Regency Centers delivered standout Q2 results, with 7.4% same-store NOI growth and 9.4% FFO/share growth, outpacing sector peers. REG’s leasing success is translating into real-time growth due to fewer option renewals, quicker lease commencements, and higher occupancy. Despite operational excellence and strong fundamentals, REG trades at a premium to peers, making its relative value less compelling. I view REG as a bellwether for future sector growth, but prefer cheaper peers poised for similar gains as lease mechanics play out. \n\nShopping centers, as a sector, have had multiple strong quarters in a row on the leasing front. New leases are consistently being signed well above expiring rent, but it hasn’t really translated to particularly strong same-store NOI growth or FFO/share growth. The sector has largely remained discounted because investors want to see the leasing prove out into real growth. Regency’s quarter was notable because it did exactly that.\n\nREG owns over 57 million square feet of retail space located across the USA. S&P Global Market Intelligence Their property locations essentially mirror population density distribution which makes REG a great bellwether for national shopping center performance. Property level performance has been strong and trending upward. Occupancy has eclipsed 96% which is essentially full because there is always going to be some frictional vacancy. 2MC The company has pushed rental rates up as occupancy rose leading to increasing same-store NOI growth. S&P Global Market Intelligence AFFO/share has been growing nicely and is projected to continue rising at a good pace. S&P Global Market Intelligence $3.53 to $4.96 in 5 years represents an 8% average pace (not compounded). Despite the growth, its stock price has done a whole lot of nothing, up a mere 15% over 10 years. SA That contrast between fundamentals and stock price has made REG quite a bit cheaper than it used to be.\n\nREG is trading at 18.9X forward AFFO and 95% of net asset value. Given its reasonably low leverage, size and operating history I think it is undervalued. In my opinion 20X-22X would be more appropriate for its growth rate. However, similar undervaluation is plaguing the entire sector so REG’s value is less clear on a relative basis. Even when using a leverage neutral adjustment, REG is trading at a significant premium to peers. Portfolio Income Solutions Some premium is warranted by REG’s operational excellence, but I still prefer certain peers. One potential reason REG trades at a premium is that its leasing seems to be better translating into other growth measures like Same-Store NOI and AFFO/share. With that in mind, I would like to dig into the mechanics of how leasing flows through to the bottom line.\n\nRegency reported 19.3% GAAP leasing spreads and 10% cash leasing spreads. Per usual, new leases were a bit high at 27.7% GAAP and renewals were a bit lower at 17.2% GAAP. REG These numbers are very normal for the shopping center sector right now. You would see similar leasing spreads at just about any peer. We will use GAAP numbers for comparability. BRX had 19.4% total rent spreads compared to 19.3% for REG. Yet REG had 7.4% same-store NOI growth while BRX came in at only 3.8%. Brixmor’s same-store NOI looks much closer to the rest of the sector, so there must be something special about the way REG’s leasing is translating to same-store. Brixmor’s rent spreads consisted of a blend of +43.8% on new leases, 15.5% on renewals and 6.8% on option leases. So while BRX’s new lease rolls are much higher, they are being drowned out by option based renewals granted to tenants from onerous leases signed maybe 10-15 years ago. Such renewal options have been par for the course in retail’s history. Shopping centers were in bad shape coming out of the Financial Crisis and before they fully recovered the “retail apocalypse” started in which seemingly every retailer wanted to jump into E-commerce. Demand for brick and mortar stores was weak from 2010-2018. As time went on, retailers realized that a “bricks and clicks” strategy was better as the physical locations actually synergized really well with online. Omnichannel revived retail real estate demand and the environment has been consistently getting stronger since 2018 with exception to brief shutdown during COVID. Since retail leases tend to be long, it is that 2010-2018 era of leases that is expiring now. In their desperation for tenants, many of the leases signed back then had unfavorable terms like renewal options for tenants where they could extend their leases at very little roll up. In the 2nd quarter, 756,000 of Brixmor’s leasing activity was via these options. That is close to a third of their overall leasing and the terms of the optioned allowed tenants to stay at just a 6.8% mark-up compared to the 43.8% mark-up for those who had to sign at market rates. These renewal options are not unique to Brixmor. They are endemic to the sector and dramatically holding back leasing strength from translating into bottom line growth. Regency is somehow different. As a large and very well capitalized company, REG may have felt less strain in the 2010-2018 era. Its renewal leases were seemingly free of onerous options, allowing their renewals to be as powerfully positive as new leases.\n\nAnother significant difference maker as to why REG’s leasing translated to growth is the timing of lease commencement. \n\nREG has $38 million in Signed-Not-Occupied (SNO) leases which represents about $0.21 per share in upside as these leases commence. REG That is a relatively low number compared to peers. Using Brixmor again as the comparable peer: BRX has $67.14 million SNO leases or $0.22 per share which represents more than 2X as much as a percentage of overall AFFO. SNO leasing is not a bad thing. It represents future growth that is contractually baked in. It is however, even better to get that growth today which is what REG is largely doing. Since REG is sitting at 96%+ occupancy they are approaching full which gives them enhanced negotiating power. It is much easier to tell a tenant that they have to open right away when there are other potential tenants wanting to occupy that exact same space. Other shopping center REITs are still closer to 93% occupied and at that level they will still gladly accept tenants who might be requesting a 12-16 month opening window.\n\nSummary of leasing differences causing REG to experience faster growth: \n1. No option renewals \n2. Less SNO leasing (quicker commencement period) \n3. Slightly shorter lease terms \n\nIn aggregate, these leasing differences cause REG to get its growth NOW while other shopping centers have to wait. Full mark-to-market will take longer for those with option renewals and achievement of higher NOI will have to wait until SNO leases commence. In my opinion, this makes Regency’s leasing unequivocally better than the rest of the sector. However, I think it worth noting that the differences largely come down to timing. When it comes to things that impact long term growth, it is basically the same.\n\nLeasing similarities: \n* Roll-ups both cash and GAAP \n* Mark-to-market magnitude \n* Net effective rent as percentage of rent REG’s net effective rent as a percentage of rent is about 80% REG That is very typical of the sector.\n\nWith all of this in mind, REG’s healthy strong growth largely stands out because of its accelerated timing. The majority of shopping centers, particularly those which are grocery anchored are likely to experience the same growth. They just have to wait a little bit longer to realize it. As such, I see REG’s growth as a look into the future of the shopping center sector. BRX, Kite Realty (), Whitestone REIT () Kimco () and others are well positioned to get 8%+ annual growth rates and 7%+ same-store NOI. They simply have to wait for leases to commence and options to bleed off. REG is a great company and it is trading at a reasonably attractive price. I simply prefer the even cheaper peers whose rapid growth is hiding behind the subtle timing of leasing mechanics. At Portfolio Income Solutions we do ad hoc analysis of special situations as well as full reports on specific stock. If you found this analysis compelling please check out our library of work which you can access with a free trial below. I hope you enjoy the plethora of data tables, sector analysis and deep dives into opportunistic stocks.

Regency Centers: A Glimpse At The Future Of Shopping Centers (NASDAQ:REG)

Regency Centers (NASDAQ:REG) reported strong Q2 results with 7.4% same-store NOI growth and 9.4% FFO/share growth, outpacing sector peers. The company's leasing performance, characterized by strong new lease signings, minimal tenant renewal options, and quicker lease commencements, has translated into real-time growth. Despite operating at 96%+ occupancy and a robust portfolio of over 57 million square feet across the U.S., REG trades at a premium to peers with a forward AFFO multiple of 18.9X and 95% of net asset value. Analysts note that while REG's leasing mechanics are superior—particularly due to the absence of onerous renewal options and lower Signed-Not-Occupied (SNO) leases—its stock has underperformed over the past decade, rising only 15% in 10 years. The sector-wide leasing challenges, especially from legacy leases with favorable renewal options, are slowing growth for other REITs like Brixmor (BRX), which has higher SNO leases and weaker same-store growth. Regency is seen as a bellwether for future sector performance, though investors are advised to prefer cheaper peers with similar long-term growth potential.