UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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 Centers Corporation)
Commission File Number 0-24763 (Regency Centers, L.P.)
REGENCY CENTERS CORPORATION
REGENCY CENTERS, L.P.
(Exact name of registrant as specified in its charter)
FLORIDA (REGENCY CENTERS CORPORATION)
59-3191743
DELAWARE (REGENCY CENTERS, L.P)
59-3429602
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Independent Drive, Suite 114
Jacksonville, Florida 32202
(904) 598-7000
(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Regency Centers Corporation
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $.01 par value
REG
The Nasdaq Stock Market LLC
Regency Centers, L.P.
None
N/A
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.
Regency Centers Corporation YES ☒ NO ☐ Regency Centers, L.P. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Regency Centers Corporation:
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filer
Smaller reporting company
Regency Centers, L.P.:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Regency Centers Corporation YES ☐ NO ☐ Regency Centers, L.P. YES ☐ NO ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Regency Centers Corporation YES ☐ NO ☒ Regency Centers, L.P. YES ☐ NO ☒
The number of shares outstanding of the Regency Centers Corporation’s common stock was 167,557,086 as of August 2, 2019.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2019, of Regency Centers Corporation and Regency Centers, L.P. Unless stated otherwise or the context otherwise requires, references to “Regency Centers Corporation” or the “Parent Company” mean Regency Centers Corporation and its controlled subsidiaries; and references to “Regency Centers, L.P.” or the “Operating Partnership” mean Regency Centers, L.P. and its controlled subsidiaries. The term “the Company”, "Regency Centers" or “Regency” means the Parent Company and the Operating Partnership, collectively.
The Parent Company is a real estate investment trust (“REIT”) and the general partner of the Operating Partnership. The Operating Partnership's capital includes general and limited common Partnership Units (“Units”). As of June 30, 2019, the Parent Company owned approximately 99.8% of the Units in the Operating Partnership. The remaining limited Units are owned by investors. As the sole general partner of the Operating Partnership, the Parent Company has exclusive control of the Operating Partnership's day-to-day management.
The Company believes combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into this single report provides the following benefits:
•
Enhances investors' understanding of the Parent Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
Eliminates duplicative disclosure and provides a more streamlined and readable presentation; and
Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
Management operates the Parent Company and the Operating Partnership as one business. The management of the Parent Company consists of the same individuals as the management of the Operating Partnership. These individuals are officers of the Parent Company and employees of the Operating Partnership.
The Company believes it is important to understand the key differences between the Parent Company and the Operating Partnership in the context of how the Parent Company and the Operating Partnership operate as a consolidated company. The Parent Company is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain debt of the Operating Partnership. Except for $500 million of unsecured public and private placement debt, the Parent Company does not hold any indebtedness, but guarantees all of the unsecured debt of the Operating Partnership. The Operating Partnership is also the co-issuer and guarantees $500 million of debt of the Parent Company. The Operating Partnership holds all the assets of the Company and retains the ownership interests in the Company's joint ventures. Except for net proceeds from public equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates all remaining capital required by the Company's business. These sources include the Operating Partnership's operations, its direct or indirect incurrence of indebtedness, and the issuance of partnership units.
Stockholders' equity, partners' capital, and noncontrolling interests are the main areas of difference between the consolidated financial statements of the Parent Company and those of the Operating Partnership. The Operating Partnership's capital includes general and limited common Partnership Units. The limited partners' units in the Operating Partnership owned by third parties are accounted for in partners' capital in the Operating Partnership's financial statements and outside of stockholders' equity in noncontrolling interests in the Parent Company's financial statements.
In order to highlight the differences between the Parent Company and the Operating Partnership, there are sections in this report that separately discuss the Parent Company and the Operating Partnership, including separate financial statements, controls and procedures sections, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure for the Parent Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company.
As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have assets other than its investment in the Operating Partnership. Therefore, while stockholders' equity and partners' capital differ as discussed above, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements.
TABLE OF CONTENTS
Form 10-Q
Report Page
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018
1
Consolidated Statements of Operations for the periods ended June 30, 2019 and 2018
2
Consolidated Statements of Comprehensive Income for the periods ended June 30, 2019 and 2018
3
Consolidated Statements of Equity for the periods ended June 30, 2019 and 2018
4
Consolidated Statements of Cash Flows for the periods ended June 30, 2019 and 2018
6
8
9
10
Consolidated Statements of Capital for the periods ended June 30, 2019 and 2018
11
13
Notes to Consolidated Financial Statements
15
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
56
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
57
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
58
SIGNATURES
59
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2019 and December 31, 2018
(in thousands, except share data)
2019
2018
Assets
(unaudited)
Real estate assets, at cost
$
10,878,303
10,863,162
Less: accumulated depreciation
1,656,527
1,535,444
Real estate investments, net
9,221,776
9,327,718
Investments in real estate partnerships
465,495
463,001
Properties held for sale
15,106
60,516
Cash, cash equivalents and restricted cash (including $3,582 and $2,658 of restricted cash at June 30, 2019 and December 31, 2018, respectively)
37,364
45,190
Tenant and other receivables
157,883
172,359
Deferred leasing costs, less accumulated amortization of $104,972 and $101,093 at June 30, 2019 and December 31, 2018, respectively
81,183
84,983
Acquired lease intangible assets, less accumulated amortization of $237,924 and $219,689 at June 30, 2019 and December 31, 2018, respectively
262,553
387,069
Right of use assets, net
295,084
—
Other assets
410,745
403,827
Total assets
10,947,189
10,944,663
Liabilities and Equity
Liabilities:
Notes payable
2,994,495
3,006,478
Unsecured credit facilities
683,970
708,734
Accounts payable and other liabilities
188,723
224,807
Acquired lease intangible liabilities, less accumulated amortization of $106,286 and $92,746 at June 30, 2019 and December 31, 2018, respectively
457,667
496,726
Lease liabilities
223,959
Tenants’ security, escrow deposits and prepaid rent
45,527
57,750
Total liabilities
4,594,341
4,494,495
Commitments and contingencies
Equity:
Stockholders’ equity:
Common stock, $0.01 par value per share, 220,000,000 shares authorized; 167,555,322 and 167,904,593 shares issued at June 30, 2019 and December 31, 2018, respectively
1,676
1,679
Treasury stock at cost, 430,536 and 390,163 shares held at June 30, 2019 and December 31, 2018, respectively
(22,536
)
(19,834
Additional paid-in-capital
7,645,065
7,672,517
Accumulated other comprehensive loss
(14,086
(927
Distributions in excess of net income
(1,309,278
(1,255,465
Total stockholders’ equity
6,300,841
6,397,970
Noncontrolling interests:
Exchangeable operating partnership units, aggregate redemption value of $23,352 and $20,532 at June 30, 2019 and December 31, 2018, respectively
10,528
10,666
Limited partners’ interests in consolidated partnerships
41,479
41,532
Total noncontrolling interests
52,007
52,198
Total equity
6,352,848
6,450,168
Total liabilities and equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
(in thousands, except per share data)
Three months ended June 30,
Six months ended June 30,
Revenues:
Lease income
266,236
272,203
543,539
539,713
Other property income
2,194
2,322
4,176
4,347
Management, transaction, and other fees
7,442
6,887
14,415
14,045
Total revenues
275,872
281,412
562,130
558,105
Operating expenses:
Depreciation and amortization
93,589
89,105
190,783
177,629
Operating and maintenance
42,759
41,851
83,397
84,367
General and administrative
18,717
16,776
40,017
34,382
Real estate taxes
33,506
31,541
67,661
61,967
Other operating expenses
1,533
2,799
2,667
4,432
Total operating expenses
190,104
182,072
384,525
362,777
Other expense (income):
Interest expense, net
37,173
38,074
74,925
74,859
Provision for impairment, net of tax
10,441
12,533
12,113
28,587
Gain on sale of real estate, net of tax
(442
(1,123
(16,932
(1,219
Early extinguishment of debt
11,010
10,591
11,172
Net investment income
(966
(569
(3,320
(602
Total other expense (income)
46,206
59,925
77,377
112,797
Income from operations before equity in income of investments in real estate partnerships
39,562
39,415
100,228
82,531
Equity in income of investments in real estate partnerships
13,128
9,174
43,955
19,523
Net income
52,690
48,589
144,183
102,054
Exchangeable operating partnership units
(109
(100
(299
(212
(853
(648
(1,710
(1,342
Income attributable to noncontrolling interests
(962
(748
(2,009
(1,554
Net income attributable to common stockholders
51,728
47,841
142,174
100,500
Income per common share - basic
0.31
0.28
0.85
0.59
Income per common share - diluted
Consolidated Statements of Comprehensive Income
(in thousands)
Other comprehensive (loss) income:
Effective portion of change in fair value of derivative instruments:
Effective portion of change in fair value of derivative instruments
(9,227
4,289
(14,716
13,794
Reclassification adjustment of derivative instruments included in net income
584
1,415
408
3,553
Unrealized gain (loss) on available-for-sale debt securities
123
44
260
(75
Other comprehensive (loss) income
(8,520
5,748
(14,048
17,272
Comprehensive income
44,170
54,337
130,135
119,326
Less: comprehensive income attributable to noncontrolling interests:
Net income attributable to noncontrolling interests
962
748
2,009
1,554
Other comprehensive (loss) income attributable to noncontrolling interests
(529
195
(889
678
Comprehensive income attributable to noncontrolling interests
433
943
1,120
2,232
Comprehensive income attributable to the Company
43,737
53,394
129,015
117,094
Consolidated Statements of Equity
For the three months ended June 30, 2019 and 2018
Noncontrolling Interests
Common
Stock
Treasury
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Distributions
in Excess of
Net Income
Total
Stockholders’
Equity
Exchangeable
Operating
Partnership
Units
Limited
Partners’
Interest in
Consolidated
Partnerships
Noncontrolling
Interests
Balance at March 31, 2018
1,694
(18,756
7,746,427
4,764
(1,169,828
6,564,301
10,847
30,233
41,080
6,605,381
100
648
Other comprehensive income
5,553
12
183
Deferred compensation plan, net
(512
511
(1
Restricted stock issued, net of amortization
4,014
Common stock redeemed for taxes withheld for stock based compensation, net
103
Common stock issued under dividend reinvestment plan
320
Distributions to partners
(1,141
Cash dividends declared:
Common stock/unit ($0.555 per share)
(94,031
(194
(94,225
Balance at June 30, 2018
(19,268
7,751,375
10,317
(1,216,018
6,528,100
10,765
29,923
40,688
6,568,788
Balance at March 31, 2019
1,675
(21,226
7,639,353
(6,096
(1,263,011
6,350,695
10,641
41,437
52,078
6,402,773
109
853
(7,990
(17
(513
(530
(1,310
1,310
3,951
3,952
94
357
Contributions from partners
1,001
(1,299
Common stock/unit ($0.585 per share)
(97,995
(205
(98,200
Balance at June 30, 2019
For the six months ended June 30, 2019 and 2018
Balance at December 31, 2017
1,714
(18,307
7,873,104
(6,289
(1,158,170
6,692,052
10,907
30,095
41,002
6,733,054
Adjustment due to change in accounting policy (note 1)
30,889
30,901
30,903
Adjusted balance at January 1, 2018
(6,277
(1,127,281
6,722,953
30,097
41,004
6,763,957
212
1,342
16,594
35
643
(961
957
(4
8,134
8,135
(6,540
Common stock repurchased and retired
(21
(124,968
(124,989
Common stock issued, net of issuance costs
(2,159
Common stock/unit ($1.11 per share)
(189,237
(389
(189,626
Balance at December 31, 2018
299
1,710
(13,159
(28
(861
(2,702
2,702
7,901
7,904
(5,957
(6
(32,772
(32,778
740
1,896
(2,864
Reallocation of limited partner's interest
(66
66
Common stock/unit ($1.17 per share)
(195,987
(409
(196,396
5
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan costs and debt premiums
5,911
4,999
(Accretion) and amortization of above and below market lease intangibles, net
(19,496
(19,326
Stock-based compensation, net of capitalization
6,989
6,574
(43,955
(19,523
Distribution of earnings from operations of investments in real estate partnerships
25,659
26,711
Settlement of derivative instruments
(5,719
Deferred compensation expense
3,297
544
Realized and unrealized gain on investments
(3,299
Changes in assets and liabilities:
6,975
(3,802
Deferred leasing costs
(4,782
(3,404
(7,628
(6,174
(3,292
(6,052
(12,075
2,666
Net cash provided by operating activities
289,323
300,906
Cash flows from investing activities:
Acquisition of operating real estate
(19,302
(85,766
Advance deposits paid on acquisition of operating real estate
(11,000
(2,025
Real estate development and capital improvements
(80,032
(120,579
Proceeds from sale of real estate investments
83,460
42,508
Collection of notes receivable
15,648
(32,970
(45,451
Distributions received from investments in real estate partnerships
46,740
2,328
Dividends on investment securities
264
176
Acquisition of investment securities
(11,498
(11,726
Proceeds from sale of investment securities
10,828
10,976
Net cash used in investing activities
(13,510
(193,911
Cash flows from financing activities:
Repurchase of common shares in conjunction with equity award plans
(6,148
(6,755
Common shares repurchased through share repurchase program
Proceeds from sale of treasury stock
99
Distributions to limited partners in consolidated partnerships, net
(968
Distributions to exchangeable operating partnership unit holders
Dividends paid to common stockholders
(195,246
(188,559
Repayment of fixed rate unsecured notes
(250,000
(150,000
Proceeds from issuance of fixed rate unsecured notes, net
298,983
299,511
Proceeds from unsecured credit facilities
185,000
400,000
Repayment of unsecured credit facilities
(210,000
(310,000
Proceeds from notes payable
1,740
Repayment of notes payable
(53,530
(6,199
Scheduled principal payments
(4,562
(5,513
Payment of loan costs
(3,343
(9,432
Early redemption costs
(10,647
(10,491
Net cash used in financing activities
(283,639
(113,136
Net decrease in cash and cash equivalents and restricted cash
(7,826
(6,141
Cash and cash equivalents and restricted cash at beginning of the period
49,381
Cash and cash equivalents and restricted cash at end of the period
43,240
Supplemental disclosure of cash flow information:
Cash paid for interest (net of capitalized interest of $1,996 and $4,150 in 2019 and 2018, respectively)
68,351
66,692
Cash paid for income taxes, net of refunds
459
290
Supplemental disclosure of non-cash transactions:
Mortgage loans assumed for the acquisition of real estate
9,700
Change in accrued capital expenditures
9,149
Common stock issued by Parent Company for dividend reinvestment plan
Stock-based compensation capitalized
1,105
1,777
Contributions from limited partners in consolidated partnerships, net
Common stock issued for dividend reinvestment in trust
479
415
Contribution of stock awards into trust
2,397
1,174
Distribution of stock held in trust
167
524
Change in fair value of debt securities available-for-sale
(89
7
(in thousands, except unit data)
Liabilities and Capital
Capital:
Partners’ capital:
General partner; 167,555,322 and 167,904,593 units outstanding at June 30, 2019 and December 31, 2018, respectively
6,314,927
6,398,897
Limited partners; 349,902 units outstanding at June 30, 2019 and December 31, 2018
Accumulated other comprehensive (loss)
Total partners’ capital
6,311,369
6,408,636
Noncontrolling interest: Limited partners’ interests in consolidated partnerships
Total capital
Total liabilities and capital
(in thousands, except per unit data)
Net income attributable to common unit holders
51,837
47,941
142,473
100,712
Income per common unit - basic
Income per common unit - diluted
Less: comprehensive income (loss) attributable to noncontrolling interests:
341
831
849
1,985
Comprehensive income attributable to the Partnership
43,829
53,506
129,286
117,341
Consolidated Statements of Capital
General Partner Preferred
and Common Units
Partners
Noncontrolling Interests in
Limited Partners’ Interest in
Consolidated Partnerships
6,559,537
6,575,148
Other comprehensive loss
5,565
(95,366
Restricted units issued as a result of amortization of restricted stock issued by Parent Company
Common units issued as a result of common stock issued by Parent Company, net of repurchases
423
6,517,783
6,538,865
6,356,791
6,361,336
(8,007
(99,499
Restricted units issued as a result of restricted stock issued by Parent Company, net of amortization
Common units redeemed as a result of common stock redeemed by Parent Company, net of issuances
451
General
Partner
Preferred
and Common
Interests in
Limited Partners’
6,698,341
6,702,959
6,729,230
6,733,860
16,629
(191,785
Common units repurchased and retired as a result of common stock repurchased and retired by Parent Company
(5,852
(13,187
(199,260
(5,217
Issuance of notes receivable
Common units repurchased through share repurchase program
(195,655
(188,948
14
REGENCY CENTERS CORPORATION AND REGENCY CENTERS, L.P.
Notes to Unaudited Consolidated Financial Statements
June 30, 2019
1.
Organization and Significant Accounting Policies
Regency Centers Corporation (the “Parent Company”) began its operations as a Real Estate Investment Trust (“REIT”) in 1993 and is the general partner of Regency Centers, L.P. (the “Operating Partnership”). The Parent Company primarily engages in the ownership, management, leasing, acquisition, and development and redevelopment of shopping centers through the Operating Partnership, and has no other assets other than through its investment in the Operating Partnership, and its only liabilities are $500 million of unsecured public and private placement notes, which are co-issued and guaranteed by the Operating Partnership. The Parent Company guarantees all of the unsecured debt of the Operating Partnership.
As of June 30, 2019, the Parent Company, the Operating Partnership, and their controlled subsidiaries on a consolidated basis owned 304 properties and held partial interests in an additional 117 properties through unconsolidated investments in real estate partnerships (also referred to as "joint ventures" or "investment partnerships").
The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. These adjustments are considered to be of a normal recurring nature.
Consolidation
The Company consolidates properties that are wholly-owned and properties where it owns less than 100%, but which it has control over the activities most important to the overall success of the partnership. Control is determined using an evaluation based on accounting standards related to the consolidation of Variable Interest Entities ("VIEs") and voting interest entities.
Ownership of the Operating Partnership
The Operating Partnership’s capital includes general and limited common Partnership Units. As of June 30, 2019, the Parent Company owned approximately 99.8% of the outstanding common Partnership Units of the Operating Partnership with the remaining limited common Partnership Units held by third parties (“Exchangeable operating partnership units” or “EOP units”). The EOP units are exchangeable for cash or one share of common stock of the Parent Company, at the discretion of the Parent Company, and the unit holder cannot require redemption in cash or other assets. The Parent Company classifies EOP units as permanent equity in the accompanying Consolidated Balance Sheets and Consolidated Statements of Equity and Comprehensive Income. The Parent Company serves as general partner of the Operating Partnership. The EOP unit holders have limited rights over the Operating Partnership such that they do not have the power to direct the activities of the Operating Partnership. As such, the Operating Partnership is considered a VIE, and the Parent Company, which consolidates it, is the primary beneficiary. The Parent Company’s only investment is the Operating Partnership. Net income and distributions of the Operating Partnership are allocable to the general and limited common Partnership Units in accordance with their ownership percentages.
Real Estate Partnerships
As of June 30, 2019, Regency had a partial ownership interest in 129 properties through partnerships, of which 12 are consolidated. Regency's partners include institutional investors, other real estate developers and/or operators, and individual parties who had a role in Regency sourcing transactions for development and investment (the "Partners" or "limited partners"). Regency has a variable interest in these entities through its equity interests, with Regency the primary beneficiary in certain of these real estate partnerships. As such, Regency consolidates the partnerships for which it is the primary beneficiary and reports the limited partners’ interests as noncontrolling interests. For those partnerships which Regency is not the primary beneficiary and does not control, but has significant influence, Regency recognizes its investment in them using the equity method of accounting.
The assets of these partnerships are restricted to the use of the partnerships and cannot be used by general creditors of the Company. And similarly, the obligations of the partnerships can only be settled by the assets of these partnerships.
The major classes of assets, liabilities, and non-controlling equity interests held by the Company's consolidated VIEs, exclusive of the Operating Partnership, are as follows:
December 31, 2018
Net real estate investments
116,894
112,085
Cash, cash equivalents and restricted cash
4,022
7,309
Liabilities
17,657
18,432
31,058
30,280
Leases
Lease Income and Tenant Receivables
The Company leases space to tenants under agreements with varying terms that generally provide for fixed payments of base rent, with designated increases over the term of the lease. Some of the lease agreements contain provisions that provide for additional rents based on tenants' sales volume ("percentage rent"). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. Additionally, most lease agreements contain provisions for reimbursement of the tenants' share of actual real estate taxes, insurance and common area maintenance (“CAM”) costs (collectively "Recoverable Costs") incurred.
Lease terms generally range from three to seven years for tenant space under 10,000 square feet (“Shop Space”) and in excess of five years for spaces greater than 10,000 square feet (“Anchor Tenants”). Many leases also provide the option for the tenants to extend their lease beyond the initial term of the lease. If a tenant does not exercise its option or otherwise negotiate to renew, the lease expires and the lease contains an obligation for the tenant to relinquish its space so it can be leased to a new tenant. This generally involves some level of cost to prepare the space for re-leasing, which is capitalized and depreciated over the shorter of the life of the subsequent lease or the life of the improvement.
On January 1, 2019, the Company adopted the new accounting guidance in Accounting Standards Codification (“ASC”) Topic 842, Leases, including all related Accounting Standard Updates (“ASU”). The Company elected to use the alternative modified retrospective transition method provided in ASU 2018-11 (the "effective date method"). Under this method, the effective date of January 1, 2019 is the date of initial application. In connection with the adoption of Topic 842, the Company elected a package of practical expedients, transition options, and accounting policy elections as follows:
Package of practical expedients - applied to all leases, allowing the Company not to reassess (i) whether expired or existing contracts contain leases under the new definition of a lease, (ii) lease classification for expired or existing leases, and (iii) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842;
For land easements, the Company elected not to assess at transition whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the previous lease accounting standard ("Topic 840");
Lessor separation and allocation practical expedient - Regency elected, as lessor, to aggregate non-lease components with the related lease component if certain conditions are met, and account for the combined component based on its predominant characteristic, which generally results in combining lease and non-lease components of its tenant lease contracts to a single line shown as Lease income in the accompanying Consolidated Statements of Operations; and
The Company made an accounting policy election to continue to exclude, from contract consideration, sales tax (and similar taxes) collected from lessees.
The Company's existing leases were not re-evaluated and continue to be classified as operating leases, as per the practical expedient package elected above. New and modified leases will now require evaluation of specific classification criteria, which, based on the customary terms of the Company's leases, should continue to be classified as operating leases. However, certain longer-term leases (both lessee and lessor leases) may be classified as direct financing or sales type leases, which may result in selling profit and an accelerated pattern of earnings recognition. On June 30, 2019, all of the Company’s leases were classified as operating leases.
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CAM is a non-lease component of the lease contract under Topic 842, and therefore would be accounted for under Topic 606, Revenue from Contracts with Customers, and presented separate from Lease income in the Consolidated Statements of Operations, based on an allocation of the overall contract price, which is not necessarily the amount that would be billable to the tenants for CAM reimbursements per the terms of the lease contract. As the timing and pattern of providing the CAM service to the tenant is the same as the timing and pattern of the tenants' use of the underlying lease asset, the Company elected, as part of a practical expedient referred to above, to combine CAM with the remaining lease components, along with tenants' reimbursement of real estate taxes and insurance, and recognize them together as Lease income in the accompanying Consolidated Statements of Operations.
Lease income for operating leases with fixed payment terms is recognized on a straight-line basis over the expected term of the lease for all leases for which collectibility is considered probable at the commencement date. At lease commencement, the Company generally expects that collectibility is probable due to the Company’s credit checks on tenants and other creditworthiness analysis undertaken before entering into a new lease; therefore, income from most operating leases is initially recognized on a straight-line basis. For operating leases in which collectibility of Lease income is not considered probable, Lease income is recognized on a cash basis and all previously recognized uncollectible Lease income is reversed in the period in which the Lease income is determined not to be probable of collection. In addition to the lease-specific collectability assessment performed under Topic 842, the Company also recognizes a general reserve, as a reduction to Lease income, for its portfolio of operating lease receivables which are not expected to be fully collectible based on the Company’s historical collection experience.
Topic 842 also changes the treatment of leasing costs, such that non-contingent internal leasing and legal costs associated with leasing activities can no longer be capitalized. The Company, as a lessor, may only defer as initial direct costs the incremental costs of a tenant operating lease that would not have been incurred if the lease had not been obtained. These costs generally include third party broker payments, which are capitalized to Deferred leasing costs in the accompanying Consolidated Balance Sheets and amortized over the expected term of the lease to Depreciation and amortization expense in the accompanying Consolidated Statements of Operations.
Lease Obligations
The Company has certain properties within its consolidated real estate portfolio that are either partially or completely on land subject to ground leases with third parties, which are all classified as operating leases. Accordingly, the Company owns only a long-term leasehold or similar interest in these properties. The building and improvements constructed on the leased land are capitalized as Real estate assets in the accompanying Consolidated Balance Sheets and depreciated over the shorter of the useful life of the improvements or the lease term.
In addition, the Company has non-cancelable operating leases pertaining to office space from which it conducts its business. Leasehold improvements are capitalized as tenant improvements, included in Other assets in the Consolidated Balance Sheets, and depreciated over the shorter of the useful life of the improvements or the lease term.
Upon the adoption of Topic 842 the Company has recognized Lease liabilities on its Consolidated Balance Sheets for its ground and office leases of $225.4 million at January 1, 2019, and corresponding Right of use assets of $297.8 million, net of or including the opening balance for straight line rent and above / below market ground lease intangibles related to these same ground and office leases. A key input in estimating the Lease liabilities and resulting Right of use assets is establishing the discount rate in the lease, which requires additional inputs for the longer-term ground leases, including interest rates that correspond with the remaining term of the lease, the Company's credit spread, and a securitization adjustment necessary to reflect the collateralized payment terms present in the lease.
The ground and office lease expenses continue to be recognized on a straight line basis over the term of the leases, including management's estimate of expected option renewal periods. For ground leases, the Company generally assumes it will exercise options through the latest option date of that shopping center's anchor tenant lease. See Note 7, Leases, for additional disclosures.
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Revenues and Other Receivables
Other property income includes incidental income from the properties and is generally recognized at the point in time that the performance obligation is met. All income from contracts with the Company's real estate partnerships is included within Management, transaction and other fees on the Consolidated Statements of Operations. The primary components of these revenue streams, the timing of satisfying the performance obligations, and amounts recognized are as follows:
Timing of satisfaction of performance obligations
Point in time
Management, transaction and other fees
Property management services
Over time
3,665
3,652
7,428
7,420
Asset management services
1,760
1,804
3,538
3,507
Leasing services
705
1,072
1,463
1,757
Other transaction fees
1,312
359
1,986
1,361
Total management, transaction, and other fees
The accounts receivable for the above Other property income and management services, which are included within Tenant and other receivables in the accompanying Consolidated Balance Sheets, are $11.0 million and $12.5 million, as of June 30, 2019 and December 31, 2018, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation, including amounts in Cash, cash equivalents, and restricted cash in the accompanying Consolidated Balance Sheets, and in Lease income and Other property income in the accompanying Consolidated Statements of Operations.
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Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements and expected impact on our financial statements:
Standard
Description
Date of adoption
Effect on the financial statements or other significant matters
Recently adopted:
Leases (Topic 842) and related updates:
ASU 2016-02, February 2016, Leases (Topic 842)
ASU 2018-10, July 2018: Codification Improvements to Topic 842, Leases
ASU 2018-11, July 2018, Leases (Topic 842): Targeted Improvements
ASU 2018-20, December 2018, Leases (Topic 842) : Narrow-Scope Improvements for Lessors
ASU 2019-01, March 2019, Leases (Topic 842) : Codification Improvements
Topic 842 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. It also makes targeted changes to lessor accounting.
The provisions of these ASUs are effective as of January 1, 2019, with early adoption permitted. Topic 842 provides a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief or an additional transition method, allowing for initial application at the date of adoption and a cumulative-effect adjustment to opening retained earnings.
See the updated Leases accounting policy disclosed earlier in Note 1 and the added Leases disclosures in Note 7.
January 2019
The Company has completed its evaluation and adoption of this standard, as discussed earlier in Note 1. The Company utilized the alternative modified retrospective transition method provided in ASU 2018-11 (the "effective date method"), under which the effective date of January 1, 2019 is also the date of initial application.
See the updated Leases accounting policy disclosed earlier in Note 1 and the added disclosures in Note 7, Leases.
Beyond the policy, presentation and disclosure changes discussed, the following changes had a direct impact to Net Income from the adoption of Topic 842:
Capitalization of indirect internal non-contingent leasing costs and legal leasing costs are no longer permitted upon the adoption of this standard, which is resulting in an increase to Total operating expenses in the Consolidated Statements of Operations.
Previous capitalization of internal leasing costs was $6.5 million during the year ended December 31, 2018.
Previous capitalization of legal costs was $1.6 million during the year ended December 31, 2018, including our pro rata share recognized through Equity in income of investments in real estate partnerships.
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Not yet adopted:
ASU 2016-13, June 2016, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
This ASU also applies to how the Company evaluates impairments of any held to maturity debt securities.
January 2020
The Company is currently evaluating the accounting standard, but does not expect the adoption to have a material impact on its financial position, results of operations, or cash flows.
ASU 2018-19, November 2018: Codification Improvements to Topic 326, Financial Instruments - Credit Losses
This ASU clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases.
The Company currently does not expect the adoption of this ASU to have a material impact on its financial statements and related disclosures.
See Leases section of Note 1 for disclosure of collectibility policy over lease receivables from operating leases.
ASU 2018-13, August 2018, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
This ASU modifies the disclosure requirements for fair value measurements within the scope of Topic 820, Fair Value Measurements, including the removal and modification of certain existing disclosures, and the addition of new disclosures.
The Company is currently evaluating the impact of adopting this new accounting standard, which is expected to only impact fair value measurement disclosures and therefore should have no impact on the Company's financial position, results of operations, or cash flows.
ASU 2018-15, August 2018, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.
The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU provides further clarification of the appropriate presentation of capitalized costs, the period over which to recognize the expense, the presentation within the Statements of Operations and Statements of Cash Flows, and the disclosure requirements.Early adoption of the standard is permitted.
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2.
Real Estate Investments
The following tables detail the shopping centers acquired or land acquired or leased for development or redevelopment:
Six months ended June 30, 2019
Date Purchased
Property Name
City/State
Property Type
Ownership
Purchase
Price
Debt
Assumed,
Net of
Premiums
Intangible
1/8/19
Pablo Plaza (1)
Jacksonville, FL
100%
600
2/8/19
Melrose Market
Seattle, WA
15,515
941
358
6/18/19
The Field at Commonwealth Ph II (2)
Chantilly, VA
Development
4,083
6/21/19
Culver Public Market
Culver City, CA
1,279
6/28/19
6401 Roosevelt
3,550
Total property acquisitions
25,027
(1) The Company purchased a .17 acre land parcel adjacent to the Company's existing operating Pablo Plaza for redevelopment.
(2) The Company purchased The Field at Commonwealth Ph II, which is land adjacent to an existing operating property, for future development.
Subsequent to the balance sheet date, on July 1, 2019, the Company acquired a 100% interest in a 258,000 SF retail operating property, The Pruneyard, in Campbell, CA for a purchase price of $212.5 million.
Six months ended June 30, 2018
1/2/18
Ballard Blocks I
49.9%
54,500
3,668
2,350
Ballard Blocks II
4,000
1/5/18
Metuchen
Metuchen, NJ
20%
33,830
3,147
1,905
1/10/18
Hewlett Crossing I & II
Hewlett, NY
30,900
3,114
1,868
4/3/18
Rivertowns Square
Dobby Ferry, NY
68,933
4,993
5,554
5/18/18
Crossroads Commons II
Boulder, CO
10,500
447
769
202,663
15,369
12,446
3.
Property Dispositions
Dispositions
The following table provides a summary of consolidated shopping centers and land parcels disposed of during the periods set forth below:
(in thousands, except number sold data)
Net proceeds from sale of real estate investments
927
38,781
42,008
442
1,123
16,932
1,219
Provision for impairment of real estate sold
2,974
1,666
3,348
Number of operating properties sold
-
Number of land parcels sold
Percent interest sold
%
At June 30, 2019, the Company also had one property classified within Properties held for sale on the Consolidated Balance Sheets.
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4.
Other Assets
The following table represents the components of Other assets in the accompanying Consolidated Balance Sheets:
Goodwill, net
313,180
314,143
Investments
45,244
41,287
Prepaid and other
35,595
17,937
Derivative assets
4,367
17,482
Furniture, fixtures, and equipment, net
6,590
6,127
Deferred financing costs, net
5,769
6,851
Total other assets
The following table presents the goodwill balances and activity during the year to date periods ended:
Goodwill
Impairment
Losses
Beginning of year balance
316,858
(2,715
331,884
Goodwill additions
500
Goodwill allocated to Provision for impairment
(963
(12,628
Goodwill allocated to Properties held for sale
(1,159
Goodwill associated with disposed reporting units:
(1,779
1,779
(9,913
9,913
Goodwill allocated to Gain on sale of real estate
(527
527
(4,454
End of period balance
314,552
(1,372
As the Company identifies properties ("reporting units") that no longer meet its investment criteria, it will evaluate the property for potential sale. A decision to sell a reporting unit results in the need to evaluate its goodwill for recoverability and may result in impairment. If events occur that trigger an impairment evaluation at multiple reporting units, a goodwill impairment may be significant.
5.
Notes Payable and Unsecured Credit Facilities
The Company’s outstanding debt consisted of the following:
Weighted
Average
Contractual
Rate
Effective
Notes payable:
Fixed rate mortgage loans
4.5%
4.0%
344,963
403,306
Variable rate mortgage loans (1)
3.5%
3.6%
127,018
127,850
Fixed rate unsecured public and private debt
4.4%
2,522,514
2,475,322
Total notes payable
Unsecured credit facilities:
Line of Credit (the "Line") (2)
3.4%
120,000
145,000
Term loans
2.4%
2.5%
563,970
563,734
Total unsecured credit facilities
Total debt outstanding
3,678,465
3,715,212
(1) Includes five mortgages whose interest rates vary on LIBOR based formulas. Three of these variable rate loans have interest rate swaps in place to fix the interest rates at a range of 2.8% to 4.1%.
(2) Weighted average effective and contractual rate for the Line is calculated based on a fully drawn Line balance.
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Significant financing activity during 2019 includes:
On March 6, 2019, the Company issued $300 million of 4.65% senior unsecured public notes, which priced at 99.661%, and mature in March 2049. The net proceeds of the offering were used to repay in full its outstanding $250 million 4.8% notes due April 15, 2021, including a make-whole premium of approximately $9.6 million and accrued interest, with the remaining proceeds used toward repaying in full two mortgages totaling $52.7 million with interest rates ranging between 6.25% and 7.25%, including a prepayment premium of $1 million.
As of June 30, 2019, scheduled principal payments and maturities on notes payable and unsecured credit facilities were as follows:
Scheduled Principal Payments and Maturities by Year:
Scheduled
Principal
Payments
Mortgage
Loan
Maturities
Unsecured
Maturities (1)
2019 (2)
4,924
2020
11,287
39,074
300,000
350,361
2021
11,599
76,251
87,850
2022
11,798
5,848
685,000
702,646
2023
10,077
59,375
69,452
Beyond 5 Years
27,013
209,846
2,250,000
2,486,859
Unamortized debt premium/(discount) and issuance costs
4,890
(28,517
(23,627
76,698
395,284
3,206,483
(1) Includes unsecured public and private debt and unsecured credit facilities.
(2) Reflects scheduled principal payments for the remainder of the year.
The Company was in compliance as of June 30, 2019 with the financial and other covenants under its unsecured public and private placement debt and unsecured credit facilities.
6.
Derivative Financial Instruments
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors, and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
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The following table summarizes the terms and fair values of the Company's derivative financial instruments, as well as their classification on the Consolidated Balance Sheets:
Fair Value
Assets (Liabilities) (1)
Date
Maturity
Notional
Amount
Counterparty Pays
Variable Rate of
Regency Pays
Fixed Rate of
12/6/18
250,000
30 year U.S. Treasury
3.147%
(2)
(5,491
4/3/17
12/2/20
1 Month LIBOR with Floor
1.824%
(240
3,759
8/1/16
1/5/22
265,000
1.053%
3,975
10,838
4/7/16
4/1/23
19,942
1 Month LIBOR
1.303%
217
880
12/1/16
11/1/23
33,000
1.490%
175
1,376
6/2/17
6/2/27
37,452
2.366%
(1,379
629
2,748
11,991
(1) Derivatives in an asset position are included within Other assets in the accompanying Consolidated Balance Sheets, while those in a liability position are included within Accounts payable and other liabilities.
(2) On March 7, 2019, the Company settled its 30 year Treasury rate lock in connection with its issuance of the $300 million 4.65% unsecured notes due March 2049 for $5.7 million, which is included in the balance of AOCI and will be reclassified to earnings over the 30 year term of the hedged transaction.
These derivative financial instruments are all interest rate swaps, which are designated and qualify as cash flow hedges. The Company does not use derivatives for trading or speculative purposes and, as of June 30, 2019, does not have any derivatives that are not designated as hedges. The Company has master netting agreements; however, the Company does not have multiple derivatives subject to a single master netting agreement with the same counterparties. Therefore, none are offset in the accompanying Consolidated Balance Sheets.
The changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income (loss) ("AOCI") and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
The following table represents the effect of the derivative financial instruments on the accompanying consolidated financial statements:
Location and Amount of Gain (Loss) Recognized in OCI on Derivative
Location and Amount of Gain (Loss) Reclassified from AOCI into Income
Total amounts presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
Interest rate swaps
Interest expense
Location and Amount of Gain (Loss) Recognized
in OCI on Derivative
Location and Amount of Gain (Loss) Reclassified
from AOCI into Income
Total amounts presented in the Consolidated
Statements of Operations in which the effects
of cash flow hedges are recorded
As of June 30, 2019, the Company expects approximately $5.3 million of net deferred losses on derivative instruments in AOCI, including the Company's share from its Investments in real estate partnerships, to be reclassified into earnings during the next 12 months. Included in the reclassification is $6.5 million related to previously settled swaps on the Company's ten and thirty year fixed rate unsecured debt.
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7.
Lessor Accounting
The Company's Lease income is comprised of both fixed and variable income, as follows:
Fixed and in-substance fixed lease income includes stated amounts per the lease contract, which are primarily related to base rent, and in some cases stated amounts for CAM, real estate taxes, and insurance. Income for these amounts is recognized on a straight line basis.
Variable lease income includes the following two main items in the lease contracts:
Recoveries from tenants represents amounts which tenants are contractually obligated to reimburse the Company for the tenants’ portion of actual Recoverable Costs incurred. Generally the Company’s leases provide for the tenants to reimburse the Company based on the tenants’ share of the actual costs incurred in proportion to the tenants’ share of leased space in the property.
Percentage rent represents amounts billable to tenants based on the tenants' actual sales volume in excess of levels specified in the lease contract.
The following table provides a disaggregation of lease income recognized under ASC Topic 842, Leases, as either fixed or variable lease income based on the criteria specified in ASC 842:
Three months ended
Operating lease income
Fixed and in-substance fixed lease income
197,413
399,291
Variable lease income
62,610
125,445
Other lease related income, net
Above/below market rent amortization
6,793
20,247
Uncollectible amounts in lease income
(580
(1,444
Total lease income
Future minimum rents under non-cancelable operating leases, excluding variable lease payments, are as follows:
Future Minimum Rents
as of (in thousands)
Year Ending December 31,
389,051
(1)
761,151
735,879
693,848
653,515
608,587
561,918
516,369
460,749
414,424
Thereafter
1,841,436
1,691,203
4,642,548
4,685,582
(1) The future minimum rental income for 2019 as of June 30, 2019 includes amounts due between July 1, 2019 and December 31, 2019.
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Lessee Accounting
The Company has shopping centers that are subject to non-cancelable, long-term ground leases where a third party owns the underlying land and has leased the land to the Company to construct and/or operate a shopping center.
The Company has 22 properties within its consolidated real estate portfolio that are either partially or completely on land subject to ground leases with third parties. Accordingly, the Company owns only a long-term leasehold or similar interest in these properties. These ground leases expire through the year 2101, and in most cases, provide for renewal options.
In addition, the Company has non-cancelable operating leases pertaining to office space from which it conducts its business. Office leases expire through the year 2029, and in many cases, provide for renewal options.
The ground and office lease expense is recognized on a straight line basis over the term of the leases, including management's estimate of expected option renewal periods. Operating lease expense under the Company's ground and office leases was as follows, including straight line rent expense and variable lease expenses such as CPI increases, percentage rent and reimbursements of landlord costs:
Operating lease expense
Ground leases
3,528
7,200
Office leases
1,064
2,106
Total fixed operating lease expense
4,592
9,306
Variable lease expense
444
873
131
274
Total variable lease expense
575
1,147
Total Lease Expense
5,167
10,453
Cash paid for amounts included in the measurement of operating lease liabilities
Operating cash flows from operating leases
3,721
7,412
Operating lease expense under the Company's ground and office leases was $5.2 million and $5.0 million during the three months ended June 30, 2019 and 2018, respectively, and $10.5 million and $9.2 million during the six months ended June 30, 2019 and 2018, respectively, which includes fixed and variable rent expense.
The following table summarizes the undiscounted future cash flows by year attributable to the operating lease liabilities under ground and office leases as of June 30, 2019, and provides a reconciliation to the Lease liability included in the accompanying Consolidated Balance Sheets:
Ground Leases
Office Leases
2019 (1)
5,336
2,522
7,858
10,706
4,976
15,682
10,674
3,863
14,537
10,698
2,893
13,591
10,914
2,188
13,102
564,081
5,955
570,036
Total undiscounted lease liabilities
612,409
22,397
634,806
Present value discount
(408,464
(2,383
(410,847
203,945
20,014
Weighted average discount rate
5.2%
Weighted average remaining term
49.6 years
5.7 years
(1) The undiscounted lease liability maturities shown for 2019 are as of June 30, 2019, and includes amounts due between July 1, 2019 and December 31, 2019.
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The following table summarizes the future obligations under non-cancelable operating leases, excluding unexercised renewal options, as of December 31, 2018:
Future Lease Obligations
Total Future Lease Obligations
10,672
4,405
15,077
10,439
4,294
14,733
10,344
3,549
13,893
10,258
13,151
10,369
2,189
12,558
461,762
5,944
467,706
513,844
23,274
537,118
8.
Fair Value Measurements
(a) Disclosure of Fair Value of Financial Instruments
All financial instruments of the Company are reflected in the accompanying Consolidated Balance Sheets at amounts which, in management's estimation, reasonably approximate their fair values, except for the following:
Carrying
Financial liabilities:
3,175,311
2,961,769
685,705
710,902
The above fair values represent management's estimate of the amounts that would be received from selling those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants as of June 30, 2019 and December 31, 2018, respectively. These fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company's own judgments about the assumptions that market participants would use in pricing the asset or liability.
The Company develops its judgments based on the best information available at the measurement date, including expected cash flows, appropriate risk-adjusted discount rates, and available observable and unobservable inputs. Service providers involved in fair value measurements are evaluated for competency and qualifications on an ongoing basis. As considerable judgment is often necessary to estimate the fair value of these financial instruments, the fair values presented above are not necessarily indicative of amounts that will be realized upon disposition of the financial instruments.
(b) Fair Value Measurements
The following financial instruments are measured at fair value on a recurring basis:
Securities
The Company has investments in marketable securities that are included within Other assets on the accompanying Consolidated Balance Sheets. The fair value of the securities was determined using quoted prices in active markets, which are considered Level 1 inputs of the fair value hierarchy. Changes in the value of securities are recorded within Net investment income in the accompanying Consolidated Statements of Operations, and include unrealized gains of $525,000 and $291,000, during the three months ended June 30, 2019 and 2018, respectively, and unrealized gains of $2.7 million and unrealized losses of $93,000 for the six months ended June 30, 2019 and 2018, respectively.
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Available-for-Sale Debt Securities
Available-for-sale debt securities consist of investments in certificates of deposit and corporate bonds, and are recorded at fair value using matrix pricing methods to estimate fair value, which are considered Level 2 inputs of the fair value hierarchy. Unrealized gains or losses on these debt securities are recognized through other comprehensive income.
Interest Rate Derivatives
The fair value of the Company's interest rate derivatives is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation in its entirety is classified in Level 2 of the fair value hierarchy.
The following tables present the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis:
Fair Value Measurements as of June 30, 2019
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
Balance
(Level 1)
(Level 2)
(Level 3)
Assets:
37,093
Available-for-sale debt securities
8,151
Interest rate derivatives
49,611
12,518
(1,619
Fair Value Measurements as of December 31, 2018
33,354
7,933
58,769
25,415
The following tables present the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a non-recurring basis:
Total Gains
(Losses)
Operating properties
41,976
(10,447
28
42,760
(6,579
During six months ended June 30, 2019, the Company impaired two properties, one of which is classified as held and used while the other is classified as held for sale, based on the expected selling prices.
During the year-ended December 31, 2018, the Company impaired three properties, classified as held for sale, based on the expected selling prices. Two of these three properties have been sold and the third continues to be classified as held for sale in the accompanying Consolidated Balance Sheets.
9.
Equity and Capital
Common Stock of the Parent Company
At the Market ("ATM") Program
Under the Parent Company's ATM equity offering program, the Parent Company may sell up to $500 million of common stock at prices determined by the market at the time of sale. There were no shares issued under the ATM equity program during the six months ended June 30, 2019 and 2018. As of June 30, 2019, all $500 million of common stock remained available for issuance under this ATM equity program.
Share Repurchase Program
On February 5, 2019, the Company's Board authorized a common share repurchase program under which the Company may purchase, from time to time, up to a maximum of $250 million of shares of its outstanding common stock through open market purchases and/or in privately negotiated transactions. Any shares purchased will be retired. The program is set to expire on February 4, 2020. The timing and actual number of shares purchased under the program depend upon marketplace conditions and other factors. The program remains subject to the discretion of the Board. Through June 30, 2019, no shares have been repurchased under this new program.
The Company settled, in January 2019, 563,229 shares, which were repurchased in December 2018 under a previously active repurchase program, for $32.8 million at an average price of $58.17 per share. The program closed in February 2019.
Common Units of the Operating Partnership
Common units of the operating partnership are issued or redeemed and retired for each of the shares of Parent Company common stock issued or repurchased and retired, as described above.
Accumulated Other Comprehensive Income (Loss) ("AOCI")
The following tables present changes in the balances of each component of AOCI:
Controlling Interests
Cash Flow
Hedges
Unrealized gain (loss) on Available-For-Sale Debt Securities
AOCI
Balance as of December 31, 2018
(805
(122
189
(738
Other comprehensive loss before reclassifications
(13,874
(13,614
(842
(14,456
Amounts reclassified from AOCI (1)
455
(47
Current period other comprehensive loss, net
(13,419
Balance as of June 30, 2019
(14,224
138
(700
(14,786
(1) Amounts reclassified from AOCI into income are presented within Interest expense, net in the Consolidated Statements of Operations.
29
Balance as of December 31, 2017
(6,262
(27
(112
(6,401
Opening adjustment due to change in accounting policy (2)
Adjusted balance as of January 1, 2018
(6,250
(110
(6,387
Other comprehensive income before reclassifications
13,156
13,081
638
13,719
3,513
40
Current period other comprehensive income, net
16,669
Balance as of June 30, 2018
10,419
(102
568
10,885
(1) Amounts reclassified from AOCI into income are presented within Interest expense, net in the Consolidated Statement of Operations.
(2) Upon adoption of ASU 2017-12, the Company recognized the immaterial adjustment to opening retained earnings and AOCI for previously recognized hedge ineffectiveness from off-market hedges, as further discussed in note 1.
10.
Stock-Based Compensation
During the six months ended June 30, 2019, the Company granted 253,237 shares of restricted stock with a weighted-average grant-date fair value of $65.12 per share. The Company records stock-based compensation expense within General and administrative expenses in the accompanying Consolidated Statements of Operations.
11.
Non-Qualified Deferred Compensation Plan ("NQDCP")
The Company maintains a NQDCP which allows select employees and directors to defer part or all of their cash bonus, director fees, and vested restricted stock awards. All contributions into the participants' accounts are fully vested upon contribution to the NQDCP and are deposited in a Rabbi trust.
The following table reflects the balances of the assets and deferred compensation liabilities of the Rabbi trust and related participant account obligations in the accompanying Consolidated Balance Sheets, excluding Regency stock:
Location in Consolidated
Balance Sheets
35,189
31,351
Deferred compensation obligation
35,049
31,166
12.
Earnings per Share and Unit
Parent Company Earnings per Share
The following summarizes the calculation of basic and diluted earnings per share:
Numerator:
Income from operations attributable to common stockholders - basic
Income from operations attributable to common stockholders - diluted
Denominator:
Weighted average common shares outstanding for basic EPS
167,536
169,424
167,488
170,056
Weighted average common shares outstanding for diluted EPS (1)
167,962
169,682
167,877
170,291
Income per common share – basic
Income per common share – diluted
(1) Includes the dilutive impact of unvested restricted stock using the treasury stock method.
30
Income allocated to noncontrolling interests of the Operating Partnership has been excluded from the numerator and exchangeable Operating Partnership units have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would be anti-dilutive. Weighted average exchangeable Operating Partnership units outstanding for both the three and six months ended June 30, 2019 and 2018 were 349,902 for both periods.
Operating Partnership Earnings per Unit
The following summarizes the calculation of basic and diluted earnings per unit:
Income from operations attributable to common unit holders - basic
Income from operations attributable to common unit holders - diluted
Weighted average common units outstanding for basic EPU
167,886
169,774
167,838
170,406
Weighted average common units outstanding for diluted EPU (1)
168,312
170,032
168,227
170,641
Income per common unit – basic
Income per common unit – diluted
13.
Commitments and Contingencies
Litigation
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. Legal fees are expensed as incurred.
Environmental
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. The Company believes that the ultimate disposition of currently known environmental matters will not have a material effect on its financial position, liquidity, or operations. The Company can give no assurance that existing environmental studies with respect to the shopping centers have revealed all potential environmental contaminants or 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.
Letters of Credit
The Company has the right to issue letters of credit under the Line up to an amount not to exceed $50.0 million, which reduces the credit availability under the Line. These letters of credit are primarily issued as collateral on behalf of its captive insurance program and to facilitate the construction of development projects. As of June 30, 2019 and December 31, 2018, the Company had $12.6 million and $9.4 million, respectively in letters of credit outstanding.
Purchase Commitments
The Company enters into purchase and sale agreements to buy or sell real estate assets in the normal course of business, which generally provide limited recourse if either party ends the contract. At June 30, 2019, the Company has an agreement related to its Town and Country Center in Los Angeles, CA (“the Center”) that provides an option for the seller to require the Company to purchase up to an additional 81.63% ownership interest in the center by December 2019. The Company currently expects to be required to purchase an additional 16.63% interest by that date for approximately $17.1 million.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
In addition to historical information, the following information contains forward-looking statements as defined under federal securities laws. These forward-looking statements include statements about anticipated changes in our revenues, the size of our development and redevelopment program, earnings per share and unit, returns and portfolio value, and expectations about our liquidity. These statements are based on current expectations, estimates and projections about the real estate industry and markets in which the Company operates, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to changes in national and local economic conditions, financial difficulties of tenants, competitive market conditions, including timing and pricing of acquisitions and sales of properties and building pads ("out-parcels"), changes in leasing activity and market rents, timing of development starts, meeting development schedules, natural disasters in geographic areas in which we operate, cost of environmental remediation, our inability to exercise voting control over the co-investment partnerships through which we own many of our properties, and technology disruptions. For additional information, see “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of Regency Centers Corporation and Regency Centers, L.P. appearing elsewhere herein. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of uncertain events.
Defined Terms
In addition to the required Generally Accepted Accounting Principles ("GAAP") presentations, we use certain non-GAAP performance measures as we believe these measures improve the understanding of the Company's operational results. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change.
The following terms, as defined, are commonly used by management and the investing public to understand and evaluate our operational results:
Development Completion is a property in development that is deemed complete upon the earliest of: (i) 90% of total estimated net development costs have been incurred and percent leased equals or exceeds 95%, or (ii) the property features at least two years of anchor operations, or (iii) three years have passed since the start of construction. Once deemed complete, the property is termed a Retail Operating Property the following calendar year.
Fixed Charge Coverage Ratio is defined as Operating EBITDA re divided by the sum of the gross interest and scheduled mortgage principal paid to our lenders plus dividends paid to our preferred stockholders.
NAREIT EBITDAre is a measure of REIT performance, which the National Association of Real Estate Investment Trusts ("NAREIT") defines as net income, computed in accordance with GAAP, excluding (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) gains on sales of real estate, (v) impairments of real estate, and (vi) adjustments to reflect the Company's share of unconsolidated partnerships and joint ventures.
NAREIT Funds from Operations ("NAREIT FFO") is a commonly used measure of REIT performance, which NAREIT defines as net income, computed in accordance with GAAP, excluding gains on sales and impairments of real estate, net of tax, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We compute NAREIT FFO for all periods presented in accordance with NAREIT's definition in effect during that period. Effective January 1, 2019, we prospectively adopted the NAREIT FFO White Paper - 2018 Restatement ("2018 FFO White Paper"), and elected the option of excluding gains on sale and impairments of land, which are considered incidental to our main business. Prior period amounts were not restated to conform to the current year presentation, and therefore are calculated as described above, and also include gains on sale and impairments of land.
Many companies use different depreciable lives and methods, and real estate values historically fluctuate with market conditions. Since NAREIT FFO excludes depreciation and amortization and gains on sale and impairments of real estate, it provides a performance measure that, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, acquisition and development activities, and financing costs. This provides a perspective of our financial performance not immediately apparent from net income determined in accordance with GAAP. Thus, NAREIT FFO is a supplemental non-GAAP financial measure of our operating performance, which does not represent cash generated from operating activities in accordance with GAAP; and, therefore, should not be considered a substitute measure of cash flows from operations. The Company provides a reconciliation of Net Income Attributable to Common Stockholders to NAREIT FFO.
Net Operating Income ("NOI") is the sum of base rent, percentage rent, recoveries from tenants, other lease income, and other property income, less operating and maintenance expenses, real estate taxes, ground rent, and uncollectible lease income / provision for doubtful accounts. NOI excludes straight-line rental income and expense, above and below market rent and ground rent amortization, tenant lease inducement amortization, and other fees. The Company also provides disclosure of NOI excluding termination fees, which excludes both termination fee income and expenses.
A Non-Same Property is a property acquired, sold, or a Development Completion during either calendar year period being compared. Non-retail properties and corporate activities, including the captive insurance program, are part of Non-Same Property.
Operating EBITDAre (previously Adjusted EBITDA) begins with the NAREIT EBITDA re and excludes certain non-cash components of earnings derived from above and below market rent amortization and straight-line rents.
Pro-Rata information includes 100% of our consolidated properties plus our economic share (based on our ownership interest) in our unconsolidated real estate investment partnerships.
We manage our entire real estate portfolio without regard to ownership structure, although certain decisions impacting properties owned through partnerships require partner approval. Therefore, we believe presenting our pro-rata share of certain operating metrics, along with other non-GAAP measures, makes comparisons of other REITs' operating results to the Company's more meaningful.
The pro-rata information is prepared on a basis consistent with the comparable consolidated amounts and is intended to more accurately reflect our proportionate economic interest in the operating results of properties in our portfolio. We do not control the unconsolidated investment partnerships, and the pro-rata presentations of the assets and liabilities, and revenues and expenses do not represent our legal claim to such items. The partners are entitled to profit or loss allocations and distributions of cash flows according to the operating agreements, which provide for such allocations according to their invested capital. Our share of invested capital establishes the ownership interests we use to prepare our pro-rata share.
The presentation of pro-rata information has limitations which include, but are not limited to, the following:
o
The amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting or allocating noncontrolling interests, and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses; and
Other companies in our industry may calculate their pro-rata interest differently, limiting the comparability of pro-rata information.
Because of these limitations, the pro-rata financial information should not be considered independently or as a substitute for our financial statements as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP financial statements, using the pro-rata information as a supplement.
Property In Development includes properties in various stages of development and redevelopment including active pre-development activities.
A Retail Operating Property is any retail property not termed a Property in Development. A retail property is any property where the majority of the income is generated from retail uses.
Same Property is a Retail Operating Property that was owned and operated for the entirety of both calendar year periods being compared. This term excludes all developments and Non-Same Properties.
33
Overview of Our Strategy
Regency Centers Corporation began its operations as a publicly-traded REIT in 1993, and, as of June 30, 2019, had full or partial ownership interests in 421 retail properties primarily anchored by market leading grocery stores. Our properties are principally located in affluent and infill trade areas of the United States, and contain 52.7 million square feet ("SF") of gross leasable area ("GLA"). All of our operating, investing, and financing activities are performed through our Operating Partnership, Regency Centers, L.P., our wholly-owned subsidiaries, and through our co-investment partnerships.
As of June 30, 2019, the Parent Company owns approximately 99.8% of the outstanding common partnership units of the Operating Partnership.
Our mission is to be the preeminent national owner, operator, and developer of shopping centers connecting outstanding retailers and service providers with surrounding neighborhoods and communities. Our goals are to:
Own and manage a portfolio of high-quality neighborhood and community shopping centers anchored by market leading grocers and located in affluent suburban and near urban trade areas in the country’s most desirable metro areas. We expect that this combination will produce highly desirable and attractive centers with best-in-class retailers. These centers should command higher rental and occupancy rates resulting in excellent prospects to grow net operating income ("NOI");
Maintain an industry leading and disciplined development and redevelopment platform to deliver exceptional retail centers at higher returns as compared to acquisitions;
Support our business activities with a strong balance sheet; and
Engage a talented, dedicated team of employees, who are guided by Regency’s strong values and special culture, which are aligned with shareholder interests.
Executing on our Strategy
During the six months ended June 30, 2019:
We had Net income attributable to common stockholders of $142.2 million as compared to $100.5 million during the six months ended June 30, 2019 and 2018, respectively.
We sustained same property NOI growth:
We achieved pro-rata same property NOI growth, excluding termination fees, of 2.1%.
We executed 740 leasing transactions representing 2.9 million pro-rata SF of new and renewal leasing, with trailing twelve month rent spreads of 8.9% on comparable retail operating property spaces.
At June 30, 2019, our total property portfolio was 94.7% leased, while our same property portfolio was 95.1% leased.
We continued our development and redevelopment of high quality shopping centers at attractive returns on investment:
We started a new development representing a total pro-rata project investment of $27.3 million upon completion with a projected return on investment of 6.0%.
We started six redevelopments representing a total pro-rata project investment of $76.6 million upon completion, with a weighted average projected return on investment of 8.4%.
Including these projects, a total of 23 properties were in the process of development or redevelopment, representing a pro-rata investment upon completion of $473.8 million.
We completed one new development representing a total pro-rata project investment of $17.1 million, with a return on investment of 8.2%.
We completed two redevelopments representing a total pro-rata project investment of $3.8 million, with a weighted average return on investment of 5.8%.
34
We maintained a conservative balance sheet providing financial flexibility to cost effectively fund investment opportunities and debt maturities:
On March 6, 2019, we issued $300 million of 4.65% senior unsecured public notes, which priced at 99.661%, and mature in March 2049. The net proceeds of the offering were used to repay in full our outstanding $250 million 4.8% notes due April 15, 2021, including a make-whole premium of approximately $9.6 million and accrued interest, with the remaining proceeds used toward repaying in full two mortgages for $52.7 million with interest rates ranging between 6.25% and 7.25%, including a prepayment premium of $1 million.
At June 30, 2019, our annualized net debt-to-operating EBITDAre ratio on a pro-rata basis was 5.3x.
Property Portfolio
The following table summarizes general information related to the Consolidated Properties in our portfolio:
(GLA in thousands)
Number of Properties
304
305
Properties in Development
GLA
37,485
37,946
% Leased – Operating and Development
94.6%
95.5%
% Leased – Operating
94.8%
95.9%
Weighted average annual effective rent per square foot ("PSF"), net of tenant concessions.
22.13
21.51
The following table summarizes general information related to the Unconsolidated Properties owned in co-investment partnerships in our portfolio:
117
120
15,208
15,622
95.0%
95.4%
% Leased –Operating
95.2%
95.7%
Weighted average annual effective rent PSF, net of tenant concessions
21.47
21.46
For the purpose of the following disclosures of occupancy and leasing activity, "anchor space" is considered space greater than or equal to 10,000 SF and "shop space" is less than 10,000 SF. The following table summarizes pro-rata occupancy rates of our combined Consolidated and Unconsolidated shopping center portfolio:
% Leased – All Properties
94.7%
95.6%
Anchor space
97.0%
98.4%
Shop space
90.7%
90.9%
The decline in anchor space percent leased is attributable to a 100 basis point decrease from the closure of two anchor spaces as a result of the Sears bankruptcy filing and the remaining 40 basis point decrease is primarily from other properties going into redevelopment.
The following table summarizes leasing activity, including our pro-rata share of activity within the portfolio of our co-investment partnerships:
Leasing
Transactions
SF (in
thousands)
Base Rent
PSF
Tenant
Allowance
and Landlord
Work PSF
Commissions
PSF (1)
Anchor Leases
New
220
21.17
47.71
5.34
Renewal
52
1,460
12.69
0.90
0.10
Total Anchor Leases
64
1,680
13.80
7.04
0.78
Shop Space
227
403
32.64
29.43
8.89
449
770
32.05
1.09
0.55
Total Shop Space Leases
676
1,173
32.25
10.82
3.41
Total Leases
2,853
21.39
8.59
1.86
(1) On January 1, 2019, the Company adopted ASC Topic 842, Leases, under which non-contingent internal leasing costs can no longer be capitalized.
151
20.10
43.12
8.39
808
16.10
0.70
0.39
46
959
16.73
7.38
1.65
269
453
33.53
26.65
571
947
33.17
0.89
2.04
840
1,400
33.28
9.22
5.85
886
2,359
26.55
8.47
4.14
The weighted average base rent on signed shop space leases during 2019 was $32.25 and exceeds the average annual base rent of all shop space leases due to expire during the next 12 months of $31.74 PSF. In the anchor category, base rent PSF on renewal leases decreased due to the higher volume of options for anchor deals and varying geographic locations in 2019 as compared to 2018. On a comparable basis, new and renewal anchor rent spreads were positive.
Significant Tenants and Concentrations of Risk
We seek to reduce our operating and leasing risks through geographic diversification and by avoiding dependence on any single property, market, or tenant. The following table summarizes our most significant tenants, based on their percentage of annualized base rent:
Grocery Anchor
Number of
Stores
Percentage of
Company-
owned GLA (1)
Annualized
Base Rent (1)
Publix
69
6.5%
3.2%
Kroger
6.7%
3.1%
Albertsons Companies
4.3%
2.8%
Whole Foods
TJX Companies
60
3.0%
(1) Includes Regency's pro-rata share of Unconsolidated Properties and excludes those owned by anchors.
36
Bankruptcies and Credit Concerns
Our management team devotes significant time to researching and monitoring retail trends, consumer preferences, customer shopping behaviors, changes in retail delivery methods, and changing demographics in order to anticipate the challenges and opportunities impacting the retail industry. A greater shift to e-commerce, large-scale retail business failures, and tight credit markets could negatively impact consumer spending and have an adverse effect on our results of operations. We seek to mitigate these potential impacts through tenant diversification, replacing weaker tenants with stronger operators, anchoring our centers with market leading grocery stores that drive foot traffic, and maintaining a presence in affluent suburbs and dense infill trade areas. As a result of our research and findings, we may reduce new leasing, suspend leasing, or curtail allowances for construction of leasehold improvements within a certain retail category or to a specific retailer in order to reduce our risk from bankruptcies and store closings.
We closely monitor the operating performance and rent collections of tenants in our shopping centers as well as those retailers experiencing significant changes to their business models as a result of reduced customer traffic in their stores and increased competition from e-commerce sales. Retailers who are unable to withstand these and other business pressures may file for bankruptcy. Although base rent is supported by long-term lease contracts, tenants who file bankruptcy generally have the legal right to reject any or all of their leases and close related stores. Any unsecured claim we hold against a bankrupt tenant for unpaid rent might be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. As a result, it is likely that we would recover substantially less than the full value of any unsecured claims we hold. Additionally, we may incur significant expense to recover our claim and to release the vacated space. 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. Tenants who are currently in bankruptcy and continue to occupy space in our shopping centers represent an aggregate of 0.8% of our annual base rent on a pro-rata basis, which includes 0.5% for Barneys New York.
37
Results from Operations
Comparison of the three months ended June 30, 2019 and 2018:
Our revenues decreased as summarized in the following table:
Change
Lease income (1)
(5,967
(128
555
(5,540
(1) As discussed in Note 1 to the Consolidated Financial Statements, Regency adopted ASC Topic 842, Leases, using the modified retrospective adoption method as of January 1, 2019, and elected to apply the transition provisions of the standard at the beginning of the period of adoption. As such, the prior period amounts prepared and presented under the former ASC Topic 840, Leases, were not restated, but were reclassified to conform with the current year presentation. Part of the practical expedients in ASC Topic 842 allow management to avoid separating lease and non-lease components of Lease income, therefore all lease income earned pursuant to tenant leases, including recoveries from tenants and percentage rent, in 2019 and as reclassified for 2018, is reflected in Lease income in the accompanying Consolidated Statements of Operations.
Lease income decreased $6.0 million, driven by the following contractually billable components of rent to the tenants per the lease agreements:
$889,000 increase from billable Base rent, as follows:
$3.2 million increase from rent commencing at development properties;
$183,000 increase from acquisitions of operating properties; and
$3.7 million net increase from same properties due to rental rate growth on new and renewal leases and rent steps in existing leases, offset by declines in rent paying occupancy,
reduced by $6.2 million from the sale of operating properties.
$2.2 million net increase from billable Recoveries from tenants, which represent amounts contractually billable to tenants per the terms of the leases for their reimbursements to us for the tenants' pro-rata share of the operating, maintenance, and real estate tax expenses that we incur to operate our shopping centers. Recoveries from tenants increased, on a net basis, as follows:
$1.2 million increase from rent commencing at development properties;
$344,000 increase from acquisitions of operating properties; and
$2.3 million increase from same properties due to a $1.6 million increase in real estate recoveries and a $667,000 increase in CAM recoveries, both driven by increases in recoverable costs;
reduced by $1.7 million from the sale of operating properties.
$4.7 million decrease in Straight line rent primarily driven by expected early lease terminations.
$4.9 million net decrease in Above and below market rent accretion within our same property portfolio, primarily driven by 2018 accelerated accretion related to early tenant move-outs.
$1.1 million increase in Other lease income, from higher lease termination fees, and Percentage rent, from timing of tenant sales.
$580,000 decrease from uncollectible lease income. Beginning with the adoption of ASC 842, Leases, on January 1, 2019, uncollectible lease income is recorded as a direct charge against Lease income. The uncollectible lease income was $580,000 during the three months ended June 30, 2019, as compared to $1.3 million of Provision for doubtful accounts during the three months ended June 30, 2018, which is included in Other operating expenses in the accompanying Consolidated Statements of Operations, reflecting favorable collections experience.
38
Changes in our operating expenses are summarized in the following table:
4,484
908
1,941
1,965
Provision for doubtful accounts (1)
1,319
(1,319
1,480
53
8,032
(1) Beginning with the adoption of ASC 842, Leases, on January 1, 2019, uncollectible lease income is a direct charge against Lease income, which totaled $580,000 during the three months ended June 30, 2019.
Depreciation and amortization costs increased, on a net basis, as follows:
$1.9 million increase as we began depreciating costs at development properties where tenant spaces were completed and became available for occupancy;
$1.1 million increase from acquisitions of operating properties and corporate assets; and
$4.5 million increase from same properties, primarily attributable to additional depreciation at redevelopment properties;
reduced by $3.0 million from the sale of operating properties.
Operating and maintenance costs increased, on a net basis, as follows:
$731,000 increase from operations commencing at development properties; and
$1.4 million net increase from same properties driven by $2.4 million increase in recoverable costs, including insurance, management fees, and timing of snow removal costs, offset by $1.2 million decrease in lease termination costs;
reduced by $1.2 million from the sale of operating properties.
General and administrative costs increased $1.9 million, on a net basis, due primarily to eliminating capitalization of non-contingent internal leasing costs and legal costs associated with leasing activities upon the adoption of ASC 842, Leases, on January 1, 2019, offset by lower compensation costs.
Real estate taxes increased, on a net basis, as follows:
$824,000 increase from development properties where capitalization ceased as tenant spaces became available for occupancy; and
$1.9 million increase within the same property portfolio from increased tax assessments;
reduced by $810,000 from the sale of operating properties.
Provision for doubtful accounts was $1.3 million during the three months ended June 30, 2018. Beginning with the adoption of ASC 842, Leases, on January 1, 2019, uncollectible lease income is a direct charge against Lease income. The uncollectible lease income was $580,000 during the three months ended June 30, 2019, reflecting favorable collections experience.
39
The following table presents the components of other expense (income):
Interest on notes payable
31,473
33,102
(1,629
Interest on unsecured credit facilities
4,775
5,000
(225
Capitalized interest
(980
(1,970
990
Hedge expense
2,149
2,102
47
Interest income
(244
(160
(84
(901
(2,092
681
(11,010
(397
(13,719
The $901,000 net decrease in total interest expense is driven by $1.6 million decrease in Interest on notes payable from several mortgage payoffs, offset by $990,000 increase due to lower capitalization of interest based on the size and progress of development and redevelopment projects in process.
During the three months ended June 30, 2019, we recognized $10.4 million of impairment losses on two operating properties based on expected selling price. During the three months ended June 30, 2018, we recognized $12.5 million of impairment losses on three operating properties, all of which have sold.
During the three months ended June 30, 2019, we recognized gains of $442,000 upon the sale of one land parcel and receipt of property insurance proceeds. During the three months ended June 30, 2018, we sold one operating property and two land parcels for gains totaling $1.1 million.
During the three months ended June 30, 2018, we early redeemed the $150 million 6% senior unsecured notes resulting in $11.0 million of debt extinguishment costs.
Our equity in income of investments in real estate partnerships increased as follows:
Regency's
GRI - Regency, LLC (GRIR)
40.00%
10,297
7,220
3,077
New York Common Retirement Fund (NYC)
30.00%
365
331
Columbia Regency Retail Partners, LLC (Columbia I)
20.00%
328
346
(18
Columbia Regency Partners II, LLC (Columbia II)
385
Cameron Village, LLC (Cameron)
241
63
RegCal, LLC (RegCal)
25.00%
345
392
US Regency Retail I, LLC (USAA)
20.01%
224
Other investments in real estate partnerships
18.38% - 50.00%
336
572
Total equity in income of investments in real estate partnerships
3,954
The $4.0 million increase in our equity in income of investments in real estate partnerships is largely attributed to the following changes:
$3.1 million increase at GRIR due to a $2.0 million gain recognized during 2019 upon the sale of operating real estate, coupled with improvements in net operating income throughout the partnership’s portfolio; and
$571,000 increase within Other investments in real estate partnerships due to the sale of our ownership interest in a single operating property partnership which experienced a net loss in 2018.
The following represents the remaining components that comprised net income attributable to the common stockholders and unit holders:
4,101
(214
3,887
Net income attributable to exchangeable operating partnership units
(9
3,896
41
Comparison of the six months ended June 30, 2019 and 2018:
Our revenues increased as summarized in the following table:
3,826
(171
370
4,025
Lease income increased $3.8 million, driven by the following contractually billable components of rent to the tenants per the lease agreements:
$5.9 million increase from billable Base rent, as follows:
$7.8 million increase from rent commencing at development properties;
$1.1 million increase from acquisitions of operating properties; and
$9.1 million net increase from same properties due to rental rate growth on new and renewal leases and rent steps in existing leases, offset by declines in rent paying occupancy;
reduced by $12.1 million from the sale of operating properties.
$4.4 million increase from billable Recoveries from tenants, which represent amounts contractually billable to tenants per the terms of the leases for their reimbursements to us for the tenants' pro-rata share of the operating, maintenance, and real estate tax expenses that we incur to operate our shopping centers. Recoveries from tenants increased, on a net basis, as follows:
$2.6 million increase from rent commencing at development properties;
$706,000 increase from acquisitions of operating properties; and
$4.4 million increase from same properties due to a $3.2 million increase in real estate recoveries and a $1.2 million increase in CAM recoveries, both driven by increases in recoverable costs;
reduced by $3.3 million from the sale of operating properties.
$347,000 decrease in Percentage rent primarily due to declines in tenant sales.
$1.4 million decrease from uncollectible lease income. Beginning with the adoption of ASC 842, Leases, on January 1, 2019, uncollectible lease income is recorded as a direct charge against Lease income. The uncollectible lease income was $1.4 million during the six months ended June 30, 2019, as compared to $2.5 million of Provision for doubtful accounts during the six months ended June 30, 2018, which is included in Other operating expenses in the accompanying Consolidated Statements of Operations, reflecting favorable collection experience.
42
13,154
(970
5,635
5,694
2,515
(2,515
1,917
750
21,748
(1) Beginning with the adoption of ASC 842, Leases, on January 1, 2019, uncollectible lease income is a direct charge against Lease income, which totaled $1.4 million during the six months ended June 30, 2019.
$4.0 million increase as we began depreciating costs at development properties where tenant spaces were completed and became available for occupancy;
$1.8 million increase from acquisitions of operating properties and corporate assets; and
$13.4 million increase from same properties, primarily attributable to additional depreciation at redevelopment properties;
reduced by $6.1 million from the sale of operating properties.
Operating and maintenance costs decreased, on a net basis, as follows:
$2.4 million increase from operations commencing at development properties; offset by
$685,000 net decrease due to a $1.2 million decrease from higher property damage claims in 2018 related to winter storms and hail damage, offset by a $535,000 increase from acquisitions of operating properties;
$263,000 net decrease from same properties primarily attributable to $1.2 million decrease in lease termination fees, offset by $815,000 net increase in recoverable costs; and
$2.4 million decrease from the sale of operating properties.
General and administrative increased, on a net basis, as follows:
$3.9 million increase due to eliminating capitalization of non-contingent internal leasing costs and legal costs associated with leasing activities upon the adoption of ASC 842, Leases, on January 1, 2019;
$1.2 million net increase in compensation-related costs, primarily due to $2.8 million appreciation in the value of participant obligations within the deferred compensation plan, offset by $1.6 million decrease in compensation costs; and
$429,000 increase from changes in development overhead capitalization based on the stage of development projects.
$1.9 million increase from development properties where capitalization ceased as tenant spaces became available for occupancy;
$374,000 increase from acquisitions of operating properties; and
$5.0 million increase within the same property portfolio from increased tax assessments;
reduced by $1.5 million from the sale of operating properties.
Provision for doubtful accounts was $2.5 million during the six months ended June 31, 2018. Beginning with the adoption of ASC 842, Leases, on January 1, 2019, uncollectible lease income is a direct charge against Lease income. The uncollectible lease income was $1.4 million during the six months ended June 30, 2019, reflecting favorable collection experience.
Other operating expenses increased $750,000, primarily attributable to environmental costs at one of our properties.
43
63,986
66,070
(2,084
9,318
9,289
(1,996
(4,150
2,154
4,264
4,204
(647
(554
(93
(16,474
(15,713
(581
(2,718
(35,420
The $66,000 net increase in total interest expense is driven by a $2.2 million increase due to lower capitalization of interest based on the size and progress of development and redevelopment projects in process, offset by a $2.1 million decrease in Interest on notes payable from several mortgage payoffs.
During the six months ended June 30, 2019, we recognized $12.1 million of impairment losses on four operating properties, based on actual or expected sales price. During the six months ended June 30, 2018, we recognized $28.6 million of impairment losses on five operating properties and one land parcel, all of which have sold.
During the six months ended June 30, 2019, we sold two operating properties and three land parcels for gains totaling $16.9 million. During the six months ended June 30, 2018, we sold one operating property and two land parcels for gains totaling $1.2 million.
During the six months ended June 30, 2019, we early redeemed the $250 million 4.8% senior unsecured notes and prepaid one mortgage resulting in $10.6 million of debt extinguishment costs. During the same period in 2018, we early redeemed the $150 million 6% senior unsecured notes and amended our Line resulting in $11.2 million of debt extinguishment costs.
Net investment income increased $2.7 million, primarily driven by changes in unrealized gains on plan assets held in the non-qualified deferred compensation plan.
21,032
14,738
6,294
636
630
731
147
560
485
75
2,964
828
2,136
16,713
1,578
15,135
24,432
The $24.4 million increase in our equity in income of investments in real estate partnerships is largely attributed to the following changes:
$6.3 million increase at GRIR due to $5.0 million of gains recognized during 2019 on the sale of operating real estate, coupled with improvements in net operating income among the portfolio of properties within the partnership;
$2.1 million increase at RegCal due to a $2.3 million gain recognized during 2019 on the sale of an operating property within the partnership; and
$15.1 million increase within Other investments in real estate partnerships due to a $15.0 million gain recognized during 2019 on the sale of our ownership interest in a single operating property partnership.
42,129
(455
41,674
(87
41,761
45
Supplemental Earnings Information
We use certain non-GAAP performance measures, in addition to certain performance metrics determined under GAAP, as we believe these measures improve the understanding of the Company's operating results. We manage our entire real estate portfolio without regard to ownership structure, although certain decisions impacting properties owned through partnerships require partner approval. Therefore, we believe presenting our pro-rata share of operating results regardless of ownership structure, along with other non-GAAP measures, may assist in comparing the Company's operating results to other REITs. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change. See "Defined Terms" at the beginning of this Management's Discussion and Analysis.
Pro-Rata Same Property NOI:
Our pro-rata same property NOI, excluding termination fees, changed from the following major components:
June 30,
Six months ended
Base rent (1)
210,837
206,700
4,137
421,862
411,982
9,880
Recoveries from tenants (1)
67,781
65,292
2,489
134,947
130,299
4,648
Percentage rent (1)
1,688
1,479
209
5,452
5,742
(290
Termination fees (1)
1,499
438
1,061
1,984
1,618
366
Uncollectible lease income (2)
(633
(1,289
Other lease income (1)
2,081
2,037
4,175
(279
2,226
2,275
(49
4,156
4,375
(219
Total real estate revenue
285,479
278,221
7,258
571,008
558,191
12,817
42,176
39,563
2,613
82,925
81,905
1,020
Termination expense
1,700
(1,200
36,469
34,470
1,999
73,313
67,965
5,348
Ground rent
2,290
4,605
4,713
(108
Provision for doubtful accounts (2)
1,231
(1,231
2,372
(2,372
Total real estate operating expenses
81,435
79,196
2,239
161,343
158,655
2,688
Pro-rata same property NOI
204,044
199,025
5,019
409,665
399,536
10,129
Less: Termination fees
999
(1,262
2,261
1,484
(82
1,566
Pro-rata same property NOI, excluding termination fees
203,045
200,287
2,758
408,181
399,618
8,563
Pro-rata same property NOI growth, excluding termination fees
1.4
2.1
(1) Represents amounts included within Lease income, in the accompanying Consolidated Statements of Operations and further discussed in Note 1, that are contractually billable to the tenants per the terms of the lease agreements.
(2) Beginning with the adoption of ASC 842, Leases, on January 1, 2019, uncollectible lease income is a direct charge against Lease income. Provision for doubtful accounts was included in Total real estate operating expenses during the three and six months ended June 30, 2018.
Billable Base rent increased $4.1 million and $9.9 million during the three and six months ended June 30, 2019, driven by increases in rental rate growth on new and renewal leases and contractual rent steps in existing leases, offset by a decline in percentage rent commenced.
Billable Recoveries from tenants increased $2.5 million and $4.6 million during the three and six months ended June 30, 2019, as a result of increases in recoverable costs and real estate taxes, as noted below.
Operating and maintenance expenses increased $2.6 million and $1.0 million during the three and six months ended June 30, 2019, primarily due to increases in insurance, landscaping and general maintenance costs. Snow removal costs decreased in 2019 as compared to 2018, however the timing of those costs were later and impacted the three months ended June 30, 2019 greater than the same period in 2018.
Termination expense decreased $1.2 million during both the three and six months ended June 30, 2019, due to costs to terminate specific tenant leases.
Real estate taxes increased $2.0 million and $5.3 million during the three and six months ended June 30, 2019, due to higher real estate tax assessments.
Same Property Rollforward:
Our same property pool includes the following property count, pro-rata GLA, and changes therein:
Property
Count
Beginning same property count
401
40,904
409
41,961
Disposed properties
(3
(227
SF adjustments (1)
62
Ending same property count
40,966
406
41,758
(1) SF adjustments arise from remeasurements or redevelopments.
399
40,866
395
40,601
Acquired properties owned for entirety of comparable periods
918
Developments that reached completion by beginning of earliest comparable period presented
512
(7
(766
(304
93
NAREIT FFO:
Our reconciliation of net income attributable to common stock and unit holders to NAREIT FFO is as follows:
(in thousands, except share information)
Reconciliation of Net income to NAREIT FFO
Adjustments to reconcile to NAREIT FFO: (1)
Depreciation and amortization (excluding FF&E)
100,168
97,189
204,665
193,386
Provision for impairment to operating properties
12,440
28,494
Gain on sale of operating properties, net of tax
(2,393
(246
(39,463
(348
Gain (loss) on sale of land
NAREIT FFO attributable to common stock and unit holders
160,036
157,324
319,789
322,244
(1) Includes Regency's pro-rate share of unconsolidated investment partnerships, net of pro-rata share attributable to noncontrolling interest.
Same Property NOI Reconciliation:
Our reconciliation of property revenues and property expenses to Same Property NOI, on a pro-rata basis, is as follows:
Same
Other (1)
94,570
(42,842
100,983
(53,142
Less:
Other (2)
5,836
2,519
8,355
15,360
2,274
17,634
Plus:
88,127
5,462
77,928
11,177
293
18,424
Other operating expense, excluding provision for doubtful accounts (3)
1,087
446
245
1,235
Other expense (income)
14,696
31,510
20,541
39,384
Equity in income (loss) of investments in real estate excluded from NOI (4)
11,107
869
11,976
14,688
981
15,669
Pro-rata NOI, as adjusted
4,870
208,914
7,998
207,023
(1) Includes revenues and expenses attributable to non-same property, sold property, development property, and corporate activities.
(2) Includes straight-line rental income and expense, net of reserves, above and below market rent amortization, other fees, and noncontrolling interest.
(3) Provision for doubtful accounts is applicable only to 2018 amounts. Beginning January 1, 2019, with the adoption of Topic 842, Leases, uncollectible amounts are presented net within Lease income.
(4) Includes non-NOI income earned and expenses incurred at our unconsolidated real estate partnerships, including those separated out above for our consolidated properties.
223,182
(81,008
237,354
(136,854
22,038
5,287
27,325
42,371
(10,564
31,807
181,212
9,571
161,009
16,620
545
39,472
1,340
1,327
314
1,603
21,235
56,142
14,713
98,084
4,189
2,158
6,347
28,517
2,245
30,762
9,969
419,634
14,153
413,689
48
Liquidity and Capital Resources
We use cash flows generated from operating, investing, and financing activities to strengthen our balance sheet, finance our development and redevelopment projects, fund our investment activities, and maintain financial flexibility. We continuously monitor the capital markets and evaluate our ability to issue new debt or equity, to repay maturing debt, or fund our capital commitments.
Except for $500 million of unsecured public and private placement debt, our Parent Company has no capital commitments other than its guarantees of the commitments of our Operating Partnership. All remaining debt is held by our Operating Partnership or by our co-investment partnerships. The Operating Partnership is a co-issuer and a guarantor of the $500 million of outstanding debt of our Parent Company. The Parent Company will from time to time access the capital markets for the purpose of issuing new equity and will simultaneously contribute all of the offering proceeds to the Operating Partnership in exchange for additional partnership units. Based upon our available sources of capital, our current credit ratings, and the number of high quality, unencumbered properties we own, we believe our available capital resources are sufficient to meet our expected capital needs.
In addition to our $33.8 million of unrestricted cash, we have the following additional sources of capital available:
ATM equity program
Original offering amount
500,000
Available capacity
Line of Credit
Total commitment amount
1,250,000
Available capacity (1)
1,117,355
Maturity (2)
March 23, 2022
(1) Net of letters of credit.
(2) The Company has the option to extend the maturity for two additional six-month periods.
Our dividend distribution policy is set by our Board of Directors, who monitors our financial position. Our Board of Directors recently declared a common stock dividend of $0.585 per share, payable on August 22, 2019, to shareholders of record as of August 12, 2019. Future dividends will be declared at the discretion of our Board of Directors and will be subject to capital requirements and availability. We plan to continue paying an aggregate amount of distributions to our stock and unit holders that, at a minimum, meet the requirements to continue qualifying as a REIT for federal income tax purposes.
We expect to generate sufficient cash flow from operations to fund our dividend distributions. During the six months ended June 30, 2019 and 2018, we generated cash flow from operations of $289.3 million and $300.9 million, respectively, and paid $195.7 million and $188.9 million in dividends to our common stock and unit holders, respectively.
We estimate that we will require capital during the next twelve months of approximately $329.0 million to fund construction and related costs for in-process development and redevelopment, to repay maturing debt, and to make capital contributions to our co-investment partnerships. We expect to generate the necessary cash to fund our capital needs from future cash flow from operations after dividends paid, borrowings from our Line, proceeds from the sale of real estate, and when the capital markets are favorable, proceeds from the sale of equity or the issuance of new debt.
If we start new developments or redevelopments, commit to new acquisitions, prepay debt prior to maturity, or repurchase shares of our common stock, our cash requirements will increase. In addition, we have an agreement related to our Town and Country Center in Los Angeles, CA (“the Center”) that provides an option for the seller to require us to purchase up to an additional 81.63% ownership interest in the center by December 2019; we currently expect the seller to require us to purchase an additional 16.63% ownership interest by that date for approximately $17.1 million.
We endeavor to maintain a high percentage of unencumbered assets. As of June 30, 2019, 88.9% of our wholly-owned real estate assets were unencumbered. Such assets allow us to access the secured and unsecured debt markets and to maintain availability on the Line. Our annualized Fixed charge coverage ratio, including our pro-rata share of our partnerships, was 4.3 and 4.2 times for each of the periods ended June 30, 2019 and December 31, 2018, respectively.
Our Line, Term Loans, and unsecured loans require that we remain in compliance with various covenants, which are described in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. We are in compliance with these covenants at June 30, 2019 and expect to remain in compliance.
49
Summary of Cash Flow Activity
The following table summarizes net cash flows related to operating, investing, and financing activities of the Company:
(11,583
180,401
(170,503
(1,685
Total cash and cash equivalents and restricted cash
(5,876
Net cash provided by operating activities:
Net cash provided by operating activities decreased $11.6 million due to:
$5.7 million decrease from cash paid to settle treasury rate locks put in place in 2018 to hedge changes in interest rates on a 30 year fixed rate debt offering completed during 2019,
$4.0 million net decrease in cash due to timing of cash receipts and payments,
$0.8 million decrease in cash from operating income, and
$1.1 million decrease in operating cash flow distributions from our unconsolidated real estate partnerships.
Net cash used in investing activities:
Net cash used in investing activities changed by $180.4 million as follows:
66,464
(8,975
40,547
40,952
(15,648
12,481
44,412
88
228
(148
Significant changes in investing activities include:
We acquired three operating properties for $19.3 million during 2019 and two operating properties for $85.8 million during the same period in 2018.
We paid deposits of $11.0 million during 2019 toward the expected acquisition of operating properties, including one that we acquired on July 1, 2019 for a purchase price of $212.5 million.
We invested $40.5 million less in 2019 than the same period in 2018 on real estate development, redevelopment, and capital improvements, as further detailed in a table below.
50
We sold four operating properties and three land parcels in 2019 and received proceeds of $83.5 million, compared to four operating properties and three land parcels in 2018 for proceeds of $42.5 million.
We invested $33.0 million in our real estate partnerships during 2019, including:
$21.3 million to fund our share of development and redevelopment activities,
$9.7 million to fund our share of acquiring an additional equity interest in one partnership, and
$2.1 million to fund our share of debt refinancing.
During the same period in 2018, we invested $45.5 million, including:
$34.7 million to fund our share of acquiring three operating properties,
$9.3 million to fund our share of development and redevelopment activities, and
$1.5 million to acquire an interest in one land parcel for development.
Distributions from our unconsolidated real estate partnerships include return of capital from sales or financing proceeds. The $46.7 million received in 2019 is driven by the sale of two operating properties, the sale of our ownership interest in a single operating property partnership, and our share of proceeds from debt refinancing activities. During the same period in 2018, we received $2.3 million from the sale of one land parcel.
Acquisition of securities and proceeds from sale of securities pertain to investment activities held in our captive insurance company and our deferred compensation plan.
We plan to continue developing and redeveloping shopping centers for long-term investment. During 2019, we deployed capital of $80.0 million for the development, redevelopment, and improvement of our real estate properties, comprised of the following:
Capital expenditures:
Land acquisitions for development
5,206
Building and tenant improvements
25,073
31,061
(5,988
Redevelopment costs
15,955
31,072
(15,117
Development costs
26,062
48,242
(22,180
1,399
3,865
(2,466
Capitalized direct compensation
6,337
6,339
(2
80,032
120,579
(40,547
During 2019, we acquired two land parcels for new development projects.
Building and tenant improvements decreased $6.0 million in 2019, primarily related to the timing of capital projects.
Redevelopment expenditures are lower in 2019 due to the timing, magnitude, and number of projects currently in process. We intend to continuously improve our portfolio of shopping centers through redevelopment which can include adjacent land acquisition, existing building expansion, facade renovation, new out-parcel building construction, and redevelopment related tenant improvement costs. The size and magnitude of each redevelopment project varies with each redevelopment plan.
Development expenditures are lower in 2019 due to the progress during 2018 towards completion of our development projects currently in process. At June 30, 2019 and December 31, 2018, we had six consolidated development projects that were either under construction or in lease up. See the tables below for more details about our development projects.
Interest is capitalized on our development and redevelopment projects and is based on cumulative actual costs expended. We cease interest capitalization when the property is no longer being developed or is available for occupancy upon substantial completion of tenant improvements, but in no event would we capitalize interest on the project beyond 12 months after the anchor opens for business.
51
We have a staff of employees who directly support our development program, which includes redevelopment of our existing properties. We currently expect that our development activity will approximate our recent historical averages, although the amount of activity by type will vary. Internal compensation costs directly attributable to these activities are capitalized as part of each project. Changes in the level of future development activity could adversely impact results of operations by reducing the amount of internal costs for development projects that may be capitalized. A 10% reduction in development activity without a corresponding reduction in development related compensation costs could result in an additional charge to net income of $1.5 million per year.
The following table summarizes our in-process consolidated development projects:
(in thousands, except cost PSF)
Market
Start
Estimated
Project
Completion
Estimated Net
Costs (1)
% of Costs Incurred (1)
Cost PSF
of GLA (1)
Carytown Exchange (2)
Richmond, VA
Q4-18
25,580
6%
107
239
Los Angeles, CA
Q2-19
27,313
14%
1,012
Mellody Farm
Chicago, IL
Q2-17
104,304
89%
259
Pinecrest Place (3)
Miami, FL
Q1-17
16,367
92%
70
234
The Village at Hunter's Lake
Tampa, FL
22,048
18%
72
306
The Village at Riverstone
Houston, TX
Q4-16
30,874
185
226,486
67%
702
323
(1) Includes leasing costs and is net of tenant reimbursements.
(2) Estimated Net Development Costs and GLA reported based on Regency's ownership interest in the partnership at project completion, which is currently estimated to be 64%.
(3) Estimated Net Development Costs for Pinecrest Place excludes the cost of land, which the Company has leased long term.
The following table summarizes our pro-rata share of in-process unconsolidated development projects:
Q1-18
32,717
69%
574
Midtown East
Raleigh, NC
Q4-17
22,682
79
287
55,399
78%
136
407
The following table summarizes our completed consolidated development projects:
Net
Indigo Square
Charleston, SC
17,111
Net cash used in financing activities:
Net cash flows from financing activities changed by $170.5 million during 2019, as follows:
607
92,211
1,191
Dividend payments and operating partnership distributions
(6,707
(Repayments of) proceeds from unsecured credit facilities, net
(25,000
90,000
(115,000
Proceeds from debt issuance
301,251
(2,268
Debt repayment, including early redemption costs
(318,739
(172,203
(146,536
6,089
Proceeds from sale of treasury stock, net
(90
Significant financing activities during the six months ended June 30, 2019 and 2018 include the following:
We repurchased for cash a portion of the common stock granted to employees for stock based compensation to satisfy employee tax withholding requirements.
We paid $32.8 million to repurchase 563,229 common shares through our share repurchase program that were executed in December 2018 but not settled until January 2019. During the six months ended June 30, 2018, we paid $125 million to repurchase 2,145,209 common shares through the same share repurchase program.
Distributions to limited partners, net of contributions, decreased $1.2 million in 2019 due to contributions made by a new limited partner during 2019.
We paid $6.7 million more in dividends as a result of an increase in our dividend rate from $1.11 per share, during the six months ended June 30, 2018, to $1.17 per share, during the six months ended June 30, 2019, partially offset by the reduced shares outstanding in 2019.
We had the following debt related activity during 2019:
We repaid, net of draws, $25 million on our Line.
We received proceeds of $299 million upon issuance, in March, of $300 million of senior unsecured public notes.
We paid $318.7 million for debt repayments, including $259.6 million to early redeem our senior unsecured public notes originally due April 2021, $53.7 million to repay two mortgage maturities with interest rates of 6.25% and 7.3%, and $5.4 million in principal mortgage payments.
We paid $3.3 million of loan costs in connection with our public note offering above.
We had the following debt related activity during 2018:
We borrowed, net of payments, an additional $90 million on our Line.
We received proceeds of $301.3 million from debt issuances, including $299.5 million from issuing $300 million of senior unsecured public notes and $1.7 million from construction loan draws used to fund an in-process development project.
We paid $172.2 million for debt repayments, including $160.5 million to early redeem our senior unsecured public notes originally due June 2020, and $11.7 million to pay scheduled principal mortgage payments.
We paid $9.4 million of loan costs in connection with our $300 million public note offering noted above and upon expanding our Line commitment.
Investments in Real Estate Partnerships
The following table is a summary of the unconsolidated combined assets and liabilities of these co-investment partnerships and our pro-rata share:
Combined
Regency's Share (1)
(dollars in thousands)
Number of Co-investment Partnerships
Regency’s Ownership
18.38%-50%
9.38%-50%
3,185,748
3,227,831
1,084,164
1,079,072
1,759,228
1,749,725
585,030
580,220
1,426,520
1,478,106
499,134
498,852
Negative investment in US Regency Retail I, LLC (2)
3,754
Basis difference
(36,093
(38,064
Impairment of investment in real estate partnerships
(1,300
(1) Pro-rata financial information is not, and is not intended to be, a presentation in accordance with GAAP. However, management believes that providing such information is useful to investors in assessing the impact of its investments in real estate partnership activities on our operations, which includes such items on a single line presentation under the equity method in our consolidated financial statements.
(2) The USAA partnership has distributed proceeds from debt financing and real estate sales in excess of Regency's carrying value of its investment, resulting in a negative investment balance, which is classified within Accounts payable and other liabilities in the Consolidated Balance Sheets.
Our equity method investments in real estate partnerships consist of the following:
December 31,
182,485
189,381
53,646
54,250
Columbia Regency Retail Partners, LLC
(Columbia I)
9,220
13,625
39,637
38,110
10,949
11,169
23,829
31,235
145,729
125,231
Total Investment in real estate partnerships
US Regency Retail I, LLC (USAA) (1)
(3,754
(3,513
Net Investment in real estate partnerships
461,741
459,488
(1) The USAA partnership has distributed proceeds from debt financing and real estate sales in excess of Regency's carrying value of its investment, resulting in a negative investment balance, which is classified within Accounts payable and other liabilities in the Consolidated Balance Sheets.
Notes Payable - Investments in Real Estate Partnerships
Scheduled principal repayments on notes payable held by our investments in real estate partnerships were as follows:
Regency’s
Pro-Rata
Share
9,568
10,311
19,879
6,183
17,043
335,169
352,212
114,234
11,048
269,942
19,635
300,625
104,375
7,811
170,702
178,513
68,417
2,989
171,608
174,597
65,096
8,068
567,923
575,991
174,632
Net unamortized loan costs, debt premium / (discount)
(9,570
(2,898
56,527
1,516,085
1,592,247
530,039
54
At June 30, 2019, our investments in real estate partnerships had notes payable of $1.6 billion maturing through 2034, of which 91.7% had a weighted average fixed interest rate of 4.5%. The remaining notes payable float with LIBOR and had a weighted average variable interest rate of 4.7%. These fixed and variable rate notes payable are all non-recourse, and our pro-rata share was $530.0 million as of June 30, 2019. As notes payable mature, we expect they will be repaid from proceeds from new borrowings and/or partner capital contributions.
We believe that our partners are financially sound and have sufficient capital or access thereto to fund future capital requirements. In the event that a co-investment partner was unable to fund its share of the capital requirements of the co-investment partnership, we would have the right, but not the obligation, to loan the defaulting partner the amount of its capital call.
Management fee income
In addition to earning our pro-rata share of net income or loss in each of these co-investment partnerships, we receive fees, as shown below:
Asset management, property management, leasing, and other transaction fees
7,370
6,664
14,028
13,720
See Note 1 to Consolidated Financial Statements.
Environmental Matters
We are subject to numerous environmental laws and regulations as they apply to our shopping centers pertaining primarily to chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks. 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 more environmentally friendly systems. Where available, we have been accepted into state-sponsored environmental programs. We have a blanket environmental insurance policy for 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.
As of June 30, 2019 we and our Investments in real estate partnerships had accrued liabilities of $9.4 million for our pro-rata share of environmental remediation. We believe that the ultimate disposition of currently known environmental matters will not have a material effect on our financial position, liquidity, or results of operations; however, we can give no assurance that existing environmental studies on 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/Deflation
Inflation has been historically low and has had a minimal impact on the operating performance of our shopping centers; however, inflation may become a greater concern in the near future. Substantially all of our long-term leases contain provisions designed to mitigate the adverse impact of inflation, which require tenants to pay their pro-rata 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. 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. However, during deflationary periods or periods of economic weakness, minimum rents and percentage rents will decline as the supply of available retail space exceeds demand and consumer spending declines. Occupancy declines will result in lower recovery rates of our operating expenses.
55
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the quantitative and qualitative disclosures about market risk disclosed in item 7A of Part II of our Form 10-K for the year ended December 31, 2018 .
Item 4. Controls and Procedures
Controls and Procedures (Regency Centers Corporation)
Under the supervision and with the participation of the Parent Company's management, including its chief executive officer and chief financial officer, the Parent Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, the Parent Company's chief executive officer and chief financial officer concluded that its disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Parent Company in the reports it files or submits is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Parent Company's internal controls over financial reporting identified in connection with this evaluation that occurred during the second quarter of 2019 which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Controls and Procedures (Regency Centers, L.P.)
Under the supervision and with the participation of the Operating Partnership's management, including the chief executive officer and chief financial officer of its general partner, the Operating Partnership conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based on this evaluation, the chief executive officer and chief financial officer of its general partner concluded that its disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Operating Partnership in the reports it files or submits is accumulated and communicated to management, including the chief executive officer and chief financial officer of its general partner, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Operating Partnership's internal controls over financial reporting identified in connection with this evaluation that occurred during the second quarter of 2019 which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 1. Legal Proceedings
We are a party to various legal proceedings that 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 1A. Risk Factors
There have been no material changes from the risk factors disclosed in item 1A. of Part I of our Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the quarter ended June 30, 2019.
The following table represents information with respect to purchases by the Parent Company of its common stock, by month, during the three months ended June 30, 2019.
Period
Total number of shares purchased
Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs (1)
Maximum number or approximate dollar value of shares that may yet be purchased under the plans or programs (1)
April 1 through April 30, 2019
250,000,000
May 1 through May 31, 2019
June 1 through June 30, 2019
(1) On February 5, 2019, the Company's Board authorized a new common share repurchase program under which the Company, may purchase, from time to time, up to a maximum of $250 million of shares of its outstanding common stock through open market purchases and/or in privately negotiated transactions. Any shares purchased will be retired. The program is set to expire on February 4, 2020. The timing and actual number of shares purchased under the program depend upon marketplace conditions and other factors. The program remains subject to the discretion of the Board. Through June 30, 2019, no shares have been repurchased under this new program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
In reviewing any agreements included as exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties to the agreements. Each agreement contains representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading. Additional information about the Company may be found elsewhere in this report and the Company's other public files, which are available without charge through the SEC's website at http://www.sec.gov. Unless otherwise indicated below, the Commission file number to the exhibit is No. 001-12298.
Ex # Description
31. Rule 13a-14(a)/15d-14(a) Certifications.
31.1 Rule 13a-14 Certification of Chief Executive Officer for Regency Centers Corporation.
31.2 Rule 13a-14 Certification of Chief Financial Officer for Regency Centers Corporation.
31.3 Rule 13a-14 Certification of Chief Executive Officer for Regency Centers, L.P.
31.4 Rule 13a-14 Certification of Chief Financial Officer for Regency Centers, L.P.
32. Section 1350 Certifications.
32.1 * 18 U.S.C. § 1350 Certification of Chief Executive Officer for Regency Centers Corporation.
32.2 * 18 U.S.C. § 1350 Certification of Chief Financial Officer for Regency Centers Corporation.
32.3 * 18 U.S.C. § 1350 Certification of Chief Executive Officer for Regency Centers, L.P.
32.4 * 18 U.S.C. § 1350 Certification of Chief Financial Officer for Regency Centers, L.P.
101. Interactive Data Files
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*Furnished, not filed.
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, thereunto duly authorized.
August 6, 2019
By:
/s/ Lisa Palmer
Lisa Palmer, President and Chief Financial Officer (Principal Financial Officer)
/s/ J. Christian Leavitt
J. Christian Leavitt, Senior Vice President and Treasurer (Principal Accounting Officer)
Regency Centers Corporation, General Partner