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The past as prologue: Simon Property Group at 25


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The past as prologue: Simon Property Group at 25

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Simon Property Group's Forum Shops at Caesars is among the highest grossing malls in the U.S. by sales per square foot.

Source: Simon Property Group

If there is still a shopping mall business in 25 years and most expect there will be Simon Property Group Inc. likely will still be its torchbearer, longtime industry players and observers said.

This month, the company, the second-largest publicly traded U.S. real estate investment trust by market capitalization, marks a quarter-century as a public company. In interviews, industry leaders described Simon Property in mostly positive terms: A dynamic retail landlord helmed by a management team that has made few mistakes and played both offense and defense adeptly, allocating capital judiciously while taking measured risk when it saw opportunity.

"They tick all the boxes of what the modern mall owner is going to look like in the future," Thomas Dobrowski, executive managing director at Newmark Knight Frank, said, citing the company's achievements in creating unique, customer-centric experiences. "They've positioned themselves to be the dominant player for the next 25 years, you could say, without question."

Simon Property, born in 1993 as a public entity out of the Melvin Simon & Associates portfolio the pioneering shopping mall developer led by Simon Property CEO David Simon's father, Mel Simon, and uncle, Herb Simon — has grown significantly over the years as it evolved from the main midwestern player in a still largely regional business, to a dominant influence in today's national market.

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Bill Rose, head of the national retail group at the brokerage and advisory firm Marcus & Millichap, attributed Simon Property's rise in significant part to CEO David Simon's instinct to avoid over-exposure to the capital markets. While many mall developers were putting mortgages on their projects, Simon opted to rely on equity capital, a move Rose said allowed the company to survive the 2008 financial crisis and continue to grow the business.

Rose also noted the company's decision to prioritize the quality of its portfolio over the years. In the early 1990s, when Rose, then employed at The Hahn Co., a major shopping center owner and developer of the period, handled leasing for the Fashion Show in Las Vegas, he competed directly with Simon Property, which at the time was building out The Forum Shops at Caesars — today among the highest grossing malls in the U.S. by sales per square foot.

"That personal experience told me that Simon was very focused on maintaining a highly curated tenancy that was upscale, period," Rose said. "And I think the success of that project resonated throughout everything they did."

David Harris, an analyst and portfolio manager at Uniplan Investment Counsel who has followed Simon Property since it went public, highlighted its strategic entity-level acquisitions over the years, beginning with DeBartolo Realty Corp. in 1996. While the benefits of scale have not always been clear in the REIT space, each of Simon's company acquisitions have made strategic sense, Harris said.

"Simon's corporate acquisitions actually could be completely rationalized, in terms of bulking up and gaining scale," he said.

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Evercore ISI analyst Steve Sakwa similarly praised the company's strategic acquisitions over the years, and even had a positive read on its measured expansion into foreign markets a move initially panned by some investors as too risky including its acquisition of a major stake in the French mall operator Klépierre.

"As CEOs they won't always get good, loving press," Sakwa said. "But I think David [Simon] has done a very good job on the capital allocation front. If you look back over the 25 years, there's not been too many, if any, missteps."

Simon Property has not escaped the negative effect the so-called "retail apocalypse" has had on retail REIT share prices in the last couple of years, but its stock has recovered some ground in 2018. Observers credited the lingering weakness in the company's and other REITs' share price to an "emotional" market, and said the name will eventually regain fair value.

Both Harris and Sakwa said Simon Property is well-positioned to handle any more major curveballs, in the form of tenant bankruptcies or downsizing or department store closures, that may come its way. "The company has the management depth and experience to accommodate the rise and fall of the retailer, a phenomena that is playing out on steroids in the age of e-commerce," Harris said.

Newmark Knight's Dobrowski pointed out that Simon Property has weight in tenant negotiations even when the market is down. Its balance sheet and strategic orientation in top markets give it options in the redevelopment and densification of its assets.

"They have the pick of the litter, given that they own the highest-quality assets in most of those ... markets," he said. "That lets them navigate around the negative headlines and the secular changes you hear about shopping in malls."

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