Business context and reporting period
Regency Centers Corporation and Regency Centers, L.P. filed a combined Form 10-K for the fiscal year ended December 31, 2010. Regency is a REIT focused on owning, developing and managing primarily grocery-anchored shopping centers. The Parent Company owns approximately 99.8% of the Operating Partnership, which holds the operating assets and debt.
At year-end, Regency managed 396 centers with 45.1 million square feet of gross leasable area across 28 states and the District of Columbia: 215 directly owned centers and 181 held through unconsolidated partnerships. Combined portfolio occupancy was 92.6%, or 93.2% excluding properties in development.
Financial and operating highlights
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $486.8 million | $488.1 million |
| Net income (loss) | $16.2 million | $(32.7) million |
| Net income (loss) attributable to common stockholders | $(7.7) million; diluted loss per share $(0.10) | $(56.4) million; diluted loss per share $(0.74) |
| Cash from operating activities | $141.2 million | $193.9 million |
| Cash from investing activities | $(184.0) million | $45.7 million |
| Cash from financing activities | $(34.2) million | $(161.6) million |
| Year-end cash | $22.5 million | $99.5 million |
| Total debt | $2.09 billion | $1.89 billion |
| Coverage ratio, including Regency’s pro-rata share of partnerships | 2.1x | 2.1x |
Revenue was nearly flat year over year. Minimum rent increased 0.7% to $347.1 million, while management, transaction and other fees fell $8.9 million to $29.4 million, principally because of a $7.8 million disposition fee recognized in 2009. Operating expenses rose 1.5% to $311.6 million; interest expense increased to $125.3 million from $109.2 million. The filing does not present a conventional operating margin measure.
Common dividends declared fell to $1.85 per share for 2010 from $2.11 in 2009. The quarterly dividend was $0.4625 and had been unchanged since May 2009.
Material changes versus the prior comparable period
- Common-stockholder loss improved by $48.7 million from 2009, but remained a loss. Management attributed the improvement mainly to lower impairment charges and better operating fundamentals, partly offset by higher interest expense and lower gains on property sales.
- Impairment provision declined to $26.6 million in 2010 from $97.5 million in 2009. The 2010 amount included $23.9 million on consolidated real estate and $2.7 million on a partnership investment; 2009 impairment was heavily weighted toward land held for development or sale.
- Combined occupancy improved to 92.6% from 92.1%; occupancy of operating centers alone was 93.2% in both years. Combined portfolio rental rates declined 2.7% in 2010, versus a 2.0% decline in 2009.
- Development properties decreased to 26 from 40, and reported real estate investment in development fell to $610.9 million from $920.4 million.
- Operating cash flow fell $52.7 million. Cash declined by $77.0 million during 2010, compared with a $77.9 million increase in 2009.
- Debt rose by $208.1 million. Regency issued $400 million of ten-year unsecured notes at 6.0% and 4.8%, used proceeds partly to repay credit-line borrowings, and repurchased $69.4 million principal of existing notes in a tender offer.
Outlook, risks and unusual items
- Management said leasing activity and tenant collections improved versus 2009, and tenant defaults and move-outs appeared to be easing. It nevertheless expected weaker tenants to continue vacating in 2011 and anticipated moderate rental-rate declines in some markets as leases reset to market.
- Regency scaled back development starts, phased projects where demand was lacking and reduced overhead. The 26-property pipeline was expected to require a net investment of $520.7 million upon completion; estimated average return when completed and fully leased was 6.7%. Remaining costs to complete in-process projects, net of projected sales and reimbursements, were estimated at $11.4 million.
- Management estimated $455.8 million of capital needs through 2013, primarily for debt maturities, in-process development and Regency’s share of partnership debt repayment. It expected to use refinancing, available credit, asset sales and equity proceeds. A forward sale covering 8.0 million shares was expected to settle by March 2011 and produce estimated net proceeds of $217.8 million; physical settlement would dilute shareholders.
- At year-end, the $600 million unsecured line had $10 million drawn and was due in February 2012. A separate $113.8 million revolving facility expired in February 2011 and was not renewed. Regency said it expected to arrange a replacement credit facility before the line matured.
- Debt refinancing is a key risk, including partnership debt: Regency’s pro-rata share of partnership maturities was $185.7 million in 2011 and $99.0 million in 2012. The filing notes that refinancing may require capital contributions from Regency and its partners. Consolidated debt maturities were also significant in 2011 and 2012.
- Blockbuster Video was in Chapter 11; by year-end it had rejected 14 Regency leases and notified the company of five further early-2011 closures. Its annualized base rent was $4.4 million, or 1.0% of Regency’s pro-rata annualized base rent. Management said no single tenant exceeded 5% of pro-rata annual base rent.
- Known environmental remediation obligations were accrued at $2.9 million. Management did not expect currently known matters or ordinary-course litigation to have a material effect, while cautioning that additional environmental liabilities could emerge.
- Other material exposures include geographic concentration (California, Florida and Texas generated 32.6%, 14.3% and 13.4% of consolidated NOI, respectively), tenant and retail-market weakness, co-tenancy provisions, joint-venture governance and refinancing, interest rates, property impairments, and REIT qualification and distribution requirements.
- Fourth-quarter 2010 common-stockholder loss was $36.7 million, compared with income of $25.3 million in fourth-quarter 2009. KPMG gave unqualified opinions on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether the forward equity sale settled as expected, its actual net proceeds and share dilution.
- How the 2011–2013 debt maturities and partnership refinancing needs were funded, and the terms and availability of replacement credit facilities.
- Whether the pipeline was completed near budget and achieved the projected 6.7% return amid subdued tenant demand.
- Subsequent occupancy, renewal spreads and rent collections, including leasing of space vacated by Blockbuster and other distressed retailers.
- Future impairment charges and the financial performance, debt and capital-call requirements of unconsolidated partnerships.
- Dividend sustainability relative to operating cash flow, capital commitments, debt service and REIT distribution requirements.