Regency Centers Corporation and Regency Centers, L.P. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Regency is a REIT focused mainly on grocery-anchored shopping centers; the parent owns approximately 99.8% of the Operating Partnership, which holds the assets and debt. At quarter-end, Regency owned 200 centers directly and held partial interests in 119 more through joint ventures, across 27 states and Washington, D.C.
Financial performance
Amounts below are in millions, except per-share data. The filing presents the parent and Operating Partnership together; their operating results are substantially the same.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $141.1 | $134.9 | $281.5 | $268.2 |
| Income from operations | $32.6 | $29.5 | $62.8 | $53.8 |
| Net income attributable to common stockholders | $32.5 | $25.5 | $57.7 | $44.9 |
| Diluted EPS | $0.34 | $0.28 | $0.61 | $0.48 |
| FFO | $71.0 | $65.9 | $140.7 | $131.4 |
| Core FFO | $71.2 | $65.9 | $140.7 | $130.0 |
Revenue increased about 4.6% in Q2 and 5.0% year to date. Growth reflected higher same-property rent and occupancy, plus properties entering operation after development; Q2 common income also benefited from a $5.7 million property-sale gain. Pro-rata same-property NOI rose 4.2% for both the quarter and six-month period. Regency reported 95.9% operating occupancy across its combined portfolio; weighted average effective rent per square foot increased year over year in both consolidated and joint-venture properties. No headline operating-margin measure is provided in the filing.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $127.4 million, versus $119.6 million a year earlier. Investing used $76.7 million, compared with $162.6 million, while financing used $137.4 million, versus $0.9 million. Cash declined to $27.1 million from $113.8 million at year-end.
- Development, redevelopment and capital improvements used $109.1 million, up from $93.8 million. There were no operating-property acquisitions in the first half, compared with $79.4 million of acquisitions in the prior-year period; real estate sale proceeds were $26.6 million.
- Total debt was $1.989 billion at June 30, down from $2.021 billion at December 31, 2014. The company had $120 million outstanding on unsecured credit facilities and reported $749.1 million of remaining Line availability, net of letters of credit, plus $90 million available under the Term Loan. It was in compliance with debt covenants.
- Fixed-rate debt carried a 5.4% weighted average contractual rate; variable-rate debt carried 1.1%. The coverage ratio was 2.7x for the trailing four quarters. About 80.1% of wholly owned real estate assets were unencumbered.
- Management estimated $458.7 million of cash requirements for the remainder of 2015, including $350.1 million of maturing debt. After quarter-end, Regency repaid $350 million of unsecured debt at maturity using a draw on its credit facilities; it expected to repay that draw with forward equity-sale proceeds and new long-term debt.
Changes, outlook and risks
- Management attributed operating growth to rent increases, rent-paying occupancy improvement and development openings. Its strategic objective is average annual same-property NOI growth of 3%; this is a stated objective, not formal earnings guidance. The filing gives no specific EPS or FFO forecast.
- The January 2015 forward equity offering covered 2.875 million shares at $67.40 per share, for approximately $193.8 million gross proceeds when settled. Proceeds were intended for development, acquisitions, debt repayment or general corporate purposes. Management expected to use operating cash, asset sales, equity proceeds and borrowing capacity to meet funding needs.
- Regency continued development and redevelopment, with six projects under construction or in lease-up at quarter-end and estimated remaining costs to complete its in-process projects reflected in its cash needs. It had no property acquisitions during the first half.
- Joint-venture equity income declined year over year, largely because prior-year periods included gains on property and land sales. Regency’s own property-sale gains were higher in 2015; the first half included $6.5 million versus $2.4 million in 2014. No impairment was recorded in the first half of 2015, versus $0.2 million in 2014.
- Interest-rate swaps hedge portions of anticipated 2015 and 2017 debt issuance. The company expected $8.5 million of deferred derivative losses to be reclassified into earnings over the following 12 months.
- Risks discussed include tenant financial distress or lease rejection in bankruptcy, changing retail competition and consumer behavior, local and national economic conditions, leasing and development execution, weather or natural disasters, and dependence on co-investment partnerships. Kroger, Publix and Safeway/Albertsons represented 4.5%, 3.7% and 3.0% of annualized base rent, respectively; no tenant exceeded 5%.
- Environmental remediation liabilities accrued were $9.5 million for Regency’s pro-rata share. Management did not expect known environmental matters or ordinary-course litigation to have a material adverse effect, while cautioning that additional environmental liabilities could emerge. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether same-property NOI growth and occupancy improvements persist, and how leasing spreads and tenant improvement costs evolve.
- How the $350 million credit-facility draw is refinanced, and whether the forward equity offering and planned debt issuance occur on expected terms.
- Funding requirements and completion schedules for development and redevelopment projects, including returns on invested capital.
- The quality and timing of joint-venture cash distributions and debt refinancing; Regency’s pro-rata share of joint-venture debt was $505.6 million.
- Potential changes in environmental remediation exposure beyond the $9.5 million accrued amount and any developments in tenant credit quality.