UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number 333-11491
SIMON DeBARTOLO GROUP, L.P.
(Exact name of registrant as specified in its charter)
Delaware 34-1755769
---------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
115 West Washington Street
Indianapolis, Indiana 46204
---------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-1600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
01
SIMON DeBARTOLO GROUP, L.P.
FORM 10-Q
INDEX
Part I - Financial Information Page
Item 1: Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of
Operations for the three-month and six-month
periods ended June 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash
Flows for the six-month periods ended June
30, 1997 and 1996 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Simon Property Group, L.P. (Guarantor)
Consolidated Condensed Balance Sheets as of
June 30, 1997 and December 31, 1996 13
Consolidated Condensed Statements of
Operations for the three-month and six-month
periods ended June 30, 1997 and 1996 14
Consolidated Condensed Statements of Cash
Flows for the six-month periods ended June
30, 1997 and 1996 15
Notes to Unaudited Consolidated Condensed
Financial Statements 16
Item 2: Management's Discussion and
Analysis of Financial Condition and Results
of Operations 22
Part II - Other Information
Items 1 through 6 29
Signatures 30
02
SIMON DeBARTOLO GROUP, L. P.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per unit amounts)
June 30, December 31,
1997 1996
ASSETS: ---------- ----------
Investment properties, at cost $5,446,684 $5,301,021
Less _ accumulated depreciation 358,928 279,072
---------- ----------
5,087,756 5,021,949
Cash and cash equivalents 44,946 64,309
Restricted cash 33,414 6,110
Tenant receivables and accrued revenue, net 165,375 166,119
Notes and advances receivable from Management
Company and affiliate 90,209 75,452
Investment in partnerships and joint ventures,
at equity 403,090 394,409
Other investments 50,000 -
Deferred costs and other assets 143,871 138,492
Minority interest 27,773 29,070
---------- ----------
Total assets $6,046,434 $5,895,910
========== ==========
LIABILITIES:
Mortgages and other indebtedness $3,928,662 $3,681,984
Accounts payable and accrued expenses 177,064 170,203
Cash distributions and losses in partnerships
and joint ventures, at equity 19,264 17,106
Investment in Management Company and affiliates
6,658 8,567
Other liabilities 63,996 72,876
---------- ----------
Total liabilities 4,195,644 3,950,736
COMMITMENTS AND CONTINGENCIES (Note 11)
PARTNERS' EQUITY:
Preferred units, 12,000,000 units outstanding 292,912 292,912
General Partner, 97,656,615 and 96,880,415 units
outstanding, respectively 970,228 1,017,333
Limited Partner, 60,974,050 units outstanding 605,841 640,283
Unamortized restricted stock award (18,191) (5,354)
---------- ----------
Total partners' equity 1,850,790 1,945,174
---------- ----------
Total liabilities and partners' equity $6,046,434 $5,895,910
========== ==========
The accompanying notes are an integral part of these statements.
03
SIMON DeBARTOLO GROUP, L. P.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per unit amounts)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
REVENUE:
Minimum rent $149,354 $ 81,484 $297,373 $159,938
Overage rent 10,049 5,784 17,564 10,751
Tenant reimbursements 74,208 47,241 150,031 94,226
Other income 11,444 9,251 22,501 18,289
--------- --------- --------- ---------
Total revenue 245,055 143,760 487,469 283,204
--------- --------- --------- ---------
EXPENSES:
Property operating 41,357 25,759 84,025 50,606
Depreciation and amortization 44,129 26,635 87,483 51,307
Real estate taxes 24,589 14,535 49,350 28,364
Repairs and maintenance 7,597 5,468 17,546 12,541
Advertising and promotion 6,687 4,703 11,900 8,897
Provision for credit losses 1,850 254 2,825 1,751
Other 4,391 3,355 8,179 5,614
--------- --------- --------- ---------
Total operating expenses 130,600 80,709 261,308 159,080
--------- --------- --------- ---------
OPERATING INCOME 114,455 63,051 226,161 124,124
INTEREST EXPENSE 67,076 40,568 134,994 79,134
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 47,379 22,483 91,167 44,990
MINORITY INTEREST (741) (672) (2,225) (1,175)
GAIN ON SALE OF ASSET, NET (17) 0 20 0
--------- --------- --------- ---------
INCOME BEFORE UNCONSOLIDATED ENTITIES 46,621 21,811 88,962 43,815
INCOME FROM UNCONSOLIDATED ENTITIES 1,792 2,157 2,513 3,985
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 48,413 23,968 91,475 47,800
EXTRAORDINARY ITEMS (1,467) 0 (24,714) (265)
--------- --------- --------- ---------
NET INCOME 46,946 23,968 66,761 47,535
GENERAL PARTNER PREFERRED UNIT
REQUIREMENT (6,407) (2,031) (12,813) (4,062)
--------- --------- --------- ---------
NET INCOME AVAILABLE TO UNITHOLDERS $ 40,539 $ 21,937 $ 53,948 $ 43,473
========= ========= ========= =========
NET INCOME AVAILABLE TO UNITHOLDERS
ATTRIBUTABLE TO:
General Partner $ 24,951 $ 13,412 $ 33,184 $ 26,566
Limited Partners 15,588 8,525 20,764 16,907
--------- --------- --------- ---------
$ 40,539 $ 21,937 $ 53,948 $ 43,473
========= ========= ========= =========
EARNINGS PER UNIT:
Income before extraordinary items $ 0.27 $ 0.23 $ 0.50 $ 0.45
Extraordinary items (0.01) 0.00 (0.16) 0.00
--------- --------- --------- ---------
Net income $ 0.26 $ 0.23 $ 0.34 $ 0.45
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
04
SIMON DeBARTOLO GROUP, L. P.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
For the Six Months
Ended June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 66,761 $ 47,535
Adjustments to reconcile net income to net
cash provided by operating activities_
Extraordinary items 24,714 265
Equity in income of unconsolidated entities
(2,513) (3,985)
Gain on sale of assets, net (20) 0
Minority interest 2,225 1,175
Depreciation and amortization 90,961 55,303
Straight-line rent (3,461) 506
Changes in assets and liabilities_
Tenant receivables and accrued revenue 7,104 5,889
Deferred costs and other assets (8,370) (3,171)
Accounts payable, accrued expenses and other
liabilities (5,347) (12,883)
Net cash provided by operating activities
172,054 90,634
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition - (43,941)
Capital expenditures (142,327) (51,578)
Cash from consolidation of joint venture - 1,695
Increase in restricted cash (27,304) -
Proceeds from sale of assets 599 -
Investments in and advances to
unconsolidated entities (39,887) (9,123)
Distributions from unconsolidated entities 19,211 32,937
Other investing activities (55,400) -
Net cash used in investing activities (245,108) (70,010)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock, net
5,920 (62)
Minority interest distributions (1,792) (2,770)
Partnership distributions (170,646) (97,827)
Mortgage and other indebtedness proceeds,
net of transaction costs 590,798 230,085
Mortgage and other indebtedness principal
payments (349,589) (147,215)
Other refinancing transaction (21,000) -
Net cash provided by (used in) financing
activities 53,691 (17,789)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (19,363) 2,835
CASH AND CASH EQUIVALENTS, beginning of
period 64,309 62,721
CASH AND CASH EQUIVALENTS, end of period $ 44,946 $ 65,556
The accompanying notes are an integral part of these statements.
05
SIMON DeBARTOLO GROUP, L.P.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands)
Note 1 - Organization
Simon DeBartolo Group, L.P. ("SDG, LP") is a subsidiary partnership of
Simon DeBartolo Group, Inc. (the "Company"), a self-administered and self-
managed real estate investment trust ("REIT"). Simon Property Group, L.P.
("SPG, LP") is a subsidiary partnership of SDG, LP and of the Company. SDG, LP
and SPG, LP are hereafter collectively referred to as the "Operating
Partnership." On August 9, 1996 (the "Merger Date"), the Company acquired,
through merger (the "Merger") the national shopping center business of
DeBartolo Realty Corporation ("DRC") (See Note 4). Prior to the Merger Date,
references to the Operating Partnership refer to SPG, LP only. The Operating
Partnership is engaged primarily in the ownership, operation, management,
leasing, acquisition, expansion and development of real estate properties,
primarily regional malls and community shopping centers. As of June 30, 1997,
the Operating Partnership owned or held an interest in 186 income-producing
properties, consisting of 113 regional malls, 65 community shopping centers,
three specialty retail centers, four mixed-use properties and one value-
oriented super-regional mall in 33 states (the "Properties"). The Operating
Partnership also owns interests in six properties under construction, six
parcels of land held for future development and substantially all of the
economic interest in M.S. Management Associates, Inc. (the "Management Company"
- - See Note 7).
Note 2 - Basis of Presentation
The accompanying consolidated condensed financial statements are
unaudited; however, they have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the disclosures required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring matters) necessary for a fair presentation of the consolidated
condensed financial statements for these interim periods have been included.
The results for the interim period ended June 30, 1997 are not necessarily
indicative of the results to be obtained for the full fiscal year. These
unaudited consolidated condensed financial statements should be read in
conjunction with the December 31, 1996 audited financial statements and notes
thereto included in the Simon DeBartolo
Group, L.P. Annual Report on Form 10-K.
The accompanying consolidated condensed financial statements of the
Operating Partnership include all accounts of all entities owned or controlled
by the Operating Partnership. All significant intercompany amounts have been
eliminated. The accompanying consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect the
reported amounts of the Operating Partnership's assets, liabilities, revenues
and expenses during the reported periods. Actual results could differ from
these estimates.
Properties which are wholly-owned or owned less than 100% and are
controlled by the Operating Partnership have been consolidated. The Operating
Partnership's equity interests in certain partnerships and joint ventures which
represent noncontrolling 14.7% to 50.0% ownership interests and the investment
in the Management Company are accounted for under the equity method of
accounting. These investments are recorded initially at cost and subsequently
adjusted for net equity in income (loss) and cash contributions and
distributions. In addition, the Operating Partnership held a 2% noncontrolling
ownership interest in West Town Mall, which is accounted for using the cost
method of accounting. On July 10, 1997, the Operating Partnership acquired a
48% interest in West Town Mall. Effective July 10, 1997, the property is being
accounted for using the equity method of accounting (See Note 12).
Net operating results of the Operating Partnership are allocated after
preferred distributions, based on its partners' ownership interests. The
Company's weighted average ownership interest in the Operating Partnership for
the three-month periods ended June 30, 1997 and 1996 was 61.6% and 61.1%,
respectively. The Company's weighted average ownership interest in the
Operating Partnership for the six-month periods ended June 30, 1997 and 1996
was 61.5% and 61.1%, respectively. The Company owned 61.6% and 61.4% of the
Operating Partnership as of June 30, 1997 and December 31, 1996.
06
Note 3 - Reclassifications
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1997 presentation.
Note 4 -The Merger
On August 9, 1996, the Company acquired the national shopping center
business of DRC for an aggregate value of approximately $3.0 billion. The
acquired portfolio consisted of 49 regional malls, 11 community centers and 1
mixed-use Property. These Properties included 47,052,267 square feet of retail
space gross leasable area ("GLA") and 558,636 square feet of office GLA. The
Merger was accounted for using the purchase method of accounting. Of these
Properties, 40 regional malls, 10 community centers and the mixed-use Property
are being accounted for using the consolidated method of accounting. The
remaining Properties are being accounted for using the equity method of
accounting, with the exception of one regional mall, which is accounted for
using the cost method of accounting.
Pro Forma
The following unaudited pro forma summary financial information combines
the consolidated results of operations of the Operating Partnership as if the
Merger had occurred as of January 1, 1996, and was carried forward through June
30, 1996. Preparation of the pro forma summary information was based upon
assumptions deemed appropriate by the Operating Partnership. The pro forma
summary information is not necessarily indicative of the results which actually
would have occurred if the Merger had been consummated at January 1, 1996, nor
does it purport to represent the future financial position and results of
operations for future periods.
Six Months
Ended June 30,
1996
---------------
Revenue $ 461,536
Net income available to unitholders 79,541
Net income per unit $ 0.51
Weighted average number of units outstanding 156,850,806
Note 5 - Cash Flow Information
Cash paid for interest, net of amounts capitalized, during the six months
ended June 30, 1997 was $136,657, as compared to $75,908 for the same period in
1996. All accrued distributions had been paid as of June 30, 1997 and December
31, 1996.
Note 6 - Per Unit Data
Per unit data is based on the weighted average number of units of
ownership in the Operating Partnership ("Units") outstanding during the period.
As used herein, the term Units does not include units of partnership interest
entitled to preferential distribution of cash ("Preferred Units"). The
weighted average number of Units used in the computation for the three months
ended June 30, 1997 and 1996 was 158,566,712 and 95,842,853, respectively. The
weighted average number of Units used in the computation for the six months
ended June 30, 1997 and 1996 was 158,260,924 and 95,753,829, respectively.
Units of ownership in the Operating Partnership may be exchanged for shares of
common stock of the Company on a one-for-one basis in certain circumstances.
The outstanding stock options and the Preferred Units have not been included in
the computations of per Unit data as they did not have a dilutive effect.
07
Note 7 - Investment in Unconsolidated Entities
Partnerships and Joint Ventures
Summary financial information of partnerships and joint ventures accounted
for using the equity method of accounting and a summary of the Operating
Partnership's investment in and share of income from such partnerships and
joint ventures follow:
June 30, December 31,
BALANCE SHEETS 1997 1996
Assets: ---------- ------------
Investment properties at cost, net $2,018,421 $1,887,555
Cash and cash equivalents 62,563 61,267
Tenant receivables 65,996 58,548
Other assets 56,714 69,365
---------- ------------
Total assets $2,203,694 $2,076,735
========== ============
Liabilities and Partners' Equity:
Mortgages and other indebtedness $1,274,586 $1,121,804
Accounts payable, accrued expenses and
other liabilities 155,606 213,394
---------- ------------
Total liabilities 1,430,192 1,335,198
Partners' equity 773,502 741,537
---------- ------------
Total liabilities and partners' equity $2,203,694 $2,076,735
========== ============
The Operating Partnership's Share of:
Total assets $ 651,677 $ 602,084
========== ============
Partners' equity $ 156,868 $ 144,376
Add: Excess Investment (See below) 226,958 232,927
---------- ------------
Operating Partnership's net Investment in
Joint Ventures $ 383,826 $ 377,303
========== ============
For the three For the six months
months ended ended
June 30, June 30,
------------------- -------------------
STATEMENTS OF OPERATIONS 1997 1996 1997 1996
-------- -------- -------- --------
Revenue:
Minimum rent $ 53,749 $ 25,876 $106,204 $ 53,840
Overage rent 1,623 927 3,314 1,689
Tenant reimbursements 24,346 13,380 49,578 27,448
Other income 5,666 1,653 7,363 6,422
-------- -------- -------- --------
Total revenue 85,384 41,836 166,459 89,399
Operating Expenses:
Operating expenses and other 30,121 15,282 60,915 32,849
Depreciation and amortization 17,062 9,916 35,061 20,586
-------- -------- -------- --------
Total operating expenses 47,183 25,198 95,976 53,435
-------- -------- -------- --------
Operating Income 38,201 16,638 70,483 35,964
Interest Expense 20,489 6,287 41,578 14,134
Extraordinary Losses 324 - 1,182 -
-------- -------- -------- --------
Net Income 17,388 10,351 27,723 21,830
Third Party Investors' Share of Net
Income 13,083 8,676 20,377 18,698
-------- -------- -------- --------
The Operating Partnership's Share
of Net Income $ 4,305 $ 1,675 $ 7,346 $ 3,132
Amortization of Excess Investment
(See below) (3,062) - (5,969) -
-------- -------- -------- --------
Income from Unconsolidated Entitie $ 1,243 $ 1,675 $ 1,377 $ 3,132
======== ======== ======== ========
As of June 30, 1997 and December 31, 1996, the unamortized excess of the
Operating Partnership's investment over its share of the equity in the
underlying net assets of the partnerships and joint ventures ("Excess
Investment") was approximately $226,958 and $232,927, respectively. This
Excess Investment, which resulted primarily from the Merger, is being amortized
generally over the life of the related Properties. Amortization included in
income from unconsolidated entities for the three-month and six-month periods
ended June 30, 1997 was $3,062 and $5,969, respectively.
08
The net income or net loss for each partnership and joint venture is
allocated in accordance with the provisions of the applicable partnership or
joint venture agreement. The allocation provisions in these agreements are not
always consistent with the ownership interest held by each general or limited
partner or joint venturer, primarily due to partner preferences.
The Management Company
The Management Company, including its consolidated subsidiaries, provides
management, leasing, development, accounting, legal, marketing and management
information systems services to 33 non-wholly owned Properties, Melvin Simon &
Associates, Inc., and certain other non-owned properties. Certain subsidiaries
of the Management Company provide architectural, design, construction,
insurance and other services primarily to certain of the Properties. The
Management Company also invests in other businesses to provide other
synergistic services to the Properties. The Operating Partnership's share of
consolidated net income of the Management Company, after intercompany profit
eliminations, was $549 and $482 for the three-month periods ended June 30, 1997
and 1996, respectively, and was $1,136 and $853 for the six-month periods ended
June 30, 1997 and 1996, respectively.
Note 8 - Other Investment
On June 16, 1997, the Operating Partnership purchased 1,408,450 shares of
common stock of Chelsea GCA Realty, Inc. ("Chelsea"), a publicly traded REIT,
for $50,000 using borrowings from the Operating Partnership's Credit Facility
(See below). The shares purchased represent approximately 9.2% of Chelsea's
outstanding common stock. In addition, the Operating Partnership and Chelsea
announced that they have formed a strategic alliance to develop and acquire
manufacturer's outlet shopping centers with 500,000 square feet or more of GLA
in the United States. The investment in Chelsea is being reflected in the
accompanying consolidated condensed balance sheets in other investments.
Note 9 - Debt
On January 31, 1997, the Operating Partnership completed a refinancing
transaction involving debt on four consolidated Properties. The transaction
consisted of the payoff of one loan totaling $43,375, a restatement of the
interest rate on the three remaining loans, the acquisition of the contingent
interest feature on all four loans for $21,000, and $3,904 of principal
reductions on two additional loans. This transaction, which was funded using
the Credit Facility (See below), resulted in an extraordinary loss of $23,247,
including the write-off of deferred mortgage costs of $2,247.
On April 14, 1997, the Operating Partnership obtained improvements to its
$750,000 unsecured revolving credit facility (the "Credit Facility"), which has
an initial maturity of September 1999, subject to an automatic one-year
extension. The Credit Facility agreement was amended to reduce the interest
rate from LIBOR plus 0.90% to LIBOR plus 0.75%. In addition, the Credit
Facility's competitive bid feature, which has further reduced interest costs,
was increased from $150,000 to $300,000.
On May 15, 1997, the Operating Partnership established a Medium-Term Note
("MTN") program. On June 24, 1997, the Operating Partnership completed the
sale of $100,000 of notes under the MTN program. The notes sold bear interest
at 7.125% and have a stated maturity of June 24, 2005. The net proceeds of
approximately $99,000 from this sale were used primarily to pay down the Credit
Facility.
Also on May 15, 1997, the Operating Partnership refinanced approximately
$140,000 in existing debt on The Forum Shops at Caesar's. The new debt
consists of three classes of notes totaling $180,000, with $90,000 bearing
interest at 7.125% and $90,000 bearing interest at LIBOR plus 0.30%, all of
which mature on May 15, 2004. Approximately $40,000 of the borrowings were
placed in escrow to pay for construction costs required in connection with the
expansion of this project, which is scheduled to open on August 28, 1997. As
of June 30, 1997, $28,539 remains in escrow, which is reflected in restricted
cash in the accompanying consolidated condensed balance sheet.
On June 5, 1997, the Operating Partnership closed a $115,000 construction
loan for The Shops at Sunset Place. The loan initially bears interest at LIBOR
plus 1.25% and matures on June 30, 2000, with two one-year extensions
available, contingent upon certain conditions and subject to extension fees.
On June 30, 1997, the Operating Partnership closed an unsecured loan which
bears interest at LIBOR plus 0.75% and matures on September 29, 1998. The
proceeds were used to retire an existing $55,000 mortgage on East Towne Mall,
which bore interest at LIBOR plus 1.125%.
At June 30, 1997, the Operating Partnership had consolidated debt of
$3,928,662, of which $2,938,157 was fixed-rate debt and $990,505 was variable-
rate debt. The Operating Partnership's pro rata share of indebtedness of the
unconsolidated joint
09
venture Properties as of June 30, 1997 and December 31, 1996 was $498,726 and
$448,218, respectively. As of June 30, 1997 and December 31, 1996, the
Operating Partnership had interest-rate protection agreements related to
$476,575 and $524,561 of its pro rata share of indebtedness, respectively. The
agreements are generally in effect until the related variable-rate debt
matures. As a result of the various interest rate protection agreements,
interest savings were $473 and $359 for the three months ended June 30, 1997
and 1996, respectively, and $1,086 and $812 for the six-month periods ended
June 30, 1997 and 1996, respectively.
Note 10 - Partners' Equity
The following table summarizes the change in the Operating Partnership's
partners' equity since December 31, 1996.
Preferred General Limited Unamortized Total
Units Partner Partner Restricted Partners'
Stock Award Equity
Award
--------- ---------- --------- ---------- ----------
Balance at December 31, 1996 $ 292,912 $1,017,333 $ 640,283 $ (5,354) $1,945,174
Units issued in connection with
stock incentive program
(507,549 Units) 15,861 (15,861) -
Other Units issuances
(268,651 Units) 6,477 6,477
Amortization of stock incentive 3,024 3,024
Adjustment to allocate net equity
of the Operating Partnership
(5,616) 5,616 -
Net income 12,813 33,184 20,764 66,761
Distributions (12,813) (97,011) (60,822) (170,646)
--------- ---------- --------- ---------- ----------
Balance at June 30, 1997 $ 292,912 $ 970,228 $ 605,841 $ (18,191) $1,850,790
========= ========== ========= ========== ==========
Stock Incentive Programs
Under the terms of the Company's Stock Incentive Programs (the "Plans"),
eligible executives receive restricted stock, subject to performance standards,
vesting requirements and other terms of the Plans. On March 26, 1997, the
compensation committee of the board of directors of the Company approved the
issuance of 507,549 shares under the Plans. As of June 30, 1997, there were
total of 850,890 shares issued under the Plans, with 391,870 shares remaining
available for issuance, subject to applicable performance standards and other
terms of the Plans. The value of shares issued under the Plans is being
amortized pro-rata over their respective four-year vesting periods.
Approximately $3,024 and $1,042 have been amortized for the six-month periods
ended June 30, 1997 and 1996, respectively.
Note 11 - Commitments and Contingencies
Litigation
Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. On October 16,
1996, a complaint was filed in the Court of Common Pleas of Mahoning County,
Ohio, captioned Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. The
named defendants are SD Property Group, Inc., a 99%-owned subsidiary of the
Company, and DeBartolo Properties Management, Inc., and the plaintiffs are 27
former employees of the defendants. In the complaint, the plaintiffs allege
that they were recipients of deferred stock grants under the DRC stock
incentive plan (the "DRC Plan") and that these grants immediately vested under
the DRC Plan's "change in control" provision as a result of the Merger.
Plaintiffs assert that the defendants' refusal to issue them approximately
661,000 shares of DRC common stock, which is equivalent to approximately
450,000 shares of common stock of the Company computed at the 0.68 Exchange
Ratio used in the Merger, constitutes a breach of contract and a breach of the
implied covenant of good faith and fair dealing under Ohio law. Plaintiffs
seek damages equal to such number of shares of DRC common stock, or cash in
lieu thereof, equal to all deferred stock ever granted to them under the DRC
Plan, dividends on such stock from the time of the grants, compensatory damages
for breach of the implied covenant of good faith and fair dealing, and punitive
damages.
10
The complaint was served on the defendants on October 28, 1996, and
pretrial proceedings have commenced. The Company is of the opinion that it has
meritorious defenses and accordingly intends to defend this action vigorously.
While it is difficult for the Company to predict the outcome of this litigation
at this stage based on the information known to the Company to date, the
Company does not expect this action will have a material adverse effect on the
Company.
Roel Vento et al v. Tom Taylor et al. An affiliate of the 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, tortuous interference with
contract and civil conspiracy arising out of the sale of a business operating
under a temporary license agreement at Valle Vista Mall in Harlingen, Texas.
The Operating Partnership is seeking to overturn the award and has appealed the
verdict. Although the Operating Partnership is optimistic that it may be able
to reverse or reduce the verdict, there can be no assurance thereof.
Management, based upon the advice of counsel, believes that the ultimate
outcome of this action will not have a material adverse effect on the Operating
Partnership.
The 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 Operating Partnership's financial position or results of operations.
Note 12 - Significant Subsequent Events
Series C Preferred Shares
On July 9, 1997 the Company sold 3,000,000 shares of 7.89% Series C
Cumulative Step-Up Premium RateSM Preferred Stock (the "Series C Preferred
Shares") in a public offering at $50.00 per share. Beginning October 1, 2012,
the rate increases to 9.89% of the liquidation preference per annum. The
Series C Preferred Shares are not redeemable prior to September 30, 2007.
Beginning September 30, 2007, the Series C Preferred Shares may be redeemed at
the option of the Company in whole or in part, at a redemption price of $50.00
per share, plus accrued and unpaid distributions, if any, thereon. The
redemption price of the Series C Preferred Shares may only be paid from the
sale proceeds of other capital stock of the Company, which may include other
classes or series of preferred stock. Additionally, the Series C Preferred
Shares have no stated maturity and are not subject to any mandatory redemption
provisions, nor are they convertible into any other securities of the Company.
The Company contributed the net proceeds of this offering of approximately
$146,000 to the Operating Partnership in exchange for Preferred Units, the
economic terms of which are substantially identical to the Series C Preferred
Shares. The Operating Partnership used the proceeds to increase its ownership
interest in West Town Mall (See below), to pay down the Credit Facility and for
general working capital purposes.
West Town Mall
On July 10, 1997, the Operating Partnership acquired a 48% interest in
West Town Mall in Knoxville, Tennessee for $69,930. This transaction increased
the Operating Partnership's ownership of West Town Mall to 50%. Effective July
10, 1997, the property is being accounted for using the equity method of
accounting. It was previously accounted for using the cost method.
Debt Securities Offering
On July 17, 1997, the Operating Partnership completed a $250,000 public
offering of two tranches of its seven-year and twelve-year non-convertible
senior unsecured debt securities (the "Notes"). The first tranche was for
$100,000 at 6 3/4% with a maturity of July 15, 2004. The second tranche was
for $150,000 at 7% with a maturity of July 15, 2009. The Notes pay interest
semi-annually, are guaranteed by SPG, LP, and contain covenants relating to
minimum leverage, EBITDA and unencumbered EBITDA ratios. The Notes were issued
under the Operating Partnership's $750,000 debt shelf registration.
Dadeland Mall
On August 8, 1997, an affiliate of the Operating Partnership acquired a
50% interest in a trust that owns Dadeland Mall, a 1.4 million square foot
super-regional mall in Miami, Florida. Dadeland Mall is a dominant mall in its
trade area with small shop sales of $649 per square foot in 1996 and leased and
committed occupancy of 94%. A portion of the purchase price was paid in the
form of 658,707 shares of the Company's common stock. The remaining portion of
the purchase price was financed using borrowings from the Credit Facility.
This joint venture will be accounted for using the equity method of accounting.
11
Shelf Registration
On August 13, 1997, the Operating Partnership filed a shelf registration
statement with the SEC to provide for the offering, from time to time, of up to
$1,000,000 aggregate public offering price of unsecured debt securities of the
Operating Partnership. The net proceeds of such offerings may be used to fund
acquisition or development activity, retire existing debt or for any other
purpose deemed appropriate by the Operating Partnership. Any securities issued
under this registration would be guaranteed by SPG, LP, although management has
no immediate plans to issue securities under the program.
12
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per unit amounts)
June 30, December 31,
1997 1996
----------- -----------
ASSETS:
Investment properties, at cost $2,563,974 $2,467,779
Less _ accumulated depreciation 285,706 238,167
----------- -----------
2,278,268 2,229,612
Cash and cash equivalents 27,324 50,009
Restricted cash 28,539 0
Tenant receivables and accrued revenue, net 132,690 136,496
Notes and advances receivable from Management
Company 78,735 63,978
Investment in partnerships and joint ventures,
at equity 150,708 139,711
Deferred costs and other assets 138,349 129,665
Minority interest 9,602 9,712
----------- -----------
Total assets $2,844,215 $2,759,183
=========== ===========
LIABILITIES:
Mortgages and other indebtedness $2,141,302 $2,042,254
Advances from Simon DeBartolo Group, L.P. 339,338 259,382
Accounts payable and accrued expenses 115,482 113,027
Cash distributions and losses in partnerships
and joint ventures, at equity 19,054 17,106
Investment in Management Company and affiliates
16,610 18,519
Minority interest held by affiliates 67,235 12,128
Other liabilities 32,696 42,139
----------- -----------
Total liabilities 2,731,717 2,504,555
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
PARTNERS' EQUITY:
Preferred units, 4,000,000 units authorized,
issued and outstanding 99,923 99,923
General Partner, 958,429 units outstanding 169 1,601
Special Limited Partner, 95,356,834 units
outstanding 16,718 158,458
Unamortized restricted stock award (4,312) (5,354)
----------- -----------
Total partners' equity 112,498 254,628
----------- -----------
Total liabilities and partners' equity $2,844,215 $2,759,183
=========== ===========
The accompanying notes are an integral part of these statements.
13
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per unit amounts)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
REVENUE:
Minimum rent $ 87,521 $ 81,484 $174,010 $159,938
Overage rent 6,460 5,784 11,360 10,751
Tenant reimbursements 50,499 47,241 102,138 94,226
Other income 8,881 9,251 13,875 18,289
--------- --------- --------- ---------
Total revenue 153,361 143,760 301,383 283,204
--------- --------- --------- ---------
EXPENSES:
Property operating 26,460 25,759 53,836 50,606
Depreciation and amortization 27,321 26,635 53,794 51,307
Real estate taxes 15,170 14,535 30,411 28,364
Repairs and maintenance 5,315 5,468 11,868 12,541
Advertising and promotion 4,541 4,703 8,032 8,897
Provision for credit losses 904 254 2,192 1,751
Other 3,394 3,355 4,882 5,614
--------- --------- --------- ---------
Total operating expenses 83,105 80,709 165,015 159,080
--------- --------- --------- ---------
OPERATING INCOME 70,256 63,051 136,368 124,124
INTEREST EXPENSE 42,858 40,568 85,874 79,134
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 27,398 22,483 50,494 44,990
MINORITY INTEREST (7,563) (672) (6,393) (1,175)
GAIN ON SALE OF ASSETS, NET (17) 0 20 0
--------- --------- --------- ---------
INCOME BEFORE UNCONSOLIDATED
ENTITIES 19,818 21,811 44,121 43,815
INCOME FROM UNCONSOLIDATED ENTITIES 1,387 2,157 3,161 3,985
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 21,205 23,968 47,282 47,800
EXTRAORDINARY ITEMS (1,467) 0 (24,714) (265)
--------- --------- --------- ---------
NET INCOME 19,738 23,968 22,568 47,535
PREFERRED UNIT REQUIREMENT (2,032) (2,031) (4,063) (4,062)
--------- --------- --------- ---------
NET INCOME AVAILABLE TO UNITHOLDERS $ 17,706 $ 21,937 $ 18,505 $ 43,473
========= ========= ========= =========
NET INCOME AVAILABLE TO UNITHOLDERS
ATTRIBUTABLE TO:
General Partner $ 177 $ 13,412 $ 185 $ 26,566
Limited Partners 17,529 8,525 18,320 16,907
--------- --------- --------- ---------
$ 17,706 $ 21,937 $ 18,505 $ 43,473
========= ========= ========= =========
EARNINGS PER UNIT:
Income before extraordinary items $ 0.20 $ 0.23 $ 0.45 $ 0.45
Extraordinary items (0.02) 0.00 (0.26) 0.00
--------- --------- --------- ---------
Net income $ 0.18 $ 0.23 $ 0.19 $ 0.45
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
14
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
For the Six Months
Ended June 30,
-----------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ---------- ----------
Net income $ 22,568 $ 47,535
Adjustments to reconcile net income to net cash
provided by operating activities_
Depreciation and amortization 57,618 55,303
Loss on extinguishments of debt 24,714 265
Gain on sale of assets, net (20) 0
Straight-line rent (103) 506
Minority interest 6,393 1,175
Equity in income of unconsolidated entities (3,161) (3,985)
Changes in assets and liabilities_
Tenant receivables and accrued revenue 4,951 5,889
Deferred costs and other assets (10,310) (3,171)
Accounts payable, accrued expenses and other
liabilities (6,986) (12,883)
---------- ----------
Net cash provided by operating activities 95,664 90,634
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition 0 (43,941)
Capital expenditures (96,818) (51,578)
Cash from consolidation of joint venture 0 1,695
Increase in restricted cash (28,539) 0
Proceeds from sale of assets 599 0
Investments in and advances to unconsolidated
entities (37,117) (9,123)
Distributions from unconsolidated entities 13,932 32,937
Other investing activity (5,400) 0
---------- ----------
Net cash used in investing activities (153,343) (70,010)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock, net 0 (62)
Minority interest distributions (17,013) (2,770)
Partnership distributions (100,137) (97,827)
Mortgage and other indebtedness proceeds, net
of transaction costs 435,798 230,085
Mortgage and other indebtedness principal
payments (342,610) (147,215)
Advances from affiliate 79,956 0
Other refinancing transaction (21,000) 0
---------- ----------
Net cash provided by (used in) financing
activities 34,994 (17,789)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (22,685) 2,835
CASH AND CASH EQUIVALENTS, beginning of period 50,009 62,721
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 27,324 $ 65,556
========== ==========
The accompanying notes are an integral part of these statements.
15
SIMON PROPERTY GROUP, L.P.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands)
Note 1 - Organization
Simon DeBartolo Group, L.P. ("SDG, LP") is a subsidiary partnership of
Simon DeBartolo Group, Inc. (the "Company"), a self-administered and self-
managed real estate investment trust ("REIT"). Simon Property Group, L.P.
("SPG, LP" or the "Simon Operating Partnership") is a subsidiary partnership of
SDG, LP and of the Company. On August 9, 1996 (the "Merger Date"), the Company
acquired, through merger (the "Merger") the national shopping center business
of DeBartolo Realty Corporation ("DRC") (See Note 4). The Simon Operating
Partnership, is engaged primarily in the ownership, operation, management,
leasing, acquisition, expansion and development of real estate properties,
primarily regional malls and community shopping centers. As of June 30, 1997,
the Simon Operating Partnership owned or held an interest in 123 income-
producing properties, consisting of 63 regional malls, 53 community shopping
centers, three specialty retail centers, three mixed-use properties and one
value-oriented super-regional mall in 30 states (the "Properties"). The Simon
Operating Partnership also holds substantially all of the economic interest in
M.S. Management Associates, Inc. (the "Management Company") - (See Note 7.)
Note 2 - Basis of Presentation
The accompanying consolidated condensed financial statements are
unaudited; however, they have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the disclosures required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring matters) necessary for a fair presentation of the consolidated
condensed financial statements for these interim periods have been included.
The results for the interim period ended June 30, 1997 are not necessarily
indicative of the results to be obtained for the full fiscal year. These
unaudited consolidated condensed financial statements should be read in
conjunction with the December 31, 1996 audited financial statements and notes
thereto included in the Simon Property Group, L.P. Annual Report on Form 10-K.
The accompanying consolidated condensed financial statements of the Simon
Operating Partnership include all accounts of the entities owned or controlled
by the Simon Operating Partnership. All significant intercompany amounts have
been eliminated. The accompanying consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect the
reported amounts of the Simon Operating Partnership's assets, liabilities,
revenues and expenses during the reported periods. Actual results could differ
from these estimates.
Properties which are wholly-owned or owned less than 100% and are
controlled by the Simon Operating Partnership have been consolidated. The
Simon Operating Partnership's equity interests in certain partnerships and
joint ventures which represent noncontrolling 14.7% to 50.0% ownership
interests and the investment in the Management Company are accounted for under
the equity method of accounting. These investments are recorded initially at
cost and subsequently adjusted for net equity in income (loss) and cash
contributions and distributions.
Net operating results of the Simon Operating Partnership are allocated
after preferred distributions, based on its partners' remaining ownership
interests. The Company's remaining weighted average ownership interest in the
Simon Operating Partnership for the three-month periods ended June 30, 1997 and
1996 was 60.8% and 61.1%, respectively. The Company's remaining weighted
average ownership interest in the Simon Operating Partnership for the six-month
periods ended June 30, 1997 and 1996 was 60.8% and 61.1%, respectively. The
Company indirectly owned 60.8% of the Simon Operating Partnership as of June
30, 1997 and December 31, 1996.
16
Note 3 - Reclassifications
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1997 presentation.
Note 4 -The Merger
On August 9, 1996, the Company acquired the national shopping center
business of DRC for an aggregate value of $3.0 billion. The acquired portfolio
consisted of 49 regional malls, 11 community centers and 1 mixed-use Property.
These Properties included 47,052,267 square feet of retail gross leasable area
("GLA") and 558,636 of office GLA. The Merger was accounted for using the
purchase method of accounting. Of these Properties, 40 regional malls, 10
community centers and the mixed-use Property are being accounted for using the
consolidated method of accounting. The remaining Properties are being
accounted for using the equity method of accounting, with the exception of one
regional mall, which is accounted for using the cost method of accounting. As a
result of the merger, the Simon Operating Partnership became a subsidiary of
SDG, LP with 99% of the profits allocable to SDG, LP and 1% of the profits
allocable to the Company. Cash flow allocable to the Company's 1% profit
interest in SPG, LP is absorbed by public company costs and related expenses
incurred by the Company.
It is currently expected that subsequent to the first anniversary of the
date of the Merger, reorganizational transactions will be effected so that SDG,
LP will directly own all of the assets and partnership interests now owned by
the Simon Operating Partnership. In connection therewith, the Simon Operating
Partnership transferred partnership interests in certain properties ranging
from 1.0% to 49.5% in the form of a distribution to the partners of the Simon
Operating Partnership, SDG, LP and the Company. The distribution of the
partnership interests in the certain properties has been reflected for
financial reporting purposes as of January 1, 1997. The distribution was
determined based on the historical cost value of the partnership interests
transferred, which aggregated $65,603. The interest in the properties now held
directly by SDG, LP and the Company was $67,235 as of June 30, 1997, and is
reflected as minority interest held by affiliates in the accompanying
consolidated condensed balance sheets. Earnings related to these minority
interests held by SDG, LP and the Company for the three-month and six-month
periods ended June 30, 1997 were $7,262 and $5,360, respectively.
Note 5 - Cash Flow Information
Cash paid for interest, net of amounts capitalized, during the six months
ended June 30, 1997 was $86,809, as compared to $75,908 for the same period in
1996. All accrued distributions had been paid as of June 30, 1997 and December
31, 1996.
Note 6 - Per Unit Data
Per unit data is based on the weighted average number of units of
partnership interest in the Simon Operating Partnership ("Units") outstanding
during the period. As used herein, the term Units does not include units of
partnership interest entitled to preferential distribution of cash ("Preferred
Units"). The weighted average number of units used in the computation for the
three months ended June 30, 1997 and 1996 was 96,315,263 and 95,842,853,
respectively. The weighted average number of Units used in the computation for
the six months ended June 30, 1997 and 1996 was 96,315,263 and 95,753,829,
respectively. Additionally, Preferred Units may be converted into common stock
of the Company. The outstanding stock options and Preferred Units have not
been included in the computations of per Unit data as they did not have a
dilutive effect.
17
Note 7 - Investment in Unconsolidated Entities
Partnerships and Joint Ventures
Summary financial information of partnerships and joint ventures accounted
for using the equity method of accounting and a summary of the Simon Operating
Partnership's investment in and share of income from such partnerships and
joint ventures follow:
June 30, December 31,
BALANCE SHEETS 1997 1996
Assets: ---------- ------------
Investment properties at cost, net $1,429,975 $1,328,600
Cash and cash equivalents 48,999 41,270
Tenant receivables 43,419 37,067
Other assets 38,348 54,981
---------- ------------
Total assets $1,560,741 $1,461,918
========== ============
Liabilities and Partners' Equity:
Mortgages and other indebtedness $ 697,769 $ 569,433
Accounts payable, accrued expenses and other
liabilities 102,095 161,552
---------- ------------
Total liabilities 799,864 730,985
Partners' equity 760,877 730,933
---------- ------------
Total liabilities and partners' equity $1,560,741 $1,461,918
========== ============
The Simon Operating Partnership's Share of:
Total assets $ 378,786 $ 340,449
========== ============
Investment in partnerships and joint ventures,
at equity $ 150,708 $ 139,711
Cash distributions and losses in partnerships
and joint ventures, at equity (19,054) (17,106)
---------- ------------
Partners' equity $ 131,654 $ 122,605
========== ============
For the three For the six months
months ended ended
June 30, June 30,
------------------ ------------------
STATEMENTS OF OPERATIONS 1997 1996 1997 1996
-------- -------- -------- --------
Revenue:
Minimum rent $ 30,230 $ 25,876 $ 60,533 $ 53,840
Overage rent 321 927 1,190 1,689
Tenant reimbursements 13,697 13,380 27,697 27,448
Other income 2,970 1,653 4,305 6,422
-------- -------- -------- --------
Total revenue 47,218 41,836 93,725 89,399
Operating Expenses:
Operating expenses and other 17,919 15,282 35,597 32,849
Depreciation and amortization 11,061 9,916 22,971 20,586
-------- -------- -------- --------
Total operating expenses 28,980 25,198 58,568 53,435
-------- -------- -------- --------
Operating Income 18,238 16,638 35,157 35,964
Interest Expense 9,899 6,287 19,325 14,134
Extraordinary Losses 324 - 1,182 -
-------- -------- -------- --------
Net Income 8,015 10,351 14,650 21,830
Third Party Investors' Share of Net
Income 7,177 8,676 12,625 18,698
-------- -------- -------- --------
The Simon Operating Partnership's
Share of Net Income
$ 838 $ 1,675 $ 2,025 $ 3,132
======== ======== ======== ========
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.
18
The Management Company
The Management Company, including its consolidated subsidiaries, provides
management, leasing, development, accounting, legal, marketing and management
information systems services to 33 non-wholly owned Properties, Melvin Simon &
Associates, Inc., and certain other nonowned properties. Certain subsidiaries
of the Management Company provide architectural, design, construction,
insurance and other services primarily to certain of the Properties. The
Management Company also invests in other businesses to provide other
synergistic services to the Properties. The Simon Operating Partnership's
share of consolidated net income of the Management Company, after intercompany
profit eliminations, was $549 and $482 for the three-month periods ended June
30, 1997 and 1996, respectively, and was $1,136 and $853 for the six-month
periods ended June 30, 1997 and 1996, respectively.
Note 8 - Debt
On January 31, 1997, the Simon Operating Partnership completed a
refinancing transaction involving debt on four consolidated Properties. The
transaction consisted of the payoff of one loan totaling $43,375, a restatement
of the interest rate on the three remaining loans, the financing transaction
which included the acquisition of the contingent interest feature on all four
loans for $21,000, and $3,904 of principal reductions on two additional loans.
This transaction, which was funded using the Credit Facility (as defined
below), resulted in an extraordinary loss of $23,247, including the write-off
of deferred mortgage costs of $2,247.
On April 14, 1997, the Simon Operating Partnership, as co-borrower with
SDG, LP, obtained improvements to its unsecured revolving credit facility (the
"Credit Facility"). The Credit Facility agreement was amended to reduce the
interest rate from LIBOR plus 0.90% to LIBOR plus 0.75%. In addition, the
Credit Facility's competitive bid feature, which can further reduce interest
costs, was increased from $150,000 to $300,000.
On May 15, 1997, SDG, LP established a Medium-Term Note ("MTN") program.
On June 24, 1997, SDG, LP completed the sale of $100,000 of notes under the MTN
program. The notes sold bear interest at 7.125% and have a stated maturity of
June 24, 2005. The net proceeds of approximately $99,000 from this sale were
used primarily to pay down the Credit Facility. These notes are guaranteed by
the Simon Operating Partnership.
Also on May 15, 1997, approximately $140,000 in existing debt on The Forum
Shops at Caesar's was refinanced. The new debt consists of three classes of
notes totaling $180,000, with $90,000 bearing interest at 7.125% and $90,000
bearing interest at LIBOR plus 0.30%, all of which mature on May 15, 2004.
Approximately $40,000 of the borrowings were placed in escrow to pay for
construction costs required in connection with the expansion of this project,
which is scheduled to open on August 28, 1997. As of June 30, 1997, $28,539
remains in escrow, which is reflected in restricted cash in the accompanying
consolidated condensed balance sheet.
On June 30, 1997, SDG, LP closed an unsecured loan which bears interest at
LIBOR plus 0.75% and matures on September 29, 1998. The proceeds were advanced
to SPG, LP and used to retire an existing $55,000 mortgage on East Towne Mall,
which bore interest at LIBOR plus 1.125%.
At June 30, 1997, the Simon Operating Partnership had consolidated debt of
$2,141,302, of which $1,368,093 was fixed-rate debt and $773,209 was variable-
rate debt. As of June 30, 1997 and December 31, 1996, the Simon Operating
Partnership had interest-rate protection agreements related to $289,374 and
$306,879 principal amount of debt, respectively. The agreements are generally
in effect until the related variable-rate debt matures. As a result of the
various interest rate protection agreements, interest savings were $76 and $359
for the three months ended June 30, 1997 and 1996, respectively, and $306 and
$812 for the six-month periods ended June 30, 1997 and 1996, respectively. The
Simon Operating Partnership's pro rata share of indebtedness of the
unconsolidated joint venture Properties as of June 30, 1997 and December 31,
1996 was $234,700 and $193,310, respectively.
Net advances due SDG, LP of $339,338 result primarily from debt and equity
instruments issued by SDG, LP for which a portion of the proceeds were advanced
to the Simon Operating Partnership to retire mortgages and other indebtedness
and amounts under the Credit Facility. The Simon Operating Partnership has
recognized interest costs based on the terms of the instruments issued by SDG,
LP.
19
Note 9 - Partners' Equity
The following table summarizes the change in the Simon Operating
Partnership's partners' equity since December 31, 1996.
Special Unamortized Total
Preferred General Limited Restricted Partners'
Units Partner Partner Stock Award Equity
--------- --------- --------- ----------- ---------
Balance at
December 31, 1996 $ 99,923 $ 1,601 $158,458 $ (5,354) $ 254,628
Amortization of stock
incentive 1,042 1,042
Adjustment to allocate net
equity of the Simon
Operating Partnership (5) 5 -
Net income 4,063 185 18,320 22,568
Distributions (4,063) (1,612) (160,065) (165,740)
--------- --------- --------- ----------- ---------
Balance at June 30, 1997 $ 99,923 $ 169 $ 16,718 $ (4,312) $ 112,498
========= ========= ========= =========== =========
Note 10 - Commitments and Contingencies
Litigation
Roel Vento et al v. Tom Taylor et al. An affiliate of the Simon 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, tortuous interference with
contract and civil conspiracy arising out of the sale of a business operating
under a temporary license agreement at Valle Vista Mall in Harlingen, Texas.
The Simon Operating Partnership is seeking to overturn the award and has
appealed the verdict. Although the Simon Operating Partnership is optimistic
that it may be able to reverse or reduce the verdict, there can be no assurance
thereof. Management, based upon the advice of counsel, believes that the
ultimate outcome of this action will not have a material adverse effect on the
Company or the Simon Operating Partnership.
The Company or the Simon Operating Partnership currently are not subject
to any other material litigation other than routine litigation and
administrative proceedings arising in the ordinary course of business. On the
basis of consultation with counsel, management believes that these items will
not have a material adverse impact on the Company's or the Simon Operating
Partnership's financial position or results of operations.
Note 11 - Significant Subsequent Events
Series C Preferred Shares
On July 9, 1997 the Company sold 3,000,000 shares of 7.89% Series C
Cumulative Step-Up Premium RateSM Preferred Stock (the "Series C Preferred
Shares") in a public offering at $50.00 per share. Beginning October 1, 2012,
the rate increases to 9.89% of the liquidation preference per annum. The
Series C Preferred Shares are not redeemable prior to September 30, 2007.
Beginning September 30, 2007, the Series C Preferred Shares may be redeemed at
the option of the Company in whole or in part, at a redemption price of $50.00
per share, plus accrued and unpaid distributions, if any, thereon. The
redemption price of the Series C Preferred Shares may only be paid from the
sale proceeds of other capital stock of the Company, which may include other
classes or series of preferred stock. Additionally, the Series C Preferred
Shares have no stated maturity and are not subject to any mandatory redemption
provisions, nor are they convertible into any other securities of the Company.
The Company contributed the net proceeds of this offering of approximately
$146,000 to SDG, LP in exchange for Preferred Units, the economic terms of
which are substantially identical to the Series C Preferred Shares. SDG, LP
used the proceeds to increase its ownership interest in West Town Mall, to pay
down the Credit Facility and for general working capital purposes.
20
Debt Securities Offering
On July 17, 1997, SDG, LP completed a $250,000 public offering of two
tranches of its seven-year and twelve-year non-convertible senior unsecured
debt securities (the "Notes"). The first tranche was for $100,000 at 6 3/4%
with a maturity of July 15, 2004. The second tranche was for $150,000 at 7%
with a maturity of July 15, 2009. The Notes, which are guaranteed by SPG, LP,
pay interest semi-annually, and contain covenants relating to minimum leverage,
EBITDA and unencumbered EBITDA ratios. The Notes were issued under SDG, LP's
$750,000 debt shelf registration.
Shelf Registration
On August 13, 1997, SDG, LP filed a shelf registration statement with the
SEC to provide for the offering, from time to time, of up to $1,000,000
aggregate public offering price of unsecured debt securities of SDG, LP. The
net proceeds of such offerings may be used to fund acquisition or development
activity, retire existing debt or for any other purpose deemed appropriate by
SDG, LP. Any securities issued under this registration would be guaranteed by
SPG, LP, although management has no immediate plans to issue securities under
the program.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Operating Partnership to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, which
will, among other things, affect demand for retail space or retail goods,
availability and creditworthiness of prospective tenants, lease rents and the
terms and availability of financing; adverse changes in the real estate markets
including, among other things, competition with other companies and technology;
risks of real estate development and acquisition; governmental actions and
initiatives; and environmental/safety requirements.
Overview
The financial results reported subsequent to August 9, 1996 reflect the
Merger of the Company and DRC, in accordance with the purchase method of
accounting utilized to record the transaction, valued at approximately $3.0
billion. The Merger resulted in the addition of 49 regional malls, 11
community centers and 1 mixed-use Property. These Properties included
47,052,267 square feet of retail space GLA and 558,636 of office GLA. Of these
Properties, 40 regional malls, 10 community centers and the mixed-use Property
are being accounted for using the consolidated method of accounting. The
remaining Properties are being accounted for using the equity method of
accounting, with the exception of one regional mall, which is accounted for
using the cost method of accounting.
In addition, the Operating Partnership acquired additional interest in two
regional malls and opened one regional mall during the comparative periods (the
"Property Transactions"). The following is a description of such transactions.
On April 11, 1996, the Operating Partnership acquired the remaining 50%
economic ownership interest in Ross Park Mall in Pittsburgh, Pennsylvania, and
subsequently began accounting for the Property using the consolidated method of
accounting. On July 31, 1996, the Operating Partnership opened Cottonwood Mall
in Albuquerque, New Mexico. The Operating Partnership owns 100% of this
regional mall and accounts for it using the consolidated method of accounting.
On October 4, 1996, the Operating Partnership acquired the remaining interest
in North East Mall and subsequently began accounting for the Property using the
consolidated method of accounting.
Results of Operations
For the Three Months Ended June 30, 1997 vs. the Three Months Ended June 30,
1996
Total revenue increased $101.3 million or 70.5% for the three months ended
June 30, 1997, as compared to the same period in 1996. This increase is
primarily the result of the Merger ($91.9 million) and the Property
Transactions ($7.5 million). Excluding these transactions, total revenues
increased $1.8 million, which includes a $1.6 million increase in minimum rent,
a $0.9 million increase in overage rent, and a $1.1 million increase in tenant
reimbursements, partially offset by a $1.8 million decrease in other income.
The $1.6 million increase in minimum rents results from increased occupancy
levels and the replacement of expiring tenant leases with renewal leases at
higher minimum base rents. The $1.8 million decrease in other income is
primarily the result of an adjustment recorded in the prior year to reflect the
collectability of notes receivable ($2.0 million).
Total operating expenses increased $49.9 million, or 61.8%, for the three
months ended June 30, 1997, as compared to the same period in 1996. This
increase is primarily the result of the Merger ($48.3 million) and the Property
Transactions ($3.6 million).
Interest expense increased $26.5 million, or 65.3% for the three months
ended June 30, 1997, as compared to the same period in 1996. This increase is
primarily as a result of the Merger ($25.7 million) and the Property
Transactions ($1.6 million).
Net income was $46.9 million for the three months ended June 30, 1997, as
compared to $24.0 million for the same period in 1996, reflecting an increase
of $23.0 million, for the reasons discussed above, and was allocated to the
Company based on the Units and Preferred Units owned by the Company during the
period, and to the remaining Unitholders based upon their respective ownership
interests.
22
The Preferred Unit requirement increased by $4.4 million to $6.4 million
in 1997 as a result of the Company's issuance of $200 million of 8 3/4% Series
B cumulative redeemable preferred stock on September 27, 1996. The proceeds of
which were contributed to the Operating Partnership in exchange for Preferred
Units with economic terms substantially identical to the Series B Cumulative
redeemable preferred stock issued by the Company.
For the Six Months Ended June 30, 1997 vs. the Six Months Ended June 30, 1996
Total revenue increased $204.3 million or 72.1% for the six months ended
June 30, 1997, as compared to the same period in 1996. This increase is
primarily the result of the Merger ($185.8 million) and the Property
Transactions ($18.7 million). Excluding these transactions, total revenues
decreased $0.3 million, which includes a $3.3 million increase in minimum rent,
a $0.7 million increase in overage rent, and a $1.7 million increase in tenant
reimbursements, partially offset by a $6.0 million decrease in other income.
The $3.3 million increase in minimum rents results from increased occupancy
levels, the replacement of expiring tenant leases with renewal leases at higher
minimum base rents, and a $1.3 million increase in rents from tenants operating
under license agreements. The $6.0 million decrease in other income is
primarily the result of an adjustment recorded in the prior year to reflect the
collectability of notes receivable ($2.0 million) and decreases in lease
settlement income ($2.2 million) and interest income ($1.7 million).
Total operating expenses increased $102.2 million, or 64.3%, for the six
months ended June 30, 1997, as compared to the same period in 1996. This
increase is primarily the result of the Merger ($96.0 million) and the Property
Transactions ($9.7 million).
Interest expense increased $55.9 million, or 70.6% for the six months
ended June 30, 1997, as compared to the same period in 1996. This increase is
primarily as a result of the Merger ($51.7 million) and the Property
Transactions ($5.7 million).
The $24.7 million loss from extraordinary items in 1997 is the result of
the acquisition of the contingent interest feature on four loans for $21.0
million and write-off of mortgage costs associated with early extinguishments
of debt.
Net income was $66.8 million for the six months ended June 30, 1997, as
compared to $47.5 million for the same period in 1996, reflecting an increase
of $19.2 million, for the reasons discussed above, and was allocated to the
Company based on the Units and Preferred Units owned by the Company during the
period, and to the remaining Unitholders based upon their respective ownership
interests.
The Preferred Unit distributions increased by $8.8 million to $12.8
million in 1997 as a result of the Company's issuance of $200 million of 8 3/4%
Series B cumulative redeemable preferred stock on September 27, 1996. The
proceeds of which were contributed to the Operating Partnership in exchange for
Preferred Units with economic terms substantially identical to the Series B
Cumulative redeemable preferred stock issued by the Company.
Liquidity and Capital Resources
As of June 30, 1997, the Operating Partnership's balance of unrestricted
cash and cash equivalents was $44.9 million. In addition to its cash balance,
the Operating Partnership has a $750 million Credit Facility with approximately
$379 million available after outstanding borrowings and letters of credit.
Subsequent to June 30, 1997, net reductions of $180 million have been made to
the Credit Facility, including paydowns from the net proceeds of the Series C
Preferred Shares offering, which were contributed by the Company in exchange
for preferred units, and from the net proceeds of the Notes offering, partially
offset by a borrowing to finance the acquisition of Dadeland Mall (See below).
Consequently, as of August 11, 1997, the amount of borrowing availability under
the Credit Facility was approximately $559 million. The Company and the
Operating Partnership also have access to public and private equity and debt
markets.
Acquisitions. On June 16, 1997, the Operating Partnership purchased
1,408,450 shares of common stock of Chelsea GCA Realty, Inc. ("Chelsea"), a
publicly traded REIT, for approximately $50 million using borrowings from the
Credit Facility. The shares purchased represent approximately 9.2% of
Chelsea's outstanding common stock. In addition, the Operating Partnership and
Chelsea announced that they have formed a strategic alliance to develop and
acquire manufacturer's outlet shopping centers with 500,000 square feet or more
of GLA in the United States.
On July 10, 1997, the Operating Partnership acquired a 48% interest in
West Town Mall in Knoxville, Tennessee for $69.9 million. This transaction
increased the Operating Partnership's ownership of West Town Mall to 50%.
23
Effective July 10, 1997, the property is being accounted for using the equity
method of accounting. It was previously accounted for using the cost method.
On August 8, 1997, an affiliate of the Operating Partnership acquired a
50% interest in a trust that owns Dadeland Mall, a 1.4 million square foot
super-regional mall in Miami, Florida. Dadeland Mall is a dominant mall in its
trade area with small shop sales of $649 per square foot in 1996 and leased and
committed occupancy of 94%. A portion of the purchase price was paid in the
form of 658,707 shares of the Company's common stock. The remaining portion of
the purchase price was financed using borrowings from the Credit Facility.
This joint venture will be accounted for using the equity method of accounting.
Financing and Debt. The Operating Partnership's ratio of consolidated
debt-to-market capitalization was 42.2% at June 30, 1997.
At June 30, 1997, the Operating Partnership had consolidated debt of
$3,929 million, of which $2,938 million was fixed-rate debt and $991 million
was variable-rate debt. The Operating Partnership's pro rata share of
indebtedness of the unconsolidated joint venture Properties as of June 30, 1997
and December 31, 1996 was $499 million and $448 million, respectively. As of
June 30, 1997 and December 31, 1996, the Operating Partnership had interest-
rate protection agreements related to $477 million and $525 million of its pro
rata share of indebtedness, respectively. The agreements are generally in
effect until the related variable-rate debt matures.
On April 14, 1997, the Operating Partnership obtained improvements to its
Credit Facility. The Credit Facility agreement was amended to reduce the
interest rate from LIBOR plus 0.90% to LIBOR plus 0.75%. In addition, the
Credit Facility's competitive bid feature, which has further reduced interest
costs, was increased from $150 million to $300 million.
On May 15, 1997, the Operating Partnership established a Medium-Term Note
("MTN") program. On June 24, 1997, the Operating Partnership completed the
sale of $100 million of notes under the MTN program. The notes sold bear
interest at 7.125% and have a stated maturity of June 24, 2005. The net
proceeds of this sale were used primarily to pay down the Credit Facility.
Additionally, on May 15, 1997, the Operating Partnership refinanced
approximately $140 million in existing debt on The Forum Shops at Caesar's.
The new debt consists of three classes of notes totaling $180 million, with $90
million bearing interest at 7.125% and the other $90 million bearing interest
at LIBOR plus 0.3 %, all of which will mature on May 15, 2004. Approximately
$40 million of the borrowings were placed in escrow to pay for construction
costs required in connection with the development of the expansion of this
project, which is scheduled to open on August 28, 1997. As of June 30, 1997,
$28.5 million remains in escrow.
On June 5, 1997, the Operating Partnership closed a $115 million
construction loan for The Shops at Sunset Place. The loan initially bears
interest at LIBOR plus 1.25% and matures on June 30, 2000, with two one-year
extensions available.
On June 30, 1997, the Operating Partnership closed an unsecured loan which
bears interest at LIBOR plus 0.75% and matures on September 29, 1998. The
proceeds were used to retire an existing $55 million mortgage on East Towne
Mall, which bore interest at LIBOR plus 1.125%.
On July 9, 1997 the Company sold 3,000,000 shares of 7.89% Series C
Cumulative Step-Up Premium RateSM Preferred Stock (the "Series C Preferred
Shares") in a public offering at $50.00 per share. Beginning October 1, 2012,
the rate increases to 9.89% of the liquidation preference per annum. The
Series C Preferred Shares are not redeemable prior to September 30, 2007.
Beginning September 30, 2007, the Series C Preferred Shares may be redeemed at
the option of the Company in whole or in part, at a redemption price of $50.00
per share, plus accrued and unpaid distributions, if any, thereon. The
redemption price of the Series C Preferred Shares may only be paid from the
sale proceeds of other capital stock of the Company, which may include other
classes or series of preferred stock. Additionally, the Series C Preferred
Share have no stated maturity and are not subject to any mandatory redemption
provisions, nor are they convertible into any other securities of the Company.
The Company contributed the net proceeds of this offering of approximately $146
million to the Operating Partnership in exchange for preferred units, the
economic terms of which are substantially identical to the Series C Preferred
Shares. The Operating Partnership used the net proceeds for the purchase of
additional ownership interest in West Town Mall, to pay down the Credit
Facility and for general working capital purposes.
On July 17, 1997, the Operating Partnership completed a $250 million public
offering, of two tranches of its seven-year and twelve-year non-convertible
senior unsecured debt securities (the "Notes"). The first tranche was for $100
million at 6 3/4% with a maturity of July 15, 2004. The second tranche was for
$150 million at 7% with a maturity of July 15, 2009. The Notes pay interest
semi-annually, are guaranteed by SPG, LP, and contain covenants relating to
minimum leverage,
24
EBITDA and unencumbered EBITDA ratios. The Notes were issued under the
Operating Partnership's $750 million debt shelf registration. Up to $150
million in additional debt securities may currently be issued under this
registration, however the Operating Partnership is in the process of amending
this registration to increase its capacity to $180 million..
In addition, on August 13, 1997, the Operating Partnership filed a shelf
registration statement with the SEC to provide for the offering, from time to
time, of up to $1 billion aggregate public offering price of unsecured debt
securities of the Operating Partnership. The net proceeds of such offerings
may be used to fund acquisition or development activity, retire existing debt
or for any other purpose deemed appropriate by the Operating Partnership. Any
securities issued under this registration would be guaranteed by SPG, LP,
although management has no immediate plans to issue securities under the
program.
Development, Expansions and Renovations. The Operating Partnership is
involved in several development, expansion and renovation efforts.
In March 1997, the Operating Partnership opened Indian River Commons, a
265,000 square foot community shopping center in Vero Beach, Florida. This 50%-
owned joint venture is accounted for using the equity method of accounting.
Construction also continues on the following development projects: The
Source, an approximately $150 million value-oriented retail and entertainment
development project containing 730,000 square feet of GLA, is expected to open
in September 1997 in Westbury (Long Island), New York. Arizona Mills, an
approximately $190 million retail development project containing 1.2 million
square feet of GLA, is expected to open in November 1997 in Tempe, Arizona.
Grapevine Mills, an approximately $200 million retail development project
containing approximately 1.4 million square feet of GLA, is expected to open in
October 1997 in Grapevine (Dallas/Fort Worth), Texas. The Shops at Sunset
Place, an approximately $150 million destination-oriented retail and
entertainment project containing approximately 500,000 square feet of GLA, is
scheduled to open in 1998 in South Miami, Florida.
In addition, the Operating Partnership has begun construction on two new
community center projects at an aggregate cost of approximately $50 million.
Muncie Plaza, a wholly-owned project, is scheduled to open in April of 1998 in
Muncie, Indiana. Lakeline Plaza, a 50%-owned joint venture project, is
scheduled to open in two phases in May and November of 1998 in Austin, Texas.
Each of these projects is immediately adjacent to existing regional mall
Properties.
A key objective of the Operating Partnership is to increase the
profitability and market share of its Properties through the completion of
strategic renovations and expansions. The Operating Partnership currently has
a number of expansion projects under construction and in the preconstruction
development stage. The Operating Partnership's share of the projected costs to
fund these projects for the year 1997 is approximately $300 million. It is
anticipated that the cost of these projects will be financed principally with
the Credit Facility, project-specific indebtedness, access to debt and equity
markets, and cash flows from operations. Included in investment properties at
June 30, 1997 is $213.5 million of construction in progress.
Distributions. During the first quarter of 1997, the Operating Partnership
paid a distribution of $0.4925 per Unit to Unitholders of record on February 7,
1997. On each of May 6, 1997 and July 28, 1997, the Operating Partnership
declared distributions of $0.505 per Unit, an increase of $.0125 per Unit over
the previous distributions. Future distributions will be determined based on
actual results of operations and cash available for distribution. In addition,
Preferred Unit distributions of $1.0156 per Series A Preferred Unit and $1.0938
per Series B Preferred Unit were paid during the first six months of 1997.
Capital Resources. Management anticipates that cash generated from
operating performance will provide the necessary funds on a short- and long-
term basis for its operating expenses, interest expense on outstanding
indebtedness, recurring capital expenditures, and distributions to Unitholders
in accordance with tax requirements applicable to REITs. Sources of capital
for nonrecurring capital expenditures, such as major building renovations and
expansions, as well as for scheduled principal payments, including balloon
payments, on outstanding indebtedness are expected to be obtained from: (i)
excess cash generated from operating performance; (ii) working capital
reserves; (iii) additional debt financing; and (iv) additional equity sold in
the public markets.
Management continues to actively review and evaluate a number of
individual property and portfolio acquisition opportunities. Management
believes that funds on hand, amounts available under the Credit Facility, and
securities which may be issued under existing debt and equity shelf
registrations are sufficient to finance likely acquisitions. No assurance can
be given that the 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.
25
Investing and Financing Activities
Cash flows from investing activities for the six months ended June 30,
1997 included, $142.3 million of capital expenditures, which included
construction costs of $35.6 million, including $15.0 million at The Shops at
Sunset Place and $9.2 million for the acquisition of the land for the
construction of North East Plaza. Also included in capital expenditures is
renovation and expansion costs of approximately $81.4 million and tenant costs
and other operational capital expenditures of approximately $25.3 million. The
$27.3 million net increase in restricted cash relates primarily to an escrow
for costs associated with the expansion of Forum. In addition, investments in
and advances to unconsolidated entities of $39.9 million included $14.8
million, $14.0 million and $6.2 million to the Management Company, Grapevine
Mills and The Source, respectively. Other investments includes $50 million for
the purchase of Chelsea stock and $5.4 million to purchase bonds.
Cash flows from financing activities for the six months ended June 30,
1997 included distributions of $170.6 million, net borrowings of $241.2 million
primarily used to fund development and other investment activity, and $21.0
million for the acquisition of a contingent interest feature on four mortgage
loans.
EBITDA_Earnings from Operating Results before Interest, Taxes,
Depreciation and Amortization
Management believes that there are several important factors that
contribute to the ability of the Operating Partnership to increase rent and
improve profitability of its shopping centers, including aggregate tenant sales
volume, sales per square foot, occupancy levels and tenant costs. Each of
these factors has a significant effect on EBITDA. Management believes that
EBITDA is an effective measure of shopping center operating performance
because: (i) it is industry practice to evaluate real estate properties based
on operating income before interest, taxes, depreciation and amortization,
which is generally equivalent to EBITDA; and (ii) EBITDA is unaffected by the
debt and equity structure of the property owner. EBITDA: (i) does not
represent cash flow from operations as defined by generally accepted accounting
principles; (ii) should not be considered as an alternative to net income as a
measure of operating performance; (iii) is not indicative of cash flows from
operating, investing and financing activities; and (iv) is not an alternative
to cash flows as a measure of liquidity.
Total EBITDA for the Properties increased from $232.0 million for the six
months ended June 30, 1996 to $419.2 million for the same period in 1997,
representing a growth rate of 80.7%. This increase is primarily attributable
to the Merger ($177.0 million) and the Properties opened during 1996 and 1997
($19.9 million). During this period, operating profit margin increased from
62.3% to 64.1%.
FFO-Funds from Operations
FFO, as defined by the National Association of Real Estate Investment
Trusts ("NAREIT"), means the consolidated net income of the Operating
Partnership and its subsidiaries without giving effect to depreciation and
amortization, gains or losses from extraordinary items, gains or losses on
sales of real estate, gains or losses on investments in marketable securities
and any provision/benefit for income taxes for such period, plus the allocable
portion, based on the Operating Partnership's ownership interest, of funds from
operations of unconsolidated joint ventures, all determined on a consistent
basis in accordance with generally accepted accounting principles. Management
believes that FFO is an important and widely used measure of the operating
performance of REITs which provides a relevant basis for comparison among
REITs. FFO is presented to assist investors in analyzing the performance.
FFO: (i) does not represent cash flow from operations as defined by generally
accepted accounting principles; (ii) should not be considered as an alternative
to net income as a measure of operating performance or to cash flows from
operating, investing and financing activities; and (iii) is not an alternative
to cash flows as a measure of liquidity.
26
The following summarizes FFO of the Operating Partnership and reconciles
net income of the Operating Partnership to FFO for the periods presented:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In thousands)
FFO of the Operating Partnership $ 93,285 $ 50,532 $181,224 $ 99,212
Reconciliation:
Income of the Operating Partnership
before extraordinary items
$ 48,413 $ 23,968 $ 91,475 $ 47,800
Plus:
Depreciation and amortization from
consolidated Properties 43,774 26,501 87,086 51,038
The Operating Partnership's share
of depreciation, and amortization
from unconsolidated affiliates
9,152 2,918 18,010 5,950
Less:
Gain on the sale of real estate 17 N/A (20) N/A
Minority interest portion of
depreciation, amortization and
extraordinary items (1,664) (824) (2,514) (1,514)
Preferred dividends (6,407) (2,031) (12,813) (4,062)
-------- -------- -------- --------
FFO of the Operating Partnership $ 93,285 $ 50,532 $181,224 $ 99,212
======== ======== ======== ========
Portfolio Data
Operating statistics give effect to the Merger and are based upon the
business and Properties of the Operating Partnership and DRC on a combined
basis for all periods presented. The purpose of this presentation is to
provide a more comparable set of statistics on the portfolio as a whole. The
following statistics exclude Ontario Mills and Charles Towne Square. Ontario
Mills is a new value-oriented super-regional mall which management believes is
not comparable to the remaining Properties. The Operating Partnership intends
to create a separate reporting category for its Mills Properties in 1997,
following the expected openings of Grapevine Mills and Arizona Mills. The
Operating Partnership is converting Charles Towne Square into a community
center.
Aggregate Tenant Sales Volume. For the six months ended June 30, 1997
compared to the same period in 1996, total reported retail sales for mall and
freestanding stores at the regional malls for GLA owned by the Operating
Partnership ("Owned GLA") increased 4.2% from $2,785 million to $2,902 million.
Total reported sales for all stores at the community shopping centers for Owned
GLA decreased 2.4% from $668 million to $652 million. Retail sales at Owned
GLA affect revenue and profitability levels because they determine the amount
of minimum rent that can be charged, the percentage rent realized, and the
recoverable expenses (common area maintenance, real estate taxes, etc.) the
tenants can afford to pay.
Occupancy Levels. Occupancy levels for regional malls increased 1.8% to
85.2% at June 30, 1997 as compared to 83.4% at June 30, 1996 . Occupancy
levels for community shopping centers increased from 91.8% at June 30, 1996 to
92.4% at June 30, 1997. Total GLA has increased 3.9 million square feet from
June 30, 1996 to June 30, 1997, primarily as a result of the July 1996 opening
of Cottonwood Mall, the November 1996 openings of Ontario Mills, the Tower
Shops and Indian River Mall, and the March 1997 opening of Indian River
Commons, partially offset by the March 1997 sale of Bristol Plaza.
Average Base Rents. Average base rents per square foot of mall and
freestanding stores at regional mall Owned GLA increased 3.8%, from $20.18 at
June 30, 1996 to $20.94 as of June 30, 1997. In community shopping centers,
average base rents per square foot of Owned GLA increased 4.2%, from $7.44 to
$7.75 during this same period.
27
Inflation
Inflation has remained relatively low during the past three years and has
had a minimal impact on the operating performance of the Properties.
Nonetheless, substantially all of the tenants' leases contain provisions
designed to lessen the impact of inflation. Such provisions include clauses
enabling the Operating Partnership to receive percentage rentals based on
tenants' gross sales, which generally increase as prices rise, and/or
escalation clauses, which generally increase rental rates during the terms of
the leases. In addition, many of the leases are for terms of less than ten
years, which may enable the Operating Partnership to replace existing leases
with new leases at higher base and/or percentage rentals if rents of the
existing leases are below the then-existing market rate. Substantially all of
the leases, other than those for anchors, require the tenants to pay a
proportionate share of operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing the Operating Partnership's
exposure to increases in costs and operating expenses resulting from inflation.
However, inflation may have a negative impact on some of the Operating
Partnership's other operating items. Interest and general and administrative
expenses may be adversely affected by inflation as these specified costs could
increase at a rate higher than rents. Also, for tenant leases with stated rent
increases, inflation may have a negative effect as the stated rent increases in
these leases could be lower than the increase in inflation at any given time.
Other
The shopping center industry is seasonal in nature, particularly in the
fourth quarter during the holiday season, when tenant occupancy and retail
sales are typically at their highest levels. In addition, shopping malls
achieve most of their temporary tenant rents during the holiday season. As a
result of the above, earnings are generally highest in the fourth quarter of
each year.
28
Part II - Other Information
Item 1: Legal Proceedings
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
One Form 8-K was filed during the current period.
On May 16, 1997 under Item 5 - Other Events, the Operating
Partnership reported that it established a program for the
issuance from time to time of up to $300 million aggregate
principal amount of Medium Term Notes, and reported certain
details regarding the program. In addition, under Item 7, the
Operating Partnership provided as exhibits, certain documents
relating to the establishment of the program.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMON DEBARTOLO GROUP, L.P.
By: SIMON DEBARTOLO GROUP, Inc.
General Partner
Date: August 14, 1997 /s/ Stephen E. Sterrett,
------------------------
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: August 14, 1997
/s/ John Dahl,
-----------------------
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
30
5
1,000
6-MOS
DEC-31-1997
JUN-30-1997
44,946
0
165,375
0
0
0
5,446,684
358,928
6,046,434
0
3,928,662
0
292,912
0
1,557,878
6,046,434
0
487,469
0
261,308
0
2,825
134,994
91,475
91,475
91,475
0
(24,714)
0
66,761
0.34
0.34
Receivables are stated net of allowances and also include accrued revenues.
The Registrant does not report using a classified balance sheet.
