Regency Centers Corporation and Regency Centers, L.P. — Q1 2014 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2014. Regency is a REIT focused on owning, managing, leasing, acquiring, and developing grocery-anchored retail shopping centers. At quarter-end, it directly owned 206 centers and held interests in 126 additional centers through co-investment partnerships. The Parent Company owned approximately 99.8% of the Operating Partnership.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 or prior quarter-end |
|---|---|---|
| Total revenue | $133.3 million | $120.4 million; up 10.7% |
| Net income | $25.1 million | $21.1 million |
| Net income attributable to common stockholders | $19.4 million; $0.21 per share | $15.6 million; $0.17 per share |
| Funds from operations (FFO) | $65.5 million | $57.9 million |
| Core FFO | $64.1 million | $58.3 million |
| Pro-rata same-property NOI | $104.6 million; up 3.0% | $101.6 million |
| Cash from operating activities | $52.3 million | $41.3 million |
| Cash and cash equivalents | $35.2 million | $80.7 million at Dec. 31, 2013 |
| Total debt | $2.001 billion | $1.855 billion at Dec. 31, 2013 |
Operating expenses were $89.6 million versus $81.0 million. Net interest expense was $27.1 million, down from $27.8 million. The company reported a $0.2 million impairment charge and a $0.7 million gain on real estate sales. Other comprehensive loss was $11.3 million, primarily reflecting a decline in the fair value of interest-rate derivatives.
Investing activities used $117.1 million, principally for acquisitions and real estate development. Financing activities provided $19.3 million, including $70 million drawn on the credit line. Q1 cash distributions to common and preferred stockholders and unit holders totaled approximately $48.3 million.
Material changes and operating developments
- Revenue rose $12.9 million, led by higher minimum rent, tenant recoveries, acquisitions, and development operations. Management attributed $2.2 million of minimum-rent growth to same-property rental rates, occupancy, and contractual rent increases.
- Same-property NOI increased 3.0%. Higher base rent and recoveries were partly offset by higher operating expenses, including snow-removal costs from harsher winter weather and increased real estate taxes.
- Consolidated portfolio occupancy was 94.3%, compared with 93.9% a year earlier and 94.5% at year-end. The company acquired an 80% controlling interest in three Fairfield, Connecticut properties and acquired a center in Austin, Texas; acquisitions included approximately $78.0 million of assumed debt, net of premiums.
- The company sold one shopping center and two out-parcels, receiving $4.5 million in net proceeds. It had seven development projects under construction or in lease-up, with estimated net costs to complete of $119.9 million.
- Q1 2014 had no discontinued operations under newly adopted accounting guidance; Q1 2013 included $2.6 million of discontinued-operations income. This limits direct comparability of reported net income.
Liquidity, outlook, risks, and unusual items
At March 31, the company had $710.7 million of remaining availability under its $800 million line of credit, net of letters of credit, and $200 million available under its ATM equity program. It reported compliance with debt covenants and a 2.5x coverage ratio, versus 2.3x in Q1 2013. Approximately 74.9% of wholly owned real estate assets were unencumbered.
Management estimated cash needs of approximately $350.6 million for the remainder of 2014, including development and redevelopment commitments, debt repayment, and contributions to co-investment partnerships. A $150 million unsecured maturity was repaid on April 15, 2014 using credit-line borrowings; $350 million of unsecured debt was scheduled to mature in August 2015. Management expected to meet obligations through operating cash flow, credit-line borrowings, property sales, equity or debt issuance, and mortgage refinancing. It declared a $0.47 quarterly common dividend payable June 4, 2014; future dividends remain at the board’s discretion.
To hedge anticipated 2014–2015 debt issuance, Regency had $440 million of forward-starting interest-rate swaps locking the 10-year Treasury rate and swap spread at a weighted-average fixed rate of 2.55%; a market-based credit spread will determine the eventual bond yield. Deferred derivative losses of $14.0 million were expected to be reclassified into earnings over the next 12 months.
Risks highlighted include tenant financial distress or lease rejection in bankruptcy, economic and market conditions, leasing and development execution, interest rates and access to capital, co-investment partnership governance, natural disasters, and environmental liabilities. Safeway’s announced merger with Albertsons could result in store closures; management said it was not aware of pending bankruptcies or announced closures expected individually to materially reduce revenue. Management said known litigation and environmental matters were not expected to have a material adverse effect, while noting environmental exposures may be unidentified. No specific earnings or FFO guidance was provided in the filing.
Important facts for investors to verify
- How acquisition-related growth and same-property rent and occupancy trends contribute to future NOI, particularly given occupancy’s decline from year-end.
- Progress, leasing, cost-to-complete, and expected returns for development and redevelopment projects.
- Debt refinancing and maturity plans, the post-quarter credit-line borrowing, covenant headroom, and the cost of future debt issuance.
- The effect of the Safeway-Albertsons merger and any grocery-anchor closures on rent and occupancy.
- The sustainability of distributions relative to operating cash flow and investment requirements, and the extent to which reported FFO/Core FFO adjustments recur.
- The valuation sensitivity of derivative positions and real estate impairments, along with any developments in environmental or other contingencies.