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Business Context and Reporting Period

Company: Regency Realty Corporation (Regency)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and nine months ended September 30, 1999

Business Overview: Regency is a qualified Real Estate Investment Trust (REIT) focused on owning, operating, and developing grocery-anchored neighborhood shopping centers. As of September 30, 1999, the portfolio consisted of 216 properties totaling approximately 24.9 million square feet, with an occupancy rate of 92.6%. The Company completed a significant merger with Pacific Retail Trust in February 1999, substantially expanding its asset base.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 104% year-over-year, driven primarily by the inclusion of Pacific Retail Trust and 1998 acquisitions, which contributed $101.2 million in additional revenue. Same-property gross rental revenues increased 6% due to higher base rents.
• Expense Increases: Total operating expenses rose 90% to $96.6 million, and interest expense increased 110% to $43.6 million, reflecting the larger asset base and increased debt levels associated with acquisitions.
• Earnings Per Share: While Net Income for common stockholders increased 53%, Diluted EPS decreased from $1.42 to $1.16. This decline was caused by significant share dilution (27.1 million additional weighted average shares) resulting from the Pacific merger and share issuances to SC-USREALTY, which offset the income growth.
• Balance Sheet Expansion: Total assets more than doubled to $2.6 billion, and total liabilities increased to $968 million, largely due to the acquisition of Pacific and the assumption of $379 million in debt.

Outlook, Risks, and Management Commentary

• Capital Strategy: Management anticipates meeting liquidity needs through operating cash flow, a $635 million unsecured line of credit (with ~$164 million available), and future equity/debt offerings. The Company plans to continue acquiring and developing shopping centers.
• Development Pipeline: As of September 30, 1999, 47 properties were under construction or renovation with costs to date of $414.1 million. An additional $157.5 million is committed to complete these projects through 2000.
• Contingent Consideration: The Company may pay up to $23 million in contingent consideration related to the 1998 Midland Group acquisitions, dependent on performance criteria. $5.2 million was paid in April 1999.
• Risks:
  • Interest Rate Risk: Exposure to variable rates on the line of credit and certain mortgages, though the Company primarily borrows at fixed rates.
  • Environmental: Approximately 38 properties require environmental remediation (primarily dry cleaning plants), though management does not expect a material financial impact.
  • Year 2000 Compliance: Management believes systems are compliant, but acknowledges risks related to third-party failures.

Investor Verification Checklist

• Acquisition Integration: Verify the operational integration of the 71 Pacific Retail Trust properties and the realization of projected synergies.
• Debt Covenants: Confirm continued compliance with financial covenants on the $635 million line of credit, specifically the EBITDA to interest expense and unencumbered NOI ratios.
• Contingent Liabilities: Monitor the performance criteria for the Midland Group acquisitions to assess the potential for the remaining contingent consideration payments.
• Development Costs: Track the $157.5 million in committed costs for ongoing developments to ensure they align with budgeted capital expenditures.
• Dividend Sustainability: Assess the ability to maintain distributions given the increased interest expense and the requirement to distribute taxable income to maintain REIT status.