Fitch Rates Simon Property Group, L.P.'s Sr. Unsecured Notes due 2018 and
2023 'A-'; Outlook Stable
NEW YORK -- December 12, 2012
Fitch Ratings has assigned 'A-' ratings to the $750 million aggregate
principal amount 1.50% coupon senior unsecured notes due 2018 and $500 million
aggregate principal amount 2.75% coupon senior unsecured notes due 2023 issued
by Simon Property Group, L.P., the operating partnership of Simon Property
Group, Inc. (NYSE: SPG). The 2018 notes were issued in a private offering
pursuant to Rule 144A under the Securities Act of 1933 and the 2023 notes were
priced in a public offering at 99.446% of par to yield 2.813% to maturity, or
120 basis points over the benchmark treasury rate.
Simon Property Group, L.P. expects to use the proceeds from the 2018 notes to
repay a portion of the outstanding balance on its $6 billion credit facility,
which it incurred in connection with acquisitions. Net proceeds from the 2023
notes are expected to be used for general corporate and partnership 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-';
--Preferred stock 'BBB'.
Simon Property Group, L.P.
--$6 billion unsecured revolving credit facility 'A-';
--$13.5 billion senior unsecured notes at 'A-'.
The Rating Outlook is Stable.
The 'A-' rating takes into account the company's significant capitalization,
diversified portfolio of regional malls and other retail properties, strong
fixed-charge coverage, staggered lease expirations, granular tenant roster,
and an established management team with a strong track record. The rating also
takes into consideration the company's continued appetite for large
acquisitions that may result in elevated leverage for the rating. Simon also
has an adequate liquidity coverage ratio pro forma for the bond offerings,
strong access to capital, and contingent liquidity from an unencumbered
Simon is the largest publicly traded REIT globally, with an equity market
capitalization of approximately $55 billion and total market capitalization of
approximately $82.5 billion as of Sept. 30, 2012. SPG's scale, coupled with
its diversified retail portfolio reduces reliance on regional retail drivers.
For the nine months ended Sept. 30, 2012, the company's top five states by net
operating income (NOI) contribution were Florida at 14.5%, Texas at 11.2%,
California at 10.8%, New York at 6.7% and Massachusetts at 6.7%, with no other
state exceeding 5.6% of total NOI.
Fitch anticipates that the retailer environment will be stable in 2013,
although market share defensibility remains a key challenge for many
traditional retailers. Despite wide product availability, increasing price
transparency, and lack of consumer loyalty that have threatened the long-term
viability of certain retailer business models, Simon's same-store net
operating income (SSNOI) performance has remained resilient. SSNOI increased
by 4.7% in third quarter 2012 (3Q'12), 5.1% in 2Q'12 and 5.7% in 1Q'12,
following SSNOI growth of 3.4% in 2011, 2.9% in 2010 and 1.1% in 2009.
Positive leasing spreads and modest improvements in occupancy, which stood at
94.6% across the entire portfolio as of Sept. 30, 2012, have driven SSNOI
The company has a staggered lease expiration schedule, limiting rent rolldown
risk. As of Sept. 30, 2012, only 1.4% of annual U.S. rental revenue including
small shop and anchor space leases will expire during the remainder of 2012,
followed by 0.9% in 2013 and 7.3% in 2014. Fitch views such levels as
manageable and a credit positive. In addition, tenant credit risk is minimal,
which Fitch views favorably. As of Sept. 30, 2012, top small-shop tenants are
The Gap, Inc. (Fitch IDR of 'BBB-' with a Stable Outlook, at 3.2% of base
minimum rent), Limited Brands, Inc. (Fitch IDR of 'BB+' with a Stable Outlook,
at 2.2%) and Abercrombie & Fitch Co. (1.5%), and top anchor tenants are
Macy's, Inc. (Fitch IDR of 'BBB' with a Stable Outlook, at 0.5%), Sears
Roebuck & Co. (Fitch IDR of 'CCC' with a Negative Outlook, at 0.2%) and J.C.
Penney Co., Inc. (Fitch IDR of 'B' with a Negative Outlook, at 0.6%).
Fixed-charge coverage ratio is appropriate for the 'A-' rating at 2.9x in
3Q'12 pro forma for the bond offerings, compared with 2.9x in 2011 and 2.6x in
2010. Fitch defines fixed-charge coverage as recurring operating EBITDA
including Fitch's estimate of recurring cash distributions from unconsolidated
entities less recurring capital expenditures and straight-line rent
adjustments divided by total interest incurred and preferred stock dividends.
Organic EBITDA growth and recent unconsolidated investments (e.g. Simon's
interest in Klepierre) have improved coverage since 2010. Fitch anticipates
that low single-digit same-store NOI growth, and incremental cash flow from
redevelopment and expansion activities will result in coverage in the high 2x
to low 3x range over the next 12-to-24 months, which will remain commensurate
with the 'A-' rating.
Simon did not experience negative SSNOI during the recent cyclical downturn
and has typically outperformed peer mall owners. However, even in a more
adverse case than that anticipated by Fitch, in which SSNOI declines by low
single digits per year, coverage would remain around 3x, which would remain
consistent with an 'A-' rating.
Simon's management team has a well-established track record, but the company's
continued appetite for large acquisitions has in some cases temporarily
resulted in elevated leverage for the rating. Net debt-to-recurring operating
EBITDA including Fitch's estimate of recurring cash distributions from
unconsolidated entities was 6.0x as of Sept. 30, 2012, compared with 5.7x as
of Dec. 31, 2011 and 5.7x as of Dec. 31, 2010. Investments in Klepierre and
The Mills Limited Partnership assets, funded with common stock and senior
notes in March 2012, contributed towards the change in leverage. However,
leverage has fluctuated between the mid-5x range and the mid-6x range through
the cycle at an 'A-' rating, including during adverse conditions in 2008 and
Fitch anticipates leverage will sustain between 5.5x and 6.0x over the next
12-to-24 months. Should leverage sustain above 6.0x over an extended period,
which is not expected by Fitch, it may place pressure on the 'A-' rating.
Simon also has an adequate liquidity coverage ratio pro forma for the bond
offerings, at 1.3x for the period Oct. 1, 2012 to Dec. 31, 2014. Fitch defines
liquidity coverage as liquidity sources (unrestricted cash, availability under
the unsecured revolving credit facility pro forma for the bond offerings and
projected retained cash flows from operating activities after dividends and
distributions) divided by uses (pro rata debt maturities and projected
recurring capital expenditures and development expenditures). Assuming a 90%
refinance rate on upcoming secured debt maturities, liquidity coverage would
improve to 2.2x.
The rating takes into account Simon's strong access to capital, as evidenced
by pricing on the 2018 notes and 2023 notes, and contingent liquidity from an
unencumbered portfolio. The unencumbered portfolio comprises more than 150
wholly owned assets and generates annual EBITDA in excess of $2 billion, and
unencumbered asset coverage of unsecured debt per the company's June 2005 bond
indenture was approximately 2.5x as of Sept. 30, 2012. Additionally, the
covenants in the company's credit agreements do not restrict Simon's financial
The two-notch differential between Simon's IDR and its preferred stock rating
is consistent with Fitch's criteria for corporate entities with an IDR of
'A-'. Based on Fitch's criteria report, 'Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis,' dated Dec. 15, 2011, the
company's preferred stock is deeply subordinated and has loss absorption
elements that would likely result in poor recoveries in the event of a
WHAT COULD TRIGGER A RATING ACTION
The following factors may result in positive momentum on the rating and/or
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (pro
forma coverage is 2.9x);
--Fitch's expectation of net debt-to-recurring operating EBITDA including cash
flow from unconsolidated joint ventures sustaining below 5.0x (Sept. 30, 2012
leverage was 6.0x).
The following factors may result in negative momentum on the rating and/or
--Fitch's expectation of fixed-charge coverage sustaining below 2.3x;
--Fitch's expectation of leverage sustaining above 6.0x;
--A sustained liquidity coverage ratio of below 1.0x;
--A highly leveraged transaction.
Additional information is available at www.fitchratings.com. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'2013 Outlook: U.S. Retailing - Grab for Share Intensifies' (Nov. 21, 2012);
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Equity REITs
2013 Outlook: U.S. Retailing -- Grab for Share Intensifies
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