Regency Centers Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. The filing combines Regency Centers Corporation and Regency Centers, L.P. Financial comparisons are materially affected by the March 1, 2017 merger with Equity One; 2017 includes Equity One results from the closing date, while 2016 does not.
Business context
Regency is a U.S. retail REIT focused primarily on grocery-anchored neighborhood and community shopping centers. At year-end, it had full or partial interests in 426 properties with 53.9 million square feet of gross leasable area (44.0 million square feet pro rata). The Equity One merger added 121 properties, including joint-venture properties, and was valued at approximately $5.2 billion.
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $984.3 million | $614.4 million |
| Income from operations | $151.5 million | $119.7 million |
| Net income attributable to common stockholders | $159.9 million | $143.9 million |
| Diluted earnings per share | $1.00 | $1.42 |
| NAREIT FFO | $494.8 million | $277.3 million |
| Core FFO | $592.1 million | $334.0 million |
| Cash from operating activities | $471.1 million | $297.4 million |
| Cash and cash equivalents at year-end | $45.4 million | $13.3 million |
| Total debt | $3.595 billion | $1.642 billion |
All amounts are consolidated unless noted. FFO and Core FFO are non-GAAP measures and should be read with their reconciliations and definitions in the filing.
- Portfolio operations: Pro-rata same-property NOI growth, adjusted to exclude termination fees, was 3.6%. The combined portfolio was 95.5% leased; same-property occupancy was 96.3%. Comparable leasing rent spreads were 7.8%.
- Debt and leverage: The company reported annualized net debt to Adjusted EBITDA of 5.4x. It had $623.3 million drawn across unsecured credit facilities, including $60.0 million on a $1.0 billion line; available line capacity was $930.6 million, net of letters of credit. Management reported covenant compliance.
- Liquidity and investment: The company reported $45.4 million of cash, $930.6 million of line availability, and $500 million remaining under its ATM equity program. 2017 investing cash outflow was $1.008 billion, including the merger and $347.8 million of development, redevelopment and capital improvements.
- Distributions: Common dividends declared were $2.10 per share, up from $2.00 in 2016. The Board declared a $0.555-per-share quarterly dividend payable in March 2018.
Material changes versus 2016
- Revenue rose $370.0 million, primarily reflecting the partial-year contribution of Equity One. The filing attributes $337.8 million of 2017 revenue to the acquired business from the merger date through year-end.
- Operating expenses increased $341.6 million, including $80.7 million in merger-related costs, higher depreciation and amortization, and expenses from the enlarged portfolio. Interest expense, net, increased $41.9 million.
- Common net income increased, but diluted EPS fell to $1.00 from $1.42, reflecting, among other factors, the substantial increase in shares issued in the merger. Core FFO increased, but includes adjustments such as merger costs; compare non-GAAP measures using the filing’s reconciliations.
- Operating cash flow increased by $173.8 million. Investing outflow increased by $598.3 million, largely due to the Equity One acquisition and higher development and capital spending.
- Debt increased by approximately $2.0 billion year over year, reflecting assumed debt and new financing. Regency issued approximately $1.1 billion of debt during 2017 and redeemed both outstanding preferred stock series for a combined $325 million.
Outlook, risks and unusual items
- Management outlook: Based on conditions and portfolio characteristics at filing, Regency expected 2018 new and renewal lease rents on average to meet or exceed rents on leases expiring in 2018. It estimated approximately $256.4 million of cash needs over the following 12 months, including $238.0 million to complete in-process development and redevelopment, $6.4 million of maturing debt, and $12.0 million for its share of partnership debt maturities.
- Development pipeline: Twenty-three properties were in development or redevelopment at year-end, representing an estimated $543.8 million pro-rata investment upon completion. Five new developments started in 2017 with projected weighted-average returns of 7.3%; these are estimates, not guarantees.
- Unusual and accounting items: The company recorded $80.7 million of merger-related costs, $12.4 million of debt-extinguishment costs, and a $9.7 million deferred-tax benefit arising primarily from tax-rate changes under the Tax Cuts and Jobs Act. Equity One’s purchase-price allocation remained provisional; reported goodwill was $331.9 million. No consolidated property impairments were recorded in 2017.
- Principal risks: Retail tenant distress, e-commerce and store closures; lease renewals and occupancy; concentration of NOI in California, Florida and Texas; natural disasters and insurance limits; development cost, timing and lease-up risk; interest rates, refinancing and debt covenants; and environmental liabilities. Shop tenants were about 36% of leased GLA; management estimated a one-percentage-point decline in shop occupancy could reduce minimum rent by approximately $4.7 million.
- Contingencies and governance: Management did not expect known litigation or environmental matters to materially affect financial position or results. Environmental remediation liabilities accrued were $9.9 million pro rata. The merger-related shareholder class action was settled and dismissed in January 2018. A $250 million share repurchase authorization was approved in February 2018; the filing reports $74.2 million repurchased through its filing date.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- How much of revenue, earnings and FFO growth reflects the Equity One merger versus organic performance; review pro forma results and the treatment of merger-related adjustments.
- The final Equity One purchase-price allocation, including acquired property values, goodwill and related lease intangibles.
- Whether 3.6% same-property NOI growth, occupancy and leasing spreads persist, especially given the decline in shop-space occupancy to 92.5% on a pro-rata operating basis.
- Debt maturities and refinancing plans, the 5.4x net-debt-to-Adjusted-EBITDA measure, covenant headroom, and the company’s capacity to fund development commitments and distributions.
- Actual development and redevelopment costs, leasing progress, completion dates and realized returns compared with management’s projections.
- The performance of tenants and markets exposed to retail disruption, weather and insurance risk, as well as the status and cost of environmental remediation.