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Business Context and Reporting Period

Company: Regency Centers Corporation (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2002
Business Overview: Regency is a national owner, operator, and developer of grocery-anchored neighborhood retail shopping centers. As of March 31, 2002, the portfolio consisted of 271 properties with a 94.3% occupancy rate. The company operates through Regency Centers, L.P. (RCLP), in which it holds approximately 97% of the common units.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4% ($3.4 million) driven by a 9% increase in minimum rent and an 8% increase in tenant recoveries. This was offset by a 63% decrease in service operations revenue due to fewer development property sales.
• Profitability: Net income for common stockholders rose 10% to $24.5 million. Diluted EPS increased 8% to $0.42.
• Operating Expenses: Increased 3% to $44.2 million, primarily due to higher operating costs for newly completed developments and increased real estate taxes.
• Interest Expense: Rose 12% to $21.5 million due to higher debt balances and a shift toward fixed-rate debt (85% of total debt vs. 80% in 2001).
• Discontinued Operations: Contributed $3.2 million to income in 2002 (vs. $0.9 million in 2001), largely due to a $1.7 million gain on the sale of an operating property.
• Liquidity: Net cash provided by operating activities decreased significantly to $25.3 million from $52.2 million, primarily due to changes in working capital accounts (specifically a decrease in accounts payable and other liabilities).

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Development Pipeline: 38 projects are under construction or renovation, representing a total investment of $508 million. Approximately $174 million remains to be expended through 2005. These projects are 66% complete and 73% pre-leased.
• Capital Strategy: The company expects to fund long-term requirements through operating cash flow, real estate sales, joint ventures, and debt/equity markets. A $250 million unsecured debt offering was completed in January 2002 to reduce the unsecured line of credit.
• Portfolio Strategy: Focus remains on grocery-anchored centers to withstand economic downturns. The company actively sells properties that no longer meet long-term investment standards.

Risks and Contingencies

• Tenant Bankruptcy: Kmart Corporation filed for Chapter 11 bankruptcy. Two of Regency's four Kmart leases (representing $0.9 million in annualized base rent) have been announced for closure. While this represents only 0.56% of annualized base rent, there is no assurance Kmart will accept the remaining leases or at current rates.
• Environmental: Exposure exists primarily from dry cleaning plants. The company maintains environmental insurance and believes known matters will not materially affect financial position.
• Interest Rate Risk: The company is exposed to interest rate changes on its variable rate debt (Line of Credit and variable mortgages). As of March 31, 2002, no derivative instruments were used to hedge borrowings.

Investor Verification Checklist

• Kmart Lease Status: Verify the final outcome of the remaining two Kmart leases and potential rent reductions.
• Development Completion: Monitor the $174 million remaining capital expenditure required to complete the 38 active development projects.
• Debt Maturities: Review the scheduled principal payments, noting a significant maturity of $401.9 million in 2004 (including the unsecured line of credit).
• FFO vs. Net Income: Compare the $40.0 million Diluted FFO against Net Income to assess the impact of depreciation and amortization on cash generation.
• Joint Venture Performance: Review the performance of the Columbia Regency and Macquarie CountryWide-Regency joint ventures, which hold significant assets and debt.