Regency Centers Corporation and Regency Centers, L.P. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Regency is a REIT that owns, operates, leases, acquires, and develops retail shopping centers, primarily grocery-anchored. On March 1, 2017, it completed its $5.2 billion merger with Equity One; reported 2017 results include Equity One only from the closing date unless otherwise noted.
Key financial results
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Total revenue | $261.3 million | $457.4 million | $152.4 million Q2; $302.0 million six months |
| Net income attributable to common stockholders | $48.4 million | $15.1 million | $34.8 million Q2; $82.7 million six months |
| Diluted earnings per share | $0.28 | $0.10 | $0.35 Q2; $0.84 six months |
| Operating cash flow | $175.8 million for six months | $151.3 million | |
| Investing cash flow | $(769.8) million for six months | $(316.0) million | |
| Financing cash flow | $677.9 million for six months | $152.8 million |
- Revenue growth primarily reflects the Equity One acquisition. The merger contributed $100.9 million of Q2 revenue and $135.8 million for the six-month period.
- Six-month net income attributable to common stockholders fell by $67.5 million year over year, principally reflecting $74.4 million of merger-related costs, lower property-sale gains, and higher interest expense. Q2 common-stockholder income increased year over year, helped by merger contribution and lower preferred dividends.
- Q2 included $12.4 million of debt-extinguishment expense after the company prepaid nine mortgages. The six-month period also included $4.8 million of gains on real estate sales, versus $13.4 million in 2016.
- Company-reported pro-rata same-property NOI, adjusted to include Equity One as if merged at the start of the comparison period and excluding termination fees, grew 3.2% in Q2 and 3.5% for six months. These are non-GAAP measures.
- Core FFO attributable to common stock and unit holders was $158.2 million in Q2 and $272.5 million for six months, compared with $81.0 million and $159.8 million, respectively. Core FFO includes adjustments for merger costs and other items and is non-GAAP.
Balance sheet, debt, and liquidity
- At June 30, 2017, total assets were $11.19 billion, total liabilities $4.46 billion, and total equity $6.73 billion. Cash and cash equivalents were $97.3 million.
- Total debt was $3.51 billion, compared with $1.64 billion at December 31, 2016. The increase reflects the merger and debt issuance. The company issued $950 million of senior unsecured notes in January and June and assumed debt in the Equity One merger.
- Debt included $2.94 billion of notes payable and $563.0 million of unsecured credit facilities. The company reported covenant compliance at quarter-end. Its $1.0 billion credit line had $994.1 million of available capacity, net of letters of credit.
- Available capital also included $500 million remaining under its ATM equity program and approximately $94.1 million of forward equity to settle. The company estimated cash needs of $303.1 million over the next 12 months, including $266.5 million to complete current developments and redevelopments and $36.5 million for maturing debt.
- Annualized pro-rata net debt to adjusted EBITDA was 5.1x, up from 4.5x at year-end 2016; annualized coverage ratio was 4.3x, compared with 3.3x. Management said available resources were sufficient for expected capital needs.
- Six-month distributions to common and preferred shareholders and unit holders totaled $147.6 million. The board declared a $0.53-per-share common dividend payable August 30, 2017; future dividends remain at board discretion.
Portfolio, outlook, and risks
- At June 30, the portfolio comprised 313 consolidated shopping centers and partial interests in 115 unconsolidated centers, with 54.2 million square feet of gross leasable area. Pro-rata operating occupancy was 95.7%; the company attributed lower shop-space occupancy partly to Equity One’s portfolio.
- Regency completed 843 leasing transactions covering 2.85 million pro-rata square feet during the first half. Trailing-twelve-month rent spreads on comparable spaces were 9.1%. Management reported three new development starts with $158.5 million of projected total investment and a weighted-average projected return of 7.1%; 29 properties were in development or redevelopment, representing $624 million of investment upon completion.
- The filing gives no formal earnings or FFO guidance. Management’s stated near-term capital requirement is $303.1 million, subject to changes if new projects or acquisitions are undertaken or debt is refinanced.
- Principal risks cited include integration of Equity One and realization of expected synergies; e-commerce and changing shopping patterns; tenant financial distress or lease rejection in bankruptcy; economic and leasing conditions; development timing and costs; environmental liabilities; and risks from co-investment partnerships.
- Environmental remediation liabilities accrued for Regency’s pro-rata share were $10.7 million. Management did not expect known environmental matters or ordinary-course litigation to materially affect financial position, liquidity, or operations, but noted that undiscovered contamination or legal changes could increase exposure.
- Equity One represented about 60% of total assets at quarter-end and was excluded from management’s internal-control-over-financial-reporting assessment while integration proceeded. Management reported disclosure controls were effective and said no material control changes were identified during the quarter.
- After quarter-end, Regency announced redemption of its remaining $75 million Series 7 preferred stock, scheduled for August 23, 2017, funded with June note proceeds. It also obtained noteholder consents effective July 28 to amend guarantees on $300 million of notes.
Important facts for investors to verify
- How much of revenue, NOI, and FFO growth is attributable to the merger versus underlying same-property performance, and whether integration synergies are being realized.
- The final Equity One purchase-price allocation: the reported allocation was provisional and included $246.6 million of goodwill.
- Debt leverage, interest costs, maturity and refinancing plans, covenant headroom, and the impact of the preferred-stock redemptions.
- Delivery, leasing, projected costs, and expected returns for the development and redevelopment pipeline.
- Tenant occupancy and rent collection trends, particularly shop-space leasing and exposure to retailers affected by e-commerce.
- Potential additional environmental costs and progress integrating Equity One into Regency’s internal-control framework.