What a difference two years can make. For Regency Realty Corp., the 24-month window that defined the company's impact on the retail real estate industry was from early 1997 to February of this year. During this period, the Jacksonville, Fla.-based owner, operator and developer of grocery-anchored shopping centers completed several corporate acquisitions that transformed the firm from a regional player into a dominant retail developer at the forefront of the national scene.
Like all REITs, Regency Realty was seeking growth to benefit from the economies of scale of a large portfolio. The company accelerated its pace in 1997 with the acquisition of Atlanta-based Branch Properties. Branch's grocery center portfolio gave Regency a strong presence in Georgia. In early 1998, Regency added The Midland Group. The St. Louis company's portfolio was centered in the Midwest and provided another area on which to concentrate.
With these additions still not completely assimilated, many firms might have decided to stand pat. Regency, on the other hand, was negotiating its boldest move yet. In February, it completed the acquisition of Dallas-based Pacific Retail Trust (PRT), a private, $1.1 billion real estate developer and one of the leading neighborhood shopping center companies in the western United States.
That transaction and subsequent purchases have increased the size of Regency's portfolio to 214 retail centers, comprising more than 24 million sq. ft. and $2.5 billion in assets. PRT's own strong balance sheet, which featured a debt-to-asset ratio of 30%, improved Regency's already healthy balance sheet by lowering its debt-to-equity ratio to 39%. In addition, 70% of Regency's properties are unsecured.
The company's strength is not going unnoticed. Investment-grade ratings from Moody's, Standard & Poor's and Duff and Phelps aided in raising $180 million through the issuance of unsecured debt and securities. In total, following the merger, Regency has a credit capacity of $500 million.
"Not only did the merger essentially double our portfolio, but also it improved our financial position from various angles," says Martin E. "Hap" Stein Jr., chairman and CEO of the company and the son of its founders.
Genesis of a corporate philosophy Martin Sr. and Joan Stein started the real estate company in 1963. Regency's first major project was Regency Square shopping center, today Regency Square Mall, in Jacksonville, Fla. Hap Stein says the company developed malls as well as neighborhood centers in the early days before deciding to focus, in 1981, on its current niche: dominant grocery-anchored shopping centers in established neighborhood locations.
"We felt the grocery anchors were sort of recession-proof, and we liked the attractive demographics of in-fill locations," he explains. Regency's management emphasizes that the barriers to entry in established neighborhood locations provide protection from additional competition.
Properties targeted for acquisition by Regency's management are characterized by strong demographics with growth potential. The trade area's income, rent structure and leasing climate must be primed for increases, reports Stein. Indeed, population in areas where the company operates is growing at twice the national average, while household incomes are increasing 25% faster than the national mark.
No fear of consolidation Retail consolidation, particularly among grocery chains, is a serious topic for developers because the loss of an anchor can devastate a property. But Regency's team is confident that it is positioned to weather any problems consolidation may cause.
"Strong grocery anchors are good credit tenants, so the revenue is consistent and they usually sign 20-year leases," says Mary Lou Rogers, president and COO.
The company's grocery anchors are all among the top three players in their trade area. In fact, 76% of Regency's anchors are either first or second in their markets, says Stein.
"We have very strong centers and, as a result, we will continue to attract the major grocery chains in our markets," Rogers says. "And we believe the top players will continue to do well in the grocery category."
Regency backs up that opinion with the results of a Merrill Lynch study that concluded that new grocery concepts tend to hurt weaker chains more than the top-name players.
Thus, maintaining a relationship with the major chains is important, a fact Regency's hierarchy knows very well. "Perhaps the most important thing we acquired in the Midland Group merger was a strong relationship with Kroger," Rogers stresses.
Regency currently houses more Kroger stores than any other landlord. The developer's other grocery relationships include Publix, Safeway, Winn-Dixie and Albertson's.
These chains have proven resilient to market changes over the years and generate high daily traffic figures. The numbers underscore the advantages of Regency's in-fill locations. According to Stein, sales figures for the grocery stores located in Regency centers are 20% higher than the chains' national averages.
"Strong anchors attract higher-quality side tenants," Rogers says, adding that the company prefers to complement the grocery store with personal-service operators such as dry cleaners and hair care chains, restaurants, specialty fashion retailers and home furnishing stores.
Growing opportunities Regency's national presence brings with it other advantages. It opened up the western United States for future expansion by providing a multi-center presence in growth markets such as Dallas, Denver, Seattle, Portland and cities throughout California.
Becoming a national firm also provides the company with coast-to-coast coverage from a leasing and development services standpoint. Third-party, build-to-suit and site-selection services are an important and growing part of Regency Realty. Stein points out that during 1998, revenues from Regency's third-party services increased 46% over the previous year to $12.3 million. "Third-party business provides a high-profit margin for our firm without the use of much of our long-term capital," he says.
Regency's broadening spectrum of services has begun to attract national retailers seeking a single service provider to assist them nationwide.
Regency's next step, she adds, is to be more aggressive in leasing efforts, such as working with existing regional tenants to expand nationally through the rest of the company's portfolio.
Many of these efforts will be spearheaded by the new additions to the management team, another benefit of the acquisitions.
Rogers herself was a new addition to the firm in 1998. But she was not completely new to Regency's operations. Rogers joined Regency from the Chicago office of Santa Fe, N.M.-based Security Capital U.S. Realty, where she served as managing director of retail operations. Security Capital U.S. Realty holds strategic ownership positions in a number of real estate operating companies, including Regency and PRT. In her position at Security Capital, Rogers served on the boards of both firms for 18 months before the merger.
One for all and all for one Upon joining Regency Realty, Rogers was the obvious choice to oversee the transition of Regency and PRT into one. "I knew all of the personnel from both firms, and I already had a good idea of what the best practices were," she explains.
Rogers immediately created a transition committee with members representing each office and each function within the company. "Within 30 days, everyone was aware of who their boss would be, what their title was and what their job was," Rogers says. "This eliminated a lot of the anxiety that usually comes with mergers."
But she insists that the similarities that had drawn the companies together initially also aided in the transition. "The similar corporate cultures and the geography, in that we were merging an eastern firm with a western firm, made the pieces a better fit," she says. "Everyone basically kept doing the same job they had been doing."
The company has maintained the PRT offices, giving Regency a total of 16. The additional offices underscore Regency's philosophy concerning the importance of local market knowledge.
"We have a vice president of operations and investment people in all of our offices," Rogers says. "This way, we are able to make quicker decisions. A real estate company has to have people with local market knowledge to find where the opportunities lie."
Since going public three years ago, Regency's management has met or exceeded its projected financial numbers, according to Rogers. This performance has created great confidence in the firm, from investors and tenants alike, that will serve it well in future opportunities.
Rogers points to Chicago as a market that Regency will soon focus on, but she maintains that taking advantage of opportunities in the company's existing markets is the priority.
"We have built an exceptional portfolio with market-leading anchors in properties located in excellent trade areas with growth potential," Stein says. "And the talent in our management team will continue to allow us to make the most of these opportunities."