Fitch Ratings has assigned a credit rating of 'A-' to the EUR750 million
aggregate principal amount 2.375% coupon senior unsecured notes due 2020
issued by Simon Property Group, L.P., the operating partnership of Simon
Property Group, Inc. (NYSE: SPG). The notes were priced at 99.675% of
par to yield 2.426% to maturity, or 123.5 basis points over the
benchmark rate.
Simon Property Group, L.P. expects to use the proceeds from the notes to
repay euro-denominated borrowings under its unsecured revolving credit
facility and for general corporate purposes.
Fitch currently rates Simon Property Group, Inc. and Simon Property
Group, L.P. (collectively, Simon) as follows:
Simon Property Group, Inc.
--Issuer Default Rating (IDR) 'A-';
--$39.8 million preferred stock 'BBB'.
Simon Property Group, L.P.
--IDR 'A-';
--$6.2 billion unsecured revolving credit facilities and term loan 'A-';
--$14 billion senior unsecured notes 'A-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The 'A-' IDR reflects the resilient cash flow of the company's large,
high-quality mall and premium outlet portfolio as well as other retail
real estate interests, which underpin a fixed-charge coverage ratio
appropriate for the 'A-' rating. Credit strengths also include the
company's strong management team and track record of accessing multiple
sources of capital. Leverage is expected remain consistent with the 'A-'
IDR for a large capitalization retail REIT.
The rating is balanced by Simon's growing development pipeline (largely
re-development projects), although this risk is mitigated by adequate
liquidity coverage. The rating takes into consideration the company's
continued appetite for large acquisitions that temporarily weaken
certain debt metrics.
RESILIENT CASH FLOW
Same-store net operating income growth remained positive throughout the
recent cycle and increased by 5.9% in the mall and premium outlet
segment in 2Q'13, driven by stable occupancy and positive re-leasing
spreads of 14.1% during the quarter. Fitch expects positive same-store
results will continue over the next 12-to-24 months as lease rollover
remains positive driven in part by limited new supply.
Looking forward, lease expirations are well staggered with small shop
lease expirations of 1.5%, 7.4% and 8.0% of revenues in 2013, 2014 and
2015, respectively. Anchor lease revenue expirations are immaterial
through 2015, totaling only 0.7% of gross annualized rental revenues.
DIFFUSE TENANT BASE
Simon is well positioned to withstand the constantly changing retailer
landscape given the diversification of its tenant roster. Simon's top
inline tenants as of June 30, 2013 were The Gap, Inc. (Fitch IDR of
'BBB-' with a Stable Outlook), which represented 3.2% of base minimum
rent, followed by L Brands, Inc. at 2.2% and Phillips-Van Heusen at
1.6%. Top anchor tenants have a more limited contribution to base
minimum rents and as of Dec. 31, 2012 included Macy's, Inc. (IDR of
'BBB' with a Stable Outlook) at 0.5%, J.C. Penney Co., Inc. (IDR of 'B-'
with a Negative Outlook) at 0.5%, and Sears Holdings Corporation (IDR of
'CCC' with a Negative Outlook) at 0.2%.
Many of Simon's tenants are unrated; however, retailer health as
measured by sales per square foot in Simon's mall and premium outlet
portfolio continued an upward trend to $577 in 2Q'13 from $554 in 2Q'12.
Continued growth in tenant sales supports Simon's ability to continue to
achieve positive same-store net operating income (NOI) growth.
SOLID FIXED-CHARGE COVERAGE
The aforementioned favorable operating fundamentals led to fixed-charge
coverage of 3.0x in 2Q'13 pro forma for the bond offering, compared with
2.9x in both 2012 and 2011. Positive comparable results, coupled with
the company's increased interest in The Mills Limited Partnership
assets, cash dividends from Simon's 28.9% ownership interest in
Klepierre, and lower cost of debt capital, drove the sustained increase
in coverage.
Under Fitch's base case in which same-store NOI growth remains in the
low single digits and the company realizes incremental cash flow from
re-development, coverage would be in the low-3x range, which would be
strong for the 'A-' IDR. In a stress case not anticipated by Fitch in
which same-store NOI declines and incremental cash flow from
re-development is muted, fixed-charge coverage would remain in the high
2x range, which would still be appropriate for the 'A-' IDR.
Fitch defines fixed-charge coverage as recurring operating EBITDA
including Fitch's estimate of recurring cash distributions from
unconsolidated investments less recurring capital expenditures less
straight-line adjustments, divided by total interest incurred and
preferred stock dividends.
ACCESS TO MULTIPLE SOURCES OF CAPITAL
Simon has a long track record of accessing multiple sources of capital,
including in the depths of the financial crisis. Recent notable
transactions other than the EUR750 million bond offering include two
U.S.-dollar-denominated bond offerings totaling $1.3 billion in December
2012 and a supplemental $2 billion unsecured revolving credit facility
established in June 2012 (bringing total revolver capacity to $6
billion). Simon is also an active secured borrower in the insurance
company, bank, and CMBS markets. The euro-denominated bond offering
match-funds Simon's euro-denominated investments, limiting currency
exchange rate risk.
LEVERAGE MODERATING
Leverage was 5.7x in 2Q'13, compared with 6.0x in 2012 and 5.6x in 2011.
Debt incurrence associated with various acquisitions (including
wholly-owned assets and joint ventures) and development projects drove
the increase in leverage in 2012. Leverage has recently declined with
debt repayment via retained cash flow.
Under Fitch's base case, leverage is forecasted to be in the 5.5x to
6.0x range over the next several years, which would be appropriate for
the 'A-' IDR for a large retail REIT. Under a stress case not
anticipated by Fitch, leverage is forecasted to sustain above 6.0x,
which would be commensurate with a 'BBB+' IDR. Fitch defines leverage as
net debt-to-recurring operating EBITDA including Fitch's estimate of
recurring cash distributions from unconsolidated investments.
LARGE PORTFOLIO/STRONG FRANCHISE
Simon is the largest publicly traded REIT in the U.S., with an equity
market capitalization of $57.3 billion as of June 30, 2013, and its
diversified retail portfolio reduces reliance on regional retail
drivers. For 2Q'13, the company's top five states by NOI contribution
were Florida at 14.9%, Texas at 11.5%, California at 11%, New York at
6.5% and Massachusetts at 6.2%, with no other state exceeding 5.4% of
total NOI. Simon also has investments outside the U.S. via interests in
or joint ventures with local owners (e.g. Calloway Real Estate
Investment Trust in Canada, Shinsegae International Co. in Korea) that
further diversify its geographical risk.
GROWING DEVELOPMENT PIPLEINE
Simon's U.S. and international development pipeline included $1.3
billion in pro rata net cost to complete as of June 30, 2013, and the
company will likely incur similar annual funding requirements over the
next several years. Projects vary widely and include new outlet
construction, expansions, and re-configurations. Unfunded development
costs to complete for U.S. projects represented 3.2% of undepreciated
cost basis assets as of June 30, 2013, which is still below the
pre-crisis level of 4.2% as of Dec. 31, 2007.
Liquidity coverage is adequate at 1.1x for July 1, 2013 to Dec. 31,
2015, despite growing development. Fitch defines liquidity coverage as
liquidity sources divided by liquidity uses. Sources include
unrestricted cash, availability under Simon's unsecured revolving credit
facilities pro forma for the bond offering, and projected retained cash
flows from operating activities after dividends. Uses include pro rata
debt maturities and projected recurring capital expenditures. If the
company refinances 90% of upcoming secured debt maturities, liquidity
coverage would improve to 1.8x.
Fitch calculates that the company's common stock dividends and
distributions represented 76.7% of funds from operations adjusted for
capital expenditures and straight-line rents during the first half of
2013, reflective of substantial internally-generated liquidity.
SIGNIFICANT FINANCIAL FLEXIBILITY
Unencumbered assets (2Q'13 unencumbered NOI divided by a stressed 7%
capitalization rate) covered net unsecured debt by 2.4x as of June 30,
2013, which is low for the 'A-' IDR. However, unencumbered asset quality
is strong, as the unencumbered assets produced sales of approximately
$732 per square foot compared with $568 for the portfolio overall in
2012. In addition, the covenants in the company's debt agreements do not
restrict financial flexibility.
STABLE OUTLOOK
The Stable Outlook is predicated on coverage being strong at or just
above 3x, offset by Fitch's expectation of leverage sustaining between
5.5x and 6.0x, along with adequate liquidity coverage. Simon has a long
track record of acquisitions, including Prime Outlets in 2010 for $2.3
billion, The Mills Corporation in 2007 for $4 billion, and Chelsea
Property Group in 2004 for $5.1 billion. These transactions have
diversified Simon across the retail spectrum, given SPG exposure to the
value segment within retail, and have provided opportunities to leverage
tenant relationships and back office capabilities. However, in some
cases, such as the Klepierre investment in 2012, certain credit metrics
have temporarily weakened.
PREFERRED STOCK NOTCHING
The two-notch differential between Simon's IDR and preferred stock
rating is consistent with Fitch's criteria for corporate entities with
an IDR of 'A-'. Based on Fitch Research on 'Treatment and Notching of
Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available
on Fitch's web site at www.fitchratings.com,
these preferred securities are deeply subordinated and have loss
absorption elements that would likely result in poor recoveries in the
event of a corporate default.
RATING SENSITIVITIES
The following factors may have a positive impact on Simon's ratings
and/or Outlook:
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x
(coverage was 3.0x in 2Q'13 pro forma);
--Fitch's expectation of leverage sustaining below 5.0x (leverage was
5.7x in 2Q2013).
The following factors may have a negative impact on Simon's ratings
and/or Outlook:
--A highly leveraged transaction that materially weakens the company's
credit profile;
--Fitch's expectation of fixed-charge coverage sustaining below 2.3x;
--Fitch's expectation of leverage sustaining above 6.0x beyond 2014;
--Liquidity coverage sustaining below 1.0x (coverage is forecasted to be
1.1x for July 1, 2013 to Dec. 31, 2015 pro forma).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis' (Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12,
2012).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=803364
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