DDR Ddr Corp.

We have recently lowered our recommendation on Regency Centers Corp. (REG), a leading operator and developer of grocery-anchored and community shopping centers across the U.S., from Neutral to Underperform as we anticipate it to perform well below the broader market.

Jacksonville, Florida-based Regency owns, operates, and develops grocery-anchored retail shopping centers in the U.S. The company seeks to own assets in high-income in-fill markets that are tenanted by market-dominant grocers, category-leading anchors, specialty retailers and restaurants.

We are presently bearish on Regency primarily due to its active development pipeline, which increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays, and lease-up risk. As such, we are skeptical about the long-term earnings potential of the company. 

In addition, most of the properties of the company are concentrated in select markets of California, Florida and Texas, leading to concentration risk. Furthermore, the possibility of store closings at many Regency stores adds uncertainty to earnings, and it might have to re-let large big box spaces at significantly lower rents in a tough leasing environment. This undermines the earnings expectation of the company and consequently, we remain cautious about its future.

However, the average household income in the markets in which Regency has a significant presence is over $95,000, nearly 30% higher than the national average. Regency’s quality portfolio is also anchored by dominant grocers as well as leading national retailers, which drive traffic into its centers. About 79% of its total portfolio is leased to national and regional retailers. If the company can weather the present deluge of negative investor sentiments, it can expect a reversal in fortunes.

Regency presently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating. We also have a Zacks #3 Rank for Developers Diversified Realty Corp. (DDR), one of the competitors of Regency.

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