Regency Centers Corporation / Regency Centers, L.P. — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019. Regency is a retail REIT focused on grocery-anchored shopping centers. It reported 302 consolidated properties and partial interests in 117 unconsolidated properties, totaling 419 properties. The Parent Company owned approximately 99.8% of the Operating Partnership.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $286.3 million | $276.7 million |
| Net income | $91.5 million | $53.5 million |
| Net income attributable to common stockholders | $90.4 million; $0.54 per diluted share | $52.7 million; $0.31 per diluted share |
| NAREIT FFO attributable to common stock and unit holders | $159.8 million | $164.9 million |
| Cash from operating activities | $131.4 million | $149.9 million |
| Cash, cash equivalents and restricted cash | $42.8 million | $45.2 million at Dec. 31, 2018 |
| Total debt outstanding | $3.684 billion | $3.715 billion at Dec. 31, 2018 |
Revenue growth was primarily from rent commencements, acquisitions and same-property rent growth. Pro-rata same-property NOI, excluding termination fees, grew 2.9%. The portfolio was 94.6% leased, versus 95.6% at year-end; same-property occupancy was 95.0%. Trailing 12-month comparable leasing rent spreads were 8.4%.
Total assets were $11.018 billion and total liabilities were $4.615 billion. Regency reported a 5.3x annualized pro-rata net-debt-to-Operating EBITDAre ratio and a 4.2x annualized fixed-charge coverage ratio. The $1.127 billion available under its $1.25 billion credit line was net of letters of credit. Unrestricted cash was approximately $39.5 million.
The Board declared a quarterly dividend of $0.585 per share, payable May 23, 2019. Q1 distributions to common stock and unit holders totaled approximately $97.8 million.
Changes versus the prior comparable period
- GAAP net income attributable to common stockholders rose $37.8 million. The increase included $16.5 million of gains on real estate sales, $20.5 million higher equity income from real estate partnerships—largely partnership property-sale gains—and substantially lower impairment expense. These items make the GAAP earnings increase less indicative of recurring operating growth.
- NAREIT FFO declined to $159.8 million from $164.9 million despite the increase in GAAP earnings.
- Operating cash flow decreased $18.5 million. Investing cash flow was positive $47.0 million versus a $107.2 million outflow in Q1 2018, principally reflecting higher real estate sale proceeds and partnership distributions. Financing cash flow was a $180.8 million outflow, including debt repayment, dividends and share repurchases.
- Operating expenses increased $13.7 million, including higher depreciation and amortization, real estate taxes and general and administrative costs. Net interest expense rose $1.0 million.
- At January 1, 2019, Regency adopted ASC 842. It recognized $225.4 million of lease liabilities and $297.8 million of right-of-use assets at adoption. The accounting change also shifted uncollectible lease amounts to a direct reduction of lease income and ended capitalization of certain internal leasing and legal costs.
Outlook, financing, risks and unusual items
- Management estimated approximately $182 million of cash requirements over the next 12 months: $163.8 million to complete developments and redevelopments, $13.2 million for maturing debt and $5.0 million for Regency’s estimated share of partnership debt contributions. Management expected operating cash flow after dividends to cover these needs and said available capital resources were sufficient.
- In March, Regency issued $300 million of 4.65% senior unsecured notes due 2049. Proceeds funded repayment of a $39.5 million mortgage carrying 7.3% interest and early redemption of $250 million of 4.8% notes due 2021. Early redemption costs were $10.6 million. Management said the transaction extended average debt maturities to more than 10 years while maintaining the weighted-average interest rate.
- Management reported compliance with debt covenants. Scheduled debt maturities and principal payments were $350.4 million in 2020 and $692.6 million in 2022. These figures exclude debt held at unconsolidated partnerships.
- Regency had 21 development or redevelopment projects with a projected total pro-rata investment of $403.3 million upon completion. It began two redevelopments with an estimated combined investment of $13.5 million and projected weighted-average return of 6.4%. Management expects development activity near recent historical averages, with activity likely to shift toward redevelopment.
- Retail bankruptcies, store closures, e-commerce competition, tenant financial distress, economic weakness, leasing and occupancy trends, development execution, natural disasters, environmental liabilities, and reliance on co-investment partners are identified risks. Tenants in bankruptcy occupying Regency space represented 0.2% of annual base rent. One Sears and one Kmart closure contributed to lower anchor occupancy.
- Environmental remediation liabilities accrued for Regency’s pro-rata share were $9.0 million. Management did not expect currently known environmental matters or ordinary-course litigation to have a material adverse effect, but cautioned that additional environmental issues or liabilities may be identified.
- The filing provides no specific full-year earnings or revenue guidance. Management stated that a 10% reduction in development activity without a corresponding reduction in related compensation costs could increase annual expense by $1.5 million.
Important facts for investors to verify
- How much of the GAAP earnings increase reflects property and partnership sale gains versus recurring property operations; also reconcile the decline in NAREIT FFO.
- Whether 2.9% same-property NOI growth, leasing spreads and occupancy remain durable, particularly following the Sears and Kmart closures.
- Development and redevelopment completion costs, timing, leasing progress and realized returns relative to management’s estimates.
- Debt maturities, refinancing access, covenant headroom and the effect of interest rates, including debt at unconsolidated partnerships.
- Cash available after dividends and planned capital spending, and the potential use of the new $250 million share repurchase authorization.
- Potential additional environmental remediation exposure and the funding capacity of co-investment partners.