Regency Centers Corporation and Regency Centers, L.P. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Regency is a REIT that owns, operates, leases, acquires, and develops primarily grocery-anchored shopping centers. At quarter-end, it directly owned 216 centers and held partial interests in 180 additional centers through joint ventures. The Parent Company and Operating Partnership are managed as one business; the Operating Partnership holds the operating assets and debt.
Key financial results
| Metric | Q1 2011 | Q1 2010 or prior date |
|---|---|---|
| Total revenue | $127.1 million | $124.1 million; up 2.4% |
| Operating expenses | $86.1 million | $81.6 million; up 5.6% |
| Revenue less listed operating expenses | $41.0 million | $42.5 million |
| Income from continuing operations | $8.1 million | $10.5 million |
| Net income | $8.1 million | $17.4 million |
| Net income attributable to common stockholders | $2.2 million; diluted EPS $0.02 | $11.4 million; diluted EPS $0.14 |
| Cash from operating activities | $49.5 million | $44.1 million |
| Cash and cash equivalents | $65.8 million at March 31 | $22.5 million at December 31, 2010 |
| Total debt | $1.922 billion | $2.094 billion at December 31, 2010 |
| Total assets | $3.991 billion | $3.995 billion at December 31, 2010 |
Q1 investing cash outflow was $6.6 million and financing cash inflow was $0.4 million. The Company paid $43.2 million in common distributions and preferred dividends. The quarterly common dividend was $0.4625 per share, unchanged since May 2009.
Management reported a 2.2x coverage ratio for Q1, including its pro-rata share of joint ventures, versus 2.1x in Q4 2010. Debt to assets, before accumulated depreciation and including pro-rata joint-venture debt and assets, was 44.8%, down from 48.3% at year-end 2010. The filing states that 82.4% of real estate assets were unencumbered. These are management-defined or pro-rata measures, not GAAP ratios.
Material changes versus the prior comparable period
- Revenue rose $3.0 million, driven by higher minimum and percentage rent and management, transaction, and other fees; tenant recoveries and other income declined.
- Operating expenses increased $4.6 million, notably depreciation and amortization, property operating costs, and general and administrative expense. The provision for doubtful accounts fell to $0.6 million from $2.3 million.
- Interest expense increased $1.7 million to $30.9 million. Lower interest on notes payable was offset by reduced capitalized interest and higher amortization of losses on settled hedges.
- Common earnings and EPS fell sharply, primarily because Q1 2010 included a $6.8 million gain on sales of one operating property and one development property. Higher depreciation in 2011 also weighed on results. Q1 2011 had no property-sale gain in discontinued operations.
- Equity in losses of real estate partnerships improved to $2.7 million from $3.9 million, but included a $4.6 million impairment provision on one joint-venture investment. In Q1 2010, Regency’s share of an impairment at GRIR was $3.6 million.
Liquidity, debt, and outlook
- On March 9, Regency settled a forward equity offering by issuing 8.0 million shares and receiving approximately $215.4 million net. Proceeds helped repay the $161.7 million of 7.95% unsecured notes that matured in January and the related line-of-credit borrowing. The $600 million unsecured line had no balance outstanding at March 31 and matures in February 2012; management said it was discussing a replacement facility and expected to close before maturity.
- Management estimated approximately $278.5 million of funding needs through 2013, primarily for $229.3 million of maturing debt, in-process development, and Regency’s share of joint-venture capital contributions. Regency’s own scheduled debt maturities and principal payments include $197.6 million in 2012 and $399.4 million in 2015.
- Joint ventures had $760.7 million of debt and credit lines maturing through 2013. The filing reports that, through April 2011, joint ventures repaid $418.4 million of 2011 maturities through refinancing and partner contributions. Regency contributed $25.3 million toward a capital call. Management noted that access to capital and partners’ ability to fund future calls remain important risks.
- At March 31, 99.4% of Regency’s debt was fixed-rate; variable-rate debt was less than 1% of total debt. Management cited interest-rate exposure on its credit line and the risk of refinancing fixed-rate debt at higher rates. It reported compliance with the line’s financial covenants.
- Operating centers were 90.9% leased at quarter-end. Management anticipated continued move-outs by weaker retailers during 2011 and possible moderate rent declines in isolated markets, while aiming to re-lease space to stronger tenants and restore occupancy. The filing gives no numerical earnings or revenue guidance.
- There were 26 development properties under construction or in lease-up, with an estimated $531.3 million net investment upon completion and an expected average return of 6.8% when completed and fully leased. Estimated remaining costs, net of reimbursements and projected land sales, were $15.5 million.
- Effective May 1, 2011, Regency redeemed its 16.35% interest in the MCWR-DESCO joint venture through an in-kind property distribution, selecting four St. Louis assets. It received a $5.0 million disposition fee at closing on May 4 and expected transition asset-management fees through 2011.
Risks, contingencies, and unusual items
- Management cited ongoing exposure to economic weakness, tenant financial distress and bankruptcy, co-tenancy provisions, leasing and rent pressure, development execution, joint-venture refinancing, and access to capital. Blockbuster had rejected 36 of 43 Regency leases; management expected further closures and possible lease assignments. No tenant represented more than 5% of annual base rent on a pro-rata basis.
- Environmental remediation costs were estimated at $2.8 million and accrued. Management did not expect known legal or environmental matters to have a material adverse effect, but cautioned that unknown conditions or changes in law could create additional liability. Ordinary-course litigation was not expected to have a material adverse effect.
- The Company disclosed that it had not properly accounted for its non-qualified deferred compensation plan and certain deferred restricted stock awards in previously filed statements. It concluded the prior-period errors were not material and corrected the December 31, 2010 balance sheet. The filing also describes effects on earlier annual earnings, including a $3.1 million decrease in 2010 common-stockholder income and increases in 2009 and 2008 income of $3.7 million and $6.0 million, respectively.
- No impairment provision on long-lived assets was recorded in Q1 2011 or Q1 2010; the separate $4.6 million impairment was on an investment in a real estate partnership.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter. Risk factors were unchanged from the 2010 Form 10-K.
Important facts for investors to verify
- Confirm the causes and sustainability of lower common earnings, separating recurring property operations from the prior-year property-sale gain, depreciation, joint-venture impairments, and hedge-loss amortization.
- Review the February 2012 credit-line refinancing, Regency’s debt maturities, and the financing and capital-call plans for joint ventures.
- Assess leasing trends, rent changes, tenant credit exposure, and co-tenancy risks. The filing contains an occupancy inconsistency: the narrative says 90.9% leased versus 91.6% at December 2010, while the portfolio table gives 92.6% operating occupancy at December 2010.
- Evaluate development completion costs, lease-up assumptions, and the projected 6.8% return, as well as the effect of the DESCO asset distribution and related fees.
- Review the deferred compensation accounting correction and its stated prior-period effects, and monitor environmental exposures and the estimated remediation accrual.