Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto that are included in this Annual Report on Form 10-K.

Overview

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. In this discussion, 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. 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, 2019, we owned or held an interest in 204 income-producing properties in the United States, which consisted of 106 malls, 69 Premium Outlets, 14 Mills, four lifestyle centers, and 11 other retail properties in 37 states and Puerto Rico. In addition, we have redevelopment and expansion projects, including the addition of anchors, big box tenants, and restaurants, underway at several properties in the United States, Canada, Europe and Asia. Internationally, as of December 31, 2019, we had ownership in 29 Premium Outlets and Designer Outlet properties primarily located in Asia, Europe, and Canada. We also have four international outlet properties under development. As of December 31, 2019, we also owned a 22.2% 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 15 countries in Europe.

We generate the majority of our lease income from retail, dining, entertainment, and other tenants including consideration received from:

	●	fixed minimum lease consideration and fixed common area maintenance (CAM) reimbursements, and

	●	variable lease consideration primarily based on tenants’ sales, as well as reimbursements for real estate taxes, utilities, marketing and certain other items.

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 invest in real estate properties to maximize total financial return which includes both operating cash flows and capital appreciation. We seek growth in earnings, funds from operations, or FFO, and cash flows by enhancing the profitability and operation of our properties and investments. We seek to accomplish this growth through the following:

	●	attracting and retaining high quality tenants and utilizing economies of scale to reduce operating expenses,

	●	expanding and re-tenanting existing highly productive locations at competitive rental rates,

	●	selectively acquiring or increasing our interests in high quality real estate assets or portfolios of assets,

	●	generating consumer traffic in our retail properties through marketing initiatives and strategic corporate alliances, and

	●	selling selective non-core assets.

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

	●	establishing our malls 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.

We focus on high quality real estate across the retail real estate spectrum. We expand or redevelop properties to enhance profitability and market share of existing assets when we believe the investment of our capital meets our risk-reward criteria. We selectively develop new properties in markets we believe are not adequately served by existing retail outlet properties.

We routinely review and evaluate acquisition opportunities based on their ability to enhance our portfolio. Our international strategy includes partnering with established real estate companies and financing international investments with local currency to minimize foreign exchange risk.

To support our growth, we employ a three-fold capital strategy:

	●	provide the capital necessary to fund growth,

	●	maintain sufficient flexibility to access capital in many forms, both public and private, and

	●	manage our overall financial structure in a fashion that preserves our investment grade credit ratings.

We consider FFO, net operating income, or NOI, portfolio NOI and comparable property NOI (NOI for properties owned and operated in both periods under comparison) to be key measures of operating performance that are not specifically defined by accounting principles generally accepted in the United States, or GAAP. We use these measures internally to evaluate the operating performance of our portfolio and provide a basis for comparison with other real estate companies. Reconciliations of these measures to the most comparable GAAP measure are included below in this discussion.

Results Overview

Diluted earnings per share and diluted earnings per unit decreased $1.06 during 2019 to $6.81 as compared to $7.87 in 2018. The decrease in diluted earnings per share and diluted earnings per unit was primarily attributable to:

	●	2018 net gains primarily related to disposition activity of $288.8 million, or $0.81 per diluted share/unit, which were higher than 2019 net gains of $14.9 million, or $0.04 per diluted share/unit,

	●	a non-cash investment gain of $35.6 million, or $0.10 per diluted share/unit, in 2018,

	●	decreased consolidated lease settlement activity in 2019 of $26.7 million, or $0.08 per diluted share/unit,

	●	decreased income related to distributions from an international investment in 2018 of $23.9 million, or $0.07 per diluted share/unit,

	●	a charge on early extinguishment of debt of $116.3 million, or $0.33 per diluted share/unit, in 2019, and

	●	an increase in depreciation and amortization of $76.9 million, or $0.22 per diluted share/unit, in 2019, from our consolidated properties and our share of depreciation and amortization from equity method investments, principally related to the acceleration of depreciation on a property upon initiation of a major redevelopment, partially offset by,

	●	improved operating performance and solid core business fundamentals in 2019 and the impact of our acquisition, development and expansion activity,

	●	a lawsuit settled with our former insurance broker in 2019 related to the significant flood damage sustained at Opry Mills in May 2010 of $68.0 million, or $0.19 per diluted share/unit,

	●	a gain in 2019 related to the disposition of our interest in a multi-family residential investment of $16.2 million, or $0.05 per diluted share/unit,

	●	our share of an early repayment charge and write-off of deferred debt issuance costs in 2018 related to refinancing at Aventura Mall, of $12.5 million, or $0.03 per diluted share/unit, and

	●	decreased interest expense in 2019 of $26.6 million, or $0.07 per diluted share/unit.

Solid core business fundamentals during 2019 were primarily driven by strong leasing activity. Portfolio NOI grew by 1.4% in 2019 as compared to 2018. Comparable property NOI grew 1.4% for our portfolio of U.S. Malls, Premium Outlets, and The Mills. Total reported sales per square foot, or psf, increased 4.8% to $693 psf at December 31, 2019 from $661 psf at December 31, 2018 for our U.S. Malls and Premium Outlets. Average base minimum rent for U.S. Malls and Premium Outlets increased 0.8% to $54.59 psf as of December 31, 2019, from $54.18 psf as of December 31, 2018. Leasing spreads in our U.S. Malls and Premium Outlets were positive as we were able to lease available square feet at higher rents, resulting in an open/close leasing spread (based on total tenant payments — base minimum rent plus common area maintenance) of $7.83 psf ($62.39 openings compared to $54.56 closings) as of December 31, 2019, representing a 14.4% increase. Ending occupancy for our U.S. Malls and Premium Outlets decreased 0.8% to 95.1% as of December 31, 2019, from 95.9% as of December 31, 2018.

Our effective overall borrowing rate at December 31, 2019 on our consolidated indebtedness decreased 19 basis points to 3.16% as compared to 3.35% at December 31, 2018. This decrease was primarily due to a decrease in the effective overall borrowing rate on variable rate debt of 56 basis points (2.61% at December 31, 2019 as compared to 3.17% at December 31, 2018) partially offset by an increase in the effective overall borrowing rate on fixed rate debt of nine basis points (3.46% at December 31, 2019 as compared to 3.37% at December 31, 2018). The weighted average years to maturity of our consolidated indebtedness was 7.4 years and 6.4 years at December 31, 2019 and 2018, respectively.

Our financing activity for the year ended December 31, 2019 included:

	●	Increasing our borrowings under the Operating Partnership’s global unsecured commercial paper note program, or the Commercial Paper program, by $568.4 million.

	●	Repaying at maturity $600.0 million of senior unsecured notes with a fixed interest rate of 2.20% on February 1, 2019.

	●	Completing the issuance, on September 13, 2019, of $1.0 billion of senior unsecured notes at a fixed annual interest rate of 2.00% with a maturity date of September 13, 2024, $1.25 billion of senior unsecured notes at a fixed annual interest rate of 2.45% with a maturity date of September 13, 2029, and $1.25 billion of senior unsecured notes at a fixed annual interest rate of 3.25% with a maturity date of September 13, 2049.

	●	Completing, on October 7, 2019, the early redemption of The Operating Partnership’s $900 million 4.375% notes due March 1, 2021, $700 million 4.125% notes due December 1, 2021, $600 million 3.375% notes due March 15, 2022, and €375 million of the €750 million 2.375% notes due October 2, 2020. We recorded a $116.3 million loss on extinguishment of debt as a result of the early redemption.

United States Portfolio Data

The portfolio data discussed in this overview includes the following key operating statistics: ending occupancy, average base minimum rent per square foot, and total sales per square foot for our domestic assets. We include acquired properties in this data beginning in the year of acquisition and remove disposed properties in the year of disposition. For comparative information purposes, we separate the information related to The Mills from our other U.S. operations. We also do not include any information for properties located outside the United States.

The following table sets forth these key operating statistics for the combined U.S. Malls and Premium Outlets:

	●	properties that are consolidated in our consolidated financial statements,

	●	properties we account for under the equity method of accounting as joint ventures, and

	●	the foregoing two categories of properties on a total portfolio basis.

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	%/Basis Point	​	​	​	​	%/Basis Point	​	​	​
​		2019		​	Change (1)	​	2018		​	Change (1)	​	2017
U.S. Malls and Premium Outlets:	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Occupancy	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Consolidated	​	​	95.3	%	-60	bps	​	95.9	%	10	bps	​	95.8	%
Unconsolidated	​	​	94.5	%	-130	bps	​	95.8	%	70	bps	​	95.1	%
Total Portfolio	​	​	95.1	%	-80	bps	​	95.9	%	30	bps	​	95.6	%
Average Base Minimum Rent per Square Foot	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Consolidated	​	$	53.06	​	1.0	%	$	52.51	​	2.3	%	$	51.34	​
Unconsolidated	​	$	58.71	​	0.2	%	$	58.59	​	1.2	%	$	57.88	​
Total Portfolio	​	$	54.59	​	0.8	%	$	54.18	​	2.0	%	$	53.11	​
Total Reported Sales per Square Foot	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Consolidated	​	$	662	​	3.2	%	$	641	​	4.6	%	$	613	​
Unconsolidated	​	$	783	​	9.0	%	$	719	​	7.2	%	$	671	​
Total Portfolio	​	$	693	​	4.8	%	$	661	​	5.3	%	$	628	​
The Mills:	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Occupancy	​		97.0	%	-60	bps		97.6	%	-80	bps		98.4	%
Average Base Minimum Rent per Square Foot	​	$	33.09	​	1.4	%	$	32.63	​	5.3	%	$	30.98	​
Total Sales per Square Foot	​	$	620	​	1.0	%	$	614	​	4.6	%	$	587	​

(1)	Percentages may not recalculate due to rounding. Percentage and basis point changes are representative of the change from the comparable prior period.

Ending Occupancy Levels and Average Base Minimum Rent per Square Foot. Ending occupancy is the percentage of gross leasable area, or GLA, which is leased as of the last day of the reporting period. We include all company owned space except for mall anchors, mall majors, mall freestanding and mall outlots in the calculation. Base minimum rent per square foot is the average base minimum rent charge in effect for the reporting period for all tenants that would qualify to be included in ending occupancy.

Total Reported Sales per Square Foot. Total sales include total reported retail tenant sales on a trailing 12-month basis at owned GLA (for mall stores with less than 10,000 square feet) in the malls and The Mills and stores with less than 20,000 square feet in the Premium Outlets. Retail sales at owned GLA affect revenue and profitability levels because sales determine the amount of minimum rent that can be charged, the percentage rent realized, and the recoverable expenses (common area maintenance, real estate taxes, etc.) that tenants can afford to pay.

Current Leasing Activities

During 2019, we signed 990 new leases and 1,281 renewal leases (excluding mall anchors and majors, new development, redevelopment and leases with terms of one year or less) with a fixed minimum rent across our U.S. Malls and Premium Outlets portfolio, comprising approximately 7.6 million square feet, of which 5.7 million square feet related to consolidated properties. During 2018, we signed 900 new leases and 1,183 renewal leases with a fixed minimum rent, comprising approximately 7.1 million square feet, of which 5.3 million square feet related to consolidated properties. The average annual initial base minimum rent for new leases was $56.80 per square foot in 2019 and $57.29 per square foot in 2018 with an average tenant allowance on new leases of $47.57 per square foot and $54.21 per square foot, respectively.

Japan Data

The following are selected key operating statistics for our Premium Outlets in Japan. The information used to prepare these statistics has been supplied by the managing venture partner.

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		December 31,			%/basis point		December 31,			%/basis point		December 31,
​	​	2019		​	Change	​	2018		​	Change	​	2017
Ending Occupancy	​	​	99.5	​	-20 bps	​	​	99.7	​	-20 bps	​	​	99.9	​
Total Sales per Square Foot	​	¥	107,866	​	0.56	​	¥	107,265	​	2.02	​	¥	105,138	​
Average Base Minimum Rent per Square Foot	​	¥	5,269	​	2.19	​	¥	5,156	​	1.86	​	¥	5,062	​

​

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we reevaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain. For a summary of our significant accounting policies, see Note 3 of the notes to the consolidated financial statements.

	●	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 fixed lease income on a straight-line basis over the terms of the 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 this variable consideration only when each tenant’s sales exceed the applicable sales threshold, as well as reimbursements for real estate taxes, utilities, marketing, and certain other items. We amortize any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the related lease of occupancy term of the tenant, if shorter.

	●	We review investment properties for impairment on a property-by-property basis to identify and evaluate events or changes in circumstances which 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 also review our investments, including investments in unconsolidated entities, to identify and evaluate whether events or changes in circumstances indicate 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. Our evaluation of changes in economic or operating conditions may include developing estimates of forecasted cash flows or operating income before depreciation and amortization to support the recoverability of the carrying amount of the investment. We estimate undiscounted cash flows and fair value using observable and unobservable data such as operating income, estimated capitalization and discount rates, or relevant market multiples, leasing prospects and local market information. 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.

	●	To maintain Simon’s status as a REIT, we must distribute at least 90% of REIT taxable income in any given year and meet certain asset and income tests. We monitor our business and transactions that may potentially impact Simon’s REIT status. In the unlikely event that we fail to maintain Simon’s REIT status, and available relief provisions do not apply, we would be required to pay U.S. federal income taxes at regular corporate income tax rates during the period Simon did not qualify as a REIT. If Simon lost 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 its failure was due to reasonable cause and certain other conditions were met. As a result, failing to maintain REIT status would result in a significant increase in the income tax expense recorded and paid during those periods.

	●	We make estimates as part of our valuation of the purchase price of asset acquisitions (including the components of excess investment in joint ventures) to the various components of the acquisition based upon the relative fair value of each component. The most significant components of our valuations are typically the determination of relative fair value to the buildings as-if-vacant, land and market value of in-place leases. In the case of the fair value of buildings and fair value of land and other intangibles, our estimates of the values of these components will affect the amount of depreciation or amortization we record over the estimated useful life of the property acquired or the remaining lease term. In the case of the market value of in-place leases, we make our best estimates of the tenants’ ability to pay rents based upon the tenants’ operating performance at the property, including the competitive position of the property in its market as well as sales psf, rents psf, and overall occupancy cost for the tenants in place at the acquisition date. Our assumptions affect the amount of future revenue that we will recognize over the remaining lease term for the acquired in-place leases.

	●	A variety of costs are incurred in the development of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves judgment. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy and cease capitalization of costs upon opening.

Results of Operations

In addition to the activity discussed above in the “Results Overview” section, the following acquisitions, dispositions, and openings of consolidated properties affected our consolidated results in the comparative periods:

	●	On September 19, 2019, we acquired the remaining 50% interest in a hotel adjacent to one of our properties from our joint venture partner.

	●	During the third quarter of 2019, we disposed of two retail properties.

	●	On September 27, 2018, we opened Denver Premium Outlets, a 330,000 square foot center in Thornton (Denver), Colorado. We own a 100% interest in this center.

	●	On September 25, 2018, we acquired the remaining 50% interest in the previously unconsolidated The Outlets at Orange in Los Angeles, California from our joint venture partner.

	●	During 2018, we disposed of two retail properties.

	●	On April 21, 2017, through our European investee, we acquired Roosendaal Designer Outlet, A 247,500 square foot center in Roosendaal, Netherlands. We have a 94% interest in this center.

	●	On April 13, 2017, through our European investee, we opened Provence Designer Outlet, a 269,000 square foot center in Miramas, France. We have a 90% interest in the new center.

In addition to the activities discussed above and in “Results Overview”, the following acquisitions, dispositions, and openings of joint venture properties affected our income from unconsolidated entities in the comparative periods:

	●	On May 22, 2019, we and our partner opened Premium Outlets Querétaro, a 274,800 square foot center in Santiago de Querétaro, Mexico. We own a 50% interest in this center.

	●	During the fourth quarter of 2018, our interest in the 41 German department store properties owned through our investment in HBS Global Properties, or HBS, was sold, as further discussed in Note 6 of the notes to the consolidated financial statements.

	●	During 2018, we contributed our interest in the licensing venture of Aéropostale for additional interests in Authentic Brands Group LLC, or ABG. Our noncontrolling interest in ABG is 5.4%.

	●	On May 2, 2018, we and our partner opened Premium Outlet Collection Edmonton International Airport, a 424,000 square foot shopping center in Edmonton (Alberta), Canada. We have a 50% noncontrolling interest in this new center.

	●	During 2017, we disposed of our interest in one retail property.

	●	On September 14, 2017, we and our partner opened The Shops at Clearfork, a 500,000 square foot center in Fort Worth, Texas. We have a 45% noncontrolling interest in this new center.

	●	On June 29, 2017, we and our partner opened Norfolk Premium Outlets, a 332,000 square foot center in Norfolk, Virginia. We have a 65% noncontrolling interest in this new center.

	●	On June 15, 2017, we and our partner opened Genting Highlands Premium Outlets in Kuala Lumpur, Malaysia. We have a 50% noncontrolling interest in this 278,000 square foot center.

	●	On April 6, 2017, we and our partner opened Siheung Premium Outlets, a 444,400 square foot center in Siheung (Seoul), South Korea. We have a 50% noncontrolling interest in this new center.

For the purposes of the following comparisons between the years ended December 31, 2019 and 2018 and the years ended December 31, 2018 and 2017, the above transactions are referred to as the property transactions. In the following discussions of our results of operations, “comparable” refers to properties we owned and operated in both years in the year to year comparisons.

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. For purposes of the below comparisons, these properties are also included in the property transactions due to the fact they were not open for business during the entirety of the periods being compared.

Year Ended December 31, 2019 vs. Year Ended December 31, 2018

Lease income increased $85.4 million during 2019, of which the property transactions accounted for $33.2 million of the increase. Comparable lease income increased $52.2 million, or 1.0%, due to increases in fixed minimum lease and CAM consideration recorded on a straight-line basis, as a result of the adoption of ASC 842.

Total other income increased $27.9 million, primarily due to a $68.0 million increase related to a lawsuit settled with our former insurance broker in 2019 related to the significant flood damage sustained at Opry Mills in May 2010, a $16.2 million gain on the sale of our interest in a multi-family residential property, a $12.4 million increase in interest income, an $11.2 million increase in Simon Brand Venture and gift card revenues, an increase of $10.4 million in land sales including gains as a result of land contributions for densification projects at two of our properties, and the impact of consolidated franchise and hotel revenues, partially offset by a $35.6 million non-cash gain recorded in 2018 associated with our contribution of our interest in the Aéropostale licensing venture for additional interests in ABG, a $26.7 million decrease in lease settlement income, a $23.9 million decrease in income related to distributions from an international investment received in 2018 and a $9.5 million decrease related to business interruption insurance proceeds received in connection with our two Puerto Rico properties as a result of hurricane damages.

Depreciation and amortization expense increased $58.0 million, of which the property transactions accounted for $11.0 million. The comparable properties increased $47.0 million primarily as a result of an increase in tenant allowance write-offs in 2019 and the acceleration of depreciation on a property upon initiation of a major redevelopment.

Home and regional office costs increased $53.4 million, primarily due to the suspension of leasing cost capitalization in 2019 as a result of the adoption of a new accounting pronouncement.

General and administrative expense decreased $11.7 million due to lower executive compensation.

Other expense increased $15.8 million primarily related to a $4.9 million unfavorable non-cash mark-to-market on certain of our non-real estate equity instruments, and the impact of consolidated franchise and hotel operational expenses.

During 2019, we recorded a loss on extinguishment of debt of $116.3 million as a result of the early redemption of senior unsecured notes.

Income from unconsolidated entities decreased $30.9 million as a result of the sale of German assets within our HBS joint venture in 2018, and the impact from the consolidation of a property that was previously unconsolidated in the third quarter of 2018, partially offset by favorable results of operations from our international joint venture investments.

During 2019, we recorded net gains of $62.1 million primarily related to Klépierre’s disposition of certain shopping centers, offset by a $47.2 million impairment charge related to our investment in HBS. During 2018, we recorded net gains of $12.5 million related to property insurance recoveries of previously depreciated assets and $276.3 million primarily related to our disposition of two retail properties, as well as the disposal of our interest in the German department stores owned through our investment in HBS, as further discussed in Note 6 of the notes to the consolidated financial statements.

Simon’s net income attributable to noncontrolling interests decreased $60.7 million due to a decrease in the net income of the Operating Partnership.

Year Ended December 31, 2018 vs. Year Ended December 31, 2017

Lease income increased $49.3 million during 2018, of which the comparable rents increased $58.0 million, or 1.2%, primarily attributable to an increase in base minimum rents and variable consideration based on tenant sales, offset partially by an $8.7 million decrease related to the property transactions.

Total other income increased $73.6 million, primarily due to a $35.6 million increase related to a non-cash gain associated with our contribution of our interest in the Aéropostale licensing venture for additional interests in ABG, a $21.9 million increase in income related to distributions from an international investment, a $17.9 million increase related to business interruption insurance proceeds received in connection with two of our Puerto Rico properties as a result of hurricane damages, a $13.2 million increase in Simon Brand Venture and gift card revenues and a $6.5 million increase in net other revenues, partially offset by a $21.5 million decrease related to the sale of marketable securities during 2017.

Real estate tax expense increased $17.7 million as a result of higher tax assessments in 2018.

General and administrative expense decreased $5.4 million due to lower executive compensation.

Other expense decreased $37.4 million primarily related to a decrease in legal fees and expenses of $25.1 million and the write off of pre-development costs and other investments in 2017 of $11.3 million.

During 2017, we recorded a loss on extinguishment of debt of $128.6 million as a result of an early redemption of a series of senior unsecured notes.

Income and other taxes increased $13.6 million as a result of higher tax expense due to higher net income from improved performance on our share of results in the retail operations venture of Aéropostale as compared to 2017, and increased withholding and income taxes related to certain of our international investments.

Income from unconsolidated entities increased $75.0 million primarily due to the stronger operations of the retail operations venture of Aéropostale and favorable results of operations from our international joint venture investments and our acquisition and development activity, offset partially by our share of an early repayment charge at one of our joint venture properties.

During 2018, we recorded net gains of $12.5 million related to property insurance recoveries of previously depreciated assets and $276.3 million primarily related to our disposition of two retail properties, as well as the disposal of our interest in the German department stores owned through our investment in HBS, as further discussed in Note 6 of the notes to the consolidated financial statements. During 2017, we recorded a $5.0 million gain related to Klépierre’s sale of certain assets, partially offset by the disposition of our interest in one unconsolidated retail property that resulted in a loss of $1.3 million.

Simon’s net income attributable to noncontrolling interests increased $85.3 million due to an increase in the net income of the Operating Partnership.

Liquidity and Capital Resources

Because we own long-lived income-producing assets, our financing strategy relies primarily on long-term fixed rate debt. Floating rate debt comprised only 3.5% of our total consolidated debt at December 31, 2019. We also enter into interest rate protection agreements from time to time to manage our interest rate risk. We derive most of our liquidity from positive net cash flow from operations and distributions of capital from unconsolidated entities that totaled $4.0 billion in the aggregate during 2019. The Operating Partnership has a $4.0 billion Credit Facility, and a $3.5 billion supplemental unsecured revolving credit facility, or Supplemental Facility, and together with the Credit Facility, the Credit Facilities. The Credit Facilities and the Commercial Paper program provide alternative sources of liquidity as our cash needs vary from time to time. Borrowing capacity under these sources may be increased as discussed further below.

Our balance of cash and cash equivalents increased $155.0 million during 2019 to $669.4 million as of December 31, 2019 as further discussed in “Cash Flows” below.

On December 31, 2019, we had an aggregate available borrowing capacity of approximately $6.0 billion under the Credit Facilities, net of outstanding borrowings of $125.0 million, amounts outstanding under the Commercial Paper program of $1.3 billion and letters of credit of $11.4 million. For the year ended December 31, 2019, the maximum aggregate outstanding balance under the Credit Facilities was $130.7 million and the weighted average outstanding balance was $125.1 million. The weighted average interest rate was 3.04% for the year ended December 31, 2019.

Simon has historically had access to public equity markets and the Operating Partnership has historically had access to private and public, short and long-term unsecured debt markets and access to secured debt and private equity from institutional investors at the property level.

Our business model and Simon’s status as a REIT require us to regularly access the debt markets to raise funds for acquisition, development and redevelopment activity, and to refinance maturing debt. Simon may also, from time to time, access the equity capital markets to accomplish our business objectives. We believe we have sufficient cash on hand and availability under the Credit Facilities and the Commercial Paper program to address our debt maturities and capital needs through 2020.

Cash Flows

Our net cash flow from operating activities and distributions of capital from unconsolidated entities totaled $4.0 billion during 2019. In addition, we had net proceeds from our debt financing and repayment activities of $784.6 million, including $100.0 million of cash paid to extinguish debt. These activities are further discussed below under “Financing and Debt.” During 2019, we also:

	●	paid stockholder dividends and unitholder distributions totaling approximately $2.9 billion and preferred unit distributions totaling $5.3 million,

	●	funded consolidated capital expenditures of $876.0 million (including development and other costs of $72.5 million, redevelopment and expansion costs of $498.0 million, and tenant costs and other operational capital expenditures of $305.5 million),

	●	funded investments in unconsolidated entities of $63.8 million,

	●	funded investments in equity instruments of $374.2 million,

	●	received insurance proceeds from third-party carriers for property restoration, remediation, and business interruption from hurricane damages in Puerto Rico of $17.2 million,

	●	funded the repurchase of $359.8 million of Simon’s common stock.

In general, we anticipate that cash generated from operations will be sufficient to meet operating expenses, monthly debt service, recurring capital expenditures, and dividends to stockholders and/or distributions to partners necessary to maintain Simon’s REIT qualification on a long-term basis. In addition, we expect to be able to generate or obtain capital for nonrecurring capital expenditures, such as acquisitions, major building redevelopments and expansions, as well as for scheduled principal maturities on outstanding indebtedness, from:

	●	excess cash generated from operating performance and working capital reserves,

	●	borrowings on the Credit Facilities and Commercial Paper program,

	●	additional secured or unsecured debt financing, or

	●	additional equity raised in the public or private markets.

We expect to generate positive cash flow from operations in 2020, and we consider these projected cash flows in our sources and uses of cash. These cash flows are principally derived from rents paid by our tenants. A significant deterioration in projected cash flows from operations could cause us to increase our reliance on available funds from the Credit Facilities and Commercial Paper program, curtail planned capital expenditures, or seek other additional sources of financing as discussed above.

Financing and Debt

Unsecured Debt

At December 31, 2019, our unsecured debt consisted of $15.9 billion of senior unsecured notes of the Operating Partnership, $125.0 million outstanding under the Operating Partnership’s $4.0 billion unsecured revolving credit facility, or Credit Facility, and $1.3 billion outstanding under the Operating Partnership’s global unsecured commercial paper program, or Commercial Paper program.

On December 31, 2019, we had an aggregate available borrowing capacity of $6.0 billion under the Credit Facility and the Operating Partnership’s $3.5 billion unsecured revolving credit facility, or Supplemental Facility, and together with the Credit Facility, the Credit Facilities. The maximum aggregate outstanding balance under the Credit Facilities during the year ended December 31, 2019 was $130.7 million and the weighted average outstanding balance was $125.1 million. Letters of credit of $11.4 million were outstanding under the Credit Facilities as of December 31, 2019.

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.

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 is LIBOR plus 77.5 basis points, with an additional facility fee of 10 basis points.

The Operating Partnership also has available a Commercial Paper program of $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, 2019, we had $1.3 billion outstanding under the Commercial Paper program, of which $1.0 billion was comprised of U.S. dollar denominated notes with a weighted average interest rate of 1.72% and $269.2 million was comprised of Euro denominated notes with a weighted average interest rate of (0.38%). These borrowings have a weighted average maturity date of March 6, 2020 and reduce amounts otherwise available under the Credit Facilities.

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%.

On September 13, 2019 the Operating Partnership completed the issuance of the following senior unsecured notes: $1.0 billion with a fixed interest rate of 2.00%, $1.25 billion with a fixed interest rate of 2.45%, and $1.25 billion with a fixed interest rate of 3.25%, with maturity dates of September 13 of 2024, 2029, and 2049, respectively. Proceeds from the unsecured notes offering funded the early redemption of senior unsecured notes in October 2019, as discussed below, and repaid a portion of the indebtedness outstanding under the Commercial Paper program.

On October 7, 2019, the Operating Partnership completed the early redemption of its $900 million 4.375% notes due March 1, 2021, $700 million 4.125% notes due December 1, 2021, $600 million 3.375% notes due March 15, 2022 and €375 million of the €750 million 2.375% notes due October 2, 2020. We recorded a $116.3 million loss on extinguishment of debt in the fourth quarter as a result of the early redemption.

Mortgage Debt

Total mortgage indebtedness was $6.9 billion and $6.8 billion at December 31, 2019 and 2018, respectively.

​

Covenants

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, 2019, we were in compliance with all covenants of our unsecured debt.

At December 31, 2019, our consolidated subsidiaries were the borrowers under 46 non-recourse mortgage notes secured by mortgages on 50 properties and other assets, 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, 2019, 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.

Summary of Financing

Our consolidated debt, adjusted to reflect outstanding derivative instruments, and the effective weighted average interest rates as of December 31, 2019 and 2018, consisted of the following (dollars in thousands):

​	​	​	​	​	​	​	​	​	​	​	​
​		​	​		Effective		​	​		Effective
​	​	Adjusted Balance		​	Weighted	​	Adjusted		​	Weighted
​	​	as of		​	Average	​	Balance as of		​	Average
Debt Subject to	​	December 31, 2019			Interest Rate(1)	​	December 31, 2018			Interest Rate(1)	​
Fixed Rate	​	$	23,298,167		3.46%	​	$	22,461,191		3.37%	​
Variable Rate	​		865,063		2.61%	​		844,344		3.17%	​
​	​	$	24,163,230		3.16%	​	$	23,305,535		3.35%	​

(1)	Effective weighted average interest rate excludes the impact of net discounts and debt issuance costs.

Contractual Obligations and Off-balance Sheet Arrangements

In regards to long-term debt arrangements, the following table summarizes the material aspects of these future obligations on our consolidated indebtedness as of December 31, 2019, and subsequent years thereafter (dollars in thousands) assuming the obligations remain outstanding through initial maturities:

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		2020			2021 - 2022			2023 - 2024			After 2024			Total
Long Term Debt (1) (5)	​	$	2,857,060	​	$	4,414,458	​	$	4,765,135	​	$	12,208,803	​	$	24,245,456	​
Interest Payments (2)	​		743,555	​		1,309,076	​		1,029,338	​		3,514,867	​		6,596,836	​
Consolidated Capital Expenditure Commitments (3)	​		551,418	​		—	​		—	​		—	​		551,418	​
Lease Commitments (4)	​		32,438	​		64,891	​		65,300	​		908,701	​		1,071,330	​

(1)	Represents principal maturities only and, therefore, excludes net discounts and debt issuance costs.

(2)	Variable rate interest payments are estimated based on the LIBOR or other applicable rate at December 31, 2019.

(3)	Represents contractual commitments for capital projects and services at December 31, 2019. Our share of estimated 2020 development, redevelopment and expansion activity is further discussed below under “Development Activity”.

(4)	Represents only the minimum non-cancellable lease period, excluding applicable lease extension and renewal options, unless reasonably certain of exercise.

(5)	The amount due in 2020 includes $1.3 billion in Global Commercial Paper.

Our off-balance sheet arrangements consist primarily of our investments in joint ventures which are common in the real estate industry and are described in Note 6 of the notes to the consolidated financial statements. Our joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint venture debt is secured by a first mortgage, is without recourse to the joint venture partners, and does not represent a liability of the partners, except to the extent the partners or their affiliates expressly guarantee the joint venture debt. As of December 31, 2019, the Operating Partnership guaranteed joint venture-related mortgage indebtedness of $214.8 million (of which we have a right of recovery from our venture partners of $10.8 million as of December 31, 2019). 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 has an estimated fair value in excess of the guaranteed amount. We may elect to fund cash needs of a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans, although such fundings are not required contractually or otherwise.

Hurricane Impacts

As discussed further in Note 10 of the notes to the consolidated financial statements, during the third quarter of 2017, two of our wholly-owned properties located in Puerto Rico sustained significant property damage and business interruption as a result of Hurricane Maria.

Since the date of the loss, we have received $73.9 million of insurance proceeds from third-party carriers related to the two properties located in Puerto Rico, of which $45.5 million was used for property restoration and remediation and to reduce the insurance recovery receivable. During the years ended December 31, 2019 and 2018, we recorded $10.5 million and $17.9 million, respectively, as business interruption income, which was recorded in other income in the accompanying consolidated statements of operations and comprehensive income.

Acquisitions and Dispositions

Buy-sell, marketing rights, and other exit mechanisms are common in real estate partnership agreements. Most of our partners are institutional investors who have a history of direct investment in retail real estate. We and our partners in our joint venture properties may initiate these provisions (subject to any applicable lock up or similar restrictions). If we determine it is in our best interests for us to purchase the joint venture interest and we believe we have adequate liquidity to execute the purchase without hindering our cash flows, then we may initiate these provisions or elect to buy our partner’s interest. If we decide to sell any of our joint venture interests, we expect to use the net proceeds to reduce outstanding indebtedness or to reinvest in development, redevelopment, or expansion opportunities.

Acquisitions. On September 19, 2019, we acquired the remaining 50% interest in a hotel adjacent to one of our properties from our joint venture partner for cash consideration of $12.8 million. As of closing, the property was subject to a $21.5 million, 4.02% variable rate mortgage.

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.

Dispositions. We may continue to pursue the disposition of properties that no longer meet our strategic criteria or that are not a primary retail venue within their trade area.

During 2019, we disposed of our interests in one multi-family residential investment. Our share of the gross proceeds on this transaction was $17.9 million. Our share of the gain of $16.2 million is included in other income in the accompanying consolidated statement of operations and comprehensive income. We also recorded net gains of $62.1 million, primarily related to Klépierre’s disposition of its interests in certain shopping centers, of which our share was $58.6 million, as discussed in Note 6 to the consolidated financial statements.

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 6 of the notes to the consolidated financial statements, 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 6 of the notes to the consolidated financial statements, Klépierre disposed of its interests in certain shopping centers resulting in a gain of which our share was $20.2 million.

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 6 of the notes to the consolidated financial statements, Klépierre’s disposition of its interest in certain shopping centers, resulting in a gain of which our share was $5.0 million.

Joint Venture Formation Activity

On October 16, 2019, we contributed approximately $276.8 million consisting of cash and the Shop Premium Outlets, or SPO, assets for a 45% noncontrolling interest in Rue Gilt Groupe, or RGG, to create a new multi-platform venture dedicated to digital value shopping, as further discussed in Note 6 to the consolidated financial statements.

Subsequent Event

On February 10, 2020, we and Taubman Centers, Inc., a publicly held Michigan corporation (“TCO”), issued a joint press release announcing the execution of an Agreement and Plan of Merger (the “Merger Agreement”) dated as of February 9, 2020, pursuant to which, among other things and subject to the satisfaction or waiver of certain conditions, the Operating Partnership will acquire 100% of the equity interests of TCO and, following the transactions contemplated in the Merger Agreement, will hold 80% of the equity interests of The Taubman Realty Group Limited Partnership (“TRG”), with the Taubman Family (as defined in the Merger Agreement) retaining a 20% interest in TRG. Consummation of the transactions contemplated by the Merger Agreement are subject to the satisfaction or waiver of customary closing conditions, including the approval and adoption of the Merger Agreement by (i) shareholders holding two-thirds of TCO’s outstanding voting stock and (ii) shareholders, excluding the Taubman Family, holding a majority of TCO’s outstanding voting stock.

TRG is engaged in the ownership, management and/or leasing of 26 super-regional shopping centers in the U.S. and Asia. The TRG board will be comprised of 3 Simon designees and 3 Taubman designees. TRG will continue to be managed by its existing executive team. We, through the Operating Partnership, will acquire all of Taubman common stock for $52.50 per share in cash and expect to fund the total required cash consideration of approximately $3.6 billion with existing liquidity.

Development Activity

We routinely incur costs related to construction for significant redevelopment and expansion projects at our properties. Redevelopment and expansion projects, including the addition of anchors, big box tenants, and restaurants are underway at several properties in the United States, Canada, Europe, and Asia.

Our share of the costs of all new development, redevelopment and expansion projects currently under construction is approximately $1.8 billion. We expect to fund these capital projects with cash flows from operations. Our estimated stabilized return on invested capital typically ranges between 7-10% for all our new development, redevelopment and expansion projects.

Summary of Capital Expenditures. The following table summarizes total capital expenditures on consolidated properties on a cash basis (in millions):

​	​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
New Developments	​	$	73	​	$	87	​	$	61	​
Redevelopments and Expansions	​		498	​		419	​		474	​
Tenant Allowances	​		162	​		144	​		127	​
Operational Capital Expenditures	​		143	​		132	​		70	​
Total	​	$	876	​	$	782	​	$	732	​

​

New Domestic Developments, Redevelopments and Expansions

In the third quarter, construction started on a 338,000 square foot upscale outlet located in Jenks (Tulsa), Oklahoma, projected to open in spring of 2021. We own a 100% interest in this project.

On September 25, 2018, we opened Denver Premium Outlets, a 330,000 square foot center in Thornton (Denver), Colorado. We own a 100% interest in this project. The cost of this project was $128.6 million.

​

International Development Activity

We typically reinvest net cash flow from our international joint ventures to fund future international development activity. We believe this strategy mitigates some of the risk of our initial investment and our exposure to changes in foreign currencies. We have also funded most of our foreign investments with local currency-denominated borrowings that act as a natural hedge against fluctuations in exchange rates. Our consolidated net income exposure to changes in the volatility of the Euro, Yen, Peso, Won, and other foreign currencies is not material. We expect our share of international development costs for 2020 will be approximately $211 million, primarily funded through reinvested joint venture cash flow and construction loans.

The following table describes recently completed and new development and expansion projects as well as our share of the estimated total cost as of December 31, 2019 (in millions):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	Gross	​	Our	​	Our Share of		​	Our Share of		​	Projected
​	​	​	​	Leasable	​	Ownership	​	Projected Net Cost		​	Projected Net Cost		​	Opening
Property		Location		Area (sqft)		Percentage		(in Local Currency)			(in USD) (1)			Date
New Development Projects:	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Premium Outlets Querétaro	​	Querétaro, Mexico	​	274,800	​	50%	​	MXN	441.7	​	$	23.4	​	Opened May - 2019
Málaga Designer Outlet	​	Málaga, Spain	​	191,000	​	46%	​	EUR	50.3	​	$	56.4	​	Feb. - 2020
Siam Premium Outlets Bangkok	​	Bangkok, Thailand	​	251,000	​	50%	​	THB	1,607	​	$	53.9	​	Apr. - 2020
West Midlands Designer Outlet	​	Cannock (West Midlands), England	​	197,000	​	20%	​	GBP	26.5	​	$	34.9	​	Oct. - 2020
Paris-Giverny Designer Outlet	​	Vernon (Normandy), France	​	229,000	​	81%	​	EUR	183.9	​	$	206.2	​	Sep. - 2021
Expansions:	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Vancouver Designer Outlet Phase 2	​	Richmond (British Columbia), Canada	​	84,000	​	46%	​	CAD	26.9	​	$	20.7	​	Opened Aug. - 2019
Paju Premium Outlets Phase 3	​	Gyeonggi Province, South Korea	​	116,000	​	50%	​	KRW	26,905	​	$	23.3	​	Opened Aug. - 2019
Ashford Designer Outlet Phase 2	​	Ashford, England	​	98,000	​	46%	​	GBP	43.0	​	$	56.8	​	Opened Oct. - 2019
Noventa di Piave Designer Outlet Phase 5	​	Noventa di Piave (Venice), Italy	​	29,000	​	92%	​	EUR	21.4	​	$	24.0	​	Opened Nov. - 2019
Tosu Premium Outlets Phase 4	​	Tosu City, Japan	​	38,000	​	40%	​	JPY	964	​	$	8.9	​	Opened Nov. - 2019
Gotemba Premium Outlets Phase 4	​	Gotemba, Japan	​	178,000	​	40%	​	JPY	7,476	​	$	68.8	​	Apr. - 2020
Rinku Premium Outlets Phase 5	​	Izumisano (Osaka), Japan	​	110,000	​	40%	​	JPY	3,219	​	$	29.6	​	Jul. - 2020
La Reggia Designer Outlet Phase 3	​	Marcianise (Naples), Italy	​	58,000	​	92%	​	EUR	30.9	​	$	34.6	​	Nov. - 2020

(1)	USD equivalent based upon December 31, 2019 foreign currency exchange rates.

Dividends, Distributions and Stock Repurchase Program

Simon paid a common stock dividend of $2.10 per share in the fourth quarter of 2019 and $8.30 per share for the year ended December 31, 2019. The Operating Partnership paid distributions per unit for the same amounts. In 2018, Simon paid dividends of $2.00 and $7.90 per share for the three and twelve month periods ended December 31, 2018, respectively. The Operating Partnership paid distributions per unit for the same amounts. Simon’s Board of Directors declared a quarterly cash dividend for the first quarter of 2020 of $2.10 per share of common stock payable on February 28, 2020 to stockholders of record on February 14, 2020. The distribution rate on units is equal to the dividend rate on common stock. In order to maintain its status as a REIT, Simon must pay a minimum amount of dividends. Simon’s future dividends and the Operating Partnership’s future distributions will be determined by Simon’s Board of Directors, in its sole discretion, based on actual and projected financial condition, liquidity and results of operations, cash available for dividends and limited partner distributions, cash reserves as deemed necessary for capital and operating expenditures, financing covenants, if any, and the amount required to maintain Simon’s status as a REIT.

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 plan, Simon may repurchase up to $2.0 billion of its common stock during the two-year period ending February 11, 2021 in the open market or in privately negotiated transactions as market conditions warrant. During the year ended December 31, 2019, Simon purchased 2,247,074 shares at an average price of $160.11 per share, of which 46,377 shares at an average price of $164.49 were purchased as part of the previous program. During the year ended December 31, 2018, Simon purchased 2,275,194 shares at an average

price of $155.64 per share as part of the previous program. At December 31, 2019, we had remaining authority to repurchase approximately $1.6 billion of common stock. As Simon repurchases shares under these programs, the Operating Partnership repurchases an equal number of units from Simon.

Forward-Looking Statements

Certain statements made in this section or elsewhere in this Annual Report on Form 10-K may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and other factors. Such factors include, but are not limited to: changes in economic and market conditions that may adversely affect the general retail environment; the potential loss of anchor stores or major tenants; the inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise; decreases in market rental rates; the intensely competitive market environment in the retail industry; the inability to lease newly developed properties and renew leases and relet space at existing properties on favorable terms; risks related to international activities, including, without limitation, the impact, if any, of the United Kingdom’s exit from the European Union; changes to applicable laws or regulations or the interpretation thereof; risks associated with the acquisition, development, redevelopment, expansion, leasing and management of properties; general risks related to real estate investments, including the illiquidity of real estate investments; the impact of our substantial indebtedness on our future operations; any disruption in the financial markets that may adversely affect our ability to access capital for growth and satisfy our ongoing debt service requirements; any change in our credit rating; changes in market rates of interest and foreign exchange rates for foreign currencies; changes in the value of our investments in foreign entities; our ability to hedge interest rate and currency risk; our continued ability to maintain our status as a REIT; changes in tax laws or regulations that result in adverse tax consequences; risks relating to our joint venture properties; environmental liabilities; changes in insurance costs, the availability of comprehensive insurance coverage; security breaches that could compromise our information technology or infrastructure; natural disasters; the potential for terrorist activities; the loss of key management personnel; and the transition of LIBOR to an alternative reference rate. We discussed these and other risks and uncertainties under the heading "Risk Factors" in Part I, Item1A of this Annual Report on Form 10-K. We may update that discussion in subsequent other periodic reports, but, except as required by law, we undertake no duty or obligation to update or revise these forward-looking statements, whether as a result of new information, future developments, or otherwise.

Non-GAAP Financial Measures

Industry practice is to evaluate real estate properties in part based on performance measures such as FFO, diluted FFO per share, NOI, portfolio NOI and comparable property NOI. We believe that these non-GAAP measures are helpful to investors because they are widely recognized measures of the performance of REITs and provide a relevant basis for comparison among REITs. We also use these measures internally to measure the operating performance of our portfolio.

We determine FFO based upon the definition set forth by the National Association of Real Estate Investment Trusts (“NAREIT”) Funds From Operations White Paper – 2018 Restatement. Our main business includes acquiring, owning, operating, developing, and redeveloping real estate in conjunction with the rental of real estate. Gains and losses of assets incidental to our main business are included in FFO. We determine FFO to be our share of consolidated net income computed in accordance with GAAP:

	●	excluding real estate related depreciation and amortization,

	●	excluding gains and losses from extraordinary items,

	●	excluding gains and losses from the sale, disposal or property insurance recoveries of, or any impairment related to, depreciable retail operating properties,

	●	plus the allocable portion of FFO of unconsolidated joint ventures based upon economic ownership interest, and

	●	all determined on a consistent basis in accordance with GAAP.

You should understand that our computations of these non-GAAP measures might not be comparable to similar measures reported by other REITs and that these non-GAAP measures:

	●	do not represent cash flow from operations as defined by GAAP,

	●	should not be considered as an alternative to net income determined in accordance with GAAP as a measure of operating performance, and

	●	are not an alternative to cash flows as a measure of liquidity.

The following schedule reconciles total FFO to consolidated net income and, for Simon, diluted net income per share to diluted FFO per share.

​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	2019		​	2018		​	2017		​	​
​	(in thousands)								​
Funds from Operations (A)	$	4,272,271	​	$	4,324,601	​	$	4,020,505	​	​
Change in FFO from prior period		(1.2)	%		7.6	%		6.0	%	​
Consolidated Net Income	$	2,423,188	​	$	2,822,343	​	$	2,244,903	​	​
Adjustments to Arrive at FFO:	​	​	​	​	​	​	​	​	​	​
Depreciation and amortization from consolidated properties		1,329,843	​		1,270,888	​		1,260,865	​	​
Our share of depreciation and amortization from unconsolidated entities, including Klépierre and HBS		551,596	​		533,595	​		540,718	​	​
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net (B)		(14,883)	​		(282,211)	​		(3,647)	​	​
Unrealized losses in fair value of equity instruments	​	8,212	​	​	15,212	​	​	—	​	​
Net income attributable to noncontrolling interest holders in properties		(991)	​		(11,327)	​		(13)	​	​
Noncontrolling interests portion of depreciation and amortization		(19,442)	​		(18,647)	​		(17,069)	​	​
Preferred distributions and dividends		(5,252)	​		(5,252)	​		(5,252)	​	​
FFO of the Operating Partnership (A)	$	4,272,271	​	$	4,324,601	​	$	4,020,505	​	​
FFO allocable to limited partners		563,342	​		568,817	​		529,595	​	​
Dilutive FFO allocable to common stockholders (A)	$	3,708,929	​	$	3,755,784	​	$	3,490,910	​	​
Diluted net income per share to diluted FFO per share reconciliation:	​	​	​	​	​	​	​	​	​	​
Diluted net income per share	$	6.81	​	$	7.87	​	$	6.24	​	​
Depreciation and amortization from consolidated properties and our share of depreciation and amortization from unconsolidated entities, including Klépierre and HBS, net of noncontrolling interests portion of depreciation and amortization		5.25	​		5.01	​		4.98	​	​
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net (B)		(0.04)	​		(0.79)	​		(0.01)	​	​
Unrealized losses in fair value of equity instruments	​	0.02	​	​	0.04	​	​	—	​	​
Diluted FFO per share (A)	$	12.04	​	$	12.13	​	$	11.21	​	​
Basic and Diluted weighted average shares outstanding		307,950	​		309,627	​		311,517	​	​
Weighted average limited partnership units outstanding		46,774	​		46,893	​		47,260	​	​
Basic and Diluted weighted average shares and units outstanding		354,724	​		356,520	​		358,777	​	​

(A)

Includes FFO of the Operating Partnership related to a loss on extinguishment of debt of $116.3 million and $128.6 million for the years ended December 31, 2019 and 2017, respectively. Includes Diluted FFO per share/unit related to a loss on extinguishment of debt of $0.33 and $0.36 for the years ended December 31, 2019 and 2017, respectively. Includes Diluted FFO allocable to common stockholders related to a loss on extinguishment of debt of $100.9 million and $111.7 million for the years ended December 31, 2019 and 2017, respectively.

(B)	Includes gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net of $288.8 million for the year ended December 31, 2018. Noncontrolling interest portion of the gain was $6.6 million, or $0.02 per diluted share/unit for the year ended December 31, 2018.

The following schedule reconciles consolidated net income to NOI and sets forth the computations of portfolio NOI and comparable property NOI.

​	​	​	​	​	​	​	​
​	​	For the Year
​	​	Ended December 31,
​		2019			2018
​	​	(in thousands)
Reconciliation of NOI of consolidated entities:	​	​			​	​	​
Consolidated Net Income	​	$	2,423,188	​	$	2,822,343	​
Income and other taxes	​		30,054	​		36,898	​
Interest expense	​		789,353	​		815,923	​
Income from unconsolidated entities	​		(444,349)	​		(475,250)	​
Loss on extinguishment of debt	​	​	116,256	​	​	--	​
Unrealized losses in fair value of equity instruments	​		8,212	​		15,212	​
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net	​		(14,883)	​		(288,827)	​
Operating Income Before Other Items	​		2,907,831	​		2,926,299	​
Depreciation and amortization	​		1,340,503	​		1,282,454	​
Home and regional office costs	​	​	190,109	​	​	136,677	​
General and administrative	​	​	34,860	​	​	46,543	​
NOI of consolidated entities	​	$	4,473,303	​	$	4,391,973	​
Reconciliation of NOI of unconsolidated entities:	​	​	​	​	​	​	​
Net Income	​	$	892,506	​	$	876,412	​
Interest expense	​		636,988	​		663,693	​
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net	​		(24,609)	​		(33,367)	​
Operating Income Before Other Items	​		1,504,885	​		1,506,738	​
Depreciation and amortization	​		681,764	​		652,968	​
NOI of unconsolidated entities	​	$	2,186,649	​	$	2,159,706	​
Add: Our share of NOI from Klépierre, HBS, and other corporate investments	​	​	293,979	​	​	316,155	​
Combined NOI	​	$	6,953,931	​	$	6,867,834	​
Less: Corporate and Other NOI Sources (1)	​		481,059	​		482,615	​
Portfolio NOI	​	$	6,472,872	​	$	6,385,219	​
Portfolio NOI Growth	​	​	1.4	%	​	​	​
Less: Our share of NOI from Klépierre, HBS, and other corporate investments	​	​	293,979	​	​	292,513	​
Less: International Properties (2)	​	​	483,563	​	​	465,421	​
Less: NOI from New Development, Redevelopment, Expansion and Acquisitions (3)	​		181,871	​		191,959	​
Comparable Property NOI (4)	​	$	5,513,459	​	$	5,435,326	​
Comparable Property NOI Growth	​		1.4	%	​	​	​

(1)	Includes income components excluded from portfolio NOI and comparable property NOI (domestic lease termination income, interest income, land sale gains, straight line lease income, above/below market lease adjustments), unrealized and realized gains/losses on non-real estate related equity instruments, Northgate, Simon management company revenues, and other assets.

(2)	Includes International Premium Outlets (except for Canadian Premium Outlets included in comparable property NOI) and International Designer Outlets.

(3)	Includes total property NOI for properties undergoing redevelopment as well as incremental NOI for expansion properties not yet included in comparable properties.

(4)	Includes Malls, Premium Outlets, The Mills and Lifestyle Centers opened and operating as comparable for the period.

Item 7A. Qualitative and Quantitative Disclosures About Market Risk

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 anticipated issuances of senior notes. Upon completion of the debt issuance, the cost 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.

Our future earnings, cash flows and fair values relating to financial instruments are dependent upon prevalent market rates of interest, primarily LIBOR. Based upon consolidated indebtedness and interest rates at December 31, 2019, a 50 basis point increase in the market rates of interest would decrease future earnings and cash flows by approximately $4.4 million, and would decrease the fair value of debt by approximately $713.4 million.

​