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Can Regency's (REG) Mergers Counter Rising Internet Sales?

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Regency Centers Corporation (REG - Free Report) has been making strategic acquisitions to drive the company’s long-term growth. Recently, the company announced the closure of the Equity One-merger deal, a move that created a combined company with a total market capitalization of around $16 billion.

Notably, this merger created a high quality portfolio of 429 properties, mainly grocery-anchored, for the company.

Making solid progress in the merger, Regency has engaged Real Foundations (RF) to provide guidance, planning, program management and data conversion services for this. The efficient moves enabled Regency to already realize the anticipated $27 million of G&A synergies.

The company is also shedding its non-strategic assets and redeploying the proceeds in its development pipeline. Specifically, during he second quarter, the company sold one wholly owned property and one co-investment property, for a gross price of $25.1 million, Regency’s share being $7.1 million. It also commenced the development of Mellody Farm, a 252,000 square foot center in the Chicago metro area, with total estimated net development costs of $97.4 million.

Additionally, Regency primarily focuses on building a premium portfolio of grocery-anchored shopping centers. These centers are usually necessity driven and drive a dependable traffic. The company boasts a cluster of industry-leading grocers, such as Kroger, Safeway and Publix as tenants, which help generate steady rental revenue.

Even though the company has considerable experience in the retail real estate industry, it faces stiff competition from other retail REITs as well as private real estate developers. This limits any growth in the demand for its properties.

Furthermore, the shift of retail shopping from brick and mortar stores to internet sales has emerged as a pressing concern. Particularly, the recent focus of online retailers in the grocery business has emerged as a concern for this REIT that focuses on building a premium portfolio of grocery-anchored shopping centers. This is because the shift in retail shopping to internet sales has been adversely affecting the retail tenants’ sales, leading retailers to reconsider their footprint and opt for store closures, in turn, resulting in lesser demand for retail real estate space.

At the second-quarter end, the company had 29 projects in development or under redevelopment with estimated costs of $600 million. Although a growing development and redevelopment projects pipeline is encouraging, it exposes the company to various risks such as escalating construction costs, entitlement delays and lease-ups. Moreover, such initiatives involve significant upfront costs and drag the margin until the properties get established.

Shares of Regency have underperformed the industry year to date. During this time frame, shares of the company descended 5%, whereas the industry increased nearly 1%. The stock currently carries a Zacks Rank #3 (Hold).  

Stocks to Consider

Some better-ranked stocks in the REIT space are American Asset Trust, Inc (AAT - Free Report) , Communications Sales & Leasing, Inc. (UNIT - Free Report) and Liberty Property Trust (LPT - Free Report) . All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While American Asset Trust and Communications Sales & Leasing have expected long-term growth rates of 6.1% and 7.5%, respectively, Liberty Property Trust has expected long-term growth rate of 5%.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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