Fitch Ratings has affirmed the ratings of Regency Centers Corp.
(NYSE: REG) and its operating partnership Regency Centers, L.P.
(collectively, REG or the company) at 'BBB+' upon the announcement
it will acquire Equity One, Inc. (NYSE: EQY) in an all-stock
transaction. The Rating Outlook is Stable.
KEY RATING DRIVERSFitch views the transaction positively given
the quality of EQY's portfolio, its geographic overlap with REG's
in higher barrier to entry markets and the potential for the issuer
to have improved access to debt and equity capital as the largest
shopping center REIT. These positive elements are unlikely to
result in a materially stronger credit at the onset but could over
time as the pro forma leverage (expected to be between 4.5x to 5x)
is largely consistent with Fitch's projections at the time of the
August 2016 upgrade. A key factor for positive momentum that Fitch
identified at the time of the upgrade was REG demonstrating
market-leading capital markets access across the broader REIT
universe. Fitch will watch to see whether this occurs as a result
of the transaction.
POSITIVE MOVEMENT IN CREDIT METRICSFitch expects leverage will
settle in the 4.5x - 5x range after the transaction closes. REG's
pro-rata leverage (defined as net debt divided by trailing 12
months [TTM] recurring operating EBITDA) was 4.3x as of Sept. 30,
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. When
including 50% of the company's preferred stock as debt, leverage
increases by approximately 0.3x-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.
STABLE FUNDAMENTALSOperating fundamentals for shopping centers
remain favorable, driven in large part by limited new supply. Pro
rata same-store property net operating income (NOI) has grown 3.4%
year-to-date, a slight deceleration from the approximately 4%
growth of 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.
STRONG UA / UD; SUFFICIENT LIQUIDITY TO CLOSE TRANSACTIONREG'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%
stressed capitalization rate to unencumbered NOI, and pro forma for
the earlier tender of $300 million of unsecured bonds with proceeds
from an equity issuance. This ratio is strong for the 'BBB+'
rating, and Fitch does not envision it deteriorating materially pro
forma for EQY.
Fitch expects REG has adequate liquidity to close the
transaction given the all-stock equity consideration and the
expectation that EQY's private placements could be assumed by the
issuer. Fitch expects REG will refinance EQY's unsecured bank
borrowings to restore liquidity back to its pre-EQY levels.
MODERATE GEOGRAPHIC CONCENTRATION TO INCREASEREG's community and
neighborhood shopping center portfolio has moderate geographic and
anchor tenant concentrations which will likely concentrate further
pro forma for EQY. Over 75% of REG's annualized base rent will be
derived from its top 25 markets pro forma with the highest
concentration in California, although many of the assets and
markets REG is acquiring are of solid quality. REG's three largest
tenants by annual base rent (ABR) will represent 9.1% of ABR down
from 11.2%. The company's three largest tenants are Publix Super
Markets Inc. (3.1%), The Kroger Co. (3%, IDR of 'BBB'), and Safeway
(2.9%).
PREFERRED STOCK NOTCHINGThe 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 April 5, 2016, available
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 RATIONALEFitch 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 OUTLOOKThe 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 ASSUMPTIONSFitch's key assumptions within the rating case
for REG include:
--The closing of the EQY transaction and refinancing of EQY's
bank debt with new unsecured bonds;--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% by 2018.
RATING SENSITIVITIESThe 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;--Fitch's expectation of
fixed charge coverage sustaining above 3.0x for several
quarters.
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 affirmed the following ratings:
Regency Centers Corporation--IDR at 'BBB+';--Preferred Stock at
'BBB-'.
Regency Centers, L.P.--IDR at 'BBB+';--Unsecured Revolving
Facility at 'BBB+';--Senior Unsecured Term Loan at 'BBB+';--Senior
Unsecured Notes at 'BBB+'.
The Rating Outlook is Stable.
Should Regency assume any of the unsecured notes issued by
Equity One, Inc. upon consummation of the merger, Fitch anticipates
that it will assign 'BBB+' ratings at that time.
Additional information is available on www.fitchratings.com.
SUMMARY OF KEY FINANCIAL STATEMENT ADJUSTMENTSA 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 CriteriaCriteria for Rating Non-Financial Corporates
(pub. 27 Sep
2016)https://www.fitchratings.com/site/re/885629Treatment and
Notching of Hybrids in Non-Financial Corporate and REIT Credit
Analysis (pub. 29 Feb
2016)https://www.fitchratings.com/site/re/878264
Additional DisclosuresDodd-Frank Rating Information Disclosure
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Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014881Endorsement
Policyhttps://www.fitchratings.com/regulatory
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Fitch RatingsPrimary AnalystSteven MarksManaging
Director+1-212-908-9161Fitch Ratings, Inc.33 Whitehall StreetNew
York, NY 10004orSecondary AnalystBritton Costa,
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New York, +1 212-908-0278sandro.scenga@fitchratings.com