Business context and reporting period
Regency Centers Corporation and Regency Centers, L.P. filed a combined unaudited Form 10-Q for the quarter ended September 30, 2018. Regency is a REIT focused on owning, operating, acquiring, developing and redeveloping grocery-anchored shopping centers. At quarter-end it had interests in 426 properties and 53.6 million square feet of gross leasable area; the Parent Company owned approximately 99.8% of the Operating Partnership.
Financial performance and operating metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $278.3 million | $262.1 million | $836.4 million | $719.6 million |
| Net income attributable to common stockholders | $69.7 million | $59.7 million | $170.2 million | $74.8 million |
| Diluted earnings per share | $0.41 | $0.35 | $1.00 | $0.48 |
| NAREIT FFO attributable to common stock and unit holders | $163.5 million | $155.7 million | $485.7 million | $333.5 million |
For the nine months, net cash from operating activities was $464.8 million, versus $345.4 million in 2017. Investing activities used $147.2 million, compared with $857.7 million used in 2017; financing activities used $322.5 million, compared with $525.1 million provided. Cash and restricted cash totaled $44.5 million at September 30.
Total debt was $3.72 billion, consisting of $3.01 billion in notes payable and $708.6 million in unsecured credit facilities. Cash was $40.4 million. Regency reported annualized pro-rata net debt to Operating EBITDAre of 5.4x and fixed-charge coverage of 4.1x. It had $1.096 billion of available capacity on its $1.25 billion revolving line and $500 million available under its ATM equity program. The company reported covenant compliance.
Pro-rata same-property NOI, adjusted to exclude termination fees, grew 2.9% in Q3 and 3.8% for the nine months. The combined operating portfolio was 95.8% leased, down from 96.2% at year-end 2017. Comparable leasing rent spreads were 7.4% for the trailing twelve months. Regency declared a quarterly dividend of $0.555 per share, payable November 28, 2018.
Material changes versus prior periods
- Q3 revenue increased $16.2 million year over year; nine-month revenue rose $116.8 million. The nine-month comparison includes additional Equity One properties for the full 2018 period but only from March 1 in 2017.
- Q3 common-stockholder income rose to $69.7 million from $59.7 million; the comparison benefited from the absence of 2017 preferred-stock dividends. Nine-month 2017 income also included $75.6 million of merger costs and a partial-year contribution from Equity One.
- Nine-month interest expense increased $14.2 million to $111.5 million, reflecting new debt, higher average credit-facility balances and rates, partly offset by debt redemptions and mortgage payoffs.
- Regency recorded $29.4 million of impairment losses, including $9.2 million of goodwill impairment, on properties and land parcels sold during the period. It also recorded $11.2 million of early debt-extinguishment expense.
- Share repurchases totaled $125.0 million for the nine months. Regency issued $300 million of 4.125% senior notes due 2028 and redeemed $150 million of 6% notes due 2020. Its revolving credit facility was increased from $1.0 billion to $1.25 billion and extended to 2022, with two six-month extension options.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said it expects development activity to approximate recent historical averages, with activity likely to shift toward more redevelopment. It estimated approximately $163.6 million of cash needs over the next 12 months, including $123.5 million for in-process developments and redevelopments, $13.2 million for maturing debt and $26.9 million for its share of partnership debt needs. Management expects to fund requirements through operating cash flow, asset-sale proceeds, revolver borrowings and, when markets permit, debt or equity issuance.
The seller may require Regency to acquire up to a 100% interest in a property valued at $205 million by November 2019; the company currently expects to purchase a 30% interest for approximately $61.5 million. Environmental remediation liabilities were $9.1 million for Regency’s pro-rata share. Management did not expect known litigation or environmental matters to materially affect financial position, liquidity or results, but noted uncertainty about undiscovered contamination and future regulatory changes.
Management identified risks including economic weakness, tenant financial distress and bankruptcies, e-commerce competition, leasing and occupancy trends, development costs and schedules, natural disasters, environmental remediation, and limited voting control in co-investment partnerships. Tenants in bankruptcy represented 0.6% of pro-rata annual base rent at quarter-end, including three Sears/Kmart locations. The company also noted that adoption of lease accounting in January 2019 was expected to recognize operating lease liabilities and corresponding assets for ground and office leases totaling less than 5% of assets; capitalization changes could increase operating expenses.
Other notable items: adoption of real estate sale accounting resulted in a $30.9 million opening retained-earnings adjustment for previously deferred gains. The Board approved moving the stock listing from NYSE to Nasdaq, expected to begin November 13, 2018, under ticker REG.
Important facts for investors to verify
- How comparable same-property NOI, occupancy and rent spreads trend, including the effect of rising property taxes and strategic vacancies.
- Debt maturities, refinancing assumptions, interest-rate exposure and the sustainability of leverage and fixed-charge coverage.
- Development and redevelopment spending, completion timing, lease-up and projected returns versus actual results.
- The assumptions and comparability underlying reported FFO and the effects of impairments, debt-extinguishment costs, asset sales and merger-related comparisons.
- Whether the expected property purchase, environmental exposures and tenant distress create additional cash needs or material liabilities.