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Simon DeBartolo Surges Forward

As the sun marks its early-summer shadows on Indiana farmland, crops that were once seeds in fertile soil begin to stretch their roots and grow. Although some farmers measure greater crop acreage than others, it is the maintenance and management of the earth, essentially, that allows the farmer to enjoy the brightest blooms and the tallest stalks.

All major roads from Indiana farmland feed into the state's capital, where for Simon DeBartolo Group Inc. the business of real estate also depends on careful maintenance and management. The company may have been integral in reviving Indianapolis' downtown district - with Circle Center as the city's new hub - but it also has spent time, energy and money to expand its mall holdings into a national property group.

Although Simon DeBartolo's pending acquisition of New York-based Corporate Property Investors (CPI) will add to its growing network, the company expends equal effort on cultivating its portfolio to produce increased value for Simon DeBartolo customers.

According to David Simon, the company's chief executive officer, Simon DeBartolo need not sacrifice quality of operations while amassing a large quantity of centers (which will reach a post-CPI level of 240). In fact, he says, the company's growth allows for even greater opportunities in portfolio-wide savings and value.

"What we've seen increase in our company is two things: scale and quality," he says. "Each of those has helped enhance our profitability and growth. So our strategy has been to increase our scale, which has in turn allowed us to increase our profit margins.

"We also focus on the quality of our assets, because at the end of the day in the real estate business, every company must have quality assets," he continues. "And that's been our strategy, which has helped fuel our growth."

Simon DeBartolo saw its property crop grow exponentially with the August 1996 combination of Simon Property Group and DeBartolo Realty Corp. (see "Taking Stock Of The Simon DeBartolo Deal," Shopping Center World, October 1996). The two companies were then Nos. 2 and 6, respectively, within the spectrum of mall owners, and the deal fueled further discussion of corporate consolidation, both in the real estate industry and beyond.

"The reality is that this industry is no different than any other in the United States," says Rick Sokolov, president and chief operating officer, adding that the Simon DeBartolo integration was one merger transaction of many, across nearly all business sectors, that produced added strength through increased market share.

"And what we are about is delivering value," he continues. "Every segment of industry and business in the United States - including banks, brokerage houses, drug companies, retailers - recognizes that size gives you certain economies of scale, as well as the incremental ability to grow the business and accelerate revenues. And we're no different."

The dealmakers Simon DeBartolo's acceleration can be attributed, in large part, to its ability to make deals, both in acquisitions and strategic agreements (see "SDG TimeLine," p. 102-104). Last September, the company acquired 10 enclosed malls and one community center from Retail Property Trust. Two months later, Simon DeBartolo formed a joint venture with DLJ Capital Partners LP, New York, to acquire and develop entertainment-focused real estate projects worldwide. Most recently, the company teamed in March with The Macerich Co., Santa Monica, Calif., to acquire a regional mall portfolio from Atlanta-based ERE Yarmouth (on behalf of IBM, one of its pension fund clients).

In the case of its acquisitions, Simon DeBartolo has gained a valuable trait over the past few years: integration know-how. After hitting the ground in a sprint with the Simon DeBartolo combination, says treasurer Steve Sterrett, the company's ability to seamlessly acquire properties compounds itself. Continuing to find attractive acquisitions, he says, is an exercise in recognizing property diamonds through rough edges.

"One of the things we have done, by virtue of having looked at many properties and lots of portfolios, is that we've got a great process down for evaluating what's there today and what we can make it tomorrow," says Sterrett. "Once that acquisition cycle is completed a couple of times, it becomes easier to know where the hot spots are. And I think it gives us a decided advantage in how we conduct our business, because it allows us to get things up to speed and to integrate them more easily."

In February, Simon DeBartolo's due process was put to the test with the news that the company would acquire CPI in a $5.8 billion transaction. Expected to close as early as next month, the deal includes four office properties and 23 regional malls - many of which are class A, market-dominant centers that would be jewels in any corporate crown.

Simon DeBartolo's acquisition of CPI, which has received approval from both boards of directors, will add significant volume to the company's property hopper. They include: Lenox Square Mall (1.5 million sq. ft.), Phipps Plaza (820,000 sq. ft.) and Town Center at Cobb (1.3 million sq. ft.) in Atlanta; Burlington Mall (1.2 million sq. ft.) in Burlington, Mass. and South Shore Plaza (1.6 million sq. ft.) in Braintree, Mass.; and Roosevelt Field Mall (2.2 million sq. ft.) in Garden City, N.Y. and Nanuet Mall (910,000 sq. ft.) in Nanuet, N.Y.

"I'm convinced that with a portfolio the size of CPI," says Sterrett, "we're the only company that could have acquired it, integrated it as smoothly and improved the profitability of its properties as substantially as we think we're going to do."

David Simon agrees, adding that CPI and its properties were attractive because of the potential volume it could add to Simon DeBartolo. Moreover, he says, CPI had gone to great lengths to reinvest in its properties.

"The CPI deal continues our emphasis on scale," Simon says. "And CPI's quality of properties is as good as, if not better than, any large portfolio of properties out there today. They've done a good job in identifying high-quality assets and putting a lot of capital in them. Because of that, they're poised for future growth."

Herb Simon, co-chairman and founder, agrees, noting that CPI's "blockbuster properties," while upgraded from smart capital improvements, gave the company clear competitive advances in new markets. "Their centers will give us incredible opportunities in Atlanta, Long Island and Florida," he says. "They represent good quality properties in strategic areas, along with a number in Boston that are very valuable."

Share holders Simon DeBartolo's strategic partnerships, although not an en masse contributor to the company's portfolio holdings, still give the company operational and competitive advantages. According to Sokolov, the deals - with such companies as The Mills Corp., Arlington, Va., and Roseland, N.J.-based Chelsea GCA - allow Simon DeBartolo to tap expertise in a particular development sector and share project costs without having to create costly new corporate divisions.

"The reality is that each partnership allows us to leverage our core management team," he says. "Could we have devoted the time and the resources to gain freestanding expertise in doing Mills-type projects? Sure, but why? This was a very efficient way to team up strategically with a leader in that product type, learn how to develop that type of mall, deliver value in design, and complement the tenant mix by introducing entertainment concepts and theater concepts."

Simon DeBartolo will put that plan in motion in its strategic deal with New York-based DLJ Real Estate Capital Partners (the real estate merchant banking fund of New York-based Donaldson, Lufkin & Jenrette Inc.). In late March, Simon DeBartolo and DLJ joined with a third firm, Cincinnati-based Madison Marquette, to develop lifestyle and entertainment retail real estate projects - in the same vein as The Shops at Sunset Place in south Miami.

"We are a very big believer in relationships, alliances and combining strengths," Sokolov continues, adding that Madison Marquette has a "wealth of expertise" and a fresh approach to entertainment project development. "To the extent that people [can contribute] expertise, financial strength and marketing clout, then it's something we should do."

Walk tall and carry a brand venture While partnering in development will help the company explore other center formats, Simon DeBartolo has built another type of partnership - one that plays to the strength of its own portfolio by saving money and creating additional revenue streams. Simon Brand Ventures (SBV), formed last August, represents an entrepreneurial vision that harkens back to when Mall of America was still a gleam in Mel Simon's eye.

Simon DeBartolo enjoys a 100-million strong customer base and a staggering 1.5 billion shopper visits. SBV was formed specifically to tap this huge group as a means to save operating dollars and to offer increased value to Simon DeBartolo customers. This pool of people made the once-smaller MallPerks shopper loyalty program - which now claims more than 1 million participants - into a resounding portfolio-wide success.

To further implement its retail marketing engine, the company teamed Andrew Halliday and Karen Corsaro as co-presidents of the brand venture division, both of whom were tapped because of their previous retail marketing experience and innovative approaches to business development.

According to Corsaro, SBV is a culmination of strategic business development concepts (see "SBV Fast Facts," p. 108) that had been ongoing, but had lacked a national effort. Today, SBV helps the company view its portfolio as a lot more than just a group of retail real estate assets.

"For the first time, we looked at our assets not only as real estate," she says. "We looked at how many customer visits we have, how many households those visits represent, and what else our consumers need that we can provide for them. In doing so, we identified that we have three key assets that we weren't doing anything with."

The "assets" to which Corsaro refers is a three-fold Simon DeBartolo customer group: mall shoppers, retail tenants and store employees. The mission of SBV is therefore to increase value across those categories and reduce costs at both the corporate and local levels. In its agreement with Pepsi, for example, Simon DeBartolo will have increased access to Pepsi beverage products while the soft drink company is awarded exclusive promotional and vending rights within the common areas of the company's centers.

Most recently, the company formed an alliance with Houston-based Browning-Ferris Industries (BFI) to provide waste removal and construction support services across the company's portfolio. In exchange for exclusive access to the Simon DeBartolo portfolio (with the potential to reach more than 40 million sq. ft. when fully deployed), both companies inked a lease agreement whereby Simon DeBartolo will realize rental revenue based on square footage levels serviced by BFI.

The deal gives BFI increased business and market share. Moreover, says Corsaro, it reduces garbage collection costs for Simon DeBartolo retailers and, in turn, creates new income for the company.

"What we found is that we could save our retailers 10 percent across the board [in garbage collection]," she says, adding that the new deal takes Simon DeBartolo from BFI's 42nd largest customer in Indianapolis to its fifth largest worldwide. "And that's part of our role going forward. SBV is about stepping out of the traditional leasing model, in terms of how services are delivered in the building, and finding new and innovative ways to create business relationships that allow us to accomplish that."

The leasing model is a concept of particular interest to Jim Napoli, senior vice president of leasing for Simon DeBartolo. He notes that, when a shopping center owner makes a concerted, portfolio-wide effort to help retailers, the leasing wheel automatically gets some oil.

"When we can provide a service to our tenants that will, either directly or indirectly, reduce their overall costs, then there is a very positive benefit in leasing," he says. "If we can [accomplish that], then it gives us more of an opportunity to talk to them about the kind of rents we need to continue to operate our centers. So we're backing this effort as much as possible."

Wall Street is watching ... Although Simon DeBartolo's venture into strategic partnering may impact its center leasing, it is also likely to help whet Wall Street's hungry appetite. Although size clearly matters on Wall Street - and, in that case, the self-managed, self-administered REIT plays to a captive audience - the company's stock (traded under the "SPG" symbol) was recently put on a credit watch by four major Wall Street rating agencies.

According to Sterrett, stocks are often placed in a cautionary mode when a CPI-size deal is in the acquisition pipeline. "When you spend $6 billion to buy a portfolio, there always is increased risk and uncertainty," he says. "But we have a great relationship with the rating agencies, and we're still going to be a solid, investment-grade-rated company when this is all said and done."

Sterrett would caution industry observers not to count out Simon DeBartolo's stock, nor question the future of REITs. After some confusion in the role of REITs in the early 1990s, he says, public real estate companies seem to be bounding back (see "REITs Are Here To Stay," Shopping Center World, January 1998). The initial problem, he says, was that first-generation public real estate companies lacked internal direction and focus.

"The REITs of prior generations were primarily vehicles for raising money," he says, adding that public offerings were a means for companies to achieve liquidity and increased access to capital. But, he says, "They did not have active management embedded in them - they were managed by third parties. So they weren't real, live operating businesses.

"Now, more than 90 percent of today's REITs are self-managed and advised, which means they have their own employees and their own management team," he continues. "If you look around the country, the majority of the premier real estate organizations are now REITs. Whether it's Sam Zell, the Simons, the Bucksbaums or the Taubmans - the industry now has the best of the best real estate organizations doing business in a public format. And I think the market has clearly embraced that."

Sterrett sees numerous advantages to creating a burgeoning real estate conglomerate in the public eye. As the company nears the $18 billion mark in market capitalization - and as Simon DeBartolo competes with other public entities for new acquisitions - he sees a clear movement toward publicly held companies.

"It is clear that REITs and the public ownership of commercial real estate are becoming the norm," he asserts. "We're having a dramatic securitization of the entire commercial real estate business in this country, and the train has clearly left the station. Less than 10 percent of commercial properties in the United States - office, industrial, multi-family, retail - is collectively owned by public REITs, and we could see that number increase to [as much as] 50 percent in the future."

"As a public company, we certainly have a bottom-line focus, and we do operate differently now than we did when we were a private entity," adds David Simon. "The bottom line, however, is that the philosophy and entrepreneurial foundation of this company really hasn't changed. We may funnel it to different areas and in different directions, but our willingness to try different things and to be at the forefront of the industry hasn't changed."

Sterrett also notes that public real estate companies, while owning a smaller portion of the entire shopping center pool, concentrate their holdings in upper-echelon retail properties. The company supports those findings after it conducted a market analysis of the 150 best performing malls in the country. (The study further concluded that, of the group studied, Sim on DeBartolo had a 25 percent market share.)

... as property enrichment continues If Simon DeBartolo finds itself on the leader board of class-A properties owned and managed, at least some of that success must be attributed to its efforts in reinvesting capital resources back into its centers (see "SDG Renovations," below). Simon DeBartolo's lead management emphasizes the company's commitment to upgrading strong-market centers in need of repositioning. In fact, says Herb Simon, the industry in general has cast off underperforming centers, thus leaving potential earnings unrealized.

"In the beginning, we ran so hard to do the next mall that we never really paid enough attention to our existing malls, and we didn't realize what valuable properties they were," he says, adding that Simon DeBartolo's renovation program is blowing the dust off valuable footage. "As we go back and renovate our centers and add features to them, we see that the value has been untapped."

Jim Napoli agrees, noting that the company continues to place emphasis on renovations as it relates to leasing success. "We've earmarked hundreds of millions of dollars to renovate and brighten many of our centers that we feel are in need," he says. "Along with those renovations comes a real leasing thrust to change the tenant mix to better reflect what each marketplace is calling for."

In the case of The Forum Shops at Caesar's, the company sought to increase performance and add features to a center that needed no assistance. In sales per sq. ft., the center's performance is consistently sky-high. Also, the company recently completed Phase II of The Forum Shops, which included 235,000 sq. ft. of GLA, tenants such as NikeTown, Virgin Megastore, FAO Schwarz and Cheesecake Factory and a second animatronic attraction.

"The Forum Shops continues to be a fun place to be a part of," says David Simon."It's such a unique experience. I'm not an architect, but with Phase II, I have yet to see any physical retail space ever look like that in anything I've ever worked on."

The company's groundbreaking work in bringing The Forum Shops and Mall of America to fruition also can be felt with some of its newer developments. The Shops at Sunset Place, for example, is due for completion in October and will feature distinctive courtyards and animated special effects spread out over 510,000 sq. ft. The project will house a variety of entertainment and themed venues, including GameWorks, IMAX 3-D Theater, NikeTown, Virgin Megastore and an AMC 24 Theatre, to name a few.

David Simon acknowledges entertainment's effect on shopping centers but stops short of calling it an essential in the future of retail real estate. "You'll get a different response from everyone in the company," he says. "I think entertainment complements centers and can be beneficial, and it remains a nice trend with everyone still focused on it. But I think the basis of our company - and for the industry - [should be grounded in] broadening the overall experience in the mall."

Developing the 'grand vision' Among Simon DeBartolo's key strengths, regardless of how much theming and entertainment play in setting a shopping center's tone, is how the company can use its 240 centers to attract top-scale retailers. In their quest to expand nationally, says Napoli, retailers are becoming increasingly aware of the corporation behind the facades.

"I don't think retailers are going to grow their business randomly or just because they need a certain amount of stores per year, without knowing with whom they want to continue doing business" he says. "New retailers add excitement and build traffic. Our job as shopping center developers is to create that traffic and energy so people will continue to be excited by shopping."

In Simon DeBartolo's case, the company has employed strength in numbers to gain retailer interest and economies of scale that few shopping center owners and managers can enjoy. Sokolov, who has been tapped as the 1998-1999 ICSC chairman, says ongoing tenant interest is a combination of a strong retail sector and Simon DeBartolo's property network.

"Most of the retail stocks are trading at or near 52-week highs," he says. "They've learned how to operate in a low-inflation, lower-comp store growth environment, and many of them are looking for opportunities. We can provide retailers one-phone-call access to an entire market, a state or a series of markets. And that has really helped us work with retailers on a national scale while making it more efficient for all parties."

Herb Simon adds that the company's growth over the past five years will actually help, not hurt, the chances of it providing added quality. "We're going prudently and slowly, but we've got some exciting things on the boards," he says. "We're finding that we're adding a lot of value to the customer, which is another reason for them to come back as we make our centers more attractive and entertaining."

Despite Simon DeBartolo's size, says Napoli, one of the company's greatest traits is the strong ties the Simon family maintains to its employees. "Despite the fact that we have become as large as we have, the compelling reason that people enjoy working [at Simon] is the Simons themselves," he says. "They make it very clear to us that they appreciate what we do, and that's important. People want to know that their hard work, sacrifices, and many days and nights away are truly appreciated."

"Forget family," encourages Herb Simon. "We just happen to have a very good chief executive; whether he's family or not is irrelevant. Rick Sokolov is an incredible part of our management team - he's not family, but it almost feels that way now.

"And as we acquire these other companies, we continue to get valuable people who know the business," he continues. "We like to think of ourselves as a family, but it extends way beyond our literal and immediate [ties]."

For David Simon, the most successful retail real estate companies will build and improve their real estate "acreage" while achieving operational excellence. Being the leader in retail real estate, he says, comes with the responsibility to continue breaking ground, both literally and figuratively.

"Whatever we've done - whether or not we've had this 'grand vision' - we got there and we've got to execute," he says. "Shopping centers might be easier to build, but they're much more difficult to operate. We have the raw materials as we've never had them before, so if we can harness the creativity that we've always had in this organization, we should be in a position to be the industry leader. And that's what I'm after."

With its Simon Youth Foundation, Simon DeBartolo Group is looking to foster development of a different kind: the future of America's youth. With at least five in-mall, open-classroom learning centers on tap for 1998 - in centers such as Century III Mall in Pittsburgh and Sunland Park Mall in El Paso, Texas, among others - the Indianapolis-based owner and manager will donate approximately 4,000 sq. ft. of GLA to provide young people with out-of-school learning.

"The Youth Foundation is a traditional academic program, but one that is reshaped to fit in a nontraditional environment," says Ron Hanson, Simon DeBartolo's divisional vice president of property management. "The program is generally targeted at young people who have a difficult time in a traditional school environment."

Prior to the merger of Simon Property Group and DeBartolo Realty Corp., says Hanson, each company had education-related initiatives of their own. Simon sponsored a major program in Indianapolis at Circle Center (which remains in place today), while DeBartolo had sponsored a number of educational resource centers in Florida. It only made sense, Hanson explains, to double-up those efforts once the two companies merged in 1996.

According to Hanson, Simon DeBartolo's alliance with Alexandria, Va.-based Communities & Schools will allow the Simon Youth Foundation to provide a true education for teen-agers who might slip out of the standard schooling system but who still want to complete high school.

"Communities & Schools works primarily with local school districts to establish nontraditional classrooms and facilities outside traditional school buildings," he says. While Simon DeBartolo provides the educational venue, Communities & Schools then works with the local school systems to help use their own funds to formulate and execute the center's curriculum.

"The typical program investment for the school district is about $250,000, which provides for educational materials, the teachers and a director," he says. "The local school districts are then responsible for the program content and the program administration, and they assign the teachers and director to oversee and manage the program at the mall. Together they conduct classes [right in the mall] as if it were a normal school."

While the nation's malls may serve their communities well with convenient shopping, says Hanson, the foundation initiative might afford a stronger, more involved connection that previously had been lacking. The Simon family is collectively donating approximately $500,000 to help solidify that connection, and defray administration costs."The perception that most people have of the malls is negative," he says. "Through the efforts of the Foundation and alongside our strategic partners, we will be able to overcome and reshape that perception. We will be able to demonstrate that our young people are clearly our future, and we have a responsibility to assist in their development - both in education and for their future careers."

Hanson says the foundation will look to mall retailers for involvement with career training and job placement; he notes that there is dual incentive for retailers to join the program. Not only are the retailers donating time for retail career training, he says, but they also are potentially expanding their future employee base.

"Retail is just one of the service-related industries that has one of the greatest struggles in finding staff," he says. "The hours are typically very long, and it's difficult to find workers, particularly young people, who are willing to make that level of commitment. This program will likely help in providing a pool for them to train, with their own resources. I have no doubt that they will also get in line to be a part of the process."

Simon Brand Ventures identifies five key business units through which Simon DeBartolo Group can secure value- and revenue-generating strategic partnerships for its mall network. They are:

* AFFINITY MARKETING: Strategic marketing partnerships with quality brands interested in the public-space, customer-facing opportunity presented by regional malls.

* INTERACTIVE MEDIA: Integrated systems between the developer and retailer in the mall-based marketplace, plus a commerce-enabled electronic market capability.

* TRADITIONAL MEDIA: Expansion of on-mall media to provide marketers with a national network platform for their brand messages.

* ALTERNATIVE USES: New presentation and customer service spaces in the shopping center to maximize underused space.

* MERCHANT SERVICES: Packaging of services for affiliated retailers to provide competitively-priced services.Simon Brand Ventures' marketing partners include: Visa, Pepsi Co., Browning-Ferris Industries (BFI), Cybersmith, HFS, AmeriCash, Diebold and CUC.

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