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Updated: Simon Property to Spin Off New Retail REIT

Shopping Center Giant to Focus on Global Portfolio of Larger Malls, Including Mills and Premium Outlets Brands
December 17, 2013
A plan by Indianapolis-based Simon Property Group (NYSE: SPG) to spin off its strip centers and smaller enclosed malls into a publicly traded REIT separate from its super regional shopping malls has drawn largely good reviews from Wall Street.

The spin-off REIT, appropriately called SpinCo, is expected to own or have an interest in 54 strip centers and 44 malls totaling 53 million square feet in 23 states when the transaction closes in second-quarter 2014. Each of the malls being allocated to the new spin-off REIT generates annual net operating income of $10 million or less.

Simon said the spin-off will result in higher sales per square foot, NOI growth and occupancy for its topline SPG entity, while maintaining the retail REIT's massive scale, conservative leverage and portfolio of high-quality assets.

SpinCo's initial year NOI is estimated to be in excess of $400 million and its initial year funds from operations is estimated to be $300 million, or $0.80 per share.

Occupancy of the prospective REIT's strip centers is 94.2% and 90.4% for the malls as of Sept. 30. In a release, Simon said it has made a "substantial recent investment" in SpinCo's assets.

Wall Street analysts greeted the announcement with relative enthusiasm, along with an "I told you so" moment for at least one REIT watcher. Throughout 2013, especially after publicly traded REIT shares turned volatile in the middle of the year, REIT analysts repeatedly stressed “focus” and “clarity” in defining how REITs can differentiate and increase shareholder value during the current phase of the real estate cycle, marked by improving property fundamentals and stability and continued low capital costs.

"A consistent theme among some of the more transformative deals recently is the narrowing of a REIT’s focus. This has taken a number of forms - acquisitions, dispositions, spin-offs, joint venture buy-ins and asset trades," Citi analyst Michael Bilerman said in a September report to investors.

“Simon’s formidable asset base is not receiving full value in the markets," and by selling a portion of its lower productivity malls and the entire shopping center portfolio, the company could highlight the value of SPG’s higher quality malls and outlets, Bilerman noted two months ago.

A bullish Bilerman claimed the moment following the announcement, describing the proposed spin off in a Dec. 13 note as Simon’s "2-for-the-price-of-1 holiday stocking stuffer."

"Consistant with [Citi’s earlier] view, we are very supportive of the announced transaction that provides Simon shareholders with two companies that should be able to produce more value over time than as one company together, and effectively lifts the dividend by 10%."

While maintaining an independent management team and board of directors, the new company will maintain strong ties to Simon. Richard Sokolov, Simon's president and chief operating officer and member of its board, will also become chairman of the SpinCo board.

SPG Chairman and CEO David Simon will also serve as a director. Simon's strip center management team will become employees of SpinCo, and Simon's property management services will continue to manage SpinCo properties.

The announcement Friday, made on the 20th anniversary of Simon's initial public offering, "will unlock the potential of the strip centers and malls" to be owned by the new company, David Simon said.

"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. At the same time, this transaction allows Simon to focus on our global portfolio of larger malls, Mills and Premium Outlets while maintaining our considerable scale and conservative leverage profile."
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