Regency Centers Corporation and Regency Centers, L.P. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016. Regency is a REIT focused primarily on grocery-anchored shopping centers. It owned 199 centers directly and held partial interests in 115 more through real estate partnerships; its combined portfolio comprised 314 centers across 26 states and Washington, D.C. The parent company owns approximately 99.8% of the Operating Partnership, which holds the operating assets and debt.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 or prior period |
|---|---|---|
| Total revenue | $149.6 million | $140.4 million; up 6.6% |
| Net income | $53.6 million | $31.0 million |
| Net income attributable to common stockholders | $47.9 million; $0.49 per diluted share | $25.2 million; $0.27 per diluted share |
| NAREIT FFO attributable to common stockholders | $84.4 million | $69.6 million |
| Core FFO attributable to common stockholders | $78.8 million | $69.5 million |
| Cash from operating activities | $68.8 million | $54.5 million |
| Cash and cash equivalents at quarter-end | $27.1 million | $36.9 million at December 31, 2015 |
| Total debt at quarter-end | $1.835 billion | $1.864 billion at December 31, 2015 |
Net cash used in investing activities was $7.3 million, including $38.3 million of development and capital spending and $32.3 million of real estate sale proceeds. Financing activities used $71.2 million, including $53.9 million in dividends and distributions and $28.9 million of debt repayments, partly offset by $12.3 million of equity proceeds. Cash decreased $9.7 million during the quarter.
Pro-rata same-property NOI, excluding termination fees, grew 4.1% year over year (versus 4.4% in Q1 2015). Pro-rata operating occupancy was 96.2%, compared with 95.9% at December 31, 2015. Comparable new and renewal leases achieved rental-rate growth of 15.9%, versus 8.8% a year earlier. The pro-rata net debt-to-Core EBITDA ratio was 5.1x, versus 5.2x at year-end; the trailing-four-quarter coverage ratio was 2.9x, versus 2.5x a year earlier.
Material changes and unusual items
- Revenue increased by $9.2 million, led by higher minimum rent, tenant recoveries, and fees. Minimum rent benefited from developments, acquisitions, and same-property growth, partly offset by property sales.
- Net income growth included $12.9 million of gains on real estate sales, versus $0.8 million in Q1 2015. Regency sold three operating properties and five land parcels.
- Equity income from real estate partnerships rose to $12.9 million from $5.6 million, primarily reflecting gains from two property sales by the GRI-Regency partnership and lower interest expense.
- Interest expense declined $2.5 million year over year, while operating expenses rose $6.0 million. Regency recorded $1.7 million in impairment charges, including an impairment on land held for sale.
- Other comprehensive loss was $14.4 million, largely reflecting a $16.8 million unfavorable change in the effective fair value of cash-flow hedge derivatives. Derivative liabilities were $34.8 million at quarter-end, up from $20.5 million at year-end.
Liquidity, outlook, risks, and contingencies
Regency reported $794.1 million of remaining availability on its $800 million credit line, net of letters of credit, and $70.8 million remaining under its ATM equity program. A March forward equity offering for 3.1 million shares was expected to provide approximately $233.3 million gross proceeds when settled, which could occur by June 2017. The company said it expected operating cash flow to fund distributions and anticipated issuing secured or unsecured debt as needed. It estimated cash needs of approximately $173.5 million over the following 12 months, including $125.2 million to complete developments and redevelopments, $23.9 million for maturing debt, and $24.4 million for its pro-rata share of partnership debt contributions.
Six ground-up developments were in process with $135.1 million of expected net costs and projected returns of 7.8%; 17 redevelopments were in process with $120.0 million of expected net costs and projected incremental returns of 7.0%–10.0%. Management’s stated long-term strategy includes average annual NOI growth of 3%; the filing does not provide specific full-year 2016 earnings guidance.
Risks include tenant distress and lease rejection: Sports Authority’s three leases represented 0.5% of pro-rata annualized base rent, and five Sears/Kmart leases represented 0.6%. No tenant exceeded 5% of annualized base rent. Regency accrued $9.8 million for its pro-rata share of environmental remediation and cautioned that unknown or additional environmental liabilities could arise. Management said known litigation and environmental matters were not expected to have a material adverse effect, while noting the limits of that assessment. The company was in compliance with debt covenants.
Important facts for investors to verify
- Separate recurring operating performance from property-sale gains and partnership-level transaction gains; compare Core FFO and same-property NOI alongside GAAP earnings.
- Confirm the timing and net proceeds of the forward equity offering, and the funding plan for the $300 million debt maturity in June 2017.
- Reconcile reported quarter-end cash of $27.1 million with management’s overview reference to $36.9 million of cash and its liquidity disclosures.
- Track development and redevelopment costs, projected returns, leasing progress, and the estimated $173.5 million of next-12-month cash needs.
- Monitor tenant bankruptcies and store closures, environmental remediation exposure, and the fair-value and future earnings effects of interest-rate hedges.