2020 has been a tough year for retail. Coronavirus-related closures and social distancing protocols put tremendous pressure on brick-and-mortar stores. Regency Centers Corporation (NASDAQ: REG), which specializes in open-air retail centers largely anchored by essential retailers, like grocery stores, is one of the luckier retail real estate investment trusts (REITs). Despite very challenging economic circumstances, the company has been able to keep the majority of its facilities open. With share prices trading roughly 26% lower than pre-covid levels, Regency Centers could be a worthwhile investment for patient investors. Let's take a look at where Regency Centers stand today and where the company could be in five years.
Regency Centers today
Regency Centers is one of the largest publicly traded retail REITs, with 414 facilities, $11 billion market capitalization, and 56 million square feet of retail space under management. Regency Centers owns, manages, and develops open-air shopping centers in affluent suburban and urban neighborhoods across the country. 63% of its annual base rent is earned from essential service retailers, 78% of its tenant base are national and regional institutional tenants, and roughly 80% of its facilities are grocery anchored.
This has provided some relative stability given the current economic situation and has allowed the majority of tenants to remain in operation despite local and statewide mandates. As of October 2020, 97% of all tenants are open and operating, 1,318 tenants were on some type of lease deferral plan, and the average base rent collected during Q3 2020 was 86%.
It comes as no surprise that the company has suffered losses this year. Its funds from operations (FFO) for Q3 2020 was $0.60 per diluted share, a 39% decline from the same time last year. Despite a very challenging year, the company is still well positioned financially with a debt-to-EBITDA ratio of 5.9x and $1.5 billion in liquidity from either cash on hand or revolving line of credit.
The future of retail is still unknown
The future of retail is still very much unknown. While other commercial real estate sectors, including office and hotels, have been hit just as hard if not harder than the retail sector in 2020, the future of those industries is still relatively clear. Tourism and office space will return. When that happens, occupancy rates, demand, and revenues for those sectors will rise with it. Retail however, was already a struggling sector before the pandemic. The current crisis accelerated certain trends that were already in motion and will surely result in more vacant retail space than ever with record-low demand, which means for Regency Centers to continue to prosper, they must adapt.
Out of the six developments and redevelopment projects underway as of Q3 2020, five of them include some type of additional revenue streams in addition to retail space, such as apartments, office space, hotel, or senior housing. One development in particular, a mall, is being reconsidered all together because of how badly malls were impacted as a result of COVID-19. This trend of adding other types of commercial real estate to the retail center is a great move for the company and a trend I believe will continue in future developments over the next five years.
76.8% of Regency Centers' annual base rent is earned from the top markets by population, many of which are seeing residents flee the urban cores. This will put added pressure on and mean possible long-term losses for small retailers in particular in these areas until consumers return to these markets. The company's current payout ratio of 99% is high for REIT standards, but it can likely be maintained because of the company's current financial standing. However, the general uncertainty over the future along with long-term impact from the pandemic mean huge dividend increases aren't likely. As Regency Centers sees income and revenues return to more historical levels, I see the company maintaining its 55% - 59% average payout ratio.
Maintaining a solid portfolio in a changing market
I believe Regency will make it through this and will find ways to profitably adapt and recreate its space to meet demand while still delivering the core foundation of its portfolio and investment strategy -- grocery-anchored centers in highly desirable markets. But I don't think we'll see monumental growth over the next five years. I think Regency Center's coming growth will be far more focused on current redevelopment projects and tenant retention for owned properties than developments and acquisitions as demand for retail changes over the next five years.