Fitch Ratings has assigned 'A' credit ratings to the $900 million
aggregate principal amount 3.375% coupon senior unsecured notes due 2024
and $400 million aggregate principal amount 4.25% coupon senior
unsecured notes due 2044 issued by Simon Property Group, L.P., the
operating partnership of Simon Property Group, Inc. (NYSE: SPG,
collectively, Simon).
The 2024 notes were priced at 99.804% of par to yield 3.398% to
maturity, or 100 basis points over the benchmark treasury rate and the
2044 notes were priced at 99.409% of par to yield 4.285% to maturity, or
115 basis points over the benchmark treasury rate.
Simon intends to use the net proceeds of the offerings primarily to fund
the redemption of a series of outstanding notes of a subsidiary and the
purchase of any and all of five series of outstanding notes that are
validly tendered upon the terms and subject to the conditions in an
offer to purchase dated September 3, 2014, and for general corporate
purposes.
Fitch currently rates Simon as follows:
Simon Property Group, Inc.
--Issuer Default Rating (IDR) 'A';
--$75 million preferred stock to 'BBB+'.
Simon Property Group, L.P.
--IDR 'A';
--$6 billion unsecured revolving credit facilities 'A';
--$240 million unsecured term loan 'A';
--$14 billion senior unsecured notes 'A'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The 'A' rating takes into account the strong quality of the company's
retail real estate portfolio, fixed-charge coverage appropriate for the
'A' rating level, and robust pro forma liquidity coverage, driven in
part by a low expected adjusted funds from operations (AFFO) payout
ratio. Credit strengths also 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.
Strong Asset Quality
On May 28, 2014, Simon completed a 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) to
Washington Prime Group, Inc. (NYSE: WPG; Fitch IDR of 'BBB' with a
Stable Outlook). Simon's portfolio as of June 30, 2014 included
ownership or interests in 228 properties, comprised on 181 U.S. malls
and premium outlets, 13 The Mills properties, 20 international premium
outlets and designer outlets, among other investments. 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 3.2x for the trailing 12
months ended June 30, 2014 (3.1x in 2Q'2014) from 2.9x in both 2012 and
2011. Releasing spreads were 20% in 2Q'2014 and 21.1% in 1Q'2014 after
averaging 14.9% in 2013 and 10.2% in 2012. Recently signed rents per
square foot relative to average expiring rent per square foot over the
next several years indicate further upward momentum on releasing spreads.
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. Over the past year, Simon expanded its international
investment base beyond its equity stake in Klepierre (28.9% as of June
30, 2014 and 19.3% pro forma for the merger of Klepierre and Corio
announced on July 29, 2014) 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 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
comprised of a $4 billion facility and $2 billion supplementary
facility, aggregating the largest capacity in the U.S. REIT sector. In
April 2014, the company amended and extended the $4 billion facility and
reduced the rate to LIBOR plus 80 basis points from LIBOR plus 95 basis
points. In addition to the abovementioned Euro and Dollar denominated
bond offerings, over the past year 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 company also retained $1 billion of
cash proceeds from the debt placed on the WPG assets prior to the
spinoff.
Adequate Liquidity
Liquidity coverage is adequate at 1.2x for the period July 1, 2014 to
Dec. 31, 2016 pro forma for the bond offerings and tender offers. 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 WPG spinoff. Liquidity uses
include pro rata debt maturities, projected recurring capital
expenditures and development expenditures. If 80% of secured debt
maturities through 2016 are refinanced, liquidity coverage would improve
to 1.7x.
Liquidity is enhanced by Simon's low adjusted funds from operations
(AFFO) payout ratio, which was 66.4% in 2Q'2014 compared with 59.2% in
2013 and 57% in 2012. Fitch estimates that Simon generates approximately
$1.2 billion in internally-generated liquidity per year, which can be
deployed for future investments, development and/or debt repayment.
Strong Contingent Liquidity Supports IDR
The company also has strong contingent liquidity from its unencumbered
pool. Unencumbered assets (Fitch-estimated unencumbered EBITDA divided
by a stressed 7% capitalization rate) covers unsecured debt by 2.4x,
which is adequate for an 'A' rating. The company's unrestricted cash
balance totaled $1.7 billion at June 30, 2014 and Fitch expects a
minimum cash balance of approximately $1 billion to fund the business.
Unencumbered assets to unsecured debt, net of readily available cash, is
2.5x as of June 30, 2014.
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 June 30, 2014,
the pipeline had a pro rata net cost of approximately $1.6 billion and
pro rata cost to complete of $1.2 million, representing 3.1% of gross
assets, which is manageable especially considering it can be largely
funded via retained operating cash flow.
Leverage Expected to Decline
Leverage as of June 30, 2014 was 5.6x compared with 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 SPG's IDR and its preferred stock
rating is consistent with Fitch's 'Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis' Criteria Report dated
Dec. 23, 2013, as SPG's preferred securities have cumulative coupon
deferral options exercisable by SPG and thus have readily triggered loss
absorption provisions in a going concern.
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, that the company will have
sufficient liquidity to fund its active development pipeline and that
qualitative credit strengths will include excellent access to capital
and a strong management team. On June 19, 2014, Simon announced that
Andrew Juster will become Chief Financial Officer in early 2015,
succeeding retiring CFO Stephen Sterrett. Mr. Juster has served as
Simon's Treasurer since 2000. Fitch does not expect a change in Simon's
financial policies as a result of this announcement.
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 3.1x in 2Q'2014);
--Fitch's expectation of leverage sustaining below 4.5x (leverage was
5.6x 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:
--'Corporate Rating Methodology' (May 28, 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).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957
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
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=866514
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