Regency Centers Corporation and Regency Centers, L.P. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Regency is a grocery-anchored shopping-center REIT; the Parent Company owns approximately 99.9% of the Operating Partnership. Unless otherwise indicated, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $152.8 million | $142.1 million | $454.8 million | $423.6 million |
| Net income attributable to common stockholders | $5.3 million | $53.7 million | $88.0 million | $111.4 million |
| Diluted earnings per share | $0.05 | $0.57 | $0.88 | $1.18 |
| NAREIT FFO attributable to common stock and unit holders | $30.1 million | $71.6 million | $194.2 million | $212.3 million |
| Core FFO attributable to common stock and unit holders | $84.3 million | $72.2 million | $244.1 million | $212.9 million |
Revenue grew 7.5% in Q3 and 7.4% for the nine months, mainly from acquisitions, development properties commencing rent, and rental increases. Pro-rata same-property NOI, excluding termination fees, grew 2.9% in Q3 and 3.4% year to date. Comparable new and renewal leases achieved rental-rate growth of 10.7% year to date. Pro-rata portfolio occupancy was 95.8% at quarter-end.
GAAP earnings declined substantially year over year, particularly in Q3, while Core FFO increased. Core FFO is a non-GAAP measure and excludes specified items, including debt-extinguishment costs and hedge-related charges. The filing does not present a conventional profit-margin measure.
Cash flow, debt, and liquidity
- For the first nine months, operating cash flow was $217.3 million, versus $216.8 million a year earlier; investing cash flow was $(354.6) million, versus $(108.4) million; financing cash flow was $141.3 million, versus $(198.3) million.
- Cash and cash equivalents were $40.9 million at September 30, compared with $36.9 million at December 31, 2015.
- Total debt was $1.628 billion, down from $1.864 billion at year-end 2015. Debt comprised $1.364 billion of notes payable and $263.4 million under unsecured credit facilities. The $800 million revolving Line had no borrowings outstanding; available capacity, net of letters of credit, was $794.2 million.
- Management reported a pro-rata net debt-to-Core EBITDA ratio of 4.4x, compared with 5.2x at year-end 2015. Pro-rata coverage ratio was 3.2x for the trailing four quarters. The company was in compliance with debt covenants.
- Regency estimated approximately $258.1 million of cash needs over the next 12 months, including $127.4 million to complete projects, $117.3 million of debt maturities, and $13.4 million for its estimated share of partnership capital contributions related to debt repayment.
Material changes and unusual items
- Regency issued 5.0 million common shares in July for $400.1 million of net proceeds. Proceeds funded redemption of $300 million of 5.875% notes due 2017, settlement of forward interest-rate swaps, investments, and general corporate purposes. The redemption generated a $13.9 million expense, including a $13.2 million make-whole premium.
- Following the equity offering and early redemption, the company determined that the previously forecast debt issuance hedged by $220 million of forward-starting swaps was no longer probable. It recognized a $40.6 million charge when settling those swaps. These two financing-related charges materially reduced Q3 GAAP earnings.
- Year-to-date equity in income from real-estate partnerships increased to $46.6 million from $18.0 million, largely reflecting partnership property-sale gains and lower interest and depreciation costs. Property-sale gains included in Regency’s results were $23.0 million year to date, compared with $34.2 million.
- Investing outflows rose chiefly because operating-property acquisitions totaled $333.2 million, compared with $43.0 million in the prior-year period. Regency also spent $146.8 million on development, redevelopment, and capital improvements.
- The company acquired three operating properties and made development investments; its portfolio included 197 consolidated centers and partial interests in 110 centers through unconsolidated partnerships.
Outlook, risks, and contingencies
- Management’s stated strategy targets average annual NOI growth of 3%, continued disciplined development and redevelopment, and a strong balance sheet. This filing does not provide a specific near-term earnings or FFO forecast.
- At quarter-end, five ground-up developments were in process, with projected returns on capital of 7.9%; 16 redevelopments were underway, with projected incremental returns of 7.0%–10.0%. Projected returns and completion costs are estimates and subject to execution and leasing risks.
- Sports Authority rejected two leases, representing $2.1 million, or 0.4%, of pro-rata annualized base rent; Regency was seeking replacement tenants. Five Sears or Kmart leases represented $3.1 million, or 0.6%, of annualized base rent, and management noted uncertainty about the retailers’ continued operations.
- Regency recorded $8.9 million for its pro-rata share of environmental remediation liabilities. Management did not expect known matters to have a material effect, but cautioned that undiscovered conditions or regulatory changes could create additional costs. Ordinary-course litigation was not expected to have a material adverse effect.
- Partnerships had $1.3 billion of debt, of which Regency’s pro-rata share was $476.9 million; Regency may need to contribute its share if partnership debt cannot be refinanced. The company also cited economic conditions, tenant financial distress, leasing and acquisition competition, development costs and timing, natural disasters, and reliance on joint-venture partners as risks.
- Hurricane Matthew caused minor damage at East Coast properties, mainly debris, power outages, and minor roof leaks; no major structural damage was reported.
Most important facts for investors to verify
- Reconcile GAAP earnings declines with the $40.6 million swap-settlement charge, $13.9 million debt-redemption charge, property-sale gains, and the non-GAAP Core FFO calculation.
- Review the remaining forward equity settlement, share-count dilution, upcoming debt maturities, and the assumptions behind projected liquidity and leverage.
- Track renewal and re-leasing outcomes for Sports Authority and Sears/Kmart spaces, occupancy, and same-property NOI growth.
- Assess development and redevelopment cost-to-complete estimates, projected returns, and leasing progress, alongside environmental exposure and partnership debt refinancing needs.
- Note the board-declared quarterly common dividend of $0.50 per share, payable November 30, 2016; future dividends remain subject to board discretion and capital availability.