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Rating Action:

Moody's upgrades Simon Property Group to A3

01 Nov 2006
Moody's upgrades Simon Property Group to A3

Approximately $11 Billion of Securities Affected.

New York, November 01, 2006 -- Moody's Investors Service upgraded the ratings of Simon Property Group (senior debt at A3). Moody's action reflects the REIT's strong market leadership in US regional malls, sound and consistent track record in integrating and realizing benefits from strategic acquisitions, and stable earnings in its core retail property portfolio. The rating outlook is stable.

Moody's believes that Simon will continue to be a successful consolidator and the premier firm in the retail property industry -- a sector where such leadership is of particular value. Simon is the largest REIT in the USA focused on operating a nationwide portfolio of retail properties. The REIT's US portfolio comprises 284 properties accounting for 200 million square feet in 38 states and Puerto Rico. The REIT also owns the leading portfolio of premium outlet centers in the USA. About 93% of its mall and premium outlet EBITDA is derived from centers that generate sales over $300 per square foot. Simon possesses proven ability to generate growth in earnings both internally (positive releasing spreads, redevelopment and adjacent activities such as Simon Brand Ventures and Simon Business Network) and externally (greenfield development, acquisitions and international expansion).

Moody's notes that Simon's unencumbered property portfolio generates over $1.5 billion of EBITDA, and that unencumbered EBITDA to total pro rata EBITDA is 58% at 3Q06 (vs. 50% in 2004; 54% in 2005). Unencumbered properties consist of high quality malls generating $485 in average sales per square foot at 3Q06.

Simon's fixed charge coverage increased to 2.2x at 3Q06 (pro forma for subsequent redemption of preferred stock), and Moody's expects this to rise further over the next few years. Secured leverage as a percent of gross book assets improved to 26% (with JVs) at 3Q06 from 27% at year-end 2005, and Moody's expects this figure to remain flat for some time. Liquidity remains robust with $2.7 billion available under its $3 billion credit facility at 3Q06, and its debt maturity schedule continues to be well-laddered. Variable rate debt/total debt has declined from 26% at year-end 2004, to 16% at year-end 2005, to 7% at 3Q06.

Simon's management team is strong and innovative, with a deep bench that positions it well to pursue more innovative asset management, tenant-relationship and marketing programs. The REIT has made substantial investments in building its systems which support its property operating infrastructure encompassing leasing, asset management and development. Simon's operating platform is one of the most sophisticated in the REIT universe.

Although Simon's international retail real estate ventures should grow further, Moody's does not expect any aggressive, leveraged international expansion. The REIT participates in joint ventures that own 52 shopping centers in Europe, five outlet centers in Japan, and one outlet center in Mexico. International ventures now account for 4% of Simon's EBITDA. Simon and its joint venture partners are also developing retail properties in South Korea and China. Simon approaches international expansion cautiously by entering into partnerships with local retail real estate developers and targeting high-growth under-retailed markets with strong demographics. Its US development pipeline is focused on construction of shopping centers with mixed-use components, and asset-intensification activities and redevelopments at existing shopping centers. Such activities tend to be of relatively low risk.

Moody's remarked that an upgrade to A2 would be contingent upon net debt/EBITDA consistently below 6x or secured debt comfortably below 20% of gross assets, combined with deepening leadership in the USA, and strengthening the international platform to closer to 10% of the REIT's EBITDA. Moody's believes that a negative rating action would reflect an acute reversal in earnings strength, stability or in competitive position, and would most likely be tied to a highly levered, large acquisition of a firm that is already highly geared with secured debt, resulting in fixed charge coverage consistently less than 2.0x, and secured debt over 30% of gross assets.

Last rating action: On August 22, 2006, Moody's put Simon on review for upgrade.

The following ratings are being upgraded with a stable outlook:

Simon Property Group, L.P. -- Senior unsecured debt to A3, from Baa1; senior unsecured debt shelf to (P)A3, from (P)Baa1

Simon Property Group, Inc. -- Preferred stock to Baa1, from Baa2; preferred stock shelf to (P)Baa1, from (P)Baa2

Corporate Property Investors -- Senior debt to A3, from Baa1

CPG Partners, LP -- Senior debt to A3, from Baa1

Chelsea Property Group, Inc. -- Senior debt to A3, from Baa1

Simon Property Group, Inc. [NYSE: SPG], headquartered in Indianapolis, Indiana, USA, is the largest retail REIT in the USA. Simon owns, manages, leases and develops 284 properties, primarily regional and super-regional malls as well as premium outlet centers, encompassing 200 million SF of gross leaseable area in the USA, and holds interests in 58 international properties. At September 30, 2006, Simon had consolidated gross book assets of $25 billion, book equity of $4 billion, a total market capitalization of $45 billion, and an equity market capitalization of $27 billion.

New York
Merrie S. Frankel
VP - Senior Credit Officer
Real Estate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Daniel Michles
Associate Analyst
Real Estate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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