filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements in this document regarding anticipated financial, business, legal or other outcomes including business and market conditions, outlook and other similar statements relating to Regency's future events, developments, or financial or operational performance or results, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as "may," "will," "should," "expect," "estimate," "believe," "intend," "forecast," "anticipate," "guidance," and other similar language. However, the absence of these or similar words or expressions does not mean a statement is not forward-looking. While we believe these forward-looking statements are reasonable when made, forward-looking statements are not guarantees of future performance or events and undue reliance should not be placed on these statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance these expectations will be attained, and it is possible actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.
Our operations are subject to a number of risks and uncertainties including, but not limited to, risk factors described in our SEC filings. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in our most recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q and our other filings with and submissions to the SEC. If any of the events described in the risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected. Forward-looking statements are only as of the date they are made, and Regency undertakes no duty to update its forward-looking statements except as and to the extent required by law.
Non-GAAP Measures
In addition to the required Generally Accepted Accounting Principles ("GAAP") presentations, we use certain non-GAAP performance measures as we believe these measures improve the understanding of our operational results. We believe these non-GAAP measures provide useful information to our Board of Directors, management and investors regarding certain trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, purposes of determining management incentive compensation and budgeting, forecasting and planning purposes. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change.
We do not consider non-GAAP measures an alternative to financial measures determined in accordance with GAAP, rather they supplement GAAP measures by providing additional information we believe to be useful to our shareholders. The principal limitation of these non-GAAP financial measures is they may exclude significant expense and income items that are required by GAAP to be recognized in our consolidated financial statements. In addition, they reflect the exercise of management’s judgment about which expense and income items are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, reconciliations of the non-GAAP financial measures we use to their most directly comparable GAAP measures are provided. Non-GAAP financial measures should not be relied upon in evaluating the financial condition, results of operations or future prospects of the Company.
Defined Terms
The following terms, as defined, are commonly used by management and the investing public to understand and evaluate our operational results:
Core Operating Earnings is an additional performance measure we use because the computation of Nareit Funds from Operations ("Nareit FFO") includes certain non-comparable items that affect our period-over-period performance. Core Operating Earnings excludes from Nareit FFO: (i) transaction related income or expenses, (ii) gains or losses from the early extinguishment of debt, (iii) certain non-cash components of earnings derived from above and below market rent amortization, straight-line rents, and amortization of mark-to-market debt adjustments, and (iv) other amounts as they occur. We provide reconciliations of both Net income attributable to common stockholders to Nareit FFO and Nareit FFO to Core Operating Earnings.
Development Completion is a property in development that is deemed complete upon the earlier of: (i) 90% of total estimated net development costs have been incurred and percent leased equals or exceeds 95%, or (ii) the property features at least two years of anchor operations. Once deemed complete, the property is termed a Retail Operating Property the following calendar year.
Fixed Charge Coverage Ratio is defined as Operating EBITDAre divided by the sum of the gross interest and scheduled mortgage principal paid to our lenders.
Nareit EBITDAre is a measure of REIT performance, which the National Association of Real Estate Investment Trusts ("Nareit") defines as net income, computed in accordance with GAAP, excluding (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) gains on sales of real estate, (v) impairments of real estate, and (vi) adjustments to reflect the Company's share of unconsolidated partnerships and joint ventures.
Nareit Funds from Operations is a commonly used measure of REIT performance, which Nareit defines as net income, computed in accordance with GAAP, excluding gains on sales and impairments of real estate, net of tax, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We compute Nareit FFO for all periods presented in accordance with Nareit's definition.
Companies use different depreciable lives and methods, and real estate values historically fluctuate with market conditions. Since Nareit FFO excludes depreciation and amortization and gains on sale and impairments of real estate, it provides a performance measure that, when compared year over year, reflects the impact on operations from trends in percent leased, rental rates, operating costs, acquisition and development activities, and financing costs. This provides a perspective of our financial performance not immediately apparent from net income determined in accordance with GAAP. Thus, Nareit FFO is a supplemental non-GAAP financial measure of our operating performance, which does not represent cash generated from operating activities in accordance with GAAP; and, therefore, should not be considered a substitute measure of cash flows from operations. We provide a reconciliation of Net Income Attributable to Common Stockholders to Nareit FFO.
Net Operating Income ("NOI") is the sum of base rent, percentage rent, recoveries from tenants, other lease income, and other property income, less operating and maintenance expenses, real estate taxes, ground rent, and uncollectible lease income. NOI excludes straight-line rental income and expense, above and below market rent and ground rent amortization, tenant lease inducement amortization, and other fees. We also provide disclosure of NOI excluding termination fees, which excludes both termination fee income and expenses.
A Non-Same Property is any property, during either calendar year period being compared, that was acquired, sold, a Property in Development, a Development Completion, or a property under, or being positioned for, significant redevelopment that distorts comparability between periods. Non-retail properties and corporate activities, including the captive insurance program, are part of Non-Same Property.
Operating EBITDAre begins with Nareit EBITDAre and excludes certain non-cash components of earnings derived from above and below market rent amortization and straight-line rents. We provide a reconciliation of Net income to Nareit EBITDAre to Operating EBITDAre.
Pro-rata information includes 100% of our consolidated properties plus our economic share (based on our ownership interest) in our unconsolidated real estate investment partnerships.
We provide Pro-rata financial information because we believe it assists investors and analysts in estimating our economic interest in our consolidated and unconsolidated partnerships, when read in conjunction with our reported results under GAAP. We believe presenting our Pro-rata share of assets, liabilities, operating results, and other metrics, along with certain other non-GAAP measures, makes comparisons of other REITs' operating results to ours more meaningful. The Pro-rata information provided is not, nor is it intended to be, presented in accordance with GAAP. The Pro-rata supplemental details of assets and liabilities and supplemental details of operations reflect our proportionate economic ownership of the assets, liabilities, and operating results of the properties in our portfolio.
The Pro-rata information is prepared on a basis consistent with the comparable consolidated amounts and is intended to more accurately reflect our proportionate economic interest in the assets, liabilities, and operating results of properties in our portfolio. We do not control the unconsolidated investment partnerships, and the Pro-rata presentations of the assets and liabilities, and revenues and expenses do not represent our legal claim to such items. The partners are entitled to profit or loss allocations and distributions of cash flows according to the operating agreements, which generally provide for such allocations according to their invested capital. Our share of invested capital establishes the ownership interests we use to prepare our Pro-rata share.
The presentation of Pro-rata information has limitations which include, but are not limited to, the following:
o
The amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses; and
o
Other companies in our industry may calculate their Pro-rata interest differently, limiting the comparability of Pro-rata information.
Because of these limitations, the Pro-rata financial information should not be considered independently or as a substitute for our financial statements as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP financial statements, using the Pro-rata information as a supplement.
Property In Development includes properties in various stages of ground-up development.
Property In Redevelopment includes Retail Operating Properties under redevelopment or being positioned for redevelopment. Unless otherwise indicated, a Property in Redevelopment is included in the Same Property pool.
Redevelopment Completion is a property in redevelopment that is deemed complete upon the earlier of: (i) 90% of total estimated project costs have been incurred and percent leased equals or exceeds 95% for the Company owned GLA related to the project, or (ii) the property features at least two years of anchor operations, if applicable.
Retail Operating Property is any retail property not termed a Property in Development. A retail property is any property where the majority of the income is generated from retail uses.
Same Property is a Retail Operating Property that was owned and operated for the entirety of both calendar year periods being compared. This term excludes Properties in Development, prior year Development Completions, and Non-Same Properties. Properties in Redevelopment are included unless otherwise indicated.
Overview of Our Strategy
Regency Centers Corporation began its operations as a publicly-traded REIT in 1993, and as of September 30, 2022, had full or partial ownership interests in 404 retail properties. Our properties are high-quality neighborhood and community shopping centers primarily anchored by market leading grocers and principally located in suburban markets within the country's most desirable metro areas and contain approximately 51.1 million square feet ("SF") of gross leasable area ("GLA"). All of our operating, investing, and financing activities are performed through our Operating Partnership, Regency Centers, L.P. and its wholly-owned subsidiaries, and through our co-investment partnerships. As of September 30, 2022, the Parent Company owns approximately 99.6% of the outstanding common partnership units of the Operating Partnership.
Our mission is to create thriving environments for retailers and service providers to connect with surrounding neighborhoods and communities. Our vision is to elevate quality of life as an integral thread in the fabric of our communities. Our portfolio includes thriving properties merchandised with highly productive grocers, restaurants, service providers, and best-in-class retailers that connect to their neighborhoods, communities, and customers.
Our values:
We are our people: Our people are our greatest asset, and we believe a talented team from differing backgrounds and experiences make us better.
We do what is right: We act with unwavering standards of honesty and integrity.
We connect with our communities: We promote philanthropic ideas and strive for the betterment of our neighborhoods by giving our time and financial support.
We are responsible: Our duty is to balance purpose and profit, being good stewards of capital and the environment for the benefit of all our stakeholders.
We strive for excellence: When we are passionate about what we do, it is reflected in our performance.
We are better together: When we listen to each other and our customers, we will succeed together.
Our goals are to:
Own and manage a portfolio of high-quality neighborhood and community shopping centers primarily anchored by market leading grocers and principally located in suburban trade areas in the country’s most desirable metro areas. We expect that this strategy will result in highly desirable and attractive centers with best-in-class retailers. These centers should command higher rental and occupancy rates resulting in excellent prospects to grow net operating income ("NOI");
Maintain an industry leading and disciplined development and redevelopment platform to create exceptional retail centers that deliver higher returns as compared to acquisitions;
Support our business activities with a conservative capital structure, including a strong balance sheet with sufficient liquidity to meet our capital needs together with a carefully constructed debt maturity profile;
Implement leading environmental, social, and governance practices through our Corporate Responsibility Program;
Engage and retain an exceptional and diverse team that is guided by our strong values, while fostering an environment of innovation and continuous improvement; and
Create shareholder value by increasing earnings and dividends per share that generate total returns at or near the top of our shopping center peers.
Risks and Uncertainties
The success of our tenants in operating their businesses and their corresponding ability to pay rent continue to be significantly influenced by many current economic challenges, which impact their cost of doing business, including, but not limited to, the impact of inflation, labor shortages, supply chain constraints, and increasing energy prices and interest rates. Additionally, macroeconomic and geopolitical risks create challenges that may exacerbate current market conditions in the United States. The policies implemented by the U.S. government to address these issues, including raising interest rates, could result in adverse impacts on the U.S. economy, including a slowing of growth and potentially a recession, thereby impacting consumer spending, our tenants' businesses, and/or decreasing future demand for space in our shopping centers. Refer to Item 1, Note 1 to Unaudited Consolidated Financial Statements.
Please also refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2021, including, without limitation, the Risk Factors discussed in Item 1A of Part I thereof, and the Risk Factors described in Part II, Item 1A of this Form 10-Q.
Executing on our Strategy
During the nine months ended September 30, 2022, we had Net income attributable to common stockholders of $387.6 million, which includes gains on sale of real estate of $106.5 million, as compared to $293.6 million during the nine months ended September 30, 2021.
During the nine months ended September 30, 2022:
Our Pro-rata same property NOI, excluding termination fees, increased 2.5%, as compared to the nine months ended September 30, 2021, primarily attributable to continued improvement in collections of lease income from cash basis tenants, combined with improvements in base rent from increases in year over year occupancy rates, contractual rent steps in existing leases, and positive rent spreads on new and renewal leases.
We executed 1,474 new and renewal leasing transactions representing 5.6 million Pro-rata SF during the nine months ended September 30, 2022 as compared to 1,489 leasing transactions representing 5.1 million Pro-rata SF during the nine months ended September 30, 2021. Rent spreads for the trailing twelve months ended September 30, 2022, were positive 8.8%. Rent spreads are calculated on all executed leasing transactions for comparable Retail Operating Property space, including spaces vacant greater than twelve months.
At September 30, 2022, December 31, 2021, and September 30, 2021 our total property portfolio was 94.6%, 94.1%, and 93.5% leased, respectively. At September 30, 2022, December 31, 2021, and September 30, 2021 our Same Property portfolio was 94.7%, 94.3%, and 93.8% leased, respectively.
We continued our development and redevelopment of high quality shopping centers:
Estimated Pro-rata project costs of our current in process development and redevelopment projects total $398.4 million at September 30, 2022 as compared to $307.3 million at December 31, 2021.
Redevelopment projects completed during 2022 represent $20.8 million of estimated net project cost with a weighted average incremental stabilized yield of 9%.
We maintain a conservative balance sheet in order to provide liquidity and financial flexibility to cost effectively fund investment opportunities and debt maturities:
During April 2022, we settled and issued 984,618 common shares under forward sale agreements at a weighted average price of $64.59, before any underwriting discount and offering expenses. Net proceeds received at settlement were approximately $61.3 million and were used to fund acquisitions.
During June 2022, we executed multiple trades to repurchase 1,294,201 common shares under the Authorized Repurchase Program for a total of $75.4 million at a weighted average price of $58.25 per share. All repurchased shares were retired on the respective settlement dates.
We have no unsecured debt maturities until 2024 and a manageable level of secured mortgage maturities during the next twelve months, including mortgages within our real estate partnerships.
At September 30, 2022, our Pro-rata net debt-to-operating EBITDAre ratio on a trailing twelve month basis was 5.0x as compared to 5.1x at December 31, 2021.
Property Portfolio
The following table summarizes general information related to the Consolidated Properties in our portfolio:
| (GLA in thousands) | September 30, 2022 | December 31, 2021 | |
| Number of Properties | 308 | 302 | |
| GLA | 38,647 | 37,864 | |
| % Leased – Operating and Development | 94.7% | 94.0% | |
| % Leased – Operating | 94.9% | 94.1% | |
| Weighted average annual effective rent per square foot ("PSF"), net of tenant concessions. | $23.71 | $23.17 |
The following table summarizes general information related to the Unconsolidated Properties owned in co-investment partnerships in our portfolio:
| (GLA in thousands) | September 30, 2022 | December 31, 2021 | |
| Number of Properties | 96 | 103 | |
| GLA | 12,468 | 13,300 | |
| % Leased – Operating and Development | 93.3% | 93.9% | |
| % Leased –Operating | 93.4% | 93.9% | |
| Weighted average annual effective rent PSF, net of tenant concessions | $23.10 | $22.37 |
For the purpose of the following disclosures of occupancy and leasing activity, "anchor space" is considered space greater than or equal to 10,000 SF and "shop space" is less than 10,000 SF. The following table summarizes Pro-rata occupancy rates of our combined Consolidated and Unconsolidated shopping center portfolio:
| September 30, 2022 | December 31, 2021 | ||
| % Leased – All Properties | 94.6% | 94.1% | |
| Anchor space | 96.9% | 97.0% | |
| Shop space | 90.8% | 89.2% |
The following table summarizes leasing activity, including our Pro-rata share of activity within the portfolio of our co-investment partnerships:
| Nine months ended September 30, 2022 | ||||||||||||||||||||
| Leasing Transactions | SF (in thousands) | Base Rent PSF | Tenant Allowance and Landlord Work PSF | Leasing Commissions PSF | ||||||||||||||||
| Anchor Leases | ||||||||||||||||||||
| New | 17 | 498 | $ | 14.74 | $ | 15.12 | $ | 5.57 | ||||||||||||
| Renewal | 88 | 2,592 | 16.39 | 0.87 | 0.17 | |||||||||||||||
| Total Anchor Leases | 105 | 3,090 | $ | 16.12 | $ | 3.17 | $ | 1.04 | ||||||||||||
| Shop Space | ||||||||||||||||||||
| New | 419 | 802 | $ | 37.62 | $ | 36.41 | $ | 11.93 | ||||||||||||
| Renewal | 950 | 1,737 | 35.98 | 1.69 | 0.89 | |||||||||||||||
| Total Shop Space Leases | 1,369 | 2,539 | $ | 36.50 | $ | 12.66 | $ | 4.37 | ||||||||||||
| Total Leases | 1,474 | 5,629 | $ | 25.31 | $ | 7.45 | $ | 2.55 |
| Nine months ended September 30, 2021 | ||||||||||||||||||||
| Leasing Transactions | SF (in thousands) | Base Rent PSF | Tenant Allowance and Landlord Work PSF | Leasing Commissions PSF | ||||||||||||||||
| Anchor Leases | ||||||||||||||||||||
| New | 19 | 366 | $ | 12.02 | $ | 35.69 | $ | 4.93 | ||||||||||||
| Renewal | 92 | 2,219 | 14.64 | 0.65 | 0.19 | |||||||||||||||
| Total Anchor Leases | 111 | 2,585 | $ | 14.27 | $ | 5.61 | $ | 0.86 | ||||||||||||
| Shop Space | ||||||||||||||||||||
| New | 415 | 726 | $ | 34.01 | $ | 26.58 | $ | 8.79 | ||||||||||||
| Renewal | 963 | 1,763 | 34.01 | 1.81 | 0.78 | |||||||||||||||
| Total Shop Space Leases | 1,378 | 2,489 | $ | 34.01 | $ | 9.04 | $ | 3.11 | ||||||||||||
| Total Leases | 1,489 | 5,074 | $ | 23.95 | $ | 7.29 | $ | 1.96 |
The weighted average annual base rent ("ABR") per square foot on signed shop space leases during 2022 was $36.50 PSF, which is higher than the ABR rent per square foot of all shop space leases due to expire during the next 12 months of $34.42 PSF. New and renewal rent spreads on a trailing twelve month basis were positive at 8.8% as compared to prior rents on those same spaces.
The success of our tenants in operating their businesses and their corresponding ability to pay us rent continue to be significantly impacted by many current economic challenges, which impact their cost of doing business, including, but not limited to, inflation, labor shortages, supply chain constraints, and increasing energy prices and interest rates. Additionally, macroeconomic and geopolitical risks create challenges that may exacerbate current market conditions in the United States.
These economic conditions could adversely impact our volume of leasing activity, leasing spreads, and financial results generally, as well as negatively affect the business and financial results of our tenants. The aggregate impacts of these current economic challenges may also negatively affect the overall market for retail space, resulting in decreased demand for space in our centers. This, in turn, could result in pricing pressure on rents that we are able to charge to new or renewing tenants, such that future rent spreads could be adversely impacted. Further, we may experience higher costs for tenant buildouts, as costs of materials and labor may increase and supply and availability of both may become more limited.
Significant Tenants and Concentrations of Risk
We seek to reduce our operating and leasing risks by avoiding dependence on any single property, market, or tenant. Based on percentage of annualized base rent, the following table summarizes our most significant tenants with ABR greater than 2%, of which four of the top five are grocers:
| September 30, 2022 | ||||||||
| Tenant | Number of Stores | Percentage of Company- owned GLA (1) | Percentage of ABR (1) | |||||
| Publix | 67 | 7.1% | 3.3% | |||||
| Kroger Co. | 53 | 7.3% | 3.1% | |||||
| Albertsons Companies, Inc. | 46 | 4.7% | 3.0% | |||||
| Amazon/Whole Foods | 36 | 2.9% | 2.7% | |||||
| TJX Companies, Inc. | 63 | 3.6% | 2.6% |
(1)
Includes Regency's Pro-rata share of Unconsolidated Properties and excludes those owned by anchors.
Bankruptcies and Credit Concerns
Our management team devotes significant time to researching and monitoring consumer preferences and trends, customer shopping behaviors, changes in delivery methods, shifts to e-commerce, and changing demographics in order to anticipate the challenges and opportunities impacting our industry. We seek to mitigate these potential impacts through maintaining a high quality portfolio, tenant diversification, replacing weaker tenants with stronger operators, anchoring our centers with market leading grocery stores that drive customer traffic, and maintaining a presence in suburban trade areas with compelling demographic populations benefiting from high levels of disposal income. The potential for a recession and the severity and duration of any economic downturn could negatively impact our existing tenants and their ability to continue to meet their lease obligations, which could result in increased bankruptcy filings.
Although base rent is set forth in long-term lease contracts, tenants who file bankruptcy generally have the legal right to reject any or all of their leases and close related stores. Any unsecured claim we hold against a bankrupt tenant for unpaid rent might be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. As a result, it is likely that we would recover substantially less than the full value of any unsecured claims we hold. Additionally, we may incur significant expense to adjudicate our claim and to re-lease the vacated space. In the event that a tenant with a significant number of leases in our shopping centers files bankruptcy and cancels its leases, we could experience a significant reduction in our revenues. Tenants who are currently in bankruptcy and continue to occupy space in our shopping centers represent an aggregate of 0.1% of our annual base rent on a pro-rata basis.
Results from Operations
Comparison of the three months ended September 30, 2022 and 2021:
Our revenues changed as summarized in the following table:
| Three months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Lease income | ||||||||||||
| Base rent | $ | 207,555 | 192,433 | 15,122 | ||||||||
| Recoveries from tenants | 69,376 | 62,234 | 7,142 | |||||||||
| Percentage rent | 1,884 | 1,271 | 613 | |||||||||
| Uncollectible lease income | 1,110 | 9,198 | (8,088 | ) | ||||||||
| Other lease income | 3,426 | 4,145 | (719 | ) | ||||||||
| Straight-line rent | 6,921 | 7,565 | (644 | ) | ||||||||
| Above / below market rent amortization | 5,484 | 6,457 | (973 | ) | ||||||||
| Total lease income | $ | 295,756 | 283,303 | 12,453 | ||||||||
| Other property income | 2,466 | 4,401 | (1,935 | ) | ||||||||
| Management, transaction, and other fees | 5,767 | 19,671 | (13,904 | ) | ||||||||
| Total revenues | $ | 303,989 | 307,375 | (3,386 | ) |
Lease income increased $12.5 million, on a net basis, driven by the following contractually billable components of rent to the tenants per the lease agreements:
$15.1 million increase from billable Base rent, as follows:
o
$5.6 million increase from acquisitions of operating properties as well as from rent commencements at development properties; and
o
$11.1 million net increase from same properties, including a $3.1 million increase related to our acquisition and resulting consolidation of the eleven properties previously held in the USAA and RegCal partnerships, and a $8.0 million net increase in the remaining same properties due to increases from occupancy, rent steps in existing leases, and positive rental spreads on new and renewal leases; offset by
o
$1.6 million decrease from the sale of operating properties.
$7.1 million increase from Recoveries from tenants, which represents the tenants' Pro-rata share of the operating, maintenance, insurance and real estate tax expenses that we incur to operate our shopping centers. Recoveries from tenants increased, on a net basis, primarily from the following:
o
$2.3 million increase from acquisition of operating properties and rent commencing at development properties; and
o
$5.3 million net increase from same properties due to increases in recoverable expenses; offset by
o
$520,000 decrease from the sale of operating properties.
$613,000 increase in percentage rent primarily due to improvements in tenant sales.
$8.1 million decrease from changes in Uncollectible lease income.
o
During 2022, Uncollectible lease income was a net positive $1.1 million driven by the $2.6 million collection of prior period reserves on cash basis tenants and $288,000 positive impact of lease modification agreements, offset by the $1.7 million reserve recognized on current period billings.
o
During 2021, Uncollectible lease income was a net positive $9.2 million driven by $13.7 million collection of prior period reserves on cash basis tenants exceeding $4.5 million reserve recognized on current period billings.
$719,000 decrease in Other lease income primarily due to a decrease in lease termination fees.
$644,000 decrease in Straight-line rent.
o
During 2022, Straight-line rent was $6.9 million, driven by $3.3 million of new straight-line rents and $3.9 million of reinstated straight-line rents from returning tenants to accrual basis of accounting, offset by $313,000 of uncollectible straight-line rents on cash basis tenants.
o
During 2021, Straight-line rent was $7.6 million driven by $3.9 million of new straight-line rents and $5.0 million of reinstated straight-line rents from returning tenants to accrual basis of accounting, offset by $1.3 million of uncollectible straight-line rents on cash basis tenants.
$973,000 decrease in Above and below market rent primarily from same properties driven by the timing of lease activity on acquired in-place tenant leases.
Other property income decreased $1.9 million primarily due to a decrease in settlements, which were higher during 2021.
Management, transaction, and other fees decreased $13.9 million primarily due to $13.6 million of promote income recognized during 2021 for our performance as managing member of the USAA partnership.
Changes in our operating expenses are summarized in the following table:
| Three months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Depreciation and amortization | $ | 80,270 | 75,459 | 4,811 | ||||||||
| Operating and maintenance | 49,577 | 43,468 | 6,109 | |||||||||
| General and administrative | 20,273 | 17,789 | 2,484 | |||||||||
| Real estate taxes | 37,926 | 35,779 | 2,147 | |||||||||
| Other operating expenses | 949 | 812 | 137 | |||||||||
| Total operating expenses | $ | 188,995 | 173,307 | 15,688 |
Depreciation and amortization costs increased $4.8 million, on a net basis, as follows:
$4.1 million increase from acquisitions of operating properties and corporate assets, as well as from development properties where tenant spaces became available for occupancy; and
$871,000 increase from same properties, primarily related to redevelopment projects; offset by
$124,000 decrease from the sale of operating properties.
Operating and maintenance costs increased $6.1 million, on a net basis, as follows:
$2.7 million net increase from acquisitions of operating properties, from development properties, and from hurricane related clean up; and
$3.8 million increase from same properties primarily attributable to an increase in costs associated with general property maintenance and tenant utilities as our centers return to customary pre-pandemic operating levels, as well as additional management fees; offset by
$405,000 decrease from the sale of operating properties.
General and administrative costs increased $2.5 million, on a net basis, as follows:
$2.2 million increase in compensation costs, primarily driven by performance based incentive compensation;
$672,000 increase due to lower development overhead capitalization based on the status and progress of our development and redevelopment projects; and
$569,000 net increase in other corporate overhead costs primarily driven by travel and entertainment returning to more customary pre-pandemic levels; offset by
$860,000 net decrease due to changes in the value of participant obligations within the deferred compensation plan, attributable to changes in market values of those investments, reflected within Net investment income.
Real estate taxes increased $2.1 million, on a net basis, from acquisitions of operating properties, as well as from same properties, primarily from the consolidation of the properties previously held in the USAA and RegCal partnerships.
The following table presents the components of other expense (income):
| Three months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Interest expense, net | ||||||||||||
| Interest on notes payable | $ | 37,187 | 36,628 | 559 | ||||||||
| Interest on unsecured credit facilities | 524 | 558 | (34 | ) | ||||||||
| Capitalized interest | (1,171 | ) | (1,147 | ) | (24 | ) | ||||||
| Hedge expense | 109 | 109 | — | |||||||||
| Interest income | (288 | ) | (155 | ) | (133 | ) | ||||||
| Interest expense, net | $ | 36,361 | 35,993 | 368 | ||||||||
| Provision for impairment of real estate, net of tax | — | (20 | ) | 20 | ||||||||
| Gain on sale of real estate, net of tax | (220 | ) | (6,719 | ) | 6,499 | |||||||
| Net investment loss (income) | 1,215 | 209 | 1,006 | |||||||||
| Total other expense (income) | $ | 37,356 | 29,463 | 7,893 |
During the three months ended September 30, 2022, we recognized a gain on sale of $220,000 for one land parcel. During the three months ended September 30, 2021, we recognized gains on sale of $6.7 million from two land parcels and a portion of an operating property.
Net investment loss increased $1.0 million primarily driven by changes in realized and unrealized gains and losses during 2022 on investments held in the non-qualified deferred compensation plan and our captive insurance company. There is an offsetting $860,000 benefit in General and administrative costs related to participant obligations within the deferred compensation plans.
Our equity in income of investments in real estate partnerships changed as follows:
| Three months ended September 30, | ||||||||||||||
| (in thousands) | Regency's Ownership | 2022 | 2021 | Change | ||||||||||
| GRI - Regency, LLC (GRIR) | 40.00% | $ | 8,876 | 10,080 | (1,204 | ) | ||||||||
| New York Common Retirement Fund (NYC) (1) | 30.00% | (49 | ) | 266 | (315 | ) | ||||||||
| Columbia Regency Retail Partners, LLC (Columbia I) | 20.00% | 452 | 562 | (110 | ) | |||||||||
| Columbia Regency Partners II, LLC (Columbia II) | 20.00% | 388 | 702 | (314 | ) | |||||||||
| Columbia Village District, LLC | 30.00% | 454 | 372 | 82 | ||||||||||
| RegCal, LLC (RegCal) (2) | 25.00% | 124 | 530 | (406 | ) | |||||||||
| US Regency Retail I, LLC (USAA) (3) | 20.01% | — | 81 | (81 | ) | |||||||||
| Other investments in real estate partnerships | 31.00% - 50.00% | 964 | 1,650 | (686 | ) | |||||||||
| Total equity in income of investments in real estate partnerships | $ | 11,209 | 14,243 | (3,034 | ) |
(1)
On May 25, 2022, the NYC partnership sold its remaining two properties and distributed sales proceeds to its members. Dissolution will follow final distributions, which are expected in 2023.
(2)
On April 1, 2022, we acquired our partner's 75% share in four properties held in the RegCal partnership for a total purchase price of $88.5 million; therefore, results following the date of acquisition are included in consolidated results. A single operating property remains within RegCal, LLC, at September 30, 2022.
(3)
On August 1, 2021, we acquired our partner's 80% interest in the seven properties held in the USAA partnership; therefore, results following the date of acquisition are included in consolidated results.
The $3.0 million decrease in our equity in income of investments in real estate partnerships is largely attributable to the following changes:
$1.2 million decrease within GRIR, primarily due to positive impact in 2021 of collections of previously reserved rents and reinstatement of straight-line rents;
$315,000 decrease within NYC as all properties were sold prior to the three months ended September 30, 2022;
$406,000 decrease within RegCal as five of the six properties were sold prior to the three months ended September 30, 2022; and
$686,000 decrease within Other investments in real estate partnerships, primarily from the gain on sale of a single property partnership that occurred during 2021.
The following represents the remaining components that comprised net income attributable to common stockholders and unit holders:
| Three months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Net income | $ | 88,847 | 118,848 | (30,001 | ) | |||||||
| Income attributable to noncontrolling interests | (1,269 | ) | (1,442 | ) | 173 | |||||||
| Net income attributable to common stockholders | $ | 87,578 | 117,406 | (29,828 | ) | |||||||
| Net income attributable to exchangeable operating partnership units | (379 | ) | (519 | ) | 140 | |||||||
| Net income attributable to common unit holders | $ | 87,957 | 117,925 | (29,968 | ) |
Results from Operations
Comparison of the nine months ended September 30, 2022 and 2021:
Our revenues changed as summarized in the following table:
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Lease income | ||||||||||||
| Base rent | $ | 611,160 | 570,602 | 40,558 | ||||||||
| Recoveries from tenants | 205,614 | 193,079 | 12,535 | |||||||||
| Percentage rent | 7,583 | 5,386 | 2,197 | |||||||||
| Uncollectible lease income | 12,156 | 18,093 | (5,937 | ) | ||||||||
| Other lease income | 10,561 | 11,172 | (611 | ) | ||||||||
| Straight-line rent | 18,405 | 9,598 | 8,807 | |||||||||
| Above / below market rent amortization | 16,786 | 18,460 | (1,674 | ) | ||||||||
| Total lease income | $ | 882,265 | 826,390 | 55,875 | ||||||||
| Other property income | 8,290 | 9,428 | (1,138 | ) | ||||||||
| Management, transaction, and other fees | 18,950 | 33,419 | (14,469 | ) | ||||||||
| Total revenues | $ | 909,505 | 869,237 | 40,268 |
Lease income increased $55.9 million, on a net basis, driven by the following contractually billable components of rent to the tenants per the lease agreements:
$40.6 million increase from billable Base rent, as follows:
o
$1.4 million net increase from rent commencements at development properties;
o
$14.5 million increase from acquisitions of operating properties; and
o
$30.6 million net increase from same properties, including a $11.7 million increase related to our acquisition and resulting consolidation of the eleven properties previously held in the USAA and RegCal partnerships, and a $18.9 million net increase in the remaining same properties due to increases from occupancy, rent steps in existing leases, and positive rental spreads on new and renewal lease; offset by
o
$5.9 million decrease from the sale of operating properties.
$12.5 million increase from Recoveries from tenants, which represents the tenants' Pro-rata share of the operating, maintenance, insurance and real estate tax expenses that we incur to operate our shopping centers. Recoveries from tenants increased, on a net basis, primarily from the following:
o
$6.2 million increase from acquisition of operating properties and rent commencing at development properties; and
o
$8.0 million net increase from same properties due to increases in recoverable expenses; offset by
o
$1.7 million decrease from the sale of operating properties.
$2.2 million increase in percentage rent primarily due to improvements in tenant sales.
$5.9 million decrease from favorable changes in Uncollectible lease income.
o
During 2022, Uncollectible lease income was a net positive $12.2 million driven by $16.9 million collection of prior period reserves on cash basis tenants and $2.1 million positive impact of lease modification agreements, offset by the $6.8 million reserve recognized on current period billings.
o
During 2021, Uncollectible lease income was a net positive $18.1 million driven by $37.7 million collection of prior period reserves on cash basis tenants exceeding the $19.6 million reserve recognized on 2021 billings.
$8.8 million increase in Straight-line rent.
o
During 2022, Straight-line rent was $18.4 million, driven by $9.9 million of new straight-line rents and $10.7 million of reinstated straight-line rents from returning tenants to accrual basis of accounting, offset by $2.2 million of uncollectible straight-line rents on cash basis tenants.
o
During 2021, Straight-line rent was $9.6 million driven by $9.8 million of new straight-line rents and $5.0 million of reinstated straight-line rents from returning tenants to accrual basis of accounting, offset by $5.2 million of uncollectible straight-line rents on cash basis tenants.
$1.7 million decrease in Above and below market rent primarily from same properties driven by the timing of lease activity on acquired in-place tenant leases.
Other property income decreased $1.1 million primarily due to a decrease in settlements, which were higher during 2021.
Management, transaction, and other fees decreased $14.5 million primarily due to $13.6 million of one-time promote income recognized during 2021 for our performance as managing member of the USAA partnership, as well as a decrease in property management fees resulting from a smaller portfolio of properties held within our co-investment partnerships following the sale of several properties to third parties or the purchase and consolidation by Regency.
Changes in our operating expenses are summarized in the following table:
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Depreciation and amortization | $ | 237,462 | 226,935 | 10,527 | ||||||||
| Operating and maintenance | 143,788 | 135,616 | 8,172 | |||||||||
| General and administrative | 56,710 | 58,263 | (1,553 | ) | ||||||||
| Real estate taxes | 111,495 | 107,392 | 4,103 | |||||||||
| Other operating expenses | 3,739 | 2,687 | 1,052 | |||||||||
| Total operating expenses | $ | 553,194 | 530,893 | 22,301 |
Depreciation and amortization costs increased $10.5 million, on a net basis, as follows:
$549,000 increase from development properties where tenant spaces became available for occupancy, offset by decreases in corporate asset depreciation;
$10.3 million increase from acquisitions of operating properties; and
$2.0 million increase from same properties, primarily related to redevelopment projects; offset by
$2.3 million decrease from the sale of operating properties.
Operating and maintenance costs increased $8.2 million, on a net basis, as follows:
$509,000 increase from development properties where tenant spaces became available for occupancy;
$4.1 million increase from acquisitions of operating properties; and
$7.1 million increase from same properties primarily attributable to higher insurance premiums as well as an increase in costs associated with general property maintenance as our centers return to customary operating levels; offset by
$3.5 million decrease from the sale of operating properties.
General and administrative costs decreased $1.6 million, on a net basis, as follows:
$10.7 million net decrease due to changes in the value of participant obligations within the deferred compensation plan, attributable to changes in market values of those investments, reflected within Net investment income; offset by
$5.7 million net increase in compensation costs primarily driven by performance based incentive compensation and annual base salary increases;
$2.3 million net increase in other corporate overhead costs primarily driven by travel and entertainment costs returning to customary levels; and
$1.1 million increase due to lower development overhead capitalization based on the timing and progress of our development and redevelopment projects.
Real estate taxes increased $4.1 million, on a net basis, as follows:
$738,000 increase from developments where capitalization ceased and spaces became available for occupancy;
$3.3 million increase from acquisitions of operating properties; and
$1.4 million net increase at same properties including $2.1 million increase related to our acquisition and resulting consolidation of the eleven properties previously held in the USAA and RegCal partnerships, offset by $718,000 decrease at various properties within the portfolio from lower assessed values; offset by
$1.3 million decrease from the sale of operating properties.
The following table presents the components of other expense (income):
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Interest expense, net | ||||||||||||
| Interest on notes payable | $ | 111,547 | 110,252 | 1,295 | ||||||||
| Interest on unsecured credit facilities | 1,500 | 1,636 | (136 | ) | ||||||||
| Capitalized interest | (2,985 | ) | (3,012 | ) | 27 | |||||||
| Hedge expense | 328 | 328 | — | |||||||||
| Interest income | (592 | ) | (463 | ) | (129 | ) | ||||||
| Interest expense, net | $ | 109,798 | 108,741 | 1,057 | ||||||||
| Provision for impairment of real estate, net of tax | — | 115 | (115 | ) | ||||||||
| Gain on sale of real estate, net of tax | (106,459 | ) | (38,198 | ) | (68,261 | ) | ||||||
| Net investment loss (income) | 9,177 | (3,275 | ) | 12,452 | ||||||||
| Total other expense (income) | $ | 12,516 | 67,383 | (54,867 | ) |
The $1.1 million net increase in Interest expense is primarily driven by an increase in mortgage interest expense from assumed loans on recently acquired properties. We expect that refinancing our debt at maturity or borrowing on our variable rate Line, in the current interest rate environment, could result in higher interest expense in future periods if rates remain elevated.
During the nine months ended September 30, 2022, we recognized gains on sale of $106.5 million for four land parcels and one operating property. During the nine months ended September 30, 2021, we recognized gains on sale of $38.2 million from three land parcels, five operating properties, and a portion of an operating property.
Net investment income decreased $12.5 million primarily driven by realized and unrealized losses during 2022 of investments held in the non-qualified deferred compensation plan and our captive insurance company. There is an offsetting $10.7 million benefit in General and administrative costs related to participant obligations within the deferred compensation plans.
Our equity in income of investments in real estate partnerships increased as follows:
| Nine months ended September 30, | ||||||||||||||
| (in thousands) | Regency's Ownership | 2022 | 2021 | Change | ||||||||||
| GRI - Regency, LLC (GRIR) | 40.00% | $ | 27,280 | 26,014 | 1,266 | |||||||||
| New York Common Retirement Fund (NYC) (1) | 30.00% | 9,162 | 127 | 9,035 | ||||||||||
| Columbia Regency Retail Partners, LLC (Columbia I) | 20.00% | 1,396 | 1,494 | (98 | ) | |||||||||
| Columbia Regency Partners II, LLC (Columbia II) | 20.00% | 1,307 | 1,702 | (395 | ) | |||||||||
| Columbia Village District, LLC | 30.00% | 1,154 | 1,058 | 96 | ||||||||||
| RegCal, LLC (RegCal) (2) | 25.00% | 4,374 | 1,486 | 2,888 | ||||||||||
| US Regency Retail I, LLC (USAA) (3) | 20.01% | — | 631 | (631 | ) | |||||||||
| Other investments in real estate partnerships | 35.00% - 50.00% | 3,182 | (6,168 | ) | 9,350 | |||||||||
| Total equity in income of investments in real estate partnerships | $ | 47,855 | 26,344 | 21,511 |
(1)
On May 25, 2022, the NYC partnership sold its remaining two properties and distributed sales proceeds to its members. Dissolution will follow final distributions, which are expected in 2023.
(2)
We acquired our partner's 75% share in four properties held in the RegCal partnership for a total purchase price of $88.5 million on April 1, 2022; therefore results following the date of acquisition are included in consolidated results. A single operating property remains within RegCal, LLC, at September 30, 2022.
(3)
We acquired our partner's 80% interest in the seven properties held in the USAA partnership on August 1, 2021; therefore results following the date of acquisition are included in consolidated results.
The $21.5 million increase in our equity in income of investments in real estate partnerships is largely attributable to the following changes:
$1.3 million increase within GRIR primarily due to an increase in base rent across the portfolio from higher occupancy and rent growth combined with continued improvements in tenant rent collections and re-instating straight-line rent on certain tenants returning to accrual basis of accounting;
$9.0 million increase within NYC, primarily due to gains on the sale of two operating properties during 2022, as well as an increase due to the loss on sale of an operating property during 2021;
$2.9 million increase within RegCal, primarily due to a gain on sale of one operating property during 2022; and
$9.4 million increase within Other investments in real estate partnerships, primarily from the impairment of a single property partnership that sold during 2021.
The following represents the remaining components that comprised net income attributable to common stockholders and unit holders:
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Net income | $ | 391,650 | 297,305 | 94,345 | ||||||||
| Income attributable to noncontrolling interests | (4,048 | ) | (3,753 | ) | (295 | ) | ||||||
| Net income attributable to common stockholders | $ | 387,602 | 293,552 | 94,050 | ||||||||
| Net income attributable to exchangeable operating partnership units | (1,694 | ) | (1,315 | ) | (379 | ) | ||||||
| Net income attributable to common unit holders | $ | 389,296 | 294,867 | 94,429 |
Supplemental Earnings Information
We use certain non-GAAP performance measures, in addition to certain performance metrics determined under GAAP, as we believe these measures improve the understanding of the our operating results. We believe these non-GAAP measures provide useful information to our Board of Directors, management and investors regarding certain trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, purposes of determining management incentive compensation and budgeting, forecasting and planning purposes. We provide Pro-rata financial information because we believe it assists investors and analysts in estimating our economic interest in our consolidated and unconsolidated partnerships, when read in conjunction with our reported results under GAAP. We believe presenting our Pro-rata share of operating results, along with other non-GAAP measures, may assist in comparing our operating results to other REITs. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change. See "Non-GAAP Measures" at the beginning of this Management's Discussion and Analysis.
We do not consider non-GAAP measures an alternative to financial measures determined in accordance with GAAP, rather they supplement GAAP measures by providing additional information we believe to be useful to shareholders. The principal limitation of these non-GAAP financial measures is they may exclude significant expense and income items that are required by GAAP to be recognized in our consolidated financial statements. In addition, they reflect the exercise of management's judgment about which expense and income items are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, reconciliations of the non-GAAP financial measures we use to their most directly comparable GAAP measures are provided. Non-GAAP financial measures should not be relied upon in evaluating the financial condition, results of operations or future prospects of the Company.
Pro-Rata Same Property NOI:
Our Pro-rata same property NOI, with and without termination fees, changed from the following major components:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||
| Base rent | $ | 224,521 | 216,092 | 8,429 | $ | 665,452 | 644,751 | 20,701 | ||||||||||||||||
| Recoveries from tenants | 74,325 | 69,811 | 4,514 | 222,684 | 218,968 | 3,716 | ||||||||||||||||||
| Percentage rent | 2,228 | 1,405 | 823 | 8,738 | 6,302 | 2,436 | ||||||||||||||||||
| Termination fees | 902 | 2,031 | (1,129 | ) | 3,790 | 4,697 | (907 | ) | ||||||||||||||||
| Uncollectible lease income | 1,389 | 10,271 | (8,882 | ) | 13,484 | 19,317 | (5,833 | ) | ||||||||||||||||
| Other lease income | 3,055 | 2,701 | 354 | 8,527 | 8,303 | 224 | ||||||||||||||||||
| Other property income | 1,857 | 3,720 | (1,863 | ) | 6,447 | 7,447 | (1,000 | ) | ||||||||||||||||
| Total real estate revenue | 308,277 | 306,031 | 2,246 | 929,122 | 909,785 | 19,337 | ||||||||||||||||||
| Operating and maintenance | 48,556 | 45,070 | 3,486 | 144,437 | 139,218 | 5,219 | ||||||||||||||||||
| Real estate taxes | 40,401 | 39,801 | 600 | 119,998 | 121,220 | (1,222 | ) | |||||||||||||||||
| Ground rent | 2,991 | 2,794 | 197 | 8,856 | 8,686 | 170 | ||||||||||||||||||
| Total real estate operating expenses | 91,948 | 87,665 | 4,283 | 273,291 | 269,124 | 4,167 | ||||||||||||||||||
| Pro-rata same property NOI | $ | 216,329 | 218,366 | (2,037 | ) | $ | 655,831 | 640,661 | 15,170 | |||||||||||||||
| Less: Termination fees | 902 | 2,031 | (1,129 | ) | 3,790 | 4,697 | (907 | ) | ||||||||||||||||
| Pro-rata same property NOI, excluding termination fees | $ | 215,427 | 216,335 | (908 | ) | $ | 652,041 | 635,964 | 16,077 | |||||||||||||||
| Pro-rata same property NOI growth, excluding termination fees | -0.4 | % | 2.5 | % |
Billable Base rent increased $8.4 million and $20.7 million, respectively, during the three and nine months ended September 30, 2022, due to rent steps in existing leases, positive rental spreads on new and renewal leases, and increases in occupancy.
Recoveries from tenants increased $4.5 million and $3.7 million, respectively, during the three and nine months ended September 30, 2022, due to increases in recoverable expenses and greater recovery rates from higher average occupancy.
Percentage rent increased $823,000 and $2.4 million, respectively, during the three and nine months ended September 30, 2022, due to improvements in tenant sales.
Termination fees decreased $1.1 million and $907,000 during the three and nine months ended September 30, 2022, due to termination fees from several tenants at various properties during 2021, both wholly owned and within our partnerships.
Uncollectible lease income decreased $8.9 million and $5.8 million, respectively, during the three and nine months ended September 30, 2022, primarily driven by the 2021 collection of previously reserved amounts, which have continued but to a lesser degree in 2022.
Other property income decreased $1.9 million and $1.0 million, respectively, during the three and nine months ended September 30, 2022, primarily driven by a decrease in settlements compared to 2021.
Operating and maintenance increased $3.5 million and $5.2 million, respectively, during the three and nine months ended September 30, 2022, due primarily to increases in insurance and other reimbursable costs.
Real estate taxes increased $600,000 and decreased $1.2 million, respectively, during the three and nine months ended September 30, 2022, due to changes in assessed values at properties across our portfolio.
Same Property Rollforward:
Our same property pool includes the following property count, Pro-rata GLA, and changes therein:
| Three months ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| (GLA in thousands) | Property Count | GLA | Property Count | GLA | ||||||||||||
| Beginning same property count | 390 | 41,446 | 394 | 40,918 | ||||||||||||
| Acquired properties owned for entirety of comparable periods (1) | — | — | — | 546 | ||||||||||||
| SF adjustments (2) | — | 10 | — | (152 | ) | |||||||||||
| Ending same property count | 390 | 41,456 | 394 | 41,312 |
| Nine months ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| (GLA in thousands) | Property Count | GLA | Property Count | GLA | ||||||||||||
| Beginning same property count | 393 | 41,294 | 393 | 40,228 | ||||||||||||
| Acquired properties owned for entirety of comparable periods presented (1) | — | 327 | 2 | 924 | ||||||||||||
| Developments that reached completion by the beginning of earliest comparable period presented | 1 | 72 | 6 | 683 | ||||||||||||
| Disposed properties | (4 | ) | (191 | ) | (7 | ) | (407 | ) | ||||||||
| SF adjustments (2) | — | (46 | ) | — | (116 | ) | ||||||||||
| Ending same property count | 390 | 41,456 | 394 | 41,312 |
(1)
Includes an adjustment to GLA arising from the acquisition of our partners' share of properties previously held in the RegCal and USAA partnerships, of which our previous ownership share was already included in our same property pool.
(2)
SF adjustments arising from remeasurements or redevelopments.
Nareit FFO and Core Operating Earnings:
Our reconciliation of net income attributable to common stock and unit holders to Nareit FFO and to Core Operating Earnings is as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| (in thousands, except share information) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Reconciliation of Net income to Nareit FFO | ||||||||||||||||
| Net income attributable to common stockholders | $ | 87,578 | 117,406 | $ | 387,602 | 293,552 | ||||||||||
| Adjustments to reconcile to Nareit FFO: (1) | ||||||||||||||||
| Depreciation and amortization (excluding FF&E) | 86,405 | 81,928 | 256,273 | 247,599 | ||||||||||||
| Provision for impairment of real estate | — | (505 | ) | — | 10,586 | |||||||||||
| Gain on sale of real estate, net of tax | (202 | ) | (6,737 | ) | (119,301 | ) | (38,584 | ) | ||||||||
| Exchangeable operating partnership units | 379 | 519 | 1,694 | 1,315 | ||||||||||||
| Nareit FFO attributable to common stock and unit holders | $ | 174,160 | 192,611 | $ | 526,268 | 514,468 | ||||||||||
| Reconciliation of Nareit FFO to Core Operating Earnings | ||||||||||||||||
| Nareit Funds From Operations | $ | 174,160 | 192,611 | $ | 526,268 | 514,468 | ||||||||||
| Adjustments to reconcile to Core Operating Earnings (1): | ||||||||||||||||
| Early extinguishment of debt | — | — | 176 | — | ||||||||||||
| Promote income | — | (13,589 | ) | — | (13,589 | ) | ||||||||||
| Certain Non Cash Items | ||||||||||||||||
| Straight-line rent | (3,140 | ) | (4,004 | ) | (9,152 | ) | (10,294 | ) | ||||||||
| Uncollectible straight-line rent | (4,156 | ) | (4,376 | ) | (9,610 | ) | 159 | |||||||||
| Above/below market rent amortization, net | (5,191 | ) | (6,390 | ) | (15,906 | ) | (18,098 | ) | ||||||||
| Debt premium/discount amortization | (28 | ) | (368 | ) | (185 | ) | (460 | ) | ||||||||
| Core Operating Earnings | $ | 161,645 | 163,884 | $ | 491,591 | 472,186 |
(1)
Includes Regency's Pro-rata share of unconsolidated investment partnerships, net of Pro-rata share attributable to noncontrolling interest.
Same Property NOI Reconciliation:
Our reconciliation of Net income attributable to common stockholders to Same Property NOI, on a Pro-rata basis, is as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Net income attributable to common stockholders | $ | 87,578 | 117,406 | $ | 387,602 | 293,552 | ||||||||||
| Less: | ||||||||||||||||
| Management, transaction, and other fees | 5,767 | 19,671 | 18,950 | 33,419 | ||||||||||||
| Other (1) | 13,564 | 15,125 | 38,295 | 31,184 | ||||||||||||
| Plus: | ||||||||||||||||
| Depreciation and amortization | 80,270 | 75,459 | 237,462 | 226,935 | ||||||||||||
| General and administrative | 20,273 | 17,789 | 56,710 | 58,263 | ||||||||||||
| Other operating expense | 949 | 812 | 3,739 | 2,687 | ||||||||||||
| Other expense (income) | 37,356 | 29,463 | 12,516 | 67,383 | ||||||||||||
| Equity in income of investments in real estate excluded from NOI (2) | 11,754 | 11,023 | 23,767 | 49,267 | ||||||||||||
| Net income attributable to noncontrolling interests | 1,269 | 1,442 | 4,048 | 3,753 | ||||||||||||
| Pro-rata NOI | $ | 220,118 | 218,598 | $ | 668,599 | 637,237 | ||||||||||
| Less non-same property NOI (3) | 3,789 | 232 | 12,768 | (3,424 | ) | |||||||||||
| Pro-rata same property NOI | $ | 216,329 | 218,366 | $ | 655,831 | 640,661 |
(1)
Includes straight-line rental income and expense, net of reserves, above and below market rent amortization, other fees, and noncontrolling interest.
(2)
Includes non-NOI income earned and expenses incurred at our unconsolidated real estate partnerships, including those separated out above for our consolidated properties.
(3)
Includes revenues and expenses attributable to non-same property, sold property, development property, and corporate activities. Also includes adjustments for earnings at the four and seven properties we acquired from our former unconsolidated RegCal and USAA partnerships in 2022 and 2021, respectively, in order to calculate growth on a comparable basis for the periods presented.
Liquidity and Capital Resources
General
We use cash flows generated from operating, investing, and financing activities to strengthen our balance sheet, finance our development and redevelopment projects, fund our investment activities, and maintain financial flexibility. A significant portion of our cash from operations is distributed to our common shareholders in the form of dividends in order to maintain our status as a REIT.
Except for $200 million of private placement debt, our Parent Company has no capital commitments other than its guarantees of the commitments of our Operating Partnership. All remaining debt is held by our Operating Partnership or by our co-investment partnerships. The Operating Partnership is a co-issuer and a guarantor of the $200 million of outstanding debt of our Parent Company. The Parent Company will from time to time access the capital markets for the purpose of issuing new equity and will simultaneously contribute all of the offering proceeds to the Operating Partnership in exchange for additional partnership units.
We continually assess our available liquidity and our expected cash requirements, which includes monitoring our tenant rent collections. We draw on multiple financing sources to fund our long-term capital needs, including the capital requirements of our in process and planned developments, redevelopments, and capital expenditures, and the repayment of debt. We expect to meet these needs by using a combination of the following: cash flow from operations after funding our dividend, borrowings from our Line, proceeds from the sale of real estate, mortgage loan and unsecured bank financing, distributions received from our co-investment partnerships, and when the capital markets are favorable, proceeds from the sale of equity or the issuance of new unsecured debt. We continually evaluate alternative financing options, and we believe we can obtain new financing on reasonable terms, although likely at higher interest rates than that of our debt currently outstanding.
We have no unsecured debt maturities in 2023, $250 million of unsecured debt maturing in 2024, and a manageable level of secured mortgage maturities during the next 12 months, including those mortgages within our real estate partnerships. Based upon our available cash balance, sources of capital, our current credit ratings, and the number of high quality, unencumbered properties we own, we believe our available capital resources are sufficient to meet our expected capital needs for the next year.
In addition to our $151.2 million of unrestricted cash, we have the following additional sources of capital available:
| (in thousands) | September 30, 2022 | ||
| ATM equity program | |||
| Original offering amount | $ | 500,000 | |
| Available capacity | $ | 350,363 | |
| Line of Credit | |||
| Total commitment amount | $ | 1,250,000 | |
| Available capacity (1) | $ | 1,240,619 | |
| Maturity (2) | March 23, 2025 |
(1)
Net of letters of credit.
(2)
The Company has the option to extend the maturity for two additional six-month periods.
The declaration of dividends is determined quarterly by our Board of Directors. On November 2, 2022, our Board of Directors declared a common stock dividend of $0.65 per share, payable on January 4, 2023, to shareholders of record as of December 16, 2022. While future dividends will be determined at the discretion of our Board of Directors, we plan to continue paying an aggregate amount of distributions to our stock and unit holders that, at a minimum, meet the requirements to continue qualifying as a REIT for federal income tax purposes. We have historically generated sufficient cash flow from operations to fund our dividend distributions. During the nine months ended September 30, 2022 and 2021, we generated cash flow from operations of $528.2 million and $508.5 million, respectively, and paid $322.9 million and $303.3 million in dividends to our common stock and unit holders, respectively.
We currently have development and redevelopment projects in various stages of construction, along with a pipeline of potential projects for future development or redevelopment. After funding our common stock dividend payment in October 2022, we estimate that we will require capital during the next twelve months of approximately $361.8 million related to leasing, tenant improvements, in-process developments and redevelopments, capital contributions to our co-investment partnerships, and repaying maturing debt. These capital requirements are being impacted by current levels of high inflation resulting in increased costs of construction materials, labor, and services from third party contractors and suppliers. In response, we have implemented mitigation strategies such as entering into fixed cost construction contracts, pre-ordering materials, and other planning efforts. Further, continued challenges from labor shortages and supply chain disruptions may extend the time to completion of these projects.
If we start new developments or redevelopments, commit to property acquisitions, repay debt prior to maturity, declare future dividends, or repurchase shares of our common stock, our cash requirements will increase. If we refinance maturing debt, our cash requirements will decrease. We expect to generate the necessary cash to fund our long-term capital needs from cash flow from operations, borrowings from our Line, proceeds from the sale of real estate, mortgage loan and unsecured bank financing, and when the capital markets are favorable, proceeds from the sale of equity or the issuance of new unsecured debt.
We endeavor to maintain a high percentage of unencumbered assets. As of September 30, 2022, 89.4% of our wholly-owned real estate assets were unencumbered. Such assets allow us to access the secured and unsecured debt markets and to maintain availability on the Line. Our trailing twelve month Fixed charge coverage ratio, including our Pro-rata share of our partnerships, was 4.6x and 4.5x for the periods ended September 30, 2022, and December 31, 2021, respectively, and our Pro-rata net debt-to-operating EBITDAre ratio on a trailing twelve month basis was 5.0x and 5.1x, respectively, for the same periods.
Our Line and unsecured loans require that we remain in compliance with various covenants, which are described in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. We are in compliance with all covenants at September 30, 2022, and expect to remain in compliance. Please also refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2021, including, without limitation, the Risk Factors discussed in Item 1A of Part I thereof, and the Risk Factors described in Part II, Item 1A of this Form 10-Q.
Summary of Cash Flow Activity
The following table summarizes net cash flows related to operating, investing, and financing activities of the Company:
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Net cash provided by operating activities | $ | 528,242 | 508,478 | 19,764 | ||||||||
| Net cash used in investing activities | (111,867 | ) | (1,571 | ) | (110,296 | ) | ||||||
| Net cash used in financing activities | (356,418 | ) | (522,672 | ) | 166,254 | |||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 59,957 | (15,765 | ) | 75,722 | |||||||
| Total cash and cash equivalents and restricted cash | $ | 154,984 | 362,685 | (207,701 | ) |
Net cash provided by operating activities:
Net cash provided by operating activities increased $19.8 million due to:
$26.3 million increase in cash from operations due to timing of receipts and payments, and
$2.5 million increase driven by cash used in 2021 to settle interest rate swaps on our term loan which was repaid in January 2021, partially offset by,
$9.0 million decrease in operating cash flow distributions from Investments in real estate partnerships.
Net cash used in investing activities:
Net cash (used in) provided by investing activities changed by $110.3 million as follows:
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Acquisition of operating real estate, net of cash acquired of $3,061 in 2022 and $2,991 in 2021 | $ | (141,275 | ) | (78,111 | ) | (63,164 | ) | |||||
| Real estate development and capital improvements | (143,724 | ) | (120,827 | ) | (22,897 | ) | ||||||
| Proceeds from sale of real estate | 137,280 | 131,861 | 5,419 | |||||||||
| Issuance of notes receivable | — | (20 | ) | 20 | ||||||||
| Investments in real estate partnerships | (13,573 | ) | (21,788 | ) | 8,215 | |||||||
| Return of capital from investments in real estate partnerships | 48,473 | 86,449 | (37,976 | ) | ||||||||
| Dividends on investment securities | 336 | 125 | 211 | |||||||||
| Acquisition of investment securities | (15,205 | ) | (22,422 | ) | 7,217 | |||||||
| Proceeds from sale of investment securities | 15,821 | 23,162 | (7,341 | ) | ||||||||
| Net cash used in investing activities | $ | (111,867 | ) | (1,571 | ) | (110,296 | ) |
Significant changes in investing activities include:
We paid $141.3 million to purchase six operating properties in 2022, including four properties in which we previously held a 25% interest through an unconsolidated Investment in real estate partnership. We paid $78.1 million, net of cash acquired, to purchase seven operating properties during 2021, of which we previously held a 20% interest through an unconsolidated Investment in real estate partnership.
We invested $22.9 million more in 2022 than the same period in 2021 on real estate development, redevelopment, and capital improvements, as further detailed in a table below.
We sold one operating property, three land parcels, and one development project interest in 2022 and received proceeds of $137.3 million compared to six operating properties, three land parcels, and a portion of an operating property in 2021 for proceeds of $131.9 million.
We invested $13.6 million in our real estate partnerships during 2022, including:
o
$6.1 million to fund our share of acquiring one operating property within an existing co-investment partnership, and
o
$7.5 million to fund our share of development and redevelopment activities.
During the same period in 2021, we invested $21.8 million, including:
o
$18.7 million to fund our share of debt repayments, and
o
$3.1 million to fund our share of development and redevelopment activities.
Return of capital from our unconsolidated real estate partnerships includes sales or financing proceeds. During the nine months ended September 30, 2022 we received $36.9 million from our share of proceeds from real estate sales and $11.6 million from our share of proceeds from debt refinancing activities. During the same period in 2021, we received $58.3 million from our share of proceeds from real estate sales and $28.1 million from our share of debt refinancing activities.
Acquisition of securities and proceeds from sale of securities pertain to investment activities held in our captive insurance company and our deferred compensation plan.
We plan to continue developing and redeveloping shopping centers for long-term investment. During 2022, we deployed capital of $143.7 million for the development, redevelopment, and improvement of our real estate properties, comprised of the following:
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Capital expenditures: | ||||||||||||
| Land acquisitions | $ | 11,545 | — | 11,545 | ||||||||
| Building and tenant improvements | 55,094 | 34,030 | 21,064 | |||||||||
| Redevelopment costs | 48,641 | 61,176 | (12,535 | ) | ||||||||
| Development costs | 20,252 | 14,897 | 5,355 | |||||||||
| Capitalized interest | 2,922 | 2,963 | (41 | ) | ||||||||
| Capitalized direct compensation | 5,270 | 7,761 | (2,491 | ) | ||||||||
| Real estate development and capital improvements | $ | 143,724 | 120,827 | 22,897 |
We acquired one land parcel for development in 2022.
Building and tenant improvements increased $21.1 million in 2022, primarily related to the timing of capital projects.
Redevelopment expenditures are lower in 2022 due to the timing and magnitude of projects currently in process. We intend to continuously improve our portfolio of shopping centers through redevelopment which can include adjacent land acquisition, existing building expansion, facade renovation, new out-parcel building construction, and redevelopment related tenant improvement costs. The size and magnitude of each redevelopment project varies with each redevelopment plan. The timing and duration of these projects could also result in volatility in NOI. See the tables below for more details about our redevelopment projects.
Development expenditures are higher in 2022 due to the progress towards completion of our development projects currently in process. See the tables below for more details about our development projects.
Interest is capitalized on our development and redevelopment projects and is based on cumulative actual costs expended. We cease interest capitalization when the property is no longer being developed or is available for occupancy upon substantial completion of tenant improvements, but in no event would we capitalize interest on the project beyond 12 months after the anchor opens for business. If we reduce our development and redevelopment activity, the amount of interest that we capitalize may be lower than historical averages.
We have a staff of employees who directly support our development program, which includes redevelopment of our existing properties. Internal compensation costs directly attributable to these activities are capitalized as part of each project.
The following table summarizes our development projects in process:
| (in thousands, except cost PSF) | September 30, 2022 | |||||||||||||||||||||||
| Property Name | Market | Ownership | Start Date | Estimated Stabilization Year (1) | Estimated Net Development Costs (2) (3) | GLA (3) | % of Costs Incurred | Cost PSF of GLA (2) (3) | ||||||||||||||||
| Developments In-Process | ||||||||||||||||||||||||
| Carytown Exchange - Phase I & II | Richmond, VA | 64% | Q4-18 | 2024 | $ | 29,268 | 74 | 86 | % | $ | 396 | |||||||||||||
| East San Marco | Jacksonville, FL | 100% | Q4-20 | 2023 | 19,085 | 59 | 85 | % | 323 | |||||||||||||||
| Glenwood Green | Old Bridge, NJ | 70% | Q1-22 | 2025 | 45,530 | 249 | 34 | % | 183 | |||||||||||||||
| Eastfield at Baybrook | Houston, TX | 50% | Q2-22 | 2025 | 10,384 | 25 | 19 | % | 415 |
(1)
Estimated Stabilization Year represents the estimated first full calendar year that the project will reach our expected stabilized yield.
(2)
Includes leasing costs and is net of tenant reimbursements.
(3)
Estimated Net Development Costs and GLA reported based on Regency's ownership interest in the partnership at completion.
The following table summarizes our redevelopment projects in process and completed:
| (in thousands, except cost PSF) | September 30, 2022 | |||||||||||||||||||
| Property Name | Market | Ownership | Start Date | Estimated Stabilization Year (1) | Estimated Net Project Costs (2) (3) | GLA (3) | % of Costs Incurred | |||||||||||||
| Redevelopments In-Process | ||||||||||||||||||||
| The Crossing Clarendon | Metro DC | 100% | Q4-18 | 2024 | $ | 56,950 | 129 | 68 | % | |||||||||||
| The Abbot | Boston, MA | 100% | Q2-19 | 2024 | 58,379 | 64 | 84 | % | ||||||||||||
| Preston Oaks | Dallas, TX | 100% | Q4-20 | 2023 | 20,216 | 103 | 82 | % | ||||||||||||
| Serramonte Center | San Francisco, CA | 100% | Q4-20 | 2026 | 55,000 | 1,072 | 68 | % | ||||||||||||
| Westbard Square Phase I | Bethesda, MD | 100% | Q2-21 | 2025 | 37,269 | 123 | 36 | % | ||||||||||||
| Buckhead Landing | Atlanta, GA | 100% | Q2-22 | 2025 | 25,853 | 152 | 6 | % | ||||||||||||
| Various Redevelopments | Various | 20% - 100% | Various | Various | 40,432 | 2,385 | 29 | % | ||||||||||||
| Redevelopments Completed | ||||||||||||||||||||
| Sheridan Plaza | Hollywood, FL | 100% | Q3-19 | 2023 | $ | 11,915 | 507 | 95 | % | |||||||||||
| Various Properties | Various | 100% | Various | Various | 8,916 | 243 | 94 | % |
(1)
Estimated Stabilization Year represents the estimated first full calendar year that the project will reach our expected stabilized yield.
(2)
Includes leasing costs and is net of tenant reimbursements.
(3)
Estimated Net Development Costs and GLA reported based on Regency's ownership interest in the partnership at completion.
Net cash used in financing activities:
Net cash flows from financing activities changed by $166.3 million during 2022, as follows:
| Nine months ended September 30, | ||||||||||||
| (in thousands) | 2022 | 2021 | Change | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Net proceeds from common stock issuances | $ | 61,284 | 82,510 | (21,226 | ) | |||||||
| Repurchase of common shares in conjunction with equity award plans | (6,438 | ) | (4,066 | ) | (2,372 | ) | ||||||
| Common shares repurchased through share repurchase program | (75,419 | ) | — | (75,419 | ) | |||||||
| Contributions from (distributions to) limited partners in consolidated partnerships, net | 1,568 | (3,272 | ) | 4,840 | ||||||||
| Dividend payments and operating partnership distributions | (322,897 | ) | (303,260 | ) | (19,637 | ) | ||||||
| Repayment of unsecured credit facilities, net | — | (265,000 | ) | 265,000 | ||||||||
| Debt repayment, including early redemption costs | (14,498 | ) | (22,212 | ) | 7,714 | |||||||
| Payment of loan costs | (82 | ) | (7,468 | ) | 7,386 | |||||||
| Proceeds from sale of treasury stock, net | 64 | 96 | (32 | ) | ||||||||
| Net cash used in financing activities | $ | (356,418 | ) | (522,672 | ) | 166,254 |
Significant financing activities during the nine months ended September 30, 2022 and 2021, include the following:
We received proceeds of $61.3 million, net of issue costs, in April 2022 upon settling our forward equity sales under our ATM program. During 2021, we received proceeds of $82.5 million, net of issue costs, upon partially settling our forward equity sales under our ATM program.
We repurchased for cash a portion of the common stock granted to employees for stock based compensation to satisfy employee tax withholding requirements, which totaled $6.4 million and $4.1 million during 2022 and 2021, respectively.
We paid $75.4 million to repurchase 1,294,201 common shares through our Authorized Repurchase Program during 2022.
We received $1.6 million, net from limited partners, including $6.5 million of contributions from limited partners in new consolidated Investments in real estate partnerships offset by $4.9 million in distributions to limited partners during 2022. During 2021, we paid $3.3 million in distributions to limited partners.
We paid $19.6 million more in dividends as a result of an increase in our dividend rate per share and the number of shares of our common stock outstanding.
We had the following debt related activity during 2022:
o
$8.5 million in principal mortgage payments, and
o
$6.0 million to repay a mortgage loan at maturity.
We had the following debt related activity during 2021:
o
We paid $287.2 million for debt repayments, including:
▪
$265 million to repay our outstanding term loan,
▪
$13.8 million to repay mortgage loans at maturity, and
▪
$8.4 million in principal mortgage payments.
o
We paid $7.5 million of loan costs in connection with the renewal of our Line in 2021.
Investments in Real Estate Partnerships
The following table is a summary of the unconsolidated combined assets and liabilities of our co-investment partnerships and our Pro-rata share:
| Combined | Regency's Share (1) | |||||||||||||||
| (dollars in thousands) | September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | ||||||||||||
| Number of Co-investment Partnerships | 13 | 15 | ||||||||||||||
| Regency's Ownership | 20% - 50% | 20% - 50% | ||||||||||||||
| Number of Properties | 96 | 103 | ||||||||||||||
| Assets | $ | 2,616,444 | 2,755,444 | $ | 946,269 | 992,060 | ||||||||||
| Liabilities | 1,547,843 | 1,555,942 | 550,967 | 553,550 | ||||||||||||
| Equity | 1,068,601 | 1,199,502 | 395,302 | 438,510 | ||||||||||||
| Basis difference | (63,054 | ) | (65,919 | ) | ||||||||||||
| Investments in real estate partnerships | $ | 332,248 | 372,591 |
(1)
Pro-rata financial information is not, and is not intended to be, a presentation in accordance with GAAP. However, management believes that providing such information is useful to investors in assessing the impact of its investments in real estate partnership activities on our operations, which includes such items on a single line presentation under the equity method in our consolidated financial statements.
Our equity method investments in real estate partnerships consist of the following:
| (in thousands) | Regency's Ownership | September 30, 2022 | December 31, 2021 | |||||||
| GRI-Regency, LLC (GRIR) | 40.00% | $ | 137,535 | 153,125 | ||||||
| New York Common Retirement Fund (NYC) (1) | 30.00% | 827 | 11,688 | |||||||
| Columbia Regency Retail Partners, LLC (Columbia I) | 20.00% | 7,406 | 7,360 | |||||||
| Columbia Regency Partners II, LLC (Columbia II) | 20.00% | 42,094 | 35,251 | |||||||
| Columbia Village District, LLC | 30.00% | 5,770 | 5,554 | |||||||
| RegCal, LLC (RegCal) (2) | 25.00% | 5,802 | 24,995 | |||||||
| Individual Investors | ||||||||||
| Ballard Blocks | 49.90% | 62,883 | 63,783 | |||||||
| Town & Country Center | 35.00% | 39,343 | 39,021 | |||||||
| Others | 50.00% | 30,588 | 31,814 | |||||||
| Total Investment in real estate partnerships | $ | 332,248 | 372,591 |
(1)
On May 25, 2022, the NYC partnership sold the remaining two properties and distributed sales proceeds to the members. Dissolution will follow final distributions, which are expected in 2023.
(2)
During April 2022, we acquired our partner's 75% share in four properties held in the RegCal, LLC partnership for a total purchase price of $88.5 million. Upon acquisition, these four properties were consolidated into Regency's financial statements. A single operating property remains within RegCal, LLC at September 30, 2022.
Notes Payable - Investments in Real Estate Partnerships
Scheduled principal repayments on notes payable held by our investments in real estate partnerships were as follows:
| (in thousands) | September 30, 2022 | |||||||||||||||||||
| Scheduled Principal Payments and Maturities by Year: | Scheduled Principal Payments | Mortgage Loan Maturities | Unsecured Maturities | Total | Regency’s Pro-Rata Share | |||||||||||||||
| 2022 (1) | $ | 1,629 | 64,843 | — | 66,472 | 23,666 | ||||||||||||||
| 2023 | 3,194 | 216,931 | — | 220,125 | 83,325 | |||||||||||||||
| 2024 | 2,205 | 33,690 | — | 35,895 | 14,298 | |||||||||||||||
| 2025 | 3,433 | 137,000 | — | 140,433 | 42,567 | |||||||||||||||
| 2026 | 3,807 | 125,255 | 7,300 | 136,362 | 43,671 | |||||||||||||||
| Beyond 5 Years | 12,995 | 842,450 | — | 855,445 | 312,925 | |||||||||||||||
| Net unamortized loan costs, debt premium / (discount) | — | (9,768 | ) | — | (9,768 | ) | (3,373 | ) | ||||||||||||
| Total | $ | 27,263 | 1,410,401 | 7,300 | 1,444,964 | 517,079 |
(1)
Reflects scheduled principal payments for the remainder of the year.
At September 30, 2022, our investments in real estate partnerships had notes payable of $1.4 billion maturing through 2034, of which 93.2% had a weighted average fixed interest rate of 3.5%. The remaining notes payable float with LIBOR or SOFR and had a weighted average variable interest rate of 4.7%. These fixed and variable rate notes payable are all non-recourse, and our Pro-rata share was $517.1 million as of September 30, 2022. As notes payable mature, we expect they will be repaid from proceeds from new
borrowings and/or partner capital contributions. Refinancing debt at maturity in the current interest rate environment could result in higher interest expense in future periods if rates remain elevated.
We believe that our partners are financially sound and have sufficient capital or access thereto to fund future capital requirements. In the event that a co-investment partner was unable to fund its share of the capital requirements of the co-investment partnership, we would have the right, but not the obligation, to loan the defaulting partner the amount of its capital call.
Management fee income
In addition to earning our Pro-rata share of net income or loss in each of these co-investment partnerships, we receive fees, as shown below:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Asset management, property management, leasing, and other transaction fees | $ | 5,767 | 19,662 | (1) | $ | 18,950 | 33,392 | (1) |
(1)
In connection with the USAA partnership, we received and recognized a one-time promote fee of $13.6 million during the three months ended September 30, 2021, in consideration for exceeding return thresholds resulting from our performance as managing member.
Recent Accounting Pronouncements
See Note 1 to Unaudited Financial Statements.
Environmental Matters
We are subject to numerous environmental laws and regulations as they apply to our shopping centers pertaining primarily to specific chemicals historically used by certain current and former dry cleaning and gas station tenants and the existence of asbestos in older shopping centers. We believe that the few tenants who currently operate dry cleaning plants or gas stations do so in accordance with current laws and regulations. Generally, we endeavor to require tenants to remove dry cleaning plants from our shopping centers or convert them to more environmentally friendly systems, in accordance with the terms of our leases. We carry an environmental insurance policy for certain third-party liabilities and remediation costs on shopping centers that currently have no known environmental contamination. We have also secured environmental insurance policies, where appropriate, on a relatively small number of specific properties with known contamination, in order to mitigate our environmental risk. We monitor the shopping centers containing environmental issues and in certain cases voluntarily remediate the sites. We also have legal obligations to remediate certain sites and we are in the process of doing so.
As of September 30, 2022, we had accrued liabilities of $10.7 million for our Pro-rata share of environmental remediation, including our Investments in real estate partnerships. We believe that the ultimate remediation of currently known environmental matters will not have a material effect on our financial position, liquidity, or results of operations. We can give no assurance that existing environmental studies on our shopping centers have revealed all potential environmental contamination; that our estimate of liabilities will not change as more information becomes available; 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We continuously monitor the capital markets and evaluate our ability to issue new debt, to repay maturing debt, or fund our commitments. We continue to believe, in light of our credit ratings, the available capacity under our unsecured credit facility, and the number of high quality, unencumbered properties that we own which could collateralize borrowings, we will be able to successfully issue new secured or unsecured debt to fund maturing debt obligations. It is uncertain the degree to which capital market volatility and rising interest rates will adversely impact the interest rates on any new debt that we may issue, which will impact future interest costs. Please also refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2021, including, without limitation, the Risk Factors discussed in Item 1A of Part I thereof, and the Risk Factors described in Part II, Item 1A of this Form 10-Q.
Item 4. Controls and Procedures
Controls and Procedures (Regency Centers Corporation)
Under the supervision and with the participation of the Parent Company's management, including its chief executive officer and chief financial officer, the Parent Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, the Parent Company's chief executive officer and chief financial officer concluded that its disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Parent Company in the reports it files or submits is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Parent Company's internal controls over financial reporting identified in connection with this evaluation that occurred during the third quarter of 2022 which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Controls and Procedures (Regency Centers, L.P.)
Under the supervision and with the participation of the Operating Partnership's management, including the chief executive officer and chief financial officer of its general partner, the Operating Partnership conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based on this evaluation, the chief executive officer and chief financial officer of its general partner concluded that its disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Operating Partnership in the reports it files or submits is accumulated and communicated to management, including the chief executive officer and chief financial officer of its general partner, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Operating Partnership's internal controls over financial reporting identified in connection with this evaluation that occurred during the third quarter of 2022 which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to various legal proceedings that arise in the ordinary course of our business. We are not currently involved in any litigation, nor to our knowledge, is any litigation threatened against us, the outcome of which would, in our judgment based on information currently available to us, have a material adverse effect on our financial position or results of operations. However, no assurances can be given as to the outcome of any threatened or pending legal proceedings.
Item 1A. Risk Factors
Please also refer to the discussion of the potential risks of inflation and rising interest rates on the Company and its tenants due to the challenges in the current macroenvironment and recent global events under note 1 in Item 1. Financial Statements and Item 2. Management's Discussion and Analysis for Financial Condition and Results of Operations, including but not limited to "Risks and Uncertainties."
Potential Impacts of Rising Interest Rates on Borrowing, Real Estate Valuation, and Stock Price
Primarily in response to concerns about inflation, during 2022 the Board of Governors of the Federal Reserve System ("the U.S. Federal Reserve") significantly raised its benchmark federal funds rate, which has led to increases in interest rates in the credit markets. The U.S. Federal Reserve may continue to raise the federal funds rate, which will likely lead to higher interest rates in the credit markets and the possibility of slowing economic growth and/or a recession. Additionally, U.S. government policies implemented to address inflation, including actions by the U.S. Federal Reserve to increase interest rates, could negatively impact consumer spending, our tenants' businesses, and/or future demand for space in our shopping centers.
Rising interest rates would adversely impact our cost of borrowing. Our exposure to increases in interest rates in the short term includes our variable-rate borrowings, which consist of borrowings under our unsecured senior line of credit and variable rate based secured notes payable. Increases in interest rates could increase our financing costs over time, either through near-term borrowings on our floating-rate line of credit or refinancing of our existing borrowings that may incur higher interest expenses related to the issuance of new debt. Historically, during periods of increasing interest rates, real estate valuations have generally decreased due to rising capitalization rates, which tend to move directionally with interest rates. Consequently, prolonged periods of higher interest rates may negatively impact the valuation of our real estate asset portfolio and could result in the decline of our stock price and market capitalization which may adversely impact our ability and willingness to raise equity capital on favorable terms through sales of our common shares, including through our ATM program.
Although the extent of any prolonged periods of higher interest rates remains unknown at this time, negative impacts to our cost of capital may adversely affect our future business plans and growth, at least in the near term.
Potential Impact of Current Economic Challenges on our Tenants and our Business
The success of our tenants in operating their businesses and their corresponding ability to pay us rent continue to be significantly impacted by many current economic challenges, which impact their cost of doing business, including, but not limited to, inflation, labor shortages, supply chain constraints and increasing energy prices and interest rates. Additionally, macroeconomic and geopolitical risks create challenges that may exacerbate current market conditions in the United States.
These economic conditions could adversely impact our volume of leasing activity, leasing spreads, and financial results generally, as well as negatively affect the business and financial results of our tenants. The aggregate impacts of these current economic challenges may also negatively affect the overall market for retail space, resulting in decreased demand for space in our centers. This, in turn, could result in pricing pressure on rents that we are able to charge to new or renewing tenants, such that future rent spreads could be adversely impacted. Further, we may experience higher costs for tenant buildouts, as costs of materials and labor may increase and supply and availability of both may become more limited.
Other than these matters, there have been no material developments from the risk factors disclosed in item 1A. of Part I of our Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the three months ended September 30, 2022.
The following table represents information with respect to purchases by the Parent Company of its common stock, by month, during the three months ended September 30, 2022.
| Period | Total number of shares purchased (1) | Average price paid per share (1) | Total number of shares purchased as part of publicly announced plans or programs (2) | Maximum number or approximate dollar value of shares that may yet be purchased under the plans or programs (2) | ||||||||||||
| July 1 through July 31, 2022 | — | $ | — | — | $ | 174,607,162 | ||||||||||
| August 1 through August 31, 2022 | 327 | $ | 66.30 | — | $ | 174,607,162 | ||||||||||
| September 1 through September 30, 2022 | 453 | $ | 61.75 | — | $ | 174,607,162 |
(1)
Represents shares repurchased to cover payment of withholding taxes in connection with restricted stock vesting by participants under Regency’s Long-Term Omnibus Plan.
(2)
On February 3, 2021, the Company's Board authorized a common share repurchase program under which the Company may purchase, from time to time, up to a maximum of $250 million of shares of its outstanding common stock through open market purchases and/or in privately negotiated transactions. Any shares purchased will be retired. This program expires by its terms on February 3, 2023. The timing and actual number of shares purchased under the program depend upon marketplace conditions and other factors. The authorization remains subject to the discretion of the Board. Through September 30, 2022, 1.3 million shares have been repurchased and retired under this program. Under the existing board authorization, $174.6 million remained available for repurchase.
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