Regency Centers Corporation (REG) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Regency is a retail REIT focused on grocery-anchored neighborhood and community shopping centers. At quarter-end, it had interests in 404 properties and 51.1 million square feet of gross leasable area. The Parent Company owned approximately 99.6% of Regency Centers, L.P.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $302.1 million | $287.2 million | $605.5 million | $561.9 million |
| Net income attributable to common stockholders | $104.8 million | $95.5 million | $300.0 million | $176.1 million |
| Diluted EPS | $0.61 | $0.56 | $1.74 | $1.04 |
| Nareit FFO attributable to common stock and unit holders | $173.9 million | $168.4 million | $352.1 million | $321.9 million |
| Core Operating Earnings | $163.1 million | $161.6 million | $329.9 million | $308.3 million |
Q2 revenue increased about 5% year over year. Six-month GAAP net income rose substantially, mainly reflecting $106.2 million of real estate sale gains, versus $31.5 million in the prior-year period. Q2 sale gains were $4.3 million, below $19.8 million a year earlier. FFO and Core Operating Earnings are non-GAAP measures and should be considered alongside GAAP results.
- Property performance: Pro-rata same-property NOI excluding termination fees increased 0.6% in Q2 and 4.1% for the first half year over year. Management attributed growth principally to improved collections, higher occupancy, contractual rent increases, and positive leasing spreads. The Q2 same-property NOI increase was partly offset by lower tenant recoveries and termination fees.
- Leasing and occupancy: 934 new and renewal leases covering 3.2 million pro-rata square feet were executed in the first half, compared with 986 leases covering 3.0 million square feet in 2021. Trailing 12-month rent spreads were positive 8.3%. The combined portfolio was 94.2% leased at June 30, 2022, versus 94.1% at year-end 2021.
- Cash flow: First-half operating cash flow was $327.8 million, compared with $325.3 million. Investing activities used $65.3 million, versus providing $73.0 million in 2021; financing activities used $236.3 million, versus $490.2 million. Cash, cash equivalents, and restricted cash totaled $121.2 million at June 30, including $3.1 million restricted.
- Debt and liquidity: Notes payable were $3.74 billion, up from $3.72 billion at December 31, 2021. Weighted-average contractual rates were 4.0% on fixed-rate mortgage debt, 3.3% on variable-rate mortgage debt, and 3.8% on fixed-rate unsecured debt. The Company reported $118.1 million of unrestricted cash, $1.24 billion of available credit-line capacity net of letters of credit, and $350.4 million available under its ATM equity program. It reported no unsecured debt maturities before 2024 and compliance with debt covenants.
- Leverage and coverage: Pro-rata net debt to Operating EBITDAre was 5.0x at June 30, compared with 5.1x at December 31, 2021. Trailing 12-month fixed-charge coverage was 4.6x, compared with 4.5x.
Material changes and notable items
- First-half acquisitions included six operating properties; cash paid for operating real estate was $139.8 million. The Company also acquired its partner’s 75% interest in four RegCal properties for $88.5 million, bringing those properties into consolidated results.
- First-half real estate development and capital improvements totaled $99.5 million, compared with $72.7 million in 2021. Current in-process development and redevelopment project costs were estimated at $389.6 million on a pro-rata basis.
- First-half real estate sale proceeds were $136.4 million. The Company reported gains on sales of one operating property and three land parcels.
- In April, the Company settled forward equity sales and received approximately $61.3 million net, used to fund acquisitions. In June, it repurchased 1.29 million shares for $75.4 million at a weighted-average $58.25 per share; some June 30 trades settled July 5.
- The quarterly dividend was $0.625 per share. On August 2, 2022, the board declared another $0.625 dividend payable October 4, 2022.
Outlook, risks, and contingencies
Management estimated approximately $382.5 million of capital needs over the next 12 months for leasing, tenant improvements, projects, partnership contributions, and maturing debt. It expects to fund needs through operating cash flow, property-sale proceeds, borrowings, partnership distributions, and potentially equity or debt issuance. Management stated available capital resources should be sufficient for expected needs over the next year. No quantified earnings or FFO guidance is provided in the supplied filing text.
- Management highlighted inflation, labor shortages, and supply-chain constraints as risks to tenant costs, rent-paying ability, construction budgets, and project schedules. Higher interest rates may raise borrowing and refinancing costs, slow economic growth or contribute to recession, reduce property valuations and transaction activity, and weaken leasing demand or rent spreads.
- Construction-cost pressures were being addressed through measures including fixed-cost contracts and advance material orders. Management cautioned that labor and supply disruptions could extend project timelines.
- The Company had accrued $11.1 million for its pro-rata share of environmental remediation obligations. Management did not expect currently known environmental matters to materially affect financial position, liquidity, or operations, but noted uncertainty regarding undiscovered contamination and future liability estimates.
- Management did not expect pending ordinary-course litigation or disputes to have a material adverse effect. Letters of credit outstanding were $9.4 million. The filing reported no material changes to other previously disclosed risk factors.
Important facts for investors to verify
- How much of the first-half GAAP earnings increase reflects recurring property operations versus real estate sale gains and partnership-related gains.
- Whether rent collection improvements, occupancy, and positive leasing spreads persist, particularly if inflation, rate increases, or economic weakness affect tenants.
- Whether the $382.5 million estimated next-12-month capital requirement and project costs change with construction inflation, labor availability, or schedule delays.
- Debt maturity and refinancing exposure, variable-rate borrowing sensitivity, covenant headroom, and the effect of higher market rates on funding costs and property values.
- Potential additional environmental remediation obligations and the assumptions underlying the reported $11.1 million accrued liability.