Fitch: Simon Property Group, Inc.'s 'A-' IDR Unaffected by Spin-Off; Outlook Stable
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NEW YORK, December 17 (Fitch) The planned spin - off of the strip center business
and smaller enclosed malls by Simon Property Group, Inc. (NYSE: SPG) will not
affect the company's 'A-' Issuer Default Rating and Stable Outlook, according to
Fitch Ratings. The transaction, which is expected to close in 2Q2014, is credit
neutral; benefits to SPG bondholders include a refined strategic focus on
higher-quality larger malls, The Mills and premium outlets. Higher quality cash
flow is offset by a modest increase in leverage.
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 strong 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 REIT.
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 track record of
large acquisitions that in certain cases have temporarily weakened certain debt
metrics.
Resilient Cash Flow
Same-store net operating income growth remained positive throughout the recent
cycle and increased by 5.2% in the mall and premium outlet segment for the
year-to-date period ended Sept. 30, 2013, driven by stable occupancy and
positive re-leasing spreads of 15.2% during the 3Q2013 after 14.1% growth in
2Q2013 and 13.4% growth in 1Q2013. 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 supply.
Looking forward, lease expirations are well staggered with inline store and
freestanding lease expirations of 0.8%, 7.1% and 8% of revenues in 4Q2013, 2014
and 2015, respectively. Anchor lease revenue expirations are immaterial through
2015, totaling only 0.5% 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
Sept. 30, 2013 were The Gap, Inc. (Fitch IDR '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 'BBB' with a Stable Outlook) at 0.5%, J.C. Penney Co., Inc. (IDR 'CCC') at
0.5%, and Sears Holdings Corporation (IDR 'CCC') at 0.2%.
Many of Simon's tenants are unrated, but retailer health as measured by sales
per square foot in Simon's mall and premium outlet portfolio is strong. Simon's
pre-spin-off total sales PSF were $579 compared with $616 post-spin-off.
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 for the trailing 12 months ended Sept. 30, 2013, 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 high 2x 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
include a EUR750 million bond offering in September 2013, 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.
Appropriate Leverage
Leverage was 5.6x in 3Q'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 flow.
Leverage is expected to increase modestly post-spin-off. Over the longer term,
leverage is forecasted to be in the 5.5x to 6.0x range, which remains
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 investments.
Large Portfolio/Strong Franchise
Simon is the largest publicly traded REIT in the U.S., with an equity market
capitalization of $53.8 billion as of Sept. 30, 2013, and its diversified retail
portfolio reduces reliance on regional retail drivers. For the nine months ended
Sept. 30, 2013, the company's top five states by NOI contribution were Florida
at 14.9%, Texas at 11.4%, California at 11%, New York at 6.5% and Massachusetts
at 6.4%, with no other state exceeding 5.3% 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 Pipeline
Simon's U.S. and international development pipeline included $1.3 billion in pro
rata net cost to complete as of Sept. 30, 2013, and the company will likely
incur similar annual funding requirements over the next several years. The
spin-off transaction will enable SPG to focus its efforts on various projects
including new outlet construction, expansions, and re-configurations.
Unfunded development costs to complete for U.S. projects represented 2.1% of
undepreciated cost basis assets as of Sept. 30, 2013, which is still below the
pre-crisis level of 4.2% as of Dec. 31, 2007.
Adequate Liquidity
Liquidity coverage is adequate at 1.1x for Oct. 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, 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. Liquidity excludes the impact of cash proceeds from the
spin-off and a special dividend that SPG plans to pay upon the closing of the
spin-off transaction.
Fitch calculates that the company's common stock dividends and distributions
represented 60.9% of funds from operations adjusted for capital expenditures and
straight-line rents during year-to-date period ended Sept. 30, 2013, reflective
of substantial internally-generated liquidity.
Significant Financial Flexibility
Unencumbered assets (3Q'13 unencumbered NOI divided by a stressed 7%
capitalization rate) covered net unsecured debt by 2.4x as of Sept. 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.
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.
--IDR 'A-';
--$6.2 billion unsecured revolving credit facilities and term loan 'A-';
--$12.9 billion senior unsecured notes 'A-'.
The Rating Outlook is Stable.
Stable Outlook
The Stable Outlook is predicated on coverage being strong in the high 2x range,
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
refining the portfolio and leveraging tenant relationships including the via
planned spin-off transaction in 2014, as well as the acquisitions of 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.
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 '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.
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 3.0x (coverage
was 3.0x in 3Q2013 but 2.7x pro forma for the spin-off);
--Fitch's expectation of leverage sustaining below 5.0x (leverage was 5.6x in
3Q2013 though expected to rise modestly post-spin-off).
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 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 Oct. 1, 2013 to
Dec. 31, 2015).
Contact:
Primary Analyst
Sean Pattap
Senior Director
+1-212-908-0642
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Britton Costa
Associate Director
+1-212-908-0524
Committee Chairperson
Monica Aggarwal
Senior Director
+1-212-908-0282
Media Relations: Sendhil Selvaraj, , Tel: +44 (0) 207 682 7218, Email:
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013).
--'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).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
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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DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE
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ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
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