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| REG > SEC Filings for REG > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Forward-Looking Statements
In addition to historical information, the following information contains forward-looking statements as defined under federal securities laws. These forward-looking statements include statements about anticipated changes in our revenues, the size of our development program, earnings per share, returns and portfolio value, and expectations about our liquidity. These statements are based on current expectations, estimates and projections about the industry and markets in which Regency Centers Corporation ("Regency" or "Company") operates, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in national and local economic conditions including the impact of a slowing economy; financial difficulties of tenants; competitive market conditions, including timing and pricing of acquisitions and sales of properties and out-parcels; changes in expected leasing activity and market rents; timing of development starts and sales of properties and out-parcels; meeting development schedules; our inability to exercise voting control over the co-investment partnerships through which we own or develop many of our properties; weather; consequences of any armed conflict or terrorist attack against the United States; and the ability to obtain governmental approvals. For additional information, see "Risk Factors" under Part II Item 1A of this quarterly report on Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2008. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of Regency Centers Corporation appearing elsewhere within.
Overview of Our Operating Strategy
Regency is a qualified real estate investment trust ("REIT"), which began operations in 1993. Our primary operating and investment goal is long-term growth in earnings and total shareholder return, which we work to achieve by focusing on a strategy of owning, operating and developing high-quality community and neighborhood shopping centers that are tenanted by market-dominant grocers, category-leading anchors, specialty retailers and restaurants located in areas with above average household incomes and population densities. All of our operating, investing and financing activities are performed through our operating partnership, Regency Centers, L.P. ("RCLP" or "Partnership"), RCLP's wholly owned subsidiaries, and through its investments in real estate partnerships with third parties (also referred to as co-investment partnerships or joint ventures). Regency currently owns 99% of the outstanding operating partnership units of RCLP.
At September 30, 2009, we directly owned 224 shopping centers (the "Consolidated Properties") located in 24 states representing 23.8 million square feet of gross leasable area ("GLA"). Our cost of these shopping centers and those under development is $4.1 billion before depreciation. Through co-investment partnerships, we own partial ownership interests in 185 shopping centers (the "Unconsolidated Properties") located in 26 states and the District of Columbia representing 22.1 million square feet of GLA. Our investment in the partnerships that own the Unconsolidated Properties is $333.6 million. Certain portfolio information described below is presented (a) on a Combined Basis, which is a total of the Consolidated Properties and the Unconsolidated Properties, (b) for our Consolidated Properties only and (c) for the Unconsolidated Properties that we own through co-investment partnerships. We believe that presenting the information under these methods provides a more complete understanding of the properties that we wholly-own versus those that we indirectly own through entities we do not control, but for which we provide asset management, disposition, property management, leasing, investing and financing services. The shopping center portfolio that we manage, on a Combined Basis, represents 409 shopping centers located in 29 states and the District of Columbia and contains 45.9 million square feet of GLA.
We earn revenues and generate cash flow by leasing space in our shopping centers to market-leading grocers, major retail anchors, specialty side-shop retailers, and restaurants, including ground
leasing or selling building pads (out-parcels) to these potential tenants. Historically, we have experienced growth in revenues by increasing occupancy and rental rates at currently owned shopping centers, and by acquiring and developing new shopping centers. Community and neighborhood shopping centers generate substantial daily traffic by conveniently offering necessities and services. This high traffic generates increased sales, thereby driving higher occupancy and rental-rate growth, which we expect will sustain our growth in earnings per share and increase the value of our portfolio over the long term.
We seek a range of strong national, regional and local specialty retailers, for the same reason that we choose to anchor our centers with leading grocers and major retailers who provide a mix of goods and services that meet consumer needs. We have created a formal partnering process, the Premier Customer Initiative ("PCI"), to promote mutually beneficial relationships with our specialty retailers. The objective of PCI is for us to build a base of specialty tenants who represent the "best-in-class" operators in their respective merchandising categories. Such retailers reinforce the consumer appeal and other strengths of a center's anchor, help stabilize a center's occupancy, reduce re-leasing downtime, reduce tenant turnover and yield higher sustainable rents.
The recent recession and a continued weak economy have negatively impacted our results. Regency is experiencing slower lease up and less tenant demand for vacant space as well as a higher level of retail store closings and collection losses in our shopping centers. These factors have contributed to a decline in our occupancy percentages and rental revenues.
We are closely monitoring certain national tenants who have negotiated co-tenancy clauses in their lease agreements. Co-tenancy clauses have several variants: they may allow a tenant to postpone a store opening if certain other tenants fail to open their store; they may allow a tenant the opportunity to close their store prior to lease expiration if another tenant closes their store prior to lease expiration; or more commonly, they may allow a tenant to pay reduced levels of rent until a certain number of tenants open their stores within the same shopping center. As the weak economy continues to depress retail sales, we could experience reductions in rent and occupancy related to tenants exercising their co-tenancy clauses. We believe that our investment focus on neighborhood and community shopping centers that conveniently provide daily necessities will help to mitigate the current economy's negative impact on our shopping centers. However, the negative impact could still be significant, especially in our larger format community shopping centers that contain a substantial number of tenant leases with co-tenancy clauses.
We are closely monitoring the operating performance, collections, and tenants' sales in our shopping centers including those tenants operating retail formats that are experiencing significant changes in competition, business practice, reductions in sales and store closings in other locations. We expect as the current economic downturn continues, additional retailers will announce store closings and/or bankruptcies that could affect our shopping centers. We are currently experiencing a higher tenant default rate as compared to previous years primarily related to our local tenants, which are generally defined as tenants operating five or fewer stores, primarily restaurants, fitness centers, dry cleaners and tanning salons, to name a few.
We grow our shopping center portfolio through acquisitions of operating centers and new shopping center development, where we acquire the land and construct the building. Development is customer driven, meaning we generally have an executed lease from the anchor before we start construction. Developments serve the growth needs of our anchors and specialty retailers, resulting in modern shopping centers with long-term anchor leases that produce attractive returns on our invested capital. This development process can require three to five years from initial land or redevelopment acquisition through construction, lease-up and stabilization of rental income, but can take longer depending upon the size of the project. Generally, anchor tenants begin operating their stores prior to the completion of construction of the entire center, resulting in rental income during the development phase.
In the near term, fewer new store openings amongst retailers is resulting in reduced demand for new retail space and causing corresponding reductions in new leasing rental rates and development pre-leasing. As a result, we have significantly reduced our development program by decreasing the number
of new projects started, phasing existing developments that lack retail demand, and decreasing related general and administrative expense. Although our development program will continue to play a part of our long term business strategy, new development projects are being and will always be rigorously evaluated in regard to availability of capital, visibility of tenant demand to achieve a stabilized occupancy, and sufficient investment returns.
We strive to maintain a conservative capital structure, with the objective of maintaining our investment-grade ratings. Our approach is founded on a combination of maintaining a strong balance sheet and capital recycling to fund our future capital commitments and growth. The strength of our balance sheet is directly related to maintaining conservative debt to asset, debt to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), and fixed charge coverage ratios. Further, we endeavor to maintain a high percentage of unencumbered assets, currently 82.5% of our total real estate assets, which allows access to the mortgage markets; maintain significant cash balances, $173.8 million as of September 30, 2009; and maintain significant availability on our $713.8 million line of credit commitment, which currently has no outstanding balance. Our debt to asset ratio, including our pro-rata share of the debt and assets of unconsolidated partnerships is 48.2% at September 30, 2009, which is favorably lower than our ratio at December 31, 2008 of 50%. If we were to repay a portion of our outstanding debt with our available cash balances, our current debt to asset ratio would fall to 46.6%. For the nine months ended September 30, 2009, our fixed charge coverage ratio, including our pro-rata share of the EBITDA and interest of unconsolidated partnerships, declined to 2.1 times as compared to 2.3 times in 2008, directly related to a reduction in EBITDA which has been significantly impacted by the recent recession.
During September 2009, Standard and Poor's Rating Services lowered our corporate credit rating and senior unsecured debt rating from BBB+ to BBB due to the decline in our fixed charge coverage ratio.
Capital recycling involves contributing shopping centers to co-investment partnerships and culling non-strategic assets from our real estate portfolio and selling those in the open market. These sales proceeds are either reserved for future capital commitments related to in process development or debt maturities, or re-deployed into new, high-quality developments and acquisitions that will generate sustainable revenue growth and attractive returns. To the extent that we are unable to execute our capital recycling program or generate adequate sources of capital, we will significantly reduce and even stop new investment activity.
Co-investment partnerships provide us with a reliable capital source for new developments and acquisitions, as well as the opportunity to earn fees for asset management, property management, and disposition services. As asset manager, we are engaged by our partners to apply similar operating, investment and capital strategies to the portfolios owned by the co-investment partnerships as those applied to the portfolio that we wholly-own. Co-investment partnerships grow their shopping center investments through acquisitions from third parties or direct purchases from us. Although selling properties to co-investment partnerships reduces our direct ownership interest, it provides a source of capital that further strengthens our balance sheet while we continue to share, to the extent of our ownership interest, in the risks and rewards of shopping centers that meet our high quality standards and long-term investment strategy.
The current lack of liquidity in the capital markets is having a corresponding effect on new investment activity in our co-investment partnerships. Our co-investment partnerships have significant levels of debt that mature through 2012, and are subject to significant borrowing risks. As a result of declines in real estate values during the recession, the refinancing of maturing loans will require us and our joint venture partners to each contribute our respective pro-rata share of capital to the joint ventures in order to reduce the amount of borrowing to acceptable loan to value levels which we expect will be required for new financings. While we have to date successfully refinanced maturing loans, the longer-term impact of the current economy on our ability to access capital, including access by our joint venture partners, or to obtain future financing to fund maturing debt remains challenging. While we believe that our partners have sufficient capital or access thereto for these future capital requirements, we can provide no assurance that the constrained capital markets will not inhibit their ability to access capital and meet their future funding requirements. The impact to Regency of a co-investment partner defaulting on its share of a capital call is discussed below under "Liquidity and Capital Resources".
Shopping Center Portfolio
The following tables summarize general information related to our shopping
center portfolio, which we use to evaluate and monitor our performance.
September 30, December 31,
2009 2008
Number of Properties (a) (d) 409 440
Number of Properties (b) (d) 224 224
Number of Properties (c) (d) 185 216
Properties in Development (a) 40 45
Properties in Development (b) 39 44
Properties in Development (c) 1 1
Gross Leasable Area (a) 45,883,496 49,644,545
Gross Leasable Area (b) 23,780,620 24,176,536
Gross Leasable Area (c) 22,102,876 25,468,009
Percent Leased (a) 92.0 % 92.3 %
Percent Leased (b) 90.8 % 90.2 %
Percent Leased (c) 93.3 % 94.3 %
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(a) Combined Basis (includes properties owned by unconsolidated co-investment partnerships)
(b) Consolidated Properties (excludes properties owned by unconsolidated co-investment partnerships)
(c) Unconsolidated Properties (only properties owned by unconsolidated co-investment partnerships)
(d) Includes Properties in Development
We seek to reduce our operating and leasing risks through diversification which we achieve by geographically diversifying our shopping centers, avoiding dependence on any single property, market, or tenant, and owning a portion of our shopping centers through co-investment partnerships.
The following table is a list of the shopping centers summarized by state and in order of largest holdings presented on a Combined Basis (includes properties owned by unconsolidated co-investment partnerships):
September 30, 2009 December 31, 2008
# % of Total % # % of Total %
Location Properties GLA GLA Leased Properties GLA GLA Leased
California 71 8,814,903 19.2 % 92.3 % 76 9,597,194 19.3 % 91.9 %
Florida 57 5,518,898 12.0 % 91.7 % 60 6,050,697 12.2 % 93.9 %
Texas 36 4,403,509 9.6 % 89.9 % 36 4,404,025 8.9 % 90.5 %
Virginia 29 3,645,315 7.9 % 94.4 % 30 3,799,919 7.6 % 95.6 %
Illinois 23 2,769,865 6.0 % 89.7 % 24 2,901,919 5.8 % 90.0 %
Missouri 23 2,265,466 4.9 % 97.2 % 23 2,265,422 4.6 % 96.8 %
Ohio 15 2,245,341 4.9 % 93.2 % 17 2,631,530 5.3 % 86.7 %
Colorado 20 2,067,854 4.5 % 88.4 % 22 2,285,926 4.6 % 91.4 %
Georgia 23 2,019,330 4.4 % 91.4 % 30 2,648,555 5.3 % 92.7 %
North Carolina 14 2,016,488 4.4 % 90.7 % 15 2,107,442 4.2 % 91.9 %
Maryland 16 1,873,908 4.1 % 92.6 % 16 1,873,759 3.8 % 94.0 %
Pennsylvania 12 1,414,123 3.1 % 92.4 % 12 1,441,791 2.9 % 90.1 %
Washington 11 1,038,514 2.3 % 96.3 % 13 1,255,836 2.5 % 97.0 %
Oregon 10 976,696 2.1 % 97.2 % 11 1,087,738 2.2 % 97.1 %
Tennessee 7 565,386 1.2 % 90.4 % 8 574,114 1.2 % 92.0 %
Massachusetts 3 561,186 1.2 % 93.8 % 3 561,186 1.1 % 93.4 %
Nevada 3 532,054 1.2 % 81.7 % 3 528,368 1.1 % 83.4 %
Arizona 4 496,073 1.1 % 85.3 % 4 496,073 1.0 % 94.3 %
Minnesota 3 483,938 1.1 % 96.9 % 3 483,938 1.0 % 92.9 %
Delaware 4 472,005 1.0 % 94.0 % 4 472,005 0.9 % 95.2 %
South Carolina 6 360,718 0.8 % 96.1 % 8 451,494 0.9 % 96.7 %
Indiana 6 273,253 0.6 % 81.1 % 6 273,279 0.6 % 76.4 %
Wisconsin 2 269,128 0.6 % 97.7 % 2 269,128 0.5 % 97.7 %
Alabama 2 203,206 0.4 % 72.0 % 3 278,299 0.6 % 78.3 %
Connecticut 1 179,860 0.4 % 100.0 % 1 179,860 0.4 % 100.0 %
New Jersey 2 156,482 0.3 % 92.3 % 2 156,482 0.3 % 96.2 %
Michigan 2 118,273 0.3 % 85.8 % 2 118,273 0.2 % 84.9 %
New Hampshire 1 78,893 0.2 % 96.7 % 1 84,793 0.2 % 80.4 %
Dist. of Columbia 2 39,647 0.1 % 100.0 % 2 39,647 0.1 % 100.0 %
Kentucky 1 23,184 0.1 % 63.7 % 3 325,853 0.7 % 90.2 %
Total 409 45,883,496 100.0 % 92.0 % 440 49,644,545 100.0 % 92.3 %
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The Combined Properties include the consolidated and unconsolidated properties encumbered by mortgage loans of $398.8 million and $2.4 billion, respectively.
The following table is a list of the shopping centers summarized by state and in order of largest holdings presented for Consolidated Properties (excludes properties owned by unconsolidated co-investment partnerships):
September 30, 2009 December 31, 2008
# % of Total % # % of Total %
Location Properties GLA GLA Leased Properties GLA GLA Leased
California 46 5,571,318 23.4 % 92.1 % 46 5,668,350 23.5 % 89.7 %
Florida 43 4,301,310 18.1 % 91.4 % 41 4,198,414 17.4 % 94.4 %
Texas 28 3,370,864 14.2 % 89.3 % 28 3,371,380 13.9 % 89.9 %
Ohio 13 1,708,268 7.2 % 93.7 % 14 1,985,392 8.2 % 85.3 %
Georgia 17 1,507,612 6.3 % 91.0 % 16 1,409,622 5.8 % 92.0 %
Colorado 14 1,120,610 4.7 % 86.0 % 14 1,130,771 4.7 % 86.2 %
North Carolina 9 939,726 4.0 % 94.9 % 9 951,177 3.9 % 94.6 %
Virginia 7 870,886 3.7 % 91.1 % 7 958,825 4.0 % 90.8 %
Oregon 8 735,544 3.1 % 98.1 % 8 733,068 3.0 % 98.4 %
Tennessee 6 479,321 2.0 % 89.9 % 7 488,049 2.0 % 91.2 %
Washington 6 461,073 1.9 % 94.5 % 7 538,155 2.2 % 95.9 %
Nevada 2 432,990 1.8 % 78.5 % 2 429,304 1.8 % 81.1 %
Illinois 3 414,996 1.7 % 84.7 % 3 414,996 1.7 % 84.7 %
Arizona 3 388,440 1.6 % 85.1 % 3 388,440 1.6 % 93.0 %
Massachusetts 2 375,907 1.6 % 90.7 % 2 375,907 1.6 % 90.5 %
Pennsylvania 4 320,279 1.4 % 88.7 % 4 347,430 1.4 % 77.6 %
Delaware 2 240,418 1.0 % 99.2 % 2 240,418 1.0 % 99.2 %
Michigan 2 118,273 0.5 % 85.8 % 2 118,273 0.5 % 84.9 %
Maryland 1 107,063 0.5 % 75.4 % 1 106,915 0.4 % 77.8 %
Alabama 1 84,740 0.4 % 76.2 % 1 84,741 0.4 % 68.7 %
New Hampshire 1 78,893 0.3 % 96.7 % 1 84,793 0.4 % 80.4 %
South Carolina 2 74,421 0.3 % 90.6 % 2 74,422 0.3 % 90.6 %
Indiana 3 54,484 0.2 % 48.7 % 3 54,510 0.2 % 34.1 %
Kentucky 1 23,184 0.1 % 63.7 % 1 23,184 0.1 % 33.6 %
Total 224 23,780,620 100.0 % 90.8 % 224 24,176,536 100.0 % 90.2 %
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The Consolidated Properties are encumbered by mortgage loans of $398.8 million.
The following table is a list of the shopping centers summarized by state and in order of largest holdings presented for Unconsolidated Properties (only properties owned by unconsolidated co-investment partnerships):
September 30, 2009 December 31, 2008
# % of Total % # % of Total %
Location Properties GLA GLA Leased Properties GLA GLA Leased
California 25 3,243,585 14.7 % 92.9 % 30 3,928,844 15.4 % 94.9 %
Virginia 22 2,774,429 12.6 % 95.4 % 23 2,841,094 11.2 % 97.2 %
Illinois 20 2,354,869 10.7 % 90.5 % 21 2,486,923 9.8 % 90.9 %
Missouri 23 2,265,466 10.2 % 97.2 % 23 2,265,422 8.9 % 96.8 %
Maryland 15 1,766,845 8.0 % 93.7 % 15 1,766,844 6.9 % 95.0 %
Florida 14 1,217,588 5.5 % 92.7 % 19 1,852,283 7.3 % 92.6 %
Pennsylvania 8 1,093,844 4.9 % 93.5 % 8 1,094,361 4.3 % 94.1 %
North Carolina 5 1,076,762 4.9 % 86.9 % 6 1,156,265 4.5 % 89.7 %
. . .
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