Regency Centers Corporation — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; the filing also includes fourth-quarter results. Regency is a REIT focused primarily on grocery-anchored shopping centers. At year-end, it owned or held partial interests in 307 centers across 25 states and the District of Columbia, totaling 37.8 million square feet of GLA (28.7 million square feet pro rata).
Financial and operating performance
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Revenue | $614.4 million | $569.8 million | Up 7.8%; growth reflected acquisitions, development completions and same-property rent increases. |
| Net income attributable to common stockholders | $143.9 million | $129.0 million | Up 11.5%; includes $47.3 million of real estate sale gains. |
| Diluted EPS | $1.42 | $1.36 | Up 4.4%. |
| NAREIT FFO | $277.3 million | $276.5 million | Nearly flat. |
| Core FFO | $334.0 million | $288.9 million | Up 15.6%; excludes specified non-core items. |
| Cash from operating activities | $289.4 million | $275.6 million | Up $13.7 million. |
| Cash used in investing activities | $409.7 million | $139.3 million | Higher acquisition and development spending. |
| Total debt at year-end | $1.642 billion | $1.864 billion | Down $221.9 million. |
| Cash and cash equivalents | $13.3 million | $36.9 million | Line-of-credit availability was $779.2 million. |
- Pro-rata same-property NOI, excluding termination fees, increased 3.5%. Operating-property occupancy was 96.0% pro rata; shop-space occupancy improved to 93.1%, while anchor occupancy declined to 97.8%, partly following Sports Authority lease rejections.
- Comparable new and renewal lease rates increased 11.3%. Average base rent on shop leases signed in 2016 was $30.95 per square foot, 9% above the average rent on shop leases due to expire over the following 12 months.
- Common dividends declared were $2.00 per share, versus $1.94 in 2015. The board declared a subsequent quarterly dividend of $0.51 per share.
- At year-end, Regency reported a 4.4x pro-rata net debt-to-Core EBITDA ratio, down from 5.2x a year earlier, and a 3.3x coverage ratio, versus 2.8x.
Material changes and unusual items
- Revenue rose $44.6 million. Minimum rent increased $29.2 million, including contributions from new acquisitions, development properties commencing rent and same-property growth; property sales partially offset the increase.
- Operating expenses increased $38.1 million, notably depreciation and amortization, maintenance, and merger- and acquisition-related costs. Net interest expense fell $11.9 million, but other expense included a $40.6 million charge to settle forward-starting interest-rate swaps, $14.2 million of early debt-extinguishment costs and $4.2 million of property and land impairment losses.
- Income from unconsolidated real estate partnerships rose to $56.5 million from $22.5 million, substantially reflecting property-sale gains and lower interest and depreciation costs in partnerships. Regency sold 11 operating properties and 16 land parcels; reported net gains on real estate sales were $47.3 million, compared with $35.6 million in 2015.
- Core FFO included adjustments such as $6.5 million of merger-related costs, $40.6 million of derivative losses and $14.2 million of debt-extinguishment costs. FFO and Core FFO are non-GAAP measures and should be considered alongside GAAP results and cash flows.
Liquidity, investment plans and outlook
- Regency estimated approximately $240.2 million of cash needs over the next 12 months, including $149.9 million to complete projects and $86.3 million for maturing debt and related partnership contributions. It expected to address these needs with operating cash flow, property-sale proceeds, credit availability and capital-market funding.
- Management reported compliance with debt covenants. It expected to refinance $86.3 million of debt maturing over the next 12 months and said available line capacity could provide a repayment alternative. Approximately 83% of wholly owned real estate assets were unencumbered; 1.3% of outstanding debt was reported as variable-rate debt.
- Development activity included six ground-up projects and 15 redevelopments in process. Ground-up projects were projected to return 7.4% on capital upon completion; redevelopment projects had projected incremental returns of 7.0%–10.0%. During 2016, new development and redevelopment starts totaled $221.4 million net of partner funding, with a projected 7.8% return upon completion.
- Management’s strategy targets average annual same-property NOI growth of 3%. For 2017, it expected average base rents on new and renewal leases to meet or exceed rents on leases expiring that year, while cautioning that local market conditions could affect results. The filing provides no full-year 2017 earnings or FFO guidance.
Merger, risks and contingencies
- Regency agreed to acquire Equity One in a stock-for-stock merger at a fixed exchange ratio of 0.45 Regency share per Equity One share. Both companies’ stockholders approved the merger on February 24, 2017; the filing expected closing on March 1, subject to remaining conditions. The filing projected legacy Regency holders would own approximately 62% of the combined company and legacy Equity One holders approximately 38%.
- After year-end, Regency priced $650 million of senior notes: $350 million of 3.6% notes due 2027 and $300 million of 4.4% notes due 2047. The proceeds were intended in part to fund merger-related debt repayment and expenses and to redeem Series 6 preferred shares. A planned $350 million tranche would be redeemable at 101% plus accrued interest if the merger did not close. Merger-contingent financing also included a proposed $1.0 billion credit line and a new $300 million term loan.
- Risks include merger completion and integration, additional debt and dilution, tenant bankruptcies and store closures, e-commerce impacts, lease renewals, and concentration in California, Florida and Texas. Natural disasters and severe weather may also affect properties and insurance costs.
- Five Sears or Kmart leases represented $3.1 million, or 0.6%, of annualized base rent; no announced closures were then located in Regency centers. Sports Authority’s two rejected leases represented $2.1 million of annualized base rent, and Regency reported executing leases to re-tenant those spaces.
- Environmental remediation liabilities accrued were $8.9 million pro rata. A merger-related stockholder lawsuit was settled through agreed supplemental disclosures; Regency stated it believed the claims were without merit. Management did not expect ordinary-course litigation or currently known environmental matters to have a material adverse effect.
- KPMG issued unqualified opinions on the financial statements and internal controls. Management and the auditor reported effective internal control over financial reporting at December 31, 2016.
Investor facts to verify
- Confirm the merger’s actual closing, final consideration, acquired debt, integration costs and realized benefits; the stated closing date and related financing were forward-looking at filing.
- Reconcile GAAP earnings with NAREIT FFO and Core FFO, particularly the effect of property-sale gains, swap settlement, debt-extinguishment charges and merger costs.
- Track execution, leasing, costs and realized returns for the development and redevelopment pipeline, alongside occupancy and same-property NOI.
- Review debt maturities, refinancing outcomes, post-merger leverage, covenant headroom and liquidity after the note offering and preferred-share redemption.
- Monitor tenant credit and store-closure exposure, regional concentration, environmental obligations and weather-related insurance coverage.