REG

Business Context and Reporting Period

Company: Regency Centers Corporation (NYSE: REG)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Regency is a self-administered, self-managed Real Estate Investment Trust (REIT) focused on owning, operating, and developing grocery-anchored retail shopping centers. As of December 31, 2002, the portfolio consisted of 262 shopping centers across 21 states with approximately 29.5 million square feet of Gross Leasable Area (GLA), 94.8% of which was leased. The company operates through Regency Centers, L.P., an operating partnership in which Regency owns approximately 98% of the common units.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 6% to $380.2 million, driven by a full year of revenue from 2001 developments and a 10.8% growth in rental rates from renewals and new leases.
• Profitability: Net income for common stockholders rose 10% to $107.7 million. Diluted EPS increased 9% to $1.84.
• Discontinued Operations: Income from discontinued operations significantly increased to $28.7 million (from $12.1 million in 2001) due to an $18.7 million gain on the sale of 41 operating properties.
• Service Operations: Service operations revenue decreased 36% to $20.3 million, primarily due to the adoption of SFAS No. 144, which reclassified $15.6 million of gains from property sales to discontinued operations.
• Interest Expense: Net interest expense increased 28% to $81.3 million due to higher average outstanding debt balances, despite a decline in average interest rates from 7.27% to 6.93%.
• Portfolio Activity: The company reduced its property count from 272 to 262, selling lower-quality assets to recycle capital into higher-yield developments and acquisitions.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects to realize growth in net income through increasing occupancy, rental rates, and development/acquisition in targeted markets. The company maintains a conservative capital structure to fund growth without compromising investment-grade ratings. Liquidity is expected to be met through operating cash flows, proceeds from real estate sales, joint venturing, and available credit facilities.

Unusual Items

• Impairment Loss: A $2.4 million provision for loss was recorded on an operating property due to the closure of a Kmart store and an adjacent Winn-Dixie grocery store.
• Accounting Changes: Adoption of SFAS No. 144 resulted in the reclassification of certain property sales and operations to "Discontinued Operations."

Risks and Contingencies

• Tenant Bankruptcy: Kmart filed for Chapter 11 protection in January 2002, rejecting two leases ($942,000 annual rent) and closing stores. Two other Kmart leases remain open but carry uncertainty.
• Environmental: The company faces potential liability for hazardous substances, primarily related to dry cleaning plants. Management believes current reserves and insurance mitigate material financial impact.
• Market Risk: Exposure to interest rate changes on variable-rate debt (LIBOR-based) and the unsecured line of credit.

Investor Verification Checklist

• Kmart Exposure: Verify the status of the two remaining Kmart leases and potential impact on cash flow if they are rejected.
• Discontinued Operations: Confirm the sustainability of earnings excluding the $18.7 million one-time gain from property sales.
• Debt Maturities: Review the $306.5 million in debt maturing in 2004 (including the unsecured line of credit) and refinancing plans.
• Development Pipeline: Assess the $326 million in costs required to complete 34 projects under construction and their pre-lease status (64% pre-leased).
• Dividend Coverage: Verify that Funds from Operations (FFO) continue to cover the $2.04 per share dividend requirement to maintain REIT status.