Regency Centers Corporation and Regency Centers, L.P. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in millions of dollars unless stated otherwise. The filing combines the parent REIT and its operating partnership; their consolidated assets and liabilities are the same.
Business context and reporting period
Regency owns, operates, acquires, and develops grocery-anchored retail shopping centers. On March 1, 2017, it completed its merger with Equity One, issuing approximately 65.5 million shares and acquiring 121 properties for a stated purchase price of $5.2 billion. Results include Equity One from the merger date, so reported year-over-year comparisons are substantially affected by the larger portfolio.
At September 30, 2017, Regency had interests in 427 retail properties: 313 consolidated properties and partial interests in 114 properties through unconsolidated partnerships. The portfolio contained approximately 54.1 million square feet of gross leasable area.
Financial and operating metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $262.1 | $152.8 | $719.6 | $454.8 |
| Net income attributable to common stockholders | $59.7 | $5.3 | $74.8 | $88.0 |
| Basic and diluted earnings per share | $0.35 | $0.05 | $0.48 | $0.88 |
| NAREIT FFO attributable to common stock and unit holders | $155.7 | $30.1 | $333.5 | $194.2 |
| Core FFO attributable to common stock and unit holders | $161.7 | $84.3 | $434.2 | $244.1 |
Same-property NOI, adjusted for the merger and excluding termination fees, grew 5.0% in Q3 and 4.0% for the nine-month period. Trailing 12-month comparable rent spreads were 9.4%. Regency reported a 95.3% leased total portfolio and 96.1% leased same-property portfolio.
Cash flow, nine months: Operating activities provided $343.9, versus $225.3 in 2016. Investing activities used $858.6, including $648.8 net cash for the Equity One acquisition and $241.8 for development, redevelopment, and capital improvements. Financing activities provided $525.1. Cash and cash equivalents were $23.5 at September 30, compared with $13.3 at December 31, 2016.
Debt and liquidity: Total debt was $3.52 billion at September 30, up from $1.64 billion at year-end, reflecting the merger and related financing. The company reported a 5.4x annualized pro-rata net debt-to-adjusted EBITDA ratio and a 4.1x annualized coverage ratio. It had $979.1 of available capacity under its $1.0 billion credit line, $500 of remaining ATM equity capacity, and $94.1 of forward equity available to settle. A reported 86.6% of wholly owned real estate assets was unencumbered. Management estimated approximately $300 of cash needs over the next 12 months, including $261.9 for projects in process and $38.1 for maturing debt.
Material changes versus comparable periods
- Revenue increased 71.6% in Q3 and 58.2% for the nine months, primarily reflecting the addition of Equity One properties. Regency attributed $102.4 of Q3 revenue and $238.3 of nine-month revenue to the merger.
- Q3 common-stockholder income rose to $59.7 from $5.3. The comparison also reflects unusually large 2016 charges: a $40.6 loss on derivative instruments and a $13.9 early debt-extinguishment charge. For the nine months, common-stockholder income fell to $74.8 from $88.0, including $75.6 of merger-related costs.
- Operating expenses rose substantially with the expanded portfolio. Nine-month other operating expenses were $81.6, including $75.6 of merger-related costs. Interest expense also increased as debt and credit-facility balances rose.
- Same-property NOI growth remained positive on the company’s merger-adjusted pro-rata basis, while reported occupancy measures reflect portfolio additions and differing portfolio definitions. Shop-space occupancy declined, which Regency attributed to Equity One having lower shop-space occupancy.
- Regency redeemed its $250 preferred Series 6 and $75 preferred Series 7 shares during 2017, funding the redemptions primarily with new senior notes. It issued $950 of unsecured public notes during the year and refinanced or repaid certain higher-rate mortgage debt.
Outlook, risks, contingencies, and unusual items
- Management said available capital resources were sufficient for expected needs and expected operating cash flow to fund distributions. The board declared a $0.53-per-share common dividend payable November 29, 2017; future dividends remain subject to board discretion and capital needs. The filing does not provide a numerical earnings or FFO forecast.
- The development and redevelopment pipeline included 30 properties with approximately $598 of projected pro-rata investment upon completion. Three new developments started during the nine months, with projected weighted average returns of 7.1%; these are projections, not realized results.
- Key stated risks include retail disruption from e-commerce, tenant financial distress and bankruptcies, economic and leasing conditions, development costs and timing, natural disasters, integration of Equity One, and dependence on partners in unconsolidated ventures. Tenants in bankruptcy that continued to occupy space represented 0.5% of pro-rata annual base rent.
- Regency cited $1.2 of Q3 and $1.9 of nine-month hurricane-related captive-insurance claims losses within operating and maintenance expense; $1.9 of hurricane losses was also excluded in its Core FFO reconciliation. Environmental remediation liabilities accrued for Regency’s pro-rata share were $9.7. Management did not expect known environmental matters or ordinary-course litigation to have a material adverse effect, but noted that unknown conditions or regulatory changes could create additional exposure.
- The Equity One purchase-price allocation remained provisional, including $302.3 of recorded goodwill, and could be adjusted as valuation work is completed. The company reported effective disclosure controls, but excluded Equity One, representing about 60% of total assets, from its internal-control assessment while integration continued.
- A putative shareholder class action related to merger disclosures was addressed by a settlement stipulation and supplemental disclosures; the filing notes that the stipulation remained subject to court approval.
Important facts for investors to verify
- Whether Equity One integration, anticipated synergies, and the provisional purchase-price allocation—including goodwill and acquired lease valuations—develop as management expects.
- Whether same-property NOI growth, leasing spreads, occupancy, and rent collections remain durable, particularly in shop space and amid e-commerce and tenant-credit pressures.
- Debt maturities, refinancing plans, covenant compliance, leverage, and the availability and cost of credit-line or capital-market funding.
- Actual completion costs, leasing, timing, and returns for the development and redevelopment pipeline, alongside the estimated $300 of next-12-month cash needs.
- Potential changes in environmental remediation exposure, hurricane-related insurance claims, and the status of the merger-related shareholder settlement.