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

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned an 'A' rating to EUR500 million of 1.25% senior unsecured notes issued by Simon International Finance, S.C.A., a wholly-owned subsidiary of Simon Property Group, Inc. SPG. The notes are guaranteed by Simon Property Group LP. A full list of ratings follows at the end of this 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, its significant scale, and its 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 relates to whether Simon's partially utilized $2 billion common stock repurchase program and its bid for The Macerich Company MAC last year reflect a more shareholder-friendly capital allocation policy. However, the company has reiterated a commitment to maintaining its existing ratings.

APPROPRIATE METRICS

Fitch calculates Simon's leverage was 5.4x and 5.5x for the trailing 12 months (TTM) and quarter ended March 31, 2016 as compared to 5.2x and 5.1x for 2015 and 2014, respectively. 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, and 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 could trend in the 5.5x-6.0x range, which would be weak for the 'A' rating. During 1Q16, SPG did not complete any share repurchases but maintains $1.66 billion in capacity on its $2 billion share repurchase program announced in April 2015 and authorized for a 24-month period. When including 50% of preferred stock in total debt, SPG's leverage was 5.5x and 5.4x for the quarter and TTM ended March 31, 2016. 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 sustain in the low 4x over the next 12-to-24 months (4.3x and 4.1x for quarter and TTM ended March 31, 2016 and 4.1x in 2015) 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 1Q16 $613 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 2005-2015 and occupancy outperforming peers by 100 basis points from 2005-2015.

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 in 2014 (the first such program created 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 totalling $7.5 billion. The credit facilities are comprised of a $4 billion facility and $3.5 billion supplementary facility (upsized from $2 billion in March 2015 with the accordion option exercised in April 2016), 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 1.2x for the period April 1, 2016 through Dec. 31, 2017 pro forma for the EUR denominated notes issued in May 2016, the exercised accordion option on the revolving line of credit and the closing of the acquisition of The Shops at Crystals. Fitch defines liquidity coverage as liquidity sources divided by liquidity uses. 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 1.8x.

Liquidity is enhanced by Simon's consistently low adjusted funds from operations (AFFO) payout ratio, which was 64.5% in 1Q16 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.

Fitch view's SPG's unencumbered pool as strong on an absolute basis given the pool's size ($3 billion of EBITDA in 2015) and quality. Unencumbered assets (based on a stressed 7% capitalization rate) cover net unsecured debt by 2.8x, 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 5.4x at March 31, 2016);

--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (fixed-charge coverage was 4.1x at March 31, 2016).

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'.

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 included cash distributions from unconsolidated entities in recurring operating EBITDA.

--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $100 million of cash for working capital purposes which is otherwise unavailable to repay debt.

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. 03 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874214

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878264

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004379

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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