Zacks_Analysts' Blog : Regency to Underperform - Analyst Blog

We have recently downgraded our recommendation on Regency Centers Corp. (REG), a leading operator and developer of grocery-anchored and community shopping centers across the U.S., from Neutral to Underperform as we anticipate it to perform well below the broader market.

Jacksonville, Florida-based Regency owns, operates, and develops grocery-anchored retail shopping centers in the U.S. The company seeks to own assets in high-income in-fill markets that are tenanted by market-dominant grocers, category-leading anchors, specialty retailers and restaurants.

We are presently bearish on Regency primarily due to its active development pipeline, which increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays, and lease-up risk. As such, we are skeptical about the long-term earnings potential of the company. 

In addition, most of the properties of the company are concentrated in select markets in California, Florida and Texas, leading to concentration risk. The possibility of store closings at many Regency stores also adds uncertainty to earnings, and it might have to re-let large big box spaces at significantly lower rents in a tough leasing environment.

Furthermore, the dearth of available credit in the commercial real estate market has reduced the available capital for new developments or other new investments, which forms an integral part of the capital recycling strategy of Regency. The lack of liquidity in the capital markets has also led to a significant increase in the cost to refinance maturing loans, thereby resulting in increased refinancing risks. This is likely to affect the long-term growth of the company, and consequently, we remain circumspect about its future.

However, the average household income in the markets in which Regency has a significant presence is over $96,000, nearly 33% higher than the national average. Regency’s quality portfolio is also anchored by dominant grocers such as The Kroger Co. (KR) and Publix, as well as leading national retailers such as Target Corp. (TGT), which drive traffic into its centers. In addition, 78% of the portfolio is leased to national and regional retailers. If the company can weather the present deluge of negative investor sentiments, it can expect a steady reversal of fortunes in future.