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Fitch Affirms Simon Property Group's IDR at 'A-'; Outlook Stable

^{Published on 2010-10-11 15:10:16 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the credit ratings of Simon Property Group, Inc. (NYSE:SPG) and its subsidiary, Simon Property Group, L.P. (collectively, Simon, or the company) as follows:

Simon Property Group, Inc.

--Issuer Default Rating (IDR) at 'A-';

--Preferred stock rating at 'BBB'.

Simon Property Group, L.P.

--IDR at 'A-';

--Unsecured revolving credit facility at 'A-';

--Senior unsecured notes at 'A-.'

The Rating Outlook is Stable.

The affirmation of Simon's IDR at 'A-' reflects the company's credit strengths, including steady cash flows from its large and well-diversified portfolio of retail centers covering fixed charges, a strong leasing profile with a diversified tenant roster and long-term leases in place, and an accomplished management team with a long track record of strong performance. Additionally, Simon maintains strong liquidity, significant financial flexibility to address debt maturities and other capital needs including demonstrated access to a wide variety of capital sources through cycles, and a large pool of unencumbered assets covering unsecured debt. Further, the company's leverage metrics are consistent with an 'A-' IDR.

Credit concerns include weakened retailer demand for space, sizable exposure to joint ventures, and management appetite for large acquisitions.

Simon's portfolio cash flows have remained resilient during the global economic downturn. Comparable property net operating income (NOI) increased 1.9% during the second quarter of 2010 (2Q'10), 2.3% during the first six months of 2010, and 1.1% for all of 2009. While Simon has clusters of assets in certain states that have been hit hard by the economic downturn, including Florida (12.9% of portfolio NOI in second-quarter 2010) and California (10.7% of portfolio NOI in 2Q'10), the company's portfolio is diversified geographically and is not overly reliant on individual regions within the U.S.

Fitch notes that Simon has combined its disclosure related to the operating performance of its regional mall and premium outlet center portfolios. Fitch believes that this action has reduced the level of disclosure of property level performance for investors, which makes certain property NOI ratios less comparable.

Simon maintains a large and diverse tenant base, and only two tenants, Gap Inc. (3.0%) and The Limited Brands (2.0%) represent more than 2% of the portfolio's minimum base rents. Simon also has a manageable lease expiration schedule, with no more than 11% of annual base rents expiring in any year over the next 10 years. While consumer demand for retail goods remains somewhat volatile, comparable store sales per square foot in Simon's portfolio is improving and minimal construction is being planned, which should continue to bolster retailer demand for space in existing centers.

During 2009, Simon management focused on improving the company's liquidity position. The combination of the reduction in the common dividend from $0.90 per share to $0.60 per share beginning in 2Q'09 and the election to pay 90% of the 2009 dividend in stock provided over $750 million in additional retained capital through the end of 2009.

Management has also been judicious as far as new capital spending since late 2008, halting new-development starts for almost two years. At June 30, 2010, Simon's share of capital needs from the development and redevelopment pipeline was only approximately $93 million, representing a minimal liquidity use.

The company maintains significant financial flexibility and has demonstrated access to a wide variety of capital sources through cycles. At June 30, 2010, Simon had approximately $2.3 billion of consolidated cash and cash equivalents on its balance sheet as well as approximately $3.35 billion of availability under its unsecured revolving credit facility. Additionally, Simon has raised $3.15 billion of long-term, unsecured bonds year-to-date to fund tenders of bonds due between 2011 and 2014. Simon also raised over $3.5 billion of external capital in 2009 through unsecured bonds, mortgage debt, and common stock during volatile financial market conditions.

Further supporting Simon's unsecured debt is a large unencumbered property pool, which gives the company financial flexibility as a source of contingent liquidity. Using the formula that is defined in Simon's bond covenants in indentures dated June 7, 2005 or later, Simon unencumbered asset coverage of unsecured debt was 2.7 times (x) as of June 30, 2010, which is appropriate for an 'A-' rating. Moreover, covenants within the company's unsecured bond indentures do not currently restrict Simon's financial flexibility.

Simon's fixed charge coverage (defined as recurring operating EBITDA including Fitch's estimate of recurring distributions from unconsolidated joint ventures less recurring capital expenditures less straight line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) was 2.5x for the 12 months ended June 30, 2010 as compared to 2.5x for the trailing twelve 12 ended Dec. 31, 2009. Additionally, projected coverage levels are expected to remain solid.

Simon's leverage ratio remains consistent with an 'A-' rating, as the company's net debt divided by recurring EBITDA including Fitch's estimate of recurring distributions from unconsolidated joint ventures, was 5.5x for the trailing 12 months ended June 30, 2010, compared with 5.4x and 6.5x during 2009 and 2008, respectively. The improvement in leverage since 2008 stems from the company's equity issuances and additional cash retained from the company's reduction in its cash dividend paid on common stock.

The 'A-' IDR reflects some credit concerns. Although retail leasing activity has increased in 2010, the global recession has generally weakened retail demand for space, with rents down significantly from the market peak in 2007. Additionally, Simon maintains interests in a large number of joint ventures which could make it more challenging to monetize its interest in a short period of time, while sizable partner monetizations could also increase capital needs should Simon elect to purchase partner interests. Finally, the company has demonstrated an appetite for large acquisitions that could indicate a tolerance for a lower credit profile for periods of time.

The two-notch differential between Simon's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with an 'A-' IDR. Based on Fitch's report, 'Equity Credit for Hybrids and Other Capital Securities' (dated Dec. 29, 2009 and available at '[ www.fitchratings.com ]'), Simon Property Group's preferred stock is 75% equity-like and 25% debt-like since it is perpetual and has no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock-to-recurring operating EBITDA was 5.7x as of June 30, 2010, compared with 5.7x and 6.9x, as of Dec. 31, 2009 and Dec. 31, 2008, respectively.

The Stable Outlook reflects Fitch's expectation that Simon's credit metrics will remain in a range that is reflective of current ratings over the near- to medium-term. The Stable Outlook also centers on Simon's strong liquidity position. Sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and expected recurring capital expenditures) for July 1, 2010 to Dec. 31, 2011 result in a liquidity coverage ratio of 2.2x and 2.8x if maturing secured debt is refinanced at a rate of 80% of current debt outstanding. Furthermore, the company's debt maturity schedule is well laddered with no more than 13% of its share of debt maturing annually for the next five years. In addition, Simon's leverage and coverage metrics are expected to remain at levels consistent with the 'A-' rating category.

The following factors may result in positive momentum on the ratings and/or Rating Outlook:

--Fitch-defined fixed charge coverage, including recurring cash flow from unconsolidated joint ventures, sustaining above 3.0x;

--Net debt to recurring EBITDA, including recurring cash flow from unconsolidated joint ventures, sustaining below 5.0x.

The following factors may result in negative momentum on the ratings and/or Rating Outlook:

--Fitch-defined fixed charge coverage, including recurring cash flow from unconsolidated joint ventures, sustaining below 2.2x;

--Net debt to recurring EBITDA sustaining above 6.0x.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 16, 2010;

--'Criteria for Rating U.S. Equity REITs and REOCs', April 16, 2010;

--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;

--'Rating Hybrid Securities', Dec. 29, 2009;

--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009.

Applicable Criteria and Related Research:

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

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