Regency Centers Earnings: High Re-Leasing Spreads Slightly Offset by Operating Expense Growth

Third-quarter results for Regency Centers REG 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 completed the previously announced merger with shopping center REIT Urstadt Biddle during the quarter, which owned a portfolio of similar high-quality, grocery-anchored centers. We believe that the transaction should improve core FFO in 2024 by approximately 4% and increased our fair value estimate for the company by 3%.

Management provided updated guidance for 2023. Same-store NOI growth for 2023 is now expected to be up 3.5%, which puts management’s outlook at the high end of the prior guidance range of 3.0% to 3.5% and is above our estimate of 3.0% growth for 2023. Management also raised core FFO guidance to a new range of $3.93 to $3.95, a three-cent increase over the midpoint of the prior guidance range of $3.89 to $3.93, and puts our $3.95 estimate within the updated guidance range.