UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
For the fiscal year ended December 31, 2005
or
For the transition period from to
Commission File Number 1-12298
REGENCY CENTERS CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
identification No.)
121 West Forsyth Street, Suite 200
Jacksonville, Florida 32202
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
on which registered
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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, and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $3,787,700,259
The number of shares outstanding of the registrant’s voting common stock was 68,200,492 as of March 8, 2006.
Documents Incorporated by Reference
Portions of the registrant’s proxy statement in connection with its 2006 Annual Meeting of Stockholders are incorporated by reference in Part III.
TABLE OF CONTENTS
Item No.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 growth in revenues, 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 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 pricing of acquisitions and sales of properties and out-parcels; changes in expected leasing activity and market rents; timing of acquisitions, development starts and sales of properties and out-parcels; our inability to exercise voting control over the joint ventures through which we own or develop some of our properties; weather; consequences of any armed conflict or terrorist attack against the United States; the ability to obtain governmental approvals; and meeting development schedules. For additional information, see “Risk Factors” elsewhere herein. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of Regency Centers Corporation appearing elsewhere within.
PART I
Item 1. Business
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 per share and total shareholder return, which we hope 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. We own, manage, lease, acquire, and develop shopping centers through our operating partnership, Regency Centers, L.P. (“RCLP”), in which we currently own approximately 98% of the outstanding operating partnership units. Regency’s operating, investing and financing activities are generally performed by RCLP, its wholly owned subsidiaries and its joint ventures with third parties.
Currently, we operate and manage a real estate investment portfolio that totals $7.3 billion at cost before depreciation with 393 shopping centers in 27 states and the District of Columbia, including approximately $4.1 billion in real estate assets composed of 180 shopping centers owned by unconsolidated joint ventures in 23 states and the District of Columbia. Portfolio information is presented (a) on a combined basis, including unconsolidated joint ventures (“Combined Basis”), (b) on a basis that excludes the unconsolidated joint ventures (“Consolidated Properties”) and (c) on a basis that includes only the unconsolidated joint ventures (“Unconsolidated Properties”). We believe that providing our shopping center portfolio information under these methods provides a more complete understanding of the properties that we own, including those that we partially own and for which we provide property and asset management services. At December 31, 2005, our gross leasable area (“GLA”) on a Combined Basis totaled 46.2 million square feet and was 91.3% leased. The portfolio contains 50.8 million square feet when anchored owned buildings are included. The GLA for the 213 Consolidated Properties totaled 24.4 million square feet and was 88.0% leased, including shopping centers under construction and partially pre-leased. The GLA for the Unconsolidated Properties totaled 21.8 million square feet and was 95.1% leased.
We earn revenues and generate operating cash flow by leasing space in our shopping centers to market-leading grocers, and major retail anchors, as well as specialty side-shop retailers, restaurants and outparcel tenants in our shopping centers. We experience 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 daily necessities and services. This high traffic generates increased sales, thereby driving higher occupancy, rental rates and rental-rate growth for Regency, which we expect to 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. 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 Regency 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 to stabilize a center’s occupancy, reduce re-leasing downtime, reduce tenant turnover and yield higher sustainable rents.
1
We grow our shopping center portfolio through acquisitions 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 up to 36 months, or longer, from initial land or redevelopment acquisition through construction, lease-up and stabilization of rental income, 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.
We intend to maintain a conservative capital structure to fund our growth programs, which should preserve our investment-grade ratings. Our approach is founded on our self-funding business model. This model utilizes center “recycling” as a key component, which requires ongoing monitoring of each center to ensure that it meets our stringent quality standards. Properties that do not measure up to our standards are sold in combination with non-core development sales. These sale proceeds are re-deployed into new, higher-quality developments and acquisitions that are expected to generate sustainable revenue growth and more attractive returns.
Joint venturing of shopping centers also provides us with a capital source for new development, as well as the opportunity to earn fees for asset and property management services. As asset manager, we are engaged by our partners to apply similar operating, investment, and capital strategies to the portfolios owned by the joint ventures. Joint ventures grow their shopping center investments through acquisitions from third parties or direct purchases from Regency. Although selling properties to joint ventures reduces our ownership interest, we continue to share in the risks and rewards of centers that meet our high quality standards and long-term investment strategy. We have no obligations or liabilities of the joint ventures beyond our ownership interest percentage.
There are many challenges affecting our industry, and we are addressing them accordingly. An economic downturn could result in declines in occupancy levels at our shopping centers, which would reduce our rental revenues; however, we believe that our investment focus on grocery and discount (Target and Wal-Mart) anchored shopping centers that conveniently provide daily necessities will minimize the impact of a downturn in the economy. The grocery anchor environment is changing constantly and increased competition from super-centers such as Wal-Mart and industry consolidation could result in grocery store closings. We closely monitor the operating performance and tenants’s sales in our shopping centers that operate near super-centers as well as those tenants operating retail formats that are experiencing significant changes in competition or business practice such as the video rental format. A slowdown in the demand for new shopping centers could cause a corresponding reduction in our shopping center development program and likely reduce our future operating revenues and gains from development sales. We believe that the presence of our development teams in key markets and their excellent relationships with leading anchor tenants will enable us to sustain our development program.
Competition
We are among the largest publicly-held owners of shopping centers in the nation based on revenues, number of properties, gross leaseable area and market capitalization. There are numerous companies and private individuals engaged in the ownership, development, acquisition and operation of shopping centers which compete with us in our targeted markets. This results in competition for attracting anchor tenants, as well as the acquisition of existing shopping centers and new development sites. We believe that the principal competitive factors in attracting tenants in our market areas are location, demographics, rental costs, tenant mix, property age and maintenance. We believe that our competitive advantages include our locations within our market areas, the design quality of our shopping centers, the strong demographics surrounding our shopping centers, our relationships with our anchor tenants and our side-shop and out-parcel retailers, our PCI program which allows us to provide retailers with multiple locations, our practice of maintaining and renovating our shopping centers, and our ability to source and develop new shopping centers.
Changes in Policies
Our Board of Directors establishes the policies that govern our investment and operating strategies including, among others, development and acquisition of shopping centers, tenant and market focus, debt and equity financing policies, quarterly distributions to stockholders, and REIT tax status. The Board of Directors may amend these policies at any time without a vote of our stockholders.
Employees
Our headquarters are located at 121 West Forsyth Street, Suite 200, Jacksonville, Florida. We presently maintain 20 market offices nationwide where we conduct management, leasing, construction, and investment activities. At December 31, 2005, we had 457 employees and we believe that our relations with our employees are good.
Compliance with Governmental Regulations
Under various federal, state and local laws, ordinances and regulations, we may be liable for the cost to remove or remediate certain hazardous or toxic substances at our shopping centers. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The cost of required remediation and the owner’s liability for remediation could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly
2
remediate such substances, may adversely affect our ability to sell or rent the property or borrow using the property as collateral. We have a number of properties that could require or are currently undergoing varying levels of environmental remediation. Environmental remediation is not currently expected to have a material financial effect on us due to reserves for remediation, insurance programs designed to mitigate the cost of remediation and various state-regulated programs that shift the responsibility and cost to the state.
Executive Officers
The executive officers of the Company are appointed each year by the Board of Directors. Each of the executive officers has been employed by the Company in the position or positions indicated in the list and pertinent notes below. Each of the executive officers has been employed by the Company for more than five years.
Name
Age
Title
Executive Officer in
Position Shown Since
Martin E. Stein, Jr.
Mary Lou Fiala
Bruce M. Johnson
Brian M. Smith
Company Website Access and SEC Filings
The Company’s website may be accessed at www.regencycenters.com. All of our filings with the Securities and Exchange Commission can be accessed through our website promptly after filing; however, in the event that the website is inaccessible, then we will provide paper copies of our most recent annual report on Form 10-K, the most recent quarterly report on Form 10-Q, current reports filed or furnished on Form 8-K, and all related amendments, excluding exhibits, free of charge upon request.
Item 1A. Risk Factors
Risk Factors Related to Our Industry and Real Estate Investments
Our revenues and cash flow could be adversely affected by poor market conditions where properties are geographically concentrated.
Regency’s performance depends on the economic conditions in markets in which our properties are concentrated. During the year ended December 31, 2005, our properties in California, Florida and Texas accounted for 52.2% of our base rent. Our revenues and cash available for distribution to stockholders could be adversely affected by this geographic concentration if market conditions in these areas, such as an oversupply of retail space or a reduction in the demand for shopping centers, become more competitive relative to other geographic areas.
Loss of revenues from major tenants could reduce distributions to stockholders.
We derive significant revenues from anchor tenants such as Kroger, Publix and Safeway that occupy more than one center. Distributions to stockholders could be adversely affected by the loss of revenues in the event a major tenant:
3
Vacated anchor space, including space owned by the anchor, can reduce rental revenues generated by the shopping center because of the loss of the departed anchor tenant’s customer drawing power. Most anchors have the right to vacate and prevent re-tenanting by paying rent for the balance of the lease term. If major tenants vacate a property, then other tenants may be entitled to terminate their leases at the property.
Downturns in the retailing industry likely will have a direct adverse impact on our revenues and cash flow.
Our properties consist primarily of grocery-anchored shopping centers. Our performance therefore is generally linked to economic conditions in the market for retail space. The market for retail space has been or could be adversely affected by any of the following:
To the extent that any of these conditions occur, they are likely to impact market rents for retail space and our cash available for distribution to stockholders.
Unsuccessful development activities could reduce distributions to stockholders.
We actively pursue development activities as opportunities arise. Development activities require various government and other approvals. We may not recover our investment in development projects for which approvals are not received. We incur other risks associated with development activities, including:
4
If we sustain material losses due to an unsuccessful development project, our cash flow available for distribution to stockholders will be reduced.
We may encounter difficulties in assimilating the First Washington portfolio.
In June 2005, we acquired a 100-property portfolio from a joint venture between the California Public Employees Retirement System and First Washington Realty, Inc. Although we currently own 24.95% of the portfolio through a joint venture, we will be responsible for managing the entire portfolio once First Washington ends its transitional management and leasing services. The purchase agreement did not require us to acquire any First Washington offices, personnel or other infrastructure. We may encounter difficulties in integrating such a large portfolio with our existing systems and personnel, which could result in additional expense and adversely affect our results of operations.
Uninsured loss may adversely affect distributions to stockholders.
We carry comprehensive liability, fire, flood, extended coverage, rental loss and environmental insurance for our properties with policy specifications and insured limits customarily carried for similar properties. We believe that the insurance carried on our properties is adequate in accordance with industry standards. There are, however, some types of losses, such as from hurricanes, terrorism, wars or earthquakes, which may be uninsurable, or the cost of insuring against such losses may not be economically justifiable. If an uninsured loss occurs, we could lose both the invested capital in and anticipated revenues from the property, but we would still be obligated to repay any recourse mortgage debt on the property. In that event, our distributions to stockholders could be reduced.
We face competition from numerous sources.
The ownership of shopping centers is highly fragmented, with less than 10% owned by real estate investment trusts. We face competition from other real estate investment trusts as well as from numerous small owners in the acquisition, ownership and leasing of shopping centers. We compete to develop shopping centers with other real estate investment trusts engaged in development activities as well as with local, regional and national real estate developers.
We compete in the acquisition of properties through proprietary research that identifies opportunities in markets with high barriers to entry and higher-than-average population growth and household income. We seek to maximize rents per square foot by establishing relationships with supermarket chains that are first or second in their markets and leasing non-anchor space in multiple centers to national or regional tenants. We compete to develop properties by applying our proprietary research methods to identify development and leasing opportunities and by pre-leasing a significant portion of a center before beginning construction.
There can be no assurance, however, that other real estate owners or developers will not utilize similar research methods and target the same markets and anchor tenants that we target. These entities may successfully control these markets and tenants to our exclusion. If we cannot successfully compete in our targeted markets, our cash flow, and therefore distributions to stockholders, may be adversely affected.
Costs of environmental remediation could reduce our cash flow available for distribution to stockholders.
Under various federal, state and local laws, an owner or manager of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on the property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. The cost of any required remediation could exceed the value of the property and/or the aggregate assets of the owner.
5
Our principal environmental risk is from dry cleaning plants that currently operate, or have operated in the past, at our shopping centers. The presence of, or the failure to properly remediate, hazardous or toxic substances may adversely affect our ability to sell or rent a contaminated property or to borrow using the property as collateral. Any of these developments could reduce cash flow and distributions to stockholders.
Risk Factors Related to Our Acquisition Structure
We do not have voting control over our joint venture investments, so we are unable to ensure that our objectives will be pursued.
We have invested as a co-venturer in the acquisition or development of properties. As of December 31, 2005, our investments in real estate partnerships represented 15% of our total assets. These investments involve risks not present in a wholly-owned project. We do not have voting control over the ventures. The co-venturer might (1) have interests or goals that are inconsistent with our interests or goals or (2) otherwise impede our objectives. The co-venturer also might become insolvent or bankrupt.
Our partnership structure may limit our flexibility to manage our assets.
We invest in retail shopping centers through Regency Centers, L.P., the operating partnership in which we currently own 98% of the outstanding common partnership units. From time to time, we acquire properties through our operating partnership in exchange for limited partnership interests. This acquisition structure may permit limited partners who contribute properties to us to defer some, if not all, of the income tax liability that they would incur if they sold the property.
Properties contributed to our operating partnership may have unrealized gain attributable to the difference between the fair market value and adjusted tax basis in the properties prior to contribution. As a result, the sale of these properties could cause adverse tax consequences to the limited partners who contributed them.
Generally, our operating partnership has no obligation to consider the tax consequences of its actions to any limited partner. However, our operating partnership may acquire properties in the future subject to material restrictions on refinancing or resale designed to minimize the adverse tax consequences to the limited partners who contribute those properties. These restrictions could significantly reduce our flexibility to manage our assets by preventing us from reducing mortgage debt or selling a property when such a transaction might be in our best interest in order to reduce interest costs or dispose of an under-performing property.
Risk Factors Related to Our Capital Structure
Our debt financing may reduce distributions to stockholders.
We do not expect to generate sufficient funds from operations to make balloon principal payments when due on our debt. If we are unable to refinance our debt on acceptable terms, we might be forced (1) to dispose of properties, which might result in losses, or (2) to obtain financing at unfavorable terms. Either could reduce the cash flow available for distributions to stockholders.
In addition, if we cannot make required mortgage payments, the mortgagee could foreclose on the property securing the mortgage, causing the loss of cash flow from that property. Furthermore, substantially all of our debt is cross-defaulted, which means that a default under one loan could trigger defaults under other loans.
On June 1, 2005, we incurred $275 million of additional debt to complete the funding of our portion of the joint venture that acquired the First Washington portfolio. As a result, our debt-to-equity ratio and the ratio of our debt-to-total assets have increased. Our lenders modified our line of credit to increase our debt-to-assets leverage ratio from 0.55 to 1.00 to 0.60 to 1.00. The line of credit has also been modified to impose limitations on the amount of recourse indebtedness that can be incurred by our unconsolidated affiliates. We intend to reduce our debt ratios through our capital recycling program, in which we sell properties that no longer meet our long-term investment criteria. However, there can be no assurance that we will be able to reduce our debt ratios in accordance with our plan. We could be required to seek an extension for our line of credit modification with our lenders, and a failure to do so could result in an event of default. In addition, the rating agencies could decide to lower our debt ratings, which would increase our borrowing costs and could make it more difficult for us to obtain financing on acceptable terms.
6
Our organizational documents do not limit the amount of debt that may be incurred. The degree to which we are leveraged could have important consequences, including the following:
We depend on external sources of capital, which may not be available in the future.
To qualify as a REIT, we must, among other things, distribute to our stockholders each year at least 90% of our REIT taxable income (excluding any net capital gains). Because of these distribution requirements, we likely will not be able to fund all future capital needs, including capital for acquisitions, with income from operations. We therefore will have to rely on third-party sources of capital, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of things, including the market’s perception of our growth potential and our current and potential future earnings. In addition, our line of credit imposes covenants that limit our flexibility in obtaining other financing, such as a prohibition on negative pledge agreements.
Additional equity offerings may result in substantial dilution of stockholders’ interests, and additional debt financing may substantially increase our degree of leverage.
Risk Factors Related to Interest Rates and the Market for Our Stock
Increased interest rates may reduce distributions to stockholders.
We are obligated on floating rate debt, and if we do not eliminate our exposure to increases in interest rates through interest rate protection or cap agreements, these increases may reduce cash flow and our ability to make distributions to stockholders.
Although swap agreements enable us to convert floating rate debt to fixed rate debt and cap agreements enable us to cap our maximum interest rate, they expose us to the risk that the counterparties to these hedge agreements may not perform, which could increase our exposure to rising interest rates. If we enter into swap agreements, decreases in interest rates will increase our interest expense as compared to the underlying floating rate debt. This could result in our making payments to unwind these agreements, such as in connection with a prepayment of the floating rate debt. Cap agreements do not protect us from increases up to the capped rate.
Increased market interest rates could reduce our stock prices.
The annual dividend rate on our common stock as a percentage of its market price may influence the trading price of our stock. An increase in market interest rates may lead purchasers to demand a higher annual dividend rate, which could adversely affect the market price of our stock. A decrease in the market price of our common stock could reduce our ability to raise additional equity in the public markets.
Outstanding SynDECs could adversely influence the market price for our common stock.
In June 2003, Citigroup Global Markets Holdings Inc., or CGMHI, sold an aggregate of 8,280,000 SynDECS (Debt Exchangeable for Common Stock). The SynDECS are a series of debt securities of CGMHI that will each be mandatorily exchanged upon maturity, on July 1, 2006, into our common stock or its value in cash based on a formula linked to the market price of our common stock. Any market for the SynDECS is likely to influence the market for our common stock. For example, the price of our common stock could become more volatile and could be depressed by investors’ anticipation of the potential distribution into the market of substantial additional amounts of our common stock at the maturity of the SynDECS, by possible sales of our common stock by investors who view the SynDECS as a more attractive means of equity participation in Regency and by hedging or arbitrage trading activity that may develop involving the SynDECS and our common stock.
7
Risk Factors Related to Federal Income Tax Laws
If we fail to qualify as a REIT for federal income tax purposes, we would be subject to federal income tax at regular corporate rates.
We believe that we qualify for taxation as a REIT for federal income tax purposes, and we plan to operate so that we can continue to meet the requirements for taxation as a REIT. If we qualify as a REIT, we generally will not be subject to federal income tax on our income that we distribute currently to our stockholders. Many of the REIT requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances, some of which may not be totally within our control and some of which involve questions of interpretation. For example, to qualify as a REIT, at least 95% of our gross income must come from specific passive sources, like rent, that are itemized in the REIT tax laws. There can be no assurance that the IRS or a court would agree with the positions we have taken in interpreting the REIT requirements. We also are required to distribute to our stockholders at least 90% of our REIT taxable income (excluding capital gains). The fact that we hold some of our assets through joint ventures and their subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for us to remain qualified as a REIT.
Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify. If we failed to qualify as a REIT, we would have to pay significant income taxes. This likely would have a significant adverse affect on the value of our securities. In addition, we would no longer be required to pay any dividends to stockholders.
Even if we qualify as a REIT for federal income tax purposes, we are required to pay certain federal, state and local taxes on our income and property. For example, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. While we have undertaken a significant number of asset sales in recent years, we do not believe that those sales should be considered prohibited transactions, but there can be no assurance that the IRS would not contend otherwise.
In addition, any net taxable income earned directly by our taxable affiliates, including Regency Realty Group, Inc., is subject to federal and state corporate income tax. Several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments made to an affiliated REIT. In addition, a REIT has to pay a 100% penalty tax on some payments that it receives if the economic arrangements between the REIT, the REIT’s tenants and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
A REIT may not own securities in any one issuer if the value of those securities exceeds 5% of the value of the REIT’s total assets or the securities owned by the REIT represent more than 10% of the issuer’s outstanding voting securities or 10% of the value of the issuer’s outstanding securities. An exception to these tests allows a REIT to own securities of a subsidiary that exceed the 5% value test and the 10% value tests if the subsidiary elects to be a “taxable REIT subsidiary.” We are not able to own securities of taxable REIT subsidiaries that represent in the aggregate more than 20% of the value of our total assets. We currently own more than 10% of the total value of the outstanding securities of Regency Realty Group, Inc., which has elected to be a taxable REIT subsidiary.
Risk Factors Related to Our Ownership Limitations, the Florida Business Corporation Act and Certain Other Matters
Restrictions on the ownership of our capital stock to preserve our REIT status could delay or prevent a change in control.
Ownership of more than 7% by value of our outstanding capital stock by certain persons is restricted for the purpose of maintaining our qualification as a REIT, with certain exceptions. This 7% limitation may discourage a
8
change in control and may also (i) deter tender offers for our capital stock, which offers may be attractive to our stockholders, or (ii) limit the opportunity for our stockholders to receive a premium for their capital stock that might otherwise exist if an investor attempted to assemble a block in excess of 7% of our outstanding capital stock or to effect a change in control.
The issuance of our capital stock could delay or prevent a change in control.
Our articles of incorporation authorize our board of directors to issue up to 30,000,000 shares of preferred stock and 10,000,000 shares of special common stock and to establish the preferences and rights of any shares issued. The issuance of preferred stock or special common stock could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders’ interest. The provisions of the Florida Business Corporation Act regarding control share acquisitions and affiliated transactions could also deter potential acquisitions by preventing the acquiring party from voting the common stock it acquires or consummating a merger or other extraordinary corporate transaction without the approval of our disinterested stockholders.
Item 1B. Unresolved Staff Comments
The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding December 31, 2005 that remain unresolved.
9
Item 2. Properties
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 joint ventures):
Location
California
Florida
Texas
Virginia
Georgia
Colorado
Maryland
Illinois
North Carolina
Ohio
Pennsylvania
Washington
Oregon
Delaware
Tennessee
South Carolina
Arizona
Wisconsin
Kentucky
Minnesota
Michigan
Alabama
Indiana
Connecticut
New Jersey
New Hampshire
Nevada
Dist. of Columbia
Total
10
Item 2. Properties (continued)
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 joint ventures):
The Consolidated Properties are encumbered by notes payable of $250.6 million.
11
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 joint ventures):
12
The following table summarizes the largest tenants occupying our shopping centers for Consolidated Properties plus Regency’s pro-rata share of Unconsolidated Properties as of December 31, 2005 based upon a percentage of total annualized base rent exceeding .5%.
Tenant
Kroger
Safeway
Publix
Blockbuster
Albertsons
H.E.B.
SuperValu
Harris Teeter
Walgreens
Washington Mutual Bank
TJX Companies
CVS
Whole Foods
Stater Brothers
Hallmark
Sears / K-Mart
Starbucks
Rite Aid
Petco
Movie Gallery
The UPS Store
Subway
Long’s Drug
Bank of America
Kohl’s
Regency’s leases have terms generally ranging from three to five years for tenant space under 5,000 square feet. Leases greater than 10,000 square feet generally have lease terms in excess of five years, mostly comprised of anchor tenants. Many of the anchor leases contain provisions allowing the tenant the option of extending the term of the lease at expiration. The leases provide for the monthly payment in advance of fixed minimum rentals, additional rents calculated as a percentage of the tenant’s sales, the tenant’s pro-rata share of real estate taxes, insurance, and common area maintenance expenses, and reimbursement for utility costs if not directly metered.
13
The following table sets forth a schedule of lease expirations for the next ten years, assuming no tenants renew their leases:
Year
(1)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
10 Year Total
See the following Combined Basis property table and also see Item 7, Management’s Discussion and Analysis for further information about Regency’s properties.
14
Property Name
Grocery Anchor
Drug Store & Other Anchors >10,000 Sq Ft
CALIFORNIA
Los Angeles/Southern CA
4S Commons Town Center (3)
Amerige Heights Town Center (5)
Target (4)
Bear Creek Phase II (3)
—
Bear Creek Village Center (5)
Brea Marketplace (5)
Campus Marketplace (5)
Costa Verde
El Camino
El Norte Pkwy Plaza
Falcon Ridge
Falcon Ridge Town Center Phase II (3)
Five Points Shopping Center (5)
French Valley (3)
Friars Mission
Garden Village Shopping Center (5)
Gelson’s Westlake Market Plaza
Granada Village (5)
Hasley Canyon Village
Heritage Plaza
Laguna Niguel Plaza (5)
Lake Forest Village (5)
Morningside Plaza
Newland Center
Oakbrook Plaza
Park Plaza Shopping Center (5)
Plaza Hermosa
Point Loma Plaza (5)
Rancho San Diego Village (5)
Rio Vista Town Center (3)
Rona Plaza
Santa Ana Downtown
Santa Maria Commons (3)
Seal Beach (3) (5)
Soquel Canyon Crossings (3)
The Shops of Santa Barbara
The Shops of Santa Barbara Phase II (3)
The Vine at Castaic (3)
Twin Oaks Shopping Center (5)
Twin Peaks
Valencia Crossroads
Ventura Village
Vista Village Phase I
Vista Village Phase II
Westlake Village Plaza and Center
Westridge
Woodman Van Nuys
15
Drug Store & Other Anchors >
10,000 Sq Ft
CALIFORNIA (continued)
San Francisco/Northern CA
Alameda Bridgeside Shopping Center (3)
Auburn Village (5)
Goodwill Industries, Long’s
Drug(4)
Bayhill Shopping Center (5)
Blossom Valley
Clayton Valley (3)
Clovis Commons (3)
Corral Hollow (5)
Diablo Plaza
El Cerrito Plaza (5)
Encina Grande
Folsom Prairie City Crossing
Loehmanns Plaza California
Mariposa Shopping Center (5)
Pleasant Hill Shopping Center (5)
Powell Street Plaza
San Leandro
Sequoia Station
Silverado Plaza (5)
Snell & Branham Plaza (5)
Stanford Ranch Village (5)
Strawflower Village
Tassajara Crossing
West Park Plaza
Woodside Central
Ygnacio Plaza (5)
Subtotal/Weighted Average (CA)
FLORIDA
Ft. Myers / Cape Coral
Grande Oak
Jacksonville / North Florida
Anastasia Plaza (5)
Carriage Gate
Courtyard Shopping Center
Fleming Island
Highland Square (5)
John’s Creek Shopping Center
Julington Village (5)
Millhopper
Newberry Square
Ocala Corners (5)
Old St Augustine Plaza
Palm Harbor Shopping Village (5)
Pine Tree Plaza
Plantation Plaza (5)
Plantation Plaza Phase II (3) (5)
Regency Court
Starke
The Shoppes at Bartram Park (5)
The Shoppes at Bartram Park - Phase II (3) (5)
The Shoppes at Bartram Park - Phase III (3) (5)
The Shops at John’s Creek (3)
Vineyard Shopping Center
16
FLORIDA (continued)
Miami / Fort Lauderdale
Aventura Shopping Center
Berkshire Commons
Five Points Plaza (5)
Garden Square
Palm Trails Plaza
Pebblebrook Plaza (5)
Shoppes @ 104 (5)
Welleby
Tampa / Orlando
Beneva Village Shops
Bloomingdale
East Towne Shopping Center
Kings Crossing Sun City (5)
Lynnhaven (5)
Marketplace St Pete
Peachland Promenade (5)
Regency Square Brandon
Regency Village (5)
Town Square
University Collection
Village Center 6
Willa Springs Shopping Center
West Palm Beach / Treasure Cove
Boynton Lakes Plaza
Chasewood Plaza
East Port Plaza
Martin Downs Village Center
Martin Downs Village Shoppes
Ocean Breeze
Shops of San Marco (5)
Town Center at Martin Downs
Village Commons Shopping Center (5)
Wellington Town Square
Subtotal/Weighted Average (FL)
TEXAS
Austin
Hancock
Market at Round Rock
North Hills
Dallas / Ft. Worth
Bethany Park Place
Casa Linda Plaza
Hebron Park (5)
Highland Village (3)
Hillcrest Village
Lebanon/Legacy Center
Main Street Center
Market at Preston Forest
Mockingbird Common
Preston Park
Prestonbrook
Prestonwood Park
Rockwall Town Center (3)
Shiloh Springs
Signature Plaza
Valley Ranch Centre
Cooper Street
Keller Town Center
Trophy Club
17
TEXAS (Continued)
Houston
Alden Bridge
Atascocita Center
Cochran’s Crossing
First Colony Marketplace (5)
Fort Bend Center
Indian Springs Center (5)
Kleinwood Center
Kleinwood Center II (3)
Memorial Collection Shopping Center (5)
Panther Creek
South Shore (3)
Spring West Center (3)
Sterling Ridge
Sweetwater Plaza (5)
Weslayan Plaza East (5)
Weslayan Plaza West (5)
Westheimer Marketplace (5)
Woodway Collection (5)
Subtotal/Weighted Average (TX)
VIRGINIA
Richmond
Gayton Crossing (5)
Glen Lea Centre (5)
Hanover Village (5)
Laburnum Park Shopping Center (5)
Village Shopping Center (5)
Other Virginia
601 King Street (5)
Ashburn Farm Market Center
Ashburn Farm Village Center (5)
Braemar Shopping Center (5)
Brafferton Center (5)
Centre Ridge Marketplace (5)
Cheshire Station
Festival at Manchester Lakes (5)
Fortuna
Fox Mill Shopping Center (5)
Greenbriar Town Center (5)
Kamp Washington Shopping Center (5)
Kings Park Shopping Center (5)
Saratoga Shopping Center (5)
Signal Hill
Somerset Crossing (5)
Tall Oaks Village Center
The Market at Opitz Crossing
The Shops at County Center (3)
Town Center at Sterling Shopping Center (5)
Village Center at Dulles (5)
Willston Centre I (5)
Willston Centre II (5)
18
VIRGINIA (continued)
Brookville Plaza (5)
Hollymead Town Center
Statler Square Phase I
Subtotal/Weighted Average (VA)
GEORGIA
Atlanta
Ashford Place
Bethesda Walk (5)
Briarcliff La Vista
Briarcliff Village
Brookwood Village (5)
Buckhead Court
Buckhead Crossing (5)
Cambridge Square Shopping Ctr
Chapel Hill (3)
Cobb Center (5)
Coweta Crossing (5)
Cromwell Square
Delk Spectrum
Dunwoody Hall
Dunwoody Village
Howell Mill Village (5)
Killian Hill Center (5)
Lindbergh Crossing (5)
Loehmanns Plaza Georgia
Northlake Promenade (5)
Orchard Square (5)
Paces Ferry Plaza
Peachtree Parkway Plaza (5)
Powers Ferry Kroger (5)
Powers Ferry Square
Powers Ferry Village
Rivermont Station
Rose Creek (5)
Roswell Crossing (5)
Russell Ridge
Thomas Crossroads (5)
Trowbridge Crossing (5)
Woodstock Crossing (5)
Subtotal/Weighted Average (GA)
COLORADO
Colorado Springs
Cheyenne Meadows (5)
Falcon Marketplace (3)
Monument Jackson Creek
Woodmen Plaza
19
COLORADO (continued)
Denver
Applewood Shopping Center (5)
Arapahoe Village (5)
Belleview Square
Boulevard Center
Buckley Square
Centerplace of Greeley (5)
Cherrywood Square (5)
Crossroads Commons (5)
Fort Collins Center (3)
Hilltop Village (5)
Leetsdale Marketplace
Littleton Square
Lloyd King Center
Longmont Center (3)
Loveland Shopping Center (3)
New Windsor Marketplace
Ralston Square Shopping Center (5)
Stroh Ranch
Subtotal/Weighted Average (CO)
MARYLAND
Baltimore
Elkridge Corners (5)
Festival at Woodholme (5)
Lee Airport (3)
Northway Shopping Center (5)
Parkville Shopping Center (5)
Southside Marketplace (5)
Valley Centre (5)
Other Maryland
Bowie Plaza (5)
Clinton Park (5)
Clinton Square (5)
Cloppers Mill Village (5)
Firstfield Shopping Center (5)
Goshen Plaza (5)
King Farm Apartments (5)
King Farm Village Center (5)
Mitchellville Plaza (5)
Penn Station Shopping Center (5)
Rosecroft Shopping Center (5)
Takoma Park (5)
Watkins Park Plaza (5)
Woodmoor Shopping Center (5)
Subtotal/Weighted Average (MD)
20
ILLINOIS
Chicago
Baker Hill Center (5)
Brentwood Commons (5)
Civic Center Plaza (5)
Deer Grove Center (5)
Deer Grove Phase II (3) (5)
Frankfort Crossing Shpg Ctr
Geneva Crossing (5)
Heritage Plaza—Chicago (5)
Heritage Plaza Phase II (3) (5)
Hinsdale
Mallard Creek Shopping Center (5)
McHenry Commons Shopping Center (5)
Riverside Sq & River’s Edge (5)
Riverview Plaza (5)
Shorewood Crossing (5)
Stearns Crossing (5)
Stonebrook Plaza Shopping Center (5)
The Oaks Shopping Center (5)
Westbrook Commons
Subtotal/Weighted Average (IL)
NORTH CAROLINA
Charlotte
Carmel Commons
Jetton Village (5)
Union Square Shopping Center
Greensboro
Kernersville Plaza
Raleigh / Durham
Bent Tree Plaza (5)
Cameron Village (5)
Fuquay Crossing (5)
Garner
Glenwood Village
Greystone Village (5)
Lake Pine Plaza
Maynard Crossing
Shoppes of Kildaire (5)
Southpoint Crossing
Woodcroft Shopping Center
Subtotal/Weighted Average (NC)
OHIO
Cincinnati
Beckett Commons
Cherry Grove
Hyde Park
Indian Springs Market Center (3)
Regency Commons (3)
Regency Milford Center (5)
Shoppes at Mason
Westchester Plaza
21
OHIO (continued)
Columbus
East Pointe
Kingsdale Shopping Center
Kroger New Albany Center
Maxtown Road (Northgate)
Park Place Shopping Center
Windmiller Plaza Phase I
Worthington Park Centre
Other Ohio
Wadsworth Crossing (3)
Subtotal/Weighted Average (OH)
PENNSYLVANIA
Allentown / Bethlehem
Allen Street Shopping Center (5)
Stefko Boulevard Shopping Center (5)
Harrisburg
Colonial Sq/ PA (5)
Silver Spring Square (3)
Philadelphia
City Avenue Shopping Center (5)
Gateway Shopping Center
Mayfair Shopping Center (5)
Mercer Square Shopping Center (5)
Newtown Square Shopping Center (5)
Towamencin Village Square (5)
Warwick Square Shopping (5)
Other Pennsylvania
Kenhorst Plaza (5)
Hershey
Subtotal/Weighted Average (PA)
WASHINGTON
Portland
Orchard Market Center
Orchards Phase II (3)
Seattle
Aurora Marketplace (5)
Cascade Plaza (5)
Eastgate Plaza (5)
Inglewood Plaza
James Center (5)
Overlake Fashion Plaza (5)
Pine Lake Village
Sammamish Highland
South Point Plaza
Southcenter
Thomas Lake
Subtotal/Weighted Average (WA)
22
OREGON
Cherry Park Market (5)
Greenway Town Center (5)
Hillsboro Market Center (5)
Murrayhill Marketplace
Sherwood Crossroads
Sherwood Market Center
Sunnyside 205
Walker Center
Subtotal/Weighted Average (OR)
DELAWARE
Dover
White Oak—Dover, DE
Wilmington
First State Plaza (5)
Newark Shopping Center (5)
Pike Creek
Shoppes of Graylyn (5)
Subtotal/Weighted Average (DE)
TENNEESSEE
Nashville
Harding Mall
Harpeth Village Fieldstone
Nashboro
Northlake Village I & II
Peartree Village
Other Tenneessee
Dickson Tn
Subtotal/Weighted Average (TN)
SOUTH CAROLINA
Charleston
Merchants Village (5)
Queensborough (5)
Columbia
Murray Landing
North Pointe (5)
Rosewood Shopping Center (5)
Greenville
Fairview Market (5)
Pelham Commons
Poplar Springs (5)
Subtotal/Weighted Average (SC)
23
ARIZONA
Phoenix
Anthem Marketplace
Palm Valley Marketplace (5)
Pima Crossing
The Shops
Subtotal/Weighted Average (AZ)
WISCONSIN
Cudahy Center Shopping Center (5)
Whitnall Square Shopping Center (5)
Racine Centre Shopping Center (5)
Subtotal/Weighted Average (WI)
KENTUCKY
Silverlake (5)
Franklin Square (5)
Subtotal/Weighted Average (KY)
MINNESOTA
Colonial Square (5)
Rockford Road Plaza (5)
Subtotal/Weighted Average (MN)
MICHIGAN
Independence Square
Waterford Towne Center
Fenton Marketplace
Subtotal/Weighted Average (MI)
ALABAMA
Southgate Village Shopping Ctr (5)
Trace Crossing
Valleydale Village Shop Center (5)
Subtotal/Weighted Average (AL)
24
INDIANA
Greenwood Springs (3)
Willow Lake Shopping Center (5)
Willow Lake West Shopping Center (5)
Subtotal/Weighted Average (IN)
CONNECTICUT
Corbin’s Corner (5)
Subtotal/Weighted Average (CT)
NEW JERSEY
Plaza Square (5)
Haddon Commons (5)
Subtotal/Weighted Average (NJ)
NEW HAMPSHIRE
Amherst Street Village Center (3)
Merrimack Shopping Center (3)
Subtotal/Weighted Average (NH)
NEVADA
Athem Highland Shopping Center (3)
Subtotal/Weighted Average (NV)
DISTRICT OF COLUMBIA
Spring Valley Shopping Center (5)
Subtotal/Weighted Average (DC)
Total Weighted Average
25
Item 3. Legal Proceedings
We are a party to various legal proceedings, which arise, in the ordinary course of our business. We are not currently involved in any litigation nor to our knowledge, is any litigation threatened against us, the outcome of which would, in our judgment based on information currently available to us, have a material adverse effect on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for stockholder vote during the fourth quarter of 2005.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “REG”. We currently have approximately 19,800 stockholders. The following table sets forth the high and low prices and the cash dividends declared on our common stock by quarter for 2005 and 2004.
Quarter Ended
March 31
June 30
September 30
December 31
We intend to pay regular quarterly distributions to our common stockholders. Future distributions will be declared and paid at the discretion of our Board of Directors, and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, and such other factors as our Board of Directors deem relevant. We anticipate that for the foreseeable future, cash available for distribution will be greater than earnings and profits due to non-cash expenses, primarily depreciation and amortization, to be incurred by us. Distributions by us to the extent of our current and accumulated earnings and profits for federal income tax purposes will be taxable to stockholders as either ordinary dividend income or capital gain income if so declared by us. Distributions in excess of earnings and profits generally will be treated as a non-taxable return of capital. Such distributions have the effect of deferring taxation until the sale of a stockholder’s common stock. In order to maintain our qualification as a REIT, we must make annual distributions to stockholders of at least 90% of our taxable income. Under certain circumstances, which we do not expect to occur, we could be required to make distributions in excess of cash available for distributions in order to meet such requirements. We currently maintain the Regency Centers Corporation Dividend Reinvestment and Stock Purchase Plan which enables our stockholders to automatically reinvest distributions, as well as, make voluntary cash payments towards the purchase of additional shares.
Under our loan agreement for our line of credit, distributions may not exceed 95% of Funds from Operations (“FFO”) based on the immediately preceding four quarters. FFO is defined in accordance with the NAREIT definition available on their website at www.nareit.com. Also, in the event of any monetary default, we may not make distributions to stockholders.
26
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)
We sold the following equity securities during the quarter ended December 31, 2005 that we did not report on Form 8-K because they represent in the aggregate less than 1% of our outstanding common stock. All shares were issued to one accredited investor, an unrelated party, in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, in exchange for an equal number of common units of our operating partnership, Regency Centers, L.P.
Date
Number of Shares
The following table provides information about the Company’s purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2005:
Period
October 1 through October 31, 2005
November 1 through November 30, 2005
December 1 through December 31, 2005
27
Item 6. Selected Consolidated Financial Data
(in thousands, except per share data and number of properties)
The following table sets forth Selected Consolidated Financial Data for Regency on a historical basis for the five years ended December 31, 2005. This information should be read in conjunction with the consolidated financial statements of Regency (including the related notes thereto) and Management’s Discussion and Analysis of the Financial Condition and Results of Operations, each included elsewhere in this Form 10-K. This historical Selected Consolidated Financial Data has been derived from the audited consolidated financial statements and restated for discontinued operations.
Operating Data:
Revenues
Operating expenses
Other expenses (income)
Minority interests
Income from continuing operations
Income from discontinued operations
Net income
Preferred stock dividends
Net income for common stockholders
Income per common share - diluted:
Balance Sheet Data:
Real estate investments before accumulated depreciation
Total assets
Total debt
Total liabilities
Stockholders’ equity
Other Information:
Common dividends declared per share
Common stock outstanding including convertible preferred stock and operating partnership units
Combined Basis gross leasable area (GLA)
Combined Basis number of properties owned
Ratio of earnings to fixed charges
28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Operating Philosophy
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. 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 Regency 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 to stabilize a center’s occupancy, reduce re-leasing downtime, reduce tenant turnover and yield higher sustainable rents.
We grow our shopping center portfolio through acquisitions 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 up to 36 months, or longer, from initial land or redevelopment acquisition through construction, lease-up and stabilization of rental income, 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.
29
We have identified certain significant risks and challenges affecting our industry, and we are addressing them accordingly. An economic downturn could result in declines in occupancy levels at our shopping centers, which would reduce our rental revenues; however, we believe that our investment focus on grocery and discount (Target and Wal-Mart) anchored shopping centers that conveniently provide daily necessities will minimize the impact of a downturn in the economy. Increased competition from super-centers such as Wal-Mart and industry consolidation could result in grocery store closings. We closely monitor the operating performance and tenants’ sales in our shopping centers that operate near super-centers as well as those tenants operating retail formats that are experiencing significant changes in competition or business practice such as the video rental format. A slowdown in the demand for new shopping centers could cause a corresponding reduction in our shopping center development program and likely reduce our future operating revenues and gains from development sales. We believe that the presence of our development teams in key markets and their excellent relationships with leading anchor tenants will enable us to sustain our development program.
Shopping Center Portfolio
The following tables summarize general operating statistics related to our shopping center portfolio, which we use to evaluate and monitor our performance. The portfolio information below is presented (a) on a Combined Basis, (b) for Consolidated Properties and (c) for Unconsolidated Properties, the definitions of which are provided above:
Number of Properties (a)
Number of Properties (b)
Number of Properties (c)
Properties in Development (a)
Properties in Development (b)
Properties in Development (c)
Gross Leaseable Area (a)
Gross Leaseable Area (b)
Gross Leaseable Area (c)
Percent Leased (a)
Percent Leased (b)
Percent Leased (c)
30
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 joint ventures.
The following table is a list of the shopping centers summarized by state and in order of largest holdings presented on a Combined Basis:
31
The following table is a list of the shopping centers summarized by state and in order of largest holdings presented for Consolidated Properties:
32
The following table is a list of the shopping centers summarized by state and in order of largest holdings presented for Unconsolidated Properties owned in joint ventures:
33
The following summarizes the four largest grocery tenants occupying our shopping centers at December 31, 2005:
Albertsons (c)
Liquidity and Capital Resources
General
We expect that cash generated from revenues, including gains from the sale of real estate, will provide the necessary funds on a short-term basis to pay our operating expenses, interest expense, scheduled principal payments on outstanding indebtedness, capital expenditures necessary to maintain and improve our shopping centers, and dividends to stockholders. Net cash provided by operating activities was $208.2 million, $183.9 million and $180.6 million for the years ended December 31, 2005, 2004 and 2003, respectively. Operating cash flow increased 13.2% during 2005 primarily as a result of a 19.3% increase in net income as described below under Results of Operations. For the years ended December 31, 2005, 2004 and 2003, our gains from the sale of real estate were $76.7 million, $60.5 million and $65.9 million, the details of which are discussed below under Shopping Center Developments, Acquisitions and Sales. We incurred capital expenditures of $14.4 million, $11.7 million and $13.5 million to improve our shopping centers, we paid scheduled principal payments of $5.5 million, $5.7 million and $4.1 million to our lenders on mortgage loans, and we paid dividends of $170.1 million, $157.2 million and $157.9 million to our stockholders, respectively. The increase in dividends of 8.2% during 2005 was primarily related to a $200 million equity offering as described below under Equity Capital Transactions.
Although base rent is supported by long-term lease contracts, tenants who file bankruptcy are able to cancel their leases and close the 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. On February 21, 2005, Winn-Dixie Stores, Inc. filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. We currently lease three stores to Winn-Dixie, two of which are owned directly by us and one is owned in a joint venture. Our annualized base rent from Winn-Dixie including our share of the joint venture is $1.2 million. Winn-Dixie currently owes Regency $34,750 in pre-petition rent related to common area expense reimbursements, and is current on all rent post-petition. We are not aware at this time of the current or pending bankruptcy of any of our other tenants that would cause a significant reduction in our revenues, and no tenant represents more than 7% of the total of our annual base rental revenues and our pro-rata share of the base revenues of the Unconsolidated Properties.
34
We expect to meet long-term capital requirements for redeemable preferred stock and units, maturing debt, the acquisition of real estate, investments in joint ventures, and the renovation or development of shopping centers from: (i) residual cash generated from operating activities after the payments described above, (ii) proceeds from the sale of real estate, (iii) joint venturing of real estate, (iv) refinancing of debt or our line of credit, and (v) equity raised in the private or public markets. At December 31, 2005, we had $123.6 million available for equity securities under our shelf registration and RCLP had $600.0 million available for debt under its shelf registration.
We intend to continue to grow our portfolio through new developments and acquisitions, either directly or through our joint venture relationships. Because development and acquisition activities are discretionary in nature, they are not expected to burden the capital resources we have currently available for liquidity requirements. Capital necessary to complete developments-in-process will be funded from our line of credit and our capital recycling program as previously described. We expect that cash provided by operating activities, proceeds from the sale of real estate, unused amounts available under our line of credit and cash reserves are adequate to meet short-term and committed long-term liquidity requirements.
Shopping Center Developments, Acquisitions and Sales
On a Consolidated Basis, we had 30 projects under construction or undergoing major renovations at December 31, 2005, which, when completed, will represent an investment of $778.9 million before the estimated reimbursement of certain tenant-related costs and projected sales proceeds from adjacent land and out-parcels of $81.9 million. We estimate that we will earn an average return on our investment on these projects of 9.7% upon completion. This average return on investment is approximately 50 to 75 basis points less than our experience in prior years and is the result of higher costs associated with the acquisition of land and construction. While the average return on investment has decreased from historical experience, the Company believes the return on a risk adjusted basis is very adequate because expected profit margins are well in excess of historic margins. Costs necessary to complete the current in process developments are estimated to be $475.7 million and will likely be expended through 2009. The costs to complete these developments will be funded from the Company’s unsecured line of credit, which had $338.0 million of available funding at December 31, 2005, and also from expected proceeds from the future sale of shopping centers as part of the capital recycling program described above. Our expected total investment in new developments increased 16.7% at December 31, 2005. At December 31, 2004, we had 32 consolidated projects under construction representing an investment at completion of $682.5 million. Our estimated return on investment for the projects under construction at the end of 2004 was 10.2%. We expect to continue increasing our development pipeline in the future subject to the on-going demand for new retail space by our retail customers.
During 2005, the Company sold 100% of its interest in 14 properties for net proceeds of $175.2 million. The operating income and gains from these properties and properties classified as held for sale are included in discontinued operations. The revenues from properties included in discontinued operations were $19.4 million, $30.9 million and $40.4 million for the years ended December 31, 2005, 2004 and 2003, respectively.
35
Off Balance Sheet Arrangements
Investments in Unconsolidated Real Estate Partnerships
At December 31, 2005, we had investments in real estate partnerships of $545.6 million. The following is a summary of unconsolidated combined assets and liabilities of these joint ventures, and our pro-rata share (see note below) at December 31, 2005 and 2004 (in thousands):
Number of Joint Ventures
Regency’s Ownership
Number of Properties
Combined Assets
Combined Liabilities
Combined Equity
Regency’s Share of:
Assets
Liabilities
Note: Pro rata financial information is not and is not intended to be a presentation in accordance with generally accepted accounting principles. However, management believes that providing such information is useful to investors in assessing the impact of its unconsolidated real estate partnership activities on the operations of the Company which include such items on a single line presentation under the equity method in the Company’s Consolidated financial statements.
We account for all investments in which we own 50% or less and do not have a controlling financial interest using the equity method. We have determined that these investments are not variable interest entities, and therefore are subject to the voting interest model in determining our basis of accounting. Major decisions, including property acquisitions and dispositions, financings, annual budgets and dissolution of the ventures are subject to the approval of all partners. Investments in real estate partnerships are primarily composed of joint ventures where we invest with three co-investment partners, as further described below. In addition to earning our pro-rata share of net income in each of these partnerships, these partnerships pay us fees for asset management, property management, and acquisition and disposition services. During the years ended December 31, 2005, 2004 and 2003, we received fees from these joint ventures of $26.8 million, $9.3 million and $5.6 million, respectively. Our investments in real estate partnerships as of December 31, 2005 and 2004 consist of the following (in thousands):
Macquarie CountryWide-Regency (MCWR)
Macquarie CountryWide Direct (MCWR)
Macquarie CountryWide-Regency II (MCWR II)
Macquarie CountryWide-Regency III (MCWR III)
Columbia Regency Retail Partners (Columbia)
Cameron Village LLC (Columbia)
Columbia Regency Partners II (Columbia)
RegCal, LLC (RegCal)
Other investments in real estate partnerships
We co-invest with the Oregon Public Employees Retirement Fund in three joint ventures (collectively “Columbia”), in which we have ownership interests of 20% or 30%. As of December 31, 2005, Columbia owned 16 shopping centers, had total assets of $465.5 million, and net income of $22.3 million for the year ended. Our share of Columbia’s total assets and net income was $105.7 million and
36
$4.2 million, respectively. Our share of Columbia represents 2.9% of our total assets and net income available for common stockholders, respectively. Columbia did not acquire any properties in 2005 and sold two shopping centers for $47.6 million to unrelated parties at a gain of $8.9 million. During 2004, Columbia acquired eight shopping centers from unrelated parties for a purchase price of $250.8 million. We contributed $31.9 million for our proportionate share of the purchase price. Columbia sold three shopping centers during 2004 for $74.0 million to unrelated parties at a gain of $10.0 million.
We co-invest with the California State Teachers’ Retirement System (“CalSTRS”) in a joint venture called (“RegCal”) in which we have a 25% ownership interest. As of December 31, 2005, RegCal owned seven shopping centers, had total assets of $146.8 million, and had net income of $2.0 million for the year ended. Our share of RegCal’s total assets and net income was $36.7 million and $609,316, respectively. Our share of RegCal represents less than 1% of our total assets and net income available for common stockholders, respectively. During 2005, RegCal acquired two shopping centers from an unrelated party for a purchase price of $20.0 million. We contributed $1.7 million for our proportionate share of the purchase price, which was net of loan financing assumed by RegCal. During 2004, RegCal acquired four shopping centers from us valued at $124.5 million, for which it assumed debt from us of $34.8 million and paid cash to us of $73.9 million.
We co-invest with Macquarie CountryWide Trust of Australia (“MCW”) in four joint ventures, two in which we have an ownership interest of 25% (“MCWR”), one in which we have an ownership interest of 35% (“MCWR II”), and one in which we have an ownership interest of 24.95% (“MCWR III) as of December 31, 2005. We reduced our ownership interest in MCWR II to 24.95% in January 2006 as described further below.
As of December 31, 2005, MCWR owned 51 shopping centers, had total assets of $738.8 million, and net income of $7.3 million for the year ended. Our share of MCWR’s total assets and net income was $184.8 million and $2.2 million, respectively. During 2005, MCWR acquired one shopping center from an unrelated party for a purchase price of $24.4 million. We contributed $4.5 million for our proportionate share of the purchase price, which was net of loan financing placed on the shopping center by MCWR. In addition, MCWR acquired two shopping centers from us valued at $31.9 million, for which we received cash of $25.7 million for MCW’s portion. MCWR sold four shopping centers during 2005 for $34.7 million to unrelated parties with a gain of $582,910. During 2004, MCWR acquired 23 shopping centers from unrelated parties for a purchase price of $274.5 million. We contributed $34.8 million for our proportionate share of the purchase price. In addition, MCWR acquired three shopping centers from us valued at $69.7 million, for which we received cash of $63.7 million for MCW’s portion. MCWR sold one shopping center during 2004 to an unrelated party for $12.8 million at a gain of $190,559.
On June 1, 2005, Macquarie CountryWide-Regency II, LLC (MCWR II) closed on the acquisition of 100 retail shopping centers (the “First Washington Portfolio”) totaling approximately 12.6 million square feet located throughout 17 states and the District of Columbia from a joint venture between CalPERS and an affiliate of First Washington Realty, Inc. (the “Sellers”) pursuant to a Purchase and Sale Agreement dated February 14, 2005. The total purchase price was approximately $2.8 billion, including the assumption of approximately $68.6 million of mortgage debt and the issuance of approximately $1.6 billion of new mortgage loans on the properties acquired. The First Washington Portfolio acquisition was accounted for as a purchase business combination by MCWR II. At December 31, 2005, MCWR II is owned 64.95% by an affiliate of MCW, 34.95% by Regency and 0.1% by Macquarie-Regency Management, LLC (“US Manager”). US Manager is owned 50% by Regency and 50% by an affiliate of Macquarie Bank Limited. Including its share of US Manager, Regency’s effective ownership is 35% as of December 31, 2005 and is reflected as such in the accompanying consolidated financial statements. Regency’s required equity investment in MCWR II was approximately $397 million and was paid in cash. The fair value of the consideration paid by MCW and Regency was used as the valuation basis for the First Washington Portfolio. The costs of the assets acquired and liabilities assumed in conjunction with the First Washington Portfolio were revalued based on their respective fair values as of the effective date of the acquisition in accordance with SFAS No. 141, “Business Combinations” (“Statement 141”).
37
Upon closing of the acquisition into the joint venture, MCWR II paid us acquisition, due diligence and capital restructuring fees totaling $21.2 million, of which we recognized $13.8 million as fee income. We only recognized fee income on that portion of the joint venture not owned by us and as a result, recorded $7.4 million of the fee as a reduction to our investment in MCWR II. We have the ability to earn additional acquisition fees of approximately $9.2 million (the “Contingent Acquisition Fees”) subject to achieving certain targeted income levels in 2006 and 2007; and accordingly, the Contingent Acquisition Fee will only be recognized in 2006 and 2007 if earned. We will also earn recurring fees for asset and property management on a quarterly and monthly basis, respectively. To assist in the transition of the portfolio to us, the Seller agreed to provide property management services for up to two years on approximately 50% of the portfolio which will result in lower property management fee income to us during the transition period. During 2005, MCWR II sold one shopping center for $9.7 million to an unrelated party with a gain of $35,127. As of December 31, 2005, MCWR II owned 99 shopping centers, had total assets of $2.8 billion and a net loss of $32.3 million. Our share of MCWR II’s total assets and net loss was $995.0 million and $11.2 million, respectively. As a result of the significant amount of depreciation and amortization expense being recorded by MCWR II in connection with the acquisition of the First Washington Portfolio, we expect that the joint venture will continue to report a net loss in future years, but should produce positive cash flow from operations.
As of December 31, 2005, MCWR III owned one shopping center, had total assets of $12.2 million, and a net loss of $46,921 for the year ended. Our share of MCWR III’s total assets and the net loss was $3.1 million and $11,707, respectively. The shopping center owned by MCWR III was acquired from us in December 2005 and we received cash of $4.1 million and a short-term notes receivable of $6.2 million.
Our investment in the four joint ventures with MCW totals $433.0 million and represents 12% of our total assets at December 31, 2005. Our pro-rata share of the assets and net loss of these ventures was $1.2 billion and $9.1 million, respectively, which represents 33.2% and 6.2% of our total assets and net income available for common stockholders, respectively. On January 13, 2006, we sold a portion of our investment in MCWR II to MCW for $113.2 million in cash and reduced our ownership interest in MCWR II from 35% to 24.95%. The proceeds from the sale were used to reduce the unsecured line of credit (the “Line”).
Recognition of gains from sales to joint ventures is recorded on only that portion of the sales not attributable to our ownership interest. The gains and operations are not recorded as discontinued operations because of our continuing involvement in these shopping centers. Columbia, RegCal, and the joint ventures with MCW intend to continue to acquire retail shopping centers, some of which they may acquire directly from us. For those properties acquired from unrelated parties, we are required to contribute our pro-rata share of the purchase price to the partnerships.
On June 1, 2005, Regency entered into a credit agreement that provided for a $275 million unsecured term loan maturing on March 1, 2006 (the “Bridge Loan”) which was fully repaid on August 1, 2005 using proceeds from the sale of common stock and the issuance of fixed rate debt described below. The Bridge Loan was used to provide partial financing necessary for Regency’s 35% equity investment of $397 million in MCWR II which closed on June 1, 2005. Our remaining equity investment was funded from the line of credit. The interest rate was a floating rate of LIBOR plus 65 basis points, which was subject to adjustment based on the credit ratings assigned by Regency’s rating agencies with interest only paid monthly.
On April 5, 2005, we entered into a forward stock purchase contract with an affiliate of Citigroup Global Markets Inc. (“Citigroup”) pursuant to which we agreed to issue 4.3 million of Regency’s common shares and Citigroup agreed to purchase the shares for $46.60 per share (the “Forward Sale Agreement”). On August 1, 2005, we completed the sale of 3.8 million shares to Citigroup and received proceeds of $175.5 million. The proceeds were used to redeem the Series E Preferred Units, reduce our line of credit and repay the balance of the Bridge Loan. On September 7, 2005, the remaining 530,000 shares under the Forward Sale Agreement were settled for $24.4 million and the net proceeds were used to redeem the Series F Preferred Units.
38
Shopping center acquisitions, sales and the net acquisitions or sales activities within our investments in real estate partnerships are included in investing activities in the accompanying consolidated statements of cash flows. Net cash used in investing activities was $484.8 million, $38.3 million and $49.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. The significant increase in net cash used in investing activities of $446.5 million was primarily related to our investment in MCWR II, and an increase in the number of projects under development as described previously.
Contractual Obligations
We have debt obligations related to our mortgage loans, unsecured notes, and our unsecured line of credit as described further below. We have shopping centers that are subject to non-cancelable long-term ground leases where a third party owns and has leased the underlying land to us to construct and/or operate a shopping center. In addition, we have non-cancelable operating leases pertaining to office space from which we conduct our business. The table excludes obligations for approximately $2.7 million related to environmental remediation as discussed below under Environmental Matters as the timing of the remediation is not currently known, and also excludes obligations related to construction contracts where payment is only due upon performance by the contractor. The following table summarizes our debt maturities including interest, (excluding recorded debt premiums that are not obligations), and obligations under non-cancelable operating leases as of December 31, 2005 including our pro-rata share of obligations within unconsolidated joint ventures (in thousands).
Notes Payable:
Regency (1)
Regency's share of JV
Operating Leases:
Regency
Ground Leases:
Outstanding debt at December 31, 2005 and 2004 consists of the following (in thousands):
Fixed rate mortgage loans
Variable rate mortgage loans
Fixed rate unsecured loans
Total notes payable
Unsecured line of credit
39
Mortgage loans are secured and may be prepaid, but could be subject to yield maintenance premiums. Mortgage loans are generally due in monthly installments of interest and principal, and mature over various terms through 2017. Variable interest rates on mortgage loans are currently based on LIBOR, plus a spread in a range of 90 to 150 basis points. Fixed interest rates on mortgage loans range from 5.22% to 8.95% and average 6.61%.
We have an unsecured revolving line of credit (the “Line”) with a commitment of $500 million, and the right to expand the Line by an additional $150 million subject to additional lender syndication. The balance of the Line on December 31, 2005 was $162.0 million. Contractual interest rates on the Line, which are based on LIBOR plus .75%, were 5.125% and 3.1875% at December 31, 2005 and 2004, respectively. The spread that we pay on the Line is dependent upon maintaining specific investment-grade ratings. We are also required to comply, and are in compliance, with certain financial covenants such as Minimum Net Worth, Total Liabilities to Gross Asset Value (“GAV”), Secured Indebtedness to GAV and other covenants customary with this type of unsecured financing. The Line is used primarily to finance the development and acquisition of real estate, but is also available for general working-capital purposes.
On February 15, 2005, we executed a commitment letter related to the Line which temporarily modified certain Line covenants related to our borrowing capacity and leverage in conjunction with the $275 million Bridge Loan as part of the First Washington Portfolio acquisition. The Bridge Loan was fully repaid on August 1, 2005.
The combined borrowings under the Line of $122 million and the $275 million Bridge Loan provided the funding of our $397 million equity investment in MCWR II. On July 18, 2005, we issued $350 million of unsecured notes, the proceeds of which were used to reduce the Bridge Loan by $180 million to $95 million and reduce the Line by approximately $170 million. The notes bear interest at 5.25% and mature August 1, 2015. On August 1, 2005, we received proceeds of approximately $175.5 million from the sale of common shares, as further described below, which were used to repay the Bridge Loan in full, further reduce the balance of the Line and redeem the Series E Preferred Units.
As of December 31, 2005, scheduled principal repayments on notes payable and the Line were as follows (in thousands):
Scheduled Payments by Year
2007 (includes the Line)
Beyond 5 Years
Unamortized debt premiums
Our investments in real estate partnerships had notes and mortgage loans payable of $2.4 billion at December 31, 2005, which mature through 2028. Our proportionate share of these loans was $764.2 million, of which 82.6% had average fixed interest rates of 5.08% and the remaining had variable interest rates based on LIBOR plus a spread in a range of 75 to 100 basis points. The loans are primarily non-recourse, but for those that are guaranteed by a joint venture, our liability does not extend beyond our ownership percentage of the joint venture.
40
We are exposed to capital market risk such as changes in interest rates. In order to manage the volatility related to interest-rate risk, we originate new debt with fixed interest rates, or we consider entering into interest-rate hedging arrangements. We do not utilize derivative financial instruments for trading or speculative purposes. We account for derivative instruments under Statement of Financial Accounting Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended (“Statement 133”). On April 1, 2005, we entered into three forward-starting interest rate swaps of approximately $65.6 million each, with fixed rates of 5.029%, 5.05% and 5.05%. We designated the $196.7 million swaps as cash flow hedges to fix the rate on unsecured notes issued during July 2005, the proceeds of which were used to reduce the Line. As described above, we issued $350 million of unsecured notes priced to yield 5.25%. On July 13, 2005, we settled the swaps with a payment to the counter-parties for $7.3 million, which is recorded in other comprehensive loss in our consolidated balance sheets and statements of stockholder’s equity and comprehensive income (loss). The swap settlement is being amortized to interest expense as interest is incurred on the $350 million of ten-year unsecured notes sold July 18, 2005. The effective interest rate on the notes including the amortization of the swap settlement amount is 5.48%.
At December 31, 2005, 85.1% of our total debt had fixed interest rates, compared with 82.0% at December 31, 2004. We intend to limit the percentage of variable interest-rate debt to be no more than 30% of total debt, which we believe to be an acceptable risk. At December 31, 2005, our variable rate debt represented 14.9% of our total debt. Based upon the variable interest-rate debt outstanding at December 31, 2005, if variable interest rates were to increase by 1%, our annual interest expense would increase by $2.4 million.
Equity Capital Transactions
From time to time, we issue equity in the form of exchangeable operating partnership units or preferred units of RCLP, or in the form of common or preferred stock of Regency Centers Corporation. As previously discussed, these sources of long-term equity financing allow us to fund our growth while maintaining a conservative capital structure. The following describes our equity capital transactions during 2005.
Preferred Units
We have issued Preferred Units in various amounts since 1998, the net proceeds of which we used to reduce the balance of the Line. We issue Preferred Units primarily to institutional investors in private placements. Generally, the Preferred Units may be exchanged by the holders for Cumulative Redeemable Preferred Stock at an exchange rate of one share for one unit. The Preferred Units and the related Preferred Stock are not convertible into Regency common stock. At December 31, 2005 and 2004, the face value of total Preferred Units issued was $50 million and $104 million, respectively with a weighted average fixed distribution rate of 7.45% and 8.13%, respectively. As of December 31, 2005, only Series D Preferred Units remained outstanding. These Units may be called by us in 2009, have no stated maturity or mandatory redemption, and pay a cumulative, quarterly dividend of 7.45%. Included in the Series D Preferred Units are original issuance costs of $842,023 that will be expensed when they are redeemed in the future.
On August 1, 2005, we redeemed the $30 million Series E Preferred Units and expensed their related issuance costs of $762,180. The redemption was funded from the proceeds of the common stock sale completed August 1, 2005 as discussed below under Common Stock. On September 7, 2005, we redeemed the $24 million Series F Preferred Units and expensed their related issuance costs of $634,201. This redemption was funded from the additional sale of common shares as further discussed below under Common Stock.
41
Preferred Stock
At December 31, 2005 we had three series of Preferred stock outstanding , two of which underlie depositary shares held by the public. The depositary shares each represent 1/10th of a share of the underlying preferred stock and have a liquidation preference of $25 per depository share. In 2003, we issued 7.45% Series 3 Cumulative Redeemable Preferred Stock underlying 3 million depositary shares. In 2004, we issued 7.25% Series 4 Cumulative Redeemable preferred stock underlying 5 million depositary shares. On August 2, 2005, we issued 3 million shares, or $75 million of 6.70% Series 5 Preferred Stock, with a liquidation preference of $25 per share, the proceeds of which were used to reduce the balance of the Line. All series of Preferred Stock are perpetual, are not convertible into common stock of the Company and are redeemable at par upon our election five years after the issuance date. The terms of the Preferred Stock do not contain any unconditional obligations that would require us to redeem the securities at any time or for any purpose.
Common Stock
On April 5, 2005, we entered into the Forward Sale Agreement to sell 4,312,500 shares of our common stock at $46.60 per share to Citigroup in connection with the acquisition of the First Washington Portfolio described above. On August 1, 2005, we completed the sale of 3,782,500 shares and received proceeds of approximately $175.5 million. On September 7, 2005, we completed the sale of the remaining 530,000 shares and received proceeds of approximately $24.4 million. The proceeds were used to redeem the Series E and F Preferred Units, repay the Bridge Loan, and reduce the Line.
In summary, net cash provided by financing activities was $223.8 million for the year ended December 31, 2005 and net cash used in financing activities was $80.1 million and $158.2 million for the years ended December 31, 2004 and 2003, respectively. The significant increase in net cash provided by financing activities was primarily related to a net increase in outstanding debt of $120.9 million and the $200 million Forward Sale Agreement described above.
Critical Accounting Policies and Estimates
Knowledge about our accounting policies is necessary for a complete understanding of our financial results, and discussion and analysis of these results. The preparation of our financial statements requires that we make certain estimates that impact the balance of assets and liabilities at a financial statement date and the reported amount of income and expenses during a financial reporting period. These accounting estimates are based upon, but not limited to, our judgments about historical results, current economic activity, and industry accounting standards. They are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from those judgments, or that the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to ensure reasonableness. However, the amounts we may ultimately realize could differ from such estimates.
Revenue Recognition and Tenant Receivables – Tenant Receivables represent revenues recognized in our financial statements, and include base rent, percentage rent, and expense recoveries from tenants for common area maintenance costs, insurance and real estate taxes. We analyze tenant receivables, historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of our allowance for doubtful accounts. In addition, we analyze the accounts of tenants in bankruptcy, and we estimate the recovery of pre-petition and post-petition claims. Our reported net income is directly affected by our estimate of the recoverability of tenant receivables.
Recognition of Gains from the Sales of Real Estate - We account for profit recognition on sales of real estate in accordance with SFAS Statement No. 66, “Accounting for Sales of Real Estate.” Profits from sales of real estate will not be recognized by us unless (i) a sale has been consummated; (ii) the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property; (iii) we have transferred to the buyer the usual risks and rewards of ownership; and (iv) we do not have substantial continuing involvement with the property. Recognition of gains from sales to joint ventures is recorded on only that portion of the sales not attributable to our ownership interest.
42
Capitalization of Costs - We have an investment services group with an established infrastructure that supports the due diligence, land acquisition, construction, leasing and accounting of our development properties. All direct costs related to these activities are capitalized. Included in these costs are interest and real estate taxes incurred during construction, as well as estimates for the portion of internal costs that are incremental and deemed directly or indirectly related to our development activity. If future accounting standards limit the amount of internal costs that may be capitalized, or if our development activity were to decline significantly without a proportionate decrease in internal costs, we could incur a significant increase in our operating expenses.
Real Estate Acquisitions - Upon acquisition of operating real estate properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements), and identified intangible assets and liabilities (consisting of above- and below-market leases, in-place leases and tenant relationships) and assumed debt in accordance with Statement 141. Based on these estimates, we allocate the purchase price to the applicable assets and liabilities. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. We evaluate the useful lives of amortizable intangible assets each reporting period and account for any changes in estimated useful lives over the revised remaining useful life.
Valuation of Real Estate Investments - Our long-lived assets, primarily real estate held for investment, are carried at cost unless circumstances indicate that the carrying value of the assets may not be recoverable. We review long-lived assets for impairment whenever events or changes in circumstances indicate such an evaluation is warranted. The review involves a number of assumptions and estimates used to determine whether impairment exists. Depending on the asset, we use varying methods such as i) estimating future cash flows, ii) determining resale values by market, or iii) applying a capitalization rate to net operating income using prevailing rates in a given market. These methods of determining fair value can fluctuate significantly as a result of a number of factors, including changes in the general economy of those markets in which we operate, tenant credit quality and demand for new retail stores. If we determine that the carrying amount of a property is not recoverable and exceeds its fair value, we will write down the asset to fair value for “held-and-used” assets and to fair value less costs to sell for “held-for-sale” assets.
Discontinued Operations - The application of current accounting principles that govern the classification of any of our properties as held-for-sale on the balance sheet, or the presentation of results of operations and gains on the sale of these properties as discontinued, requires management to make certain significant judgments. In evaluating whether a property meets the criteria set forth by SFAS No. 144 “Accounting for the Impairment and Disposal of Long-Lived Assets” (“Statement 144”), the Company makes a determination as to the point in time that it can be reasonably certain that a sale will be consummated. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period, or may not close at all. Due to these uncertainties, it is not likely that the Company can meet the criteria of Statement 144 prior to the sale formally closing. Therefore, any properties categorized as held for sale represent only those properties that management has determined are likely to close within the requirements set forth in Statement 144. The Company also makes judgments regarding the extent of involvement it will have with a property subsequent to its sale, in order to determine if the results of operations and gain on sale should be reflected as discontinued. Consistent with Statement 144, any property sold to an entity in which the Company has significant continuing involvement (most often joint ventures) is not considered to be discontinued. In addition, any property which the Company sells to an unrelated third party, but retains a property or asset management function, is also not considered discontinued. Therefore, only properties sold, or to be sold, to unrelated third parties that the Company, in its judgment, has no continuing involvement with are classified as discontinued.
Investments in Real Estate Joint Ventures – In addition to owning real estate directly, we invest in real estate through our co-investment joint ventures. Joint venturing provides us with a capital source to
43
acquire real estate, and to earn our pro-rata share of the net income from the joint ventures in addition to fees for services. As asset and property manager, we conduct the business of the shopping centers held in the joint ventures in the same way that we conduct the business of our wholly-owned shopping centers; therefore, the Critical Accounting Policies as described are also applicable to our investments in the joint ventures and the fees that we earn. We account for all investments in which we own 50% or less and do not have a controlling financial interest using the equity method. We have determined that these investments are not variable interest entities, and therefore, are subject to the voting interest model in determining our basis of accounting. Major decisions, including property acquisitions and dispositions, financings, annual budgets and dissolution of the ventures are subject to the approval of all partners.
Income Tax Status - The prevailing assumption underlying the operation of our business is that we will continue to operate in order to qualify as a REIT, as defined under the Internal Revenue Code. We are required to meet certain income and asset tests on a periodic basis to ensure that we continue to qualify as a REIT. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to stockholders. We evaluate the transactions that we enter into and determine their impact on our REIT status. Determining our taxable income, calculating distributions, and evaluating transactions requires us to make certain judgments and estimates as to the positions we take in our interpretation of the Internal Revenue Code. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, our positions are subject to change at a later date upon final determination by the taxing authorities.
Recent Accounting Pronouncements
In October 2005, the Financial Accounting Standards Board (“FASB”) Issued Staff Position No. FAS 13-1 “Accounting for Rental Costs Incurred during a Construction Period”. This FSP requires that rental costs associated with ground or building operating leases incurred during a construction period be recognized as rental expense. However, FSP No. FAS 13-1 does not address lessees that account for the sale or rental of real estate projects under FASB Statement No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects”.
In June 2005, the FASB ratified the EITF’s consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” This consensus establishes the presumption that general partners in a limited partnership control that limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. Whether the presumption of control is overcome is a matter of judgment based on the facts and circumstances, for which the consensus provides additional guidance. This consensus is currently applicable to us for new partnerships created in 2005, and will be applicable to all partnerships beginning January 1, 2006. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. We have applied EITF Issue No. 04-5 to our joint ventures and concluded that it does not require the consolidation of additional entities.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“Statement 154”). Statement 154 requires restatement of prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We are not currently aware of any future potential accounting changes which would require the retrospective application described in Statement 154.
44
In March 2005 the FASB issued FIN 47, Accounting for Asset Retirement Obligations (as amended). FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. We are not currently aware of any asset retirement obligations beyond those currently recorded in the consolidated balance sheets which would have a material effect on our financial condition.
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“Statement 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“Statement 123”). Statement 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”) and generally, the approach is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values and pro-forma disclosure is no longer an alternative. Statement 123(R) is effective for fiscal years beginning after December 31, 2005, however we elected early adoption effective January 1, 2005. As permitted by Statement 123(R), we have applied the “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
Prior to 2005, we followed the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“Statement 148”), which provided alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amended the disclosure requirements of Statement 123, to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. As permitted under Statement 123 and Statement 148, we previously followed the accounting guidelines pursuant to Opinion 25, for stock-based compensation and furnished the pro-forma disclosures as required under Statement 148. During 2004 and 2003, we accounted for share-based payments to employees using Opinion 25’s intrinsic value method and recognized no compensation cost for employee stock options.
In December 2004, the FASB issued Statement No. 153, Exchange of Non-monetary Assets - an amendment of APB Opinion No 29 (“Statement 153”). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. Statement 153 amends Opinion No. 29 to eliminate the exception for non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Statement 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The impact of adopting Statement 153 has not had a material adverse impact on the Company’s financial position or results of operations.
Results from Operations
Comparison of the years ended December 31, 2005 to 2004
At December 31, 2005, on a Combined Basis, we were operating or developing 393 shopping centers, as compared to 291 shopping centers at the end of 2004. We identify our shopping centers as either development properties or stabilized properties. Development properties are defined as properties that are in the construction or initial lease-up process and have not reached their initial full occupancy (reaching full occupancy generally means achieving at least 93% leased and rent paying on newly constructed or renovated GLA). At December 31, 2005, on a Combined Basis, we were developing 31 properties, as compared to 34 properties at the end of 2004.
45
Our revenues increased by $23.1 million, or 6%, to $394.0 million in 2005. As a result of MCWR II acquiring the First Washington Portfolio on June 1, 2005, we recorded $13.8 million in fees related to acquisition, due diligence and capital restructuring services that we provided to MCWR II. MCWR II paid us approximately $21.2 million for these services, however, as previously discussed, the amount recognized as fee income includes only that portion of fees paid by the venture not owned by us.
The increase in revenues was also related to changes in occupancy in the portfolio of stabilized and development properties, growth in re-leasing rental rates and revenues from new developments commencing operations in the current year. In addition to collecting minimum rent from our tenants for the GLA that they lease from us, we also collect percentage rent based upon tenant sales. Tenants are also responsible for reimbursing us for their pro-rata share of the expenses associated with operating our shopping centers. In 2005, our minimum rent increased by $14.1 million, or 5%, and our recoveries from tenants increased $4.3 million, or 6%. Percentage rent was $4.4 million in 2005, compared with $3.8 million in 2004.
The equity in income of real estate partnerships declined $13.1 million to a loss of $2.9 million in 2005. The loss was a result of the significant amount of depreciation and amortization expense being recorded by MCWR II since the acquisition of the First Washington Portfolio on June 1, 2005. Excluding the depreciation and amortization, MCWR II produced positive cash flow from operations during the period.
Our operating expenses increased by $10.3 million, or 5%, to $213.5 million in 2005 related to increased operating and maintenance costs, general and administrative costs and depreciation expense, as further described below.
Our combined operating, maintenance, and real estate taxes increased by $3.7 million, or 4%, for the year ended December 31, 2005 to $92.3 million. This increase was primarily due to shopping center developments that recently began operating; and therefore, did not incur operating expenses for a full comparable 12 months in the previous year. During the 2005 hurricane season, we did not incur any significant damages to our shopping centers.
Our general and administrative expenses increased $7.5 million to $37.8 million during 2005. The increase is related to additional salary costs for new employees necessary to manage the First Washington Portfolio under a property management agreement with MCWR II and higher stock based compensation expenses associated with the early adoption of Statement 123(R), which requires the expensing of stock options. During 2005, we recorded compensation expense associated with stock options of $1.4 million.
Our depreciation and amortization expense increased $4.3 million to $80.7 million in 2005 primarily related to new development properties placed in service in the current year that had no operations during the comparable prior year period.
Our net interest expense increased $7.7 million to $87.4 million in 2005 from $79.7 million in 2004 primarily related to the financing of our investment in MCWR II. On June 1, 2005 we borrowed $275 million on the Bridge Loan and $122 million on the Line to fund our investment. During July and August, we repaid the Bridge Loan and reduced the Line using a portion of the proceeds from the $200 million Forward Sale Agreement, a $75 million preferred stock offering and the issuance of $350 million of 5.48% fixed rate debt. Average interest rates on our outstanding debt increased to 6.34% at December 31, 2005 compared to 6.24% at December 31, 2004. Our weighted average outstanding debt at December 31, 2005 was $1.6 billion compared to $1.5 billion at December 31, 2004.
Gains from the sale of operating properties and properties in development during 2005 includes $8.7 million in gains from the sale of 26 out-parcels for proceeds of $29.0 million and $10.3 million in
46
gains related to the sale of three development properties and one operating property. In 2004, the gains from the sale of operating and development properties included $18.9 million from the sale of 41 out-parcels for proceeds of $60.4 million and $20.5 million in gains from shopping centers sold. These gains are included in continuing operations rather than discontinued operations because they were either properties that had no operating income, or they were properties sold to joint ventures where we have continuing involvement through our equity investment.
We review our real estate portfolio for impairment whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of an asset. We determine whether impairment has occurred by comparing the property’s carrying value to an estimate of fair value based upon methods described in our Critical Accounting Policies. In the event a property is impaired, we write down the asset to fair value for “held-and-used” assets and to fair value less costs to sell for “held-for- sale” assets. During 2005 and 2004 we established provisions for loss of $550,000 and $810,000 respectively, to adjust operating properties to their estimated fair values.
Income from discontinued operations was $61.6 million in 2005 related to 14 properties sold to unrelated parties for net proceeds of $175.2 million and four properties classified as held-for-sale. Income from discontinued operations was $31.9 million in 2004 related to the operations of shopping centers sold or classified as held-for-sale in 2005 as well as 2004. In compliance with Statement 144, if we sell an asset in the current year, we are required to reclassify its operating income into discontinued operations for all prior periods. This practice results in a reclassification of amounts previously reported as continuing operations into discontinued operations. Our income from discontinued operations is shown net of minority interest of exchangeable partnership units totaling $1.2 million and $603,727, and income taxes totaling $3.6 million and $2.3 million for the years ended December 31, 2005 and 2004, respectively.
Minority interest of preferred units declined $11.7 million to $8.1 million in 2005 as a result of redeeming $54 million of preferred units in 2005 and redeeming $125 million of preferred units in 2004. Preferred stock dividends increased $8.1 million to $16.7 million in 2005 as a result of the issuance of $75 million of preferred stock in 2005 and $125 million preferred stock in 2004.
Net income for common stockholders increased $18.2 million to $145.9 million in 2005 as compared with $127.7 million in 2004. Diluted earnings per share were $2.23 in 2005, compared with $2.08 in 2004, or 7% higher, a result of the increase in net income and an increase in weighted average common shares associated with the Forward Sale Agreement discussed above.
Comparison of the years ended December 31, 2004 to 2003
At December 31, 2004, on a Combined Basis, we were operating or developing 291 shopping centers, as compared to 265 shopping centers at the end of 2003, and we were developing 34 properties at the end of 2004, as compared to 36 properties at the end of 2003.
Our revenues increased by $25.0 million, or 7%, to $370.9 million in 2004. This increase was related to changes in occupancy in the portfolio of stabilized and development properties, growth in re-leasing rental rates, shopping centers acquired during 2004, and revenues from new developments commencing operations in 2004. In 2004, our minimum rent increased by $18.2 million, or 7%, and our recoveries from tenants increased $4.2 million, or 6%. Percentage rent was $3.8 million in 2004, compared with $4.3 million in 2003. The reduction was primarily related to renewing anchor tenant leases with minimum rent increases, which had a corresponding reduction to percentage rent.
Our operating expenses increased by $21.9 million, or 12%, to $203.2 million in 2004 related to increased operating and maintenance costs, general and administrative costs and depreciation expense, as further described below.
Our combined operating, maintenance, and real estate taxes increased by $5.0 million, or 6%, during 2004 to $88.6 million. This increase was primarily due to shopping centers acquired in 2004, new
47
developments that only recently began operating and therefore incurred operating expenses for only a portion of the previous year, normal increases in operating expenses on the stabilized properties and the cost to repair our shopping centers impacted by hurricanes during 2004. During 2004, three hurricanes affected 42 of our shopping centers in Florida and our repair costs related to the hurricanes were approximately $1 million.
Our general and administrative expenses were $30.3 million during 2004, compared with $24.2 million in 2003, or 25% higher, related to an increase in the total number of employees necessary to properly manage our real estate portfolio and costs related to implementing new regulations for public companies imposed by the Sarbanes-Oxley Act.
Our depreciation and amortization expense increased $7.8 million during 2004 primarily related to shopping centers acquired during the year and new development properties placed in service during 2004.
Our net interest expense decreased to $79.7 million in 2004 from $82.3 million in 2003. Average interest rates on our outstanding debt declined to 6.24% at December 31, 2004, compared with 6.49% at December 31, 2003. The reduction was primarily related to reducing the interest rate spread on the Line and issuing $150 million of 4.95% Notes in April 2004, the proceeds of which were used to repay maturing Notes that had fixed rates of 7.4%. Our weighted average outstanding debt during 2004 was $1.5 billion, compared with $1.4 billion in 2003.
Gains from the sale of operating and development properties includes $18.9 million in gains from the sale of 41 out-parcels for proceeds of $60.4 million and $20.5 million for properties sold to joint ventures. During 2003, the gains from the sale of operating and development properties included $11.6 million from the sale of 45 out-parcels for proceeds of $53.0 million and $37.1 million for properties sold. These gains are included in continuing operations rather than discontinued operations because they were either properties that had no operating income, or they were properties sold to joint ventures where we have continuing involvement through our minority investment.
During 2004 and 2003 we established provisions for loss of $810,000 and $2.0 million respectively, to adjust operating properties to their estimated fair values. Provisions for loss on properties subsequently sold are reclassified to discontinued operations; therefore the $2.0 million recorded in 2003 has been reclassified.
Income from discontinued operations was $31.9 million in 2004 as compared to $32.4 million in 2003. Discontinued operations pertain to properties either held-for-sale or properties sold to third parties that had operations during the period. Our income from discontinued operations is shown net of minority interest of exchangeable partnership units totaling $603,727 and $727,117, and income taxes totaling $2.3 million and $560,402 for the years ended December 31, 2004 and 2003, respectively.
Minority interest of preferred units declined $10 million to $19.8 million in 2004 as a result of redeeming $125 million of preferred units during 2004. Preferred stock dividends increased $4.5 million to $8.6 million in 2004 as a result of the issuance of $125 million of preferred stock, the proceeds of which were used to redeem the preferred units.
Net income for common stockholders was $127.7 million in 2004, compared with $126.6 million in 2003 or a 1% increase for the reasons described above. Diluted earnings per share were $2.08 in 2004, compared with $2.12 in 2003, or 2% lower. Although net income for common stockholders increased $1.1 million during 2004, the increase was diluted as a result of an increase in weighted average common shares associated with the $67 million common stock offering completed in August 2004.
Environmental Matters
We are subject to numerous environmental laws and regulations as they apply to our shopping centers pertaining to chemicals used by the dry cleaning industry, the existence of asbestos in older
48
shopping centers, and underground petroleum storage tanks (UST’s). We believe that the tenants who currently operate dry cleaning plants or gas stations do so in accordance with current laws and regulations. Generally, we use all legal means to cause tenants to remove dry cleaning plants from our shopping centers or convert them to non-chlorinated solvent systems. Where available, we have applied and been accepted into state-sponsored environmental programs. We have a blanket environmental insurance policy that covers us against third-party liabilities and remediation costs on shopping centers that currently have no known environmental contamination. We have also placed environmental insurance, where possible, on specific properties with known contamination, in order to mitigate our environmental risk. We monitor the shopping centers containing environmental issues and in certain cases voluntarily remediate the sites. We also have legal obligations to remediate certain sites and we are in the process of doing so. We estimate the cost associated with these legal obligations to be approximately $2.7 million. We believe that the ultimate disposition of currently known environmental matters will not have a material affect on Regency’s financial position, liquidity, or operations; however, we can give no assurance that existing environmental studies with respect to our shopping centers have revealed all potential environmental liabilities; that any previous owner, occupant or tenant did not create any material environmental condition not known to us; that the current environmental condition of the shopping centers will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties; or that changes in applicable environmental laws and regulations or their interpretation will not result in additional environmental liability to us.
Inflation
Inflation has remained relatively low and has had a minimal impact on the operating performance of our shopping centers; however, substantially all of our long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling us to receive percentage rent 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 our leases are for terms of less than ten years, which permits us to seek increased rents upon re-rental at market rates. Most of our leases require tenants to pay their share of operating expenses, including common-area maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation.
49
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
We are exposed to interest-rate changes primarily related to the variable interest rate on the Line and the refinancing of long-term debt, which currently contain fixed interest rates. The objective of our interest-rate risk management is to limit the impact of interest-rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we borrow primarily at fixed interest rates and may enter into derivative financial instruments such as interest-rate swaps, caps or treasury locks in order to mitigate our interest-rate risk on a related financial instrument. We have no plans to enter into derivative or interest-rate transactions for speculative purposes.
Our interest-rate risk is monitored using a variety of techniques. The table below presents the principal cash flows (in thousands), weighted average interest rates of remaining debt, and the fair value of total debt (in thousands) as of December 31, 2005, by year of expected maturity to evaluate the expected cash flows and sensitivity to interest-rate changes.
Fixed rate debt
Average interest rate for all fixed rate debt
Variable rate LIBOR debt
Average interest rate for all variable rate debt
As the table incorporates only those exposures that exist as of December 31, 2005, it does not consider those exposures or positions that could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented above has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest-rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at that time, and actual interest rates.
Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements and supplementary data included in this Report are listed in Part IV, Item 15(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
50
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer, chief operating officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our chief executive officer, chief operating officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report. There have been no changes in the Company’s internal controls over financial reporting identified in connection with this evaluation that occurred during the fourth quarter of 2005 and that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our chief executive officer, chief operating officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control —Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.
KPMG LLP, an independent registered public accounting firm, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting as stated in their report which is included herein.
Regency’s system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no mater how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B. Other Information
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning the directors of Regency is incorporated herein by reference to Regency’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2006 Annual Meeting of Stockholders.
Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G(3).
Audit Committee, Independence, Financial Experts. Incorporated herein by reference to Regency’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2006 Annual Meeting of Stockholders.
Compliance with Section 16(a) of the Exchange Act. Information concerning filings under Section 16(a) of the Exchange Act by the directors or executive officers of Regency is incorporated herein by reference to Regency’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2006 Annual Meeting of Stockholders.
Code of Ethics. We have adopted a code of ethics applicable to our Board of Directors, principal executive officers, principal financial officer, principal accounting officer and persons performing similar functions. The text of this code of ethics may be found on our web site at “www.regencycenters.com.” We intend to post notice of any waiver from, or amendment to, any provision of our code of ethics on our web site.
51
Item 11. Executive Compensation
Incorporated herein by reference to Regency’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2006 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Our Stock Grant Plan for non-key employees, while terminated in January 2006, was the only equity compensation plan in effect at year end 2005 that our stockholders had not approved. This Plan provides for the award of a stock bonus of a specified value to each non-key employee on the 1st anniversary date and every 5th anniversary date of their employment. For example, each non-manager employee received $500 in shares at the specified anniversary dates based on the average fair market value of Regency’s common stock for the most recent quarter prior to the anniversary date. A total of 30,000 shares of common stock were reserved for issuance under this Plan, of which 7,388 shares were available at December 31, 2005 for future issuance. In January 2006, we amended our Long-Term Omnibus Plan to allow similar anniversary stock bonuses to employees who are not otherwise eligible to receive awards under that Plan.
Information about security ownership is incorporated herein by reference to Regency’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2006 Annual Meeting of Stockholders.
52
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
53
PART IV
Regency’s 2005 financial statements and financial statement schedule, together with the report of KPMG LLP are listed on the index immediately preceding the financial statements at the end of this report.
~
(a) Regency Centers Corporation Amended and Restated Long Term Omnibus Plan (incorporated by reference to Appendix 1 to Regency’s 2003 annual meeting proxy statement filed April 3, 2003).
54
~*
(n) Amended and Restated Severance and Change of Control Agreement dated as of March, 2002 by and between the Company and Martin E. Stein, Jr. (incorporated by reference to Exhibit 10(r) of the Company’s Form 10-K/A filed April 15, 2002).
55
(o) Amended and Restated Severance and Change of Control Agreement dated as of March, 2002 by and between the Company and Mary Lou Fiala (incorporated by reference to Exhibit 10(s) of the Company’s Form 10-K/A filed April 15, 2002).
(p) Amended and Restated Severance and Change of Control Agreement dated as of March, 2002 by and between the Company and Bruce M. Johnson (incorporated by reference to Exhibit 10(t) of the Company’s Form 10-K/A filed April 15, 2002).
(q) Regency Centers Corporation 2005 Deferred Compensation Plan (incorporated by reference to Exhibit 10(s) to the Company’s Form 8-K filed December 21, 2004).
(i) First Amendment to Regency Centers Corporation 2005 Deferred Compensation Plan dated December, 2005.
(r) Regency Centers Corporation 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed August 8, 2005).
(s) Credit Agreement dated as of June 1, 2005 by and among Regency Centers, L.P., Regency Centers Corporation, each of the Lenders signatory thereto, and Wells Fargo Bank, National Association as Agent (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed August 8, 2005).
(t) Amended and Restated Limited Liability Company Agreement of Macquarie CountryWide-Regency II, LLC dated as of June 1, 2005 by and among Regency Centers, L.P., Macquarie CountryWide (US) No. 2 LLC, Macquarie-Regency Management, LLC, Macquarie CountryWide (US) No. 2 Corporation and Macquarie CountryWide Management Limited (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed August 8, 2005).
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
March 9, 2006
/s/ Martin E. Stein, Jr.
Martin E. Stein, Jr., Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Mary Lou Fiala
Mary Lou Fiala, President, Chief Operating Officer
and Director
/s/ Bruce M. Johnson
Bruce M. Johnson, Managing Director, Chief
Financial Officer (Principal Financial Officer)
/s/ J. Christian Leavitt
J. Christian Leavitt, Senior Vice President,
Secretary and Treasurer (Principal Accounting
Officer)
/s/ Raymond L. Bank
Raymond L. Bank, Director
/s/ C. Ronald Blankenship
C. Ronald Blankenship, Director
/s/ A. R. Carpenter
A. R. Carpenter, Director
/s/ J. Dix Druce
J. Dix Druce, Director
57
(continued)
/s/ Douglas S. Luke
Douglas S. Luke, Director
/s/ John C. Schweitzer
John C. Schweitzer, Director
/s/ Thomas G. Wattles
Thomas G. Wattles, Director
/s/ Terry N. Worrell
Terry N. Worrell, Director
58
Regency Centers Corporation
Index to Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Schedule III - Regency Centers Corporation Combined Real Estate and Accumulated Depreciation—December 31, 2005
All other schedules are omitted because they are not applicable or because information required therein is shown in the consolidated financial statements or notes thereto.
F-1
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Regency Centers Corporation:
We have audited the accompanying consolidated balance sheets of Regency Centers Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Regency Centers Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Regency Centers Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Jacksonville, Florida
Certified Public Accountants
F-2
The Stockholders and Board of Directors of
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Regency Centers Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Regency Centers Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Regency Centers Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Regency Centers Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal
F-3
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Regency Centers Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005, and related financial statement schedule and our report dated March 9, 2006 expressed an unqualified opinion on those consolidated financial statements and related financial statement schedule.
F-4
Consolidated Balance Sheets
December 31, 2005 and 2004
(in thousands, except share data)
Real estate investments at cost (notes 2, 4 and 12):
Land
Buildings and improvements
Less: accumulated depreciation
Properties in development
Operating properties held for sale
Investments in real estate partnerships (note 4)
Net real estate investments
Cash and cash equivalents
Notes receivable (note 5)
Tenant receivables, net of allowance for uncollectible accounts of $3,849 and $3,393 at December 31, 2005 and 2004, respectively
Deferred costs, less accumulated amortization of $31,846 and $25,735 at December 31, 2005 and 2004, respectively
Acquired lease intangible assets, less accumulated amortization of $6,593 and $2,602 at December 31, 2005 and 2004, respectively (note 6)
Other assets
Liabilities:
Notes payable (note 7)
Unsecured line of credit (note 7)
Accounts payable and other liabilities
Acquired lease intangible liabilities, net (note 6)
Tenants’ security and escrow deposits
Preferred units (note 9)
Exchangeable operating partnership units
Limited partners’ interest in consolidated partnerships
Total minority interest
Stockholders’ equity (notes 8, 9, 10 and 11):
Preferred stock, $.01 par value per share, 30,000,000 shares authorized; 3,000,000 and 800,000 shares issued and outstanding at December 31, 2005 with liquidation preferences of $25 and $250 per share, respectively; 800,000 shares issued and outstanding at December 31, 2004, liquidation preference of $250
Common stock $.01 par value per share, 150,000,000 shares authorized; 73,263,472 and 67,970,538 shares issued at December 31, 2005 and 2004, respectively
Treasury stock at cost, 5,297,129 and 5,161,559 shares held at December 31, 2005 and 2004, respectively
Additional paid in capital
Restricted stock deferred compensation
Accumulated other comprehensive loss
Distributions in excess of net income
Total stockholders’ equity
Commitments and contingencies (notes 12 and 13)
See accompanying notes to consolidated financial statements.
F-5
Consolidated Statements of Operations
For the years ended December 31, 2005, 2004 and 2003
(in thousands, except per share data)
Revenues:
Minimum rent (note 12)
Percentage rent
Recoveries from tenants
Management, acquisition and other fees
Equity in (loss) income of investments in real estate partnerships
Total revenues
Operating expenses:
Depreciation and amortization
Operating and maintenance
General and administrative
Real estate taxes
Other expenses
Total operating expenses
Other expense (income)
Interest expense, net of interest income of $2,361, $3,125 and $2,357 in 2005, 2004 and 2003, respectively
Gain on sale of operating properties and properties in development
Provision for loss on operating properties
Total other expense (income)
Income before minority interests
Minority interest of preferred units
Minority interest of exchangeable operating partnership units
Minority interest of limited partners
Discontinued operations, net:
Operating income from discontinued operations
Income per common share - basic (note 11):
Continuing operations
Discontinued operations
Net income for common stockholders per share
Income per common share - diluted (note 11):
F-6
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
Balance at December 31, 2002
Comprehensive Income:
Change in fair value of derivative instruments
Total comprehensive income
Restricted stock issued
Amortization of restricted stock deferred compensation
Common stock issued for stock options exercised, net
Tax benefit for issuance of stock options
Treasury stock issued for common stock offering
Common stock issued for partnership units exchanged
Common stock issued for Series 2 preferred stock exchanged
Series 3 preferred stock issued
Reallocation of minority interest
Repurchase of common stock
Cash dividends declared:
Preferred stock
Common stock ($2.08 per share)
Balance at December 31, 2003
Comprehensive Income (note 8):
Loss on settlement of derivative instruments
Amortization of loss on derivative instruments
Amortization of restricted stock deferred compensation (note 10)
Common stock issued in stock offering (note 9)
Series 4 preferred stock issued (note 9)
Common stock ($2.12 per share)
Balance at December 31, 2004
Reclassification of unearned deferred compensation upon adoption of FAS 123(R) (note 10)
Restricted stock issued, net of amortization (note 10)
Common stock issued for stock offering (note 9)
Series 5 preferred stock issued (note 9)
Common stock ($2.20 per share)
Balance at December 31, 2005
F-7
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred loan cost and debt premium amortization
Stock based compensation
Equity in loss (income) of investments in real estate partnerships
Net gain on sale of properties
Distributions from operations of investments in real estate partnerships
Hedge settlement
Changes in assets and liabilities:
Tenant receivables
Deferred leasing costs
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of operating real estate
Development of real estate including land acquired
Proceeds from sale of real estate investments
(Issuance) repayment of notes receivable, net
Investments in real estate partnerships
Distributions received from investments in real estate partnerships
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from common stock issuance
Redemption of preferred units
Redemption of exchangeable operating partnership units
(Distributions) contributions from limited partners in consolidated partnerships
Distributions to exchangeable operating partnership unit holders
Distributions to preferred unit holders
Dividends paid to common stockholders
Dividends paid to preferred stockholders
Net proceeds from issuance of preferred stock
Repayment of fixed rate unsecured notes
Proceeds from issuance of fixed rate unsecured notes, net
(Repayments) proceeds from unsecured line of credit, net
Proceeds from notes payable
Repayment of notes payable
Scheduled principal payments
Deferred loan costs
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
F-8
Supplemental disclosure of cash flow information - cash paid for interest (net of capitalized interest of $12,400, $11,228, and $13,106 in 2005, 2004, and 2003, respectively)
Supplemental disclosure of non-cash transactions:
Mortgage debt assumed by purchaser on sale of real estate
Mortgage loans assumed for the acquisition of real estate
Real estate contributed as investments in real estate partnerships
Exchangeable operating partnership units issued for the acquisition of real estate
Notes receivable taken in connection with sales of operating properties, properties in development and out parcels
Change in fair value of derivative instrument
F-9
December 31, 2005
Regency Centers Corporation (“Regency” or the “Company”) began its operations as a Real Estate Investment Trust (“REIT”) in 1993, and is the managing general partner of its operating partnership, Regency Centers, L.P. (“RCLP” or the “Partnership”). Regency currently owns approximately 98% of the outstanding common partnership units (“Units”) of the Partnership. Regency engages in the ownership, management, leasing, acquisition, and development of retail shopping centers through the Partnership, and has no other assets or liabilities other than its investment in the Partnership. At December 31, 2005, the Partnership directly owned 213 retail shopping centers and held partial interests in 180 retail shopping centers through investments in joint ventures.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Partnership and its wholly owned subsidiaries, and joint ventures in which the Partnership has a majority ownership or controlling interest. The equity interests of third parties held in the Partnership or its majority owned joint ventures are included in the consolidated financial statements as preferred units, exchangeable operating partnership units or limited partners’ interest in consolidated partnerships. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.
Investments in joint ventures not controlled by the Company (Unconsolidated Joint Ventures) are accounted for under the equity method. The Company has evaluated its investment in the Unconsolidated Joint Ventures and has concluded that they are not variable interest entities as defined in FIN 46R. The other venture partners in the Unconsolidated Joint Ventures have significant ownership rights, including approval over operating budgets and strategic plans, capital spending, sale or financing, and admission of new partners; therefore, the Company has concluded that the equity method of accounting is appropriate for these interests. Under the equity method of accounting, investments in the Unconsolidated Joint Ventures are initially recorded at cost, and subsequently increased for additional contributions and allocations of income and reduced for distributions received and allocation of losses. These investments are included in the consolidated financial statements as Investments in Real Estate Partnerships.
Ownership of the Company
Regency has a single class of common stock outstanding and three series of preferred stock outstanding (Series 3, 4, and 5). The dividends on the Series 3, 4, and 5 preferred stock are cumulative and payable in arrears on or before the last day of each calendar quarter. The Company owns corresponding Series 3, 4, and 5 preferred unit interests (“Preferred Units”) in the Partnership that entitle the Company to income and distributions from the Partnership in amounts equal to the dividends paid on the Company’s Series 3, 4, and 5 preferred stock.
F-10
Ownership of the Operating Partnership
The Partnership’s capital includes general and limited partnership Units, and four classes of preferred units (Series 3, 4, 5, and D Preferred Units). At December 31, 2005 the Company owned approximately 98% or 67,966,343 Partnership Units of the total 69,218,483 Partnership Units outstanding. Each outstanding Partnership Unit not owned by the Company is exchangeable for one share of Regency common stock. Net income and distributions of the Partnership are allocable first to the Preferred Units, and the remaining amounts to the general and limited partners’ Units in accordance with their ownership percentage. The Series 3, 4, and 5 Preferred Units are owned by the Company and are eliminated in consolidation. The Series D Preferred Units are owned by institutional investors.
The Company leases space to tenants under agreements with varying terms. Leases are accounted for as operating leases with minimum rent recognized on a straight-line basis over the term of the lease regardless of when payments are due. As part of the leasing process, the Company may provide the lessee with an allowance for the construction of leasehold improvements. Leasehold improvements are capitalized as part of the building and recorded as tenant improvements and depreciated over the shorter of the useful life of the improvements or the lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation include, among others, who holds legal title to the improvements, and other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease. Lease revenue recognition commences when the lessee is given possession of the leased space upon completion of tenant improvements. Accrued rents are included in tenant receivables.
Substantially all of the lease agreements contain provisions that grant additional rents based on tenants’ sales volume (contingent or percentage rent) and reimbursement of the tenants’ share of real estate taxes, insurance and common area maintenance (“CAM”) costs. Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. Recovery of real estate taxes, insurance and CAM costs are recognized as the respective costs are incurred in accordance with the lease agreements.
The Company accounts for profit recognition on sales of real estate in accordance with Statement of Financial Accounting Standards (“SFAS”) Statement No. 66, “Accounting for Sales of Real Estate.” In summary, profits from sales will not be recognized by the Company unless a sale has been consummated; the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property; the Company has transferred to the buyer the usual risks and rewards of ownership; and the Company does not have substantial continuing involvement with the property.
The Company has been engaged by joint ventures to provide asset and property management services for such ventures’ shopping centers. The fees are market based and generally calculated as a percentage of either revenues earned or the estimated values of the properties and are recognized as services are provided.
F-11
Land, buildings and improvements are recorded at cost. All specifically identifiable costs related to development activities are capitalized into properties in development on the consolidated balance sheets. The capitalized costs include pre-development costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, and direct employee costs incurred during the period of development.
The Company incurs costs prior to land acquisition including contract deposits, as well as legal, engineering and other external professional fees related to evaluating the feasibility of developing a shopping center. These pre-development costs are included in properties in development. If the Company determines that the development of a particular shopping center is no longer probable, any related pre-development costs previously incurred are immediately expensed. At December 31, 2005 and 2004, the Company had capitalized pre-development costs of $12.2 million and $10.5 million, respectively.
The Company’s method of capitalizing interest is based upon applying its weighted average borrowing rate to that portion of the actual development costs expended. The Company ceases cost capitalization when the property is available for occupancy upon substantial completion of tenant improvements. In no event would the Company capitalize interest on the project beyond 12 months after substantial completion of the building shell.
Maintenance and repairs that do not improve or extend the useful lives of the respective assets are reflected in operating and maintenance expense.
Depreciation is computed using the straight-line method over estimated useful lives of up to 40 years for buildings and improvements, term of lease for tenant improvements, and three to seven years for furniture and equipment.
The Company and the Unconsolidated Joint Ventures allocate the purchase price of assets acquired (net tangible and identifiable intangible assets) and liabilities assumed based on their relative fair values at the date of acquisition pursuant to the provisions of SFAS No. 141, “Business Combinations” (“Statement 141”). Statement 141 provides guidance on allocating a portion of the purchase price of a property to intangible assets. The Company’s methodology for this allocation includes estimating an “as-if vacant” fair value of the physical property, which is allocated to land, building and improvements. The difference between the purchase price and the “as-if vacant” fair value is allocated to intangible assets. There are three categories of intangible assets to be considered: (i) value of in-place leases, (ii) above and below-market value of in-place leases and (iii) customer relationship value.
The value of in-place leases is estimated based on the value associated with the costs avoided in originating leases compared to the acquired in-place leases as well as the value associated with lost rental and recovery revenue during the assumed lease-up period. The value of in-place leases is amortized to expense over the remaining initial term of the respective leases.
F-12
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the comparable in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The value of above-market leases is amortized as a reduction of base rental revenue over the remaining terms of the respective leases. The value of below-market leases is accreted as an increase to base rental revenue over the remaining terms of the respective leases, including renewal options.
The Company allocates no value to customer relationship intangibles if it has pre-existing business relationships with the major retailers in the acquired property since those associated with the acquired property provide no incremental value over the Company’s existing relationships.
The Company follows the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“Statement 144”). In accordance with Statement 144, the Company classifies an operating property as held–for-sale when it determines that the property is available for immediate sale in its present condition, the property is being actively marketed for sale and management is reasonably certain that a sale will be consummated. Operating properties held-for-sale are carried at the lower of cost or fair value less costs to sell. Depreciation and amortization are suspended during the held-for-sale period. The operations of properties held-for-sale are reclassified into discontinued operations for all periods presented.
In accordance with Statement 144, when the Company sells a property and will not have continuing involvement after disposition, its operations and gain on sale are reported in discontinued operations when the operations and cash flows are clearly distinguished. Once classified as discontinued operations, these properties are eliminated from ongoing operations. Prior periods are also restated to reflect the operations of these properties as discontinued operations. When the Company sells operating properties to its joint ventures or to third parties, and it will have continuing involvement, the operations and gains on sales are included in income from continuing operations.
The Company reviews its real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon expected undiscounted cash flows from the property. The Company determines impairment by comparing the property’s carrying value to an estimate of fair value based upon varying methods such as i) estimating future cash flows, ii) determining resale values by market, or iii) applying a capitalization rate to net operating income using prevailing rates in a given market. These methods of determining fair value can fluctuate significantly as a result of a number of factors, including changes in the general economy of those markets in which the Company operates, tenant credit quality and demand for new retail stores. In the event that the carrying amount of a property is not recoverable and exceeds its fair value, the Company will write down the asset to fair value for “held-and-used” assets and to fair value less costs to sell for “held-for-sale” assets. During 2005, 2004 and 2003 the Company recorded a provision for loss of approximately $550,000, $810,000, and $2.0 million based upon the criteria described above. The provision for loss on properties subsequently sold to third parties is included as part of discontinued operations.
F-13
The Company believes it qualifies, and intends to continue to qualify, as a REIT under the Internal Revenue Code (the “Code”). As a REIT, the Company will generally not be subject to federal income tax, provided that distributions to its stockholders are at least equal to REIT taxable income.
Earnings and profits, which determine the taxability of dividends to stockholders, differs from net income reported for financial reporting purposes primarily because of differences in depreciable lives and cost bases of the shopping centers, as well as other timing differences.
The net book basis of real estate assets exceeds the tax basis by approximately $131.3 million and $103.9 million at December 31, 2005 and 2004, respectively, primarily due to the difference between the cost basis of the assets acquired and their carryover basis recorded for tax purposes.
The following summarizes the tax status of dividends paid during the respective years:
Dividend per share
Ordinary income
Capital gain
Return of capital
Unrecaptured Section 1250 gain
Post-May 5 gain
Regency Realty Group, Inc. (“RRG”), a wholly-owned subsidiary of RCLP, is a Taxable REIT Subsidiary as defined in Section 856(l) of the Code. RRG is subject to federal and state income taxes and files separate tax returns. Income tax expense consists of the following for the years ended December 31, 2005, 2004 and 2003 which is included in either other expenses or discontinued operations on the consolidated statements of operations (in thousands):
Income tax expense
Current
Deferred
Total income tax expense
F-14
Income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to pretax income for the year ended December 31, 2005 and 34% for December 31, 2004 and 2003, respectively as follows (in thousands):
Computed expected tax expense
Increase in income taxes resulting from state taxes
All other items
RRG had net deferred tax assets of $11.2 million and $10.3 million at December 31, 2005 and 2004, respectively. The majority of the deferred tax assets relate to deferred interest expense and tax costs capitalized on projects under development. No valuation allowance was provided and the Company believes it is more likely than not that the future benefits associated with these deferred tax assets will be realized.
Deferred costs include deferred leasing costs and deferred loan costs, net of accumulated amortization. Such costs are amortized over the periods through lease expiration or loan maturity, respectively. Deferred leasing costs consist of internal and external commissions associated with leasing the Company’s shopping centers. Net deferred leasing costs were $30.6 million and $30.8 million at December 31, 2005 and 2004, respectively. Deferred loan costs consist of initial direct and incremental costs associated with financing activities. Net deferred loan costs were $11.1 million and $10.2 million at December 31, 2005 and 2004, respectively.
Basic net income per share of common stock is computed based upon the weighted average number of common shares outstanding during the period. Diluted net income per share also includes common share equivalents for stock options, restricted stock and exchangeable operating partnership units, if dilutive. See note 11 for the calculation of earnings per share (“EPS”).
Repurchases of the Company’s common stock are recorded at cost and are reflected as Treasury stock in the consolidated statement of stockholders’ equity and comprehensive income (loss). Outstanding shares do not include treasury shares.
Any instruments which have an original maturity of 90 days or less when purchased are considered cash equivalents. Cash distributions of normal operating earnings from investments in real estate partnerships are included in cash flows from operations in the consolidated statements of cash flows.
F-15
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Regency grants stock-based compensation to its employees, all of which are employed by the Partnership. When Regency issues common shares as compensation, it receives a comparable number of common units from the Partnership including stock options. Regency is committed to contribute to the Partnership all proceeds from the exercise of stock options or other stock-based awards granted under Regency’s Long-Term Omnibus Plan. Accordingly, Regency’s ownership in the Partnership will increase based on the amount of proceeds contributed to the Partnership for the common units it receives. As a result of the issuance of common units to Regency for stock-based compensation, the Partnership accounts for stock-based compensation in the same manner as Regency.
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“Statement 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“Statement 123”). Statement 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”) and generally, the approach is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values and pro-forma disclosure is no longer an alternative. Statement 123(R) is effective for fiscal years beginning after December 31, 2005, however the Company elected early adoption effective January 1, 2005. As permitted by Statement 123(R), the Company has applied the “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. See Note 10 for further discussion.
Prior to 2005, the Company followed the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“Statement 148”), which provided alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amended the disclosure requirements of Statement 123, to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. As permitted under Statement 123 and Statement 148, the Company previously followed the accounting guidelines pursuant to Opinion 25, for stock-based compensation and furnished the pro-forma disclosures as required under Statement 148. During 2004 and 2003, the Company accounted for share-based payments to employees using Opinion 25’s intrinsic value method and recognized no compensation cost for employee stock options. Had the Company adopted Statement 123(R) in 2004 and 2003, the impact of that standard would have approximated the impact of Statement 123 in the disclosure of pro-forma net income and earnings per share as further described in Note 10.
F-16
The Company’s business is investing in retail shopping centers through direct ownership or through joint ventures. The Company actively manages its portfolio of retail shopping centers and may from time to time make decisions to sell lower performing properties or developments not meeting its long-term investment objectives. The proceeds of sales are reinvested into higher quality retail shopping centers through acquisitions or new developments, which management believes will meet its planned rate of return. It is management’s intent that all retail shopping centers will be owned or developed for investment purposes. The Company’s revenue and net income are generated from the operation of its investment portfolio. The Company also earns fees from third parties for services provided to manage and lease retail shopping centers owned through joint ventures.
The Company’s portfolio is located throughout the United States; however, management does not distinguish or group its operations on a geographical basis for purposes of allocating resources or measuring performance. The Company reviews operating and financial data for each property on an individual basis, therefore, the Company defines an operating segment as its individual properties. No individual property constitutes more than 10% of the Company’s combined revenue, net income or assets, and thus the individual properties have been aggregated into one reportable segment based upon their similarities with regard to both the nature and economics of the centers, tenants and operational processes, as well as long-term average financial performance. In addition, no single tenant accounts for 10% or more of revenue and none of the shopping centers are located outside the United States.
The Company adopted SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“Statement 133”) as amended by SFAS No. 149. Statement 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company’s use of derivative financial instruments is normally to mitigate its interest rate risk on a related financial instrument or forecasted transaction through the use of interest rate swaps.
Statement 133 requires that changes in fair value of derivatives that qualify as cash flow hedges be recognized in other comprehensive income (“OCI”) while the ineffective portion of the derivative’s change in fair value be recognized immediately in earnings. Upon the settlement of a hedge, gains and losses associated with the transaction are recorded in OCI and amortized over the underlying term of the hedge transaction. Historically all of the Company’s derivative instruments have qualified for hedge accounting.
To determine the fair value of derivative instruments, the Company uses standard market conventions and techniques such as discounted cash flow analysis, option pricing models and termination costs at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
F-17
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“Statement 150”). Statement 150 affects the accounting for certain financial instruments, which requires companies having consolidated entities with specified termination dates to treat minority owners’ interests in such entities as liabilities in an amount based on the fair value of the entities. Although Statement 150 was originally effective July 1, 2003, the FASB has indefinitely deferred certain provisions related to classification and measurement requirements for mandatory redeemable financial instruments that become subject to Statement 150 solely as a result of consolidation, including minority interests of entities with specified termination dates. As a result, Statement 150 had no impact on the Company’s consolidated statements of operations for the periods ended December 31, 2005, 2004 and 2003.
At December 31, 2005, the Company held a majority interest in two consolidated entities with specified termination dates of 2017 and 2049. The minority owners’ interests in these entities will be settled upon termination by distribution or transfer of either cash or specific assets of the underlying entities. The estimated fair value of minority interests in entities with specified termination dates was approximately $7.2 million at December 31, 2005 as compared to their carrying value of $1.1 million. The Company has no other financial instruments that are affected by Statement 150.
In October 2005, the FASB Issued Staff Position No. FAS 13-1 “Accounting for Rental Costs Incurred during a Construction Period”. This FSP requires that rental costs associated with ground or building operating leases incurred during a construction period be recognized as rental expense. However, FSP No. FAS 13-1 does not address lessees that account for the sale or rental of real estate projects under FASB Statement No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects”.
In June 2005, the FASB ratified the EITF’s consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” This consensus establishes the presumption that general partners in a limited partnership control that limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. Whether the presumption of control is overcome is a matter of judgment based on the facts and circumstances, for which the consensus provides additional guidance. This consensus is currently applicable to the Company for new partnerships created in 2005, and will be applicable to all partnerships beginning January 1, 2006. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. The Company has applied EITF Issue No. 04-5 to its joint ventures and concluded that it does not require consolidation of additional entities.
F-18
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“Statement 154”). Statement 154 requires restatement of prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is not currently aware of any future potential accounting changes which would require the retrospective application described in Statement 154.
In March 2005 the FASB issued FIN 47, Accounting for Asset Retirement Obligations (as amended). FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is not currently aware of any asset retirement obligations beyond those currently recorded in the consolidated balance sheets which would have a material effect on its financial condition.
In December 2004, the FASB issued SFAS No. 153, “Exchange of Non-monetary Assets”, an amendment of APB Opinion No 29 (“Statement 153”). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. Statement 153 amends Opinion No. 29 to eliminate the exception for non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Statement 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The impact of adopting Statement 153 is not expected to have a material adverse impact on the Company’s financial position or results of operations.
Certain reclassifications have been made to the 2004 and 2003 amounts to conform to classifications adopted in 2005.
F-19
During 2005, the Company’s acquisition activity was through its joint ventures discussed further in Note 4. During 2004, the Company acquired five operating properties from third parties for $164.4 million. The purchase price included the assumption of $61.7 million in debt, the issuance of 920,562 exchangeable operating partnership units valued at $38.4 million, and cash. In accordance with Statement 141, acquired lease intangible assets of $6.3 million for in-place leases were recorded for the acquisitions in 2004. The acquisitions were accounted for as purchases and the results of their operations are included in the consolidated financial statements from the respective dates of acquisition, and neither was considered significant to the Company’s operations in the current or preceding periods.
Regency maintains a conservative capital structure to fund its growth programs without compromising its investment-grade ratings. This approach is founded on a self-funding business model which utilizes center “recycling” as a key component and requires ongoing monitoring of each center to ensure that it meets our stringent quality standards. This recycling strategy calls for the Company to sell properties that do not measure up and re-deploy the proceeds into new, higher-quality developments and acquisitions that are expected to generate sustainable revenue growth and more attractive returns.
During 2005, the Company sold 100% of its interest in 14 properties for net proceeds of $175.2 million. The combined operating income and gains from these properties and properties classified as held-for-sale are included in discontinued operations. The revenues from properties included in discontinued operations, including properties sold in 2005, 2004 and 2003, as well as operating properties held for sale, were $19.4 million, $30.9 million and $40.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. The operating income and gains from properties included in discontinued operations are reported net of minority interest of exchangeable operating partnership units and income taxes as follows for the years ended December 31, 2005, 2004 and 2003:
Operations and gain
Less: Minority interest
Less: Income taxes
Discontinued operations, net
F-20
The Company accounts for all investments in which it owns 50% or less and does not have a controlling financial interest using the equity method. The Company has determined that these investments are not variable interest entities, and therefore, subject to the voting interest model in determining its basis of accounting. Major decisions, including property acquisitions and dispositions, financings, annual budgets and dissolution of the ventures are subject to the approval of all partners. The Company’s combined investment in these partnerships was $545.6 million and $179.7 million at December 31, 2005 and 2004, respectively. Any difference between the carrying amount of these investments and the underlying equity in net assets is amortized to equity in (loss) income of investments in real estate partnerships over the expected useful lives of the properties and other intangible assets which range in lives from 10 to 40 years. Net income (loss) from these partnerships, which includes all operating results, as well as gains and losses on sales of properties within the joint ventures, is allocated to the Company in accordance with the respective partnership agreements. Such allocations of net income (loss) are recorded in equity in (loss) income of investments in real estate partnerships in the accompanying consolidated statements of operations.
Investments in real estate partnerships are comprised primarily of joint ventures with three unrelated co-investment partners, as described below. In addition to earning its pro-rata share of net income in each of the partnerships, these partnerships pay the Company fees for asset management, property management, and acquisition and disposition services. During 2005, 2004 and 2003, the Company received fees from these joint ventures of $26.8 million, $9.3 million and $5.6 million, respectively.
The Company co-invests with the Oregon Public Employees Retirement Fund in three joint ventures (collectively “Columbia”) in which the Company has ownership interests of 20% or 30%. As of December 31, 2005, Columbia owned 16 shopping centers, had total assets of $465.5 million, and net income of $22.3 million for the year ended. The Company’s share of Columbia’s total assets and net income was $105.7 million and $4.2 million, respectively. Columbia did not acquire any properties in 2005 and sold two shopping centers to an unrelated party for $47.6 million at a gain of $8.9 million. During 2004, Columbia acquired eight shopping centers from unrelated parties for a purchase price of $250.8 million. The Company contributed $31.9 million for its proportionate share of the purchase price. Columbia sold three shopping centers to unrelated parties during 2004 for $74.0 million at a gain of $10.0 million.
The Company co-invests with the California State Teachers’ Retirement System (“CalSTRS”) in a joint venture called (“RegCal”) in which the Company has an ownership interest of 25%. As of December 31, 2005, RegCal owned seven shopping centers, had total assets of $146.8 million, and net income of $2.0 million for the year ended. The Company’s share of RegCal’s total assets and net income was $36.7 million and $609,316, respectively. During 2005, RegCal acquired two shopping centers from an unrelated party for a purchase price of $20.0 million. The Company contributed $1.7 million for its proportionate share of the purchase price, which was net of loan financing assumed by RegCal. During 2004, RegCal acquired four shopping centers from the Company valued at $124.5 million, assumed debt of $34.8 million and the Company received net proceeds of $73.9 million.
F-21
The Company co-invests with Macquarie CountryWide Trust of Australia (“MCW”) in four joint ventures, two in which the Company has an ownership interest of 25% (collectively, “MCWR”), one in which it had an ownership interest of 35% (“MCWR II”), and one with an ownership interest of 24.95% (“MCWR III”) as of December 31, 2005.
As of December 31, 2005, MCWR owned 51 shopping centers, had total assets of $738.8 million, and net income of $7.3 million for the year ended. Regency’s share of MCWR’s total assets and net income was $184.8 million and $2.2 million, respectively. During 2005, MCWR acquired one shopping center from an unrelated party for a purchase price of $24.4 million. The Company contributed $4.5 million for its proportionate share of the purchase price, which was net of loan financing placed on the shopping center by MCWR. In addition, MCWR acquired two properties from the Company valued at $31.9 million, for which the Company received cash of $25.7 million for MCW’s proportionate share. During 2005, MCWR sold four shopping centers to unrelated parties for $34.7 million with a gain of $582,910. During 2004, MCWR acquired 23 shopping centers from unrelated parties for a purchase price of $274.5 million. The Company contributed $34.8 million for its proportionate share of the purchase price. In addition, MCWR acquired three shopping centers from the Company valued at $69.7 million and the Company received cash of $63.7 million for MCW’s proportionate share. MCWR sold one shopping center during 2004 to an unrelated party for $12.8 million at a gain of $190,559.
On June 1, 2005, Macquarie CountryWide-Regency II, LLC (MCWR II) closed on the acquisition of 100 retail shopping centers (the “First Washington Portfolio”) totaling approximately 12.6 million square feet located throughout 17 states and the District of Columbia from a joint venture between CalPERS and an affiliate of First Washington Realty, Inc. (the “Sellers”) pursuant to a Purchase and Sale Agreement dated February 14, 2005. The total purchase price was approximately $2.8 billion, including the assumption of approximately $68.6 million of mortgage debt and the issuance of approximately $1.6 billion of new mortgage loans on the properties acquired. The First Washington Portfolio acquisition was accounted for as a purchase business combination by MCWR II. At December 31, 2005, MCWR II is owned 64.95% by an affiliate of MCW, 34.95% by Regency and 0.1% by Macquarie-Regency Management, LLC (“US Manager”). US Manager is owned 50% by Regency and 50% by an affiliate of Macquarie Bank Limited. Including its share of US Manager, Regency’s effective ownership is 35% as of December 31, 2005 and is reflected as such on the equity method in the accompanying consolidated financial statements. Regency’s required equity investment in MCWR II was approximately $397 million and was paid in cash. The fair value of the consideration paid by MCW and Regency was used as the valuation basis for the First Washington Portfolio. The costs of the assets acquired and liabilities assumed in conjunction with the First Washington Portfolio were revalued based on their respective fair values as of the effective date of the acquisition in accordance with SFAS No. 141, “Business Combinations” (“Statement 141”).
Upon closing of the acquisition into the joint venture, MCWR II paid Regency acquisition, due diligence and capital restructuring fees totaling $21.2 million, of which Regency recognized $13.8 million as fee income. Regency recognized fee income on only that percentage of the joint venture not owned by it, and as a result, recorded $7.4 million of the fee as a reduction to its investment in MCWR II. The Company has the ability to earn additional acquisition fees of approximately $9.2 million (the “Contingent Acquisition Fees”) subject to achieving certain targeted income levels in 2006 and 2007; and accordingly, the Contingent Acquisition Fee will only be recognized in 2006 and 2007, if earned.
F-22
The Company earns recurring fees for asset and property management on a quarterly and monthly basis, respectively. To assist in the transition of the portfolio to Regency, the Seller agreed to provide property management services for up to two years on approximately 50% of the portfolio which will result in a lesser amount of property management fee income to Regency during the transition period. As of December 31, 2005, MCWR II owned 99 shopping centers, had total assets of $2.8 billion and recorded a net loss of $32.3 million for the period inception to date. Regency’s share of MCWR II’s total assets and net loss was $995.0 million and $11.2 million, respectively. The loss incurred by MCWR II was the result of depreciation and amortization of the acquisition price recorded in accordance with Statement 141, and therefore, MCWR II is expected to continue to record a net loss through December 31, 2006, but will produce positive operating cash flow. During 2005, MCWR II sold one shopping center for $9.7 million to an unrelated party with a gain of $35,127.
As of December 31, 2005, MCWR III owned one shopping center, had total assets of $12.2 million, and recorded a net loss of $46,921 for the year ended. The Company’s share of MCWR III’s total assets and net loss was $3.1 million and $11,707, respectively. MCWR III acquired this shopping center from the Company valued at $12.3 and the Company received cash of $4.1 million and a short-term note receivable of $6.2 million.
On January 13, 2006, the Company sold a portion of its investment in MCWR II to MCW for $113.2 million in cash and reduced its ownership interest from 35% to 24.95%. The proceeds from the sale were used to reduce the unsecured line of credit.
Recognition of gains from sales to joint ventures is recorded on only that portion of the sales not attributable to the Company’s ownership interest. The gains and operations are not recorded as discontinued operations because of Regency’s substantial continuing involvement in these shopping centers. Columbia, RegCal, and the joint ventures with MCW intend to continue to acquire retail shopping centers, some of which they may acquire directly from the Company. For those properties acquired from third parties, the Company is required to contribute its pro-rata share of the purchase price to the partnerships.
The Company’s investments in real estate partnerships as of December 31, 2005 and 2004 consist of the following (in thousands):
F-23
Summarized financial information for the unconsolidated investments on a combined basis, is as follows (in thousands):
Investment in real estate, net
Acquired lease intangible assets, net
Notes payable
Acquired lease intangible liabilities, net
Other liabilities
Partners’ equity
Total liabilities and equity
Unconsolidated investments in real estate partnerships had notes payable of $2.4 billion and $665.5 million as of December 31, 2005 and 2004, respectively and the Company’s proportionate share of these loans was $764.2 million and $168.1 million, respectively. The loans are primarily non-recourse, but for those that are guaranteed by a joint venture, Regency’s guarantee does not extend beyond its ownership percentage of the joint venture.
The revenues and expenses for the unconsolidated investments on a combined basis are summarized as follows for the years ended December 31, 2005, 2004 and 2003 (in thousands):
Other expense (income):
Interest expense, net
Gain on sale of real estate
Other income
F-24
The Company has notes receivables outstanding of $46.5 million and $25.6 million at December 31, 2005 and 2004, respectively. The notes bear interest ranging from 4.25% to 8.0% with maturity dates through November 2014. Subsequent to year-end, two notes totaling $8.4 million were paid in full.
The Company’s acquired lease intangible assets are all related to in-place leases which have a remaining weighted average amortization period of approximately 4.5 years. The aggregate amortization expense from acquired leases was approximately $4.0 million, $2.2 million and $368,231 for the years ended December 31, 2005, 2004 and 2003, respectively. Acquired lease intangible liabilities are all related to below-market rents and recorded net of previously accreted minimum rent of $2.9 million and $1.9 million at December 31, 2005 and 2004, respectively. The remaining weighted average amortization period is approximately 5.2 years.
The estimated aggregate amortization and accretion amounts from acquired lease intangibles for each of the next five years are as follows (in thousands):
Year Ending December 31,
The Company’s outstanding debt at December 31, 2005 and 2004 consists of the following (in thousands):
The Company has an unsecured revolving line of credit (the “Line”) with a commitment of $500 million and the right to expand the Line by an additional $150 million subject to additional lender syndication. The Line has a three-year term with a one-year extension option at an interest rate of LIBOR plus .75%. At December 31, 2005, the balance on the Line was $162.0 million. Contractual interest rates on the Line, which are based on LIBOR plus .75%, were 5.125% and 3.1875% at December 31, 2005 and 2004, respectively.
F-25
The spread paid on the Line is dependent upon the Company maintaining specific investment-grade ratings. The Company is also required to comply, and is in compliance, with certain financial covenants such as Minimum Net Worth, Total Liabilities to Gross Asset Value (“GAV”) and Secured Indebtedness to GAV and other covenants customary with this type of unsecured financing. The Line is used primarily to finance the development of real estate, but is also available for general working-capital purposes.
On June 1, 2005, the Company entered into a credit agreement that provided for a $275 million unsecured term loan maturing on March 1, 2006 (the “Bridge Loan”) which was fully repaid on August 1, 2005. The Bridge Loan was used to partially fund Regency’s equity investment in MCWR II. The interest rate was a floating rate of LIBOR plus 65 basis points.
On July 18, 2005, RCLP completed the sale of $350 million of ten-year senior unsecured notes. The notes are due August 1, 2015 and were priced at 99.858% to yield 5.25%. The proceeds of the offering were used to reduce the balance on the Bridge Loan and the Line. As a result of the forward-starting interest rate swaps initiated on April 1, 2005, totaling $196.7 million, the effective interest rate on the notes is 5.48%. On July 13, 2005, the interest rate swaps were settled for $7.3 million, which is recorded in OCI and is being amortized over the underlying term of the hedge transaction of ten years in interest expense.
Mortgage loans are secured by certain real estate properties and may be prepaid, but could be subject to a yield-maintenance premium. Mortgage loans are generally due in monthly installments of interest and principal and mature over various terms through 2017. The Company intends to repay mortgage loans at maturity from proceeds from the Line. Variable interest rates on mortgage loans are currently based on LIBOR plus a spread in a range of 90 to 150 basis points. Fixed interest rates on mortgage loans range from 5.22% to 8.95%.
The fair value of the Company’s variable rate notes payable and the Line are considered to be at fair value, since the interest rates on such instruments re-price based on current market conditions. The fair value of fixed rate loans are estimated using cash flows discounted at current market rates available to the Company for debt with similar terms and average maturities. Fixed rate loans assumed in connection with real estate acquisitions are recorded in the accompanying financial statements at fair value. Based on the estimates used by the Company, the fair value of notes payable and the Line is approximately $1.6 billion.
F-26
The Company is exposed to capital market risk, such as changes in interest rates. In order to manage the volatility relating to interest rate risk, the Company may enter into interest rate hedging arrangements from time to time. The Company does not utilize derivative financial instruments for trading or speculative purposes.
On April 1, 2005, the Company entered into three forward-starting interest rate swaps of approximately $65.6 million each with fixed rates of 5.029%, 5.05% and 5.05%. The Company designated the $196.7 million swaps as cash flow hedges to fix the rate on the unsecured notes issued during July 2005. On July 13, 2005, the Company settled the swaps with a payment to the counter-parties for $7.3 million which is included as an adjustment to interest expense as interest is incurred on the $350 million of ten-year unsecured notes sold July 18, 2005. The interest expense that will be recorded in 2006 related to these swaps will be approximately $734,000.
During 2003, the Company entered into two forward-starting interest rate swaps for a total of $144.2 million to fix the rate on a refinancing in April 2004. On March 31, 2004, the Company settled the swaps previously entered into with a payment to the counter-party for $5.7 million.
All of these swaps qualify for hedge accounting under Statement 133, therefore the losses associated with the swaps have been included in accumulated other comprehensive income (loss) in the consolidated statements of stockholders’ equity and comprehensive income (loss) and the unamortized balance is amortized as additional interest expense over the ten year terms of the hedged loans.
At December 31, 2005 and 2004, the face value of total Preferred Units issued was $50 million and $104 million with a weighted average fixed distribution rate of 7.45% and 8.13%, respectively and is recorded on the accompanying balance sheets net of original issuance costs.
On August 1, 2005, the Company redeemed the $30 million Series E Preferred Units and expensed related issuance costs of $762,180. On September 7, 2005, the Company redeemed the $24 million Series F Preferred Units and expensed their related issuance costs of $634,201. The redemptions were funded from the net proceeds from issuing common stock related to a Forward Sale Agreement as discussed further below.
Terms and conditions for the Series D Preferred Units outstanding as of December 31, 2005 are summarized as follows:
Units Outstanding
500,000
The Preferred Units, which may be called by RCLP at par after certain dates have no stated maturity or mandatory redemption and pay a cumulative, quarterly dividend at a fixed rate. The Preferred Units may be exchanged by the holder for Cumulative Redeemable Preferred Stock (“Preferred Stock”) at an exchange rate of one share for one unit. The Preferred Units and the related Preferred Stock are not convertible into common stock of the Company.
F-27
Terms and conditions of the preferred stock outstanding as of December 31, 2005 are summarized as follows:
Series
Series 3
Series 4
Series 5
On August 2, 2005, the Company issued 3 million shares, or $75 million, of 6.70% Series 5 Preferred Stock with a liquidation preference of $25 per share of which the proceeds were used to reduce the balance of the Line. The Series 3 and 4 depositary shares, which have a liquidation preference of $25, and the Series 5 preferred shares are perpetual, are not convertible into common stock of the Company, and are redeemable at par upon Regency’s election five years after the issuance date. None of the terms of the Preferred Stock contain any unconditional obligations that would require the Company to redeem the securities at any time or for any purpose.
On April 5, 2005, the Company entered into an agreement to sell 4,312,500 shares of its common stock to an affiliate of Citigroup Global Markets Inc. (“Citigroup”) at $46.60 per share, in connection with a forward sale agreement (the “Forward Sale Agreement”). On August 1, 2005, the Company issued 3,782,500 shares to Citigroup for net proceeds of approximately $175.5 million. The proceeds from the offering were used to reduce the Company’s Line, repay the remaining balance of the Bridge Loan and redeem the Series E Preferred Units. On September 7, 2005, the remaining 530,000 shares under the Forward Sale Agreement were issued to Citigroup and the net proceeds of $24.4 million were used to redeem the Series F Preferred Units.
F-28
The Company recorded stock-based compensation expense for the years ended December 31, 2005, 2004, and 2003 as follows, the components of which are further described below (in thousands):
Restricted stock
Stock options, dividends and equivalents
The recorded amounts of stock-based compensation expense in 2005 represent amortization of deferred compensation related to share based payments in accordance with Statement 123(R). Compensation expense that is specifically identifiable to development activities is capitalized to the associated development project and is included above.
During 2004 and 2003, as permitted by Statement 123, the Company accounted for share-based payments to employees using Opinion 25’s intrinsic value method and recognized no compensation cost for employee stock options in prior years. Had the Company adopted Statement 123(R) in 2004 and 2003, the impact of that standard would have approximated the impact of Statement 123 in the disclosure of pro-forma net income and earnings per share described as follows (in thousands except per share data):
Net income for common stockholders as reported:
Add: stock-based employee compensation expense included in reported net income
Deduct: total stock-based employee compensation expense determined under Fair value based methods for all awards
Pro-forma net income
Earnings per share:
Basic – as reported
Basic – pro-forma
Diluted – as reported
Diluted – pro-forma
F-29
The Company has a Long-Term Omnibus Plan (the “Plan”) under which the Board of Directors may grant stock options and other stock-based awards to officers, directors and other key employees. The Plan allows the Company to issue up to 5.0 million shares in the form of common stock or stock options, but limits the issuance of common stock excluding stock options to no more than 2.75 million shares. At December 31, 2005, there were approximately 1.4 million shares available for grant under the Plan either through options or restricted stock. The Plan also limits outstanding awards to no more than 12% of outstanding common stock.
Stock options are granted under the Plan with an exercise price equal to the stock’s fair market value at the date of grant. All stock options granted have ten-year lives, contain vesting terms of one to five years from the date of grant and some have dividend equivalent rights. Stock options granted prior to 2005 also contained “reload” rights, which allowed for an option holder to receive new options each time existing options were exercised if the existing options were exercised under specific criteria provided for in the Plan. In January 2005, the Company offered to acquire the “reload” rights of existing stock options from the option holders by issuing them additional stock options or restricted stock that will vest 25% per year and be expensed over a four-year period beginning in 2005 in accordance with Statement 123(R). As a result of the offer, on January 18, 2005, the Company granted 771,645 options to 37 employees with an exercise price of $51.36, the fair value on the date of grant, and granted 7,906 restricted shares to 11 employees representing value of $363,664, substantially canceling all of the “reload” rights on existing stock options. One employee chose to retain their reload rights. The stock option reload right buy-out program was not offered to the non-employee directors. Options granted under the reload buy-out plan do not earn dividend equivalents.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton closed-form (“Black Scholes”) option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
F-30
The Company believes that the use of the Black-Scholes model meets the fair value measurement objectives of Statement 123(R) and reflects all substantive characteristics of the instruments being valued. The following table represents the assumptions used for the Black-Scholes option-pricing model for options granted in the respective year:
Per share weighted average fair value of stock options
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life in years
The following table reports stock option activity during the years ended December 31, 2005, 2004 and 2003:
RemainingContractualTerm
(in years)
IntrinsicValue
Outstanding - December 31, 2002
Granted
Exercised
Forfeited
Outstanding - December 31, 2003
Outstanding - December 31, 2004
Outstanding - December 31, 2005
Exercisable - December 31, 2005
F-31
The following table presents information regarding unvested option activity during the year ended December 31, 2005:
Non-vested at January 1, 2005
Less: 2005 Vesting
Non-vested at December 31, 2005
As of December 31, 2005, there was $2.9 million of total unrecognized compensation cost related to non-vested stock options granted under the Plan. That cost is expected to be recognized over a period of three years through 2008.
The Company grants restricted stock under the Plan to its employees as a form of long-term compensation and retention. The terms of each grant vary depending upon the participant’s responsibilities and position within the Company. The Company’s stock grants to date can be categorized into three types: (a) 4-year vesting, (b) performance-based vesting, and (c) 8-year cliff vesting.
Performance grants and 8-year cliff vesting grants are currently only granted to the top executives in the Company. The Company considers the likelihood of meeting the performance criteria based upon management’s estimates and analysis of future earnings growth from which it determines the amounts recognized as expense on a periodic basis. The Company determines the grant date fair value of TSR Grants based upon a Monte Carlo Simulation model. Compensation expense is measured at the grant date and recognized over the vesting period.
F-32
As of December 31, 2005, there was $22.2 million of total unrecognized compensation cost related to non-vested restricted stock granted under the Plan, which is recorded in the additional paid in capital column of the statements of stockholders’ equity and comprehensive income (loss). This unrecognized compensation cost will be recognized over the next four years through 2009.
The following table reports restricted stock activity during the years ended December 31, 2005, 2004 and 2003:
Unvested at December 31, 2002
Shares Granted
Shares Vested and Distributed
Shares Forfeited
Unvested at December 31, 2003
Unvested at December 31, 2004
Unvested at December 31, 2005
F-33
The following summarizes the calculation of basic and diluted earnings per share for the three years ended December 31, 2005, 2004 and 2003, respectively (in thousands except per share data):
Numerator:
Less: Preferred stock dividends
Less: Dividends paid on unvested restricted stock
Net income for common stockholders—basic
Add: Dividends paid on Treasury Method restricted stock
Net income for common stockholders – diluted
Denominator:
Weighted average common shares outstanding for basic EPS
Incremental shares to be issued under common stock options using the Treasury method
Incremental shares to be issued under unvested restricted stock using the Treasury method
Incremental shares to be issued under Forward Equity Offering using the Treasury method
Weighted average common shares outstanding for diluted EPS
Income per common share – basic
Income per common share – diluted
The exchangeable operating partnership units were anti-dilutive to diluted EPS for the three years ended December 31, 2005, 2004 and 2003, therefore, the units and the related minority interest of exchangeable operating partnership units are excluded from the calculation of diluted EPS.
F-34
The Company’s properties are leased to tenants under operating leases with expiration dates extending to the year 2031. Future minimum rents under noncancelable operating leases as of December 31, 2005 excluding tenant reimbursements of operating expenses and excluding additional contingent rentals based on tenants’ sales volume are as follows (in thousands):
Thereafter
The shopping centers’ tenant base includes primarily national and regional supermarkets, drug stores, discount department stores and other retailers and, consequently, the credit risk is concentrated in the retail industry. There were no tenants that individually represented more than 7% of the Company’s future minimum rents.
The Company has shopping centers that are subject to non-cancelable long-term ground leases where a third party owns and has leased the underlying land to Regency to construct and/or operate a shopping center. In addition, the Company has non-cancelable operating leases pertaining to office space from which it conducts its business. The following table summarizes the future obligations under non-cancelable operating leases as of December 31, 2005 (in thousands):
F-35
The Company is involved in litigation on a number of matters and is subject to certain claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. The Company is also subject to numerous environmental laws and regulations as they apply to real estate pertaining to chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks (UST’s). The Company believes that the tenants who currently operate dry cleaning plants or gas stations do so in accordance with current laws and regulations. The Company has placed environmental insurance, where possible, on specific properties with known contamination, in order to mitigate its environmental risk. The Company monitors the shopping centers containing environmental issues and in certain cases voluntarily remediates the sites. The Company also has legal obligations to remediate certain sites and is in the process of doing so. The Company estimates the cost associated with these legal obligations to be approximately $2.7 million. The Company believes that the ultimate disposition of currently known environmental matters will not have a material affect on its financial position, liquidity, or operations; however, it can give no assurance that existing environmental studies with respect to the shopping centers have revealed all potential environmental liabilities; that any previous owner, occupant or tenant did not create any material environmental condition not known to it; that the current environmental condition of the shopping centers will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties; or that changes in applicable environmental laws and regulations or their interpretation will not result in additional environmental liability to the Company.
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “REG”. The Company currently has approximately 19,800 shareholders. The following table sets forth the high and low sales prices and the cash dividends declared on the Company’s common stock by quarter for 2005 and 2004:
F-36
Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2005 and 2004 (in thousands except per share data):
2005:
Revenues as originally reported
Reclassified to discontinued operations
Adjusted revenues
Net income per share:
Basic
Diluted
2004:
F-37
Combined Real Estate and Accumulated Depreciation
Total CostNet of
AccumulatedDepreciation
S-1
S-2
S-3
S-4
Depreciation and amortization of the Company’s investment in buildings and improvements reflected in the statements of operation is calculated over the estimated useful lives of the assets as follows:
Buildings and improvements up to 40 years
The aggregate cost for Federal income tax purposes was approximately $2.8 billion at December 31, 2005.
The changes in total real estate assets for the years ended December 31, 2005, 2004 and 2003:
Balance, beginning of year
Developed or acquired properties
Sale of properties
Reclass accumulated depreciation to adjust building basis
Reclass accumulated depreciation related to properties held for sale
Improvements
Balance, end of year
Depreciation for year
S-5