CEO PROFILE RESEARCH REPORT | 6/15/20 DAVID SIMON Chairman/President/CEO, Simon Rating: 5.5 (out of 7) Property Group (Ticker: SPG) STRATEGIC VISION 5 CAPITAL ALLOCATION 5 PATTERN OF SUCCESS 5 ALIGNMENT OF INTERESTS 6 SHAREHOLDER FRIENDLY 6 INTRODUCTION David Simon has served as CEO of Simon Property Group (SPG) since 1995, just two years after he spearheaded the reorganization of family business Melvin Simon & Associates (a shopping center leasing company) as a publicly traded entity. Melvin Simon & Associates was the joint venture of brothers Melvin Simon (David’s father) and Herbert Simon (David’s Uncle), which they founded in 1959. Simon has overseen the growth of SPG to become the largest retail REIT (Real Estate Investment Trust) in the United States, through a mix of organic growth and strategic acquisitions. Simon joined the family business after five years working at various Wall Street firms in the Mergers & Acquisitions (M&A) segment. It was in this environment where Simon learned the techniques he has used over the years to build SPG’s considerable retail real estate empire. Under Simon’s care, SPG has gained the well-earned reputation as a shareholder friendly organization, paying out in excess of $30 billion in dividends since the 1993 IPO. Over this period, SPG has outperformed the S&P by nearly 3% per year, on a total return basis. Above all else, Simon’s reputation is as a dealmaker: he was responsible for the $1 billion IPO in 1993 (largest real estate stock offering at the time), along with the $3 billion merger with DeBartolo Realty in 1996, among a number of other later major acquisitions (see below). In February 2020, SPG entered into a deal to acquire fellow retail REIT Taubman Centers for $3.6 billion. In June 2020, Simon announced his intention to exit the deal, due to issues related to COVID- 19 and the associated weakness in the retail industry. EARLY LIFE, EDUCATION, FAMILY AND CAREER David Simon spent his early years in Indianapolis, the headquarters of Melvin Simon & Associates, his father’s shopping center leasing firm. He credits his New York-born father with instilling his aggressive quality, to which he attributes his success with SPG. He attended Indiana University, making the choice according to his own recalling, due to the school’s strong basketball program. After graduation in 1983, Simon immediately attended Columbia University’s Graduate School of Business and earned an MBA in 1985. After Columbia, Simon began his career in the Investment Banking business, beginning at First Boston (now Credit Suisse). In a speech to Wharton School students, Simon discusses that he entered the firm in the “heyday of M&A” during the mid-1980s. After three years at First Boston, he joined boutique investment bank Wasserstein Perella & Co. as a Vice President covering M&A. Simon values his time in New York, remarking that every year spent on Wall Street corresponds to 4-5 years of experience, particularly considering the environment of the mid-late 1980s. “ Seeking Stocks that can 1 Double in 2-3 Years” 0.94 CEO PROFILE RESEARCH REPORT | 6/15/20 After just two years at the bank, Simon returned to Indiana to help his father’s family business through a difficult time: the S&L crisis and commercial real estate recession of the late 1980s. Upon joining Melvin Simon & Associates, Simon quickly put his Wall Street education to work as the firm’s young COO. With the business struggling, Simon helped to re-equitize the business by bringing public institutional investors (pension funds, etc.) into the fold. With the REIT structure Simon put into place in the formation of SPG, pension funds became more comfortable with the cash flows on offer. This is remarkable considering that institutional investment in retail REITs was rare at the time. From there, Simon put in place his master plan: raising capital to grow the business to the level of scale that would drive down the firm’s cost of capital. Looking back at historical shareholder returns and at the SPG of today, it is clear Simon’s initiatives were wildly successful. With limited video content available from Simon, the 2009 Wharton speech is crucial to understand Simon’s mindset. While Simon strives to be shareholder friendly, he says it is imperative for him to take the tough decisions and “hopefully your shareholders and colleagues will have confidence in what you do.” For his part, Simon places an emphasis on aggressiveness and toughness, which give him the foundation to make difficult and often contrarian decisions. At the same time, aggressiveness has its limit and every acquisition is made with an eye toward the balance sheet: Simon never wants to roll the dice to risk the whole business. Perhaps this is why he never went through with the attempted acquisition of General Growth Properties in 2009, a decision supported retrospectively by GGP’s eventual failure. In speaking with NAREIT in 2010, Simon relays his view that cash flow growth is the most crucial metric he follows in assessing his current business, as well as potential acquisitions. THE RISE OF SPG: 1990s UNTIL THE 2010s Before David Simon returned home to Indianapolis in the early 1990s, the shopping center business was highly fragmented, consisting mostly of family businesses like Melvin Simon & Associates. Even that environment, Simon was one of the top shopping center developers in the United States. After the 1993 IPO, David Simon embarked a mergers and acquisitions strategy, informed by his time at First Boston and Wasserstein Perella. Simon brokered the 1996 merger between his firm and DeBartolo Realty Corp. The combined entity then acquired a series of properties, including the REIT Corporate Property Investors in 1998. Over the coming years, SPG added a significant portfolio of top-flight properties, including the Houston Galleria, Fashion Valley Mall (San Diego), Copley Place (Boston), Pentagon City (Northern Virginia). In the early 2000s, Simon completed two acquisitions that transformed the company: Chelsea Premium Outlets (2004) and the acquisition of Mills Corporation (2007). The Chelsea acquisition positioned Simon as a leader in the premium outlet center business, which is a major segment of the business today (SPG currently operates 69 open-air outlets). In his 2009 speech at Wharton, Simon relays the story that SPG had the option of buying either Chelsea or the Rouse Group, which was ultimately purchased by General Growth Properties (GGP). He mentions that he made the decision based on Chelsea’s higher ‘cap rate’ (lower price) and the fact that he envisioned much higher growth opportunities in the outlet business. It must be noted that the acquisition of Rouse was a potential factor in GGP’s eventual bankruptcy, while the Premium Outlet business has been a key component of SPG’s success. The addition of “The Mills” gave SPG a group of super-regional shopping centers mostly in suburban/exurban locations, including Gurnee Mills outside Chicago and the Great Mall of the Bay Area outside San Jose. “The Mills” are a mix of 14 centers encompassing mall, outlet, big box stores, and entertainment venues. In December 2013, Simon made a move that would strengthen the business on a going forward basis: the Washington Prime Group (WPG) spinoff. At that time, Simon formed a separate REIT that included many of the company’s smaller malls and community shopping centers (strip malls). Simon managed these properties until early 2016, when they became the responsibility of WPG. This transaction solidified SPG’s status as an operator of Class ‘A’ shopping centers. “Seeking Stocks that can 2 Double in 2-3 Years” 0.94 CEO PROFILE RESEARCH REPORT | 6/15/20 Recognizing the changing landscape of retail, SPG has made a series of changes to the business. In late 2019, SPG partnered with Rue Gilt Groupe, which is the largest online marketplace for excess merchandise. This partnership creates an integration between the largest physical and online platforms for excess merchandise, looking to take advantage of the $200 billion market for off-price online retail. In the 2019 interview announcing the partnership, Simon notes that SPG’s 10 largest tenants in 1993 are no longer in business, which shows the ever-changing nature of this business. SPG: CONSISTENTLY DELIVERING RETURNS As mentioned above, SPG has paid out some $33 billion in dividends to unitholders since SPG’s IPO in 1993. Simon had significant influence in the decision to take the company public and has been CEO since 1995, so our view is that he can take the bulk of the credit for this performance. Since REITs are required by law to pay out 90% of funds from operations (FFO) to unitholders in the form of a dividend, stock price appreciation has been understandably muted. However, a 4.26% annual capital return is commendable in this context. It is difficult to ascertain relative performance of a business in isolation, particularly over a long time frame. In order to gain greater context of SPG’s performance over David Simon’s tenure, we provide below a chart that tracks the total returns of SPG relative to the subset of equity retail REITs, as well as the broader asset class of REITs overall: (Source: FactSet) SPG IN DOWNTURNS In this section it is important to note that SPG’s portfolio is made up of ‘class A’ malls, which are the most quality shopping center locations in the US. Below is the way that shopping centers are classified: “Seeking Stocks that can 3 Double in 2-3 Years” 0.94 CEO PROFILE RESEARCH REPORT | 6/15/20 Class ‘A’ malls attract the best tenants, which seems to insulate them in downturns relative to their Class ‘B’ and ‘C’ tiers which have lower quality tenants and tend to be more economically sensitive.