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

^{Published on 2011-10-08 07:00:53 - Market Wire}
 

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

Simon Property Group, Inc.
--Issuer Default Rating (IDR) at 'A-';
--Preferred stock 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 increasing cash flows from its large and well diversified portfolio of retail centers, a strong leasing profile with a diversified tenant roster and long-term leases in place, solid fixed charge coverage, significant financial flexibility with demonstrated access to a wide variety of capital sources through cycles, and a large pool of unencumbered assets covering unsecured debt.

Credit concerns include the company's demonstrated appetite for large acquisitions that indicate a tolerance for a lower credit profile for periods of time, as well as a base case liquidity coverage ratio below 1.0 times (x) through 2013 in an adverse case that assumes no access to external capital sources to address capital uses. In addition, although the company's leverage is appropriate for the 'A-' IDR on a net debt-to-recurring operating EBITDA basis, the company's risk-adjusted capital ratio is not robust for the rating category.

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.

Cash flows from operations continue to increase within Simon's core portfolio, which is well-diversified across several retail property formats. Comparable property net operating income (NOI) increased 3.5% during the second quarter of 2011, compared to 2.3% during the first three months of 2011, and 2.9% for all of 2010. While Simon has clusters of assets in certain states that have been hit hard by the economic downturn, including Florida (14.6% of portfolio NOI in second-quarter 2011) and California (10.4%), many of the company's assets in these states continue to be highly productive.

Simon maintains a large and diverse tenant base, and only two tenants, Gap Inc. (3.1%) and The Limited Brands (2%) representing 2% or more 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. Comparable store sales per square foot in Simon's portfolio continue to improve, and limited new construction should continue to bolster retailer demand for space in existing centers.

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 and straight line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) was 2.8x for the 12 months ended June 30, 2011 as compared to 2.6x for each of the trailing 12 months ended Dec. 31, 2010 and 2009. Fitch anticipates that fixed-charge coverage will remain in the high 2 times range over the next 12-to-24 months principally due to low single digit same-property NOI growth.

The company maintains significant financial flexibility and has demonstrated access to a wide variety of capital sources through cycles. At June 30, 2011, Simon had approximately $790 million of consolidated cash and cash equivalents on its balance sheet as well as approximately $3.1 billion of availability under its unsecured revolving credit facility, pro forma for the company's $4 billion unsecured revolving credit facility that closed this week. During 2010, Simon raised $3.15 billion of long-term unsecured bonds 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, unencumbered asset coverage of unsecured debt was 3.1x as of June 30, 2011, compared to 2.7x as of June 30, 2010. These metrics are appropriate for an 'A-' rating. Moreover, covenants within the company's unsecured bond indentures do not currently restrict Simon's financial flexibility.

The 'A-' IDR reflects some credit concerns. Although retail leasing activity has increased in 2010 and 2011, the global recession weakened retail demand for space, with market rents down from the market peak in 2007.

The company has demonstrated an appetite for large acquisitions that could indicate a tolerance for a lower credit profile for periods of time, as was the case of its bid for General Growth Properties, Inc.

Sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility pro forma for the recent commitment size increase, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and projected recurring capital expenditures) for July 1, 2011 to Dec. 31, 2013 result in a liquidity coverage ratio of 0.8x. If 80% of secured debt is refinanced, liquidity coverage would be 1.2x. Furthermore, the company's debt maturity schedule is well laddered with less than 13% of its share of debt maturing annually.

Simon's net debt divided by recurring operating EBITDA ratio including Fitch's estimate of recurring distributions from unconsolidated joint ventures remains consistent with an 'A-' rating at 5.6x for the trailing 12 months ended June 30, 2011, compared with 6.0x and 5.6x and during 2010 and 2009, respectively. Fitch anticipates that leverage will remain in the mid-5 times range over the next 12-to-24 months due to modest capital retention along with ongoing debt refinancings used to repay upcoming debt maturities, coupled with organic EBITDA growth. However, the company's risk-adjusted capital ratio at a single-A category stress level is less robust at 1.0x, which is driven by the company's joint venture exposures that may be challenging to monetize in a short period of time in a capital-constrained environment. The heavy utilization of joint ventures is also a concern at the property level, given the need to make decisions with third parties that may have a different investment time horizon.

The two-notch differential between Simon's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'A-'. Based on Fitch's Research on 'Rating Hybrid Securities' dated July 28, 2011 and available 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 ratings and/or Rating Outlook:
--Fixed charge coverage, including recurring distributions from unconsolidated joint ventures, sustaining above 3.0x (for the trailing 12 months ended June 30, 2011, fixed charge coverage was 2.8x);
--Net debt to recurring EBITDA, including recurring distributions from unconsolidated joint ventures, sustaining below 5.0x (for the trailing 12 months ended June 30, 2011, net debt to recurring operating EBITDA was 5.6x).

The following factors may result in negative momentum on the ratings and/or Rating Outlook:
--Fixed charge coverage, including recurring distributions from unconsolidated joint ventures, sustaining below 2.3x;
--Net debt to recurring EBITDA sustaining above 6.0x.
--A sustained base case liquidity coverage ratio of below 1.0x;
--A highly leveraged transaction.

Additional information is available at [ www.fitchratings.com ]. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011;
--'Rating Hybrid Securities', July 28, 2011;
--'Treatment of Hybrids in Corporate and REIT Credit Analysis', July 11, 2011;
--'Recovery Rating and Notching Criteria for Equity REITs', May 12, 2011;
--'Criteria for Rating U.S. Equity REITs and REOCs', March 15, 2011.

Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647091 ]
Treatment of Hybrids in Corporate and REIT Credit Analysis
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642132 ]
Recovery Rating and Notching Criteria for Equity REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]

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