# Simon Property Group Inc.: Form 10-Q for the period ended Mar 31, 2010

- Company: [Simon Property Group Inc.](/companies/spg.md) (CIK 1063761)
- Form: 10-Q
- Filed: 2010-05-10
- Accepted by EDGAR: May 10, 2010, 11:30 ET
- Period: 2010-03-31
- Accession: 0001047469-10-004999
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1063761/000104746910004999/a2198289z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1063761/000104746910004999/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-01-01 to 2010-03-31 | $925.1m | us-gaap:Revenues |
| Operating income | 3 months, 2010-01-01 to 2010-03-31 | $426.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2010-01-01 to 2010-03-31 | $264.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2010-01-01 to 2010-03-31 | $202.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2010-01-01 to 2010-03-31 | $20.8m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2010-01-01 to 2010-03-31 | $0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-01-01 to 2010-03-31 | $0.03 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2010-01-01 to 2010-03-31 | $448.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2010-03-31 | $3.33bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2010-03-31 | $24.98bn | us-gaap:Assets |
| Total liabilities | at 2010-03-31 | $19.49bn | us-gaap:Liabilities |
| Shareholders' equity | at 2010-03-31 | $4.44bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2010-03-31 | 0 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 41,773 characters.

You should read the following discussion in conjunction with the financial statements and notes thereto included in this report.

### Overview

Simon Property Group, Inc., or Simon Property, is a Delaware corporation that operates as a self-administered and self-managed real estate investment trust, or REIT, under the Internal Revenue Code. To qualify as a REIT, among other things, a company must distribute at least 90 percent of its taxable income to its stockholders annually. Taxes are paid by stockholders on ordinary dividends received and any capital gains distributed. Most states also follow this federal treatment and do not require REITs to pay state income tax. Simon Property Group, L.P., or the Operating Partnership, is a majority-owned partnership subsidiary that owns all of our real estate properties. In this discussion, the terms "we", "us" and "our" refer to Simon Property Group, Inc. and its subsidiaries.

We own, develop, and manage retail real estate properties, which consist primarily of regional malls, Premium Outlets®, The Mills®, and community/lifestyle centers. As of March 31, 2010, we owned or held an interest in 318 income-producing properties in the United States, which consisted of 161 regional malls, 41 Premium Outlets, 66 community/lifestyle centers, 36 properties acquired in the 2007 acquisition of The Mills Corporation, or Mills, and 14 other shopping centers or outlet centers in 41 states and Puerto Rico. Of the 36 properties in the Mills portfolio, 16 of these properties are The Mills, 16 are regional malls, and four are community centers. Internationally, we have ownership interests in 53 European shopping centers (France, Italy and Poland), eight Premium Outlets in Japan, one Premium Outlet in Mexico, and one Premium Outlet in South Korea. In the first quarter of 2010, we and our joint venture partner entered into a definitive agreement to sell all of the interests in Simon Ivanhoe S.à.r.l, or Simon Ivanhoe, which owns seven shopping centers located in France and Poland. The transaction is expected to close in the second quarter of 2010. We also have entered into a definitive agreement to acquire a portfolio of 22 outlet shopping centers which is expected to close in the summer of 2010.

We generate the majority of our revenues from leases with retail tenants including:

Base minimum rents,

Overage and percentage rents based on tenants' sales volume, and

Recoveries of substantially all of our recoverable expenditures, which consist of property operating, real estate taxes, repair and maintenance, and advertising and promotional expenditures.

Revenues of our management company, after intercompany eliminations, consist primarily of management fees that are typically based upon the revenues of the property being managed.

We seek growth in earnings, funds from operations, or FFO, and cash flows by enhancing the profitability and operation of our properties and investments. We seek to accomplish this growth through the following:

Focusing on leasing to increase revenues and using economies of scale to reduce operating expenses,

Expanding and re-tenanting existing franchise locations at competitive market rates,

Adding mixed-use elements to properties,

Selectively acquiring high quality real estate assets or portfolios of assets, and

Selling non-core assets.

We also grow by generating supplemental revenues from the following activities:

Establishing our malls as leading market resource providers for retailers and other businesses and consumer-focused corporate alliances, including: payment systems (such as handling fees relating to the sales of bank-issued prepaid cards), national marketing alliances, static and digital media initiatives, business development, sponsorship, and events,

Offering property operating services to our tenants and others, including waste handling and facility services, and the sale of energy,

Selling or leasing land adjacent to our shopping center properties, commonly referred to as "outlots" or "outparcels," and

Generating interest income on cash deposits and loans made to related entities.

We focus on high quality real estate across the retail real estate spectrum. We expand or renovate to enhance existing assets' profitability and market share when we believe the investment of our capital meets our risk-reward criteria. We selectively develop new properties in metropolitan areas that exhibit strong population and economic growth.

We routinely review and evaluate acquisition opportunities based on their ability to complement our portfolio. Our international strategy includes partnering with established real estate companies and financing international investments with local currency to minimize foreign exchange risk.

To support our growth, we employ a three-fold capital strategy:

Provide the capital necessary to fund growth,

Maintain sufficient flexibility to access capital in many forms, both public and private, and

Manage our overall financial structure in a fashion that preserves our investment grade credit ratings.

### Results Overview

Diluted earnings per common share decreased $0.42 during the first quarter of 2010, or 93.3%, to $0.03 from $0.45 for the same period last year. The decrease in diluted earnings per share was primarily attributable to a $165.6 million, or $0.48 per diluted share, loss on extinguishment of debt related to our senior unsecured notes tender offer during the first quarter of 2010.

Core business fundamentals during the first quarter of 2010 improved from the unfavorable economic environment that existed during the first quarter of 2009. Comparable sales per square foot, or psf, remained stable at $467 psf on a combined basis for our Regional Malls and Premium Outlets. Average base rents increased 3.2% to $38.72 psf as of March 31, 2010, from $37.51 psf as of March 31, 2009. Leasing spreads remained positive as we were able to lease available square feet at higher rents than the expiring rental rates resulting in a leasing spread of $2.11 psf as of March 31, 2010, representing a 5.2% increase over expiring rents. Occupancy was 92.2% as of March 31, 2010, as compared to 92.1% as of March 31, 2009, an increase of 10 basis points.

Our effective overall borrowing rate at March 31, 2010 increased 17 basis points to 5.67% as compared to 5.50% at March 31, 2009. This increase was primarily due to a $691.2 million increase in our portfolio of relatively higher rate fixed rate debt. Our financing activities for the three months ended March 31, 2010, included:

completing a cash tender offer for any and all senior unsecured notes of ten outstanding series with maturity dates ranging from 2011 to March 2013. The total principal amount of the notes accepted for purchase on January 26, 2010 was approximately $2.3 billion, with a weighted average duration of 2.0 years and a weighted coupon of 5.76%. The Operating Partnership purchased the tendered notes with cash on hand and the proceeds from an offering of $2.25 billion of senior unsecured notes which closed on January 25, 2010. The senior notes offering was comprised of $400.0 million of 4.20% notes due 2015, $1.25 billion of 5.65% notes due 2020 and $600.0 million of 6.75% notes due 2040. The weighted average duration of the notes offering was 14.4 years and the weighted average coupon was 5.69%. We reported a $165.6 million loss on extinguishment of debt in the first quarter of 2010 as a result of the tender offer.

redeeming a $300.0 million maturing unsecured note that had a fixed rate of 4.875%.

unencumbering two properties by repaying $281.6 million in mortgage loans.

### United States Portfolio Data

The portfolio data discussed in this overview includes the following key operating statistics: occupancy, average base rent per square foot, and comparable sales per square foot for our domestic assets. We include acquired properties in this data beginning in the year of acquisition and remove properties sold in the year disposed. For comparative purposes, we separate the information below related to the Mills properties and the Mills Regional Malls, from our other U.S. operations. We also do not include any properties located outside of the United States. The following table sets forth these key operating statistics for:

properties that are consolidated in our consolidated financial statements,

properties we account for under the equity method of accounting as joint ventures, and

the foregoing two categories of properties on a total portfolio basis.

| U.S. Regional Malls and Premium Outlets: Occupancy | March 31, 2010 | March 31, 2009 | %/basis point Change(1) |
| --- | ---: | ---: | ---: |
| Consolidated | **92.8%** | 92.5% | +30 bps |
| Unconsolidated | **90.7%** | 91.0% | -30 bps |
| **Total Portfolio** | **92.2%** | 92.1% | +10 bps |
| **Average Base Rent per Square Foot** |  |  |  |
| Consolidated | **$37.15** | $35.59 | 4.4% |
| Unconsolidated | **$43.44** | $43.32 | 0.3% |
| **Total Portfolio** | **$38.72** | $37.51 | 3.2% |
| **Comparable Sales Per Square Foot** |  |  |  |
| Consolidated | **$458** | $458 | No Change |
| Unconsolidated | **$496** | $495 | 0.2% |
| **Total Portfolio** | **$467** | $467 | No Change |
| **The Mills®:** |  |  |  |
| **Occupancy** | **93.3%** | 89.7% | +360 bps |
| **Average Base Rent per Square Foot** | **$19.79** | $19.78 | 0.0% |
| **Comparable Sales per Square Foot** | **$372** | $373 | -0.3% |
| **Mills Regional Malls:** |  |  |  |
| **Occupancy** | **88.6%** | 87.4% | +120 bps |
| **Average Base Rent per Square Foot** | **$35.42** | $37.14 | -4.6% |
| **Comparable Sales per Square Foot** | **$389** | $410 | -5.1% |
| **Community/Lifestyle Centers:** |  |  |  |
| **Occupancy** | **90.3%** | 87.4% | +290 bps |
| **Average Base Rent per Square Foot** | **$13.44** | $13.37 | 0.5% |

(1)

Percentages may not recalculate due to rounding. Percentages and basis point changes are representative of the change from the comparable prior period.

***Occupancy Levels and Average Base Rent Per Square Foot.*** Occupancy and average base rent are based on gross leasable area, or GLA, owned by us in the regional malls, all tenants at the Premium Outlets, all tenants in the Mills portfolio, and all tenants at community/lifestyle centers. Our portfolio has maintained stable occupancy while average base rents have increased.

***Comparable Sales Per Square Foot.*** Comparable sales include total reported retail tenant sales at owned GLA (for mall and freestanding stores with less than 10,000 square feet) in the regional malls and all reporting tenants at the Premium Outlets and the Mills. Retail sales at Owned GLA affect revenue and profitability levels because sales 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.) that tenants can afford to pay.

### International Property Data

The following key operating statistics are provided for our international properties, which we account for using the equity method of accounting.

| European Shopping Centers: | March 31, 2010 | March 31, 2009 | %/basis point Change |
| --- | ---: | ---: | ---: |
| Occupancy | **95.4%** | 98.5% | -310 bps |
| Comparable Sales per Square Foot | **€407** | €409 | -0.5% |
| Average Base Rent per Square Foot | **€31.13** | €30.86 | 0.9% |
| International Premium Outlets(1) |  |  |  |
| Occupancy | **99.6%** | 99.9% | -30 bps |
| Comparable Sales per Square Foot | **¥90,993** | ¥91,492 | -0.5% |
| Average Base Rent per Square Foot | **¥4,731** | ¥4,705 | 0.6% |

(1)

Does not include our centers in Mexico (Premium Outlets Punta Norte) or South Korea (Yeoju Premium Outlets).

### Results of Operations

In addition to the activity discussed above in the "Results Overview" section, the following dispositions, property openings and other activity affected our consolidated results from continuing operations in the comparative periods:

During the first quarter of 2010, we disposed of one regional mall, one community center, one other retail property and a non-retail building.

On March 11, 2010, we opened Phase II of The Domain, in Austin, Texas.

During 2009, we sold four consolidated properties consisting of three community centers and one other retail property.

During the fourth quarter of 2009, we recognized a $20 million loss on our joint venture interests in our shopping centers in China resulting from the sale of our interests to affiliates of our Chinese partner for approximately $29 million.

On August 6, 2009, we opened Cincinnati Premium Outlets, a 400,000 square foot outlet located in Warren County, Ohio, north of Cincinnati.

On April 23, 2009, we opened The Promenade at Camarillo Premium Outlets, a 220,000 square foot expansion located in Ventura County, north of Los Angeles.

In addition to the activities discussed in "Results Overview," the following dispositions and property openings affected our income from unconsolidated entities in the comparative periods:

On March 25, 2010, Gallerie Commerciali Italia, or GCI, one of our European joint ventures in which we hold a 49% ownership interest, opened Catania, a 642,000 square foot shopping center in Sicily, Italy.

On March 2, 2010, GCI opened Argine, a 300,000 square foot shopping center in Napoli, Italy.

On July 9, 2009, Chelsea Japan Company, Ltd., the joint venture which operates the Japanese Premium Outlets in which we have a 40% ownership interest, opened Ami Premium Outlets located in Ami, Japan.

For the purposes of the following comparison between the three months ended March 31, 2010, and 2009, the above transactions are referred to as the "property transactions." In the following discussions of our results of operations, "comparable" refers to properties open and operating throughout the periods in both 2010 and 2009.

### Three Months Ended March 31, 2010 vs. Three Months Ended March 31, 2009

Minimum rents increased $0.2 million during the period. The property transactions accounted for a $2.3 million increase which is offset by a decrease in comparable minimum rents of $2.1 million, or 0.4%. The decrease in comparable minimum rents was primarily attributable to a $1.9 million decline in the fair market value of in-place lease amortization and a $6.3 million decrease in straight-line rents, offset by a $3.9 million increase in base minimum rents and a $2.2 million increase in comparable rents from carts, kiosks, and other temporary tenants. Overage rents increased $0.7 million, or 5.7%, as a result of an increase in tenant sales for the period as compared to the prior year.

Management fees and other revenues decreased $2.1 million principally as a result of decreased fee revenue due to the reduction in development.

Total other income increased $10.6 million, and was principally the result of the following:

an increase in lease settlement income of $7.1 million,

an increase in land sale activity of $1.5 million, and

other net activity of $2.0 million.

Property operating costs decreased $7.4 million, or 7.0%, primarily related to lower utility costs resulting from our cost control and reduction initiatives.

Depreciation and amortization expense decreased $27.4 million due to the impact of the acceleration of depreciation for certain properties scheduled for redevelopment, offset by a slight increase as a result of our prior year openings and expansion activity.

The (recovery of) provision for credit losses decreased $16.5 million due to a reduction in the number of tenants in default and a decrease in the number of tenants in bankruptcy proceedings compared to the first quarter of 2009. We also had strong collections of receivables in connection with lease settlement agreements occurring during the quarter which had been reserved due to uncertainty of payment.

Home and regional office expense decreased $8.8 million primarily due to decreased personnel costs attributable to our cost control initiatives and a final adjustment for an incentive compensation plan in our Premium Outlet business.

During 2010, we incurred $3.7 million in transaction expenses related to costs associated with acquisition related activities.

Interest expense increased $37.9 million primarily related to the Operating Partnership's issuance of unsecured notes totaling $2.3 billion on January 25, 2010, and $1.8 billion during 2009, offset by the impact of the unsecured notes tendered on January 26, 2010.

The first quarter of 2010 included a loss on extinguishment of debt of $165.6 million related to the charge for the unsecured note tender offer.

Income from unconsolidated entities increased $12.0 million primarily due to favorable results of operations over the prior period, a property opening and expansion in Japan, a decrease in the provision for credit losses and interest savings.

Gain on sale or disposal of assets increased $6.0 million as a result of the disposition of one regional mall, one community center, one other retail property and a non-retail building.

Net income attributable to noncontrolling interests decreased $27.2 million primarily due to a decrease in the income of the Operating Partnership.

### Liquidity and Capital Resources

Because we generate revenues primarily from long-term leases, our financing strategy relies primarily on long-term fixed rate debt. We manage our floating rate debt to be at or below 15-25% of total outstanding indebtedness. Floating rate debt currently comprises approximately 9.7% of our total consolidated debt. We also enter into interest rate protection agreements as appropriate to assist in managing our interest rate risk. We derive most of our liquidity from leases that generate positive net cash flow from operations and distributions of capital from unconsolidated entities that totaled $477.1 million during the first quarter of 2010. In addition, our unsecured revolving credit facility, or Credit Facility, provides an alternative source of liquidity as our cash needs vary from time to time.

Our balance of cash and cash equivalents decreased $631.1 million during the first quarter of 2010 to $3.3 billion as of March 31, 2010 primarily due to the use of cash to reduce indebtedness. Our balance of cash and cash equivalents as of March 31, 2010 and December 31, 2009, includes $39.8 million and $38.1 million, respectively, related to our co-branded gift card programs, which we do not consider available for general working capital purposes.

On March 31, 2010, we had available borrowing capacity of approximately $3.2 billion under the Credit Facility, net of outstanding borrowings of $435.1 million and letters of credit of $4.2 million. For the three months ended March 31, 2010, the maximum amount outstanding under the Credit Facility was $447.9 million and the weighted average amount outstanding was $446.7 million. The weighted average interest rate was 2.27% for the three months ended March 31, 2010.

We and the Operating Partnership have historically had access to public equity and long term unsecured debt markets and access to private equity from institutional investors at the property level.

Our business model requires us to regularly access the debt and equity capital markets to raise funds for acquisition and development activity, redevelopment capital, and to refinance maturing debt. We believe we have sufficient cash on hand and availability under our corporate Credit Facility to address our debt maturities and capital needs through 2011.

As discussed further in "Financing and Debt" below, on January 12, 2010, we commenced a tender offer to purchase ten outstanding series of notes. We subsequently purchased $2.285 billion of notes on January 26, 2010. The purchase of the notes was primarily funded with proceeds from the sale of $2.25 billion of senior unsecured notes issued on January 25, 2010.

### Loans to SPG-FCM

As part of the Mills acquisition, the Operating Partnership made loans to SPG-FCM and Mills primarily at rates of LIBOR plus 270-275 basis points. These funds were used by SPG-FCM and Mills to repay loans and other obligations of Mills, including the redemption of preferred stock. As of March 31, 2010 and December 31, 2009, the outstanding balance of our remaining loan to SPG-FCM was $632.0 million. During the first three months of 2010 and 2009, we recorded approximately $3.0 million and $2.2 million in interest income (net of inter-entity eliminations), related to this loan, respectively. The loan facility bears interest at a rate of LIBOR plus 275 basis points and matures on June 7, 2010, with two available one-year extensions.

### Cash Flows

Our net cash flow from operating activities and distributions of capital from unconsolidated entities for the three months ended March 31, 2010, totaled $477.1 million. In addition, we had net repayments from all of our debt financing and repayment activities in this period of $654.9 million and an additional $165.6 million primarily related to premiums paid to par as a result of the note tender offer. These activities are further discussed below in "Financing and Debt." During the 2010 period, we or the Operating Partnership also:

paid stockholder dividends and unitholder distributions totaling $206.1 million,

paid preferred stock dividends and preferred unit distributions totaling $6.8 million,

funded consolidated capital expenditures of $62.8 million (these capital expenditures include development costs of $5.0 million, renovation and expansion costs of $28.5 million, and tenant costs and other operational capital expenditures of $29.3 million), and

funded investments in unconsolidated entities of $4.4 million.

In general, we anticipate that cash generated from operations will be sufficient to meet operating expenses, monthly debt service, recurring capital expenditures, and distributions to stockholders necessary to maintain our REIT qualification for 2010. In addition, we expect to be able to obtain capital for nonrecurring capital expenditures, such as acquisitions, major building renovations and expansions, as well as for scheduled principal maturities on outstanding indebtedness, from:

excess cash generated from operating performance and working capital reserves,

borrowings on our Credit Facility,

additional secured or unsecured debt financing, or

additional equity raised in the public or private markets.

We expect to generate positive cash flow from operations in 2010, and we consider these projected cash flows in our sources and uses of cash. These cash flows are principally derived from retail tenants, many of whom continue to experience financial distress. A significant deterioration in projected cash flows from operations could cause us to increase our reliance on available funds from our Credit Facility, curtail planned capital expenditures, or seek other additional sources of financing as discussed above.

### Financing and Debt

### Unsecured Debt

Our unsecured debt currently consists of $11.2 billion of senior unsecured notes of the Operating Partnership and $435.1 million outstanding under our Credit Facility. The Credit Facility has a borrowing capacity of $3.68 billion and contains an accordion feature allowing the maximum borrowing capacity to expand to $4.0 billion. The Credit Facility matures on March 31, 2013. The base interest on the Credit Facility is LIBOR plus 210 basis points and includes a facility fee of 40 basis points.

The total outstanding balance of the Credit Facility at March 31, 2010 was $435.1 million, all of which was comprised of the U.S. dollar equivalent of Euro and Yen-denominated borrowings. The maximum outstanding balance during the three months ended March 31, 2010 was approximately $452.3 million. During the three months ended March 31, 2010, the weighted average outstanding balance on the Credit Facility was approximately $446.7 million.

On January 12, 2010, the Operating Partnership commenced a cash tender offer for any and all senior unsecured notes of ten outstanding series with maturity dates ranging from 2011 to March 2013. The total principal amount of the notes accepted for purchase on January 26, 2010 was approximately $2.3 billion, with a weighted average duration of 2.0 years and a weighted average coupon of 5.76%. The Operating Partnership purchased the tendered notes with cash on hand and the proceeds from an offering of $2.25 billion of senior unsecured notes that closed on January 25, 2010. The senior notes offering was comprised of $400.0 million of 4.20% notes due 2015, $1.25 billion of 5.65% notes due 2020 and $600.0 million of 6.75% notes due 2040. We recorded a $165.6 million loss on extinguishment of debt in the first quarter of 2010 as a result of the tender offer.

On March 18, 2010, the Operating Partnership repaid a $300.0 million senior unsecured note, which had a fixed rate of 4.875%.

### Secured Debt

Total secured indebtedness was $6.2 billion and $6.6 billion at March 31, 2010 and December 31, 2009, respectively. During the three months ended March 31, 2010, we repaid $281.6 million in mortgage loans, unencumbering two properties.

### Summary of Financing

Our consolidated debt, adjusted to reflect outstanding derivative instruments, and the effective weighted average interest rates as of March 31, 2010, and December 31, 2009, consisted of the following (dollars in thousands):

| Debt Subject to | Adjusted Balance as of March 31, 2010 | Effective Weighted Average Interest Rate | Adjusted Balance as of December 31, 2009 | Effective Weighted Average Interest Rate |
| --- | ---: | ---: | ---: | ---: |
| **Fixed Rate** | **$16,178,221** | **6.10%** | $16,814,240 | 6.10% |
| **Variable Rate** | **1,704,968** | **1.64%** | 1,816,062 | 1.19% |
|  | **$17,883,189** | **5.67%** | $18,630,302 | 5.62% |

As of March 31, 2010, we had $693.8 million of notional amount fixed rate swap agreements that have a weighted average fixed pay rate of 2.79% and a weighted average variable receive rate of 0.48%. As of March 31, 2010, the net effect of these agreements effectively converted $693.8 million of variable rate debt to fixed rate debt.

***Contractual Obligations and Off-Balance Sheet Arrangements.*** There have been no material changes to our outstanding capital expenditure commitments previously disclosed in our 2009 Annual Report on Form 10-K.

In regards to long-term debt arrangements, the following table summarizes the material aspects of these future obligations as of March 31, 2010, for the remainder of 2010 and subsequent years thereafter (dollars in thousands):

| Long-Term Debt | 2010 | 2011-2012 | 2013-2015 | After 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Consolidated(1) | $1,715,786 | $2,749,703 | $6,654,688 | $6,768,999 | $17,889,176 |
| **Pro rata share of Long-Term Debt:** |  |  |  |  |  |
| Consolidated(2) | $1,697,664 | $2,619,832 | $6,585,764 | $6,710,735 | $17,613,995 |
| Joint Ventures(2) | 752,840 | 1,904,485 | 2,333,888 | 1,643,698 | 6,634,911 |
| **Total Pro Rata Share of Long-Term Debt** | $2,450,504 | $4,524,317 | $8,919,652 | $8,354,433 | $24,248,906 |

(1)

Represents principal maturities only and therefore, excludes net discounts of $5,987 and all required interest payments. We incurred interest expense of $264.0 million, net of capitalized interest of $2.4 million, for the three months ended March 31, 2010.

(2)

Represents our pro rata share of principal maturities and excludes net premiums and discounts.

Our off-balance sheet arrangements consist primarily of our investments in real estate joint ventures which are common in the real estate industry and are described in Note 5 of the notes to the accompanying financial statements. Joint venture debt is the liability of the joint venture, is typically secured by the joint venture property, and is non-recourse to us. As of March 31, 2010, the Operating Partnership had loan guarantee obligations of $44.3 million to support our total $6.6 billion share of joint venture mortgage and other indebtedness presented in the table above.

### Acquisitions and Dispositions

Buy-sell provisions are common in real estate partnership agreements. Most of our partners are institutional investors who have a history of direct investment in retail real estate. Our partners in our joint venture properties may initiate these provisions at any time. If we determine it is in our stockholders' best interests for us to purchase the joint venture interest and we believe we have adequate liquidity to execute the purchase without hindering our cash flows, then we may initiate these provisions or elect to buy. If we decide to sell any of our joint venture interests, we expect to use the net proceeds to reduce outstanding indebtedness or to reinvest in development, redevelopment, or expansion opportunities.

***Acquisitions.*** Although the acquisition of high quality individual properties or portfolios of properties remains an integral component of our growth strategies, we did not acquire any properties during the first three months of 2010.

We entered into a definitive agreement in December 2009 to acquire all of the outlet shopping centers currently owned by Prime Outlets Acquisition Company and certain of its affiliated entities, or the Prime Outlets, subject to Prime Outlets' existing fixed rate indebtedness and preferred stock. The Prime Outlets consist of 22 outlet centers located primarily in major metropolitan markets. We will pay consideration (consisting of cash and units of the Operating Partnership) of approximately $0.7 billion for the owners' interests in the Prime Outlets. The acquisition is subject to several closing conditions relating to certain financing arrangements of the Prime Outlets. Assuming all closing conditions are satisfied on a timely basis, we expect the transaction to close in the summer of 2010.

***Dispositions.*** We continue to pursue the disposition of properties that no longer meet our strategic criteria or that are not the primary retail venue within their trade area. During the three months ended March 31, 2010, we disposed of one regional mall, one community center, one other retail property and a non-retail building for an aggregate gain of $6.0 million.

On February 4, 2010, we and our joint venture partner in Simon Ivanhoe, Ivanhoe Cambridge Inc., or Ivanhoe Cambridge, entered into a definitive agreement to sell all of the interests in Simon Ivanhoe which owns seven shopping centers located in France and Poland to Unibail-Rodamco. The joint venture partners will receive consideration of €715 million for their interests, subject to certain post-closing adjustments. We expect our share of the gain on sale of our interests in Simon Ivanhoe to be approximately $300 million. The transaction is scheduled to close during the second quarter of 2010, subject to customary closing conditions and regulatory approvals.

### Development Activity

***New Domestic Development, Expansions and Renovations.*** Given the downturn in the economy, we have substantially reduced our development spending as well as strategic expansions and renovation. Our share of new development activity is not expected to be significant. Our share of the cost of other renovation or expansion projects that we expect to initiate or complete in 2010 is approximately $70.0 million. We expect to fund these capital projects with cash flow from operations.

***International Development Activity.*** We typically reinvest net cash flow from our international investments to fund future international development activity. We believe this strategy mitigates some of the risk of our initial investment and our exposure to changes in foreign currencies. We have also funded our European investments with Euro-denominated borrowings that act as a natural hedge against local currency fluctuations. This has also been the case with our Premium Outlets in Japan, Korea, and Mexico where we use Yen, Won, and Peso denominated financing, respectively. Currently, our consolidated net income exposure to changes in the volatility of the Euro, Yen, Won, Peso and other foreign currencies is not material. We expect our share of international development costs for 2010 will be approximately $64.0 million.

The carrying amount of our total combined investment in Simon Ivanhoe and GCI, as of March 31, 2010, including all related components of other comprehensive income, was $279.9 million. Our investments in Simon Ivanhoe and GCI are accounted for using the equity method of accounting. We have a 50% ownership interest in Simon Ivanhoe and a 49% ownership interest in GCI. In March 2010, two European developments opened adding approximately 942,000 square feet of GLA for a total net cost of approximately €221 million, of which our share was approximately €53 million, or $71.4 million based on current Euro:USD exchange rates. Although we agreed to sell our joint venture interest in Simon Ivanhoe in 2010, we and Ivanhoe Cambridge have the right to participate with Unibail-Rodamco in the potential development of up to five new retail projects in the Simon Ivanhoe pipeline, subject to customary approval rights. We will own a 25% interest in any of these projects in which we agree to participate.

As of March 31, 2010, the carrying amount of our 40% joint venture investment in the eight Japanese Premium Outlets including all related components of other comprehensive income was $301.5 million. Currently, Toki Premium Outlets Phase III and Tosu Premium Outlets Phase III are under construction in Japan. Toki Premium Outlets Phase III is a 62,000 square foot expansion to the Toki Premium Outlet located in Toki, Japan. Tosu Premium Outlets Phase III is a 52,000 square foot expansion to the Tosu Premium Outlet located in Fukuoka, Japan. The combined projected net cost of these projects is JPY 5.3 billion, of which our share is approximately JPY 2.1 billion, or $23.0 million based on applicable Yen:USD exchange rates.

We hold a minority interest in Liberty International PLC, or Liberty, which is a U.K. Real Estate Investment Trust that operates regional shopping centers and owns other prime retail assets throughout the U.K. Liberty is a U.K. FTSE 100 listed company, with shareholders' funds of £3.2 billion and property investments of £6.2 billion, of which its U.K. regional shopping centers comprise 74%. Assets of the group under control or joint control amount to £9.3 billion. Our interest in Liberty is less than 6% of its outstanding shares. We adjust the carrying value of this investment quarterly using quoted market prices, including a related foreign exchange component.

### Dividends

We paid a common stock dividend of $0.60 per share in the first quarter of 2010. We are required to pay a minimum level of dividends to maintain our status as a REIT. Our dividends and the Operating Partnership's limited partner distributions typically exceed our net income generated in any given year primarily because of depreciation, which is a "non-cash" expense. Future dividends and distributions of the Operating Partnership will be determined by our Board of Directors based on actual results of operations, cash available for dividends and limited partner distributions, and what may be required to maintain our status as a REIT.

### Forward-Looking Statements

Certain statements made in this section or elsewhere in this report may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such factors include, but are not limited to: our ability to meet debt service requirements, the availability of financing, changes in our credit rating, changes in market rates of interest and foreign exchange rates for foreign currencies, the ability to hedge interest rate risk, risks associated with the acquisition, development and expansion of properties, general risks related to retail real estate, the liquidity of real estate investments, environmental liabilities, international, national, regional and local economic climates, changes in market rental rates, trends in the retail industry, relationships with anchor tenants, the inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise, risks relating to joint venture properties, costs of common area maintenance, competitive market forces, risks related to international activities, insurance costs and coverage, terrorist activities, changes in economic and market conditions and maintenance of our status as a real estate investment trust. We discussed these and other risks and uncertainties under the heading "Risk Factors" in our most recent Annual Report on Form 10-K. We may update that discussion in our Quarterly Reports on Form 10-Q, but otherwise we undertake no duty or obligation to update or revise these forward-looking statements, whether as a result of new information, future developments, or otherwise.

### Non-GAAP Financial Measure — Funds from Operations

Industry practice is to evaluate real estate properties in part based on funds from operations, or FFO. We consider FFO to be a key measure of our operating performance that is not specifically defined by accounting principles generally accepted in the United States, or GAAP. We believe that FFO is helpful to investors because it is a widely recognized measure of the performance of REITs and provides a relevant basis for comparison among REITs. We also use FFO to internally measure the operating performance of our portfolio.

We determine FFO based on the definition set forth by the National Association of Real Estate Investment Trusts, or NAREIT, as consolidated net income computed in accordance with GAAP:

excluding real estate related depreciation and amortization,

excluding gains and losses from extraordinary items and cumulative effects of accounting changes,

excluding gains and losses from the sales of previously depreciated operating properties,

plus the allocable portion of FFO of unconsolidated entities accounted for under the equity method of accounting, based upon economic ownership interest, and

all determined on a consistent basis in accordance with GAAP.

We have adopted NAREIT's clarification of the definition of FFO that requires us to include the effects of nonrecurring items not classified as extraordinary, cumulative effect of accounting changes, or a gain or loss resulting from the sale of previously depreciated operating properties. We include in FFO gains and losses realized from the sale of land, outlot buildings, marketable and non-marketable securities, and investment holdings of non-retail real estate.

However, you should understand that our computation of FFO might not be comparable to FFO reported by other REITs and that FFO:

does not represent cash flow from operations as defined by GAAP,

should not be considered as an alternative to net income determined in accordance with GAAP as a measure of operating performance, and

is not an alternative to cash flows as a measure of liquidity.

The following schedule sets forth total FFO before allocation to the limited partners of the Operating Partnership. This schedule also reconciles consolidated net income, which we believe is the most directly comparable GAAP financial measure, to FFO for the periods presented.

*(in thousands)*

|  | For the Three Months Ended March 31, 2010 | 2009 |
| --- | ---: | ---: |
| **Funds from Operations** | **$325,558** | $476,832 |
| **Change in FFO from prior period** | **-31.7%** | 13.5% |
| **Reconciliation:** |  |  |
| **Consolidated Net Income** | **$20,754** | $146,248 |
| Depreciation and amortization from consolidated properties | **225,430** | 252,913 |
| Simon's share of depreciation and amortization from unconsolidated entities | **96,879** | 93,378 |
| Gain on sale or disposal of assets | **(6,042)** | — |
| Net income attributable to noncontrolling interest holders in properties | **(2,663)** | (3,039) |
| Noncontrolling interests portion of depreciation and amortization | **(1,972)** | (1,962) |
| Preferred distributions and dividends | **(6,828)** | (10,706) |
| **Funds from Operations** | **$325,558** | $476,832 |
| FFO Allocable to Simon Property | **$270,925** | $384,220 |
| **Diluted net income per share to diluted FFO per share reconciliation:** |  |  |
| **Diluted net income per share** | **$0.03** | $0.45 |
| Depreciation and amortization from consolidated Properties and our share of depreciation and amortization from unconsolidated affiliates, net of noncontrolling interests portion of depreciation and amortization | **0.94** | 1.18 |
| Gain on sale or disposal of assets | **(0.02)** | — |
| Impact of additional dilutive securities for FFO per share | **(0.01)** | (0.02) |
| **Diluted FFO per share** | **$0.94** | $1.61 |

The decline in FFO is primarily attributable to the $165.6 million loss on extinguishment of debt associated with the unsecured notes tender offer, reducing FFO by $0.47 per share during the three months ended March 31, 2010. Also, FFO per share amounts reflect the impact of the issuance of 52.1 million shares of common stock through public offerings and common stock dividends in 2009. In the first quarter of 2010, this dilution accounted for a decline of approximately $0.17 per share (FFO).

## Market risk

As filed, 385 characters.

***Sensitivity Analysis.*** We disclosed a comprehensive qualitative and quantitative analysis regarding market risk in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2009 Annual Report on Form 10-K. There have been no material changes in the assumptions used or results obtained regarding market risk since December 31, 2009.

## Controls and procedures

As filed, 1,005 characters.

***Evaluation of Disclosure Controls and Procedures.*** We carried out an evaluation under the supervision and with participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2010.

***Changes in Internal Control Over Financial Reporting.*** There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f)) that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 168 characters.

Through the period covered by this report, there were no significant changes to the Risk Factors disclosed in "Part 1: Business" of our 2009 Annual Report on Form 10-K.

Filed May 10, 2010.
Source: SEC EDGAR, the filing index for accession 0001047469-10-004999. Last ingested by Listed: Nov 6, 2026, 12:01 ET. No prices; not investment advice.