Company Reports

First-quarter results for Regency Centers were mixed compared with our expectations, though we didn't see anything that would materially change our $74 fair value estimate for the no-moat company. Same-store occupancy improved 20 basis points sequentially to 95.8%, better than our estimate of a 40-basis-point sequential decline. Re-leasing spreads were solid at 8.5% in the first quarter, in line with the company's average over the past 10 quarters but slightly below our estimate of new rents being 10.5% than prior rental terms. While base rent grew a solid 2.7% in the first quarter, base rent growth has been decelerating since the fourth quarter of 2022. Same-store revenue was only up 1.4% in the quarter in part due to lower lease termination fees, which we view as a positive for the company, and higher uncollectible lease income deductions, which we view as a negative. Combined with same-store operating expenses growing 4.8%, Regency reported flat growth for same-store net operating income in the first quarter, below our estimate of 3.8% growth. However, when termination income and the collection of previously owed rent are excluded, same-store NOI grew 2.1% in the quarter. Additionally, non-same-store NOI was higher than we anticipated, and interest expenses were lower than our estimate, leading to Regency reporting core funds from operations of $1.04 per share that beat our estimate of $1.01 for the first quarter.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Regency Centers is the largest shopping center REIT, with 482 properties spread across more than 20 major US metropolitan areas following the completion of the Urstadt Biddle acquisition in August 2023. Regency's portfolio is filled with high-quality assets located in population-dense, affluent markets. The company focuses on owning grocery-anchored centers, with over 80% of properties featuring a grocery anchor and grocery stores representing slightly more than 20% of annual base rent. Regency's grocery anchors are strong draws to the centers as they produce sales per square foot well above the national average and are very healthy with low occupancy costs. The rest of the portfolio contains a substantial number of service-oriented tenants that are naturally resistant to e-commerce pressures.

Regency Centers reported fourth-quarter results that were slightly below our estimates, but we don’t see anything in the quarter that would materially change our $76 fair value estimate for the no-moat company. Same-store occupancy improved 30 basis points sequentially to 94.7%, relatively in line with our 94.8% estimate. Re-leasing spreads were very strong at 11.7% in the fourth quarter, better than our estimate of new rents being 8.8% higher than expiring rents. As a result, base rent increased 3.2% and same-store revenue rose 3.6% in the quarter. However, same-store expense growth continues to accelerate and rose 10.2%, leading to same-store net income growth of just 0.8% that was slightly below our estimate of 1.5% growth. Regency reported core funds from operations, or FFO, of $0.99 per share for the fourth quarter, which was a penny below our $1.00 estimate.

Third-quarter results for Regency Centers were relatively in line with our expectations, leading us to reaffirm our $76 fair value estimate for the no-moat company. Same-store occupancy improved 20 basis points sequentially and 70 basis points year over year to 95.4%. Re-leasing spreads were strong with new rent terms 9.3% higher than expiring rent terms, relatively in line with our estimate of an 8.8% re-leasing spread for the third quarter. As a result, same-store revenue increased 3.3%. However, same-store operating expenses grew even faster at 5.9%, though that is down from the 7.6% growth reported in the second quarter. Therefore, Regency reported same-store net operating income growth of 2.9% in the third quarter that was slightly below our estimate of 3.3% growth. The company reported core funds from operations of $0.97 per share in the third quarter, which is a penny below our $0.98 estimate for the quarter but three cents better than the $0.94 figure the company reported in the third quarter of 2022.

Regency Centers is the largest shopping center REIT, with 480 properties spread across more than 20 major U.S. metropolitan areas following the completion of the Urstadt Biddle acquisition in August 2023. Regency's portfolio is filled with high-quality assets located in population-dense, affluent markets. The company focuses on owning grocery-anchored centers, with over 80% of properties featuring a grocery anchor and grocery stores representing slightly more than 20% of annual base rent. Regency's grocery anchors are strong draws to the centers as they produce sales per square foot well above the national average and are very healthy with low occupancy costs. The rest of the portfolio contains a substantial number of service-oriented tenants that are naturally resistant to e-commerce pressures.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Regency Centers reported second-quarter results that were in line with our expectations, leading us to reaffirm our $76 fair value estimate for the no-moat company. Same-store occupancy improved 10 basis points sequentially and 70 basis points year over year to 95.2%. Re-leasing spreads were 11.7% in the second quarter, well above our estimate of 8.1%, as rent on leases to new tenants was up 29.3% over prior rent terms. Same-store revenue increased 3.2%, though same-store operating expenses were up even higher with expense growth of 7.6% in the quarter. As a result, same-store net operating income grew just 1.3%, though that was slightly ahead of our 0.7% estimate. However, 2022 benefited from the collection of previously owed rent, so excluding termination fees and the collection of 2020 and 2021 rent reserves, same-store NOI increased 3.6%. Regency reported core funds from operations of $0.96 per share, in line with our estimate and $0.02 better than the $0.94 reported in the second quarter of 2022.

First-quarter results for Regency Centers were better than we anticipated, giving us confidence in our $76 fair value estimate for the no-moat company. Same-store occupancy remained flat sequentially and was up 80 basis points year over year at 95.1%. Re-leasing spreads were 5.5% in the first quarter, a little below our estimate of 8.1% higher rent over prior rent terms. Still, same-store revenues were up 3.8%, same-store operating expenses were up 4.1%, and same-store net operating income was up 3.7%. Excluding the impact of lease termination fees and excluding the impact of rent owed from 2020 and 2021 collected in 2022, same-store NOI was up 6.3%, which was better than our estimate of same-store NOI increasing 3.0%. Part of the reason same-store NOI growth was higher was that the company reported $7.7 million in percentage rent due to high tenant sales, well above our estimate of just $1.5 million percentage rent in the quarter. Regency reported core funds from operations of $1.03 per share in the first quarter, better than our $0.96 estimate largely due to the higher NOI growth.

Regency Centers is the largest shopping center REIT, with 404 properties spread across more than 20 major U.S. metropolitan areas. Regency's portfolio is filled with high-quality assets located in population-dense, affluent markets. The company focuses on owning grocery-anchored centers, with over 80% of properties featuring a grocery anchor and grocery stores representing slightly more than 20% of annual base rent. Regency's grocery anchors are strong draws to the centers as they produce sales per square foot well above the national average and are very healthy with low occupancy costs. The rest of the portfolio contains a substantial number of service-oriented tenants that are naturally resistant to e-commerce pressures.

Regency Centers reported fourth-quarter results that were ahead of our expectations, though we don’t see anything that would materially change our $76 fair value estimate for the no-moat company. Same-store occupancy increased 40 basis points sequentially and 80 basis points year over year to 95.1%, which was better than our 94.6% estimate. Re-leasing spreads remained strong at 7.2% in the fourth quarter, though that was slightly below our estimate of new rent improving 9.1% over prior terms. Same-store revenue increased 3.6% in the fourth quarter, while same-store operating expenses increased 3.0%, leading to same-store net operating income, or NOI, growth of 3.8% that beat our estimate of just 0.7%. Regency reported core funds from operations, or FFO, of $0.98 per share in the fourth quarter that was 3 cents higher than our $0.95 estimate and 6 cents higher than the $0.92 figure the company reported in the fourth quarter of 2021.

Regency Centers is the largest shopping center REIT, with 404 properties spread across more than 20 major U.S. metropolitan areas. Regency's portfolio is filled with high-quality assets located in population-dense, affluent markets. The company focuses on owning grocery-anchored centers, with over 80% of properties featuring a grocery anchor and grocery stores representing slightly more than 20% of annual base rent. Regency's grocery anchors are strong draws to the centers as they produce sales per square foot well above the national average and are very healthy with low occupancy costs. The rest of the portfolio contains a substantial number of service-oriented tenants that are naturally resistant to e-commerce pressures.

Third-quarter results for Regency Centers were in line with our estimates, leading us to reaffirm our $75 fair value estimate for the no-moat company. Same-store occupancy increased 20 basis points sequentially and 90 basis points year-over-year to 94.7%. Re-leasing spreads were relatively strong at 7.0% in the third quarter, though that was slightly below our estimate of 8.3% spreads. While same-store revenues were up just 0.7% in the third quarter, this includes the noncash impact of reducing reserves of uncollectible lease income back to straight-line rent. We think the same-store base rent growth of 3.9% is more representative of the improvement to Federal Realty's operations in the third quarter. Similarly, while same-store net operating income fell 0.9% year-over-year in the third quarter, removing the impact of lease termination fees and uncollectible lease income improves the same-store NOI figure to 2.6%, which is in line with our estimate of 2.2% growth. Regency reported core funds from operations of $0.94 in the third quarter, which was in line with our estimate and in line with the $0.94 figure reported in the second quarter of 2022.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Regency Centers reported second-quarter results that were mixed compared with our expectations, though we didn’t see anything in the quarter that would change our $75 fair value estimate for the no-moat company. Same-store occupancy improved 20 basis points sequentially to 94.5%, which was in line with our estimate. Re-leasing spreads were up 8.8%, better than our estimate of 6.1% re-leasing spreads, which led to base rent increasing 3.0% year over year in the second quarter. However, Regency reported revenue declines in tenant recoveries, percentage rent, and termination fees, which led to same-store revenue falling 0.4% in the quarter. However, we will note that falling termination fee income is a positive for the company in the long term and that falling tenant recoveries are directly tied to lower same-store operating expenses, which were down 1.3%. So, while same-store net operating income was flat year over year and missed our estimate of 7.5% growth, we think how Regency missed our numbers presents a long-term positive for the company. Regency also reported core funds from operations of $0.95 in the quarter that beat our $0.90, which is another positive for the company in the quarter.

Regency Centers reported first-quarter results that were ahead of our expectations, though we didn’t see anything in the quarter that would materially change our $75 fair value estimate for the no-moat company. Same-store occupancy remained at 94.3%, slightly better than our estimate of a 40-basis-point decline. Blended re-leasing spreads were 6.5% in the first quarter, in line with our 6.2% estimate. Same-store revenue was up 6.3%, though much of that growth is nonrecurring as it came from Regency collecting previously owed rent. Still, base rent grew 2.7%, the best single quarter since the first quarter of 2019. While revenue growth was in line with our expectations, same-store expense growth was below our 3.1% estimate as both real estate taxes and ground rent fell year over year, leading to total expenses growing just 1.2%. As a result, same-store net operating income growth was 8.6% in the first quarter, ahead of our estimate of 7.3%. In addition to the slightly better-than-anticipated operating results, Regency collected more tenant recoveries than we expected in the first quarter, leading to core funds from operations of $0.97 per share that beat our $0.90 estimate.

Regency Centers is the largest shopping center REIT, with 405 properties spread across more than 20 major U.S. metropolitan areas. Regency's portfolio is filled with high-quality assets located in population-dense, affluent markets. The company focuses on owning grocery-anchored centers, with over 80% of properties featuring a grocery anchor and grocery stores representing slightly more than 20% of annual base rent. Regency's grocery anchors are strong draws to the centers as they produce sales per square foot well above the national average and are very healthy with low occupancy costs. The rest of the portfolio contains a substantial number of service-oriented tenants that are naturally resistant to e-commerce pressures.

Regency Centers reported fourth-quarter results that were mixed compared with our expectations, though we didn’t see anything that would materially alter our $75 fair value estimate for the no-moat company. Same-store occupancy increased 50 basis points sequentially to 94.3%, slightly better than our estimate of a 30-basis-point improvement. Re-leasing spreads jumped to 12.9% after being at 5% or less over the past seven quarters. While that significantly beat our estimate of just 1.9% growth, the outperformance is driven by rents on leases to new tenants, which can vary wildly from quarter to quarter, being up 45.6% while new leases to existing tenants were up 4.1%, which is probably more indicative of where market rents are moving. Same-store net operating income increased 15.2%, which was slightly better than our estimate of 13.7% growth. Regency reported core funds from operations of $0.92 per share in the fourth quarter, missing our $0.99 estimate. However, the miss was mostly due to Regency collecting a lower amount of previously owed rent than we had anticipated. Since we assumed that line item would normalize in 2022, the miss doesn’t affect our forecasts for the company.

We are increasing our fair value estimates for no-moat Federal Realty to $136 from $122, for no-moat Kimco Realty to $26.50 from $21, and for no-moat Regency Centers to $75 from $66. While the pandemic posed a significant threat to brick-and-mortar retail, retailers are seeing very strong sales growth in 2021. Many sales shifted online early in the pandemic as people stayed at home and avoided public spaces, leading to significant e-commerce sales growth at the expense of brick-and-mortar sales. However, the negative impact of the pandemic on brick-and-mortar retail disappeared in the second half of 2020. While foot traffic was down in 2020, consumers were spending more per ticket due to extra income from the government stimulus checks and due to less competition for disposable income from travel and experiences. In 2021, foot traffic returned to prepandemic levels while spending levels remained high, leading to double-digit growth in brick-and-mortar sales in each of the first three quarters of 2021.

Regency Centers is the largest shopping center REIT, with 402 properties spread across more than 20 major U.S. metropolitan areas. Regency's portfolio is filled with high-quality assets located in population-dense, affluent markets. The company focuses on owning grocery-anchored centers with over 80% of properties featuring a grocery anchor and grocery stores representing slightly more than 20% of annual base rent. Regency's grocery anchors are strong draws to the centers as they produce sales per square foot well above the national average and are very healthy with low occupancy costs. The rest of the portfolio contains a substantial number of service-oriented tenants that are naturally resistant to e-commerce pressures.