Fitch Ratings has assigned initial credit ratings to Washington Prime
Group, Inc. and Washington Prime Group, L.P. (collectively, Washington
Prime or the company) as follows:
Washington Prime Group, Inc.
--Issuer Default Rating (IDR) of 'BBB'.
Washington Prime Group, L.P.
--IDR at 'BBB';
--$900 million unsecured revolving credit facility of 'BBB';
--$500 million unsecured term loan of 'BBB'.
The Outlook is Stable.
TRANSACTION OVERVIEW
On Dec. 13, 2013, Simon Property Group, Inc. (NYSE: SPG, Fitch IDR of
'A' with a Stable Outlook) announced a plan to spin off all of its
strip-center business and smaller enclosed malls into a separate
publicly traded REIT named Washington Prime Group, Inc. SPG's Board of
Directors approved the spin-off on May 6, 2014 and the distribution is
expected to occur on May 28, 2014 by way of a pro rata special dividend
to SPG stockholders. Following the distribution, Washington Prime is
expected to trade on the New York Stock Exchange under the symbol 'WPG'.
Washington Prime will initially own or have an interest in 55 strip
centers and 44 malls.
KEY RATING DRIVERS
The 'BBB' IDR takes into account the company's strong expected credit
metrics for the rating post-spin-off over the next 12-to-24 months,
including leverage and fixed-charge coverage, as the company migrates
towards a strategy of funding its smaller malls and strip centers with a
mix of long-term unsecured debt, secured debt and equity. As an
independent, publicly traded REIT with a dedicated management team,
Washington Prime should initially benefit from the franchise affiliation
with SPG, which will provide the company with property management,
leasing and development services, but ultimately become self-managed.
Credit strengths also include a high degree of portfolio granularity as
evidenced by limited asset and tenant concentration, as well as good
liquidity and a long-dated debt maturity profile.
The rating is balanced by the company's ownership of smaller malls
(based on property-level net operating income [NOI]) that produced
weaker through-the-cycle same-store NOI (SSNOI) growth and occupancy
performance when compared with those of select mall and strip center
REIT peers. Malls are expected to generate 70% of Washington Prime's
initial NOI with the remainder to be derived from strip centers. The
majority of Washington Prime's properties are located outside of major
market infill locations. Fitch has a cautious outlook on the
competitiveness of such assets long-term. As such, a sustained
deterioration in operating fundamentals or asset quality (e.g. sustained
negative SSNOI results or negative leasing spreads) could result in
negative momentum on the ratings and/or Outlook.
Washington Prime's same-store NOI growth was positive in 2012 and 2013
and Fitch expects same-store NOI will continue to grow over the next 12
to 24 months. Further, the company's focus on organic growth along with
development and redevelopment opportunities should improve asset quality
and cash flow going forward.
Low Projected Leverage
Fitch projects that leverage will remain around 5.0x over the next
12-to-24 months, driven by low-single-digit same-store NOI growth from
contractual rent increases (mainly 3% annual increases on base minimum
rent), positive re-leasing spreads and incremental EBITDA from
redevelopment, offset by moderately rising net debt. Leverage sustaining
between 5.0x and 6.0x is appropriate for a 'BBB' rating. Fitch defines
leverage as net debt to recurring operating EBITDA.
Initially, the company's capital structure consists of equity capital
along with mortgage debt assumed from SPG, a $500 million unsecured term
loan, and borrowings under the $900 million unsecured revolving credit
facility. Fitch anticipates that Washington Prime will complete an
inaugural unsecured bond offering within the next year and would view
the establishment of broader capital access favorably.
In a stress case not anticipated by Fitch in which the company generates
SSNOI results comparable to the 2009-2010 period, leverage would
approach the high 5x range, which would remain adequate for the 'BBB'
rating. The company has a stated leverage range of between 5x and 6x and
expects to issue follow-on common equity to fund acquisitions and
development and/or maintain leverage in this range.
Strong Projected Fixed-Charge Coverage
Fixed-charge coverage is currently 3.8x and Fitch projects that this
ratio will approach 3.0x over the next 12-to-24 months, which is strong
for the 'BBB' rating. Washington Prime generated portfolio EBITDA growth
in 2013, with occupancy up 90 basis points year-over-year to 92.8%,
SSNOI growth of 2.8%, leasing spreads up $0.50 per square foot on new
and renewal leases, and overall portfolio average rent PSF rising to
$18.71 from $18.65. Fitch anticipates that organic and
development-related growth will be more than offset by increased
interest expense associated with additional debt incurrence.
In the Fitch stress case noted above, fixed-charge coverage would
approach 2.5x, which would be adequate for a 'BBB' rating. Fitch defines
fixed-charge coverage as recurring operating EBITDA less recurring
capital expenditures and straight-line rent adjustments, divided by
total interest incurred.
Agreements with SPG
Washington Prime has entered into several agreements with SPG to
facilitate its transition towards becoming a self-managed entity. Under
property management agreements, Washington Prime will pay annual
property management fees to SPG equal to 2.5% of base minimum and
percentage rents and will also pay leasing and development fees to
effectively reimburse SPG. Washington Prime's management team has a
renewed focus on improving the performance of the company's assets
already managed by SPG, a recognized franchise and industry leader in
terms of mall performance. Other agreements have been put into place to
facilitate the spin-off, including a transition services agreement. It
is unclear to what extent SPG will influence the performance of the
Washington Prime portfolio upon expiration of these agreements.
Granular Portfolio
The portfolio is comprised of 99 properties (including one strip-center
property held for development) dispersed across 23 states. Top states in
2013 by gross leasable area were Florida at 19%, Texas at 14%, Illinois
at 10%, Ohio at 8% and Indiana at 6%. Washington Prime's top tenants as
of Dec. 31, 2013 were L Brands, Inc. (IDR of 'BB+' with a Stable
Outlook) at 2.6% of minimum rent, Foot Locker, Inc. at 2.5%, Ascena
Retail Group, Inc. at 1.8%, Sterling Jewelers, Inc. at 1.8% and Zale
Corporation at 1.5%, minimizing tenant concentration.
Exposure to Sears Holdings Corporation (IDR of 'CCC' with a Negative
Outlook) and J.C. Penney Co., Inc. (IDR of 'CCC') is marginal at 0.7%
and 1.3% of minimum rent, respectively. However, the effects of a
closure may be greater than the minimum rent paid by the tenant due to
decreased foot traffic at the mall generally. Fitch continues to have a
cautious view on malls with exposure to J.C. Penney and Sears in
secondary markets; however, only two recently announced J.C. Penney
closures affected the Washington Prime portfolio.
Solid Liquidity
The company has a solid liquidity coverage ratio of 2.8x for the period
Jan. 1, 2014 to Dec. 31, 2015. Fitch defines liquidity coverage as
liquidity sources divided by liquidity uses. Liquidity sources include
unrestricted cash, availability under unsecured revolving credit
facilities and projected retained cash flows from operating activities.
Liquidity uses include debt maturities, projected recurring capital
expenditures and development expenditures. Liquidity coverage would
improve to 3.8x if the company refinances 90% of secured debt maturities
through 2015.
The company intends to access both the secured and unsecured debt
markets regularly, and debt yields on upcoming secured maturities are in
the low-to-mid-teens, reflecting strong refinancing capacity. Near- to
medium-term debt maturities are minimal as approximately 5.7% of debt
matures in 2015 followed by 14.1% in 2016 and 5.0% in 2017.
Liquidity is enhanced by Washington Prime's low expected adjusted funds
from operations (AFFO) payout ratio. Fitch expects the company's AFFO
payout ratio will trend in the low- to mid-60% range, which should allow
for internally generated liquidity of over $100 million annually.
The company also has strong contingent liquidity from its unencumbered
pool and will derive more than half of its EBITDA from the unencumbered
pool. The unencumbered pool includes numerous assets including those
that the company considers 'redevelopment targets' such as Virginia
Center Commons in Richmond, VA, 'only game in town' assets such as
Southern Park Mall in Youngstown, OH, and major market in-fill malls
such as Orange Park Mall in Jacksonville, FL. Unencumbered assets
(unencumbered EBITDA divided by a stressed 8.5% capitalization rate)
cover net unsecured debt by 4.8x at spin and Fitch projects that this
ratio will trend between 3.0x and 4.0x, which is appropriate for the
'BBB' rating.
Initial Lender Commitments Support Capital Access / Liquidity
The company has established two facilities with Bank of America and J.P.
Morgan as joint lead arrangers including a $900 million unsecured
revolver and $500 million unsecured term loan. Lender commitments have
been robust across 22 institutions totaling $2.5 billion of commitments.
The company already has accessed the secured debt market and an
inaugural unsecured bond offering over the near- to medium-term will
further expand access to capital.
Weaker Relative Asset Quality
Washington Prime's SSNOI growth averaged negative 0.2% for 2010-2013,
270 basis points below all mall REIT peers (which reflects WPG's
portfolio relative to all mall classes) and 90 basis points below select
mall REITs with more similar portfolios. The company's average occupancy
during the cycle was 91.6%, 160 basis points below select mall REITs.
Notably however, in 2013, Washington Prime's 2.8% SSNOI growth exceeded
the 0.9% growth achieved by the company's closest peer, CBL Associates,
Inc. (IDR of 'BBB-' with a Stable Outlook). Overall, Fitch believes
there are risks associated with the longer-term viability of certain
smaller mall assets.
Development Opportunities Should Improve Cash Flow
The company's development pipeline includes $90.9 million of development
projects and $162.8 million of re-development projects, totaling $253.7
million. Net of construction-in-progress as of Dec. 31, 2013,
cost-to-complete development represents 4.5% of undepreciated assets.
Fitch views the pipeline favorably from a credit standpoint as
Washington Prime has adequate liquidity to fund these developments and
all but one project has committed tenants. These projects should improve
operating cash flows assuming Washington Prime achieves its target
returns that range from 8% to 11%.
Stable Outlook
The Stable Outlook reflects Fitch's expectation of leverage sustaining
between 5.0x and 6.0x, fixed charge coverage sustaining between 2.5x and
3.5x, along with solid liquidity coverage, offset by relatively weaker
asset quality.
RATING SENSITIVITIES
The following factors may have a positive impact on Washington Prime's
ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 5.0x (leverage at
spin is expected to be 4.9x and Fitch expects leverage to sustain around
5.0x over the next 12-to-24 months);
--Fitch's expectation of fixed charge coverage sustaining above 3.5x
(this ratio is 3.8x at spin but Fitch expects this ratio to migrate
towards 3.0x over the next 12-to-24 months).
The following factors may have a negative impact on Washington Prime's
ratings and/or Outlook:
--Sustained deterioration in operating fundamentals or asset quality
(e.g. sustained negative SSNOI results or negative leasing spreads);
--Fitch's expectation of leverage sustaining above 6.0x;
--Fitch's expectation of fixed charge coverage sustaining below 2.5x;
--Fitch's expectation of unencumbered assets, using a stressed 8.5%
capitalization rate, coverage of net unsecured debt sustaining below
3.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Washington Prime Group, Inc.' (May 1, 2014);
--'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
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