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REG > SEC Filings for REG > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for REGENCY CENTERS CORP

Form 10-Q for REGENCY CENTERS CORP


1-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 and redevelopment program, earnings per share and unit, returns and portfolio value, and expectations about our liquidity. These statements are based on current expectations, estimates and projections about the real estate industry and markets in which the 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; financial difficulties of tenants; competitive market conditions, including timing and pricing of acquisitions and sales of properties and building pads ("out-parcels"); changes in leasing activity and market rents; timing of development starts; meeting development schedules; natural disasters in geographic areas in which we operate; cost of environmental remediation; our inability to exercise voting control over the co-investment partnerships through which we own many of our properties; and technology disruptions. For additional information, see "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2012. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of Regency Centers Corporation and Regency Centers, L.P. appearing elsewhere herein. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of uncertain events.

Overview of Our Strategy

Regency Centers Corporation began its operations as a REIT in 1993 and is the managing general partner of Regency Centers, L.P. We endeavor to be the preeminent, best-in-class national shopping center company, distinguished by total shareholder return and per share growth in Core Funds from Operations (Core FFO) and Net Asset Value (NAV) that positions Regency as a leader among its peers. We work to achieve these goals through:
reliable growth in net operating income from a high-quality, growing portfolio of thriving, primarily grocery-anchored shopping centers,

disciplined value-add development and redevelopment capabilities profitably creating and enhancing high-quality shopping centers,

a conservative balance sheet and track record of cost effectively accessing capital to withstand market volatility and efficiently fund investments, and

an engaged and talented team of people guided by Regency's culture.

All of our operating, investing, and financing activities are performed through the Operating Partnership, its wholly-owned subsidiaries, and through its co-investment partnerships. The Parent Company currently owns approximately 99.8% of the outstanding common partnership units of the Operating Partnership.

At September 30, 2013, we directly owned 202 shopping centers (the "Consolidated Properties") located in 23 states representing 22.5 million square feet of gross leasable area ("GLA"). Through co-investment partnerships, we own partial ownership interests in 131 shopping centers (the "Unconsolidated Properties") located in 23 states and the District of Columbia representing 15.8 million square feet of GLA.

We earn revenues and generate cash flow by leasing space in our shopping centers to grocery stores, major retail anchors, restaurants, side-shop retailers, and service providers, as well as ground leasing or selling out-parcels to these same types of tenants. We experience growth in revenues by increasing occupancy and rental rates in our existing shopping centers and by acquiring and developing new shopping centers. At September 30, 2013, the consolidated shopping centers were 94.4% leased, as compared to 94.0% at September 30, 2012 and 94.1% at December 31, 2012.

We grow our shopping center portfolio through acquisitions of operating centers and new shopping center development. We will continue to use our development capabilities, market presence, and anchor relationships to invest in value-added new developments and redevelopments of existing centers. 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 retailers, resulting in modern shopping centers with long-term anchor leases that produce attractive returns on our invested capital. This development process typically requires two to three years once construction has commenced, but can vary subject to the size and complexity of the project. We fund our acquisition and development activity from various capital sources including property sales, equity offerings, and new debt.


Co-investment partnerships provide us with an additional capital source for shopping center acquisitions, developments, and redevelopments, as well as the opportunity to earn fees for asset management, property management, and other investing and financing services. As an 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, direct purchases from us, and developments. 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.


Shopping Center Portfolio

The following table summarizes general information related to the Consolidated
Properties in our shopping center portfolio (GLA in thousands):

                                                   September 30,     December 31,
                                                       2013              2012
Number of Properties                                    202               204
Properties in Development                                7                 4
Gross Leasable Area                                   22,463            22,532
% Leased - Operating and Development                   94.4%             94.1%
% Leased - Operating                                   94.9%             94.4%
Weighted average annual effective rent per
square foot (1)                                 $      17.21             16.95
(1) Net of tenant concessions.

The following table summarizes general information related to the Unconsolidated Properties owned in co-investment partnerships in our shopping center portfolio, excluding the assets and liabilities held by BRE Throne, LLC ("BRET") as the property holdings of BRET do not impact the rate of return on Regency's preferred investment (GLA in thousands):

                                                   September 30,     December 31,
                                                       2013              2012
Number of Properties                                    131               144
Gross Leasable Area                                   15,824            17,762
% Leased - Operating                                   95.5%             95.2%
Weighted average effective annual rent per
square foot (1)                                 $      17.48             17.03
(1) Net of tenant concessions.

The following table summarizes leasing activity for the nine months ended September 30, 2013, including Regency's pro-rata share of activity within the portfolio of our co-investment partnerships, excluding the BRET portfolio:

                     Leasing        GLA (in                                 Tenant              Leasing
                   Transactions    thousands)      Base Rent / SF     Improvements / SF     Commissions / SF
New leases             418           1,115       $          21.35     $           7.84     $           8.34
Renewals               716           1,729       $          20.50     $           0.47     $           2.38
Total                 1,134          2,844       $          20.83     $           3.36     $           4.72

We seek to reduce our operating and leasing risks through geographic diversification, avoiding dependence on any single property, market, or tenant, and owning a portion of our shopping centers through co-investment partnerships. The following table summarizes our three most significant tenants, each of which is a grocery tenant, occupying our shopping centers at September 30, 2013:

                                               Percentage of                 Percentage  of
                          Number of               Company-                     Annualized
Grocery Anchor            Stores (1)           owned GLA (2)                 Base Rent (2)
Publix                        53                    7.1%                          4.4%
Kroger                        47                    7.7%                          4.2%
Safeway                       50                    5.4%                          3.0%

(1) Includes stores owned by grocery anchors that are attached to our centers.
(2) Includes Regency's pro-rata share of Unconsolidated Properties and excludes those owned by anchors.

In July 2013, The Kroger Co. ("Kroger") announced its plan to buy Harris Teeter Supermarkets, Inc. Although Kroger's acquisition is expected to expand its presence in the southeastern United States, there is a possibility that Kroger may


identify stores in which it has a presence in the same local market as Harris Teeter, which could result in store closures. We currently have nine stores leased by Harris Teeter, which represents 0.7% of annualized base rent on a pro-rata basis.

On October 10, 2013, Safeway Inc. announced that it intends to exit the Chicago market, where it operates 72 Dominick's stores, by early 2014. Safeway is marketing the chain for sale or individual store sublease. We have 7 store leases with Dominick's, which represent less than 1% of company owned GLA and less than 0.5% of annualized base rent, on a pro-rata basis. It is uncertain at this time whether the Dominick's stores at our shopping centers will be sold, subleased, or closed.

Although base rent is supported by long-term lease contracts, tenants who file bankruptcy may have the legal right to reject any or all of their leases and close related stores. In the event that a tenant with a significant number of leases in our shopping centers files bankruptcy and cancels its leases, we could experience a significant reduction in our revenues. We monitor the operating performance and rent collections of all tenants in our shopping centers, especially those tenants operating retail formats that are experiencing significant changes in competition, business practice, and store closings in other locations. We also evaluate consumer preferences, shopping behaviors, and demographics to anticipate both challenges and opportunities in the changing retail industry that may affect our tenants. As a result of our findings, we may reduce new leasing, suspend leasing, or curtail the allowance for the construction of leasehold improvements within a certain retail category or to a specific retailer. We are not currently aware of the pending bankruptcy or announced store closings of any tenants in our shopping centers that would individually cause a material reduction in our revenues, and no tenant represents more than 5% of our annual base rent on a pro-rata basis.

Liquidity and Capital Resources

Our Parent Company has no capital commitments other than its guarantees of the commitments of our Operating Partnership. The Parent Company will from time to time access the capital markets for the purpose of issuing new equity and will simultaneously contribute all of the offering proceeds to the Operating Partnership in exchange for additional partnership units. All debt is issued by our Operating Partnership or by our co-investment partnerships. The following table represents the remaining available capacity under our ATM equity program and Line as of September 30, 2013 (in thousands):

                                September 30, 2013
ATM equity program
Total capacity                $            200,000
Remaining capacity            $            198,400

Line
Total capacity                $            800,000
Remaining capacity (1)        $            780,700
Maturity                          September 2016
(1) Net of letters of credit.

The following table summarizes net cash flows related to operating, investing, and financing activities of the Company for the nine months ended September 30, 2013 and 2012 (in thousands):

                                               2013            2012           Change
Net cash provided by operating
activities                               $     200,562         196,054           4,508
Net cash (used in) provided by investing
activities                                     (30,438 )       115,362        (145,800 )
Net cash used in financing activities         (129,771 )      (301,468 )       171,697
Net increase in cash and cash
equivalents                              $      40,353           9,948          30,405
Total cash and cash equivalents          $      62,702          21,350          41,352

Net cash provided by operating activities:

Cash provided by operating activities during the nine months ended September 30, 2013 was $4.5 million more than the nine months ended September 30, 2012 primarily due to improved net operating income and timing of cash payments. We operate our business such that we expect net cash provided by operating activities will provide the necessary funds to pay our distributions to our common and preferred share and unit holders included in net cash used in financing activities, above, which were $141.6 million and $137.2 million for the nine months ended September 30, 2013 and 2012, respectively. Our dividend


distribution policy is set by our Board of Directors who monitor our financial position. Our Board of Directors declared common stock quarterly dividend of $0.4625 per share, payable on November 27, 2013. Our dividend has remained unchanged since May 2009 and future dividends will be declared at the discretion of our Board of Directors and will be subject to capital requirements and availability. We plan to continue paying an aggregate amount of distributions to our stock and unit holders that, at a minimum, meet the requirements to continue qualifying as a REIT for Federal income tax purposes.

Net cash used in investing activities:

Cash flows from investing activities during the nine months ended September 30, 2013 changed by $145.8 million compared to the nine months ended September 30, 2012 due to the proceeds from the portfolio sale completed during the nine months ended September 30, 2012.

Significant investing activities during the nine months ended September 30, 2013 included:

We received proceeds of $137.0 million from the sale of real estate investments, including eight shopping centers and five out-parcels;

We received distributions from our investments in real estate partnerships of $31.5 million, primarily related to the disposition of all operating properties within the Regency Retail Partners, LP (the "Fund") during August 2013 and subsequent distribution of proceeds, offset by additional investments of $10.8 million for mortgage maturities and acquisitions;

We paid $26.7 million for the acquisition of the Preston Oaks shopping center; and

We paid $162.4 million for the development, redevelopment, improvement and leasing of our real estate properties as comprised of the following (in thousands):

                                            Nine months ended September 30,
                                                 2013              2012           Change
Capital expenditures:
Acquisition of land for development /
redevelopment                            $          17,383          27,100          (9,717 )
Building improvements and other                     25,103          26,661          (1,558 )
Tenant allowances                                    4,665           7,905          (3,240 )
Redevelopment costs                                 12,014          10,015           1,999
Development costs                                   90,562          35,147          55,415
Capitalized interest                                 4,174           2,477           1,697
Capitalized direct compensation                      8,518           8,245             273
Real estate development and capital
improvements                             $         162,419         117,550          44,869



            During the nine months ended September 30, 2012, we acquired five
             land parcels for $27.1 million, compared to three land parcels for
             approximately $17.4 million during the nine months ended
             September 30, 2013.



            As occupancy stabilizes, there is less vacant space to lease, which
             reduces our cash outflow on tenant allowances, which are generally
             highest with new leases. Occupancy increased 30 basis points during
             the nine months ended September 30, 2013, compared to 100 basis
             point increase during the nine months ended September 30, 2012,
             which resulted in the decrease in tenant allowances over the prior
             year.



            Although the number of development projects remained relatively
             consistent during the nine months ended September 30, 2013, as
             compared to the nine months ended September 30, 2012, development
             costs increased primarily due to the size of the current projects
             under construction during the nine months ended September 30, 2013.
             East Washington Place and Grand Ridge Plaza, which are projected to
             have estimated net development costs of $146.9 million upon
             completion, are progressing and represent $67.2 million of 2013
             development costs.



            Capitalized interest increases as development costs accumulate
             during the construction period, which is why more interest costs
             were capitalized during 2013 than 2012.


At September 30, 2013, we had seven development projects that were either under construction or in lease up, compared to four such development projects at December 31, 2012. The following table details our development projects as of September 30, 2013 (in thousands, except cost per square foot):

                                             Estimated Net
                                              Development
                                Estimated     Costs After      Estimated                Cost per
                                 /Actual        Partner        Net Costs                 square
                                 Anchor      Participation    to Complete    Company     foot of
 Property Name     Start Date    Opening          (1)             (1)       Owned GLA    GLA (1)
East Washington
Place                Q4-11         Jun-13 $        58,112   $     3,657         203   $     286
Southpark at
Cinco Ranch          Q1-12         Oct-12          30,633         4,821         243         126
Grand Ridge
Plaza                Q2-12         Jul-13          88,764        14,328         325         273
Shops at Erwin
Mill                 Q2-12         Nov-13          14,593         3,385          90         162
Juanita Tate
Marketplace          Q2-13         Mar-14          17,189        12,636          77         223
Shops on Main        Q2-13         Apr-14          29,424         5,618         155         190
Fountain Square      Q3-13         Nov-14          52,561        31,898         181         290
Total                                     $       291,276   $    76,343       1,274   $     229   (2)

(1) Amount represents costs, including leasing costs, net of tenant reimbursements.
(2) Amount represents a weighted average.

There were no development projects completed during the nine months ended September 30, 2013.

We plan to continue developing and redeveloping projects for long-term investment purposes and have a staff of employees who directly support our development and redevelopment program. Internal costs attributable to these development and redevelopment activities are capitalized as part of each project. During the nine months ended September 30, 2013, we capitalized $4.2 million of interest expense and $5.5 million of internal costs for salaries and related benefits for development and redevelopment activity. Changes in the level of future development and redevelopment activity could adversely impact results of operations by reducing the amount of internal costs for development and redevelopment projects that may be capitalized. A 10% reduction in development and redevelopment activity without a corresponding reduction in the compensation costs directly related to our development and redevelopment activities could result in an additional charge to net income of approximately $824,000.

Net cash used in financing activities:

Significant financing activities during the nine months ended September 30, 2013 include:

The Parent Company issued 1.9 million shares of common stock through our ATM program resulting in net proceeds of $99.8 million;

We repaid $70.0 million, net, on our Line and $16.4 million of mortgage loans; and

We paid dividends to our common and preferred stockholders of $125.5 million and $15.8 million, respectively.

We endeavor to maintain a high percentage of unencumbered assets. At September 30, 2013, 77.2% of our wholly-owned real estate assets were unencumbered. Such assets allow us to access the secured and unsecured debt markets and to maintain significant availability on the Line. Our coverage ratio, including our pro-rata share of our partnerships, was 2.4 times for the nine months ended September 30, 2013 and 2012. We define our coverage ratio as earnings before interest, taxes, investment transaction profits net of deal costs, depreciation and amortization ("Core EBITDA") divided by the sum of the gross interest and scheduled mortgage principal paid to our lenders plus dividends paid to our preferred stockholders.

Through 2014, we estimate that we will require approximately $312.1 million, including $143.1 million to complete currently in-process developments and redevelopments, $167.8 million to repay maturing debt, and $1.2 million to fund our pro-rata share of estimated capital contributions to our co-investment partnerships for repayment of debt. If we start new developments or redevelop additional shopping centers, our cash requirements will increase. At September 30, 2013, we and our joint ventures had $176.1 million and $67.1 million, respectively, of debt maturing through 2014. To meet our cash requirements, we will refinance maturing mortgages, utilize cash generated from operations, borrowings from our Line,


proceeds from the sale of real estate, and when the capital markets are favorable, proceeds from the sale of common equity and the issuance of debt.

We have $150.0 million and $350.0 million of fixed rate, unsecured debt maturing in April 2014 and August 2015, respectively. As the economy improves, long term interest rates will likely continue to increase. In order to mitigate the risk of interest rate volatility, in December 2012, we entered into $300.0 million of forward starting interest rate swaps for new debt issues occurring through August 1, 2016. These interest rate swaps locked in a weighted average fixed rate of 2.32% plus a credit spread based upon the Company's credit rating at the time of the debt issuance. In October 2013, we entered into two additional forward-starting interest rate swaps for $95.0 million of notional value at a combined fixed rate of 2.867% for a ten year period effective April 15, 2014, to hedge potential changes in the ten-year LIBOR rate covering the expected borrowing term between now and the expected date that new unsecured borrowings are obtained in 2014.

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