FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 1-12298 REGENCY REALTY CORPORATION (Exact name of Registrant as specified in its charter) FLORIDA 59-3191743 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 121 West Forsyth Street Suite 200 Jacksonville, Florida 32202 (Address of principal executive offices) (Zip code) (904) 356-7000 (Registrant's telephone number including area code) Not applicable (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____ (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of November 13, 1997, there were 23,256,277 shares outstanding of the registrant's common stock.
Item 1. Financial Statements REGENCY REALTY CORPORATION Consolidated Balance Sheets September 30, 1997 and December 31, 1996 <TABLE> <CAPTION> September 30, December 31, 1997 1996 ------------ ----------- <S> <C> <C> Assets Real estate investments, at cost: Land .......................................... $187,700,054 85,395,120 Buildings and improvements .................... 584,796,206 305,277,505 Construction in progress for resale ........... 16,210,961 1,695,062 ------------ ----------- 788,707,221 392,367,687 Less: accumulated depreciation ............... 37,129,650 26,213,225 ------------ ----------- 751,577,571 366,154,462 Investments in real estate partnerships ...... 1,004,801 1,035,107 ------------ ----------- Real estate investments, net .................. 752,582,372 367,189,569 Cash and cash equivalents ..................... 14,031,270 8,293,229 Tenant receivables, net of allowance for uncollectible accounts of $1,420,662 and $832,091 at September 30, 1997 and December 31, 1996, respectively ............... 5,213,264 5,281,419 Deferred costs, less accumulated amortization of $3,467,554 and $2,519,019 at September 30, 1997 and December 31, 1996, respectively ................................... 4,158,131 3,961,439 Other assets ................................... 2,664,734 1,798,393 ------------ ----------- $778,649,771 386,524,049 ============ =========== Liabilities and Stockholders' Equity Liabilities: Mortgage loans payable ......................... 236,277,202 97,906,288 Acquisition and development line of credit ..... 3,831,185 73,701,185 Accounts payable and other liabilities ......... 16,002,249 6,300,640 Tenants' security deposits ..................... 2,225,748 1,381,673 ------------ ----------- Total liabilities .............................. 258,336,384 179,289,786 ------------ ----------- Redeemable partnership units ................... 13,752,877 - Limited partners' interest in consolidated partnerships ................................... 8,504,275 508,486 ------------ ----------- Total minority interest ........................ 22,257,152 508,486 ------------ ----------- Stockholders' equity: Common stock $.01 par value per share: 150,000,000 shares authorized; 23,250,697 and 10,614,905 shares issued and outstanding at September 30, 1997 and December 31, 1996, respectively ................................... 232,507 106,149 Special common stock - 10,000,000 shares authorized: Class B $.01 par value per share, 2,500,000 shares issued and outstanding .................. 25,000 25,000 Additional paid in capital ..................... 519,282,270 223,080,831 Distributions in excess of net income .......... (19,336,794) (13,981,770) Stock loans .................................... (2,146,748) (2,504,433) ------------ ------------ Total stockholders' equity ..................... 498,056,235 206,725,777 ------------ ------------ $778,649,771 386,524,049 ============ ============ <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
REGENCY REALTY CORPORATION Consolidated Statements of Operations For the Three Months Ended September 30, 1997 and 1996 <TABLE> <CAPTION> September 30, September 30, 1997 1996 ------------ ------------ <S> <C> <C> Revenues: Minimum rent ................................... $19,364,235 8,897,421 Percentage rent ................................ 504,178 175,065 Recoveries from tenants ........................ 4,317,917 1,948,944 Management, leasing and brokerage fees ......... 2,601,076 991,427 Equity in income of real estate partnership investments ........................ 2,557 16,787 ----------- ----------- Total revenues ................................. 26,789,963 12,029,644 ----------- ----------- Operating expenses: Depreciation and amortization .................. 4,427,304 1,999,248 Operating and maintenance ...................... 3,978,209 1,896,479 General and administrative ..................... 2,545,388 1,294,469 Real estate taxes .............................. 2,450,520 1,059,950 ----------- ----------- Total operating expenses ....................... 13,401,421 6,250,146 ----------- ----------- Interest expense (income): Interest expense ............................... 4,527,622 2,945,634 Interest income ................................ 276,112 191,408 ----------- ----------- Net interest expense ........................... 4,251,510 2,754,226 ----------- ----------- Income before minority interest ................ 9,137,032 3,025,272 Minority interest of redeemable partnership units .............................. 172,945 - Minority interest of limited partners' interest in consolidated partnerships .......... 220,589 - ----------- ----------- Net income ..................................... 8,743,498 3,025,272 Preferred stock dividends ...................... - - ----------- ----------- Net income for common stockholders ............. $ 8,743,498 3,025,272 =========== =========== Weighted average common shares outstanding .................................... 25,423,740 10,802,711 =========== =========== Earnings per share (EPS): Primary EPS .................................... $ .35 .28 =========== =========== Fully diluted EPS .............................. $ .33 .28 =========== =========== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
REGENCY REALTY CORPORATION Consolidated Statements of Operations For the Nine Months Ended September 30, 1997 and 1996 <TABLE> <CAPTION> September 30, September 30, 1997 1996 ------------ ------------ <S> <C> <C> Revenues: Minimum rent ................................... $49,924,839 24,898,572 Percentage rent ................................ 1,612,115 598,785 Recoveries from tenants ........................ 11,303,821 5,435,877 Management, leasing and brokerage fees ......... 6,288,601 2,511,929 Equity in income of real estate partnership investments ........................ 19,694 38,132 ----------- ----------- Total revenues ................................. 69,149,070 33,483,295 ----------- ----------- Operating expenses: Depreciation and amortization .................. 11,501,974 5,565,088 Operating and maintenance ...................... 9,966,899 5,356,131 General and administrative ..................... 7,761,402 3,898,109 Real estate taxes .............................. 6,049,354 2,971,807 ----------- ----------- Total operating expenses ....................... 35,279,629 17,791,135 ----------- ----------- Interest expense (income): Interest expense ............................... 14,748,996 7,915,281 Interest income ................................ 728,715 478,586 ----------- ----------- Net interest expense ........................... 14,020,281 7,436,695 ----------- ----------- Income before minority interest ................ 19,849,160 8,255,465 Minority interest of redeemable partnership units .............................. 1,776,382 - Minority interest of limited partners' interest in consolidated partnerships .......... 565,731 - ----------- ----------- Net income ..................................... 17,507,047 8,255,465 Preferred stock dividends ...................... - 57,721 ----------- ----------- Net income for common stockholders ............. $17,507,047 8,197,744 =========== =========== Weighted average common shares outstanding .................................... 19,955,594 10,150,394 =========== =========== Earnings per share (EPS): Primary EPS .................................... $ .97 .81 =========== =========== Fully diluted EPS .............................. $ .89 .81 =========== =========== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
REGENCY REALTY CORPORATION Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 1997 and 1996 <TABLE> <CAPTION> 1997 1996 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net income ............................. $17,507,047 8,170,465 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......... 11,501,974 5,565,088 Deferred financing cost amortization ... 674,326 542,880 Minority interest in redeemable partnership units ...................... 1,776,382 - Limited partners' minority interest in consolidated partnerships ........... 565,731 - Equity in income of real estate partnership investments ................ (19,694) (38,132) Changes in assets and liabilities: Decrease(increase) in tenant receivables ............................ 736,356 (440,663) Increase in deferred leasing commissions ............................ (580,641) (377,021) Increase in other assets ............... (1,177,680) (1,291,818) Increase in tenants' security deposits ............................... 386,550 192,222 Increase in accounts payable and other liabilities .................. 6,661,691 1,951,914 ------------ ----------- Net cash provided by operating activities ............................. 38,032,042 14,274,935 ------------ ----------- Cash flows from investing activities: Acquisition and development of real estate ................................. (109,967,466) (48,539,267) Investment in real estate partnership .. - (881,308) Capital improvements ................... (2,662,606) (1,857,276) Construction in progress for resale .... (8,094,704) (8,863,090) Distributions received from real estate partnership investments ......... 50,000 8,160 Net cash received from purchase of real estate ............................ 2,742,914 - ------------ ----------- Net cash used in investing activities .. (117,931,862) (60,132,781) ------------ ----------- Cash flows from financing activities: Net proceeds from common stock issuance ............................... 208,356,926 16,468,800 Proceeds from issuance of redeemable partnership units ...................... 2,255,140 - Distributions to redeemable partnership unit holders ............... (1,710,402) - Distribution to limited partners in consolidated partnerships ........... (160,983) - Dividends paid to stockholders ......... (22,862,071) (11,548,562) (Repayment) or proceeds from acquisition and development line of credit ........................ (69,870,000) 48,961,382 Proceeds from mortgage loans payable .. 14,649,706 4,900,576 Repayments of mortgage loans payable .. (44,455,869) (593,875) Deferred financing costs .............. (564,586) (692,515) ------------ ------------ Net cash provided by financing activities ........................... 85,637,861 57,495,806 ------------ ----------- Net increase in cash and cash equivalents .......................... 5,738,041 11,637,960 ------------ ----------- Cash and cash equivalents at beginning of period .................. 8,293,229 3,401,701 ------------ ----------- Cash and cash equivalents at end of period ............................... $ 14,031,270 15,039,661 ============ =========== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
REGENCY REALTY CORPORATION Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies (a) General. Regency Realty Corporation (the Company) was incorporated in the State of Florida for the purpose of owning, operating and developing neighborhood shopping centers. At September 30, 1997, the Company owned 87 properties in the eastern United States. The Company also provides management, leasing, brokerage and development services for real estate not owned by the Company (third parties). The Company commenced operations effective with the completion of its initial public offering on November 5, 1993. The accompanying consolidated financial statements include the accounts of Regency Realty Group II, Inc. (the "Management Company"), its subsidiaries and their wholly owned or majority owned properties and joint ventures. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjuction with the financial statements and notes thereto included in the Company's December 31,1996 Form 10-K filed with the Securities and Exchange Commission on March 25, 1997. Certain amounts for 1996 have been reclassified to conform to the presentation adopted in 1997. (b) Basis of Presentation. The accompanying interim unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are of a normal recurring nature, and in the opinion of management, are necessary to properly state the results of operations and financial position. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. (c) Financial Accounting Standard No. 128. During February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, (SFAS 128) "Earnings per Share". SFAS 128 governs the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held Common Stock. SFAS 128 was issued to simplify the computation of EPS and replaces the Primary and Fully diluted EPS calculations currently in use with calculations of Basic and Diluted EPS. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997, and earlier application is not permitted. The Company will begin to calculate its EPS in compliance with SFAS 128 for the year ended December 31, 1997. 2. Acquisition and Development of Real Estate On March 7, 1997, the Company acquired, through its partnership, Regency Retail Partnership, L.P. (the "Partnership") of which a subsidiary of the Company is the sole general partner, substantially all the assets of Branch Properties, L.P. ("Branch"), a privately held real estate firm based in Atlanta, Georgia. The assets acquired from Branch include 26 shopping centers totaling approximately 2,496,921 SF of gross leasable area including 473,682 SF currently under development or redevelopment. The Partnership acquired (i) a 100% fee simple interest in 19 of these operating properties and (ii) partnership interests (ranging from 70% to 97%) in 4 partnerships with outside investors ("Limited Partners' Interest") that own the remaining seven properties. In addition, the Company, through Regency Realty Group II, Inc., acquired Branch's third party development business, including build-to-suit projects, and third party management and leasing contracts for approximately 3.6 million square feet of shopping centers owned by third party investors.
At closing, the Company invested $26 million in the Partnership to pay transaction costs and reduce debt assumed. The Partnership issued 3,373,801 redeemable partnership units ("Units") and the Company issued 155,797 shares of Common Stock to the sellers of Branch ("Unit Holders") at $26.85 for $94,769,706 and assumed $105,302,169 of debt (net of a $25,728,111 paydown at the date of closing). Subsequent to the acquisition of Branch, the Company issued 198,626 Units to acquire the partnership interests of two outside investors that had partial interests in two properties. Limited partners' interest in consolidated partnerships of $7,925,479 was recorded for the four partnerships with outside investors. The operations of Branch are included from the date of acquisition and contributed $2,398,011 to net income for Common stockholders net of the minority interest of redeemable partnership units of $1,776,382. For purposes of determining minority interest, the Company owned 32.6% of the outstanding Units in the Partnership until the approval by the Company's shareholders at its annual meeting on June 12, 1997, at which time 3,027,080 of the outstanding Units held by Unit Holders were redeemed for Common Stock. At completion of the redemption, the Company owned approximately 88% of the outstanding Units of the Partnership. In addition to the Branch acquisition, the Company completed the acquisition of ten shopping centers which were accounted for as purchases during the nine months ending September 30, 1997. The properties are 100% owned unless noted otherwise as follows: <TABLE> <CAPTION> Contract Purchase Date Acquired Company Shopping Center Location Price by the Company GLA --------------- -------- ----- -------------- --- <S> <C> <C> <C> <C> Oakley Plaza Asheville, NC 8,057,000 03-14-97 118,727 Mariners Village Orlando, FL 7,400,000 03-25-97 117,665 Carmel Commons Charlotte, NC 11,210,000 03-28-97 132,647 Mainstreet Square Orlando, FL 5,792,911 04-15-97 107,159 East Port Plaza Port St.Lucie,FL 14,810,305 04-25-97 232,270 Hyde Park Plaza Cincinnati, OH 42,000,000 06-06-97 374,537 Rivermont Station Atlanta, GA 13,066,035 06-30-97 90,323 Lovejoy Station Clayton, GA 7,057,662 06-30-97 77,336 Tamiami Trail Miami, FL 9,301,300 07-10-97 110,867 Garden Square Miami, FL 9,425,000 09-19-97 90,258 </TABLE> 3. Acquisition and Development Line of Credit The Company has a $150 million unsecured revolving line of credit ("the Line") which is primarily used to acquire and develop real estate. The interest rate is Libor + 150 basis points with interest only for two years, and if then terminated, becomes a two year term loan with principal due in seven equal quarterly installments. The borrower may request a one year extension of the interest only revolving period annually in May of each year. 4. Stockholders' Equity On June 11, 1996, the Company entered into a Stockholders Agreement (the "Agreement") with SC-USREALTY granting it certain rights such as purchasing Common Stock, nominating representatives to the Company's Board of Directors, and subjecting SC-USREALTY to certain restrictions including voting and ownership restrictions. The Agreement primarily granted SC-USREALTY (i) the right to acquire 7,499,400 shares for approximately $132 million and also participation rights entitling it to purchase additional equity in the Company, at the same price as that offered to other purchasers, each time that the Company sells additional shares of capital stock or options or other rights to acquire capital stock, in order to preserve SC-USREALTY's pro rata ownership position; and (ii) the right to nominate a proportionate number of directors on the Company's Board, rounded down to the nearest whole number, based upon SC-USREALTY's percentage ownership of outstanding Common Stock (but not to exceed 49% of the Board). As of September 30, 1997, SC-USREALTY has acquired all of the 7,499,400 shares related to the Agreement.
For a period of at least five years (subject to certain exceptions), SC-USREALTY is precluded from, among other things, (i) acquiring more than 45% of the outstanding Common Stock on a fully diluted basis, (ii) transferring shares without the Company's approval in a negotiated transaction that would result in any transferee beneficially owning more than 9.8% of the Company's capital stock, or (iii) acting in concert with any third parties as part of a 13D group. Subject to certain exceptions, SC-USREALTY is required to vote its shares either as recommended by the Board of Directors or proportionately in accordance with the vote of the other shareholders. In connection with the Units and shares of Common Stock issued in exchange for Branch's assets on March 7, 1997, SC-USREALTY had the right to acquire up to 3,771,622 shares of Common Stock at a price of $22-1/8 per share. However, pursuant to Amendment No. 1 to its Stockholders Agreement with the Company, SC-USREALTY elected (i) to waive such rights with respect to all but 1,750,000 shares (or such lesser number, not less than 850,000 shares, as will not result in the Company ceasing to be a domestically controlled real estate investment trust), (ii) to initially defer its rights with respect to the 1,750,000 shares to no later than August 31, 1997, and (iii) to defer its rights with respect to any such shares, not to exceed 1,050,000 shares, that remain unpurchased on August 31, 1997 to no later than the first Earn-Out Closing, in order to permit Unit holders who are Non-U.S. Persons (as defined in the Company's Articles of Incorporation) to redeem their Units for Common Stock. SC-USREALTY's participation rights (i) remain in effect, with respect to Units and shares issued at the Earn-Out Closings, and (ii) also remain in effect, at a price equal to the then market price of the Common Stock, with respect to shares issued upon the redemption of Units for Common Stock provided that SC-USREALTY did not exercise its participation rights at the time of issuance of such Units. On August 28, 1997, SC-USREALTY acquired 1,050,000 shares at a price of 22 1/8 per share. The acquisition of the remaining 400,000 shares is anticipated by November 30, 1997. On July 11, 1997, the Company sold 2,415,000 shares to the public at $27.25 per share. In connection with that offering, SC-USREALTY purchased an additional 1,785,000 shares at $27.25 directly from the Company. On August 11, 1997, the Underwriters exercised the over-allotment option and the Company issued an additional 129,800 shares to the public and 95,939 shares to SC-USREALTY at $27.25 per share. Total net proceeds from the sale of common stock to the public and SC-USREALTY of approximately $117 million was used to reduce the balance of the Company's line of credit.
5. Earnings Per Share Additional Units and shares of Common Stock may be issued on the fifteenth day after the first, second and third anniversaries of the closing of the acquisition of Branch (each an "Earn-Out Closing"), based on the performance of certain of the Partnership's properties (the "Property Earn-Out"). The formula for the Property Earn-Out provides for calculating any increases in value on a property-by-property basis, based on any increases in net income for certain properties in the Partnership's portfolio as of February 15 of the year of calculation. The Property Earn-Out is limited to $15,974,188 at the first Earn-Out Closing and $22,568,851 at all Earn-Out Closings (including the first Earn-Out Closing). Since issuance of additional consideration is contingent upon increased earnings, for purposes of calculating fully diluted earning per share, net income has been adjusted to give effect to the increase in earnings specified by the Contribution Agreement with Branch Properties, L.P. that results in the largest potential dilution, and outstanding shares have been adjusted to include those shares contingently issuable upon attainment of the increased earnings level. The following summarizes the calculation of primary and fully diluted earnings per share for the quarter ended and year to date ended, September 30, 1997 (in thousands): <TABLE> <CAPTION> Primary Earnings Per Share (EPS) Third Quarter Year to Date Calculation: <S> <C> <C> Weighted average common shares outstanding including redeemable partnership units .......... 25,424 19,956 ------ ------ Net income for common stockholders .............. 8,743 17,507 Minority interest of redeemable partnership units ............................... 173 1,776 ------ ------ Net income for Primary EPS ...................... 8,916 19,283 ====== ====== Primary EPS ................................. .35 .97 ====== ====== Fully Diluted Earnings Per Share Calculation: Primary common shares ........................... 25,424 19,956 Contingent units or shares that could be issued to previous owners of Branch in 1998,1999,and 2000 if earned per the terms of the contribution agreement ......... 1,020 1,020 The incremented shares issuable to SC-USREALTY calculated under the Treasury method related to the contigent shares issued to Branch ................................ 106 106 ------ ------ Total fully diluted shares ...................... 26,550 21,082 ====== ====== Required quarterly increase in income from real estate operations necessary to earn contingent shares, less applicable depreciation on increased purchase price ........ (154) (416) Net income for Primary EPS ...................... 8,916 19,283 ------ ------ Net income for common stockholders for computation of fully diluted earnings per share ....................................... 8,762 18,867 ===== ====== Fully diluted EPS ............................... .33 .89 ===== ====== </TABLE>
PART II Item 1. Legal Proceedings None Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands). The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of Regency Realty Corporation (the "Company") appearing elsewhere in this Form 10-Q, the Company's December 31, 1996 Form 10-K, and the Company's Form 8-K `s dated March 7, 1997 and June 6, 1997. Business The Company's principal business is owning, operating and developing grocery anchored neighborhood shopping centers in targeted infill markets in the eastern Unites States. At September 30, 1997 the Company owned 87 properties or approximately 9.4 million square feet (SF or GLA); 53% and 27% of the GLA of the properties are located in Florida and Georgia, respectively, and 67 are grocery anchored. At September 30, 1996, the Company owned 43 properties or approximately 4.7 million SF. The Company's four largest grocery anchor tenants in order by number of leased store locations, including properties under development, are Publix Supermarkets (27), Winn-Dixie Stores (14), The Kroger Co. (6) and Harris Teeter (4). Acquisition and Development On March 7, 1997, the Company acquired, through its partnership, Regency Retail Partnership, L.P. (the "Partnership") of which a subsidiary of the Company is the sole general partner, substantially all the assets of Branch Properties, L.P. ("Branch"), a privately held real estate firm based in Atlanta, Georgia. The assets acquired from Branch included 26 shopping centers totaling approximately 2,496,921 SF (the "Branch Properties"). The Partnership acquired (i) a 100% fee simple interest in 19 of these operating properties and (ii) partnership interests (ranging from 70% to 97%) in four partnerships with outside investors that owned the remaining seven properties. The Company also acquired the third party property management business of Branch with contracts on approximately 3.6 million SF of shopping center GLA that generate management fees and leasing commission revenues. The Partnership issued 3,373,801 units of limited partnership interest (the "Units") and the Company issued 155,797 shares of Common Stock in exchange for the assets acquired and the liabilities assumed from Branch. Subsequent to the acquisition of Branch, the Company issued 198,626 Units to acquire the partnership interests of two outside investors that had partial interests in two properties. The Units are redeemable on a one-for-one basis in exchange for shares of Common Stock which was approved by the Company's shareholders at the Company's 1997 annual meeting on June 12, 1997. On June 13, 1997, 3,027,080 partnership units were converted to Common Stock. The Company and Branch agreed to the Units and shares to be issued based upon a purchase price of approximately $78 million (initially 3,529,598 combined Units and shares at $22.125, the fair market value of the Company's Common Stock on the date the terms of the acquisition were reached) plus the assumption of Branch's existing liabilities. On the date the acquisition was publicly announced, the average fair market value of the Company's Common Stock had risen to $26.85 per share. Accordingly, the purchase price of Branch as reflected in the Company's financial statements was increased to approximately $100 million (initially 3,529,598 Units and shares at $26.85 and approximately $5 million in related reserves and transaction costs) plus the assumption of Branch's existing liabilities. Additional Units and shares of Common Stock may be issued on the fifteenth day after the first, second and third anniversaries of the closing (each an "Earn-Out Closing"), based on the performance of certain of the Partnership's properties (the "Property Earn-Out"), and additional shares of Common Stock may be issued at the first and second Earn-Out Closings based on revenues earned from third party management and leasing contracts (the "Third Party Earn-Out" estimated to be approximately $750). The formula for the Property Earn-Out provides for calculating any increases in value on a property-by-property basis, based on any increases in net income for certain properties in the Partnership's portfolio as of February 15 of the year of calculation. The Property Earn-Out is limited to $15.9 million at the first Earn-Out Closing and $22.6 million at all Earn-Out Closings (including the first Earn-Out Closing). The acquisition of Branch is discussed further in note 2, Acquisition and Development of Real Estate, of the notes to Consolidated Financial Statements.
During the first nine months of 1997, the Company also acquired ten shopping centers (the "1997 Acquisitions") unrelated to the Branch Properties for $131 million (including certain budgeted capital improvements designed to improve the performance of the acquired properties) representing 1,451,789 SF. In addition to the acquisition of the Branch Properties and the 1997 Acquisitions, the Company also has six grocery anchored shopping centers under development and is redeveloping three existing shopping centers, all of which when completed in 1998, will represent a total investment of approximately $66.2 million. During the first nine months of 1996, the Company had acquired six shopping centers totaling 706,862 square feet for $51.6 million. Liquidity and Capital Resources The Company's total indebtedness at September 30, 1997 and 1996 was approximately $240 million and $173 million, respectively, of which $206.7 million and $94.3 million had fixed interest rates averaging 7.4% and 7.5%, respectively. The weighted average interest rate on total debt at September 30, 1997 and 1996 was 7.4% and 7.6%, respectively. Based upon the Company's total market capitalization (total debt and the market value of equity) at September 30, 1997 of $957 million (closing common stock price of $26.75 per share and total common stock and equivalents outstanding of 26.8 million), the Company's debt to total market capitalization ratio was 25% vs. 41% at September 30, 1997 and 1996, respectively. Included in outstanding debt at September 30, 1997 is $101 million of outstanding debt assumed as part of the Branch acquisition. The 1997 Acquisitions were financed from the Company's $150 million line of credit (the "Line"). At September 30, 1997, the balance of the Line was $3.8 million after reducing the Line with the net proceeds from the sale of Common Stock in July, 1997, further discussed below, and had a variable rate of interest equal to the London Inter-bank Offered Rate ("Libor") plus 150 basis points, or approximately 7.15%. During 1996, the Company entered into a Stock Purchase Agreement (the "Agreement") with SC-USREALTY. Under the Agreement, the Company agreed to sell 7,499,400 shares of common stock to SC-USREALTY at a price of $17.625 per share (the fair market value of the Company's Common Stock on the date the terms of the Agreement were reached) representing total maximum proceeds of approximately $132 million. During 1996, the Company sold 3,651,800 shares to SC-USREALTY for approximately $64.4 million and the proceeds were used to pay down the Line. The Company sold 1,475,178 shares to US Realty on March 3, 1997 and the $26 million proceeds were used to reduce debt assumed as part of the Branch transaction by $25.7 million. On June 26, 1997, the Company sold 2,372,422 shares to SC-USREALTY generating proceeds of approximately $41.8 million which were used to pay down the Line, completing the issuance of common stock under the Agreement. As part of the Agreement, US Realty also has participation rights entitling them to purchase additional equity in the Company at the same price as that offered to other purchasers in order to preserve their pro rata ownership in the Company. For further discussion of the Agreement, see note 4, Stockholders' Equity, of the notes to Consolidated Financial Statements. On July 11, 1997, the Company sold 2,415,000 shares to the public at $27.25 per share. In connection with that offering, SC-USREALTY purchased an additional 1,785,000 shares at $27.25 directly from the Company. On August 11, 1997, the Underwriters exercised the over-allotment option and the Company issued an additional 129,800 shares to the public and 95,939 shares to SC-USREALTY at $27.25 per share. Total net proceeds from the sale of common stock to the public and SC-USREALTY of approximately $117 million were used to reduce the balance of the Line. The unused commitment currently available under the Line for future acquisition and development activity is approximately $146.2 million.
The Company's principal demands for liquidity are dividends to stockholders, distributions to unit holders, the operation, maintenance and improvement of real estate, and scheduled interest and principal payments. The Company paid dividends and distributions of $24.6 million and $11.5 million to its stockholders and Unit holders during the nine months ended September 30, 1997 and 1996, respectively. In January 1997, the Company increased its quarterly common dividend to $.42 per share vs. $.405 per share in 1996. Total dividends and distributions expected to be paid by the Company during 1997 will increase substantially over 1996 due to the common stock dividend increase, the sale of common stock to US Realty, the shares and Units issued as part of the Branch acquisition, and the public offering. As of September 30, 1997 and 1996, the Company's net cash used in investing activities was $118 million and $60 million, respectively, due primarily to the real estate acquisitions, developments and redevelopments previously discussed above. The Company anticipates that cash provided by operating activities, unused amounts available under the Line, and cash reserves are adequate to meet liquidity requirements. At September 30, 1997, the Company had cash balances of $14 million, a significant portion of which are escrows for the future payment of real estate taxes. The Company has made an election to be taxed, and is operating so as to qualify, as a Real Estate Investment Trust ("REIT") for Federal income tax purposes, and accordingly has paid no Federal income tax since its Initial Public Offering in 1993. While the Company intends to continue to pay dividends to its stockholders, the Company will reserve such amounts of cash flow as it considers necessary for the proper maintenance and improvement of its real estate, while still maintaining its qualification as a REIT. The Company's real estate portfolio has grown substantially during 1997 as a result of the acquisitions and developments discussed above. In addition to the Branch acquisition, during 1997 the Company has already exceeded the 1996 level of real estate acquisitions of $107 million and intends to continue to acquire shopping centers which meet its investment criteria. The Company expects to meet the related capital requirements, principally for the acquisition or development of new properties, from borrowings on the Line, and from additional public equity and debt offerings. Because such acquisition and development activities are discretionary in nature, they are not expected to burden the Company's capital resources currently available for liquidity requirements. Results of Operations Comparison of the Nine Months Ended September 30, 1997 to 1996 Revenues increased $35.7 million or 106% to $69.1 million in 1997. The increase is due primarily to the acquisition of the Branch Properties and the 1997 Acquisitions providing $25.1 million in revenues in 1997, and the 1996 Acquisitions providing $11.1 million in 1997 compared with only $1.5 during 1996, the majority of which were owned less than three months during 1996. At September 30, 1997, the real estate portfolio contained approximately 9.4 million SF, was 93.9% leased and had average rents of $9.26 per SF. Minimum rent increased $25 million or 100%, and recoveries from tenants increased $5.9 million or 108%. On a same property basis (excluding the 1997, 1996 and Branch Properties Acquisitions) revenues increased $904 or 2.8%, primarily due to higher occupancy levels. Revenues from property management, leasing, brokerage, and development services provided on properties not owned by the Company were $6.3 million in 1997 compared to $2.5 million in 1996, the increase due to the property management and leasing contracts acquired as part of the acquisition of Branch. At September 30, 1997, the Company managed properties for third party owners containing approximately 4.8 million SF vs. 1.2 million SF at September 30, 1996.
Operating expenses increased $17.5 million or 98.3% to $35.3 million in 1997. Combined operating and maintenance, and real estate taxes increased $7.7 million or 92% during 1997 to $16 million. The increases are due to the acquisition of the Branch Properties and the 1997 Acquisitions generating $9.1 million in operating expenses in 1997 and the 1996 Acquisitions generating $4.4 million in operating expenses in 1997 compared with $491 in expenses during 1996, the majority of which were owned less than three months during 1996. General and administrative expense increased 99% during 1997 to $7.8 million due to the hiring of new employees and related costs necessary to manage the properties recently acquired and expected to be acquired during 1997. Depreciation and amortization was 107% higher than 1996 due to the acquisition of the Branch Properties and the 1997 and 1996 Acquisitions. Interest expense increased to $14.7 million in 1997 from $7.9 million in 1996 or 86% due primarily to increased average outstanding loan balances as previously discussed. Net income for common stockholders was $17.5 million or $.97 per share in 1997 vs. $8.2 million or $.81 per share in 1996. Comparison of the Three Months Ended September 30, 1997 to 1996 Revenues increased $14.8 million or 123% to $26.8 million in 1997. The increase is due primarily to the acquisition of Branch Properties and the 1997 Acquisitions providing $12.1 million in revenues in 1997, and the 1996 Acquisitions providing $3.7 million in 1997 compared with only $1.3 million in 1996, the majority of which were owned less than three months during 1996. Minimum rent increased $10.5 million or 118%, and recoveries from tenants increased $2.4 million or 122%. On a same property basis (excluding the 1997, 1996 and Branch Properties Acquisitions) revenues increased $211 or 2%. Revenues from property management, leasing, brokerage, and development services provided on properties not owned by the Company were $2.6 million in 1997 compared to $991 in 1996, the increase due to the property management and leasing contracts acquired as part of the acquisition of Branch. Operating expenses increased $7.2 million or 114% to $13.4 million in 1997. Combined operating and maintenance expense and real estate taxes increased $3.5 million or 117% during 1997 to $6.5 million. The increase is due primarily to the acquisition of the Branch Properties and the 1997 Acquisitions generating $4.6 million in operating expenses in 1997 and the 1996 Acquisitions producing $1.5 million in operating expenses in 1997 compared with $440 during 1996, the majority of which were owned less than three months during 1996. General and administrative expense increased 97% during 1997 to $2.5 million for the same reasons discussed above. Depreciation and amortization was 121% higher than 1996 due to the acquisition of the Branch Properties and the 1997 and 1996 Acquisitions. Interest expense increased to $4.5 million in 1997 from $2.9 million in 1996 or 54% due primarily to increased average outstanding loan balances as discussed above. Net income for common stockholders was $8.7 million or $.35 per share in 1997 vs. $3.0 million or $.28 per share in 1996.
Funds from Operations The Company considers funds from operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts as net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of income producing property, plus depreciation and amortization of real estate, and after adjustments for unconsolidated investments in real estate partnerships and joint ventures, to be the industry standard for reporting the operations of real estate investment trusts ("REITs"). Adjustments for investments in real estate partnerships are calculated to reflect FFO on the same basis. While management believes that FFO is the most relevant and widely used measure of the Company's performance, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered an alternative to net income as an indicator of the Company's operating performance, and is not indicative of cash available to fund all cash flow needs. Additionally, the Company's calculation of FFO, as provided below, may not be comparable to similarly titled measures of other REITs. FFO for the nine months ended September 30 increased $16.6 million or 121% from 1996 to 1997 as a result of the acquisition activity discussed above under "Results of Operations". FFO for the periods ended September 30, 1997 and 1996 are summarized in the following table: <TABLE> <CAPTION> 1997 1996 ------- ------- <S> <C> <C> Net income for common stockholders $17,507 8,198 Add back: Real estate depreciation and 11,090 5,557 amortization, net Minority interests in net income of redeemable operating partnership units 1,776 0 ------- ------ Funds from operations $30,373 13,755 ======= ====== Cash flow provided by (used by): Operating activities $38,032 14,275 Investing activities (117,932) (60,133) Financing activities 85,638 57,496 Weighted average shares outstanding 19,956 10,150 ======= ====== </TABLE> Environmental Matters The Company like others in the commercial real estate industry, is subject to numerous environmental laws and regulations and the operation of dry cleaning plants at the Company's shopping centers is the principal environmental concern. The Company believes that the dry cleaners are operating in accordance with current laws and regulations and has established procedures to monitor their operations. Based on information presently available, no additional environmental accruals were made and management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or operations of the Company.
Economic Conditions A substantial number of the Company's long-term leases contain provisions designed to mitigate the adverse impact of inflation on the Company's net income. Such provisions include percentage rentals, rental escalation clauses and reimbursements to the Company for actual common area maintenance, insurance, and real estate taxes paid. In addition, 37% of the Company's leases have terms of five years or less, which allows the Company the opportunity to increase rents upon lease expiration. Approximately 38% of the Company's leases expire beyond 10 years and are generally anchor tenants. Unfavorable economic conditions could result in the inability of certain tenants to meet their lease obligations and otherwise could adversely affect the Company's ability to attract and retain desirable tenants. The Company had one tenant which leased four stores that filed bankruptcy. The total rents from this tenant represented less than 1% of the Companys' total rent, and the Company had previously reserved for these amounts. At September 30, 1997 approximately 9.7%, 4.8%, 3.1% and 2.6% of the Company's annualized total rent is received from Publix, Winn-Dixie, Kroger, and Harris Teeter, respectively (the "Four Major Tenants"). Although the Company considers the financial condition and its relationship with the Four Major Tenants to be good, a significant downturn in business or the non-renewal of expiring leases of the Four Major Tenants could adversely affect the Company. Management also believes that the shopping centers are relatively well positioned to withstand adverse economic conditions since they are typically anchored by supermarkets, drug stores and discount department stores that offer day-to-day necessities rather than luxury goods.
Item 6. Exhibits and Reports on Form 8-K 10. Material Contracts: (a) Purchase and Sale Agreement, dated May 12, 1997 between Quantum Realty Partners, L.P., a Delaware limited partnership, as Sellers, and RRC Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary of the Company, as Buyer relating to the acquisition of Tamiami Trail Shopping Center. (b) Amendment to Purchase and Sale Agreement, dated July 11, 1997 between Quantum Realty Partners, L.P., a Delaware limited partnership, as Sellers, and RRC Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary of the Company, as Buyer relating to the acquisition of Tamiami Trail Shopping Center. (c) Purchase and Sale Agreement, dated July 9, 1997 between Miami Garden Associates, a New Jersey general partnership, as Sellers, and RRC Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary of the Company, as Buyer relating to the acquisition of Garden Square Shopping Center. (d) Purchase and Sale Agreement, dated September 19, 1997 between TBC Kingsdale, Inc. a Massachusetts corporation, as Sellers, and RRC Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary of the Company, as Buyer relating to the acquisition of Kingsdale Shopping Center. (e) Amendment to Purchase and Sale Agreement, dated October 1, 1997 between TBC Kingsdale, Inc. a Massachusetts corporation, as Sellers, and RRC Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary of the Company, as Buyer relating to the acquisition of Kingsdale Shopping Center. B. Reports on Form 8-K: None 27. Financial Data Schedule
SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 13, 1997 REGENCY REALTY CORPORATION --------------------------- By: /s/ J.Christian Leavitt Vice President, Treasurer and Secretary