NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a credit rating of 'BBB' to the $250 million aggregate principal amount of 3.75% senior unsecured notes due 2024 issued by Regency Centers, L.P., the operating partnership of Regency Centers Corporation (NYSE: REG). The notes were issued at 99.482% of par value to yield 3.812% or 120 basis points over the benchmark rate.
The company intends to use the net proceeds from the offering to fund, in whole or in part, 'Eligible Green Projects,' including the acquisition, construction, development or re-development of such projects. Eligible Green Projects means new or ongoing projects (including new development, expansions and/or property renovations) and/or existing assets under management by Regency Centers or any of its subsidiaries, which have received, or are expected to receive, any LEED certification rating level (Certified, Silver, Gold or Platinum) or LEED equivalent certification.
Fitch currently rates REG as follows:
Regency Centers Corporation
--Issuer Default Rating 'BBB';
--Preferred Stock 'BB+'.
Regency Centers, L.P.
--Issuer Default Rating 'BBB';
--Unsecured Revolving Facilities 'BBB';
--Senior Unsecured Term Loan 'BBB';
--Senior Unsecured Notes 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The rating is based on improvements in operating fundamentals and Fitch's expectations that leverage and fixed-charge coverage metrics will stabilize or improve slightly from current levels. Absent any further deleveraging initiatives, Fitch expects REG to maintain credit metrics within a range appropriate for the 'BBB' IDR.
Pro-rata same-property net operating income (NOI) grew at a healthy rate of 4% in both 2013 and 2012, but decelerated throughout 2013 and into the first quarter of 2014. Rent growth has been strong across both new leases and renewals. Fitch expects that same-property NOI will continue to grow in the low single digits through 2016 with the company maintaining its current occupancy rate. Additionally, the company's lease expiration schedule is manageable, with no year representing more than 14% of expiring pro-rata minimum base rent, further improving the durability of rental cash flows, absent tenant bankruptcies.
APPROPRIATE CREDIT METRICS
REG's pro-rata leverage was 6.1x for the trailing 12 months (TTM) ended March 31, 2014, up from 5.7x at year-end 2013, but down from 6.3x as of year-end 2012. The uptick in leverage was driven by a draw on the revolving credit facility to fund 1Q'14 acquisitions. Fitch projects the company's leverage to sustain in the high 5.0x's through 2016 which would be appropriate for the rating. Fitch defines leverage as net debt divided by recurring operating EBITDA.
REG's pro-rata fixed-charge coverage ratio was 2.1x for the trailing twelve months ended March 31, 2014, up from 2.0x and 1.9x at yearend 2013 and 2012, respectively. Fitch projects REG's fixed-charge coverage will sustain in the low 2x's through 2016. 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.
LIMITED DEVELOPMENT RISK
Although REG was a prolific developer during the last real estate cycle, the company is now taking a more measured approach. The company's net cost to complete in-progress developments was 2.4% of its gross undepreciated assets as of March 31, 2014, up from 1.6% and 2.1% at year-end 2013 and 2012, respectively. This compares to 12.7% as of 2007. The size of the overall development pipeline has decreased materially since the start of the global financial crisis, reflecting an overall de-risking of the company's strategy. Fitch expects the company to gradually increase its development pipeline by starting $165 million of annual developments and redevelopments from 2014 through 2016.
STRONG UNENCUMBERED ASSET COVERAGE OF UNSECURED DEBT; UNEVEN DEBT MATURITY PROFILE
REG's implied unencumbered asset value covered its net unsecured debt by 2.6x for the year ended Dec. 31, 2013 when applying an 8.0% stressed capitalization rate to unencumbered NOI. This ratio is strong for the 'BBB' rating and indicative of good contingent liquidity.
REG has some unevenness in its debt maturity schedule with large unsecured bond maturities contributing to 19.0% of pro-rata debt maturing in 2015 and 21.6% maturing in 2017. The company has forward-starting swaps which reduce interest rate risk associated with the 2015 maturities. Refinancing risk is also mitigated by the company's strong unencumbered asset pool and demonstrated access to the unsecured debt and equity markets.
For the period April 1, 2014 to Dec. 31, 2015, REG's sources of liquidity (unrestricted 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, amortization, projected recurring capital expenditures and development) by 1.1x. While the May 2014 bond issuance is not included in Fitch's base case liquidity analysis, assuming the proceeds are deployed toward development and capital expenditures, liquidity coverage would improve. Under a scenario whereby 80% of REG's pro-rata secured debt is refinanced with new secured debt, liquidity coverage would improve to 1.5x. The company has demonstrated strong access to various forms of capital over the past few years, mitigating near-term refinance risk.
CONSISTENT AFFO PAYOUT RATIO
REG's dividend payout ratio has ranged between 85% and 92% of adjusted funds from operations (AFFO) over the past five years, indicative of a modest amount of internally generated capital. Fitch expects the company's dividend coverage will remain within this recent historical range over the next three years.
MODERATE GEOGRAPHIC CONCENTRATION
REG's community and neighborhood shopping center portfolio has moderate geographic and anchor tenant concentrations. Of REG's annualized base rent, 52% is derived from properties located within the states of California, Florida and Texas. However, the company is exposed to various markets within these three largest states, reducing the headline concentration risk. Although REG's three largest tenants by annual base rents represent approximately 11% of annual base rents, this tenant concentration is offset by the fact that Fitch rates two of the top three tenants as investment grade. The three largest tenants are The Kroger Co. (4.5%, IDR of 'BBB' by Fitch), Publix Super Markets Inc. (4.1%), Safeway Inc. (2.5%, IDR of 'BBB-'). However, Safeway Inc. is currently on Rating Watch Negative, and would likely be downgraded to 'B' assuming the proposed Cerberus acquisition (announced March 2014) was completed as proposed.
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 Dec. 23, 2013, 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.
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.
The Stable Outlook is based on continued improvement in retail fundamentals and Fitch's expectation that leverage and coverage will remain relatively unchanged over the next two years.
The following factors may have a positive impact on REG's ratings and/or Outlook:
--Fitch's expectation of pro-rata leverage sustaining below 5.5x for several quarters (pro rata leverage was 6.1x as of March 31, 2014);
--Fitch's expectation of fixed-charge coverage sustaining above 2.3x for several quarters (pro rata coverage was 2.1x for the TTM ended March 31, 2014).
The following factors may have a negative impact on REG's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 7.0x for several quarters;
--Fitch's expectation of fixed-charge coverage sustaining below 1.8x for several quarters;
--A liquidity shortfall (REG had a base case liquidity coverage ratio of 1.1x as of March 31, 2014).
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs (Sector Credit Factors) (Feb. 26, 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Equity REITs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)