Simon to Spin Off Strip Centers, Small Malls in New REIT

Simon Property Group Inc., the largest U.S. mall owner, plans to spin off to shareholders its strip-center business and smaller enclosed malls into a new real estate investment trust.

The new company, referred to as SpinCo, will own all or part of 54 strip centers and 44 malls and is expected to generate net operating income of more than $400 million in its first year, Indianapolis-based Simon said in a statement today. SpinCo will operate 53 million square feet (4.9 million square meters) of retail space in 23 states.

Simon is focused on redeveloping its top regional malls, opening outlet centers and investing overseas to boost growth. The company, whose strip-center business accounts for 3.3 percent of its net operating income, said the new REIT will be better able to pursue acquisitions and development.

The transaction “allows this group of spun-off assets to have a life of their own with a dedicated management team in order to create value and pursue its own business plan,” Paul Adornato, an analyst at BMO Capital Markets in New York, said in a telephone interview. For Simon, “one would expect management would devote most of its time and attention to the most productive and important assets.”

Simon rose 2.2 percent to $151.63 today. The shares have fallen 4.1 percent this year.

Dividend Growth

“We expect to be able to do some nice and interesting things at SpinCo,” Simon Chairman and Chief Executive Officer David Simon said on a conference call with analysts. “This company will be successful.”

The spinoff, expected to be completed in the first half of 2014, will increase Simon’s sales per square foot, net operating income growth and occupancy rates, according to the statement. Simon’s current dividend of $4.80 a share will be maintained and is expected to grow in line with its funds from operations and taxable income, the company said. SpinCo’s initial dividend is expected to be at least 50 cents a share.

David Simon will be a director of the new REIT. Richard Sokolov, Simon’s president and chief operating officer, will become chairman of SpinCo.

Sokolov said on the call that he and David Simon will be “significant shareholders” in SpinCo. The arrangement means they’ll be committed to helping the company succeed, David Simon said.

Investment Grade

In a presentation on its website, Simon said that 70 percent of the new REIT’s net operating income would be from the malls, which had an occupancy rate of 90.4 percent. The strip centers being spun off have an occupancy rate of 94.2 percent.

The new company plans redevelopment projects totaling about $300 million. Simon expects SpinCo to have about $2 billion of debt and it intends to pursue an investment-grade rating.

“From having SpinCo separately capitalized and managed, it won’t have to wait in line to get the capital for improvements and redevelopments that it deserves,” Adornato said.

A spinoff is better for stockholders than a sale of the properties, in part because of the tax ramifications of the latter, David Simon said. Investor interest in the portfolio would be strong, he said.

“Let’s give that opportunity to our shareholders as opposed to the guys that like to skim off the top,” Simon said on the call. “We’re delivering this value to the shareholders, and that’s what makes this look exciting.”

Shopping-center REITs in the U.S. have performed better this year than mall owners, with Bloomberg’s shopping-center REIT index rising almost 1 percent, compared with a 3.5 percent decline for the Bloomberg mall index.

The largest U.S. shopping-center REIT is Kimco Realty Corp., based in New Hyde Park, New York. Kimco, with a market value of $8.3 billion, owned interests in 855 shopping centers with 125 million square feet of leasable space as of Sept. 30.

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