Annual Report 2006

1 Annual Report 2006

Regional Malls Premium Outlet

Centers Community/Lifestyle Centers International Properties

Simon Property Group, Inc. (NYSE: SPG), headquartered in Indianapolis,

Indiana, is the largest public real estate company in the United States. We

operate from four major retail real estate platforms – regional malls, Premium

Outlet Centers

, community/lifestyle centers and international properties.

Through our subsidiary partnership, as of December 31, 2006, we owned or

had an interest in 286 properties comprising 201 million square feet in 38

states plus Puerto Rico. We also held interests in 53 European shopping

centers in France, Italy and Poland; ﬁve Premium Outlet Centers in Japan;

and one Premium Outlet Center in Mexico. Simon Property Group is an S&P

500 Company.

Additional Simon Property Group information is available at www.simon.com.

Table of Contents

Corporate Proﬁle 1

Financial Highlights 2

From the CEO 3

Regional Malls 6

Premium Outlet Centers 11

Community/Lifestyle Centers 14

International Properties 16

Balance Sheet and Capital Markets 18

Selected Financial Data 21

Management’s Discussion & Analysis 22

Consolidated Financial Statements 41

Notes to Consolidated Financial Statements 46

Properties 77

Board of Directors 80

Executive Ofﬁcers and Members of Senior Management 82

Investor Information 83

CORPORATE PROFILE

2 Simon Property Group, Inc.

Percent

Change

2006 2005 2006 vs. 2005

Operating Data (in millions)

Consolidated Revenue $ 3,332 $ 3,167 5.2%

Funds from Operations (FFO)* 1,537 1,411 8.9%

Per Common Share Data

FFO* (Diluted) $ 5.39 $ 4.96 8.7%

Net Income (Diluted)

2.19 1.82 20.3%

Cash Dividends

3.04 2.80 8.6%

Common Stock Price at December 31

101.29 76.63 32.2%

Stock and Limited Partner Units Outstanding at Year End

Shares of Common Stock (in thousands)

221,431 220,361

Limited Partner Units in the Operating Partnership (in thousands)

59,113 58,523

Market Value of Common Stock and Limited Partner Units (in millions) $ 28,416 $ 21,371

Total Market Capitalization** (in millions) $ 48,780 $ 40,153

Other Data

Total Number of Properties in the U.S.

286 286

U.S. Gross Leasable Area (in thousands)

201,015 200,412

Total Number of European Shopping Centers

53 51

European Gross Leasable Area (in thousands)

12,215 11,078

Total Number of International Premium Outlet Centers

6 6

International Premium Outlet Center Gross Leasable Area (in thousands)

1,679 1,537

Number of employees 4,300 4,700

* FFO is a non-GAAP ﬁnancial measure commonly used in the real estate industry that we believe provides useful information to investors. Please refer to

Management’s Discussion & Analysis of Financial Condition and Results of Operations for a deﬁnition of FFO, and to pages 36-37 for a reconciliation of net

income to funds from operations and of diluted net income per share to diluted FFO per share.

** Includes our share of consolidated and joint venture debt.

FFO Per Share

(Diluted)

Consolidated Revenue

($ In billions)

$2.1

$2.2

$2.6

$3.2

$3.3

’02 ’03 ’04 ’05 ’06

$2.18

$2.40

$2.60

$2.80

$3.04

’02 ’03 ’04 ’05 ’06

$3.76

$4.04

$4.39

$4.96

$5.39

’02 ’03 ’04 ’05 ’06

$21.2

$25.7

$36.9

$40.2

$48.8

’02 ’03 ’04 ’05 ’06

Dividends Per Common Share Total Market Capitalization

($ In billions)

This Annual Report contains a number of forward-looking statements. For more information, please see page 22.

FINANCIAL HIGHLIGHTS

3 Annual Report 2006

006 was an outstanding

year for our Company. We

generated strong ﬁnancial

and operational results,

successfully completed several new

development projects, expanded our

development and redevelopment

pipeline, continued to strengthen our

balance sheet, and generated a total

return to our stockholders of 37%.

Financial Highlights

c Consolidated revenue increased

5.2% to $3.332 billion from $3.167

billion in 2005.

c Funds from operations increased

8.9% to $1.537 billion from $1.411

billion in 2005. On a diluted per

share basis, the increase was 8.7%

to $5.39 from $4.96.

c Net income available to common

stockholders increased 21.0% to

$486.1 million from $401.9 million

in 2005. On a diluted per share

basis the increase was 20.3% to

$2.19 from $1.82.

c Comparable net operating income

(“NOI”), the most comprehensive

measure of operating performance

of our properties, increased a robust

5.0% for our regional mall portfolio

and 5.1% at our Premium Outlets.

Operational Highlights

Strong operational results were

achieved throughout each of our four

retail real estate platforms:

Regional Malls

Comparable sales were up 5.8% to

$476 per square foot in our mall

portfolio of 171 properties comprising

nearly 64 million square feet of small

shop space. We increased occupancy in

the mall portfolio to 93.2% in 2006, in

spite of an increase in square footage

lost to bankruptcies and store closures.

Premium Outlet Centers

Comparable sales increased 6.1% to

$471 per square foot in our U.S. Pre

mium Outlet portfolio of 36 centers

comprising 13.9 million square feet.

The portfolio remains effectively fully

occupied at 99.4%.

Comparable sales increased 5.2% in

our Premium Outlets in Japan in 2006

and the portfolio is fully occupied.

Community/Lifestyle Centers

Comparable sales in our community/

lifestyle center portfolio of 69 properties

were slightly higher than in the year

earlier period and occupancy increased

160 basis points to 93.2%.

International Properties

Comparable sales increased 2.9% in

our European shopping centers for

the year. Occupancy declined 100

basis points, to 97.1% at December

31, 2006, primarily as a result of

remerchandising activities underway at

several centers and the opening of two

new shopping centers late in the year.

Other 2006 Highlights

c The uniqueness of our multi-platform

structure is best evidenced by our

2006 new project openings. We

successfully completed and opened

7 new developments:

Regional Mall

Coconut Point in Estero, Florida

Premium Outlet Centers

Round Rock Premium Outlets in

Round Rock (Austin), Texas

Rio Grande Valley Premium

Outlets in Mercedes, Texas

Community/Lifestyle Center

The Shops at Arbor Walk in

Austin, Texas

International Properties

Wasquehal Shopping Center in

Wasquehal (Lille), France

Giugliano Shopping Center in

Giugliano (Naples), Italy

Arena Shopping Center in

Gliwice, Poland

c We identiﬁed a development and

redevelopment pipeline in excess

of $5 billion to be constructed from

2007 to 2010. This pipeline will be a

signiﬁcant driver of future growth

for our company.

c We were upgraded by Standard

& Poor’s to A- and by Moody’s

to A3, the highest ratings in our

company’s history and the highest

among U.S. real estate companies,

reﬂecting the strength of our

ﬁnancial position.

David Simon, Chief Executive Ofﬁcer

FROM THE CEO

4 Simon Property Group, Inc.

Dividends and Stockholder Returns

In February of 2006, the Company’s

Board of Directors increased the

annual common stock dividend from

$2.80 to $3.04 per share, an 8.6%

increase. Based upon solid results in

2006 and a positive outlook for 2007,

in February of 2007 the dividend was

increased by another 10.5%, to $3.36

per share.

Our common stock price increased

32% in 2006, to close the year at

$101.29. The 2006 total return to

stockholders, including dividends, was

37%. Over the last ﬁve years, our

dividends have increased by 46% and

our total return to stockholders was

approximately 350%.

The Mills Corporation

On February 16, 2007, we announced

that a joint venture between an entity

owned by us and funds managed by

Farallon Capital Management, L.L.C., a

leading investment ﬁrm, entered into a

deﬁnitive merger agreement to acquire

The Mills Corporation (“The Mills”)

for $25.25 per common share in cash.

The total value of the transaction is

approximately $1.64 billion for all of

the outstanding common stock and

common units not owned by The

Mills, and approximately $7.3 billion

including the assumption of debt and

preferred stock. The acquisition of The

Mills is to be initiated through a cash

tender offer, which has commenced.

Completion of the tender offer will be

subject to the receipt of valid tenders

for at least a majority of The Mills’

common shares and the satisfaction of

other customary conditions.

I believe that The Mills properties

are an excellent strategic ﬁt with our

existing retail platforms and they

present a compelling opportunity

for the stockholders of Simon, the

Farallon investors and The Mills’

existing joint venture partners. We

are conﬁdent that our signiﬁcant

experience operating both regional

malls and outlet centers, substantial

resources, previous ownership interest

in certain Mills properties and history

of successful acquisitions, together

Simon Property Group headquarters building in downtown Indianapolis, Indiana – All Indianapolis operations were consolidated in a new state-of-the-art

ofﬁce building in the summer of 2006. As a result of development and construction cost control and a favorable interest rate environment, we were

successful in constructing and operating this building at an annual cash outlay comparable to the previously paid annual ofﬁce rent.

5 Annual Report 2006

with Farallon’s ﬁnancial resources and

expertise, will allow us to improve the

performance of The Mills assets.

The Mills portfolio is comprised

of two distinctive types of assets

– regional malls and the traditional

Mills properties. Upon completion of

the proposed acquisition of The Mills,

we plan to integrate the 18 regional

malls into our regional mall platform

and existing infrastructure. We believe

that our resources, both human and

capital, can improve the operations

and cash ﬂow of these assets. In

addition, several of the malls provide

redevelopment opportunities that The

Mills was unable to execute as a result

of its capital constraints.

The 17 traditional Mills properties

will become our ﬁfth retail real estate

platform. A Mills property is large,

comprising well over one million

square feet of gross leasable area

(“GLA”) – with a combination of

traditional mall, outlet center, and

big box retailers and entertainment

uses – all focused on delivering value

for the consumer. These assets are

well-located in major metropolitan

markets, have considerable consumer

brand equity and large trade areas,

and generate signiﬁcant total sales

volumes. We believe that our

industry-leading presence in the

regional mall and Premium Outlet

sectors and our substantial retailer

relationships should enable us to

improve these properties. We plan

to manage the traditional Mills

properties as a separate platform, but

will utilize resources from all of our

platforms in an effort to maximize

results.

Simon Headquarters

We completed the move into our new

ofﬁce building in the summer of 2006,

consolidating all of our Indianapolis

operations into one location. The new

building has been very well-received

by our employees as well as the

City of Indianapolis. We are proud

of our new headquarters and on the

following pages you will ﬁnd photos of

our people in our new state-of-the-art

work environment.

Creativity and

Organizational Strength

For the past two years, I have

challenged our organization to be

creative in all of our development and

redevelopment activities. Recently,

I had the opportunity to visit our

two latest development projects,

Coconut Point in Estero, Florida

and The Domain in Austin, Texas,

and I witnessed ﬁrst-hand just how

creative and effective our people can

be. Coconut Point and The Domain are

world class developments that were

extremely well-executed. The focus

and energy applied to these projects

was outstanding and bodes well for

the future success of our $5 billion

development and redevelopment

pipeline.

One of our organizational strengths

is the depth and quality of our

management team. I asked each of

our platform leaders to provide an

overview of their 2006 activities and

2007 priorities. On the following

pages you will ﬁnd letters from

Rick Sokolov, Les Chao, Michael E.

McCarty and Hans Mautner, in which

they provide their thoughts. Our

chief ﬁnancial ofﬁcer, Steve Sterrett,

provides a review of our balance sheet

and capital market activities.

Outlook

2006 was another successful year

for Simon Property Group as we

outperformed the S&P 500 Index for

the seventh consecutive year and the

Morgan Stanley REIT Index for the

sixth consecutive year. We are proud of

this record, however, our Company’s

attitude is to never rest on our laurels,

but instead to focus on the future.

Our portfolio of high-quality,

highly-productive retail real estate

assets and strong balance sheet

position us well for a proﬁtable 2007,

and we will continue to pursue a

multi-faceted growth strategy which is

focused on:

c Increasing proﬁtability of our

existing portfolio (including the

addition of non-retail components

and the expansion of the mall as a

marketing medium)

c Developing high quality assets

across the U.S. retail real estate

spectrum

c Creating value from the expected

Mills transaction and;

c Expanding our international

presence

I believe a testament to our unique

multiple platform development

expertise is that in 2007 we will open

an open-air luxury regional mall in

Austin, Texas (recently opened and

doing great); a Premium Outlet near

Philadelphia; a community shopping

center in McAllen, Texas (near our

very successful mall and Premium

Outlet); as well as upscale outlet

centers in Kobe, Japan and Seoul,

South Korea and three enclosed

shopping centers in Italy (in Milan,

Naples, and Rome). No other real

estate company has this breadth of

product type and geographic reach.

In closing, I would like to thank

my colleagues at Simon Property

Group for their many contributions

to our success, our Board of Directors

for their continued guidance, and our

stockholders for their ongoing support

and encouragement.

David Simon, Chief Executive Ofﬁcer

March 19, 2007

6 Simon Property Group, Inc.

am pleased to have this opportunity to review with

you the accomplishments in our regional mall business

during 2006 and the strategies we have set for that

business going forward. The operation of our regional mall

portfolio is driven by a single, simple premise: to make

each of our properties the most compelling and best place

to shop that it can be.

In 2006, our regional mall portfolio produced very

good results. We operate 171 regional malls in 33 states

plus Puerto Rico that comprise over 166 million square

feet of space with center section square footage of 64

million square feet. Last year, the portfolio produced

comparable NOI growth of 5%, comparable sales growth

in our small shops of 5.8% to $476 per square foot and

ended 2006 93.2% leased.

For 2007 and beyond, we remain focused on continually

enhancing the shopping environment for our consumers

and our retailer partners through our management,

marketing, leasing, and development efforts.

In the management of our mall properties a renewed

emphasis is being placed on enhancing the look and feel of

the projects. In 2007, we anticipate renovating more than

a dozen properties, and plan to renovate a similar number

in 2008 and 2009. In addition, throughout the portfolio,

we are installing soft seating areas, new restrooms,

shopper lounges, children’s play areas, new customer

service centers and upgraded carts and kiosks. All of these

initiatives are designed to provide a more welcoming and

sophisticated shopping environment.

Our marketing efforts continue to enhance the

strength of our portfolio as shown by increases in sales,

visits and time spent at our properties. In 2006, the

strength of those efforts was demonstrated by the fact that

we sold $518 million of Simon gift cards at Simon malls.

The Simon gift card is the largest privately issued debit

card in the United States. This program drives incremental

consumer visits to our properties to purchase the cards

and increases sales at our properties when those cards are

utilized at our merchants.

REGIONAL MALLS

Regional Mall Portfolio Statistics

Richard S. Sokolov, President and Chief Operating Ofﬁcer, (left center)

and John Rulli, Executive Vice President and Chief Operating Ofﬁcer

– Operating Properties, (right center) participate in a regional mall

strategy meeting with (from the left) Thomas J. Schneider, Executive Vice

President – Development; Paula Ramey, Vice President – Simon Business

Network; Vicki Hanor, Executive Vice President – Leasing; and Mark

Palombaro, Senior Vice President – Development.

As of December 31 2006 2005

Number of properties 171 171

Gross Leasable Area (in millions of square feet) 166.4 166.4

Occupancy

(1)

93.2% 93.1%

Comparable Sales per Square Foot

(2)

$ 476 $ 450

Average Base Rent per Square Foot

(1)

$35.38 $ 34.49

(1) For mall and freestanding stores.

(2) For mall and freestanding stores with less than 10,000 square feet.

2006 also marked the debut of our ON-SPOT Digital

Network program in ﬁfty of our properties. This is a joint

venture with Publicis Inc. and provides digital screen

network programming opportunities for vendors and

merchants to reach our shoppers. The initial response has

been very encouraging.

We also continue to drive traffic to our portfolio

through our proprietary marketing programs such as In-

Style

Inside Simon Malls, Simon Super Chef’s Live, and

Simon Kidgits Club.

7 Annual Report 2006

A team of professionals is assigned to each Simon development

project. Representatives from development, leasing, construction,

tenant coordination, and ﬁnancial planning meet weekly throughout

the development phase to ensure successful execution. Shown here

is the development team for The Domain, the Company’s new luxury

open-air center in Austin, Texas (opened on March 9, 2007) – from

the left – Nena Wilke, Kathleen Shields, Robert Dinsmore, Dennis

Caraﬁol, Joseph Stallsmith, Vicki Hanor, Michelle Smith and Jeff Jones.

Above: The Florida Mall in Orlando generates sales in excess of $600

per square foot. Below: Asset enhancement is one of Simon’s core

competencies, as we invest capital to increase cash ﬂow and enhance

our portfolio assets through renovation and expansion. This enhancement

includes the addition of impact retailers and restaurants. For example,

we are adding eight new Nordstrom stores between now and 2010.

In the leasing of our properties we are driven to

continually upgrade the quality of our tenants and to

accommodate new retailers that are constantly seeking

space in our properties. This continual upgrading of our

tenant base has increased our market share and sales per

square foot. Demand for space in our properties is strong

as evidenced by our 2006 year-end occupancy of 93.2%.

This tenant demand is being driven by ﬁve primary

sources: new concepts introduced by our existing tenants;

vendors seeking new consumer distribution channels for

their goods in reaction to consolidation in the department

store industry; new retail concepts; expansion demands

from our existing tenants; and foreign retailers looking to

access and expand in the lucrative United States market.

Our releasing spreads remain robust at 17.6% and the

average base rent per square foot in the mall portfolio

increased for the thirteenth consecutive year (every year

since our IPO) to $35.38.

8 Simon Property Group, Inc.

To maximize land values and create more compelling and integrated

projects, we have embarked on a strategy to add non-retail components

– residential, hotel, and ofﬁce – at speciﬁc centers. Above: Ofﬁce

condominiums comprising 30,000 square feet are located above retail

stores at Coconut Point in Estero, Florida. Above right: Coconut Point also

includes 290 residential condominiums – located above retail stores and

in freestanding buildings in close proximity to retailers and restaurants.

Above: The Village at SouthPark is located adjacent to our highly-

productive SouthPark in Charlotte, North Carolina. The project includes

Crate & Barrel (opened in November of 2006), small shops (opening

in March of 2007), and 150 luxury apartments (shown here under

construction, and scheduled to open during the summer of 2007).

In our development activities, we seek to strengthen

our existing properties through the addition of anchors

and small shop space and intensify our assets with the

addition of mixed-use components such as residential,

ofﬁce or hotel, to create compelling new developments.

Last year also presented opportunities to strengthen the

portfolio as a result of the signiﬁcant consolidation in the

department store sector because of the Federated-May

merger and the acquisition of parts of the Saks Department

Store Group by Belk, Inc. and Bon-Ton, Inc. respectively. In

2006, we added over 20 anchors to our portfolio, including

Neiman Marcus, Dick’s Sporting Goods, Barneys New

York, Bloomingdale’s and Dillard’s. We also added several

restaurants and bookstores to our portfolio.

We have identiﬁed approximately $2 billion of

redevelopment projects in the portfolio which we intend to

complete over the next four years. Fueled by space that we

have recaptured as a result of the Federated-May merger, we

will open more than 20 lifestyle additions. These additions

will enable us to enhance market share of our properties by

absorbing available demand while upgrading the amenities

and exterior appearance of our malls. We will also be adding

eight new Nordstrom stores during this period.

During 2007, we will add approximately 30 additional

anchors to our portfolio such as Belk, Crate & Barrel,

Dick’s Sporting Goods, Dillard’s, theaters and bookstores.

9 Annual Report 2006

Above: As a result of the merger of Federated Department Stores and

The May Company, Federated is our largest anchor tenant, with over

160 Bloomingdale’s and Macy’s stores. Above right: The Simon portfolio

includes assets of national and international renown, such as Lenox

Square, one of Atlanta’s premier shopping destinations. Below right:

The Company continues the roll-out of Simon Kidgits Club

play areas

throughout its mall portfolio.

We initiated a program last year to add other

compatible uses, such as ofﬁce, residential and hotel, to

our projects to take advantage of the excellent locations

in their markets and the existence of the necessary

infrastructure such as parking and access roads. This

summer we will open the Village at SouthPark which is a

retail and residential mixed-use project on land adjacent

to our highly-successful SouthPark in Charlotte, North

Carolina. We are under construction with a multi-family

residential project at Firewheel Town Center in Garland,

Texas and we are in pre-development on several additional

residential opportunities and hotel sites.

In 2006, we opened Coconut Point, a new open-air

regional mall in Estero, Florida featuring Dillard’s, Barnes

& Noble, Muvico Theater, restaurants, big boxes, specialty

stores, ofﬁce space, residential condominiums and a future

hotel. The project has been enthusiastically received by

both consumers and retailers.

10 Simon Property Group, Inc.

Simon Brand Ventures (SBV), Simon’s business-to-consumer arm, has

pioneered the transformation of shopping malls into a medium where

consumer brands can build one-on-one relationships with more than

100 million shoppers who make approximately 2.4 billion visits to

Simon malls each year. Simon’s franchise of market-leading shopping

centers provides SBV the foundation to monetize the distribution

system through numerous consumer ventures. Top: SBV is led by

Stewart A. Stockdale, Chief Marketing Ofﬁcer and President – Simon

Brand Ventures (second from the right). His direct reports in this

initiative include (from the left): Mikael Thygesen, Cathi Weiner, Chip

Harding and Lisa Ross.

Top: Simon has the broadest and deepest relationships with the best

merchants in the retail world. Bottom: In March, Barneys New York

opened a ﬂagship store at our Copley Place in Boston.

In March of 2007, we opened The Domain in Austin,

Texas. This center represents our latest thinking in the

development of compelling projects that provide the

opportunity for people to live, work, dine and shop.

Anchored by Neiman Marcus and Macy’s, The Domain

features designer specialty stores, restaurants unique to

Austin and multi-family residential and ofﬁce components

– all in an environment unequalled in central Texas. We

also have new development openings planned in 2008 with

Hamilton Town Center in Noblesville, Indiana, and in

2009, with The Grand in Houston, Texas.

2006 was a very productive year for the regional

mall portfolio and we are excited and energized by the

opportunities within the portfolio for 2007 and beyond.

Richard S. Sokolov

President and Chief Operating Ofﬁcer

PHOTO BY ADRIAN WILSON, COURTESY OF BARNEYS NEW YORK

11 Annual Report 2006

PREMIUM OUTLET CENTERS

helsea’s pioneering concept – the upscale outlet

center strategically located in a major metropolitan

or tourist market – began a quarter of a century

ago. Today, as a Simon platform, we are the world’s largest

developer, owner and operator of outlet centers, with assets

across the United States, Japan and Mexico. We remain

exceptionally well positioned to continue expanding

our Premium Outlet business both domestically and

internationally.

2006 was another strong year for Premium Outlets.

Comparable property net operating income rose 5.1%,

driven by strong internal growth. U.S. Premium Outlet

comparable sales rose 6.1% to $471 per square foot, while

re-leasing spreads (the difference between expiring and

new rental rates) averaged 31%, a record. At the same

time, tenant occupancy costs remained a modest 7.8% of

sales, leaving substantial rent upside for the future.

Premium Outlet Center Portfolio Statistics

As of December 31 2006 2005

U.S. Premium Outlets

Number of properties 36 33

Gross Leasable Area

(in millions of square feet) 13.9 12.6

Occupancy

(1)

99.4% 99.6%

Comparable Sales per Square Foot

(1)

$ 471 $ 444

Average Base Rent per Square Foot

(1)

$ 24.23 $ 23.16

International Premium Outlets

(2)

Number of properties 5 5

Gross Leasable Area

(in millions of square feet) 1.4 1.3

Occupancy 100% 100%

Comparable Sales per Square Foot

¥ 89,238 ¥ 84,791

Average Base Rent per Square Foot

¥ 4,646 ¥ 4,512

(1) For all owned gross leasable area.

(2) Does not include Premium Outlets Punta Norte in Mexico

The Chelsea team is led by Leslie T. Chao, Chief Executive Ofﬁcer; left,

John R. Klein, Co-President, and right, Michael J. Clarke, Co-President

and Chief Financial Ofﬁcer

Sales at Woodbury Common Premium Outlets, our

ﬂagship property, rose 11%, to $821 per square foot.

Orlando Premium Outlets, our most productive center for

the past two years, reported sales of $1,047 per square foot,

a 12% increase. Demand for space remained strong across

the portfolio, with occupancy rates consistently in the

range of 99% throughout 2006.

The breadth of our tenant relationships remains an

asset unique to Chelsea. During the past year, we again

added important new brands, expanded old relationships,

cultivated emerging names, and actively managed the

tenant mix at every one of our properties. As a result, our

U.S. and Japanese portfolios are not only the largest in

their respective markets, but we believe the best-leased

and most productive.

Many of our relationships date back to the earliest

days of the outlet industry. Today, our ties to hundreds of

the world’s best brands – ranging from Armani to Zegna

and Gap to Nike – are stronger than ever, ampliﬁed further

by the unsurpassed scale and reach of Simon’s regional

mall platform. As consumers around the world become

ever more brand and value-conscious, Chelsea is uniquely

well-positioned to deliver the kind of retail they demand.

12 Simon Property Group, Inc.

Desert Hills Premium Outlets in Cabazon, California generates annual

sales in excess of $700 per square foot.

Round Rock Premium Outlets in Round Rock, Texas opened on August 3, 2006. Located just 20 minutes north of Austin, Round Rock Premium Outlets

comprises 432,000 square feet and features 125 designer and name-brand outlet stores. The center was 99% leased at year-end.

Above and Opposite:

Orlando Premium Outlets, our most productive

Premium Outlet for the past two years, reported sales in excess of

$1,000 per square foot in 2006. An expansion of Orlando is expected to

begin in 2007.

13 Annual Report 2006

Chelsea continues to lead the industry in new

development. In 2006 we successfully opened Round

Rock Premium Outlets (near Austin, Texas) and Rio

Grande Valley Premium Outlets (in Mercedes, Texas),

each containing more than 400,000 square feet of GLA.

We also began construction of three new projects – in the

United States, Japan, and for the ﬁrst time, South Korea

– all scheduled to open during 2007: Philadelphia Premium

Outlets, a 430,000 square-foot center located in Limerick,

Pennsylvania, in the fourth quarter; the 190,000 square-

foot ﬁrst phase of Kobe Sanda Premium Outlets, near

Kobe, in the third quarter; and the 250,000 square-foot

ﬁrst phase of Yeoju Premium Outlets, near Seoul, in the

second quarter, respectively.

Houston Premium Outlets, a new 430,000 square-

foot center, recently began construction for a spring 2008

opening. Potential sites in New Jersey, New Hampshire,

Ohio, Arizona, Florida, Japan and Korea are in earlier

stages of pre-development. Additionally we expect to begin

expansions in 2007 totaling more than one million square

feet of GLA – at Orlando, Las Vegas, Camarillo, Allen, Rio

Grande Valley, Philadelphia, Round Rock, Gotemba, Sano

and Tosu Premium Outlets – all due to open in 2007 or

2008.

Our international business continues to prosper and

grow. Chelsea Japan’s ﬁve operating Premium Outlet

centers – soon to be six with the addition of Kobe Sanda

– now generate (from a standing start in 2000) annual

tenant sales of more than $1 billion, or $757 per square

foot; they account for 9% of Chelsea’s total net operating

income. Korea represents a very exciting new market

with the opening of Yeoju Premium Outlets this summer,

and we continue to look for the right opportunities and

partners in other Asian markets, including China.

Our partners in Japan are Mitsubishi Estate Co., Ltd.

and Sojitz Corporation; in Korea, Shinsegae Co., Ltd. and

Shinsegae International Co., Ltd.; and in Mexico, Grupo

Sordo Madaleno – all market leaders in retail and/or real

estate. We are delighted to have them as our partners,

friends, and trusted advisors.

Since becoming a Simon platform in 2004, Chelsea

has beneﬁted from synergies that come with being part

of a large global organization, including site selection,

leasing, ancillary income programs, cost of and access

to capital, management efﬁciencies, and the elimination

of our previous public-company obligations. Our core

management team remains in place, and we continue

to be focused on creating value through high-quality

development and redevelopment.

Leslie T. Chao

Chief Executive Ofﬁcer – Chelsea Premium Outlet Centers

14 Simon Property Group, Inc.

ur business consists of an existing portfolio

of nearly 20 million square feet within

approximately 70 projects ranging in size from

30,000 square feet to nearly 1,000,000 square feet. Each

center has the combined focus of development, leasing

and management personnel, experienced and dedicated

in dealing with the opportunities and issues of open-air

centers. During 2006, this portfolio of centers generated

comparable NOI growth of 4%. Additionally, we increased

occupancy by 160 basis points to end the year at 93.2%.

Even though these venues may be different than our

other platforms at Simon, there remain opportunities

to employ best practices from those platforms that have

been honed over the years. More than ever before, the

interdependence between the platforms is allowing

us to create more meaningful projects – projects that

accommodate a broader spectrum of retailers designed to

meet the needs of our shoppers.

A collaboration between the regional mall platform

and the community/lifestyle center platform led to

the successful opening of St. Johns Town Center in

Jacksonville, Florida in 2005. Even more recent was the

November 2006 opening of Coconut Point in Estero,

COMMUNITY/LIFESTYLE

CENTERS

Waterford Lakes Town Center in Orlando provides easy access to popular retailers including Super Target, Best Buy and T.J. Maxx. Waterford Lakes is

also home to more than 100 specialty shops, a variety of restaurants, and ongoing entertainment in a park-like, open-air environment.

Florida. Today these same teams are collectively engaged

in the development and leasing of Pier Park, our new

open-air center under construction in Panama City Beach,

Florida.

As the community/lifestyle and regional mall

platforms continue to work together, we ﬁnd new retailers

interested in operating their concepts within both types of

properties. The retailer world is ever-evolving and having

multiple platforms facilitates the growth of our business,

as we offer a wide range of property options for our

national, regional and local retailers.

Development plans are taking shape for a community/

lifestyle center located adjacent to the planned Houston

Premium Outlets in northwest Houston, Texas. This will

be the ﬁrst time we have aligned these two platforms

side by side, and it should prove to be a compelling and

innovative development.

During 2006 and also into 2007 we are spending time

identifying which Simon Brand Network and Simon

Brand Venture opportunities may migrate into the open

air environment, in an effort to drive additional trafﬁc and

revenue into the community/lifestyle center platform.

The anchor tenants within our portfolio of existing

centers are critical to the performance and identity of

each center. We are proud of the key anchor tenant

relationships that we have cultivated over the years. These

are the best of the best in retailing circles - Best Buy, Bed

Bath and Beyond, Dick’s Sporting Goods and T.J. Maxx, to

name just a few.

Our leasing team is expected to make the best long-

term business decision for every lease expiration in our

portfolio, and with over 500,000 square feet of small shop

15 Annual Report 2006

provides shoppers with the convenience of 14 big box

tenants including Best Buy, Ross Dress for Less, DSW,

Sports Authority, T.J. Maxx,

Cost Plus World Market,

and Super Target (which

will open in March of 2008).

Also opening in 2006

was The Shops at Arbor

Walk, a more conventional

power center in central

Austin, Texas. This 455,000

square foot center features

Home Depot, Circuit City,

Marshalls, DSW and Golf

Galaxy along with over

75,000 square feet of small

shops.

The new development

pipeline within the community/lifestyle center platform

continues to drive our business. In the fall of 2007, we

will begin Phase 1 openings at Palms Crossing, our new

385,000 square foot project in McAllen, Texas, and our

920,000 square foot Pier Park in Panama City Beach,

Florida.

We will continue our efforts in working with lead

anchor tenants such as Target, Kohl’s, JCPenney and

others to create additional future developments. These

developments will capitalize on the combined resources of

the various platforms here at Simon, resulting in the

best retail properties we can imagine.

Michael E. McCarty

President – Community/Lifestyle Centers

Community/Lifestyle Center Portfolio Statistics

As of December 31 2006 2005

Number of properties 69 71

Gross Leasable Area (in millions of square feet) 19.1 19.4

Occupancy

(1)

93.2% 91.6%

Comparable Sales per Square Foot

(1)

$ 222 $ 220

Average Base Rent per Square Foot

(1)

$ 11.82 $ 11.41

(1) For all owned gross leasable area.

Coconut Point in Estero, Florida, is a 1.2 million square foot, open-air regional mixed-use complex with village, lakefront and community center retail

components featuring a mix of world-class retail, dining and entertainment. Anchoring the community center portion of Coconut Point are 14 big box

tenants including Bed Bath & Beyond, Best Buy, DSW, Sports Authority, T.J. Maxx, Ulta, Cost Plus World Market and Super Target (which will open in

March of 2008).

Michael E. McCarty, President

Community/Lifestyle Centers

lease expirations in 2007 we will have the opportunity to

upgrade our tenant mix and grow our NOI. We will be

diligent in evaluating the economics and the merchandise

selection surrounding these decisions.

Realizing that we are in the convenience business,

our management team stays focused on the “ease” of

shopping our existing centers. The cleanliness, condition

and appearance of our centers are instrumental in bringing

customers back to our centers again and again. If what we

offer customers helps our retailers, then it helps us.

In addition to the ongoing management, leasing and

development of existing centers, we are also very engaged

in the development of new retail centers. Many of these

new developments are in Texas and Florida, two states

experiencing increasing population growth and thus new

emerging retail markets.

During 2006, our focus was on the development

and opening of the Company’s Coconut Point project in

Estero, Florida. This project had the attention and shared

resources of our division and the regional mall division

to create a new shopping environment. Coconut Point

combines the tenant mix normally found in an enclosed

regional mall along with Dillard’s, Barnes and Noble

and Muvico Theaters. Additionally, Coconut Point also

16 Simon Property Group, Inc.

INTERNATIONAL

PROPERTIES

aving joined Simon via the Corporate Property

Investors acquisition in 1998, it was agreed that

I would investigate the opportunities available

to create an international dimension to the Company’s

business. Toward that end, a small ofﬁce was established in

London in 1999.

History

It has been some 7 years since Simon made its ﬁrst

relatively exploratory investment abroad. The broad

principles which underlay that ﬁrst investment consisted

of the following:

c Investing internationally was not something the

Company “had” to do; it would be pursued only if it

produced reasonable returns and could be of long-term

strategic value;

c It could/should only be done with high quality local

partners to whom Simon could bring complementary

skills and resources;

c We would insist on partners with generally

corresponding views as to business strategy, time

horizon, and quality expectations.

These principles, consistently applied and essentially

unaltered, have stood the Company in good stead and have

resulted in the ownership of the following non-U.S. assets

as of 31 December 2006:

c Through its ownership with Ivanhoe Cambridge of

Simon Ivanhoe:

– Ownership interests in 5 shopping centers in France

having aggregate GLA of 1.5 million square feet plus a

substantial pipeline of projects in development and/or

pre-development.

– Ownership interests in 7 shopping centers in Poland

having aggregate GLA of 3.1 million square feet plus

a pipeline of projects in development and/or pre-

development.

c Through its ownership with Auchan of Gallerie

Commerciali Italia, one of the largest retail landlords

in Italy, ownership of 41 shopping centers in Italy

with aggregate GLA of 7.6 million square feet, plus a

substantial pipeline of projects in development and/or

pre-development.

International Portfolio Statistics

As of December 31 2006 2005

European Shopping Centers

Number of properties 53 51

Gross Leasable Area

(in millions of square feet) 12.2 11.1

Occupancy 97.1% 98.1%

Comparable Sales per Square Foot ¤ 391 ¤ 380

Average Base Rent per Square Foot ¤ 26.29 ¤ 25.72

In October of 2006, our Simon Ivanhoe European joint venture opened

the 230,000 square foot expansion of a Carrefour-anchored shopping

center in Wasquehal, France.

c A venture in China with (i) Shenzhen International

Trust and Investment Company CP and (ii) Morgan

Stanley that is currently involved in the development

of 5 shopping centers to be anchored by Wal-Mart and

to have aggregate GLA of 2.4 million square feet.

The Past Year

The major accomplishments in 2006 included the opening

of the following shopping centers:

c Giugliano in Naples, Italy (750,000 sq. ft.)

c Wasquehal* in Wasquehal, France (230,000 sq. ft.)

c Arena Shopping Center in Gliwice, Poland (380,000 sq. ft.)

* Expansion of existing center

2007

The current year promises to be even more signiﬁcant as

far as the completion and opening of centers is concerned,

particularly as it relates to our venture in Italy. A number

of the properties scheduled to open are of a size and

sophistication quite new to the Italian market.

17 Annual Report 2006

While not immune from mistakes, we believe the

quality of our investing platforms, our experience to date,

and the continuing governing principle that we do not

“have” to grow internationally at any given speed should

mitigate any sense of

urgency which might

lead to poorly thought

out investment.

It is clear that our

investigation of and/or

initial investment

in some of the large

and economically

developing countries

takes us into riskier

areas. That is surely

one of the quid pro

quos of searching for

the higher development

returns that no longer

exist, at least for the

time being, in the stable and more mature countries of

Western Europe and Asia. We believe, however, that with

prudence, the right partners and organizational structure,

and a recognition of our resource limitations, both

ﬁnancial and human, we can make the risks manageable

and consonant with the expected returns. We will certainly

not abandon the broad principles with which we began our

international activities in 1999.

We will limit the number of places we choose to go,

but endeavor to make them places where success, if we

are able to achieve it, can come in a scale where it could

be meaningful to Simon over time. I would expect that

development and redevelopment will continue to be the

most logical and effective means of value creation. At the

same time, however, Europe is surely on the threshold

of the kind of consolidation which has transformed the

shopping center business in the United States. Simon is

positioned to be a participant in that phenomenon as and

when it occurs – and should it make sense to us at the time.

Hans C. Mautner

President – International Properties

Projects opening in 2007:

c Porta di Roma in Rome, Italy (1.3 million sq. ft.)

c Olbia* in Sardinia, Italy (97,000 sq. ft.)

c Cinisello in Milan, Italy (400,000 sq. ft.)

c Nola in Naples, Italy (1.0 million sq. ft.)

* Expansion of existing center

During 2007, we hope to further develop and expand

our pipeline of development opportunities in the countries

where we are now active.

We are exploring the potential ownership of a

shopping center currently under pre-construction

development in Moscow. Our discussions are with an

organization that could lead to additional opportunities

for us to deliver development services on additional retail

projects in Russia.

We have also entered into an understanding with a

major Indian group for a joint venture to explore and

undertake shopping center development opportunities in

that very exciting country.

Porta di Roma is a 1.3 million square foot shopping center under

construction in Rome, Italy. The center is scheduled to open in the

summer of 2007 and will be anchored by Auchan, Leroy Merlin, UGC

Theatres, IKEA, Media World and Decathlon.

Hans C. Mautner, President

– International Properties

What Next?

As is well-documented almost daily, internationalization

has “arrived” and there is an enormous quantity of capital

from worldwide sources looking for property investments

in virtually every corner of the globe. Opportunities seem to

abound almost everywhere, but certainly many of them are

illusory, and mistakes will be made in an urgency to invest.

18 Simon Property Group, Inc.

BALANCE SHEET AND

CAPITAL MARKETS

ne of the foundations of the Simon organization

is a conservative and consistent philosophy in

ﬁnancing our business and allocating our capital.

We ﬁrmly believe that to properly match our assets,

primarily long-lived income-producing real estate, our

debt should primarily be long-term, ﬁxed-rate debt. We

also believe we should maintain a moderate amount of

overall leverage which results in comfortable coverage of

our debt service, and which will generate signiﬁcant free

cash ﬂow to reinvest in our business. The balance sheet has

also been constructed to withstand economic downturns

and tightness in credit markets, and because of our size, we

want the ability to access capital in many different forms.

We are also disciplined in allocating our capital only to

those opportunities that we determine have an appropriate

risk-adjusted return.

I am pleased to report that in 2006 we had an

outstanding year in the capital markets. We completed

3 separate issuances of unsecured debt, raising $3.15

billion at an average rate of 5.50% and a weighted average

maturity of 7.7 years. We are the largest issuer of REIT

debt in the unsecured market with $10.9 billion of bonds

outstanding at 12/31/06.

One of the hallmarks of Simon’s capital structure is

our ﬁnancial ﬂexibility. With our $1.5 billion of annual

NOI generated by unencumbered, wholly owned assets,

we can be opportunistic in accessing capital. A prime

example of this occurred in December, 2006. From late

October to early December the 10 year treasury rallied,

lowering the yield by 40 basis points. The 5 year treasury

similarly rallied. We opportunistically tapped the bond

market, raising $1.25 billion

in early December,

at an all-in rate

of 5.23%. We

then used $660

million of the

From the left – James M. Barkley, General Counsel; Stephen E. Sterrett,

Executive Vice President and Chief Financial Ofﬁcer; and Andrew Juster,

Senior Vice President and Treasurer

proceeds to completely liquidate the U.S. dollar borrowings

under our corporate credit facility, for which we were

paying interest of 5.70%, and invested the remaining cash

in short-term, liquid investments yielding over 5.30%.

During 2006 our corporate credit rating was upgraded

to A3 by Moody’s Investors Service and A- by Standard

and Poor’s, reﬂecting the strength of our company’s

ﬁnancial health. The initial upgrade reduced the borrowing

rate on our $3 billion corporate credit facility to a real

estate industry leading LIBOR + 37.5 basis points. Our

line was undrawn at 12/31/06 except for $305 million of

non-U.S. dollar borrowings. One of the relatively new

features of our credit facility is the ability to borrow up to

$750 million directly in Euros, Yen or Sterling. The ability

to borrow in those currencies allows us to create a more

natural hedge against currency movements on some of our

international investments. Floating rate debt comprised

only 6% of our total debt at 12/31/06, a prudent and

enviable position given the inverted shape of the yield

curve.

Common Equity

58.3%

Total Market Capitalization

at December 31, 2006

Unsecured

Debt 22.5%

Mortgage Debt

15.8%

3.4%

Preferred Equity

19 Annual Report 2006

The above line graph compares the percentage change in the cumulative total shareholder return on our common stock as compared to the cumulative

total return of the S&P 500 Index and the FTSE NAREIT Equity REIT Index for the period December 31, 2001 through December 31, 2006. The graph

assumes an investment of $100 on December 31, 2001, a reinvestment of dividends and actual increase in the market value of the common stock

relative to an initial investment of $100. The comparisons in this table are required by the Securities and Exchange Commission and are not intended to

forecast or be indicative of possible future performance.

Total Return Performance (December 31, 2001 to December 31, 2006)

($ In Dollars)

$450

$400

$350

$300

$250

$200

$150

$100

$50

12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06

Simon Property Group, Inc.

FTSE NAREIT Equity REIT Index

S&P 500 Index

We were also very active in the CMBS market in

2006, raising $1.9 billion in 20 mortgage transactions. We

remain a very signiﬁcant issuer in the CMBS market.

At 12/31/06, our debt as a percentage of our total

market capitalization was 38%, and our interest coverage

was 2.6x. We also generated substantial “free cash ﬂow”

after payment of our dividends and distributions, to

reinvest in the business. As you have read elsewhere in

this annual report, we are signiﬁcantly increasing our

capital spending on new development and redevelopment

projects. We expect to spend in excess of $5 billion over the

next four years in new development and redevelopment

projects. The signiﬁcant annual free cash ﬂow generated

will allow us to construct these projects on a nearly

leverage neutral basis.

We allocate capital, including our free cash ﬂow, only

to those projects that we determine have an acceptable

risk-adjusted return. Our internal review process is both

thorough and arduous, and involves substantial input

from the primary disciplines of leasing, development and

management. Detailed income estimates are prepared, and

construction budgets are set before a project is reviewed

and approved. This process and the discipline required

has helped to ensure an unblemished track record for the

Company in developing new projects, expanding existing

assets and acquiring properties that have met or exceeded

our underwriting expectations.

Simon ended 2006 in the strongest ﬁnancial position

in its history. We are also one of the most ﬁnancially

solid publicly traded REITS with “A” ratings from both

Standard & Poor’s and Moody’s Investor Service. We

believe we have a solid ﬁnancial foundation which should

position us well for a proﬁtable 2007 and beyond.

Stephen E. Sterrett

Executive Vice President and Chief Financial Ofﬁcer

12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006

Simon Property Group, Inc 100 124.03 179.21 262.83 324.08 443.90

FTSE NAREIT Equity REIT Index 100 103.82 142.37 187.33 210.12 283.78

S&P 500 Index 100 77.90 100.24 111.15 116.61 135.02

20 Simon Property Group, Inc.

Our new headquarters building has been very well-received by our

employees and the City of Indianapolis. The series of photos below

shows the internet café and tness center, as well as employees

enjoying food and drink on the outdoor terrace during our Employee

and Family Open House. In the photo on the lower left-hand side

are employees representing our nancial, human resources, leasing,

development and construction departments who participated in the

Company’s 2006 college recruitment program, interviewing students

at nine colleges and universities across the country.

21 Annual Report 2006

SELECTED FINANCIAL DATA

(In thousands, except per share data)

The following tables set forth selected ﬁnancial data. The selected ﬁnancial data should be read in conjunction with the ﬁnancial statements

and notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results of Operations. Amounts represent the

combined amounts for Simon Property and SPG Realty Consultants, Inc. (“SPG Realty”) for all periods as of or for the year ended December 31,

2002 and Simon Property thereafter. SPG Realty, Simon Property’s former “paired share” afﬁliate, merged into Simon Property on December 31,

2002. Other data we believe is important in understanding trends in Simon Property’s business is also included in the tables.

As of or for the Year Ended December 31, 2006 2005 2004

(1)

2003

(1)

2002

(1)

OPERATING DATA:

Total consolidated revenue $ 3,332,154 $ 3,166,853 $ 2,585,079 $ 2,242,399 $ 2,052,978

Income from continuing operations 563,443 353,407 350,830 334,198 399,484

Net income available to common stockholders $ 486,145 $ 401,895 $ 300,647 $ 313,577 $ 358,387

BASIC EARNINGS PER SHARE:

Income from continuing operations $ 2.20 $ 1.27 $ 1.49 $ 1.47 $ 1.86

Discontinued operations — 0.55 (0.04 ) 0.18 0.13

Net income $ 2.20 $ 1.82 $ 1.45 $ 1.65 $ 1.99

Weighted average shares outstanding 221,024 220,259 207,990 189,475 179,910

DILUTED EARNINGS PER SHARE:

Income from continuing operations $ 2.19 $ 1.27 $ 1.48 $ 1.47 $ 1.86

Discontinued operations — 0.55 (0.04 ) 0.18 0.13

Net income $ 2.19 $ 1.82 $ 1.44 $ 1.65 $ 1.99

Diluted weighted average shares outstanding 221,927 221,130 208,857 190,299 181,501

Distributions per share

(2)

$ 3.04 $ 2.80 $ 2.60 $ 2.40 $ 2.18

BALANCE SHEET DATA:

Cash and cash equivalents $ 929,360 $ 337,048 $ 520,084 $ 535,623 $ 397,129

Total assets 22,084,455 21,131,039 22,070,019 15,684,721 14,904,502

Mortgages and other indebtedness 15,394,489 14,106,117 14,586,393 10,266,388 9,546,081

Stockholders’ equity $ 3,979,642 $ 4,307,296 $ 4,642,606 $ 3,338,627 $ 3,467,733

OTHER DATA:

Cash ﬂow provided by (used in):

Operating activities $ 1,273,367 $ 1,170,371 $ 1,080,532 $ 950,869 $ 882,990

Investing activities (601,851 ) (52,434 ) (2,745,697 ) (761,663 ) (785,730 )

Financing activities $ (79,204 ) $ (1,300,973 ) $ 1,649,626 $ (50,712 ) $ 40,109

Ratio of Earnings to Fixed Charges and

Preferred Stock Dividends

(3)

1.56x 1.40x 1.51x 1.50x 1.63x

Funds from Operations (FFO)

(4)

$ 1,537,223 $ 1,411,368 $ 1,181,924 $ 1,041,105 $ 936,356

FFO allocable to Simon Property $ 1,215,319 $ 1,110,933 $ 920,196 $ 787,467 $ 691,004

Notes

(1) On October 14, 2004 Simon Property acquired Chelsea Property Group, Inc. On May 3, 2002, Simon Property and other parties jointly acquired Rodamco North

America N.V. In the accompanying ﬁnancial statements, Note 2 describes the basis of presentation and Note 4 describes acquisitions and disposals.

(2) Represents distributions declared per period.

(3) The ratios for 2004, 2003, and 2002 have been restated for the reclassiﬁcation of discontinued operations described in Note 3. 2002 includes $162.0 million of

gains on sales of assets, net, and excluding these gains the ratio would have been 1.42x.

(4) FFO is a non-GAAP ﬁnancial measure that we believe provides useful information to investors. Please refer to Management’s Discussion and Analysis of Financial

Condition and Results of Operations for a deﬁnition and reconciliation of FFO.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

22 Simon Property Group, Inc.

You should read the following discussion in conjunction with the consolidated ﬁnancial statements and notes thereto that are included

in this Annual Report to Stockholders. Certain statements made in this section or elsewhere in this report may be deemed “forward-looking

statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reﬂected in

any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and it

is possible that our actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and

uncertainties. Those risks and uncertainties include, but are not limited to: our ability to meet debt service requirements, the availability of

ﬁnancing, changes in our credit rating, changes in market rates of interest and foreign exchange rates for foreign currencies, the ability to hedge

interest rate risk, risks associated with the acquisition, development and expansion of properties, general risks related to retail real estate, the

liquidity of real estate investments, environmental liabilities, international, national, regional and local economic climates, changes in market

rental rates, trends in the retail industry, relationships with anchor tenants, the inability to collect rent due to the bankruptcy or insolvency of

tenants or otherwise, risks relating to joint venture properties, costs of common area maintenance, competitive market forces, risks related to

international activities, insurance costs and coverage, impact of terrorist activities, inﬂation and maintenance of REIT status. We discuss these

and other risks and uncertainties under the heading “Risk Factors” in our Annual Report on Form 10-K that could cause our actual results

to differ materially from the forward-looking statements that we make. We may update that discussion in subsequent quarterly reports, but

otherwise we undertake no duty or obligation to update or revise these forward-looking statements, whether as a result of new information, future

developments, or otherwise.

OVERVIEW

Simon Property Group, Inc. (“Simon Property”) is a Delaware corporation that operates as a self-administered and self-managed real estate

investment trust (“REIT”). To qualify as a REIT, among other things, a company must distribute at least 90 percent of its taxable income to its

stockholders annually. Taxes are paid by stockholders on ordinary dividends received and any capital gains distributed. Most states also follow

this federal treatment and do not require REITs to pay state income tax. Simon Property Group, L.P. (the “Operating Partnership”) is a majority-

owned partnership subsidiary of Simon Property that owns all of our real estate properties. In this discussion, the terms “we”, “us” and “our”

refer to Simon Property, the Operating Partnership, and their subsidiaries.

We are engaged in the ownership, development, and management of retail real estate properties, primarily regional malls, Premium Outlet

centers and community/lifestyle centers. As of December 31, 2006, we owned or held an interest in 286 income-producing properties in the

United States, which consisted of 171 regional malls, 69 community/lifestyle centers, 36 Premium Outlet centers and 10 other shopping centers

or outlet centers in 38 states plus Puerto Rico (collectively, the “Properties”, and individually, a “Property”). We also own interests in ﬁve parcels of

land held in the United States for future development (together with the Properties, the “Portfolio”). In the United States, we have ﬁve new proper-

ties currently under development aggregating approximately 3.5 million square feet which will open during 2007 or early 2008. Internationally,

we have ownership interests in 53 European shopping centers (France, Italy, and Poland); ﬁve Premium Outlet centers in Japan; and one Premium

Outlet center in Mexico. We also have begun construction on a Premium Outlet center in which we will hold a 50% interest located in South Korea

and, through a joint venture arrangement, we will have a 32.5% interest in ﬁve shopping centers (four of which are under construction) in China.

Operating Fundamentals

We generate the majority of revenues from leases with retail tenants including:

Base minimum rents and cart and kiosk rentals,

Overage and percentage rents based on tenants’ sales volume, and

Recoveries of a signiﬁcant portion of our operating expenses, including common area maintenance, real estate taxes, and insurance.

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 seek growth in our earnings, funds from operations (“FFO”), and cash ﬂows by enhancing the proﬁtability and operation of our properties

and investments. We seek to accomplish this growth through the following:

Focusing on leasing to increase revenues and utilization of economies of scale to reduce operating expenses,

Expanding and re-tenanting existing franchise locations at competitive market rates,

Adding mixed-use elements to our Portfolio through our asset intensiﬁcation initiatives. This may include adding elements such as

multifamily, condominiums, hotel and self-storage at selected locations, and

The acquisition of high quality real estate assets or portfolios of assets,

Selling non-core assets.

23 Annual Report 2006

We also grow by generating supplemental revenues in our existing real estate portfolio, from outlot parcel sales and, due to our size and

tenant relationships, from the following:

Simon Brand Ventures (“Simon Brand”) mall marketing initiatives revenue sources which include: payment systems (including marketing

fees relating to the sales of bank-issued prepaid cards), national marketing alliances, static and digital media initiatives, business

development, sponsorship, and events.

Simon Business Network (“Simon Business”) offers property operating services to our tenants and others resulting from its relationships

with vendors.

We focus on high quality real estate across the retail real estate spectrum. We expand or renovate to enhance existing assets’ proﬁtability

and market share when we believe the investment of our capital meets our risk-reward criteria. We selectively develop new properties in major

metropolitan areas that exhibit strong population and economic growth.

We routinely review and evaluate acquisition opportunities based on their complement to our Portfolio. Lastly, we are selectively expanding

our international presence. Our international strategy includes partnering with established real estate companies and ﬁnancing international

investments with local currency to minimize foreign exchange risk.

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

Provide the capital necessary to fund growth.

Maintain sufﬁcient ﬂexibility to access capital in many forms, both public and private.

Manage our overall ﬁnancial structure in a fashion that preserves our investment grade ratings.

Results Overview

Diluted earnings per common share increased $0.37 during 2006, or 20.3%, to $2.19 from $1.82 for 2005. The 2006 results include a

$34.4 million gain (or $0.12 per diluted share) from the sale of partnership interests in one of our European joint ventures to our new partner,

Ivanhoe Cambridge, Inc. (“Ivanhoe”), an afﬁliate of Caisse de dépôt et placement du Québec, an $86.5 million gain related to our receipt of

capital transaction proceeds and recognition of $15.6 million in income during 2006 (aggregating $0.36 per diluted share) from contributed

beneﬁcial interests, representing the right to receive cash ﬂow, capital distributions, and related proﬁts and losses of Mall of America Associates

(“MOAA”), and increases in Portfolio operations. Included in 2005 results is a $125.1 million gain (or $0.45 per diluted share) realized upon

the disposition of the Riverway and O’Hare International Center ofﬁce building properties.

Our core business fundamentals remained strong during 2006. Regional mall comparable sales per square foot (“psf”) strengthened in

2006, increasing 5.8% to $476 psf from $450 psf in 2005, reﬂecting robust retail sales activity. Our regional mall average base rents increased

2.6% to $35.38 psf from $34.49 psf. In addition, our regional mall leasing spreads were $6.48 psf as of December 31, 2006, compared to

$7.40 psf as of December 31, 2005, principally as a result of changes in leasing mix. The operating fundamentals of the Premium Outlet centers

and community/lifestyle centers also contributed to the improved 2006 operating results, as seen in the following section entitled Portfolio

Data. Finally, regional mall occupancy was 93.2% as of December 31, 2006, as compared to 93.1% as of December 31, 2005. During 2006,

we disposed of three consolidated properties that had an aggregate book value of $39.4 million for aggregate sales proceeds of $43.9 million,

resulting in a net gain on sale of $4.5 million. We also sold a property accounted for under the equity method of accounting for $8.8 million and

recorded a gain of $7.7 million on its disposition.

We continue to identify additional opportunities in various international markets. We look to continue to focus on our joint venture interests

in Europe, Japan, and other market areas abroad. In 2005, we realigned the interests in Simon Ivanhoe S.à.r.l. (“Simon Ivanhoe”) with the

result that our ownership and our new partner’s ownership were increased to 50% each in the ﬁrst quarter of 2006. In 2006, we increased our

presence in Europe with the opening of Gliwice Shopping Center in Poland, a 380,000 square-foot center, and Giugliano in Italy, a 748,000

square foot center. We also opened expansions to a Premium Outlet center in Toki, Japan and a shopping center in Wasquehal, France. We expect

international development and redevelopment/expansion activity for 2007 to include:

Continuing construction by our Italian joint venture, Gallerie Commerciali Italia (“GCI”), of four shopping centers in Napoli, Roma, Nola

(Napoli), and Milano with a gross leasable area (“GLA”) of nearly 3.0 million square feet;

Completing and opening of Kobe-Sanda Premium Outlets, a 185,000 square foot Premium Outlet center located in Kobe, Japan, in

which we hold a 40% ownership interest;

Completing and opening of Yeoju Premium Outlets, a 253,000 square foot Premium Outlet center located in South Korea. We hold a

50% ownership interest this property; and

Continuing construction on four Wal-Mart anchored shopping centers, and commencement of a ﬁfth shopping center, all located in

China. We hold a 32.5% ownership interest in these centers.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

24 Simon Property Group, Inc.

Despite a signiﬁcantly increasing interest rate environment that resulted in an approximate 93 basis point increase in LIBOR (5.32% at

December 31, 2006 versus 4.39% at December 31, 2005), our effective overall borrowing rate for the twelve months ended December 31, 2006

decreased ﬁve basis points as compared to the twelve months ended December 31, 2005. Our ﬁnancing activities for the twelve months ended

December 31, 2006 are highlighted by the following:

We repaid $609.1 million in unsecured notes and term loans that bore interest ranging from 6.875% to 7.38%.

We paid off seven mortgages, unencumbering four properties, totaling $275.8 million that bore interest at ﬁxed rates ranging from

6.76% to 8.25% and a variable rate of LIBOR plus 138 basis points.

We made the ﬁnal $600 million payment on the facility we used to fund the cash portion of our 2004 acquisition of Chelsea Property

Group, Inc. (“Chelsea”).

On March 31, 2006, Standard & Poor’s Rating Services raised our corporate credit rating to ‘A-’ from ‘BBB+’ which resulted in a

decrease in the interest rate applicable to borrowings on our unsecured revolving $3 billion credit facility (the “Credit Facility”) to 37.5

basis points over LIBOR from 42.5 basis points over LIBOR. The revision to our rating also decreased the facility fee on the Credit Facility

to 12.5 basis points from 15 basis points.

We issued two tranches of senior unsecured notes in May totaling $800 million at a weighted average ﬁxed interest rate of 5.93%. We

used the net proceeds of $803.9 million, which includes $10.1 million proceeds from terminated forward-starting swap arrangements,

to reduce the borrowings on our Credit Facility.

We issued two tranches of senior unsecured notes in August totaling $1.1 billion at a weighted average ﬁxed interest rate of 5.73%. We

used the proceeds of the offering to reduce borrowings on our Credit Facility.

We issued two tranches of senior unsecured notes in December totaling $1.25 billion at a weighted average ﬁxed interest rate of 5.13%.

We used the proceeds of the offering to reduce borrowings on our Credit Facility and reinvested the remaining $577.4 million to be used

for general working capital purposes.

The outstanding balance of our Credit Facility decreased to approximately $305.1 million during the twelve months ended December

31, 2006, principally as a result of the above repayments. The December 31, 2006 outstanding balance consisted of Euro and Yen

denominated borrowings only.

As a result of the acquisition of the remaining 50% interest in Mall of Georgia on November 1, 2006, we now own 100% of the mall,

and the property was consolidated as of the acquisition date. This included the consolidation of the $192.0 million ﬁxed rate mortgage

on this property.

United States Portfolio Data

The Portfolio data discussed in this overview includes the following key operating statistics: occupancy; average base rent per square foot;

and comparable sales per square foot for our three domestic platforms. We include acquired Properties in this data beginning in the year of

acquisition and remove properties sold in the year disposed. We do not include any Properties located outside of the United States. The following

table sets forth these key operating statistics for:

Properties that are consolidated in our consolidated ﬁnancial statements,

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

the foregoing two categories of Properties on a total Portfolio basis.

25 Annual Report 2006

%/basis points %/basis points %/basis points

2006 Change

(1)

2005 Change

(1)

2004 Change

(1)

REGIONAL MALLS:

Occupancy

Consolidated 93.0% -30 bps 93.3% +60 bps 92.7% +50 bps

Unconsolidated 93.5% +80 bps 92.7% +10 bps 92.6% -10 bps

Total Portfolio 93.2% +10 bps 93.1% +40 bps 92.7% +30 bps

Average Base Rent per Square Foot

Consolidated $ 34.79 2.2% $ 34.05 3.8% $ 32.81 4.9%

Unconsolidated $ 36.47 3.3% $ 35.30 1.5% $ 34.78 3.1%

Total Portfolio $ 35.38 2.6% $ 34.49 3.0% $ 33.50 3.8%

Comparable Sales Per Square Foot

Consolidated $ 462 6.2% $ 435 5.8% $ 411 5.9%

Unconsolidated $ 505 5.6% $ 478 3.9% $ 460 7.8%

Total Portfolio $ 476 5.8% $ 450 5.4% $ 427 6.1%

PREMIUM OUTLET CENTERS:

Occupancy 99.4% -20 bps 99.6% +30 bps 99.3% —

Average Base Rent per Square Foot

$ 24.23 4.6% $ 23.16 6.0% $ 21.85 —

Comparable Sales Per Square Foot

$ 471 6.1% $ 444 7.8% $ 412 —

COMMUNITY/LIFESTYLE CENTERS:

Occupancy

Consolidated 91.5% +200 bps 89.5% -100 bps 90.5% +340 bps

Unconsolidated 96.5% +40 bps 96.1% -140 bps 94.7% -160 bps

Total Portfolio 93.2% +160 bps 91.6% -30 bps 91.9% +170 bps

Average Base Rent per Square Foot

Consolidated $ 11.90 1.7% $ 11.70 5.2% $ 11.12 1.0%

Unconsolidated $ 11.68 8.0% $ 10.81 3.1% $ 10.49 7.4%

Total Portfolio $ 11.82 3.6% $ 11.41 4.6% $ 10.91 3.0%

Comparable Sales Per Square Foot

Consolidated $ 233 2.2% $ 228 2.7% $ 222 5.5%

Unconsolidated $ 202 (1.0% ) $ 204 2.0% $ 200 (2.9% )

Total Portfolio $ 222 0.9% $ 220 2.3% $ 215 2.9%

(1) Percentages may not recalculate due to rounding.

Occupancy Levels and Average Base Rent Per Square Foot. Occupancy and average base rent are based on mall and freestanding Gross

Leaseable Area (“GLA”) owned by us (“Owned GLA”) in the regional malls, all tenants at the Premium Outlet centers, and all tenants at

community/lifestyle centers. Our Portfolio has maintained stable occupancy and increased average base rents despite the current economic

climate.

Comparable Sales Per Square Foot. Comparable sales include total reported retail tenant sales at Owned GLA (for mall and freestanding stores

with less than 10,000 square feet) in the regional malls and all reporting tenants at the Premium Outlet centers and community/lifestyle centers.

Retail sales at Owned GLA affect revenue and proﬁtability levels because sales determine the amount of minimum rent that can be charged, the

percentage rent realized, and the recoverable expenses (common area maintenance, real estate taxes, etc.) that tenants can afford to pay.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

26 Simon Property Group, Inc.

International Property Data

The following key operating statistics are provided for our international properties which are accounted for using the equity method of

accounting.

2006 2005 2004

European Shopping Centers

Occupancy 97.1% 98.1% 96.0%

Comparable sales per square foot

€ 391 € 380 € 386

Average rent per square foot

€ 26.29 € 25.72 € 25.03

International Premium Outlet Centers

(1)

Occupancy 100% 100% 100%

Comparable sales per square foot

¥ 89,238 ¥ 84,791 ¥ 88,925

Average rent per square foot

¥ 4,646 ¥ 4,512 ¥ 4,358

(1) Does not include our center in Mexico (Premium Outlets Punta Norte), which opened December 2004.

Critical Accounting Policies

The preparation of ﬁnancial statements in conformity with accounting principles generally accepted in the United States of America, or

GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base

our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments

affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the ﬁnancial statements

and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances

relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a

different presentation of our ﬁnancial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or

assumptions prove to be different from actual results, adjustments are made in subsequent periods to reﬂect more current information. Below is

a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates

about matters that are inherently uncertain. For a summary of all of our signiﬁcant accounting policies, see Note 3 of the Notes to Consolidated

Financial Statements.

We, as a lessor, retain substantially all of the risks and beneﬁts of ownership of the investment properties and account for our leases as

operating leases. We accrue minimum rents on a straight-line basis over the terms of their respective leases. Substantially all of our retail

tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. We recognize overage rents

only when each tenant’s sales exceeds its sales threshold.

We review Properties for impairment on a case-by-case basis whenever events or changes in circumstances indicate that our carrying

value may not be recoverable. These circumstances include, but are not limited to, declines in cash ﬂows, occupancy and sales per

square foot. Changes in our estimates of the future undiscounted cash ﬂows as well as the holding period for each Property could affect

our conclusion on whether an impairment charge is necessary. We recognize an impairment of investment property when we estimate

that the undiscounted cash ﬂows are less than the carrying value of the Property. To the extent an impairment has occurred, we charge

to income the excess of the carrying value of the Property over its estimated fair value. We may decide to sell Properties that are held for

use and the sales prices of these Properties may differ from their carrying values.

To maintain our status as a REIT, we must distribute at least 90% of our taxable income in any given year and meet certain asset and

income tests. The American Jobs Creation Act of 2004 builds in some ﬂexibility to the REIT tax rules and imposes at most, monetary

penalties in lieu of REIT disqualiﬁcation, for the failure to meet certain REIT rules. These REIT savings provisions apply to issues

discovered by the REIT after October 22, 2004. We monitor our business and transactions that may potentially impact our REIT status.

In the unlikely event that we fail to maintain our REIT status, and we are not able to avail ourselves of the REIT savings provisions, then

we would be required to pay federal income taxes at regular corporate income tax rates during the period we did not qualify as a REIT.

If we lost our REIT status, we could not elect to be taxed as a REIT for four years unless our failure was due to reasonable cause and

certain other conditions were met. As a result, failing to maintain REIT status would result in a signiﬁcant increase in the income tax

expense recorded during those periods.

We make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based

upon the relative value of each component. The most signiﬁcant components of our allocations are typically the allocation of fair value

to the buildings as-if-vacant, land and market value of in-place leases. In the case of the fair value of buildings and the allocation of

27 Annual Report 2006

value to land and other intangibles, our estimates of the values of these components will affect the amount of depreciation we record

over the estimated useful life of the property acquired or the remaining lease term. In the case of the market value of in-place leases,

we make our best estimates of the tenants’ ability to pay rents based upon the tenants’ operating performance at the property, including

the competitive position of the property in its market as well as sales psf, rents psf, and overall occupancy cost for the tenants in place

at the acquisition date. Our assumptions affect the amount of future revenue that we will recognize over the remaining lease term for the

acquired in-place leases.

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost,

it is allocated to the speciﬁc component of a project that is beneﬁted. Determination of when a development project is substantially

complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by

SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting for Costs and the Initial Rental Operations of Real Estate

Properties.” The costs of land and buildings under development include speciﬁcally identiﬁable costs. The capitalized costs include pre-

construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes,

salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially

completed and held available for occupancy and cease capitalization of costs upon opening.

RESULTS OF OPERATIONS

In addition to the activity discussed in the Results Overview, the following acquisitions, Property openings, and other activity affected our

consolidated results from continuing operations in the comparative periods:

On November 2, 2006, we opened Rio Grande Valley Premium Outlets, a 404,000 square foot upscale outlet center in Mercedes, Texas,

20 miles east of McAllen, Texas, and 10 miles from the Mexico border.

On November 2, 2006, we received capital transaction proceeds of $102.2 million related to beneﬁcial interests in a mall contributed

to us in 2006 by the Simon family members who were partners in the underlying mall partnership. This transaction terminated our

beneﬁcial interests and resulted in the recognition of a $86.5 million gain.

On November 1, 2006, we acquired the remaining 50% interest in Mall of Georgia from our partner for $252.6 million, including the

assumption of our $96.0 million share of debt.

On August 4, 2006, we opened Round Rock Premium Outlets, a 432,000 square foot Premium Outlet center located 20 minutes North

of Austin, Texas in Round Rock, Texas.

In November 2005, we opened Rockaway Plaza, a 450,000 square foot community center located in Rockaway, New Jersey, adjacent to

our Rockaway Townsquare.

On October 7, 2005, we opened Firewheel Town Center, a 785,000 square foot open-air regional mall located 15 miles northeast of

downtown Dallas in Garland, Texas.

On July 15, 2005, we opened Wolf Ranch, a 600,000 square foot open-air community center located in Georgetown, Texas.

On May 6, 2005, we opened the 400,000 square foot Seattle Premium Outlets.

On March 15, 2005, we and our joint venture partner completed the construction of, obtained permanent ﬁnancing for, and opened St.

Johns Town Center (St. Johns), a 1.5 million square foot open-air retail project in Jacksonville, Florida. Prior to the project’s completion,

we consolidated St. Johns as we were responsible for 85% of the development costs and were deemed to be the Property’s primary

beneﬁciary. At opening and permanent ﬁnancing, the ownership percentages were each adjusted to 50%, and we began to account for

St. Johns using the equity method of accounting.

On December 15, 2004, we increased our ownership interest in Woodland Hills, located in Tulsa, Oklahoma, to approximately 94.5%

for $119.5 million, including the assumption of our $39.7 million share of debt, resulting in this Property now being consolidated.

On November 19, 2004, we increased our ownership interest in Lehigh Valley, located in Whitehall, Pennsylvania, to 37.6% for

approximately $42.3 million, including the assumption of our $25.9 million share of debt.

On October 22, 2004, Phase III of The Forum Shops at Caesars in Las Vegas opened.

On October 14, 2004, we completed our acquisition of Chelsea. The acquisition included 32 Premium Outlet centers, 4 Premium Outlet

centers in Japan, 3 community/lifestyle centers, 21 other retail centers, 1 Premium Outlet in Mexico, and its development portfolio. The

purchase price was approximately $5.2 billion including the assumption of debt. As a result, we acquired the remaining 50% interests

in two Premium Outlet centers in Las Vegas and Chicago, which resulted in our owning a 100% interest in these Properties which were

previously accounted for under the equity method of accounting.

On May 4, 2004, we purchased a 100% interest in Plaza Carolina in San Juan, Puerto Rico for approximately $309.0 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

28 Simon Property Group, Inc.

On April 27, 2004, we increased our ownership interest in Bangor Mall and Montgomery Mall to approximately 67.6% and 54.4%,

respectively, for approximately $67.0 million and the assumption of our $16.8 million share of debt.

On April 1, 2004, we increased our ownership interest in Mall of Georgia Crossing from 50% to 100% for approximately $26.3 million,

including the assumption of our $16.5 million share of debt.

On February 5, 2004 we purchased a 95% interest in Gateway Shopping Center in Austin, Texas for approximately $107.0 million.

In addition to the activity discussed above and in the Results Overview, the following acquisitions, dispositions, and Property openings

affected our income from unconsolidated entities in the comparative periods:

On November 10, 2006 we opened Coconut Point, in Bonita Springs, Florida, a 1.2 million square foot, open-air shopping center

complex with village, lakefront and community center areas.

On October 26, 2006, we opened the 200,000 square foot expansion of a shopping center in Wasquehal, France.

On October 14, 2006 we opened a 53,000 square foot expansion of Toki Premium Outlets.

On September 28, 2006, our Simon Ivanhoe joint venture opened Gliwice Shopping Center, a 380,000 square foot shopping center in

Gliwice, Poland.

On May 31, 2006, GCI opened Giugliano, an 800,000 square foot center anchored by a hypermarket, in Italy.

On November 18, 2005, we purchased a 37.99% interest in Springﬁeld Mall in Springﬁeld, Pennsylvania for approximately $39.3

million, including the issuance of our share of debt of $29.1 million.

On November 21, 2005, we purchased a 50% interest in Coddingtown Mall in Santa Rosa, California for approximately $37.1 million,

including the assumption of our share of debt of $10.5 million.

In March 2005, we opened Toki Premium Outlets in Japan.

On January 11, 2005, Metrocenter, a regional mall located in Phoenix, Arizona, was sold. We held a 50% interest in Metrocenter.

On October 14, 2004, we opened Clay Terrace, a 500,000 square foot lifestyle center located in Carmel, Indiana.

On May 10, 2004, we and our then joint venture partner (Chelsea) completed the construction and opened Chicago Premium Outlets.

On April 7, 2004, we sold the joint venture interest in a hotel property held by our management company.

On August 6, 2004, we completed the court ordered sale of our joint venture interest in Mall of America, in Minneapolis, Minnesota.

For the purposes of the following comparisons between the years ended December 31, 2006 and 2005 and the years ended December 31,

2005 and 2004, the above transactions are referred to as the Property Transactions. In the following discussions of our results of operations,

“comparable” refers to Properties open and operating throughout both the current and prior year.

Our consolidated discontinued operations reﬂect results of the following signiﬁcant property dispositions on the indicated date:

Property Date of Disposition

Hutchinson Mall June 15, 2004

Bridgeview Court July 22, 2004

Woodville Mall September 1, 2004

Heritage Park Mall December 29, 2004

Riverway (ofﬁce) June 1, 2005

O’Hare International Center (ofﬁce) June 1, 2005

Grove at Lakeland Square July 1, 2005

Cheltenham Square November 17, 2005

Southgate Mall November 28, 2005

Eastland Mall (Tulsa, OK) December 16, 2005

Biltmore Square December 28, 2005

We sold the following properties in 2006 on the indicated date. Due to the limited signiﬁcance of these properties on our ﬁnancial

statements, we did not report these properties as discontinued operations.

Property Date of Disposition

Wabash Village July 27, 2006

Trolley Square August 3, 2006

Northland Plaza December 22, 2006

29 Annual Report 2006

Year Ended December 31, 2006 vs. Year Ended December 31, 2005

Minimum rents, excluding rents from our consolidated Simon Brand and Simon Business initiatives, increased $75.7 million during the

period, of which the Property Transactions accounted for $21.2 million of the increase. Total amortization of the fair market value of in-place

leases increased minimum rents by $5.3 million. Comparable rents, excluding rents from Simon Brand and Simon Business, increased $54.5

million, or 2.9%. This was primarily due to leasing space at higher rents, resulting in an increase in base rents of $51.9 million. In addition,

rents from carts, kiosks, and other temporary tenants increased comparable rents by $4.3 million in 2006.

Overage rents increased $10.2 million or 12.0%, reﬂecting the increases in tenants’ rents, particularly in the Premium Outlet centers.

Tenant reimbursements, excluding Simon Business initiatives, increased $46.9 million. The Property Transactions accounted for $11.8

million. The remainder of the increase of $35.1 million, or 4.0%, was in comparable Properties and was due to inﬂationary increases in property

operating costs.

Management fees and other revenues increased $4.5 million primarily due to increased leasing and development fees generated through

our support activities provided to new joint venture Properties.

Total other income, excluding consolidated Simon Brand and Simon Business initiatives, increased $22.8 million. The aggregate increase

in other income included the following signiﬁcant activity:

$11.9 million increase in our land sales activity on consolidated Properties;

$6.4 million increase in interest income as a result of increasing investment rates;

$3.7 million increase related to a gain on sale of a holding in a technology venture by Chelsea; and

a $0.8 million increase in other net activity of the comparable Properties.

Consolidated revenues from Simon Brand and Simon Business initiatives increased $5.1 million to $162.2 million from $157.1 million.

The increase in revenues is primarily due to increased event and sponsorship income, offset by decreased revenue as a result of structural

changes to the gift card program.

Simon Brand and Simon Business expenses decreased $11.4 million that primarily resulted from decreased operating expenses of the co-

branded gift card program, which are included in total property operating expenses.

Property operating expenses increased $19.6 million, $18.4 million of which was on comparable properties (representing an increase of

4.4%) and was principally as a result of inﬂationary increases.

Home ofﬁce and regional costs increased $12.0 million due to increased personnel costs, which is primarily due to the effect of the increase

in our stock price on our stock-based compensation program.

Other expenses increased $6.6 million primarily due to increases in ground rent expenses of $3.9 million and increased professional fees.

Interest expense increased $22.8 million due to the impact of increased debt, primarily as a result of the issuances of unsecured notes in

May, August, and December of 2006, and the annualized effect of our unsecured notes issued in June and November of 2005.

Income from unconsolidated entities and beneﬁcial interests increased $29.0 million primarily due to favorable results of operations at the

joint venture properties, plus the increase in ownership of Simon Ivanhoe and the recording of income from our beneﬁcial interest in MOAA of

$15.6 million.

We recorded a $132.8 million net gain on the sales of assets and interests in unconsolidated entities in 2006 that included a gain related

to the sale of a beneﬁcial interest of $86.5 million, a $34.4 million gain on the sale of 10.5% interest in Simon Ivanhoe, and the net gain on

the sale of four non-core properties, including one joint venture property, of $12.2 million.

The increase in the Limited Partner interest of $52.8 million is primarily due to the increases in our income from continuing operations.

Discontinued operations for 2005 included the net operating results of properties sold, including the sale of underlying ground adjacent to

the Riverway and O’Hare International Center properties. There were no discontinued operations in 2006.

In 2005, the gain on sale of discontinued operations of $115.8 million, net of the limited partners’ interest, principally represents the net

gain upon disposition of seven non-core Properties consisting of four regional malls, two ofﬁce buildings, and one community/lifestyle center.

Preferred dividends increased due to the net impact of the redemption of the Series F Preferred Stock, which resulted in a $7.0 million

charge to net income related to the redemption.

Year Ended December 31, 2005 vs. Year Ended December 31, 2004

Minimum rents, excluding rents from our consolidated Simon Brand and Simon Business initiatives, increased $393.3 million during the pe-

riod. The net effect of the Property Transactions increased minimum rents $355.9 million of which $299.7 million was due to the operations of the

Premium Outlet centers and other Properties acquired from Chelsea in October of 2004 (the “Chelsea Acquisition”). Total amortization of the fair

market value of in-place leases increased minimum rents by $25.1 million, including the impact of the Property Transactions, principally the result

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

30 Simon Property Group, Inc.

of the Chelsea Acquisition. Comparable rents, excluding rents from Simon Brand and Simon Business, increased $37.4 million, or 2.7%. This

was primarily due to the leasing of space at higher rents that resulted in an increase in base rents of $30.1 million. In addition, increased rents

from carts, kiosks, and other temporary tenants increased comparable rents by $6.7 million. Straight-line rents also increased by $12.9 million

year over year.

Overage rents increased $19.2 million of which $15.7 million related to the Property Transactions, principally the Chelsea Acquisition.

Comparable overage rents increased $3.5 million.

Tenant reimbursements, excluding Simon Business initiatives, increased $142.3 million. The Property Transactions accounted for $122.0

million of this increase, $98.3 million of which was due to the Chelsea Acquisition. The remainder of the increase of $20.3 million, or 2.8%,

was in comparable Properties and was due to inﬂationary increases in property operating expenses, resulting in higher reimbursements.

Management fees and other revenues increased $5.0 million primarily due to increased leasing and development fees generated through

our support activities provided to new joint venture Properties.

Total other income, excluding consolidated Simon Brand and Simon Business initiatives, decreased $1.3 million. The aggregate decrease

in other income included the following signiﬁcant activity:

$26.0 million decrease in our land sales activity on consolidated Properties;

the effect of the Property Transactions, principally Chelsea, which contributed $5.7 million to the increase for the ancillary fees received

from the Japanese Premium Outlet Properties;

increase in interest income of $8.0 million;

collection of a $4.1 million note receivable that had been previously reserved for;

$2.5 million gain on the sale of air rights at the Villages at Southpark in North Carolina;

$2.2 million in gains related to the sale of stock received in prior period bankruptcy proceedings; and

$2.2 million in other net activity of the comparable Properties.

Consolidated revenues from Simon Brand and Simon Business initiatives increased $23.3 million to $155.0 million from $131.7 million.

The increase in revenues is primarily due to:

increased revenue from fees derived from our co-branded gift card programs,

increased rents and fees from service providers,

increased advertising rentals, and

increased event and sponsorship income.

The increased revenues from Simon Brand and Simon Business were offset by a $1.9 million increase in Simon Brand and Simon Business

expenses that primarily resulted from increased gift card and other operating expenses, which are reported with property operating expenses in

our consolidated statements of operations and comprehensive income.

Property operating expenses increased $65.9 million, $14.8 million of which was on comparable properties (representing an increase of

4.4%) and was principally as a result of inﬂationary increases. The remainder of the increase in property operating expenses was due to the effect

of Property Transactions, principally the Chelsea Acquisition.

Depreciation and amortization expenses increased $242.8 million primarily due in large part to the net effect of the Property Transactions.

The Chelsea Acquisition accounted for $191.1 million of the increase. Comparable properties depreciation and amortization increased $9.6

million, or 1.8%, due to the effect of our expansion and renovation activities.

Real estate taxes increased $46.2 million, due principally to the Property Transactions. The Chelsea Acquisition accounted for $32.3

million of the increase. The increase for the comparable properties was $9.3 million, or 4.0%.

Repairs and maintenance increased $16.2 million due principally to the Property Transactions. The Chelsea Acquisition accounted for $9.7

million of the increase. The comparable properties increased $4.5 million, or 5.4%.

Advertising and promotion expenses increased $23.6 million, of which $24.7 million was due to the Property Transactions, offset by a $1.1

million decrease on comparable properties.

Provision for credit losses decreased $8.9 million from the prior period due to a reduction of gross receivables, an overall improvement in

quality of the receivables, and recoveries of amounts previously written off or provided for in prior periods.

Home ofﬁce and regional costs increased $26.2 million due to the Property Transactions, primarily due to the Chelsea Acquisition and the

additional costs of operating the Roseland, NJ ofﬁces, and incentive compensation arrangements.

Other expenses increased $18.3 million due to increases in ground rent expenses of $5.1 million and increases in professional fees and

legal fees.

31 Annual Report 2006

Interest expense increased $145.3 million due to the following:

the effect of the borrowings to ﬁnance the Property Transactions, including $41.4 million related to the Acquisition Facility,

the consolidation and/or acquisition of debt related to Property Transactions, principally the Chelsea Acquisition, which increased

interest expense by $50.4 million,

increased average borrowings resulting from the impact of an unsecured note offering in August of 2004, and

increases in our average borrowing rates for our variable rate debt.

Income from unconsolidated entities for 2005 was comparable to the results of our income from consolidated entities for 2004. This

includes an increase in the aggregate operations of our joint venture Properties, as a result of our acquisition activity and redevelopment/

expansion, offset by an increase in the amount of depreciation and amortization related to acquired properties, principally as a result of the

Chelsea Acquisition. The total number of joint venture properties increased from 124 in 2004 to 126 in 2005.

We recorded a $0.8 million net loss on the sales of interests in unconsolidated entities in 2005 that included our share of the loss on the

sale of Forum Entertainment Center of $13.7 million, offset by our share of the gain on the sale of Metrocenter of $11.8 million and a $1.3

million net gain on the sale of a property management entity acquired as part of a 2002 acquisition.

In 2005, the gain on sale of discontinued operations of $115.8 million, net of the limited partners’ interest principally represents the net

gain upon disposition of seven non-core Properties consisting of four regional malls, two ofﬁce buildings, and one community/lifestyle center.

The results of operations from discontinued operations includes the net operating results of properties sold, including the sale of underlying

ground adjacent to the Riverway and O’Hare International Center properties. We believe these dispositions will not have a material adverse effect

on our results of operations or liquidity.

Preferred distributions of the Operating Partnership increased by $6.9 million and preferred dividends increased $31.5 million due to the

preferred stock and preferred units issued in the Chelsea Acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Because we generate revenues primarily from long-term leases, our ﬁnancing strategy relies primarily on long-term ﬁxed rate debt. We

manage our ﬂoating rate debt to be at or below 15-25% of total outstanding indebtedness by setting interest rates for each ﬁnancing or

reﬁnancing based on current market conditions. Because of attractive ﬁxed-rate debt opportunities in the past three years, ﬂoating rate debt

currently comprises approximately 6% of our total consolidated debt. We also enter into interest rate protection agreements as appropriate to

assist in managing our interest rate risk. We derive most of our liquidity from leases that generate positive net cash ﬂow from operations and

distributions of capital from unconsolidated entities that totaled $1.5 billion during 2006. In addition, our Credit Facility provides an alternative

source of liquidity as our cash needs vary from time to time.

Our balance of cash and cash equivalents increased $592.3 million during 2006 to $929.4 million as of December 31, 2006, principally

as a result of excess proceeds resulting from the issuance of additional unsecured notes in December of 2006. The December 31, 2006 and

2005 balances include $27.2 million and $42.3 million, respectively, related to our co-branded gift card programs, which we do not consider

available for general working capital purposes.

On December 31, 2006, our Credit Facility had available borrowing capacity of approximately $2.7 billion, net of outstanding borrowings of

$305.1 million and letters of credit of $20.0 million. During 2006, the maximum amount outstanding under our Credit Facility was $2.0 billion and

the weighted average amount outstanding was $1.1 billion. The weighted average interest rate was 4.80% for the year ended December 31, 2006.

On March 31, 2006, Standard & Poor’s Rating Services raised its corporate credit rating for us to “A-’ from “BBB+’ which resulted in a

decrease in the interest rate applicable to borrowings on our unsecured revolving $3 billion credit facility (the “Credit Facility”) to 37.5 basis

points over LIBOR from 42.5 basis points over LIBOR. The revision to our rating also decreased the facility fee on our Credit Facility to 12.5

basis points from 15 basis points. On November 1, Moody’s Investors Service raised our senior unsecured debt rating to A3.

We and the Operating Partnership also have access to public equity and long term unsecured debt markets and access to private equity from

institutional investors at the Property level.

Acquisition of The Mills Corporation

On February 16, 2007, SPG-FCM Ventures, LLC (“SPG-FCM”) a newly formed joint venture owned 50% by an entity owned by Simon

Property and 50% by funds managed by Farallon Capital Management, L.L.C. (“Farallon”) entered into a deﬁnitive merger agreement with

The Mills Corporation (“Mills”) pursuant to which SPG-FCM will acquire Mills for $25.25 per common share in cash. The total value of the

transaction is approximately $1.64 billion for all of the outstanding common stock of Mills and common units of The Mills Limited Partnership

(“Mills LP”) not owned by Mills, and approximately $7.3 billion, including assumed debt and preferred stock.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

32 Simon Property Group, Inc.

The acquisition will be completed through a cash tender offer at $25.25 per share for all outstanding shares of Mills common stock, which

is expected to conclude in late March or early April 2007. If successful, the tender offer will be followed by a merger in which all shares not

acquired in the offer will be converted into the right to receive the offer price. Completion of the tender offer is subject to the receipt of valid

tenders of sufﬁcient shares to result in ownership of a majority of Mills’ fully diluted common shares and the satisfaction of other customary

conditions. As part of the merger following the successful completion of the tender offer, Mills LP common unitholders will receive $25.25 per

unit in cash, subject to certain qualiﬁed unitholders having the option to exchange their units for limited partnership units of the Operating

Partnership based upon a ﬁxed exchange ratio of 0.211 Operating Partnership units for each unit of Mills LP.

In connection with the proposed transaction, we made a loan to Mills on February 16, 2007 to permit it to repay a loan facility provided by

a previous bidder for Mills. The $1.188 billion loan to Mills carries a rate of LIBOR plus 270 basis points. The loan facility also permits Mills

to borrow an additional $365 million on a revolving basis for working capital requirements and general corporate purposes. Simon Property or

an afﬁliate of Mills will serve as the manager for all or a portion of the 38 properties that SPG-FCM will acquire an interest in following the

completion of the tender offer.

We will be required to provide at least 50% of the funds necessary to complete the tender offer and any additional amounts required to

complete the acquisition of Mills. We have and intend to obtain all funds necessary to fulﬁll our equity requirement for SPG-FCM, as well as any

funds that we have or will provide in the form of loans to Mills, from available cash and our Credit Facility.

Cash Flows

Our net cash ﬂow from operating activities and distributions of capital from unconsolidated entities totaled $1.5 billion during 2006. We

also received proceeds of $209.0 million from the sale of partnership interests and the sales of assets during 2006. In addition, we received

net proceeds from all of our debt ﬁnancing and repayment activities in 2006 of $1.1 billion. These activities are further discussed below in

“Financing and Debt”. We also:

repurchased preferred stock and limited partner units amounting to $409.7 million,

paid stockholder dividends and unitholder distributions totaling $849.5 million,

paid preferred stock dividends and preferred unit distributions totaling $104.7 million,

funded consolidated capital expenditures of $767.7 million. These capital expenditures include development costs of $317.2 million,

renovation and expansion costs of $306.6 million, and tenant costs and other operational capital expenditures of $143.9 million, and

funded investments in unconsolidated entities of $157.3 million.

In general, we anticipate that cash generated from operations will be sufﬁcient to meet operating expenses, monthly debt service, recurring

capital expenditures, and distributions to stockholders necessary to maintain our REIT qualiﬁcation for 2007 and on a long-term basis. In

addition, we expect to be able to obtain capital for nonrecurring capital expenditures, such as acquisitions, major building renovations and

expansions, as well as for scheduled principal maturities on outstanding indebtedness, from:

excess cash generated from operating performance and working capital reserves,

borrowings on our Credit Facility,

additional secured or unsecured debt ﬁnancing, or

additional equity raised in the public or private markets.

Financing and Debt

Unsecured Debt

We have $1.0 billion of unsecured notes issued by a subsidiary that are structurally senior in right of payment to holders of other unsecured

notes to the extent of the assets and related cash ﬂows of certain Properties. These unsecured notes have a weighted average interest rate of

7.02% and weighted average maturities of 5.3 years.

On May 15, 2006, we sold two tranches of senior unsecured notes totaling $800 million at a weighted average ﬁxed interest rate of 5.93%.

The ﬁrst tranche is $400.0 million at a ﬁxed interest rate of 5.75% due May 1, 2012 and the second tranche is $400.0 million at a ﬁxed interest

rate of 6.10% due May 1, 2016. We used the proceeds of the offering and the termination of forward-starting interest rate swap arrangements

to reduce borrowings on our Credit Facility.

33 Annual Report 2006

On August 29, 2006, we sold two tranches of senior unsecured notes totaling $1.1 billion at a weighted average ﬁxed interest rate of

5.73%. The ﬁrst tranche is $600.0 million at a ﬁxed interest rate of 5.60% due September 1, 2011 and the second tranche is $500.0 million

at a ﬁxed interest rate of 5.875% due March 1, 2017. We used proceeds from the offering to reduce borrowings on our Credit Facility.

On December 12, 2006, we sold two tranches of senior unsecured notes totaling $1.25 billion at a weighted average ﬁxed interest rate

of 5.13%. The ﬁrst tranche is $600.0 million at a ﬁxed interest rate of 5.00% due March 1, 2012 and the second tranche is $650.0 million

at a ﬁxed interest rate of 5.25% due December 1, 2016. We used proceeds from the offering to reduce borrowings on our Credit Facility and

reinvested the remainder of the proceeds of approximately $577.4 million to be used for general working capital purposes.

Credit Facility. Other signiﬁcant draws on our Credit Facility during the twelve-month period ended December 31, 2006 were as follows:

Draw Date Draw Amount Use of Credit Line Proceeds

01/03/06 $ 59,075 Repayment of a Term Loan (CPG Partners, L.P.), which had a rate of 7.26%.

01/06/06 140,000 Repayment of a mortgage, which had a rate of LIBOR plus 137.5 basis points.

01/20/06 300,000 Repayment of unsecured notes, which had a ﬁxed rate of 7.375%.

03/27/06 600,000 Early repayment of the $1.8 billion facility we used to ﬁnance our acquisition of Chelsea in 2004.

04/03/06 58,000 Repayment of two secured mortgages which each bore interest at 8.25%.

11/01/06 200,000 Repayment of the preferred stock issued to fund the redemption of our Series F Preferred Stock.

11/15/06 250,000 Repayment of unsecured notes, which had a ﬁxed rate of 6.875%.

Other amounts drawn on our Credit Facility during the period were primarily for general working capital purposes. We repaid a total of $2.8

billion on our Credit Facility during the year ended December 31, 2006. The total outstanding balance on our Credit Facility as of December

31, 2006 was $305.1 million, and the maximum amount outstanding during the year was approximately $2.0 billion. During the year ended

December 31, 2006, the weighted average outstanding balance on our Credit Facility was approximately $1.1 billion.

Acquisition Facility. We borrowed $1.8 billion in 2004 to ﬁnance the cash portion of our acquisition of Chelsea. As disclosed above, this

facility has been fully repaid.

Secured Debt

Total secured indebtedness was $4.4 billion and $4.6 billion at December 31, 2006 and 2005, respectively. During the twelve-month

period ended December 31, 2006, we repaid $275.8 million in mortgage loans, unencumbering four properties.

As a result of the acquisition of the November 1, 2006 purchase of the remaining 50% interest in Mall of Georgia from our partner, we now

own 100% of this Property, and consolidated it as of the acquisition date. This included the consolidation of its $192.0 million 7.09% ﬁxed-rate

mortgage.

Summary of Financing

Our consolidated debt, adjusted to reﬂect outstanding derivative instruments and the effective weighted average interest rates for the years

then ended consisted of the following (dollars in thousands):

Effective Effective

Adjusted Weighted Adjusted Weighted

Balance Average Balance Average

as of Interest as of Interest

Debt Subject to

December 31, 2006 Rate December 31, 2005 Rate

Fixed Rate $ 14,548,226 6.02% $ 11,908,050 6.22%

Variable Rate

846,263 5.01% 2,198,067 4.95%

$ 15,394,489 5.97% $ 14,106,117 6.02%

As of December 31, 2006, we had interest rate cap protection agreements on $95.7 million of consolidated variable rate debt. We also

hold $370.0 million of notional amount variable rate swap agreements that have a weighted average variable pay rate of 5.36% and a weighted

average ﬁxed receive rate of 3.72%. As of December 31, 2006 and December 31, 2005, these agreements effectively converted $370.0 million

and $310.9 million of ﬁxed rate debt to variable rate debt, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

34 Simon Property Group, Inc.

Contractual Obligations and Off-balance Sheet Arrangements: The following table summarizes the material aspects of our future obligations as

of December 31, 2006 (dollars in thousands):

2007 2008 to 2009 2010 to 2012 After 2012 Total

Long Term Debt

Consolidated

(1)

$ 1,683,966 $ 2,463,153 $ 6,117,971 $ 5,075,066 $ 15,340,156

Pro Rata Share Of Long Term Debt:

Consolidated

(2)

$ 1,644,109 $ 2,449,549 $ 6,067,580 $ 4,989,902 $ 15,151,140

Joint Ventures

(2)

208,137 500,399 1,496,570 1,267,911 3,473,017

Total Pro Rata Share Of Long Term Debt 1,852,246 2,949,948 7,564,150 6,257,813 18,624,157

Consolidated Capital Expenditure Commitments

(3)

718,187 161,448 — — 879,635

Joint Venture Capital Expenditure Commitments

(3)

160,649 29,277 — — 189,926

Consolidated Ground Lease Commitments

(4)

16,790 33,999 50,309 688,868 789,966

Total $ 2,747,872 $ 3,174,672 $ 7,614,459 $ 6,946,681 $ 20,483,684

(1) Represents principal maturities only and therefore, excludes net premiums and discounts and fair value swaps of $54,333.

(2) Represents our pro rata share of principal maturities and excludes net premiums and discounts.

(3) Represents our pro rata share of capital expenditure commitments.

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

Capital expenditure commitments presented in the table above represent new developments, redevelopments or renovation/expansions that

we have committed to the completion of construction. The timing of these expenditures may vary due to delays in construction or acceleration

of the opening date of a particular project. In addition, the amount includes our share of committed costs for joint venture developments.

Our off-balance sheet arrangements consist primarily of our investments in real estate joint ventures which are common in the real estate

industry and are described in Note 7 of the notes to the accompanying ﬁnancial statements. Joint venture debt is the liability of the joint venture,

is typically secured by the joint venture Property, and is non-recourse to us. As of December 31, 2006, we have loan guarantees and other

guarantee obligations to support $43.6 million and $19.0 million, respectively, to support our total $3.5 billion share of joint venture mortgage

and other indebtedness presented in the table above.

Preferred Stock Activity

During 2006, six unitholders exchanged 230,486 units of the 6% Convertible Perpetual Preferred Units for an equal number of shares of

Series I Preferred Stock, and we redeemed 11,377 units of Series I Preferred Units for cash. We issued a total of 222,933 shares of common

stock to holders of Series I Preferred Stock who exercised their conversion rights. We had 42 unitholders convert 1,149,077 units of the 7%

Cumulative Convertible Preferred Units into 869,574 units of the Operating Partnership. On October 4, 2006, we redeemed all 8,000,000

shares of the 8 3§4% Series F Cumulative Redeemable Preferred Stock, through the use of proceeds derived from the issuance of a new series of

preferred stock (Series K) issued in a private transaction which was also repurchased prior to year end. As a result of this transaction we recorded

a $7.0 million charge to net income.

Acquisitions and Dispositions

Buy/sell provisions are common in real estate partnership agreements. Most of our partners are institutional investors who have a history of

direct investment in retail real estate. Our partners in our joint venture properties may initiate these provisions at any time and if we determine

it is in our stockholders’ best interests for us to purchase the joint venture interest and we believe we have adequate liquidity to execute the

purchases of the interests without hindering our cash ﬂows or liquidity, then we may elect to buy. Should we decide to sell any of our joint

venture interests, we would expect to use the net proceeds from any such sale to reduce outstanding indebtedness or to reinvest in development,

redevelopment, or expansion opportunities.

Acquisitions. The acquisition of high quality individual properties or portfolios of properties remain an integral component of our growth

strategies.

On November 1, 2006, we acquired the remaining 50% interest in Mall of Georgia, a regional mall Property, from our partner for $252.6

million, including the assumption of our $96.0 million share of debt. As a result, we now own 100% of Mall of Georgia and the property was

consolidated as of the acquisition date.

35 Annual Report 2006

Dispositions. We continue to pursue the sale of Properties that no longer meet our strategic criteria. In 2006, we disposed of three

consolidated properties and one property in which we held a 50% interest and accounted for under the equity method. We received net proceeds

of $52.7 million and recorded our share of a gain on the disposals totaling $12.2 million. We do not believe the sale of these properties will have

a material impact on our future results of operations or cash ﬂows. We believe the disposition of these properties will enhance the average overall

quality of our Portfolio. In addition, we also received capital transaction proceeds related to a beneﬁcial interest that we held during 2006 in a

mall partnership, which resulted in an $86.5 million gain, terminating our beneﬁcial interests in this entity.

Development Activity

New U.S. Developments. The following describes certain of our new development projects, the estimated total cost, and our share of the

estimated total cost and our share of the construction in progress balance as of December 31, 2006 (dollars in millions):

Gross Estimated Our Share of Our Share of

Leaseable Total Estimated Construction Estimated

Property Location Area Cost

(a)

Total Cost in Progress Opening Date

Under Construction:

Domain, The Austin, TX 700,000 195 195 140 1st Quarter 2007

Hamilton Town Center Noblesville, IN 950,000 118 59 7 1st Quarter 2008

Palms Crossing McAllen, TX 385,000 65 65 22 4th Quarter 2007

Philadelphia Premium Outlets Limerick, PA 430,000 114 114 34 4th Quarter 2007

Pier Park Panama City Beach, FL 920,000 127 127 43 1st Quarter 2008

Village at SouthPark, The Charlotte, NC 81,000 26 26 15 1st Quarter 2007

(a) Represents the project costs net of land sales, tenant reimbursements for construction, and other items (where applicable).

We expect to fund these projects with available cash ﬂow from operations, borrowings from our Credit Facility, or project speciﬁc construction

loans. We expect our share of total 2007 new development costs for these and our other planned new development projects to be approximately

$600 million.

Strategic Expansions and Renovations. In addition to new development, we also incur costs related to construction for signiﬁcant renovation

and /or expansion projects at our properties. Included in these projects are the renovation and addition of Crate & Barrel and Nordstrom at

Burlington Mall, expansions and life-style additions at Lehigh Valley Mall, Smith Haven Mall and Town Center at Boca Raton, a Neiman Marcus

expansion at Lenox Square, addition of Phase II expansions at Las Vegas Premium Outlets, Orlando Premium Outlets, and St. Johns Town Center,

and the acquisition and renovation of several anchor stores previously operated by Federated.

We expect to fund these capital projects with available cash ﬂow from operations or borrowings from our Credit Facility. We expect to invest

a total of approximately $675 million (our share) on expansion and renovation activities in 2007.

Capital Expenditures on Consolidated Properties.

The following table summarizes total capital expenditures on consolidated Properties on a cash basis:

2006 2005 2004

New Developments $ 317 $ 341 $ 215

Renovations and Expansions 307 252 244

Tenant Allowances 52 69 73

Operational Capital Expenditures 92 64 17

Total $ 768 $ 726 $ 549

International. We typically reinvest net cash ﬂow from our international investments to fund future international development activity. We

believe this strategy mitigates some of the risk of our initial investment and our exposure to changes in foreign currencies. We have also funded

our European investments with Euro-denominated borrowings that act as a natural hedge against local currency ﬂuctuations. This has also been

the case with our Premium Outlet joint ventures in Japan and Mexico where we use Yen and Peso denominated ﬁnancing. We expect our share

of international development for 2007 to approximate $200 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

36 Simon Property Group, Inc.

Currently, our net income exposure to changes in the volatility of the Euro, Yen, Peso and other foreign currencies is not material. In addition,

since cash ﬂows from operations are currently being reinvested in other development projects, we do not expect to repatriate foreign denominated

earnings in the near term.

The carrying amount of our total combined investment in Simon Ivanhoe and Gallerie Commerciali Italia (“GCI”), as of December 31, 2006,

net of the related cumulative translation adjustment, was $338.1 million. Our investments in Simon Ivanhoe and GCI are accounted for using the

equity method of accounting. Currently four European developments are under construction which will add approximately 3 million square feet

of GLA for a total net cost of approximately €571 million, of which our share is approximately €151 million, or $199 million based on current

Euro:USD exchange rates.

On October 20, 2005, Ivanhoe Cambridge, Inc. (“Ivanhoe”), an afﬁliate of Caisse de dépôt et placement du Québec, effectively acquired our

former partner’s 39.5% ownership interest in Simon Ivanhoe. On February 13, 2006, we sold a 10.5% interest in this joint venture to Ivanhoe

for € 45.2 million, or $53.9 million and recorded a gain on the disposition of $34.4 million. This gain is reported in “gain on sales of interests

in unconsolidated entities” in the consolidated statements of operations. We then settled all remaining share purchase commitments from the

company’s founders, including the early settlement of some commitments by purchasing an additional 25.8% interest for €55.1 million, or

$65.5 million. The result of these transactions equalized our and Ivanhoe’s ownership in Simon Ivanhoe to 50% each.

As of December 31, 2006, the carrying amount of our 40% joint venture investment in the ﬁve Japanese Premium Outlet centers net of the

related cumulative translation adjustment was $281.2 million. Currently, Kobe-Sanda Premium Outlets, a 185,000 square foot Premium Outlet

Center, is under construction in Kobe, Japan. The project’s total projected net cost is JPY 5.9 billion, of which our share is approximately JPY

2.4 billion, or $19.8 million based on current Yen:USD exchange rates.

In addition to the developments in Europe and Japan, construction has begun on Yeoju Premium Outlets, a 253,000 square foot center

near Seoul, South Korea. The project’s total projected net cost is KRW 78.7 billion, of which our share is approximately KRW 39.1 billion, or

approximately $42.6 million based on current KRW:USD exchange rates.

During 2006, we ﬁnalized the formation of joint venture arrangements to develop and operate shopping centers in China. The shopping

centers will be anchored by Wal-Mart stores and will be through a 32.5% ownership in a joint venture entity, Great Mall Investments, Ltd.

(“GMI”). We are planning on initially developing ﬁve centers in China, four of which are under construction as of December 31, 2006. Our total

equity commitment for these centers approximates $60 million and as of December 31, 2006, our combined investment in GMI is approximately

$15.9 million.

Distributions and Stock Repurchase Program

On February 2, 2007, our Board of Directors (“Board”) approved an increase in the annual distribution rate by 10.5% to $3.36 per share.

Dividends during 2006 aggregated $3.04 per share and dividends during 2005 aggregated $2.80 per share. We are required to pay a minimum

level of dividends to maintain our status as a REIT. Our dividends and limited partner distributions typically exceed our net income generated

in any given year primarily because of depreciation, which is a “non-cash” expense. Future dividends and the distributions of the Operating

Partnership will be determined by the Board based on actual results of operations, cash available for dividends and limited partner distributions,

and what may be required to maintain our status as a REIT.

On May 11, 2006, the Board authorized the repurchase of up to 6,000,000 shares of our common stock subject to a maximum aggregate

purchase price of $250 million over the next twelve months as market conditions warrant. We may repurchase the shares in the open market or

in privately negotiated transactions. There have been no purchases under this program since May, 2006.

Non-GAAP Financial Measure — Funds from Operations

Industry practice is to evaluate real estate properties in part based on funds from operations (“FFO”). We consider FFO to be a key measure

of our operating performance that is not speciﬁcally deﬁned by accounting principles generally accepted in the United States (“GAAP”). We

believe that FFO is helpful to investors because it is a widely recognized measure of the performance of REITs and provides a relevant basis for

comparison among REITs. We also use this measure internally to measure the operating performance of our Portfolio.

As deﬁned by the National Association of Real Estate Investment Trusts (“NAREIT”), FFO is consolidated net income computed in accordance

with GAAP:

excluding real estate related depreciation and amortization,

excluding gains and losses from extraordinary items and cumulative effects of accounting changes,

excluding gains and losses from the sales of real estate,

37 Annual Report 2006

plus the allocable portion of FFO of unconsolidated entities accounted for under the equity method of accounting based upon economic

ownership interest, and

all determined on a consistent basis in accordance with GAAP.

We have adopted NAREIT’s clariﬁcation of the deﬁnition of FFO that requires us to include the effects of nonrecurring items not classiﬁed

as extraordinary, cumulative effect of accounting change or resulting from the sale or disposal of depreciable real estate. However, you should

understand that our computation of FFO might not be comparable to FFO reported by other REITs and that FFO:

does not represent cash ﬂow from operations as deﬁned by GAAP,

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

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

The following schedule sets forth total FFO before allocation to the limited partners of the Operating Partnership and FFO allocable to Simon

Property. This schedule also reconciles consolidated net income, which we believe is the most directly comparable GAAP ﬁnancial measure, to

FFO for the periods presented.

For the Year Ended

December 31,

(in thousands)

2006 2005 2004

Funds from Operations $ 1,537,223 $ 1,411,368 $ 1,181,924

Increase in FFO from prior period 8.9% 19.4% 13.5%

Net Income $ 563,840 $ 475,749 $ 342,993

Adjustments to Net Income to Arrive at FFO:

Limited partners’ interest in the Operating Partnership and preferred distributions

of the Operating Partnership

155,640 103,921 109,111

Limited partners’ interest in Discontinued Operations

87 1,744 (2,188 )

Depreciation and amortization from consolidated properties, beneﬁcial interests

and discontinued operations

854,394 850,519 615,195

Simon’s share of depreciation and amortization from unconsolidated entities

209,428 205,981 181,999

(Gain)/loss on sales of real estate, discontinued operations and interests in

unconsolidated entities, net of Limited partners’ interest

(132,853 ) (115,006 ) 956

Tax (provision) beneﬁt related to sale

— (428 ) 4,281

Minority interest portion of depreciation and amortization

(8,639 ) (9,178 ) (6,857 )

Preferred distributions and dividends

(104,674 ) (101,934 ) (63,566 )

Funds from Operations $ 1,537,223 $ 1,411,368 $ 1,181,924

FFO Allocable to Simon Property $ 1,215,319 $ 1,110,933 $ 920,196

Diluted net income per share to diluted FFO per share reconciliation:

Diluted net income per share $ 2.19 $ 1.82 $ 1.44

Depreciation and amortization from consolidated Properties and beneﬁcial interests,

and our share of depreciation and amortization from unconsolidated afﬁliates,

net of minority interest portion of depreciation and amortization

3.78 3.73 2.94

Gain on sales of other assets, and real estate and discontinued operations

(0.47 ) (0.52 ) —

Tax beneﬁt related to sale

— — 0.02

Impact of additional dilutive securities for FFO per share

(0.11 ) (0.07 ) (0.01 )

Diluted FFO per share $ 5.39 $ 4.96 $ 4.39

Basic weighted average shares outstanding

221,024 220,259 207,990

Adjustments for dilution calculation:

Effect of stock options

903 871 867

Impact of Series C cumulative preferred 7% convertible units

912 1,086 1,843

Impact of Series I preferred 6% Convertible Perpetual stock

10,816 10,736 2,286

Impact of Series I preferred 6% Convertible Perpetual units

3,230 3,369 759

Diluted weighted average shares outstanding

236,885 236,321 213,745

Weighted average limited partnership units outstanding

58,543 59,566 59,086

Diluted weighted average shares and units outstanding

295,428 295,887 272,831

38 Simon Property Group, Inc.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We are responsible for establishing and maintaining adequate internal control over ﬁnancial reporting. Internal control over ﬁnancial

reporting is deﬁned in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or

under the supervision of, our principal executive and principal ﬁnancial ofﬁcers and effected by our Board of Directors, management and other

personnel, 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 and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reﬂect our transactions and disposition of asset;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance with

generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations

of our management and directors; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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. 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.

We assessed the effectiveness of our internal control over ﬁnancial reporting as of December 31, 2006. In making this assessment, we

used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated

Framework.

Based on that assessment, we believe that, as of December 31, 2006, our internal control over ﬁnancial reporting is effective based on those

criteria.

Our independent registered public accounting ﬁrm has issued an audit report on our assessment of our internal control over ﬁnancial

reporting. Their report appears on the following page of this Annual Report.

39 Annual Report 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Simon Property Group, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial

Reporting immediately preceding this report, that Simon Property Group, Inc. and Subsidiaries maintained effective internal control over

ﬁnancial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee

of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Simon Property Group, Inc. and Subsidiaries’ management is

responsible for maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of internal control over

ﬁnancial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s

internal control over ﬁnancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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,

evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such

other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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.

In our opinion, management’s assessment that Simon Property Group, Inc. and Subsidiaries maintained effective internal control over

ﬁnancial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Simon

Property Group, Inc. and Subsidiaries maintained, in all material respects, effective internal control over ﬁnancial reporting as of December 31,

2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated

balance sheets of Simon Property Group, Inc. and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of

operations and comprehensive income, stockholders’ equity and cash ﬂows for each of the three years in the period ended December 31, 2006,

and our report dated February 23, 2007 expressed an unqualiﬁed opinion thereon.

ERNST & YOUNG LLP

Indianapolis, Indiana

February 23, 2007

40 Simon Property Group, Inc.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Simon Property Group, Inc.:

We have audited the accompanying consolidated balance sheets of Simon Property Group, Inc. and Subsidiaries as of December 31, 2006

and 2005, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash ﬂows for each of

the three years in the period ended December 31, 2006. These ﬁnancial statements are the responsibility of the Company’s management. Our

responsibility is to express an opinion on these ﬁnancial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An

audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall

ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial position of Simon

Property Group, Inc. and Subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash ﬂows for

each of the three years in the period ended December 31, 2006, 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), the effectiveness

of Simon Property Group, Inc. and Subsidiaries’ internal control over ﬁnancial reporting as of December 31, 2006, based on criteria established

in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated

February 23, 2007, expressed an unqualiﬁed opinion thereon.

ERNST & YOUNG LLP

Indianapolis, Indiana

February 23, 2007

41 Annual Report 2006

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

December 31, December 31,

2006 2005

ASSETS:

Investment properties, at cost $ 22,863,963 $ 21,745,309

Less — accumulated depreciation 4,606,130 3,809,293

18,257,833 17,936,016

Cash and cash equivalents 929,360 337,048

Tenant receivables and accrued revenue, net 380,128 357,079

Investment in unconsolidated entities, at equity 1,526,235 1,562,595

Deferred costs and other assets 990,899 938,301

Total assets $ 22,084,455 $ 21,131,039

LIABILITIES:

Mortgages and other indebtedness $ 15,394,489 $ 14,106,117

Accounts payable, accrued expenses, intangibles, and deferred revenues 1,109,190 1,092,334

Cash distributions and losses in partnerships and joint ventures, at equity 227,588 194,476

Other liabilities, minority interest and accrued dividends 178,250 163,524

Total liabilities 16,909,517 15,556,451

COMMITMENTS AND CONTINGENCIES

LIMITED PARTNERS’ INTEREST IN THE OPERATING PARTNERSHIP 837,836 865,565

LIMITED PARTNERS’ PREFERRED INTEREST IN THE OPERATING PARTNERSHIP 357,460 401,727

STOCKHOLDERS’ EQUITY:

CAPITAL STOCK (750,000,000 total shares authorized, $.0001 par value,

237,996,000 shares of excess common stock):

All series of preferred stock, 100,000,000 shares authorized,

17,578,701 and 25,632,122 issued and outstanding, respectively,

and with liquidation values of $878,935 and $1,081,606, respectively 884,620 1,080,022

Common stock, $.0001 par value, 400,000,000 shares authorized,

225,797,566 and 225,165,236 issued and outstanding, respectively 23 23

Class B common stock, $.0001 par value, 12,000,000 shares authorized,

8,000 issued and outstanding — —

Class C common stock, $.0001 par value, 4,000 shares authorized, issued and outstanding — —

Capital in excess of par value 5,010,256 4,998,723

Accumulated deﬁcit (1,740,897 ) (1,551,179 )

Accumulated other comprehensive income 19,239 9,793

Common stock held in treasury at cost, 4,378,495 and 4,815,655 shares, respectively (193,599 ) (230,086 )

Total stockholders’ equity 3,979,642 4,307,296

Total liabilities and stockholders’ equity $ 22,084,455 $ 21,131,039

The accompanying notes are an integral part of these statements.

42 Simon Property Group, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

For the Year Ended December 31,

2006 2005 2004

REVENUE:

Minimum rent $ 2,020,856 $ 1,937,657 $ 1,541,281

Overage rent 95,767 85,536 66,385

Tenant reimbursements 946,554 896,901 748,262

Management fees and other revenues 82,288 77,766 72,737

Other income 186,689 168,993 156,414

Total revenue 3,332,154 3,166,853 2,585,079

EXPENSES:

Property operating 441,203 421,576 355,719

Depreciation and amortization 856,202 849,911 607,071

Real estate taxes 300,174 291,113 244,941

Repairs and maintenance 105,983 105,489 89,297

Advertising and promotion 88,480 92,377 68,775

Provision for credit losses 9,500 8,127 17,010

Home and regional ofﬁce costs 129,334 117,374 91,178

General and administrative 16,652 17,701 16,776

Other 64,397 57,762 39,469

Total operating expenses 2,011,925 1,961,430 1,530,236

OPERATING INCOME 1,320,229 1,205,423 1,054,843

Interest expense (821,858 ) (799,092 ) (653,798 )

Minority interest in income of consolidated entities (11,524 ) (13,743 ) (9,687 )

Income tax expense of taxable REIT subsidiaries (11,370 ) (16,229 ) (11,770 )

Income from unconsolidated entities and beneﬁcial interests, net 110,819 81,807 81,113

Gain (loss) on sales of assets and interests in unconsolidated entities, net 132,787 (838 ) (760 )

Limited partners’ interest in the Operating Partnership (128,661 ) (75,841 ) (87,891 )

Preferred distributions of the Operating Partnership (26,979 ) (28,080 ) (21,220 )

Income from continuing operations 563,443 353,407 350,830

Discontinued operations, net of Limited Partners’ interest 331 6,498 (7,641 )

Gain on sale of discontinued operations, net of Limited Partners’ interest 66 115,844 (196 )

NET INCOME 563,840 475,749 342,993

Preferred dividends (77,695 ) (73,854 ) (42,346 )

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 486,145 $ 401,895 $ 300,647

BASIC EARNINGS PER COMMON SHARE:

Income from continuing operations $ 2.20 $ 1.27 $ 1.49

Discontinued operations — 0.55 (0.04 )

Net income $ 2.20 $ 1.82 $ 1.45

DILUTED EARNINGS PER COMMON SHARE:

Income from continuing operations $ 2.19 $ 1.27 $ 1.48

Discontinued operations — 0.55 (0.04 )

Net income $ 2.19 $ 1.82 $ 1.44

Net Income $ 563,840 $ 475,749 $ 342,993

Unrealized gain on interest rate hedge agreements 5,211 2,988 4,514

Net income on derivative instruments reclassiﬁed from accumulated

other comprehensive income (loss) into interest expense 1,789 (1,428 ) (3,535 )

Currency translation adjustments 1,336 (7,342 ) 3,130

Other income (loss) 1,110 (790 ) (330 )

Comprehensive Income $ 573,286 $ 469,177 $ 346,772

The accompanying notes are an integral part of these statements.

43 Annual Report 2006

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

For the Year Ended December 31,

2006 2005 2004

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 563,840 $ 475,749 $ 342,993

Adjustments to reconcile net income to net cash provided by operating activities —

Depreciation and amortization 812,718 818,468 620,699

Impairment on Investment Properties — — 18,000

(Gain) loss on sales of assets and interests in unconsolidated entities (132,787 ) 838 760

(Gain) loss on disposal or sale of discontinued operations,

net of limited partners’ interest (66 ) (115,844 ) 196

Limited partners’ interest in the Operating Partnership 128,661 75,841 87,891

Limited partners’ interest in the results of operations from discontinued operations 87 1,744 (2,188 )

Preferred distributions of the Operating Partnership 26,979 28,080 21,220

Straight-line rent (17,020 ) (21,682 ) (8,981 )

Minority interest 11,524 13,743 9,687

Minority interest distributions (37,200 ) (24,770 ) (20,426 )

Equity in income of unconsolidated entities (110,819 ) (81,807 ) (81,113 )

Distributions of income from unconsolidated entities 94,605 106,954 97,666

Changes in assets and liabilities —

Tenant receivables and accrued revenue, net (3,799 ) 22,803 (37,166 )

Deferred costs and other assets (132,570 ) (38,417 ) (58,947 )

Accounts payable, accrued expenses, intangibles, deferred revenues

and other liabilities 69,214 (91,329 ) 90,241

Net cash provided by operating activities 1,273,367 1,170,371 1,080,532

CASH FLOWS FROM INVESTING ACTIVITIES:

Acquisitions (158,394 ) (37,505 ) (2,359,056 )

Capital expenditures, net (767,710 ) (726,386 ) (549,304 )

Cash from acquisitions — — 51,189

Cash impact from the consolidation and de-consolidation of properties 8,762 (9,479 ) 2,507

Net proceeds from sale of partnership interests, other assets

and discontinued operations 209,039 384,104 51,271

Investments in unconsolidated entities (157,309 ) (76,710 ) (84,876 )

Distributions of capital from unconsolidated entities and other 263,761 413,542 142,572

Net cash used in investing activities (601,851 ) (52,434 ) (2,745,697 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from sales of common and preferred stock and other 217,237 13,811 5,756

Purchase of limited partner units and treasury stock (16,150 ) (193,837 ) (40,195 )

Preferred stock redemptions (393,558 ) (579 ) (59,681 )

Minority interest contributions 2,023 — 464

Preferred distributions of the Operating Partnership (26,979 ) (28,080 ) (21,220 )

Preferred dividends and distributions to stockholders (749,507 ) (690,654 ) (572,669 )

Distributions to limited partners (177,673 ) (166,617 ) (151,809 )

Mortgage and other indebtedness proceeds, net of transaction costs 5,507,735 3,962,778 5,710,886

Mortgage and other indebtedness principal payments (4,442,332 ) (4,197,795 ) (3,221,906 )

Net cash (used in) provided by ﬁnancing activities (79,204 ) (1,300,973 ) 1,649,626

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 592,312 (183,036 ) (15,539 )

CASH AND CASH EQUIVALENTS, beginning of year 337,048 520,084 535,623

CASH AND CASH EQUIVALENTS, end of year $ 929,360 $ 337,048 $ 520,084

The accompanying notes are an integral part of these statements.

44 Simon Property Group, Inc.

Accumulated Other Common Stock Total

Preferred Common Comprehensive Capital in Excess Accumulated Held in Stockholders’

Stock Stock Income of Par Value Deﬁcit Treasury Equity

BALANCE AT DECEMBER 31, 2003 $ 367,483 $ 21 $ 12,586 $ 4,108,372 $ (1,097,317 ) $ (52,518 ) $ 3,338,627

Conversion of Limited Partner Units (4,997,458 Common Shares, Note 10) 1 103,450 103,451

Series H Variable Rate Preferred stock repurchase (78,012 net preferred shares) (1,950 ) (1,950 )

Stock options exercised (392,943 Common Shares) 10,689 10,689

Common Stock issuance (12,978,795 Shares) 1 734,339 734,340

Series I Preferred Stock issuance (13,261,712 Shares) 663,086 663,086

Series I Preferred Unit conversion to Series I Preferred Stock (376,307 shares) 18,815 18,815

Series J Preferred Stock issuance (796,948 Preferred Shares) 39,847 39,847

Series D Preferred Stock issuance (1,156,039 shares) 34,681 34,681

Series D Preferred Stock redemption (1,156,039 shares) (34,681 ) (34,681 )

Series E Preferred Stock redemption (1,000,000 shares) (25,000 ) (25,000 )

Treasury Stock purchase (317,300 Shares) (20,400 ) (20,400 )

Series E and Series G Preferred stock accretion 406 406

Stock incentive program (365,602 Common Shares, Net) — —

Common Stock retired (93,000 Shares) (3,127 ) (2,258 ) (5,385 )

Amortization of stock incentive 11,935 11,935

Other 26 26

Adjustment to limited partners’ interest from increased ownership in the Operating Partnership 6,201 6,201

Distributions (578,854 ) (578,854 )

Other comprehensive income 3,779 3,779

Net income 342,993 342,993

BALANCE AT DECEMBER 31, 2004 $ 1,062,687 $ 23 $ 16,365 $ 4,971,885 $ (1,335,436 ) $ (72,918 ) $ 4,642,606

Conversion of Limited Partner Units (2,281,481 Common Shares, Note 10) 37,381 37,381

Stock options exercised (206,464 Common Shares) 6,184 6,184

Series I Preferred Unit conversion to Series I Preferred Stock (197,155 Preferred Shares) 9,858 9,858

Series J Preferred Stock premium net of amortization 7,171 7,171

Treasury Stock purchase (2,815,400 Shares) (182,408 ) (182,408 )

Series G Preferred stock accretion 306 306

Stock incentive program (400,541 Common Shares, Net) (25,240 ) 25,240 —

Common Stock retired (18,000 Shares) (605 ) (502 ) (1,107 )

Amortization of stock incentive 14,320 14,320

Other 505 505

Adjustment to limited partners’ interest from increased ownership in the Operating Partnership (5,707 ) (5,707 )

Distributions (690,990 ) (690,990 )

Other comprehensive income (6,572 ) (6,572 )

Net income 475,749 475,749

BALANCE AT DECEMBER 31, 2005 $ 1,080,022 $ 23 $ 9,793 $ 4,998,723 $ (1,551,179 ) $ (230,086 ) $ 4,307,296

Conversion of Limited Partner Units (86,800 Common Shares, Note 10) 1,247 1,247

Stock options exercised (414,659 Common Shares) 14,906 14,906

Series I Preferred Unit conversion to Series I Preferred Stock (230,486 Preferred Shares) 11,524 11,524

Series I Preferred Stock conversion to Common Stock (283,907 Preferred Shares to 222,933 Common Shares) (14,195 ) 14,195 —

Series J Preferred Stock premium and amortization (329 ) (329 )

Series F Preferred Stock redemption (8,000,000 shares) (192,989 ) (192,989 )

Series G Preferred stock accretion 587 587

Series K Preferred Stock issuance (8,000,000 shares) 200,000 200,000

Series K Preferred Stock redemption (8,000,000 shares) (200,000 ) (200,000 )

Stock incentive program (415,098 Common Shares, Net) (36,487 ) 36,487 —

Common Stock retired (70,000 Shares) (2,354 ) (4,051 ) (6,405 )

Amortization of stock incentive 23,369 23,369

Other 608 608

Adjustment to limited partners’ interest from increased ownership in the Operating Partnership (3,951 ) (3,951 )

Distributions (749,507 ) (749,507 )

Other comprehensive income 9,446 9,446

Net income 563,840 563,840

BALANCE AT DECEMBER 31, 2006 $ 884,620 $ 23 $ 19,239 $ 5,010,256 $ (1,740,897 ) $ (193,599 ) $ 3,979,642

The accompanying notes are an integral part of these statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

45 Annual Report 2006

Accumulated Other Common Stock Total

Preferred Common Comprehensive Capital in Excess Accumulated Held in Stockholders’

Stock Stock Income of Par Value Deﬁcit Treasury Equity

BALANCE AT DECEMBER 31, 2003 $ 367,483 $ 21 $ 12,586 $ 4,108,372 $ (1,097,317 ) $ (52,518 ) $ 3,338,627

Conversion of Limited Partner Units (4,997,458 Common Shares, Note 10) 1 103,450 103,451

Series H Variable Rate Preferred stock repurchase (78,012 net preferred shares) (1,950 ) (1,950 )

Stock options exercised (392,943 Common Shares) 10,689 10,689

Common Stock issuance (12,978,795 Shares) 1 734,339 734,340

Series I Preferred Stock issuance (13,261,712 Shares) 663,086 663,086

Series I Preferred Unit conversion to Series I Preferred Stock (376,307 shares) 18,815 18,815

Series J Preferred Stock issuance (796,948 Preferred Shares) 39,847 39,847

Series D Preferred Stock issuance (1,156,039 shares) 34,681 34,681

Series D Preferred Stock redemption (1,156,039 shares) (34,681 ) (34,681 )

Series E Preferred Stock redemption (1,000,000 shares) (25,000 ) (25,000 )

Treasury Stock purchase (317,300 Shares) (20,400 ) (20,400 )

Series E and Series G Preferred stock accretion 406 406

Stock incentive program (365,602 Common Shares, Net) — —

Common Stock retired (93,000 Shares) (3,127 ) (2,258 ) (5,385 )

Amortization of stock incentive 11,935 11,935

Other 26 26

Adjustment to limited partners’ interest from increased ownership in the Operating Partnership 6,201 6,201

Distributions (578,854 ) (578,854 )

Other comprehensive income 3,779 3,779

Net income 342,993 342,993

BALANCE AT DECEMBER 31, 2004 $ 1,062,687 $ 23 $ 16,365 $ 4,971,885 $ (1,335,436 ) $ (72,918 ) $ 4,642,606

Conversion of Limited Partner Units (2,281,481 Common Shares, Note 10) 37,381 37,381

Stock options exercised (206,464 Common Shares) 6,184 6,184

Series I Preferred Unit conversion to Series I Preferred Stock (197,155 Preferred Shares) 9,858 9,858

Series J Preferred Stock premium net of amortization 7,171 7,171

Treasury Stock purchase (2,815,400 Shares) (182,408 ) (182,408 )

Series G Preferred stock accretion 306 306

Stock incentive program (400,541 Common Shares, Net) (25,240 ) 25,240 —

Common Stock retired (18,000 Shares) (605 ) (502 ) (1,107 )

Amortization of stock incentive 14,320 14,320

Other 505 505

Adjustment to limited partners’ interest from increased ownership in the Operating Partnership (5,707 ) (5,707 )

Distributions (690,990 ) (690,990 )

Other comprehensive income (6,572 ) (6,572 )

Net income 475,749 475,749

BALANCE AT DECEMBER 31, 2005 $ 1,080,022 $ 23 $ 9,793 $ 4,998,723 $ (1,551,179 ) $ (230,086 ) $ 4,307,296

Conversion of Limited Partner Units (86,800 Common Shares, Note 10) 1,247 1,247

Stock options exercised (414,659 Common Shares) 14,906 14,906

Series I Preferred Unit conversion to Series I Preferred Stock (230,486 Preferred Shares) 11,524 11,524

Series I Preferred Stock conversion to Common Stock (283,907 Preferred Shares to 222,933 Common Shares) (14,195 ) 14,195 —

Series J Preferred Stock premium and amortization (329 ) (329 )

Series F Preferred Stock redemption (8,000,000 shares) (192,989 ) (192,989 )

Series G Preferred stock accretion 587 587

Series K Preferred Stock issuance (8,000,000 shares) 200,000 200,000

Series K Preferred Stock redemption (8,000,000 shares) (200,000 ) (200,000 )

Stock incentive program (415,098 Common Shares, Net) (36,487 ) 36,487 —

Common Stock retired (70,000 Shares) (2,354 ) (4,051 ) (6,405 )

Amortization of stock incentive 23,369 23,369

Other 608 608

Adjustment to limited partners’ interest from increased ownership in the Operating Partnership (3,951 ) (3,951 )

Distributions (749,507 ) (749,507 )

Other comprehensive income 9,446 9,446

Net income 563,840 563,840

BALANCE AT DECEMBER 31, 2006 $ 884,620 $ 23 $ 19,239 $ 5,010,256 $ (1,740,897 ) $ (193,599 ) $ 3,979,642

The accompanying notes are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

46 Simon Property Group, Inc.

1. ORGANIZATION

Simon Property Group, Inc. (“Simon Property”) is a Delaware corporation that operates as a self-administered and self-managed real

estate investment trust (“REIT”). Simon Property Group, L.P. (the “Operating Partnership”) is a majority-owned partnership subsidiary of Simon

Property that owns all of our real estate properties. In these notes to consolidated ﬁnancial statements, the terms “we”, “us” and “our” refer to

Simon Property, the Operating Partnership, and their subsidiaries.

We are engaged primarily in the ownership, development, and management of retail real estate, primarily regional malls, Premium Outlet

centers and community/lifestyle centers. As of December 31, 2006, we owned or held an interest in 286 income-producing properties in the

United States, which consisted of 171 regional malls, 69 community/lifestyle centers, 36 Premium Outlet centers and 10 other shopping

centers or outlet centers in 38 states and Puerto Rico (collectively, the “Properties”, and individually, a “Property”). We also own interests in

ﬁve parcels of land held in the United States for future development (together with the Properties, the “Portfolio”). Internationally, we have

ownership interests in 53 European shopping centers (France, Italy, and Poland); ﬁve Premium Outlet centers in Japan; and one Premium Outlet

center in Mexico. We also have begun construction on a Premium Outlet center in South Korea and, through a joint venture arrangement we have

ownership interests in four shopping centers under construction in China.

We generate the majority of our revenues from leases with retail tenants including:

Base minimum rents and cart and kiosk rentals,

Overage and percentage rents based on tenants’ sales volume, and

Recoveries of substantially all of our recoverable expenditures, which consist of property operating, real estate tax, repairs and

maintenance, and advertising and promotional expenditures.

We also generate revenues due to our size and tenant relationships from:

Pursuing mall marketing initiatives, including payment systems (including marketing fees relating to the sales of bank-issued prepaid

cards), national marketing alliances, static and digital media initiatives, business development, sponsorships, and events,

Forming consumer focused strategic corporate alliances, and

Offering property operating services to our tenants and others resulting from our relationships with vendors.

2. BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying consolidated ﬁnancial statements of Simon Property include the accounts of all majority-owned subsidiaries, and all

signiﬁcant intercompany amounts have been eliminated.

We consolidate Properties that are wholly owned or Properties that we own less than 100% but we control. Control of a Property is

demonstrated by, among other factors, our ability to:

manage day-to-day operations,

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 all variable interest entities when we are determined to be the primary beneﬁciary.

The deﬁcit minority interest balances included in deferred costs and other assets in the accompanying consolidated balance sheets represent

outside partners’ interests in the net equity of certain properties. We record deﬁcit minority interests when a joint venture agreement provides

for the settlement of deﬁcit capital accounts before distributing the proceeds from the sale of joint venture assets or the joint venture partner is

obligated to make additional contributions to the extent of any capital account deﬁcits and has the ability to fund such additional contributions.

Investments in partnerships and joint ventures represent noncontrolling ownership interests in Properties. We account for these investments

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, and cash contributions and

distributions. 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.

47 Annual Report 2006

As of December 31, 2006, of our 345 properties we consolidated 199 wholly-owned properties and consolidated 19 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 127 properties

using the equity method of accounting (joint venture properties). We manage the day-to-day operations of 58 of the 127 joint venture properties

but have determined that our partner or partners have substantive participating rights in regards to the assets and operations of these joint

venture properties.

We allocate net operating results of the Operating Partnership after preferred distributions to third parties and Simon Property based on the

partners’ respective weighted average ownership interests in the Operating Partnership.

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

For the Year Ended December 31,

2006 2005 2004

Weighted average ownership interest 79.1% 78.7% 77.7%

As of December 31, 2006 and 2005, our ownership interest in the Operating Partnership was 78.9% and 79.0%, respectively. We adjust

the limited partners’ interest in the Operating Partnership at the end of each period to reﬂect their interest in the Operating Partnership.

Preferred distributions of the Operating Partnership in the accompanying statements of operations and cash ﬂows represent distributions on

outstanding preferred units of limited partnership interest.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investment Properties

We record investment properties at cost. Investment properties include costs of acquisitions; development, predevelopment, and construction

(including salaries and related beneﬁts); tenant allowances and improvements; and interest and real estate taxes incurred related to construction.

We capitalize improvements and replacements from repair and maintenance when the repair and maintenance extend the useful life, increase

capacity, or improve the efﬁciency of the asset. All other repair and maintenance items are expensed as incurred. We record depreciation on

buildings and improvements utilizing the straight-line method over an estimated original useful life, which is generally 10 to 40 years. We review

depreciable lives of investment properties periodically and we make adjustments when necessary to reﬂect a shorter economic life. We record

depreciation on tenant allowances, tenant inducements and tenant improvements utilizing the straight-line method over the term of the related

lease or occupancy term of the tenant, if shorter. We record depreciation on equipment and ﬁxtures utilizing the straight-line method over seven

to ten years.

We review investment properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate

that the carrying value of investment properties may not be recoverable. These circumstances include, but are not limited to, declines in cash

ﬂows, occupancy and comparable sales per square foot at the property. We recognize an impairment of investment property when the estimated

undiscounted operating income before depreciation and amortization 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 may decide

to sell properties that are held for use and the sale prices of these properties may differ from their carrying values.

Purchase Accounting Allocation

We allocate the purchase price of acquisitions to the various components of the acquisition based upon the relative value of each component

in accordance with SFAS No. 141 “Business Combinations” (SFAS 141). These components typically include buildings, land and intangibles

related to in-place leases and we estimate:

the fair value of the buildings on an as-if-vacant basis. The value allocated to land and related improvements is determined either by real

estate tax assessments, a third party valuation specialist, or other relevant data.

the market value of in-place leases based upon our best estimate of current market rents and amortize the resulting market rent

adjustment into revenues.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

48 Simon Property Group, Inc.

Amounts allocated to building are depreciated over the estimated remaining life of the acquired building or related improvements. We

amortize amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles over the remaining life of the

underlying leases, either on a speciﬁc lease methodology for a portfolio acquisition or an average of total property leases methodology, generally

applied for a single property acquisition, depending on the availability of estimates by lease. We also estimate the value of other acquired

intangible assets, if any, which are amortized over the remaining life of the underlying related leases or intangibles. Any remaining amount of

value will be allocated to in-place leases, as deemed appropriate under the circumstances.

Discontinued Operations

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) provides a framework for the evaluation

of impairment of long-lived assets, the treatment of assets held for sale or to be otherwise disposed of, and the reporting of discontinued

operations. SFAS No. 144 requires us to reclassify any material operations related to consolidated properties sold during the period to discontinued

operations. We have reclassiﬁed the results of operations of the seven regional malls, community/lifestyle centers, and ofﬁce building properties

disposed during 2005 and ﬁve properties sold during 2004, as described in Note 4 to discontinued operations in the accompanying consolidated

statements of operations and comprehensive income for 2005 and 2004. Revenues included in discontinued operations were $29.3 million for

the year ended December 31, 2005 and $62.7 million for the year ended December 31, 2004. There were no discontinued operations reported

in 2006, as assets sold in 2006 were not material.

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 market value. Cash equivalents generally consist of commercial paper, bankers acceptances,

Eurodollars, repurchase agreements, and money markets. During 2005, independent banks assumed responsibility for the gift card programs. We

collect gift card funds at the point of sale and then remit those funds to the banks for further processing. As a result, cash and cash equivalents,

as of December 31, 2006, includes a balance of $27.2 million related to these gift card programs which we do not consider available for general

working capital purposes. See Notes 4, 8, and 10 for disclosures about non-cash investing and ﬁnancing transactions.

Marketable Securities

Marketable securities consist primarily of the assets of our insurance subsidiaries and are included in deferred costs and other assets. The

types of securities typically include U.S. Treasury or other U.S. government securities as well as corporate debt securities with maturities ranging

from 1 to 10 years. These securities are classiﬁed as available-for-sale and are valued based upon quoted market prices or using discounted

cash ﬂows when quoted market prices are not available. The amortized cost of debt securities in this category 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 until the gain or loss is realized and recorded in other income. However, if we determine a decline in value is other than temporary, then

we recognize the unrealized loss in income to write down the investments to their net realizable value. Our insurance subsidiaries are required to

maintain statutory minimum capital and surplus as well as maintain a minimum liquidity ratio. Therefore, our access to their securities may be

limited.

Accounting for Beneﬁcial Interests in Mall of America

In January 2006, an entity controlled by the Simon family assigned to us its right to receive cash ﬂow, capital distributions, and related

proﬁts and losses with respect to a portion of its ownership interest in the Mall of America through Mall of America Associates (“MOAA”).

This beneﬁcial interest was transferred subject to a credit facility repayable from MOAA’s distributions from the property. As a result of this

assignment, we began recognizing our share of MOAA’s income during the ﬁrst quarter of 2006, including the proportionate share of earnings of

MOAA since August 2004 through the ﬁrst quarter of 2006 of $10.2 million. This income is included with “income from unconsolidated entities

and beneﬁcial interests, net” in our consolidated statement of operations. We accounted for our beneﬁcial interests in MOAA under the equity

method of accounting. On November 2, 2006, the Simon family entity sold its partnership interest to an afﬁliate of another partner in MOAA and

settled all pending litigation disclosed in Note 8, terminating our beneﬁcial interests. As a result of this sale, we ceased recording income from

this property’s operations, and recorded a gain of approximately $86.5 million as a result of the receipt of $102.2 million of capital transaction

proceeds assigned to us from this arrangement.

49 Annual Report 2006

Use of Estimates

We prepared the accompanying consolidated ﬁnancial statements in accordance with accounting principles generally accepted in the United

States (“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.

Capitalized Interest

We capitalize interest on projects during periods of construction until the projects are ready for their intended purpose. The amount of

interest capitalized during each year is as follows:

For the Year Ended December 31,

2006 2005 2004

Capitalized interest $ 30,115 $ 14,433 $ 14,612

Segment Disclosure

The Financial Accounting Standards Board (the “FASB”) Statement No. 131, “Disclosures about Segments of an Enterprise and Related

Information” (“Statement 131”) requires disclosure of certain operating and ﬁnancial data with respect to separate business activities within an

enterprise. Our primary business is the ownership, development, and management of retail real estate. We have aggregated our retail operations,

including regional malls, Premium Outlet centers and community/lifestyle centers, into one reportable segment because they have similar

economic characteristics and we provide similar products and services to similar types of tenants. Further, all material operations are within the

United States and no customer or tenant comprises more than 10% of consolidated revenues.

Deferred Costs and Other Assets

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

2006 2005

Deferred ﬁnancing and lease costs, net $ 204,645 $ 183,249

In-place lease intangibles, net

93,563 127,590

Fair market value of acquired above market lease intangibles, net

70,623 96,090

Marketable securities of our captive insurance companies

103,605 98,024

Goodwill 20,098 20,098

Minority interests

81,282 62,373

Prepaids, notes receivable and other assets, net

417,083 350,877

$ 990,899 $ 938,301

Deferred Financing and Lease Costs. Our deferred costs consist primarily of ﬁnancing fees we incurred in order to obtain long-term ﬁnancing

and internal and external leasing commissions and related costs. We record amortization of deferred ﬁnancing costs on a straight-line basis

over the terms of the respective loans or agreements. Our deferred leasing costs consist primarily of capitalized salaries and related beneﬁts in

connection with lease originations. We record amortization of deferred leasing costs on a straight-line basis over the terms of the related leases.

We amortize debt premiums and discounts, which are included in mortgages and other indebtedness, over the remaining terms of the related

debt instruments. These debt premiums or discounts arise either at the debt issuance or as part of the purchase price allocation of the fair value

of debt assumed in acquisitions. Details of these deferred costs as of December 31 are as follows:

2006 2005

Deferred ﬁnancing and lease costs $ 340,427 $ 337,919

Accumulated amortization

(135,782 ) (154,670 )

Deferred ﬁnancing and lease costs, net

$ 204,645 $ 183,249

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

50 Simon Property Group, Inc.

The accompanying statements of operations and comprehensive income includes amortization as follows:

For the year ended December 31,

2006 2005 2004

Amortization of deferred ﬁnancing costs $ 18,716 $ 22,063 $ 17,188

Amortization of debt premiums net of discounts

(28,163 ) (26,349 ) (8,401 )

Amortization of deferred leasing costs

22,259 20,606 19,281

We report amortization of deferred ﬁnancing costs, amortization of premiums, and accretion of discounts as part of interest expense.

Amortization of deferred leasing costs are a component of depreciation and amortization expense.

Intangible Assets. The average life of the in-place lease intangibles is approximately 6.5 years and is amortized over the remaining life of

the leases of the related property on the 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 are amortized into revenue over the remaining

lease life as a component of reported minimum rents. The weighted average remaining life of these intangibles approximates 4.5 years. The

unamortized amounts of below market leases are included in accounts payable, accrued expenses, intangibles and deferred revenues on the

consolidated balance sheets and are $186.6 million and $261.9 million as of December 31, 2006 and 2005, respectively. The amount of

amortization of above and below market leases, net for the year ended December 31, 2006, 2005, and 2004 was $53.3 million, $48.0 million,

and $22.4 million, respectively.

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

2006 2005

In-place lease intangibles $ 183,544 $ 183,544

Accumulated amortization

(89,981 ) (55,954 )

In-place lease intangibles, net

$ 93,563 $ 127,590

Fair market value of acquired above market lease intangibles

$ 144,224 $ 144,224

Accumulated amortization

(73,601 ) (48,134 )

Fair market value of acquired above market lease intangibles, net

$ 70,623 $ 96,090

Estimated future amortization, and the increasing (decreasing) effect on minimum rents for our above and below market leases recorded as

of December 31, 2006 are as follows:

Increase to

Below Market Above Market Minimum

Leases Leases Rent, Net

2007 $ 63,760 $ (20,881 ) $ 42,879

2008 44,617 (16,929 ) 27,688

2009 29,907 (13,388 ) 16,519

2010 18,681 (6,958 ) 11,723

2011 12,628 (4,909 ) 7,719

Thereafter 17,018 (7,558 ) 9,460

$ 186,611 $ (70,623 ) $ 115,988

51 Annual Report 2006

Derivative Financial Instruments

We account for our derivative ﬁnancial instruments pursuant to SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,”

as amended by SFAS 138, “Accounting for Derivative Instruments and Hedging Activities.” We use a variety of derivative ﬁnancial instruments in

the normal course of business to manage or hedge the risks described in Note 8 and record all derivatives on our balance sheets at fair value. We

require that hedging derivative instruments are 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 adjust our balance sheets on an ongoing basis to reﬂect the current fair market value of our derivatives. We record changes in the fair

value of these derivatives each period in earnings or comprehensive income, as appropriate. The ineffective portion of the hedge is immediately

recognized in earnings to the extent that the change in value of a derivative does not perfectly offset the change in value of the instrument

being hedged. The unrealized gains and losses held in accumulated other comprehensive income will be reclassiﬁed to earnings over time as

the hedged items are recognized in earnings. We have a policy of only entering into contracts with major ﬁnancial institutions based upon their

credit ratings and other factors.

We use standard market conventions to determine the fair values of derivative instruments, and techniques such as discounted cash ﬂow

analysis, option pricing models, and termination cost are used to determine fair value at each balance sheet date. All methods of assessing fair

value result in a general approximation of value and such value may never actually be realized.

Accumulated Comprehensive Income

The components of our accumulated comprehensive income consisted of the following as of December 31:

2006 2005

Cumulative translation adjustment $ (1,475 ) $ (2,811 )

Accumulated derivative gains, net

19,715 12,715

Net unrealized gains (losses) on marketable securities

999 (111 )

Total accumulated comprehensive income

$ 19,239 $ 9,793

Revenue Recognition

We, as a lessor, retain substantially all of the risks and beneﬁts of ownership of the investment properties and account for our leases as

operating leases. We accrue minimum rents on a straight-line basis over the terms of their respective leases. Substantially all of our retail tenants

are also required to pay overage rents based on sales over a stated base amount during the lease year. We recognize overage rents only when each

tenant’s sales exceeds the applicable sales threshold.

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 (CAM), real estate taxes and

insurance. This signiﬁcantly reduces our exposure to increases in costs and operating expenses resulting from inﬂation. For approximately 60%

of our leases, we receive a ﬁxed payment from the tenant for the CAM component, which is subject to an annual adjustment. We are continually

working toward converting the remainder of our leases to the ﬁxed payment methodology. Under these leases, CAM expense reimbursements

are based on the tenant’s proportionate share of the allocable operating expenses and CAM capital expenditures for the property. Such property

operating expenses typically include utility, insurance, security, janitorial, landscaping, food court and other administrative expenses. We accrue

reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred.

We also receive escrow payments for these reimbursements from substantially all our non-ﬁxed CAM tenants and monthly ﬁxed CAM payments

throughout the year. We do this to reduce the risk of loss on uncollectible accounts once we perform the ﬁnal year-end billings for recoverable

expenditures. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

52 Simon Property Group, Inc.

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 recognized based on a contractual percentage of joint venture property revenue. Development fee revenue is

recognized on a contractual percentage of hard costs to develop a property. Leasing fee revenue is recognized on a contractual per square foot

charge based on the square footage of current year leasing activity.

Insurance premiums written and ceded are recognized on a pro-rata basis over the terms of the policies. Insurance losses are reﬂected in

property operating expenses in the accompanying 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 actuaries and management’s best

estimates. Total insurance reserves for our insurance subsidiary as of December 31, 2006 and 2005 approximated $112.5 million and $93.6

million, respectively.

We recognize fee revenues from our co-branded gift card programs when the fees are earned under the related arrangements with the card is-

suer. Generally, these revenues are recorded at the issuance of the gift card for handling fees and, if applicable, at future dates for servicing fees.

Allowance for Credit Losses

We record a provision for credit losses based on our judgment of a tenant’s creditworthiness, ability to pay and probability of collection.

In addition, we also consider the retail sector in which the tenant operates and our historical collection experience in cases of bankruptcy, if

applicable. Presented below is the activity in the allowance for credit losses and includes the activities related to discontinued operations during

the following years:

For the year Ended December 31,

2006 2005 2004

Balance at Beginning of Year $ 35,239 $ 37,039 $ 31,473

Consolidation of previously unconsolidated entities

321 — —

Provision for Credit Losses

9,730 7,284 18,975

Accounts Written Off

(12,473 ) (9,084 ) (13,409 )

Balance at End of Year

$ 32,817 $ 35,239 $ 37,039

Income Taxes

Simon Property and certain other subsidiaries are taxed as REITs under Sections 856 through 860 of the Internal Revenue Code of 1986,

as amended (the “Code”) and applicable Treasury regulations relating to REIT qualiﬁcation. In order to maintain this REIT status, the regulations

require us to distribute at least 90% of our taxable income to stockholders and meet certain other asset and income tests as well as other

requirements. We intend to continue to adhere to these requirements and maintain the REIT status of Simon Property and the REIT subsidiaries.

As REITs, these entities will generally not be liable for federal corporate income taxes as long as they continue to distribute in excess of 100%

of their taxable income. Thus, we made no provision for federal income taxes for these entities in the accompanying consolidated ﬁnancial

statements. If Simon Property or any of our REIT subsidiaries fail to qualify as a REIT, it will be subject to tax at regular corporate rates for the

years in which it failed to qualify. If we lose our REIT status we could not elect to be taxed as a REIT for four years unless our failure to qualify

was due to reasonable cause and certain other conditions were satisﬁed.

On October 22, 2004, President Bush signed the American Jobs Creation Act which included several provisions of the REIT Improvement

Act, which builds in some ﬂexibility to the REIT rules. This Act provides for monetary penalties in lieu of REIT disqualiﬁcation. This better

matches the severity of the penalty to the REIT’s error and therefore reduces the possibility of disqualiﬁcation.

State income, franchise or other taxes were not signiﬁcant in any of the periods presented.

We have also elected taxable REIT subsidiary (“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 don’t 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

53 Annual Report 2006

is provided if we believe all or some portion of the deferred tax asset may not be realized. An increase or decrease in the valuation allowance

that results from the change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is

included in income.

As of December 31, 2006 and 2005, we had a net deferred tax asset of $12.8 million and $7.1 million, respectively, related to our TRS

subsidiaries. The net deferred tax asset is included in deferred costs and other assets in the accompanying consolidated balance sheets and

consists primarily of operating losses and other carryforwards for Federal income tax purposes as well as the timing of the deductibility of losses

or reserves from insurance subsidiaries.

Reclassiﬁcations

We made certain reclassiﬁcations of prior period amounts in the ﬁnancial statements to conform to the 2006 presentation. These

reclassiﬁcations have no impact on net income previously reported. The reclassiﬁcations principally related to the classiﬁcation of certain

expenses and inclusion of the Limited Partners’ interest in the Operating Partnership and preferred distributions of the Operating Partnership in

the determination of net income from continuing operations. Also, signiﬁcant property dispositions during 2004 and 2005 have been reclassiﬁed

in the statements of operations and comprehensive income for the periods ended December 31, 2004 and 2005.

4. REAL ESTATE ACQUISITIONS, DISPOSALS, AND IMPAIRMENT

We acquire properties to generate both current income and long-term appreciation in value. We acquire individual properties or portfolios of

other retail real estate companies that meet our investment criteria. We sell properties which no longer meet our strategic criteria. Our acquisition

and disposal activity for the periods presented are highlighted as follows:

2006 Acquisitions

As described in Note 7, on February 13, 2006, we sold 10.5% of our ownership interests in Simon Ivanhoe S.à.r.l. (“Simon Ivanhoe”) to

our partner, Ivanhoe Cambridge, Inc. (“Ivanhoe”), and recognized a gain upon this transaction of $34.4 million. We then settled all remaining

share purchase commitments from the company’s founders, including the early settlement of some commitments by purchasing an additional

25.8% interest for €55.1 million, or $65.5 million. The result of these transactions equalized our and Ivanhoe’s ownership in Simon Ivanhoe to

50% each.

On November 1, 2006, we acquired the remaining 50% interest in Mall of Georgia, a regional mall Property, from our partner for $252.6

million, including the assumption of our $96.0 million share of debt. As a result, we now own 100% of Mall of Georgia and the Property was

consolidated as of the acquisition date.

2005 Acquisitions

On November 18, 2005, we purchased a 37.99% interest in Springﬁeld Mall in Springﬁeld, Pennsylvania, for approximately $39.3 million,

including the issuance of our share of debt of $29.1 million. On November 21, 2005, we purchased a 50% interest in Coddingtown Mall in Santa

Rosa, California, for approximately $37.1 million, including the assumption of our share of debt of $10.5 million. Both of these Properties are

being accounted for on the equity method of accounting.

2004 Acquisitions

On February 5, 2004, we purchased a 95% interest in Gateway Shopping Center in Austin, Texas, for approximately $107.0 million. We

initially funded this transaction with borrowings on our Credit Facility and with the issuance of 120,671 units of the Operating Partnership valued

at approximately $6.0 million.

On April 1, 2004, we increased our ownership interest in The Mall of Georgia Crossing from 50% to 100% for approximately $26.3 million,

including the assumption of $16.5 million of debt. As a result of this transaction, this Property is now reported as a consolidated entity.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

54 Simon Property Group, Inc.

On April 27, 2004, we increased our ownership in Bangor Mall in Bangor, Maine from 32.6% to 67.6% and increased our ownership in

Montgomery Mall in Montgomery, Pennsylvania from 23.1% to 54.4%. We acquired these additional ownership interests from our partner in

the properties for approximately $67.0 million and the assumption of $16.8 million of debt. We funded this transaction with a mortgage and

borrowings on our Credit Facility. Bangor Mall and Montgomery Mall were previously accounted for under the equity method. These Properties

are now consolidated as a result of this acquisition.

On May 4, 2004, we purchased a 100% interest in Plaza Carolina in San Juan, Puerto Rico for approximately $309.0 million. We funded

this transaction with a mortgage and borrowings on our Credit Facility.

On November 19, 2004, we increased our ownership interest in Lehigh Valley Mall, located in Whitehall, Pennsylvania, from 24.88% to

37.61% for approximately $42.3 million, including the assumption of our $25.9 million share of debt.

On December 15, 2004, we increased our ownership in Woodland Hills in Tulsa, Oklahoma from 47.2% to 94.5%. We acquired this

additional ownership interest from our partner in the property for approximately $119.5 million, including the assumption of $39.7 million of

debt. Woodland Hills was previously accounted for under the equity method. This Property is now consolidated as a result of this acquisition.

Chelsea Acquisition

On October 14, 2004, we acquired all of the outstanding common stock of Chelsea Property Group, Inc. (“Chelsea”) and the limited

partnership units of its operating partnership subsidiary in a transaction valued at approximately $5.2 billion, including the assumption of $1.5

billion of debt (the “Chelsea Acquisition”). Chelsea had interests in 37 Premium Outlet centers and 24 other shopping centers containing 16.6

million square feet of gross leasable area in 31 states, Japan and Mexico. We funded the cash portion of this acquisition with a $1.8 billion

unsecured term loan facility discussed in Note 8. Chelsea common stockholders received consideration of $36.00 per share for each share of

Chelsea’s common stock in cash, a fractional share of 0.2936 of our common stock, and a fractional share of 0.3000 of Simon 6% Series I

convertible perpetual preferred stock. The holders of Chelsea’s operating partnership subsidiary’s limited partnership common units exchanged

their units for common and convertible preferred units of the Operating Partnership. The following shares and units were issued at closing:

12,978,795 shares of common stock

4,652,232 Operating Partnership common units

13,261,712 shares of Simon Property 6% Series I Convertible Perpetual Preferred Stock (liquidation value of $50 per share)

4,753,794 Operating Partnership 6% Convertible Perpetual Preferred Units (liquidation value of $50 per unit)

During 2005, we ﬁnalized the purchase price allocation for the Chelsea Acquisition as required by FAS 141, as described in our purchase

accounting allocation policy in Note 3. Our valuation of the Chelsea assets was developed in consultation with independent valuation specialists.

The ﬁnal purchase price allocation reﬂects reallocations between tangible assets and ﬁnite life intangible assets. However, these adjustments did

not have a signiﬁcant impact on our consolidated results of operations.

The following unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2004 includes

adjustments for the Chelsea Acquisition as if the transaction had occurred as of January 1, 2004. The pro forma information does not purport

to present what actual results would have been had this acquisition, and the related transaction, in fact, occurred at the previously mentioned

date, or to project results for any future period. Our other acquisitions during the periods presented were not considered material business

combinations for the purpose of presenting this pro forma ﬁnancial information.

For the Year

Ended

December 31,

2004

Pro Forma Total Revenue $ 2,979,479

Pro Forma Income from Continuing Operations 416,032

Pro Forma Net Income 308,665

Pro Forma Earnings Per Common Share — Basic (a) $1.06

Pro Forma Earnings Per Common Share — Diluted (a) $1.05

(a) Pro forma basic earnings per share are based upon weighted average common shares of 218,264,464 for 2004. Pro forma diluted earnings per share are based upon

weighted average common shares of 219,131,832 for 2004.

55 Annual Report 2006

2006 Disposals

During the year ended December 31, 2006, we disposed of three consolidated properties and one property in which we held a 50% interest

and accounted for under the equity method. We received net proceeds of $52.7 million and recorded our share of a gain on the disposals totaling

$12.2 million.

2005 Disposals

During the year ended December 31, 2005, we sold or disposed of sixteen non-core properties, consisting of four regional malls, one

community/lifestyle center, nine other outlet centers and two ofﬁce buildings. Our signiﬁcant dispositions are summarized as follows (dollars in

millions):

Properties Ownership % Date of Disposal Sales Price Gain/(Loss)

Riverway and O’Hare International Center 100% June 1, 2005 $257.3 $125.1

Grove at Lakeland Square 100% July 1, 2005 10.4 (0.1)

Cheltenham Square 100% November 17, 2005 71.5 19.7

Southgate Mall 100% November 28, 2005 8.5 1.1

Eastland Mall (Tulsa, OK) 100% December 16, 2005 1.5 (1.1)

Biltmore Square 100% December 28, 2005 26.0 2.2

$375.2 $146.9

Less: Limited Partners’ Interest 31.1

$115.8

The disposition of Biltmore Square was accomplished through a transfer of the deed to the property to the lender in settlement of the

remaining balance of the non-recourse debt on the property. Additionally, nine other insigniﬁcant non-core properties were sold which resulted

in no gain or loss.

We disposed of two joint venture properties during 2005. On January 11, 2005, Metrocenter was sold for $62.6 million and we recognized

our share of the gain of $11.8 million. On December 22, 2005, our Canadian property, Forum Entertainment Centre, was sold and we recognized

our share of the loss of $13.7 million.

Certain of the net proceeds from these sales, net of repayment of outstanding debt, were held in escrow to complete IRS Section 1031

exchanges while the remainder was used for general working capital purposes.

2004 Disposals

During the year ended December 31, 2004, we sold ﬁve non-core properties, consisting of three regional malls, one community/lifestyle

center and one Premium Outlet center. The signiﬁcant properties and their dates of sale consisted of:

Properties Ownership % Date of Disposal Sales Price Gain/(Loss)

Hutchinson Mall 100% June 15, 2004 $16.3 $0.2

Bridgeview Court 100% July 22, 2004 5.3 2.3

Woodville Mall 100% September 1, 2004 2.5 (2.7)

Santa Fe Premium Outlets 100% December 28, 2004 7.7 —

Heritage Park Mall 100% December 29, 2004 4.1 (0.2)

$35.9 $(0.4)

Less: Limited Partners’ Interest 0.1

$(0.3)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

56 Simon Property Group, Inc.

We disposed of three joint venture properties during 2004. On April 7, 2004, we sold a joint venture interest in a hotel for $17.0 million,

resulting in a gain of $12.6 million, $8.3 million net of tax. On April 8, 2004, we sold our joint venture interest in Yards Plaza resulting in no

gain or loss on this disposition. On August 6, 2004, we completed the court ordered sale of our joint venture interest in Mall of America (see

Note 11).

Impairment. In 2004, we recorded an $18.0 million impairment charge related to one Property. We evaluate our Properties for impairment

using a combination of estimations of the fair value based upon a multiple of the net cash ﬂow of the Properties and discounted cash ﬂows from

the individual Properties’ operations as well as contract prices, if applicable and available.

5. PER SHARE DATA

We determine basic earnings per share based on the weighted average number of shares of common stock outstanding during the period.

We determine diluted earnings per share based on the weighted average number of shares of common stock outstanding combined with the

incremental weighted average shares that would have been outstanding assuming all dilutive potential common shares were converted into shares

at the earliest date possible. The following table sets forth the computation of our basic and diluted earnings per share. The amounts presented

in the reconciliation below represent the common stockholders’ pro rata share of the respective line items in the statements of operations and is

after considering the effect of preferred dividends.

For the Year ended December 31,

2006 2005 2004

Common Stockholders’ share of:

Net Income available to Common Stockholders — Basic $ 486,145 $ 401,895 $ 300,647

Effect of dilutive securities:

Impact to General Partner’s interest in Operating Partnership from all

dilutive securities and options

415 337 279

Net Income available to Common Stockholders — Diluted $ 486,560 $ 402,232 $ 300,926

Weighted Average Shares Outstanding — Basic 221,024,096 220,259,480 207,989,585

Effect of stock options

903,255 871,010 867,368

Weighted Average Shares Outstanding — Diluted 221,927,351 221,130,490 208,856,953

For the year ending December 31, 2006, potentially dilutive securities include stock options, certain preferred units of limited partnership

interest of the Operating Partnership, certain contingently convertible preferred stock and the units of limited partnership interest (“Units”) in

the Operating Partnership which are exchangeable for common stock. The only potentially dilutive security that had a dilutive effect for the year

ended December 31, 2006, 2005 and 2004 were stock options.

We accrue distributions when they are declared. The taxable nature of the dividends declared for each of the years ended as indicated is

summarized as follows:

For the Year ended December 31,

2006 2005 2004

Total dividends paid per share $3.04 $2.80 $2.60

Percent taxable as ordinary income

81.4% 85.8% 88.0%

Percent taxable as long-term capital gains

18.6% 14.2% 6.0%

Percent non-taxable as return of capital

— — 6.0%

100.0% 100.0% 100.0%

57 Annual Report 2006

6. INVESTMENT PROPERTIES

Investment properties consist of the following as of December 31:

2006 2005

Land $ 2,651,205 $ 2,560,335

Buildings and improvements

19,993,094 18,990,912

Total land, buildings and improvements

22,644,299 21,551,247

Furniture, ﬁxtures and equipment

219,664 194,062

Investment properties at cost

22,863,963 21,745,309

Less — accumulated depreciation

4,606,130 3,809,293

Investment properties at cost, net

$ 18,257,833 $ 17,936,016

Construction in progress included above

$ 530,298 $ 384,096

7. INVESTMENTS IN UNCONSOLIDATED ENTITIES

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. We held joint venture ownership interests in 68 Properties as of December 31, 2006 and 69 as of

December 31, 2005. We also held interests in two joint ventures which owned 53 European shopping centers as of December 31, 2006 and 51

as of December 31, 2005. We also held an interest in ﬁve joint venture properties under operation in Japan and one joint venture property in

Mexico. We account for these Properties using the equity method of accounting.

Substantially all of our joint venture Properties are subject to rights of ﬁrst refusal, buy-sell provisions, or other sale rights for partners which

are customary in real estate joint venture agreements and the industry. Our partners in these joint ventures may initiate these provisions at any

time (subject to any applicable lock up or similar restrictions), which will result in either the sale of our interest or the use of available cash or

borrowings to acquire the joint venture interest.

On May 10, 2006, we reﬁnanced thirteen cross-collateralized mortgages with seven individual secured loans totaling $796.6 million with

ﬁxed rates ranging from 5.79% to 5.83%. The balance of the previous mortgages totaled $625.0 million, and bore interest at rates ranging from

LIBOR plus 41 basis points to a ﬁxed rate of 8.28%, and was scheduled to mature on May 15, 2006. We received our share of excess reﬁnanced

proceeds of approximately $86 million on the closing of the new mortgage loan.

On November 1, 2006, we acquired the remaining 50% interest in Mall of Georgia, a regional mall Property, from our partner for $252.6

million, including the assumption of our $96.0 million share of debt. As a result, we now own 100% of Mall of Georgia and the property was

consolidated as of the acquisition date. We have reclassiﬁed the results of this property in the Joint Venture Statement of Operations into

“Consolidated Joint Venture Interests.”

During 2005, we and our joint venture partner completed the construction of, obtained permanent ﬁnancing for, and opened St. Johns Town

Center (St. Johns). Prior to the completion of construction and opening of the center, we were responsible for 85% of the development costs,

and guaranteed this same percentage of the outstanding construction debt. As a result, we consolidated St. Johns during its construction phase.

Upon obtaining permanent ﬁnancing, the guarantee was released, and our partner’s and our ownership percentages were each adjusted to 50%.

We received a distribution from the partnership of $15.7 million in repayment of our capital contributions to equalize our ownership interests,

and this Property is now accounted for using the equity method of accounting.

On June 1, 2005, we reﬁnanced Westchester Mall, a joint venture Property, with a $500.0 million, 4.86% ﬁxed-rate mortgage that matures

on June 1, 2010. The balances of the two previous mortgages, which were repaid, were $142.0 million and $50.1 million and bore interest

at ﬁxed rates of 8.74% and 7.20%, respectively. Both were scheduled to mature on September 1, 2005. We received our share of the excess

reﬁnancing proceeds of approximately $120.0 million on the closing of the new mortgage loan.

On November 29, 2005, we reﬁnanced Houston Galleria, a joint venture Property, with a $821.0 million, 5.436% ﬁxed-rate mortgage that

matures on December 1, 2015. The balances of the two previous mortgages, which were repaid, were $213.2 million and $84.7 million and

bore interest at a ﬁxed rate of 7.93% and at LIBOR plus 150 basis points, respectively. They were scheduled to mature on December 1, 2005

and December 31, 2006, respectively. We received our share of the excess reﬁnancing proceeds of approximately $165.0 million on the closing

of the new mortgage loan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

58 Simon Property Group, Inc.

On December 28, 2005, we invested $50.0 million of equity for a 40% interest in a joint venture with Toll Brothers, Inc. (Toll Brothers)

and Meritage Homes Corp. (Meritage Homes) to purchase a 5,485-acre land parcel in northwest Phoenix from DaimlerChrysler Corporation for

$312 million. Toll Brothers and Meritage Homes each plan to build a signiﬁcant number of homes on the site. We have the option to purchase

a substantial portion of the commercial property for retail uses. Other parcels may also be sold to third parties. The site plans call for a mixed-

use master planned community, which will include approximately 4,840 acres of single-family homes and attached homes. Approximately 645

acres of commercial and retail development will include schools, community amenities and open space. The entitlement, planning, and design

processes are ongoing and initial home sales are tentatively scheduled to begin in 2009. The joint venture, of which Toll Brothers is the managing

member, expects to develop a master planned community of approximately 12,000 to 15,000 residential units.

Summary ﬁnancial information of the joint ventures and a summary of our investment in and share of income from such joint ventures

follow. We condensed into separate line items major captions of the statements of operations for joint venture interests sold or consolidated.

Consolidation occurs when we acquire an additional interest in the joint venture or became the primary beneﬁciary and as a result, gain unilateral

control of the Property. We reclassiﬁed these line items into “Discontinued Joint Venture Interests” and “Consolidated Joint Venture Interests” so

that we may present comparative results of operations for those joint venture interests held as of December 31, 2006. Balance sheet information

as of December 31 is as follows:

2006 2005

BALANCE SHEETS

Assets:

Investment properties, at cost $ 10,669,967 $ 9,915,521

Less — accumulated depreciation

2,206,399 1,951,749

8,463,568 7,963,772

Cash and cash equivalents

354,620 334,714

Tenant receivables

258,185 207,153

Investment in unconsolidated entities

176,400 135,914

Deferred costs and other assets

307,468 304,825

Total assets

$ 9,560,241 $ 8,946,378

Liabilities and Partners’ Equity:

Mortgages and other indebtedness $ 8,055,855 $ 7,479,359

Accounts payable, accrued expenses, and deferred revenue

513,472 403,390

Other liabilities

255,633 189,722

Total liabilities

8,824,960 8,072,471

Preferred units

67,450 67,450

Partners’ equity

667,831 806,457

Total liabilities and partners’ equity

$ 9,560,241 $ 8,946,378

Our Share of:

Total assets $ 4,113,051 $ 3,765,258

Partners’ equity

$ 380,150 $ 429,942

Add: Excess Investment

918,497 938,177

Our net Investment in Joint Ventures

$ 1,298,647 $ 1,368,119

Mortgages and other indebtedness

$ 3,472,228 $ 3,169,662

“Excess Investment” represents the unamortized difference of our investment over our share of the equity in the underlying net assets of

the joint ventures acquired. We amortize excess investment over the life of the related Properties, typically no greater than 40 years, and the

amortization is included in the reported amount of income from unconsolidated entities.

59 Annual Report 2006

As of December 31, 2006, scheduled principal repayments on joint venture properties’ mortgages and other indebtedness are as follows:

2007 $ 469,067

2008 724,433

2009 482,547

2010 1,524,707

2011 1,179,018

Thereafter 3,677,689

Total principal maturities 8,057,461

Net unamortized debt discounts (1,606 )

Total mortgages and other indebtedness $ 8,055,855

This debt becomes due in installments over various terms extending through 2017 with interest rates ranging from 1.22% to 10.61% and

a weighted average rate of 5.89% at December 31, 2006.

For the Year Ended December 31,

2006 2005 2004

STATEMENTS OF OPERATIONS

Revenue:

Minimum rent $1,092,514 $ 1,035,351 $ 915,276

Overage rent

90,125 81,766 43,296

Tenant reimbursements

556,366 530,044 468,430

Other income

150,468 126,232 64,188

Total revenue

1,889,473 1,773,393 1,491,190

Operating Expenses:

Property operating

375,546 348,581 286,811

Depreciation and amortization

324,042 317,339 274,053

Real estate taxes

133,517 131,571 123,523

Repairs and maintenance

84,766 82,369 69,073

Advertising and promotion

43,968 36,759 36,553

Provision for credit losses

4,659 9,332 11,100

Other 126,172 120,230 65,223

Total operating expenses

1,092,670 1,046,181 866,336

Operating Income 796,803 727,212 624,854

Interest expense

(432,190 ) (387,027 ) (353,594 )

Income (loss) from unconsolidated entities

1,204 (1,892 ) (5,129 )

Gain (loss) on sale of asset

(6 ) 1,423 —

Income from Continuing Operations 365,811 339,716 266,131

Income from joint venture interests before consolidation

912 2,497 20,601

Income (loss) from discontinued joint venture interests

736 (2,452 ) 13,513

Gain on disposal or sale of discontinued operations, net

20,375 65,599 4,704

Net Income $ 387,834 $ 405,360 $ 304,949

Third-Party Investors’ Share of Net Income $ 232,499 $ 238,265 $ 193,282

Our Share of Net Income 155,335 167,095 111,667

Amortization of Excess Investment (49,546 ) (48,597 ) (30,554 )

Income from Beneﬁcial Interests and Other, net 15,605 — —

Write-off of Investment Related to Properties Sold (2,846 ) (38,666 ) —

Our Share of Net Gain (Loss) Related to Properties Sold (7,729 ) 1,975 —

Income from Unconsolidated Entities and Beneﬁcial Interests, net $ 110,819 $ 81,807 $ 81,113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

60 Simon Property Group, Inc.

On January 11, 2005, Metrocenter, a joint venture regional mall property was sold. We recognized our share of the gain of $11.8 million, net

of the write-off of the related investment and received $62.6 million representing our share of the proceeds from this disposition. On December

22, 2005, The Forum Entertainment Centre, our Canadian property, was sold. We recognized our share of the loss of $13.7 million, net of the

write-off of the related investment, from the disposition of this property. The result of these two dispositions is included in the loss on sales of

interests in unconsolidated entities and other assets, net in the 2005 consolidated statements of operations and comprehensive income. On

April 25, 2006, Great Northeast Plaza, a joint venture community center was sold. We recognized our share of the gain of $7.7 million, net of

the write-off of the related investment and received $8.8 million representing our share of the proceeds from this disposition.

Our share of the net gain resulting from the sale of Metrocenter, The Forum Entertainment Centre, and Great Northeast Plaza are shown

separately in “gain on sales of assets and interests in unconsolidated entities, net” in the consolidated statement of operations.

International Joint Venture Investments

We conduct our international operations in Europe through our two European joint venture investment entities; Simon Ivanhoe S.à.r.l.

(“Simon Ivanhoe”) and Gallerie Commerciali Italia (“GCI”). The carrying amount of our total combined investment in these two joint venture

investments is $338.1 million and $287.4 million as of December 31, 2006 and 2005, respectively, net of the related cumulative translation

adjustments. The Operating Partnership has a 50% ownership in Simon Ivanhoe and a 49% ownership in GCI as of December 31, 2006.

On October 20, 2005, Ivanhoe Cambridge, Inc. (“Ivanhoe”), an afﬁliate of Caisse de dépôt et placement du Québec, effectively acquired our

former partner’s 39.5% ownership interest in Simon Ivanhoe. On February 13, 2006, pursuant to the terms of our October 20, 2005 transaction

with Ivanhoe, we sold a 10.5% interest in this joint venture to Ivanhoe for € 45.2 million, or $53.9 million, and recorded a gain on the

disposition of $34.4 million. This gain is reported in “gain on sales of interests in unconsolidated entities, net” in the consolidated statements

of operations. We then settled all remaining share purchase commitments from the company’s founders, including the early settlement of some

commitments by purchasing an additional 25.8% interest in Simon Ivanhoe for €55.1 million, or $65.5 million. These transactions equalized

our and Ivanhoe’s ownership in Simon Ivanhoe to 50% each.

We conduct our international Premium Outlet operations in Japan through joint venture partnerships with Mitsubishi Estate Co., Ltd. and

Sojitz Corporation (formerly known as Nissho Iwai Corporation). The carrying amount of our investment in these Premium Outlet joint ventures

in Japan is $281.2 million and $287.7 million as of December 31, 2006 and 2005, respectively, net of the related cumulative translation

adjustments. We have a 40% ownership in these Japan Premium Outlet joint ventures. We also began construction on our ﬁrst Premium Outlet

in South Korea. As of December 31, 2006, our investment in our Premium Outlet in South Korea, for which we hold a 50% ownership interest,

approximated $18.5 million.

During 2006, we ﬁnalized the formation of joint venture arrangements to develop and operate shopping centers in China. The shopping

centers will be anchored by Wal-Mart stores and will be through a 32.5% ownership in a joint venture entity, Great Mall Investments, Ltd.

(“GMI”). We are planning on initially developing ﬁve centers, four of which are currently under construction, with our share of the total equity

commitment of approximately $60 million. We account for our investments in GMI under the equity method of accounting. As of December 31,

2006, our combined investment in these shopping centers in GMI is approximately $15.9 million.

61 Annual Report 2006

8. INDEBTEDNESS AND DERIVATIVE FINANCIAL INSTRUMENTS

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

2006 2005

Fixed-Rate Debt:

Mortgages and other notes, including $41,579 and $53,669 net premiums, respectively.

Weighted average interest and maturity of 6.39% and 4.0 years at December 31, 2006.

$ 4,266,045 $ 4,145,689

Unsecured notes, including $17,513 and $38,523 net premiums, respectively.

Weighted average interest and maturity of 5.77% and 5.7 years at December 31, 2006.

10,447,513 7,868,523

7% Mandatory Par Put Remarketed Securities, including $4,669 and $4,761 premiums,

respectively, due June 2028 and subject to redemption June 2008.

204,669 204,763

Total Fixed-Rate Debt 14,918,227 12,218,975

Variable-Rate Debt:

Mortgages and other notes, at face value, respectively. Weighted average interest and

maturity of 6.22% and 2.4 years.

153,189 430,612

Credit Facility (see below)

305,132 809,264

Acquisition Facility (see below)

— 600,000

Aventura Mall Credit Facility. Weighted average rates and maturities of 6.32% and 0.8 years

at December 31, 2006.

27,369 —

Unsecured term loans.

— 59,075

Total Variable-Rate Debt 485,690 1,898,951

Fair value interest rate swaps

(9,428 ) (11,809 )

Total Mortgages and Other Indebtedness, Net $ 15,394,489 $ 14,106,117

General. At December 31, 2006, we have pledged 80 Properties as collateral to secure related mortgage notes including 8 pools of cross-

defaulted and cross-collateralized mortgages encumbering a total of 42 Properties. Under these cross-default provisions, a default under any

mortgage included in the cross-defaulted package may constitute a default under all such mortgages and may lead to acceleration of the

indebtedness due on each Property within the collateral package. Of our 80 encumbered Properties, indebtedness of 20 of these encumbered

Properties and our unsecured notes are subject to various ﬁnancial performance covenants relating to leverage ratios, annual real property

appraisal requirements, debt service coverage ratios, minimum net worth ratios, debt-to-market capitalization, and/or minimum equity values.

Our mortgages and other indebtedness may be prepaid but are generally subject to prepayment of a yield-maintenance premium or defeasance.

As of December 31, 2006, we are in compliance with all our debt covenants.

Some of the limited partner Unitholders guarantee a portion of our consolidated debt through foreclosure guarantees. In total, 53 limited

partner Unitholders provide guarantees of foreclosure of $447.3 million of our consolidated debt at 12 consolidated Properties. In each case, the

loans were made by unrelated third party institutional lenders and the guarantees are for the beneﬁt of each lender. In the event of foreclosure

of the mortgaged property, the proceeds from the sale of the property are ﬁrst applied against the amount of the guarantee and also reduce the

amount payable under the guarantee. To the extent the sale proceeds from the disposal of the property do not cover the amount of the guarantee,

then the Unitholder is liable to pay the difference between the sale proceeds and the amount of the guarantee so that the entire amount

guaranteed to the lender is satisﬁed. The debt is non-recourse to us and our afﬁliates.

Unsecured Debt

We have $1.0 billion of unsecured notes issued by our subsidiaries that are structurally senior in right of payment to holders of other

unsecured notes to the extent of the assets and related cash ﬂows of certain Properties. These unsecured notes have a weighted average interest

rate of 7.02% and weighted average maturities of 5.3 years.

On March 31, 2006, Standard & Poor’s Rating Services raised its corporate credit rating for us to “A-’ from “BBB+’ which resulted in a

decrease in the interest rate applicable to borrowings on our unsecured revolving $3 billion credit facility (the “Credit Facility”) to 37.5 basis

points over LIBOR from 42.5 basis points over LIBOR. The revision to our rating also decreased the facility fee on our Credit Facility to 12.5

basis points from 15 basis points.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

62 Simon Property Group, Inc.

On May 15, 2006, we issued two tranches of senior unsecured notes totaling $800 million at a weighted average ﬁxed interest rate of

5.93%. The ﬁrst tranche is $400.0 million at a ﬁxed interest rate of 5.75% due May 1, 2012 and the second tranche is $400.0 million at a

ﬁxed interest rate of 6.10% due May 1, 2016. We used the proceeds of the offering and the termination of forward-starting swap arrangements

to reduce borrowings on our Credit Facility.

On August 29, 2006, we issued two tranches of senior unsecured notes totaling $1.1 billion at a weighted average ﬁxed interest rate of

5.73%. The ﬁrst tranche is $600.0 million at a ﬁxed interest rate of 5.60% due September 1, 2011 and the second tranche is $500.0 million

at a ﬁxed interest rate of 5.875% due March 1, 2017. We used proceeds from the offering to reduce borrowings on our Credit Facility.

On December 12, 2006, we issued two tranches of senior unsecured notes totaling $1.25 billion at a weighted average ﬁxed interest rate

of 5.13%. The ﬁrst tranche is $600.0 million at a ﬁxed interest rate of 5.00% due March 1, 2012 and the second tranche is $650.0 million

at a ﬁxed interest rate of 5.25% due December 1, 2016. We used proceeds from the offering to reduce borrowings on our Credit Facility and

reinvested the remainder of the proceeds of approximately $577.4 million to be used for general working capital purposes.

Credit Facility. Other signiﬁcant draws on our Credit Facility during the twelve-month period ended December 31, 2006 were as follows:

Draw Date Draw Amount Use of Credit Line Proceeds

01/03/06 $ 59,075 Repayment of a Term Loan (CPG Partners, L.P.), which had a rate of 7.26%.

01/06/06 140,000 Repayment of a mortgage, which had a rate of LIBOR plus 137.5 basis points.

01/20/06 300,000 Repayment of unsecured notes, which had a ﬁxed rate of 7.375%.

03/27/06 600,000 Early repayment of the $1.8 billion facility we used to ﬁnance our acquisition of Chelsea in 2004.

04/03/06 58,000 Repayment of two secured mortgages which each bore interest at 8.25%.

11/01/06 200,000 Repayment of the preferred stock issued to fund the redemption of our Series F Preferred Stock.

11/15/06 250,000 Repayment of unsecured notes, which had a ﬁxed rate of 6.875%.

Other amounts drawn on our Credit Facility were primarily for general working capital purposes. We repaid a total of $2.8 billion on our

Credit Facility during the year ended December 31, 2006. The total outstanding balance on our Credit Facility as of December 31, 2006 was

$305.1 million, and the maximum amount outstanding during the year was approximately $2.0 billion. During the year ended December 31,

2006, the weighted average outstanding balance on our Credit Facility was approximately $1.1 billion.

Acquisition Facility. We borrowed $1.8 billion in 2004 to ﬁnance the cash portion of our acquisition of Chelsea. As disclosed above, this

facility has been fully repaid.

Secured Debt

Mortgages and Other Indebtedness. The balance of ﬁxed and variable rate mortgage notes was $4.4 billion and $4.6 billion as of December

31, 2006 and 2005, respectively, including related premiums. Of the 2006 amount, $4.3 billion is nonrecourse to us. The ﬁxed-rate mortgages

generally require monthly payments of principal and/or interest. The interest rates of variable-rate mortgages are typically based on LIBOR.

During the twelve-month period ended December 31, 2006, we repaid $275.8 million in mortgage loans, unencumbering four properties.

As a result of the acquisition of our partner’s 50% ownership interest in Mall of Georgia on November 1, 2006, we now own 100% of the

mall and the Property was consolidated as of the acquisition date. This included the consolidation of the Property’s $192.0 million 7.09% ﬁxed-

rate mortgage.

63 Annual Report 2006

Debt Maturity and Other

Our scheduled principal repayments on indebtedness as of December 31, 2006 are as follows:

2007 $ 1,683,966

2008 809,667

2009 1,653,486

2010 2,001,021

2011 2,309,420

Thereafter 6,882,596

Total principal maturities 15,340,156

Net unamortized debt premium and other 54,333

Total mortgages and other indebtedness $ 15,394,489

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

For the year ended December 31,

2006 2005 2004

Cash paid for interest $ 845,964 $ 822,906 $ 648,984

Derivative Financial Instruments

Our exposure to market risk due to changes in interest rates primarily relates to our long-term debt obligations. We manage exposure to

interest rate market risk through our risk management strategy by a combination of interest rate protection agreements to effectively ﬁx or cap a

portion of variable rate debt, or in the case of a fair value hedge, effectively convert ﬁxed rate debt to 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. If the anticipated transaction does not occur, the

cost is charged to net income. Upon completion of the debt issuance, the cost of these instruments is recorded as part of accumulated other

comprehensive income and is amortized to interest expense over the life of the debt agreement.

As of December 31, 2006, we have reﬂected the fair value of outstanding consolidated derivatives in other liabilities for $9.4 million. In

addition, we recorded the beneﬁts from our treasury lock and interest rate hedge agreements in accumulated comprehensive income and the

unamortized balance of these agreements is $5.7 million as of December 31, 2006. The net beneﬁts from terminated swap agreements are also

recorded in accumulated comprehensive income and the unamortized balance is $12.2 million as of December 31, 2006. As of December 31,

2006, our outstanding LIBOR based derivative contracts consist of:

interest rate cap protection agreements with a notional amount of $95.7 million that mature in May 2007.

variable rate swap agreements with a notional amount of $370.0 million that mature in September 2008 and January 2009 and have a

weighted average pay rate of 5.36% and a weighted average receive rate of 3.72%.

Within the next twelve months, we expect to reclassify to earnings approximately $4.3 million of income of the current balance held in

accumulated other comprehensive income. The amount of ineffectiveness relating to fair value and cash ﬂow hedges recognized in income during

the periods presented was not material.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

64 Simon Property Group, Inc.

Fair Value of Financial Instruments

The carrying value of our variable-rate mortgages and other loans approximates their fair values. We estimated the fair values of combined

ﬁxed-rate mortgages using cash ﬂows discounted at current borrowing rates and other indebtedness using cash ﬂows discounted at current

market rates. The fair values of ﬁnancial instruments and our related discount rate assumptions used in the estimation of fair value for our

consolidated ﬁxed-rate mortgages and other indebtedness as of December 31 is summarized as follows:

2006 2005

Fair value of ﬁxed-rate mortgages and other indebtedness $ 14,479,171 $ 12,078,531

Average discount rates assumed in calculation of fair value

6.53% 6.11%

9. RENTALS UNDER OPERATING LEASES

Future minimum rentals to be received under noncancelable tenant operating leases for each of the next ﬁve years and thereafter, excluding

tenant reimbursements of operating expenses and percentage rent based on tenant sales volume as of December 31, 2006 are as follows:

2007 $ 1,619,178

2008 1,491,243

2009 1,339,472

2010 1,163,250

2011 976,740

Thereafter 2,921,770

$9,511,653

Approximately 0.8% of future minimum rents to be received are attributable to leases with an afﬁliate of a limited partner in the Operating

Partnership.

10. CAPITAL STOCK

The Board of Directors (“Board”) is authorized to reclassify the 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 Simon Property without further action of the stockholders. The ability of the Board 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 the outstanding voting stock

of Simon Property.

The holders of common stock of Simon Property 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. At the time of the initial public offering of Simon Property’s predecessor in 1993, the

charter of the predecessor gave Melvin Simon, Herbert Simon, David Simon and certain of their afﬁliates (the “Simons”) the right to elect four

of the thirteen members of the Board, conditioned upon the Simons, or entities they control, maintaining speciﬁed levels of equity ownership

in Simon Property’s predecessor, the Operating Partnership and all of their subsidiaries. In addition, at that time, Melvin Simon & Associates,

Inc. (“MSA”), acquired 3,200,000 shares of Class B common stock. MSA placed the Class B common stock into a voting trust under which the

Simons were the sole trustees. These voting trustees had the authority to elect the four members of the Board. These same arrangements were

incorporated into Simon Property’s Charter in 1998 during the combination of its predecessor and Corporate Property Investors, Inc. Shares of

Class B common stock convert automatically into an equal number of shares of common stock upon the sale or transfer thereof to a person not

afﬁliated with Melvin Simon, Herbert Simon or David Simon. The holder of the Class C common stock (the “DeBartolos”) is entitled to elect two

of the thirteen members of the Board. Shares of Class C common stock convert automatically into an equal number of shares of common stock

65 Annual Report 2006

upon the sale or transfer thereof to a person not afﬁliated with the members of the DeBartolo family or entities controlled by them. The Class B

and Class C shares can be converted into shares of common stock at the option of the holders. At the initial offering we reserved 3,200,000 and

4,000 shares of common stock for the possible conversion of the outstanding Class B and Class C shares, respectively.

On March 1, 2004, Simon Property and the Simons completed a restructuring transaction in which MSA exchanged 3,192,000 Class B

common shares for an equal number of shares of common stock in accordance with our Charter. Those shares continue to be owned by MSA

and remain subject to a voting trust under which the Simons are the sole voting trustees. MSA exchanged the remaining 8,000 Class B common

shares with David Simon for 8,000 shares of common stock and David Simon’s agreement to create a new voting trust under which the Simons as

voting trustees, hold and vote the remaining 8,000 shares of Class B common stock acquired by David Simon. As a result, these voting trustees

have the authority to elect four of the members of the Board contingent on the Simons maintaining speciﬁed levels of equity ownership in Simon

Property, the Operating Partnership and their subsidiaries.

Common Stock Issuances and Repurchases

In 2006, we issued 86,800 shares of common stock to ﬁve limited partners in exchange for an equal number of Units.

We issued 414,659 shares of common stock related to employee and director stock options exercised during 2006. We used the net

proceeds from the option exercises of approximately $14.9 million to acquire additional units of the Operating Partnership. The Operating

Partnership used the net proceeds for general working capital purposes.

On May 12, 2006, the Board authorized the repurchase of up to 6,000,000 shares of our common stock subject to a maximum aggregate

purchase price of $250 million over the next twelve months as market conditions warrant. We may purchase the shares in the open market or in

privately negotiated transactions. There have been no purchases under this program since May, 2006.

Beginning on April 3, 2006, holders of Simon Property Group’s Series I 6% Convertible Perpetual Preferred Stock (“Series I Preferred

Stock”) could elect to convert their shares during the year into shares of Simon Property common stock per the preferred stock agreement.

During the twelve months ended December 31, 2006, 283,907 shares of Series I Preferred Stock were converted into 222,933 shares of Simon

Property common stock.

Preferred Stock

The following table summarizes each of the authorized series of preferred stock of Simon Property as of December 31:

2006 2005

Series B 6.5% Convertible Preferred Stock, 5,000,000 shares authorized,

none issued and outstanding

$ — $ —

Series C 7.00% Cumulative Convertible Preferred Stock, 2,700,000 shares authorized,

none issued or outstanding

— —

Series D 8.00% Cumulative Redeemable Preferred Stock, 2,700,000 shares authorized,

none issued or outstanding

— —

Series E 8.00% Cumulative Redeemable Preferred Stock, 1,000,000 shares authorized,

none issued and outstanding

— —

Series F 8.75% Cumulative Redeemable Preferred Stock, 8,000,000 shares authorized,

0 and 8,000,000 issued and outstanding

— 192,989

Series G 7.89% Cumulative Step-Up Premium Rate Preferred Stock, 3,000,000 shares authorized,

3,000,000 issued and outstanding

148,843 148,256

Series H Variable Rate Preferred Stock, 4,530,000 shares authorized, none issued and outstanding

— —

Series I 6% Convertible Perpetual Preferred Stock, 19,000,000 shares authorized,

13,781,753 and 13,835,174 issued and outstanding

689,088 691,759

Series J 8

⁄

% Cumulative Redeemable Preferred Stock, 1,000,000 shares authorized,

796,948 issued and outstanding, including unamortized premium of $6,842 and 7,171

in 2006 and 2005, respectively.

46,689 47,018

Series K Variable Rate Redeemable Preferred Stock, 8,000,000 shares authorized,

none issued and outstanding

— —

$ 884,620 $ 1,080,022

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

66 Simon Property Group, Inc.

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 Property equal to the dividends paid on the

preferred stock issued.

Series B Convertible Preferred Stock. During 2003, all of the outstanding shares of our 6.5% Series B Convertible Preferred Stock were either

converted into shares of common stock or were redeemed at a redemption price of $106.34 per share. We issued an aggregate of 1,628,400

shares of common stock to the holders who exercised their conversion rights. The remaining 18,340 shares of Series B preferred stock were

redeemed with cash from the proceeds of the private issuance of a new series of preferred stock (Series H).

Series C Cumulative Convertible Preferred Stock and Series D Cumulative Redeemable Preferred Stock. On August 27, 1999, Simon Property

authorized these two new series of preferred stock to be available for issuance upon conversion by the holders or redemption by the Operating

Partnership of the 7.00% Preferred Units or the 8.00% Preferred Units, described below. Each of these new series of preferred stock had terms

that were substantially identical to the respective series of Preferred Units.

Series E Cumulative Redeemable Preferred Stock. We issued the Series E Cumulative Redeemable Preferred Stock for $24.2 million. These

preferred shares were being accreted to their liquidation value. The Series E Cumulative Redeemable Preferred Stock was redeemed on November

10, 2004, at the liquidation value of $25 per share.

Series F Cumulative Redeemable Preferred Stock. The 8.75% Series F Cumulative Redeemable Preferred Stock (the “Series F Preferred

Stock”) were redeemable at any time on or after September 29, 2006, at a liquidation value of $25.00 per share (payable solely out of the

sale proceeds of other capital stock of Simon Property, which may include other series of preferred shares), plus accrued and unpaid dividends.

Effective October 4, 2006, we redeemed all 8,000,000 shares of our Series F Preferred Stock at a liquidation preference of $25.00 per share

plus accrued dividends. Funds to redeem the Series F Preferred Stock were obtained through the issuance of a new series of preferred stock

issued in a private transaction (Series K). These preferred shares were subsequently repurchased prior to year end at par value with borrowings

from our Credit Facility. We recorded a $7.0 million charge to net income during the fourth quarter of 2006 related to the redemption of the

Series F Preferred Stock.

Series G Cumulative Step-Up Premium Rate Preferred Stock. The 7.89% Series G Cumulative Step-Up Premium Rate Preferred Stock are

being accreted to their liquidation value and may be redeemed at any time on or after September 30, 2007 at a liquidation value of $50.00 per

share (payable solely out of the sale proceeds of other capital stock of Simon Property, which may include other series of preferred shares), plus

accrued and unpaid dividends. Beginning October 1, 2012, the rate on this series of preferred stock increases to 9.89% per annum. We intend

to redeem the Series G Preferred Shares prior to October 1, 2012. This series of preferred stock does not have a stated maturity or is convertible

into any other securities of Simon Property. This series is not subject to any mandatory redemption provisions, except as needed to maintain or

bring the direct or indirect ownership of the capital stock of Simon Property into conformity with REIT requirements. The Operating Partnership

pays a preferred distribution to Simon Property equal to the dividends paid on this series of preferred stock.

Series H Variable Rate Preferred Stock. To fund the redemption of the Series B Preferred Stock in 2003, we issued 3,328,540 shares of

Series H Variable Rate Preferred Stock for $83.2 million. We repurchased 3,250,528 shares of the Series H Preferred Stock for $81.3 million

on December 17, 2003. On January 7, 2004 we repurchased the remaining 78,012 shares for $1.9 million.

Series I 6% Convertible Perpetual Preferred Stock. On October 14, 2004, we issued 13,261,712 shares of this new series of preferred stock

in the Chelsea Acquisition. The terms of this new series of preferred stock is substantially identical to those of the respective series of Preferred

Units. In 2006, unitholders exchanged 230,486 units of the 6% Convertible Perpetual Preferred Units for an equal number of shares of Series

I Preferred Stock. In prior years, 573,466 units were exchanged for an equal number of shares of preferred stock. Distributions are to be made

quarterly beginning November 30, 2004 at an annual rate of 6% per share. On or after October 14, 2009, we shall have the option to redeem

the 6% Convertible Perpetual Preferred Stock, in whole or in part, for shares of common stock only at a liquidation preference of $50.00 per

67 Annual Report 2006

share plus accumulated and unpaid dividends. However, if the redemption date falls between the record date and dividend payment date the

redemption price will be equal to only the liquidation preference per share, and will not include any amount of dividends declared and payable on

the corresponding dividend payment date. The redemption may occur only if, for 20 trading days within a period of 30 consecutive trading days

ending on the trading day before notice of redemption is issued, the closing price per share of common stock exceeds 130% of the applicable

conversion price. The 6% Convertible Perpetual Preferred Stock shall be convertible into a number of fully paid and non-assessable common

shares upon the occurrence of a conversion triggering event. A conversion triggering event includes the following: (a) if the 6% Convertible

Perpetual Preferred Share is called for redemption by us; or, (b) if we are a party to a consolidation, merger, binding share exchange, or sale of

all or substantially all of our assets; or, (c) if during any ﬁscal quarter after the ﬁscal quarter ending December 31, 2004, the closing sale price

of the common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding

ﬁscal quarter exceeds 125% of the applicable conversion price. If the closing price condition is not met at the end of any ﬁscal quarter, then

conversions will not be permitted in the following ﬁscal quarter.

As of December 31, 2006, the conversion trigger price of $79.27 had been met and the Series I Preferred Stock is convertible into 0.78846

of a share of Simon Property common stock beginning January 2, 2007 through March 30, 2007. During the twelve months ended December

31, 2006, 283,907 shares of Series I Preferred Stock were converted into 222,933 shares of Simon Property common stock.

Series J 8

⁄

% Cumulative Redeemable Preferred Stock. On October 14, 2004, we issued 796,948 shares of Series J 8

⁄

% Cumulative

Redeemable Preferred Stock in replacement of an existing series of Chelsea preferred stock in the Chelsea Acquisition. On or after October 15,

2027, the Series J Preferred Stock, in whole or in part, may be redeemed at our option at a price, payable in cash, of $50.00 per share (payable

solely out of the sale proceeds of other capital stock of Simon Property, which may include other series of preferred shares), plus accumulated

and unpaid dividends. The Series J Preferred Stock is not convertible or exchangeable for any other property or securities of Simon Property. The

Series J Preferred Stock was issued at a premium of $7,553 as of the date of our acquisition of Chelsea.

Series K Variable Rate Redeemable Preferred Stock. To fund the redemption of the Series F Preferred Stock in the fourth quarter of 2006, we

issued 8,000,000 shares of Series K Variable Rate Redeemable Preferred Stock for $200.0 million. During the fourth quarter, we repurchased

all 8,000,000 shares of this preferred stock at the same price.

Limited Partners’ Preferred Interests in the Operating Partnership

The following table summarizes each of the authorized preferred units of the Operating Partnership as of December 31:

2006 2005

6% Series I Convertible Perpetual Preferred Units, 19,000,000 units authorized,

3,935,165 and 4,177,028 issued and outstanding

$ 196,759 $ 208,852

7.75% / 8.00% Cumulative Redeemable Preferred Units, 900,000 shares authorized,

850,698 issued and outstanding

85,070 85,070

7.5% Cumulative Redeemable Preferred Units, 260,000 units authorized, 255,373 issued and outstanding

25,537 25,537

7% Cumulative Convertible Preferred Units, 2,700,000 units authorized,

261,683 and 1,410,760 issued and outstanding

7,327 39,501

8.00% Cumulative Redeemable Preferred Units, 2,700,000 units authorized, 1,425,573 issued and outstanding

42,767 42,767

$ 357,460 $ 401,727

6% Series I Convertible Perpetual Preferred Units. On October 14, 2004, the Operating Partnership issued 4,753,794 6% Convertible

Perpetual Preferred Units in the Chelsea Acquisition. In 2006, unitholders exchanged 230,486 units of the 6% Convertible Perpetual Preferred

Units for an equal number of shares of Series I Preferred Stock. In prior years, 573,466 units were exchanged for an equal number of shares of

preferred stock. The Series I Units have terms that are substantially identical to the respective series of Preferred Stock, except that as it relates

to the Series I Units, we have the option to satisfy the holder’s exchange of Series I Preferred Units for cash or Series I Preferred Stock.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

68 Simon Property Group, Inc.

7.75%/8.00% Cumulative Redeemable Preferred Units. During 2003, in connection with the purchase of additional interest in certain

Properties, the Operating Partnership issued 7.75%/8.00% Cumulative Redeemable Preferred Units (the “7.75% Preferred Units”) that accrue

cumulative dividends at a rate of 7.75% of the liquidation value for the period beginning December 5, 2003 and ending December 31, 2004,

8.00% of the liquidation value for the period beginning January 1, 2005 and ending December 31, 2009, 10.00% of the liquidation value for

the period beginning January 1, 2010 and ending December 31, 2010, and 12% of the liquidation value thereafter. These dividends are payable

quarterly in arrears. A unitholder may require the Operating Partnership to repurchase the 7.75% Preferred Units on or after January 1, 2009, or

any time the aggregate liquidation value of the outstanding units exceeds 10% of the book value of partners’ equity of the Operating Partnership.

The Operating Partnership may redeem the 7.75% Preferred Units on or after January 1, 2011, or earlier upon the occurrence of certain tax

triggering events. Our intent is to redeem these units after January 1, 2009, after the occurrence of a tax triggering event. The redemption price

is the liquidation value plus accrued and unpaid distributions, payable in cash or interest in one or more properties mutually agreed upon.

7.5% Cumulative Redeemable Preferred Units. The Operating Partnership issued 7.5% Cumulative Redeemable Preferred Units (the “7.5%

Preferred Units”) in connection with the purchase of additional interest in Kravco. The 7.5% Preferred Units accrue cumulative dividends at

a rate of $7.50 annually, which is payable quarterly in arrears. The Operating Partnership may redeem the 7.5% Preferred Units on or after

November 10, 2013, unless there is the occurrence of certain tax triggering events such as death of the initial unitholder, or the transfer of any

units to any person or entity other than the persons or entities entitled to the beneﬁts of the original holder. The 7.5% Preferred Units’ redemption

price is the liquidation value plus accrued and unpaid distributions, payable either in cash or shares of common stock. 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 Preferred unitholder may require the Operating Partnership to redeem the 7.5% Preferred Units payable at the option of the Operating

Partnership in either cash or shares of common stock.

7.00% Cumulative Convertible Preferred Units. The 7.00% Cumulative Convertible Preferred Units (the “7.00% Preferred Units”) accrue

cumulative dividends at a rate of $1.96 annually, which is payable quarterly in arrears. The 7.00% Preferred Units are convertible at the holders’

option on or after August 27, 2004, into either a like number of shares of 7.00% Cumulative Convertible Preferred Stock of Simon Property with

terms substantially identical to the 7.00% Preferred Units or Units of the Operating Partnership at a ratio of 0.75676 to one provided that the

closing stock price of Simon Property’s common stock exceeds $37.00 for any three consecutive trading days prior to the conversion date. The

Operating Partnership may redeem the 7.00% Preferred Units at their liquidation value plus accrued and unpaid distributions on or after August

27, 2009, payable in Units. In the event of the death of a holder of the 7.00% Preferred Units, or the occurrence of certain tax triggering events

applicable to a holder, the Operating Partnership may be required to redeem the 7.00% Preferred Units at liquidation value payable at the option

of the Operating Partnership in either cash (the payment of which may be made in four equal annual installments) or shares of common stock.

In 2006, 42 unitholders converted 1,149,077 of the preferred units into common units.

8.00% Cumulative Redeemable Preferred Units. The 8.00% Cumulative Redeemable Preferred Units (the “8.00% Preferred Units”) accrue

cumulative dividends at a rate of $2.40 annually, which is payable quarterly in arrears. The 8.00% Preferred Units are each paired with one

7.00% Preferred Unit or with the Units into which the 7.00% Preferred Units may be converted. The Operating Partnership may redeem the

8.00% Preferred Units at their liquidation value plus accrued and unpaid distributions on or after August 27, 2009, payable in either new

preferred units of the Operating Partnership having the same terms as the 8.00% Preferred Units, except that the distribution coupon rate would

be reset to a then determined market rate, or in Units. The 8.00% Preferred Units are convertible at the holders’ option on or after August 27,

2004, into 8.00% Cumulative Redeemable Preferred Stock of Simon Property with terms substantially identical to the 8.00% Preferred Units.

In the event of the death of a holder of the 8.00% Preferred Units, or the occurrence of certain tax triggering events applicable to a holder, the

Operating Partnership may be required to redeem the 8.00% Preferred Units owned by such holder at their liquidation value payable at the option

of the Operating Partnership in either cash (the payment of which may be made in four equal annual installments) or shares of common stock.

Notes Receivable from Former CPI Stockholders. Notes receivable of $17,261 from former Corporate Property Investors, Inc. (“CPI”)

stockholders, which result from securities issued under CPI’s executive compensation program and were assumed in our merger with CPI, are

reﬂected as a deduction from capital in excess of par value in the consolidated statements of stockholders’ equity in the accompanying ﬁnancial

statements. The notes do not bear interest and become due at the time the underlying shares are sold.

69 Annual Report 2006

The Simon Property Group 1998 Stock Incentive Plan. We have a stock incentive plan (the “1998 Plan”), which provides for the grant of equity-

based awards during a ten-year period, in the form of options to purchase shares (“Options”), stock appreciation rights (“SARs”), restricted stock

grants and performance unit awards (collectively, “Awards”). Options may be granted which are qualiﬁed as “incentive stock options” within the

meaning of Section 422 of the Code and Options which are not so qualiﬁed. An aggregate of 11,300,000 shares of common stock have been

reserved for issuance under the 1998 Plan. Additionally, the partnership agreement requires us to sell shares to the Operating Partnership, at

fair value, sufﬁcient to satisfy the exercising of stock options, and for us to purchase Units for cash in an amount equal to the fair market value

of such shares.

Administration. The 1998 Plan is administered by Simon Property’s Compensation Committee (the “Committee”). The Committee, at its sole

discretion, determines which eligible individuals may participate and the type, extent and terms of the Awards to be granted to them. In addition,

the Committee interprets the 1998 Plan and makes all other determinations deemed advisable for the administration of the 1998 Plan. Options

granted to employees (“Employee Options”) become exercisable over the period determined by the 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. We have not granted Employee Options, except for a series of reload options as part of a prior business

combination, since 2001.

Automatic Awards For Eligible Directors. Prior to May 7, 2003, the 1998 Plan provided for automatic grants of Options to directors (“Director

Options”) of Simon Property who are not also our employees or employees of our afﬁliates (“Eligible Directors”). Each Eligible Director was

automatically granted Director Options to purchase 5,000 shares upon the director’s initial election to the Board, and upon each re-election, an

additional 3,000 Director Options multiplied by the number of calendar years that had elapsed since such person’s last election to the Board.

The exercise price of Director Options is equal to the fair market value of the shares on the date of grant. Director Options vest and become

exercisable on the ﬁrst anniversary of the date of grant or in the event of a “Change in Control” as deﬁned in the 1998 Plan. The last year during

which Eligible Directors received awards of Director Options was 2002.

Pursuant to an amendment to the 1998 Plan approved by the stockholders effective May 7, 2003, Eligible Directors received annual grants

of restricted stock in lieu of Director Options. Each Eligible Director received on the ﬁrst day of the ﬁrst calendar month following his or her

initial election as a director, a grant of 1,000 shares of restricted stock annually. Thereafter, as of the date of each annual meeting of Simon

Property’s stockholders, Eligible Directors who were re-elected as directors received a grant of 1,000 shares of restricted stock. In addition,

Eligible Directors who served as chairpersons of the standing committees of the Board received an additional annual grant in the amount of 500

shares of restricted stock (in the case of the Audit Committee) or 300 shares of restricted stock (in the case of all other standing committees).

Each award of restricted stock issued prior to May 11, 2006 vested in four equal annual installments on January 1 of each year, beginning

in the year following the year in which the award occurred. If a director otherwise ceased to serve as a director before vesting, the unvested

portion of the award terminated. Any unvested portion of a restricted stock award vested if the director died or became disabled while in ofﬁce

or has served a minimum of ﬁve annual terms as a director, but only if the Compensation Committee or full Board determines that such vesting

is appropriate. The restricted stock also vested in the event of a “Change in Control.”

Pursuant to an amendment to the 1998 plan approved by the stockholders effective May 11, 2006, each Eligible Director will receive on

the ﬁrst day of the ﬁrst calendar month following his or her initial election as a director, an award of restricted stock with a value of $82,500

(pro-rated for partial years of service). Thereafter, as of the date of each annual meeting of the Company’s stockholders, Eligible Directors who

are re-elected as directors will receive an award of restricted stock having a value of $82,500. In addition, Eligible Directors who serve as

chairpersons of the standing committees of the Board of Directors (excluding the Executive Committee) will receive an additional annual award

of restricted stock having a value of $10,000 (in the case of the Audit Committee) or $7,500 (in the case of all other standing committees). The

Lead Director will also receive an annual restricted stock award having a value of $12,500. The restricted stock will vest in full after one year.

Once vested, the delivery of any shares with respect to a restricted stock award (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 Eligible

Directors may vote and are entitled to receive dividends on the shares underlying the restricted stock awards; however, any dividends on the

shares underlying restricted stock awards must be reinvested in shares and held in the Director Deferred Compensation Plan until the shares

underlying a restricted stock award are delivered to the former director.

In addition to automatic awards, Eligible Directors may be granted discretionary awards under the 1998 Plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

70 Simon Property Group, Inc.

Restricted Stock. The 1998 Plan also provides for shares of restricted common stock of Simon Property to be granted to certain employees at

no cost to those employees, subject to achievement of certain ﬁnancial and return-based performance measures established by the Compensation

Committee related to the most recent year’s performance (the “Restricted Stock Program”). Restricted Stock Program grants vest annually over a

four-year period (25% each year) beginning on January 1 of the year following the year in which the restricted stock award is granted. The cost of

restricted stock grants, which is based upon the stock’s fair market value on the grant date, is charged to earnings ratably over the vesting period.

Through December 31, 2006 a total of 4,238,812 shares of restricted stock, net of forfeitures, have been awarded under the plan. Information

regarding restricted stock awards are summarized in the following table for each of the years presented:

For the Year Ended December 31,

2006 2005 2004

Restricted stock shares awarded during the year, net of forfeitures 415,098 400,541 365,602

Weighted average grant price of shares granted during the year

$ 84.33 $ 61.01 $ 56.86

Amortization expense for all awards vesting during the year

$ 23,369 $ 14,320 $ 11,935

The weighted average life of our outstanding options as of December 31, 2006 is 3.6 years. Information relating to Director Options and

Employee Options from December 31, 2003 through December 31, 2006 is as follows:

Director Options Employee Options

Weighted Average Weighted Average

Exercise Price Exercise Price

Options Per Share Options Per Share

Shares under option at December 31, 2003 92,360 $ 27.48 1,852,033 $ 26.16

Granted and other

(1)

— N/A 263,884 49.79

Exercised (28,070 ) 29.13 (364,873 ) 27.05

Forfeited — N/A (55,018 ) 24.15

Shares under option at December 31, 2004 64,290 $ 26.75 1,696,026 $ 29.71

Granted — N/A 18,000 61.48

Exercised (22,860 ) 25.25 (183,604 ) 27.20

Forfeited (3,930 ) 25.51 (2,500 ) 25.54

Shares under option at December 31, 2005 37,500 $ 27.80 1,527,922 $ 30.39

Granted — N/A 70,000 90.87

Exercised (18,000 ) 27.68 (396,659 ) 36.02

Forfeited (3,000 ) 24.25 (3,000 ) 24.47

Shares under option at December 31, 2006

16,500 $ 28.57 1,198,263 $ 32.07

(1) Principally Chelsea options issued to certain employees as part of acquisition consideration.

Outstanding Exercisable

Weighted

Average Weighted Weighted

Director Options: Remaining Average Average

Contractual Exercise Price Exercise Price

Range of Exercise Prices Options Life in Years Per Share Options Per Share

$22.26 – $33.68 16,500 3.07 $28.57 16,500 $28.57

Total 16,500 $28.57 16,500 $28.57

71 Annual Report 2006

Outstanding Exercisable

Weighted

Average Weighted Weighted

Employee Options: Remaining Average Average

Contractual Exercise Price Exercise Price

Range of Exercise Prices Options Life in Years Per Share Options Per Share

$22.36 – $30.38 989,539 3.35 $25.24 989,539 $25.24

$30.39 – $46.97 59,749 7.10 $46.97 59,749 $46.97

$46.98 – $63.51 78,975 5.24 $54.27 78,975 $54.27

$63.52 – $90.87 70,000 1.72 $90.87 — N/A

Total 1,198,263 $32.07 1,128,263 $28.42

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

employees.

Exchange Rights

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 selected by the Board. 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 Property’s common stock at that time. At December 31, 2006, we had reserved 79,592,963

shares of common stock for possible issuance upon the exchange of Units, options, Class B and C common stock and certain convertible

preferred stock.

11. COMMITMENTS AND CONTINGENCIES

Litigation

On November 15, 2004, the Attorneys General of Massachusetts, New Hampshire and Connecticut ﬁled complaints in their respective

state Superior Courts against us and our afﬁliate, SPGGC, Inc., alleging that the sale of co-branded, bank-issued gift cards sold in certain

of its Portfolio Properties violated gift certiﬁcate statutes and consumer protection laws in those states. Each of these suits seeks injunctive

relief, unspeciﬁed civil penalties and disgorgement of any fees determined to be improperly charged to consumers. We ﬁled our own actions for

declaratory judgment actions in Federal district courts in each of the three states.

With respect to the New Hampshire litigation, on August 1, 2006, the Federal district court in New Hampshire granted our motion for

summary judgment and held that the gift card program that has been in existence since September 1, 2005 is a banking product and state law

regulation is preempted by Federal banking laws. However, the Attorney General’s appeal of this judgment in our favor in Federal district court

in New Hampshire is pending. In February 2007, we entered into a voluntary, no-fault settlement agreement regarding the elements of the New

Hampshire action which related to the program that existed before September 1, 2005. This settlement did not have a signiﬁcant impact on the

results of our operations.

In addition, we are a defendant in three other proceedings relating to the gift card program. Each of the three proceedings has been brought

as a purported class action and alleges violation of state consumer protection laws, state abandoned property and contract laws or state statutes

regarding gift certiﬁcates or gift cards and seeks a variety of remedies including unspeciﬁed damages and injunctive relief.

We believe that we have viable defenses under both state and federal laws to the above pending gift card actions. Although it is not possible

to provide any assurance of the ultimate outcome of any of these pending actions, management does not believe that an adverse outcome would

have a material adverse effect on our ﬁnancial position, results of operations or cash ﬂow.

As previously disclosed, we were a defendant in a suit brought against us by a partner in a partnership in which we previously held ownership

in, Mall of America Associates (MOAA). Effective November 2, 2006, all parties agreed to settle the lawsuit and all claims with no settlement

payment due by either party. Prior to that date we were a beneﬁcial interest holder in the operations of MOAA which entitled us the right to receive

cash ﬂow distributions and capital transaction proceeds, or approximately a 25% interest in the underlying mall operations. Concurrently with the

settlement of the litigation, the Simon family partner in MOAA sold its interest in MOAA and we received $102.2 million of capital transaction

proceeds related to this transaction, terminating our beneﬁcial interests, and resulting in a gain of $86.5 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

72 Simon Property Group, Inc.

We are involved in various other legal proceedings that arise in the ordinary course of our business. We believe that such routine litigation,

claims and administrative proceedings will not have a material adverse impact on our ﬁnancial position or our results of operations. We record a

liability when a loss is considered probable and the amount can be reasonably estimated.

Lease Commitments

As of December 31, 2006, a total of 32 of the consolidated Properties are subject to ground leases. The termination dates of these ground

leases range from 2007 to 2090. These ground leases generally require us to make payments of a ﬁxed annual rent, or a ﬁxed annual rent plus

a participating percentage over a base rate based upon the revenues or total sales of the property. Some of these leases also include escalation

clauses and renewal options. We incurred ground lease expense included in other expense and discontinued operations as follows:

For the year ended December 31,

2006 2005 2004

Ground lease expense $ 29,301 $25,584 $ 20,689

Future minimum lease payments due under such ground leases for years ending December 31, excluding applicable extension options, are

as follows:

2007 $ 16,790

2008 17,036

2009 16,963

2010 16,746

2011 16,721

Thereafter 705,710

$ 789,966

Insurance

We maintain commercial general liability, ﬁre, ﬂood, extended coverage and rental loss insurance on our Properties. Rosewood Indemnity,

Ltd, a wholly-owned subsidiary of our management company, has agreed to indemnify our general liability carrier for a speciﬁc layer of losses.

The 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 through Rosewood Indemnity, Ltd. also provides initial coverage for property insurance and certain windstorm risks at the

Properties located in Florida.

The events of September 11, 2001 affected our insurance programs. Although insurance rates remain high, since the President signed into

law the Terrorism Risk Insurance Act (TRIA) in November of 2002, the price of terrorism insurance has steadily decreased, while the available

capacity has been substantially increased. We have purchased terrorism insurance covering all Properties. The program provides limits up to $1

billion per occurrence for Certiﬁed (Foreign) acts of terrorism and $500 million per occurrence for Non-Certiﬁed (Domestic) acts of terrorism.

The coverage is written on an “all risk” policy form that eliminates the policy aggregates associated with our previous terrorism policies. In

December of 2005, the President signed into law the Terrorism Risk Insurance Extension Act (TRIEA) of 2005, thereby extending the federal

terrorism insurance backstop through 2007. TRIEA narrows terms and conditions afforded by TRIA for 2006 and 2007 by: 1) excluding lines of

coverage for commercial automobile, surety, burglary and theft, farm owners’ multi-peril and professional liability; 2) raising the certiﬁable event

trigger mechanism from $5 million to $50 million in 2006 and $100 million in 2007; and, 3) increasing the deductibles and co-pays assigned

to insurance companies.

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, 2006, we have loan guarantees and other guarantee obligations of $43.6 million and $19.0 million, respectively, to support

our total $3.5 billion share of joint venture mortgage and other indebtedness in the event the joint venture partnership defaults under the terms

of the underlying arrangement. Mortgages which are guaranteed by us are secured by the property of the joint venture and that property could be

sold in order to satisfy the outstanding obligation.

73 Annual Report 2006

Concentration of Credit Risk

We are subject to risks incidental to the ownership and operation of commercial real estate. These risks include, among others, the risks

normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness of tenants, competition for

tenants and customers, changes in tax laws, interest rate and foreign currency levels, the availability of ﬁnancing, and potential liability under

environmental and other laws. Our regional malls, Premium Outlet centers and community/lifestyle centers rely heavily upon anchor tenants like

most retail properties. Four retailers occupied 474 of the approximately 1,000 anchor stores in the Properties as of December 31, 2006. An

afﬁliate of one of these retailers is a limited partner in the Operating Partnership.

Limited Life Partnerships

FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”)

establishes standards for how an issuer classiﬁes and measures certain ﬁnancial instruments with characteristics of both liabilities and equity.

It requires that an issuer classify a ﬁnancial instrument that is within its scope as a liability. The effective date of a portion of the Statement

has been indeﬁnitely postponed by the FASB. We have certain transactions, arrangements, or ﬁnancial instruments that have been identiﬁed

that appear to meet the criteria for liability recognition in accordance with paragraphs 9 and 10 under SFAS 150 due to the ﬁnite life of certain

joint venture arrangements. However, SFAS 150 requires disclosure of the estimated settlement value of these non-controlling interests. As of

December 31, 2006 and 2005, the estimated settlement value of these non-controlling interests was approximately $175 million and $145

million, respectively.

12. RELATED PARTY TRANSACTIONS

Our management company provides management, insurance, and other services to Melvin Simon & Associates, Inc. (“MSA”), a related

party, and other non-owned properties. Amounts for services provided by our management company and its afﬁliates to our unconsolidated joint

ventures and other related parties were as follows:

For the year ended December 31,

2006 2005 2004

Amounts charged to unconsolidated joint ventures $ 62,879 $ 58,450 $ 59,500

Amounts charged to properties owned by related parties

9,494 9,465 9,694

13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an

amendment of Accounting Principles Board (“APB”) Opinion No. 29.” SFAS No. 153 requires exchanges of productive assets to be accounted for

at fair value, rather than at carryover basis, unless: (a) neither the asset received nor the asset surrendered has a fair value that is determinable

within reasonable limits; or (b) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges

occurring in ﬁscal periods beginning after June 15, 2005. The adoption of this Statement did not have a material impact on our ﬁnancial position

or results of operations.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based

Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95,

“Statement of Cash Flows.” This Statement requires that a public entity measure the cost of equity-based service awards based on the grant date

fair value of the award. All share-based payments to employees, including grants of employee stock options, are required to be recognized in the

income statement based on their fair value. SFAS No. 123(R) is effective as of the beginning of the ﬁrst annual reporting period after June 15,

2005. Other than the reclassiﬁcation of the unamortized portion of our restricted stock awards to capital in excess of par in the consolidated

balance sheets, the adoption of this Statement did not have a material impact on our ﬁnancial position or results of operations. We began

expensing the vested portion of stock option awards to the recipients in the consolidated statements of operations in 2002.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

74 Simon Property Group, Inc.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 is a replacement of APB

Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This Statement

requires voluntary changes in accounting to be accounted for retrospectively and all prior periods to be restated as if the newly adopted policy

had always been used, unless it is impracticable. APB Opinion No. 20 previously required most voluntary changes in accounting to be recognized

by including the cumulative effect of the change in accounting in net income in the period of change. This Statement also requires a change in

method of depreciation, amortization or depletion for a long-lived asset be accounted for as a change in estimate that is affected by a change

in accounting principle. SFAS No. 154 is effective for ﬁscal years beginning after December 15, 2005. The adoption of this Statement did not

have a material impact on our ﬁnancial position or results of operations.

In June 2005, the FASB ratiﬁed its consensus in EITF Issue 04-05, “Determining Whether a General Partner, or the General Partners as a

Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (Issue 04-05). The effective date for

Issue 04-05 is June 29, 2005 for all new or modiﬁed partnerships and January 1, 2006 for all other partnerships for the applicable provisions.

The adoption of the provisions of EITF 04-05 did not have a material impact on our ﬁnancial position or results of operations.

In June 2005, the FASB ratiﬁed its consensus in EITF 05-06, “Determining the Amortization Period of Leasehold Improvements” (Issue

05-06). The effective date for Issue 05-06 is June 29, 2005. The adoption of the provisions of EITF 05-06 did not have a material impact on

our ﬁnancial position or results of operations.

During 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of

FASB Statement No. 143, Asset Retirement Obligations” (“FIN 47”). FIN 47 provides clariﬁcation of the term “conditional asset retirement

obligation” as used in SFAS 143, deﬁned as a legal obligation to perform an asset retirement activity in which the timing or method of settlement

are conditional on a future event that may or may not be within our control. Under this standard, we must record a liability for a conditional asset

retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 became effective for our year ended December 31,

2005. The adoption of FIN 47 did not have a material adverse effect on our consolidated ﬁnancial statements. Certain of our real estate assets

contain asbestos. The asbestos is appropriately contained, in accordance with current environmental regulations, and we have no current plans

to remove the asbestos. If these properties were demolished, certain environmental regulations are in place which specify the manner in which

the asbestos must be handled and disposed. Because the obligation to remove the asbestos has an indeterminable settlement date, we are not

able to reasonably estimate the fair value of this asset retirement obligation.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement

No. 109” (“FIN 48”). FIN 48 clariﬁes the accounting for uncertainty in income taxes recognized in a company’s ﬁnancial statements and

prescribes a recognition threshold and measurement attribute for the ﬁnancial statement recognition and measurement of a tax position taken or

expected to be taken in a tax return. The Interpretation also provides guidance on description, classiﬁcation, interest and penalties, accounting

in interim periods, disclosure and transition. FIN 48 becomes effective on January 1, 2007. We do not expect FIN 48 will have a material impact

on our ﬁnancial position or results of operations.

In September 2006, the FASB issued FASB No. 157, “Fair Value Measurements”. SFAS 157 is deﬁnitional and disclosure oriented

and addresses how companies should approach measuring fair value when required by GAAP; it does not create or modify any current GAAP

requirements to apply fair value accounting. The Standard provides a single deﬁnition for fair value that is to be applied consistently for all

accounting applications, and also generally describes and prioritizes according to reliability the methods and inputs used in valuations. SFAS

157 prescribes various disclosures about ﬁnancial statement categories and amounts which are measured at fair value, if such disclosures are

not already speciﬁed elsewhere in GAAP. The new measurement and disclosure requirements of SFAS 157 are effective for us in the ﬁrst quarter

of 2008. We do not expect the adoption of SFAS 157 will have a signiﬁcant impact on our results of operations or ﬁnancial position.

75 Annual Report 2006

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly 2006 and 2005 data is summarized in the table below and, as disclosed in Note 3, the amounts have been reclassiﬁed from

previously disclosed amounts due to presentation of the classiﬁcation of the Limited Partners’ interest in the Operating Partnership and the

preferred distributions of the Operating Partnership.

First Second Third Fourth

Quarter Quarter Quarter Quarter

2006

Total revenue $ 787,649 $ 798,738 $ 818,736 $ 927,031

Operating income 299,204 310,049 321,324 389,652

Income from continuing operations 122,461 101,282 112,950 226,750

Net income available to common stockholders 104,017 82,868 94,592 204,668

Income from continuing operations per share — Basic $ 0.47 $ 0.37 $ 0.43 $ 0.93

Net income per share — Basic $ 0.47 $ 0.37 $ 0.43 $ 0.93

Income from continuing operations per share — Diluted $ 0.47 $ 0.37 $ 0.43 $ 0.92

Net income per share — Diluted $ 0.47 $ 0.37 $ 0.43 $ 0.92

Weighted average shares outstanding 220,580,464 220,990,425 221,198,011 221,317,474

Diluted weighted average shares outstanding 221,553,566 221,875,643 222,069,615 222,185,308

2005

Total revenue $ 741,969 $ 752,082 $ 783,012 $ 889,790

Operating income 269,595 288,824 298,837 348,167

Income from continuing operations 72,912 78,936 84,677 116,882

Net income available to common stockholders 57,067 154,811 74,358 115,659

Income from continuing operations per share — Basic $ 0.25 $ 0.27 $ 0.30 $ 0.45

Net income per share — Basic $ 0.26 $ 0.70 $ 0.34 $ 0.53

Income from continuing operations per share — Diluted $ 0.25 $ 0.27 $ 0.30 $ 0.44

Net income per share — Diluted $ 0.26 $ 0.70 $ 0.34 $ 0.52

Weighted average shares outstanding 220,386,301 220,227,523 220,558,724 219,861,205

Diluted weighted average shares outstanding 221,281,321 221,110,797 221,491,013 220,784,422

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

76 Simon Property Group, Inc.

15. SUBSEQUENT EVENT—ACQUISITION OF THE MILLS CORPORATION