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The $6.7B Question: What’s Next for Simon?

Simon Property Group may have lost out on its well publicized bids to buy or recapitalize rival General Growth Properties, but the REIT remains in an enviable financial position as it sits on vast reserves of cash and credit.

Last week, U.S. Bankruptcy Judge Allan Gropper in Manhattan approved a Brookfield Asset Management plan to recapitalize General Growth Properties and granted the Canadian firm “stalking horse” status. As part of the bid, Brookfield Asset Management and some of its partners were granted millions of warrants to buy stock in the reorganized company—warrants that will have to paid for should General Growth now accept a competing bid. By all accounts, that won’t be Simon. Shortly after the ruling was announced, Simon retracted two separate offers it had made—one to buy General Growth for $20 per share and another to recapitalize General Growth at substantially the same terms as the Brookfield bid, minus the warrants.

Yet the Indianapolis-based firm is still sitting on a pile of cash, about $3.3 billion, and it has another $3.4 billion available through its credit lines. So the $6.7 billion question becomes: What will Simon do with all this dough?

In announcing it was withdrawing its General Growth offers, Simon Property Group CEO David Simon said in a statement, “I am confident in our ability to grow the business as we have done historically. We will continue to focus on our business and evaluate other opportunities in the marketplace as we always have: prudently, in a disciplined manner, and in the best interests of our shareholders.”

Simon declined to comment further on its intentions.

Analysts and observers, however, think it is likely Simon won’t stay quiet for too long.

“I wouldn’t say Simon is under significant pressure to use their capital, but it is expected that it will deploy it, sooner rather than later, and definitely within the next year,” says Jason Lail, senior industry analyst – retail estate for Charlottesville, Va.-based SNL Financial.

The answer likely depends on the pace of the economic recovery and on what General Growth decides to do as it restructures. If the economy experiences a strong recovery, retailers will be drawn toward higher quality real estate like Simon’s malls and outlet centers, which should drive organic growth for the REIT. If the economy’s recovery remains weak, more distressed assets will come to market, and Simon certainly has the wherewithal to make acquisitions.

“Regardless of the tempo of the recovery, Simon is well-positioned,” Lail notes.

Deploying all that cash could be challenging. Investment in retail real estate properties remains slow. In the first quarter, deal volume on retail properties amounted to only $3.1 billion—less than half of what Simon could potentially spend by itself. In order to spend it all, Simon may have to broaden its horizons beyond regional malls. As an alternative, Simon could opt to grow its community center platform, but in recent years it has not elected to do so, says Rich Moore, a managing director with RBC Capital Markets. International expansion offers another outlet for growth, but the company has also not indicated any plans to ramp up that part of its business either.

In the end, the money could end up being used for exactly what Simon intended all along—acquiring General Growth malls—but in a different manner than it has proposed so far. As General Growth continues to restructure and emerge from bankruptcy, it may have to sell some properties and Simon could be waiting in the wings. “I think GGP will have to divest itself and sell off some assets,” Moore says. “And presumably Simon will be there waiting to acquire them and will win some of the deals.”

Those opportunities may not materialize for several months. In the near term, Moore says Simon will likely deploy some of its cash to pay down debt on encumbered assets.

Simon has roughly $1.5 billion in debt coming due before Dec. 31, 2010 including $400 million in notes in June and August and a $200 million loan on Copley Place in Boston. It also has $600 million in debt coming due through its joint ventures.

“I really don’t think Simon will have any trouble using its cash,” Moore says. “By the end of the year, I think they’ll whittle away more than half of it.” That leaves Simon with its credit lines and the $750 million or so it generates from operations—still a significant war chest for just about any path it chooses to take.

—Jennifer Popovec

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