Fitch Upgrades Regency Centers to 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has upgraded the ratings of Regency Centers Corp. REG and its operating partnership Regency Centers, L.P. (collectively REG, or the company) to 'BBB+' from 'BBB'. The Rating Outlook is Stable. A full list of ratings actions follows at the end of this release.

KEY RATING DRIVERS

The upgrade of REG's Issuer Default Rating (IDR) to 'BBB+' reflects the company's consistent operating fundamentals which, when combined with follow-on equity issuances, have led to a material improvement in leverage and coverage. Actual metrics exceed our upgrade sensitivities, and are expected to improve further from current levels throughout the ratings horizon.

POSITIVE MOVEMENT IN CREDIT METRICS

REG's pro-rata leverage (defined as net debt divided by trailing 12 months [TTM] recurring operating EBITDA) was 5.0x as of March 31, 2016, down from 5.1x and 5.5x as of Dec. 31, 2015 and 2014, respectively. The company has improved leverage primarily due to common equity issuance to fund acquisitions and development. Fitch projects the company's leverage to approach the mid-4x level by the end of 2018. When including 50% of the company's preferred stock as debt, leverage increases by approximately 0.4x, which remains appropriate for the 'BBB+' rating.

Fitch projects REG's pro-rata fixed charge coverage will reach 2.8x by the end of 2016 and sustain in the low 3x range through 2018. This compares to 2.6x for the TTM ended March 31, 2016, up from 2.5x in 2015 and 2.3x 2014. Fitch defines fixed charge coverage as recurring operating EBITDA less straight-line rents, leasing commissions and tenant and building improvements, divided by total interest incurred and preferred stock dividends.

STABLE FUNDAMENTALS

Operating fundamentals for shopping centers remain favorable driven in large part by limited new supply. Pro-rata same-store property net operating income (NOI) grew 4.6% in first quarter of 2016, exceeding the 4.0%-4.1% growth from 2012-2015. Rent growth has been strong for both new leases and renewals in recent years and is the primary factor driving NOI growth given relatively stable occupancies. Fitch expects that same-property NOI will continue to grow in the low single digits through 2018 with the company maintaining its current occupancy rate. Additionally, the company's lease expiration schedule is manageable, with no year representing more than 12.0% of expiring pro-rata minimum base rent, further improving the durability of rental cash flows.

STRONG UA / UD; UNEVEN DEBT MATURITY PROFILE

REG's unencumbered asset (UA) pool provides ample contingent liquidity to unsecured bondholders. REG's implied UA value covered its net unsecured debt by 3.5x as of March 31, 2016 when applying an 8.0% stressed capitalization rate to unencumbered NOI, and pro forma for the company's recently announced tender of $300 million of unsecured bonds with proceeds from an equity issuance. This ratio is strong for the 'BBB+' rating.

Pro forma for the note redemption and extension of the term loan to 2022, REG has a manageable debt maturity schedule in the near term. However, REG still has some unevenness in its debt maturity schedule further out with 15.2% of pro rata debt maturing in 2020. However, refinancing risk is mitigated by the company's strong unencumbered asset pool and demonstrated access to the unsecured debt and equity markets.

LIMITED DEVELOPMENT RISK

While REG was a prolific developer during the last real estate cycle, the company is now taking a more measured approach, and the company's development exposure is at the lowest level in recent history. A smaller development pipeline limits some of the downside risk to key credit metrics in the next downturn. The company's net cost-to-complete development was 1% of its gross undepreciated assets as of March 31, 2016, compared with levels of 6.0% in 2008 and 12.7% in 2007. The size of the overall development pipeline has also decreased materially since the start of the global financial crisis, reflective of an overall de-risking of the company's strategy. Fitch expects the company to gradually increase its development pipeline by starting approximately $175 million of annual developments and redevelopments in 2016 and 2017, which would still result in development exposure sustaining at a manageable level.

APPROPRIATE LIQUIDITY

REG's liquidity coverage ratio is 2x for the period April 1, 2016 through Dec. 31, 2017. The base case assumes development costs of $51.2 million which is the cost-to-complete of on-going development projects and assumes no new development starts. Under a scenario in which development spending continues at its current trajectory, the company's liquidity coverage would decrease to 1.8x, which is still strong for the rating. Under a scenario where REG then refinances 80% of pro-rata secured debt with new secured debt, liquidity coverage would improve to 2.4x. Fitch calculates liquidity coverage as sources of liquidity (proceeds from the most recent equity offering earmarked for debt repayment, cash, availability under its unsecured revolving credit facility, and projected retained cash flows from operating activities after dividends) to uses of liquidity (pro rata debt maturities, amortization, projected recurring capital expenditures and development).

CONSISTENT AFFO PAYOUT RATIO

The company's payout ratio was 79.3% in 2015, enabling it to retain approximately $40 million of cash flow annually. This ratio is in line with the broader REIT universe. Fitch expects the company's dividend coverage will remain between 70%-80% over the three-year projection period, enabling a modest degree of internal capital formation.

MODERATE GEOGRAPHIC CONCENTRATION

REG's community and neighborhood shopping center portfolio has moderate geographic and anchor tenant concentrations. Over 70% of REG's annualized base rent is derived from its top 25 markets, with the highest concentration within the states of California, Florida and Texas. Although REG's three largest tenants by annual base rent (ABR) represent 11.2% of ABR, this tenant concentration is offset somewhat by the fact that Fitch rates two of REG's top tenants as investment grade. The company's three largest tenants are The Kroger Co. (4.7%, IDR of 'BBB'), Publix Super Markets Inc. (3.6%), and Albertsons Inc. (2.9%).

PREFERRED STOCK NOTCHING

The two-notch differential between REG's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB+' IDR. Based on Fitch's criteria report, 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' dated Apr. 5, 2016, available on Fitch's website at www.fitchratings.com, the company's cumulative redeemable preferred stock is deeply subordinated and has loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

PRO-RATA RATIONALE

Fitch looks at REG's property portfolio profile, credit statistics, debt maturities, and liquidity position based on combining its wholly-owned properties and its pro-rata share of co-investment partnerships, to analyze the company as if each of the co-investment partnerships was dissolved via distribution in kind.

Several of REG's co-investment partnerships provide for unilateral dissolution. Most of these co-investment partnerships provide for a distribution in kind in the event of a dissolution, whereby REG and its limited partner unwind the partnership by distributing the underlying properties (and related property-level debt, if any) to each partner based on each partner's respective ownership percentage in the partnership. Further, the company has supported its co-investment partnerships in the past by raising common equity to repay or refinance its share of secured debt, demonstrating its willingness to de-lever these partnerships.

Fitch views REG's partnership platform positively as it provides REG with broader market insights and incremental fee and property income. Via follow-on common equity offerings, the company has also reduced leverage in its partnerships to levels consistent with leverage on the wholly-owned consolidated portfolio.

STABLE OUTLOOK

The Stable Outlook reflects Fitch's view that REG's operating fundamentals will remain favorable over the next 12-to-24 months and that the issuer will maintain credit metrics consistent with the 'BBB+' rating.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for REG include:

Same-store revenue growth in the mid 2% range for 2016-2018;

Acquisitions of $350 million in 2016 and $100 million in both 2017 and 2018, all at a 4.5% yield;

Dispositions of $125 million in 2016, and $200 million in both 2017 and 2018 all at a 7.5% yield.

Additional (re)development spending of $175 in 2016-2017 and $200 million in 2018;

All secured debt is refinanced dollar for dollar at fixed rates starting at 4.5% in 2016 and rising to 5.0% by 2018.

RATING SENSITIVITIES

The following factors may have a positive impact on REG's ratings:

--Demonstrated market-leading capital markets access across the broader REIT universe;

--Fitch's expectation of pro-rata leverage sustaining below 4.5x for several quarters (pro-rata leverage was 5.0x for the TTM ended March 31, 2016);

--Fitch's expectation of fixed charge coverage sustaining above 3.0x for several quarters (pro-rata coverage was 2.6x for the TTM ended March 31, 2016).

The following factors may have a negative impact on REG's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining above 5.5x for several quarters;

--Fitch's expectation of fixed charge coverage sustaining below 2.5x for several quarters.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings:

Regency Centers Corporation

--IDR to 'BBB+' from 'BBB';

--Preferred Stock to 'BBB-' from 'BB+'.

Regency Centers, L.P.

--IDR to 'BBB+' from 'BBB';

--Unsecured Revolving Facility to 'BBB+' from 'BBB';

--Senior Unsecured Term Loan to 'BBB+' from 'BBB';

--Senior Unsecured Notes to 'BBB+' from 'BBB'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

A summary of financial adjustments includes combining the financial results of REG's wholly-owned properties and its pro-rata share of co-investment partnerships, Fitch's exclusion of non-cash stock-based compensation in G&A expense, and inclusion of 50% of preferred stock in debt calculation.

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

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009771

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009771

Endorsement Policy

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

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