United States SECURITIES AND EXCHANGE COMMISSION Washington DC 20549 FORM 10-Q (Mark One) [X] For the quarterly period ended June 30, 1998 -or- [ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number 1-12298 REGENCY REALTY CORPORATION (Exact name of registrant as specified in its charter) Florida 59-3191743 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 121 West Forsyth Street, Suite 200 Jacksonville, Florida 32202 (Address of principal executive offices) (Zip Code) (904) 356-7000 (Registrant's telephone number, including area code) Unchanged (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] (Applicable only to Corporate Registrants) As of August 14, 1998, there were 25,464,383 shares outstanding of the Registrant's common stock.
REGENCY REALTY CORPORATION Consolidated Balance Sheets June 30, 1998 and December 31, 1997 <TABLE> <CAPTION> 1998 1997 ---- ---- (unaudited) <S> <C> <C> Assets Real estate investments, at cost: Land $ 229,481,678 177,245,784 Buildings and improvements 820,869,554 622,555,583 Construction in progress - development for investment 9,947,030 13,427,370 Construction in progress - development for sale 21,186,446 20,173,039 ------------- ---------- 1,081,484,708 833,401,776 Less: accumulated depreciation 46,160,048 40,795,801 -------------- ---------- 1,035,324,660 792,605,975 Investments in real estate partnerships 22,401,368 999,730 -------------- ----------- Net real estate investments 1,057,726,028 793,605,705 Cash and cash equivalents 12,732,702 16,586,094 Tenant receivables, net of allowance for uncollectible accounts of $2,057,749 and $1,162,570 at June 30, 1998 and December 31, 1997, respectively 10,684,242 9,546,584 Deferred costs, less accumulated amortization of $4,219,427 and $3,842,914 at June 30, 1998 and December 31, 1997, respectively 4,496,876 4,252,991 Other assets 7,458,208 2,857,217 -------------- ---------- $ 1,093,098,056 826,848,591 ============= =========== Liabilities and Stockholders' Equity Liabilities: Mortgage loans payable 317,796,022 229,919,242 Acquisition and development line of credit 89,731,185 48,131,185 Accounts payable and other liabilities 17,064,007 11,597,232 Tenants' security and escrow deposits 2,762,506 2,319,941 ------------ ----------- Total liabilities 427,353,720 291,967,600 ------------ ----------- Redeemable preferred units 78,800,000 - Redeemable operating partnership units 26,912,106 13,777,156 Limited partners' interest in consolidated partnerships 7,520,049 7,477,182 ---------- ----------- 113,232,155 21,254,338 Stockholders' equity Common stock $.01 par value per share: 150,000,000 shares authorized; 25,422,870 and 23,992,037 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 254,229 239,920 Special common stock - 10,000,000 shares authorized: Class B $.01 par value per share, 2,500,000 shares issued and outstanding 25,000 25,000 Additional paid in capital 577,140,482 535,498,878 Distributions in excess of net income (14,501,931) (20,494,893) Stock loans (10,405,599) (1,642,252) ------------ ----------- Total stockholders' equity 552,512,181 513,626,653 -------------- ----------- Commitments and contingencies $ 1,093,098,056 826,848,591 ============= =========== </TABLE> See accompanying notes to consolidated financial statements.
REGENCY REALTY CORPORATION Consolidated Statements of Operations For the Three Months ended June 30, 1998 and 1997 (unaudited) <TABLE> <CAPTION> 1998 1997 ---- ----- <S> <C> <C> Revenues: Minimum rent $ 25,405,644 18,061,032 Percentage rent 558,514 637,339 Recoveries from tenants 5,817,685 3,890,704 Management, leasing and brokerage fees 2,902,262 2,046,334 Equity in income of investments in real estate partnerships 145,425 (9,654) ---------- ---------- Total revenues 34,829,530 24,625,755 ---------- ---------- Operating expenses: Depreciation and amortization 5,928,251 4,231,170 Operating and maintenance 4,355,499 3,505,909 General and administrative 3,829,341 2,995,008 Real estate taxes 2,999,053 1,778,745 --------- --------- Total operating expenses 17,112,144 12,510,832 ---------- ---------- Interest expense (income): Interest expense 7,658,571 6,484,343 Interest income (631,179) (280,335) --------- --------- Net interest expense 7,027,392 6,204,008 --------- --------- Income before minority interests and sale of real estate investments 10,689,994 5,910,915 ---------- --------- Minority interest of redeemable partnership units (297,500) (969,731) Minority interest of limited partners (103,009) (214,406) Gain on sale of real estate investments 508,678 - --------- --------- Net income for common stockholders $ 10,798,163 4,726,778 ========== ========== Net income per share: Basic $ .38 .26 ========= =========== Diluted $ .38 .26 ========= =========== </TABLE> See accompanying notes to consolidated financial statements. REGENCY REALTY CORPORATION Consolidated Statements of Operations For the Six Months ended June 30, 1998 and 1997 (unaudited) <TABLE> <CAPTION> 1998 1997 ---- ----- <S> <C> <C> Revenues: Minimum rent $ 47,660,793 30,560,604 Percentage rent 1,661,861 1,107,937 Recoveries from tenants 10,638,415 6,985,904 Management, leasing and brokerage fees 5,406,368 3,687,525 Equity in income (loss) of investments in real estate partnerships 146,411 17,137 ---------- ---------- Total revenues 65,513,848 42,359,107 ---------- ---------- Operating expenses: Depreciation and amortization 11,384,555 7,074,670 Operating and maintenance 8,471,901 5,988,690 General and administrative 7,262,449 5,216,014 Real estate taxes 5,787,804 3,598,834 ---------- ---------- Total operating expenses 32,906,709 21,878,208 ---------- ---------- Interest expense (income): Interest expense 12,873,370 10,221,374 Interest income (966,383) (452,602) ---------- ---------- Net interest expense 11,906,987 9,768,772 ------------ --------- Income before minority interests and sale of real estate investments 20,700,152 10,712,127 ---------- ---------- Minority interest of redeemable partnership units (891,824) (1,603,436) Minority interest of limited partners (200,159) (345,142) Gain on sale of real estate investments 10,746,097 - ---------- ---------- Net income for common stockholders $ 30,354,266 8,763,549 ========== ========== Net income per share: Basic $ 1.11 .51 ========== ========== Diluted $ 1.06 .51 ========== ========== </TABLE> See accompanying notes to consolidated financial statements.
REGENCY REALTY CORPORATION Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1998 and 1997 (unaudited) <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 30,354,266 8,763,550 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation and amortization 11,384,555 7,074,670 Deferred financing cost and debt premium amortization 46,002 441,004 Minority interest of redeemable partnership units 891,824 1,603,436 Minority interest of limited partners 200,159 345,142 Equity in income of investments in real estate partnerships (146,411) (17,137) Gain on sale of real estate investments (10,746,097) - Changes in assets and liabilities: Tenant receivables (676,428) 2,186,499 Deferred leasing commissions (554,373) (273,695) Other assets (5,917,878) (447,802) Tenants' security deposits 442,565 245,481 Accounts payable and other liabilities 7,406,975 5,011,309 ------------ ---------- Net cash provided by operating activities 32,685,159 24,932,457 ------------- ---------- Cash flows from investing activities: Acquisition and development of real estate (120,592,104) (115,441,611) Investment in real estate partnerships (21,276,350) - Capital improvements (2,842,069) (1,451,400) Construction in progress for sale, net of reimbursement (1,013,407) (8,248,018) Proceeds from sale of real estate investments 30,662,197 - Distributions received from real Estate partnership investments 21,123 - --------------- ------------ Net cash used in investing activities (115,040,610) (125,141,029) --------------- ------------ Cash flows from financing activities: Net proceeds from common stock issuance 9,685,435 68,275,213 Proceeds from issuance of redeemable partnership units 7,667 2,255,140 Distributions to redeemable partnership unit holders (897,817) (1,442,196) Distributions to limited partners In consolidated partnerships (157,292) (24,232) Dividends paid to stockholders (24,361,304) (12,253,317) Proceeds from issuance of redeemable preferred units, net 78,800,000 - Proceeds from acquisition and Development line of credit, net 41,600,000 37,630,000 Proceeds from mortgage loans payable 7,345,000 15,148,753 Repayments of mortgage loans payable (32,903,271) (3,751,167) Deferred financing costs (616,359) (510,471) --------------- ------------ Net cash provided by financing activities 78,502,059 105,327,723 --------------- ------------ Net (decrease) increase in cash and cash equivalents (3,853,392) 5,119,151 Cash and cash equivalents at beginning of period 16,586,094 8,293,229 -------------- ----------- Cash and cash equivalents at end of period $ 12,732,702 13,412,380 ============= ========== </TABLE>
REGENCY REALTY CORPORATION Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1998 and 1997 (unaudited) -continued- <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Supplemental disclosure of non cash transactions: Mortgage loans assumed from sellers of real estate at fair value $ 113,945,176 135,802,817 =========== =========== Redeemable operating partnership units and common stock issued to sellers of real estate $ 33,938,977 94,769,706 ========== =========== </TABLE> See accompanying notes to consolidated financial statements.
REGENCY REALTY CORPORATION Notes to Consolidated Financial Statements June 30, 1998 1. Summary of Significant Accounting Policies (a) Organization and Principles of Consolidation Regency Realty Corporation (the Company) was formed for the purpose of managing, leasing, brokering, acquiring, and developing shopping centers. The Company also provides management, leasing, brokerage and development services for real estate not owned by the Company. The accompanying interim unaudited financial statements (the "Financial Statements") include the accounts of the Company, its wholly owned qualified REIT subsidiaries, and its majority owned subsidiaries and partnerships. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company owns approximately 95% of the outstanding units of Regency Centers, L.P., ("RCLP" or the "Partnership" formally known as Regency Retail Partnership, L.P.) and partnership interests ranging from 51% to 93% in four majority owned real estate partnerships (the "Majority Partnerships"). The equity interests of third parties held in RCLP and the Majority Partnerships are included in the consolidated financial statements as redeemable operating partnership units, redeemable preferred units and limited partners' interests in consolidated partnerships, respectively. The Company is a qualified real estate investment trust ("REIT") which began operations in 1993. The Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are of a normal recurring nature, and in the opinion of management, are necessary to properly state the results of operations and financial position. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The Financial Statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1997 Form 10-K filed with the Securities and Exchange Commission. (b) Statement of Financial Accounting Standards No. 130 The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which is effective for fiscal years beginning after December 15, 1997. FAS 130 establishes standards for reporting total comprehensive income in financial statements, and requires that Companies explain the differences between total comprehensive income and net income. Management has adopted this statement in 1998. No differences between total comprehensive income and net income existed in the interim financial statements reported at June 30, 1998 and 1997.
REGENCY REALTY CORPORATION Notes to Consolidated Financial Statements June 30, 1998 1. Summary of Significant Accounting Policies (continued) (c) Statement of Financial Accounting Standards No. 131 The FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), which is effective for fiscal years beginning after December 15, 1997. FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Management does not believe that FAS 131 will effect its current disclosures. (d) Emerging Issues Task Force Issue 97-11 Effective March 19, 1998, the Emerging Issues Task Force (EITF) ruled in Issue 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", that only internal costs of identifying and acquiring non-operating properties that are directly identifiable with the acquired properties should be capitalized, and that all internal costs associated with identifying and acquiring operating properties should be expensed as incurred. The Company had previously capitalized direct costs associated with the acquisition of operating properties as a cost of the real estate. The Company has adopted EITF 97-11 effective March 19, 1998. During 1997, the Company capitalized approximately $1.5 million of internal costs related to acquiring operating properties. Through the effective date of EITF 97-11, the Company has capitalized $474,000 of internal acquisition costs. For the remainder of 1998, the Company expects to incur $1.1 million of internal costs related to acquiring operating properties which will be expensed. (e) Emerging Issues Task Force Issue 98-9 On May 22, 1998, the EITF reached a consensus on Issue 98-9 "Accounting for Contingent Rent in Interim Financial Periods". The EITF has stated that lessors should defer recognition of contingent rental income that is based on meeting specified targets until those specified targets are met and not ratably throughout the year. The Company has previously recognized contingent rental income (i.e. percentage rent) ratably over the year based on the historical trends of its tenants. The Company has adopted Issue 98-9 prospectively and has ceased the recognition of contingent rents until such time as its tenants have achieved its specified target. The Company believes this will effect the interim period in which percentage rent is recognized, however it will not have a material impact on the annual recognition of percentage rent. (f) Reclassifications Certain reclassifications have been made to the 1997 amounts to conform to classifications adopted in 1998.
REGENCY REALTY CORPORATION Notes to Consolidated Financial Statements June 30, 1998 2. Acquisitions of Shopping Centers During the first six months of 1998, the Company acquired 24 shopping centers for approximately $239.2 million (the "1998 Acquisitions"). In January, 1998, the Company entered into an agreement to acquire the shopping centers from various entities comprising the Midland Group ("Midland") consisting of 21 shopping centers plus a development pipeline of 11 shopping centers. Of the 32 centers to be acquired or developed, 31 are anchored by Kroger, or its affiliate. Eight of the shopping centers included in the development pipeline will be owned through a joint venture in which the Company will own less than a 50% interest upon completion of construction (the "JV Properties"). The Company's investment in the properties acquired from Midland is $180.3 million at June 30, 1998. As of June 30, 1998, the Company has acquired all but one of the shopping centers and all the JV Properties. During 1998, 1999 and 2000, including all payments made to date, the Company will pay approximately $213 million (including costs to be incurred on properties currently under construction) for the 32 properties, and in addition may pay contingent consideration of $23 million for the properties through the issuance of units of RCLP, the payment of cash and the assumption of debt. In March, 1997, the Company acquired 26 shopping centers from Branch Properties ("Branch") for $232.4 million. Additional Units and shares of common stock may be issued after the first, second and third anniversaries of the closing with Branch (each an "Earn-Out Closing"), based on the performance of the properties acquired. The formula for the earn-out provides for calculating any increases in value on a property-by-property basis, based on any increases in net income for the properties acquired, as of February 15 of the year of calculation. The earn-out is limited to 721,997 Units at the first Earn-Out Closing and 1,020,061 Units for all Earn-Out Closings (including the first Earn-Out Closing). During March, 1998, the Company issued 721,997 Units and shares valued at $18.2 million to the partners of Branch. 3. Mortgage Loans Payable and Unsecured Line of Credit The Company's outstanding debt at June 30, 1998 and December 31, 1997 consists of the following: 1998 1997 ---- ---- Mortgage Loans Payable: Fixed rate secured loans $283,350,997 199,078,264 Variable rate secured loans 12,679,515 30,840,978 Fixed rate unsecured loans 21,765,510 - Unsecured line of credit 89,731,185 48,131,185 ---------- ------------ Total $407,527,207 278,050,427 ============ =========== During March, 1998, the Company modified the terms of its unsecured line of credit (the "Line") by increasing the commitment to $300 million, reducing the interest rate, and incorporating a competitive bid facility of up to $150 million of the commitment amount. Maximum availability under the Line is subject to a pool of unencumbered assets which cannot have an aggregate value less than 175% of the amount of the Company's outstanding unsecured liabilities. The Line matures in May 2000, but may be extended annually for one year periods. Borrowings under the Line bear interest at a variable rate based of LIBOR plus a specified spread, (.875% currently), which is dependent on the Company's investment grade rating. The Company's ratings are currently Baa2 from Moody's Investor Service, BBB from Duff and Phelps, and BBB- from Standard and Poors. The Company is required to comply with certain financial covenants consistent with this type of
REGENCY REALTY CORPORATION Notes to Consolidated Financial Statements June 30, 1998 3. Mortgage Loans Payable and Unsecured Line of Credit (continued) unsecured financing. The Line is used primarily to finance the acquisition and development of real estate, but is available for general working capital purposes. On June 29, 1998, the Company through RCLP, issued $80 million of 8.125% Series A Cumulative Redeemable Preferred Units to an institutional investor in a private placement. The issuance involved the sale of 1.6 million Preferred Units by RCLP for $50.00 per unit. The Preferred Units, which may be called by the Partnership at par on or after June 25, 2003, have no stated maturity or mandatory redemption, and pay a cumulative, quarterly dividend at an annualized rate of 8.125%. The Preferred Units are not convertible into common stock of the Company. The net proceeds of the offering were used to reduce the Company's bank line of credit. On July 17, 1998 the Company through RCLP, completed a $100 million private offering of senior term notes at an effective interest rate of 7.17%. The Notes were priced at 162.5 basis points over the current yield for seven year US Treasury Bonds. The net proceeds of the offering were used to repay borrowings under the line of credit. Mortgage loans are secured by certain real estate properties, but generally may be prepaid subject to a prepayment of a yield-maintenance premium. Unconsolidated partnerships and joint ventures had mortgage loans payable of $62,727,120 at June 30, 1998, and the Company's share of these loans was $25,447,514. Mortgage loans are generally due in monthly installments of interest and principal and mature over various terms through 2018. Variable interest rates on mortgage loans are currently based on LIBOR plus a spread in a range of 125 basis points to 150 basis points. Fixed interest rates on mortgage loans range from 7.04% to 9.8%. During the first six months of 1998, the Company assumed mortgage loans with a face value of $107,892,774 related to the acquisition of shopping centers. The Company has recorded the loans at fair value which created debt premiums of $6,052,402 related to assumed debt based upon the above market interest rates of the debt instruments. Debt premiums are being amortized over the terms of the related debt instruments. As of June 30, 1998, scheduled principal repayments on mortgage loans payable and the unsecured line of credit were as follows: 1998 $ 8,723,209 1999 23,285,800 2000 150,832,696 2001 43,392,285 2002 46,752,004 Thereafter 128,998,936 ------------ Subtotal 401,984,930 Net unamortized debt premiums 5,542,277 ------------ Total $407,527,207 ============
REGENCY REALTY CORPORATION Notes to Consolidated Financial Statements June 30, 1998 4. Earnings Per Share The following summarizes the calculation of basic and diluted earnings per share for the three months ended, June 30, 1998 and 1997(in thousands except per share data): <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Basic Earnings Per Share (EPS) Calculation: Weighted average common shares outstanding 24,945 13,051 Net income for common stockholders $ 10,798 4,727 Less: dividends paid on Class B common stock 1,344 1,285 ----- ----- Net income for Basic EPS $ 9,454 3,442 ===== ===== Basic EPS $ .38 .26 === === Diluted Earnings Per Share (EPS) Calculation: Weighted average shares outstanding for Basic EPS 24,945 13,051 Redeemable operating partnership units 1,294 2,891 Class B common stock equivalents, if dilutive - - Incremental shares to be issued under common stock options using the Treasury method - 78 Contingent units or shares for the acquisition of real estate 519 1,138 Total diluted shares 26,758 17,158 Net income for Basic EPS $ 9,454 3,442 Add: minority interest of redeemable partnership units 297 970 ----- ----- Net income for Diluted EPS $ 9,751 4,412 ===== ===== Diluted EPS $ .36 .26 ===== === </TABLE>
REGENCY REALTY CORPORATION Notes to Consolidated Financial Statements June 30, 1998 4. Earnings Per Share (continued) The following summarizes the calculation of basic and diluted earnings per share for the six months ended, June 30, 1998 and 1997(in thousands except per share data): <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Basic Earnings Per Share (EPS) Calculation: Weighted average common shares outstanding 24,837 12,127 Net income for common stockholders $ 30,354 8,764 Less: dividends paid on Class B common stock 2,689 2,570 ----- ----- Net income for Basic EPS $ 27,665 6,194 ====== ===== Basic EPS $ 1.11 .51 ==== === Diluted Earnings Per Share (EPS) Calculation: Weighted average shares outstanding for Basic EPS 24,837 12,127 Redeemable operating partnership units 1,135 1,926 Class B common stock equivalents, if dilutive (a) 2,975 - Incremental shares to be issued under common stock options using the Treasury method 27 89 Contingent units or shares for the acquisition of real estate 428 759 Total diluted shares 29,402 14,901 Net income for Basic EPS $ 27,665 6,194 Add: dividends paid on Class B common stock 2,689 - Add: minority interest of redeemable partnership units 892 1,603 ------ ----- Net income for Diluted EPS 31,246 7,797 ====== ===== Diluted EPS 1.06 .51 ==== === </TABLE> (a) Class B common stock is not included in the 1997 calculation of diluted earnings per share because it is anti-dilutive.
PART II Item 1. Legal Proceedings None Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands). The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of Regency Realty Corporation (the "Company") appearing elsewhere in this Form 10-Q, and with the Company's Form 10-K dated December 31, 1997. Certain statements made in the following discussion may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve unknown risks and uncertainties of business and economic conditions pertaining to the operation, acquisition, or development of shopping centers including the retail business sector, and may cause actual results of the Company in the future to significantly differ from any future results that may be implied by such forward-looking statements. Organization The Company is a qualified real estate investment trust ("REIT") which began operations in 1993. The Company invests in real estate primarily through general partnership interest in Regency Centers, L.P., ("RCLP" or "Partnership") an operating partnership in which the Company currently owns approximately 95% of the outstanding partnership units ("Units"). Of the 124 properties included in the Company's portfolio at June 30, 1998, 103 properties were owned either fee simple or through partnerships interests by RCLP. At June 30, 1998, the Company had an investment in real estate, at cost, of approximately $1.1 billion of which $891 million or 81% was owned by RCLP. Shopping Center Business The Company's principal business is owning, operating and developing grocery anchored neighborhood infill shopping centers. Infill refers to shopping centers within a targeted investment market offering sustainable competitive advantages such as barriers to entry resulting from zoning restrictions, growth management laws, or limited new competition from development or expansions. The Company's properties summarized by state including their gross leasable areas (GLA) follows: <TABLE> <CAPTION> Location June 30, 1998 December 31, 1997 -------- ------------- ----------------- # Properties GLA % Leased # Properties GLA % Leased ------------- ------------- -------------- ------------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Florida 46 5,686,915 91.4% 45 5,267,894 91.5% Georgia 27 2,715,918 91.7% 25 2,539,507 92.4% North Carolina 12 1,241,784 97.2% 6 554,332 99.0% Ohio 12 1,675,550 94.4% 2 629,920 89.1% Alabama 5 516,080 99.9% 5 516,080 99.9% Texas 5 450,267 89.6% - - - Colorado 5 451,949 81.1% - - - Tennessee 4 295,257 93.7% 3 208,386 98.5% Kentucky 1 205,060 96.1% - - - South Carolina 1 79,723 95.0% 1 79,743 84.3% Virginia 2 197,324 98.1% - - - Michigan 1 85,478 99.0% - - - Missouri 1 82,498 98.4% - - - Mississippi 2 185,061 97.8% 2 185,061 96.9% -------------- ----------- -------- ------------ --------- -------- Total 124 13,868,864 92.7% 89 9,980,923 92.8% ============== =========== ======== ============ ========= ======= </TABLE>
The Company is focused on building a platform of grocery anchored neighborhood shopping centers because grocery stores provide convenience shopping of daily necessities, foot traffic for adjacent local tenants, and should withstand adverse economic conditions. The Company's current investment markets have continued to offer strong stable economies, and accordingly, the Company expects to realize growth in net income as a result of increasing occupancy in the portfolio, increasing rental rates, development and acquisition of shopping centers in targeted markets, and redevelopment of existing shopping centers. The following table summarizes the four largest tenants occupying the Company's shopping centers: Average Grocery Anchor Number of % of % of Annual Remaining Lease Stores Total GLA Base Rent Term Kroger * 37 16.0% 15.7% 20 yrs Publix 31 9.6% 7.1% 12 yrs Winn Dixie 17 5.6% 4.4% 11 yrs Harris Teeter 5 1.7% 2.4% 16 yrs *includes properties under development scheduled for opening in 1998 and 1999. Excluding development properties, Kroger would represent 12.8% of GLA and 12.0% of annual base rent. Acquisition and Development of Shopping Centers During the first six months of 1998, the Company acquired 24 shopping centers for approximately $239.2 million (the "1998 Acquisitions"). In January, 1998, the Company entered into an agreement to acquire the shopping centers from various entities comprising the Midland Group ("Midland") consisting of 21 shopping centers plus a development pipeline of 11 shopping centers. Of the 32 centers to be acquired or developed, 31 are anchored by Kroger, or its affiliate. Eight of the shopping centers included in the development pipeline will be owned through a joint venture in which the Company will own less than a 50% interest upon completion of construction (the "JV Properties"). The Company's investment in the properties acquired from Midland is $180.3 million at June 30, 1998. As of June 30, 1998, the Company has acquired all but one of the shopping centers and all the JV Properties. During 1998, 1999 and 2000, including all payments made to date, the Company will pay approximately $213 million (including costs to be incurred on properties currently under construction) for the 32 properties, and in addition may pay contingent consideration of $23 million for the properties through the issuance of units of RCLP, the payment of cash and the assumption of debt. The Company acquired 35 shopping centers during 1997 (the "1997 Acquisitions") for approximately $395.7 million. The 1997 Acquisitions include the acquisition of 26 shopping centers from Branch Properties ("Branch") for $232.4 million in March, 1997. The real estate acquired from Branch included 100% fee simple interests in 20 shopping centers, and also partnership interests (ranging from 50% to 93%) in four partnerships with outside investors that owned six shopping centers. The Company was also assigned the third party property management contracts of Branch on approximately 3 million SF of shopping center GLA that generate management fees and leasing commission revenues. Additional Units and shares of common stock may be issued after the first, second and third anniversaries of the closing with Branch (each an "Earn-Out Closing"), based on the performance of the properties acquired. The formula for the earn-out provides for calculating any increases in value on a property-by-property basis, based on any increases in net income for the properties acquired, as of February 15 of the year of calculation. The earn-out is limited to 721,997 Units at the first Earn-Out Closing and 1,020,061 Units for all Earn-Out Closings (including the first Earn-Out Closing). During March, 1998, the Company issued 721,997 Units and shares valued at $18.2 million to the partners of Branch. Liquidity and Capital Resources Net cash provided by operating activities was $32.7 million and $24.9 million for the six months ended June 30, 1998 and 1997, respectively, and is the primary source of funds to pay dividends and distributions on outstanding common stock and Units, maintain and operate the shopping centers, and pay interest and scheduled principal reductions on outstanding debt. Changes in net cash provided by operating activities is further discussed below under results from operations. Net cash used in investing activities was $115 million and $ 125.1 million, during 1998 and 1997, respectively, as discussed above in Acquisitions and Development of Shopping Centers. Net cash provided by financing activities was $78.5 million and $105.3 million during 1998 and 1997, respectively. The Company paid dividends and distributions of $25.4 million and $13.7 million, during 1998 and 1997, respectively (see Funds from Operations below for further discussion on payment of dividends). In 1998, the Company increased its quarterly common dividend and distribution per Unit to $.44 per share vs. $.42 per share in 1997, had more outstanding common shares and Units in 1998 vs. 1997; and accordingly, expects dividends and distributions paid during 1998 to increase substantially over 1997. The Company's total indebtedness at June 30, 1998 and 1997 was approximately $407.5 million and $356.4 million, respectively, of which $305.1 million and $205.7 million had fixed interest rates averaging 7.5% and 7.4%, respectively. The weighted average interest rate on total debt at June 30, 1998 and 1997 was 7.5% respectively. During 1998, the Company, as part of its acquisition activities, assumed debt with a fair value of $113.9 million. The cash portion of the purchase price for the 1998 and 1997 Acquisitions was financed from the Company's line of credit (the "Line"). At June 30, 1998 and 1997, the balance of the Line was $89.7 million and $111.3 million, respectively. The Line has a variable rate of interest currently equal to the London Inter-bank Offered Rate ("LIBOR") plus 87.5 basis points. In March, 1998, the Company entered into an agreement with the banks that provide the Line to increase the unsecured commitment amount to $300 million, provide for a $150 million competitive bid facility, and reduce the interest rate on the line based upon achieving an investment grade rating. During the first quarter of 1998, the Company received investment grade ratings from Moody's of Baa2, Duff and Phelps of BBB, and S&P of BBB-. On June 29, 1998, the Company, through RCLP, issued $80 million of 8.125% Series A Cumulative Redeemable Preferred Units to an institutional investor in a private placement. The issuance involved the sale of 1.6 million Preferred Units for $50.00 per unit. The Preferred Units, which may be called at par on or after June 25, 2003, have no stated maturity or mandatory redemption, and pay a cumulative, quarterly dividend at an annualized rate of 8.125%. The Preferred Units are not convertible into common stock of the Company. The net proceeds of the offering were used to reduce the balance of the Line. On July 17, 1998 the Company, through RCLP, completed a $100 million private offering of senior notes at an effective interest rate of 7.17%. The Notes were priced at 162.5 basis points over the current yield for seven year US Treasury Bonds. The net proceeds of the offering were used to reduce the balance of the Line.
The Company qualifies and intends to continue to qualify as a REIT under the Internal Revenue Code. As a REIT, the Company is allowed to reduce taxable income by all or a portion of its distributions to stockholders. As distributions have exceeded taxable income, no provision for federal income taxes has been made. While the Company intends to continue to pay dividends to its stockholders, it also will reserve such amounts of cash flow as it considers necessary for the proper maintenance and improvement of its real estate, while still maintaining its qualification as a REIT. The Company's real estate portfolio has grown substantially during 1998 as a result of the acquisitions discussed above. The Company intends to continue to acquire and develop shopping centers during 1998, and expects to meet the related capital requirements from borrowings on the Line, and from additional public equity and debt offerings. Because such acquisition and development activities are discretionary in nature, they are not expected to burden the Company's capital resources currently available for liquidity requirements. The Company expects that cash provided by operating activities, unused amounts available under the Line, and cash reserves are adequate to meet liquidity requirements. Results from Operations Comparison of the Six Months Ended June 30, 1998 to 1997 Revenues increased $23.2 million or 55% to $65.5 million in 1998. The increase was due primarily to the 1998 Acquisitions and 1997 Acquisitions providing increases in revenues of $19.5 million during 1998. At June 30, 1998, the real estate portfolio contained approximately 13.9 million SF, was 92.7% leased and had average rents of $9.25 per SF. Minimum rent increased $17.1 million or 56%, and recoveries from tenants increased $3.7 million or 52%. On a same property basis (excluding the 1998 and 1997 Acquisitions) revenues decreased $.2 million or 1%, primarily due to the sale of the office properties. Revenues from property management, leasing, brokerage, and development services provided on properties not owned by the Company were $5.4 million in 1998 compared to $3.7 million in 1997, the increase due primarily to fees earned from third party property management and leasing contracts acquired as part of the acquisition of Branch and Midland. During 1998, the Company sold four office buildings and a parcel of land for $ 30.6 million, and recognized a gain on the sale of $10.7 million. As a result of these transactions the Company's real estate portfolio is comprised entirely of neighborhood shopping centers. The proceeds from the sale were applied toward the purchase of the 1998 acquisitions. Operating expenses increased $11.0 million or 50% to $32.9 million in 1998. Combined operating and maintenance, and real estate taxes increased $4.7 million or 49% during 1998 to $14.3 million. The increases are due to the 1998 and 1997 Acquisitions generating operating and maintenance expenses and real estate tax increases of $5.1 million during 1998. On a same property basis, operating and maintenance expenses and real estate taxes decreased $445,000 or 6% due to the sale of the four office properties. General and administrative expenses increased 39% during 1998 to $7.3 million due to the hiring of new employees and related office expenses necessary to manage the shopping centers acquired during 1998 and 1997, as well as, the shopping centers that the Company began managing for third parties during 1997. Depreciation and amortization increased $4.3 million during 1998 or 61% primarily due to the 1998 and 1997 Acquisitions generating $6.1 million in depreciation and amortization. Interest expense increased to $12.9 million in 1998 from $10.2 million in 1997 or 26% due to increased average outstanding loan balances related to the financing of the 1998 and 1997 Acquisitions on the Line and the assumption of debt.
Net income for common stockholders was $30.4 million in 1998 vs. $8.8 million in 1997, a $21.6 million or 246% increase for the reasons previously described. Diluted earnings per share in 1998 was $1.06. vs. $.51 in 1997 due to the increase in net income combined with the dilutive impact from the increase in weighted average common shares and equivalents of 14.5 million primarily due to the acquisition of Branch and Midland, the issuance of shares to SC-USREALTY during 1997, and the public offering completed in July, 1997. Comparison of the Three Months Ended June 30, 1998 to 1997 Revenues increased $10.2 million or 41% to $34.8 million in 1998. The increase was due primarily to the 1998 Acquisitions and 1997 Acquisitions providing increases in revenues of $8.5 million during 1998. Minimum rent increased $7.3 million or 41%, and recoveries from tenants increased $1.9 million or 50%. On a same property basis (excluding the 1998 and 1997 Acquisitions) revenues decreased $.4 million or 3%, primarily due to the sale of the office properties. Revenues from property management, leasing, brokerage, and development services provided on properties not owned by the Company were $2.9 million in 1998 compared to $2.0 million in 1997, the increase due primarily to fees earned from third party property management and leasing contracts acquired as part of the acquisition of Branch. Operating expenses increased $4.6 million or 37% to $17.1 million in 1998. Combined operating and maintenance, and real estate taxes increased $2.1 million or 39% during 1998 to $7.4 million. The increases are due to the 1998 and 1997 Acquisitions generating operating and maintenance expenses and real estate tax increases of $2.4 million during 1998. On a same property basis, operating and maintenance expenses and real estate taxes decreased $294,000 or 8% due to the sale of the office properties. General and administrative expenses increased 28% during 1998 to $3.8 million due to the hiring of new employees and related office expenses necessary to manage the shopping centers acquired during 1998 and 1997, as well as, the shopping centers that the Company began managing for third parties during 1997. Depreciation and amortization increased $1.7 million during 1998 or 40% primarily due to the 1998 and 1997 Acquisitions generating $3.4 million in depreciation and amortization. Interest expense increased to $7.7 million in 1998 from $6.5 million in 1997 or 18% due to increased average outstanding loan balances related to the financing of the 1998 and 1997 Acquisitions on the Line and the assumption of debt.
Funds from Operations The Company considers funds from operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts as net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of income producing property held for investment, plus depreciation and amortization of real estate, and after adjustments for unconsolidated investments in real estate partnerships and joint ventures, to be the industry standard for reporting the operations of real estate investment trusts ("REITs"). Adjustments for investments in real estate partnerships are calculated to reflect FFO on the same basis. While management believes that FFO is the most relevant and widely used measure of the Company's performance, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered an alternative to net income as an indicator of the Company's operating performance, and is not indicative of cash available to fund all cash flow needs. Additionally, the Company's calculation of FFO, as provided below, may not be comparable to similarly titled measures of other REITs. FFO increased by 89% from 1997 to 1998 as a result of the acquisition activity discussed above under "Results of Operations". FFO for the six months ended June 30, 1998 and 1997 are summarized in the following table: 1998 1997 ---- ---- Net income for common stockholders $ 30,354 8,764 Add (subtract): Real estate depreciation and amortization 10,997 6,773 Gain on sale of operating property (9,844) - Minority interests in net income of redeemable partnership units 892 1,603 Funds from operations $ 32,399 17,140 ========= ====== Cash flow provided by (used in): Operating activities $ 32,685 24,932 Investing activities (115,041) (125,141) Financing activities 78,502 105,328 New Accounting Standards and Accounting Changes The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which is effective for fiscal years beginning after December 15, 1997. FAS 130 establishes standards for reporting total comprehensive income in financial statements, and requires that Companies explain the differences between total comprehensive income and net income. Management has adopted this statement in 1998. No differences between total comprehensive income and net income existed in the interim financial statements reported at June 30, 1998 and 1997. The FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), which is effective for fiscal years beginning after December 15, 1997. FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Management does not believe that FAS 131 will effect its current disclosures. Effective March 19, 1998, the Emerging Issues Task Force (EITF) ruled in Issue 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", that only internal costs of identifying and acquiring non-operating properties that are directly identifiable with the acquired properties should be capitalized, and that all internal costs associated with identifying and acquiring operating properties should be expensed as incurred. The Company had previously capitalized direct costs associated with the acquisition of operating properties as a cost of the real estate. The Company has adopted EITF 97-11 effective March 19, 1998. During 1997, the Company capitalized approximately $1.5 million of internal costs related to acquiring operating properties. Through the effective date of EITF 97-11, the Company has capitalized $474,000 of internal acquisition costs. For the remainder of 1998, the Company expects to incur $1.1 million internal costs related to acquiring operating properties which will be expensed. On May 22, 1998, the EITF reached a consensus on Issue 98-9 "Accounting for Contingent Rent in Interim Financial Periods". The EITF has stated that lessors should defer recognition of contingent rental income that is based on meeting specified targets until those specified targets are met and not ratably throughout the year. The Company has previously recognized contingent rental income (i.e. percentage rent) ratably over the year based on the historical trends of its tenants. The Company has adopted Issue 98-9 prospectively and has ceased the recognition of contingent rents until such time as its tenants have achieved its specified target. The Company believes this will effect the interim period in which percentage rent is recognized, however it will not have a material impact on the annual recognition of percentage rent. Environmental Matters The Company like others in the commercial real estate industry, is subject to numerous environmental laws and regulations and the operation of dry cleaning plants at the Company's shopping centers is the principal environmental concern. The Company believes that the dry cleaners are operating in accordance with current laws and regulations and has established procedures to monitor their operations. Based on information presently available, no additional environmental accruals were made and management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or operations of the Company. Inflation Inflation has remained relatively low during 1998 and 1997 and has had a minimal impact on the operating performance of the shopping centers, however, substantially all of the Company's long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indices. In addition, many of the Company's leases are for terms of less than ten years, which permits the Company to seek increased rents upon re-rental at market rates. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Year 2000 System Compliance The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" problem and is in process of resolving the issue. During 1997, the Company converted its operating system, and its general accounting and lease administration software systems to versions containing modifications that corrected for the Year 2000 problem. The Company will continue to assess its other internal systems and reprogram or upgrade as necessary, however, the cost to convert remaining systems is not expected to have a material effect on the Company's financial position. The Company is also reviewing the Year 2000 system conversions of other companies of which it does business in order to determine their compliance.
Item 4. Submission of Matters to a Vote of Security Holders The annual meeting for Regency Realty Corporation was held on May 26, 1998 for the following purpose: To elect one Class III Director, one Class I Director and four Class II Directors to serve terms expiring at the annual meeting of shareholders to be held in 1999, 2000, and 2001, respectively, and until their successors have been elected and qualified. To consider and vote on a proposed amendment to the Company's Articles of Incorporation that would apply to the Company's major beneficial shareholder, Security Capital U.S. Realty and its subsidiary (collectively, "SC-USREALTY'), the same transfer restrictions that currently apply to all other Non-U.S. Persons (as defined in the Articles of Incorporation). To transact such other business as may properly come before the meeting or any adjournment thereof. All items were approved with total outstanding votes received of 22,006,051. The votes were as follows: 18,365,301 voting FOR and 19,712 ABSTAIN for Item 1, 18,343,286 votes FOR, 23,556 AGAINST and 18,170 ABSTAIN for Item 2 and 18,385,023 FOR Item 3. Accordingly, the proposals were passed. 5. Other Information The deadline for submission of shareholder proposals pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended ("Rule14a-8"), for inclusion in the Company's proxy statement for its 1999 Annual Meeting of Shareholders is December 16, 1998. After March 1, 1999, notice to the Company of a shareholder proposal submitted otherwise than pursuant to Rule 14a-8 will be considered untimely, and the persons named in proxies solicited by the Company's Board of Directors for its 1999 Annual Meeting of Shareholders may exercise discretionary voting power with respect to any such proposal as to which the Company does not receive timely notice. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 3. Articles of Incorporation (a) Restated Articles of Incorporation of Regency Realty Corporation as amended to date. (i) Amendment to Restated Articles of Incorporation of Regency Realty Corporation as amended to date. 4. Instruments defining the rights of security holders, including indentures Indenture dated as of July 20, 1998 among RCLP, the Guarantors named therein and First Union National Bank, as trustee, incorporated by reference to Exhibit 10.3 to the Regency Centers, L.P. Form 10 Registration Statement. Material Contracts Item 10. Material contracts Purchase and Sale Agreement, dated March 10, 1998 between Faison-Fleming Island Limited Partnership, a Florida limited partnership, as Seller, and RRC Acquisitions, Two, Inc. a Florida corporation, its designees, successors and assigns ("Buyer"), relating to the acquisition of Fleming Island Shopping Center. 10.1 Exchange and Registration Rights Agreement dated as of July 15, 1998 among RCLP, the Guarantors named therein and the Purchasers named therein, incorporated by reference to Exhibit 10.4 to the Partnership's Form 10 Registration Statement. 10.2 Registration Rights Agreement dated as of June 25, 1998 between Regency Realty Corporation and the Unit Holder named therein. Reports on Form 8-K: A report on Form 8-K was filed on July 20, 1998 reporting under Item 5. Acquisition of five shopping centers to include audited financial statements and December 31, 1997 audited financial statements for the Midland Group and pro forma condensed consolidated financial statements of operations for the three months ended March 31, 1998 and the year ended December 31, 1997. 27. Financial Data Schedule June 30, 1998 Restated June 30, 1997
SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 14, 1998 REGENCY REALTY CORPORATION By: /s/ J. Christian Leavitt Vice President, Treasurer and Secretary