The Simon Brand.

With $2 billion in revenue and record profits, the nation's top shopping-mall operator looks to extend its name.

Talk about thinking outside the box.

The people at Simon Property Group make boxes, really big ones. Their 252 shopping malls in 36 states enclose 186 million square

"For our first 35-plus years, we tended to view our business in a strikingly simple way: serving as landlord to our retail tenants," says David Simon, CEO of the Indianapolis company that bears his family name. "While that continues to be our core business, we have discovered that we serve a role no other shopping venue can provide--we are the gatekeeper between our retail tenants and the more than 2 billion visits made each year to our shopping centers. Through this realization was born our second-curve business strategy of finding ways to connect customers to real estate in new and different ways."

Thus, the company now sees itself not just as a mall operator but as a medium for reaching consumers in less-traditional ways. And it's not just a retail landlord but a provider of a variety of goods and services that retailers need to succeed.

Simon's rethinking also shows up in the kinds of properties in its portfolio. Small-town shopping centers were once its mainstay, but development and $13 billion worth of acquisitions in the past five years have given the company a stable of malls unlike anyone else's. Not only is it by far the biggest retail portfolio, it also is top-heavy with some of the country's highest-quality, most-upscale properties.

The result of Simon's out-of-the-box thinking: Shoppers now recognize the Simon name and increasingly equate it with a quality shopping experience. New revenue streams are flowing and growing. And, even as the economy has slowed, Simon's malls continue to produce healthy income--revenues in 2000 surpassed the $2 billion mark and profits climbed to a new record of $223 million.

Yes, Simon acknowledges, the slowing economy has translated into slower sales for some mall retailers, more of which have filed for bankruptcy in recent months. But, he observes, "better, stronger malls are still in demand. We are very well-positioned to withstand an economic downturn. With a strong balance sheet, quality portfolio and below-market occupancy costs, our company is stronger than it has ever been."

INDUSTRY LEADER

"Commercial real estate has always been a highly fragmented business, but we have amassed a portfolio that has 12 to 13 percent of all regional malls in the U.S.," says Stephen Sterrett, the company's chief financial officer. "We are more than twice as big as our nearest competitor."

Even more significant, says Simon, is how successful the company has been in acquiring not just a lot of malls but a lot of the country's top properties. The company, he says, "has ownership of 26 percent of the top-tier regional malls in the country, and sales per square foot are approximately $390 this year, compared to $300 as the industry average."

Sterrett believes his company's accomplishments put it among the upper echelon of Indiana public companies. "It's an opportunity that's pretty rare in our state, to invest in a company that is the absolute leader in its industry," he says. "And it's an opportunity for people to invest in a business that they know and can touch on a regular basis."

As a real-estate investment trust--the country's largest retail-focused REIT, in fact--Simon offers average investors the opportunity to put their money into big-time real estate. REITs these days have become for many investors what utility stocks have been in the past: steady, reasonably safe investments with a strong emphasis on dividends.

That focus on dividends is encouraged by the laws governing REITs, Sterrett says. "We are required to pay out at least 90 percent of our taxable income to our shareholders as dividends," he says. The reward: "We do not pay federal income taxes on our earnings. Our shareholders avoid the double-taxation issue associated with most corporate income."

Simon is looking pretty good these days to investors soured on the get-rich-quick mentality of the dot-coms. Except for a couple of down months last fall and some wandering in 1999, Simon stock has climbed slowly but steadily since the company went public in the early 1990s.

The mall business has proven itself remarkably resilient in the face of seemingly strong competition: catalog and online shopping, home-shopping channels, big-box and discount retailers, Why? "People tend to greatly underestimate the social aspect of shopping in a mall," Sterrett says.

"The continued success of shopping center-based retail-notwithstanding the 'threats' over the years--is a testimony to its adaptability and flexibility," Simon adds.

Even in more difficult economic times, Simon's mall business has done relatively well. As long as occupancy remains strong, consistent rental income will flow into company coffers, and rents tend to rise over time as leases come up for renewal. The strength of the company's portfolio helps keep space occupied even as some individual retailers fall by the wayside. "If a space becomes available in one of the top Simon malls, a retailer will eagerly take it," Simon notes, "even if their expansion plans for the year have already been met."

THE MALL AS A MEDIUM

The more than 2 billion mall visits Simon mentions represent shopping trips--and often repeat visits--by some 100 million different consumers. An epiphany came when the company began to think of those people as an audience, not all that different from the audience watching a TV show or reading a newspaper.

And if those people are an audience, then "we are a medium. When you aggregate that many consumers, you are a medium," says Drew Sheinman, president of a company business unit called Simon Brand Ventures. Developing that consumer franchise and leveraging those shopper visits, Sheinman says, is the mission of Simon Brand Ventures, which is based not in Indianapolis but in the media capital of New York.

"Simon Brand Ventures is a manifestation of a cutting-edge approach in incubating new business," Simon says. "By validating the mall as an effective marketing medium, we have attracted sponsorships and marketing partnerships from some of the nation's top brands--Visa, Pepsi, Ford and Microsoft, among others."

A key to the consumer effort has been to get the Simon name before shoppers in a much more prominent way. Signs in and around the company's properties declare them to be Simon malls, and the company has taken out advertising promoting the name. The result, says Sheinman, is 50 percent brand-name recognition among mall shoppers. "There is value in the Simon brand," he says.

"The next stage has been to build a platform in the mall that enables us to communicate with customers on a regular basis," he continues. The most obvious part of that platform thus far was rolled out last year: a collection of large advertising display units placed throughout nearly five dozen of Simon's top malls. The company views the displays more as elegant furniture than billboards--Sheinman says that "they enhance the mall experience."

Building on that is the more interactive concept Sheinman calls the Simon Live Media Network, a way for brand marketers to reach consumers more directly than they can through traditional advertising. Marketers may use Simon malls for everything from product displays to sample giveaways to collection of consumer data.

One manufacturer, for example, has handed out samples of antibacterial hand wipes at Simon food courts, and another has given away bites of frozen fish products. What makes these different from grocery-store samples is the fact that they're products that cannot even be purchased at the mall. "Consumer packaged-goods companies have realized the value of the mall as a medium even if their products are not sold at the mall," Sheinman says.

"The mall provides broad access to targeted shoppers in an ideal environment to surround them and immerse them in meaningful brand experiences," Simon adds, "at a time when they are inclined to spend money."

Live events at the mall further leverage the Simon audience, Sheinman says. For example, trick-or-treating and other activities bring families to the mall for Halloween and Simon can offer such events as a way to reach this particular audience simultaneously at malls across the country. No other medium, he claims, can serve up this kind of live, in-person audience.

A number of futuristic consumer-oriented projects are in the works. One would allow shoppers to use a wireless unit in tenant stores to record a "wish list" or make a gift registry. Another would let shoppers go online to learn where at a Simon mall they can find specific merchandise they're seeking. If a product is in stock, the service would direct the shopper to a nearby Simon mall store; if not, it would allow the online shopper to order it from the retailer.

DOING B2B AT THE MALL

While Simon Brand Ventures has worked to leverage the company s relationship with shoppers, a separate division called Simon Business Network has been building the company's business-to-business relationships. The goal is to provide products and services to tenants, generating profits for Simon while reducing costs for retailers.

"What we do essentially is help put buyers and sellers together," says Scott Mumphrey, president of Simon Business Network. "We bring value to both sides of the transaction." Services and products offered through Simon Business Network range from energy to waste management to security and personnel services to design and construction. Practically anything a tenant might need to operate a retail store can be acquired through Simon Business Network.

One of the prime offerings is called Total Facility Support, established as a joint venture with three national facility-maintenance companies. Tenants may call on this operation for store build-outs, repair services, light-bulb changing and numerous other tasks. The partner firms maintain offices on-site to serve tenants. Some $80 million worth of services are expected to be arranged through Total Facility Support this year-la times the volume of just three years ago.

The business-to-business network has signed deals giving tenants access to traffic-analysis and people-counting services. It has brought an ATM network to the malls. It's testing a new parking concept that offers prime lot spaces for a $5 fee, a B2B partnership with Indianapolis-based Denison Parking. While-you-shop car-washing, detailing and oil-changing services may follow, Mumphrey says.

Simon Business Network connections have even helped Simon malls and their tenants weather the California energy crisis. The company has a multiyear energy deal with Enron that has offered price protection and helped promote energy efficiency.

The B2B concept has such promise, Mumphrey says, that Simon may take it outside the mall. Most of the company's malls are surrounded by additional retail, often in centers operated by other developers. There's plenty of potential to offer some Simon Business Network services to nearby retailers.

Says Simon, the "growth potential is virtually unlimited."

THE FUTURE FOR SIMON

Don't expect a continuation of Simon's explosive building and acquisition spree of the past several years. The company, says Sterrett, feels that it has amassed a healthy portfolio for now, and will spend some time digesting it. "We have slowed down development in the construction of new malls because we think America is pretty fully retailed," he says. Still, there may be selective acquisitions here and there as prime opportunities arise, Sterrett adds.

In the meantime, watch for continued expansion of Simon's non-traditional lines of business. One avenue with potential is a majority-owned subsidiary called MerchantWired, which Simon launched as a joint venture with five of its competitors in the regional mall business.

MerchantWired is in the communications business, providing broadband connections to mall tenants at more than 300 properties across the country. "It's important for tenant point-of-sale reporting and inventory management" Sterrett says, "and a lot of tenants are putting Internet kiosks and streaming video into their stores."

It's yet another departure from what used to be a simple business of building space and leasing it to tenants. But out-of-the-box thinking is starting to show up on the bottom line. Simon Brand Ventures and Simon Business Network brought $62 million into the mix last year. "It's a small part of the business today," Sterrett says, "but it's growing rapidly and also has a very high margin."

And as for the core business, David Simon is upbeat. "Remember, it was only about 18 months ago when conventional wisdom said that e-commerce was going to make the mall obsolete," he observes. As it happened, e-commerce is on life support, but "the mall is healthy."

SIMON

1. Simon Property Group

Indianapolis

Total gross leasable area owned: 186.0 mil. sq. ft.

2. General Growth Properties

Chicago Total gross leasable area owned: 84.3 mil. sq. ft.

3. Westfield Corp.

Los Angeles

Total gross leasable area owned: 64.2 mil. sq. ft.

Source: Shopping Center World, January 2001

Simon's Indiana Properties

REGIONAL MALLS

Castleton Square, Indianapolis

Circle Centre, Indianapolis

Claypool Court, Indianapolis

College Mall, Bloomington

Eastland Mall, Evansville

The Fashion Mall at Keystone, Indianapolis

Greenwood Park Mall, Greenwood

Lafayette Square, Indianapolis

Markland Mall, Kokomo

Mounds Mall, Anderson

Muncie Mall, Muncie

Richmond Square, Richmond

Tippecanoe Mall, Lafayette

University Park Mall, Mishawaka

Washington Square, Indianapolis

COMMUNITY CENTERS

Brightwood Plaza, Indianapolis

Century, Merrillville

Eastgate, Indianapolis

Eastland Convenience Center, Evansville

Greenwood Plus, Greenwood

Griffith Park Plaza, Griffith

Keystone Shoppes, Indianapolis

Markland Plaza, Kokomo

Mounds Mall Cinema, Anderson

Muncie Towne Plaza, Muncie

New Castle Plaza, New Castle

Northwood Plaza, Fort Wayne

Teal Plaza, Lafayette

Tippecanoe Plaza, Lafayette

University Center, Mishawaka

Village Park Plaza, Carmel

Wabash Village, West Lafayette

Washington Plaza, Indianapolis