacobs, et al. v. Simon
DeBartolo Group, L.P. The plaintiffs are all principals or affiliates of
The Richard E. Jacobs Group, Inc. ("Jacobs"). The plaintiffs allege in
their complaint that the SPG Operating Partnership engaged in malicious
prosecution, abuse of process, defamation, libel, injurious
falsehood/unlawful disparagement, deceptive trade practices under Ohio
law, tortious interference and unfair competition in connection with the
SPG Operating Partnership's acquisition by tender offer of shares in
RPT, a Massachusetts business trust, and certain litigation instituted
in September, 1997, by the SPG Operating Partnership against Jacobs in
federal district court in New York, wherein the SPG Operating
Partnership alleged that Jacobs and other parties had engaged, or were
engaging in activity which violated Section 10(b) of the Securities
Exchange Act of 1934, as well as certain rules promulgated thereunder.
Plaintiffs in the Ohio action are seeking compensatory damages in excess
of $200,000, punitive damages and reimbursement for fees and expenses.
It is difficult to predict the ultimate outcome of this action and there
can be no assurance that the SPG Operating Partnership will receive a
favorable verdict. Based upon the information known at this time, in the
opinion of management, it is not expected that this action will have a
material adverse effect on the SPG Operating Partnership.
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., an
indirect 99%-owned subsidiary of the SPG, 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 Paired Shares 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 defendants
each filed motions for summary judgment. On October 31, 1997, the Court
entered a judgment in favor of the defendants granting their motion for
summary judgment. The plaintiffs have appealed this judgment and the
matter is pending. While it is difficult to predict the ultimate outcome
of this action, based on the information known to date, it is not
expected that this action will have a material adverse effect on the SPG
Operating Partnership.
Roel Vento et al v. Tom Taylor et al. An affiliate of the SPG
Operating Partnership is a defendant in litigation entitled Roel Vento
et al v. Tom Taylor et al., in the District Court of Cameron County,
Texas, in which a judgment in the amount of $7,800 has been entered
against all defendants. This judgment includes approximately $6,500 of
punitive damages and is based upon a jury's findings on four separate
theories of liability including fraud, intentional infliction of
emotional distress, tortious 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
SPG Operating Partnership is seeking to overturn the award and has
appealed the verdict. The SPG Operating Partnership's appeal is pending.
Although management is optimistic that they 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 SPG Operating
Partnership.
The SPG Operating Partnership 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 SPG Operating Partnership's
financial position or results of operations.
Note 12 - New Accounting Pronouncements
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 formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
<Page 17>
Statement 133 will be effective for the SPG Operating Partnership
beginning with the 2000 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.
On April 3, 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs
of Start-Up Activities, which is effective for fiscal years beginning
after December 15, 1998. The SPG Operating Partnership has assessed the
impact of this pronouncement and determined the impact to be immaterial
to the financial statements.
Note 13 - Pending Acquisition
On February 25, 1999 the SPG Operating Partnership entered into a
definitive agreement with New England Development Company ("NED") to
acquire and assume management responsibilities for NED's portfolio of up
to 14 regional malls aggregating approximately 10.6 million square feet
of GLA. The purchase price for the portfolio is approximately $1.725
billion. On April 15, 1999, the SPG Operating Partnership executed a
letter of intent to form a joint venture to acquire the portfolio, with
the SPG Operating Partnership's ultimate ownership to be between 30% to
50%.
Note 14 - Subsequent Events
On April 15, 1999, the SPG Operating Partnership sold the Three Dag
Hammarskjold office building and land (the former headquarters of CPI)
in New York, New York for $21,253. The SRC Operating Partnership, which
owned the building, used the net proceeds of $11,753 related to the sale
of the building primarily to repay the remaining $10,565 mortgage
payable to the SPG Operating Partnership.
<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 SPG Properties or
the SPG 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; substantial
indebtedness; conflicts of interests; maintenance of REIT status; risks
related to the "year 2000 issue"; and environmental/safety requirements.
Overview
As of March 31, 1999, SPG Properties, including its consolidated
subsidiary, held a 49.0% ownership interest in the SPG Operating
Partnership. This investment is their sole asset and represents their
only source of income. For these reasons, management has based the
following discussion on the results of operations and financial position
of the SPG Operating Partnership. Prior to the CPI Merger, which was
consummated as of the close of business on September 24, 1998, SPG
Properties (formerly Simon DeBartolo Group, Inc.) and subsidiary
accounted for their interests in the SPG Operating Partnership using the
consolidated method of accounting. As a result of the CPI Merger and
related transactions, SPG Properties and subsidiary began accounting for
their noncontrolling interests in the SPG Operating Partnership using
the equity method of accounting.
For financial reporting purposes, as of the close of business on
September 24, 1998, the operating results include the CPI Merger
described in Note 3 to the financial statements of the SPG Operating
Partnership. As a result, the 1999 consolidated results of operations of
the SPG Operating Partnership include an additional 16 regional malls,
two office buildings and one community center, with an additional six
regional malls being accounted for using the equity method of
accounting.
The following Property acquisitions, sales and opening (the
"Property Transactions"), also impacted the SPG Operating Partnership's
results of operations in the comparative periods. On January 26, 1998,
the SPG Operating Partnership acquired 100% of Cordova Mall in
Pensacola, Florida for approximately $87.3 million. In March of 1998,
the SPG Operating Partnership opened the approximately $13.3 million
Muncie Plaza in Muncie, Indiana. On May 5, 1998, the SPG Operating
Partnership acquired the remaining 50.1% interest in Rolling Oaks Mall
for consideration valued at approximately $17.2 million. Effective June
1, 1998, the SPG Operating Partnership sold The Promenade for $33.5
million. Effective June 30, 1998, the SPG Operating Partnership sold
Southtown Mall for $3.3 million. On December 7, 1998, the SPG Operating
Partnership obtained a controlling 90% interest in The Arboretum, a
community center in Austin, Texas. On January 29, 1999, the SPG
Operating Partnership acquired the remaining 15% ownership interests in
Lakeline Mall and Lakeline Plaza. On February 26, 1999 the SPG Operating
Partnership acquired the remaining 50% ownership interests in Century
III Mall. (See Liquidity and Capital Resources for additional
information on the Lakeline Mall, Lakeline Plaza and Century III
purchases.)
Results of Operations
For the Three Months Ended March 31, 1999 vs. the Three Months Ended
March 31, 1998
Total revenue of the SPG Operating Partnership increased $140.9
million or 46.9% for the three months ended March 31, 1999, as compared
to the same period in 1998. This increase is primarily the result of the
CPI Merger ($111.7 million) and the Property Transactions ($7.1
million). Excluding these items, total revenues increased $22.1 million
or 7.4%, primarily due to an $11.1 million increase in minimum rent, a
$7.0 million increase in tenant reimbursements and a $4.3 million
increase in gains on the sales of real property. The minimum rent
increase results from increased occupancy levels and the replacement of
expiring tenant leases with renewal leases at higher minimum base rents,
and the $7.0 million increase in tenant reimbursements is offset by an
increase in recoverable expenses.
Total operating expenses of the SPG Operating Partnership increased
$79.9 million, or 48.0%, for the three months ended March 31, 1999, as
compared to the same period in 1998. This increase is primarily the
result of the CPI Merger ($67.1 million) and the Property Transactions
($4.2 million). Excluding these transactions, total operating expenses
increased $8.6 million, or 5.2% primarily due to an $8.9 million
increase in recoverable expenses, as described above, including a $2.7
million increase in snow removal expenses.
Interest expense of the SPG Operating Partnership increased $46.7
million, or 50.8% for the three months ended March 31, 1999, as compared
to the same period in 1998. This increase is primarily a result of the
CPI Merger ($39.0 million), the Property Transactions ($2.5 million) and
incremental interest on borrowings under the Credit Facility to acquire
a noncontrolling joint venture interest in twelve regional malls and two
community centers (the "IBM Properties") in February 1998 ($2.2
million). Excluding these transactions, interest expense increased $3.0
million.
<Page 19>
Income from unconsolidated entities of the SPG Operating
Partnership increased from $4.8 million in 1998 to $12.3 million in
1999, primarily from a $9.1 million increase in income from
unconsolidated partnerships and joint ventures. This increase is
primarily due to an increase in income from the IBM Properties ($3.2
million) and the CPI Merger ($7.3 million), partially offset by the
increase in the amortization of the excess of the SPG Operating
Partnership's investment over its share of the equity in the underlying
net assets of unconsolidated joint-venture Properties ($4.1 million).
Net income of the SPG Operating Partnership was $64.9 million for
the three months ended March 31, 1999, as compared to $45.1 million for
the same period in 1998, reflecting an increase of $19.8 million,
primarily for the reasons discussed above, and was allocated to the
partners of the SPG Operating Partnership based upon their preferred
Unit preferences and weighted average ownership interests in the SPG
Operating Partnership during the period.
Liquidity and Capital Resources
As of March 31, 1999, the SPG Operating Partnership's balance of
cash and cash equivalents was approximately $86.3 million. In addition
to its cash balance, the SPG Operating Partnership had a borrowing
capacity on the Credit Facility of $907.8 million available after
outstanding borrowings and letters of credit at March 31, 1999. The SPG
Operating Partnership also has access to public equity and debt markets.
The SPG Operating Partnership has a debt shelf registration statement
under which $250 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.
On February 26, 1999, 150,000 Series A Convertible Preferred Units
of the SPG Operating Partnership were converted into 5,699,304 Units in
the SPG Operating Partnership, with 59,249 Series A Convertible
Preferred Units remaining outstanding. Additionally, on March 1, 1999,
another 152,346 Units were issued in lieu of the cash dividends
allocable to these preferred Units.
Sensitivity Analysis
The SPG Operating Partnership's future earnings, cash flows and
fair values relating to financial instruments are dependent upon
prevalent market rates of interest, such as LIBOR. Based upon
consolidated indebtedness and interest rates at March 31, 1999, a 1%
increase in the market rates of interest would decrease future earnings
and cash flows by approximately $11.4 million per year, and would
decrease the fair value of debt by approximately $900 million. A 1%
decrease in the market rates of interest would increase future earnings
and cash flows by approximately $11.4 million per year, and would
increase the fair value of debt by approximately $1.2 billion.
Financing and Debt
At March 31, 1999, the SPG Operating Partnership had consolidated
debt of $8,263 million, of which $6,377 million is fixed-rate debt
bearing interest at a weighted average rate of 7.31% and $1,886 million
is variable-rate debt bearing interest at a weighted average rate of
5.85%. As of March 31, 1999, the SPG Operating Partnership had interest
rate protection agreements related to $938 million of consolidated
variable-rate debt. The SPG Operating Partnership's interest rate
protection agreements did not materially impact interest expense or
weighted average borrowing rates for the three months ended March 31,
1999 or 1998.
Scheduled principal payments of the SPG Operating Partnership'
share of consolidated indebtedness over the next five years is $3,904
million, with $4,216 million thereafter. The SPG Operating Partnership,
together with the SRC Operating Partnership, had a combined ratio of
consolidated debt-to-market capitalization of 53.0% and 51.7% at March
31, 1999 and December 31, 1998, respectively.
In January of 1999 the SPG Operating Partnership retired the $22
million mortgage on North East Mall using cash from working capital. The
paydown included a $1.8 million prepayment charge, which was recorded as
an extraordinary loss.
<Page 20>
On February 4, 1999, the SPG Operating Partnership completed the
sale of $600 million of senior unsecured notes. These notes include two
$300 million tranches. The first tranche bears interest at 6.75% and
matures on February 4, 2004 and the second tranche bears interest at
7.125% and matures on February 4, 2009. The SPG Operating Partnership
used the net proceeds of approximately $594 million primarily to retire
the $450 million initial tranche of the Merger Facility and to pay $142
million on the outstanding balance of the Credit Facility.
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 SPG Operating
Partnership will not be required to, or will not elect to, even if not
required to, obtain funds from outside sources, including through the
sale of debt or equity securities, to finance significant acquisitions,
if any.
On January 29, 1999, the SPG Operating Partnership acquired the
remaining 15% ownership interests in Lakeline Mall and Lakeline Plaza
for $6.3 million cash from existing working capital. In addition, on
March 1, 1999, the SPG Operating Partnership acquired the remaining 50%
ownership interest in Century III Mall for $57 million. The purchase
price of the Century III Mall interest included the assumption of $33
million of mortgage indebtedness, with the remainder financed through
the Credit Facility. Each of these Properties were previously accounted
for using the equity method of accounting and are now accounted for
using the consolidated method of accounting.
On April 15, 1999, the SPG Operating Partnership sold the Three Dag
Hammarskjold office building and land (the former headquarters of CPI)
in New York, New York for $21.3 million. The SRC Operating Partnership,
which owned the building, used the net proceeds of $11.8 million related
to the sale of the building primarily to repay the remaining $10.6
million mortgage payable to the SPG Operating Partnership.
Portfolio Restructuring. As a continuing part of the SPG Operating
Partnership's long-term strategic plan, management is evaluating the
potential sale of non-retail holdings, along with a number of retail
assets that are no longer aligned with the SPG Operating Partnership's
strategic criteria. If these assets are sold, management expects the
sale prices will not differ materially from the carrying value of the
related assets.
Development, Expansions and Renovations. The SPG Operating
Partnership is involved in several development, expansion and renovation
efforts.
In January of 1999, The Shops at Sunset Place, a 510,000 square-
foot destination-oriented retail and entertainment project, opened in
South Miami, Florida. The SPG Operating Partnership owns 37.5% of this
approximately $150 million specialty center.
Construction also continues on the following projects, which have
an aggregate construction cost of approximately $711 million, the SPG
Operating Partnership's share of which is approximately $393 million:
* Concord Mills, a 37.5%-owned value-oriented super regional mall
project, containing approximately 1.4 million square feet of GLA, is
scheduled to open in September of 1999 in Concord (Charlotte), North
Carolina.
* The Mall of Georgia, an approximately 1.6 million square foot
regional mall project, is scheduled to open in August of 1999. Adjacent
to the regional mall, The Mall of Georgia Crossing is an approximately
441,000 square-foot community shopping center project, which is also
scheduled to open in August of 1999. The SPG Operating Partnership is
funding 85% of the capital requirements of the project. The SPG
Operating Partnership has a noncontrolling 50% ownership interest in
each of these development projects after the return of its equity and a
9% return thereon.
* In addition to Mall of Georgia Crossing, two other new community
center projects are under construction: The Shops at North East Mall and
Waterford Lakes Town Center at a combined 1,243,000 square feet of GLA.
* Orlando Premium Outlets marks the SPG Operating Partnership's first
project to be constructed in partnership with Chelsea GCA Realty. This
433,000 square-foot upscale outlet center is scheduled for completion in
the summer of 2000 in Orlando, Florida.
A key objective of the SPG Operating Partnership is to increase the
profitability and market share of its Properties through strategic
renovations and expansions. The SPG Operating Partnership's share of
projected costs to fund all renovation and expansion projects in 1999 is
approximately $400 million, which includes approximately $56 million
incurred in the first three months of 1999. 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 SPG Operating Partnership
currently has seven major expansion and/or redevelopment projects under
construction and in the preconstruction development stage with targeted
1999 completion dates. Included in combined investment properties at
March 31, 1999 is approximately $240 million of construction in
progress, with another $240 million in the unconsolidated joint venture
investment properties.
<Page 21>
Distributions. SPG Properties declared a distribution of $0.505 per
share in the first quarter of 1999. The current annual distribution rate
is $2.02 per share. Future distributions will be determined based on
actual results of operations and cash available for distribution.
Investing and Financing Activities
Cash used by the SPG Operating Partnership in investing activities
for the three months ended March 31, 1999 of $79.4 million is primarily
the result of acquisitions of $30.3 million, $100.5 million of capital
expenditures, $19.0 million of investments in unconsolidated joint
ventures, including $10.5 million in Orlando Premium Outlots, and $11.0
million of investments in and advances to the Management Company,
partially offset by net distributions from unconsolidated entities of
$63.1 million, including $26.5 million from Westchester Mall and $14.0
million from Concord Mills, a note payment of $10.0 million from the SRC
Operating Partnership and cash of $8.3 million from the consolidation of
Century III Mall, Lakeline Mall and Lakeline Plaza. The $11.0 million
investment in the Management Company is primarily to fund an additional
investment in Group BEG. Acquisitions includes $24.0 million for the
remaining interest in Century III Mall and $6.3 million for the
remaining interest Lakeline Mall and Lakeline Plaza. Capital
expenditures includes development costs of $3.9 million, renovation and
expansion costs of approximately $76.3 million and tenant costs and
other operational capital expenditures of approximately $20.3 million.
Cash used by the SPG Operating Partnership in financing activities
for the three months ended March 31, 1999 was $33.7 million and includes
net distributions of $138.2 million, partially offset by net borrowings
of $104.5 million.
Inflation
Inflation has remained relatively low during the past four years
and has had a minimal impact on the operating performance of the
Properties. Nonetheless, substantially all of the tenants' leases
contain provisions designed to lessen the impact of inflation. Such
provisions include clauses enabling the SPG 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 SPG 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 SPG
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 SPG
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
The SPG Operating Partnership has undertaken a project to identify
and correct problems arising from the inability of information
technology hardware and software systems to process dates after
December 31, 1999. This Year 2000 project consists of two primary
components. The first component focuses on the SPG Operating
Partnership's key information technology systems (the "IT Component")
and the second component focuses on the information systems of key
tenants and key third party service providers as well as imbedded
systems within common areas of substantially all of the Properties (the
"Non-IT Component"). Key tenants include the 20 largest base rent
contributors and anchor tenants with over 25,000 square feet of GLA. Key
third party service providers are those providers whose Year 2000
problems, if not addressed, would be likely to have a material adverse
effect on the SPG Operating Partnership's operations.
The IT Component of the Year 2000 project is being managed by the
information services department of the SPG Operating Partnership who
have actively involved other disciplines within the SPG Operating
Partnership who are directly impacted by an IT Component of the project.
The Non-IT Component is being managed by a steering committee of 25
employees, including senior executives of a number of the SPG Operating
Partnership's departments. In addition, outside consultants have been
engaged to assist in the Non-IT Component.
<Page 22>
Status of Project Through April 30, 1999
IT Component. The SPG Operating Partnership's primary
operating, financial accounting and billing systems and the
SPG Operating Partnership's standard primary desktop software
have been determined to be Year 2000 ready. The SPG Operating
Partnership's information services department has also
completed its assessment of other "mission critical"
applications within the SPG Operating Partnership and is
currently implementing solutions to those applications in
order for them to be Year 2000 ready. It is expected that the
implementation of these mission critical solutions will be
complete by September 30, 1999.
Non-IT Component. The Non-IT Component includes the
following phases: (1) an inventory of Year 2000 items which
are determined to be material to the SPG Operating
Partnership's operations; (2) assigning priority to
identified items; (3) assessing Year 2000 compliance status
as to all critical items; (4) developing replacement or
contingency plans based on the information collected in the
preceding phases; (5) implementing replacement and
contingency plans; and (6) testing and monitoring of plans,
as applicable.
Phase (1) and Phase (2) are complete and Phase (3) is in
process. The assessment of compliance status of key tenants
is approximately 90% complete, the assessment of compliance
status of key third party service providers is approximately
85% complete, the assessment of compliance status of critical
inventoried components at the Properties is approximately 90%
complete and the assessment of compliance status of non-
critical inventoried components at the Properties is
approximately 89% complete. The SPG Operating Partnership
expects to complete Phase (3) by May 31, 1999. The
development of contingency or replacement plans (Phase (4))
is scheduled to be completed by June 30, 1999. Development of
such plans is ongoing. Implementation of contingency and
replacement plans (Phase (5)) has commenced and will continue
throughout 1999 to the extent Year 2000 issues are
identified. Any required testing (Phase (6)) is to be
completed throughout the remainder of 1999.
Costs. The SPG Operating Partnership estimates that it will spend
approximately $1.5 million in incremental costs for its Year 2000
project. This amount is being incurred over a period that commenced in
January 1997 and is expected to end in September 1999. Costs incurred
through March 31, 1999 are estimated at approximately $600 thousand,
including approximately $100 thousand in the three-month period ended
March 31, 1999. Such amounts are expensed as incurred. These estimates
do not include the costs expended by the SPG Operating Partnership
following the DRC Merger for software, hardware and related costs
necessary to upgrade its primary operating, financial accounting and
billing systems, which allowed those systems to, among other things,
become Year 2000 compliant.
Risks. The most reasonably likely worst case scenario for the SPG
Operating Partnership with respect to the Year 2000 problems would be
disruptions in operations at the Properties. This could lead to reduced
sales at the Properties and claims by tenants which would in turn
adversely affect the SPG Operating Partnership's results of operations.
The SPG Operating Partnership has not yet completed all phases of
its Year 2000 project and the SPG Operating Partnership is dependent
upon key tenants and key third party suppliers to make their information
systems Year 2000 compliant. In addition, disruptions in the economy
generally resulting from Year 2000 problems could have an adverse effect
on the SPG Operating Partnership's operations.
<Page 23>
Pending Acquisition
As described in Note 13 to the financial statements, on February
25, 1999 the SPG Operating Partnership entered into a definitive
agreement with NED to acquire and assume management responsibilities for
NED's portfolio of up to 14 regional malls aggregating approximately
10.6 million square feet of GLA. The purchase price for the portfolio is
approximately $1.725 billion. On April 15, 1999, the SPG Operating
Partnership executed a letter of intent to form a joint venture to
acquire the portfolio, with the SPG Operating Partnership's ultimate
ownership to be between 30% to 50%.
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 24>
Part II - Other Information
Item 1: Legal Proceedings
None.
Item 6: Exhibits and Reports on Form 8-K
None
<Page 25>
SIGNATURE
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.
SPG PROPERTIES, INC.
/s/ John Dahl
John Dahl,
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Date: May 12, 1999
<Page 26>
<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 financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,125,189<F1>
<CURRENT-LIABILITIES> 0
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0
339,352
<COMMON> 12
<OTHER-SE> 1,785,825
<TOTAL-LIABILITY-AND-EQUITY> 2,125,189
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 30,862
<INCOME-TAX> 0
<INCOME-CONTINUING> 30,862
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<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>The Registrant's sole asset is an equity investment in Simon Property Group,
L.P.
<F2>Because substantially all of the Registrant's common stock is held by an
affiliate, Simon Property Group, Inc., the Registrant does not report earnings
per share.
</FN>
</TABLE>
