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Fitch Affirms Regency Centers Upon Equity One Merger; Outlook Stable

REG | November 16, 2016

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 DRIVERS
Fitch 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 METRICS
Fitch 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 FUNDAMENTALS
Operating 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 TRANSACTION
REG'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 INCREASE
REG'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 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 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 RATIONALE
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.

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 OUTLOOK
The 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 ASSUMPTIONS
Fitch'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 SENSITIVITIES
The 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 ADJUSTMENTS
A 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 Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
https://www.fitchratings.com/site/re/878264

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014881
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