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Business Context and Reporting Period

Company: Regency Realty Corporation (Regency Centers Corp)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Three months ended March 31, 1999

Business Overview: Regency is a qualified Real Estate Investment Trust (REIT) focused on owning, operating, and developing grocery-anchored neighborhood shopping centers. The portfolio grew significantly in Q1 1999 due to the merger with Pacific Retail Trust (effective Feb 28, 1999) and acquisitions made in 1998. As of March 31, 1999, the portfolio consisted of 204 properties totaling approximately 23.7 million square feet, with an occupancy rate of 92.3%.

Key Financial Metrics

Debt Composition: Includes $546.3 million in notes payable and $441.4 million drawn on an acquisition and development line of credit. The weighted average interest rate on total debt was 7.1%.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 66% to $51.4 million, driven primarily by the inclusion of Pacific Retail Trust and 1998 acquisitions, which added $20.8 million in revenue.
• Net Income Decline: Net income for common stockholders decreased 31% to $13.5 million. This decline is primarily attributable to a $10.2 million gain on the sale of office buildings recognized in Q1 1998, which did not recur in 1999.
• FFO Growth: Funds From Operations (FFO) increased 46% to $23.4 million, reflecting the accretive nature of the new acquisitions when excluding non-recurring gains/losses.
• Expense Increases: Operating expenses rose 58% and interest expense nearly doubled (99%) due to the expanded asset base and increased debt levels associated with the Pacific merger and 1998 acquisitions.
• Balance Sheet Expansion: Total assets more than doubled to $2.48 billion, and total liabilities increased to $1.03 billion, reflecting the purchase accounting for the Pacific merger.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Strategy: Management expects growth in net income through increasing occupancy, rental rate increases, and continued development/acquisition in targeted markets.
• Liquidity: The company maintains a $635 million unsecured line of credit (mature May 2001). On April 15, 1999, Regency completed a $250 million unsecured debt offering to reduce the line balance.
• Development: There are 14 properties under construction or major renovation with $119.6 million spent to date and $209 million in committed costs to complete.

Risks and Contingencies:

• Contingent Consideration: Up to $23 million in contingent consideration may be paid in 1999-2000 related to the Midland Group acquisition based on performance criteria. $5.2 million was paid in April 1999.
• Environmental: Approximately 31 properties require environmental remediation (primarily dry cleaning plants). Management does not expect a material financial effect.
• Year 2000 Compliance: The company is implementing a compliance project. While core systems are compliant, some building management systems require upgrades (estimated cost under $500,000). Risks remain regarding third-party vendors and tenants.
• Market Risk: Exposure to interest rate fluctuations on variable rate debt (LIBOR-based). The company uses fixed-rate debt primarily to mitigate this risk.

Investor Verification Checklist

• Merger Integration: Verify the operational integration of the 71 Pacific Retail Trust properties and the realization of projected synergies.
• Debt Covenants: Confirm continued compliance with financial covenants on the $635 million line of credit, specifically the EBITDA to interest expense and unencumbered NOI ratios.
• Contingent Liabilities: Monitor the performance criteria for the Midland Group acquisition to assess the likelihood of the remaining contingent consideration payments.
• Development Costs: Track the $209 million in committed development costs against cash flow to ensure no liquidity strain.
• Year 2000 Status: Verify the completion of testing for building management systems and the contingency plans for third-party failures by the September 1999 deadline.