Regency Centers Corporation and Regency Centers, L.P. — 2012 Form 10-K
Business context and period. This combined annual report covers the fiscal year ended December 31, 2012. Regency is a U.S. retail shopping-center REIT, operating primarily through its Operating Partnership. At year-end, it owned 204 consolidated centers (22.5 million square feet) and held partial interests in 144 centers through joint ventures (17.8 million square feet). Consolidated portfolio occupancy rose to 94.1% from 92.2% at year-end 2011.
Financial performance and position
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Revenue | $496.9 million | $493.1 million | Up 0.8%; minimum rent rose, partly offset by lower fees |
| Net income attributable to common stockholders | $(6.7) million | $31.7 million | Diluted EPS was $(0.08), versus $0.35 |
| Funds from operations (FFO) | $222.1 million | $220.3 million | Up 0.8% |
| Core FFO | $230.9 million | $213.1 million | Up 8.3% |
| Net cash from operating activities | $257.2 million | $217.6 million | Up $39.6 million |
| Cash from investing activities | $3.6 million | $(77.7) million | 2012 included $352.7 million in real-estate sale proceeds |
| Cash used in financing activities | $(249.9) million | $(145.6) million | Included debt repayment, distributions, and preferred-stock transactions |
| Total debt | $1.942 billion | $1.982 billion | Down $40.5 million |
| Cash and cash equivalents | $22.3 million | $11.4 million | At December 31 |
| Line of credit | $70 million drawn of $800 million | $40 million drawn | $730 million available at year-end; maturity extended to September 2016 |
Operating expenses were $321.3 million, up 1.0%. Same-property NOI was $383.9 million, up approximately 3.8% from $370.0 million. The filing does not present a single comparable GAAP operating margin. Net income included $74.8 million of impairment provisions, versus $12.4 million in 2011, and $23.5 million of income from discontinued operations.
At year-end, total assets were $3.853 billion and total liabilities were $2.108 billion. The reported coverage ratio, including Regency’s pro-rata share of partnerships, was 2.5x, compared with 2.3x in 2011. The ratio of earnings to fixed charges was 1.1x, versus 1.4x.
Material changes versus 2011
- Revenue increased modestly as higher occupancy and average base rents lifted minimum rent; management, transaction, and other fees fell $7.5 million, chiefly because 2011 included fees from the DESCO partnership liquidation.
- Common-stockholder results swung to a loss. The largest factor was the $62.4 million year-over-year increase in impairment provisions. Lower interest expense ($11.5 million) and higher equity income from real-estate partnerships ($14.2 million) partly offset the increase.
- Occupancy improved in consolidated and unconsolidated centers. Regency acquired five operating properties and five land parcels and began five developments and one redevelopment; four projects were under construction or lease-up at year-end, compared with seven a year earlier.
- Capital expenditures rose to $320.6 million from $152.7 million. Property-sale proceeds included $273.5 million from a 15-property portfolio transaction; Regency retained a $47.5 million preferred investment in the acquiring entity.
- Regency issued $313.9 million net from new Series 6 and Series 7 preferred shares and redeemed $275 million of Series 3, 4, and 5 preferred shares, as well as $50 million of Series D preferred units. Related preferred-stock redemptions and issuance costs affected common-stockholder earnings.
- Common dividends remained $1.85 per share for the year. Operating cash flow exceeded reported distributions to stock and unit holders of $188.4 million.
Outlook, commentary, risks, and unusual items
- Management expected operating cash flow, line borrowings, real-estate sales, and access to debt and equity markets to fund operations and commitments. It estimated approximately $130.5 million of 2013 needs for maturing debt, in-process development and redevelopment, and Regency’s share of joint-venture debt repayment. Additional development starts would increase requirements.
- Management expected to refinance maturing debt using new secured or unsecured debt, citing current capital-market access, credit ratings, line capacity, and unencumbered assets. About 76.8% of wholly owned real-estate assets were unencumbered. Debt maturities include $150 million in 2014 and $350 million in 2015.
- The quarterly common dividend was $0.4625 per share; the Board retained discretion over future distributions. Management intended to maintain distributions sufficient for REIT qualification, while noting distributions depend on cash generation, financial condition, and capital needs.
- The 15-property portfolio sale generated an $18.1 million net impairment charge. Additional impairment was recorded on properties and land, including a $50 million charge on a property in North Las Vegas after a shortened expected holding period and weak market fundamentals.
- SUPERVALU announced in January 2013 an agreement to sell its four largest grocery chains. Regency said it would monitor potential effects; Supervalu represented 2.1% of annualized base rent on a pro-rata basis. No tenant individually represented more than 5% of annualized base rent.
- Key risks include retail-sector weakness and tenant bankruptcies or store closures; geographic concentration, including California, Florida, and Texas; lease renewal and occupancy risk; development cost, approval, and lease-up risk; joint-venture governance and refinancing; debt maturities, interest rates, and covenant compliance; property-value impairments; natural disasters and insurance costs; environmental remediation; and continued access to external capital. Management reported no litigation expected to materially affect financial position or results.
- Environmental remediation reserves were $9.3 million for Regency’s pro-rata share. Management did not expect currently known matters to have a material impact, but cautioned that additional liabilities could emerge.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded controls were effective at year-end.
Important facts for investors to verify
- Whether the higher impairment burden, particularly the North Las Vegas property charge, signals further valuation pressure or asset-sale plans.
- Leasing and rent trends behind the occupancy improvement, including renewal spreads, tenant-improvement costs, and the schedule of lease expirations.
- 2013 development completion costs and lease-up progress, and the expected returns on the four active projects.
- Refinancing plans and pricing for 2014–2017 maturities, covenant headroom, and the effect of variable rates or credit-rating changes.
- Performance and redemption terms of the $47.5 million preferred investment retained in the 15-property portfolio transaction, and any exposure to the joint venture’s debt or operations.
- Whether operating cash flow continues to cover distributions and capital needs, and whether the common dividend remains sustainable.
- Potential tenant exposure following SUPERVALU’s announced sale, as well as any material changes in tenant credit quality or store closures.