Business context and reporting period
Regency Centers Corporation and Regency Centers, L.P. filed a combined Form 10-K for the fiscal year ended December 31, 2019. Regency is a U.S. retail real estate REIT focused on acquiring, developing, owning, and operating grocery-anchored shopping centers. At year-end, it held full or partial interests in 419 properties with 52.6 million square feet of gross leasable area; its pro-rata share was 42.8 million square feet. The financial results below are primarily annual; unaudited fourth-quarter figures are identified separately.
Financial and operating results
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1.133 billion | $1.121 billion | Up $12.2 million, or 1.1% |
| Net income attributable to common stockholders | $239.4 million | $249.1 million | Down $9.7 million, or 3.9% |
| Diluted EPS | $1.43 | $1.46 | Down $0.03 |
| NAREIT FFO | $654.4 million | $652.9 million | Up $1.5 million, or 0.2% |
| Cash from operating activities | $621.3 million | $610.3 million | Up $10.9 million |
| Cash used in investing activities | $282.7 million | $106.0 million | Higher use of $176.7 million |
| Cash used in financing activities | $268.2 million | $508.5 million | Lower use of $240.3 million |
| Cash, cash equivalents, and restricted cash | $115.6 million | $45.2 million | Up $70.4 million |
| Total debt | $3.920 billion | $3.715 billion | Up $204.3 million |
| Common distributions declared per share | $2.34 | $2.22 | Up $0.12 |
Pro-rata same-property NOI, excluding termination fees, grew 2.1%. The portfolio was 94.8% leased at year-end, compared with 95.6% a year earlier; same-property occupancy was 95.1%. Pro-rata anchor occupancy was 97.3% and shop-space occupancy 90.6%.
Annualized net debt to operating EBITDAre was 5.4x on a pro-rata basis, and fixed-charge coverage was 4.3x, compared with 4.2x in 2018. The company reported $113.0 million of unrestricted cash and $1.018 billion of available capacity on its $1.25 billion credit line. It stated that 88.6% of wholly owned real estate assets were unencumbered. A 1% increase in interest rates was estimated to reduce annual earnings and cash flows by approximately $2.6 million, based on year-end floating-rate exposure.
For fourth-quarter 2019, unaudited revenue was $288.7 million, net income attributable to common stockholders was $40.3 million, and diluted EPS was $0.24. The comparable 2018 quarter reported revenue of $284.6 million, net income of $78.9 million, and diluted EPS of $0.47.
Material changes versus the prior comparable period
- Revenue rose modestly, while net income and diluted EPS declined; FFO was nearly flat. Same-property NOI growth and leasing spreads supported operating performance, but higher impairment charges and expenses weighed on earnings.
- Impairment losses were $54.2 million in 2019, versus $38.4 million in 2018. The 2019 total included a $40.3 million charge for the single-tenant 101 7th Avenue property after tenant Barneys filed for bankruptcy and its lease was expected to terminate in February 2020. The company also recorded $3.1 million of goodwill impairment.
- Lease income increased $10.5 million. Growth from development commencements, acquisitions, and same-property rent growth was partly offset by property sales. Total operating expenses increased $22.4 million, including higher depreciation and general and administrative costs.
- ASC 842 lease accounting was adopted in 2019. It added right-of-use assets and lease liabilities to the balance sheet and prohibited capitalization of certain non-contingent internal leasing and legal costs, contributing to higher general and administrative expense. Prior-year results were not restated.
- Regency issued $300 million of 4.65% senior notes due 2049 and $425 million of 2.95% senior notes due 2029. Proceeds refinanced maturing or higher-cost debt and reduced credit-line borrowings. At year-end, 6.5% of outstanding debt was variable-rate debt not hedged to fixed.
Outlook, management commentary, risks, and unusual items
- Management expected 2020 new and renewal rents to meet or exceed the average rent on leases expiring during 2020, while noting local-market and property-specific exceptions. Expiring leases represented 3.3 million square feet at an average base rent of $24.13 per square foot; the average rent on leases signed in 2019 was $28.38.
- At year-end, 22 development and redevelopment projects represented a pro-rata investment of $350.8 million upon completion. In-process projects included $76.2 million of development costs and $274.5 million of redevelopment costs. Management said activity should approximate recent historical averages, with the mix varying.
- Management estimated approximately $391.2 million of capital needs over the next 12 months for projects, debt repayment, and partnership contributions. Expected funding sources included operating cash flow after distributions, credit-line borrowings, property-sale proceeds, and potential debt or equity issuance. The filing states that management expected available capital resources to meet expected needs and expected sufficient operating cash flow to fund distributions.
- Key business risks include e-commerce and changing shopping habits, tenant bankruptcies and anchor departures, shop-tenant performance, geographic concentration, development and redevelopment costs and leasing, natural disasters and climate exposure, insurance limits, joint-venture funding and control, debt covenant and refinancing risks, interest-rate and LIBOR transition exposure, cybersecurity, environmental liabilities, and maintaining REIT qualification.
- California and Florida generated 29.0% and 21.0%, respectively, of pro-rata NOI in 2019. Publix, Kroger, Albertsons, TJX, and Whole Foods each accounted for 2.4%–3.2% of pro-rata annualized base rent; no single tenant accounted for 5% or more of revenue. Tenants in bankruptcy occupying space at year-end represented 0.6% of pro-rata annual base rent, including Barneys at 0.5%.
- Known environmental remediation liabilities were accrued at $9.4 million pro rata. Management did not expect known environmental matters or ordinary-course litigation to have a material adverse effect, but disclosed uncertainty about undiscovered conditions and future regulatory changes. KPMG issued unqualified opinions on the financial statements and internal controls; impairment valuation and lease discount-rate estimates were critical audit matters.
- Lisa Palmer became CEO effective January 1, 2020, while Martin Stein became Executive Chairman. The Board authorized a new share repurchase program of up to $250 million in February 2020; no shares had been repurchased under that new program at the filing date. Regency also completed an $18.1 million purchase of an additional Town and Country Center interest in January 2020.
Important facts for investors to verify
- Reconcile the $54.2 million impairment total to property-level charges and evaluate the assumptions underlying the $40.3 million 101 7th Avenue write-down and redevelopment value.
- Track Barneys’ lease termination, re-leasing or redevelopment plans, and any related effects on occupancy, NOI, and co-tenancy provisions.
- Review debt maturities, credit-line availability, covenant headroom, pro-rata joint-venture debt obligations, and the transition of LIBOR-linked contracts.
- Assess whether projected development and redevelopment costs, completion dates, leasing, and returns are achieved, and whether 2020 rent spreads support management’s outlook.
- Monitor portfolio occupancy, shop-space tenant health, tenant bankruptcies, and geographic and weather-related concentration risks.
- Confirm the treatment and settlement of the 1,894,845 forward-sale shares, dividend sustainability, and use of the newly authorized share repurchase capacity.