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Fitch Rates Simon Property Group's Notes Offering 'A'; Outlook Stable
December 1, 2017 / 3:20 PM / in 13 days

Fitch Rates Simon Property Group's Notes Offering 'A'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 01 (Fitch) Fitch Ratings has assigned an 'A' rating to the multi-tranche senior notes issued by Simon Property Group, L.P., the operating partnership of Simon Property Group, Inc. (NYSE: SPG). The offering is comprised of notes due 2023 and 2027. KEY RATING DRIVERS SPG's 'A' Issuer Default Rating (IDR) reflects the company's continued market-leading access to capital, high quality real estate portfolio, cycle-tested management team, and its significant scale influencing efficiencies and the aforementioned access to capital. Other strengths include its financial flexibility stemming from a low dividend payout ratio and a sizable unencumbered pool. Partially offsetting these strengths is leverage that is low on an absolute basis but high relative to the rating sensitivities for Fitch's 'A' rating. HEADLINE CREDIT METRICS CONSISTENT: Fitch expects leverage will sustain in the mid-5x range following the stabilization of development and re-development projects. Leverage sustaining between 4.5x-5.5x is appropriate for the 'A' rating, and Fitch's projections are towards the high-end of the range. These levels are largely unchanged from where SPG has operated recently. Fitch projects that fixed charge coverage will sustain in the mid-to-high 4x range. Fitch includes cash distributions from unconsolidated entities plus dividends from its investment in Klepierre shares net of distributions to noncontrolling property interests when calculating SPG's leverage and coverage metrics. STRONG ASSET QUALITY DRIVING OPERATING PERFORMANCE: Fitch considers SPG's portfolio to be prime with notable trophy assets, which has supported operating performance despite broader retail tenant headwinds, and should be more financeable on a relative basis. The portfolio has scale and diversity with interests in properties in North America, Asia, and Europe ranging from premium outlets to luxury malls. Fitch views SPG's third quarter 2017 (3Q17) $622 sales per square foot and outperformance relative to other mall REITs (as measured by occupancy, leasing spreads, and same store net operating income growth) as further indications of the portfolio's quality. Simon has consistently outperformed its U.S. mall REIT peers, with average comparable NOI growth and occupancy exceeding peers from 2005 to 2017 year-to-date. SPG has sought to address secular tenant pressures by reducing exposure to smaller and/or weaker assets through the Washington Prime Group spin-off and reinvesting in its portfolio through expansion and redevelopment projects, particularly the re-tenanting of less productive apparel-focused anchors. Nonetheless, persistent tenant headwinds could affect the productivity and financeability of SPG's portfolio. MARKET-LEADING ACCESS TO CAPITAL: Fitch views SPG as having sector-leading and durable access to capital and its relative and absolute access to debt capital are primary factors behind the 'A' rating. Substantiating this view is the diversity of SPG's capital sources. SPG has demonstrated access to debt capital in multiple currencies (USD and EUR), across a wide range of tenors (commercial paper through 30-year notes) and at all points in the cycle. STABLE OUTLOOK: The Stable Outlook reflects Fitch's view that SPG's operating fundamentals will remain favorable over the next 12 to 24 months and that the company will maintain leverage consistent with the 'A' rating. Beyond the rating horizon, Fitch considers the mall's long-term competitive position as a key determinant of SPG's operating fundamentals, the financeability of its assets, and its overall access to capital. DERIVATION SUMMARY SPG's 'A' IDR reflects the company's high-quality retail real estate portfolio, cycle-tested management team, market-leading access to capital, conservative financial policies and significant scale which influences efficiencies and its aforementioned access to capital. The combination of these factors place the company in a rating category held only by three other U.S. REITs, Federal Realty Trust (A-/Stable), Equity Residential (A/Stable), and Camden Property Trust (A-/Stable). Simon's Fitch-rated mall peers, CBL & Associates Properties (BB+/Negative) and Washington Prime Group (BBB-/Negative) are several tiers below SPG in asset quality, capital access, and operating fundamentals. Washington Prime was created in 2013 through the spin-off of Simon's lesser real estate assets (mostly B-malls and community centers) and the discrepancy between SPG's remaining portfolio and CBL/Washington Prime's portfolio has been apparent through metrics such as occupancy levels, leasing spreads, tenant sales per square foot, and SSNOI growth. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Operating fundamentals remain accommodative but decelerate modestly from mid-single-digit SSNOI growth to reflect retailer headwinds; --SPG continues to fund redevelopment, external growth capex and share buybacks from retained cash flow from operations after dividends; --SPG maintains market-leading access to capital, refinancing all secured and unsecured debt with like amounts but does not issue equity, instead repurchasing shares on a leverage-neutral basis. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Fitch's expectation of leverage sustaining below 4.5x; --Fitch's expectation of fixed charge coverage sustaining above 3.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Should SPG demonstrate or speak to more flexible financial policies that 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; --Should the competitive position of malls generally or SPG's portfolio specifically deteriorate due to factors such as retailer headwinds or changing distribution channels, resulting in weaker operating fundamentals and mortgage financeability of SPG's portfolio; --Fitch expectation of fixed charge coverage sustaining below 3x. LIQUIDITY Adequate Liquidity Coverage: Fitch expects SPG's liquidity coverage to remain adequate for the rating. SPG has appropriate financial flexibility considering the size of its obligations. SPG's primary sources of liquidity are its unrestricted cash, availability under the two revolving credit facilities totalling $7.5 billion, and the contingent liquidity in the unencumbered asset pool. Liquidity is enhanced by Simon's consistently low adjusted funds from operations (AFFO) payout ratio. Fitch estimates that the company generates greater than $1 billion of internal liquidity per year, which can be deployed for future investments, development and/or debt repayment. FULL LIST OF RATING ACTIONS Fitch currently rates Simon as follows: Simon Property Group, Inc. --Long-Term Issuer Default Rating (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 notes 'A'; --Commercial paper (CP) notes 'F1'. Simon CP 2 --CP notes 'F1'. Simon International Finance, S.C.A. --Unsecured guaranteed notes 'A'. The Rating Outlook is Stable. Date of Relevant Committee: Sept. 19, 2017 Contact: Primary Analyst Steven Marks Managing Director +1-212-908-9161 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Christopher G. Pappas Director +1-646-582-4784 Committee Chairperson Stephen Boyd, CFA Senior Director +1-212 908-9153 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements. --Fitch adds back non-cash stock-based compensation to EBITDA; --Fitch includes operating income from discontinued operations, and adds cash distributions from unconsolidated entities net of distributions to noncontrolling property interests to EBITDA; --Fitch considers $250 million of cash necessary for working capital needs and otherwise unavailable to repay debt. --Fitch includes 50% of SPG's preferred equity and units as debt in certain leverage ratios. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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