Simon Property Group, known for its high-flying stock and willingness to snatch up companies it values anywhere in the world, surprised Wall Street on Friday with a plan to spin off its strip centers and smaller malls into a separate, publicly traded company.
The yet-to-be-named new enterprise will be based in Indianapolis, initially at the Fortune 500 company’s Downtown headquarters, and will take with it at least 25 of Simon’s employees and hire untold others.
The move by Simon is unusual because most new publicly traded companies come via initial public stock offerings from existing companies seeking more working capital. Simon’s plan will birth a ready-to-go, staffed-up and well-financed company valued near $6 billion. Its main assets will be 54 strip centers and 44 malls in 23 states, including Clay Terrace retail center in Carmel and a dozen others in Indiana.
“It’s going to be a substantial company in its own right,” said Rick Sokolov, Simon’s president and chief operating officer. “We believe it can be an immediate, impactful leader in the sectors” of smaller malls and strip centers.
Publicly traded Simon, which started up in Indianapolis in 1960 and is one of the nation’s largest operators and developers of shopping centers, said the spinoff will let it focus on its most-prized assets, its large regional malls and outlet centers, plus international expansion.
Simon’s 325 properties in the U.S. and Asia are “a lot for the executive team to say grace over,” the company’s chairman and chief executive, David Simon, told stock analysts and others in a teleconference Friday. The spinoff will slim Simon’s portfolio by a third.
Simon’s board opted not to sell the strip centers and smaller malls to the highest bidder, partly because a sale would be a taxable event for shareholders. The spinoff won’t be taxable and will give shareholders stock in the new company and a chance to share in any growth.
“This is better for our shareholders,” David Simon said. “Let’s give this opportunity to our shareholders as opposed to (selling the properties to) guys who like to skim off the top.”
The new company, which Simon referred to as SpinCo but will be renamed later, will be structured as a real estate investment trust and will have initial annual funds from operations of around $300 million. That is about 10 percent of Simon’s $2.9 billion in funds from operations last year.
Occupancy of properties that will be deeded to SpinCo is more than 90 percent. Although many are in smaller cities with limited population growth, the properties as a whole have significant expansion potential, with more than $300 million of development opportunity, Sokolov said.
Top management for SpinCo, including its CEO, will be named in the first quarter. Its board of five to nine members will include David Simon and Sokolov, who will be chairman.
David Simon said he and Sokolov will “mentor” the new company’s board and its top executives, and Simon will handle property management for the spun-off malls for the first year or two.
Asked by an analyst about the potential for the spinoff company to turn around and compete against the “mothership,” David Simon discounted the chances of that happening.
After the spinoff is complete, he said, “Simon will not be in the strip center business or ... smaller enclosed malls.
“I don’t see a realistic scenario where the two are competing.”
Simon’s big, flagship malls don’t necessarily compete for tenants or customers with smaller malls and shopping centers, said Alexander Goldfarb, senior REIT analyst at Sandler O’Neill, which has a financial interest in Simon. Spinning the smaller properties off into a separate company will let their separate management teams take a more precise focus, he said.
Goldfarb said Simon doesn’t need to sell its smaller assets. “They have a big enough portfolio that it makes sense as a stand-alone company.”
Although the new company will work out of Simon’s office tower at Washington and Capitol streets initially, it will likely move to separate offices later, Sokolov said.
He said he couldn’t estimate the company’s hiring needs. “This is very much the beginning of a journey.”
The spinoff will result in higher sales per square foot, operating income growth and occupancy rates for Simon, the company said.
Investors responded enthusiastically, with Simon stock trading up $3.26 a share, or 2.2 percent Friday, to $151.63. The stock is at the lower end of its 52-week trading range of $142.47 to $182.45. Three years ago, it was trading just under $100.
In a statement, David Simon said the spinoff will unlock the potential of the strip centers and malls to be owned by SpinCo. “We believe we are creating a new company that has both a strong Simon heritage and all of the requisite tools to grow its business and succeed.”
Simon has accomplished much of its growth through acquisitions. Last year it paid $2 billion for a 29 percent stake in one of Europe’s largest shopping center operators, Paris-based Klepierre SA. In 2010, Simon bought outlet mall operator Prime Outlets for $2.3 billion, giving it a bigger presence in one of the few U.S. retail sectors that is growing — outlet malls that sell brand-name merchandise.
The spinoff was announced almost 20 years to the day that Simon became a publicly traded company on Dec. 14, 1993.
Star reporter Alex Campbell contributed to this story.
Call Star reporter Jeff Swiatek at (317) 444-6483. Follow him on Twitter: @JeffSwiatek.
One to become two
SpinCo
Founded: Simon Property Group spinoff, to be renamed later, will launch in the second quarter of 2014.
Headquarters: Indianapolis.
Business: Shopping center management and development.
Properties: 54 strip centers, 44 malls in U.S.
Indiana properties: Clay Terrace in Carmel, Greenwood Plus in Greenwood, Keystone Shoppes in Indianapolis, Markland Mall and Markland Plaza in Kokomo, Muncie Mall and Muncie Town Plaza in Muncie, New Castle Plaza in New Castle, Northwood Plaza in Fort Wayne, Tippecanoe Plaza in Lafayette, University Center in Mishawaka, Village Park Plaza in Carmel and Washington Plaza in Indianapolis.
Funds from operations: $300 million (estimated).
Employees: At least 25 initially.
CEO: Not yet named.
Simon Property Group
Founded: 1960 and went public 1993.
Headquarters: Indianapolis.
Business: Shopping center management and development.
Properties: 325 in North America and Asia.
Notable Indiana properties: Castleton Square Mall, Circle Centre Mall and The Fashion Mall at Keystone in Indianapolis, College Mall in Bloomington.
Funds from operations: $2.9 billion.
Employees: 3,400.
CEO: David Simon.
Source: Simon Property Group
Market summary > Simon Property Group Inc
NYSE: SPG - Jan 12, 4:31 PM EST
165.51USD
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After-hours: 165.510.00 (0.00%)
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