Simon Property Group exploring overseas markets

Simon Property Group Inc. has been readying its balance sheet and sizing up buyout targets in hopes of capitalizing on
a worldwide markdown on shopping-center owners.

The Indianapolis-based company has waited on the sidelines more than 18 months since its last
big deal, the $1.6 billion purchase of Mills Corp. with Farrallon Capital Management. But all signs suggest
the quiet period for the mall giant won’t last much longer.

Credit troubles have hampered many of Simon’s competitors, leaving opportunities for the nation’s
largest owner of shopping malls to snap up more of the best retail properties in the United States. But
the expansion possibilities are particularly compelling overseas, where shopping centers do not yet dominate
the landscape as they do in the states.

Simon already has a stake in 59 overseas malls in partnership with foreign developers, and has $240 million of new projects
in its international pipeline (about 26 percent of the firm’s total). It is aggressively seeking to add more, through both
new development and acquisitions.

The company has at least $2.7 billion in credit available for a buying spree. And last month, Simon said it had bought a 4-percent
stake worth $300 million in Liberty International, the largest mall owner in the United Kingdom. Rival Westfield Group of
Australia also is buying up Liberty’s depressed shares.

"In the U.S., clearly, there’s a lot of retail space–about 20 square feet per capita,"
CEO David Simon told Smart-Money for a story this summer. "When you look at other markets,
it’s 2 to 3 square feet per capita. As we think about the future, we’d like to see more of our business
going international."

Shopping overseas

Worldwide opportunities are drawing plenty of notice now that 99,000 shopping centers have sprouted in the United States.
The International Council of Shopping Centers is holding conferences around the world this year, including in Brazil, India,
Lithuania, China, Argentina, Russia and the United Arab Emirates.

Most of Simon’s overseas properties are in Europe (France, Italy and Poland), but the company
also has six Premium Outlet centers in Japan, a Premium Outlet in Mexico, and another in South Korea.
Simon also has a 32.5-percent interest in five shopping centers totaling 2.5 million square feet under
construction in China.

The international properties make up only about 6 percent of Simon’s total 260 million square feet, but that number could
grow as troubles in the economy and credit markets push down values of overseas properties and property owners to more compelling
levels.

"We’re always
thinking about how to effectively grow our company and we’ll continue to do that," David Simon told Wall Street
analysts during a conference call in July. "I think this environment, frankly, gives us a bit more opportunities than
an environment, say, a year ago."

Company officials refused requests to talk with IBJ for this story.

Sales of mall properties in the United States
are down 73 percent so far this year to $13 billion, in part because so few real estate firms are capable
of drumming up financing, The Wall Street Journal reported.

Simon is as well positioned as any real estate company to take advantage of the slowdown, analysts
say.

"With a strong
credit rating, we think Simon is in a solid position in terms of cash flow and liquidity on the balance sheet,"
Lehman Brothers researchers noted in a July report. "We also believe that Simon should benefit if any acquisition opportunities
arise either abroad or on the distressed side in the U.S."

Chicago-based Zacks Equity Research in a July report said Simon has "one of the strongest
balance sheets in the industry," thanks in part to lower leverage compared to its competitors and
the highest per-square-foot average sales in the industry (more than $490).

Despite increased vacancies in its malls, Simon’s
second-quarter profit jumped 28 percent on higher rents and reduced expenses.

Simon’s international efforts also give it an advantage.

The company’s "international presence gives
the company a more compelling long-term growth story than its domestically focused peers," the Zacks
report said.

U.K.
investment

The
next move for Simon may involve Liberty, the British giant that owns the historic Covent Garden market in London.

The move would pit Simon against Westfield,
its largest competitor on a global scale. Westfield also has amassed a large stake, about 3 percent,
in Liberty. Observers are divided over whether Simon plans to pair with Westfield on a bid or to go it alone.

"They could either be working together
and looking to divide up the assets, or this move by Westfield could be a defensive move to try and keep
new entrants out of this market," analysts for Merrill Lynch wrote in a research note to investors.

Westfield, the largest mall owner in the world
by market value, is sinking several billion dollars in the U.K. to develop giant malls. It spent $3 billion
on its new Westfield London mall, a sprawling 43-acre center with 265 shops, a theater, library, gym
and spa. It opens Oct. 30.

The firm is spending another $2.7 billion on a retail and office complex called Westfield Stratford City near what will be
the Olympic Park for the 2012 games.

Simon initially held back on investing in malls in Britain because it viewed prices as outrageous, but it may now see a window,
a New York-based real estate portfolio manager told IBJ.

The company will pick its markets carefully, leaning toward acquisitions in established markets
where development rules are strict and building malls in emerging markets where guidelines are lenient.

Simon’s next-largest U.S. competitor, Chicago-based
General Growth Properties Inc., also could be in play because of liquidity problems. General Growth owns
200 regional malls (Simon has about 400), including 22 of the nation’s top shopping centers.

A purchase of some or all of General Growth’s
holdings could help Simon expand its overseas presence. General Growth has partnership interests in 18
shopping centers in Brazil, the world’s fifth-largest country by population, with more than 180 million people.
The firm also has interests in seven malls in Turkey. Simon doesn’t yet own a mall in either country.

Another possibility outside buying the whole
company: Simon might be able to pick off some of General Growth’s gems. Simon covets Alamoana in Honolulu,
Fashion Show in Las Vegas, and Natick in Boston, observers said.

But the real growth potential would be to spread Simon’s shopping-mall dominance around the world,
Simon told SmartMoney.

"We have a market value of real estate of around $45 billion to $50 billion," he said.
"I would like to see us become more global, and maybe that $50 billion goes to $100 billion."