NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings on Simon Property Group, Inc. (NYSE: SPG) and certain rated subsidiaries (collectively, Simon), including SPG's long-term Issuer Default Rating (IDR) at 'A'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's affirmation of Simon's long-term IDR at 'A' reflects the strong quality of the company's retail real estate portfolio that generates robust cash flow in excess of fixed charges, as well as the company's significant scale and market-leading access to capital. Other credit strengths include SPG's good liquidity and financial flexibility, featuring a low AFFO payout ratio and adequate unencumbered asset coverage of unsecured debt.
The biggest wildcard for bondholders over the next two years relates to whether Simon's recently established $2 billion common stock repurchase program and its bid for The Macerich Company (NYSE: MAC) reflect a more shareholder-friendly capital allocation policy. The program, combined with the unsuccessful bid for MAC, would have increased leverage by approximately a turn. However, the company has reiterated a commitment to maintaining its existing ratings. Moreover, Simon withdrew its bid for MAC and Fitch expects the company to repurchase a moderate amount of common stock over the next two years.
Appropriate Leverage; Share Repurchase Program a Wildcard
Fitch calculates Simon's leverage at 5.2x as of Dec. 31, 2014 pro forma for the cash acquisitions of Jersey Gardens in Elizabeth, New Jersey and University Park Village in Fort Worth, Texas in January 2015. Fitch expects leverage to be in the 5.0x-5.5x range over the next 12-to-24 months but closer to 5.5x this year, following the stabilization of development and re-development projects. Leverage sustaining between 4.5x and 5.5x is appropriate for the 'A' rating, thus Fitch's projections are towards the high-end of the range.
Should the company aggressively utilize its common stock repurchase program, which is not Fitch's expectation, leverage would trend in the 5.5x-6.0x range, which would be weak for the 'A' rating. Fitch defines leverage as debt less readily available cash to recurring operating EBITDA including recurring cash distributions from unconsolidated entities, which include dividends from Klepierre.
Strong Asset Quality
As of Dec. 31, 2014, Simon owned or had an interest in 228 properties comprising 189 million square feet in North America, Asia and Europe. Additionally, pro forma for Klepierre SA's acquisition of Corio N.V., the company had an 18.3% equity interest in Klepierre, a Paris-based shopping center company, and also has an interest in a joint venture with McArthurGlen Group formed to own and develop designer outlets primarily in Europe.
Simon has consistently outperformed its U.S. mall REIT peers, with comparable NOI growth exceeding peers by an average of 240 basis points from 2005-2014 and occupancy outperforming peers by 150 basis points from 2005-2014, demonstrating strong asset quality. Simon's 4Q2014 sales PSF was $619 ($631 for Simon's 109 malls), the second highest among the company's U.S. peers, trailing only Taubman Centers, Inc. (unrated by Fitch) at $809.
Fitch considers SPG's portfolio as '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. The portfolio has scale and diversity, ranging from Premium Outlets to luxury malls.
Robust Fixed-Charge Coverage
Simon's pro forma fixed charge coverage ratio is 3.9x, compared with 3.7x in 2014 and 3.3x in 2013. Mid-single-digit releasing spreads and occupancy gains drove SPG's same-store NOI growth of 5.1% on comparable malls and Premium Outlets in 2014. Releasing spreads for malls and Premium Outlets were 16.6% in 2014 compared with 18.2% in 2013 and 10.8% in 2012. This same-store NOI growth and a reduced cost of debt capital improved fixed-charge coverage. Recently signed rents per square foot relative to upcoming average expiring rent per square foot indicate that strong re-leasing spreads are achievable for the next several years.
Fitch projects that fixed-charge coverage will be in low 4.0x range over the next 12-to-24 months, which is strong 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.
Lower Relative Overhead & Potential Operating Synergies
Simon's general and administrative expenses as a percentage of recurring operating EBITDA was 4.1% in 2014, indicative of its significant scale as the largest publicly traded REIT. The company's equity market capitalization and total market capitalization excluding limited partnership units were $56.6 billion and $83.7 billion, respectively, as of Dec. 31, 2014 ($66.3 billion and $93.4 billion, respectively, including limited partnership units). Lower general and administrative expenses and moderately lower capital costs (primarily via unsecured bond and bank borrowings) have historically comprised the few scale advantages available to REITs generally. Outside of the mall sector, not many REIT property types have been able to generate meaningful property level savings and/or operating synergies through increased scale.
Market Leading Access to Capital
In addition to a commercial paper (CP) program established in 2014--the first such program established by a U.S. equity REIT?and upsized to $1 billion from $500 million in March 2015, the company has two multicurrency credit facilities totaling $6.75 billion. The credit facilities are comprised of a $4 billion facility and $2.75 billion supplementary facility (upsized from $2 billion in March 2015), aggregating the largest capacity in the U.S. REIT sector.
Simon was active in both the unsecured and secured debt markets in 2014. It retired $2.9 billion of senior notes at a weighted average coupon rate of 5.76% and completed two senior notes offerings totaling $2.5 billion, with a weighted average coupon rate of 3.32%. Simon also closed 16 new secured loans during 2014 totaling approximately $2.8 billion, of which SPG's share is $1.6 billion. The weighted average interest rate on these loans is 3.29% and the weighted average term is 8.4 years.
Good Liquidity and Financial Flexibility
Liquidity coverage is good at 1.3x for the period Jan. 1, 2015 to Dec. 31, 2016 pro forma. Fitch defines liquidity coverage as liquidity sources divided by liquidity uses. Liquidity sources include unrestricted cash, availability under revolving credit facilities pro forma for first quarter 2015 acquisitions, and projected retained cash flows from operating activities. 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 2.2x.
Liquidity is enhanced by Simon's low adjusted funds from operations (AFFO) payout ratio, which was 64% in 2014 compared with 59.2% in 2013 and 57% in 2012. Fitch estimates that the company generates approximately $1.5 billion of internally generated liquidity per year, which can be deployed for future investments, development and/or debt repayment.
Fitch view's SPG's unencumbered pool as strong on an absolute basis given the pool's size ($2.6 billion of EBITDA in 2014) and quality. Unencumbered assets (based on a stressed 7% capitalization rate) covers net unsecured debt by 2.7x, which is adequate for the rating. Fitch estimates that the unencumbered portfolio is levered 5.6x as compared to the encumbered portfolio at 5.4x on a gross basis and also excluding recurring cash distributions from unconsolidated entities, thus the unencumbered pool is slightly more levered than the encumbered pool.
Active Development Pipeline
Simon's development pipeline primarily consists of redevelopment projects across almost all segments including Premium Outlets. This program should improve asset quality going forward. As of Dec. 31, 2014, the pipeline had a pro rata net cost of approximately $1.3 billion, representing 3.4% of gross assets, exceeding the 2.3% level reached at year-end 2007. However, redevelopment is a significantly larger component of development expenditures today than it was then at 84% compared to 37%. Redevelopments are lower risk due to smaller scale and demonstrated leasing activity and sales history.
Fitch's key assumptions for Simon in Fitch's base case include:
--4% same-store NOI growth and 3%-3.5% same-store NOI growth in 2016-2017;
--G&A growth to maintain historical margins relative to total revenues;
--$1-$1.5 billion in annual development funded predominately with retained cash flow, generating 9% stabilized yields;
--Stock repurchases of less than $500 million over the next two years;
--Debt repayment with the issuance of new unsecured bonds and secured debt;
--AFFO payout ratio of approximately 60%.
The following factors may have a positive impact on SPG's Ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.2x pro forma for the acquisitions of Jersey Gardens and University Park Village).
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (this ratio is 3.9x pro forma).
The following factors may have a negative impact on SPG's ratings and/or Outlook:
--A deviation from SPG's public commitment to maintaining existing ratings and/or any other actions that may result in a deterioration in the company's market-leading access to capital on an absolute or relative basis;
--A leveraging transaction that materially weakens the company's credit profile and/or aggressive utilization of the company's common stock repurchase program, resulting in Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 3x.
Fitch has affirmed the following ratings:
Simon Property Group, Inc.
--Long-term IDR at 'A';
--$75 million preferred stock at 'BBB+'.
Simon Property Group, L.P.
--Long-term IDR at 'A';
--Short-term IDR at 'F1';
--$6.75 billion unsecured revolving credit facilities at 'A';
--$240 million unsecured term loan at 'A';
--$13.4 billion senior unsecured notes at 'A';
--$409.2 million commercial paper notes at 'F1'.
Simon CP 2
--$409.2 million commercial paper notes at 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Equity REITs and REOCs Ratings Navigator Companion' (Feb. 5, 2015);
--'Simon Property Group, Inc. Ratings Navigator' (Feb. 26, 2015);
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Nov. 25, 2014);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014);
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
U.S. Equity REITs and REOCs: Ratings Navigator Companion
Simon Property Group, Inc. - Ratings Navigator
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage