Business context and reporting period
Regency Centers Corporation and Regency Centers, L.P. filed this combined, unaudited Form 10-Q for the quarter ended June 30, 2018. Regency is a REIT that owns, operates, acquires and develops grocery-anchored retail shopping centers. At quarter-end, it owned 309 centers on a consolidated basis and held interests in 119 additional centers through unconsolidated partnerships; the combined portfolio comprised 428 properties and 54.1 million square feet.
Key financial and operating metrics
Amounts below are in millions unless noted. The income statement comparison is year over year; balance-sheet figures compare June 30, 2018 with December 31, 2017.
| Metric | 2018 | Prior comparable period / context |
|---|---|---|
| Q2 revenue | $281.4 | $261.3; up 7.7% |
| Q2 net income attributable to common stockholders | $47.8 | $48.4; down slightly; diluted EPS was $0.28 in both periods |
| Six-month revenue | $558.1 | $457.4; up $100.7 |
| Six-month net income attributable to common stockholders | $100.5 | $15.1; comparison affected by the 2017 Equity One merger costs and partial-period ownership |
| NAREIT FFO attributable to common stock and unit holders | Q2: $157.3; six months: $322.2 | Q2 2017: $143.6; six months 2017: $177.8 |
| Same-property NOI growth, adjusted and excluding termination fees | Q2: 4.2%; six months: 4.1% | Six-month comparison adjusted to include Equity One before the merger |
| Operating cash flow, six months | $300.9 | $177.1 |
| Cash and restricted cash | $43.2 | $49.4 at year-end 2017 |
| Total debt | $3,831.5 | $3,595.0 at year-end 2017 |
| Total assets / total liabilities | $11,181.7 / $4,612.9 | $11,145.7 / $4,412.7 at year-end 2017 |
| Portfolio occupancy | 95.4% leased, pro rata, operating properties | 96.2% at year-end 2017 |
Six-month investing cash outflow was $193.9 million, chiefly reflecting acquisitions, partnership investments and $120.6 million of development and capital improvements. Financing cash outflow was $113.1 million, including $188.6 million of common dividends and $125.0 million of share repurchases, partly offset by debt issuance and borrowings. Regency reported annualized pro-rata net debt to Operating EBITDAre of 5.6x and fixed-charge coverage of 4.1x.
Material changes versus the prior comparable period
- Q2 revenue rose $20.1 million, supported by same-property rent and recoveries, development commencements and acquisitions. Q2 same-property NOI growth excluding termination fees was 4.2%.
- Q2 net income attributable to common stockholders was slightly lower despite higher revenue. The period included $12.5 million of impairment charges and $11.0 million of debt-extinguishment costs; prior-year Q2 included $12.4 million of debt-extinguishment costs and higher property-sale gains.
- Six-month revenue and earnings comparisons are not like-for-like: the 2018 period includes a full six months of Regency’s Equity One portfolio, while the 2017 period includes it only from March 1 and included $74.4 million of merger costs. Preferred stock dividends also reduced 2017 common-stockholder earnings; Regency had no preferred shares outstanding in 2018.
- Regency issued $300 million of 4.125% senior unsecured notes due 2028 and redeemed $150 million of 6% notes due 2020. The revolving credit facility was increased to $1.25 billion and extended to March 2022, with two six-month extension options.
- The company repurchased 2.15 million shares for $125.0 million in the first half. The board-authorized program permits up to $250 million of repurchases through February 2020.
Outlook, commentary, risks and unusual items
- Management reported $1.09 billion of available capacity under its credit line, $500 million remaining under its at-the-market equity program and $37.2 million of unrestricted cash. It said available capital resources were sufficient for expected needs and reported compliance with debt covenants.
- Estimated cash needs over the next 12 months are $318.3 million: $174.8 million to complete in-process developments and redevelopments, $119.3 million for maturing debt and $24.2 million for Regency’s share of partnership debt maturities. The company expects to use operating cash flow, property-sale proceeds, credit-line borrowings and, when favorable, debt or equity markets.
- Regency was under contract through November 2019 to acquire up to 100% of an operating center valued at $205 million; management expected to purchase a 30% interest. The filing provides no formal earnings or revenue guidance.
- Development and leasing indicators: 21 properties were in development or redevelopment, with $348.5 million of pro-rata investment upon completion; two developments totaling $110.9 million were completed in the first half. Trailing 12-month rent spreads on comparable spaces were 6.4%. Management cited anticipated anchor move-outs, including Toys “R” Us and other junior anchors; pro-rata anchor occupancy was 97.3%.
- Six-month impairment provision was $28.6 million, including $26.2 million on two properties classified as held for sale; goodwill impairment was $9.2 million. Three properties held for sale at June 30 subsequently sold.
- Adoption of real-estate sale accounting guidance resulted in a $30.9 million opening retained-earnings adjustment for previously deferred gains. The company also expects the January 2019 lease-accounting standard to recognize obligations for ground and office leases and to increase operating expenses prospectively as certain leasing and legal costs can no longer be capitalized.
- Risk factors include tenant financial distress and bankruptcies, e-commerce and changing retail behavior, anchor vacancies, leasing and redevelopment execution, interest-rate exposure, and environmental liabilities. Regency accrued $9.3 million for its pro-rata environmental remediation share. Management said known litigation and environmental matters were not expected to have a material adverse effect, while noting that environmental exposures may not all be identified.
Most important facts for investors to verify
- Whether same-property NOI growth and rent spreads persist, and how anchor and shop-space leasing trends develop.
- Progress on the $318.3 million of estimated near-term cash requirements, project costs and the proposed shopping-center investment.
- Debt maturities, refinancing plans, borrowing costs and leverage, including the 5.6x net-debt-to-EBITDAre ratio.
- The disposition and valuation outcomes for held-for-sale properties, and whether further property or goodwill impairments arise.
- The effects of retail tenant distress, environmental remediation and the 2019 lease-accounting adoption on operating results and cash needs.