March 14 - Following the announcement by Simon Property Group, Inc. (NYSE:
SPG) that it is acquiring a 28.7% equity stake in Klepierre
(Euronext Paris: LI) and increasing its ownership in 26 assets of The Mills
Limited Partnership (TMLP), Fitch Ratings has affirmed the credit ratings of SPG
and its operating partnership, Simon Property Group, L.P. (collectively, Simon)
Simon Property Group, Inc.
--Issuer Default Rating (IDR) at 'A-';
--Preferred stock at 'BBB'.
Simon Property Group, L.P.
--IDR at 'A-';
--$4 billion unsecured revolving credit facility at 'A-';
--$10.7 billion senior unsecured notes at 'A-'.
The Rating Outlook is Stable.
In addition, Fitch has assigned a rating of 'A-' to Simon Property Group, L.P.'s
$600 million of 2.150% notes due 2017 (issued at a spread to the treasury rate
of 130 basis points and priced at 99.814% with a yield to maturity of
2.186%), $600 million of 3.375% notes due 2022 (issued at a spread to the
treasury rate of 140 basis points and priced at 99.588% with a yield to maturity
of 3.424%), and $550 million of 4.750% notes due 2042 (issued at a spread to the
treasury rate of 160 bps and priced at 99.493% with a yield to maturity of
4.782%). The company intends to use the net proceeds of the offerings, along
with proceeds from a common stock offering of 8.5 million shares (before the
underwriters' overallotment option) to fund the Klepierre and TMLP transactions,
and for general corporate and partnership purposes.
The affirmation reflects that the Klepierre and TMLP asset acquisitions,
together with the common stock and senior notes offerings, have an overall
neutral impact on the company's credit profile.
The Klepierre interest acquisition gives Simon a broader footprint in retail
real estate across Europe, as U.S. acquisition opportunities have been limited.
Operating performance in TMLP assets is solid and contributes towards fixed
charge coverage that will remain solid for the rating. Fitch views positively
SPG's funding strategy, demonstrated by continued strong access to various
funding sources on favorable terms.
Credit concerns include leverage that is expected to increase modestly, albeit
within a range in which SPG has operated at the 'A-' amidst more distressed
market conditions. In addition, liquidity is expected to weaken moderately,
although as previously noted, access to capital remains strong.
The 'A-' rating takes into account the company's significant capitalization,
diversified portfolio of regional malls and other retail properties, staggered
lease expiration schedule, granular tenant roster, large unencumbered pool, and
established management track record. The rating also takes into account the
company's continued appetite for large acquisitions that may temporarily weaken
certain credit metrics.
Despite economic uncertainties in Europe, Klepierre's portfolio is performing
well. Klepierre's cash flows from operations increased to EUR371.1 million in
2011 from EUR365.3 million in 2010, and absent significant changes in
Klepierre's capital structure, cash flows from operations should continue to
support the company's dividend, which had a yield of 5.2% as of Dec. 31, 2011
and will represent Simon's main source of cash flow from the investment.
Given its 28.7% equity stake in Klepierre and new presence on Klepierre's
Supervisory Board, SPG is well positioned to participate in Klepierre's cash
flow directly should Simon increase its ownership interest in the future. Such
an acquisition would likely require Simon making a tender offer for the whole
company and Fitch has not incorporated such a scenario into the rating or
SPG has a proven track record of managing TMLP assets, which will contribute
toward fixed charge coverage that will remain appropriate for the rating. For
2011, pro forma for the Klepierre and TMLP acquisitions, and common stock and
senior notes offerings, fixed charge coverage would be 2.9 times (x) compared
with 2.9x and 2.6x in 2011 and 2010, respectively. Fitch defines fixed charge
coverage as recurring operating EBITDA including cash distributions from
unconsolidated entities less recurring capital expenditures and straight line
rent adjustments, divided by total interest incurred and preferred dividends.
Fitch anticipates that low-single digit same-store NOI growth and incremental
cash flow from redevelopment and expansion activities will result in coverage
between 3.0x and 3.5x over the next 12-to-24 months, which will remain
commensurate with the 'A-' rating.
Simon has not experienced negative same-store NOI 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 same-store NOI
declines low single digits per year, coverage would remain at approximately
3.0x, which would remain consistent with an 'A-' rating.
The transactions will result in leverage that is high for the 'A-' rating. As
of Dec. 31, 2011, pro forma for the Klepierre and TMLP acquisitions, and common
stock and senior notes offerings, net debt to recurring operating EBITDA would
be 6.1x, compared with 5.7x as of Dec. 31, 2011 and Dec. 31, 2010, respectively.
Notably, 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
Fitch anticipates that same-store NOI growth and a low dividend payout ratio
that enables the company to maximize retained cash flow to repay debt and fund
development activities will result in leverage 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-'
As a result of the transactions, liquidity is weakening, though the company
maintains strong capital access to meet funding obligations. Base case
liquidity coverage for Jan. 1, 2012 to Dec. 31, 2013, was 0.9x, compared with
1.1x prior to the acquisitions. When including projected development
expenditures, liquidity coverage declines to 0.8x. However, assuming 90% of the
company's secured debt is refinanced, liquidity coverage would be 1.9x compared
with 2.1x prior to the transactions. Fitch calculates liquidity coverage as
sources of liquidity (unrestricted cash, availability under the company's
revolving credit facility pro forma for the acquisitions, and projected retained
cash flows from operating activities) divided by uses of liquidity (pro rata
debt maturities pro forma for the increased interest in certain TMLP assets and
projected recurring capital expenditures).
Debt maturities are staggered, limiting refinance risk. As of Dec. 31, 2011,
10.3% of debt matures in 2012, followed by 7.5% in 2013 and 10.3% in 2014.
SPG is the largest publicly traded REIT with an equity market capitalization of
$45.8 billion as of Dec. 31, 2011, and SPG's diversified retail portfolio
reduces reliance on regional retail drivers. For 2011, the company's top five
states by NOI contribution were Florida at 14.4%, Texas at 11.2%, California at
10.4%, Massachusetts at 7.1% and New York at 7%, with no other state exceeding
5% of total NOI.
The company has a staggered lease expiration schedule, limiting rent rolldown
risk. In 2012, 6.3% of annual rental revenue including small shop and anchor
space leases expire, followed by 7.2% in 2013 and 6.1% in 2014.
Tenant credit risk is minimal. 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%) 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 'BB+' with a
Stable Outlook, at 0.6%).
The company maintains a large unencumbered pool, which provides additional
financial flexibility. As of Dec. 31, 2011, 157 of the company's 326 properties
were unencumbered, and unencumbered asset coverage of unsecured debt per the
company's June 2005 bond indenture was approximately 2.9x. When capitalizing
unencumbered NOI, Fitch calculates that unencumbered asset coverage remains
robust for the 'A-' rating despite the most recent unsecured notes offerings.
Additionally, the covenants in the company's credit agreements do not restrict
Simon's financial flexibility.
Simon has a long track record of acquisitions, most recently with Prime Outlets
in 2010 for $2.3 billion, The Mills Corporation, via a joint venture, in 2007
for $4 billion, and Chelsea Property Group in 2004 for $5.1 billion. These
transactions have diversified Simon's portfolio across the retail spectrum,
given SPG exposure to the value segment within retail, and provided
opportunities to leverage tenant relationships and back office capabilities.
The two-notch differential between SPG's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'A-'.
Based on Fitch research titled '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 result in positive momentum on the rating and/or
--Fixed-charge coverage sustaining above 3.0x (coverage would be 2.9x pro forma
for the Klepierre and TMLP asset acquisitions, along with the common stock and
senior notes offerings);
--Net debt to recurring operating EBITDA including cash flow from unconsolidated
joint ventures sustaining below 5.0x (pro forma leverage would be 6.1x).
The following factors may result in negative momentum on the rating and/or
--Fixed-charge coverage sustaining below 2.3x;
--Leverage sustaining above 6.0x;
--A sustained liquidity coverage ratio of below 1.0x;
--A highly leveraged transaction.