**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2001**

** **

**(Commission File No.) 33-11491**

** **

**SIMON PROPERTY GROUP, L.P.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                                                                               |   | **34-1755769**                        |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State of incorporation  or organization)                                                                                                  |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                                       |   |                                  |
|                                                                                                                                       |   |                                  |
| **National  City Center,  115 West Washington Street, Suite 15 East  Indianapolis, Indiana 46204**(Address of principal executive offices) |
|                                                                                                                                       |   |                                  |
| **(317)  636-1600**                                                                                                                        |
| (Registrant's telephone  number, including area code)                                                                                      |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.    **YES    ****ý        NO    ****o**

 

 

**SIMON PROPERTY GROUP, L.P.**

 

**FORM 10-Q**

 

**INDEX**

 
| **Part  I -** | **Financial  Information**                                                                                                     |
|---------------|--------------------------------------------------------------------------------------------------------------------------------|
|          |                                                                                                                           |
|          | Item 1:   Financial Statements                                                                                            |
|          |                                                                                                                           |   |
|          | Condensed Consolidated  Balance Sheets as of September 30, 2001 and December 31, 2000                                          |
|          |                                                                                                                           |   |
|          | Condensed  Consolidated Statements of Operations for the three-month and nine-month  periods ended September 30, 2001 and 2000 |
|          |                                                                                                                           |   |
|          | Condensed  Consolidated Statements of Cash Flows for the nine-month periods ended  September 30, 2001 and 2000                 |
|          |                                                                                                                           |   |
|          |                                                                                                                           |   |
|          | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                |
|          |                                                                                                                           |   |
|          | Item  2:  Management's Discussion and  Analysis of Financial Condition and Results of Operations                          |
|          |                                                                                                                           |   |
|          | Item  3: Qualitative and Quantitative Disclosure About Market Risk                                                             |
|          |                                                                                                                           |   |
| **Part II -** | **Other Information**                                                                                                          |  
 

 

 

 

Items 1 through 6

 

 

 

**Signature**

 
 

**Simon Property Group, L.P.**

*Condensed Consolidated Balance Sheets*

(Dollars in thousands)

 

 

 

**September  30,**

** **

**December  31,**

 

 

 

**2001**

** **

**2000**

 

ASSETS:

 

 

 

 

 

Investment  properties, at cost

 

$

13,060,544

 

$

12,883,471

 

Less —  accumulated depreciation

 

1,763,060

 

1,471,178

 

 

 

11,297,484

 

11,412,293

 

Cash and cash  equivalents

 

149,905

 

209,755

 

Tenant receivables  and accrued revenue, net

 

267,318

 

294,775

 

Notes and  advances receivable from Management Company and affiliates

 

101,557

 

182,401

 

Note receivable  from the SRC Operating Partnership (Interest at 8%, due 2009)

 

--

 

29,425

 

Investment in  unconsolidated entities, at equity

 

1,361,750

 

1,308,838

 

Goodwill, net

 

37,505

 

38,384

 

Deferred costs  and other assets, net

 

273,454

 

240,578

 

Minority  interest

 

44,667

 

42,377

 

Total assets

 

$

13,533,640

 

$

13,758,826

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Mortgages and  other indebtedness

 

$

8,792,090

 

$

8,728,582

 

Accrued  dividends

 

19,321

 

18,266

 

Accounts payable  and accrued expenses

 

482,761

 

437,860

 

Cash  distributions and losses in partnerships and joint ventures, at equity

 

43,706

 

44,634

 

Other  liabilities

 

111,756

 

227,083

 

Total  liabilities

 

9,449,634

 

9,456,425

 

 

 

 

 

 

 

COMMITMENTS AND  CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

 

 

 

PARTNERS'  EQUITY:

 

 

 

 

 

 

 

 

 

 

 

Preferred units,  22,081,686 and 22,049,570 units outstanding, respectively.  Liquidation  values $1,058,697 and $1,058,950, respectively.

 

1,028,199

 

1,028,435

 

 

 

 

 

 

 

General Partner,  171,148,317 and 170,274,816 units outstanding, respectively

 

2,299,869

 

2,451,452

 

 

 

 

 

 

 

Limited  Partners, 64,889,347 and 64,966,226 units outstanding, respectively

 

871,975

 

935,321

 

 

 

 

 

 

 

Note receivable  from SPG (Interest at 7.8%, due 2009)

 

(92,825

)

(92,825

)

 

 

 

 

 

 

Unamortized  restricted stock award

 

(23,212

)

(19,982

)

 

 

 

 

 

 

Total partners'  equity

 

4,084,006

 

4,302,401

 

Total  liabilities and partners' equity

 

$

13,533,640

 

$

13,758,826

 

* *

*Theaccompanying notes are an integral part of these statements*

 

**SimonProperty Group, L.P.***Condensed ConsolidatedStatements of Operations*

 

(Dollars in thousands,except per unit amounts)

 

 

 

**For the  Three Months Ended September 30,**

 

**For the  Nine Months Ended September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

REVENUE:

 

 

 

 

 

 

 

 

 

Minimum rent

 

$

309,273

 

$

296,897

 

$

917,868

 

$

881,792

 

Overage rent

 

8,564

 

9,657

 

25,518

 

28,329

 

Tenant reimbursements

 

144,893

 

143,872

 

436,752

 

439,726

 

Other income

 

33,717

 

40,048

 

88,087

 

98,542

 

Total revenue

 

496,447

 

490,474

 

1,468,225

 

1,448,389

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Property operating

 

80,417

 

77,183

 

240,052

 

230,133

 

Depreciation and amortization

 

110,165

 

106,038

 

321,449

 

301,789

 

Real estate taxes

 

45,103

 

48,400

 

144,887

 

144,739

 

Repairs and maintenance

 

17,160

 

15,839

 

56,005

 

51,337

 

Advertising and promotion

 

13,938

 

11,114

 

40,057

 

42,038

 

Provision for credit losses

 

2,346

 

3,275

 

7,580

 

7,632

 

Other

 

12,620

 

7,100

 

26,117

 

22,075

 

Total operating expenses

 

281,749

 

268,949

 

836,147

 

799,743

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

214,698

 

221,525

 

632,078

 

648,646

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

149,030

 

161,049

 

456,924

 

475,563

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE MINORITY INTEREST

 

65,668

 

60,476

 

175,154

 

173,083

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTEREST

 

(2,486

)

(2,659

)

(7,839

)

(7,446

)

GAIN (LOSS) ON SALES OF ASSETS, NET OF ASSET WRITE DOWNS OF $0, $0,  $0, AND $10,572, RESPECTIVELY

 

(131

)

151

 

2,552

 

8,809

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE UNCONSOLIDATED ENTITIES

 

63,051

 

57,968

 

169,867

 

174,446

 

INCOME FROM UNCONSOLIDATED ENTITIES

 

6,833

 

20,400

 

32,544

 

53,613

 

INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE

 

69,884

   

78,368

   

202,411

   

228,059

   

 

 

 

 

 

 

 

 

 

 

EXTRAORDINARY ITEMS - DEBT RELATED TRANSACTIONS

 

(220

)

--

 

(245

)

(440

)

CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 5)

 

--

 

--

 

(1,638

)

(12,311

)

NET INCOME

 

69,664

 

78,368

 

200,528

 

215,308

 

 

 

 

 

 

 

 

 

 

 

PREFERRED UNIT REQUIREMENT

 

(19,334

)

(19,334

)

(58,111

)

(58,074

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME AVAILABLE TO UNITHOLDERS

 

$

50,330

 

$

59,034

 

$

142,417

 

$

157,234

 

 

 

 

 

 

 

 

 

 

 

NET INCOME AVAILABLE TO UNITHOLDERS ATTRIBUTABLE TO:

 

 

 

 

 

 

 

 

 

General Partners:

 

 

 

 

 

 

 

 

 

SPG (Managing General Partner)

 

$

36,488

 

$

14,346

 

$

58,741

 

$

38,398

 

SPG Properties

 

--

 

28,366

 

44,448

 

75,424

 

Limited Partners

 

13,842

 

16,322

 

39,228

 

43,412

 

Net income

 

$

50,330

 

$

59,034

 

$

142,417

 

$

157,234

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED EARNINGS PER UNIT:

 

 

 

 

 

 

 

 

 

Income before extraordinary items and cumulative effect of accounting  change

 

$

0.21

 

$

0.25

 

$

0.61

 

$

0.71

 

Net income

 

$

0.21

 

$

0.25

 

$

0.60

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

69,664

 

$

78,368

 

$

200,528

 

$

215,308

 

Cumulative effect of accounting change

 

--

 

--

 

(1,995

)

--

 

Unrealized loss on interest rate hedge agreements

 

(4,978

)

--

 

(11,071

)

--

 

Net losses on derivative instruments reclassified from accumulated  other comprehensive income into interest expense

 

1,183

 

--

 

2,846

 

--

 

Other

 

(44

)

--

 

(44

)

--

 

Unrealized gain on investment

 

1,980

 

1,342

 

--

 

8,098

 

Comprehensive Income

 

$

67,805

 

$

79,710

 

$

190,264

 

$

223,406

 

 

*Theaccompanying notes are an integral part of these statements.*

* *

**SimonProperty Group, L.P.**

*Condensed Consolidated Statements of Cash Flows*

* *

 (Dollars in thousands)

** **

 

 

**For the Nine Months Ended September 30,**

 

 

 

**2001**

 

**2000**

 

CASH FLOWS FROM  OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

200,528

 

$

215,308

 

Adjustments to  reconcile net income to net cash provided by operating activities—

 

 

 

 

 

Depreciation and  amortization

 

326,962

 

309,388

 

Extraordinary  items

 

245

 

440

 

Gain on sales of  assets, net of asset write downs of $0 and $10,572, respectively

 

(2,552

)

(8,809

)

Cumulative  effect of accounting change

 

1,638

 

12,311

 

Straight-line  rent

 

(7,175

)

(12,045

)

Minority  interest

 

7,839

 

7,446

 

Equity in income  of unconsolidated entities

 

(32,544

)

(53,613

)

Changes in  assets and liabilities—

 

 

 

 

 

Tenant  receivables and accrued revenue

 

45,105

 

54,751

 

Deferred costs  and other assets

 

(32,329

)

(8,214

)

Accounts  payable, accrued expenses and other liabilities

 

(41,790

)

(95,687

)

Net cash  provided by operating activities

 

465,927

 

421,276

 

 

 

 

 

 

 

CASH FLOWS FROM  INVESTING ACTIVITIES:

 

 

 

 

 

Capital  expenditures

 

(216,786

)

(300,936

)

Cash from  consolidation of ASP

 

8,156

 

--

 

Net proceeds  from sale of assets and investment

 

19,550

 

164,282

 

Investments in  unconsolidated entities

 

(119,728

)

(105,751

)

Distributions  from unconsolidated entities

 

145,325

 

233,276

 

Investment in  and advances (to)/from the Management Company and affiliate

 

1,606

 

(5,784

)

Loan to the SRC  Operating Partnership

 

5,597

 

(14,650

)

Net cash used in  investing activities

 

(156,280

)

(29,563

)

 

 

 

 

 

 

CASH FLOWS FROM  FINANCING ACTIVITIES:

 

 

 

 

 

Partnership contributions

 

7,171

 

387

 

Purchase of  treasury units and limited partner units

 

--

 

(50,828

)

Partnership  distributions

 

(424,264

)

(400,368

)

Minority  interest distributions, net

 

(10,129

)

(13,287

)

Mortgage and  other note proceeds, net of transaction costs

 

1,452,241

 

1,341,735

 

Mortgage and  other note principal payments

 

(1,394,516

)

(1,318,771

)

Net cash used in  financing activities

 

(369,497

)

(441,132

)

 

 

 

 

 

 

DECREASE IN CASH  AND CASH EQUIVALENTS

 

(59,850

)

(49,419

)

 

 

 

 

 

 

CASH AND CASH  EQUIVALENTS, beginning of period

 

209,755

 

153,743

 

 

 

 

 

 

 

 

 

CASH AND CASH  EQUIVALENTS, end of period

 

$

149,905

 

$

104,324

 

 

*The accompanying notes are an integral part of thesestatements*

 
****
**SIMONPROPERTY GROUP, L.P.**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

 

(Dollars inthousands, except per unit amounts and where indicated as in billions)

 

**Note 1 –Organization**

 

Simon Property Group, L.P. (the “SPG OperatingPartnership”), a Delaware limited partnership, is a majority owned subsidiaryof Simon Property Group, Inc. (“SPG”), a Delaware corporation. SPG is aself-administered and self-managed real estate investment trust (“REIT”) underthe Internal Revenue Code of 1986, as amended (the “Code”). Each share ofcommon stock of SPG is paired (“Paired Shares”) with a beneficial interest in1/100th of a share of common stock of SPG Realty Consultants, Inc.,also a Delaware corporation (“SRC” and together with SPG, the “Companies”).Units of ownership interest (“Units”) in the SPG Operating Partnership arepaired (“Paired Units”) with a Unit in SPG Realty Consultants, L.P. (the “SRCOperating Partnership” and together with the SPG Operating Partnership, the“Operating Partnerships”). The SRC Operating Partnership is the primary subsidiaryof SRC.

 

The SPG OperatingPartnership is engaged primarily in the ownership, operation, management,leasing, acquisition, expansion and development of real estate properties,primarily regional malls and community shopping centers. As of September 30, 2001,the SPG Operating Partnership owned or held an interest in 249 income-producingproperties, which consisted of 163 regional malls, 72 community shoppingcenters, five specialty retail centers, four office and mixed-use propertiesand five value-oriented super-regional malls in 36 states (the“Properties”).  In addition, the SPGOperating Partnership owned an interest in six additional retail real estateproperties operating in Europe and Canada. The SPG Operating Partnership alsoowned an interest in one property currently under construction and 11 parcelsof land held for future development, which together with the Properties arehereafter referred to as the “Portfolio Properties”. The SPG OperatingPartnership also holds substantially all of the economic interest in M.S.Management Associates, Inc. (the “Management Company”). Effective January 1,2001, the Management Company elected to become a taxable REIT subsidiary(“TRS”).  Effective March 31, 2001, theSPG Operating Partnership purchased clixnmortar.com, a technology venture ofthe Companies, from the SRC Operating Partnership at its carrying valueutilizing the inter-company note.  TheSPG Operating Partnership subsequently contributed clixnmortar.com to theManagement Company in exchange for preferred stock of the Management Company.

 

SimonBrand Ventures, LLC (“SBV”) and Simon Business Network (“SBN”) continue toexpand upon certain mall operations and marketing initiatives to take advantageof the SPG Operating Partnership’s size and tenant relationships, primarilythrough strategic corporate alliances. SBV is focused on leveraging the SPGOperating Partnership’s 100 million unique shoppers and their 2 billion annualshopping visits to contribute to the SPG Operating Partnership’s second-curve revenuestrategy.  The SBV concept andinitiatives were started in 1997 to create a new medium for connectingconsumers with retailers and sponsors by developing a combination of shopping,entertainment and community.  SBN isfocused on leveraging the SPG Operating Partnership’s assets to create newbusinesses, which will drive greater value to its Portfolio Properties,retailers and other developers and generate new sources of revenue for the SPGOperating Partnership.  SBN’s strategyis to provide a competitively valued, broad-based offering of products andservices via a unique and dominant marketplace and service network focused onthe real estate industry and their tenants. SBV has also entered into cost sharing arrangements with the ManagementCompany similar to those of the SPG Operating Partnership.  Effective January 1, 2001, the SPG OperatingPartnership purchased SBV from SRC at approximately its carrying valueutilizing the intercompany note.

 

On April 1, 2001, the SPGOperating Partnership became the managing general partner of SPG Administrative ServicesPartnership L.P.  (“ASP”). In addition,the SPG Operating Partnership acquired an additional 24%partnership interest in ASP from the Management Company.  As a result, the SPG OperatingPartnershipgained control of ASP consistent with the SPG OperatingPartnership’sconsolidation principles. ASP was previously consolidated as part of theManagement Company.  The change incontrol and consolidation of ASP will not have a material impact on the resultsof operations of the SPG Operating Partnership and the other aspects of thetransaction were not material.   ASP wasorganized to provide for the allocation of the salaries and other costsassociated with employees who perform services for the Management Company andits affiliates as well as multiple entities controlled by the SPGOperating Partnership.

 

In order to simplify the organizational structure ofSimon Group’s investment in European Retail Enterprises, B.V. (“ERE”), theManagement Company transferred its ownership interest in ERE to the SPGOperating Partnership at its carrying value in exchange for a reduction in thenote receivable from the Management Company.

 
****
**Note 2 -Basis of Presentation**

 

Theaccompanying financial statements are unaudited; however, they have beenprepared in accordance with generally accepted accounting principles forinterim financial information and in conjunction with the rules and regulationsof the Securities and Exchange Commission. Accordingly, they do not include allof the disclosures required by generally accepted accounting principles forcomplete financial statements. In the opinion of management, all adjustmentsnecessary for fair presentation, consisting of only normal recurringadjustments, have been included. The results for the interim period endedSeptember 30, 2001 are not necessarily indicative of the results to be obtainedfor the full fiscal year. These unaudited financial statements have beenprepared in accordance with the accounting policies described in the SPGOperating Partnership’s annual report on Form 10-K for the year ended December31, 2000, except for the change in accounting policy discussed in Note 5, andshould be read in conjunction therewith.

 

Theaccompanying condensed consolidated financial statements of the SPG OperatingPartnership include all accounts of all entities owned or controlled by the SPGOperating Partnership. All significant intercompany amounts have beeneliminated.

 

Net operating results ofthe SPG Operating Partnership are allocated after preferred distributions,based on its partners’ weighted average ownership interests during the period.SPG’s weighted average direct and indirect ownership interest in the SPGOperating Partnership for the nine-month periods ended September 30, 2001 andSeptember 30, 2000 was 72.5% and 72.4%, respectively.

 

Certain reclassificationsof prior period amounts have been made in the financial statements to conformto the 2001 presentation. These reclassifications have no impact on the netoperating results previously reported.

 

**Note 3 -Per Unit Data**

 

Basic earnings per Unit is based on the weightedaverage number of Units outstanding during the period and diluted earnings perUnit is based on the weighted average number of Units combined with theincremental weighted average Units that would have been outstanding if alldilutive potential Units would have been converted into Units at the earliestdate possible. The following table sets forth the computation for the SPGOperating Partnership’s basic and diluted earnings per Unit.

 

 

 

**For the Three Months Ended  September 30,**

 

**For the Nine Months Ended September  30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

Income before  extraordinary items and cumulative effect of accounting change, and after the  preferred Unit requirement

 

$

50,550

 

$

59,034

 

$

144,300

 

$

169,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extraordinary  items

 

(220

)

--

 

(245

)

(440

)

 

 

 

 

 

 

 

 

 

 

Cumulative  effect of accounting change

 

--

 

--

 

(1,638

)

(12,311

)

 

 

 

 

 

 

 

 

 

 

Net Income  available to Unitholders

 

$

50,330

 

$

59,034

 

$

142,417

 

$

157,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average  Units Outstanding – Basic

 

235,964,645

 

236,491,268

 

235,650,507

 

236,973,511

 

 

 

 

 

 

 

 

 

 

 

Effect of stock  options

 

285,158

 

102,704

 

331,085

 

96,441

 

 

 

 

 

 

 

 

 

 

 

Weighted Average  Units Outstanding  - Diluted

 

236,249,803

 

236,593,972

 

235,981,592

 

237,069,952

 

 

 

 

 

**For the Three Months Ended  September 30,**

 

**For the Nine Months Ended September  30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

Basic and Diluted Per Unit:

 

 

 

 

 

 

 

 

 

Income before  extraordinary items and cumulative effect of accounting change, and after the  preferred Unit requirement

 

$

0.21

 

$

0.25

 

$

0.61

 

$

0.71

 

Extraordinary  items

 

--

 

--

 

--

 

--

 

Cumulative  effect of accounting change

 

--

 

--

 

(0.01

)

(0.05

)

Net Income  available to Unitholders

 

$

0.21

 

$

0.25

 

$

0.60

 

$

0.66

 

 

Preferred Units issued and outstanding during thecomparative periods did not have a dilutive effect on earnings per Unit. PairedUnits held by limited partners in the Operating Partnerships may be exchangedfor Paired Shares, on a one-for-one basis in certain circumstances. Ifexchanged, the Paired Units would not have a dilutive effect.

 

**Note 4 -Cash Flow Information**

 

Cash paid for interest,net of amounts capitalized, during the nine months ended September 30, 2001 was$450,884 as compared to $480,802 for the same period in 2000. See Notes 1 and 8for information about non-cash transactions during the nine months endedSeptember 30, 2001.

 

**Note 5 -Cumulative Effect of Accounting Change**

 

On January 1, 2001 the SPG Operating Partnershipadopted SFAS 133  “Accounting forDerivative Instruments and Hedging Activities,” as amended in June of 2000 bySFAS 138, “Accounting for Derivative Instruments and Hedging Activities.”  SFAS 133, as amended, establishes accountingand reporting standards for derivative instruments and requires the SPGOperating Partnership to record on the balance sheet all derivative instrumentsat fair value and to recognize certain non-cash changes in these fair valueseither in the income statement or other comprehensive income, as appropriateunder SFAS 133.  SFAS 133 currentlyimpacts the accounting for the SPG Operating Partnership’s interest rate andforeign currency rate risk protection agreements.

 

On adoption of SFAS 133, the SPG Operating Partnershiprecorded the difference between the fair value of the derivative instrumentsand the previous carrying amount of those derivatives on its condensedconsolidated balance sheets in net income or other comprehensive income, asappropriate, as the cumulative effect of a change in accounting principle inaccordance with APB 20 “Accounting Changes.”  On adoption, the SPG Operating Partnership’s net fair value of derivativeswas ($2.0) million, of which $3.1 million was recorded in other liabilities and$1.1 million was recorded in other assets. In addition, $2.0 million ofunrecognized loss was recorded in other comprehensive income as a cumulativeeffect of accounting change and an expense of $1.6 million was recorded as acumulative effect of accounting change in the statement of operations, whichincludes the SPG Operating Partnership’s $1.4 million share of joint venturecumulative effect of accounting change. The joint venture cumulative effect of accounting change was recorded ininvestment in unconsolidated entities. Within the next twelve months, the SPG Operating Partnership expects toreclassify to earnings approximately $3.6 million of expense of the currentbalance held in accumulated other comprehensive income.

 

As of September 30, 2001, the SPG OperatingPartnership has recorded derivatives at their fair values of $0.5 millionincluded in other assets and $11.1 million included in other liabilities.  These derivatives consist of LIBOR and EURIBORbased swaps, caps, collars, and cross-currency investment rate swaps with atotal notional amount of $390.2 million, with maturity dates ranging fromDecember 2001 to January 2005.  Jointventure derivatives with a total asset fair value of $0.2 million consist ofinterest rate caps and swaps with a total notional amount of $1,001.4 million,with maturity dates ranging from January 2002 to May 2006.  The SPG Operating Partnership’s exposure tomarket risk due to changes in interest rates primarily relates to the SPGOperating Partnership’s long-term debt obligations. Through its risk managementstrategy, the SPG Operating Partnership manages exposure to interest ratemarket risk by a combination of interest rate protection agreements toeffectively fix or cap a portion of variable rate debt, or in the case of afair value hedge, effectively convert fixed rate debt to variable rate debt andby refinancing fixed rate debt at times when rates and terms areappropriate.  The SPG OperatingPartnership is also exposed to foreign currency risk on financings of certainforeign operations.  To manage foreigncurrency exchange rate risk as part of its risk management strategy, the SPGOperating Partnership has also entered into a foreign currency forwardcontract. The SPG Operating Partnership’s intent is to offset gains and lossesthat occur on the underlying exposures, with gains and losses on the derivativecontracts hedging these exposures.  TheSPG Operating Partnership does not enter into either interest rate protectionor foreign currency rate protection agreements for speculative purposes.

 

***Accounting Policies for Derivatives***

 

In the normal course of business, the SPG OperatingPartnership uses a variety of derivative financial instruments to manage, orhedge, interest rate and foreign currency risk and records all derivatives onthe balance sheets at fair value.  TheSPG Operating Partnership may enter into derivative contracts relating toeither wholly owned or joint venture properties.  The SPG Operating Partnership requires that hedging derivativeinstruments are effective in reducing the risk exposure that they aredesignated to hedge. For derivative instruments associated with the hedge of ananticipated transaction, hedge effectiveness criteria also require that it beprobable that the underlying transaction occurs.  The SPG Operating Partnership may hedge its exposure to thevariability in future cash flows for anticipated transactions over a maximumperiod of 12 months.  Any instrumentthat meets these hedging criteria is formally designated as a hedge at theinception of the derivative contract. When the terms of an underlying transaction are modified resulting insome ineffectiveness, the portion of the change in the derivative fair valuerelated to ineffectiveness from period to period will be included in netincome. If any derivative instrument used for risk management does not meet thehedging criteria then it is marked-to-market each period, however, the SPGOperating Partnership intends for all derivative transactions to meet all thehedge criteria and qualify as hedges.

 

On an ongoing quarterlybasis, the SPG Operating Partnership adjusts its balance sheets to reflectcurrent fair market value of its derivatives. Changes in the fair value of derivatives are to be recorded each periodin earnings or comprehensive income, depending on whether the derivative isdesignated and effective as part of a hedged transaction, and on the type ofhedge transaction.  To the extent thatthe change in value of a derivative does not perfectly offset the change invalue of the instrument being hedged, the ineffective portion of the hedge isimmediately recognized in earnings. Over time, the unrealized gains and lossesheld in accumulated other comprehensive income will be reclassified toearnings.  This reclassification occurswhen the hedged items are also recognized in earnings.  Interest rate differentials that arise underinterest rate swap contracts are settled periodically based upon the terms ofthe contract and are recognized in interest expense over the life of thecontracts.  The SPG OperatingPartnership has a policy of only entering into contracts with major financialinstitutions based upon their credit ratings and other factors.

To determine the fair valuesof derivative instruments, the SPG Operating Partnership uses standard marketconventions and techniques such as discounted cash flow analysis, optionpricing models, and termination cost are used to determine fair value at eachbalance sheet date. All methods of assessing fair value result in a generalapproximation of value, and such value may never actually be realized.

**Note 6 -Investment in Unconsolidated Entities**

 

Summary financialinformation of the SPG Operating Partnership’s investment in partnerships andjoint ventures accounted for using the equity method of accounting and asummary of the SPG Operating Partnership’s investment in and share of incomefrom such partnerships and joint ventures follow:

 

 

 

**September 30,**

 

**December  31,**

 

**BALANCE SHEETS**

 

**2001**

 

**2000**

*** ***

**Assets:**

 

 

 

 

 

Investment  properties at cost, net

 

$

6,492,997

 

$

6,563,470

 

Cash and cash  equivalents

 

187,942

 

191,687

 

Tenant  receivables

 

165,019

 

165,583

 

Other assets

 

325,421

 

278,294

 

Total  assets

 

$

7,171,379

 

$

7,199,034

 

 

 

 

 

 

 

**Liabilities and Partners' Equity:**

 

 

 

 

 

Mortgages and  other notes payable

 

$

5,452,131

 

$

5,135,488

 

Accounts  payable, accrued expenses and other liabilities

 

368,446

 

348,375

 

Total  liabilities

 

5,820,577

 

5,483,863

 

Partners' equity

 

1,350,802

 

1,715,171

 

Total  liabilities and partners' equity

 

$

7,171,379

 

$

7,199,034

 

 

 

 

 

 

 

**The SPG Operating Partnership’s  Share of:**

 

 

 

 

 

Total assets

 

$

2,981,753

 

$

2,924,666

 

Partners’ equity

 

$

698,916

 

$

672,593

 

Add: Excess  Investment

 

563,190

 

558,675

 

The SPG  Operating Partnership’s net Investment in Joint Ventures

 

$

1,262,106

 

$

1,231,268

 

 

 

 

 

**For the  Three Months Ended September 30,**

 

**For The  Nine Months Ended September 30,**

 

**STATEMENTS OF OPERATIONS**

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

**Revenue:**

 

 

 

 

 

 

 

 

 

Minimum rent

 

$

200,714

 

$

191,268

 

$

600,157

 

$

555,719

 

Overage rent

 

5,452

 

5,476

 

14,977

 

14,504

 

Tenant  reimbursements

 

93,788

 

94,082

 

290,187

 

278,192

 

Other income

 

16,137

 

20,076

 

43,761

 

39,975

 

Total revenue

 

316,091

 

310,902

 

949,082

 

888,390

 

 

 

 

 

 

 

 

 

 

 

**Operating Expenses:**

 

 

 

 

 

 

 

 

 

Operating  expenses and other

 

117,989

 

112,656

 

357,849

 

334,104

 

Depreciation and  amortization

 

66,942

 

62,487

 

194,734

 

174,258

 

Total operating  expenses

 

184,931

 

175,143

 

552,583

 

508,362

 

 

 

 

 

 

 

 

 

 

 

**Operating Income**

 

131,160

 

135,759

 

396,499

 

380,028

 

**Interest Expense**

 

88,874

 

91,094

 

275,691

 

262,232

 

**Income Before Extraordinary Items  and Cumulative Effect of Accounting Change (“IBEC”)**

 

42,286

 

44,665

 

120,808

 

117,796

 

**Extraordinary Items**

 

(220

)

--

 

(295

)

--

 

**Cumulative Effect of Accounting  Change**

 

--

 

--

 

(2,883

)

(3,948

)

**Net Income**

 

$

42,066

 

$

44,665

 

$

117,630

 

$

113,848

 

**Third-Party Investors' Share of  IBEC**

 

27,602

 

25,889

 

77,762

 

68,507

 

**The SPG Operating Partnership’s  Share of IBEC**

 

$

14,684

 

$

18,776

 

$

43,046

 

$

49,289

 

**Amortization of Excess Investment**

 

5,101

 

5,467

 

16,049

 

16,050

 

**Income from Unconsolidated Entities**

 

$

9,583

 

$

13,309

 

$

26,997

 

$

33,239

 

 

The SPG OperatingPartnership’s share of consolidated net income of the Management Company,excluded from the tables above, after intercompany profit eliminations, was$(2,750) and $7,091 for the three-month periods ended September 30, 2001 and2000, respectively, and $5,547 and $20,374 for the nine month periods endedSeptember 30, 2001 and 2000, respectively. The SPG Operating Partnership’s netinvestment in the Management Company, excluded from the tables above, was $55,938and $32,936 as of September 30, 2001 and December 31, 2000, respectively.

 

In addition, the SPGOperating Partnership has guaranteed its pro rata share of a joint venture’slease obligations up to $55.4 million.

 

**Note7 - Debt**

 

At September 30, 2001, ofthe SPG Operating Partnership’s consolidated debt, $6,833,415 was fixed-rateand $1,958,675 was variable-rate. The SPG Operating Partnership’s pro ratashare of indebtedness of the unconsolidated joint venture Properties as ofSeptember 30, 2001 was $2,281,283.

 

On January 11, 2001, theSPG Operating Partnership issued $500.0 million of unsecured debt toinstitutional investors pursuant to Rule 144A in two tranches.  The first tranche is $300.0 million bearingan interest rate of 7 3/8% due January 20, 2006 and the second tranche is$200.0 million bearing an interest rate of 7 3/4% due January 20, 2011.  The net proceeds of the offering were usedto repay the remaining portion of the indebtedness under the CPI MergerFacility due March 24, 2001 and to repay a portion of the CPI Merger Facilitydue September 24, 2001.

 

On August 6, 2001, theSPG Operating Partnership retired the third and final tranche of the CPI mergerfacility totaling $435.0 million.  Fundsused to retire this debt were generated primarily from a $277.0 millionfinancing of four mall properties at a fixed rate of 6.99% and a $110.0 millionfinancing of one office complex at LIBOR plus 115 basis points.

 

Subsequent to September30, 2001, the SPG Operating Partnership completed the sale of $750.0 million of6.375% senior unsecured notes due November 15, 2007.  Net proceeds from the offering were used to reduce theoutstanding balance of the Credit Facility

 

**Note 8 – Partners’ Equity**

 

On March 26 2001,474,625 Paired Shares of restricted stock were deemed earned and awarded underThe Simon Property Group 1998 Stock Incentive Plan (the “1998 Plan”), adoptedby the SPG Operating Partnership and SPG, at a value of $25.85 per PairedShare.  The cost of restricted stockgrants is based upon the stock’s fair market value at the time such stock isearned, awarded and issued and is charged to partners' equity and subsequentlyamortized against earnings of the SPG Operating Partnership over the vestingperiod.  In addition, 1,032,583 stockoptions to purchase Paired Shares were granted on the same day under the 1998Plan.

 

On May 22, 2001,1,220 units of the SPG Operating Partnership’s Series A Convertible PreferredUnits were converted into 46,355 Units. In addition, another 442 Units were issued to the holders of theconvertible units in lieu of the cash dividends allocable to those preferredunits.

 

As of September30, 2001, $10.3 million of accumulated other comprehensive income is includedin Partners’ Equity, of which $7.5 million is included in General Partners’equity and $2.8 million is included in Limited Partners’ equity.  Accumulated other comprehensive incomeconsists of unrealized losses on derivative instruments.  There was no accumulated other comprehensiveincome as of December 31, 2000.

 

Effective July 1,2001, SPG Properties, Inc. merged with and into SPG.  On January 27, 2000, SD Property Group, Inc. merged with and intoSPG Properties, Inc.

 

**Note 9 - Commitments andContingencies**

 

***Litigation***

 

*Triple Five of Minnesota, Inc., a Minnesota corporation, v.Melvin Simon, et. al.*On or about November 9, 1999, TripleFive of Minnesota, Inc. (“Triple Five”) commenced an action in the DistrictCourt for the State of Minnesota, Fourth Judicial District, against, amongothers, Mall of America, certain members of the Simon family and entitiesallegedly controlled by such individuals, and the SPG Operating Partnership.Two transactions form the basis of the complaint: (i) the sale by TeachersInsurance and Annuity Association of America of one-half of its partnershipinterest in Mall of America Company and Minntertainment Company to the SPGOperating Partnership and related entities (the “Teachers Sale”); and (ii) afinancing transaction involving a loan in the amount of $312,000 obtained fromThe Chase Manhattan Bank (“Chase”) that is secured by a mortgage placed on Mallof America’s assets (the “Chase Mortgage”).

 

The complaint, which contains twelve counts, seeksremedies of damages, rescission, constructive trust, accounting, and specificperformance. Although the complaint names all defendants in several counts, theSPG Operating Partnership is specifically identified as a defendant inconnection with the Teachers Sale.  Thelitigation is currently in the discovery stage.

 

The SPG Operating Partnership believes that the TripleFive litigation is without merit and intends to defend the action vigorously.Simon Group believes that the Triple Five litigation will not have a materialadverse effect on the SPG Operating Partnership. Given the early stage of thelitigation it is not possible to provide an assurance of the ultimate outcomeof the litigation or an estimate of the amount or range of potential loss, ifany.

 
**
*Carlo Angostinelli et al. v. DeBartolo Realty Corp. etal.*OnOctober 16, 1996, a complaint was filed in the Court of Common Pleas ofMahoning County, Ohio, captioned Carlo Angostinelli et al. v. DeBartoloRealty Corp. et al. The named defendants are SD Property Group, Inc., anindirect 99%-owned subsidiary of SPG, and DeBartolo Properties Management,Inc., a subsidiary of the Management Company, and the plaintiffs are 27 formeremployees of the defendants. In the complaint, the plaintiffs alleged that theywere recipients of deferred stock grants under the DeBartolo Realty Corporation(“DRC”) Stock Incentive Plan (the “DRC Plan”) and that these grants immediatelyvested under the DRC Plan’s “change in control” provision as a result of theDRC Merger. Plaintiffs asserted that the defendants’ refusal to issue themapproximately 542,000 shares of DRC common stock, which is equivalent toapproximately 370,000 Paired Shares computed at the 0.68 exchange ratio used inthe DRC Merger, constituted a breach of contract and a breach of the impliedcovenant of good faith and fair dealing under Ohio law. Plaintiffs soughtdamages equal to such number of shares of DRC common stock, or cash in lieuthereof, equal to all deferred stock ever granted to them under the DRC Plan,dividends on such stock from the time of the grants, compensatory damages for breachof the implied covenant of good faith and fair dealing, and punitive damages.The plaintiffs and the defendants each filed motions for summary judgment. OnOctober 31, 1997, the Court of Common Pleas entered a judgment in favor of thedefendants granting their motion for summary judgment. The plaintiffs appealedthis judgment to the Seventh District Court of Appeals in Ohio. On August 18,1999, the District Court of Appeals reversed the summary judgment order infavor of the defendants entered by the Common Pleas Court and grantedplaintiffs’ cross motion for summary judgment, remanding the matter to theCommon Pleas Court for the determination of plaintiffs’ damages. The defendantspetitioned the Ohio Supreme Court asking that they exercise their discretion toreview and reverse the Appellate Court decision, but the Ohio Supreme Court didnot grant the petition for review. The case was remanded to the Court of CommonPleas of Mahoning County, Ohio, to conduct discovery relevant to eachplaintiff’s damages and the counterclaims asserted by the SPG OperatingPartnership. The Trial Court referred these matters to a Magistrate. Plaintiffsfiled a Supplemental Motion for Summary Judgment on the question ofdamages.  The Magistrate ruled on thecounterclaims and found in Defendants’ favor on one of them. On December 27,2000, the Trial Court rendered judgment for the plaintiffs in the combinedtotal amount of approximately $12,000, which includes a set-off ofapproximately $2,000 with impact to two of the plaintiffs. Defendants haveappealed this judgment and plaintiffs have cross-appealed.  The judgment has accrued interest at 10% perannum from and after December 27, 2000. Those appeals are pending before the District Court of Appeals and therecan be no execution upon the judgment while the appeals are pending.  The SPG Operating Partnership recorded a$12,000 loss in the third quarter of 1999 related to this litigation as anunusual item.

 

*Roel Vento et al v. Tom Taylor et al.* Anaffiliate of the SPG Operating Partnership is a defendant in litigationentitled Roel Vento et al v. Tom Taylor et al., in the District Court ofCameron County, Texas, in which a judgment in the amount of $7,800 was enteredagainst all defendants. This judgment includes approximately $6,500 of punitivedamages and is based upon a jury’s findings on four separate theories ofliability including fraud, intentional infliction of emotional distress,tortious interference with contract and civil conspiracy arising out of thesale of a business operating under a temporary license agreement at Valle VistaMall in Harlingen, Texas. The SPG Operating Partnership appealed the verdictand on May 6, 1999, the Thirteenth Judicial District (Corpus Christi) of theTexas Court of Appeals issued an opinion reducing the trial court verdict to$3,364 plus interest. The SPG Operating Partnership filed a petition for a writof certiorari to the Texas Supreme Court requesting that they review andreverse the determination of the Appellate Court. The Texas Supreme Courtgranted certiorari and on April 26, 2001 rendered a unanimous 9-0 opinionagainst the Plaintiffs and ordered that they take nothing from the SPGOperating Partnership defendants. Plaintiffs subsequently filed a motion forreconsideration with the Texas Supreme Court which was denied.  Accordingly, this litigation has concludedand the SPG Operating Partnership has no liability to plaintiffs.

 

The SPG Operating Partnership currently is not subjectto any other material litigation other than routine litigation, claims andadministrative proceedings arising in the ordinary course of business. On thebasis of consultation with counsel, management believes that such routinelitigation, claims and administrative proceedings will not have a material adverseimpact on the SPG Operating Partnership's financial position or its results ofoperations.

 
**Note 10 - Real EstateDisposals and Other**
 

During the first ninemonths of 2001, the SPG Operating Partnership sold its ownership interest inone regional mall, one community center, and one office building for a combinedgross sales price of $20.3 million. These sales resulted in a net combined gain of $2.6 million.

 

On December 28,2000, Montgomery Ward LLC and certain of its related entities (“Ward”) filed avoluntary petition for relief under Chapter 11 of the Bankruptcy Code.   On March 1 2001, a limited liabilitycompany, Kimsward LLC (“Kimsward”), was formed to designate persons or entitiesto whom the Ward real estate assets will be sold.  These transactions are subject to Bankruptcy Court approval.  The Management Company’s interest inKimsward is 18.5% and its remaining investment in Kimsward was $1.4 million asof September 30, 2001.  During the firstnine months of 2001 the Management Company recorded $16.5 million of equity inincome from Kimsward.  During the firstnine months, the SPG Operating Partnership charged the Management Company a$5.7 million fee for services rendered to the Management Company in connectionwith the Kimsward transactions, which is included in other income in theaccompanying condensed consolidated statements of operations.

 

During the thirdquarter, the SPG Operating Partnership wrote-off its investment in clixnmortarand miscellaneous technology investments resulting in a decrease in resultsfrom operations of $16.6 million, of which $2.7 million is included in otherexpenses and $13.9 million, net,  isincluded in income from unconsolidated entities.

 
**Note 11 – New AccountingPronouncements**
 

On July 20, 2001, the FASB issued SFAS No. 141,“Business Combinations” and SFAS No. 142 “Goodwill and Other IntangibleAssets”.  SFAS 141 further clarifies thecriteria to recognize intangible assets separately from goodwill.  SFAS 141 is effective for the SPG OperatingPartnership for any business combination accounted for under the purchasemethod that is completed after June 30, 2001. SFAS No. 142 requires that goodwill and indefinite lived intangibleassets are no longer amortized but are reviewed annually, or more frequently ifimpairment indicators arise, for impairment. Separable intangible assets that are not deemed to have an indefinitelife will continue to be amortized over their useful lives but with no maximumlife.  The amortization provisions ofSFAS 142 apply to goodwill and intangible assets acquired by the SPG OperatingPartnership after June 30, 2001.  Withrespect to goodwill and intangible assets acquired prior to July 1, 2001, theSPG Operating Partnership is required to adopt SFAS 142 on January 1, 2002 atwhich time amortization of the remaining book value of goodwill will cease andthe new impairment-only approach will apply and may not be appliedretroactively.  Excluding the impact ofimpairment, if any, the impact of SFAS 142 will be to eliminate the amortizationof goodwill thereby increasing the SPG Operating Partnership’s net income byapproximately $1.2 million annually.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” thatsupersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed of.”  In addition, SFAS No. 144 supersedes the accounting and reportingprovisions of APB Opinion No. 30, “Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions”forthe disposal of a segment of a business.* * SFAS No. 144 is a broad statement thatprovides framework for the evaluation of impairment of long-lived assets, thetreatment for assets held for sale or to be otherwise disposed of, and thereporting of discontinued operations. The effective date for adoption of SFAS No. 144 is January 1, 2002.  The SPG Operating Partnership is currentlyevaluating the impact of SFAS No. 144.

 
******Item 2.Management's Discussion and Analysis of Financial Condition and Results ofOperations**
 

You should read thefollowing discussion in conjunction with the financial statements and notesthereto that are included in this Form 10-Q. Certain statements made in thisreport may be deemed “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995. Although we believe theexpectations reflected in any forward-looking statements are based onreasonable assumptions, we can give no assurance that our expectations will beattained, and it is possible that our actual results may differ materially fromthose indicated by these forward-looking statements due to a variety of risksand uncertainties. Those risks and uncertainties include, but are not limitedto, the national, regional and local economic climate, competitive marketforces, changes in market rental rates, trends in the retail industry, theinability to collect rent due to the bankruptcy or insolvency of tenants orotherwise, and changes in market rates of interest.  We undertake no duty or obligation to update or revise theseforward-looking statements, whether as a result of new information, futuredevelopments, or otherwise.

 

***Overview***

 

Who we are - SimonProperty Group, L.P. (the “SPG Operating Partnership”), a Delaware limitedpartnership, is a majority owned subsidiary of Simon Property Group Inc.(“SPG”), a Delaware corporation. SPG is a self-administered and self-managedreal estate investment trust (“REIT”). Each share of common stock of SPG ispaired with a beneficial interest in 1/100th of a share of commonstock of SPG Realty Consultants, Inc., also a Delaware corporation (“SRC” andtogether with SPG, the “Companies”). Units of partnership interests (“Units”)in the SPG Operating Partnership are paired with a Unit in SPG RealtyConsultants, L.P. (the “SRC Operating Partnership”). The SRC OperatingPartnership is the primary subsidiary of SRC. In this report, the terms “we”,“us” and “our” refer to the SPG Operating Partnership and its subsidiaries.

 

The followingProperty acquisitions and openings impacted our consolidated results ofoperations in the comparative periods.  We opened Orlando Premium Outlots in May 2000, Arundel Mills inNovember 2000, and Montreal Forum in May 2001. In addition, we sold interests in several Properties throughout thecomparative periods (collectively with the acquisitions and openings, the“Property Transactions”).  See “Liquidityand Capital Resources” and Note 10 to the financial statements for additionalinformation about acquisitions, openings and disposals during the comparativeperiod.

 

***Results of Operations***

 

*Three Months Ended September 30,2001 vs. Three Months Ended September 30, 2000*

 

Operating incomedecreased $6.8 million or 3.1% in 2001 as compared to 2000.  This decrease included a $11.9 millionincrease in minimum rents, excluding our Simon Brand Venture (“SBV”) and SimonBusiness Network (“SBN”) initiatives, and a $0.8 million increase inmiscellaneous income.  These increaseswere offset by a $4.7 million increase in depreciation and amortization, a $3.4million decrease in net tenant reimbursements, a $2.6 million decrease inconsolidated revenues realized from our SBV and SBN initiatives, a $1.1 milliondecrease in overage rents, and a $5.9 million increase in other expenses.  The increase in minimum rent primarilyresults from increased occupancy levels and the replacement of expiring tenantleases with renewal leases at higher minimum base rents. The decrease in nettenant reimbursements is primarily the result of true-up billings and lowerspending levels on recoverable expenditures. The increase in other expenses is the result of a non-recurring $3.0million write-down of an investment and $2.7 million due to the write-off ofmiscellaneous technology investments. The impact of Property Transactions is an decrease in operating incomeof $0.7 million for the comparative periods.

 

Income fromunconsolidated entities decreased $13.6 million in 2001, resulting from a $3.7million decrease in income from unconsolidated partnerships and joint venturesand a $9.8 million decrease in income from the Management Company.  The decrease in joint venture income isprimarily related to our pro rata share of the increased losses in thetechnology start up activities of MerchantWired, LLC of $5.1 million, partiallyoffset by lower interest rates and the full period impact of two propertieswhich opened in 2000.  Included in incomefrom the Management Company is $6.0 million of income from the Kimswardtransaction, offset by our net $13.9 million share of the write-off oftechnology investments, primarily clixnmortar, and a decrease in fee revenues.

 

Interest expense duringthe three months ended September 30, 2001 decreased $12.0 million, or 7.5%compared to the same period in 2000. This decrease is primarily due to lower interest rates during 2001 andreductions in the corporate credit facilities offset by the issuance of $500.0 millionof unsecured notes on January 11, 2001.

 

Net income was $69.7million for the three months ended September 30, 2001, which reflects a $8.7million or 11.1% decrease compared to the same period in 2000, primarily forthe reasons discussed above. Net income was allocated to the partners of theSPG Operating Partnership based on their preferred Unit preferences andweighted average ownership interests in the SPG Operating Partnerships duringthe period.

 

Preferreddistributions of the SPG Operating Partnership represent distributions onpreferred Units.

 

*Nine Months Ended September 30, 2001vs. Nine Months Ended September 30, 2000*

 

Operating incomedecreased $16.6 million or 2.6% in 2001 as compared to 2000.  This decrease included a $35.8 million increasein minimum rents, excluding our SBV and SBN initiatives, a $8.7 millionincrease in consolidated revenues realized from our SBV and SBNinitiatives.  These increases wereoffset by a $22.1 million increase in depreciation and amortization, a $18.2million decrease in net tenant reimbursements, a $6.9 million decrease inoutlot land sales, a $2.7 million decrease in overage rents, a $0.8 milliondecrease in miscellaneous income, and a $4.5 million increase in otherexpenses.  The increase in minimum rentprimarily results from increased occupancy levels and the replacement ofexpiring tenant leases with renewal leases at higher minimum base rents.  The increase in SBV and SBN initiativerevenues includes $5.6 million from a contract termination payment. Theincrease in depreciation and amortization is primarily due to an increase indepreciable real estate realized through renovation and expansionactivities.  The decrease in net tenantreimbursements is primarily the result of true-up billings and lower spendinglevels on recoverable expenditures. The decrease in miscellaneous incomeincludes $5.7 million in fees associated with the Kimsward transaction offsetby a decrease in various miscellaneous income items in the prior year.  The increase in other expenses is the resultof a non-recurring $3.0 million write-down of an investment and $2.7 milliondue to the write-off of miscellaneous technology investments partially offsetby decreases in various other expenses. The impact of Property Transactions isa decrease in operating income of $3.9 million for the comparative period.

 

Income fromunconsolidated entities decreased $21.1 million in 2001, resulting from a $14.8million decrease in income from the Management Company and a $6.3 milliondecrease in income from unconsolidated partnerships and joint ventures.  Included in the Management Company decreaseis our net $13.9 million share of the write-off of technology investments,primarily clixnmortar,, as well as a decrease in fee revenues.  These amounts arepartially offset by $10.0 million of income from Kimsward, LLC, net of feescharged by SPG, L.P.  The decrease injoint venture income is primarily related to our pro rata share of theincreased losses in the technology start up activities of MerchantWired, LLC of$11.3 million, partially offset by lower interest rates and the full yearimpact of opening two properties in 2000.

 

Interest expense duringthe first nine months of 2001 decreased $18.6 million, or 3.9% compared to thesame period in 2000.  This decrease isprimarily due to lower interest rates during 2001 and reductions in thecorporate credit facilities offset by the issuance of $500.0 million ofunsecured notes on January 11, 2001.

 

During the first quarterof 2001 we recorded a $1.6 million expense as a cumulative effect of anaccounting change, which includes our $1.4 million share from unconsolidatedentities, due to the adoption of SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” asamended.  See Note 5 of the Notes toUnaudited Condensed Financial Statements included in Item 1 of this Form 10-Qfor a discussion of the cumulative effect of accounting change.  During the first quarter of 2000 we recordeda $12.3 million expense as a cumulative effect of an accounting change, whichincludes our $1.8 million share from unconsolidated entities, due to theadoption of Staff Accounting Bulletin No. 101, which addressed certain revenuerecognition policies, including the accounting for overage rent by a landlord.

 

The $2.6 million net gainon the sales of assets in 2001 results from the sale of our interests in oneregional mall, one community center, and an office building for a gross salesprice of approximately $20.3 million. In 2000, we recognized a net gain of $8.8million on the sale of two regional malls, four community centers, and oneoffice building, partially offset by a $10.6 million asset write-down on twoProperties.

 

Net income was $200.5million for the nine months ended September 30, 2001, which reflects a $14.8million or 6.9% decrease compared to the same period in 2000, primarily for thereasons discussed above. Net income was allocated to the partners of the SPGOperating Partnership based on their preferred Unit preferences and weightedaverage ownership interests in the SPG Operating Partnerships during theperiod.

 

Preferreddistributions of the SPG Operating Partnership represent distributions onpreferred Units.

 

***Liquidity and Capital Resources***

 

As of September 30, 2001,our balance of unrestricted cash and cash equivalents was $149.9 million,including $44.8 million related to our gift certificate program, which we donot consider available for general working capital purposes.  We have a $1.25 billion unsecured revolvingcredit facility (the “Credit Facility”) which had available credit of $522.5million as of September 30, 2001. The Credit Facility bears interest at LIBORplus 65 basis points and has an initial maturity of August 2002, with anadditional one-year extension available at our option. SPG and the SPGOperating Partnership also have access to public equity and debt markets.  Our current corporate bond ratings are Baa1by Moody’s Investors Service and BBB+ by Standard & Poor’s.

 

We anticipate that cashgenerated from operating performance will provide the funds we need on a short-and long-term basis for operating expenses, interest expense on outstandingindebtedness, recurring capital expenditures, and distributions to Unitholdersso that SPG can comply with REIT requirements. Sources of capital fornonrecurring capital expenditures, such as major building renovations andexpansions, as well as for scheduled principal payments, including balloonpayments, on outstanding indebtedness are expected to be obtained from:

 

•      excess cashgenerated from operating performance

•      workingcapital reserves

•      additionaldebt financing and

•      additionalequity raised in the public markets.

 

*Financingand Debt*

 

At September 30, 2001, wehad consolidated debt of $8.8 billion, of which $6.8 billion was fixed-ratedebt bearing interest at a weighted average rate of 7.3% and $2.0 billion wasvariable-rate debt bearing interest at a weighted average rate of 3.9%.  As of September 30, 2001, we had interestrate protection agreements related to consolidated variable-rate debt with atotal carrying amount of $390.2 million. Our interest rate protectionagreements did not materially impact interest expense or weighted averageborrowing rates for the nine months ended September 30, 2001 or 2000.

 

Our share of total scheduled principal payments ofmortgage and other indebtedness, including unconsolidated joint ventureindebtedness over the next five years is $6.0 billion, with $4.9 billionthereafter. We, together with SPG and the SRC Operating Partnership, have acombined ratio of consolidated debt-to-market capitalization was 54.5% and57.0% at September 30, 2001 and December 31, 2000, respectively.

 

On August 6, 2001, weretired the third and final tranche of the CPI merger facility totaling $435.0million. We generated the funds used to retire this debt primarily from our$277.0 million financing of four mall properties at fixed rate of 6.99%, our$110.0 million financing of one office complex at LIBOR plus 115 basis points,and excess cash flow

 

Subsequent to September30, 2001, we completed the sale of $750.0 million of 6.375% senior unsecurednotes due November 15, 2007.  Netproceeds from the offering were initially used to reduce the outstandingbalance of the Credit Facility. Ultimately, we plan to retire mortgage indebtedness on six wholly-ownedproperties and to retire $250.0 million of 9% bonds that mature in early 2002.

 

See Note 7 of the Notesto Unaudited Condensed Financial Statements included in Item 1 of this Form10-Q for a discussion of the unsecured debt issued on January 11, 2001.

 

*Acquisitionsand Disposals*

 

Subsequent to September 30, 2001, we purchased a 50%interest in Fashion Valley Mall located in San Diego, California for a purchaseprice of $165.0 million which includes our share of a $200.0 million, sevenyear mortgage at a fixed rate of 6.5% issued by the partnership owning theproperty concurrent with the acquisition. We will also assume management responsibilities for this 1.7 millionsquare foot open-air, super-regional mall.

 

 

We continue to review and evaluate a limited number ofacquisition opportunities and will continue our focus on acquiring highlyproductive, market dominant malls. We believe that acquisition activity in thenear term will be a less significant component of our growth strategy andamounts available under the Credit Facility, together with the ability to issueUnits, provide adequate means to finance certain acquisitions. We cannot assureyou that we will not be required to, or will not elect to, even if not requiredto, obtain funds from outside sources, including through the sale of debt orequity securities, to finance significant acquisitions, if any.

 

*Dispositions*

 

During the first nine months of 2001, we sold our interests in oneregional mall, one community center, and one office building for a combinedgross sales price of $20.3 million, resulting in a net combined gain of $2.6million. The net proceeds of approximately $19.6 million were used for generalworking capital purposes.

 

In addition to theProperty sales described above, as a continuing part of our long-term strategicplan, we continue to pursue the sale of our remaining non-retail holdings and anumber of retail assets that are no longer aligned with our strategic criteria,including four Properties currently under contract for sale. We expect the saleprices of our non-core assets, if sold, will not differ materially from thecarrying value of the related assets.

 

*Development Activity*

 

*New Developments.*Development activities are an ongoing part of our business. During 2000, weopened two new Properties aggregating approximately 1.7 million square feet ofGLA. In total, we invested approximately $179.6 million on new developments in2000. With fewer new developments currently under construction, we expect 2001development costs to be approximately $65.6 million.

 

*StrategicExpansions and Renovations.*One of our key objectives is toincrease the profitability and market share of the Properties through thecompletion of strategic renovations and expansions. During 2000, we investedapproximately $201.6 million on redevelopment projects and completed five majorredevelopment projects, which added approximately 1.2 million square feet ofGLA to the Portfolio. We have a number of renovation and/or expansion projectscurrently under construction, or in preconstruction development and expect toinvest approximately $129.0 million on redevelopment in 2001.

* *

*International Expansion*.  The SPG Operating Partnership has a 32.3%ownership interest in European Retail Enterprises, B.V. (“ERE”), which isaccounted for using the equity method of accounting. Prior to January 2001, theManagement Company had a 29% ownership interest in Groupe BEG, S.A. (“BEG”)which was accounted for using the equity method of accounting.  In January 2001, BEG merged with ERE andbecame a wholly-owned subsidiary of ERE. During the third quarter of 2001 theManagement Company transferred its interest in ERE to the SPG OperatingPartnership through the intercompany note to simplify the organizationalstructure.  BEG and ERE are fullyintegrated European retail real estate developers, lessors and managers. Ourcurrent total cash investment in ERE and BEG, including subordinated debt, isapproximately $69.9 million. The current estimated additional commitment, includingsubordinated debt, is approximately $34.7 million.  However, since our future commitments are subject to certainperformance and other criteria, including our approval of development projects,these additional commitments may vary. The agreements with BEGand ERE are structured to allow us to acquire an additional 29.4% ownershipinterest over time. As of September 30, 2001, BEG and ERE had three Propertiesopen in Poland and two in France.

 

*Technology Initiatives.*We continue our technologyinitiatives through two investments including MerchantWired LLC, andConstellation Real Technologies including its investment in FacilityPro.com asdescribed in our annual report. The SPG Operating Partnershipowns an approximately 53% indirect noncontrolling interest in MerchantWired LLCand accounts for it using the equity method of accounting.  MerchantWired LLC is currently consideringdiscussions with third parties, primarily telecommunications companies, to actas further partners in the venture.  Thefuture operations of MerchantWired LLC may be impacted by the outcome of thesediscussions.

 

These activities may generate losses in the initialyears of operation, while programs are being developed and customer bases arebeing established. The investments have a total carrying amount ofapproximately $33.5 million as of September 30, 2001.  We expect to continue to invest in these programs over the nexttwo years and together with the other members of MerchantWired, LLC haveguaranteed our pro rata share of certain equipment lease payments.  We cannot assure you that our technologyprograms will succeed.

 

*Distributions.*The SPG OperatingPartnership declared a distribution of $0.525 per Unit in the third quarter of2001. The current annual distribution rate is $2.10 per Unit.  Distributions during 2000 aggregated $2.02per Unit. Future distributions will be determined based on actual results ofoperations and cash available for distribution.

 

***Investing and Financing Activities***

 

Cash used in investingactivities of $156.3 million for the nine months ended September 30, 2001includes capital expenditures of $216.8 million and investments inunconsolidated joint ventures of $119.8 million.  Capital expenditures include development costs of $54.4 million,renovation and expansion costs of $110.6 million and tenant costs and otheroperational capital expenditures of $51.8 million.  These cash uses are partially offset by distributions fromunconsolidated entities of $145.3 million, cash from the consolidation of ASPof $8.2 million, $5.6 million in loan proceeds from the SRC OperatingPartnership, $1.6 million in loan proceeds from the Management Company, and netproceeds of $19.6 million from the sale of three properties previouslymentioned.

 

Cash used in financingactivities for the nine months ended September 30, 2001 was $369.5 million andincludes net distributions of $427.2 million, offset by net borrowings of $57.7million.

 

***Inflation***

 

Inflationremains relatively low and has had a minimal impact on the operatingperformance of the Properties. Nonetheless, substantially all of the tenants’leases contain provisions designed to lessen the impact of inflation. Theseprovisions include clauses enabling us to receive percentage rentals based ontenants’ gross sales, which generally increase as prices rise, and/orescalation clauses, which generally increase rental rates during the terms ofthe leases. In addition, many of the leases are for terms of less than tenyears, which may enable us to replace existing leases with new leases at higherbase and/or percentage rentals if rents of the existing leases are below thethen-existing market rate. Substantially all of the leases, other than thosefor anchors, require the tenants to pay a proportionate share of operatingexpenses, including common area maintenance, real estate taxes and insurance,thereby reducing our exposure to increases in costs and operating expensesresulting from inflation.

 

However,inflation may have a negative impact on some of our other operating items.Interest and general and administrative expenses may be adversely affected byinflation as these specified costs could increase at a rate higher than rents.Also, for tenant leases with stated rent increases, inflation may have a negativeeffect as the stated rent increases in these leases could be lower than theincrease in inflation at any given time.

 

***Seasonality***

 

Theshopping center industry is seasonal in nature, particularly in the fourthquarter during the holiday season, when tenant occupancy and retail sales aretypically at their highest levels. In addition, shopping malls achieve most oftheir temporary tenant rents during the holiday season. As a result of theabove, our earnings are generally highest in the fourth quarter of each year.

 

***Retail Climate and Tenant Bankruptcies***

 

The recent events of September 11, 2001 have negatively impacted theoverall economy in which we operate. These pressures may further affect, amongst other factors, consumerconfidence and job growth.  Asignificant portion of our overage and percent rent revenue is typicallyrecognized during the fourth quarter of our fiscal year.  We are unable to determine what effect theseworld events may have on consumer spending for the fourth quarter 2001 and beyond.  If the impact of these events on consumerspending result in weak retail sales, they could negatively impact our abilityto recognize overage and percent rent revenue.

 

A number of local, regional, and national retailers,including both in-line and anchor tenants, have recently announced storeclosings or filed for bankruptcy.  Somechangeover in tenants is normal in our business.  We lost 800,000 square feet of tenants in 2000 and 1,600,000square feet in the first nine months of 2001 to bankruptcies.  Pressures which affect consumer confidence,job growth, energy costs and income gains, however, can affect retail salesgrowth and a continuing soft economic cycle may impact our ability to retenantproperty vacancies resulting from these store closings or bankruptcies.

 

The geographical diversityof our portfolio mitigates some of our risk in the event of an economicdownturn.  In addition, the diversity ofour tenant mix also is a factor because no single retailer represents neithermore than 2.0% of total GLA nor more than 3.5% of our annualized base minimumrent.  Bankruptcies and store closingsmay, in some circumstances, create opportunities for us to release spaces athigher rents to tenants with enhanced sales performance.  Our previously demonstrated ability tosuccessfully retenant anchor and in line store locations reflects ourresilience to fluctuations in economic cycles. While these factors reflect some of the inherent strengths of ourportfolio in a difficult retail environment, successful execution of areleasing strategy is not assured.
** ********Item 3. Qualitative andQuantitative Disclosure About Market Risk**** **
*SensitivityAnalysis.* Our futureearnings, cash flows and fair values relating to financial instruments aredependent upon prevalent market rates of interest, primarily LIBOR. Based uponconsolidated indebtedness and interest rates at September 30, 2001, a 0.50%increase in the market rates of interest would decrease annual future earningsand cash flows by approximately $9.0 million, and would decrease the fair valueof debt by approximately $462.9 million. A 0.50% decrease in the market ratesof interest would increase annual future earnings and cash flows byapproximately $9.0 million, and would increase the fair value of debt by approximately$532.3 million.  We manage our exposureto interest rate risk by a combination of interest rate protection agreementsto effectively fix or cap a portion of our variable rate debt, or in the caseof a fair value hedge, to effectively convert fixed rate debt to variable ratedebt and by refinancing fixed rate debt at times when rates and terms areappropriate.

 

**Part II - Other Information**

 

Item 1:  LegalProceedings

 

Please refer to Note 9 ofthe financial statements for a summary of material pending litigation.

 

Item 6:  Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

4.1   Ninth Supplemental Indenture relating to theNotes

4.2   Form of 6 3/8% Notes due 2007 (included asExhibit A to the Form of Ninth Supplemental Indenture filed as Exhibit 4.1)

 

(b) Reports on Form 8-K

 

On October 22, 2001 underItem 5 – Other Events, the SPG Operating Partnership reported the issuance of apress release on October 19, 2001 by Simon Property Group, Inc. regardingexpected third quarter charges and funds from operations.

 

On October 25, 2001 underItem 5 – Other Events, the SPG Operating Partnership reported the offering andsale of $750,000,000 aggregate principal amount of its 6 3/8% Notes due 2007.

 

**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

**SIMON  PROPERTY GROUP, L.P.**

 

**By:  Simon Property Group, Inc.**

 

**General  Partner**

 

 

 

 

 

 

 

/s/ Stephen E. Sterrett

 

Stephen E. Sterrett,

 

Executive Vice President and Chief Financial Officer

 

 

 

 

 

Date: November 14, 2001

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