Regency Centers Corporation and Regency Centers, L.P. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Regency is a REIT that owns, operates, leases, develops, and redevelops shopping centers, primarily grocery-anchored. At quarter-end it owned 304 consolidated properties and held interests in 117 unconsolidated properties. The Parent Company owned approximately 99.8% of the Operating Partnership.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $275.9 | $281.4 | $562.1 | $558.1 |
| Net income | $52.7 | $48.6 | $144.2 | $102.1 |
| Net income attributable to common stockholders | $51.7 | $47.8 | $142.2 | $100.5 |
| Diluted EPS | $0.31 | $0.28 | $0.85 | $0.59 |
| NAREIT FFO attributable to common stock and unit holders | $160.0 | $157.3 | $319.8 | $322.2 |
- Q2 revenue declined about 2.0% year over year; six-month revenue increased about 0.7%. Q2 lease income fell $6.0 million, partly reflecting property sales and reduced straight-line and above/below-market rent accretion.
- Six-month net income attributable to common stockholders rose $41.7 million. Results included $16.9 million of net gains on real estate sales, versus $1.2 million in the prior-year period, and lower impairment charges ($12.1 million versus $28.6 million). Equity income from real estate partnerships increased $24.4 million, substantially reflecting property and partnership-interest sale gains.
- Same-property NOI, excluding termination fees, grew 1.4% in Q2 and 2.1% for the first half. Pro-rata leasing spreads on comparable new and renewal retail operating property spaces were 8.9% on a trailing-twelve-month basis.
- Q2 total operating expenses increased to $190.1 million from $182.1 million, including higher depreciation, general and administrative expense, and real estate taxes. For the first half, operating expenses rose $21.7 million, with higher depreciation and taxes among the main drivers. Adoption of the new lease standard also increased expense by ending capitalization of certain internal leasing and legal costs.
Cash flow, debt, and liquidity
- First-half operating cash flow was $289.3 million, down from $300.9 million. Investing activities used $13.5 million, compared with $193.9 million in the prior-year period; financing activities used $283.6 million, compared with $113.1 million.
- Cash, cash equivalents, and restricted cash totaled $37.4 million at June 30, 2019, including $33.8 million unrestricted cash. The company reported $1.117 billion of available capacity on its $1.25 billion credit line, net of letters of credit, and $500 million remaining under its ATM equity program.
- Total debt was $3.678 billion at quarter-end, down from $3.715 billion at December 31, 2018. The annualized pro-rata net debt-to-Operating EBITDAre ratio was 5.3x; fixed-charge coverage was 4.3x. The company said it was in compliance with debt covenants.
- In March, Regency issued $300 million of 4.65% senior unsecured notes due 2049 and used proceeds to retire $250 million of 4.8% notes due 2021 and repay two mortgages. The refinancing generated $10.6 million of early-extinguishment costs in the first half. Scheduled maturities include approximately $350 million in 2020 and $703 million in 2022.
- First-half dividends and Operating Partnership distributions were approximately $195.7 million. The Board declared a $0.585-per-share dividend payable August 22, 2019.
Portfolio, outlook, and risks
- At June 30, total portfolio occupancy was 94.7%, down from 95.6% at year-end 2018. Same-property occupancy was 95.1%. Management attributed lower anchor-space occupancy in part to two anchor closures following the Sears bankruptcy filing and to redevelopment activity.
- Management estimated approximately $329 million of capital needs over the next 12 months for active development and redevelopment, maturing debt, and partnership contributions. It expected to fund these needs through operating cash flow after dividends, credit-line borrowings, property sales, and potentially debt or equity issuance. No specific earnings or EPS guidance is provided in the supplied filing text.
- Twenty-three properties were in development or redevelopment, representing $473.8 million of pro-rata investment upon completion. Management reported projected returns of 6.0% for a new development started in the first half and a weighted-average 8.4% for six redevelopment starts.
- Subsequent to quarter-end, on July 1, Regency acquired The Pruneyard, a 258,000-square-foot retail property in Campbell, California, for $212.5 million.
- Key disclosed risks include tenant financial distress and bankruptcies, e-commerce and changing retail demand, occupancy and rent pressure, economic conditions, development timing and costs, natural disasters, environmental remediation, and dependence on co-investment partners for certain decisions and funding. Tenants in bankruptcy represented 0.8% of pro-rata annual base rent, including 0.5% for Barneys New York. Environmental remediation liabilities accrued for Regency’s pro-rata share were $9.4 million.
- Regency adopted ASC 842 lease accounting on January 1, 2019. It recognized $295.1 million of right-of-use assets and $224.0 million of lease liabilities at June 30; the adoption also changed presentation and treatment of certain leasing costs.
Important facts for investors to verify
- Whether same-property NOI growth and leasing spreads persist as occupancy, especially anchor occupancy, has declined.
- How much reported earnings growth depends on real estate and partnership sale gains, versus recurring property operations; compare GAAP earnings with FFO and cash flow.
- Funding and expected returns for the $329 million of projected next-12-month capital needs, including development commitments and the Pruneyard acquisition.
- Debt maturity and refinancing exposure, leverage, interest-rate sensitivity, and continued covenant compliance.
- Potential additional costs from tenant bankruptcies, environmental matters, and the Town and Country Center purchase option; Regency expected a possible $17.1 million purchase by December 2019.