Fitch Rates Simon Property Group's Notes Offering 'A'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned an 'A' rating to the EUR750 million issuance of 1.375% senior unsecured notes due 2022 by Simon International Finance SCA, a subsidiary of Simon Property Group, Inc. SPG. The notes will be fully and unconditionally guaranteed by Simon Property Group, L.P., the operating partnership of Simon Property Group, Inc. The company expects to use the net proceeds to reduce its existing euro-denominated borrowings and for general corporate purposes. A full list of ratings follows at the end of the release.

KEY RATING DRIVERS

Simon's 'A' long-term Issuer Default Rating (IDR) reflects the strong quality of the company's retail real estate portfolio, 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 and partially utilized $2 billion common stock repurchase program and its bid for The Macerich Company MAC reflect a more shareholder-friendly capital allocation policy. The program, combined with the bid for MAC (should it have been successful), 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 METRICS; SHARE REPURCHASE PROGRAM A WILDCARD

Fitch calculates Simon's leverage at 5.3x as of Sept. 30, 2015 as compared to 5.2x as of Dec. 31, 2014 pro forma for certain acquisitions. 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. Through 3Q15, SPG has repurchased $343 million though the effects on leverage were mitigated by the sale of $454 million of marketable and non-marketable securities (i.e. the MAC shares) in 2Q15. 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.

Fitch projects that fixed-charge coverage will be in the low 4x over the next 12-to-24 months (4x in 3Q15 and 3.7x in 2014) driven by mid-single digit releasing spreads. 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 stock dividends.

STRONG ASSET QUALITY

Fitch considers SPG's portfolio to be prime with notable trophy assets. The portfolio has scale and diversity with interests in properties in North America, Asia and Europe, ranging from Premium Outlets to luxury malls. Fitch also views SPG's 3Q15 $616 sales per square foot and outperformance relative to other mall REITs (as measured by SSNOI) as further indications of the portfolios quality. 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.

MARKET LEADING ACCESS TO CAPITAL

Fitch views Simon as having the most consistent and durable access to capital in the REIT sector, which is a material driver of the 'A' rating. The company established a commercial paper (CP) program established in 2014 (the first such program established by a U.S. equity REIT), which it upsized to $1 billion from $500 million in March 2015. In addition to the CP program, Simon 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. Moreover, Simon has traditionally been active in both the unsecured and secured debt markets.

ADEQUATE LIQUIDITY AND FINANCIAL FLEXIBILITY

Liquidity coverage is 1.4x for the period from Oct. 1, 2015 to Dec. 31, 2016 and 0.9x through Dec. 31, 2017 pro forma for the notes issuance. Fitch defines liquidity coverage as liquidity sources divided by liquidity uses. Liquidity sources include unrestricted cash, availability under revolving credit facilities pro forma 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 and 2017 are refinanced, liquidity coverage would improve to 2.5x and 1.7x, respectively.

Liquidity is enhanced by Simon's low adjusted funds from operations (AFFO) payout ratio, which was 72.8% in 3Q15, 64% in 2014 compared with 59.2% in 2013 and 57% in 2012. Fitch estimates that the company generates approximately $1 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 2.9x, which is adequate for the rating.

KEY ASSUMPTIONS

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 cumulative over the next two years;

--Debt repayment with the issuance of new unsecured bonds and secured debt;

--AFFO payout ratio of approximately 60%.

RATING SENSITIVITIES

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 at Sept. 30, 2015);

--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (fixed-charge coverage was 4x at Sept. 30, 2015).

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.

FULL LIST OF RATING ACTIONS

Fitch currently rates SPG as follows:

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 term loan 'A';

--Senior unsecured notes 'A';

--CP notes 'F1'.

Simon CP 2

--CP notes 'F1'.

Simon International Finance SCA

--Unsecured guaranteed notes 'A'.

Date of Relevant Committee: Oct. 7, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Equity REITs (pub. 18 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Additional Disclosures

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