Regency Centers: Your Buy-The-Dip Opportunity Is Here

Summary

• Regency Centers is a shopping center juggernaut with well-located properties and a high grocery component.
• It's seeing strong operating fundamentals, with healthy lease spreads and an improving leased rate.
• Meanwhile, it maintains a strong balance sheet and pays a well-covered and growing dividend. The recent price dip spells opportunity.
• Looking for more investing ideas like this one? Get them exclusively at Hoya Capital Income Builder. Learn More »

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Every portfolio should have a number of high-quality names that can withstand economic shocks, all while paying a reliable dividend that helps the investor to sleep well at night. In the shopping center space, Federal Realty Investment Trust (FRT) often comes to mind for its desirable properties, locations, and dividend track record.

FRT is not alone, however, as I view Regency Centers (NASDAQ:REG) as being another high-quality REIT in this sector that deserves more attention and credit than its more popular peer. In this article, I highlight what makes REG a worthy buy, especially after the recent dip, so let’s get started.

Your Buy-the-Dip Opportunity is Here

Regency Centers was founded in 1963, and has one of the largest shopping center portfolios in the U.S. It’s also a member of the S&P 500 index, and at present, owns over 400 properties covering more than 8,000 tenants. REG is well diversified by geography with exposure to high population density markets along the East and West Coasts, Texas/Colorado, and the Midwest.

What sets REG apart from its peers, and even Federal Realty, is its high percentage of properties (80%) that are grocery-anchored. This makes REG’s properties more economically-essential and better prepared for continued e-commerce growth. As seen below, Publix, Kroger (KR), Safeway/Albertsons (ACI), and Whole Foods (AMZN) make up REG’s Top 4 tenants, with the rest comprised of other leading grocers and discount retailers, such as TJX (TJX).

(Source: Investor Presentation)

However, REG’s stock has seen material share price weakness in recent days, falling from the $76-level earlier this month, to $69.34 at present. As seen below, REG now carries an RSI score of 35, indicating that it’s approaching oversold territory.

(Source: StockCharts)

Concerns around REG appear to be related to the recent Omicron variant as well as news from the Federal Reserve Chairman about tapering its bond purchases. While these concerns post a legitimate risk, I don’t see them as throwing a wrench in REG’s long-term growth thesis. This is considering the fact that most of REG’s properties are grocery-anchored, thereby making them both rather “immune” to both the pandemic and e-commerce.

In addition, the Fed’s tapering of bond purchases is simply a response to inflation, which benefits the owners of “hard assets” such as the properties of Regency Centers. Lease terms for shopping centers are generally shorter than that of net lease REITs, thereby enabling Regency more quickly lease-up its properties in response to inflation. As such, I see Regency as being a beneficiary of inflation rather than being a victim.

Regency is seeing strong underlying fundamentals, with foot traffic having recovered to 100% of 2019 levels during the month of October, and its leased percentage improved by 90 bps sequentially, to 93.8% in the third quarter. Rent collection has also dramatically improved since last year, and now sits at 98%. Notably, Regency executed 2M square feet of comparable new and renewal leases during Q3 at a healthy blended rent spread of 5.1%.

Looking forward, REG has plenty of opportunity to reinvest capital into its existing centers while re-purposing or disposing of non-core retail properties that can be used for other functions. This strategy was outlined by the CEO during the recent conference call:

We remain committed to selling centers that are lower growth or non-strategic or when it's clear to us that maximizing the value of a property involves a predominantly non-retail use. For example, our recent sale of the former Sears box adjacent to our Hancock Center in Austin was in that last bucket where we determined that its highest and best use was medical office. The addition of this office component and the traffic that it will generate to our site will enhance the value of this well-leased center where HEB is currently expanding its highly productive store.

But our best risk reward proposition is to invest capital into strong grocery -anchored neighborhood and community retail, which is the bread and butter of Regency Strategy. This commitment to portfolio enhancement has proven to and will continue to fortify our future NOI growth.

Meanwhile, REG maintains a strong BBB+ rated balance sheet, with a safe net debt to EBITDAre ratio of 5.0x. It also maintains a robust $1.2B worth of liquidity, including full availability on its revolving credit facility.

This balance sheet strength and quality of REG’s underlying properties are key reasons for why it didn’t have to cut its dividend last year. In addition, Regency just raised its dividend by 5%, and this translates into a forward yield of 3.6%. The dividend is well protected with a payout ratio of 64%, and comes with 8 years of consecutive annual growth.

I see value in REG at the current price of $69.34 with a forward P/FFO of 17.6, sitting below its normal P/FFO of 18.1. Sell side analysts have a consensus Buy rating on REG, with an average price target of $76. This implies a potential one-year total return of 13% including dividends. In addition, Seeking Alpha’s Quant gives REG a Very Bullish rating, with an A- for Profitability and an A for recent upward analyst revisions, as seen below.

(Source: Seeking Alpha)

Last but not least, REG trades at a meaningful discount to peer Federal Realty Trust, despite having a higher grocery component. As seen below, Regency carries an EV/EBITDA ratio of 21.8x, comparing favorably to FRT’s 25.9x.

(Source: Seeking Alpha)

Investor Takeaway

Regency Centers is a shopping center stalwart that has well-located properties with a high grocery-anchored component. It’s demonstrating strong fundamentals, with an improving leased rate, strong rent collection, and healthy lease spreads.

Looking forward, REG has plenty of opportunities to reinvest in its existing centers while repurposing non-core assets. This is supported by a strong balance sheet with plenty of liquidity. I see value in REG, especially after the recent share price weakness. REG is a Buy for long-term growth and income.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of REG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

Comments

[Morgan Myrmo]

@Hoya Capital Real Estate nice to see the author caught the Q4 dividend increase (announced 11/2/21 but no press release/SA note of it). A 5% raise on a high-quality name, very nice indeed. I hope this helps! Many dividend increases this year in shopping center REIT-land.
-Morgan

[Pablo]

Not too late, I say it's still a buy under $70

[dgiinvestor]

@Pablo $71 and rising now.

But good article, I'll put $REG on the watchlist.

[mt57]

What is the maturity profile on their debt?

[Joe X]

@mt57 - REG 9/30/21 debt maturities as follows:

2021 - $30.6
2022 - $17.2
2023 - $74.6
2024 - $345.6
2025 - $293.7
2026 - $291.9
2027 - $666.7
Thereafter - $2,053.2

[20/20Dividends]

Great company.. One of my largest holdings... Just drip and forget. Time to buy was last year when it hit the low 30's...

[Pablo]

@20/20Dividends I agree! Yes in the $30's - but I think we can all agree 2020 was a banner buy year for most REITs and many preferreds.