Regency Centers Corp. (NYSE: REG). We think this trend bodes well for Regency, which relies heavily on grocery store and pharmacy tenants.
We believe that the premium to peers is appropriate given REG’s lower exposure to troubled retailers.
Same-property real estate revenues fell 14% to $244 million. Total revenues fell 16% to $231 million, driven by a large increase in uncollectible lease income and a decrease in straight line rent. Same-property net operating income (NOI) declined 20.1%, due to the much higher uncollectible lease income and decrease in straight line rent.
During the second quarter, the company sold one property in Denver for $9.8 million.
The stock prices of retailers and retail REITs have suffered as online sales continue to rise at the expense of sales at physical stores. Tenants such as K-Mart, Dress Barn, Pier 1 Imports, J.C. Penney, and iPic movie theaters have filed for bankruptcy, and department stores such as Macy’s and Victoria’s Secret have announced store closings. However, we believe that Regency has relatively low exposure to problematic retailers, as five of its top 10 tenants are grocery stores or pharmacies.
EARNINGS & GROWTH ANALYSIS
Regency’s 2Q operating metrics were negatively impacted by lower rent collections. Within the company’s tenant portfolio, entertainment and fitness locations had base rent collections that were down more than 50% in July. On the positive side, essential retail and services showed resiliency. Base rent collections were above 90% in the grocery/drugstore, bank, pet supply, home improvement/auto, and office tenant categories.
— Same-property NOI fell 20.1%. As of June 30, 2020, tenants in bankruptcy who continued to occupy space accounted for 2.0% of the company’s annual base rent.
— Same-space occupancy fell to 94.5% in 2Q20 from 95.0% in the prior quarter. We expect further declines in occupancy going forward due to tenant bankruptcies.
— Base rent fell to $17.15 psf as tenants locked in lower rates during the quarter.
REG is trading at 11.7-times our 2020 FFO per share forecast, below the five-year historical average of 18.9 but above the peer median of 10.9. However, we feel the premium to peers is appropriate given REG’s lower exposure to troubled retailers.