Regency Centers Corporation and Regency Centers, L.P. — Q2 2014 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2014. Regency is a REIT focused on grocery-anchored shopping centers, operated through its partnership. At quarter-end, it directly owned 206 centers and held partial interests in 122 additional centers through joint ventures.
Financial and operating performance
- Revenue: Q2 revenue was $134.9 million, up 10.3% from $122.3 million. First-half revenue was $268.2 million, up 10.5% from $242.7 million. Growth reflected acquisitions, developments entering operation, and same-property rent and occupancy gains.
- Profit and per-share results: Q2 income from continuing operations was $29.5 million versus $21.6 million; diluted continuing-operations EPS was $0.28 versus $0.19. Net income attributable to common stockholders was $25.5 million versus $31.9 million, and total diluted EPS was $0.28 versus $0.35. First-half continuing-operations income was $53.8 million versus $40.2 million; diluted continuing-operations EPS was $0.48 versus $0.34. First-half common-stockholder net income was $44.9 million versus $47.4 million, with diluted EPS of $0.48 versus $0.52. Comparisons of total net income are affected by 2013 discontinued-property operations and sale gains; 2014 property sales did not qualify as discontinued operations under newly adopted guidance.
- REIT performance measures: FFO was $65.9 million in Q2, up from $62.1 million; Core FFO was $65.9 million versus $61.8 million. For the first half, FFO was $131.4 million versus $120.0 million and Core FFO was $130.0 million versus $120.1 million. These are non-GAAP measures, not substitutes for operating cash flow.
- Property operations: Pro-rata same-property NOI increased 3.7% in Q2 and 3.3% in the first half. Consolidated operating properties were 95.4% leased at June 30, compared with 95.0% at year-end 2013; combined portfolio operating occupancy was 95.4%, versus 95.2% at year-end. Weighted average effective rent per square foot for consolidated properties rose to $17.86 from $17.40.
- Cash flow: First-half operating cash flow was $119.6 million, up from $109.3 million. Investing used $162.6 million, compared with $21.7 million in the prior-year period, reflecting higher acquisition spending and lower sale proceeds. Financing used $0.9 million, versus $50.8 million. Cash declined $43.9 million to $36.7 million; cash distributions to common and preferred holders were approximately $96.6 million.
- Debt and liquidity: Total debt was $2.031 billion at June 30, up from $1.855 billion at year-end. Cash was $36.7 million and total assets were $4.044 billion. The company reported $784.3 million of available capacity on its $800 million credit line, $90 million available under its amended term loan, and $200 million remaining under its ATM equity program. It reported covenant compliance and a trailing-four-quarter coverage ratio of 2.5 times, versus 2.4 times a year earlier.
Material changes and significant activity
- Regency acquired an 80% controlling interest in the Fairfield, Connecticut portfolio and additional properties, with total acquisition purchase prices reported at $189.4 million; $78.0 million of mortgage debt was assumed for acquisitions.
- It issued $250 million of ten-year unsecured notes at 3.75%, repaid $150 million of 4.95% notes, and amended its term loan, extending maturity to June 2019 and reducing the applicable margin. The new bond’s effective interest rate, after hedge proceeds, was 3.59%.
- Development and redevelopment spending was $93.8 million in the first half. Seven projects were under construction or in lease-up at June 30, with estimated net development costs of $223.2 million.
- Accumulated other comprehensive loss increased to $36.4 million from $17.4 million, primarily reflecting changes in derivative fair values. A $225,000 impairment was recorded on three land parcels.
Outlook, risks, and contingencies
- Management estimated approximately $166.6 million of cash needs for the remainder of 2014, including $141.1 million for in-process developments and redevelopments, $9.0 million for maturing debt, and $16.5 million for expected partnership capital contributions. Funding sources include operating cash, credit facilities, property sales, and potential debt or equity issuance.
- Regency had $350 million of unsecured debt maturing in August 2015 and had entered into $220 million of forward-starting swaps to partially hedge expected refinancing. Management stated it expected to access debt markets as needed and expected covenant compliance to continue.
- The board declared a quarterly common dividend of $0.47 per share, payable September 3, 2014. Future dividends remain subject to board discretion, capital requirements, and availability.
- On July 10, 2014, after quarter-end, Regency announced an offer to acquire the remaining AmREIT shares for $22 per share, payable in cash and/or stock. It had acquired 834,091 AmREIT shares for $14.4 million during the first half. Completion, integration, costs, and expected synergies remain uncertain.
- Key risks include tenant financial distress or bankruptcy, economic and retail-market conditions, leasing and development execution, interest-rate and refinancing exposure, environmental liabilities, and risks related to the proposed AmREIT transaction. Management did not expect known litigation or environmental matters to have a material adverse effect, but noted potential environmental liabilities cannot be ruled out.
- The filing reports a non-material correction to 2013 cash-flow classification: operating cash flow increased by $5.3 million, with an offsetting increase in investing cash use. The filing states disclosure controls were effective and there were no material changes in internal controls.
Important facts for investors to verify
- Whether the proposed AmREIT acquisition proceeds, its final consideration and financing, and any resulting integration costs or synergies.
- Regency’s ability to fund the 2014 development commitments and refinance the $350 million 2015 maturity while preserving liquidity and covenant headroom.
- Whether occupancy, same-property NOI growth, and leasing economics remain resilient; renewal base rents declined year over year, which management attributed mainly to tenants exercising pre-negotiated options.
- The quality and sustainability of reported earnings and FFO, including the role of property-sale gains, partnership gains, derivative effects, and discontinued-operations presentation.
- Potential exposure to environmental conditions, tenant bankruptcies, and debt held by unconsolidated partnerships; Regency’s pro-rata share of partnership debt was $523.2 million.