January 16, 2013 / 1:50 PM / 5 years ago

TEXT-S&P summary: Regency Centers Corp.

Jan 16 -

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Summary analysis -- Regency Centers Corp. ------------------------- 11-Jan-2013

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CREDIT RATING: BBB/Stable/-- Country: United States

State/Province: Florida

Primary SIC: Real estate

investment

trusts

Mult. CUSIP6: 758849

Mult. CUSIP6: 758939

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Credit Rating History:

Local currency Foreign currency

30-Sep-2009 BBB/-- BBB/--

05-Dec-2007 BBB+/-- BBB+/--

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Rationale

Standard & Poor’s Ratings Services’ ratings on Regency Centers Corp. and its operating partnership, Regency Centers L.P. (together, Regency), acknowledge the company’s “satisfactory” business risk profile that is characterized by a well-occupied, geographically diverse and largely grocery-anchored portfolio. We consider Regency’s financial risk profile to be “intermediate”, supported by debt coverage measures that have remained at healthier levels: for the 12 months ended Sept. 30, 2012, S&P-derived EBITDA covered debt service by 2.6x and fixed-charge coverage (FCC) was 2.2x. We expect Regency’s earnings to be stable during 2013 because we believe that modest core occupancy improvement and lower interest expense (as a result of interest savings on previous refinancings) will offset dilution from asset sales activity. A moderately leveraged balance sheet and manageable debt maturity schedule further support our expectation for debt protection measures to remain stable this year.

Jacksonville, Fla.-based Regency is a national owner, operator, and developer of grocery-anchored and community shopping centers with a total market capitalization of $6.6 billion. As of Sept. 30, 2012, the company owned or had an interest in 347 properties with 46.1 million sq. ft. of space (including tenant-owned space). Market-dominant grocers anchor most of Regency’s shopping centers. The company’s largest tenants include Publix (unrated; 4.4% of company-owned rents), Kroger (BBB/Stable/A-2; 4.1%), and Safeway (BBB/Stable/A-2; 3.4%), but the company also has some exposure (2.2% of rents pre-Cerberus and roughly 0.7% post-Cerberus) to weaker operator Supervalu (B/Watch Pos). Regency’s portfolio includes 203 wholly owned shopping centers with an undepreciated real estate cost of $3.8 billion and 144 centers owned within joint ventures (JVs; Regency had a $450 million equity investment in unconsolidated JVs with an undepreciated real estate cost of $3.8 billion).

Regency’s same store portfolio was 94.3% leased as of Sept. 30, 2012, a 110-basis-point improvement year-over-year. We expect occupancy to remain fairly stable based on steady demand from retailers and a reduced number of small shop tenants moving out. However going forward in 2013, we expect the growth to come from same-store net operating income (NOI) growth (largely rent driven), acquisitions, and leasing of developed properties. Regency has targeted roughly $150 million of average annual development starts. Regency’s $242 million (estimated net costs) in-process development pipeline requires roughly $129 million net costs to complete and is 77% leased (Regency-owned space) or 80% leased including tenant-owned sq. ft. The expected stabilized yield on these seven development projects averages 8.1%.

Our base-case scenario analysis assumes 3.6% to 4.1% growth in same-property NOI for full-year 2012 and 2.0% to 3.0% growth for 2013. We assume the improvement will come from rent step-ups associated with in-place leases and rental rate growth associated with new and renewal leases, as we expect only minimal further core occupancy improvement. We also assume that the contribution from completed developments is offset by net asset sales dilution from portfolio culling. Our base-case scenario further assumes that Regency’s debt costs upon refinancing are flat (at 5.6% current average cost of debt). Under this scenario, Regency’s debt service and FCC measures improve slightly from trailing-12-month levels (2.6x and 2.2x). We expect total coverage (which includes the common dividend as a fixed charge) to remain more than 1x.

Management has demonstrated a commitment to maintaining a moderately leveraged balance sheet with an average debt tenor of roughly five years. We expect gradual modest deleveraging to occur over the next few years, as Regency targets debt-to-assets (pro rata for its JVs) of less than 40% (was 43.7% at Sept. 30, 2012). Regency’s unconsolidated JVs, on average, remain more highly leveraged (50.6% debt-to-assets at Sept. 31, 2012) than its on-balance-sheet holdings. Importantly, all JV debt is nonrecourse to Regency and its partners. Regency maintains a large unencumbered pool of wholly owned assets. The company’s ratio of secured debt to total assets was low (8%) at Sept. 30, 2012, which allows Regency to add some secured debt to its balance sheet for debt refinancing purposes while remaining comfortably within bond and facility covenants.

Liquidity

Regency’s liquidity is “adequate” to meet its capital needs, in our view, through year-end 2013.

Our liquidity assessment reflects the following factors and assumptions:

-- We expect the company’s liquidity sources (including cash, funds from operations {FFO}, and credit facility availability) through year-end 2013 to exceed its uses by 2x;

-- Because a meaningful portion of the company’s liquidity is derived from its ($800 million) revolving line of credit, we are currently capping our liquidity assessment at “adequate” rather than “strong;”

-- Consolidated debt maturities and principal amortization for the five quarters ended Dec. 31, 2013, total a modest $26 million, or 1.4% of consolidated debt outstanding as of Sept. 30, 2012; and

-- The company has sound relationships with its banks, in our view, and has satisfactory standing in the credit markets.

In our analysis, we assumed liquidity over the next five quarters consisting of cash, FFO, and availability under the company’s credit facility. We estimate these sources will total roughly $1.0 billion and will exceed estimated uses of roughly $476 million during the same period by more than 2x. Uses include modest regularly scheduled principal payments (as Regency faces its next senior unsecured note maturity in 2014), common and preferred dividends, development and redevelopment projects, portfolio-level recurring maintenance, and leasing-related capital expenditures. The company has access to an $800 million credit facility that is due to mature in September 2016 (subject to one, one-year extension at the company’s option).The outstanding balance on the credit facility as of Sept. 30, 2012, was $65 million.

While our liquidity scenario assumes no capital recycling, we believe the company may sell roughly $105 million to $200 million of assets, reinvesting proceeds into discretionary development and modest acquisition activity (which could reach $50 million). We expect that modest dilution associated with any capital recycling will be largely offset by improved cash flow from the core portfolio and contributions from completed development projects. We also expect that the company would ultimately fund any future net acquisitions with a combination of debt and common equity to preserve its moderate leverage profile.

Outlook

The outlook is stable. The company’s well-located portfolio has experienced a solid recovery in occupancy. Regency’s debt coverage measures are likely to continue to gradually improve, in our view, due to recovering retail fundamentals and the company’s lower interest expense (the result of refinancings over the prior several quarters). However, if the improvement in debt coverage measures reverses course--perhaps due to greater-than-expected development pursuits or an unexpected large tenant default--we would likely lower our rating. Alternatively, we would consider raising our rating if Regency experiences a meaningful improvement in portfolio occupancy and rents, such that the company sustains FCC comfortably above 2.3x amid moderate development and acquisition pursuits.

Our Standards:The Thomson Reuters Trust Principles.
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