NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the $1.85 billion multi-tranche senior notes issued by Simon Property Group, L.P., the operating partnership of Simon Property Group, Inc. (NYSE: SPG). The offering is comprised of $550 million 2.35% notes due 2022, $750 million 3.25% notes due 2026, and $550 million notes due 2046.
KEY RATING DRIVERS
SPG's 'A' Issuer Default Rating (IDR) reflects the company's high-quality retail real estate portfolio, cycle-tested management team, its market-leading access to capital, and its significant scale which influences efficiencies and the aforementioned access to capital. Other strengths include its financial flexibility that stems from a low dividend payout ratio and a sizable unencumbered pool. Partially offsetting these strengths is leverage that is low on an absolute basis but high relative to the rating sensitivities for the 'A' rating. Moreover, SPG is unspecific about its financial policies and credit rating targets and has demonstrated a willingness to flex the balance sheet for external growth opportunities.
LEVERAGE STABILIZING AT CURRENT LEVELS
Fitch expects leverage will be in the 5x-5.5x range over the next 12-to-24 months but closer to 5.5x for 2016, following the stabilization of development and re-development projects. Leverage sustaining between 4.5x-5.5x is appropriate for the 'A' rating and thus Fitch's projections are towards the high-end of the range. These levels are largely unchanged from where SPG has operated recently with leverage at 5.3x for the quarter ended Sept. 30, 2016, compared to 5.4x and 5.2x for full years 2015 and 2014.
Fitch defines leverage as debt less readily available cash to recurring operating EBITDA including cash distributions from unconsolidated entities plus dividends from its investment in Klepierre shares net of distributions to noncontrolling property interests. Leverage when including 50% of preferred stock and preferred units was unchanged.
Fitch projects that fixed-charge coverage will sustain in the mid-to-high 4x range over the next 12-to-24 months as compared to 4.5x for the quarter ended Sept. 30, 2016. Fitch defines fixed-charge coverage as recurring operating EBITDA plus cash distributions from unconsolidated entities net of distributions to noncontrolling property interests less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred and preferred stock dividends.
STRONG ASSET QUALITY DRIVING OPERATING PERFORMANCE
Fitch considers SPG's portfolio to be prime with notable trophy assets, which has supported operating performance despite tenant headwinds and should be more financeable on a relative basis. The portfolio has scale and diversity with interests in properties in North America, Asia and Europe, ranging from Premium Outlets to luxury malls. Fitch views SPG's 3Q16 $604 sales per square foot and outperformance relative to other mall REITs (as measured by SSNOI growth) as further indications of the portfolio's quality. Simon has consistently outperformed its U.S. mall REIT peers, with comparable NOI growth exceeding peers by an average of 240 basis points (bps) from 2005-2015 and occupancy outperforming peers by 100 bps from 2005-2015.
SPG has sought to address secular tenant pressures by reducing exposure to smaller and/or weaker assets through the Washington Prime Group spin-off and reinvesting in its portfolio through expansion and redevelopment projects. Nonetheless, persistent tenant headwinds could affect the productivity and financeability of SPG's portfolio.
MARKET-LEADING ACCESS TO CAPITAL
Fitch views SPG as having sector-leading and durable access to capital, and its relative and absolute access to debt capital are primary factors behind the 'A' rating. Substantiating this view is the diversity of SPG's capital sources. SPG has demonstrated access to debt capital in multiple currencies (USD and EUR), across a wide range of tenors (commercial paper through 30-year notes) and at all points in the cycle. SPG re-opened the REIT unsecured debt market in 2009 when it issued $650 million of 10-year notes at 10.4%.
SUFFICIENT LIQUIDITY RELATIVE TO OBLIGATIONS
SPG has appropriate financial flexibility considering the size of its obligations. SPG's primary sources of liquidity are its unrestricted cash and availability under the two revolving credit facilities totalling $7.5 billion and the contingent liquidity in the unencumbered asset pool.
Liquidity coverage is consistent with the sector at 1.7x for the period Oct. 1, 2016 through Dec. 31, 2018 pro forma for the notes issued in November 2016. Liquidity sources include unrestricted cash, availability under revolving credit facilities 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 2017 are refinanced, liquidity coverage would improve to 2.2x.
Liquidity is enhanced by Simon's consistently low adjusted funds from operations (AFFO) payout ratio, which was 67% in 3Q16 and 66.7% in 2015, compared with 64% in 2014 and 59.2% in 2013. Fitch estimates that the company generates greater than $1 billion of internally generated liquidity per year, which can be deployed for future investments, development and/or debt repayment. Unencumbered assets (based on a stressed 7% capitalization rate) cover net unsecured debt by 2.7x, which is appropriate for the rating.
The Stable Outlook reflects Fitch's view that SPG's operating fundamentals will remain favorable over the next 12-to-24 months and that the issuer will maintain leverage consistent with the 'A' rating. Beyond the rating horizon, Fitch considers the mall's long-term competitive position as a key determinant of SPG's operating fundamentals, the financeability of its assets and its overall access to capital.
Fitch's key assumptions within its rating case for the issuer include:
--Operating fundamentals remain accommodative but decelerate modestly from mid-single-digit SSNOI growth to reflect retailer headwinds;
--SPG continues to match redevelopment and expansion capex to retained cash flow from operations after dividends;
--SPG maintains market-leading access to capital, refinancing all secured and unsecured debt with like amounts but does not issue equity.
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 5.3x for the quarter ended Sept. 30, 2016)
--Fitch's expectation of fixed charge coverage sustaining above 3.5x (fixed charge coverage was 4.5x for the quarter ended Sept. 30, 2016).
The following factors may have a negative impact on SPG's Ratings and/or Outlook:
--Should SPG demonstrate or speak to more flexible financial policies that 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;
--Should the competitive position of malls generally or SPG's portfolio specifically deteriorate due to factors such as retailer headwinds or changing distribution channels, resulting in weaker operating fundamentals and financeability of SPG's portfolio;
--Fitch's expectation of fixed charge coverage sustaining below 3x.
FULL LIST OF CURRENT RATINGS
Simon Property Group, Inc.
--Long-Term IDR 'A';
--Preferred stock 'BBB+'.
Simon Property Group, L.P.
--Long-Term IDR 'A';
--Short-Term IDR 'F1';
--Senior unsecured revolving credit facilities 'A';
--Senior unsecured notes 'A';
--CP notes 'F1'.
Simon CP 2
--CP notes 'F1'.
Simon International Finance, S.C.A.
--Unsecured guaranteed notes 'A'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Sept. 28, 2016
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include operating income from discontinued operations.
--Fitch has added cash distributions from unconsolidated entities net of distributions to noncontrolling property interests to recurring operating EBITDA;
--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $250 million of cash for working capital purposes which is otherwise unavailable to repay debt;
--Fitch has included 50% of preferred equity and preferred units (included in noncontrolling interests) as debt.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Recovery Ratings and Notching Criteria for Equity REITs - Effective from 3 December 2015 to 16 November 2016 (pub. 03 Dec 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
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