(The following statement was released by the rating agency)
NEW YORK, September 26 (Fitch) 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
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.
--$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
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
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 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
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
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
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.
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.
The following factors may have a positive impact on Simon's ratings and/or
--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
The following factors may have a negative impact on Simon's ratings and/or
--A highly leveraged transaction that materially weakens the company's credit
--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).
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
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
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Criteria for Rating U.S. Equity REITs and REOCs
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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