By Lynn Novelli

It's Saturday morning in suburbia, and shoppers are out in full force at the local shopping center. First to Starbucks for an espresso, then to Kroger's for groceries, on to Hallmark, GNC and Mailboxes, Etc. They make the rounds, a constant flow of people into and out of the shopping center.

This scene describes a typical Saturday at any of the more than 200 community shopping centers owned by Regency Realty, a Jacksonville, FL-based REIT that is helping to transform the community shopping center business.

Martin and Joanne Stein, parents of present-day chairman and CEO Martin "Hap" Stein Jr., founded Regency Realty in 1963 as a privately held land and apartment development company. Since then, Regency has metamorphosed into a leading national owner-operator and developer of grocery-anchored, neighborhood shopping centers.

Regency's current portfolio includes 235 shopping centers in 22 states for a total of 25 million sq. ft. of retail space. At each center the mix of stores varies, but the basic layout is the same: Kroger, Publix, Albertson's or Safeway—one of the four leading grocers in the country—as the anchor, complemented by high quality side stores. The average age of Regency Realty centers is eight years.

Forty-seven-year-old Hap Stein has built today's Regency Realty on the firm foundations of the company established by his parents. Four years after starting the company, the Steins developed the first regional mall in Florida. For the next 14 years they focused on office buildings and apartments. Then, in 1981 they doubled the size of the mall and began expanding the business throughout Florida.

Tough Times–Strong Choices

A turning point for the company came in 1988 with the death of Martin Stein, and the onset of economic recession.

"That was the time when we changed our focus a little, turning more to buying and developing shopping centers," says Stein. "We felt that strong, grocery-anchored centers with strong side stores served a cycle-resistant demand for necessities."

Regency Realty continued to move in this direction using private capital until 1993 when Stein and his directors decided to take the company public as a REIT. They believed that doing so would give Regency greater access to capital, coupled with the financial advantages of the REIT structure.

Between 1993 and now, Regency has undergone a transformation. From a small, local Florida developer, Regency grew into the national presence that it is today.

The change began in 1997 with Regency's purchase of Atlanta, GA-based Branch Properties. Branch was attractive for two reasons, explains Mary Lou Fiala, Regency Realty president and chief operating officer. "They were strong in the Atlanta market, and they had a strong relationship with Publix."

Prior to the acquisition Regency had less than $800,000 in market capitalization. The purchase of Branch pushed their market cap to $1.2 billion, propelling Regency Realty into competition with a handful of other developers that are capitalized in excess of $1billion.

The Branch acquisition was followed in 1998 by the purchase of Midland Realty. At that time, St. Louis-based Midland was the number one developer for Kroger and had a strong presence in the Midwest and southeast, two positions that Regency wanted.

To complete their plan for establishing a national presence, Regency in 1999 merged with Pacific Trust, a West Coast developer. That move made Regency Realty the largest grocery-anchored developer in the country and boosted the company's market cap to more than $2.2 billion.

Management Targets Growth

Stein and Fiala make a formidable team in running the company. Stein was practically raised in the business, stepping into his late father's place at a relatively young age. Still, the company as it was then is very different from what it has become, and Stein has proven his ability to cope with many changes.

Fiala, 48, brings a strong retail perspective to the company. Prior to joining Regency she was director of stores for Federated and Macy's. She first became involved with Regency three years ago with a position on the board at a time when the company was "looking for someone with a retail background who could think like a retailer," she explains. In 1999, following the Pacific Trust merger, Fiala was invited to join the Regency management team.

Rounding out the management team are 52-year-old Bruce Johnson, CFO and 49-year-old Lee Wielansky, managing director, investments.

This highly experienced team developed an acquisition plan that laid the groundwork for Regency's continuing success. "We invest in markets where there is strong household income, an average of more than $73,000. For comparison, the national average is $50,000," explains Fiala. "For acquisitions, we look for centers in densely populated areas."

Development: A Package Deal

Now that Regency has established a national platform through significant acquisitions, the company is changing course from acquisition to development. The simple reason says Fiala: "Development has higher returns than acquisition."

For development, Regency looks for the same demographics that have been so successful for acquisitions. However, key growth areas are the target for development, not the already densely populated areas Regency looks for in acquisitions.

In 1999 Regency invested $300 million in new starts and closed out 2000 with $400 million in the development pipeline. Projected development investment over the next several years probably will stay at about that level, according to Fiala.

Regency has the ability to invest at that level and still maintain 7 to 8 percent growth because the company does not do speculative development. Fully 76 percent of space in Regency shopping centers is pre-leased prior to construction.

The reason is that the Regency team has created a total package that potential customers find extremely attractive. First, Regency shopping centers are anchored by one of the big four grocers: Kroger, Safeway, Albertson's or Publix.

These companies do business with Regency because they know that a store in a Regency center will produce 20 percent greater sales than the stores in their own portfolios, according to Fiala. A typical Regency center averages 14,000 shopper visits per week and a grocery store anchor averages $22 million in annual sales.

The numbers bear out the wisdom of Regency's market positioning and lend credibility to the company's data-based planning, says Stein. "We have high quality properties, anchored by top supermarket chains, located in key markets with strong demographics," he says. "Supermarket sales prove the strength of our portfolio."

The presence of those high quality anchors is one reason that nearly 80 percent of side stores at Regency centers are leased to the top national/regional retailers. The list of Regency side tenants reads like a Who's Who in retail: Hallmark, Starbuck's, GNC, Blockbuster, Wolf Camera, Mailboxes Etc. and more.

Data Driven

To further enhance the attractiveness of Regency centers to side tenants like these, Stein and his team have developed the Premier Customer Initiative (PCI). The concept grew out of Stein's conviction that Regency Realty shopping centers could woo the top chains more readily if Regency could offer them a competitive advantage that they cannot find elsewhere. "We tried to think of how to take advantage of those 14,000 shopper visits a week for our clients," he says.

Through the PCI program Regency puts its data-gathering expertise to work for the customer and takes advantage of economies of scale.

The basis of the program is the extensive data that Regency has collected. Regency has a customer profile of each of its shopping centers that details the demographics within a three-mile radius, the usual draw area for grocery-anchored centers. Regency also maintains a database of target demographics for each of its retail customers.

By overlaying the databases, Regency can identify for any chain the Regency shopping centers that best fit their customer profile.

As an example, Fiala explains how Regency worked with Starbucks in 1999. "Last year we had 16 Starbucks," she says. "We did a presentation to them and showed them what centers they should be in. They approved 44 locations. We will open 17 of those by the end of this year, and over time we will open the rest of those."

The PCI program offers several competitive advantages to Regency's customers, says Fiala. Customers can make leasing decisions based on where they will be successful, based on information that is grounded in what Fiala calls "real numbers." Plus, PCI customers with multiple leases get a first view of Regency's portfolio, essentially taking their pick of upcoming opportunities.

Regency needed a national platform to be able to develop a PCI program, notes Paul Puryear, a senior analyst with Raymond James and Associates who has followed the REIT for a number of years. He believes that was at least part of the reason for Regency's heavy acquisition activity over the past several years.

"Now that Regency has established a national platform that makes the PCI program reasonable and possible, they can offer unique opportunities from the developer's standpoint," he adds.

Stein considers the PCI program and Regency's relationships with side tenants one of the REIT's greatest strengths. "Our operating capability is industry-leading in establishing relationships with side vendors," he says.

The PCI program and Regency's total data-based marketing approach are unique in the sector and makes the REIT very appealing, says Jim Kammert, vice president for research at Goldman-Sachs.

"For their grocer customers, they have very sophisticated data analysis, they know the area, and they know the competition," he says. "They also do a very good job of working hand-in-hand with the small shop, even assigning a specific person to them as their contact. The result is a very deep relationship with their tenants."

Over the past seven years, Regency has proved that their data-driven approach works, with an 8.6 percent earnings growth. In 1999 the company posted a 9.9 percent increase in FFO and an annual dividend rate of 8.5 percent.

With the REIT's deliberate focus on everyday commodities, their steady performance is not hard to understand, says Kammert.

"It's their consistency and every day retail needs," he says. "Regency is very much a REIT to watch. Even if economic growth nationally is 3.5 percent, people don't stop going to the grocery store."

Staying Focused

Although Regency Realty is one the few large cap shopping center owner-developers with greater than $1 billion in market capitalization, it has a lower profile than others do in the same class. Security Capital owns 60 percent of Regency stock, which also means that the company has less liquidity than most large cap companies, including its competitors.

Analysts consider Regency one of the group of top community retail center companies that includes New York-based Kimco Realty Corp, with 389 shopping center properties and 64 million sq. ft.; Texas-based Weingarten Realty Investors, with 196 shopping center properties and 28 million sq. ft.; and New York-based New Plan Excel Realty, with 350 properties and 36 million sq. ft. of leasable space.

These companies are similar in size but Regency's singular focus on developing grocery-anchored, commodity-based shopping centers is what makes them unique among these retail titans, says Puryear. Weingarten's portfolio, for example, also includes industrial properties; New Plan's includes garden apartments; and Kimco's includes malls, retail space and warehouses.

"Regency Realty is building on the strongest strip shopping center platform in the United States," says Puryear. "They have grown from a small local base into a national platform and in the process given shareholders a reasonable return."

What Price Success?

Possibly the only hitch in Regency's performance in recent years has been what some analysts considered overspending on acquisitions. "I think that slowed the company's growth," says Kammert. "But their balance sheet is solid and their development strategy will play in their favor over time."

Puryear argues, however, that Regency's acquisitions were expensive but worth it, and that the company made the right moves at the right time.

"They were aggressive at the right time in buying portfolios and in merging on the West Coast," he says. The results of the acquisitions, an intensified focus on their core business, geographic diversity and a coast-to-coast presence, will contribute to Regency's future success, he believes.

Despite the company's heavy spending on acquisitions, Regency Realty's balance sheet remains conservatively leveraged. With a 37 percent net ratio, Regency is more solid than many other real estate companies that have ratios well into the 40's, Puryear adds.

Regency regularly strengthens its balance sheet by accessing the capital markets. In September 1999 the REIT raised $160 million by selling 1.6 million preferred units for $100 a unit to two private institutional investors. The company repeated this strategy in May and September 2000 for sales of $70 million and $24 million, respectively, in private placements to institutional investors. In each instance, the net proceeds were used to reduce the company's bank line of credit and fund future growth.

During the company's acquisition periods, Regency was able to purchase some of its highest quality assets at a discount, and in recent years has been selling off older properties. This activity has helped keep Regency stock trading at a good price in relation to the company's net asset value, says Puryear. "Regency stock is not expensive, not even at its maximum value," he says.

In the final quarter of 2000, Market Guide categorized Regency as a "moderate buy." Analysts, including Puryear and Kammert, are predicting that Regency could achieve 7 to 9 percent growths over the next two years.

Stein believes those forecasts are in line with his company's objectives for same-store growth and plans for continuing development.

"We feel comfortable with 7 to 8 percent growth on a self-funded development program," he says. "One-third of that will come from same property growth; one-third from reinvestment of cash flow; and one-third from development projects."

Stein notes that there will be an overall moderation in economic growth that will result in retail being "more disciplined." But he believes that Regency can profit from that situation. "We believe that we will get more and more of our fair share as we perform for our customers," he says.

As the company grows financially, it will continue to improve in quality as well, says Stein. "We are better now than we were 10 years ago, and five years from now we'll be better than we are now."