Regency Centers (REG)

Jacksonville, Florida-based Regency Centers Corporation (REG), a self-administered and self-managed real estate investment trust (REIT), is one of the leading owners, operators, and developers of grocery-anchored retail shopping centers in the U.S. Currently, the company owns or has interests in 450 retail properties, including properties held in joint venture, spanning approximately 60 million square feet. Regency has 48 properties under development that are 59% funded and 78% leased. Regency's core strategy is to own assets in high income, in-fill markets. Since 2000 Regency has developed 189 shopping centers, including those currently in-process, representing an investment of approximately $3.0 billion. As of March 31, 2008 the company's largest markets were California (26.5% of base rents), Florida (13.1%), Texas (13.0%), Virginia (6.3%), and Georgia (5.7%). The company's three largest tenants are Kroger (5.64% of annualized base rent), Publix (4.18%), and Safeway (3.52%).

As a result of the housing market downturn and increased corporate layoffs, retailers are expected to have a rough year in 2008. Clearly, certain retailers in particular sectors have been impacted more than others and consumer spending will soften in 2008. The current turmoil in the credit markets will continue to squeeze more highly leveraged developers which could provide opportunities on the acquisition and development front for well capitalized REITs. Land prices are decreasing and cap rates are slowly increasing, which will make shopping mall construction and buying more profitable. Regency's retail strip center portfolio is among the best located in the sector, with properties in high per capita income, strong in-fill, and high-barrier markets, which allows the company to continually perform at the top end of its peer group. In addition, REG's dominant anchor tenants are grocery stores, a segment that is much less affected in a weakening economy. About 15% of the company's base rent come from its four largest grocery store tenants. The company only has 10% of its annual rents coming from department stores, which are typically hurt most in a recession as consumers curtail discretionary spending.

REG reported 1st quarter FFO of $0.87 per share, a decline of approximately 23% compared to 1Q07. The change was due to lower transactional profits compared to 1Q07. Regency's strong market position has generated excellent leasing trends over the past several quarters. Rental rate growth continues to increase at a brisk pace. Over the past 12 months, REG signed 5.3 million square feet of new/renewal leases at rates significantly higher than expiring rents. Same store rental rate growth (wholly owned and 100% of JVs) over the past 12 months was 13.1% on all leases, 26.1% on new leases and 9.9% on renewals. In the 1st quarter 2008, Regency signed 71 new leases at rents 31.3% higher than previous rents, and renewed 318 leases at rents 9.9% higher than expiring rents. Overall rental rate growth on all leases in the 1st quarter was 12.6%, which is good considering the state of the economy. Regency's same store portfolio was 94.9% leased (wholly owned and pro-rata share of JVs) at the end of 1st quarter versus 95.1% at the end of 2007. Rental rate increases led to moderate same store NOI growth, which increased 3.1% in the quarter vs.1007.

Over the past year, the company has sold assets at attractive yields to fund the higher yielding development pipeline. We continue to favor companies who can selectively develop in strong markets due to the premium yield characteristics. The company expects to complete $115-$240 million of development projects in 2008. The currently current has $1.1 billion of in process development with expected yields in excess of 9%. Four projects were stabilized in the quarter with average returns of about 11%. REG has scaled back some of the current pipeline, about 556,000 square feet in response to weaker demand from retailers. This represents only 7% of the total pipeline. The current pipeline is well pre-leased at 80%, which takes out much of the risk. REG's development pipeline is very well diversified with projects in 20+ states, making the company somewhat immune to large downturns in one particular area of the country. Despite the drop in development yields and slight increase in cap rates, there is still a 250 bps+ development premium versus acquisition, which we believe still adequately compensates for the inherent risk in new shopping center construction. The company noted on its recent call that construction costs are declining, a byproduct of the downturn in commercial real estate development. REG leased approximately 230,000 square feet in developments in the quarter, 30% higher than 1Q07 and well above the company's original expectations.

In 1Q07, the company finalized its Regency Partners Fund, which now has $565 million of equity. The fund will acquire Regency developed centers upon stabilization. Regency owns 20% of the fund. The fund format will provide fuel for the company's development pipeline, as the company now has an immediate buyer for its finished developments. More and more REITs are using the JV format as this enables a company to more quickly expand its geographic footprint and earn outsized returns through management and incentive fees.

The company has a strong balance sheet with debt to total market capitalization of 30.2%, only slightly up from 1Q07. Near term debt maturities are low, about $78 million. The FFO payout ratio is now 83.3%, up from 58% in 1Q07, which is mainly due to a higher dividend. Fixed charge coverage at year end was 2.2x (including the company's pro rata share of JVs) and interest coverage was 2.9 x.

The demographic story for REG is good the company currently has a little over 50% of its annualized base rent (wholly owned pro-rata share of JVs) coming from three states: California, Texas, and Florida. These are the three of the fastest growing areas in the country, and will continue to outperform other markets as population in these areas continues to increase. Despite a recent economic downturn, Florida and California are high-barrier markets where high land values, difficult zoning, and now difficulties in the credit market continue to impede new development. Much of the company's current development efforts are focused on these three states, which we view as good long term areas for investment.

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