Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Stockholders and the Board of Directors of Simon Property Group, Inc.:

Opinion on Internal Control over Financial Reporting

We have audited Simon Property Group, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Simon Property Group, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated February 22, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

	/s/ Ernst & Young LLP

Indianapolis, Indiana February 22, 2019

Report of Independent Registered Public Accounting Firm

The Stockholders and the Board of Directors of Simon Property Group, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Simon Property Group, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 22, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


	/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2002.

Indianapolis, Indiana February 22, 2019

Report of Independent Registered Public Accounting Firm

The Partners of Simon Property Group, L.P. and the Board of Directors of Simon Property Group, Inc.:

Opinion on Internal Control over Financial Reporting

We have audited Simon Property Group, L.P.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Simon Property Group, L.P. (the Partnership) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Partnership as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated February 22, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Definition and Limitations of Internal Control Over Financial Reporting


	/s/ Ernst & Young LLP

Indianapolis, Indiana February 22, 2019

Report of Independent Registered Public Accounting Firm

The Partners of Simon Property Group, L.P. and the Board of Directors of Simon Property Group, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Simon Property Group, L.P. (the Partnership) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 22, 2019, expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


	/s/ Ernst & Young LLP

We have served as the Partnership’s auditor since 2002. Indianapolis, Indiana February 22, 2019

Simon Property Group, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except share amounts)


	December 31,		December 31,
	2018		2017
ASSETS:
Investment properties, at cost	$	37,092,670	$	36,393,464
Less - accumulated depreciation		12,884,539		11,935,949
		24,208,131		24,457,515
Cash and cash equivalents		514,335		1,482,309
Tenant receivables and accrued revenue, net		763,815		742,672
Investment in unconsolidated entities, at equity		2,220,414		2,266,483
Investment in Klépierre, at equity		1,769,488		1,934,676
Deferred costs and other assets		1,210,040		1,373,983
Total assets	$	30,686,223	$	32,257,638
LIABILITIES:
Mortgages and unsecured indebtedness	$	23,305,535	$	24,632,463
Accounts payable, accrued expenses, intangibles, and deferred revenues		1,316,861		1,269,190
Cash distributions and losses in unconsolidated entities, at equity		1,536,111		1,406,378
Other liabilities		500,597		520,363
Total liabilities		26,659,104		27,828,394
Commitments and contingencies
Limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties		230,163		190,480
EQUITY:
Stockholders’ Equity
Capital stock (850,000,000 total shares authorized, $0.0001 par value, 238,000,000 shares of excess common stock, 100,000,000 authorized shares of preferred stock):
Series J 83/8% cumulative redeemable preferred stock, 1,000,000 shares authorized, 796,948 issued and outstanding with a liquidation value of $39,847		42,748		43,077
Common stock, $0.0001 par value, 511,990,000 shares authorized, 320,411,571 and 320,322,774 issued and outstanding, respectively		32		32
Class B common stock, $0.0001 par value, 10,000 shares authorized, 8,000 issued and outstanding		—		—
Capital in excess of par value		9,700,418		9,614,748
Accumulated deficit		(4,893,069)		(4,782,173)
Accumulated other comprehensive loss		(126,017)		(110,453)
Common stock held in treasury, at cost, 11,402,103 and 9,163,920 shares, respectively		(1,427,431)		(1,079,063)
Total stockholders’ equity		3,296,681		3,686,168
Noncontrolling interests		500,275		552,596
Total equity		3,796,956		4,238,764
Total liabilities and equity	$	30,686,223	$	32,257,638

The accompanying notes are an integral part of these statements.

Simon Property Group, Inc.

Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands, except per share amounts)


	For the Year
	Ended December 31,
	2018		2017		2016
REVENUE:
Minimum rent	$	3,488,522	$	3,440,009	$	3,358,498
Overage rent		162,189		147,471		161,508
Tenant reimbursements		1,520,340		1,532,923		1,494,804
Management fees and other revenues		116,286		121,259		143,875
Other income		370,582		296,978		276,544
Total revenue		5,657,919		5,538,640		5,435,229
EXPENSES:
Property operating		450,636		443,177		432,394
Depreciation and amortization		1,282,454		1,275,452		1,252,673
Real estate taxes		457,740		440,003		439,030
Repairs and maintenance		99,588		96,900		99,723
Advertising and promotion		151,241		150,865		142,801
Provision for credit losses		12,631		11,304		7,319
Home and regional office costs		136,677		135,150		158,406
General and administrative		46,543		51,972		65,082
Other		109,322		131,477		116,973
Total operating expenses		2,746,832		2,736,300		2,714,401
OPERATING INCOME BEFORE OTHER ITEMS		2,911,087		2,802,340		2,720,828
Interest expense		(815,923)		(809,393)		(857,554)
Loss on extinguishment of debt		—		(128,618)		(136,777)
Income and other taxes		(36,898)		(23,343)		(29,678)
Income from unconsolidated entities		475,250		400,270		353,334
Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net		288,827		3,647		84,553
CONSOLIDATED NET INCOME		2,822,343		2,244,903		2,134,706
Net income attributable to noncontrolling interests		382,285		296,941		295,810
Preferred dividends		3,337		3,337		3,337
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	2,436,721	$	1,944,625	$	1,835,559
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Net income attributable to common stockholders	$	7.87	$	6.24	$	5.87

Consolidated Net Income	$	2,822,343	$	2,244,903	$	2,134,706
Unrealized gain (loss) on derivative hedge agreements		21,633		(35,112)		39,472
Net loss (gain) reclassified from accumulated other comprehensive loss into earnings		7,020		(12,122)		149,622
Currency translation adjustments		(47,038)		45,766		(28,646)
Changes in available-for-sale securities and other		373		5,733		3,192
Comprehensive income		2,804,331		2,249,168		2,298,346
Comprehensive income attributable to noncontrolling interests		379,837		297,534		320,890
Comprehensive income attributable to common stockholders	$	2,424,494	$	1,951,634	$	1,977,456

The accompanying notes are an integral part of these statements.

Simon Property Group, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)


	For the Year
	Ended December 31,
	2018		2017		2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated Net Income	$	2,822,343	$	2,244,903	$	2,134,706
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization		1,349,776		1,357,351		1,327,946
Loss on debt extinguishment		—		128,618		136,777
Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net		(288,827)		(3,647)		(84,553)
Pre-development project cost charge		—		—		31,490
Gains on sales of marketable securities		—		(21,541)		—
Unrealized change in fair value of equity instruments		15,212		—		—
Gain on interest in unconsolidated entity (Note 7)		(35,621)		—		—
Straight-line rent		(18,325)		(26,543)		(46,656)
Equity in income of unconsolidated entities		(475,250)		(400,270)		(353,334)
Distributions of income from unconsolidated entities		390,137		374,101		331,627
Changes in assets and liabilities
Tenant receivables and accrued revenue, net		(17,518)		(26,170)		16,277
Deferred costs and other assets		(75,438)		(132,945)		(43,797)
Accounts payable, accrued expenses, intangibles, deferred revenues and other liabilities		84,307		99,931		(77,789)
Net cash provided by operating activities		3,750,796		3,593,788		3,372,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions		(51,060)		(264,488)		(499,976)
Funding of loans to related parties		(4,641)		(71,532)		—
Repayments of loans to related parties		—		—		8,207
Capital expenditures, net		(781,909)		(732,100)		(798,465)
Cash impact from the consolidation of properties		11,276		7,536		59,994
Net proceeds from sale of assets		183,241		19,944		36,558
Investments in unconsolidated entities		(63,397)		(157,173)		(312,160)
Purchase of marketable and non-marketable securities		(21,563)		(25,000)		(38,809)
Proceeds from sales of marketable and non-marketable securities		25,000		56,268		42,600
Insurance proceeds for property restoration		19,083		—		—
Distributions of capital from unconsolidated entities and other		447,464		405,078		533,025
Net cash used in investing activities		(236,506)		(761,467)		(969,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and other, net of transaction costs		(329)		(328)		(328)
Purchase of shares related to stock grant recipients' tax withholdings		(2,911)		(2,789)		(4,299)
Redemption of limited partner units		(81,506)		—		—
Purchase of treasury stock		(354,108)		(407,002)		(255,267)
Distributions to noncontrolling interest holders in properties		(76,963)		(11,295)		(9,731)
Contributions from noncontrolling interest holders in properties		161		382		1,507
Preferred distributions of the Operating Partnership		(1,915)		(1,915)		(1,915)
Distributions to stockholders and preferred dividends		(2,449,071)		(2,231,259)		(2,037,542)
Distributions to limited partners		(370,656)		(338,602)		(316,428)
Loss on debt extinguishment		—		(128,618)		(136,777)
Proceeds from issuance of debt, net of transaction costs		7,973,719		11,668,026		14,866,205
Repayments of debt		(9,118,685)		(10,456,671)		(14,650,168)
Net cash used in financing activities		(4,482,264)		(1,910,071)		(2,544,743)
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(967,974)		922,250		(141,075)
CASH AND CASH EQUIVALENTS, beginning of period		1,482,309		560,059		701,134
CASH AND CASH EQUIVALENTS, end of period	$	514,335	$	1,482,309	$	560,059

The accompanying notes are an integral part of these statements.

Simon Property Group, Inc.

Consolidated Statements of Equity

(Dollars in thousands)


					Accumulated Other
					Comprehensive		Capital in				Common Stock
	Preferred		Common		Income		Excess of Par		Accumulated		Held in		Noncontrolling		Total
	Stock		Stock		(Loss)		Value		Deficit		Treasury		Interests		Equity
Balance at December 31, 2015	$	43,733	$	31	$	(252,686)	$	9,384,450	$	(4,266,930)	$	(437,134)	$	744,905	$	5,216,369
Exchange of limited partner units (5,020,919 common shares, Note 10)				1				73,755						(73,756)		—
Series J preferred stock premium amortization		(328)														(328)
Stock incentive program (63,324 common shares, net)								(14,139)				14,139				—
Amortization of stock incentive								12,024								12,024
Treasury stock purchase (1,409,197 shares)												(255,267)				(255,267)
Long-term incentive performance units														48,324		48,324
Issuance of unit equivalents and other, net (21,041 common shares repurchased)										6,189		(4,300)		1,506		3,395
Adjustment to limited partners' interest from change in ownership in the Operating Partnership								66,996						(66,996)		—
Distributions to common stockholders and limited partners, excluding Operating Partnership preferred interests										(2,037,542)				(316,428)		(2,353,970)
Distribution to other noncontrolling interest partners														(2,765)		(2,765)
Other comprehensive income						138,560								25,080		163,640
Net income, excluding $1,915 attributable to preferred interests in the Operating Partnership and $4,301 attributable to noncontrolling redeemable interests in properties										1,838,896				289,594		2,128,490
Balance at December 31, 2016	$	43,405	$	32	$	(114,126)	$	9,523,086	$	(4,459,387)	$	(682,562)	$	649,464	$	4,959,912
Exchange of limited partner units (500,411 common shares, Note 10)								6,005						(6,005)		—
Series J preferred stock premium amortization		(328)														(328)
Stock incentive program (76,660 common shares, net)								(13,289)				13,289				—
Amortization of stock incentive								13,911								13,911
Treasury stock purchase (2,468,630 shares)												(407,002)				(407,002)
Long-term incentive performance units														38,305		38,305
Issuance of unit equivalents and other, net (16,161 common shares repurchased)								241		(39,489)		(2,788)		383		(41,653)
Adjustment to limited partners' interest from change in ownership in the Operating Partnership								84,794						(84,794)		—
Distributions to common stockholders and limited partners, excluding Operating Partnership preferred interests										(2,231,259)				(338,602)		(2,569,861)
Distribution to other noncontrolling interest partners														(3,851)		(3,851)
Other comprehensive income						3,673								592		4,265
Net income, excluding $1,915 attributable to preferred interests in the Operating Partnership and a $2,078 loss attributable to noncontrolling redeemable interests in properties										1,947,962				297,104		2,245,066
Balance at December 31, 2017	$	43,077	$	32	$	(110,453)	$	9,614,748	$	(4,782,173)	$	(1,079,063)	$	552,596	$	4,238,764
Exchange of limited partner units (92,732 common shares, Note 10)								1,004						(1,004)		—
Issuance of limited partner units (475,183 units)														84,103		84,103
Series J preferred stock premium amortization		(329)														(329)
Stock incentive program (51,756 common shares, net)								(8,651)				8,651				—
Redemption of limited partner units (454,704 units)								(76,555)						(4,951)		(81,506)
Amortization of stock incentive								12,029								12,029
Treasury stock purchase (2,275,194 shares)												(354,108)				(354,108)
Long-term incentive performance units														26,172		26,172
Cumulative effect of accounting change										7,264						7,264
Issuance of unit equivalents and other (18,680 common shares repurchased)								1,602		(109,147)		(2,911)		(2,510)		(112,966)
Adjustment to limited partners' interest from change in ownership in the Operating Partnership								156,241						(156,241)		—
Distributions to common stockholders and limited partners, excluding Operating Partnership preferred interests										(2,449,071)				(370,656)		(2,819,727)
Distribution to other noncontrolling interest partners														(1,741)		(1,741)
Other comprehensive income						(15,564)								(2,447)		(18,011)
Net income, excluding $1,915 attributable to preferred interests in the Operating Partnership and $3,416 attributable to noncontrolling redeemable interests in properties										2,440,058				376,954		2,817,012
Balance at December 31, 2018	$	42,748	$	32	$	(126,017)	$	9,700,418	$	(4,893,069)	$	(1,427,431)	$	500,275	$	3,796,956

The accompanying notes are an integral part of these statements.

Simon Property Group, L.P.

Consolidated Balance Sheets

(Dollars in thousands, except unit amounts)


	December 31,		December 31,
	2018		2017
ASSETS:
Investment properties, at cost	$	37,092,670	$	36,393,464
Less — accumulated depreciation		12,884,539		11,935,949
		24,208,131		24,457,515
Cash and cash equivalents		514,335		1,482,309
Tenant receivables and accrued revenue, net		763,815		742,672
Investment in unconsolidated entities, at equity		2,220,414		2,266,483
Investment in Klépierre, at equity		1,769,488		1,934,676
Deferred costs and other assets		1,210,040		1,373,983
Total assets	$	30,686,223	$	32,257,638
LIABILITIES:
Mortgages and unsecured indebtedness	$	23,305,535	$	24,632,463
Accounts payable, accrued expenses, intangibles, and deferred revenues		1,316,861		1,269,190
Cash distributions and losses in unconsolidated entities, at equity		1,536,111		1,406,378
Other liabilities		500,597		520,363
Total liabilities		26,659,104		27,828,394
Commitments and contingencies
Preferred units, various series, at liquidation value, and noncontrolling redeemable interests in properties		230,163		190,480
EQUITY:
Partners’ Equity
Preferred units, 796,948 units outstanding. Liquidation value of $39,847		42,748		43,077
General Partner, 309,017,468 and 311,166,854 units outstanding, respectively		3,253,933		3,643,091
Limited Partners, 46,807,372 and 46,879,625 units outstanding, respectively		492,877		548,858
Total partners’ equity		3,789,558		4,235,026
Nonredeemable noncontrolling interests in properties, net		7,398		3,738
Total equity		3,796,956		4,238,764
Total liabilities and equity	$	30,686,223	$	32,257,638

The accompanying notes are an integral part of these statements.

Simon Property Group, L.P.

Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands, except per unit amounts)


	For the Year
	Ended December 31,
	2018		2017		2016
REVENUE:
Minimum rent	$	3,488,522	$	3,440,009	$	3,358,498
Overage rent		162,189		147,471		161,508
Tenant reimbursements		1,520,340		1,532,923		1,494,804
Management fees and other revenues		116,286		121,259		143,875
Other income		370,582		296,978		276,544
Total revenue		5,657,919		5,538,640		5,435,229
EXPENSES:
Property operating		450,636		443,177		432,394
Depreciation and amortization		1,282,454		1,275,452		1,252,673
Real estate taxes		457,740		440,003		439,030
Repairs and maintenance		99,588		96,900		99,723
Advertising and promotion		151,241		150,865		142,801
Provision for credit losses		12,631		11,304		7,319
Home and regional office costs		136,677		135,150		158,406
General and administrative		46,543		51,972		65,082
Other		109,322		131,477		116,973
Total operating expenses		2,746,832		2,736,300		2,714,401
OPERATING INCOME BEFORE OTHER ITEMS		2,911,087		2,802,340		2,720,828
Interest expense		(815,923)		(809,393)		(857,554)
Loss on extinguishment of debt		—		(128,618)		(136,777)
Income and other taxes		(36,898)		(23,343)		(29,678)
Income from unconsolidated entities		475,250		400,270		353,334
Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net		288,827		3,647		84,553
CONSOLIDATED NET INCOME		2,822,343		2,244,903		2,134,706
Net income attributable to noncontrolling interests		11,327		13		7,218
Preferred unit requirements		5,252		5,252		5,252
NET INCOME ATTRIBUTABLE TO UNITHOLDERS	$	2,805,764	$	2,239,638	$	2,122,236
NET INCOME ATTRIBUTABLE TO UNITHOLDERS ATTRIBUTABLE TO:
General Partner	$	2,436,721	$	1,944,625	$	1,835,559
Limited Partners		369,043		295,013		286,677
Net income attributable to unitholders	$	2,805,764	$	2,239,638	$	2,122,236
BASIC AND DILUTED EARNINGS PER UNIT:
Net income attributable to unitholders	$	7.87	$	6.24	$	5.87

Consolidated net income	$	2,822,343	$	2,244,903	$	2,134,706
Unrealized gain (loss) on derivative hedge agreements		21,633		(35,112)		39,472
Net loss (gain) reclassified from accumulated other comprehensive loss into earnings		7,020		(12,122)		149,622
Currency translation adjustments		(47,038)		45,766		(28,646)
Changes in available-for-sale securities and other		373		5,733		3,192
Comprehensive income		2,804,331		2,249,168		2,298,346
Comprehensive income attributable to noncontrolling interests		7,911		2,091		2,917
Comprehensive income attributable to unitholders	$	2,796,420	$	2,247,077	$	2,295,429

The accompanying notes are an integral part of these statements.

Simon Property Group, L.P.

Consolidated Statements of Cash Flows

(Dollars in thousands)


	For the Year
	Ended December 31,
	2018		2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated Net Income	$	2,822,343	$	2,244,903	$	2,134,706
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization		1,349,776		1,357,351		1,327,946
Loss on debt extinguishment		—		128,618		136,777
Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net		(288,827)		(3,647)		(84,553)
Pre-development project cost charge		—		—		31,490
Gains on sales of marketable securities		—		(21,541)		—
Unrealized change in fair value of equity instruments		15,212		—		—
Gain on interest in unconsolidated entity (Note 7)		(35,621)		—		—
Straight-line rent		(18,325)		(26,543)		(46,656)
Equity in income of unconsolidated entities		(475,250)		(400,270)		(353,334)
Distributions of income from unconsolidated entities		390,137		374,101		331,627
Changes in assets and liabilities
Tenant receivables and accrued revenue, net		(17,518)		(26,170)		16,277
Deferred costs and other assets		(75,438)		(132,945)		(43,797)
Accounts payable, accrued expenses, intangibles, deferred revenues and other liabilities		84,307		99,931		(77,789)
Net cash provided by operating activities		3,750,796		3,593,788		3,372,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions		(51,060)		(264,488)		(499,976)
Funding of loans to related parties		(4,641)		(71,532)		—
Repayments of loans to related parties		—		—		8,207
Capital expenditures, net		(781,909)		(732,100)		(798,465)
Cash impact from the consolidation of properties		11,276		7,536		59,994
Net proceeds from sale of assets		183,241		19,944		36,558
Investments in unconsolidated entities		(63,397)		(157,173)		(312,160)
Purchase of marketable and non-marketable securities		(21,563)		(25,000)		(38,809)
Proceeds from sales of marketable and non-marketable securities		25,000		56,268		42,600
Insurance proceeds for property restoration		19,083		—		—
Distributions of capital from unconsolidated entities and other		447,464		405,078		533,025
Net cash used in investing activities		(236,506)		(761,467)		(969,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of units and other		(329)		(328)		(328)
Purchase of units related to stock grant recipients' tax withholdings		(2,911)		(2,789)		(4,299)
Redemption of limited partner units		(81,506)		—		—
Purchase of general partner units		(354,108)		(407,002)		(255,267)
Distributions to noncontrolling interest holders in properties		(76,963)		(11,295)		(9,731)
Contributions from noncontrolling interest holders in properties		161		382		1,507
Partnership distributions		(2,821,642)		(2,571,776)		(2,355,885)
Loss on debt extinguishment		—		(128,618)		(136,777)
Mortgage and unsecured indebtedness proceeds, net of transaction costs		7,973,719		11,668,026		14,866,205
Mortgage and unsecured indebtedness principal payments		(9,118,685)		(10,456,671)		(14,650,168)
Net cash used in financing activities		(4,482,264)		(1,910,071)		(2,544,743)
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(967,974)		922,250		(141,075)
CASH AND CASH EQUIVALENTS, beginning of period		1,482,309		560,059		701,134
CASH AND CASH EQUIVALENTS, end of period	$	514,335	$	1,482,309	$	560,059

The accompanying notes are an integral part of these statements.

Simon Property Group, L.P.

Consolidated Statements of Equity

(Dollars in thousands)


	Preferred		Simon (Managing		Limited		Noncontrolling		Total
	Units		General Partner)		Partners		Interests		Equity
Balance at December 31, 2015	$	43,733	$	4,427,731	$	741,449	$	3,456	$	5,216,369
Series J preferred stock premium and amortization		(328)								(328)
Limited partner units exchanged to common units (5,020,919 units)				73,756		(73,756)				—
Stock incentive program (63,324 common shares, net)				—						—
Amortization of stock incentive				12,024						12,024
Treasury unit purchase (1,409,197 units)				(255,267)						(255,267)
Long-term incentive performance units						48,324				48,324
Issuance of unit equivalents and other (482,779 units and 21,041 common units)				1,889		(2)		1,508		3,395
Adjustment to limited partners' interest from change in ownership in the Operating Partnership				66,996		(66,996)				—
Distributions, excluding distributions on preferred interests classified as temporary equity		(3,337)		(2,034,205)		(316,428)		(2,765)		(2,356,735)
Net income, excluding preferred distributions on temporary equity preferred units of $1,915 and $4,301 attributable to noncontrolling redeemable interests in properties		3,337		1,835,559		286,677		2,917		2,128,490
Other comprehensive income				138,560		25,080				163,640
Balance at December 31, 2016	$	43,405	$	4,267,043	$	644,348	$	5,116	$	4,959,912
Series J preferred stock premium and amortization		(328)								(328)
Limited partner units exchanged to common units (500,411 units)				6,005		(6,005)				—
Stock incentive program (76,660 common shares, net)				—						—
Amortization of stock incentive				13,911						13,911
Treasury unit purchase (2,468,630 units)				(407,002)						(407,002)
Long-term incentive performance units						38,305				38,305
Issuance of unit equivalents and other (103,941 units and 16,161 common units)				(42,036)		1		382		(41,653)
Adjustment to limited partners' interest from change in ownership in the Operating Partnership				84,794		(84,794)				—
Distributions, excluding distributions on preferred interests classified as temporary equity		(3,337)		(2,227,922)		(338,602)		(3,851)		(2,573,712)
Net income, excluding preferred distributions on temporary equity preferred units of $1,915 and a $2,078 loss attributable to noncontrolling redeemable interests in properties		3,337		1,944,625		295,013		2,091		2,245,066
Other comprehensive income				3,673		592				4,265
Balance at December 31, 2017	$	43,077	$	3,643,091	$	548,858	$	3,738	$	4,238,764
Issuance of limited partner units (475,183 units)						84,103				84,103
Series J preferred stock premium and amortization		(329)								(329)
Limited partner units exchanged to common units (92,732 units)				1,004		(1,004)				—
Stock incentive program (51,756 common units, net)				—						—
Amortization of stock incentive				12,029						12,029
Redemption of limited partner units (454,704 units)				(76,555)		(4,951)				(81,506)
Treasury unit purchase (2,275,194 units)				(354,108)						(354,108)
Long-term incentive performance units						26,172				26,172
Cumulative effect of accounting change				7,264						7,264
Issuance of unit equivalents and other (18,680 common units)				(110,456)				(2,510)		(112,966)
Adjustment to limited partners' interest from change in ownership in the Operating Partnership				156,241		(156,241)				—
Distributions, excluding distributions on preferred interests classified as temporary equity		(3,337)		(2,445,734)		(370,656)		(1,741)		(2,821,468)
Net income, excluding preferred distributions on temporary equity preferred units of $1,915 and $3,416 attributable to noncontrolling redeemable interests in properties		3,337		2,436,721		369,043		7,911		2,817,012
Other comprehensive income				(15,564)		(2,447)				(18,011)
Balance at December 31, 2018	$	42,748	$	3,253,933	$	492,877	$	7,398	$	3,796,956

The accompanying notes are an integral part of these statements.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Organization

Simon Property Group, Inc. is a Delaware corporation that operates as a self-administered and self-managed real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. REITs will generally not be liable for U.S. federal corporate income taxes as long as they distribute not less than 100% of their REIT taxable income. Simon Property Group, L.P. is our majority-owned Delaware partnership subsidiary that owns all of our real estate properties and other assets. Unless stated otherwise or the context otherwise requires, references to "Simon" mean Simon Property Group, Inc. and references to the "Operating Partnership" mean Simon Property Group, L.P. References to "we," "us" and "our" mean collectively Simon, the Operating Partnership and those entities/subsidiaries owned or controlled by Simon and/or the Operating Partnership. Unless otherwise indicated, these notes to consolidated financial statements apply to both Simon and the Operating Partnership. According to the Operating Partnership's partnership agreement, the Operating Partnership is required to pay all expenses of Simon.

We own, develop and manage premier shopping, dining, entertainment and mixed-use destinations, which consist primarily of malls, Premium Outlets®, and The Mills®. As of December 31, 2018, we owned or held an interest in 206 income‑producing properties in the United States, which consisted of 107 malls, 69 Premium Outlets, 14 Mills, four lifestyle centers, and 12 other retail properties in 37 states and Puerto Rico. Internationally, as of December 31, 2018, we had ownership interests in nine Premium Outlets in Japan, four Premium Outlets in South Korea, three Premium Outlets in Canada, two Premium Outlets in Malaysia and one Premium Outlet in Mexico. We also own an interest in eight Designer Outlet properties in Europe and one Designer Outlet property in Canada. Of the eight properties in Europe, two are located in Italy, two are located in the Netherlands and one each is located in Austria, Germany, France and the United Kingdom. As of December 31, 2018, we also owned a 21.3% equity stake in Klépierre SA, or Klépierre, a publicly traded, Paris‑based real estate company which owns, or has an interest in, shopping centers located in 16 countries in Europe.

We generate the majority of our revenues from leases with retail, dining, entertainment and other tenants, including:

	·		base minimum rents,

	·		overage and percentage rents based on tenants’ sales volume, and

	·		recoverable expenditures such as property operating, real estate taxes, repair and maintenance, and advertising and promotional expenditures.

Revenues of our management company, after intercompany eliminations, consist primarily of management fees that are typically based upon the revenues of the property being managed.

We also grow by generating supplemental revenues from the following activities:

	·		establishing our properties as leading market resource providers for retailers and other businesses and consumer‑focused corporate alliances, including payment systems (such as handling fees relating to the sales of bank‑issued prepaid cards), national marketing alliances, static and digital media initiatives, business development, sponsorship, and events,

	·		offering property operating services to our tenants and others, including waste handling and facility services, and the provision of energy services,

	·		selling or leasing land adjacent to our properties, commonly referred to as “outlots” or “outparcels,” and

	·		generating interest income on cash deposits and investments in loans, including those made to related entities.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Basis of Presentation and Consolidation

The accompanying consolidated financial statements include the accounts of all controlled subsidiaries, and all significant intercompany amounts have been eliminated.

We consolidate properties that are wholly-owned or properties where we own less than 100% but we control. Control of a property is demonstrated by, among other factors, our ability to refinance debt and sell the property without the consent of any other partner or owner and the inability of any other partner or owner to replace us.

We also consolidate a variable interest entity, or VIE, when we are determined to be the primary beneficiary. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE, including management agreements and other contractual arrangements. There have been no changes during 2018 in previous conclusions about whether an entity qualifies as a VIE or whether we are the primary beneficiary of any previously identified VIE. During the periods presented, we did not provide financial or other support to any identified VIE that we were not contractually obligated to provide.

Investments in partnerships and joint ventures represent our noncontrolling ownership interests in properties. We account for these unconsolidated entities using the equity method of accounting. We initially record these investments at cost and we subsequently adjust for net equity in income or loss, which we allocate in accordance with the provisions of the applicable partnership or joint venture agreement, cash contributions and distributions, and foreign currency fluctuations, if applicable. The allocation provisions in the partnership or joint venture agreements are not always consistent with the legal ownership interests held by each general or limited partner or joint venture investee primarily due to partner preferences. We separately report investments in joint ventures for which accumulated distributions have exceeded investments in and our share of net income of the joint ventures within cash distributions and losses in partnerships and joint ventures, at equity in the consolidated balance sheets. The net equity of certain joint ventures is less than zero because of financing or operating distributions that are usually greater than net income, as net income includes non‑cash charges for depreciation and amortization.

As of December 31, 2018, we consolidated 135 wholly‑owned properties and 18 additional properties that are less than wholly‑owned, but which we control or for which we are the primary beneficiary. We account for the remaining 81 properties, or the joint venture properties, as well as our investment in Klépierre, Aéropostale, Authentic Brands Group LLC, or ABG, and HBS Global Properties, or HBS, using the equity method of accounting, as we have determined we have significant influence over their operations. We manage the day‑to‑day operations of 57 of the 81 joint venture properties, but have determined that our partner or partners have substantive participating rights with respect to the assets and operations of these joint venture properties. Our investments in joint ventures in Japan, South Korea, Mexico, Malaysia, Germany, Canada, and the United Kingdom comprise 20 of the remaining 24 properties. These international properties are managed by joint ventures in which we share control.

Preferred distributions of the Operating Partnership are accrued at declaration and represent distributions on outstanding preferred units of partnership interests, or preferred units, and are included in net income attributable to noncontrolling interests. We allocate net operating results of the Operating Partnership after preferred distributions to limited partners and to us based on the partners’ respective weighted average ownership interests in the Operating Partnership. Net operating results of the Operating Partnership attributable to limited partners are reflected in net income attributable to noncontrolling interests.

Our weighted average ownership interest in the Operating Partnership was as follows:


	For the Year Ended
	December 31,
	2018		2017		2016
Weighted average ownership interest	86.8	%	86.8	%	86.5	%

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

As of December 31, 2018 and 2017, our ownership interest in the Operating Partnership was 86.8% and 86.9%, respectively. We adjust the noncontrolling limited partners’ interest at the end of each period to reflect their interest in the net assets of the Operating Partnership.

Preferred unit requirements in the Operating Partnership’s accompanying consolidated statements of operations and comprehensive income represent distributions on outstanding preferred units and are recorded when declared.

Summary of Significant Accounting Policies

Investment Properties

We record investment properties at cost. Investment properties include costs of acquisitions; development, predevelopment, and construction (including allocable salaries and related benefits); tenant allowances and improvements; and interest and real estate taxes incurred during construction. We capitalize improvements and replacements from repair and maintenance when the repair and maintenance extends the useful life, increases capacity, or improves the efficiency of the asset. All other repair and maintenance items are expensed as incurred. We capitalize interest on projects during periods of construction until the projects are ready for their intended purpose based on interest rates in place during the construction period. The amount of interest capitalized during each year is as follows:


	For the Year Ended
	December 31,
		2018		2017		2016
Capitalized interest	$	19,871	$	24,754	$	31,250

We record depreciation on buildings and improvements utilizing the straight‑line method over an estimated original useful life, which is generally 10 to 35 years. We review depreciable lives of investment properties periodically and we make adjustments when necessary to reflect a shorter economic life. We amortize tenant allowances and tenant improvements utilizing the straight‑line method over the term of the related lease or occupancy term of the tenant, if shorter. We record depreciation on equipment and fixtures utilizing the straight‑line method over seven to ten years.

We review investment properties for impairment on a property‑by‑property basis whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable. These circumstances include, but are not limited to, declines in a property’s cash flows, ending occupancy or total sales per square foot. We measure any impairment of investment property when the estimated undiscounted operating income before depreciation and amortization during the anticipated holding period plus its residual value is less than the carrying value of the property. To the extent impairment has occurred, we charge to income the excess of carrying value of the property over its estimated fair value. We estimate undiscounted cash flows and fair value using unobservable data such as operating income, estimated capitalization rates, or multiples, leasing prospects and local market information. We may decide to sell properties that are held for use and the sale prices of these properties may differ from their carrying values. We also review our investments, including investments in unconsolidated entities, if events or circumstances change indicating that the carrying amount of our investments may not be recoverable. We will record an impairment charge if we determine that a decline in the fair value of the investments is other‑than‑temporary. Changes in economic and operating conditions that occur subsequent to our review of recoverability of investment property and other investments could impact the assumptions used in that assessment and could result in future charges to earnings if assumptions regarding those investments differ from actual results.

During the fourth quarter of 2016, we determined we would no longer pursue the construction of the Copley residential tower given a change in property approval dynamics, construction pricing in the Boston market and the continued increase in residential supply in the market. Accordingly, we recorded a charge of approximately $31.5 million related to the write-off of pre-development costs, which is included in other expenses in the accompanying statement of operations and comprehensive income.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Purchase Accounting

We allocate the purchase price of asset acquisitions and any excess investment in unconsolidated entities to the various components of the acquisition based upon the relative fair value of each component which may be derived from various observable or unobservable inputs and assumptions. Also, we may utilize third party valuation specialists. These components typically include buildings, land and intangibles related to in‑place leases and we estimate:

	·		the relative fair value of land and related improvements and buildings on an as‑if‑vacant basis,

	·		the market value of in‑place leases based upon our best estimate of current market rents and amortize the resulting market rent adjustment into revenues,

	·		the value of costs to obtain tenants, including tenant allowances and improvements and leasing commissions, and

	·		the value of revenue and recovery of costs foregone during a reasonable lease‑up period, as if the space was vacant.

The relative fair value of buildings is depreciated over the estimated remaining life of the acquired building or related improvements. We amortize tenant improvements, in‑place lease assets and other lease‑related intangibles over the remaining life of the underlying leases. We also estimate the value of other acquired intangible assets, if any, which are amortized over the remaining life of the underlying related intangibles.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents generally consist of commercial paper, bankers’ acceptances, Eurodollars, repurchase agreements, and money market deposits or securities. Financial instruments that potentially subject us to concentrations of credit risk include our cash and cash equivalents and our trade accounts receivable. We place our cash and cash equivalents with institutions of high credit quality. However, at certain times, such cash and cash equivalents are in excess of Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insurance limits. See Notes 4 and 10 for disclosures about non-cash investing and financing transactions.

Equity Instruments and Debt Securities

Equity instruments and debt securities consist primarily of the debt securities of our captive insurance subsidiary, equity instruments, our deferred compensation plan investments, and certain investments held to fund the debt service requirements of debt previously secured by investment properties. At December 31, 2018 and 2017, we had equity instruments with readily determinable fair values of $78.1 million and $88.3 million, respectively. Effective January 1, 2018, changes in fair value of these equity instruments are recorded in earnings. As of December 31, 2018, we have recorded non-cash mark-to-market adjustments related to these equity securities with readily determinable fair values of $15.2 million, which is included in other expense in our consolidated statements of operations and comprehensive income. At December 31, 2018 and 2017, we had equity instruments without readily determinable fair values of $175.7 million and $186.9 million, respectively, for which we have elected the measurement alternative. We regularly evaluate these investments for any impairment in their estimated fair value, as well as any observable price changes for an identical or similar equity instrument of the same issuer, and determined that no material adjustment in the carrying value was required for the year ended December 31, 2018.

Our deferred compensation plan equity instruments are valued based upon quoted market prices. The investments have a matching liability as the amounts are fully payable to the employees that earned the compensation. Changes in value of these securities and changes to the matching liability to employees are both recognized in earnings and, as a result, there is no impact to consolidated net income.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

On July 26, 2017, we sold our investment in certain equity instruments. The aggregate proceeds received from the sale were $53.9 million, and we recognized a gain on the sale of $21.5 million, which is included in other income in the accompanying consolidated statement of operations and comprehensive income for the year ended December 31, 2017.

At December 31, 2018 and 2017, we held debt securities of $40.1 million and $55.7 million, respectively, in our captive insurance subsidiary. The types of securities included in the investment portfolio of our captive insurance subsidiary are typically U.S. Treasury or other U.S. government securities as well as corporate debt securities with maturities ranging from less than one year to ten years. These securities are classified as available-for-sale and are valued based upon quoted market prices or other observable inputs when quoted market prices are not available. The amortized cost of debt securities, which approximates fair value, held by our captive insurance subsidiary is adjusted for amortization of premiums and accretion of discounts to maturity. Changes in the values of these securities are recognized in accumulated other comprehensive income (loss) until the gain or loss is realized or until any unrealized loss is deemed to be other-than-temporary. We review any declines in value of these securities for other-than-temporary impairment and consider the severity and duration of any decline in value. To the extent an other-than-temporary impairment is deemed to have occurred, an impairment is recorded and a new cost basis is established.

Our captive insurance subsidiary is required to maintain statutory minimum capital and surplus as well as maintain a minimum liquidity ratio. Therefore, our access to these securities may be limited.

Fair Value Measurements

Level 1 fair value inputs are quoted prices for identical items in active, liquid and visible markets such as stock exchanges. Level 2 fair value inputs are observable information for similar items in active or inactive markets, and appropriately consider counterparty creditworthiness in the valuations. Level 3 fair value inputs reflect our best estimate of inputs and assumptions market participants would use in pricing an asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation estimate. We have no investments for which fair value is measured on a recurring basis using Level 3 inputs.

The equity instruments with readily determinable fair values we held at December 31, 2018 and 2017 were primarily classified as having Level 1 and Level 2 fair value inputs. In addition, we had derivative instruments which were classified as having Level 2 inputs, which consist primarily of foreign currency forward contracts and interest rate swap agreements with a gross asset balance of $10.9 million at December 31, 2018 and a gross liability balance of $6.2 million and $18.1 million at December 31, 2018 and 2017, respectively.

Note 8 includes a discussion of the fair value of debt measured using Level 2 inputs. Notes 3 and 4 include discussions of the fair values recorded in purchase accounting using Level 2 and Level 3 inputs. Level 3 inputs to our purchase accounting and impairment analyses include our estimations of net operating results of the property, capitalization rates and discount rates.

Gains on Issuances of Stock by Equity Method Investees

When one of our equity method investees issues additional shares to third parties, our percentage ownership interest in the investee may decrease. In the event the issuance price per share is higher or lower than our average carrying amount per share, we recognize a noncash gain or loss on the issuance, when appropriate. This noncash gain or loss is recognized in our net income in the period the change of ownership interest occurs.

Use of Estimates

We prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported period. Our actual results could differ from these estimates.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Segment and Geographic Locations

Our primary business is the ownership, development, and management of premier shopping, dining, entertainment and mixed use real estate. We have aggregated our retail operations, including malls, Premium Outlets, The Mills, and our international investments into one reportable segment because they have similar economic characteristics and we provide similar products and services to similar types of, and in many cases, the same, tenants. As discussed in Note 7, we consolidated various European assets in 2016. As of December 31, 2018, approximately 6.1% of our consolidated long-lived assets and 3.0% of our consolidated total revenues were derived from assets located outside the United States. As of December 31, 2017, approximately 6.5% of our consolidated long-lived assets and 2.6% of our consolidated total revenues were derived from assets located outside the United States.

Deferred Costs and Other Assets

Deferred costs and other assets include the following as of December 31:


	2018		2017
Deferred lease costs, net	$	249,010	$	250,442
In-place lease intangibles, net		65,825		96,054
Acquired above market lease intangibles, net		64,813		92,405
Marketable securities of our captive insurance companies		40,099		55,664
Goodwill		20,098		20,098
Other marketable and non-marketable securities		253,732		275,130
Prepaids, notes receivable and other assets, net		516,463		584,190
	$	1,210,040	$	1,373,983

Deferred Lease Costs

Our deferred leasing costs consist primarily of capitalized salaries and related benefits in connection with lease originations. We record amortization of deferred leasing costs on a straight‑line basis over the terms of the related leases. Details of these deferred costs as of December 31 are as follows:


	2018		2017
Deferred lease costs	$	497,570	$	485,977
Accumulated amortization		(248,560)		(235,535)
Deferred lease costs, net	$	249,010	$	250,442

Amortization of deferred leasing costs is a component of depreciation and amortization expense. The accompanying consolidated statements of operations and comprehensive income include amortization of deferred leasing costs as follows:


	For the Year Ended December 31,
	2018		2017		2016
Amortization of deferred leasing costs	$	56,646	$	54,323	$	49,993

Intangibles

The average remaining life of in‑place lease intangibles is approximately 2.5 years and is being amortized on a straight‑line basis and is included with depreciation and amortization in the consolidated statements of operations and comprehensive income. The fair market value of above and below market leases is amortized into revenue over the remaining lease life as a component of reported minimum rents. The weighted average remaining life of these intangibles

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

is approximately 2.7 years. The unamortized amount of below market leases is included in accounts payable, accrued expenses, intangibles and deferred revenues in the consolidated balance sheets and was $66.7 million and $94.1 million as of December 31, 2018 and 2017, respectively. The amount of amortization of above and below market leases, net, which increased revenue for the years ended December 31, 2018, 2017, and 2016, was $1.0 million, $2.8 million and $5.4 million, respectively. If a lease is terminated prior to the original lease termination, any remaining unamortized intangible is written off to earnings.

Details of intangible assets as of December 31 are as follows:


	2018		2017
In-place lease intangibles	$	291,613	$	328,811
Accumulated amortization		(225,788)		(232,757)
In-place lease intangibles, net	$	65,825	$	96,054

	2018		2017
Acquired above market lease intangibles	$	253,973	$	260,398
Accumulated amortization		(189,160)		(167,993)
Acquired above market lease intangibles, net	$	64,813	$	92,405

Estimated future amortization and the increasing (decreasing) effect on minimum rents for our above and below market leases as of December 31, 2018 are as follows:


	Below		Above		Impact to
	Market		Market		Minimum
	Leases		Leases		Rent, Net
2019	$	21,789	$	(19,818)	$	1,971
2020		17,130		(15,767)		1,363
2021		7,827		(10,414)		(2,587)
2022		5,395		(7,550)		(2,155)
2023		4,098		(5,491)		(1,393)
Thereafter		10,509		(5,773)		4,736
	$	66,748	$	(64,813)	$	1,935

Derivative Financial Instruments

We record all derivatives on our consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have designated a derivative as a hedge and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We may use a variety of derivative financial instruments in the normal course of business to selectively manage or hedge a portion of the risks associated with our indebtedness and interest payments. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps and caps. We require that hedging derivative instruments be highly effective in reducing the risk exposure that they are designated to hedge. We formally designate any instrument that meets these hedging criteria as a hedge at the inception of the derivative contract. We have no credit-risk-related hedging or derivative activities.

As of December 31, 2018 and 2017, we had no outstanding interest rate derivatives. We generally do not apply hedge accounting to interest rate caps, which had a nominal value as of December 31, 2018 and 2017, respectively.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

We are also exposed to fluctuations in foreign exchange rates on financial instruments which are denominated in foreign currencies, primarily in Yen and Euro. We use currency forward contracts, cross currency swap contracts, and foreign currency denominated debt to manage our exposure to changes in foreign exchange rates on certain Yen and Euro-denominated receivables and net investments. Currency forward contracts involve fixing the Yen:USD or Euro:USD exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward contracts are typically cash settled in U.S. dollars for their fair value at or close to their settlement date.

We had the following Euro:USD forward contracts designated as net investment hedges at December 31, 2018 and 2017 (in millions):


			Liability Value as of
		Maturity/Termination	December 31,		December 31,
Notional Value		Date	2018		2017
€	50.0	November 9, 2018	$	—	$	(2.4)
€	50.0	May 15, 2019		(0.8)		(4.9)
€	50.0	May 15, 2020		(1.5)		(5.2)
€	50.0	May 14, 2021		(2.0)		(5.5)

Liability balances in the above table are included in other liabilities.

In the first quarter of 2018, we entered into a Euro-denominated cross-currency swap agreement to manage our exposure to changes in foreign exchange rates by swapping $150.0 million of 4.38% fixed rate U.S. dollar-denominated debt to 1.37% fixed rate Euro-denominated debt of €121.6 million. The cross-currency swap matures on December 1, 2020. The fair value of our cross‑currency swap agreement at December 31, 2018 is $10.9 million and is included in deferred costs and other assets. In the third quarter of 2018, we entered into a Yen-denominated cross-currency swap agreement by swapping $200.1 million of 4.38% fixed rate U.S. dollar-denominated debt to ¥22.3 billion of 1.19% fixed rate Yen-denominated debt. Contemporaneously, we repaid Yen-denominated borrowings of $201.3 million (U.S. dollar equivalent) on the Operating Partnership’s $4.0 billion unsecured revolving credit facility, or Credit Facility. The cross-currency swap matures on December 1, 2020. The fair value of our cross-currency swap agreement at December 31, 2018 is $1.9 million and is included in other liabilities.

We have designated the currency forward contracts and cross-currency swaps as net investment hedges. Accordingly, we report the changes in fair value in other comprehensive income (loss). Changes in the value of these forward contracts are offset by changes in the underlying hedged Euro or Yen-denominated joint venture investment.

The total gross accumulated other comprehensive income related to the Operating Partnership’s derivative activities, including our share of the other comprehensive income from unconsolidated entities, approximated $37.9 million and $9.3 million as of December 31, 2018 and 2017, respectively.

Noncontrolling Interests

Simon

Details of the carrying amount of our noncontrolling interests are as follows as of December 31:




	2018		2017
Limited partners’ interests in the Operating Partnership	$	492,877	$	548,858
Nonredeemable noncontrolling interests in properties, net		7,398		3,738
Total noncontrolling interests reflected in equity	$	500,275	$	552,596

Net income attributable to noncontrolling interests (which includes nonredeemable and redeemable noncontrolling interests in consolidated properties, limited partners’ interests in the Operating Partnership, and preferred distributions

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

payable by the Operating Partnership on its outstanding preferred units) is a component of consolidated net income. In addition, the individual components of other comprehensive income (loss) are presented in the aggregate for both controlling and noncontrolling interests, with the portion attributable to noncontrolling interests deducted from comprehensive income attributable to common stockholders.

A rollforward of noncontrolling interests for the years ended December 31 is as follows:


	2018		2017		2016
Noncontrolling interests, beginning of period	$	552,596	$	649,464	$	744,905
Net income attributable to noncontrolling interests after preferred distributions and income attributable to redeemable noncontrolling interests in consolidated properties		376,954		297,104		289,594
Distributions to noncontrolling interest holders		(372,397)		(342,453)		(319,193)
Other comprehensive (loss) income allocable to noncontrolling interests:
Unrealized gain (loss) on derivative hedge agreements		2,852		(4,607)		5,444
Net loss (gain) reclassified from accumulated other comprehensive loss into earnings		923		(1,587)		19,629
Currency translation adjustments		(6,271)		6,040		(209)
Changes in available-for-sale securities and other		49		746		216
		(2,447)		592		25,080
Adjustment to limited partners’ interest from change in ownership in the Operating Partnership		(156,241)		(84,794)		(66,996)
Units issued to limited partners		84,103		—		—
Units exchanged for common shares		(1,004)		(6,005)		(73,756)
Units redeemed		(4,951)		—		—
Long-term incentive performance units		26,172		38,305		48,324
Contributions by noncontrolling interests, net, and other		(2,510)		383		1,506
Noncontrolling interests, end of period	$	500,275	$	552,596	$	649,464

The Operating Partnership

Our evaluation of the appropriateness of classifying the Operating Partnership’s common units of partnership interest, or units, held by Simon and the Operating Partnership's limited partners within permanent equity considered several significant factors. First, as a limited partnership, all decisions relating to the Operating Partnership’s operations and distributions are made by Simon, acting as the Operating Partnership’s sole general partner. The decisions of the general partner are made by Simon's Board of Directors or management. The Operating Partnership has no other governance structure. Secondly, the sole asset of Simon is its interest in the Operating Partnership. As a result, a share of common stock of Simon, or common stock, if owned by the Operating Partnership, is best characterized as being similar to a treasury share and thus not an asset of the Operating Partnership.

Limited partners of the Operating Partnership have the right under the Operating Partnership’s partnership agreement to exchange their units for shares of common stock or cash, as selected by Simon as the sole general partner. Accordingly, we classify units held by limited partners in permanent equity because Simon may elect to issue shares of common stock to limited partners exercising their exchange rights rather than using cash. Under the Operating Partnership’s partnership agreement, the Operating Partnership is required to redeem units held by Simon only when Simon has repurchased shares of common stock. We classify units held by Simon in permanent equity because the decision to redeem those units would be made by Simon.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Net income attributable to noncontrolling interests (which includes nonredeemable and redeemable noncontrolling interests in consolidated properties) is a component of consolidated net income.

A rollforward of noncontrolling interests for the years ended December 31 is as follows:




	2018		2017		2016
Noncontrolling nonredeemable interests in properties, net — beginning of period	$	3,738	$	5,116	$	3,456
Net income attributable to noncontrolling nonredeemable interests		7,911		2,091		2,917
Distributions to noncontrolling nonredeemable interest holders		(1,741)		(3,851)		(2,765)
Contributions by noncontrolling nonredeemable interests, net, and other		(2,510)		382		1,508
Noncontrolling nonredeemable interests in properties, net — end of period	$	7,398	$	3,738	$	5,116

Accumulated Other Comprehensive Income (Loss)

Simon

The changes in components of our accumulated other comprehensive income (loss) consisted of the following net of noncontrolling interest as of December 31, 2018:


					Net unrealized
	Currency		Accumulated		losses on
	translation		derivative		marketable
	adjustments		gains, net		securities		Total
Beginning balance	$	(118,138)	$	8,055	$	(370)	$	(110,453)
Other comprehensive (loss) income before reclassifications		(40,766)		18,781		324		(21,661)
Amounts reclassified from accumulated other comprehensive income (loss)		—		6,097		—		6,097
Net current-period other comprehensive (loss) income		(40,766)		24,878		324		(15,564)
Ending balance	$	(158,904)	$	32,933	$	(46)	$	(126,017)

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

The reclassifications out of accumulated other comprehensive income (loss) consisted of the following as of December 31:


	2018		2017		2016
	Amount		Amount		Amount
	reclassified		reclassified		reclassified
	from		from		from
	accumulated		accumulated		accumulated
Details about accumulated other	other		other		other
comprehensive income (loss)	comprehensive		comprehensive		comprehensive		Affected line item where
components:	income (loss)		income (loss)		income (loss)		net income is presented
Currency translation adjustments	$	—	$	—	$	(136,806)	Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net
		—		—		17,948	Net income attributable to noncontrolling interests
	$	—	$	—		(118,858)


Accumulated derivative losses, net	$	(7,020)	$	(9,419)	$	(12,230)	Interest expense
		—		—		(586)	Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net
		923		1,233		1,681	Net income attributable to noncontrolling interests
	$	(6,097)	$	(8,186)	$	(11,135)

Realized gain on sale of marketable securities	$	—	$	21,541	$	—	Other income
		—		(2,820)		—	Net income attributable to noncontrolling interests
	$	—	$	18,721	$	—

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

The Operating Partnership

The changes in accumulated other comprehensive income (loss) by component consisted of the following as of December 31, 2018:


					Net unrealized
	Currency		Accumulated		losses on
	translation		derivative		marketable
	adjustments		gains, net		securities		Total
Beginning balance	$	(135,940)	$	9,263	$	(425)	$	(127,102)
Other comprehensive (loss) income before reclassifications		(47,038)		21,633		373		(25,032)
Amounts reclassified from accumulated other comprehensive income (loss)		—		7,020		—		7,020
Net current-period other comprehensive (loss) income		(47,038)		28,653		373		(18,012)
Ending balance	$	(182,978)	$	37,916	$	(52)	$	(145,114)

The reclassifications out of accumulated other comprehensive income (loss) consisted of the following as of December 31:


	2018		2017		2016
	Amount		Amount		Amount
	reclassified		reclassified		reclassified
	from		from		from
	accumulated		accumulated		accumulated
Details about accumulated other	other		other		other
comprehensive income (loss)	comprehensive		comprehensive		comprehensive		Affected line item where
components:	income (loss)		income (loss)		income (loss)		net income is presented
Currency translation adjustments	$	—	$	—	$	(136,806)	Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net

Accumulated derivative losses, net	$	(7,020)	$	(9,419)	$	(12,230)	Interest expense
		—		—		(586)	Gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net
	$	(7,020)	$	(9,419)	$	(12,816)

Realized gain on sale of marketable securities	$	—	$	21,541	$	—	Other income

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Revenue Recognition

We, as a lessor, retain substantially all of the risks and benefits of ownership of the investment properties and account for our leases as operating leases. We accrue minimum rents on a straight‑line basis over the terms of their respective leases. Substantially all of our retail tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. We recognize overage rents only when each tenant’s sales exceed the applicable sales threshold. We amortize any tenant inducements as a reduction of revenue utilizing the straight‑line method over the term of the related lease or occupancy term of the tenant, if shorter.

We structure our leases to allow us to recover a significant portion of our property operating, real estate taxes, repairs and maintenance, and advertising and promotion expenses from our tenants. A substantial portion of our leases, other than those for anchor stores, require the tenant to reimburse us for a substantial portion of our operating expenses, including common area maintenance, or CAM, real estate taxes and insurance. This significantly reduces our exposure to increases in costs and operating expenses resulting from inflation or otherwise. Such property operating expenses typically include utility, insurance, security, janitorial, landscaping, food court and other administrative expenses. As of December 31, 2018, for substantially all of our leases in the U.S. mall portfolio, we receive a fixed payment from the tenant for the CAM component which is recognized as revenue when earned. When not reimbursed by the fixed‑CAM component, CAM expense reimbursements are based on the tenant’s proportionate share of the allocable operating expenses and CAM capital expenditures for the property. We accrue reimbursements from tenants for recoverable portions of all of these expenses as revenue in the period the applicable expenditures are incurred. We recognize differences between estimated recoveries and the final billed amounts in the subsequent year. These differences were not material in any period presented. Our advertising and promotional costs are expensed as incurred. As discussed in Note 3, upon adoption of Accounting Standards Update (ASU) 2016-02 and its related amendments on January 1, 2019, fixed CAM reimbursements for new or amended leases are recognized on a straight-line basis over the term of the respective leases.

Management Fees and Other Revenues

Management fees and other revenues are generally received from our unconsolidated joint venture properties as well as third parties. Management fee revenue is earned based on a contractual percentage of joint venture property revenue. Development fee revenue is earned on a contractual percentage of hard costs to develop a property. Leasing fee revenue is earned on a contractual per square foot charge based on the square footage of current year leasing activity. We recognize revenue for these services provided when earned based on the performance criteria.

Revenues from insurance premiums charged to unconsolidated properties are recognized on a pro‑rata basis over the terms of the policies. Insurance losses on these policies and our self‑insurance for our consolidated properties are reflected in property operating expenses in the accompanying consolidated statements of operations and comprehensive income and include estimates for losses incurred but not reported as well as losses pending settlement. Estimates for losses are based on evaluations by third-party actuaries and management’s estimates. Total insurance reserves for our insurance subsidiaries and other self‑insurance programs as of December 31, 2018 and 2017 approximated $82.5 million and $81.8 million, respectively, and are included in other liabilities in the consolidated balance sheets. Information related to the securities included in the investment portfolio of our captive insurance subsidiary is included within the “Equity Instruments and Debt Securities” section above.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Allowance for Credit Losses

We record a provision for credit losses based on our judgment of a tenant’s creditworthiness, ability to pay and probability of collection. In addition, we also consider the sector in which the tenant operates and our historical collection experience in cases of bankruptcy, if applicable. Accounts are written off when they are deemed to be no longer collectible. Presented below is the activity in the allowance for credit losses during the following years:


	For the Year Ended
	December 31,
	2018		2017		2016
Balance, beginning of period	$	23,460	$	22,498	$	30,094
Provision for credit losses		12,631		11,304		7,319
Accounts written off, net of recoveries		(9,271)		(10,342)		(14,915)
Balance, end of period	$	26,820	$	23,460	$	22,498

Income Taxes

Simon and certain subsidiaries of the Operating Partnership have elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification. In order to maintain this REIT status, the regulations require the entity to distribute at least 90% of REIT taxable income to its owners and meet certain other asset and income tests as well as other requirements. We intend to continue to adhere to these requirements and maintain Simon’s REIT status and that of the REIT subsidiaries. As REITs, these entities will generally not be liable for U.S. federal corporate income taxes as long as they distribute not less than 100% of their REIT taxable income. Thus, we made no provision for U.S. federal income taxes for these entities in the accompanying consolidated financial statements. If Simon or any of the REIT subsidiaries fail to qualify as a REIT, and if available relief provisions do not apply, Simon or that entity will be subject to tax at regular corporate rates for the years in which it failed to qualify. If Simon or any of the REIT subsidiaries loses its REIT status it could not elect to be taxed as a REIT for four taxable years following the year during which qualification was lost unless the failure to qualify was due to reasonable cause and certain other conditions were satisfied.

We have also elected taxable REIT subsidiary, or TRS, status for some of our subsidiaries. This enables us to provide services that would otherwise be considered impermissible for REITs and participate in activities that do not qualify as “rents from real property”. For these entities, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe all or some portion of the deferred tax asset may not be realized. An increase or decrease in the valuation allowance that results from the change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is included in income.

As a partnership, the allocated share of the Operating Partnership’s income or loss for each year is included in the income tax returns of the partners; accordingly, no accounting for income taxes is required in the accompanying consolidated financial statements other than as discussed above for our TRSs.

As of December 31, 2018 and 2017, we had net deferred tax liabilities of $278.3 million and $301.7 million, respectively, which primarily relate to the temporary differences between the carrying value of balance sheet assets and liabilities and their tax bases. These differences were primarily created through the consolidation of various European assets in 2016 as discussed further in Note 7. Additionally, we have deferred tax liabilities related to our TRSs, consisting of operating losses and other carryforwards for U.S. federal income tax purposes as well as the timing of the deductibility of losses or reserves from insurance subsidiaries, though these amounts are not material to the financial statements. The net deferred tax liability is included in other liabilities in the accompanying consolidated balance sheets.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

We are also subject to certain other taxes, including state and local taxes, franchise taxes, as well as income-based and withholding taxes on dividends from certain of our international investments, which are included in income and other taxes in the consolidated statements of operations and comprehensive income.

Corporate Expenses

Home and regional office costs primarily include compensation and personnel related costs, travel, building and office costs, and other expenses for our corporate home office and regional offices. General and administrative expense primarily includes executive compensation, benefits and travel expenses as well as costs of being a public company, including certain legal costs, audit fees, regulatory fees, and certain other professional fees.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014‑09, "Revenue From Contracts With Customers." ASU 2014-09 amends the existing accounting standards for revenue recognition. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property, including real estate.

Our revenues impacted by this standard primarily include management, development, leasing and financing fee revenues for services performed related to various domestic joint ventures that we manage, licensing fees earned from various international properties, sales of real estate, including land parcels and operating properties, and other ancillary income earned at our properties. The amount and timing of revenue recognition from our services to joint ventures, licensing fee arrangements, and ancillary income under the newly effective standard is consistent with the prior measurement and pattern of recognition. In addition, we do not actively sell operating properties as part of our core business strategy and, accordingly, the sale of properties does not generally constitute a significant part of our revenue and cash flows. We adopted the standard using the modified retrospective approach on January 1, 2018 and there was no cumulative effect adjustment recognized. Our revenues impacted by this standard are included in management fees and other revenues and in other income in the accompanying consolidated statements of operations and comprehensive income.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which requires entities to recognize changes in equity investments with readily determinable fair values in net income. We recognized a cumulative effect adjustment of $7.3 million as of adoption on January 1, 2018 to reclassify unrealized gains previously reported in accumulated other comprehensive income for equity instruments with readily determinable fair values that were previously accounted for as available-for-sale securities and certain equity instruments previously accounted for using the cost method for which the measurement alternative described below was not elected. For those equity instruments that do not have readily determinable fair values, the ASU permits the application of a measurement alternative using the cost of the investment, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer. This guidance is applied prospectively upon the occurrence of an event which establishes fair value to all other equity instruments we account for using the measurement alternative.

In February 2016, the FASB issued ASU 2016-02, "Leases," which will result in lessees recognizing most leased assets and corresponding lease liabilities on the balance sheet. Lessor accounting will remain substantially similar to the current accounting; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASU 2014-09, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. ASU 2016-02 also limits the capitalization of leasing costs to initial direct costs, which if applied in 2018, would have reduced our capitalized leasing costs and correspondingly increased expenses by approximately $45 million.

Substantially all of our revenues and the revenues of our equity method investments are earned from arrangements that are within the scope of ASU 2016-02. Upon adoption of ASU 2016-02 on January 1, 2019, consideration related to

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

non-lease components identified in our lease arrangements are accounted for using the guidance in ASU 2014-09, which for new and amended leases we have determined would (i) necessitate that we reallocate consideration received under many of our lease arrangements between the lease and non-lease component, (ii) result in recognizing revenue allocated to our primary non-lease component (consideration received from fixed common area maintenance arrangements) on a straight-line basis and (iii) require separate presentation of revenue recognized from lease and non-lease components on our statements of operations and comprehensive income. However, on July 30, 2018, the FASB issued ASU 2018-11, which created a practical expedient that provides lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single lease component. We determined that our new and amended lease arrangements will meet the criteria under the practical expedient to account for lease and non-lease components as a single lease component, which alleviates the requirement upon adoption of ASU 2016-02 that we reallocate or separately present lease and non-lease components. As a result, we will recognize consideration received from fixed common area maintenance arrangements on a straight-line basis for new or amended leases as this consideration is attributed to the lease component.

Further, ASU 2016-02 requires recognition in our consolidated balance sheets of leases of land and other arrangements where we are the lessee. Upon adoption on January 1, 2019, we recognized a right of use asset and corresponding lease liability of $524.0 million representing the present value of future lease payments required under our lessee arrangements. We utilized lease terms ranging from 2019 to 2090 including periods for which exercising an extension option is reasonably assured and discount rates from 3.97% to 5.52% when determining the present value of future lease payments. All of our existing lessee arrangements upon adoption will continue to be classified as operating leases, in which case the pattern of lease expense recognition will be unchanged.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses," which introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Instruments in scope include loans, held-to-maturity debt securities, and net investments in leases as well as reinsurance and trade receivables. In November 2018, the FASB issued ASU 2018-19, which clarifies that operating lease receivables are outside the scope of the new standard. This standard will be effective for us in fiscal years beginning after December 15, 2019. We are currently evaluating the impact that the adoption of the new standard will have on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets,” which clarifies the scope and application of Accounting Standards Codification 610-20 on the sale or transfer of nonfinancial assets and in substance assets to noncustomers, including partial sales. The standard generally aligns the measurement of a retained interest in a nonfinancial asset with that of a retained interest in a business. It also eliminates the use of the carryover basis for contributions of real estate into a joint venture where control of the real estate is not retained, which will result in the recognition of a gain or loss upon contribution. We adopted the standard using the modified retrospective approach on January 1, 2018 and there was no cumulative effect adjustment to recognize.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which introduced amendments to the hedge accounting model to allow for better alignment with risk management practices in addition to simplifying the hedge accounting model. The provisions may permit more risk management strategies to qualify for hedge accounting, including interest rate hedges and foreign currency hedges. We early adopted the ASU on January 1, 2018 as permitted under the standard. There was no impact on our consolidated financial statements at adoption.

Real Estate Acquisitions and Dispositions

We acquire interests in properties to generate both current income and long-term appreciation in value. We acquire interests in individual properties or portfolios of retail real estate companies that meet our investment criteria and sell properties which no longer meet our strategic criteria. Unless otherwise noted below, gains and losses on these transactions are included in gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income. We capitalize asset acquisition costs and expense costs related to business combinations, as well as disposition related costs as they are incurred. We incurred a minimal amount of transaction expenses during 2018, 2017, and 2016.

Our consolidated and unconsolidated acquisition and disposition activity for the periods presented are as follows:

2018 Acquisitions

On September 25, 2018, we acquired the remaining 50% interest in The Outlets at Orange from our joint venture partner. The Operating Partnership issued 475,183 units, or approximately $84.1 million, as consideration for the acquisition. The property is subject to a $215.0 million 4.22% fixed rate mortgage loan. We accounted for this transaction as an asset acquisition and substantially all of our investment has been determined to relate to investment property.

2017 Acquisitions

On April 21, 2017, our controlled European investee acquired a 100% interest in an outlet center in Roosendaal, Netherlands for cash consideration of $69.8 million and the assumption of existing mortgage debt of $40.1 million. In May 2017, the assumed loan was refinanced with a $69.0 million mortgage loan due in 2024, after available extension options, with an interest rate of EURIBOR plus 1.85%.

2016 Acquisitions

On January 1, 2016, as discussed further in Note 7, we gained control of the European investee that held our interest in six Designer Outlet properties, requiring a remeasurement of our previously held equity interest to fair value and a corresponding non-cash gain of $12.1 million and which also resulted in the consolidation of two of the six properties, which had been previously unconsolidated. In February 2016, we and our partner, through this European investee, acquired a noncontrolling 75.0% ownership interest in an outlet center in Ochtrup, Germany for cash consideration of approximately $38.3 million. On July 25, 2016, as further discussed in Note 7, this European investee also acquired the remaining 33% interest in two Italian outlet centers in Naples and Venice. The consolidation of these two properties resulted in a remeasurement of our previously held equity interest to fair value and a corresponding non-cash gain of $29.3 million.

On April 14, 2016, as discussed further in Note 7, we acquired a noncontrolling 50% interest in The Shops at Crystals.

2018 Dispositions

During 2018, we recorded net gains of $288.8 million primarily related to disposition activity which included the foreclosure of two consolidated retail properties in satisfaction of their $200.0 million and $80.0 million non-recourse mortgage loans and, as discussed in Note 7, our interest in the German department store properties owned through our investment in HBS was sold during the fourth quarter of 2018. Also, as discussed further in Note 7, Klépierre disposed of its interests in certain shopping centers during 2018, resulting in a gain of which our share was $20.2 million.

2017 Dispositions

During 2017, we disposed of our interest in one unconsolidated retail property. The loss recognized on this transaction was approximately $1.3 million. As discussed in Note 7, Klépierre disposed of its interests in certain shopping centers during the second quarter, resulting in a gain of which our share was $5.0 million.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

2016 Dispositions

During 2016, we disposed of our interests in two unconsolidated multi-family residential investments, three consolidated retail properties, and four unconsolidated retail properties. Our share of the gross proceeds from these transactions was $81.8 million. The gain on the consolidated retail properties was $12.4 million. The gain on the unconsolidated retail properties was $22.6 million. The aggregate gain of $36.2 million from the sale of the two unconsolidated multi-family residential investments is included in other income and resulted in an additional $7.2 million in taxes included in income and other taxes. As discussed in Note 7, Klépierre disposed of its interest in certain Scandinavian properties during the fourth quarter, resulting in a gain of which our share was $8.1 million.

Per Share and Per Unit Data

We determine basic earnings per share and basic earnings per unit based on the weighted average number of shares of common stock or units, as applicable, outstanding during the period and we consider any participating securities for purposes of applying the two-class method. We determine diluted earnings per share and diluted earnings per unit based on the weighted average number of shares of common stock or units, as applicable, outstanding combined with the incremental weighted average number of shares or units, as applicable, that would have been outstanding assuming all potentially dilutive securities were converted into shares of common stock or units, as applicable, at the earliest date possible. The following tables set forth the computation of basic and diluted earnings per share and basic and diluted earnings per unit.

Simon


	For the Year Ended December 31,
	2018		2017		2016
Net Income attributable to Common Stockholders — Basic and Diluted	$	2,436,721	$	1,944,625	$	1,835,559
Weighted Average Shares Outstanding — Basic and Diluted		309,627,178		311,517,345		312,690,756

For the year ended December 31, 2018, potentially dilutive securities include units that are exchangeable for common stock and long-term incentive performance units, or LTIP units, granted under our long-term incentive performance programs that are convertible into units and exchangeable for common stock. No securities had a material dilutive effect for the years ended December 31, 2018, 2017, and 2016. We have not adjusted net income attributable to common stockholders and weighted average shares outstanding for income allocable to limited partners or units, respectively, as doing so would have no dilutive impact. We accrue dividends when they are declared.

The Operating Partnership


	For the Year Ended December 31,
	2018		2017		2016
Net Income attributable to Unitholders — Basic and Diluted	$	2,805,764	$	2,239,638	$	2,122,236
Weighted Average Units Outstanding — Basic and Diluted		356,520,452		358,776,632		361,526,633

For the year ended December 31, 2018, potentially dilutive securities include LTIP units. No securities had a material dilutive effect for the years ended December 31, 2018, 2017, and 2016. We accrue distributions when they are declared.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

The taxable nature of the dividends declared and Operating Partnership distributions declared for each of the years ended as indicated is summarized as follows:


	For the Year Ended December 31,
	2018			2017			2016
Total dividends/distributions paid per common share/unit	$	7.90		$	7.15		$	6.50
Percent taxable as ordinary income		96.20	%		100.00	%		99.70	%
Percent taxable as long-term capital gains		3.80	%		0.00	%		0.30	%
		100.00	%		100.00	%		100.00	%

In the first quarter of 2019, Simon’s Board of Directors declared a quarterly cash dividend of $2.05 per share of common stock payable on February 28, 2019 to stockholders of record on February 14, 2019. The Operating Partnership’s distribution rate on our units is equal to the dividend rate on Simon’s common stock.

Investment Properties

Investment properties consist of the following as of December 31:


	2018		2017
Land	$	3,673,023	$	3,635,316
Buildings and improvements		32,994,937		32,379,190
Total land, buildings and improvements		36,667,960		36,014,506
Furniture, fixtures and equipment		424,710		378,958
Investment properties at cost		37,092,670		36,393,464
Less — accumulated depreciation		12,884,539		11,935,949
Investment properties at cost, net	$	24,208,131	$	24,457,515
Construction in progress included above	$	561,556	$	503,692

Investments in Unconsolidated Entities and International Investments

Real Estate Joint Ventures and Investments

Joint ventures are common in the real estate industry. We use joint ventures to finance properties, develop new properties, and diversify our risk in a particular property or portfolio of properties. As discussed in Note 2, we held joint venture interests in 81 properties as of December 31, 2018 and 2017, respectively.

Certain of our joint venture properties are subject to various rights of first refusal, buy‑sell provisions, put and call rights, or other sale or marketing rights for partners which are customary in real estate joint venture agreements and the industry. We and our partners in these joint ventures may initiate these provisions (subject to any applicable lock up or similar restrictions), which may result in either the sale of our interest or the use of available cash or borrowings, or the use of limited partnership interests in the Operating Partnership, to acquire the joint venture interest from our partner.

We may provide financing to joint ventures primarily in the form of interest bearing construction loans. As of December 31, 2018 and 2017, we had construction loans and other advances to related parties totaling $85.8 million and $87.0 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Unconsolidated Property Transactions

On September 25, 2018, as discussed in Note 4, we acquired the remaining 50% interest in The Outlets at Orange from our joint venture partner. The Operating Partnership issued 475,183 units at a price of $176.99 to acquire this remaining interest. As a result of this acquisition, we now own 100% of this property.

On June 7, 2018, Aventura Mall, a property in which we own a 33.3% interest, refinanced its $1.2 billion mortgage loan and its $200.8 million construction loan with a $1.75 billion mortgage loan at a fixed interest rate of 4.12% that matures on July 1, 2028. An early repayment charge of $30.9 million was incurred at the property, which along with the write-off of deferred debt issuance costs of $6.5 million, is included in interest expense in the accompanying combined joint venture statements of operations. Our $12.5 million share of the charge associated with the repayment is included in income from unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income. Excess proceeds from the financing were distributed to the venture partners.

We have a 50% noncontrolling interest in a joint venture with Seritage Growth Properties, or Seritage, which originally held an interest in ten Sears properties located in our malls. On November 3, 2017, we acquired additional interests in the real estate assets and/or rights to terminate leases related to twelve Sears stores located at our malls (including five stores previously held in our joint venture with Seritage), in order to redevelop these properties. Our cost of this transaction after partner participation was $149.1 million, which is reflected as investment property.

In May 2017, Colorado Mills, a property in which we have a 37.5% interest, sustained significant hail damage. During the second quarter of 2017, the property recorded an impairment charge of approximately $32.5 million based on the net carrying value of the assets damaged, which was fully offset by anticipated insurance recoveries. As of December 31, 2018, the property had received business interruption proceeds and also property damage proceeds of $65.9 million, which resulted in the property recording a $33.4 million gain in 2018. Our $12.5 million share of the gain is reflected within the gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income.

On September 15, 2016, we and a group of co-investors acquired certain assets and liabilities of Aéropostale, a retailer of apparel and accessories, out of bankruptcy. The interests were acquired through two separate joint ventures, a licensing venture and an operating venture. In April 2018, we contributed our entire interest in the licensing venture in exchange for additional interests in ABG, a brand development, marketing, and entertainment company. As a result, we recognized a $35.6 million non‑cash gain representing the increase in value of our previously held interest in the licensing venture, which is included in other income in the accompanying consolidated statements of operations and comprehensive income. At December 31, 2018, our noncontrolling equity method interests in the operations venture of Aéropostale and in ABG was 44.95% and 5.40%, respectively.

On April 14, 2016, we and a joint venture partner completed the acquisition of The Shops at Crystals, a luxury shopping center on the Las Vegas Strip, for $1.1 billion. The transaction was funded with a combination of cash on hand, cash from our partner, and a $550.0 million, 3.74% fixed-rate mortgage loan that will mature on July 1, 2026. We have a 50% noncontrolling interest in this joint venture and manage the day-to-day operations. Substantially all of our investment has been determined to relate to investment property based on estimated fair values at the acquisition date.

On April 5, 2016, Quaker Bridge Mall, in which we own a 50% noncontrolling interest, completed a $180.0 million mortgage financing with a fixed interest rate of 4.50% that matures on May 1, 2026. Proceeds of approximately $180.0 million from the financing were distributed to the joint venture partners in April 2016.

As of December 31, 2018 and 2017, we had an 11.7% noncontrolling equity interest in HBS, a joint venture we formed with Hudson’s Bay Company. As of December 31, 2017, HBS had 42 properties in the U.S. and 41 properties in Germany. During the fourth quarter of 2018, our interest in the German department store properties was sold to Hudson’s Bay Company and SIGNA Retail Holdings resulting in a gain of $91.1 million. As of December 31, 2018, HBS continues to own 42 U.S. properties. Our share of net income, net of amortization of our excess investment, was $15.1 million and $16.1 million for the year ended December 31, 2018 and 2017, respectively. Total assets and total liabilities of HBS as of December 31, 2018 were $1.7 billion and $834.1 million, respectively. Total revenues, operating income and consolidated net income were approximately $326.3 million, $196.3 million and $105.9 million, respectively, for the year ended December 31, 2018 and $351.0 million, $313.8 million, and $220.2 million, respectively for the year ended December 31, 2017.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

International Investments

We conduct our international operations primarily through joint venture arrangements and account for the majority of these international joint venture investments using the equity method of accounting.

European Investments

At December 31, 2018, we owned 63,924,148 shares, or approximately 21.3%, of Klépierre, which had a quoted market price of $30.86 per share. Our share of net income, net of amortization of our excess investment, was $98.8 million, $50.0 million and $41.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. Based on applicable Euro:USD exchange rates and after our conversion of Klépierre’s results to GAAP, Klépierre’s total assets, total liabilities, and noncontrolling interests were $20.0 billion, $12.7 billion, and $1.4 billion, respectively, as of December 31, 2018 and $21.8 billion, $13.7 billion, and $1.6 billion, respectively, as of December 31, 2017. Klépierre’s total revenues, operating income and consolidated net income were approximately $1.6 billion, $670.4 million and $693.0 million, respectively, for the year ended December 31, 2018, $1.5 billion, $545.7 million and $381.3 million, for the year ended December 31, 2017, and $1.5 billion, $449.9 million and $310.9 million, respectively, for the year ended December 31, 2016.

During the years ended December 31, 2018, 2017 and 2016, Klépierre completed the disposal of its interests in certain shopping centers. In connection with these disposals, we recorded gains of $20.2 million, $5.0 million and $8.1 million, respectively, representing our share of the gains recognized by Klépierre, which is included in gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income.

We had an interest in a European investee that had interests in nine Designer Outlet properties as of December 31, 2018 and 2017, and seven Designer Outlet properties at December 31, 2016. On January 1, 2016, we gained control of the entity through terms of the underlying venture agreement, requiring a remeasurement of our previously held equity interest to fair value resulting in a non-cash gain of $12.1 million in earnings during the first quarter of 2016, including amounts reclassified from accumulated other comprehensive income (loss) related to the currency translation adjustment previously recorded on our investment. The gain is included in gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income. As a result of the change in control, we consolidated two of the outlet properties on January 1, 2016. The consolidation required us to recognize the entity's identifiable assets and liabilities at fair value in our consolidated financial statements along with the fair value of the related redeemable noncontrolling interest representing our partners' share. The fair value of the consolidated assets and liabilities relates primarily to investment property, investments in unconsolidated entities and assumed mortgage debt. Due to certain redemption rights held by our venture partner, the noncontrolling interest is presented (i) in the accompanying Simon consolidated balance sheets outside of equity in limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties and (ii) in the accompanying Operating Partnership consolidated balance sheets within preferred units, various series, at liquidation value, and noncontrolling redeemable interests in properties.

In February 2016, we and our partner, through this European investee, acquired a noncontrolling 75.0% ownership interest in an outlet center in Ochtrup, Germany for cash consideration of approximately $38.3 million.

On July 25, 2016, this European investee also acquired the remaining 33% interest in two Italian outlet centers in Naples and Venice, as well as the remaining interests in related expansion projects and working capital for cash consideration of $159.7 million. This resulted in the consolidation of these two properties on the acquisition date, requiring a remeasurement of our previously held equity interest to fair value and the recognition of a non-cash gain of $29.3 million in earnings during the third quarter of 2016. Substantially all of our investment has been determined to relate to investment property based on estimated fair value at the acquisition date.

On April 7, 2017, this European investee acquired an additional 15.7% investment in the Roermond Designer Outlets Phase 4 expansion for cash consideration of approximately $17.9 million, bringing its total noncontrolling interest in the expansion to 51.3%.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

On April 21, 2017, this European investee acquired a 100% interest in an outlet center in Roosendaal, Netherlands for cash consideration of $69.8 million and the assumption of existing mortgage debt of $40.1 million. In May, the assumed loan was refinanced with a $69.0 million mortgage loan due in 2024, after available extension options, with an interest rate of EURIBOR plus 1.85%. Substantially all of our investment has been determined to relate to investment property based on estimated fair value at the acquisition date.

In addition, we have a 50.0% noncontrolling interest in a European property management and development company that provides services to the Designer Outlet properties and third parties.

As of December 31, 2018, our legal percentage ownership interests in these properties ranged from 45% to 94%.

We also have minority interests in Value Retail PLC and affiliated entities, which own or have interests in and operate nine luxury outlets located throughout Europe and we have a direct minority ownership in three of those outlets. At December 31, 2018 and 2017, the carrying value of these equity instruments was $140.8 million and is included in deferred costs and other assets.

Asian Joint Ventures

We conduct our international Premium Outlet operations in Japan through a joint venture with Mitsubishi Estate Co., Ltd. We have a 40% noncontrolling ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $232.1 million and $230.3 million as of December 31, 2018 and 2017, respectively, including all related components of accumulated other comprehensive income (loss). We conduct our international Premium Outlet operations in South Korea through a joint venture with Shinsegae International Co. We have a 50% noncontrolling ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $166.3 million and $149.1 million as of December 31, 2018 and 2017, respectively, including all related components of accumulated other comprehensive income (loss).

Summary Financial Information

A summary of our equity method investments and share of income from such investments, excluding Klépierre, Aéropostale, ABG, and HBS, follows. During 2017, we disposed of our interest in one retail property. During 2016, we disposed of our interests in four retail properties and our investments in two multi-family residential assets.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

COMBINED BALANCE SHEETS


	December 31,		December 31,
	2018		2017
Assets:
Investment properties, at cost	$	18,807,449	$	18,328,747
Less - accumulated depreciation		6,834,633		6,371,363
		11,972,816		11,957,384
Cash and cash equivalents		1,076,398		956,084
Tenant receivables and accrued revenue, net		445,148		403,125
Deferred costs and other assets		390,818		355,585
Total assets	$	13,885,180	$	13,672,178
Liabilities and Partners’ Deficit:
Mortgages	$	15,235,415	$	14,784,310
Accounts payable, accrued expenses, intangibles, and deferred revenue		976,311		1,033,674
Other liabilities		344,205		365,857
Total liabilities		16,555,931		16,183,841
Preferred units		67,450		67,450
Partners’ deficit		(2,738,201)		(2,579,113)
Total liabilities and partners’ deficit	$	13,885,180	$	13,672,178
Our Share of:
Partners’ deficit	$	(1,168,216)	$	(1,144,620)
Add: Excess Investment		1,594,198		1,733,063
Our net Investment in unconsolidated entities, at equity	$	425,982	$	588,443

“Excess Investment” represents the unamortized difference of our investment over our share of the equity in the underlying net assets of the joint ventures or other investments acquired and has been determined to relate to the fair value of the investment property, lease related intangibles, and debt premiums and discounts. We amortize excess investment over the life of the related depreciable components of investment properties, typically no greater than 40 years, the terms of the applicable leases and the applicable debt maturity, respectively. The amortization is included in the reported amount of income from unconsolidated entities.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

As of December 31, 2018, scheduled principal repayments on joint venture properties’ mortgage indebtedness are as follows:


2019	$	552,914
2020		1,114,394
2021		2,272,043
2022		1,831,834
2023		1,138,416
Thereafter		8,367,996
Total principal maturities		15,277,597
Net unamortized debt premium		2,225
Debt issuance costs		(44,407)
Total mortgages and unsecured indebtedness	$	15,235,415

This debt becomes due in installments over various terms extending through 2035 with interest rates ranging from 0.31% to 11.59% and a weighted average interest rate of 4.05% at December 31, 2018.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

COMBINED STATEMENTS OF OPERATIONS


	For the Year Ended
	December 31,
	2018		2017		2016
REVENUE:
Minimum rent	$	1,949,523	$	1,868,613	$	1,823,674
Overage rent		230,145		210,909		200,638
Tenant reimbursements		880,042		860,778		862,155
Other income		326,575		290,515		237,782
Total revenue		3,386,285		3,230,815		3,124,249
OPERATING EXPENSES:
Property operating		590,921		551,885		538,002
Depreciation and amortization		652,968		640,286		588,666
Real estate taxes		259,567		245,646		239,917
Repairs and maintenance		87,408		81,309		76,380
Advertising and promotion		87,349		86,480		88,956
Provision for credit losses		14,042		6,645		7,603
Other		187,292		184,037		183,435
Total operating expenses		1,879,547		1,796,288		1,722,959
Operating Income Before Other Items		1,506,738		1,434,527		1,401,290
Interest expense		(663,693)		(593,062)		(585,958)
Gain (loss) on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		33,367		(2,239)		101,051
Net Income	$	876,412	$	839,226	$	916,383
Third-Party Investors’ Share of Net Income	$	436,767	$	424,533	$	452,844
Our Share of Net Income	$	439,645	$	414,693	$	463,539
Amortization of Excess Investment		(85,252)		(89,804)		(94,213)
Our Share of (Gain) Loss on Sale or Disposal of, or Recovery on, Assets and Interests in Unconsolidated Entities, net		(12,513)		1,342		(22,636)
Our Share of Gain on Sale or Disposal of, or Recovery on, Assets and Interests Included in Other Income in the Consolidated Financial Statements		—		—		(36,153)
Income from Unconsolidated Entities	$	341,880	$	326,231	$	310,537

Our share of income from unconsolidated entities in the above table, aggregated with our share of results of Klépierre, Aéropostale, ABG, and HBS, is presented in income from unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income. Unless otherwise noted, our share of the gain or loss on sale or disposal of assets and interests in unconsolidated entities, net is reflected within gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Indebtedness and Derivative Financial Instruments

Our mortgages and unsecured indebtedness, excluding the impact of derivative instruments, consist of the following as of December 31:


	2018		2017
Fixed-Rate Debt:
Mortgage notes, including $11,822 and $16,869 of net premiums and $14,522 and $16,106 of debt issuance costs, respectively. Weighted average interest and maturity of 3.91% and 5.6 years at December 31, 2018.	$	6,099,787	$	6,020,552
Unsecured notes, including $44,691 and $51,657 of net discounts and $58,822 and $68,535 of debt issuance costs, respectively. Weighted average interest and maturity of 3.18% and 7.2 years at December 31, 2018.		15,535,468		16,375,713
Commercial Paper (see below)		758,681		978,467
Total Fixed-Rate Debt		22,393,936		23,374,732
Variable-Rate Debt:
Mortgages notes, including $5,901 and $8,988 of debt issuance costs, respectively. Weighted average interest and maturity of 3.15% and 3.1 years at December 31, 2018.		736,274		883,781
Credit Facility (see below), including $16,930 and $17,106 of debt issuance costs, respectively, at December 31, 2018.		108,070		305,530
Total Variable-Rate Debt		844,344		1,189,311
Other Debt Obligations		67,255		68,420
Total Mortgages and Unsecured Indebtedness	$	23,305,535	$	24,632,463

General. Our unsecured debt agreements contain financial covenants and other non‑financial covenants. If we were to fail to comply with these covenants, after the expiration of the applicable cure periods, the debt maturity could be accelerated or other remedies could be sought by the lender, including adjustments to the applicable interest rate. As of December 31, 2018, we were in compliance with all covenants of our unsecured debt.

At December 31, 2018, our consolidated subsidiaries were the borrowers under 45 non‑recourse mortgage notes secured by mortgages on 48 properties, including two separate pools of cross‑defaulted and cross‑collateralized mortgages encumbering a total of five properties. Under these cross‑default provisions, a default under any mortgage included in the cross‑defaulted pool may constitute a default under all mortgages within that pool and may lead to acceleration of the indebtedness due on each property within the pool. Certain of our secured debt instruments contain financial and other non‑financial covenants which are specific to the properties that serve as collateral for that debt. If the applicable borrower under these non-recourse mortgage notes were to fail to comply with these covenants, the lender could accelerate the debt and enforce its rights against their collateral. At December 31, 2018, the applicable borrowers under these non‑recourse mortgage notes were in compliance with all covenants where non‑compliance could individually or in the aggregate, giving effect to applicable cross‑default provisions, have a material adverse effect on our financial condition, liquidity or results of operations.

Unsecured Debt

At December 31, 2018, our unsecured debt consisted of $15.6 billion of senior unsecured notes of the Operating Partnership, $125.0 million outstanding under the Credit Facility, and $758.7 million outstanding under the Operating Partnership’s global unsecured commercial paper program, or Commercial Paper program.

On December 31, 2018, we had an aggregate available borrowing capacity of $6.6 billion under the Credit Facility and the Operating Partnership’s $3.5 billion unsecured revolving credit facility, or Supplemental Facility, and together with

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

the Credit Facility, the Credit Facilities. The maximum aggregate outstanding balance under the Credit Facilities during the year ended December 31, 2018 was $423.1 million and the weighted average outstanding balance was $238.1 million. Letters of credit of $11.3 million were outstanding under the Credit Facilities as of December 31, 2018.

The Credit Facility’s initial borrowing capacity of $4.0 billion may be increased to $5.0 billion during its term and provides for borrowings denominated in U.S. dollars, Euro, Yen, Sterling, Canadian dollars and Australian dollars. Borrowings in currencies other than the U.S. dollar are limited to 95% of the maximum revolving credit amount, as defined. The initial maturity date of the Credit Facility is June 30, 2021 and can be extended for an additional year to June 30, 2022 at our sole option, subject to our continued compliance with the terms thereof. The base interest rate on the Credit Facility is LIBOR plus 77.5 basis points with an additional facility fee of 10 basis points.

On February 15, 2018, the Operating Partnership amended and extended the Supplemental Facility. The Supplemental Facility’s initial borrowing capacity of $3.5 billion may be increased to $4.5 billion during its term and provides for borrowings denominated in U.S. dollars, Euro, Yen, Sterling, Canadian dollars and Australian dollars. The initial maturity date of the Supplemental Facility was extended to June 30, 2022 and can be extended for an additional year to June 30, 2023 at our sole option, subject to our continued compliance with the terms thereof. The base interest rate on the Supplemental Facility was reduced to LIBOR plus 77.5 basis points from LIBOR plus 80 basis points, with an additional facility fee of 10 basis points.

The Operating Partnership also has available a Commercial Paper program. On November 14, 2018, we amended the Commercial Paper program to increase the initial borrowing capacity of $1.0 billion to $2.0 billion, or the non-U.S. dollar equivalent thereof. The Operating Partnership may issue unsecured commercial paper notes, denominated in U.S. dollars, Euro and other currencies. Notes issued in non-U.S. currencies may be issued by one or more subsidiaries of the Operating Partnership and are guaranteed by the Operating Partnership. Notes will be sold under customary terms in the U.S. and Euro commercial paper note markets and rank (either by themselves or as a result of the guarantee described above) pari passu with the Operating Partnership's other unsecured senior indebtedness. The Commercial Paper program is supported by the Credit Facilities and if necessary or appropriate, we may make one or more draws under either of the Credit Facilities to pay amounts outstanding from time to time on the Commercial Paper program. On December 31, 2018, we had $758.7 million outstanding under the Commercial Paper program, fully comprised of U.S. dollar denominated notes with a weighted average interest rate of 2.49%. These borrowings have a weighted average maturity date of February 20, 2019 and reduce amounts otherwise available under the Credit Facilities.

On January 3, 2018, the Operating Partnership redeemed at par $750.0 million of senior unsecured notes with a fixed interest rate of 1.50%.

On July 10, 2018, the Operating Partnership repaid Yen-denominated borrowings of $201.3 million (U.S. dollar equivalent) on the Credit Facility.

On February 1, 2019, the Operating Partnership repaid at maturity $600.0 million of senior unsecured notes with a fixed interest rate of 2.20%.

Mortgage Debt

Total mortgage indebtedness was $6.8 billion and $6.9 billion at December 31, 2018 and 2017, respectively.

During the year ended December 31, 2018, we repaid a mortgage loan of $86.6 million with an interest rate of 7.79%.

On July 30, 2018, Noventa di Piave Designer Outlet, in which we own a 90% interest, refinanced its €110.0 million, 1.68% variable rate mortgage loan maturing in 2020 with a €260.0 million, 2.00% fixed rate mortgage loan that matures in 2025.

On September 25, 2018, as discussed in Note 7, we acquired the remaining 50% interest in The Outlets at Orange from our joint venture partner, resulting in the consolidation of the existing fixed rate mortgage loan of $215.0 million. The loan matures on April 1, 2024 and bears interest at 4.22%.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Debt Maturity and Other

Our scheduled principal repayments on indebtedness as of December 31, 2018 are as follows:


2019	$	1,416,309	(1)
2020		1,972,316
2021		3,146,997
2022		3,596,138
2023		1,869,674
Thereafter		11,365,890
Total principal maturities		23,367,324
Net unamortized debt premium		(32,869)
Debt issuance costs, net		(96,175)
Other Debt Obligations		67,255
Total mortgages and unsecured indebtedness	$	23,305,535

(1)Includes $600.0 million aggregate principal amount of 2.20% senior unsecured notes repaid at maturity on February 1, 2019 and $758.7 million in Global Commercial Paper - USD.

Our cash paid for interest in each period, net of any amounts capitalized, was as follows:


	For the Year Ended December 31,
	2018		2017		2016
Cash paid for interest	$	811,971	$	814,729	$	887,118

Derivative Financial Instruments

Our exposure to market risk due to changes in interest rates primarily relates to our long‑term debt obligations. We manage exposure to interest rate market risk through our risk management strategy by a combination of interest rate protection agreements to effectively fix or cap a portion of variable rate debt. We are also exposed to foreign currency risk on financings of certain foreign operations. Our intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. We do not enter into either interest rate protection or foreign currency rate protection agreements for speculative purposes.

We may enter into treasury lock agreements as part of an anticipated debt issuance. Upon completion of the debt issuance, the fair value of these instruments is recorded as part of accumulated other comprehensive income (loss) and is amortized to interest expense over the life of the debt agreement.

The unamortized loss on our treasury locks and terminated hedges recorded in accumulated other comprehensive income (loss) was $3.0 million and $10.1 million as of December 31, 2018 and 2017, respectively. Within the next year, we expect to reclassify to earnings approximately $4.3 million of losses related to terminated interest rate swaps from the current balance held in accumulated other comprehensive income (loss).

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Debt Issuance Costs

Our debt issuance costs consist primarily of financing fees we incurred in order to obtain long-term financing. We record amortization of debt issuance costs on a straight-line basis over the terms of the respective loans or agreements. Details of those debt issuance costs as of December 31 are as follows:


	2018		2017
Debt issuance costs	$	204,189	$	200,646
Accumulated amortization		(108,014)		(89,912)
Debt issuance costs, net	$	96,175	$	110,734

We report amortization of debt issuance costs, amortization of premiums, and accretion of discounts as part of interest expense. We amortize debt premiums and discounts, which are included in mortgages and unsecured indebtedness, over the remaining terms of the related debt instruments. These debt premiums or discounts arise either at the time of the debt issuance or as part of purchase accounting for the fair value of debt assumed in acquisitions. The accompanying consolidated statements of operations and comprehensive income include amortization as follows:


		For the Year Ended December 31,
	2018		2017		2016
Amortization of debt issuance costs	$	21,445	$	21,707	$	21,703
Amortization of debt discounts/(premiums)		1,618		1,357		(14,583)

Fair Value of Debt

The carrying value of our variable‑rate mortgages and other loans approximates their fair values. We estimate the fair values of consolidated fixed‑rate mortgages using cash flows discounted at current borrowing rates and other indebtedness using cash flows discounted at current market rates. We estimate the fair values of consolidated fixed‑rate unsecured notes using quoted market prices, or, if no quoted market prices are available, we use quoted market prices for securities with similar terms and maturities. The book value of our consolidated fixed‑rate mortgages and unsecured indebtedness including commercial paper was $22.4 billion and $23.4 billion as of December 31, 2018 and 2017, respectively. The fair values of these financial instruments and the related discount rate assumptions as of December 31 are summarized as follows:


	December 31,			December 31,
	2018			2017
Fair value of fixed rate mortgages and unsecured indebtedness	$	22,323		$	24,003
Weighted average discount rates assumed in calculation of fair value for fixed rate mortgages		4.55	%		4.25	%
Weighted average discount rates assumed in calculation of fair value for unsecured indebtedness		4.50	%		4.10	%

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Rentals under Operating Leases

Future minimum rentals to be received under non‑cancelable tenant operating leases for each of the next five years and thereafter, excluding tenant reimbursements of operating expenses and percentage rent based on tenant sales volume as of December 31, 2018 are as follows:


2019	$	2,864,804
2020		2,596,538
2021		2,300,681
2022		1,989,319
2023		1,609,389
Thereafter		3,791,543
	$	15,152,274

Equity

Simon’s Board of Directors is authorized to reclassify excess common stock into one or more additional classes and series of capital stock, to establish the number of shares in each class or series and to fix the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, and qualifications and terms and conditions of redemption of such class or series, without any further vote or action by the stockholders. The issuance of additional classes or series of capital stock may have the effect of delaying, deferring or preventing a change in control of us without further action of the stockholders. The ability to issue additional classes or series of capital stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of Simon’s outstanding voting stock.

Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, other than for the election of directors. The holders of Simon’s Class B common stock have the right to elect up to four members of Simon’s Board of Directors. All 8,000 outstanding shares of the Class B common stock are subject to two voting trusts as to which Herbert Simon and David Simon are the trustees. Shares of Class B common stock convert automatically into an equal number of shares of common stock upon the occurrence of certain events and can be converted into shares of common stock at the option of the holders.

Common Stock and Unit Issuances and Repurchases

In 2018, Simon issued 92,732 shares of common stock to two limited partners of the Operating Partnership in exchange for an equal number of units pursuant to the partnership agreement of the Operating Partnership. During the year ended December 31, 2018, the Operating Partnership redeemed 454,704 units from eight limited partners for $81.5 million in cash. These transactions increased Simon’s ownership interest in the Operating Partnership.

On September 25, 2018, the Operating Partnership issued 475,183 units in connection with the acquisition of the remaining 50% interest in The Outlets at Orange, as discussed in Note 4.

On February 13, 2017, Simon’s Board of Directors authorized a two-year extension of the previously authorized $2.0 billion common stock repurchase plan through March 31, 2019. On February 11, 2019, Simon's Board of Directors authorized a new common stock repurchase plan. Under the new program, the Company may purchase up to $2.0 billion of its common stock during the two-year period ending February 11, 2021. Simon may repurchase the shares in the open market or in privately negotiated transactions as market conditions warrant. During the year ended December 31, 2018, Simon repurchased 2,275,194 shares at an average price of $155.64 per share as part of this program. During the year ended December 31, 2017, Simon repurchased 2,468,630 shares at an average price of $164.87 per share as part of this program. As Simon repurchases shares under this program, the Operating Partnership repurchases an equal number of units from Simon.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Temporary Equity

Simon

Simon classifies as temporary equity those securities for which there is the possibility that Simon could be required to redeem the security for cash irrespective of the probability of such a possibility. As a result, Simon classifies one series of preferred units in the Operating Partnership and noncontrolling redeemable interests in properties in temporary equity. Each of these securities is discussed further below.

Limited Partners’ Preferred Interest in the Operating Partnership and Noncontrolling Redeemable Interests in Properties. The redemption features of the preferred units in the Operating Partnership contain provisions which could require the Operating Partnership to settle the redemption in cash. As a result, this series of preferred units in the Operating Partnership remains classified outside permanent equity.

The remaining interests in a property or portfolio of properties which are redeemable at the option of the holder or in circumstances that may be outside Simon’s control, are accounted for as temporary equity. The carrying amount of the noncontrolling interest is adjusted to the redemption amount assuming the instrument is redeemable at the balance sheet date. Changes in the redemption value of the underlying noncontrolling interest are recorded and presented within accumulated deficit in the consolidated statements of equity in the line issuance of unit equivalents and other. There were no noncontrolling interests redeemable at amounts in excess of fair value as of December 31, 2018 and 2017. The following table summarizes the preferred units in the Operating Partnership and the amount of the noncontrolling redeemable interests in properties as of December 31.


	2018		2017
7.50% Cumulative Redeemable Preferred Units, 260,000 units authorized, 255,373 issued and outstanding	$	25,537	$	25,537
Other noncontrolling redeemable interests in properties		204,626		164,943
Limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties	$	230,163	$	190,480

7.50% Cumulative Redeemable Preferred Units. This series of preferred units accrues cumulative quarterly distributions at a rate of $7.50 annually. The preferred units are redeemable by the Operating Partnership upon the death of the survivor of the original holders, or the transfer of any preferred units to any person or entity other than the persons or entities entitled to the benefits of the original holder. The redemption price is the liquidation value ($100.00 per preferred unit) plus accrued and unpaid distributions, payable either in cash or fully registered shares of common stock at our election. In the event of the death of a holder of the preferred units, the occurrence of certain tax triggering events applicable to the holder, or on or after November 10, 2006, the holder may require the Operating Partnership to redeem the preferred units at the same redemption price payable at the option of the Operating Partnership in either cash or shares of common stock. These preferred units have a carrying value of $25.5 million and are included in limited partners’ preferred interest in the Operating Partnership in the consolidated balance sheets at December 31, 2018 and 2017.

The Operating Partnership

The Operating Partnership classifies as temporary equity those securities for which there is the possibility that the Operating Partnership could be required to redeem the security for cash, irrespective of the probability of such a possibility. As a result, the Operating Partnership classifies one series of preferred units and noncontrolling redeemable interests in properties in temporary equity. Each of these securities is discussed further below.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Noncontrolling Redeemable Interests in Properties Redeemable instruments, which typically represent the remaining interest in a property or portfolio of properties, and which are redeemable at the option of the holder or in circumstances that may be outside our control, are accounted for as temporary equity. The carrying amount of the noncontrolling interest is adjusted to the redemption amount assuming the instrument is redeemable at the balance sheet date. Changes in the redemption value of the underlying noncontrolling interest are recorded within equity and are presented in the consolidated statements of equity in the line issuance of unit equivalents and other. There are no noncontrolling interests redeemable at amounts in excess of fair value as of December 31, 2018 and 2017. The following table summarizes the preferred units and the amount of the noncontrolling redeemable interests in properties as of December 31.


	2018		2017
7.50% Cumulative Redeemable Preferred Units, 260,000 units authorized, 255,373 issued and outstanding	$	25,537	$	25,537
Other noncontrolling redeemable interests in properties		204,626		164,943
Total preferred units, at liquidation value, and noncontrolling redeemable interests in properties	$	230,163	$	190,480

7.50% Cumulative Redeemable Preferred Units The 7.50% preferred units accrue cumulative quarterly distributions at a rate of $7.50 annually. We may redeem the preferred units upon the death of the survivor of the original holders, or the transfer of any preferred units to any person or entity other than the persons or entities entitled to the benefits of the original holder. The redemption price is the liquidation value ($100.00 per preferred unit) plus accrued and unpaid distributions, payable either in cash or fully registered shares of common stock of Simon at our election. In the event of the death of a holder of the 7.5% preferred units, the occurrence of certain tax triggering events applicable to the holder, or on or after November 10, 2006, the holder may require the Operating Partnership to redeem the preferred units at the same redemption price payable at the Operating Partnership’s option in either cash or fully registered shares of common stock of Simon. These preferred units have a carrying value of $25.5 million and are included in preferred units, at liquidation value in the consolidated balance sheets at December 31, 2018 and 2017.

Permanent Equity

Simon

Preferred Stock. Dividends on all series of preferred stock are calculated based upon the preferred stock’s preferred return multiplied by the preferred stock’s corresponding liquidation value. The Operating Partnership pays preferred distributions to Simon equal to the dividends Simon pays on the preferred stock issued.

Series J 83/8% Cumulative Redeemable Preferred Stock. Dividends accrue quarterly at an annual rate of 83/8% per share. Simon can redeem this series, in whole or in part, on or after October 15, 2027 at a redemption price of $50.00 per share, plus accumulated and unpaid dividends. This preferred stock was issued at a premium of $7.5 million. The unamortized premium included in the carrying value of the preferred stock at December 31, 2018 and 2017 was $2.9 million and $3.2 million, respectively.

The Operating Partnership

Series J 83/8% Cumulative Redeemable Preferred Units. Distributions accrue quarterly at an annual rate of 83/8% per unit on the Series J 83/8% preferred units, or Series J preferred units. Simon owns all of the Series J preferred units which have the same economic rights and preferences of an outstanding series of Simon preferred stock. The Operating Partnership can redeem this series, in whole or in part, when Simon can redeem the related preferred stock, on and after October 15, 2027 at a redemption price of $50.00 per unit, plus accumulated and unpaid distributions. The Series J preferred units were issued at a premium of $7.5 million. The unamortized premium included in the carrying value of the preferred units at December 31, 2018 and 2017 was $2.9 million and $3.2 million, respectively. There are 1,000,000 Series J preferred units authorized and 796,948 Series J preferred units issued and outstanding.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Other Equity Activity

The Simon Property Group 1998 Stock Incentive Plan, as amended. This plan, or the 1998 plan, provides for the grant of equity‑based awards with respect to the equity of Simon in the form of options to purchase shares, stock appreciation rights, restricted stock grants and performance‑based unit awards. Options may be granted which are qualified as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code and options which are not so qualified. An aggregate of 16,300,000 shares of common stock have been reserved for issuance under the 1998 plan.

The 1998 plan is administered by the Compensation Committee of Simon’s Board of Directors, or the Compensation Committee. The Compensation Committee determines which eligible individuals may participate and the type, extent and terms of the awards to be granted to them. In addition, the Compensation Committee interprets the 1998 plan and makes all other determinations deemed advisable for its administration. Options granted to employees become exercisable over the period determined by the Compensation Committee. The exercise price of an employee option may not be less than the fair market value of the shares on the date of grant. Employee options generally vest over a three‑year period and expire ten years from the date of grant.

Directors who are not also our employees or employees of our affiliates are eligible to receive awards under the 1998 plan. Each independent director receives an annual cash retainer of $110,000, and an annual restricted stock award with a grant date value of $175,000. Committee chairs receive annual retainers for the Company’s Audit, Compensation, and Governance and Nominating Committees of $35,000, $35,000 and $25,000, respectively. Directors receive fixed annual retainers for service on the Audit, Compensation and Governance and Nominating Committees, of $15,000, $15,000, and $10,000, respectively. The Lead Director receives an annual retainer of $50,000. These retainers are paid 50% in cash and 50% in restricted stock.

Restricted stock awards vest in full after one year. Once vested, the delivery of the shares of restricted stock (including reinvested dividends) is deferred under our Director Deferred Compensation Plan until the director retires, dies or becomes disabled or otherwise no longer serves as a director. The directors may vote and are entitled to receive dividends on the underlying shares; however, any dividends on the shares of restricted stock must be reinvested in shares of common stock and held in the Director Deferred Compensation Plan until the shares of restricted stock are delivered to the former director.

Stock Based Compensation

Awards under our stock based compensation plans primarily take the form of LTIP units and restricted stock grants. Restricted stock and awards under the LTIP programs are either market or performance-based and are based on various individual, corporate and business unit performance measures as further described below. The expense related to these programs, net of amounts capitalized, is included within home and regional office costs and general and administrative costs in the accompanying statements of operations and comprehensive income.

LTIP Programs. The Compensation Committee has approved long‑term, performance based incentive compensation programs, or the LTIP programs, for certain senior executive officers. Awards under the LTIP programs take the form of LTIP units, a form of limited partnership interest issued by the Operating Partnership, which are subject to the participant maintaining employment with us through certain dates and other conditions as described in the applicable award agreements. Awarded LTIP units not earned in accordance with the conditions set forth in the applicable award agreements are forfeited. Earned and fully vested LTIP units are equivalent to units of the Operating Partnership. During the performance period, participants are entitled to receive distributions on the LTIP units awarded to them equal to 10% of the regular quarterly distributions paid on a unit of the Operating Partnership. As a result, we account for these LTIP units as participating securities under the two‑class method of computing earnings per share.

Awards under the LTIP program for 2016 will be considered earned if, and only to the extent to which, applicable total shareholder return, or TSR, performance measures, as defined in the applicable award agreements, are achieved during the applicable performance periods. Once earned, LTIP units are subject to a two-year vesting period. One‑half of

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

the earned LTIP units will vest on January 1 of each of the second and third years following the end of the applicable performance period.

In 2018, the Compensation Committee established and granted awards under a redesigned LTIP program, or the 2018 LTIP program. Awards under the 2018 LTIP program were granted in two tranches, Tranche A LTIP units and Tranche B LTIP units. Each of the Tranche A LTIP units and the Tranche B LTIP units will be considered earned if, and only to the extent to which, the respective goals based on Funds From Operations, or FFO, per share or Relative TSR Goal performance criteria, as defined in the applicable award agreements, are achieved during the applicable two-year and three-year performance periods of the Tranche A LTIP units and Tranche B LTIP units, respectively. One‑half of the earned Tranche A LTIP units will vest on January 1, 2021 with the other one-half vesting on January 1, 2022. All of the earned Tranche B LTIP units will vest on January 1, 2022.

The grant date fair value of the portion of the LTIP units based on achieving the target FFO performance criteria is $6.1 million for the Tranche A LTIP units and the Tranche B LTIP units, for a total of $12.1 million. The 2018 LTIP program provides that the value of the FFO-based award may be adjusted up or down based on the Company’s performance compared to the target FFO performance criteria and has a maximum potential fair value of $18.2 million. The value of the FFO-based award is recorded as expense over the period from the grant date to the date at which the awards, if earned, would become vested, based on our assessment as to whether it is probable that the performance criteria will be achieved during the applicable performance periods.

The grant date fair values of any LTIP units based on TSR performance are estimated using a Monte Carlo model, and the resulting fixed expense is recorded regardless of whether the TSR performance criteria are achieved if the required service is delivered. The grant date fair values are being amortized into expense over the period from the grant date to the date at which the awards, if earned, would become vested.

The Compensation Committee approved LTIP unit grants as shown in the table below. The extent to which LTIP units were earned, and the aggregate grant date fair value, are as follows:


LTIP Program	LTIP Units Earned	Grant Date Fair Value of TSR Award	Grant Date Target Value of FFO-Based Award
2013-2015 LTIP program	466,405	$28.5 million	—
2014-2016 LTIP program	120,314	$27.5 million	—
2015-2017 LTIP program	—	$21.6 million	—
2016-2018 LTIP program	To be determined in 2019	$22.7 million	—
2018 LTIP program - Tranche A	To be determined in 2020	$6.1 million	$6.1 million
2018 LTIP program - Tranche B	To be determined in 2021	$6.1 million	$6.1 million

We recorded compensation expense, net of capitalization and forfeitures, related to these LTIP programs of approximately $12.0 million, $14.0 million, and $31.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Restricted Stock. The 1998 plan also provides for shares of restricted stock to be granted to certain employees at no cost to those employees, subject to achievement of individual performance and certain financial and return‑based performance measures established by the Compensation Committee related to the most recent year’s performance. Once granted, the shares of restricted stock then vest annually over a three‑year or a four‑year period (as defined in the award). The cost of restricted stock grants, which is based upon the stock’s fair market value on the grant date, is recognized as expense ratably over the vesting period. Through December 31, 2018 a total of 5,786,423 shares of restricted stock, net of

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

forfeitures, have been awarded under the 1998 plan. Information regarding restricted stock awards is summarized in the following table for each of the years presented:


	For the Year Ended
	December 31,
	2018		2017		2016
Shares of restricted stock awarded during the year, net of forfeitures		51,756		76,660		63,324
Weighted average fair value of shares granted during the year	$	153.24	$	170.81	$	209.16
Annual amortization	$	12,029	$	13,911	$	12,024

We recorded compensation expense, net of capitalization, related to restricted stock for employees and non-employee directors of approximately $7.8 million, $9.0 million, and $9.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Other Compensation Arrangements. On July 6, 2011, in connection with the execution of an employment agreement, the Compensation Committee granted David Simon, Simon’s Chairman, Chief Executive Officer and President, a retention award in the form of 1,000,000 LTIP units, or the Award, for his continued service through July 5, 2019. Effective December 31, 2013, the Award was modified, or the Current Award, and as a result the LTIP units would become earned and eligible to vest based on the attainment of Company‑based performance goals, in addition to the service‑based vesting requirement included in the original Award. The Current Award does not contain an opportunity for Mr. Simon to receive additional LTIP units above and beyond the original Award should our performance exceed the higher end of the performance criteria. The performance criteria of the Current Award are based on the attainment of specific FFO per share. Because the performance criteria has been met, a maximum of 360,000 LTIP units, or the A units, 360,000 LTIP units, or the B units, and 280,000 LTIP units, or the C units, became earned on December 31, 2015, December 31, 2016 and December 31, 2017, respectively. If the relevant performance criteria had not been achieved, all or a portion of the Current Award would have been forfeited. The earned A units vested on January 1, 2018, earned B units vested on January 1, 2019 and earned C units will vest on June 30, 2019, subject to Mr. Simon’s continued employment through such applicable date. The grant date fair value of the retention award of $120.3 million is being recognized as expense over the eight‑year term of his employment agreement on a straight‑line basis based on the applicable vesting periods of the A units, B units and C units.

We also maintain a tax‑qualified retirement 401(k) savings plan and offer no other post‑retirement or post‑employment benefits to our employees.

Exchange Rights

Simon

Limited partners in the Operating Partnership have the right to exchange all or any portion of their units for shares of common stock on a one‑for‑one basis or cash, as determined by Simon’s Board of Directors. The amount of cash to be paid if the exchange right is exercised and the cash option is selected will be based on the trading price of Simon’s common stock at that time. At December 31, 2018, Simon had reserved 50,643,747 shares of common stock for possible issuance upon the exchange of units, stock options and Class B common stock.

The Operating Partnership

Limited partners have the right under the partnership agreement to exchange all or any portion of their units for shares of Simon common stock on a one-for-one basis or cash, as determined by Simon in its sole discretion. If Simon selects cash, Simon cannot cause the Operating Partnership to redeem the exchanged units for cash without contributing cash to the Operating Partnership as partners’ equity sufficient to effect the redemption. If sufficient cash is not contributed, Simon will be deemed to have elected to exchange the units for shares of Simon common stock. The amount of cash to

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

be paid if the exchange right is exercised and the cash option is selected will be based on the trading price of Simon’s common stock at that time. The number of shares of Simon’s common stock issued pursuant to the exercise of the exchange right will be the same as the number of units exchanged.

Commitments and Contingencies

Litigation

We are involved from time‑to‑time in various legal and regulatory proceedings that arise in the ordinary course of our business, including, but not limited to, commercial disputes, environmental matters, and litigation in connection with transactions such as acquisitions and divestitures. We believe that current proceedings will not have a material adverse effect on our financial condition, liquidity, or results of operations. We record a liability when a loss is considered probable and the amount can be reasonably estimated.

Subsequent to December 31, 2018, we settled a lawsuit with our former insurance broker, Aon Risk Services Central Inc., related to the significant flood damage sustained at Opry Mills in May 2010. In accordance with a previous agreement with the prior co-investor in Opry Mills, a portion of the settlement was remitted to the co-investor. Our share of the settlement was approximately $68.0 million, which was recorded as other income in the first quarter of 2019.

Lease Commitments

As of December 31, 2018, a total of 23 of the consolidated properties are subject to ground leases. The termination dates of these ground leases range from 2019 to 2090. These ground leases generally require us to make fixed annual rental payments, or a fixed annual rental payment plus a percentage rent component based upon the revenues or total sales of the property. In addition, we have several regional office locations that are subject to leases with termination dates ranging from 2019 to 2028. These office leases generally require us to make fixed annual rental payments plus pay our share of common area, real estate and utility expenses. Some of our ground and office leases include escalation clauses and renewal options. We incurred ground lease expense and office lease expense, which are included in other expense and home office and regional expense, respectively, as follows:


	For the Year Ended
	December 31,
	2018		2017		2016
Ground lease expense	$	42,670	$	40,864	$	38,764
Office lease expense		4,650		4,481		4,105

Future minimum lease payments due under these leases for years ending December 31, excluding applicable extension options and renewal options unless reasonably certain of exercise and any sublease income, are as follows:


2019	$	32,417
2020		32,403
2021		32,686
2022		32,698
2023		32,729
Thereafter		947,886
	$	1,110,819

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Insurance

We maintain insurance coverage with third party carriers who provide a portion of the coverage for specific layers of potential losses, including commercial general liability, fire, flood, extended coverage and rental loss insurance on all of our properties in the United States. The initial portion of coverage not provided by third party carriers is either insured through our wholly‑owned captive insurance company, Bridgewood Insurance Company, Ltd., or other financial arrangements controlled by us. If required, a third party carrier has, in turn, agreed to provide evidence of coverage for this layer of losses under the terms and conditions of the carrier’s policy. A similar policy written either through our captive insurance company or other financial arrangements controlled by us also provides initial coverage for property insurance and certain windstorm risks at the properties located in coastal windstorm locations.

We currently maintain insurance coverage against acts of terrorism on all of our properties in the United States on an “all risk” basis in the amount of up to $1 billion. Despite the existence of this insurance coverage, any threatened or actual terrorist attacks where we operate could adversely affect our property values, revenues, consumer traffic and tenant sales.

Hurricane Impacts

During the third quarter of 2017, two of our wholly-owned properties located in Puerto Rico sustained significant damage as a result of Hurricane Maria. Due to the conditions on the island, we were unable to determine a reliable estimate or a range of reliable estimates of the extent of the damages at these properties at the end of the third quarter of 2017. During the fourth quarter of 2017, as additional information became available, we recorded an impairment of approximately $19.0 million related to damages at these properties, which was offset by an insurance recovery receivable.

Since the date of the loss, we have received $56.6 million of insurance proceeds from third-party carriers related to the two properties located in Puerto Rico, of which $38.7 million was used for property restoration and remediation and to reduce the insurance recovery receivable. In 2018, we recorded $17.9 million as business interruption proceeds in other income in the accompanying consolidated statements of operations and comprehensive income.

Guarantees of Indebtedness

Joint venture debt is the liability of the joint venture and is typically secured by the joint venture property, which is non‑recourse to us. As of December 31, 2018 and 2017, the Operating Partnership guaranteed joint venture related mortgage indebtedness of $216.1 million and $211.6 million, respectively (of which we have a right of recovery from our venture partners of $10.8 million). Mortgages guaranteed by the Operating Partnership are secured by the property of the joint venture which could be sold in order to satisfy the outstanding obligation and which have estimated fair values in excess of the guaranteed amount.

Concentration of Credit Risk

Our U.S. Malls, Premium Outlets and The Mills rely heavily upon anchor tenants to attract customers; however, anchor retailers do not contribute materially to our financial results as many anchor retailers own their spaces. All material operations are within the United States and no customer or tenant accounts for 5% or more of our consolidated revenues.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Related Party Transactions

Our management company provides management, insurance, and other services to Melvin Simon & Associates, Inc., a related party, unconsolidated joint ventures, and other non‑owned related party properties. Amounts for services provided by our management company and its affiliates to our unconsolidated joint ventures and other related parties were as follows:


	For the Year Ended
	December 31,
	2018		2017		2016
Amounts charged to unconsolidated joint ventures	$	111,476	$	116,447	$	138,496
Amounts charged to properties owned by related parties		4,810		4,812		5,384

During 2018, 2017 and 2016, we recorded development, royalty and other fee income, net of elimination, related to our international investments of $16.0 million, $15.5 million and $14.4 million, respectively. Also during 2018, 2017 and 2016, we received fees related to financing services, net of elimination, provided to unconsolidated joint ventures of $0.5 million, $1.6 million and $9.1 million, respectively. The fees related to our international investments and financing activities are included in other income in the accompanying consolidated statements of operations and comprehensive income.

Simon Property Group, Inc.

Simon Property Group, L.P.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share, per share, unit and per unit amounts and where indicated as in millions or billions)

Quarterly Financial Data (Unaudited)

Quarterly 2018 and 2017 data is summarized in the table below. Quarterly amounts may not sum to annual amounts due to rounding.


	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
2018
Total revenue	$	1,399,814	$	1,388,358	$	1,409,005	$	1,460,743
Operating income before other items		701,933		737,675		717,391		754,089
Consolidated net income		715,524		631,414		642,212		833,192
Simon Property Group, Inc.
Net income attributable to common stockholders	$	620,654	$	547,004	$	556,267	$	712,796
Net income per share — Basic and Diluted	$	2.00	$	1.77	$	1.80	$	2.30
Weighted average shares outstanding — Basic and Diluted		310,583,643		309,355,154		309,294,045		309,293,708
Simon Property Group, L.P.
Net income attributable to unitholders	$	714,303	$	629,822	$	640,402	$	821,237
Net income per unit — Basic and Diluted	$	2.00	$	1.77	$	1.80	$	2.30
Weighted average units outstanding — Basic and Diluted		357,446,988		356,181,817		356,073,080		356,396,387
2017
Total revenue	$	1,345,763	$	1,361,548	$	1,403,638	$	1,427,692
Operating income before other items		676,671		686,149		690,068		749,452
Consolidated net income		551,075		441,373		592,635		659,821
Simon Property Group, Inc.
Net income attributable to common stockholders	$	477,736	$	381,990	$	513,783	$	571,116
Net income per share — Basic and Diluted	$	1.53	$	1.23	$	1.65	$	1.84
Weighted average shares outstanding — Basic and Diluted		312,809,981		311,579,301		310,853,299		310,855,573
Simon Property Group, L.P.
Net income attributable to unitholders	$	550,006	$	439,986	$	591,872	$	657,774
Net income per unit — Basic and Diluted	$	1.53	$	1.23	$	1.65	$	1.84
Weighted average units outstanding — Basic and Diluted		360,130,442		358,865,806		358,115,572		358,025,108

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