Regency Centers Corporation and Regency Centers, L.P. — Q2 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2016. Regency is a REIT focused primarily on grocery-anchored shopping centers; it reported 199 directly owned centers and partial interests in 112 additional centers through partnerships. The Parent Company owns approximately 99.8% of the Operating Partnership, which holds the company’s assets and debt.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $152.4 million | $141.1 million | $302.0 million | $281.5 million |
| Income from operations | $40.1 million | $32.6 million | $80.8 million | $62.8 million |
| Net income attributable to common stockholders | $34.8 million | $32.5 million | $82.7 million | $57.7 million |
| Diluted earnings per share | $0.35 | $0.34 | $0.84 | $0.61 |
| NAREIT FFO attributable to common stock and unit holders | $79.7 million | $71.0 million | $164.1 million | $140.7 million |
| Core FFO attributable to common stock and unit holders | $81.0 million | $71.2 million | $159.8 million | $140.7 million |
Revenue and operations. Quarterly revenue increased 8.0%, led by rent from development completions and acquisitions, alongside same-property rent growth. For the first half, same-property NOI excluding termination fees grew 3.7%; pro-rata same-property occupancy was 96.0% at quarter-end. Rental rates on comparable new and renewal leases increased 13.7% during the first half. Regency completed 2.2 million square feet of leasing.
Cash flow and liquidity. First-half operating cash flow was $143.3 million, versus $127.4 million in 2015. Investing used $316.0 million, primarily reflecting $297.4 million of operating-property acquisitions; financing provided $160.8 million, including $149.8 million of common-stock proceeds. Cash and cash equivalents were $24.9 million at June 30, down from $36.9 million at year-end. The company declared a quarterly common dividend of $0.50 per share, payable August 31, 2016.
Debt and capital. Total debt was $1.984 billion at June 30, 2016, compared with $1.864 billion at December 31, 2015; this includes $309.6 million drawn on unsecured credit facilities. Regency reported a 5.3x pro-rata net debt-to-Core EBITDA ratio and 3.0x coverage ratio. It had $649.2 million of availability on its $800 million credit line at quarter-end, net of letters of credit. Separately, unconsolidated partnerships had $1.4 billion of non-recourse debt, of which Regency’s pro-rata share was $480.5 million. Regency reported compliance with debt covenants.
Material changes and notable items
- Revenue and common-stockholder earnings increased year over year, supported by operating-property acquisitions, development completions, rent growth, and improved equity income from real estate partnerships.
- First-half equity income from real estate partnerships rose to $24.0 million from $12.3 million, substantially reflecting higher property-sale gains and lower financing costs in certain partnerships.
- First-half gains on real estate sales were $13.4 million, compared with $6.5 million in 2015. The company also recorded a $1.7 million impairment on a property and land parcel that were subsequently sold.
- Operating expenses rose $16.7 million in the first half, including higher depreciation, maintenance, and real estate taxes, partly related to acquisitions and development activity. Net interest expense declined $4.8 million, primarily due to lower rates and lower notes-payable balances.
- Other comprehensive loss was $21.6 million for the first half, mainly reflecting changes in the fair value of interest-rate swaps; accumulated other comprehensive loss was $80.0 million at June 30.
Outlook, risks, and contingencies
- Management’s stated long-term strategy targets average annual same-property NOI growth of 3%, disciplined development and redevelopment, and balance-sheet flexibility; the filing does not provide formal earnings guidance.
- At June 30, five ground-up developments were in process, with projected net costs of $89.2 million and projected returns on capital of 7.9%; 17 redevelopments were in process, with $72.0 million of costs remaining and projected incremental returns of 7.0%–10.0%. Management estimated $578.8 million of cash needs over the next 12 months, including development costs and debt maturities.
- After quarter-end, Regency amended its term loan to $265 million, extended maturity to January 2022, and fixed the rate at 2.00% through swaps. It also issued 5.0 million shares and reported approximately $400 million of net proceeds, intended partly to redeem $300 million of 5.875% notes due in 2017, settle swaps, and fund investments and general purposes. The filing reports the offering price as both $79.78 and $79.98 in different sections; verify the correct figure. The planned note redemption includes an approximately $13 million make-whole charge; the company also settled $220 million of forward-starting swaps for $40.6 million and expected related amounts to be reclassified to earnings in Q3.
- Retail tenant credit remains a risk. Two rejected Sports Authority leases represented $2.1 million, or 0.4%, of annualized base rent; four Sears/Kmart leases represented $3.0 million, or 0.5%. No tenant exceeded 5% of pro-rata annual base rent.
- Environmental matters include a $9.1 million accrued liability for Regency’s pro-rata share of remediation. Management did not expect currently known environmental matters or ordinary-course litigation to have a material adverse effect, but noted uncertainty regarding undiscovered or future environmental liabilities.
- Management identified economic and local-market conditions, tenant financial distress, leasing and rent trends, development timing and costs, natural disasters, environmental remediation, partnership governance, and technology disruption among forward-looking risks. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the reported post-quarter equity offering price ($79.78 versus $79.98) and the final use of proceeds, note redemption, and swap-related accounting.
- Assess whether same-property NOI growth and leasing gains are sustainable, distinguishing recurring property operations from sale gains, termination fees, and partnership-level gains.
- Review debt maturities and liquidity after the term-loan amendment, equity issuance, and repayment of the credit-line balance, including Regency’s exposure to partnership debt and capital calls.
- Track development and redevelopment costs, projected returns, leasing progress, and the estimated $578.8 million of next-12-month cash needs.
- Monitor the Sports Authority and Sears/Kmart leases, environmental remediation exposure, and any developments in litigation or other contingencies.