Simon Property Group (NYSE: SPG) said Dec. 13 it plans to spin off its strip centers and smaller malls into an independent, publicly traded REIT.
The announcement coincided with the 20th anniversary of Simon Property’s initial public offering (IPO) in 1993.
Simon Property Chairman and CEO David Simon said during a conference call that the move will unlock the potential of its strip centers and smaller malls while allowing the main company to focus on its larger assets.
“This is better from a financial point of view,” Simon said. He noted that the growth potential inherent in the assets trumped possible alternatives to a spin off.
The new company, to be called SpinCo, is expected to own or have an interest in 54 strip centers and 44 malls. Simon noted that one or two assets might be shed ahead of the transaction’s completion date, which is expected to come early in the second quarter. SpinCo’s net operating income (NOI) in the company’s first year is expected to exceed $400 million, and initial year funds from operations are being forecast at approximately $300 million. SpinCo’s dividend in its first year is estimated to be at least 50 cents per share, or approximately 100 percent of its estimated taxable income.
SpinCo will operate 53 million square feet of space in 23 states. Occupancy of the strip centers currently stands at 94.2 percent, with smaller-mall occupancy at 90.4 percent.
“It’s safe to say the strip business has been extremely well run,” Simon said.
Richard Sokolov, Simon Property’s president and chief operating officer, will also become chairman of the board of directors of SpinCo. Simon’s strip center management team and personnel will become employees of SpinCo. SpinCo’s malls will continue to receive property management services from Simon.
When asked about the possibility of spinning off its outlet mall operations, Simon replied that the move would be a “horrible mistake” because the company’s executive team is “too tied” to the success of those operations.
Simon also noted that the creation of SpinCo will have no impact on how Simon Property thinks about its international operations. Simon Property’s focus on upgrading its portfolio either through sales or redevelopment will also remain intact.
“Our biggest opportunity is redeveloping our portfolio,” Simon said. “We’re in the midst of that heavy and hard.”
Meanwhile, Citi Research’s Michael Bilerman and Joshua Attie noted that the Simon spin-off “brings the idea of creative restructuring to the forefront.” The main benefits, they said, include “narrower focus, better growth on a smaller base of assets and more transparency on the value of the pieces.”