United States
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
[X] For the quarterly period ended March 31, 2004
-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
---------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3191743
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
121 West Forsyth Street, Suite 200
Jacksonville, Florida 32202
(Address of principal executive offices) (Zip Code)
(904) 598-7000 (Registrant's
telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
(Applicable only to Corporate Registrants)
As of May 6, 2004, there were 60,757,635 shares outstanding of the Registrant's
common stock.
Regency Centers Corporation
Index to Financial Statements
Regency Centers Corporation Pages
Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 1
Consolidated Statements of Operations for the
three months ended March 31, 2004 and 2003 2
Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2004 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 4
Notes to Consolidated Financial Statements 5-16
All other schedules are omitted because they are not applicable or because
information required therein is shown in the consolidated financial statements
or notes thereto.
REGENCY CENTERS CORPORATION
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
(in thousands, except share data)
(unaudited)
2004 2003
---- ----
Assets
- ------
Real estate investments at cost:
Land $ 762,459 738,101
Buildings and improvements 1,932,646 1,914,075
--------------- ----------------
2,695,105 2,652,176
Less: accumulated depreciation 299,127 285,665
--------------- ----------------
2,395,978 2,366,511
Properties in development 369,752 369,474
Operating properties held for sale 6,319 4,200
Investments in real estate partnerships 101,404 140,496
--------------- ----------------
Net real estate investments 2,873,453 2,880,681
Cash and cash equivalents 43,538 29,869
Notes receivable 70,181 70,782
Tenant receivables, net of allowance for uncollectible accounts
of $3,372 and $3,353 at March 31, 2004 and December 31, 2003,
respectively 38,085 54,573
Deferred costs, less accumulated amortization of $25,266 and
$29,493 at March 31, 2004 and December 31, 2003, respectively 38,045 35,804
Acquired lease intangible assets, net 9,764 10,205
Other assets 13,358 16,315
--------------- ----------------
$ 3,086,424 3,098,229
=============== ================
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Notes payable $ 1,251,577 1,257,777
Unsecured line of credit 230,000 195,000
Accounts payable and other liabilities 71,506 94,280
Acquired lease intangible liabilities, net 5,877 6,115
Tenants' security and escrow deposits 9,549 9,358
--------------- ----------------
Total liabilities 1,568,509 1,562,530
--------------- ----------------
Preferred units 223,526 223,526
Exchangeable operating partnership units 20,238 26,544
Limited partners' interest in consolidated partnerships 2,380 4,651
--------------- ----------------
Total minority interest 246,144 254,721
--------------- ----------------
Stockholders' equity:
Series 3 cumulative redeemable preferred stock, $.01 par value
per share, 300,000 shares authorized, issued and outstanding at
March 31, 2004 and December 31, 2003, respectively;
liquidation preference $250 per share 75,000 75,000
Common stock $.01 par value per share, 150,000,000 shares
authorized; 65,833,896 and 64,956,077 shares issued
at March 31, 2004 and December 31, 2003, respectively 658 650
Treasury stock at cost, 5,139,623 and 5,048,120 shares held at
March 31, 2004 and December 31, 2003, respectively, at cost (111,414) (111,414)
Additional paid in capital 1,401,397 1,394,361
Accumulated other comprehensive (loss) income (5,720) 175
Distributions in excess of net income (88,150) (77,794)
--------------- ----------------
Total stockholders' equity 1,271,771 1,280,978
--------------- ----------------
Commitments and contingencies
$ 3,086,424 3,098,229
=============== ================
See accompanying notes to consolidated financial statements.
1
REGENCY CENTERS CORPORATION
Consolidated Statements of Operations
For the three months ended March 31, 2004 and 2003
(in thousands, except per share data)
(unaudited)
2004 2003
---- ----
Revenues:
Minimum rent $ 70,640 67,064
Percentage rent 453 299
Recoveries from tenants 20,362 20,197
Management fees and commissions 1,610 1,561
Equity in income of investments in
real estate partnerships 2,745 2,336
---------------- ----------------
Total revenues 95,810 91,457
---------------- ----------------
Operating expenses:
Depreciation and amortization 20,207 17,998
Operating and maintenance 13,367 12,786
General and administrative 5,883 4,135
Real estate taxes 10,589 9,852
Other expenses 488 427
---------------- ----------------
Total operating expenses 50,534 45,198
---------------- ----------------
Other expense (income)
Interest expense, net of interest income of $837 and $893
in 2004 and 2003, respectively 21,234 20,582
Gain on sale of operating properties and properties in development (3,983) (2,376)
---------------- ----------------
Total other expense (income) 17,251 18,206
---------------- ----------------
Income before minority interests 28,025 28,053
Minority interest of preferred units (5,081) (10,782)
Minority interest of exchangeable partnership units (380) (409)
Minority interest of limited partners (79) (64)
---------------- ----------------
Income from continuing operations 22,485 16,798
Income from discontinued operations 332 1,126
---------------- ----------------
Net income 22,817 17,924
Preferred stock dividends (1,397) -
---------------- ----------------
Net income for common stockholders $ 21,420 17,924
================ ================
Income per common share - basic:
Continuing operations $ 0.35 0.28
Discontinued operations 0.01 0.02
---------------- ----------------
Net income for common stockholders per share $ 0.36 0.30
================ ================
Income per common share - diluted:
Continuing operations $ 0.34 0.28
Discontinued operations 0.01 0.02
---------------- ----------------
Net income for common stockholders per share $ 0.35 0.30
================ ================
See accompanying notes to consolidated financial statements.
2
REGENCY CENTERS CORPORATION
Consolidated Statement of Stockholders' Equity
For the three months ended March 31, 2004
(in thousands, except per share data)
(unaudited)
Accumulated
Additional Other Distributions Total
Series 3 Common Treasury Paid In Comprehensive in Excess of Stockholders'
Preferred Stock Stock Stock Capital (Loss) Income Net Income Equity
--------------- -------- ------------ ------------ ----------------------------------------
Balance at December 31, 2003 $ 75,000 650 (111,414) 1,394,361 175 (77,794) 1,280,978
Comprehensive Income:
Net income 22,817 22,817
Change in fair value of
derivative instruments (5,895) (5,895)
-------------
Total comprehensive income 16,922
Common stock issued as
compensation or purchased by
directors or officers - 3 - 3,971 - - 3,974
Common stock issued for exercise
of stock options - 4 - 10,757 - - 10,761
Common stock surrendered for
payment of taxes and forfeitures - - - (5,920) (5,920)
Common stock issued for
partnership units exchanged - 1 - 2,861 - - 2,862
Reallocation of minority interest - - - (4,633) - - (4,633)
Cash dividends declared:
Common stock ($.53 per share) - - - - - (31,776) (31,776)
Preferred stock ($.466 per share) - - - - - (1,397) (1,397)
----------- --------- ------------ -------------- ------------ ----------- -------------
Balance at March 31, 2004 $ 75,000 658 (111,414) 1,401,397 (5,720) (88,150) 1,271,771
=========== ========= ============ ============== ============ =========== =============
See accompanying notes to consolidated financial statements.
3
REGENCY CENTERS CORPORATION
Consolidated Statements of Cash Flows
For the three months ended March 31, 2004 and 2003
(in thousands)
(unaudited)
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 22,817 17,924
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,344 18,863
Deferred loan cost and debt premium amortization 616 532
Stock based compensation 3,548 2,869
Minority interest of preferred units 5,081 10,782
Minority interest of exchangeable operating partnership units 385 437
Minority interest of limited partners 79 64
Equity in income of investments in real estate partnerships (2,745) (2,336)
(Gain) loss on sale of operating properties (41) 642
Distributions from operations of investments in real estate
partnerships 4,644 2,099
Hedge settlement (5,720) -
Changes in assets and liabilities:
Tenant receivables 17,025 12,876
Deferred leasing costs (2,058) (2,237)
Other assets 1,889 2,540
Accounts payable and other liabilities (28,155) (31,384)
Tenants' security and escrow deposits 158 378
-------------- --------------
Net cash provided by operating activities 37,867 34,049
-------------- --------------
Cash flows from investing activities:
Acquisition and development of real estate (67,289) (101,882)
Proceeds from sale of real estate investments 30,854 31,580
Repayment of notes receivable, net 602 25,753
Investments in real estate partnerships (512) (767)
Distributions received from investments in real estate
partnerships 17,960 1,350
-------------- --------------
Net cash used in investing activities (18,385) (43,966)
-------------- --------------
Cash flows from financing activities:
Net proceeds from common stock issuance 10,761 969
Redemption of preferred units - (75,750)
Redemption of exchangeable operating partnership units (7,784) -
Net distribution to limited partner in consolidated partnership (2) -
Distributions to exchangeable operating partnership unit holders (679) (696)
Distributions to preferred unit holders (5,081) (8,110)
Dividends paid to common stockholders (31,776) (31,380)
Dividends paid to preferred stockholders (1,397) -
Proceeds from unsecured line of credit, net 35,000 98,750
Repayment of notes payable, net - (507)
Scheduled principal payments (1,497) (1,532)
Deferred loan costs (3,358) -
-------------- --------------
Net cash used in financing activities (5,813) (18,256)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 13,669 (28,173)
Cash and cash equivalents at beginning of the period 29,869 56,447
-------------- --------------
Cash and cash equivalents at end of the period $ 43,538 28,274
============== ==============
Supplemental disclosure of cash flow information - cash paid
for interest (net of capitalized interest of $3,323 and
$2,784 in 2004 and 2003, respectively) $ 30,017 29,400
============== ==============
Supplemental disclosure of non-cash transactions:
Common stock issued for partnership units exchanged $ 2,862 217
============== ==============
See accompanying notes to consolidated financial statements.
4
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
1. Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Regency Centers Corporation, its wholly-owned
qualified REIT subsidiaries, and partnerships in which it has
voting control (the "Company" or "Regency"). All significant
intercompany balances and transactions have been eliminated in
the consolidated financial statements. The Company owns
approximately 98% of the outstanding common units ("Units") of
Regency Centers, L.P. ("RCLP"). Regency invests in real estate
through its partnership interest in RCLP. Generally all of the
acquisition, development, operations and financing activities of
Regency, including the issuance of Units and preferred units, are
executed by RCLP. The equity interests of third parties held in
RCLP and the majority owned or controlled partnerships are
included in the consolidated financial statements as preferred or
exchangeable operating partnership units and limited partners'
interest in consolidated partnerships. The Company is a qualified
real estate investment trust ("REIT"), which began operations in
1993.
The financial statements reflect all adjustments that are of a
normal recurring nature, and in the opinion of management, are
necessary to properly state the results of operations and
financial position. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United
States of America have been condensed or omitted although
management believes that the disclosures are adequate to make the
information presented not misleading. The financial statements
should be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 2003 Form
10-K filed with the Securities and Exchange Commission.
(b) Revenues
The Company leases space to tenants under agreements with varying
terms. Leases are accounted for as operating leases with minimum
rent recognized on a straight-line basis over the term of the
lease regardless of when payments are due. Accrued rents are
included in tenant receivables.
Substantially all of the lease agreements contain provisions that
grant additional rents based on tenants' sales volume (contingent
or percentage rent) and reimbursement of the tenants' share of
real estate taxes and certain common area maintenance ("CAM")
costs. Percentage rents are recognized when the tenants achieve
the specified targets as defined in their lease agreements.
Recovery of real estate taxes and CAM costs are recognized as the
respective costs are incurred in accordance with their lease
agreements.
The Company accounts for profit recognition on sales of real
estate in accordance with Financial Accounting Standards Board
("FASB") Statement No. 66, "Accounting for Sales of Real Estate."
In summary, profits from sales will not be recognized by the
Company unless a sale has been consummated; the buyer's initial
and continuing investment is adequate to demonstrate a commitment
to pay for the property; the Company has transferred to the buyer
the usual risks and rewards of ownership; and the Company does
not have substantial continuing involvement with the property.
5
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
(b) Revenues (continued)
The Company has been engaged by joint ventures to provide asset
and property management services for their shopping centers. The
fees are market based and generally calculated as a percentage of
revenues earned and the estimated values of the properties and
recognized as services are provided.
(c) Real Estate Investments
Land, buildings and improvements are recorded at cost. All direct
and indirect costs related to development activities are
capitalized. Included in these costs are interest and real estate
taxes incurred during construction as well as estimates for the
portion of internal costs that are incremental, and deemed
directly or indirectly related to development activity.
Maintenance and repairs that do not improve or extend the useful
lives of the respective assets are reflected in operating and
maintenance expense. Depreciation is computed using the
straight-line method over estimated useful lives of up to 40
years for buildings and improvements, term of lease for tenant
improvements, and three to seven years for furniture and
equipment.
The Company allocates the purchase price of acquired properties
to land, buildings, and identifiable intangible assets based on
their respective fair values. Management uses various methods to
determine the fair value of acquired land and buildings,
including replacement cost, discounted cash flow analysis, and
comparable sales. Identifiable intangibles include amounts
allocated to acquired leases for rental rates that are above or
below market and the value of in-place leases. Intangibles
related to in place leases are amortized over the weighted
average life of the leases. Intangibles related to below market
rate leases are amortized to minimum rent over the remaining
terms of the underlying leases.
The Company follows the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("Statement
144"). In accordance with Statement 144, operating properties
held for sale includes only those properties available for
immediate sale in their present condition and for which
management believes it is probable that a sale of the property
will be completed within one year. Operating properties held for
sale are carried at the lower of cost or fair value less costs to
sell. Depreciation and amortization are suspended during the held
for sale period.
The Company reviews its real estate portfolio for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Regency determines
whether impairment has occurred by comparing the property's
carrying value to an estimate of the future undiscounted cash
flows. In the event impairment exists, assets are adjusted to
fair value, for held and used assets, and fair value less costs
to sell, for held for sale assets.
The Company's properties generally have operations and cash flows
that can be clearly distinguished from the rest of the Company.
In accordance with Statement 144, the operations and gains on
sales reported in discontinued operations include those operating
properties and properties in development that have been sold and
for which operations and cash flows can be clearly distinguished.
6
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
(c) Real Estate Investments (continued)
The operations from these properties have been eliminated from
ongoing operations and the Company will not have continuing
involvement after disposition. Prior periods have been restated
to reflect the operations of these properties as discontinued
operations. The operations and gains on sales of operating
properties sold to real estate partnerships in which the Company
has some continuing involvement are included in income from
continuing operations.
(d) Deferred Costs
Deferred costs include deferred leasing costs and deferred loan
costs, net of amortization. Such costs are amortized over the
periods through lease expiration or loan maturity. Deferred
leasing costs consist of internal and external commissions
associated with leasing the Company's shopping centers. Net
deferred leasing costs were $28.2 million and $28.0 million at
March 31, 2004 and December 31, 2003, respectively. Deferred loan
costs consist of initial direct and incremental costs associated
with financing activities. Net deferred loan costs were $9.8
million and $7.8 million at March 31, 2004 and December 31, 2003,
respectively.
(e) Earnings per Share and Treasury Stock
Basic net income per share of common stock is computed based upon
the weighted average number of common shares outstanding during
the year. Diluted net income per share also includes common share
equivalents for stock options and exchangeable operating
partnership units. See note 8 for the calculation of earnings per
share.
Repurchases of the Company's common stock (net of shares retired)
are recorded at cost and are reflected as Treasury stock in the
consolidated statement of stockholders' equity. Outstanding
shares do not include treasury shares.
(f) Stock-Based Compensation
The Company follows the provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure"
("Statement 148"). Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition,
Statement 148 amends the disclosure requirements of Statement No.
123, "Accounting for Stock-Based Compensation" ("Statement 123"),
to require more prominent and frequent disclosures in financial
statements about the effects of stock-based compensation. As
permitted under Statement 123 and Statement 148, the Company will
continue to follow the accounting guidelines pursuant to
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("Opinion 25"), for stock-based compensation
and to furnish the pro forma disclosures as required under
Statement 148.
7
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
(f) Stock-Based Compensation (continued)
The Company applies Opinion 25 in accounting for its plan, and
accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the
Company determined compensation cost based on the fair value at
the grant date for its stock options under Statement 123, the
Company's net income for common stockholders for the three months
ended March 31, 2004 and 2003 would have been reduced to the pro
forma amounts indicated below (in thousands except per share
data):
2004 2003
---- ----
Net income for common stockholders
as reported: $ 21,420 17,924
Add: stock-based employee compensation
expense included in reported net income 3,548 2,869
Deduct: total stock-based employee
compensation expense determined under
fair value based methods for all awards 4,729 4,094
-------------- -------------
Pro forma net income $ 20,239 16,699
============== =============
Earnings per share:
Basic - as reported $ 0.36 0.30
============== =============
Basic - pro forma $ 0.34 0.28
============== =============
Diluted - as reported $ 0.35 0.30
============== =============
Diluted - pro forma $ 0.33 0.28
============== =============
(g) Consolidation of Variable Interest Entities
In December 2003, the FASB issued Interpretation No. 46 ("FIN
46") (revised December 2003 ("FIN 46R")), "Consolidation of
Variable Interest Entities", which addresses how a business
enterprise should evaluate whether it has controlling financial
interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FIN
46, which was issued in January 2003. FIN 46R is applicable
immediately to a variable interest entity created after January
31, 2003 and as of the first interim period ending after March
15, 2004 to those variable interest entities created before
February 1, 2003 and not already consolidated under FIN 46 in
previously issued financial statements. The Company did not
create any variable interest entities after January 31, 2003. The
Company has adopted FIN 46R, analyzed the applicability of this
interpretation to its structures and determined that they are not
party to any variable interest entities that should be
consolidated.
8
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
(h) Segment Reporting
The Company's business is investing in retail shopping centers
through direct ownership or through joint ventures. The Company
actively manages its portfolio of retail shopping centers and may
from time to time make decisions to sell lower performing
properties, or developments not meeting its long-term investment
objectives. The proceeds of sales are invested into higher
quality retail shopping centers through acquisitions or new
developments, which management believes will meet its planned
rate of return. It is management's intent that all retail
shopping centers will be owned or developed for investment
purposes. The Company's revenue and net income are generated from
the operation of its investment portfolio. The Company will also
earn incidental fees from third parties for services provided to
manage and lease retail shopping centers owned through joint
ventures.
The Company's portfolio is located throughout the United States;
however, management does not distinguish or group its operations
on a geographical basis for purposes of allocating resources or
measuring performance. The Company reviews operating and
financial data for each property on an individual basis,
therefore, the Company defines an operating segment as its
individual properties. No individual property constitutes more
than 10% of the Company's combined revenue, net income or assets,
and thus the individual properties have been aggregated into one
reportable segment based upon their similarities with regard to
both the nature of the centers, tenants and operational
processes, as well as long-term average financial performance. In
addition, no single tenant accounts for 10% or more of revenue
and none of the shopping centers are located outside the United
States.
(i) Derivative Financial Instruments
The Company adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended ("Statement 133"),
on January 1, 2001. Statement 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value.
Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The
Company uses derivative financial instruments such as interest
rate swaps to mitigate its interest rate risk on a related
financial instrument. Statement 133 requires that changes in fair
value of derivatives that qualify as cash flow hedges be
recognized in other comprehensive income (loss) while the
ineffective portion of the derivative's change in fair value be
recognized immediately in earnings. Upon the settlement of a
hedge, gains and losses associated with the transaction will be
recorded in other comprehensive income (loss) and amortized
over the underlying term of the hedge transaction.
To determine the fair value of derivative instruments, the
Company uses standard market conventions and techniques such as
discounted cash flow analysis, option pricing models and
termination costs at each balance sheet date. All methods of
assessing fair value result in a general approximation of value,
and such value may never actually be realized.
9
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
(j) Financial Instruments with Characteristics of Both Liabilities
and Equity
In May 2003, the FASB issued Statement of Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("Statement
150"). Statement 150 affects the accounting for certain financial
instruments, including requiring companies having consolidated
entities with specified termination dates to treat minority
owners' interests in such entities as liabilities in an amount
based on the fair value of the entities. Although Statement 150
was originally effective July 1, 2003, the FASB has indefinitely
deferred certain provisions related to classification and
measurement requirements for mandatorily redeemable financial
instruments that become subject to Statement 150 solely as a
result of consolidation including minority interests of entities
with specified termination dates. As a result, Statement 150 has
no impact on the Company's consolidated statements of operations
for the three months ended March 31, 2004.
At March 31, 2004, the Company held a majority interest in four
consolidated entities with specified termination dates ranging
from 2012 to 2049. The minority owners' interests in these
entities are to be settled upon termination by distribution of
either cash or specific assets of the underlying entities. The
estimated fair value of minority interests in entities with
specified termination dates was approximately $5.2 million at
March 31, 2004 as compared to the carrying value of $2.4 million.
The Company has no other financial instruments that are affected
by Statement 150.
(k) Reclassifications
Certain reclassifications have been made to the 2003 amounts to
conform to classifications adopted in 2004.
2. Discontinued Operations
During the three months ended March 31, 2004, the Company sold 100% of
its interest in three operating properties for net proceeds of $21.3
million and the combined operating income and gain of $331,998 on these
sales are included in discontinued operations. The revenues from
properties included in discontinued operations, including properties
sold in 2004 and 2003, as well as operating properties held for sale,
were $775,863 and $3.9 million for the three months ended March 31,
2004 and 2003, respectively. The operating income from these properties
was $320,241 and $1.8 million for the three months ended March 31, 2004
and 2003, respectively. Operating income and gains on sales included in
discontinued operations are shown net of minority interest of
exchangeable operating partnership units totaling $5,604 and $27,932
for the three months ended March 31, 2004 and 2003, respectively.
10
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
3. Real Estate Investments
The Company accounts for all investments in which it owns 50% or less
and does not have a controlling financial interest using the equity
method. The Company's combined investment in these partnerships was
$101.4 million and $140.5 million at March 31, 2004 and December 31,
2003, respectively. Net income, which includes all operating results,
as well as gains and losses on sales of properties within the joint
ventures, is allocated to the Company in accordance with the respective
partnership agreements. Such allocations of net income are recorded in
equity in income of investments in real estate partnerships in the
accompanying consolidated statements of operations.
The Company has a 25% equity interest in Macquarie CountryWide-Regency,
LLC ("MCWR"), a joint venture with an affiliate of Macquarie
CountryWide Trust of Australia, a Sydney, Australia-based property
trust focused on investing in grocery-anchored shopping centers. At
March 31, 2004, the Company held a note receivable from MCWR with a
balance of $15.5 million for the acquisition of shopping centers during
the fourth quarter of 2003. The note receivable has an interest rate of
LIBOR plus 1.5% and was repaid in full on April 16, 2004.
The Company also has a 20% equity interest in Columbia Regency Retail
Partners, LLC ("Columbia"), a joint venture with the Oregon State
Treasury that was formed for the purpose of investing in retail
shopping centers.
Recognition of gains from sales to joint ventures is recorded on only
that portion of the sales not attributable to the Company's ownership
interest. The gains and operations are not recorded as discontinued
operations because of Regency's continuing involvement in these
shopping centers. Columbia and MCWR intend to continue to acquire
retail shopping centers, some of which they may acquire directly from
the Company. For those properties acquired from third parties, the
Company is required to contribute its pro-rata share of the purchase
price to the partnership.
With the exception of Columbia and MCWR, both of which intend to
continue expanding their investment in shopping centers, the
investments in real estate partnerships represent single asset entities
formed for the purpose of developing or owning retail based commercial
real estate.
In March 2004, the two properties in the OTR/Regency Texas Realty
Holdings, L.P., an unconsolidated joint venture in which Regency
has a 30% interest, were sold to an outside party for $28.3 million
resulting in gain of $8.2 million. The Company received $17.2 million
representing $12.9 million for loan repayments and a $4.3 distribution
for the Company's 30% interest. The Company recognized a $1.2 million
gain in the equity in income of investments in real estate partnerships
in the accompanying consolidated statements of operations.
11
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
3. Real Estate Investments (continued)
The Company's investments in real estate partnerships as of March 31,
2004 and December 31, 2003 consist of the following (in thousands):
Ownership 2004 2003
--------- ---- ----
Columbia Regency Retail Partners, LLC 20% $ 38,747 40,267
Macquarie CountryWide-Regency, LLC 25% 38,167 39,071
Other investments in real estate partnerships 27% - 50% 24,490 61,158
--------------- -------------
$ 101,404 140,496
=============== =============
Summarized financial information for the unconsolidated investments on
a combined basis, is as follows (in thousands):
March 31, December 31,
2004 2003
---- ----
Balance Sheet:
Investment in real estate, net $ 691,156 727,530
Acquired lease intangibles, net 43,725 45,252
Other assets 32,220 39,408
-------------------- --------------------
Total assets $ 767,101 812,190
==================== ====================
Notes payable $ 328,051 322,238
Other liabilities 12,946 14,102
Equity and partners' capital 426,104 475,850
-------------------- --------------------
Total liabilities and equity $ 767,101 812,190
==================== ====================
Unconsolidated partnerships and joint ventures had notes payable of
$328.1 million at March 31, 2004 and the Company's proportionate share
of these loans was $78.5 million. The Company does not guarantee any
debt of these partnerships beyond their ownership percentage.
The revenues and expenses on a combined basis are summarized as follows
for the three months ended March 31, 2004 and 2003 (in thousands):
2004 2003
---- ----
Statement of Operations:
Total revenues $ 22,463 16,269
Gain on sale of operating properties 8,211 676
Total expenses 16,007 10,268
---------------- ---------------
Net income $ 14,667 6,677
================ ===============
12
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
4. Acquired Lease Intangibles
Effective July 1, 2001, the Company adopted FAS 141, "Business
Combinations", to account for the acquisition of shopping centers that
are considered businesses. In accordance with FAS 141, identifiable
intangible assets are valued and recorded at the acquisition date. Such
intangibles include the value of in-place leases and above or
below-market leases.
Acquired lease intangible assets are net of accumulated amortization of
$846,592 and $405,327 at March 31, 2004 and December 31, 2003,
respectively. These assets have a weighted average amortization period
of seven years. The aggregate amortization expense from acquired leases
was $441,265 and $28,712 for the three months ended March 31, 2004 and
2003, respectively. Acquired lease intangible liabilities are net of
previously accreted minimum rent of $1.2 million and $953,964 at March
31, 2004 and December 31, 2003, respectively and have a weighted
average amortization period of seven years.
5. Notes Payable and Unsecured Line of Credit
The Company's outstanding debt at March 31, 2004 and December 31, 2003
consists of the following (in thousands):
2004 2003
---- ----
Notes Payable:
Fixed rate mortgage loans $ 210,797 217,001
Variable rate mortgage loans 41,589 41,629
Fixed rate unsecured loans 999,191 999,147
--------------- ---------------
Total notes payable 1,251,577 1,257,777
Unsecured line of credit 230,000 195,000
--------------- ---------------
Total $ 1,481,577 1,452,777
=============== ===============
On April 1, 2004, RCLP completed the sale of $150 million of ten-year
senior unsecured notes. The 4.95% notes are due April 15, 2014 and were
priced at 99.747% to yield 4.982%. The proceeds of the offering were
used to partially repay the $200 million of 7.4% notes maturing on
April 1, 2004 and the remaining balance due was funded from the
unsecured line of credit. As a result of two forward-starting interest
rate swaps initiated in 2003 totaling $144.2 million, the effective
interest rate is 5.47%. On March 31, 2004, the interest rate swaps were
settled for $5.7 million, which is recorded in other comprehensive loss
and will be amortized over ten years to interest expense. The swaps
qualify for hedge accounting under Statement 133; therefore, the change
in fair value was recorded through other comprehensive loss.
On March 26, 2004, the Company closed on the amended and restated
unsecured revolving line of credit (the "Line"). Under the new
agreement, the Line was reduced from $600 million to $500 million. The
Line has a three-year term with a one-year extension option at an
interest rate of LIBOR plus .75% which is a reduction of 10 basis
points from the prior agreement. The current balance on the Line is
$230 million. Interest rates paid on the Line, which were based on
LIBOR plus .85%, were 1.975% on March 31, 2004 and December 31, 2003.
The spread paid on the Line is dependent upon the Company maintaining
specific investment-grade ratings. The Company is also required to
comply, and is in compliance, with certain financial covenants such as
Minimum Net Worth, Total Liabilities to Gross Asset Value ("GAV") and
Secured Indebtedness to GAV and other covenants customary with this
type of unsecured financing. The Line is used primarily to finance the
development of real estate, but is also available for general working
capital purposes.
13
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
5. Notes Payable and Unsecured Line of Credit (continued)
Mortgage loans are secured by certain real estate properties and may be
prepaid, but could be subject to a yield-maintenance premium. Mortgage
loans are generally due in monthly installments of interest and
principal and mature over various terms through 2023. Variable interest
rates on mortgage loans are currently based on LIBOR plus a spread in a
range of 125 to 150 basis points. Fixed interest rates on mortgage
loans range from 5.65% to 9.50%.
The fair value of the Company's notes payable and Line are estimated
based on the current rates available to the Company for debt of the
same remaining maturities. Variable rate notes payable and the Line are
considered to be at fair value, since the interest rates on such
instruments reprice based on current market conditions. Fixed rate
loans assumed in connection with real estate acquisitions are recorded
in the accompanying financial statements at fair value. Based on the
borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of long-term debt
is $1.5 billion.
As of March 31, 2004, scheduled principal repayments on notes payable
and the Line were as follows (in thousands):
Scheduled
Principal Term Loan Total
Scheduled Payments by Year Payments Maturities Payments
-------------------------- -------------- --------------- ---------------
Current year $ 3,612 224,485 228,097
2005 3,698 168,538 172,236
2006 3,397 21,126 24,523
2007 (includes the Line) 2,891 255,852 258,743
2008 2,697 19,619 22,316
2009 2,657 53,090 55,747
Beyond 5 Years 17,817 697,143 714,960
Unamortized debt premiums - 4,955 4,955
----------- --------------- ---------------
Total $ 36,769 1,444,808 1,481,577
=========== =============== ===============
6. Derivative Financial Instruments
The Company is exposed to capital market risk, such as changes in
interest rates. In order to manage the volatility relating to interest
rate risk, the Company may enter into interest rate hedging
arrangements from time to time. The Company does not utilize derivative
financial instruments for trading or speculative purposes.
During 2003, the Company entered into two forward-starting interest
rate swaps of $96.5 million and $47.7 million. The Company designated
the $144.2 million swaps as cash flow hedges to fix the rate on a
refinancing in April 2004. On March 31, 2004, the Company settled the
swaps with a payment to the counter-party for $5.7 million. The swaps
qualify for hedge accounting under Statement 133, therefore the losses
associated with the swaps have been included in accumulated other
comprehensive loss since the settlement date. These amounts will
be included as an adjustment to interest expense as interest is
incurred on the $150 million of ten-year unsecured notes sold April 1,
2004.
14
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
7. Stockholders' Equity and Minority Interest
(a) The Company, through RCLP, has issued Cumulative Redeemable
Preferred Units ("Preferred Units") in various amounts since 1998.
The issues were sold primarily to institutional investors in
private placements for $100 per unit. The Preferred Units, which
may be called by RCLP at par after certain dates, have no stated
maturity or mandatory redemption, and pay a cumulative, quarterly
dividend at fixed rates. At any time after ten years from the date
of issuance, the Preferred Units may be exchanged by the holder for
Cumulative Redeemable Preferred Stock ("Preferred Stock") at an
exchange rate of one share for one unit. The Preferred Units and
the related Preferred Stock are not convertible into common stock
of the Company. At March 31, 2004 and December 31, 2003, the face
value of total Preferred Units issued was $229 million with an
average fixed distribution rate of 8.88%.
Terms and conditions of the Preferred Units outstanding as of
March 31, 2004 are summarized as follows:
Units Issue Amount Distribution Callable Exchangeable
Series Outstanding Price Outstanding Rate by Company by Unitholder
- ---------------------------------------------------------------------------------------------------------------------------
Series B 850,000 100.00 85,000,000 8.750% 09/03/04 09/03/09
Series C 400,000 100.00 40,000,000 9.000% 09/03/04 09/03/09
Series D 500,000 100.00 50,000,000 9.125% 09/29/04 09/29/09
Series E 300,000 100.00 30,000,000 8.750% 05/25/05 05/25/10
Series F 240,000 100.00 24,000,000 8.750% 09/08/05 09/08/10
--------------
------------
2,290,000 $ 229,000,000
============ ==============
15
Regency Centers Corporation
Notes to Consolidated Financial Statements
March 31, 2004
8. Earnings per Share
The following summarizes the calculation of basic and diluted earnings
per share for the three months ended March 31, 2004 and 2003,
respectively (in thousands except per share data):
2004 2003
---- ----
Numerator:
- ---------
Income from continuing operations 22,485 16,798
Discontinued operations $ 332 1,126
-------------- --------------
Net income 22,817 17,924
Less: Preferred stock dividends 1,397 -
-------------- --------------
Net income for common stockholders - basic 21,420 17,924
Add: Minority interest of exchangeable operating
partnership units - continuing operations 380 409
Add: Minority interest of exchangeable operating
partnership units - discontinued operations 6 28
-------------- --------------
Net income for common stockholders - diluted $ 21,806 18,361
============== ==============
Denominator:
- -----------
Weighted average common shares outstanding for basis EPS 60,142 60,164
Exchangeable operating partnership units 1,152 1,497
Incremental shares to be issued under common
stock options using the Treasury method 347 437
-------------- --------------
Weighted average common shares outstanding for diluted EPS 61,641 62,098
============== ==============
Income per common share - basic
- -------------------------------
Income from continuing operations $ 0.35 0.28
Discontinued operations 0.01 0.02
-------------- --------------
Net income for common stockholders per share $ 0.36 0.30
============== ==============
Income per common share - diluted
- ---------------------------------
Income from continuing operations $ 0.34 0.28
Discontinued operations 0.01 0.02
-------------- --------------
Net income for common stockholders per share $ 0.35 0.30
============== ==============
9. Contingencies
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.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information, the following information
contains forward-looking statements as defined under federal securities laws.
These statements are based on current expectations, estimates and projections
about the industry and markets in which Regency operates, and managements'
beliefs and assumptions. Forward-looking statements are not guarantees of future
performance and involve certain known and unknown risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
by such statements. Such risks and uncertainties include, but are not limited
to, changes in national and local economic conditions; financial difficulties of
tenants; competitive market conditions, including pricing of acquisitions and
sales of properties and out-parcels; changes in expected leasing activity and
market rents; timing of acquisitions, development starts and sales of properties
and out-parcels; weather; the ability to obtain governmental approvals; and
meeting development schedules. The following discussion should be read in
conjunction with the accompanying Consolidated Financial Statements and Notes
thereto of Regency Centers Corporation ("Regency" or "Company") appearing
elsewhere within.
Introduction and Strategic Overview
- -----------------------------------
Regency is a qualified real estate investment trust ("REIT"), which
began operations in 1993. Our primary operating and investment goal is long-term
growth in earnings per share and total shareholder return by focusing on a
strategy of owning and operating grocery anchored shopping centers that are
anchored by market-leading supermarkets, and that are located in areas with
attractive demographics.
Currently, our real estate investments before depreciation total $3.2
billion with 260 shopping centers in 21 states. At March 31, 2004, our gross
leasable area ("GLA") totaled 29.8 million square feet and was 92.8% leased.
Geographically, 20.1% of our GLA is located in Florida, 19.8% in California,
15.9% in Texas, 6.7% in Georgia, 6.4% in Ohio, and 31.1% spread throughout 16
other states. We own and operate our shopping centers through our operating
partnership, Regency Centers, L.P. ("RCLP"), in which we currently own 98% of
the operating partnership units. Regency's operating, investing and financing
activities are generally performed by RCLP.
We earn revenues and generate operating cash flow by leasing space to
grocers and retail side-shop tenants in our shopping centers. We experience
growth in revenues by increasing occupancy and rental rates at currently owned
shopping centers, and by developing new shopping centers. A neighborhood center
is a convenient, cost-effective distribution platform for food retailers.
Grocery anchored centers generate substantial daily traffic and offer
sustainable competitive advantages to their tenants. This high traffic generates
increased sales, thereby driving higher occupancy, rental rates and rental-rate
growth for Regency, which we expect to sustain our growth in earnings per share
and increase the value of our portfolio over the long term.
We seek a range of strong national, regional and local specialty
tenants, for the same reason that we choose to anchor our centers with leading
grocers. We have created a formal partnering process -- the Premier Customer
Initiative ("PCI") -- to promote mutually beneficial relationships with our
non-grocer specialty retailers. The objective of PCI is for Regency to build a
base of specialty tenants who represent the "best-in-class" operators in their
respective merchandising categories. Such tenants reinforce the consumer appeal
and other strengths of a center's grocery anchor, help to stabilize a center's
occupancy, reduce re-leasing downtime, reduce tenant turnover and yield higher
sustainable rents.
We primarily grow our shopping center portfolio through new shopping
center development, where we acquire the land and construct the building.
Development is customer-driven, meaning we generally have an executed lease from
the anchor before we start construction. Developments serve the growth needs of
our grocery and specialty retail customers, result in modern shopping centers
with long-term leases from the grocery anchors and produce attractive returns on
our invested capital. This development process can require up to 36 months from
initial land or redevelopment acquisition through construction, lease-up and
stabilization of rental income, depending upon the size of the project.
17
Generally, anchor tenants begin operating their stores prior to construction
completion of the entire center, resulting in rental income during the
development phase.
We intend to maintain a conservative capital structure to fund our
growth programs without compromising our investment-grade ratings. Our approach
is founded on our self-funding business model. This model utilizes center
"recycling" as a key component. Our recycling strategy calls for us to re-deploy
the proceeds from the sales of properties into new higher quality developments
that we expect to generate sustainable revenue growth and more attractive
returns on invested capital. Our commitment to maintaining a high-quality
shopping center portfolio dictates that we continually assess the value of all
of our properties and sell those that no longer meet our long-term investment
standards.
Joint venturing of shopping centers also provides us with a capital
source for new development, as well as the opportunity to earn fees for asset
and property management services. As asset manager, we are engaged by our
partners to apply similar operating, investment, and capital strategies to the
portfolios owned by the joint ventures. Joint ventures grow their shopping
center investments through acquisitions from third parties or direct purchases
of shopping centers from Regency. Although selling properties to joint ventures
reduces our ownership interest, we continue to share in the risks and rewards of
centers that meet our long-term investment strategy. Regency is not subject to
liability and has no obligations or guarantees of the joint ventures beyond its
ownership percentage.
We have identified certain significant risks and challenges affecting
our industry, and we are addressing them accordingly. A further economic
downturn could result in declines in occupancy levels at our shopping centers,
which would reduce our rental revenues; however, we believe that our investment
focus on grocery anchored shopping centers that provide daily necessities will
minimize the impact of a downturn in the economy. Increased competition from
super-centers such as Wal-Mart could result in grocery anchor closings or
consolidations in the grocery store industry. We currently have 29 shopping
centers, less than 15% of our portfolio, that operate within three miles of a
super-center and we closely monitor their performance and tenants' sales. A slow
down in our shopping center development program would reduce operating revenues
and gains from sales. We believe that developing shopping centers in markets
with strong demographics with leading grocery stores will enable us to continue
to maintain our development program at historical averages.
Shopping Center Portfolio
- -------------------------
The following table summarizes general operating statistics related to
our shopping center portfolio, including properties partially owned in joint
ventures, that we use to evaluate and monitor our performance:
3/31/04 12/31/03
------- --------
Number of Properties 260 265
Properties in Development 33 36
Gross Leaseable Area (GLA) 29,761,376 30,347,744
Percent Leased - All Properties 92.8% 92.2%
Percent Leased - Non development 95.4% 95.4%
Same Property Growth Rate 2.3% 2.7%
Lease Renewal Rate 81% 75%
Base Rent Growth on Re-Leasing 8.5% 9.5%
18
A list of our shopping centers summarized by state and in order of
largest holdings follows, including those properties that we partially own in
joint ventures:
March 31, 2004 December 31, 2003
-------------- -----------------
Location # Properties GLA % Leased # Properties GLA % Leased
-------- ------------ --- -------- ------------ --- --------
Florida 50 5,969,835 94.9% 50 5,943,345 94.3%
California 47 5,885,932 93.1% 49 5,917,372 90.8%
Texas 38 4,719,882 87.4% 41 5,086,086 88.1%
Georgia 20 2,008,066 95.4% 20 2,008,066 95.8%
Ohio 14 1,901,538 89.7% 14 1,901,538 90.6%
Colorado 15 1,623,654 95.7% 14 1,623,674 94.2%
Virginia 10 1,272,244 90.0% 10 1,272,369 89.1%
North Carolina 10 1,054,561 97.7% 10 1,050,061 98.7%
Washington 10 1,047,532 94.5% 9 1,020,470 96.4%
Oregon 8 838,715 92.2% 8 838,715 92.2%
Arizona 7 653,000 93.2% 7 652,906 91.5%
Tennessee 6 444,234 96.5% 6 444,234 96.5%
Illinois 3 408,211 96.3% 3 408,211 97.0%
Alabama 5 380,607 84.7% 6 543,330 85.5%
Michigan 4 368,260 88.4% 4 368,260 87.2%
South Carolina 5 339,926 96.0% 5 339,926 95.7%
Kentucky 3 321,525 98.3% 3 323,029 97.8%
Delaware 2 240,418 99.4% 2 240,418 99.5%
Maryland 1 188,243 91.5% 1 188,243 90.2%
New Jersey 1 88,993 93.9% 1 88,993 89.4%
Pennsylvania 1 6,000 100.0% 1 6,000 100.0%
Missouri - - - 1 82,498 91.5%
---------------------------------------------------------------------------------------------------
Total 260 29,761,376 92.8% 265 30,347,744 92.2%
===================================================================================================
The following summarizes the four largest grocery tenants occupying
our shopping centers, including those partially owned through joint ventures at
March 31, 2004:
Percentage of Percentage of
Grocery Number of Company-owned Annualized
Anchor Stores (a) GLA (b) Base Rent (b)
------ ---------- ------------- -------------
Kroger 58 11.1% 8.1%
Publix 53 8.2% 5.1%
Safeway 48 6.2% 4.8%
Albertsons 23 2.9% 2.2%
(a) Includes stores owned by the grocery anchor that are attached to
our centers.
(b) GLA includes 100% of the GLA in unconsolidated joint ventures.
Annualized base rent includes only Regency's pro-rata share of
rent from unconsolidated joint ventures.
Liquidity and Capital Resource
- ------------------------------
General
- -------
We expect that cash generated from revenues will provide the necessary
funds on a short-term basis to pay our operating expenses, interest expense,
scheduled principal payments on outstanding indebtedness, recurring capital
expenditures necessary to maintain our shopping centers properly, and
distributions to stock and unit holders. Net cash provided by operating
activities was $37.9 million and $34.0 million for the three months ended March
31, 2004 and 2003, respectively. During the three months ended March 31, 2004
and 2003, we incurred capital expenditures of $1.4 million and $2.6 million to
19
maintain our shopping centers, paid scheduled principal payments of $1.5 million
and $1.5 million to our lenders, and paid dividends and distributions of $38.9
million and $40.2 million to our share and unit holders, respectively.
Although base rent is supported by long-term lease contracts, tenants
who file bankruptcy are able to cancel their leases and close the related
stores. In the event that a tenant with a significant number of leases in our
shopping centers files bankruptcy and cancels its leases, we could experience a
significant reduction in our revenues. We are not currently aware of any current
or pending bankruptcy of any of our tenants that would cause a significant
reduction in our revenues, and no tenant represents more than 10% of our annual
base rental revenues.
We expect to meet long-term capital requirements for maturing preferred
units and debt, the acquisition of real estate, and the renovation or
development of shopping centers from: (i) residual cash generated from operating
activities after the payments described above, (ii) proceeds from the sale of
real estate, (iii) joint venturing of real estate, (iv) refinancing of debt, and
(v) equity raised in the private or public markets. We currently have $325
million available for equity securities under our shelf registration and RCLP
has $185 million available for debt under their shelf registration.
Additionally, we have the right to call and repay, at par, outstanding preferred
units five years after their issuance date, at our discretion.
We intend to continue to grow our portfolio through new development and
acquisitions, either directly or through our joint venture relationships.
Because development and acquisition activities are discretionary in nature, they
are not expected to burden the capital resources we have currently available for
liquidity requirements. Capital necessary to complete developments-in-process
are funded from our line of credit. Regency expects that cash provided by
operating activities, unused amounts available under our line of credit and cash
reserves are adequate to meet short-term and committed long-term liquidity
requirements.
Shopping Center Development, Acquisitions and Sales
- ---------------------------------------------------
At March 31, 2004, we had 33 projects under construction or undergoing
major renovations, which, when completed, will represent an expected investment
of $613.7 million before the estimated reimbursement of certain tenant-related
costs and projected sales proceeds from adjacent land and out-parcels of $127.6
million. Costs necessary to complete these developments will be $241.7 million,
are generally already committed as part of existing construction contracts, and
will be expended through 2006. These developments are approximately 61% complete
and 78% pre-leased. The costs necessary to complete these developments will be
funded from our line of credit which has a commitment amount of $500 million and
a balance of $230.0 million at March 31, 2004. In the first quarter of 2004, we
started one new development of $4.9 million based on total costs that we expect
to expend through completion.
At March 31, 2004, we sold three retail centers to third parties for
$27.0 million, compared with three retail centers sold for $14.0 million during
the first quarter of 2003 as part of our asset recycling program. Of the centers
sold in 2004, all three were operating during 2004 and are included in
discontinued operations in our accompanying consolidated statements of
operations. The three centers sold during the first quarter of 2003 were
operating and are included in discontinued operations. We have land out-parcels
adjacent to our shopping centers that we routinely develop, lease, or sell. At
March 31, 2004 and 2003, sales related to out-parcels were $10.0 million and
$19.1 million, respectively.
Investments in new developments and acquisitions, and proceeds from the
sale of properties to third parties or partial sales to joint ventures are
included in investing activities in the accompanying consolidated statements of
cash flows. Net cash used in investing activities was $18.4 million and $44.0
million for the three months ended March 31, 2004 and 2003, respectively.
20
Investments in Real Estate Partnerships
---------------------------------------
At March 31, 2004, we had investments in real estate partnerships of
$101.4 million, primarily comprised of two partnerships, a 20% investment
interest in Columbia Regency Retail Partners, LLC ("Columbia"), a joint
venture with the Oregon State Treasury, and a 25% investment interest in
Macquarie CountryWide-Regency, LLC ("MCWR"), a joint venture with an affiliate
of Macquarie CountryWide Trust of Australia, a Sydney, Australia-based
property trust. The purpose of these partnerships is to invest in retail
shopping centers, and we have been engaged by our partners to provide asset
and property management services.
The following is a summary of unconsolidated combined assets and
liabilities of these partnerships, and our pro-rata share at March 31, 2004
and December 31, 2003 ($ amounts in thousands):
2004 2003
---- ----
Number of Joint Ventures 7 8
Regency's Ownership 20%-50% 20%-50%
Number of Properties 44 46
Combined Assets $ 767,101 $ 812,190
Combined Liabilities 340,997 336,340
Combined Equity 426,104 475,850
Regency's Share of:
Assets $182,554 $239,801
Liabilities 81,150 99,305
Equity 101,404 140,496
At March 31, 2004 and 2003 total unconsolidated combined net income was
$14.7 million and $6.7 million, and our pro-rata share was $2.7 million and $2.3
million, respectively.
At March 31, 2004, Columbia owned 13 shopping centers and had total
assets of $291.8 million. At March 31, 2004, MCWR owned 26 shopping centers and
had total assets of $408.6 million. At March 31, 2004, we held a note receivable
from MCWR with a balance of $15.5 million for the acquisition of shopping
centers during the fourth quarter of 2003. The note receivable was repaid in
full on April 16, 2004.
The gain we recognize on the sales of our properties to Columbia and
MCWR is recorded on only the portion attributable to their ownership
percentage. The gains and operations are not recorded as discontinued operations
because of our continuing involvement in these shopping centers. Columbia and
MCWR intend to continue to acquire retail shopping centers, some of which they
may acquire directly from us. For those properties acquired from third parties,
we are required to contribute our pro-rata share of the purchase price to the
partnership.
In March 2004, the only two properties owned by the OTR/Regency Texas
Realty Holdings, L.P. were sold to a third party for $28.3 million resulting in
a gain of $8.2 million. We received $17.2 million and recognized our share of
the gain of $1.2 million in equity in income of investments and real estate
partnerships.
21
Debt and Equity
- ---------------
Outstanding debt at March 31, 2004 and December 31, 2003 consists of
the following (in thousands):
2004 2003
---- ----
Notes Payable:
Fixed-rate mortgage loans $ 210,797 217,001
Variable-rate mortgage loans 41,589 41,629
Fixed-rate unsecured loans 999,191 999,147
-------------- ---------------
Total notes payable 1,251,577 1,257,777
Unsecured line of credit 230,000 195,000
-------------- ---------------
Total $ 1,481,577 1,452,777
============== ===============
Mortgage loans are secured and may be prepaid, but could be subject to
yield maintenance premiums. Mortgage loans are generally due in monthly
installments of interest and principal, and mature over various terms through
2023. Variable interest rates on mortgage loans are currently based on LIBOR,
plus a spread in a range of 125 to 150 basis points. Fixed interest rates on
mortgage loans range from 5.65% to 9.5%.
On March 26, 2004, we entered into a new unsecured revolving line of
credit (the "Line"). Under the new agreement, we reduced the line commitment
from $600 million to $500 million, but have the right to expand the Line by an
additional $150 million subject to additional lender syndication. The new
facility has a three-year term, a one-year extension option at maturity, and an
interest rate of LIBOR plus .75% which is a reduction of 10 basis points from
the previous agreement. Interest rates paid on the Line, which were based on
LIBOR plus .85%, were 1.975% on March 31, 2004 and December 31, 2003. The spread
that we pay on the Line is dependent upon maintaining specific investment-grade
ratings. We are also required to comply, and are in compliance, with certain
financial covenants such as Minimum Net Worth, Total Liabilities to Gross Asset
Value ("GAV") and Secured Indebtedness to GAV and other covenants customary with
this type of unsecured financing. The Line is used primarily to finance the
development of real estate, but is also available for general working capital
purposes.
As of March 31, 2004, scheduled principal repayments on notes payable
and the Line were as follows (in thousands):
Scheduled
Principal Term-Loan Total
Scheduled Payments by Year Payments Maturities Payments
-------------------------- -------------- --------------- ---------------
Current year $ 3,612 224,485 228,097
2005 3,698 168,538 172,236
2006 3,397 21,126 24,523
2007 (includes the Line) 2,891 255,852 258,743
2008 2,697 19,619 22,316
2009 2,657 53,090 55,747
Beyond 5 Years 17,817 697,143 714,960
Unamortized debt premiums - 4,955 4,955
-------------- --------------- ---------------
Total $ 36,769 1,444,808 1,481,577
============== =============== ===============
Our investments in real estate partnerships had unconsolidated notes
and mortgage loans payable of $328.1 million at March 31, 2004, and our
proportionate share of these loans was $78.5 million. We do not guarantee any
debt of these partnerships beyond our ownership percentage.
We are exposed to capital market risk such as changes in interest
rates. In order to manage the volatility related to interest-rate risk, we
originate new debt with fixed interest rates, or we consider entering into
interest-rate hedging arrangements. At March 31, 2004, 82% of our total debt had
fixed
22
interest rates, compared with 84% at December 31, 2003. We intend to limit
the percentage of variable interest- rate debt to be no more than 30% of total
debt, which we believe to be an acceptable risk. Based upon the variable
interest-rate debt outstanding at March 31, 2004, if variable interest rates
were to increase by 1%, our annual interest expense would increase by $2.7
million. We do not utilize derivative financial instruments for trading or
speculative purposes. We account for derivative instruments under Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as amended ("Statement 133").
On April 1, 2004, we completed the sale of $150 million ten-year senior
unsecured notes (the "Notes"). The 4.95% Notes are due April 15, 2014 and were
priced at 99.747% to yield 4.982%. The proceeds of the offering combined with
borrowings from the Line were used to repay $200 million of 7.4% notes maturing
on April 1, 2004. Related to the offering, we settled two forward-starting
interest rate swaps that were initiated in 2003 totaling $144.2 million. Our
settlement payment of $5.7 million is recorded in other comprehensive loss
and will be amortized over the ten year term of the Notes into interest expense.
The swaps qualified for hedge accounting under Statement 133; and therefore, the
change in fair value was recorded in other comprehensive loss. After taking
into effect the hedge settlement, the effective interest rate on the Notes is
5.47%.
We have issued Preferred Units in various amounts since 1998, the net
proceeds of which we used to reduce the balance of the Line. We issued Preferred
Units primarily to institutional investors in private placements. The Preferred
Units, which may be called by us in 2004 and 2005, have no stated maturity or
mandatory redemption, and they pay a cumulative, quarterly dividend at fixed
rates ranging from 8.75% to 9.125%. At any time after ten years from the date of
issuance, the Preferred Units may be exchanged by the holders for Cumulative
Redeemable Preferred Stock at an exchange rate of one share for one unit. The
Preferred Units and the related Preferred Stock are not convertible into Regency
common stock. At March 31, 2004 and December 31, 2003, the face value of total
Preferred Units issued was $229 million with an average fixed distribution rate
of 8.88%. Included in Preferred Units are original issuance costs of $5.5
million that will be expensed as the underlying Preferred Units are redeemed in
the future.
In summary, net cash used in financing activities related to the debt
and equity activity discussed above was $5.8 million and $18.3 million for the
three months ended March 31, 2004 and 2003, respectively.
Critical Accounting Policies and Estimates
- ------------------------------------------
Knowledge about our accounting policies is necessary for a complete
understanding of our financial results, and discussions and analysis of these
results. The preparation of our financial statements requires that we make
certain estimates that impact the balance of assets and liabilities at a
financial statement date and the reported amount of income and expenses during a
financial reporting period. These accounting estimates are based upon our
judgments and are considered to be critical because of their significance to the
financial statements and the possibility that future events may differ from
those judgments, or that the use of different assumptions could result in
materially different estimates. We review these estimates on a periodic basis to
ensure reasonableness. However, the amounts we may ultimately realize could
differ from such estimates.
Capitalization of Costs - We have an investment services group with an
established infrastructure that supports the due diligence, land acquisition,
construction, leasing and accounting of our development properties. All direct
costs related to these activities are capitalized. Included in these costs are
interest and real estate taxes incurred during construction, as well as
estimates for the portion of internal costs that are incremental and deemed
directly or indirectly related to our development activity. If future accounting
standards limit the amount of internal costs that may be capitalized, or if our
development activity were to decline significantly without a proportionate
decrease in internal costs, we could incur a significant increase in our
operating expenses.
23
Valuation of Real Estate Investments - Our long-lived assets, primarily
real estate held for investment, are carried at cost unless circumstances
indicate that the carrying value of the assets may not be recoverable. We review
long-lived assets for impairment whenever events or changes in circumstances
indicate such an evaluation is warranted. The review involves a number of
assumptions and estimates used to determine whether impairment exists. Depending
on the asset, we use varying methods such as i) estimating future cash flows,
ii) determining resale values by market, or iii) applying a capitalization rate
to net operating income using prevailing rates in a given market. These methods
of determining fair value can fluctuate significantly as a result of a number of
factors, including changes in the general economy of those markets in which we
operate, tenant credit quality and demand for new retail stores. If we determine
that impairment exists due to our inability to recover an asset's carrying
value, a provision for loss is recorded to the extent that the carrying value
exceeds estimated fair value.
Discontinued Operations - The application of current accounting
principles that govern the classification of any of our properties as held for
sale on the balance sheet, or the presentation of results of operations and
gains on the sale of these properties as discontinued, requires management to
make certain significant judgments. In evaluating whether a property meets the
criteria set forth by Financial Accounting Standards Board ("FASB") Statement
No. 144 "Accounting for the Impairment and Disposal of Long-Lived Assets"
("Statement 144"), the Company makes a determination as to the point in time
that it can be reasonably certain that a sale will be consummated. Given the
nature of all real estate sales contracts, it is not unusual for such contracts
to allow potential buyers a period of time to evaluate the property prior to
formal acceptance of the contract. In addition, certain other matters critical
to the final sale, such as financing arrangements often remain pending even upon
contract acceptance. As a result, properties under contract may not close within
the expected time period, if at all. Due to these uncertainties, it is not
likely that the Company can meet the criteria of Statement 144 prior to the sale
formally closing. Therefore, any properties categorized as held for sale
represent only those properties that management has determined are probable to
close within the requirements set forth in Statement 144. The Company also makes
judgments regarding the extent of involvement it will have with a property
subsequent to its sale, in order to determine if the results of operations and
gain on sale should be reflected as discontinued. Consistent with Statement 144,
any property sold to an entity in which the Company has significant continuing
involvement (most often joint ventures) are not considered to be discontinued.
In addition, any property which the Company sells to an unrelated third party,
but retains a property or asset management function, is also not considered
discontinued. Thus, only properties sold, or to be sold, to unrelated third
parties for which the Company, in its judgment, has no continuing involvement
are classified as discontinued.
Income Tax Status - The prevailing assumption underlying the operation
of our business is that we will continue to operate so as to qualify as a REIT,
defined under the Internal Revenue Code. We are required to meet certain income
and asset tests on a periodic basis to ensure that we continue to qualify as a
REIT. As a REIT, we are allowed to reduce taxable income by all or a portion of
our distributions to stockholders. We evaluate the transactions that we enter
into and determine their impact on our REIT status. Determining our taxable
income, calculating distributions, and evaluating transactions requires us to
make certain judgments and estimates as to the positions we take in our
interpretation of the Internal Revenue Code. Because many types of transactions
are susceptible to varying interpretations under federal and state income tax
laws and regulations, our positions are subject to change at a later date upon
final determination by the taxing authorities.
Results from Operations
- -----------------------
Comparison of the three months ended March 31, 2004 to 2003
At March 31, 2004, we were operating or developing 260 shopping
centers. We identify our shopping centers as either development properties or
stabilized properties. Development properties are defined as properties that are
in the construction and initial lease-up process and are not yet fully leased
(fully leased generally means greater than 93% leased) or occupied. Stabilized
properties are those properties that are generally greater than 93% leased and,
if they were developed, are more than three years beyond their original
development start date. At March 31, 2004, we had 227 stabilized shopping
centers that were 95.4% leased.
24
Our revenues increased by $4.4 million, or 5%, to $95.8 million in
2004. This increase was related to changes in occupancy for the combined
portfolio of stabilized and development properties, growth in re-leasing rental
rates, and revenues from new developments commencing operations in 2004, net of
a reduction in revenues from properties sold. During the first quarter of 2004,
our rental rates grew by 8.5% from renewal leases and new leases replacing
previously occupied spaces in the stabilized properties. In addition to
collecting minimum rent from our tenants for the GLA that they lease from us, we
also collect contingent rent based upon tenant sales, which we refer to as
percentage rent. Tenants are also responsible for reimbursing us for their
pro-rata share of the expenses associated with operating our shopping centers.
In 2004, our minimum rent increased by $3.6 million, or 5%, and our recoveries
from tenants increased $164,820, or 1%. Percentage rent was $453,410 in 2004
compared with $298,841 in 2003 due to an increase related to higher tenant
sales.
Our operating expenses increased by $5.3 million, or 12%, to $50.5
million in 2004. Our combined operating, maintenance, and real estate taxes
increased by $1.3 million, or 6%, during 2004 to $24.0 million. This increase
was primarily due to new developments that incurred operating expenses for only
a portion of the previous year and general increases in operating expenses on
the stabilized properties. Our general and administrative expenses were $5.9
million during 2004, compared with $4.1 million in 2003, or 42% higher,
primarily related to accruing higher incentive compensation based upon growth in
revenues and earnings per share. Our depreciation and amortization expense
increased $2.2 million during the current year related to development properties
placed in service during 2004.
Our net interest expense increased to $21.2 million in 2004 from $20.6
million in 2003. Average interest rates on our outstanding debt declined to
6.45% at March 31, 2004 compared with 6.84% at March 31, 2003, primarily due to
reductions in the LIBOR rate. Our average fixed interest rates were 7.46% at
March 31, 2004, compared with 7.49% at March 31, 2003. Our weighted average
outstanding debt at March 31, 2004 was $1.5 billion compared with $1.4 billion
at March 31, 2003.
We account for profit recognition on sales of real estate in accordance
with FASB Statement No. 66, "Accounting for Sales of Real Estate." Profits from
sales of real estate will not be recognized by us unless a sale has been
consummated; the buyer's initial and continuing investment is adequate to
demonstrate a commitment to pay for the property; we have transferred to the
buyer the usual risks and rewards of ownership; and we do not have substantial
continuing involvement with the property. Gains from the sale of operating and
development properties were $4.0 million in 2004 related to the sale of seven
out-parcels for $10.0 million. During 2003, we recorded gains of $2.4 million
related to the sale of ten out-parcels for $19.1 million. These gains are
included in continuing operations rather than discontinued operations because
they were either properties that had no operating income, or they were
properties sold to joint ventures where we have a continuing minority
investment.
We review our real estate portfolio for impairment whenever events or
changes in circumstances indicate that we may not be able to recover the
carrying amount of an asset. We determine whether impairment has occurred by
comparing the property's carrying value to an estimate of fair value based upon
methods described in our Critical Accounting Policies. In the event a property
is impaired, we write down the asset to fair value for "held-and-used" assets
and to fair value less costs to sell for "held-for-sale" assets.
Our income from discontinued operations was $331,998 in 2004 related to
three centers sold to third parties for $27.0 million, which produced gains on
sale of $11,757. In compliance with the adoption of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("Statement 144") in
January 2002, if we sell an asset in the current year, we are required to
reclassify its operating income into discontinued operations for all prior
periods. This practice results in a reclassification of amounts previously
reported as continuing operations into discontinued operations. Reclassified
operating income from discontinued operations was $1.8 million in 2003, a result
of reclassifying the historical operations of the properties sold in 2004 as
well as properties sold subsequent to March 31, 2003. During the first quarter
of 2003, we sold two properties for $9.2 million to third parties, which
resulted in a loss of
25
$626,577. Our operating income and gain or loss on sales from discontinued
operations are shown net of minority interest of exchangeable partnership units
totaling $5,604 and $27,932 for the three months ended March 31, 2004 and 2003,
respectively.
In March of 2003, we redeemed $35 million of Series C 9% Preferred
Units and $40 million of Series E 8.75% Preferred Units. At the time of
redemption, the premium and $1.9 million of previously deferred costs related to
the original preferred units' issuance were recognized in the consolidated
statements of operations as a component of minority interest of preferred units.
During August of 2003, we redeemed the $80 million Series A 8.125% Preferred
Units. As a result of these redemptions, the minority interest of preferred
units was $5.7 million lower for the three months ended March 31, 2004.
Net income for common stockholders was $21.4 million in 2004, compared
with $17.9 million in 2003 or a 20% increase for the reasons previously
discussed. Diluted earnings per share were $0.35 in 2004, compared with $0.30 in
2003, or 17% higher, related to the increase in net income and a decrease in
weighted average common shares of 457,098 shares.
Environmental Matters
- ---------------------
We are subject to numerous environmental laws and regulations and we
are primarily concerned with dry cleaning plants that currently operate or have
operated at our shopping centers in the past. We believe that the tenants who
currently operate plants 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 environmentally approved systems.
Where available, we have applied and been accepted into state-sponsored
environmental programs. We have a blanket environmental insurance policy that
covers us against third-party liabilities and remediation costs on shopping
centers that currently have no known environmental contamination. We have also
placed environmental insurance, where possible, on specific properties with
known contamination, in order to mitigate our environmental risk. We believe
that the ultimate disposition of currently known environmental matters will not
have a material effect on Regency's financial position, liquidity, or
operations; however, we can give no assurance that existing environmental
studies with respect to our shopping centers have revealed all potential
environmental liabilities; that any previous owner, occupant or tenant did not
create any material environmental condition not known to us; that the current
environmental condition of the shopping centers will not be affected by tenants
and occupants, by the condition of nearby properties, or by unrelated third
parties; or that changes in applicable environmental laws and regulations or
their interpretation will not result in additional environmental liability to
us.
Inflation
- ---------
Inflation has remained relatively low and has had a minimal impact on
the operating performance of our shopping centers; however, substantially all of
our long-term leases contain provisions designed to mitigate the adverse impact
of inflation. Such provisions include clauses enabling us to receive percentage
rentals based on tenants' gross sales, which generally increase as prices rise;
and/or escalation clauses, which generally increase rental rates during the
terms of the leases. Such escalation clauses are often related to increases in
the consumer price index or similar inflation indices. In addition, many of our
leases are for terms of less than ten years, which permits us to seek increased
rents upon re-rental at market rates. Most of our leases require tenants to pay
their share of operating expenses, including common area maintenance, real
estate taxes, and insurance and utilities, thereby reducing our exposure to
increases in costs and operating expenses resulting from inflation.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
- -----------
We are exposed to interest-rate changes primarily related to the
variable interest rate on the line of credit and the refinancing of long-term
debt which currently contain fixed interest rates. Our interest-rate risk
management objective is to limit the impact of interest-rate changes on earnings
and cash flows and to lower our overall borrowing costs. To achieve these
objectives, we borrow primarily at fixed interest rates and may enter into
derivative financial instruments such as interest-rate swaps, caps and treasury
locks in order to mitigate our interest-rate risk on a related financial
instrument. We have no plans to enter into derivative or interest-rate
transactions for speculative purposes.
Our interest-rate risk is monitored using a variety of techniques. The
table below presents the principal cash flows (in thousands), weighted average
interest rates of remaining debt, and the fair value of total debt (in
thousands), by year of expected maturity to evaluate the expected cash flows and
sensitivity to interest-rate changes.
Fair
2004 2005 2006 2007 2008 2009 Thereafter Total Value
---- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate debt $ 211,509 147,236 24,523 28,743 22,316 55,747 714,960 1,205,034 1,267,218
Average interest rate
for all debt 7.60% 7.60% 7.60% 7.59% 7.61% 7.59% 7.34% - -
Variable rate LIBOR
debt $ 16,589 25,000 - 230,000 - - - 271,589 271,589
Average interest rate
for all debt 1.89% 1.84% - 1.84% - - - - -
As the table incorporates only those exposures that exist as of March
31, 2004, it does not consider those exposures or positions, which could arise
after that date. Moreover, because firm commitments are not presented in the
table above, the information presented above has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest-rate
fluctuations will depend on the exposures that arise during the period, our
hedging strategies at that time, and actual interest rates.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer, the Company has evaluated the effectiveness
of the design and operation of its disclosure controls and procedures as of the
end of the period covered by this report, and, based on their evaluation, the
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are effective.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
27
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10. Material Contracts
10.1 Credit Agreement dated as of March 26, 2004
by and among Regency Centers, L.P., Regency,
each of the financial institutions initially
a signatory thereto, and Wells Fargo Bank,
National Association.
31.1 Rule 13a-14 Certification of Chief Executive Officer.
31.2 Rule 13a-14 Certification of Chief Financial Officer.
31.3 Rule 13a-14 Certification of Chief Operating Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
32.3 Section 1350 Certification of Chief Operating Officer.
(b) Reports on Form 8-K:
Form 8-K dated January 28, 2004, as amended by Form
8-K/A dated April 13, 2004, furnishing Regency's
earnings release for the period ended December 31,
2003 and supplemental information.
28
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 7, 2004 REGENCY CENTERS CORPORATION
By: /s/ J. Christian Leavitt
-------------------------------------
Senior Vice President and
Chief Accounting Officer
29