Fitch Initiates Coverage of Simon Property Group, Senior Notes 'BBB'

Business Wire, Jan 29, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 29, 2003

Fitch Ratings has assigned a 'BBB' rating to the $5.3 billion senior unsecured debt due 2003 through 2028 issued by Simon Property Group, Inc.'s operating partnership, Simon Property Group, L.P. (NYSE:SPG). Fitch has also assigned a 'BBB-' rating to Simon Property Group, Inc.'s $858 million of preferred equity. The Rating Outlook is Stable.

Fitch's ratings reflect the quality of Simon's assets and the relative revenue stability that these productive assets, which averaged sales of approximately $385 per square foot in 2002, have been able to generate thus far. The ratings also consider the caliber of Simon's management team, the fundamental risks associated with the retail sector, and Simon's aggressive capital structure, which is more highly levered and more encumbered than many REITs in its rating category. Fitch is also mindful of the event risk associated with Simon's position as a consolidator in the mall sector. Details regarding the proposed purchase of Taubman Centers, Inc. (NYSE:TCO) and related financing are still in process, but based on the relative size of transaction Simon should be able to structure related financing needs to minimize any deterioration in its credit profile. Simon's market dominance, stability of cash flow, the relative size of its overall capitalization, and its proven access to multiple forms of capital are consistent with a BBB risk profile.

Simon's dominance in the U.S. Mall sector and the fact that approximately 78% of Simon's EBITDA is generated from market dominant assets (which the company defines as either the most productive asset in a given trade area as defined by sales per square foot or the only regional mall in a given trade area) with average lease terms of seven years, current in-line shop occupancy above 91%, and a high ratio of strong national tenants, provide Simon with relatively stable cash flow. Simon's annualized EBITDA to interest coverage on a consolidated basis is approximately 2.4 times, which is relatively low for the rating category. However, although only approximately 50% of Simon's EBITDA is unencumbered, this unencumbered pool of assets generated approximately $850 million of EBITDA in 2002 and covers unsecured debt service by approximately 2.4 times, which argues that the company's use of debt financing for the unencumbered portfolio is not onerous relative to the pledged portfolio and its share of joint ventures. While the listing of unencumbered assets in quarterly filings and 8-K's is helpful in gaining perspective on the relative quality of the portfolio, equally important is better disclosure regarding the performance of these assets and the cashflow they generate along with greater frequency.

Negatively, Simon's overall debt leverage is somewhat high relative to comparably rated REITs, which is approximately 59% on an undepreciated book basis, and 64% debt and preferred to undepreciated book. Of additional concern is Simon's ratio of joint venture generated EBITDA, which is approximately 25% of total EBITDA. Although Fitch recognizes that the joint venture structure is a common feature of the mall sector, it does push consolidating leverage by several basis points, and limits Simon's control of certain assets, potentially forcing the company to buy or sell an asset at a time when it may not be strategically or fiscally advantageous. Other quality of income considerations include the contribution of non-contractual revenues, which include approximately 6% of top line revenues from ancillary services, and approximately 4% of top line revenues from percentage rents generated from various in-line and anchor retailers, including several market constrained department store retailers.

Fitch's rating outlook is stable to the extent that Simon is able to maintain its unencumbered EBITDA to unsecured debt ratio. Nevertheless, Simon is an active consolidator in the mall sector which poses significant event risk. Debt financed acquisitions or more highly leveraged portfolios, such as the targeted Taubman Centers' portfolio, have the potential to put pressure on Simon's ratings. Simon's concentrated debt maturity schedule also poses material refinancing risk, since Simon will be refinancing approximately $1.2 billion in the unsecured market over a three year period. This refinancing risk may be exacerbated by the Taubman portfolio's refinancing needs should the acquisition be successful. If a disproportionate amount of Simon's refinancings were to take the form of secured debt, Simon's unsecured ratings could be negatively impacted.

Based in Indianapolis, Indiana, Simon Property Group, Inc. is the largest owner and operator of regional malls in the United States, with a total market capitalization of approximately $20 billion as of September 30, 2002. Simon owns 249 properties comprising 186 million square feet with over 4,400 tenants generating approximately $39 billion from 2 billion shopping visits per annum. Approximately 94% of Simon's EBITDA is generated from 175 mall assets, with the remaining 6% of EBITDA from a 69 assets portfolio of community shopping centers, as well as a mixed use property and an office property. The Simon portfolio is diversified across 36 states, as well as 8 assets in Europe and Canada, with the largest concentration of assets in Florida (26 malls) and Texas (20 malls).