Fitch Ratings has affirmed the following credit ratings for Regency Centers Corp. (NYSE: REG) and its operating partnership, Regency Centers, L.P., (collectively, REG):
Regency Centers Corporation
--Issuer Default rating (IDR) at 'BBB';
--Preferred stock at 'BB+'.
Regency Centers, L.P.
--IDR at 'BBB';
--Unsecured revolving facility at 'BBB';
--Senior unsecured notes at 'BBB'.
In addition, Fitch has assigned a 'BBB' rating to the company's $250 million senior unsecured term loan.
The Rating Outlook is Stable.
The rating affirmations center on leverage and fixed charge coverage metrics which have stabilized at levels appropriate for the current rating. Absent any major deleveraging initiatives, Fitch expects REG to maintain credit metrics within a range appropriate for the 'BBB' IDR.
Pro rata leverage, measured as net debt divided by recurring operating EBITDA was 6.4 times (x) as of Dec. 31, 2011. This ratio is down from 6.7x as of Dec. 31, 2010. In addition, REG's pro-rata fixed-charge coverage ratio (defined as recurring operating EBITDA less straight-line rents, leasing commissions and tenant and building improvements, divided by total interest incurred and preferred stock dividends) was 1.9x for the year ended Dec. 31, 2011, unchanged from 2010.
Fitch views REG's property portfolio profile, financial statement credit statistics, debt maturities, and liquidity position based on combining the company's 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 the company 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, REG has actively supported its co-investment partnerships in the past by raising common equity primarily used to repay or refinance its share of secured debt, demonstrating financial support of the partnerships.
Fitch views REG's joint venture platform positively as it provides broader market insights, incremental fee and property income, as well as risk-taking opportunities that the company may not want to effect on a wholly-owned basis. REG has also reduced leverage in its joint ventures to levels consistent with leverage on the consolidated portfolio, primarily through follow-on common equity offerings.
Same-store property performance showed signs of recovery in 2011. Although REG suffered a negative 10.4% roll-down on all new leases, all renewals were higher by 1.5% resulting in an overall leasing spread of negative 1.7%. Spaces which were vacant for less than 12 months had an overall leasing spread improvement of 1.2%; new leases rolled down 0.5% and renewal leases improved by 1.5% during 2011.
Same-store occupancy increased to 93.8% as of Dec. 31, 2011, up 100 basis points from a year earlier, resulting in same-store year-over-year net operating income (NOI) decreasing 0.6% in 2011, but up 0.1% without including termination fees.
Fitch expects that same-property NOI will grow in the low single digits in 2012, 2013 and 2014. This modest growth is the result of expected improvements in renewal and new lease rates and occupancy.
REG's community and neighborhood shopping center portfolio reflects moderate geographic and anchor tenant concentrations. Sixty-one percent of its annualized base rent is derived from properties located within the states of California, Florida, Texas, and Virginia. The company's lease expiration schedule is manageable, with no year representing more than 12% of expiring pro rata minimum base rent.
Although REG's five largest tenants by annual base rents represent in aggregate nearly 16.1% of annual base rents, this tenant concentration is offset by the fact that Fitch rates three of the top five tenants as investment grade. The company's five largest tenants are Publix Super Markets Inc. (4.4%), The Kroger Co. (4.2%; Fitch IDR of 'BBB' with a Stable Outlook), Safeway Inc. (3.7%, IDR of 'BBB-' with a Stable Outlook), Supervalu Inc. (2.2%, IDR of 'B' with a Negative Outlook), and CVS Caremark Corporation (1.6%, IDR of 'BBB+' with a Stable Outlook).
While REG has established itself as a developer with a national platform, the company's development activities contain certain inherent risks. However, REG's net cost of properties in development totaled only 4% of its gross undepreciated assets as of Dec. 31, 2011, which is down significantly from 11% and 23% in 2009 and 2010, respectively. This is reflective of an overall de-risking of the company's strategy since the downturn.
REG has a manageable debt maturity schedule, with no year accounting for more than 21% of total maturing debt. This laddering enhances the company's liquidity profile.
For the period Jan. 1, 2012 to Dec. 31, 2013, REG's sources of liquidity (cash, availability under its unsecured revolving credit facility and projected retained cash flows from operating activities after dividends) exceed uses of liquidity (pro rata debt maturities and amortization and projected capital expenditures and development) by 1.2x. Under a scenario whereby 80% of REG's pro rata secured debt is refinanced with new secured debt, liquidity coverage improves to 1.5x. The company has demonstrated strong access to the common equity, unsecured and secured debt and preferred stock markets, mitigating near-term refinance risk.
In addition, the company has good contingent liquidity in the form of a sizeable unencumbered asset pool. Using an 8.0% capitalization rate, the implied value of unencumbered assets covered net unsecured debt by 2.3x, which is adequate for the 'BBB' rating, and the company's unsecured debt covenants do not restrict REG's financial flexibility.
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 Dec. 15, 2011, 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.
The Stable Outlook is based on mildly strengthening retail fundamentals, Fitch's expectation that leverage and coverage will remain relatively unchanged or improve modestly compared with current levels and that REG will maintain adequate liquidity.
The following factors may have a positive impact on REG's ratings and/or Outlook:
--Total pro rata leverage sustaining below 5.5x for several quarters (pro rata leverage was 6.4x as of Dec. 31, 2011);
--Fixed charge coverage sustaining above 2.3x for several quarters (pro rata coverage was 1.9x for the year ended Dec. 31, 2011).
The following factors may have a negative impact on REG's ratings and/or Outlook:
--Leverage sustaining above 7.0x for several quarters;
--Fixed charge coverage sustaining below 1.8x for several quarters;
--A liquidity shortfall (REG had a base case liquidity coverage ratio of 1.2x as of Dec. 31, 2011).
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--Corporate and REIT Credit Analysis' (Dec. 15, 2011);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011);
--'Recovery Rating and Notching Criteria for REITs' (May 12, 2011).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Rating and Notching Criteria for Equity REITs
Sandro Scenga, +1-212-908-0278
Media Relations, New York
Steven Marks, +1-212-908-9161
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Kimberly Chan, +1-212-908-0346
Sean Pattap, +1-212-908-0642
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