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Fitch Downgrades Regency Centers IDR to 'BBB'; Outlook Stable

^{Published on 2011-04-15 06:45:22 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) and outstanding ratings of Regency Centers Corporation (NYSE: REG) and Regency Centers, L.P., REG's principal operating subsidiary, as follows:

Regency Centers Corporation

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

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

Regency Centers, L.P.

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

--Unsecured revolving facility to 'BBB' from 'BBB+';

--Senior unsecured notes to 'BBB' from 'BBB+'.

The Rating Outlook has been revised to Stable from Negative.

The rating actions center on leverage and fixed-charge coverage metrics which have migrated to levels more consistent with Fitch criteria for a 'BBB' IDR. Absent any major develeraging initiatives, Fitch expects Regency to maintain credit metrics within a range appropriate for the 'BBB' IDR.

Pro-rata leverage, measured as net debt/recurring operating EBITDA, pro forma for REG's settlement of its forward common equity sale agreements in March 2011, was 6.2 times (x) as of Dec. 31, 2010. This ratio is unchanged as of Dec. 31, 2009. 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, 2010, unchanged from 1.9x in 2009. Pro forma for the company's consummated forward equity sale agreements, fixed-charge coverage would be 2.0x for the year ended Dec. 31, 2010.

Stabilized operating property fundamentals weakened slightly in 2010 measured by releasing spreads of negative 1.8% and same store occupancy of 92.8% as of Dec. 31, 2010 (down from 93.1% as of Dec. 31, 2009). Excluding spaces vacant for more than 12 months, rent growth was down by 0.4%. Same-property year-over-year net operating income (NOI) increased 1.2% in 2010. Fitch expects that same-property NOI growth will be relatively flat in both 2011 and 2012, due to declining renewal rents, offset by increased occupancy and embedded positive contractual rent increases. This expected performance is weaker than the company's historical performance from 2000 to 2008, when it generated average annual same-property NOI growth of approximately 3.0%.

REG has a manageable debt maturity schedule, with no year accounting for more than 20% of total maturing debt. In addition, using an 8.0% capitalization rate, unencumbered assets covered net unsecured debt by 2.0x, which is adequate for the 'BBB' rating, and the company's unsecured debt covenants do not restrict REG's financial flexibility.

On a pro forma pro-rata basis, REG's risk-adjusted capitalization ratio stood at 1.1x as of Dec. 31, 2010, up from 1.0x as of Dec. 31, 2009, due in large part to REG raising common equity via settled forward equity agreements. When applying an illustrative 35% charge to construction in progress to reflect reduced risk of REG's development due to solid pre-leasing and percentage complete, pro rata risk adjusted capitalization would be 1.4x as of Dec. 31, 2010.

While REG has established itself as a developer with a national platform, the company's development activities contain certain inherent risks, such as lease-up risk. REG's net cost of properties in development made up 11% of its gross undepreciated assets as of Dec. 31, 2010, down significantly from 23% as of Dec. 31, 2009, and reflective of an overall de-risking of the company's strategy. Offsetting REG's development risk is that the development pipeline is approximately 95% complete (up from 90% as of Dec. 31, 2009) and Regency-owned development is 82% leased (up from 79% as of Dec. 31, 2009).

REG's community and neighborhood shopping center portfolio reflects moderate geographic and anchor tenant concentrations. Roughly 60% of REG's 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 15% of expiring pro-rata minimum base rent.

Additionally, even though REG's five largest tenants by annual base rents - The Kroger Co. (4.4%), Publix Super Markets Inc. (4.4%), Safeway Inc. (3.8%), Supervalu Inc. (2.4%), and CVS Caremark Corporation (1.7%) - represent in aggregate nearly 16.7% of annual base rents, this credit weakness is offset by the fact that Fitch rates three of the top five tenants as investment grade.

The two notch differential between REG's IDR and its preferred stock credit assessment is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. Based on Fitch's criteria report ('Equity Credit for Hybrids & Other Capital Securities'), REG's preferred stock is 75% equity-like and 25% debt-like, since it is perpetual and has no covenants but has a cumulative deferral option in a going concern.

The Stable Outlook is based on stabilizing retail fundamentals, Fitch's expectation that leverage and coverage will remain fairly unchanged relative to current levels and Regency will maintain adequate liquidity. For the period of Jan. 1, 2011 to Dec. 31, 2012, Fitch calculates that REG's sources of liquidity (cash, availability under its unsecured revolving credit facility assuming the commitment size is reduced by one-third given its maturity in 2012, and projected retained cash flows from operating activities after dividends) exceed uses of liquidity (pro rata debt maturities and amortization and projected capital expenditures) by 0.9x. Under a scenario whereby 80% of REG's pro-rata secured debt is refinanced with new secured debt, liquidity coverage improves to 1.3x. The company has demonstrated strong access to the common equity, unsecured debt and secured debt markets, mitigating near-term refinance risk.

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

--Total pro-rata net debt to recurring operating EBITDA sustaining below 5.5x for several quarters (pro forma pro-rata leverage was 6.2x as of Dec. 31, 2010).

--Fixed charge coverage sustaining above 2.3x for several quarters (pro forma pro-rata coverage was 2.0x for the year ended Dec. 31, 2010).

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 0.9x as of Dec. 31, 2010).

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--Criteria for Rating U.S. Equity REITs and REOCs, March 15, 2011;

--Corporate Rating Methodology, Aug. 16, 2010;

--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;

--Rating Hybrid Securities, Dec. 29, 2009

--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009.

Applicable Criteria and Related Research:

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

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