United States SECURITIES AND EXCHANGE COMMISSION Washington DC 20549 FORM 10-Q (Mark One) [X] For the quarterly period ended March 31, 2004 -or- [ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number 0-24763 REGENCY CENTERS, L.P. --------------------- (Exact name of registrant as specified in its charter) Delaware 59-3429602 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 121 West Forsyth Street, Suite 200 Jacksonville, Florida 32202 --------------------------- (Address of principal executive offices) (Zip Code) (904) 598-7000 -------------- (Registrant's telephone number, including area code) Unchanged --------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] REGENCY CENTERS, L.P. Consolidated Balance Sheets March 31, 2004 and December 31, 2003 (in thousands, except unit data) (unaudited) 2004 2003 ---- ---- Assets - ------ Real estate investments at cost: Land $ 762,459 738,101 Buildings and improvements 1,932,646 1,914,075 ---------------- --------------- 2,695,105 2,652,176 Less: accumulated depreciation 299,127 285,665 ---------------- --------------- 2,395,978 2,366,511 Properties in development 369,752 369,474 Operating properties held for sale 6,319 4,200 Investments in real estate partnerships 101,404 140,496 ---------------- --------------- Net real estate investments 2,873,453 2,880,681 Cash and cash equivalents 43,538 29,869 Notes receivable 70,181 70,782 Tenant receivables, net of allowance for uncollectible accounts of $3,372 and $3,353 at March 31, 2004 and December 31, 2003, respectively 38,085 54,573 Deferred costs, less accumulated amortization of $25,266 and $29,493 at March 31, 2004 and December 31, 2003, respectively 38,045 35,804 Acquired lease intangible assets, net 9,764 10,205 Other assets 13,358 16,315 ---------------- --------------- $ 3,086,424 3,098,229 ================ =============== Liabilities and Partners' Capital - --------------------------------- Liabilities: Notes payable 1,251,577 1,257,777 Unsecured line of credit 230,000 195,000 Accounts payable and other liabilities 71,506 94,280 Acquired lease intangible liabilities, net 5,877 6,115 Tenants' security and escrow deposits 9,549 9,358 ---------------- --------------- Total liabilities 1,568,509 1,562,530 ---------------- --------------- Limited partners' interest in consolidated partnerships 2,380 4,651 ---------------- --------------- Partners' Capital: Series B preferred units, par value $100: 850,000 units issued and outstanding at March 31, 2004 and December 31, 2003 82,800 82,800 Series C preferred units, par value $100: 750,000 units issued, 400,000 units outstanding at March 31, 2004 and December 31, 2003 38,964 38,964 Series D preferred units, par value $100: 500,000 units issued and outstanding at March 31, 2004 and December 31, 2003 49,158 49,158 Series E preferred units, par value $100: 700,000 units issued, 300,000 units outstanding at March 31, 2004 and December 31, 2003 29,238 29,238 Series F preferred units, par value $100: 240,000 units issued and outstanding at March 31, 2004 and December 31, 2003 23,366 23,366 Series 3 cumulative redeemable preferred units, par value $0.01: 300,000 units issued and outstanding at March 31, 2004 and December 31, 2003; liquidation preference $250 75,000 75,000 General partner; 60,694,273 and 59,907,957 units outstanding at March 31, 2004 and December 31, 2003, respectively 1,202,491 1,205,803 Limited partners; 1,026,379 and 1,318,625 units outstanding at March 31, 2004 and December 31, 2003, respectively 20,238 26,544 Accumulated other comprehensive (loss) income (5,720) 175 ---------------- --------------- Total partners' capital 1,515,535 1,531,048 ---------------- --------------- Commitments and contingencies $ 3,086,424 3,098,229 ================ =============== See accompanying notes to consolidated financial statements. 1 REGENCY CENTERS, L.P. Consolidated Statements of Operations For the three months ended March 31, 2004 and 2003 (in thousands, except per unit data) (unaudited) 2004 2003 ---- ---- Revenues: Minimum rent $ 70,640 67,064 Percentage rent 453 299 Recoveries from tenants 20,362 20,197 Management fees and commissions 1,610 1,561 Equity in income of investments in real estate partnerships 2,745 2,336 ---------------- ---------------- Total revenues 95,810 91,457 ---------------- ---------------- Operating expenses: Depreciation and amortization 20,207 17,998 Operating and maintenance 13,367 12,786 General and administrative 5,883 4,135 Real estate taxes 10,589 9,852 Other expenses 488 427 ---------------- ---------------- Total operating expenses 50,534 45,198 ---------------- ---------------- Other expense (income) Interest expense, net of interest income of $837 and $893 in 2004 and 2003, respectively 21,234 20,582 Gain on sale of operating properties and properties in development (3,983) (2,376) ---------------- ---------------- Total other expense 17,251 18,206 ---------------- ---------------- Income before minority interests 28,025 28,053 Minority interest of limited partners (79) (64) ---------------- ---------------- Income from continuing operations 27,946 27,989 Income from discontinued operations 337 1,154 ---------------- ---------------- Net income 28,283 29,143 Preferred unit distributions and original issuance costs (6,478) (10,782) ---------------- ---------------- Net income for common unit holders $ 21,805 18,361 ================ ================ Income per common unit - basic: Continuing operations $ 0.35 0.28 Discontinued operations 0.01 0.02 ---------------- ---------------- Net income for common unit holders per unit $ 0.36 0.30 ================ ================ Income per common unit - diluted: Continuing operations $ 0.34 0.28 Discontinued operations 0.01 0.02 ---------------- ---------------- Net income for common unit holders per unit $ 0.35 0.30 ================ ================ See accompanying notes to consolidated financial statements. 2 REGENCY CENTERS, L.P. Consolidated Statement of Changes in Partners' Capital For the three months ended March 31, 2004 (in thousands) (unaudited) Accumulated General Partner Other Total Series B-F Preferred and Limited Comprehensive Partners' Preferred Units Common Units Partner Income (Loss) Capital --------------- ------------ ------- ------------- -------- Balance at December 31, 2003 $ 223,526 1,280,803 26,544 175 1,531,048 Comprehensive Income: Net income 5,081 22,816 386 - 28,283 Change in fair value of deriviative instruments (5,895) (5,895) --------------- Total comprehensive income - - - - 22,388 Cash distributions for dividends (31,776) (679) - (32,455) Preferred unit distributions (5,081) (1,397) - - (6,478) Units converted for cash - - (7,784) - (7,784) Common Units issued as a result of common stock issued by Regency, net of repurchases - 8,816 - - 8,816 Common Units exchanged for common stock of Regency - 2,862 (2,862) - - Reallocation of limited partners interest - (4,633) 4,633 - - --------------- --------------- --------------- --------------- ---------------- Balance at March 31, 2004 $ 223,526 1,277,491 20,238 (5,720) 1,515,535 =============== =============== =============== =============== ================ See accompanying notes to consolidated financial statements. 3 REGENCY CENTERS, L.P. Consolidated Statements of Cash Flows For the three months ended March 31, 2004 and 2003 (in thousands) (unaudited) 2004 2003 ---- ---- Cash flows from operating activities: Net income $ 28,283 29,143 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,344 18,863 Deferred loan cost and debt premium amortization 616 532 Services provided by Regency in exchange for Common Units 3,548 2,869 Minority interest of limited partners 79 64 Equity in income of investments in real estate partnerships (2,745) (2,336) (Gain) loss on sale of operating properties (41) 642 Distributions from operations of investments in real estate partnerships 4,644 2,099 Hedge settlement (5,720) - Changes in assets and liabilities: Tenant receivables 17,025 12,876 Deferred leasing costs (2,058) (2,237) Other assets 1,889 2,540 Accounts payable and other liabilities (28,155) (31,384) Tenants' security and escrow deposits 158 378 --------------- -------------- Net cash provided by operating activities 37,867 34,049 --------------- -------------- Cash flows from investing activities: Acquisition and development of real estate (67,289) (101,882) Proceeds from sale of real estate investments 30,854 31,580 Repayment of notes receivable, net 602 25,753 Investments in real estate partnerships (512) (767) Distributions received from investments in real estate partnerships 17,960 1,350 --------------- -------------- Net cash used in investing activities (18,385) (43,966) --------------- -------------- Cash flows from financing activities: Net proceeds from the issuance of Regency stock and Common Units 10,761 969 Redemption of preferred partnership units - (75,750) Cash paid for conversion of Common Units by limited partner (7,784) - Net distributions to limited partners in consolidated partnerships (2) - Distributions to preferred unit holders (6,478) (8,110) Cash distributions for dividends (32,455) (32,076) Proceeds from unsecured line of credit, net 35,000 98,750 Repayment of notes payable, net - (507) Scheduled principal payments (1,497) (1,532) Deferred loan costs (3,358) - --------------- -------------- Net cash used in financing activities (5,813) (18,256) --------------- -------------- Net increase (decrease) in cash and cash equivalents 13,669 (28,173) Cash and cash equivalents at beginning of the period 29,869 56,447 --------------- -------------- Cash and cash equivalents at end of the period $ 43,538 28,274 =============== ============== Supplemental disclosure of cash flow information - cash paid for interest (net of capitalized interest of $3,323 and $2,784 in 2004 and 2003, respectively) $ 30,017 29,400 =============== ============== Supplemental disclosure of non-cash transactions: Common Units exchanged for common stock of Regency $ 2,862 217 =============== ============== See accompanying notes to consolidated financial statements. 4 Regency Centers Corporation Notes to Consolidated Financial Statements March 31, 2004 1. Summary of Significant Accounting Policies (a) Organization and Principles of Consolidation Regency Centers, L.P. ("RCLP" or the "Partnership") is the primary entity through which Regency Centers Corporation ("Regency" or the "Company"), a self-administered and self-managed real estate investment trust ("REIT"), conducts all of its business and owns all of its assets. The Partnership was formed in 1996 for the purpose of acquiring certain real estate properties. At March 31, 2004, Regency owns approximately 98% of the outstanding common units of the Partnership. The Partnership's ownership interests are represented by Units, of which there are i) six series of preferred Units, ii) common Units owned by the limited partners and iii) common Units owned by Regency which serves as the general partner. Each outstanding common Unit owned by a limited partner is exchangeable, on a one share per one Unit basis, for the common stock of Regency or for cash at Regency's election. The accompanying consolidated financial statements include the accounts of the Partnership, its wholly owned subsidiaries, and also partnerships in which it has voting control. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The financial statements reflect all adjustments that are of a normal recurring nature, and in the opinion of management, are necessary to properly state the results of operations and financial position. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted although management believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership's December 31, 2003 Form 10-K filed with the Securities and Exchange Commission. (b) Revenues The Partnership leases space to tenants under agreements with varying terms. Leases are accounted for as operating leases with minimum rent recognized on a straight-line basis over the term of the lease regardless of when payments are due. Accrued rents are included in tenant receivables. Substantially all of the lease agreements contain provisions that grant additional rents based on tenants' sales volume (contingent or percentage rent) and reimbursement of the tenants' share of real estate taxes and certain common area maintenance ("CAM") costs. Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. Recovery of real estate taxes and CAM costs are recognized as the respective costs are incurred in accordance with their lease agreements. 5 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 (b) Revenues (continued) The Partnership accounts for profit recognition on sales of real estate in accordance with Financial Accounting Standards Board ("FASB") Statement No. 66, "Accounting for Sales of Real Estate." In summary, profits from sales will not be recognized by the Partnership unless a sale has been consummated; the buyer's initial and continuing investment is adequate to demonstrate a commitment to pay for the property; the Partnership has transferred to the buyer the usual risks and rewards of ownership; and the Partnership does not have substantial continuing involvement with the property. The Partnership has been engaged by joint ventures to provide asset and property management services for their shopping centers. The fees are market based and generally calculated as a percentage of revenues earned and the estimated values of the properties and recognized as services are provided. (c) Real Estate Investments Land, buildings and improvements are recorded at cost. All direct and indirect costs related to development activities are capitalized. Included in these costs are interest and real estate taxes incurred during construction as well as estimates for the portion of internal costs that are incremental, and deemed directly or indirectly related to development activity. Maintenance and repairs that do not improve or extend the useful lives of the respective assets are reflected in operating and maintenance expense. Depreciation is computed using the straight-line method over estimated useful lives of up to 40 years for buildings and improvements, term of lease for tenant improvements, and three to seven years for furniture and equipment. The Partnership allocates the purchase price of acquired properties to land, buildings, and identifiable intangible assets based on their respective fair values. Management uses various methods to determine the fair value of acquired land and buildings, including replacement cost, discounted cash flow analysis, and comparable sales. Identifiable intangibles include amounts allocated to acquired leases for rental rates that are above or below market and the value of in-place leases. Intangibles related to in place leases are amortized over the weighted average life of the leases. Intangibles related to below market rate leases are amortized to minimum rent over the remaining terms of the underlying leases. The Partnership follows the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement 144"). In accordance with Statement 144, operating properties held for sale includes only those properties available for immediate sale in their present condition and for which management believes it is probable that a sale of the property will be completed within one year. Operating properties held for sale are carried at the lower of cost or fair value less costs to sell. Depreciation and amortization are suspended during the held for sale period. 6 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 (c) Real Estate Investments (continued) The Partnership reviews its real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Partnership determines whether impairment has occurred by comparing the property's carrying value to an estimate of the future undiscounted cash flows. In the event impairment exists, assets are adjusted to fair value, for held and used assets, and fair value less costs to sell, for held for sale assets. The Partnership's properties generally have operations and cash flows that can be clearly distinguished from the rest of the Partnership. In accordance with Statement 144, the operations and gains on sales reported in discontinued operations include those operating properties and properties in development that have been sold and for which operations and cash flows can be clearly distinguished. The operations from these properties have been eliminated from ongoing operations and the Partnership will not have continuing involvement after disposition. Prior periods have been restated to reflect the operations of these properties as discontinued operations. The operations and gains on sales of operating properties sold to real estate partnerships in which the Partnership has some continuing involvement are included in income from continuing operations. (d) Deferred Costs Deferred costs include deferred leasing costs and deferred loan costs, net of amortization. Such costs are amortized over the periods through lease expiration or loan maturity. Deferred leasing costs consist of internal and external commissions associated with leasing the Partnership's shopping centers. Net deferred leasing costs were $28.2 million and $28.0 million at March 31, 2004 and December 31, 2003, respectively. Deferred loan costs consist of initial direct and incremental costs associated with financing activities. Net deferred loan costs were $9.8 million and $7.8 million at March 31, 2004 and December 31, 2003, respectively. (e) Earnings per Unit and Treasury Stock Basic net income per common unit is computed based upon the weighted average number of common units outstanding during the year. Diluted net income per common unit also includes common unit equivalents for Regency's stock options. See note 8 for the calculation of earnings per unit. Repurchases of the Company's common stock (net of shares retired) are recorded at cost and are reflected as Treasury stock in Regency's consolidated statement of stockholders' equity. Outstanding shares do not include treasury shares. Concurrent with the Treasury stock repurchases by Regency, the Partnership repurchases the same amount of general partnership units from Regency. 7 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 (f) Stock-Based Compensation Regency is committed to contribute to the Partnership all proceeds from the exercise of options or other stock-based awards granted under Regency's Stock Option and Incentive Plan. Regency's ownership in the Partnership will be increased based on the amount of proceeds contributed to the Partnership. The Partnership follows the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("Statement 148"). Statement 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. As permitted under Statement 123 and Statement 148, the Partnership will continue to follow the accounting guidelines pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"), for stock-based compensation and to furnish the pro forma disclosures as required under Statement 148. The Partnership applies Opinion 25 in accounting for its plan, and accordingly, no compensation cost has been recognized for Regency's stock options in the consolidated financial statements. Had the Partnership determined compensation cost based on the fair value at the grant date for Regency's stock options under Statement 123, the Partnership's net income for common unit holders for the three months ended March 31, 2004 and 2003 would have been reduced to the pro forma amounts indicated below (in thousands except per unit data): 2004 2003 ---- ---- Net income for common unit holders as reported: $ 21,805 18,361 Add: stock-based employee compensation expense included in reported net income 3,548 2,869 Deduct: total stock-based employee compensation expense determined under fair value based methods for all awards 4,729 4,094 -------------- ------------- Pro forma net income $ 20,624 17,136 ============== ============= Earnings per unit: Basic - as reported $ 0.36 0.30 ============== ============= Basic - pro forma $ 0.34 0.28 ============== ============= Diluted - as reported $ 0.35 0.30 ============== ============= Diluted - pro forma $ 0.33 0.28 ============== ============= 8 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 (g) Consolidation of Variable Interest Entities In December 2003, the FASB issued Interpretation No. 46 ("FIN 46") (revised December 2003 ("FIN 46R")), "Consolidation of Variable Interest Entities", which addresses how a business enterprise should evaluate whether it has controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46, which was issued in January 2003. FIN 46R is applicable immediately to a variable interest entity created after January 31, 2003 and as of the first interim period ending after March 15, 2004 to those variable interest entities created before February 1, 2003 and not already consolidated under FIN 46 in previously issued financial statements. The Partnership did not create any variable interest entities after January 31, 2003. The Partnership has adopted FIN 46R, analyzed the applicability of this interpretation to its structures and determined that they are not party to any variable interest entities that should be consolidated. (h) Segment Reporting The Partnership's business is investing in retail shopping centers through direct ownership or through joint ventures. The Partnership actively manages its portfolio of retail shopping centers and may from time to time make decisions to sell lower performing properties, or developments not meeting its long-term investment objectives. The proceeds of sales are invested into higher quality retail shopping centers through acquisitions or new developments, which management believes will meet its planned rate of return. It is management's intent that all retail shopping centers will be owned or developed for investment purposes. The Partnership's revenue and net income are generated from the operation of its investment portfolio. The Partnership will also earn incidental fees from third parties for services provided to manage and lease retail shopping centers owned through joint ventures. The Partnership's portfolio is located throughout the United States; however, management does not distinguish or group its operations on a geographical basis for purposes of allocating resources or measuring performance. The Partnership reviews operating and financial data for each property on an individual basis, therefore, the Partnership defines an operating segment as its individual properties. No individual property constitutes more than 10% of the Partnership's combined revenue, net income or assets, and thus the individual properties have been aggregated into one reportable segment based upon their similarities with regard to both the nature of the centers, tenants and operational processes, as well as long-term average financial performance. In addition, no single tenant accounts for 10% or more of revenue and none of the shopping centers are located outside the United States. 9 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 (i) Derivative Financial Instruments The Partnership adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended ("Statement 133"), on January 1, 2001. Statement 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Partnership uses derivative financial instruments such as interest rate swaps to mitigate its interest rate risk on a related financial instrument. Statement 133 requires that changes in fair value of derivatives that qualify as cash flow hedges be recognized in other comprehensive income (loss) while the ineffective portion of the derivative's change in fair value be recognized immediately in earnings. Upon the settlement of a hedge, gains and losses associated with the transaction will be recorded in other comprehensive income (loss) and amortized over the underlying term of the hedge transaction. To determine the fair value of derivative instruments, the Partnership uses standard market conventions and techniques such as discounted cash flow analysis, option pricing models and termination costs at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. j) Financial Instruments with Characteristics of Both Liabilities and Equity In May 2003, the FASB issued Statement of Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("Statement 150"). Statement 150 affects the accounting for certain financial instruments, including requiring companies having consolidated entities with specified termination dates to treat minority owners' interests in such entities as liabilities in an amount based on the fair value of the entities. Although Statement 150 was originally effective July 1, 2003, the FASB has indefinitely deferred certain provisions related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to Statement 150 solely as a result of consolidation including minority interests of entities with specified termination dates. As a result, Statement 150 has no impact on the Partnership's consolidated statements of operations for the three months ended March 31, 2004. At March 31, 2004, the Partnership held a majority interest in four consolidated entities with specified termination dates ranging from 2012 to 2049. The minority owners' interests in these entities are to be settled upon termination by distribution of either cash or specific assets of the underlying entities. The estimated fair value of minority interests in entities with specified termination dates was approximately $5.2 million at March 31, 2004 as compared to the carrying value of $2.4 million. The Partnership has no other financial instruments that are affected by Statement 150. (k) Reclassifications Certain reclassifications have been made to the 2003 amounts to conform to classifications adopted in 2004. 10 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 2. Discontinued Operations During the three months ended March 31, 2004, the Partnership sold 100% of its interest in three operating properties for net proceeds of $21.3 million and the combined operating income and gain of $337,602 on these sales are included in discontinued operations. The revenues from properties included in discontinued operations, including properties sold in 2004 and 2003, as well as operating properties held for sale, were $775,863 and $3.9 million for the three months ended March 31, 2004 and 2003, respectively. The operating income from these properties was $325,647 and $1.8 million for the three months ended March 31, 2004 and 2003, respectively. 3. Real Estate Investments The Partnership accounts for all investments in which it owns 50% or less and does not have a controlling financial interest using the equity method. The Partnership's combined investment in these partnerships was $101.4 million and $140.5 million at March 31, 2004 and December 31, 2003, respectively. Net income, which includes all operating results, as well as gains and losses on sales of properties within the joint ventures, is allocated to the Partnership in accordance with the respective partnership agreements. Such allocations of net income are recorded in equity in income of investments in real estate partnerships in the accompanying consolidated statements of operations. The Partnership has a 25% equity interest in Macquarie CountryWide-Regency, LLC ("MCWR"), a joint venture with an affiliate of Macquarie CountryWide Trust of Australia, a Sydney, Australia-based property trust focused on investing in grocery-anchored shopping centers. At March 31, 2004, the Partnership held a note receivable from MCWR with a balance of $15.5 million for the acquisition of shopping centers during the fourth quarter of 2003. The note receivable has an interest rate of LIBOR plus 1.5% and was repaid in full on April 16, 2004. The Partnership also has a 20% equity interest in Columbia Regency Retail Partners, LLC ("Columbia"), a joint venture with the Oregon State Treasury that was formed for the purpose of investing in retail shopping centers. Recognition of gains from sales to joint ventures is recorded on only that portion of the sales not attributable to the Partnership's ownership interest. The gains and operations are not recorded as discontinued operations because of RCLP's continuing involvement in these shopping centers. Columbia and MCWR intend to continue to acquire retail shopping centers, some of which they may acquire directly from the Partnership. For those properties acquired from third parties, the Partnership is required to contribute its pro-rata share of the purchase price to the partnership. With the exception of Columbia and MCWR, both of which intend to continue expanding their investment in shopping centers, the investments in real estate partnerships represent single asset entities formed for the purpose of developing or owning retail based commercial real estate. In March 2004, the two properties in the OTR/Regency Texas Realty Holdings, L.P., an unconsolidated joint venture in which the Partnership has a 30% interest, were sold to an outside party for $28.3 million resulting in a gain of $8.2 million. The Partnership received $17.2 million representing $12.9 million for loan repayments and a $4.3 distribution for the Partnership's 30% interest. The Partnership recognized a $1.2 million gain in the equity in income of investments in real estate partnerships in the accompanying consolidated statements of operations. 11 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 3. Real Estate Investments (continued) The Partnership's investments in real estate partnerships as of March 31, 2004 and December 31, 2003 consist of the following (in thousands): Ownership 2004 2003 --------- ---- ---- Columbia Regency Retail Partners, LLC 20% $ 38,747 40,267 Macquarie CountryWide-Regency, LLC 25% 38,167 39,071 Other investments in real estate partnerships 27% - 50% 24,490 61,158 --------------- ------------- $ 101,404 140,496 =============== ============= Summarized financial information for the unconsolidated investments on a combined basis, is as follows (in thousands): March 31, December 31, 2004 2003 ---- ---- Balance Sheet: Investment in real estate, net $ 691,156 727,530 Acquired lease intangibles, net 43,725 45,252 Other assets 32,220 39,408 -------------------- -------------------- Total assets $ 767,101 812,190 ==================== ==================== Notes payable $ 328,051 322,238 Other liabilities 12,946 14,102 Equity and partners' capital 426,104 475,850 -------------------- -------------------- Total liabilities and equity $ 767,101 812,190 ==================== ==================== Unconsolidated partnerships and joint ventures had notes payable of $328.1 million at March 31, 2004 and the Partnership's proportionate share of these loans was $78.5 million. The Partnership does not guarantee any debt of these partnerships beyond their ownership percentage. The revenues and expenses on a combined basis are summarized as follows for the three months ended March 31, 2004 and 2003 (in thousands): 2004 2003 ---- ---- Statement of Operations: Total revenues $ 22,463 16,269 Gain on sale of operating properties 8,211 676 Total expenses 16,007 10,268 ---------------- --------------- Net income $ 14,667 6,677 ================ =============== 12 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 4. Acquired Lease Intangibles Effective July 1, 2001, the Partnership adopted FAS 141, "Business Combinations", to account for the acquisition of shopping centers that are considered businesses. In accordance with FAS 141, identifiable intangible assets are valued and recorded at the acquisition date. Such intangibles include the value of in-place leases and above or below-market leases. Acquired lease intangible assets are net of accumulated amortization of $846,592 and $405,327 at March 31, 2004 and December 31, 2003, respectively. These assets have a weighted average amortization period of seven years. The aggregate amortization expense from acquired leases was $441,265 and $28,712 for the three months ended March 31, 2004 and 2003, respectively. Acquired lease intangible liabilities are net of previously accreted minimum rent of $1.2 million and $953,964 at March 31, 2004 and December 31, 2003, respectively and have a weighted average amortization period of seven years. 5. Notes Payable and Unsecured Line of Credit The Partnership's outstanding debt at March 31, 2004 and December 31, 2003 consists of the following (in thousands): 2004 2003 ---- ---- Notes Payable: Fixed rate mortgage loans $ 210,797 217,001 Variable rate mortgage loans 41,589 41,629 Fixed rate unsecured loans 999,191 999,147 --------------- --------------- Total notes payable 1,251,577 1,257,777 Unsecured line of credit 230,000 195,000 --------------- --------------- Total $ 1,481,577 1,452,777 =============== =============== On April 1, 2004, RCLP completed the sale of $150 million of ten-year senior unsecured notes. The 4.95% notes are due April 15, 2014 and were priced at 99.747% to yield 4.982%. The proceeds of the offering were used to partially repay the $200 million of 7.4% notes maturing on April 1, 2004 and the remaining balance due was funded from the unsecured line of credit. As a result of two forward-starting interest rate swaps initiated in 2003 totaling $144.2 million, the effective interest rate is 5.47%. On March 31, 2004, the interest rate swaps were settled for $5.7 million, which is recorded in other comprehensive loss and will be amortized over ten years to interest expense. The swaps qualify for hedge accounting under Statement 133; therefore, the change in fair value was recorded through other comprehensive loss. On March 26, 2004, the Partnership closed on the amended and restated unsecured revolving line of credit (the "Line"). Under the new agreement, the Line was reduced from $600 million to $500 million. The Line has a three-year term with a one-year extension option at an interest rate of LIBOR plus .75% which is a reduction of 10 basis points from the prior agreement. The current balance on the Line is $230 million. Interest rates paid on the Line, which were based on LIBOR plus .85%, were 1.975% on March 31, 2004 and December 31, 2003. The spread paid on the Line is dependent upon the Partnership maintaining specific investment-grade ratings. The Partnership is also required to comply, and is in compliance, with certain financial covenants such as Minimum Net Worth, Total Liabilities to Gross Asset Value ("GAV") and Secured Indebtedness to GAV and other covenants customary with this type of unsecured financing. The Line is used primarily to finance the development of real estate, but is also available for general working capital purposes. 13 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 5. Notes Payable and Unsecured Line of Credit (continued) Mortgage loans are secured by certain real estate properties and may be prepaid, but could be subject to a yield-maintenance premium. Mortgage loans are generally due in monthly installments of interest and principal and mature over various terms through 2023. Variable interest rates on mortgage loans are currently based on LIBOR plus a spread in a range of 125 to 150 basis points. Fixed interest rates on mortgage loans range from 5.65% to 9.50%. The fair value of the Partnership's notes payable and Line are estimated based on the current rates available to the Partnership for debt of the same remaining maturities. Variable rate notes payable and the Line are considered to be at fair value, since the interest rates on such instruments reprice based on current market conditions. Fixed rate loans assumed in connection with real estate acquisitions are recorded in the accompanying financial statements at fair value. Based on the borrowing rates currently available to the Partnership for loans with similar terms and average maturities, the fair value of long-term debt is $1.5 billion. As of March 31, 2004, scheduled principal repayments on notes payable and the Line were as follows (in thousands): Scheduled Principal Term Loan Total Scheduled Payments by Year Payments Maturities Payments -------------------------- -------------- --------------- --------------- Current year $ 3,612 224,485 228,097 2005 3,698 168,538 172,236 2006 3,397 21,126 24,523 2007 (includes the Line) 2,891 255,852 258,743 2008 2,697 19,619 22,316 2009 2,657 53,090 55,747 Beyond 5 Years 17,817 697,143 714,960 Unamortized debt premiums - 4,955 4,955 ----------- --------------- --------------- Total $ 36,769 1,444,808 1,481,577 =========== =============== =============== 6. Derivative Financial Instruments The Partnership is exposed to capital market risk, such as changes in interest rates. In order to manage the volatility relating to interest rate risk, the Partnership may enter into interest rate hedging arrangements from time to time. The Partnership does not utilize derivative financial instruments for trading or speculative purposes. During 2003, the Partnership entered into two forward-starting interest rate swaps of $96.5 million and $47.7 million. The Partnership designated the $144.2 million swaps as cash flow hedges to fix the rate on a refinancing in April 2004. On March 31, 2004, the Partnership settled the swaps with a payment to the counter-party for $5.7 million. The swaps qualify for hedge accounting under Statement 133, therefore the losses associated with the swaps have been included in accumulated other comprehensive loss since the settlement date. These amounts will be included as an adjustment to interest expense as interest is incurred on the $150 million of ten-year unsecured notes sold April 1, 2004. 14 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 7. Regency's Stockholders' Equity and Partners' Capital (a) RCLP has issued Cumulative Redeemable Preferred Units ("Preferred Units") in various amounts since 1998. The issues were sold primarily to institutional investors in private placements for $100 per unit. The Preferred Units, which may be called by RCLP at par after certain dates, have no stated maturity or mandatory redemption, and pay a cumulative, quarterly dividend at fixed rates. At any time after ten years from the date of issuance, the Preferred Units may be exchanged by the holder for Cumulative Redeemable Preferred Stock ("Preferred Stock") at an exchange rate of one share for one unit. The Preferred Units and the related Preferred Stock are not convertible into common stock of the Company. At March 31, 2004 and December 31, 2003, the face value of total Preferred Units issued was $229 million with an average fixed distribution rate of 8.88%. Terms and conditions of the Preferred Units outstanding as of March 31, 2004 are summarized as follows: Units Issue Amount Distribution Callable Exchangeable Series Outstanding Price Outstanding Rate by Partnership by Unitholder - -------------------------------------------------------------------------------------------------------------------------- Series B 850,000 100.00 85,000,000 8.750% 09/03/04 09/03/09 Series C 400,000 100.00 40,000,000 9.000% 09/03/04 09/03/09 Series D 500,000 100.00 50,000,000 9.125% 09/29/04 09/29/09 Series E 300,000 100.00 30,000,000 8.750% 05/25/05 05/25/10 Series F 240,000 100.00 24,000,000 8.750% 09/08/05 09/08/10 --------------- ----------------- 2,290,000 $ 229,000,000 =============== ================= 15 Regency Centers, L.P. Notes to Consolidated Financial Statements March 31, 2004 8. Earnings per Unit The following summarizes the calculation of basic and diluted earnings per common unit for the three months ended March 31, 2004 and 2003, respectively (in thousands except per unit data): 2004 2003 ---- ---- Numerator: Income from continuing operations 27,946 27,989 Discontinued operations $ 337 1,154 -------------- -------------- Net income 28,283 29,143 Less: Preferred unit distributions and original issuance costs 6,478 10,782 -------------- -------------- Net income for common unit holders - basic and diluted $ 21,805 18,361 ============== ============== Denominator: Weighted average common units outstanding for basis EPU 61,294 61,661 Incremental units to be issued under the Company's common stock options using the Treasury method 347 437 -------------- -------------- Weighted average common units outstanding for diluted EPU 61,641 62,098 ============== ============== Income per common unit - basic Income from continuing operations $ 0.35 0.28 Discontinued operations 0.01 0.02 -------------- -------------- Net income for common unit holders per unit $ 0.36 0.30 ============== ============== Income per common unit - diluted Income from continuing operations $ 0.34 0.28 Discontinued operations 0.01 0.02 -------------- -------------- Net income for common unit holders per unit $ 0.35 0.30 ============== ============== 9. Contingencies The Partnership is involved in litigation on a number of matters and is subject to certain claims which arise in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Partnership's consolidated financial position, results of operations or liquidity. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In addition to historical information, the following information contains forward-looking statements as defined under federal securities laws. These statements are based on current expectations, estimates and projections about the industry and markets in which Regency Centers Corporation ("Regency" or the "Company") operates, and managements' beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in national and local economic conditions; financial difficulties of tenants; competitive market conditions, including pricing of acquisitions and sales of properties and out-parcels; changes in expected leasing activity and market rents; timing of acquisitions, development starts and sales of properties and out-parcels; weather; the ability to obtain governmental approvals; and meeting development schedules. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of Regency Centers, L.P. ("RCLP" or the "Partnership") appearing elsewhere within. Introduction and Strategic Overview - ----------------------------------- Regency is a qualified real estate investment trust ("REIT"), which began operations in 1993. Our primary operating and investment goal is long-term growth in earnings per share and total shareholder return by focusing on a strategy of owning and operating grocery anchored shopping centers that are anchored by market-leading supermarkets, and that are located in areas with attractive demographics. Currently, our real estate investments before depreciation total $3.2 billion with 260 shopping centers in 21 states. At March 31, 2004, our gross leasable area ("GLA") totaled 29.8 million square feet and was 92.8% leased. Geographically, 20.1% of our GLA is located in Florida, 19.8% in California, 15.9% in Texas, 6.7% in Georgia, 6.4% in Ohio, and 31.1% spread throughout 16 other states. Regency owns and operates its shopping centers through its operating partnership, RCLP, in which we currently own 98% of the operating partnership units. Regency's operating, investing and financing activities are generally performed by RCLP. We earn revenues and generate operating cash flow by leasing space to grocers and retail side-shop tenants in our shopping centers. We experience growth in revenues by increasing occupancy and rental rates at currently owned shopping centers, and by developing new shopping centers. A neighborhood center is a convenient, cost-effective distribution platform for food retailers. Grocery anchored centers generate substantial daily traffic and offer sustainable competitive advantages to their tenants. This high traffic generates increased sales, thereby driving higher occupancy, rental rates and rental-rate growth for Regency, which we expect to sustain our growth in earnings per share and increase the value of our portfolio over the long term. We seek a range of strong national, regional and local specialty tenants, for the same reason that we choose to anchor our centers with leading grocers. We have created a formal partnering process -- the Premier Customer Initiative ("PCI") -- to promote mutually beneficial relationships with our non-grocer specialty retailers. The objective of PCI is for Regency to build a base of specialty tenants who represent the "best-in-class" operators in their respective merchandising categories. Such tenants reinforce the consumer appeal and other strengths of a center's grocery anchor, help to stabilize a center's occupancy, reduce re-leasing downtime, reduce tenant turnover and yield higher sustainable rents. We primarily grow our shopping center portfolio through new shopping center development, where we acquire the land and construct the building. Development is customer-driven, meaning we generally have an executed lease from the anchor before we start construction. Developments serve the growth needs of our grocery and specialty retail customers, result in modern shopping centers with long-term leases from the grocery anchors and produce attractive returns on our invested capital. This development process can require up to 36 months from initial land or redevelopment acquisition through construction, lease-up and stabilization of rental income, depending upon the size of the project. 17 Generally, anchor tenants begin operating their stores prior to construction completion of the entire center, resulting in rental income during the development phase. We intend to maintain a conservative capital structure to fund our growth programs without compromising our investment-grade ratings. Our approach is founded on our self-funding business model. This model utilizes center "recycling" as a key component. Our recycling strategy calls for us to re-deploy the proceeds from the sales of properties into new higher quality developments that we expect to generate sustainable revenue growth and more attractive returns on invested capital. Our commitment to maintaining a high-quality shopping center portfolio dictates that we continually assess the value of all of our properties and sell those that no longer meet our long-term investment standards. Joint venturing of shopping centers also provides us with a capital source for new development, as well as the opportunity to earn fees for asset and property management services. As asset manager, we are engaged by our partners to apply similar operating, investment, and capital strategies to the portfolios owned by the joint ventures. Joint ventures grow their shopping center investments through acquisitions from third parties or direct purchases of shopping centers from Regency. Although selling properties to joint ventures reduces our ownership interest, we continue to share in the risks and rewards of centers that meet our long-term investment strategy. Regency is not subject to liability and has no obligations or guarantees of the joint ventures beyond its ownership percentage. We have identified certain significant risks and challenges affecting our industry, and we are addressing them accordingly. A further economic downturn could result in declines in occupancy levels at our shopping centers, which would reduce our rental revenues; however, we believe that our investment focus on grocery anchored shopping centers that provide daily necessities will minimize the impact of a downturn in the economy. Increased competition from super-centers such as Wal-Mart could result in grocery anchor closings or consolidations in the grocery store industry. We currently have 29 shopping centers, less than 15% of our portfolio, that operate within three miles of a super-center and we closely monitor their performance and tenants' sales. A slow down in our shopping center development program would reduce operating revenues and gains from sales. We believe that developing shopping centers in markets with strong demographics with leading grocery stores will enable us to continue to maintain our development program at historical averages. Shopping Center Portfolio - ------------------------- The following table summarizes general operating statistics related to our shopping center portfolio, including properties partially owned in joint ventures, that we use to evaluate and monitor our performance: 3/31/04 12/31/03 ------- -------- Number of Properties 260 265 Properties in Development 33 36 Gross Leaseable Area (GLA) 29,761,376 30,347,744 Percent Leased - All Properties 92.8% 92.2% Percent Leased - Non development 95.4% 95.4% Same Property Growth Rate 2.3% 2.7% Lease Renewal Rate 81% 75% Base Rent Growth on Re-Leasing 8.5% 9.5% 18 A list of our shopping centers summarized by state and in order of largest holdings follows, including those properties that we partially own in joint ventures: March 31, 2004 December 31, 2003 -------------- ----------------- Location # Properties GLA % Leased # Properties GLA % Leased -------- ------------ --- -------- ------------ --- -------- Florida 50 5,969,835 94.9% 50 5,943,345 94.3% California 47 5,885,932 93.1% 49 5,917,372 90.8% Texas 38 4,719,882 87.4% 41 5,086,086 88.1% Georgia 20 2,008,066 95.4% 20 2,008,066 95.8% Ohio 14 1,901,538 89.7% 14 1,901,538 90.6% Colorado 15 1,623,654 95.7% 14 1,623,674 94.2% Virginia 10 1,272,244 90.0% 10 1,272,369 89.1% North Carolina 10 1,054,561 97.7% 10 1,050,061 98.7% Washington 10 1,047,532 94.5% 9 1,020,470 96.4% Oregon 8 838,715 92.2% 8 838,715 92.2% Arizona 7 653,000 93.2% 7 652,906 91.5% Tennessee 6 444,234 96.5% 6 444,234 96.5% Illinois 3 408,211 96.3% 3 408,211 97.0% Alabama 5 380,607 84.7% 6 543,330 85.5% Michigan 4 368,260 88.4% 4 368,260 87.2% South Carolina 5 339,926 96.0% 5 339,926 95.7% Kentucky 3 321,525 98.3% 3 323,029 97.8% Delaware 2 240,418 99.4% 2 240,418 99.5% Maryland 1 188,243 91.5% 1 188,243 90.2% New Jersey 1 88,993 93.9% 1 88,993 89.4% Pennsylvania 1 6,000 100.0% 1 6,000 100.0% Missouri - - - 1 82,498 91.5% ----------------- --------------- ---------------- ---------------- --------------- --------------- Total 260 29,761,376 92.8% 265 30,347,744 92.2% ================= =============== ================ ================ =============== =============== The following summarizes the four largest grocery tenants occupying our shopping centers, including those partially owned through joint ventures at March 31, 2004: Percentage of Percentage of Grocery Number of Company-owned Annualized Anchor Stores (a) GLA (b) Base Rent (b) ------ ---------- ------------- ------------- Kroger 58 11.1% 8.1% Publix 53 8.2% 5.1% Safeway 48 6.2% 4.8% Albertsons 23 2.9% 2.2% (a) Includes stores owned by the grocery anchor that are attached to our centers. (b) GLA includes 100% of the GLA in unconsolidated joint ventures. Annualized base rent includes only Regency's pro-rata share of rent from unconsolidated joint ventures. Liquidity and Capital Resources - ------------------------------- General - ------- We expect that cash generated from revenues will provide the necessary funds on a short-term basis to pay our operating expenses, interest expense, scheduled principal payments on outstanding indebtedness, recurring capital expenditures necessary to maintain our shopping centers properly, and distributions to stock and unit holders. Net cash provided by operating activities was $37.9 million and $34.0 million for the three months ended March 31, 2004 and 2003, respectively. During the three months ended March 31, 2004 and 2003, we incurred capital expenditures of $1.4 million and $2.6 million 19 to maintain our shopping centers, paid scheduled principal payments of $1.5 million and $1.5 million to our lenders, and paid dividends and distributions of $38.9 million and $40.2 million to our share and unit holders, respectively. Although base rent is supported by long-term lease contracts, tenants who file bankruptcy are able to cancel their leases and close the related stores. In the event that a tenant with a significant number of leases in our shopping centers files bankruptcy and cancels its leases, we could experience a significant reduction in our revenues. We are not currently aware of any current or pending bankruptcy of any of our tenants that would cause a significant reduction in our revenues, and no tenant represents more than 10% of Regency's annual base rental revenues. We expect to meet long-term capital requirements for maturing preferred units and debt, the acquisition of real estate, and the renovation or development of shopping centers from: (i) residual cash generated from operating activities after the payments described above, (ii) proceeds from the sale of real estate, (iii) joint venturing of real estate, (iv) refinancing of debt, and (v) equity raised in the private or public markets. Regency currently has $325 million available for equity securities under their shelf registration and RCLP has $185 million available for debt under their shelf registration. Additionally, we have the right to call and repay, at par, outstanding preferred units five years after their issuance date, at our discretion. We intend to continue to grow our portfolio through new development and acquisitions, either directly or through our joint venture relationships. Because development and acquisition activities are discretionary in nature, they are not expected to burden the capital resources we have currently available for liquidity requirements. Capital necessary to complete developments-in-process are funded from our line of credit. Regency expects that cash provided by operating activities, unused amounts available under our line of credit and cash reserves are adequate to meet short-term and committed long-term liquidity requirements. Shopping Center Development, Acquisitions and Sales - --------------------------------------------------- At March 31, 2004, we had 33 projects under construction or undergoing major renovations, which, when completed, will represent an expected investment of $613.7 million before the estimated reimbursement of certain tenant-related costs and projected sales proceeds from adjacent land and out-parcels of $127.6 million. Costs necessary to complete these developments will be $241.7 million, are generally already committed as part of existing construction contracts, and will be expended through 2006. These developments are approximately 61% complete and 78% pre-leased. The costs necessary to complete these developments will be funded from our line of credit which has a commitment amount of $500 million and a balance of $230.0 million at March 31, 2004. In the first quarter of 2004, we started one new development of $4.9 million based on total costs that we expect to expend through completion. At March 31, 2004, we sold three retail centers to third parties for $27.0 million, compared with three retail centers sold for $14.0 million during the first quarter of 2003 as part of our asset recycling program. Of the centers sold in 2004, all three were operating during 2004 and are included in discontinued operations in our accompanying consolidated statements of operations. The three centers sold during the first quarter of 2003 were operating and are included in discontinued operations. We have land out-parcels adjacent to our shopping centers that we routinely develop, lease, or sell. At March 31, 2004 and 2003, sales related to out-parcels were $10.0 million and $19.1 million, respectively. Investments in new developments and acquisitions, and proceeds from the sale of properties to third parties or partial sales to joint ventures are included in investing activities in the accompanying consolidated statements of cash flows. Net cash used in investing activities was $18.4 million and $44.0 million for the three months ended March 31, 2004 and 2003, respectively. 20 Investments in Real Estate Partnerships - --------------------------------------- At March 31, 2004, we had investments in real estate partnerships of $101.4 million, primarily comprised of two partnerships, a 20% investment interest in Columbia Regency Retail Partners, LLC ("Columbia"), a joint venture with the Oregon State Treasury, and a 25% investment interest in Macquarie CountryWide-Regency, LLC ("MCWR"), a joint venture with an affiliate of Macquarie CountryWide Trust of Australia, a Sydney, Australia-based property trust. The purpose of these partnerships is to invest in retail shopping centers, and we have been engaged by our partners to provide asset and property management services. The following is a summary of unconsolidated combined assets and liabilities of these partnerships, and our pro-rata share at March 31, 2004 and December 31, 2003 ($ amounts in thousands): 2004 2003 ---- ---- Number of Joint Ventures 7 8 Regency's Ownership 20%-50% 20%-50% Number of Properties 44 46 Combined Assets $ 767,101 $ 812,190 Combined Liabilities 340,997 336,340 Combined Equity 426,104 475,850 Regency's Share of: Assets $ 182,554 $ 239,801 Liabilities 81,150 99,305 Equity 101,404 140,496 At March 31, 2004 and 2003 total unconsolidated combined net income was $14.7 million and $6.7 million, and our pro-rata share was $2.7 million and $2.3 million, respectively. At March 31, 2004, Columbia owned 13 shopping centers and had total assets of $291.8 million. At March 31, 2004, MCWR owned 26 shopping centers and had total assets of $408.6 million. At March 31, 2004, we held a note receivable from MCWR with a balance of $15.5 million for the acquisition of shopping centers during the fourth quarter of 2003. The note receivable was repaid in full on April 16, 2004. The gain we recognize on the sales of our properties to Columbia and MCWR is recorded on only the portion attributable to their ownership percentage. The gains and operations are not recorded as discontinued operations because of our continuing involvement in these shopping centers. Columbia and MCWR intend to continue to acquire retail shopping centers, some of which they may acquire directly from us. For those properties acquired from third parties, we are required to contribute our pro-rata share of the purchase price to the partnership. In March 2004, the only two properties owned by the OTR/Regency Texas Realty Holdings, L.P. were sold to a third party for $28.3 million resulting in a gain of $8.2 million. We received $17.2 million and recognized our share of the gain of $1.2 million in equity in income of investments in real estate partnerships. 21 Debt and Equity - --------------- Outstanding debt at March 31, 2004 and December 31, 2003 consists of the following (in thousands): 2004 2003 ---- ---- Notes Payable: Fixed-rate mortgage loans $ 210,797 217,001 Variable-rate mortgage loans 41,589 41,629 Fixed-rate unsecured loans 999,191 999,147 -------------- --------------- Total notes payable 1,251,577 1,257,777 Unsecured line of credit 230,000 195,000 -------------- --------------- Total $ 1,481,577 1,452,777 ============== =============== Mortgage loans are secured and may be prepaid, but could be subject to yield maintenance premiums. Mortgage loans are generally due in monthly installments of interest and principal, and mature over various terms through 2023. Variable interest rates on mortgage loans are currently based on LIBOR, plus a spread in a range of 125 to 150 basis points. Fixed interest rates on mortgage loans range from 5.65% to 9.5%. On March 26, 2004, we entered into a new unsecured revolving line of credit (the "Line"). Under the new agreement, we reduced the line commitment from $600 million to $500 million, but have the right to expand the Line by an additional $150 million subject to additional lender syndication. The new facility has a three-year term, a one-year extension option at maturity, and an interest rate of LIBOR plus .75% which is a reduction of 10 basis points from the previous agreement. Interest rates paid on the Line, which were based on LIBOR plus .85%, were 1.975% on March 31, 2004 and December 31, 2003. The spread that we pay on the Line is dependent upon maintaining specific investment-grade ratings. We are also required to comply, and are in compliance, with certain financial covenants such as Minimum Net Worth, Total Liabilities to Gross Asset Value ("GAV") and Secured Indebtedness to GAV and other covenants customary with this type of unsecured financing. The Line is used primarily to finance the development of real estate, but is also available for general working capital purposes. As of March 31, 2004, scheduled principal repayments on notes payable and the Line were as follows (in thousands): Scheduled Principal Term-Loan Total Scheduled Payments by Year Payments Maturities Payments -------------------------- -------------- --------------- --------------- Current year $ 3,612 224,485 228,097 2005 3,698 168,538 172,236 2006 3,397 21,126 24,523 2007 (includes the Line) 2,891 255,852 258,743 2008 2,697 19,619 22,316 2009 2,657 53,090 55,747 Beyond 5 Years 17,817 697,143 714,960 Unamortized debt premiums - 4,955 4,955 -------------- --------------- --------------- Total $ 36,769 1,444,808 1,481,577 ============== =============== =============== Our investments in real estate partnerships had unconsolidated notes and mortgage loans payable of $328.1 million at March 31, 2004, and our proportionate share of these loans was $78.5 million. We do not guarantee any debt of these partnerships beyond our ownership percentage. We are exposed to capital market risk such as changes in interest rates. In order to manage the volatility related to interest-rate risk, we originate new debt with fixed interest rates, or we consider entering into interest-rate hedging arrangements. At March 31, 2004, 82% of our total debt had fixed 22 interest rates, compared with 84% at December 31, 2003. We intend to limit the percentage of variable interest- rate debt to be no more than 30% of total debt, which we believe to be an acceptable risk. Based upon the variable interest-rate debt outstanding at March 31, 2004, if variable interest rates were to increase by 1%, our annual interest expense would increase by $2.7 million. We do not utilize derivative financial instruments for trading or speculative purposes. We account for derivative instruments under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended ("Statement 133"). On April 1, 2004, RCLP completed the sale of $150 million ten-year senior unsecured notes (the "Notes"). The 4.95% Notes are due April 15, 2014 and were priced at 99.747% to yield 4.982%. The proceeds of the offering combined with borrowings from the Line were used to repay $200 million of 7.4% notes maturing on April 1, 2004. Related to the offering, we settled two forward-starting interest rate swaps that were initiated in 2003 totaling $144.2 million. Our settlement payment of $5.7 million is recorded in other comprehensive loss and will be amortized over the ten year term of the Notes into interest expense. The swaps qualified for hedge accounting under Statement 133; and therefore, the change in fair value was recorded in other comprehensive loss. After taking into effect the hedge settlement, the effective interest rate on the Notes is 5.47%. We have issued Preferred Units in various amounts since 1998, the net proceeds of which we used to reduce the balance of the Line. We issued Preferred Units primarily to institutional investors in private placements. The Preferred Units, which may be called by us in 2004 and 2005, have no stated maturity or mandatory redemption, and they pay a cumulative, quarterly dividend at fixed rates ranging from 8.75% to 9.125%. At any time after ten years from the date of issuance, the Preferred Units may be exchanged by the holders for Cumulative Redeemable Preferred Stock at an exchange rate of one share for one unit. The Preferred Units and the related Preferred Stock are not convertible into Regency common stock. At March 31, 2004 and December 31, 2003, the face value of total Preferred Units issued was $229 million with an average fixed distribution rate of 8.88%. Included in Preferred Units are original issuance costs of $5.5 million that will be expensed as the underlying Preferred Units are redeemed in the future. In summary, net cash used in financing activities related to the debt and equity activity discussed above was $5.8 million and $18.3 million for the three months ended March 31, 2004 and 2003, respectively. Critical Accounting Policies and Estimates - ------------------------------------------ Knowledge about our accounting policies is necessary for a complete understanding of our financial results, and discussions and analysis of these results. The preparation of our financial statements requires that we make certain estimates that impact the balance of assets and liabilities at a financial statement date and the reported amount of income and expenses during a financial reporting period. These accounting estimates are based upon our judgments and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from those judgments, or that the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to ensure reasonableness. However, the amounts we may ultimately realize could differ from such estimates. Capitalization of Costs - We have an investment services group with an established infrastructure that supports the due diligence, land acquisition, construction, leasing and accounting of our development properties. All direct costs related to these activities are capitalized. Included in these costs are interest and real estate taxes incurred during construction, as well as estimates for the portion of internal costs that are incremental and deemed directly or indirectly related to our development activity. If future accounting standards limit the amount of internal costs that may be capitalized, or if our development activity were to decline significantly without a proportionate decrease in internal costs, we could incur a significant increase in our operating expenses. 23 Valuation of Real Estate Investments - Our long-lived assets, primarily real estate held for investment, are carried at cost unless circumstances indicate that the carrying value of the assets may not be recoverable. We review long-lived assets for impairment whenever events or changes in circumstances indicate such an evaluation is warranted. The review involves a number of assumptions and estimates used to determine whether impairment exists. Depending on the asset, we use varying methods such as i) estimating future cash flows, ii) determining resale values by market, or iii) applying a capitalization rate to net operating income using prevailing rates in a given market. These methods of determining fair value can fluctuate significantly as a result of a number of factors, including changes in the general economy of those markets in which we operate, tenant credit quality and demand for new retail stores. If we determine that impairment exists due to our inability to recover an asset's carrying value, a provision for loss is recorded to the extent that the carrying value exceeds estimated fair value. Discontinued Operations - The application of current accounting principles that govern the classification of any of our properties as held for sale on the balance sheet, or the presentation of results of operations and gains on the sale of these properties as discontinued, requires management to make certain significant judgments. In evaluating whether a property meets the criteria set forth by Financial Accounting Standards Board ("FASB") Statement No. 144 "Accounting for the Impairment and Disposal of Long-Lived Assets" ("Statement 144"), the Partnership makes a determination as to the point in time that it can be reasonably certain that a sale will be consummated. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period, if at all. Due to these uncertainties, it is not likely that the Partnership can meet the criteria of Statement 144 prior to the sale formally closing. Therefore, any properties categorized as held for sale represent only those properties that management has determined are probable to close within the requirements set forth in Statement 144. The Partnership also makes judgments regarding the extent of involvement it will have with a property subsequent to its sale, in order to determine if the results of operations and gain on sale should be reflected as discontinued. Consistent with Statement 144, any property sold to an entity in which the Partnership has significant continuing involvement (most often joint ventures) are not considered to be discontinued. In addition, any property which the Partnership sells to an unrelated third party, but retains a property or asset management function, is also not considered discontinued. Thus, only properties sold, or to be sold, to unrelated third parties for which the Partnership, in its judgment, has no continuing involvement are classified as discontinued. Income Tax Status - The prevailing assumption underlying the operation of our business is that we will continue to operate so as to qualify as a REIT, defined under the Internal Revenue Code. We are required to meet certain income and asset tests on a periodic basis to ensure that we continue to qualify as a REIT. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to stockholders. We evaluate the transactions that we enter into and determine their impact on our REIT status. Determining our taxable income, calculating distributions, and evaluating transactions requires us to make certain judgments and estimates as to the positions we take in our interpretation of the Internal Revenue Code. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, our positions are subject to change at a later date upon final determination by the taxing authorities. Results from Operations - ----------------------- Comparison of the three months ended March 31, 2004 to 2003 At March 31, 2004, we were operating or developing 260 shopping centers. We identify our shopping centers as either development properties or stabilized properties. Development properties are defined as properties that are in the construction and initial lease-up process and are not yet fully leased (fully leased generally means greater than 93% leased) or occupied. Stabilized properties are those properties that are generally greater than 93% leased and, if they were developed, are more than three years beyond their original development start date. At March 31, 2004, we had 227 stabilized shopping centers that were 95.4% leased. 24 Our revenues increased by $4.4 million, or 5%, to $95.8 million in 2004. This increase was related to changes in occupancy for the combined portfolio of stabilized and development properties, growth in re-leasing rental rates, and revenues from new developments commencing operations in 2004, net of a reduction in revenues from properties sold. During the first quarter of 2004, our rental rates grew by 8.5% from renewal leases and new leases replacing previously occupied spaces in the stabilized properties. In addition to collecting minimum rent from our tenants for the GLA that they lease from us, we also collect contingent rent based upon tenant sales, which we refer to as percentage rent. Tenants are also responsible for reimbursing us for their pro-rata share of the expenses associated with operating our shopping centers. In 2004, our minimum rent increased by $3.6 million, or 5%, and our recoveries from tenants increased $164,820, or 1%. Percentage rent was $453,410 in 2004 compared with $298,841 in 2003 due to an increase related to higher tenant sales. Our operating expenses increased by $5.3 million, or 12%, to $50.5 million in 2004. Our combined operating, maintenance, and real estate taxes increased by $1.3 million, or 6%, during 2004 to $24.0 million. This increase was primarily due to new developments that incurred operating expenses for only a portion of the previous year and general increases in operating expenses on the stabilized properties. Our general and administrative expenses were $5.9 million during 2004, compared with $4.1 million in 2003, or 42% higher, primarily related to accruing higher incentive compensation based upon growth in revenues and earnings per unit. Our depreciation and amortization expense increased $2.2 million during the current year related to development properties placed in service during 2004. Our net interest expense increased to $21.2 million in 2004 from $20.6 million in 2003. Average interest rates on our outstanding debt declined to 6.45% at March 31, 2004 compared with 6.84% at March 31, 2003, primarily due to reductions in the LIBOR rate. Our average fixed interest rates were 7.46% at March 31, 2004, compared with 7.49% at March 31, 2003. Our weighted average outstanding debt at March 31, 2004 was $1.5 billion compared with $1.4 billion at March 31, 2003. We account for profit recognition on sales of real estate in accordance with FASB Statement No. 66, "Accounting for Sales of Real Estate." Profits from sales of real estate will not be recognized by us unless a sale has been consummated; the buyer's initial and continuing investment is adequate to demonstrate a commitment to pay for the property; we have transferred to the buyer the usual risks and rewards of ownership; and we do not have substantial continuing involvement with the property. Gains from the sale of operating and development properties were $4.0 million in 2004 related to the sale of seven out-parcels for $10.0 million. During 2003, we recorded gains of $2.4 million related to the sale of ten out-parcels for $19.1 million. These gains are included in continuing operations rather than discontinued operations because they were either properties that had no operating income, or they were properties sold to joint ventures where we have a continuing minority investment. We review our real estate portfolio for impairment whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of an asset. We determine whether impairment has occurred by comparing the property's carrying value to an estimate of fair value based upon methods described in our Critical Accounting Policies. In the event a property is impaired, we write down the asset to fair value for "held-and-used" assets and to fair value less costs to sell for "held-for-sale" assets. Our income from discontinued operations was $337,602 in 2004 related to three centers sold to third parties for $27.0 million, which produced gains on sale of $11,955. In compliance with the adoption of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement 144") in January 2002, if we sell an asset in the current year, we are required to reclassify its operating income into discontinued operations for all prior periods. This practice results in a reclassification of amounts previously reported as continuing operations into discontinued operations. Reclassified operating income from discontinued operations was $1.8 million in 2003, a result of reclassifying the historical operations of the properties sold in 2004 as well as properties sold subsequent to March 31, 2003. During the first quarter of 2003, we sold two properties for $9.2 million to third parties, which resulted in a loss of $642,116. 25 In March of 2003, we redeemed $35 million of Series C 9% Preferred Units and $40 million of Series E 8.75% Preferred Units. At the time of redemption, the premium and $1.9 million of previously deferred costs related to the original preferred units' issuance were recognized in the consolidated statements of operations as a component of preferred unit distributions. During August of 2003, we redeemed the $80 million Series A 8.125% Preferred Units. As a result of these redemptions, the preferred unit distributions was $4.3 million lower for the three months ended March 31, 2004. Net income for common unit holders was $21.8 million in 2004, compared with $18.4 million in 2003 or a 19% increase for the reasons previously discussed. Diluted earnings per unit were $0.35 in 2004, compared with $0.30 in 2003, or 17% higher, related to the increase in net income and a decrease in weighted average common units of 457,098 units. Environmental Matters - --------------------- We are subject to numerous environmental laws and regulations and we are primarily concerned with dry cleaning plants that currently operate or have operated at our shopping centers in the past. We believe that the tenants who currently operate plants do so in accordance with current laws and regulations. Generally, we use all legal means to cause tenants to remove dry cleaning plants from our shopping centers or convert them to environmentally approved systems. Where available, we have applied and been accepted into state-sponsored environmental programs. We have a blanket environmental insurance policy that covers us against third-party liabilities and remediation costs on shopping centers that currently have no known environmental contamination. We have also placed environmental insurance, where possible, on specific properties with known contamination, in order to mitigate our environmental risk. We believe that the ultimate disposition of currently known environmental matters will not have a material effect on Regency's financial position, liquidity, or operations; however, we can give no assurance that existing environmental studies with respect to our shopping centers have revealed all potential environmental liabilities; that any previous owner, occupant or tenant did not create any material environmental condition not known to us; that the current environmental condition of the shopping centers will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties; or that changes in applicable environmental laws and regulations or their interpretation will not result in additional environmental liability to us. Inflation - --------- Inflation has remained relatively low and has had a minimal impact on the operating performance of our shopping centers; however, substantially all of our long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling us to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise; and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indices. In addition, many of our leases are for terms of less than ten years, which permits us to seek increased rents upon re-rental at market rates. Most of our leases require tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, and insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk Market Risk - ----------- We are exposed to interest-rate changes primarily related to the variable interest rate on the line of credit and the refinancing of long-term debt which currently contain fixed interest rates. Our interest-rate risk management objective is to limit the impact of interest-rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we borrow primarily at fixed interest rates and may enter into derivative financial instruments such as interest-rate swaps, caps and treasury locks in order to mitigate our interest-rate risk on a related financial instrument. We have no plans to enter into derivative or interest-rate transactions for speculative purposes. Our interest-rate risk is monitored using a variety of techniques. The table below presents the principal cash flows (in thousands), weighted average interest rates of remaining debt, and the fair value of total debt (in thousands), by year of expected maturity to evaluate the expected cash flows and sensitivity to interest-rate changes. Fair 2004 2005 2006 2007 2008 2009 Thereafter Total Value ---- ---- ---- ---- ---- ---- ---------- ----- ----- Fixed rate debt $ 211,509 147,236 24,523 28,743 22,316 55,747 714,960 1,205,034 1,267,218 Average interest rate for all debt 7.60% 7.60% 7.60% 7.59% 7.61% 7.59% 7.34% - - Variable rate LIBOR debt $ 16,589 25,000 - 230,000 - - - 271,589 271,589 Average interest rate for all debt 1.89% 1.84% - 1.84% - - - - - As the table incorporates only those exposures that exist as of March 31, 2004, it does not consider those exposures or positions, which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented above has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest-rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at that time, and actual interest rates. Item 4. Controls and Procedures Under the supervision and with the participation of the Partnership's management, including the Partnership's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, the Partnership has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 27 PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10. Material Contracts 10.1 Credit Agreement dated as of March 26, 2004 by and among Regency Centers, L.P., Regency, each of the financial institutions initially a signatory thereto, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 of Regency Centers Corporation's Form 10-Q filed May 10, 2004). 31.1 Rule 15d-14 Certification of Chief Executive Officer. 31.2 Rule 15d-14 Certification of Chief Financial Officer. 31.3 Rule 15d-14 Certification of Chief Operating Officer. 32.1 Section 1350 Certification of Chief Executive Officer. 32.2 Section 1350 Certification of Chief Financial Officer. 32.3 Section 1350 Certification of Chief Operating Officer. (b) Reports on Form 8-K: Form 8-K filed for the purpose of filing exhibits under registration statement no. 333-58966. 28 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 7, 2004 REGENCY CENTERS , L.P. By: Regency Centers Corporation, General Partner By: /s/ J. Christian Leavitt ------------------------------------- Senior Vice President and Chief Accounting Officer 29