REGENCY CENTERS CORP quarterly report, Q1 FY2017

Regency Centers Corporation and Regency Centers, L.P. — Q1 2017 Form 10-Q

Business and period: For the quarter ended March 31, 2017. Regency owns, operates, leases, acquires, and develops grocery-anchored retail shopping centers, directly and through joint ventures. On March 1, Regency completed its merger with Equity One, issuing approximately 65.5 million shares. Results include Equity One only from the closing date, so the reported year-over-year comparison is not fully comparable.

Key financial results

Metric	Q1 2017	Q1 2016
Total revenue	$196.1 million	$149.6 million
Operating expenses	$200.5 million	$95.9 million
Net income (loss)	$(20.7) million	$53.6 million
Net income (loss) attributable to common stockholders	$(33.2) million	$47.9 million
Basic and diluted earnings (loss) per share	$(0.26)	$0.49
Cash from operating activities	$32.7 million	$76.8 million
Net cash used in investing activities	$(689.9) million	$(7.3) million
Net cash provided by (used in) financing activities	$680.8 million	$(79.2) million

Revenue increased 31%, primarily reflecting the Equity One merger, acquisitions, development commencements, and same-property rent growth. GAAP results included $69.8 million of merger transaction costs in other operating expenses and $8.6 million of preferred-stock redemption costs. Regency reported NAREIT FFO of $34.2 million versus $84.4 million, and Core FFO of $114.3 million versus $78.8 million; Core FFO excludes specified items, including merger costs and the preferred redemption charge, and is a non-GAAP measure. Pro-rata same-property NOI, excluding termination fees, grew 3.7% on a pro forma basis that assumes the merger occurred at the start of both comparison periods. The filing does not present a single conventional operating-margin measure.

Balance sheet, debt, and liquidity

• At March 31, total assets were $11.14 billion, total liabilities $4.37 billion, and total equity $6.76 billion. Cash and cash equivalents were $36.9 million.
• Total debt was $3.41 billion, up from $1.64 billion at December 31, 2016, largely reflecting merger-related debt and financing activity. Debt comprised $2.75 billion of notes payable and $658.0 million of unsecured credit facilities.
• The $1.0 billion revolving credit line had $897.7 million of available capacity, net of letters of credit. The company also had $94.1 million available to settle the remaining forward equity offering before June 23, 2017.
• Management estimated cash requirements of $345.3 million over the next 12 months, including $269.8 million to complete in-process developments and redevelopments and $75.5 million of debt maturities. The company said it expected operating cash flows to fund distributions and believed available capital resources were sufficient for expected needs.
• Annualized pro-rata net debt to Adjusted EBITDA was 4.9x, versus 4.5x at year-end. Annualized coverage was 4.5x, versus 3.2x at December 31. Management reported covenant compliance. 83.2% of wholly owned real estate assets were unencumbered.
• Cash dividends and distributions were $56.6 million in the quarter. The board declared a $0.53-per-share common dividend payable May 31, 2017; future dividends remain at the board’s discretion.

Portfolio, performance changes, and outlook

• At quarter-end, Regency owned 313 consolidated shopping centers and held interests in 116 additional centers through unconsolidated partnerships. The combined portfolio comprised 429 properties and 54.0 million square feet of gross leasable area.
• Combined pro-rata operating occupancy was 95.8%, compared with 96.0% at December 31. Management attributed lower shop-space occupancy in part to Equity One’s lower occupancy at acquisition. Same-property leased occupancy was 96.0%.
• Regency completed 328 leasing transactions covering 1.118 million square feet; comparable-size leasing rates increased 8.2%, according to management. Two new developments represented an estimated $61.0 million investment upon completion and a projected weighted-average return of 7.4%. Thirty development or redevelopment projects represented approximately $515 million of investment upon completion.
• Operating cash flow declined by $44.1 million year over year, primarily due to merger-related expenses and timing of operating receipts and payments. Investing outflows included $649.0 million for the Equity One acquisition, net of cash acquired, and $66.5 million for development and capital improvements.
• Management cited risks including integration of Equity One, economic and tenant conditions, retail competition from e-commerce, leasing and development execution, natural disasters, environmental remediation, and risks associated with co-investment partnerships. No tenant represented more than 5% of pro-rata annual base rent; five Sears or Kmart leases represented 0.6%.

Unusual items, contingencies, and reporting matters

• The Equity One merger purchase-price allocation was provisional and subject to revision; the company noted that final allocation could result in significant goodwill. Acquired assets and operating results were included only from March 1.
• The company reported $11.5 million of accrued environmental remediation liabilities for its pro-rata share. Management did not expect known environmental matters to materially affect financial position, liquidity, or operations, but cautioned that additional liabilities could emerge.
• A merger-related shareholder class action was settled through supplemental disclosures. Management said ordinary-course litigation was not expected to have a material adverse effect.
• Disclosure controls were reported effective. Equity One, representing approximately 60% of company assets at quarter-end, was excluded from the internal-control assessment while integration proceeded.
• Management provided no specific earnings or FFO guidance in the supplied filing text. It described anticipated cash needs and funding sources, and stated that future distributions depend on capital requirements and availability.

Important facts for investors to verify

• How the provisional Equity One purchase-price allocation, merger integration, and related costs change in subsequent filings.
• Whether occupancy, same-property NOI growth, and leasing spreads persist after Equity One is included for a full comparable period.
• Progress and costs for the $269.8 million of near-term development commitments, and refinancing or repayment of 2017 maturities.
• Debt leverage, covenant headroom, available revolving capacity, and the treatment of joint-venture debt in reported leverage measures.
• Whether operating cash flows support distributions and planned capital spending, particularly given the quarter’s lower operating cash flow.
• Updates on environmental remediation liabilities, retail tenant credit conditions, and the integration of Equity One’s internal controls.