United States SECURITIES AND EXCHANGE COMMISSION Washington DC 20549 FORM 10-Q (Mark One) [X] For the quarterly period ended June 30, 1998 -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 1-12298 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) 356-7000 (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[ ] REGENCY CENTERS, L.P. Consolidated Balance Sheets June 30, 1998 and December 31, 1997 1998 1997 ---- ---- (unaudited) Assets Real estate investments, at cost: Land $ 183,543,075 134,457,274 Buildings and improvements 653,450,521 467,730,009 Construction in progress - development for investment 9,947,030 13,427,370 Construction in progress - development for sale 21,186,446 20,173,039 ------------ ----------- 868,127,072 635,787,692 Less: accumulated depreciation 24,857,246 22,041,114 ------------ ----------- 843,269,826 613,746,578 Investments in real estate partnerships 22,401,368 999,730 ------------ ----------- Net real estate investments 865,671,194 614,746,308 Cash and cash equivalents 7,997,662 14,642,429 Tenant receivables, net of allowance for uncollectible accounts of $2,203,559 and $1,162,570 at June 30, 1998 and December 31, 1997, respectively 8,523,897 7,245,788 Deferred costs, less accumulated amortization of $1,626,167 and $1,456,933 at June 30, 1998 and December 31, 1997, respectively 2,589,036 2,215,099 Other assets 2,764,023 2,299,521 ----------- ----------- $ 887,545,812 641,149,145 =========== =========== Liabilities and Stockholders' Equity Liabilities: Mortgage loans payable 224,440,767 145,455,989 Acquisition and development line of credit 89,731,185 48,131,185 Accounts payable and other liabilities 14,484,214 9,972,065 Tenants' security and escrow deposits 2,255,767 1,854,700 ----------- ----------- Total liabilities 330,911,933 205,413,939 ----------- ----------- Limited partners' interest in consolidated partnerships (note 2) 7,354,704 7,305,945 ----------- ----------- Redeemable preferred units 78,800,000 - Redeemable operating partnership units 470,479,175 428,429,261 ------------ ----------- Partners' capital 549,279,175 428,429,261 ------------ ----------- Commitments and contingencies $ 887,545,812 641,149,145 =========== =========== See accompanying notes to consolidated financial statements. REGENCY CENTERS, L.P. Consolidated Statements of Operations For the Three Months ended June 30, 1998 and 1997 (unaudited) 1998 1997 ---- ----- Revenues: Minimum rent $ 20,137,351 14,163,423 Percentage rent 203,785 404,913 Recoveries from tenants 4,534,061 2,863,135 Management, leasing and brokerage fees 2,902,262 2,046,334 Equity in income (loss) of investments in real estate partnerships 145,425 (9,654) ---------- ---------- Total revenues 27,922,884 19,468,151 ---------- ---------- Operating expenses: Depreciation and amortization 4,594,855 3,200,573 Operating and maintenance 3,326,494 2,755,616 General and administrative 3,829,341 2,995,008 Real estate taxes 2,304,500 1,344,411 ---------- ---------- Total operating expenses 14,055,190 10,295,608 ---------- ---------- Interest expense (income): Interest expense 5,840,063 5,173,451 Interest income (615,226) (264,326) ----------- --------- Net interest expense 5,224,837 4,909,125 ----------- --------- Income before minority interests and sale of real estate investments 8,642,857 4,263,418 --------- --------- Minority interest of limited partners (103,009) (214,406) Gain on sale of real estate investments 508,678 - -------- -------- Net income for unitholders $ 9,048,526 4,049,012 ========= ========= Net income per unit: Basic $ .32 .20 ========= ========== Diluted $ .31 .19 ========= ========== See accompanying notes to consolidated financial statements. REGENCY CENTERS, L.P. Consolidated Statements of Operations For the Six Months ended June 30, 1998 and 1997 (unaudited) 1998 1997 ---- ----- Revenues: Minimum rent $ 37,201,835 23,099,828 Percentage rent 622,899 526,799 Recoveries from tenants 8,344,603 5,127,636 Management, leasing and brokerage fees 5,406,368 3,687,525 Equity in income of investments in real estate partnerships 146,411 17,137 --- ------- ----------- Total revenues 51,722,116 32,458,925 ---------- ----------- Operating expenses: Depreciation and amortization 8,740,321 5,151,973 Operating and maintenance 6,370,748 4,447,846 General and administrative 7,262,449 5,216,014 Real estate taxes 4,398,495 2,719,695 --------- ---------- Total operating expenses 26,772,013 17,535,528 ---------- ---------- Interest expense (income): Interest expense 9,249,580 7,631,828 Interest income (933,472) (423,016) ---------- ---------- Net interest expense 8,316,108 7,208,812 ----------- --------- Income before minority interests and sale of real estate investments 16,633,995 7,714,585 ---------- --------- Minority interest of limited partners (200,159) (345,142) Gain on sale of real estate investments 10,746,097 - ---------- --------- Net income for unitholders $ 27,179,933 7,369,443 ========== ========= Net income per unit: Basic $ 1.04 .35 ==== === Diluted $ 1.02 .32 ==== === See accompanying notes to consolidated financial statements. REGENCY CENTERS, L.P. Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1998 and 1997 (unaudited) 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 27,179,933 7,369,443 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation and amortization 8,740,321 5,151,973 Deferred financing cost and debt premium amortization (28,814) 441,004 Minority interest of limited partners 200,159 345,142 Equity in income of investments in real estate partnerships (146,411) (17,137) Gain on sale of real estate investments (10,746,097) - Changes in assets and liabilities: Tenant receivables (1,278,109) (1,175,630) Deferred leasing commissions (477,146) (173,658) Other assets (1,656,348) 712,327 Tenants' security deposits 401,067 689,406 Accounts payable and other liabilities 4,512,149 8,126,544 ----------- ----------- Net cash provided by operating activities 26,700,704 21,469,414 ------------ ----------- Cash flows from investing activities: Acquisition and development of real estate (119,980,748) (113,482,333) Investment in real estate partnerships (21,276,350) - Capital improvements (1,878,993) (1,013,456) Construction in progress for sale, net of reimbursement (1,013,407) (8,248,018) Proceeds from sale of real estate investments 30,662,197 - Distributions received from real Estate partnership investments 21,123 - ------------- ------------ Net cash used in investing activities (113,466,178) (122,743,807) ------------- ------------ Cash flows from financing activities: Net proceeds from issuance of redeemable partnership units 7,667 2,255,140 Cash contributions from the issuance of Regency stock 9,685,435 68,275,213 Cash distributions for dividends (25,416,413) (13,719,745) Other contributions (distributions), net 1,478,481 609,420 Proceeds from issuance of redeemable preferred units 78,800,000 - Proceeds from acquisition and Development line of credit, net 41,600,000 37,630,000 Proceeds from mortgage loans payable 7,345,000 15,148,753 Repayments of mortgage loans payable (32,763,104) (2,148,114) Deferred financing costs (616,359) (510,471) ----------- ----------- Net cash provided by financing activities 80,120,707 107,540,196 ------------ ----------- Net (decrease) increase in cash and cash equivalents (6,644,767) 6,265,803 ------------- ------------ Cash and cash equivalents at beginning of period 14,642,429 6,466,899 ------------ ----------- Cash and cash equivalents at end of period $ 7,997,662 12,732,702 =========== =========== REGENCY CENTERS, L.P. Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1998 and 1997 (unaudited) -continued- 1998 1997 ---- ---- Supplemental disclosure of non cash transactions: Mortgage loans assumed from sellers of real estate at fair value $ 104,751,624 111,052,817 =========== =========== Redeemable operating partnership units issued to sellers of real estate $ 28,963,411 94,769,706 =========== =========== See accompanying notes to consolidated financial statements. REGENCY CENTERS, L.P. Notes to Consolidated Financial Statements June 30, 1998 1. Summary of Significant Accounting Policies (a) Organization and Principles of Consolidation Regency Centers, L.P. (the Partnership) is the primary entity through which Regency Realty Corporation ("Regency"), a self-administered and self-managed real estate investment trust ("REIT"), conducts substantially all of its business and owns substantially all of its assets. In 1993, Regency was formed for the purpose of managing, leasing, brokering, acquiring, and developing shopping centers. The Partnership also provides management, leasing, brokerage and development services for real estate not owned by Regency (i.e., owned by third parties). The Partnership was formed in 1996 for the purpose of acquiring certain real estate properties. The historical financial statements of the Partnership reflect the accounts of the Partnership since its inception, together with the accounts of certain predecessor entities (including Regency Centers, Inc., a wholly-owned subsidiary of Regency through which Regency owned a substantial majority of its properties), which were merged with and into the Partnership as of February 26, 1998. The accompanying interim unaudited financial statements (the "Financial Statements") include the accounts of the Partnership, and its majority owned subsidiaries and partnerships. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which 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 generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, 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, 1997 Form 10 filed with the Securities and Exchange Commission. (b) Statement of Financial Accounting Standards No. 130 The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which is effective for fiscal years beginning after December 15, 1997. FAS 130 establishes standards for reporting total comprehensive income in financial statements, and requires that Companies explain the differences between total comprehensive income and net income. Management has adopted this statement in 1998. No differences between total comprehensive income and net income existed in the interim financial statements reported at June 30, 1998 and 1997. REGENCY CENTERS, L.P. Notes to Consolidated Financial Statements June 30, 1998 1. Summary of Significant Accounting Policies (continued) (c) Statement of Financial Accounting Standards No. 131 The FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), which is effective for fiscal years beginning after December 15, 1997. FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Management does not believe that FAS 131 will effect its current disclosures. (d) Emerging Issues Task Force Issue 97-11 Effective March 19, 1998, the Emerging Issues Task Force (EITF) ruled in Issue 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", that only internal costs of identifying and acquiring non-operating properties that are directly identifiable with the acquired properties should be capitalized, and that all internal costs associated with identifying and acquiring operating properties should be expensed as incurred. The Partnership had previously capitalized direct costs associated with the acquisition of operating properties as a cost of the real estate. The Partnership has adopted EITF 97-11 effective March 19, 1998. During 1997, the Partnership capitalized approximately $1.5 million of internal costs related to acquiring operating properties. Through the effective date of EITF 97-11, the Partnership has capitalized $474,000 of internal acquisition costs. For the remainder of 1998, the Partnership expects to incur $1.1 million of internal costs related to acquiring operating properties which will be expensed. (e) Emerging Issues Task Force Issue 98-9 On May 22, 1998, the EITF reached a consensus on Issue 98-9 "Accounting for Contingent Rent in Interim Financial Periods". The EITF has stated that lessors should defer recognition of contingent rental income that is based on meeting specified targets until those specified targets are met and not ratably throughout the year. The Partnership has previously recognized contingent rental income (i.e. percentage rent) ratably over the year based on the historical trends of its tenants. The Partnership has adopted Issue 98-9 prospectively and has ceased the recognition of contingent rents until such time as its tenants have achieved its specified target. The Partnership believes this will effect the interim period in which percentage rent is recognized, however it will not have a material impact on the annual recognition of percentage rent. (f) Reclassifications Certain reclassifications have been made to the 1997 amounts to conform to classifications adopted in 1998. REGENCY CENTERS, L.P. Notes to Consolidated Financial Statements June 30, 1998 2. Acquisitions of Shopping Centers During the first six months of 1998, the Partnership acquired a total of 23 shopping centers for approximately $225.2 million (the "1998 Acquisitions"). In January, 1998, the Partnership entered into an agreement to acquire the shopping centers from various entities comprising the Midland Group ("Midland") consisting of 21 shopping centers plus a development pipeline of 11 shopping centers. Of the 32 centers to be acquired or developed, 31 are anchored by Kroger, or its affiliate. Eight of the shopping centers included in the development pipeline will be owned through a joint venture in which the Partnership will own less than a 50% interest upon completion of construction (the "JV Properties"). As of June 30, 1998, the Partnership has acquired all but one of the shopping centers and all of the JV Properties. The Partnership's investment in the properties acquired from Midland is $180.3 million at June 30, 1998. During 1998, 1999 and 2000, including all payments made to date, the Partnership will pay approximately $213 million (including costs to be incurred on propertied currently under construction) for the 32 properties, and in addition may pay contingent consideration of $23 million, for the properties through the issuance of units of the Partnership, the payment of cash and the assumption of debt. In March, 1997, the Partnership acquired 26 shopping centers from Branch Properties ("Branch") for $232.4 million. Additional Units and shares of common stock may be issued after the first, second and third anniversaries of the closing with Branch (each an "Earn-Out Closing"), based on the performance of the properties acquired. The formula for the earn-out provides for calculating any increases in value on a property-by-property basis, based on any increases in net income for the properties acquired, as of February 15 of the year of calculation. The earn-out is limited to 721,997 Units at the first Earn-Out Closing and 1,020,061 Units for all Earn-Out Closings (including the first Earn-Out Closing). During March, 1998, the Partnership issued 721,997 Units and shares valued at $18.2 million to the partners of Branch. 3. Mortgage Loans Payable and Unsecured Line of Credit The Partnership's outstanding debt at June 30, 1998 and December 31, 1997 consists of the following: 1998 1997 ---- ---- Mortgage Loans Payable: Fixed rate secured loans $189,995,742 114,615,011 Variable rate secured loans 12,679,515 30,840,978 Fixed rate unsecured loans 21,765,510 - Unsecured line of credit 89,731,185 48,131,185 ------------ ----------- Total $314,171,952 193,587,174 ============ =========== During March, 1998, the Partnership modified the terms of its unsecured line of credit (the "Line") by increasing the commitment to $300 million, reducing the interest rate, and incorporating a competitive bid facility of up to $150 million of the commitment amount. Maximum availability under the Line is subject to a pool of unencumbered assets which cannot have an aggregate value less than 175% of the amount of the Partnership's outstanding unsecured liabilities. The Line matures in May 2000, but may be extended annually for one year periods. Borrowings under the Line bear interest at a variable rate based on LIBOR plus a specified spread, (.875% currently), which is dependent on the Partnership's investment grade rating. The Partnership's ratings are currently Baa2 from Moody's Investor Service, BBB from Duff and Phelps, and BBB- from Standard and Poors. The Partnership is required to comply with certain financial covenants consistent with this REGENCY CENTERS, L.P. Notes to Consolidated Financial Statements June 30, 1998 3. Mortgage Loans Payable and Unsecured Line of Credit (continued) type of unsecured financing. The Line is used primarily to finance the acquisition and development of real estate, but is available for general working capital purposes. On June 29, 1998, the Partnership issued $80 million of 8.125% Series A Cumulative Redeemable Preferred Units to an institutional investor in a private placement. The issuance involved the sale of 1.6 million Preferred Units for $50.00 per unit. The Preferred Units, which may be called by the Partnership at par on or after June 25, 2003, have no stated maturity or mandatory redemption, and pay a cumulative, quarterly dividend at an annualized rate of 8.125%. The Preferred Units are not convertible into common stock of Regency. The net proceeds of the offering were used to reduce the Partnership's bank line of credit. On July 17, 1998 the Partnership completed a $100 million private offering of senior term notes at an effective interest rate of 7.17%. The Notes were priced at 162.5 basis points over the current yield for seven year US Treasury Bonds. The net proceeds of the offering will be used to repay borrowings under the line of credit. Mortgage loans are secured by certain real estate properties, but generally may be prepaid subject to a prepayment of a yield-maintenance premium. Unconsolidated partnerships and joint ventures had mortgage loans payable of $62,727,120 at June 30, 1998, and the Partnership's share of these loans was $25,447,514. Mortgage loans are generally due in monthly installments of interest and principal and mature over various terms through 2018. Variable interest rates on mortgage loans are currently based on LIBOR plus a spread in a range of 125 basis points to 150 basis points. Fixed interest rates on mortgage loans range from 7.04% to 9.8%. During the first six months of 1998, the Partnership assumed mortgage loans with a face value of $99,602,679 related to the acquisition of shopping centers. The Partnership has recorded the loans at fair value which created debt premiums of $5,148,945 related to assumed debt based upon the above market interest rates of the debt instruments. Debt premiums are being amortized over the terms of the related debt instruments. As of June 30, 1998, scheduled principal repayments on mortgage loans payable and the unsecured line of credit were as follows: 1998 $8,325,724 1999 14,935,360 2000 99,525,400 2001 18,931,911 2002 38,654,417 Thereafter 128,998,937 ----------- Subtotal 309,371,749 Net unamortized debt premiums 4,800,203 ----------- Total 314,171,952 =========== REGENCY CENTERS, L.P. Notes to Consolidated Financial Statements June 30, 1998 4. Earnings Per Unit The following summarizes the calculation of basic and diluted earnings per unit for the three months ended, June 30, 1998 and 1997(in thousands except per unit data): 1998 1997 ---- ---- Basic Earnings Per Unit (EPU) Calculation: Weighted average units outstanding 23,855 13,440 Net income for unitholders $ 9,049 4,049 Less: dividends paid on Class B common stock 1,344 1,285 ----- ----- Net income for Basic Earnings per Unit $ 7,705 2,764 ===== ===== Basic Earnings per Unit $ .32 .20 === === Diluted Earnings Per Unit (EPU) Calculation: Weighted average units outstanding for Basic EPU 23,855 13,440 Incremental units to be issued under common stock options using the Treasury method - 78 Contingent units for the acquisition of real estate 519 1,138 ------ ------ Total diluted units 24,374 14,656 ====== ====== Diluted Earnings per Unit $ .32 .19 === === The Class B common stock dividends are deducted from income in computing earnings per unit since the proceeds of this offerings was transferred to and reinvested by the Partnership. Accordingly, payment of such dividends is dependent upon the operations of the Partnership. REGENCY CENTERS, L.P. Notes to Consolidated Financial Statements June 30, 1998 4. Earnings Per Unit (continued) The following summarizes the calculation of basic and diluted earnings per unit for the six months ended, June 30, 1998 and 1997(in thousands except per unit data): 1998 1997 ---- ---- Basic Earnings Per Unit (EPU) Calculation: Weighted average units outstanding 23,602 13,691 Net income for unitholders $ 27,180 7,369 Less: dividends paid on Class B common stock 2,689 2,570 ----- ----- Net income for Basic Earnings per Unit $ 24,491 4,799 ====== ===== Basic Earnings per Unit $ 1.04 .35 ===== === Diluted Earnings Per Unit (EPU) Calculation: Weighted average units outstanding for Basic EPU 23,602 13,691 Incremental units to be issued under common stock options using the Treasury method 27 89 Contingent units for the acquisition of real estate 428 759 ------ ------ Total diluted units 24,057 14,539 ====== ====== Diluted Earnings per Unit $ 1.02 .33 ==== === The Class B common stock dividends are deducted from income in computing earnings per unit since the proceeds of this offerings was transferred to and reinvested by the Partnership. Accordingly, payment of such dividends is dependent upon the operations of the Partnership. PART II Item 1. Legal Proceedings None Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands). 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 in this Form 10-Q, and with the Partnership's Form 10 filed August 7, 1998. Certain statements made in the following discussion may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve unknown risks and uncertainties of business and economic conditions pertaining to the operation, acquisition, or development of shopping centers including the retail business sector, and may cause actual results of the Partnership in the future to significantly differ from any future results that may be implied by such forward-looking statements. Organization RCLP is the primary entity through which Regency Realty Corporation ("Regency"), a self-administered and self-managed real estate investment trust ("REIT") conducts substantially all of its business and owns substantially all of its assets. In 1993, Regency was formed for the purpose of managing, leasing, brokering, acquiring, and developing shopping centers. The Partnership also provides management, leasing, brokerage and development services for real estate not owned by Regency (i.e., owned by third parties). Of the 124 properties included in Regency's portfolio at June 30, 1998, 103 properties were owned either fee simple or through partnership interests by the Partnership. At June 30, 1998, Regency had an investment in real estate, at cost, of approximately $1.1 billion of which $891 million or 81% was owned by the Partnership. Shopping Center Business The Partnership's principal business is owning, operating and developing grocery anchored neighborhood infill shopping centers. Infill refers to shopping centers within a targeted investment market offering sustainable competitive advantages such as barriers to entry resulting from zoning restrictions, growth management laws, or limited new competition from development or expansions. The Partnership's properties summarized by state including their gross leasable areas (GLA) follows: Location June 30, 1998 December 31, 1997 -------- ------------- ----------------- # Properties GLA % Leased # Properties GLA % Leased ----------- ----------- ---------- ------------ ----------- ------------ Florida 36 4,529,458 93.0% 35 4,168,458 93.5% Georgia 25 2,538,711 91.3% 23 2,368,890 92.4% North Carolina 12 1,241,784 97.2% 6 554,332 99.0% Ohio 10 1,045,630 97.3% - - - Texas 5 450,267 89.6% - - - Colorado 5 451,949 81.1% - - - Tennessee 4 295,257 93.7% 3 208,386 98.5% Kentucky 1 205,060 96.1% - - - South Carolina 1 79,723 95.0% 1 79,743 84.3% Virginia 2 197,324 98.1% - - - Michigan 1 85,478 99.0% - - - Missouri 1 82,498 98.4% - - - -------------- --------- ---------- ------------- ----------- ------------ Total 103 1,203,189 93.1 68 7,379,778 93.6% ============= ========= ========== ============= =========== ============ The Partnership is focused on building a platform of grocery anchored neighborhood shopping centers because grocery stores provide convenience shopping of daily necessities, foot traffic for adjacent local tenants, and should withstand adverse economic conditions. The Partnership's current investment markets have continued to offer strong stable economies, and accordingly, the Partnership expects to realize growth in net income as a result of increasing occupancy in the portfolio, increasing rental rates, development and acquisition of shopping centers in targeted markets, and redevelopment of existing shopping centers. The following table summarizes the four largest tenants occupying the Partnership's shopping centers: Average Grocery Anchor Number of % of % of Annual Remaining Lease Stores Total GLA Base Rent Term Kroger * 36 15.5% 15.5% 20 yrs Publix 26 8.3% 6.3% 13 yrs Winn Dixie 11 3.6% 2.7% 13 yrs Blockbuster 29 1.3% 2.1% 4 yrs *includes properties under development scheduled for opening in 1998 and 1999. Excluding development properties, Kroger would represent 12.3% of GLA and 11.8% of annual base rent. Acquisition and Development of Shopping Centers During the first six months of 1998, the Partnership acquired a total of 23 shopping centers for approximately $225.2 million (the "1998 Acquisitions"). In January, 1998, the Partnership entered into an agreement to acquire the shopping centers from various entities comprising the Midland Group ("Midland") consisting of 21 shopping centers plus a development pipeline of 11 shopping centers. Of the 32 centers to be acquired or developed, 31 are anchored by Kroger, or its affiliate. Eight of the shopping centers included in the development pipeline will be owned through a joint venture in which the Partnership will own less than a 50% interest upon completion of construction (the "JV Properties"). As of June 30, 1998, the Partnership has acquired all but one of the shopping centers and all of the JV Properties. The Partnership's investment in the properties acquired from Midland is $186.5 million at June 30, 1998. During 1998, 1999 and 2000, including all payments made to date, the Partnership will pay approximately $213 million (including costs to be incurred on propertied currently under construction) for the 32 properties, and in addition may pay contingent consideration of $23 million, for the properties through the issuance of units of RCLP, the payment of cash and the assumption of debt. The Partnership acquired 36 shopping centers during 1997 (the "1997 Acquisitions") for approximately $346.1 million. The 1997 Acquisitions include the acquisition of 26 shopping centers from Branch Properties ("Branch") for $232.4 million in March, 1997. The real estate acquired from Branch included 100% fee simple interests in 20 shopping centers, and also partnership interests (ranging from 50% to 93%) in four partnerships with outside investors that owned six shopping centers. The Partnership was also assigned the third party property management contracts of Branch on approximately 3 million SF of shopping center GLA that generate management fees and leasing commission revenues. Additional Units and shares of common stock may be issued after the first, second and third anniversaries of the closing with Branch (each an "Earn-Out Closing"), based on the performance of the properties acquired. The formula for the earn-out provides for calculating any increases in value on a property-by-property basis, based on any increases in net income for the properties acquired, as of February 15 of the year of calculation. The earn-out is limited to 721,997 Units at the first Earn-Out Closing and 1,020,061 Units for all Earn-Out Closings (including the first Earn-Out Closing). During March, 1998, the Partnership issued 721,997 Units and shares valued at $18.2 million to the partners of Branch. Liquidity and Capital Resources Net cash provided by operating activities was $26.7 million and $21.5 million for the six months ended June 30, 1998 and 1997, respectively, and is the primary source of funds to pay distributions on outstanding partnership Units (which Regency uses to pay dividends on its common stock), maintain and operate the shopping centers, and pay interest and scheduled principal reductions on outstanding debt. Changes in net cash provided by operating activities is further discussed below under results from operations. Net cash used in investing activities was $113.5 million and $122.7 million, during 1998 and 1997, respectively, as discussed above in Acquisitions and Development of Shopping Centers. Net cash provided by financing activities was $80.1 million and 107.5 million during 1998 and 1997, respectively. The Partnership paid distributions of $25.4 million and $13.7 million, during 1998 and 1997, respectively. In 1998, the Partnership increased its quarterly distribution per Unit to $.44 per share vs. $.42 per share in 1997, had more outstanding Units in 1998 vs. 1997; and accordingly, expects distributions paid during 1998 to increase substantially over 1997. The Partnership's total indebtedness at June 30, 1998 and 1997 was approximately $314.2 million and $271.1 million, respectively, of which $211.8 million and $120.4 million had fixed interest rates averaging 7.4% and 8.2 %, respectively. The weighted average interest rate on total debt at June 30, 1998 and 1997 was 7.4% and 7.8% respectively. During 1998, the Partnership, as part of its acquisition activities, assumed debt with a fair value of $104.8 million. The cash portion of the purchase price for the 1998 and 1997 Acquisitions was financed from the Partnership's line of credit (the "Line"). At June 30, 1998 and 1997, the balance of the Line was $89.7 million and $111.3 million, respectively. The Line has a variable rate of interest currently equal to the London Inter-bank Offered Rate ("LIBOR") plus 87.5 basis points. In March, 1998, the Partnership entered into an agreement with the banks that provide the Line to increase the unsecured commitment amount to $300 million, provide for a $150 million competitive bid facility, and reduce the interest rate on the line based upon achieving an investment grade rating. During the first quarter of 1998, RCLP received investment grade ratings from Moody's of Baa2, Duff and Phelps of BBB, and S&P of BBB-. On June 29, 1998, the Partnership issued $80 million of 8.125% Series A Cumulative Redeemable Preferred Units to an institutional investor in a private placement. The issuance involved the sale of 1.6 million Preferred Units for $50.00 per unit. The Preferred Units, which may be called at par on or after June 25, 2003, have no stated maturity or mandatory redemption, and pay a cumulative, quarterly dividend at an annualized rate of 8.125%. The Preferred Units are not convertible into common stock of Regency. The net proceeds of the offering were used to reduce the balance of the Line. On July 17, 1998 the Partnership completed a $100 million private offering of senior term notes at an effective interest rate of 7.17%. The Notes were priced at 162.5 basis points over the current yield for seven year US Treasury Bonds. The net proceeds of the offering were used to reduce the balance of the Line. Regency qualifies and intends to continue to qualify as a REIT under the Internal Revenue Code. As a REIT, Regency is allowed to reduce taxable income by all or a portion of its distributions to stockholders. Since Regency's distributions have exceeded it's taxable income, Regency has made no provision for federal income taxes. While the Partnership intends to continue to pay distributions such that Regency can continue to pay dividends to its stockholders, the Partnership will reserve such amounts of cash flow as it considers necessary for the proper maintenance and improvement of its real estate, while still allowing Regency to maintain its qualification as a REIT. The Partnership's real estate portfolio has grown substantially during 1998 as a result of the acquisitions discussed above. The Partnership intends to continue to acquire and develop shopping centers during 1998, and expects to meet the related capital requirements from borrowings on the Line, and from additional public equity and debt offerings. Because such acquisition and development activities are discretionary in nature, they are not expected to burden the Partnership's capital resources currently available for liquidity requirements. The Partnership expects that cash provided by operating activities, unused amounts available under the Line, and cash reserves are adequate to meet liquidity requirements. Results from Operations Comparison of the Six Months Ended June 30, 1998 to 1997 Revenues increased $19.3 million or 59% to $51.7 million in 1998. The increase was due primarily to the 1998 Acquisitions and 1997 Acquisitions. At June 30, 1998, the real estate portfolio contained approximately 11.2 million SF, was 93.1% leased and had average rents of $9.45 per SF. Minimum rent increased $14.1 million or 61%, and recoveries from tenants increased $3.2 million or 63%. Revenues from property management, leasing, brokerage, and development services provided on properties not owned by the Partnership were $5.4 million in 1998 compared to $3.7 million in 1997, the increase due primarily to fees earned from third party property management and leasing contracts acquired as part of the acquisition of Branch. During 1998, the Company sold four office buildings and a parcel of land for $30.6 million, and recognized a gain on the sale of $10.7 million. As a result of these transactions the Company's real estate portfolio is comprised entirely of neighborhood shopping centers. The proceeds from the sale were applied toward the purchase of the 1998 acquisitions. Operating expenses increased $9.2 million or 53% to $26.8 million in 1998. Combined operating and maintenance, and real estate taxes increased $3.6 million or 50% during 1998 to $10.8 million. The increases are due to the 1998 and 1997 Acquisitions. General and administrative expenses increased 39% during 1998 to $7.3 million due to the hiring of new employees and related office expenses necessary to manage the shopping centers acquired during 1998 and 1997, as well as, the shopping centers that the Partnership began managing for third parties during 1997. Depreciation and amortization increased $3.6 million during 1998 or 70% primarily due to the 1998 and 1997 Acquisitions. Interest expense increased to $9.2 million in 1998 from $7.6 million in 1997 or 21% due to increased average outstanding loan balances related to the financing of the 1998 and 1997 Acquisitions on the Line and the assumption of debt. Net income for common stockholders was $27.2 million in 1998 vs. $7.4 million in 1997, a $19.8 million or 269% increase for the reasons previously described. Diluted earnings per unit in 1998 was $1.02 vs. $0.32 in 1997 due to the increase in net income combined with the dilutive impact from the increase in weighted average common units and equivalents of 9.5 million primarily due to the acquisition of Branch and Midland, the issuance of units to SC-USREALTY during 1997, and the public offering completed in July, 1997. Comparison of the Three Months Ended June 30, 1998 to 1997 Revenues increased $8.5 million or 43% to $27.9 million in 1998. The increase was due primarily to the 1998 Acquisitions and 1997 Acquisitions. Minimum rent increased $6.0 million or 42%, and recoveries from tenants increased $1.7 million or 58%. Revenues from property management, leasing, brokerage, and development services provided on properties not owned by the Partnership were $2.9 million in 1998 compared to $2.0 million in 1997, the increase due primarily to fees earned from third party property management and leasing contracts acquired as part of the acquisition of Branch. Operating expenses increased $3.8 million or 37% to $14.1 million in 1998. Combined operating and maintenance, and real estate taxes increased $1.5 million or 37% during 1998 to $5.6 million. The increases are due to the 1998 and 1997 Acquisitions. General and administrative expenses increased 28% during 1998 to $3.8 million due to the hiring of new employees and related office expenses necessary to manage the shopping centers acquired during 1998 and 1997, as well as, the shopping centers that the Partnership began managing for third parties during 1997. Depreciation and amortization increased $1.4 million during 1998 or 44% primarily due to the 1998 and 1997 Acquisitions. Interest expense increased to $5.8 million in 1998 from $5.2 million in 1997 or 13% due to increased average outstanding loan balances related to the financing of the 1998 and 1997 Acquisitions on the Line and the assumption of debt. New Accounting Standards and Accounting Changes The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which is effective for fiscal years beginning after December 15, 1997. FAS 130 establishes standards for reporting total comprehensive income in financial statements, and requires that Companies explain the differences between total comprehensive income and net income. Management has adopted this statement in 1998. No differences between total comprehensive income and net income existed in the interim financial statements reported at June 30, 1998 and 1997. The FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), which is effective for fiscal years beginning after December 15, 1997. FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Management does not believe that FAS 131 will effect its current disclosures. Effective March 19, 1998, the Emerging Issues Task Force (EITF) ruled in Issue 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", that only internal costs of identifying and acquiring non-operating properties that are directly identifiable with the acquired properties should be capitalized, and that all internal costs associated with identifying and acquiring operating properties should be expensed as incurred. The Partnership had previously capitalized direct costs associated with the acquisition of operating properties as a cost of the real estate. The Partnership has adopted EITF 97-11 effective March 19, 1998. During 1997, the Partnership capitalized approximately $1.5 million of internal costs related to acquiring operating properties. Through the effective date of EITF 97-11, the Partnership has capitalized $474,000 of internal acquisition costs. For the remainder of 1998, the Partnership expects to incur $1.1 million internal costs related to acquiring operating properties which will be expensed. On May 22, 1998, the EITF reached a consensus on Issue 98-9 "Accounting for Contingent Rent in Interim Financial Periods". The EITF has stated that lessors should defer recognition of contingent rental income that is based on meeting specified targets until those specified targets are met and not ratably throughout the year. The Partnership has previously recognized contingent rental income (i.e. percentage rent) ratably over the year based on the historical trends of its tenants. The Partnership has adopted Issue 98-9 prospectively and has ceased the recognition of contingent rents until such time as its tenants have achieved its specified target. The Partnership believes this will effect the interim period in which percentage rent is recognized, however it will not have a material impact on the annual recognition of percentage rent. Environmental Matters The Partnership like others in the commercial real estate industry, is subject to numerous environmental laws and regulations and the operation of dry cleaning plants at the Partnership's shopping centers is the principal environmental concern. The Partnership believes that the dry cleaners are operating in accordance with current laws and regulations and has established procedures to monitor their operations. Based on information presently available, no additional environmental accruals were made and management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or operations of the Partnership. Inflation Inflation has remained relatively low during 1998 and 1997 and has had a minimal impact on the operating performance of the shopping centers, however, substantially all of the Partnership's long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Partnership 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 the Partnership's leases are for terms of less than ten years, which permits the Partnership to seek increased rents upon re-rental at market rates. Most of the Partnership's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Partnership's exposure to increases in costs and operating expenses resulting from inflation. Year 2000 System Compliance The Partnership has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" problem and is in process of resolving the issue. During 1997, the Partnership converted its operating system, and its general accounting and lease administration software systems to versions containing modifications that corrected for the Year 2000 problem. The Partnership will continue to assess its other internal systems and reprogram or upgrade as necessary, however, the cost to convert remaining systems is not expected to have a material effect on the Partnership's financial position. The Partnership is also reviewing the Year 2000 system conversions of other companies of which it does business in order to determine their compliance. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 4. Instruments defining the rights of security holders, including indentures Indenture dated as of July 20, 1998 among RCLP, the Guarantors named therein and First Union National Bank, as trustee, incorporated by reference to Exhibit 10.3 to the Regency Centers, L.P. Form 10 Registration Statement. Material Contracts Item 10. Material contracts Purchase and Sale Agreement, dated March 10, 1998 between Faison-Fleming Island Limited Partnership, a Florida limited partnership, as Seller, and RRC Acquisitions, Two, Inc. a Florida corporation, its designees, successors and assigns ("Buyer"), relating to the acquisition of Fleming Island Shopping Center. 10.1 Exchange and Registration Rights Agreement dated as of July 15, 1998 among RCLP, the Guarantors named therein and the Purchasers named therein, incorporated by reference to Exhibit 10.4 to the Partnership's Form 10 Registration Statement. Reports on Form 8-K: A report on Form 8-K was filed on July 20, 1998 reporting under Item 5. Acquisition of five shopping centers to include audited financial statements and December 31, 1997 audited financial statements for the Midland Group and pro forma condensed consolidated financial statements of operations for the three months ended March 31, 1998 and the year ended December 31, 1997. 27. Financial Data Schedule June 30, 1998 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: August 14, 1998 REGENCY CENTERS, L.P. By: /s/ J. Christian Leavitt Vice President, Treasurer and Secretary