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Fitch Rates Simon Property Group's Notes Offering 'A'
May 24, 2017 / 2:12 PM / 3 months ago

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

(The following statement was released by the rating agency) NEW YORK, May 24 (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 2022, and 2027. KEY RATING DRIVERS SPG's 'A' Issuer Default Rating (IDR) reflects the company's high-quality retail real estate portfolio, cycle-tested management team, its market-leading access to capital, and its significant scale which influences efficiencies and the aforementioned access to capital. Other strengths include its financial flexibility that stems 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. Moreover, SPG is unspecific about its financial policies and credit rating targets and has demonstrated a willingness to flex the balance sheet in the name of external growth opportunities. LEVERAGE STABILIZING AT CURRENT LEVELS Fitch expects leverage will be in the 5x - 5.5x range over the next 12-to-24 months but closer to 5.5x for 2017, following the stabilization of development and re-development projects. Leverage sustaining between 4.5x - 5.5x is appropriate for the 'A' rating and thus Fitch's projection are towards the high-end of the range. These levels are largely unchanged from where SPG has operated recently with leverage at 5.3x for the quarter ended March 31, 2017, compared to 5.3x and 5.4x, respectively, for the years ended Dec. 31, 2016 and Dec. 31, 2015. Fitch projects that fixed charge coverage will sustain in the mid-to-high 4x range over the next 12-to-24 months as compared to 4.8x for the quarter ended Mar. 31, 2017. Fitch includes cash distributions from unconsolidated entities plus dividends form its investment in Klepierre shares net of distributions to noncontrolling property interests when calculating SPG's leverage and coverage metrics. Leverage when including 50% of preferred stock and preferred units was unchanged. STRONG ASSET QUALITY DRIVING OPERATING PERFORMANCE Fitch considers SPG's portfolio to be prime with notable trophy assets, which has supported operating performance despite tenant headwinds and should be more financeable on a relative basis. The portfolio has scale and diversity with interest in properties in North America, Asia, and Europe ranging from Premium Outlets to luxury malls. Fitch views SPG's 1Q17 $615 sales per square foot and outperformance relative to other mall REITs (as measured by SSNOI growth) as further indications of the portfolio's quality. Simon has consistently outperformed its U.S. mall REIT peers, with comparable NOI growth and occupancy exceeding peers from 2005 - 2016. 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. 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, as SPG re-opened the REIT unsecured debt market in 2009 when it issued $650 million of 10-year notes at 10.4%. SUFFICIENT LIQUIDITY RELATIVE TO OBLIGATIONS 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, which was 69.6% in 1Q17, 66.9% in 2016, and 66.7% in 2015. Fitch estimates that the company produces greater than $1 billion of internal generated liquidity per year, which can be deployed for future investments, development and/or debt repayment. 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 issuer 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' Issuer Default Rating (IDR) reflects the company's high-quality retail real estate portfolio, cycle-tested management team, its market-leading access to capital, and its significant scale which influences efficiencies and the aforementioned access to capital. Other strengths include its financial flexibility that stems 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. Moreover, SPG is unspecific about its financial policies and credit rating targets and has demonstrated a willingness to flex the balance sheet in the name of external growth opportunities. KEY ASSUMPTIONS Fitch's key assumptions within its 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 match redevelopment and expansion capex to 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 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 for the quarter ended March 31, 2017); --Fitch's expectation of fixed charge coverage sustaining above 3.5x (coverage was 4.8x for the quarter ended March 31, 2017). The following factors may have a negative impact on SPG's Ratings and/or Outlook: --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 financeability of SPG's portfolio; --Fitch's expectation of fixed charge coverage sustaining below 3x. LIQUIDITY Fitch expects SPG's liquidity coverage to remain adequate for the rating. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under revolving credit facilities, expected retained cash flow from operating activities after dividend payments and distributions to noncontrolling interests) divided by uses of liquidity (debt maturities, cost-to-complete development expenditures, and capital expenditures). 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 notes 'A'; --CP notes 'F1'. Simon CP 2 --CP notes 'F1'. Simon International Finance, S.C.A. --Unsecured guaranteed notes 'A'. The Rating Outlook is Stable. Contact: Primary Analyst Ronald Nirenberg Director +1-212-612-7747 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 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. Date of Relevant Rating Committee: July 22, 2016 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 added cash distributions from unconsolidated entities net of distributions to noncontrolling property interests to recurring operating EBITDA; --Fitch has adjusted the historical and projected net debt by assuming the issuer requires $250 million of cash for working capital purposes which is otherwise unavailable to repay debt; --Fitch has included 50% of preferred equity and preferred units (included in noncontrolling interests) as debt. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Recovery Ratings and Notching Criteria for Equity REITs - Effective from 3 December 2015 to 16 November 2016 (pub. 03 Dec 2015) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis- Effective from 26 February 2016 to 27 April 2017 (pub. 29 Feb 2016) 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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