Fitch Ratings has upgraded the following credit ratings for Simon
Property Group, Inc. (NYSE: SPG) and Simon Property Group, L.P.
(collectively, Simon):
Simon Property Group, Inc.
--Issuer Default Rating (IDR) to 'A' from 'A-';
--$75 million preferred stock to 'BBB+' from 'BBB'.
Simon Property Group, L.P.
--IDR to 'A' from 'A-';
--$6 billion unsecured revolving credit facilities to 'A' from 'A-';
--$14 billion senior unsecured notes to 'A' from 'A-'.
In addition, Fitch has assigned a rating of 'A' to Simon Property Group,
L.P.'s $300 million unsecured term loan due 2018, $600 million 2.2%
notes due 2019, and $600 million 3.75% notes due 2024. The Rating
Outlook is Stable.
KEY RATING DRIVERS
The upgrade to 'A' has two elements: first, improvements in the quality
of the company's retail real estate portfolio and second, improved
liquidity. Pro forma for the spinoff of the strip center business and
smaller enclosed malls to Washington Prime Group, Inc. (the spinoff) in
2Q'2014, fixed-charge coverage is appropriate for the 'A' rating level.
The company has robust pro forma liquidity coverage, driven in part by a
low expected adjusted funds from operations (AFFO) payout ratio. This
enables Simon to build unrestricted cash, enhancing the company's
ability to fund future investments and/or repay unsecured debt as needed.
Credit strengths include Simon's excellent access to capital and
management track record as a capital allocator (e.g. via operations,
development and capital recycling). Leverage is somewhat elevated for
the 'A' level but expected to decline over the next 12-to-24 months.
Spinoff Improves Asset Quality
In December 2013, Simon announced the spinoff of its strip center
business and its smaller enclosed malls (each of the malls generated
annual net operating income (NOI) of approximately $10 million or less).
The spinoff entity, Washington Prime Group, Inc. (WPG) will hold 54
strip centers and 44 mall properties, and the spinoff is expected to
occur in 2Q'2014. The transaction should improve SPG's asset quality as
evidenced by higher mall occupancy (96.5% pro forma compared with 96.1%
at year-end) and higher tenant sales per square foot ($616 pro forma
compared with $582 at year-end).
The company's mall portfolio pro forma for the spinoff will include 178
mall properties, 13 The Mills properties and 62 community/lifestyle
centers. Fitch considers the portfolio 'prime' as it includes productive
assets such as Forum Shops at Caesars in Las Vegas, NV, The Galleria in
Houston, TX, King of Prussia Mall in King of Prussia, PA, and Sawgrass
Mills in Sunrise, FL. Simon has consistently outperformed its U.S. mall
peers as measured by occupancy 60 basis points (bps) above peers and
same-store NOI 150 bps above peers from 2006 to 2013, evidencing 'prime'
asset quality.
Improving Fixed-Charge Coverage
The company's same-store NOI growth, driven by mid-single-digit
releasing spreads and occupancy gains, along with a reduced cost of debt
capital, improved fixed-charge coverage to 3.1x in 2013 (3.2x in
4Q'2013) from 2.9x in both 2012 and 2011. Releasing spreads averaged
14.9% in 2013 following 10.2% in 2012 and 9.5% in 2011.
Recently signed rents per square foot relative to 2014-2015 average
expiring rent per square foot indicate further upward momentum on
releasing spreads pro forma for the spinoff of WPG. Fitch projects that
fixed-charge coverage will remain in the low-to-mid-3x range over the
next 12-to-24 months, which is consistent with an 'A' rating. In a
stress case not anticipated by Fitch in which the company's same-store
NOI growth is consistent with 2009-2010 growth (its weakest reported
periods), fixed-charge coverage would remain in the low 3x range, which
would still be adequate for the 'A' rating. Fitch defines fixed-charge
coverage as recurring operating EBITDA including recurring cash
distributions from unconsolidated entities less recurring capital
expenditures and straight-line rent adjustments, divided by total
interest incurred and preferred stock dividends.
Opportunistic Growth
Fitch expects that the company will continue to seek out opportunities
abroad, augmenting an already diversified stream of cash flow from its
U.S. portfolio. The company recently expanded its international
investment base beyond its 28.9% equity stake in Klepierre SA and
ownership interests in international Premium Outlets, by acquiring
interests in five operating properties in the U.K., Austria, Italy and
the Netherlands through its joint venture with McArthurGlen. Simon
Property Group, L.P.'s Euro-denominated bond offering in October 2013
indicates the company's commitment to match-funding its European
investments and reducing currency risk. Simon has been equally as
opportunistic domestically. In January 2014, Simon acquired its joint
venture partners' remaining interest in Kravco Simon Investments, a
portfolio of 10 assets, including King of Prussia Mall.
Excellent Access to Capital
The company has multicurrency credit facilities totaling $6 billion,
aggregating the largest capacity in the U.S. REIT sector. In addition to
the abovementioned Euro-denominated bond offering, in January 2014 Simon
Property Group, L.P. issued $600 million of 2.20% five-year senior notes
and $600 million of 3.75% 10-year senior notes. During 2013, the company
also closed or locked rates on 30 new secured loans totaling
approximately $5.1 billion, of which SPG's share is $3 billion. The
weighted average interest rate on the new loans is 3.31% and the
weighted average term is 7.5 years.
Strong Liquidity
Liquidity coverage is solid at 1.8x for the period Jan. 1, 2014 to Dec.
31, 2015 pro forma. Fitch defines liquidity coverage as liquidity
sources divided by liquidity uses. Liquidity sources include
unrestricted cash, availability under revolving credit facilities, and
projected retained cash flows from operating activities pro forma for
the repayment of the Sawgrass Mills mortgage, January 2014 unsecured
bond offerings, and WPG spinoff. Liquidity uses include pro forma debt
maturities, projected recurring capital expenditures and development
expenditures.
If 90% of secured debt maturities through 2015 are refinanced, liquidity
coverage would improve to 2.6x. In addition, near-term debt maturities
are manageable as approximately 5.7% of pro forma debt matures in 2014
followed by 10.5% in 2015, although 2016 pro forma debt maturities are
somewhat heavy at 15.6%.
Liquidity is enhanced by Simon's low (AFFO payout ratio, which was 59.2%
in 2013. Fitch calculates that the AFFO payout ratio will increase to
62.6% in 2014 pro forma for the spin-off of WPG, which should still
provide strong internally-generated liquidity of over $1.3 billion per
year for future investments and/or debt repayment.
Strong Contingent Liquidity Supports IDR
The company also has strong contingent liquidity from its unencumbered
pool, which now includes Sawgrass Mills, one of Simon's stronger assets.
Unencumbered assets (pro forma Fitch-estimated unencumbered EBITDA
divided by a stressed 7% capitalization rate) covers net unsecured debt
by 2.7x, which is adequate for an 'A' rating. The company's unrestricted
cash balance totaled $1.7 billion at year-end 2013 and Fitch expects a
minimum cash balance of approximately $1 billion to fund the business
and/or repay corporate unsecured debt.
Active Development Pipeline
Simon's development pipeline primarily consists of redevelopment
projects across almost all segments including Premium Outlets. This
program should improve asset quality going forward. As of Dec. 31, 2013,
the pipeline had a pro rata net cost of approximately $1.3 billion and
pro rata cost to complete of $853 million, representing 2.0% of gross
assets, which is manageable especially considering it can be largely
funded via retained operating cash flow. Cost to complete is still below
year-end 2007 levels of 2.3%.
Leverage Expected to Decline
Pro forma leverage is 5.5x compared with 5.2x in 4Q'2013 (5.6x for full
year 2013). The company reduced leverage from 6.0x in 2012 due to EBITDA
growth along with a build-up of cash via retained cash flow. Fitch's
base case projects that leverage will approach 5x over the next 12
months and potentially a high 4x by 2016 due to EBITDA growth, either of
which would be appropriate for the 'A' rating given SPG's improved asset
quality. Under Fitch's stress case, leverage would remain around 5x,
which would be weaker but adequate for an 'A' rating.
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 titled '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.
Stable Outlook
The Stable Outlook reflects Fitch's projection of leverage approaching
5.0x and fixed-charge coverage sustaining above 3.0x over the near- to
medium-term. The Stable Outlook further takes into account that the
portfolio will remain 'prime' quality and that qualitative credit
strengths will include excellent access to capital and a strong
management team. The company has sufficient liquidity to fund its active
development pipeline.
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 3.5x
(pro forma fixed-charge coverage was 3.2x in 4Q'2013);
--Fitch's expectation of leverage sustaining below 4.5x (pro forma
leverage is 5.5x though expected to trend just below 5.0x over the next
12-to-24 months).
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 3.0x;
--Fitch's expectation of leverage sustaining above 5.5x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' Feb. 26,
2014;
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis' (Dec. 23, 2013);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19,
2013);
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823559
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