Regency Centers (REG) Up 10.4% in 6 Months: Will the Trend Last?
Shares of Regency Centers Corporation REG have gained 10.4% in the past six months compared with the industry's growth of 6.5%.
The Jacksonville, FL-based retail real estate investment trust, which focuses on building a high-quality portfolio of grocery-anchored shopping centers, has benefited from the robust demand for retail real estate over the past few quarters as retailers continue to rent more physical store space to meet this demand.
Earlier this month, the Zacks Rank #3 (Hold) company posted solid third-quarter 2023 results. It reported NAREIT funds from operations (FFO) per share of $1.02, surpassing both the Zacks Consensus Estimate and the prior-year quarter’s figure of $1.01. The performance was backed by healthy leasing activity and a year-over-year improvement in the base rent.
For 2023, management revised its NAREIT FFO per share guidance to the range of $4.13-$4.15 from $4.11-$4.15 estimated earlier. The Zacks Consensus Estimate is presently pegged at $4.15, within expectations.
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Let us now decipher the factors behind the surge in the stock price and check whether this trend will last.
Regency’s high-quality open-air shopping centers are situated in affluent suburban areas and near the urban trade areas where consumers have high spending power. With the continuation of the post-pandemic migration trend and the hybrid work setup, demand for Regency’s suburban shopping center portfolio remains robust, aiding leasing activity and occupancy levels.
In the nine months ended Sep 30, 2023, Regency executed 1,310 new and renewal leases representing 4.8 million of pro-rata square feet with positive rent spreads of 9.2%. The same-property portfolio was 95.4% leased as of Sep 30, 2023, reflecting an expansion of 20 basis points (bps) sequentially and 70 bps year over year.
The retail REIT’s focus on necessity, service, convenience and value retailers serving the essential needs of the communities provides it with an unequaled strategic advantage. Its portfolio comprises more than 80% of the grocery-anchored neighborhood and community centers, which are necessity-driven by nature. This ensures dependable traffic and allows the company to bank on its grocery centers during uncertain times.
Also, the company enjoys a good tenant mix with several industry-leading grocers, assuring stable revenues for the company. As of Sep 30, 2023, grocery tenants accounted for 20% of its annual base rent.
The company continues to make concerted efforts to improve its portfolio quality and enhance its market presence via strategic acquisitions and developments in key markets of the United States.
In August 2023, it closed the buyout of Urstadt Biddle Properties Inc. in an all-stock transaction. This created a combined company with a total equity market capitalization of more than $11 billion and an enterprise value of more than $16 billion.
With the combined portfolio comprising 480 properties and encompassing more than 56 million square feet of gross leasable area, the move enhances Regency's geographic diversification, tenant mix, growth prospects and balance sheet strength. The acquisition was said to be immediately accretive to its core operating earnings.
Moreover, Regency has an encouraging development pipeline which augurs well for its long-term growth. As of Sep 30, 2023, the company’s in-process development and redevelopment projects estimated net project costs of around $440 million at the company’s share. Management anticipates incurring $130 million of development and redevelopment spend for 2023.
On the balance sheet front, Regency had around $1.2 billion of immediate liquidity as of Sep 30, 2023. Its pro-rata net debt-to-operating EBITDAre ratio was 5.5 while the fixed charge coverage ratio was 4.7 as of the same date. It has no unsecured debt maturities until June 2024.
Also, its investment grade credit ratings of BBB+ (Stable Outlook) and Baa1 (Positive Outlook) S&P Global and Moody's, respectively, render it favorable access to the debt market. The company’s strong financial footing is likely to support its growth endeavors going forward.
In addition, REG’s current cash flow growth is projected at 21.54% compared with the 14.92% estimated for the industry.
Solid dividend payouts are arguably the biggest enticement for REIT investors, and Regency remains committed to that. This month, concurrent with its third-quarter earnings release, the company’s announced a 3.1% sequential increase in its quarterly cash dividend payment on its common stock to 67 cents. Moreover, in the last five years, the retail REIT increased its dividend five times. Such efforts boost investors’ confidence in the stock. Check Regency Centers’ dividend history here.
Given its solid operating platform and decent financial position compared to that of the industry, we expect this dividend rate to be sustainable over the long run.
Nonetheless, rising e-commerce adoption and the efforts of online retailers to go deeper into the grocery business raise concerns for Regency Centers. Online retailing is likely to remain a popular choice among customers, negatively impacting the market share of brick-and-mortar stores. This may hurt the demand for the company’s properties and limit top-line growth.
Also, given a high interest rate environment, the company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side.
Stocks to Consider
Some better-ranked stocks from the retail REIT sector are TANGER INC SKT and Urban Edge Properties UE. While SKT sports a Zacks Rank #1 (Strong Buy), UE carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for TANGER INC’s current-year FFO per share has moved 1% northward over the past week to $1.94.
The Zacks Consensus Estimate for Urban Edge Properties’ ongoing year’s FFO per share has been raised 1.7% over the past two months to $1.19.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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