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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 21, 2020, 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 21, 2020

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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 21, 2020, 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


		Evaluation of Investment Properties for Impairment
Description of the Matter		At December 31, 2019, the Company’s consolidated net investment properties totaled $23,899 million. In addition, a significant number of the Company’s investments in unconsolidated entities and its investment in Klépierre hold investment properties. As discussed in Note 3 to the consolidated financial statements, the Company reviews investment properties for impairment on a property-by-property basis to identify and evaluate events or changes in circumstances that indicate the carrying value of an investment property may not be recoverable. The Company estimates undiscounted cash flows of an investment property using observable and unobservable inputs such as historical and forecasted cash flows, operating income before depreciation and amortization, estimated capitalization rates, leasing prospects and local market information. Auditing management’s evaluation of investment properties for impairment was complex due to the estimation uncertainty in determining the undiscounted cash flows of an investment

		property. In particular, the impairment evaluation for investment properties was sensitive to significant assumptions such as forecasted cash flows and operating income before depreciation and amortization, and capitalization rates, all of which can be affected by expectations about future market or economic conditions, demand, and competition.
How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process for evaluating investment properties for impairment, including controls over management’s review of the significant assumptions described above. To test the Company’s evaluation of investment properties for impairment, we performed audit procedures that included, among others, assessing the methodologies applied, evaluating the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used by management in its analysis. We compared the significant assumptions used by management to current industry and economic trends, relevant market information, and other applicable sources. We also involved a valuation specialist to assist in evaluating certain assumptions. In addition, we compared the forecasted cash flows and operating income before depreciation and amortization to historical actual results and evaluated significant variances. As part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the undiscounted cash flows of the related investment property that would result from changes in the assumptions.
		Evaluation of Investments in Unconsolidated Entities for Impairment
Description of the Matter		At December 31, 2019, the carrying value of the Company’s investments in unconsolidated entities totaled $4,103 million. As explained in Note 3 to the consolidated financial statements, the Company reviews investments in unconsolidated entities for impairment if events or changes in circumstances indicate that the carrying value of an investment in an unconsolidated entity may not be recoverable. To identify and evaluate whether an other-than-temporary decline in the fair value of an investment below its carrying value has occurred, the Company assesses economic and operating conditions that may affect the fair value of the investment. The evaluation of 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. When required, the Company estimates the fair value of an investment and assesses whether any impairment is other than temporary using observable and unobservable inputs such as historical and forecasted cash flows or operating income, estimated capitalization and discount rates, or relevant market multiples, leasing prospects and local market information. Auditing management’s evaluation of investments in unconsolidated entities for impairment was complex due to the estimation uncertainty in determining the forecasted cash flows, operating income before depreciation and amortization, estimated fair value of each investment and whether any decline in fair value below the related investment’s carrying amount is other-than-temporary. In particular, the impairment evaluation for these investments was sensitive to significant assumptions such as forecasted cash flows, operating income before depreciation and amortization, relevant market multiples, and capitalization and discount rates, all of which can be affected by expectations about future market or economic conditions, demand, and competition.

How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process for evaluating investments in unconsolidated entities for impairment, including controls over management’s review of the significant assumptions described above. To test the Company’s evaluation of investments in unconsolidated entities for impairment, we performed audit procedures that included, among others, assessing the methodologies applied, evaluating the significant assumptions discussed above and testing the completeness and accuracy of data used by management in its analysis. We compared the significant assumptions used by management to current industry and economic trends, relevant market information, and other applicable sources. We also involved a valuation specialist to assist in evaluating certain assumptions. In addition, we compared the forecasted cash flows and operating income before depreciation and amortization to historical actual results and evaluated significant variances. As part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the cash flows and the fair value of the related investment that would result from changes in the assumptions.


	/s/ Ernst & Young LLP

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

Indianapolis, Indiana February 21, 2020

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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 21, 2020, 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 21, 2020

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, 2019 and 2018, 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, 2019 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 21, 2020, 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 21, 2020

Simon Property Group, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except share amounts)


	December 31,		December 31,
	2019		2018
ASSETS:
Investment properties, at cost	$	37,804,495	$	37,092,670
Less - accumulated depreciation		13,905,776		12,884,539
		23,898,719		24,208,131
Cash and cash equivalents		669,373		514,335
Tenant receivables and accrued revenue, net		832,151		763,815
Investment in unconsolidated entities, at equity		2,371,053		2,220,414
Investment in Klépierre, at equity		1,731,649		1,769,488
Right-of-use assets, net		514,660		—
Deferred costs and other assets		1,214,025		1,210,040
Total assets	$	31,231,630	$	30,686,223
LIABILITIES:
Mortgages and unsecured indebtedness	$	24,163,230	$	23,305,535
Accounts payable, accrued expenses, intangibles, and deferred revenues		1,390,682		1,316,861
Cash distributions and losses in unconsolidated entities, at equity		1,566,294		1,536,111
Lease liabilities		516,809		—
Other liabilities		464,304		500,597
Total liabilities		28,101,319		26,659,104
Commitments and contingencies
Limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties		219,061		230,163
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		42,420		42,748
Common stock, $0.0001 par value, 511,990,000 shares authorized, 320,435,256 and 320,411,571 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		9,756,073		9,700,418
Accumulated deficit		(5,379,952)		(4,893,069)
Accumulated other comprehensive loss		(118,604)		(126,017)
Common stock held in treasury, at cost, 13,574,296 and 11,402,103 shares, respectively		(1,773,571)		(1,427,431)
Total stockholders’ equity		2,526,398		3,296,681
Noncontrolling interests		384,852		500,275
Total equity		2,911,250		3,796,956
Total liabilities and equity	$	31,231,630	$	30,686,223

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,
	2019		2018		2017
REVENUE:
Lease income	$	5,243,771	$	5,158,420	$	5,109,099
Management fees and other revenues		112,942		116,286		121,259
Other income		398,476		370,582		296,978
Total revenue		5,755,189		5,645,288		5,527,336
EXPENSES:
Property operating		453,145		450,636		443,177
Depreciation and amortization		1,340,503		1,282,454		1,275,452
Real estate taxes		468,004		457,740		440,003
Repairs and maintenance		100,495		99,588		96,900
Advertising and promotion		150,344		151,241		150,865
Home and regional office costs		190,109		136,677		135,150
General and administrative		34,860		46,543		51,972
Other		109,898		94,110		131,477
Total operating expenses		2,847,358		2,718,989		2,724,996
OPERATING INCOME BEFORE OTHER ITEMS		2,907,831		2,926,299		2,802,340
Interest expense		(789,353)		(815,923)		(809,393)
Loss on extinguishment of debt		(116,256)		—		(128,618)
Income and other taxes		(30,054)		(36,898)		(23,343)
Income from unconsolidated entities		444,349		475,250		400,270
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		3,647
CONSOLIDATED NET INCOME		2,423,188		2,822,343		2,244,903
Net income attributable to noncontrolling interests		321,604		382,285		296,941
Preferred dividends		3,337		3,337		3,337
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	2,098,247	$	2,436,721	$	1,944,625
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Net income attributable to common stockholders	$	6.81	$	7.87	$	6.24

Consolidated Net Income	$	2,423,188	$	2,822,343	$	2,244,903
Unrealized (loss) gain on derivative hedge agreements		(4,066)		21,633		(35,112)
Net loss (gain) reclassified from accumulated other comprehensive loss into earnings		13,634		7,020		(12,122)
Currency translation adjustments		(1,850)		(47,038)		45,766
Changes in available-for-sale securities and other		718		373		5,733
Comprehensive income		2,431,624		2,804,331		2,249,168
Comprehensive income attributable to noncontrolling interests		322,627		379,837		297,534
Comprehensive income attributable to common stockholders	$	2,108,997	$	2,424,494	$	1,951,634

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,
	2019		2018		2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated Net Income	$	2,423,188	$	2,822,343	$	2,244,903
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization		1,394,172		1,349,776		1,357,351
Loss on debt extinguishment		116,256		—		128,618
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net		(14,883)		(288,827)		(3,647)
Gains on sales of marketable securities		—		—		(21,541)
Unrealized losses in fair value of equity instruments		8,212		15,212		—
Gain on interest in unconsolidated entity (Note 6)		—		(35,621)		—
Straight-line lease income		(67,139)		(18,325)		(26,543)
Equity in income of unconsolidated entities		(444,349)		(475,250)		(400,270)
Distributions of income from unconsolidated entities		428,769		390,137		374,101
Changes in assets and liabilities
Tenant receivables and accrued revenue, net		(157)		(17,518)		(26,170)
Deferred costs and other assets		(49,338)		(75,438)		(132,945)
Accounts payable, accrued expenses, intangibles, deferred revenues and other liabilities		13,100		84,307		99,931
Net cash provided by operating activities		3,807,831		3,750,796		3,593,788
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions		(12,800)		(51,060)		(264,488)
Funding of loans to related parties		—		(4,641)		(71,532)
Proceeds on loans to related parties		7,641		—		—
Capital expenditures, net		(876,011)		(781,909)		(732,100)
Cash impact from the consolidation of properties		1,045		11,276		7,536
Net proceeds from sale of assets		6,776		183,241		19,944
Investments in unconsolidated entities		(63,789)		(63,397)		(157,173)
Purchase of equity instruments		(374,231)		(21,563)		(25,000)
Proceeds from sales of equity instruments		—		25,000		56,268
Insurance proceeds for property restoration		5,662		19,083		—
Distributions of capital from unconsolidated entities and other		229,000		447,464		405,078
Net cash used in investing activities		(1,076,707)		(236,506)		(761,467)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and other, net of transaction costs		(328)		(329)		(328)
Purchase of shares related to stock grant recipients' tax withholdings		(2,955)		(2,911)		(2,789)
Redemption of limited partner units		(6,846)		(81,506)		—
Purchase of treasury stock		(359,773)		(354,108)		(407,002)
Distributions to noncontrolling interest holders in properties		(41,549)		(76,963)		(11,295)
Contributions from noncontrolling interest holders in properties		139		161		382
Preferred distributions of the Operating Partnership		(1,915)		(1,915)		(1,915)
Distributions to stockholders and preferred dividends		(2,558,944)		(2,449,071)		(2,231,259)
Distributions to limited partners		(388,542)		(370,656)		(338,602)
Cash paid to extinguish debt		(99,975)		—		(128,618)
Proceeds from issuance of debt, net of transaction costs		13,312,301		7,973,719		11,668,026
Repayments of debt		(12,427,699)		(9,118,685)		(10,456,671)
Net cash used in financing activities		(2,576,086)		(4,482,264)		(1,910,071)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		155,038		(967,974)		922,250
CASH AND CASH EQUIVALENTS, beginning of period		514,335		1,482,309		560,059
CASH AND CASH EQUIVALENTS, end of period	$	669,373	$	514,335	$	1,482,309

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, 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 8)								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)
Unrealized loss on hedging activities						(30,505)								(4,607)		(35,112)
Currency translation adjustments						39,726								6,040		45,766
Changes in available-for-sale securities and other						4,987								746		5,733
Net gain reclassified from accumulated other comprehensive loss into earnings						(10,535)								(1,587)		(12,122)
Other comprehensive income						3,673								592		4,265
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)
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 8)								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)
Unrealized gain on hedging activities						18,781								2,852		21,633
Currency translation adjustments						(40,766)								(6,271)		(47,037)
Changes in available-for-sale securities and other						324								49		373
Net loss reclassified from accumulated other comprehensive loss into earnings						6,097								923		7,020
Other comprehensive income						(15,564)								(2,447)		(18,011)
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)
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


					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
Exchange of limited partner units (24,000 common shares, Note 8)								253						(253)		—
Series J preferred stock premium amortization		(328)														(328)
Stock incentive program (90,902 common shares, net)								(16,589)				16,589				—
Redemption of limited partner units (43,255 units)								(6,453)						(393)		(6,846)
Amortization of stock incentive								12,604								12,604
Treasury stock purchase (2,247,074 shares)												(359,773)				(359,773)
Long-term incentive performance units														20,749		20,749
Issuance of unit equivalents and other (16,336 common shares repurchased)								19		(29,523)		(2,956)		139		(32,321)
Unrealized loss on hedging activities						(3,553)								(513)		(4,066)
Currency translation adjustments						(1,489)								(361)		(1,850)
Changes in available-for-sale securities and other						623								95		718
Net loss reclassified from accumulated other comprehensive loss into earnings						11,832								1,802		13,634
Other comprehensive income						7,413								1,023		8,436
Adjustment to limited partners' interest from change in ownership in the Operating Partnership								65,821						(65,821)		—
Distributions to common stockholders and limited partners, excluding Operating Partnership preferred interests										(2,558,944)				(388,541)		(2,947,485)
Distribution to other noncontrolling interest partners														(2,446)		(2,446)
Net income, excluding $1,915 attributable to preferred interests in the Operating Partnership and a $431 loss attributable to noncontrolling redeemable interests in properties										2,101,584				320,120		2,421,704
Balance at December 31, 2019	$	42,420	$	32	$	(118,604)	$	9,756,073	$	(5,379,952)	$	(1,773,571)	$	384,852	$	2,911,250

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,
	2019		2018
ASSETS:
Investment properties, at cost	$	37,804,495	$	37,092,670
Less — accumulated depreciation		13,905,776		12,884,539
		23,898,719		24,208,131
Cash and cash equivalents		669,373		514,335
Tenant receivables and accrued revenue, net		832,151		763,815
Investment in unconsolidated entities, at equity		2,371,053		2,220,414
Investment in Klépierre, at equity		1,731,649		1,769,488
Right-of-use assets, net		514,660		—
Deferred costs and other assets		1,214,025		1,210,040
Total assets	$	31,231,630	$	30,686,223
LIABILITIES:
Mortgages and unsecured indebtedness	$	24,163,230	$	23,305,535
Accounts payable, accrued expenses, intangibles, and deferred revenues		1,390,682		1,316,861
Cash distributions and losses in unconsolidated entities, at equity		1,566,294		1,536,111
Lease liabilities		516,809		—
Other liabilities		464,304		500,597
Total liabilities		28,101,319		26,659,104
Commitments and contingencies
Preferred units, various series, at liquidation value, and noncontrolling redeemable interests in properties		219,061		230,163
EQUITY:
Partners’ Equity
Preferred units, 796,948 units outstanding. Liquidation value of $39,847		42,420		42,748
General Partner, 306,868,960 and 309,017,468 units outstanding, respectively		2,483,978		3,253,933
Limited Partners, 46,740,117 and 46,807,372 units outstanding, respectively		378,339		492,877
Total partners’ equity		2,904,737		3,789,558
Nonredeemable noncontrolling interests in properties, net		6,513		7,398
Total equity		2,911,250		3,796,956
Total liabilities and equity	$	31,231,630	$	30,686,223

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,
	2019		2018		2017
REVENUE:
Lease income	$	5,243,771	$	5,158,420	$	5,109,099
Management fees and other revenues		112,942		116,286		121,259
Other income		398,476		370,582		296,978
Total revenue		5,755,189		5,645,288		5,527,336
EXPENSES:
Property operating		453,145		450,636		443,177
Depreciation and amortization		1,340,503		1,282,454		1,275,452
Real estate taxes		468,004		457,740		440,003
Repairs and maintenance		100,495		99,588		96,900
Advertising and promotion		150,344		151,241		150,865
Home and regional office costs		190,109		136,677		135,150
General and administrative		34,860		46,543		51,972
Other		109,898		94,110		131,477
Total operating expenses		2,847,358		2,718,989		2,724,996
OPERATING INCOME BEFORE OTHER ITEMS		2,907,831		2,926,299		2,802,340
Interest expense		(789,353)		(815,923)		(809,393)
Loss on extinguishment of debt		(116,256)		—		(128,618)
Income and other taxes		(30,054)		(36,898)		(23,343)
Income from unconsolidated entities		444,349		475,250		400,270
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		3,647
CONSOLIDATED NET INCOME		2,423,188		2,822,343		2,244,903
Net income attributable to noncontrolling interests		991		11,327		13
Preferred unit requirements		5,252		5,252		5,252
NET INCOME ATTRIBUTABLE TO UNITHOLDERS	$	2,416,945	$	2,805,764	$	2,239,638
NET INCOME ATTRIBUTABLE TO UNITHOLDERS ATTRIBUTABLE TO:
General Partner	$	2,098,247	$	2,436,721	$	1,944,625
Limited Partners		318,698		369,043		295,013
Net income attributable to unitholders	$	2,416,945	$	2,805,764	$	2,239,638
BASIC AND DILUTED EARNINGS PER UNIT:
Net income attributable to unitholders	$	6.81	$	7.87	$	6.24

Consolidated Net Income	$	2,423,188	$	2,822,343	$	2,244,903
Unrealized (loss) gain on derivative hedge agreements		(4,066)		21,633		(35,112)
Net loss (gain) reclassified from accumulated other comprehensive loss into earnings		13,634		7,020		(12,122)
Currency translation adjustments		(1,850)		(47,038)		45,766
Changes in available-for-sale securities and other		718		373		5,733
Comprehensive income		2,431,624		2,804,331		2,249,168
Comprehensive income attributable to noncontrolling interests		1,422		7,911		2,091
Comprehensive income attributable to unitholders	$	2,430,202	$	2,796,420	$	2,247,077

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,
	2019		2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated Net Income	$	2,423,188	$	2,822,343	$	2,244,903
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization		1,394,172		1,349,776		1,357,351
Loss on debt extinguishment		116,256		—		128,618
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net		(14,883)		(288,827)		(3,647)
Gains on sales of marketable securities		—		—		(21,541)
Unrealized losses in fair value of equity instruments		8,212		15,212		—
Gain on interest in unconsolidated entity (Note 6)		—		(35,621)		—
Straight-line lease income		(67,139)		(18,325)		(26,543)
Equity in income of unconsolidated entities		(444,349)		(475,250)		(400,270)
Distributions of income from unconsolidated entities		428,769		390,137		374,101
Changes in assets and liabilities
Tenant receivables and accrued revenue, net		(157)		(17,518)		(26,170)
Deferred costs and other assets		(49,338)		(75,438)		(132,945)
Accounts payable, accrued expenses, intangibles, deferred revenues and other liabilities		13,100		84,307		99,931
Net cash provided by operating activities		3,807,831		3,750,796		3,593,788
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions		(12,800)		(51,060)		(264,488)
Funding of loans to related parties		—		(4,641)		(71,532)
Proceeds on loans to related parties		7,641		—		—
Capital expenditures, net		(876,011)		(781,909)		(732,100)
Cash impact from the consolidation of properties		1,045		11,276		7,536
Net proceeds from sale of assets		6,776		183,241		19,944
Investments in unconsolidated entities		(63,789)		(63,397)		(157,173)
Purchase of equity instruments		(374,231)		(21,563)		(25,000)
Proceeds from sales of equity instruments		—		25,000		56,268
Insurance proceeds for property restoration		5,662		19,083		—
Distributions of capital from unconsolidated entities and other		229,000		447,464		405,078
Net cash used in investing activities		(1,076,707)		(236,506)		(761,467)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of units and other		(328)		(329)		(328)
Purchase of units related to stock grant recipients' tax withholdings		(2,955)		(2,911)		(2,789)
Redemption of limited partner units		(6,846)		(81,506)		—
Purchase of general partner units		(359,773)		(354,108)		(407,002)
Distributions to noncontrolling interest holders in properties		(41,549)		(76,963)		(11,295)
Contributions from noncontrolling interest holders in properties		139		161		382
Partnership distributions		(2,949,401)		(2,821,642)		(2,571,776)
Cash paid to extinguish debt		(99,975)		—		(128,618)
Mortgage and unsecured indebtedness proceeds, net of transaction costs		13,312,301		7,973,719		11,668,026
Mortgage and unsecured indebtedness principal payments		(12,427,699)		(9,118,685)		(10,456,671)
Net cash used in financing activities		(2,576,086)		(4,482,264)		(1,910,071)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		155,038		(967,974)		922,250
CASH AND CASH EQUIVALENTS, beginning of period		514,335		1,482,309		560,059
CASH AND CASH EQUIVALENTS, end of period	$	669,373	$	514,335	$	1,482,309

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, 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)
Unrealized loss on hedging activities				(30,505)		(4,607)				(35,112)
Currency translation adjustments				39,726		6,040				45,766
Changes in available-for-sale securities and other				4,987		746				5,733
Net gain reclassified from accumulated other comprehensive loss into earnings				(10,535)		(1,587)				(12,122)
Other comprehensive income				3,673		592				4,265
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
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)
Unrealized gain on hedging activities				18,781		2,852				21,633
Currency translation adjustments				(40,766)		(6,271)				(47,037)
Changes in available-for-sale securities and other				324		49				373
Net loss reclassified from accumulated other comprehensive loss into earnings				6,097		923				7,020
Other comprehensive income				(15,564)		(2,447)				(18,011)
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
Balance at December 31, 2018	$	42,748	$	3,253,933	$	492,877	$	7,398	$	3,796,956
Series J preferred stock premium and amortization		(328)								(328)
Limited partner units exchanged to common units (24,000 units)				253		(253)				—
Stock incentive program (90,902 common units, net)				—						—
Amortization of stock incentive				12,604						12,604
Redemption of limited partner units (43,255 units)				(6,453)		(393)				(6,846)
Treasury unit purchase (2,247,074 units)				(359,773)						(359,773)
Long-term incentive performance units						20,749				20,749
Issuance of unit equivalents and other (16,336 common units)				(32,460)				139		(32,321)
Unrealized loss on hedging activities				(3,553)		(513)				(4,066)
Currency translation adjustments				(1,489)		(361)				(1,850)
Changes in available-for-sale securities and other				623		95				718
Net loss reclassified from accumulated other comprehensive loss into earnings				11,832		1,802				13,634
Other comprehensive income				7,413		1,023				8,436
Adjustment to limited partners' interest from change in ownership in the Operating Partnership				65,821		(65,821)				—
Distributions, excluding distributions on preferred interests classified as temporary equity		(3,337)		(2,555,607)		(388,541)		(2,446)		(2,949,931)
Net income, excluding preferred distributions on temporary equity preferred units of $1,915 and a $431 loss attributable to noncontrolling redeemable interests in properties		3,337		2,098,247		318,698		1,422		2,421,704
Balance at December 31, 2019	$	42,420	$	2,483,978	$	378,339	$	6,513	$	2,911,250

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)

1. 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, 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. Internationally, as of December 31, 2019, we had ownership interests in 29 Premium Outlets and Designer Outlet properties primarily located in Asia, Europe, and Canada. 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 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.

2. 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

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)

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 2019 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. 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 partnerships and joint ventures for which accumulated distributions have exceeded investments in and our share of net income of the partnerships and joint ventures within cash distributions and losses in partnerships and joint ventures, at equity in the consolidated balance sheets. The net equity of certain partnerships and 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, 2019, we consolidated 133 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 82 properties, or the joint venture properties, as well as our investment in Klépierre, Aéropostale, Authentic Brands Group LLC, or ABG, HBS Global Properties, or HBS, and Rue Gilt Groupe, or RGG, 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 82 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 21 of the remaining 25 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,
	2019		2018		2017
Weighted average ownership interest	86.8	%	86.8	%	86.8	%

As of December 31, 2019 and 2018, our ownership interest in the Operating Partnership was 86.8%. 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.

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)

3. Summary of Significant Accounting Policies

Investment Properties

Investment properties consist of the following as of December 31:


	2019		2018
Land	$	3,692,056	$	3,673,023
Buildings and improvements		33,664,683		32,994,937
Total land, buildings and improvements		37,356,739		36,667,960
Furniture, fixtures and equipment		447,756		424,710
Investment properties at cost		37,804,495		37,092,670
Less — accumulated depreciation		13,905,776		12,884,539
Investment properties at cost, net	$	23,898,719	$	24,208,131
Construction in progress included above	$	812,982	$	561,556

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,
		2019		2018		2017
Capitalized interest	$	33,342	$	19,871	$	24,754

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 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 before depreciation and amortization, estimated capitalization and discount rates, or relevant market

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)

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.

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 lease income,

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

	●	the value of lease income 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 8 for disclosures about non-cash investing and financing transactions.

Equity Instruments and Debt Securities

Equity instruments and debt securities consist primarily of equity instruments, our deferred compensation plan investments, the debt securities of our captive insurance subsidiary, and certain investments held to fund the debt service requirements of debt previously secured by investment properties. At December 31, 2019 and 2018, we had equity instruments with readily determinable fair values of $68.2 million and $78.1 million, respectively. Effective January 1, 2018, changes in fair value of these equity instruments are recorded in earnings. We recognized a cumulative effect adjustment of $7.3 million as of January 1, 2018 to reclassify unrealized gains previously reported in accumulated other comprehensive income (loss) as a result of the adoption of Accounting Standards Update (ASU) 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” Non-cash mark-to-market adjustments related to an investment we hold in units of a publicly traded real estate investment trust are included in unrealized losses in fair value of equity instruments in our consolidated statements of operations and comprehensive income. Non-cash mark-to-market adjustments related to other non-real estate securities with readily determinable fair values for the years ended December 31, 2019 and 2018 were $5.0 million and nil, respectively, and these losses were recorded in other expense in

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)

our consolidated statements of operations and comprehensive income. At December 31, 2019 and 2018, we had equity instruments without readily determinable fair values of $295.4 million and $175.7 million, respectively, for which we have elected the measurement alternative under this guidance. 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 years ended December 31, 2019 and 2018.

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.

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.

At December 31, 2019 and 2018, we held debt securities of $52.8 million and $40.1 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, 2019 and 2018 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 $17.5 million and $10.9 million at December 31, 2019 and 2018, respectively, and a gross liability balance of $3.8 million and $6.2 million at December 31, 2019 and 2018, respectively.

Note 7 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 fair value, 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

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)

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.

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 of December 31, 2019, approximately 6.2% of our consolidated long-lived assets and 2.9% of our consolidated total revenues were derived from assets located outside the United States. 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.

Deferred Costs and Other Assets

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


	2019		2018
Deferred lease costs, net	$	209,277	$	249,010
In-place lease intangibles, net		31,417		65,825
Acquired above market lease intangibles, net		44,337		64,813
Marketable securities of our captive insurance companies		52,760		40,099
Goodwill		20,098		20,098
Other marketable and non-marketable securities		363,554		253,732
Prepaids, notes receivable and other assets, net		492,582		516,463
	$	1,214,025	$	1,210,040

Deferred Lease Costs

Our deferred leasing costs consist primarily of initial direct costs and, prior to the adoption of ASC 842, 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:


	2019		2018
Deferred lease costs	$	443,313	$	497,570
Accumulated amortization		(234,036)		(248,560)
Deferred lease costs, net	$	209,277	$	249,010

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)

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,
	2019		2018		2017
Amortization of deferred leasing costs	$	57,201	$	56,646	$	54,323

Intangibles

The average remaining life of in-place lease intangibles is approximately 2.0 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 lease income over the remaining lease life as a component of reported lease income. The weighted average remaining life of these intangibles is approximately 2.6 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 $44.8 million and $66.7 million as of December 31, 2019 and 2018, respectively. The amount of amortization of above and below market leases, net, which increased lease income for the years ended December 31, 2019, 2018, and 2017, was $1.9 million, $1.0 million and $2.8 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:


	2019		2018
In-place lease intangibles	$	196,007	$	291,613
Accumulated amortization		(164,590)		(225,788)
In-place lease intangibles, net	$	31,417	$	65,825

	2019		2018
Acquired above market lease intangibles	$	252,934	$	253,973
Accumulated amortization		(208,597)		(189,160)
Acquired above market lease intangibles, net	$	44,337	$	64,813

Estimated future amortization and the increasing (decreasing) effect on lease income for our above and below market leases as of December 31, 2019 are as follows:


	Below		Above		Impact to
	Market		Market		Lease
	Leases		Leases		Income, Net
2020	$	16,943	$	(15,642)	$	1,301
2021		7,970		(10,226)		(2,256)
2022		5,348		(7,421)		(2,073)
2023		4,063		(5,388)		(1,325)
2024		3,151		(3,645)		(494)
Thereafter		7,302		(2,015)		5,287
	$	44,777	$	(44,337)	$	440

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)

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, 2019 and 2018, 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, 2019 and 2018, respectively.

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 gain on our treasury locks and terminated hedges recorded in accumulated other comprehensive income (loss) was $10.6 million as of December 31, 2019, compared to an unamortized loss of $3.0 million as of December 31, 2018. Within the next year, we expect to reclassify to earnings approximately $1.9 million of gains related to terminated interest rate swaps from the current balance held in accumulated other comprehensive income (loss).

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.

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 had the following Euro:USD forward contracts designated as net investment hedges at December 31, 2019 and 2018 (in millions):


			Asset (Liability) Value as of
			December 31,		December 31,
Notional Value		Maturity Date	2019		2018
€	50.0	May 15, 2019		—		(0.8)
€	50.0	March 20, 2020		(0.5)		—
€	50.0	March 20, 2020		(0.5)		—
€	50.0	March 20, 2020		(0.5)		—
€	50.0	May 15, 2020		1.5		(1.5)
€	100.0	June 18, 2020		(0.6)		—
€	90.0	June 18, 2020		(0.5)		—
€	100.0	December 18, 2020		(0.6)		—
€	100.0	December 18, 2020		(0.6)		—
€	50.0	May 14, 2021		1.3		(2.0)

Asset balances in the above table are included in deferred costs and other assets. Liability balances in the above table are included in other liabilities.

We use 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, 2019 and 2018 was $14.7 million and $10.9 million, respectively, and is included in deferred costs and other assets.

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 Simon’s derivative activities, including our share of other comprehensive income from unconsolidated entities, was $41.2 million and $32.9 million as of December 31, 2019 and 2018, respectively. 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, was $47.5 million and $37.9 million as of December 31, 2019 and 2018, respectively.

Noncontrolling Interests

Simon

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


	2019		2018
Limited partners’ interests in the Operating Partnership	$	378,339	$	492,877
Nonredeemable noncontrolling interests in properties, net		6,513		7,398
Total noncontrolling interests reflected in equity	$	384,852	$	500,275

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, limited partners’ interests in the Operating Partnership, and preferred distributions 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.

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.

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

Accumulated Other Comprehensive Income (Loss)

Simon

The total gross accumulated other comprehensive income (loss) related to Simon’s currency translation adjustment was ($160.4 million) and ($158.9 million) as of December 31, 2019 and 2018, respectively.

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


							Affected line item where
	2019		2018		2017		net income is presented
Accumulated derivative losses, net	$	(2,782)	$	(7,020)	$	(9,419)	Interest expense
		(10,852)		—		—	Loss on extinguishment of debt
		1,802		923		1,233	Net income attributable to noncontrolling interests
	$	(11,832)	$	(6,097)	$	(8,186)

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

The Operating Partnership

The total gross accumulated other comprehensive income (loss) related to the Operating Partnership’s currency translation adjustment was ($184.8 million) and ($183.0 million) as of December 31, 2019 and 2018, respectively.

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


							Affected line item where
	2019		2018		2017		net income is presented
Accumulated derivative losses, net	$	(2,782)	$	(7,020)	$	(9,419)	Interest expense
		(10,852)		—		—	Loss on extinguishment of debt
	$	(13,634)	$	(7,020)	$	(9,419)

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

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 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 lease consideration only when each tenant’s sales exceed the applicable sales threshold. We amortize any tenant inducements as a reduction of lease income 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. Such property operating expenses typically include utility, insurance, security, janitorial, landscaping, food court and other administrative expenses. This significantly reduces our exposure to increases in costs and operating expenses resulting from inflation or otherwise. For substantially

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)

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 lease income on a straight-line basis over the term of the lease beginning with the adoption of ASC 842. 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 all variable reimbursements from tenants for recoverable portions of all of these expenses as variable lease consideration 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. Provisions for credit losses that are not probable of collection are recognized as a reduction of lease income. Refer to note 9 for further disclosure of lease income.

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, 2019 and 2018 approximated $74.5 million and $82.5 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.

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.

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 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, 2019 and 2018, we had net deferred tax liabilities of $257.7 million and $278.3 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. 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.

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 February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, "Leases," codified as Accounting Standards Codification (ASC) 842, which results in lessees recognizing most leased assets and corresponding lease liabilities on the balance sheet. Certain refinements were made to lessor accounting to conform the standard with the recently issued revenue recognition guidance in ASU 2014-09, “Revenue From Contracts With Customers”, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. ASC 842 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 in real estate are earned from arrangements that are within the scope of ASC 842. On July 30, 2018, the FASB issued ASU 2018-11, also codified as ASC 842, 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 lease arrangements 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 ASC 842 that we reallocate or separately present consideration from lease and non-lease components. On January 1, 2019, we began recognizing consideration received from fixed common area maintenance arrangements on a straight-line basis as this consideration is attributed to the lease component.

Further, ASC 842 requires recognition on 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 continue to be classified as operating leases and the pattern of lease expense recognition is unchanged. Refer to note 10 for further disclosure regarding ground leases and office leases recognized as a result of the adoption of ASC 842.

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

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)

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. There was no impact on our consolidated financial statements at adoption.

4. 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 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 on 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 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 2019, 2018, and 2017.

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

2019 Acquisitions

On September 19, 2019, we acquired the remaining 50% interest in a hotel adjacent to one of our properties for cash consideration of $12.8 million. As of closing, the property was subject to a $21.5 million, 4.02% variable rate mortgage. We accounted for this transaction as an asset acquisition and substantially all our investment relates to investment property.

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%.

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)

2019 Dispositions

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 operation 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, as discussed in Note 6 to the consolidated financial statements.

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 6, 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, 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 6, 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.

5. 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,
	2019		2018		2017
Net Income attributable to Common Stockholders — Basic and Diluted	$	2,098,247	$	2,436,721	$	1,944,625
Weighted Average Shares Outstanding — Basic and Diluted		307,950,112		309,627,178		311,517,345

For the year ended December 31, 2019, 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, 2019, 2018, and 2017. 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.

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


	For the Year Ended December 31,
	2019		2018		2017
Net Income attributable to Unitholders — Basic and Diluted	$	2,416,945	$	2,805,764	$	2,239,638
Weighted Average Units Outstanding — Basic and Diluted		354,724,019		356,520,452		358,776,632

For the year ended December 31, 2019, potentially dilutive securities include LTIP units. No securities had a material dilutive effect for the years ended December 31, 2019, 2018, and 2017. We accrue distributions when they are declared.

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,
	2019			2018			2017
Total dividends/distributions paid per common share/unit	$	8.30		$	7.90		$	7.15
Percent taxable as ordinary income		100.00	%		96.20	%		100.00	%
Percent taxable as long-term capital gains		0.00	%		3.80	%		0.00	%
		100.00	%		100.00	%		100.00	%

In the first quarter of 2020, Simon’s Board of Directors declared a quarterly cash dividend of $2.10 per share of common stock payable on February 28, 2020 to stockholders of record on February 14, 2020. The Operating Partnership’s distribution rate on its units is equal to the dividend rate on Simon’s common stock.

6. 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 82 properties as of December 31, 2019 and 81 properties as of December 31, 2018.

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, 2019 and 2018, we had construction loans and other advances to related parties totaling $78.4 million and $85.8 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

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. We attributed substantially all of our investment to goodwill and certain amortizing and non-amortizing 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)

On September 19, 2019, as discussed in note 4, we acquired the remaining 50% interest in a hotel adjacent to one of our properties from our joint venture partner. As a result of this acquisition, we now own 100% of this property.

During the first quarter of 2019, we disposed of our interests in a multi-family residential investment. Our share of the gross proceeds was $17.9 million. The gain of $16.2 million is included in other income in the accompanying consolidated statement of operations and comprehensive income.

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.

As of December 31, 2019 and 2018, we had an 11.7%noncontrolling equity interest in HBS, a joint venture we formed with Hudson’s Bay Company. In the fourth quarter of 2019, we recorded an impairment charge of $47.2 million to reduce our investment in HBS to its estimated fair value. 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. These amounts are included in gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the consolidated statements of operations and comprehensive income. Our share of net (loss) income, net of amortization of our excess investment excluding impairment, was ($16.2) million and $15.1 million for the year ended December 31, 2019 and 2018, respectively. Total revenues, operating income before other items and consolidated net (loss) income were approximately $133.4 million, $26.5 million and ($24.7) million, respectively, for the year ended December 31, 2019 and $326.3 million, $196.3 million, and $105.9 million, respectively for the year ended December 31, 2018.

On June 7, 2018, Aventura Mall, a property in which we own a noncontrolling 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.

In May 2017, Colorado Mills, a property in which we have a noncontrolling 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, 2019, the property had received business interruption proceeds and also property damage proceeds of $67.9 million, which resulted in the property recording a $3.0 million gain in 2019. 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. For the periods ended December 31, 2019 and 2018, respectively, our $1.1 million and $12.5 million share of the gain is reflected within the gain on 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.

In 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, 2019, our noncontrolling equity method interests in the operations venture of Aéropostale and in ABG were 44.95% and 5.40%, respectively.

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.

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)

European Investments

At December 31, 2019, we owned 63,924,148 shares, or approximately 22.2%, of Klépierre, which had a quoted market price of $37.96 per share. Our share of net income, net of amortization of our excess investment, was $145.2 million, $98.8 million and $50.0 million for the years ended December 31, 2019, 2018 and 2017, 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 $19.6 billion, $12.9 billion, and $1.3 billion, respectively, as of December 31, 2019 and $20.0 billion, $12.7 billion, and $1.4 billion, respectively, as of December 31, 2018. Klépierre’s total revenues, operating income before other items and consolidated net income were approximately $1.5 billion, $626.3 million and $655.5 million, respectively, for the year ended December 31, 2019, $1.6 billion, $670.4 million and $693.0 million, respectively, for the year ended December 31, 2018, and $1.5 billion, $545.7 million and $381.3 million, respectively, for the year ended December 31, 2017.

During the years ended December 31, 2019, 2018 and 2017, Klépierre completed the disposal of its interests in certain shopping centers. In connection with these disposals, we recorded gains of $58.6 million, $20.2 million and $5.0 million, respectively, representing our share of the gains recognized by Klépierre, which is included in gain on 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 have an interest in a European investee that had interests in nine Designer Outlet properties, of which six are consolidated by us, as of December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, our legal percentage ownership interests in these properties ranged from 45% to 94%. Due to certain redemption rights held by our venture partner, which will require us to purchase their interests under certain circumstances, 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.

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%.

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 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%. 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.

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 also have a direct minority ownership in three of those outlets. At December 31, 2019 and 2018, the carrying value of these equity instruments without readily determinable fair values 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 $212.1 million and $232.1 million as of December 31, 2019 and 2018, 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

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)

$173.9 million and $166.3 million as of December 31, 2019 and 2018, respectively, including all related components of accumulated other comprehensive income (loss).

Summary Financial Information

A summary of the combined balance sheets and statements of operations of our equity method investments and share of income from such investments, excluding Klépierre, Aéropostale, ABG, HBS, and RGG, follows.

COMBINED BALANCE SHEETS


	December 31,		December 31,
	2019		2018
Assets:
Investment properties, at cost	$	19,525,665	$	18,807,449
Less - accumulated depreciation		7,407,627		6,834,633
		12,118,038		11,972,816
Cash and cash equivalents		1,015,864		1,076,398
Tenant receivables and accrued revenue, net		510,157		445,148
Right-of-use assets, net		185,302		—
Deferred costs and other assets		384,663		390,818
Total assets	$	14,214,024	$	13,885,180
Liabilities and Partners’ Deficit:
Mortgages	$	15,391,781	$	15,235,415
Accounts payable, accrued expenses, intangibles, and deferred revenue		977,112		976,311
Lease liabilities		186,594		—
Other liabilities		338,412		344,205
Total liabilities		16,893,899		16,555,931
Preferred units		67,450		67,450
Partners’ deficit		(2,747,325)		(2,738,201)
Total liabilities and partners’ deficit	$	14,214,024	$	13,885,180
Our Share of:
Partners’ deficit	$	(1,196,926)	$	(1,168,216)
Add: Excess Investment		1,525,903		1,594,198
Our net Investment in unconsolidated entities, at equity	$	328,977	$	425,982

“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 properties, intangible assets, including goodwill, and debt premiums and discounts. We amortize excess investment over the life of the related depreciable components of assets acquired, typically no greater than 40 years, the terms of the applicable leases, the estimated useful lives of the finite lived intangibles, 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, 2019, scheduled principal repayments on these joint venture properties’ mortgage indebtedness are as follows:


2020	$	946,309
2021		2,476,864
2022		1,927,938
2023		1,267,179
2024		2,297,118
Thereafter		6,512,206
Total principal maturities		15,427,614
Debt issuance costs		(35,833)
Total mortgages	$	15,391,781

This debt becomes due in installments over various terms extending through 2035 with interest rates ranging from 0.18% to 10.53% and a weighted average interest rate of 3.94% at December 31, 2019.

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



	December 31,
	2019		2018		2017
REVENUE:
Lease income	$	3,088,594	$	3,045,668	$	2,933,655
Other income		322,398		326,575		290,515
Total revenue		3,410,992		3,372,243		3,224,170
OPERATING EXPENSES:
Property operating		587,062		590,921		551,885
Depreciation and amortization		681,764		652,968		640,286
Real estate taxes		266,013		259,567		245,646
Repairs and maintenance		85,430		87,408		81,309
Advertising and promotion		89,660		87,349		86,480
Other		196,178		187,292		184,037
Total operating expenses		1,906,107		1,865,505		1,789,643
Operating Income Before Other Items		1,504,885		1,506,738		1,434,527
Interest expense		(636,988)		(663,693)		(593,062)
Gain (loss) on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		24,609		33,367		(2,239)
Net Income	$	892,506	$	876,412	$	839,226
Third-Party Investors’ Share of Net Income	$	460,696	$	436,767	$	424,533
Our Share of Net Income	$	431,810	$	439,645	$	414,693
Amortization of Excess Investment		(83,556)		(85,252)		(89,804)
Our Share of Gain on Sale or Disposal of Assets and Interests in Other Income in the Consolidated Financial Statements		(9,156)		—		—
Our Share of (Gain) Loss on Sale or Disposal of, or Recovery on, Assets and Interests in Unconsolidated Entities, net		(1,133)		(12,513)		1,342
Income from Unconsolidated Entities	$	337,965	$	341,880	$	326,231

Our share of income from unconsolidated entities in the above table, aggregated with our share of results of Klépierre, Aéropostale, ABG, HBS, and RGG, 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 (loss) on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net is reflected within gain on 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)

7. Indebtedness

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


	2019		2018
Fixed-Rate Debt:
Mortgage notes, including $6,775 and $11,822 of net premiums and $15,195 and $14,522 of debt issuance costs, respectively. Weighted average interest and maturity of 3.87% and 4.8 years at December 31, 2019.	$	6,156,595	$	6,099,787
Unsecured notes, including $54,976 and $44,691 of net discounts and $70,297 and $58,822 of debt issuance costs, respectively. Weighted average interest and maturity of 3.07% and 9.3 years at December 31, 2019.		15,747,267		15,535,468
Commercial Paper (see below)		1,327,050		758,681
Total Fixed-Rate Debt		23,230,912		22,393,936
Variable-Rate Debt:
Mortgages notes, including $4,721 and $5,901 of debt issuance costs, respectively. Weighted average interest and maturity of 2.62% and 2.0 years at December 31, 2019.		751,130		736,274
Credit Facility (see below), including $11,067 and $16,930 of debt issuance costs, respectively, at December 31, 2019.		113,933		108,070
Total Variable-Rate Debt		865,063		844,344
Other Debt Obligations		67,255		67,255
Total Mortgages and Unsecured Indebtedness	$	24,163,230	$	23,305,535

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, 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.

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.

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 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.

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, 2019 are as follows:


2020	$	2,857,060	(1)
2021		1,541,478
2022		2,872,980
2023		1,868,669
2024		2,896,466
Thereafter		12,208,803
Total principal maturities		24,245,456
Net unamortized debt premium		6,775
Net unamortized debt discount		(54,976)
Debt issuance costs, net		(101,280)
Other Debt Obligations		67,255
Total mortgages and unsecured indebtedness	$	24,163,230

(1)	Includes $1.3 billion in Global Commercial Paper.

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


	For the Year Ended December 31,
	2019		2018		2017
Cash paid for interest	$	803,728	$	811,971	$	814,729

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:


	2019		2018
Debt issuance costs	$	187,514	$	204,189
Accumulated amortization		(86,234)		(108,014)
Debt issuance costs, net	$	101,280	$	96,175

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,
	2019		2018		2017
Amortization of debt issuance costs	$	21,499	$	21,445	$	21,707
Amortization of debt discounts/(premiums)		1,571		1,618		1,357

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)

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 $23.2 billion and $22.4 billion as of December 31, 2019 and 2018, 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,
	2019			2018
Fair value of consolidated fixed rate mortgages and unsecured indebtedness	$	23,231		$	22,323
Weighted average discount rates assumed in calculation of fair value for fixed rate mortgages		3.75	%		4.55	%
Weighted average discount rates assumed in calculation of fair value for unsecured indebtedness		3.67	%		4.50	%

8. 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 2019, Simon issued 24,000 shares of common stock to a limited partner 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, 2019, the Operating Partnership redeemed 43,255 units from nine limited partners for $6.8 million in cash. 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.

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 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, 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 repurchased 2,275,194 shares at an average price of $155.64 per share as part of the previous program. As Simon repurchases shares under this program, the Operating Partnership repurchases an equal number of units from Simon.

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 noncontrolling 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, 2019 and 2018. 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.


	2019		2018
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		193,524		204,626
Limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties	$	219,061	$	230,163

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, 2019 and 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)

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.

Noncontrolling Redeemable Interests in Properties Redeemable instruments, which typically represent the remaining noncontrolling interests 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, 2019 and 2018. The following table summarizes the preferred units and the amount of the noncontrolling redeemable interests in properties as of December 31.


	2019		2018
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		193,524		204,626
Total preferred units, at liquidation value, and noncontrolling redeemable interests in properties	$	219,061	$	230,163

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, 2019 and 2018.

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, 2019 and 2018 was $2.6 million and $2.9 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

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)

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, 2019 and 2018 was $2.6 million and $2.9 million, respectively. There are 1,000,000 Series J preferred units authorized and 796,948 Series J preferred units issued and outstanding.

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.

In accordance with its terms, the 1998 Plan expired on December 31, 2018. The shares of common stock that were available for grant under the 1998 Plan at the time of its expiration are not available for grant under the 2019 Plan.

The Simon Property Group, L.P. 2019 Stock Incentive Plan. This plan, or the 2019 plan, provides for the grant of equity-based awards with respect to the equity of Simon in the form of incentive and nonqualified stock options to purchase shares, stock appreciation rights, restricted stock grants and performance-based 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 8,000,000 shares of common stock have been reserved under the 2019 plan.

The 2019 plan is administered by 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 2019 plan and makes all other determinations deemed advisable for its administration. Options granted to employees become exercisable over the period determined by the Compensation

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)

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 2019 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.

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 employees. 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.

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.

In 2019, the Compensation Committee established and granted awards under a redesigned LTIP program, or the 2019 LTIP program. Awards under the 2019 LTIP program will be considered earned if, and only to the extent to which, the respective performance conditions (based on Funds From Operations, or FFO, per share, and Objective Criteria Goals)

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)

and market conditions (based on Relative TSR performance), as defined in the applicable award agreements, are achieved during the applicable three-year measurement period, subject to the recipient’s continued employment through the vesting date. All of the earned LTIP units under the 2019 LTIP program will vest on January 1, 2023. The 2019 LTIP program provides that the amount earned of the performance-based portion of the awards is dependent on Simon’s performance compared to certain criteria and has a maximum potential fair value at issuance of $22.1 million.

The grant date fair values of any LTIP units for market-based awards are estimated using a Monte Carlo model, and the resulting fixed expense is recorded regardless of whether the market condition criteria are achieved if the required service is delivered. The grant date fair values of the market-based awards 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 expense of the performance-based award is recorded 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 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 Performance-Based Awards
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
2019 LTIP program	To be determined in 2022	$9.5 million	$14.7 million

We recorded compensation expense, net of capitalization and forfeitures, related to LTIP programs of approximately $15.8 million, $12.0 million, and $14.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Restricted Stock. The 1998 and 2019 plans also provide 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, 2019 a total of 5,865,147 shares of restricted stock, net of forfeitures, have been awarded under the 1998 plan, and 12,178 shares of restricted stock have been awarded under the 2019 plan. Information regarding restricted stock awards is summarized in the following table for each of the years presented:


	For the Year Ended
	December 31,
	2019		2018		2017
Shares of restricted stock awarded during the year, net of forfeitures		90,902		51,756		76,660
Weighted average fair value of shares granted during the year	$	181.94	$	153.24	$	170.81
Annual amortization	$	12,604	$	12,029	$	13,911

We recorded compensation expense, net of capitalization, related to restricted stock for employees and non-employee directors of approximately $11.0 million, $7.8 million, and $9.0 million for the years ended December 31, 2019, 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)

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 goals. 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 vested on June 30, 2019. The grant date fair value of the retention award of $120.3 million was 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, 2019, Simon had reserved 54,528,976 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 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.

9. Lease Income

As discussed in Note 3, fixed lease income under our operating leases includes fixed minimum lease consideration and fixed CAM reimbursements recorded on a straight-line basis. Variable lease income includes consideration based on sales, as well as reimbursements for real estate taxes, utilities, marketing, and certain other items.


	For the Year Ended
	December 31,
	2019		2018		2017
Fixed lease income	$	4,293,401	$	4,185,174	$	4,156,971
Variable lease income		950,370		973,246		952,128
Total lease income	$	5,243,771	$	5,158,420	$	5,109,099

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)

Lease income for the years ended December 31, 2018 and 2017 has been reclassified to conform to the current year presentation.

Minimum fixed lease consideration under non-cancelable tenant operating leases for each of the next five years and thereafter, excluding variable lease consideration, as of December 31, 2019, is as follows:


2020	$	3,553,867
2021		3,182,630
2022		2,785,719
2023		2,293,210
2024		1,825,869
Thereafter		4,700,660
	$	18,341,955

10. 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.

During the first quarter of 2019, 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 accompanying consolidated statement of operations and comprehensive income.

Lease Commitments

As of December 31, 2019, a total of 23 of the consolidated properties are subject to ground leases. The termination dates of these ground leases range from 2021 to 2090, including periods for which exercising an extension option is reasonably assured. 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 2020 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. All of our lease arrangements are

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)

classified as operating leases. 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, 2019
Operating Lease Cost
Fixed lease cost	$	31,000
Variable lease cost		16,833
Sublease income		(694)
Total operating lease cost	$	47,139

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)

For the years ended December 31, 2018 and 2017, we incurred $47,320 and $45,345 of lease expense, respectively.


	For the Year Ended
	December 31, 2019
Other Information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	48,519

Weighted-average remaining lease term - operating leases		35.6 years
Weighted-average discount rate - operating leases		4.87%

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:


2020	$	32,438
2021		32,440
2022		32,451
2023		32,583
2024		32,717
Thereafter		908,701
	$	1,071,330
Impact of discounting		(554,521)
Operating lease liabilities	$	516,809

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 property damage and business interruption as a result of Hurricane Maria. Since the date of the loss, we have received

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)

$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.

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, 2019 and 2018, the Operating Partnership guaranteed joint venture related mortgage indebtedness of $214.8 million and 216.1 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 upon anchor tenants to attract customers; however, anchors do not contribute materially to our financial results as many anchors 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.

11. Related Party Transactions

Transactions with Affiliates

Our management company provides office space and legal, human resource administration, property specific financing and other support services to Melvin Simon & Associates, Inc., or MSA, a related party, for which we received a fee of $0.6 million in each of 2019, 2018 and 2017. In addition, pursuant to management agreements that provide for our receipt of a management fee and reimbursement of our direct and indirect costs, we have managed since 1993 two shopping centers owned by entities in which David Simon and Herbert Simon have ownership interests, for which we received a fee of $3.9 million, $4.2 million, and $4.2 million in 2019, 2018, and 2017, respectively.

Transactions with Unconsolidated Joint Ventures

As described in Note 2, our management company provides management, insurance, and other services to certain unconsolidated joint ventures. Amounts received for such services were $108.2 million, $111.5 million, and $116.4 million in 2019, 2018, and 2017, respectively. During 2019, 2018, and 2017, we recorded development, royalty, and other fee income, net of elimination, related to our unconsolidated international joint ventures of $14.8 million, $16.0 million, and $15.5 million, respectively. The fees related to our international investments are included in other income in the accompanying consolidated statements of operations and comprehensive income. Neither MSA, David Simon, or Herb Simon have an ownership interest in any of our unconsolidated joint ventures, except through their ownership interests in the Company or the Operating Partnership.

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)

12. Quarterly Financial Data (Unaudited)

Quarterly 2019 and 2018 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
2019
Total revenue	$	1,452,834	$	1,397,186	$	1,416,554	$	1,488,615
Operating income before other items		745,021		680,631		705,302		776,876
Consolidated net income		631,947		572,102		628,724		590,416
Simon Property Group, Inc.
Net income attributable to common stockholders	$	548,475	$	495,324	$	544,254	$	510,194
Net income per share — Basic and Diluted	$	1.78	$	1.60	$	1.77	$	1.66
Weighted average shares outstanding — Basic and Diluted		308,978,053		308,708,798		307,275,230		306,868,960
Simon Property Group, L.P.
Net income attributable to unitholders	$	631,551	$	570,389	$	627,074	$	587,931
Net income per unit — Basic and Diluted	$	1.78	$	1.60	$	1.77	$	1.66
Weighted average units outstanding — Basic and Diluted		355,778,250		355,491,396		354,038,110		353,619,579
2018
Total revenue (1)	$	1,394,182	$	1,385,059	$	1,404,021	$	1,462,027
Operating income before other items		704,962		727,983		722,843		770,512
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

(1)	Total revenue has been reclassified to conform to the current year presentation.

13. 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, or $3.6 billion.

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