Regency Centers Earnings: High Re-Leasing Spreads and Two Major Development Projects

Regency Centers REG 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.

Regency started two major development projects during the second quarter. The first will turn a vacant shopping mall on Long Island into an open-air center anchored by Whole Foods; it is expected to produce a 7% development yield. The second is the third redevelopment phase of Serramonte Center in Daly City, California, that will convert a former JCPenney space into a high-quality Asian food market and expand the number of small shops adjacent to the Macy’s anchor; it is expected to produce an 11% redevelopment yield. In total, Regency started $175 million worth of projects in the second quarter. Both projects reinforce our thesis that high-quality shopping centers can redevelop old anchor spaces into more productive uses that will pay significantly higher rent to the landlord.