Fitch Affirms Simon Property Group's IDR at 'A-'; Outlook Stable
NEW YORK -- March 12, 2013
Fitch Ratings has affirmed the credit ratings of Simon Property Group, Inc.
(NYSE: SPG), and its operating partnership, Simon Property Group, L.P.
(collectively, Simon) as follows:
Simon Property Group, Inc.
--Issuer Default Rating (IDR) at 'A-';
--$39.8 million preferred stock at 'BBB'.
Simon Property Group, L.P.
--IDR at 'A-';
--$6 billion unsecured revolving credit facilities at 'A-';
--$13.4 billion senior unsecured notes at 'A-'.
The Rating Outlook is Stable.
Key Rating Drivers
The affirmation of Simon's IDR at 'A-' 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, though elevated in recent periods, 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
continued appetite for large acquisitions that temporarily weaken certain debt
Resilient Cash Flow
Same-store net operating income growth remained positive throughout the recent
cycle and increased by 4.8% in the mall and premium outlet segment in 2012,
driven by stable occupancy and re-leasing spreads of 10.8% in 2012. Fitch
expects positive same-store results to 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 staggered with small shop revenues
expirations of 6.5%, 7.2% and 7.6% in 2013, 2014 and 2015, respectively.
Anchor lease revenue expirations are immaterial at 0.8% through 2015.
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 Dec. 31, 2012 were The Gap, Inc. (Fitch IDR of 'BBB' with a
Stable Outlook), which represented 3.2% of base minimum rent, followed by
Limited Brands, Inc. at 2.2% and Abercrombie & Fitch Co. 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. (Fitch IDR of 'BBB' with a Stable Outlook) at
0.5%, J.C. Penney Co., Inc. (Fitch IDR of 'B-' with a Negative Outlook) at
0.5%, and Sears Holdings Corporation (Fitch 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 $568 in 4Q'12 from $533 in 4Q'11.
Continued growth in tenant sales supports Simon's ability to achieve positive
same-store NOI growth.
Solid Fixed-Charge Coverage
The above-mentioned favorable operating fundamentals led to fixed-charge
coverage of 2.9x in 2012, compared with 2.9x in 2011 and 2.7x in 2010.
Positive comparable results, coupled with the company's increased interest in
The Mills Limited Partnership assets, cash flows 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
include a $1.2 billion follow-on common stock offering in March 2012 to fund a
portion of the Klepierre investment, a supplemental $2 billion unsecured
revolving credit facility established in June 2012 bringing total revolver
capacity to $6 billion, and two bond offerings totaling $1.3 billion in
December 2012. Simon is also an active secured borrower in the insurance
company, bank, and CMBS markets.
Leverage Expected to be Appropriate
Leverage was 6.0x in 2012, an elevated level compared with 5.6x in 2011 and
5.7x in 2010. Debt incurrence associated with various acquisitions (including
wholly-owned assets and joint ventures) and development projects drove the
increase in leverage.
Under Fitch's base case, leverage would 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 sustains
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.
Simon is the largest publicly traded REIT with an equity market capitalization
of $57.3 billion as of Dec. 31, 2012, and its diversified retail portfolio
reduces reliance on regional retail drivers. For 2012, the company's top five
states by NOI contribution were Florida at 14.5%, Texas at 11.2%, California
at 11%, New York at 6.8% and Massachusetts at 6.6%, with no other state
exceeding 5.7% 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 $1.2 billion in
pro rata net cost to complete as of Dec. 31, 2012, 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 2.4% of undepreciated cost basis assets as of Dec. 31, 2012, which
is still below the pre-crisis level of 4.2% as of Dec. 31, 2007.
Liquidity coverage is adequate at 1.3x for Jan. 1, 2013 to Dec. 31, 2014,
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 2.2x.
Fitch calculates that the company's common stock dividends and distributions
represented only 73.1% of funds from operations adjusted for capital
expenditures and straight-line rents, reflective of substantial
Significant Financial Flexibility
Of the company's 329 properties in North America and Asia, 165 are
unencumbered, providing significant financial flexibility. Unencumbered assets
(2012 unencumbered NOI divided by a stressed 7% capitalization rate) covered
unsecured debt by 2.2x as of Dec. 31, 2012, which is low for the 'A-' IDR.
However, unencumbered asset quality is strong, with 127 unencumbered Malls and
Premium Outlets producing sales of approximately $732 per square foot compared
with $568 per square foot for Malls and Premium Outlets overall. In addition,
the covenants in the company's debt agreements do not restrict financial
The stable outlook is predicated on coverage being strong at or just above 3x,
offset by 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 provided opportunities to
leverage tenant relationships and back office capabilities. However, in some
cases such as the Klepierre investment, certain credit metrics have
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 2.9x in 2012);
--Fitch's expectation of leverage sustaining below 5.0x (leverage was 6.0x 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 (this metric is 1.3x for Jan. 1,
2013 to Dec. 31, 2014).
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--'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 Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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