Regency Centers Corporation and Regency Centers, L.P. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Regency is a retail shopping-center REIT; the Operating Partnership owns the assets and conducts operations. The Parent Company owned approximately 99.8% of the Partnership’s common units.
Business context
At June 30, Regency directly owned 204 shopping centers totaling 22.5 million square feet and held partial interests in 139 centers through co-investment partnerships. Consolidated properties were 94.2% leased, compared with 92.5% a year earlier. Regency’s portfolio strategy emphasizes grocery-anchored, infill centers, acquisitions, and development and redevelopment.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $125.8 million | $126.8 million | $249.6 million | $250.6 million |
| Net income | $37.5 million | $11.3 million | $58.6 million | $38.1 million |
| Net income attributable to common stockholders | $31.9 million | $5.7 million | $47.4 million | $18.9 million |
| Diluted earnings per share | $0.35 | $0.06 | $0.52 | $0.21 |
| FFO | $62.1 million | $61.3 million | $120.0 million | $111.2 million |
| Core FFO | $61.8 million | $62.4 million | $120.1 million | $118.7 million |
| Cash from operations | Not separately presented | Not separately presented | $104.1 million | $111.3 million |
Operating expenses were $80.7 million in Q2 and $163.3 million for the first half. The filing does not present a headline operating-margin measure. Same-property NOI was $102.1 million for Q2 versus $97.0 million, and $203.2 million for the first half versus $193.5 million.
At June 30, cash and cash equivalents were $59.1 million, restricted cash was $5.4 million, and total debt was $1.892 billion: $1.767 billion of notes payable and $125 million drawn on unsecured credit facilities. The $800 million credit line had $755.7 million of remaining availability, net of letters of credit. Total debt was down $49.8 million from December 31, 2012. Regency reported a 2.4x coverage ratio and 77.5% of wholly owned real estate assets unencumbered.
Regency’s common quarterly dividend was $0.4625 per share, unchanged since May 2009; the board declared the next payment for August 28, 2013. Cash dividends and preferred distributions paid in the first half totaled approximately $88.6 million.
Material changes versus prior periods
- Revenue was nearly flat year over year in both Q2 and the first half. Higher occupancy and rent at comparable centers were offset by the prior-year portfolio sale and other changes in portfolio size.
- Common-stockholder diluted EPS increased to $0.35 in Q2 and $0.52 for the first half. The improvement substantially reflects property-sale gains and the absence of prior-period impairments; it should not be read as equivalent growth in recurring operations.
- Core FFO declined from $62.4 million to $61.8 million in Q2, but increased from $118.7 million to $120.1 million for the first half. FFO rose in both comparisons.
- First-half operating cash flow declined $7.2 million, primarily because of higher incentive-compensation payments. Investing cash outflow narrowed, as Regency was a net property seller and received $84.7 million in real estate sale proceeds.
- Same-property leasing and occupancy improved: year-over-year Q2 average occupancy was 94.1% versus 92.4%; average base rent per square foot was $17.22 versus $16.76.
Outlook, risks, and unusual items
- Capital needs: Regency estimated approximately $111.7 million of cash requirements for the remainder of 2013, including $110.8 million to complete in-process developments and redevelopments. It expected to fund needs through operating cash flow, its credit line, property sales, and, when market conditions permit, equity or debt issuance.
- Development: Six projects were under construction or in lease-up, with estimated net development costs of $240.8 million and $83.9 million remaining to complete. The East Washington Place and Grand Ridge Plaza projects accounted for substantial current-period spending. No development projects were completed in the first half.
- Debt maturities and rates: Regency had $150 million of unsecured debt maturing in April 2014 and $350 million in August 2015. It had entered into $300 million of forward-starting swaps, locking a weighted-average fixed rate of 2.32% plus the credit spread applicable when new debt is issued. Management identified rising long-term interest rates as a concern.
- Portfolio transactions: Four shopping centers were sold during the first half, generating $82.6 million of net proceeds and $11.4 million of gains. Regency also acquired Preston Oaks for $27 million and received Hilltop Village through a partnership liquidation, assuming a $7.5 million mortgage. The Regency Retail Partners portfolio was under contract for sale, with closing expected by the end of Q3 2013.
- Tenant exposure: No tenant represented more than 5% of annualized base rent. Kroger’s announced acquisition of Harris Teeter could lead to overlapping-store closures; nine Regency-leased Harris Teeter stores represented 0.8% of annualized base rent on a pro-rata basis.
- Risks and contingencies: Management cited economic conditions, tenant financial distress or bankruptcies, leasing and rent trends, competition, development timing and costs, natural disasters, environmental remediation, and limited voting control over some joint ventures. Management did not expect known litigation or environmental matters to have a material adverse effect, but noted that environmental conditions and liabilities may not all be known.
- Unusual items: Q2 discontinued operations included $11.4 million of property-sale gains. The prior-year comparison included impairments, including a $4.5 million impairment associated with a property subsequently sold in June 2013. Interest-rate swap fair value movements contributed materially to other comprehensive income; these movements are not operating cash earnings.
- No specific full-year EPS or FFO guidance is provided in the supplied filing text. The stated outlook is principally for capital requirements, development activity, and funding sources.
Important facts for investors to verify
- How much of reported EPS growth is attributable to asset-sale gains and the absence of prior-year impairments, versus recurring property operations; compare GAAP earnings with FFO, Core FFO, and same-property NOI.
- Whether the $111.7 million remainder-of-year cash requirement and $83.9 million estimated development costs to complete remain current, and whether projects meet schedule and budget.
- How Regency will refinance the $150 million 2014 and $350 million 2015 maturities, including the eventual credit spreads and cash settlement of forward-starting swaps.
- Whether the Regency Retail Partners sale closes as expected and how proceeds, debt, and recurring earnings are affected.
- Whether occupancy, rent growth, and tenant recoveries continue to offset the impact of dispositions, operating costs, and tenant or retailer consolidation.