Fitch Ratings has assigned a short-term Issuer Default Rating (IDR) of
'F1' to Simon Property Group, L.P., the operating partnership of Simon
Property Group, Inc. (NYSE: SPG or the company). In addition, Fitch has
assigned short-term ratings of 'F1' to Simon Property Group, L.P. and
Simon CP 2's $500 million commercial paper (CP) note program. Simon
Property Group, L.P. and Simon CP 2 (together Simon Property Group) are
the issuers of the CP paper, which has a maximum term of 379 days for
the U.S. notes (USCP notes) and 183 days for the Euro notes (ECP notes).
Simon Property Group, L.P. guarantees the obligations of Simon CP 2.
On Oct. 7, 2014 SPG announced that under its global unsecured CP note
program, Simon Property Group may issue unsecured CP notes denominated
in U.S. dollars, Euros, and other currencies up to a maximum amount of
$500 million or the non-U.S. equivalent. The CP program has been
utilized by both issuers, and the CP notes rank pari passu with all of
the operating partnership's other senior unsecured indebtedness, all of
which is rated 'A' by Fitch.
The time horizon of investment-grade short-term ratings does not
explicitly relate to the 13 months immediately following a given date.
Instead, it relates to the continual liquidity profile of the rated
entity that would be expected to endure over the time horizon of the
long-term IDR.
Corporate CP issuers need sufficient liquidity reserves (including
liquid assets, committed bank facilities, or liquidity from a parent or
third party) to withstand two types of liquidity challenges: systemic
risk and credit, or event risk. Fitch's initial view on the short-term
IDR generally considers the issuer's long-term ratings based on the
mapping in the Rating Correspondence Table in Fitch's 'Short-Term
Ratings Criteria for Non-Financial Corporates,' dated Aug. 5, 2013. In
this table, a long-term IDR of 'A' corresponds with a short-term IDR of
'F1'.
The global unsecured CP note program is a credit positive in that it
establishes another source of unsecured debt capital -- albeit not a
committed long-term source -- for the company and may allow for
borrowing arbitrage opportunities. As of June 30, 2014, the company's $4
billion credit facility, which has an initial maturity of June 30, 2018,
bears an interest rate of LIBOR plus 0.8%. The company's $2 billion
supplemental credit facility, which has an initial maturity of June 30,
2016, bears an interest rate of LIBOR plus 0.95%. Conversely, recent
U.S. CP rates for comparably rated issuers are 0.21% for 3 months and
0.24% for nine months and Euro CP rates for comparably rated issuers
range from 0.22% (three months) to 0.52% (nine months).
KEY RATING DRIVERS
SPG's long-term IDR of 'A' 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 SPG'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, SPG 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-'; Stable
Outlook). SPG's portfolio as of June 30, 2014 included ownership or
interests in 228 properties, consisting of 181 U.S. malls and premium
outlets, 13 The Mills properties, and 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.
SPG 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'14) from 2.9x in both 2012 and
2011. Releasing spreads were 20% in 2Q'14 and 21.1% in 1Q'14 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.
SPG has been opportunistic domestically. In January 2014, the company
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
In addition to the newly established CP program, the company has
multicurrency credit facilities totaling $6 billion comprising 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 bps from LIBOR plus 95 bps. In addition to the
abovementioned Euro and U.S. 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 both bond offerings and tender offers completed
in September. 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 SPG's low AFFO payout ratio, which was 66.4% in
2Q'14 compared with 59.2% in 2013 and 57% in 2012. Fitch estimates that
the company 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 billion to fund the business.
Unencumbered assets-to-unsecured debt, net of readily available cash,
was 2.5x as of June 30, 2014.
Active Development Pipeline
SPG's development pipeline primarily consists of redevelopment projects
across almost 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 projected 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 (net debt as of June 30, 2014 divided by TTM recurring
operating EBITDA) was 5.1x compared with 5.6x for full-year 2013. The
company reduced leverage from 6x in 2012 due to EBITDA growth along with
a build-up of cash via retained flow. Fitch's base case projects that
leverage will remain around 5x over the next 12 months and could decline
below 5x 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 increase to between 5x and 5.5x,
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
5x and fixed-charge coverage sustaining above 3x 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, SPG announced that
Andrew Juster would 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 the
company's financial policies as a result of this announcement.
RATING SENSITIVITIES
The following factors may have a positive impact on SPG'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'14);
--Fitch's expectation of leverage sustaining below 4.5x (leverage was
5.1x at June 30, 2014).
The following factors may have a negative impact on SPG'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 3x;
--Fitch's expectation of leverage sustaining above 5.5x.
Fitch currently rates the company as follows:
Simon Property Group, Inc.
--Long-term IDR 'A';
--$75 million preferred stock 'BBB+'.
Simon Property Group, L.P.
--Long-term IDR 'A';
--Short-term IDR 'F1';
--$6 billion unsecured revolving credit facilities 'A';
--$240 million unsecured term loan 'A';
--$14 billion senior unsecured notes 'A';
--CP notes 'F1'.
Simon CP 2
--CP notes 'F1'.
The Rating Outlook is Stable.
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);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (August 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
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=903294
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