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WIKI ANALYSIS
Jacksonville, Florida-based Regency Centers Corporation (REG) is an equity based real estate investment trust that owns and operates retail properties. It controls a total of 451 properties through direct ownership and joint ventures.[1]
Regency concentrates on densely populated, affluent communities, where the average household income is $85,806, compared to a $66,848 national average.[2] Its community and neighborhood shopping centers are often anchored by supermarkets, drug stores and high-volume retailers which sell consumer necessities. These two factors help Regency minimize competition to its tenants from outlet stores and big box retailers. There are two additional advantages to REG's focus on high density areas – occupancy rates in Regency's properties are high, at or above 95% since 2003, and high real estate costs are barriers to entry in these locations.[3]
Regency funds a large portion of its acquisition and development with the sale of existing assets and agreements with joint venture partners, keeping its balance sheet relatively debt-free. In 2007 REG increased its line of credit to $600M and received an upgrade in its investment grade rating from BBB to BBB+, which lowered the interest rates on its debt by 40 basis points.[4][5] Regency's low debt level effectively increases the proportion of REG that is owned by shareholders, leading to a higher demand for its stock and increasing its market capitalization. This is crucial for Regency because it operates fewer properties than competitors like Simon Property Group (SPG) and Kimco Realty (KIM), and has the lowest revenue and net income among retail REITs.[6] So its low debt level, and focus on quality markets, are key factors attracting investors to the company's stock.
Business Financials
REG increases revenues mainly with new acquisitions and new completed developments.[7] During 2007 the company acquired 5 operating properties and increased their development pipeline to $1.6B.[8] The company funds new acquisitions with new debt, proceeds from the sale of assets and investments from joint venture partners. These last two make up a particularly high portion of the funds REG uses to purchase new properties. During 2007 REG received $730 million to fund new acquisitions from disposal of properties and partners funding acquisitions.[9]
During 2007 93% of REG's revenues were from some form of rents paid by tenants.[10] The remainder was from management fees obtained by managing third party assets.[11] REG increased its revenues primarily through the addition of new leasable square feet, either through acquisition or its development pipeline.[12] Though revenue and operating income both continued to rise, operating income as a percentage of income has been steadily declining. This is due to increased depreciation expense from REG's rapidly expanding portfolio, as well as increases in interest expense from greater debt balances and increased operating expenses from operating new properties.
Funds From Operations (FFO), a measure commonly used in the real estate industry, continued to rise in 2007. Funds From Operations is obtained from a company's net income, excluding any gain/sale on real estate sold during the period and excluding any depreciation/amortization. REG's erratic net income is due to its fluctuating depreciation expense and recognition of various accounting gains/losses on the sale of its assets. Both of these are results of REG's rapid expansion.
Trends and Forces
U.S. Economic Cycles Might Lead To Decreased Revenues, Though REG's Focus on Consumer Staples Provides Some Insulation
- Regency's properties consist primarily of retail space, making the company especially vulnerable in a general economic downturn. If consumer spending levels decline, demand for REG's properties will decrease as retail businesses will contract rather than expand. Slow demand lowers the rents that tenants are willing to pay for REG's properties. This poses a risk as REG has leases on 70.4% of its gross leasable area (GLA) expiring by 2012.[16] If there is an economic down cycle at the same time that the leases are expiring, Regency will have to offer discounted rents on properties to attract tenants. This would have a lasting effect on the company's revenues. Leases with smaller tenants usually last for at least a few years, and leases with anchor tenants (Big stores which occupy a large portion of a property's GLA) can last much longer. If these leases are signed when rents are low, Regency will see lower income over the life of the lease.
- Any change in general economic conditions on a national, regional, or local scale which adversely affects Regency's tenants will decrease the amount of base rent, expense reimbursement and overages REG receives from its tenants, as all of these are tied to tenant performance. Furthermore, if during a down economic cycle any of REG's tenants become insolvent, there is a risk they will not honor their leases.[17]
- REG relies heavily on a few major anchor tenants in its centers. As of December 31st, 2007 its four largest tenants (Kroger, Publix, Safeway and Super Valu) represented over 23% of gross leasable area (total area REG has available to lease in a center).[18] If one of these tenants were to cancel their leases or choose not to renew, it would have a negative financial impact on Regency. However, these tenants are all grocers dealing in consumer staples, which have historically been resistant to financial downturns.
Increasing Competition From Discount Stores Has The Potential To Adversely Affect Anchor Tenants' Ability to Meet Lease Obligations
- Regency operates neighborhood and community shopping centers, which are facing increasing risk from outlet stores, discount stores, and other retailers( retailers). As these competitors gain market share, they impact the ability of REG's tenants to pay rent, and decrease Regency's collections of base rents, expense reimbursements and overages.
- Regency's centers are primarily grocery anchored. Its four largest tenants, representing over 23% of Gross Leasable Area, are all grocers.[19] However, Wal-Mart is developing a new, smaller, grocery based store aimed specifically at the kind of affluent areas where Regency operates its properties.[20] If Wal-Mart were to enter these markets, it would have adverse consequences for Regency's anchor tenants. Regency's anchors, which focus on consumer staples, compete directly with these Wal-Mart stores.
- Anchor tenants commonly occupy a large percentage of gross leasable area and pay a substantial portion of base rent at Regency's properties. In addition, they bring foot traffic to the property benefiting smaller tenants. If an anchor tenant cancels their lease or becomes insolvent, not only would REG lose the base rent, overages, and expense reimbursements, but its smaller tenants would suffer from the decreased foot traffic. Leases for smaller tenants in a retail center often contain clauses allowing for lease terminations or rent reductions if an anchor tenant leaves the property. If an anchor tenant left the property, smaller tenants can choose to simply cancel their leases rather than wait for REG to locate a new anchor. Because of this, the abrupt departure of anchor tenant can drastically decrease the value of a retail center.
Inability To Obtain Financing Caused By The Credit Crunch Has The Potential To Impede REG's Growth.
- As a Real estate investment trust REG is required to pay out 90% of its taxable income in dividends. This requirement makes it unlikely REG can fund all its growth from operating income. To finance growth the company also relies on debt or equity capital. If the company is unable to obtain financing at favorable rates, it will not be able to fund expansion.
- REG suffers from little risk due to loan maturities. In 2008 and 2009 it had less than $100M in principal payments due, less than 10% of the $2.0B in debt it has outstanding.[21]
- However, REG funds a large portion of its expansion with the sale of existing assets. REG estimates it will take $477.4M to complete its $1.6B development pipeline.[22] It plans to fund that remainder with the $392M left on its line of credit and from the sale of buildings. Because of potential buyers' inability to obtain financing due to the credit crunch, REG will see its assets become more and more illiquid - a lack of lending creates a lack of able buyers, which makes it more difficult for REG to sell its properties. If REG is unable to sell its under-performing or redevelopment properties, it will find itself unable to fund expansion.
REG Is Insulated Against the Effects of Interest Rates On Debt Payments, But Rate Changes Do Affect Its Stock Price
- REG does not suffer from a large risk that an increase in interest rates would increase its payments on existing debt. As discussed above, REG usually uses proceeds from the sale of assets and joint ventures, not variable rate debt, to fund a large portion of its new purchases. As of December 31, 2007 REG had about $2.0B in outstanding debt, of which $1.8B was fixed rate.[23] If LIBOR were to increase by 1%, REG's interest payments would increase by approximately $2.7M.[24] This would decrease net income by less than 1%.
- REG is also fairly insulated against the risk that higher rates will make it more costly to refinance debt. Over half of its long term debt does not mature until 2012 or after.[25]
- Since REG does rely at least partially on new debt to fund its expansion, higher interest rates are an obstacle to the firm's growth. The company relies on some debt to fund its expansion, and increasing interest rates, especially as it draws down its line of credit to fund expansion, will lead to higher payments on new debt.
- REG will also see an increase in its interest rate if its credit rating declines.[26] If it loses its investment grade rating due to market conditions or company performance, the spread on its variable rate debt (the interest rate the company pays above LIBOR) will increase.
- As interest rates rise, REG sees a decrease in its stock price as alternative investments provide greater Return on investment (ROI). This occurs because as rates rise, fixed income instruments such as bonds provide higher returns. Since investors are able to earn a higher risk-adjusted return on fixed income instruments, they shift their investment out of Regency's stock and into these fixed income products. When the number of people wishing to hold Regency's stock decreases, the stock price falls.
Competition
REG competes with numerous other firms to both acquire properties and lease tenants. The table below lists other national retail retail real estate investment trusts that directly compete with REG. REG operates in the middle of the pack in terms of geographic focus, operating properties in just 23 states. Regency operates the 2nd fewest properties of its competitors, and has the lowest revenue and net income of any of its competitors (Though FRT's net income was only higher due to a one time extraordinary item recognized in 2007, it had lower income than REG in 2003-2006).[27] Despite this fact however, it is in the middle of the pack in terms of market capitalization (only Kimco and DDR have higher market caps). This is due to REG's low debt level ($2.0B), lower than any of its competitors except FRT ($1.6B in debt).[28] This low debt level effectively increases the proportion of REG that is owned by shareholders, leading to a higher market capitalization for REG's equity. It also decreases the riskiness of REG's equity, as it decreases the amount of debt that must be paid before equity holders receive dividend payment.
The table below provides competitive data comparing REG with some of its close competitors.
| Company | Revenues (12/31/2007, Millions) | Market Cap(Billions, 04/05/08) | Operating Properties | Number of States With Operating Properties |
| Regency Centers (REG) | 451.51 [29] | 5.00 [30] | 232 [31] | 23 [32] |
| Federal Realty Investment Trust (FRT) | 485.89 [33] | 4.80 [34] | 82 [35] | 13 [36] |
| Kimco Realty (KIM) | 681.55 [37] | 10.33 [38] | 946 [39] | 45 [40] |
| Developers Diversified Realty (DDR) | 944.85 [41] | 5.31B [42] | 740 [43] | 45 [44] |
| Weingarten Realty Investors (WRI) | 599.05 [45] | 3.12 [46] | 383 [47] | 22 [48] |
Market Share
In 2007 REG's market share among global Retail REITs was just 3%. Market share is listed by Funds From Operations (FFO), a metric that takes into account earnings from existing properties but not cash from acquisitions or sales of assets. Globally there are 38 REITs focusing on retail properties producing an aggregate $10.0B in FFO.[49][50]] Most of those were small companies, only 9 Retail REITs are listed in the Russell 1000.
- General Growth Properties (GGP) has ownership interests in and/or management responsibility across regional shopping malls totaling over 200 million square feet of retail space with 24,000 retail stores and anchor department stores, as well as theaters, sit-down restaurants, ice skating rinks, and other forms of family entertainment.[53]
- Westfield Group ((WDC) is the largest retail property group is the world with a portfolio of 119 shopping centers across Australia, the U.S., New Zealand, and the United Kingdom, valued at $53.2 billion.[54]
- Kimco Realty (KIM) is largest publicly traded owner and operator of neighborhood and community shopping centers in the U.S., with more than 1,519 properties comprising 180 million square feet of leasable space across 45 states, Puerto Rico, Canada, Mexico and Chile.[55]
- Simon Property Group (SPG) develops and leases regional malls, shopping centers and strip malls. Simon Property Group owns or has an interest in over 379 properties comprising over 256 million square feet of gross leasable area across investments in the U.S., Europe, and Asia,[56] making it the largest public U.S. real estate company.[57] Simon Property Group's investments tend to be in large metropolitan areas with very high consumer traffic and are comprised of anchor department stores alongside smaller retailers.
References
- ↑ 2007 Form 10-K Page 40
- ↑ Regency Centers Company Presentation
- ↑ Regency Centers Company Presentation
- ↑ 2007 Annual Report Letter To Shareholders Page 4
- ↑ 2007 Form 10-K Page 83
- ↑ Google Finance
- ↑ 2007 Annual Report Page 64
- ↑ 2007 Annual Report Letter to Shareholders, Page 4 and 43
- ↑ 2007 Annual Report Letter To Shareholders Page 4
- ↑ 2007 Annual Report Page 52
- ↑ 2007 Annual Report Page 52
- ↑ 2007 Annual Report Page 52
- ↑ 2007 Annual Report Page 64
- ↑ Google Finance
- ↑ 2007 Annual Report Page 64
- ↑ 2007 Annual Report Page 14
- ↑ Barbaro, Michael "Retailing Chains Caught in a Wave of Bankruptcies" The New York Times, April 15th 2008
- ↑ 2007 Annual Report Page 42
- ↑ 2007 Annual Report Page 42
- ↑ McWilliams, Garcy "Walmart Eyes Smaller and Higher End Stores"; Reclaim Democracy 08/17/2007
- ↑ 2007 Annual Report Letter To Shareholders Page 47
- ↑ 2007 Annual Report Letter To Shareholders Page 4
- ↑ 2007 Annual Report Page 64
- ↑ 2007 Annual Report Page 64
- ↑ 2007 Annual Report Page 59
- ↑ 2007 Form 10-K Page 2
- ↑ Google Finance
- ↑ Google Finance
- ↑ Google Finance
- ↑ Google Finance
- ↑ Reuters
- ↑ Reuters
- ↑ Google Finance
- ↑ Google Finance
- ↑ Reuters
- ↑ Reuters
- ↑ Google Finance
- ↑ Google Finance
- ↑ Reuters
- ↑ Reuters
- ↑ Google Finance
- ↑ Google Finance
- ↑ Company Website
- ↑ Company Website
- ↑ Google Finance
- ↑ Google Finance
- ↑ Reuters
- ↑ Reuters
- ↑ U.S. Global REITs
- ↑ [2007 Company Annual Reports]
- ↑ Datamonitor Industry Market Research: Global - Retail REIT's
- ↑ [2007 Company Annual Reports]
- ↑ VNO Company Site - About Us
- ↑ Westfield Group company website - Company Profile
- ↑ Kimco Company Website - About Kimco
- ↑ Simon Property Group company website - About Us
- ↑ Simon Property Group company website - About Us
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