As I look back on 2008, I'm reminded of one of my favorite books by one of my favorite authors, No Ordinary Time: Franklin and Eleanor Roosevelt: The Home Front in World War II by Doris Kearns Goodwin. The title of the book is taken from Eleanor Roosevelt's stirring opening remarks to the 1940 Democratic Convention as our country was still trying to emerge from the devastation of the Great Depression, and the diabolic shadows of Nazi Germany and Imperial Japan were spreading over Europe and Asia. Mrs. Roosevelt said to the delegates and the citizens at large: "We cannot tell from day to day what may come. This is no ordinary time."

The changes that have taken place in the financial markets and economy in 2008 have been extraordinary, striking a daunting challenge, yet, ultimately, creating a fabulous opportunity. I've been in the real estate business since the mid-1970s and Regency has worked its way through some pretty extreme conditions. However, the current combination of crises in the capital markets and downturn in the economy has engendered the most breathtaking change, difficult challenges and exceptional opportunity that I have experienced. For the past few years, Regency's executive team has been concerned that the historic run-up in asset pricing and excesses in the capital markets were not sustainable, but the severity of the correction has been stunning. The flow of capital, which is the lifeblood of our industry, has been reduced from a flood to a trickle, and the cost is much more expensive, when available. The result of the widely publicized drop in retail sales has been a meaningful reduction in demand for new space.

Regency has obviously not been immune to the general decline in asset values and the slowdown in tenant leasing. As a result, this year our shareholder return declined by 23 percent, and for the first time in the 15 years that Regency has been a public company we did not meet our earnings expectations. At the same time, I am extremely proud of several noteworthy accomplishments, the attainment of which is a testament to the strengths of our company, especially given the difficult conditions. These successes, which were critical to positioning Regency to work through the current milieu and profit from future opportunities, include:

  • Maintained occupancy of 94 percent in the high-quality operating portfolio, increased rents by 11 percent, leased over 2 million square feet of new space and 3.6 million square feet of renewals, and grew net operating income by 2.6 percent.

  • Expanded Regency's bank facilities by 50 percent to $941 million, and managed the line of credit to only $70 million. Regency's investment-grade ratings by Moody's and S&P were reaffirmed at baa2 and BBB+. These are clear evidence of the strength of Regency's balance sheet and the careful steps that were undertaken to manage sources and uses of precious capital.

  • Sold $394 million of operating properties and developments and placed over $250 million of mortgages in one of the most difficult markets in memory.

  • Managed over $5.0 billion of co-investment partnership assets and earned a promote of nearly $20 million from the partnership with Oregon for generating a total return that was in excess of both NCREIF and the hurdle rate. These are further testimony to the high level of professionalism that Regency has dedicated to managing the partnerships.

  • Generated funds from operations (FFO) of $3.75 per share, which was less than our objective, but was attained in a highly unfavorable environment and was net of $50 million of write-downs of pre-closing costs and asset impairments. In spite of shareholder return being down, Regency's total shareholder return exceeded the FTSE NAREIT Shopping Center REIT Index in 2008 and for the past three years.


    Times such as these bring out the best in us, and we are well positioned and intensely focused on continuing to build on Regency's long-standing track record of creating intrinsic value for our shareholders. We plan to use our financial strength and access to capital, necessity-oriented, recession-resistant portfolio that is situated in excellent locations with attractive demographics and strong anchors, as well as our key customer relationships and cycle-tested team to not only work our way through the current economic maelstrom, but also to turn this turmoil into opportunity. We will focus on the following areas:

  • Preserving the Balance Sheet. With capital being more precious than ever, all eyes focus on the balance sheet. These days, not a single business decision is made without at some point - often at several points - the question being posed: How will this affect the balance sheet?

  • As a result, we've drawn some very distinct lines in the sand: new developments and acquisitions will be slowed, and even halted if necessary, to ensure that our line of credit balance does not exceed $200 million, that our debt-to-asset ratio, including our share of partnerships, does not exceed 52 percent, and that there are adequate sources of capital to meet our commitments. These measures provide the financial capacity to take advantage of what should be an increasing level of compelling acquisition and development opportunities from distressed asset and land sales.

  • Accessing Internal and External Sources of Capital. Regency has only $235 million of debt maturing in the next two years, and $479 million in 2011. Bank facilities total $714 million, $600 million of which does not expire until 2012. In addition, $3 billion of unencumbered assets provide more than adequate capacity through mortgage financing to replace these corporate loan maturities. Modest-sized mortgage loans on quality shopping centers sponsored by highly regarded operators like Regency seem to be one of the few remaining "sweet spots" in the financial markets, and we have excellent relationships with several mortgage lenders.

  • Leasing Quality Centers. Next to preserving our balance sheet, there is no more critical goal than achieving 95 percent occupancy in the operating and development portfolios. The leasing team is intensely focused on attaining this key objective. Fortunately, Regency's quality portfolio benefits as retailers are selecting only the best locations for the limited number of new stores they will open. We continue to leverage our Premier Customer relationships and will be spending even more time calling on better-performing retailers in competing centers, properties that rarely offer a comparable combination of strong anchors and demographics.

  • Investing Precious Capital. Regency's development program is being retooled and slowed. For the few, select projects we pursue, we will proceed with great caution, ensuring that there is significant pre-leasing and clear visibility to achieve full occupancy. We have increased our return and profit margin guidelines and put into place tougher underwriting standards.

  • That said, we also believe when this severe recession ends, we will enter a period of immense opportunity: there will be far fewer viable competitors, land prices will be significantly lower and we will be in an enviable position. Yet again, no matter how good, no investment will be undertaken at the expense of our balance sheet.

  • Reducing Operating Costs. With lower levels of development activity, we've meaningfully cut expenses - ranging from shrinking head count to reducing incentive compensation and G&A costs. These are painful but necessary decisions to make sure that the organization is "right-sized" in the current environment. Yet at the same time we will ensure that we have the "muscle" to execute our plan, including being positioned to take advantage of future opportunities. Keeping our team fully engaged and not compromising Regency's special culture remain top priorities.


    In these extraordinary times, the near-term imperatives are clear: protect the balance sheet, achieve 95 percent occupancy in our operating and development portfolios, rationalize the development program, operate efficiently and keep the team energized to emerge from these difficult times in strong financial shape. Longer term? Be poised to capitalize on compelling investment opportunities, all the while focusing on growing recurring FFO and intrinsic shareholder value.

    My confidence that we can achieve these goals is rooted in my faith in Regency's superb team of professionals, individuals who in these times truly give meaning to the term "cycle-tested."

    A key attribute of the management team at Regency has always been our bench strength. Earlier this year, Mary Lou Fiala, our president and chief operating officer, announced her intention to retire at the end of 2009 to spend more time with her family. Few individuals have embodied the special culture of our company more than Mary Lou, and it is always difficult to lose a dedicated talent like her. Mary Lou has done an outstanding job as President of our company, and her expertise in the retail industry is recognized throughout our industry. We are privileged that she has agreed to continue as Vice Chairman and COO at least through what promises to be a difficult year and to remain on the Board after her retirement as COO.

    At the same time, we are fortunate to be able to have a gifted, experienced, and accomplished leader who knows the shopping center business so well: Brian Smith, our chief investment officer. With our Board's strong endorsement, it was an easy and natural decision for me to tap Brian as Regency's next President. Brian will maintain his responsibilities as Chief Investment Officer and was nominated to join the Board at the February 2009 meeting.

    Additionally, I want to offer special thanks to Terry Worrell, who will not be standing for reelection at the Annual Meeting. Terry's keen insights and street-wise common sense have made him an excellent steward for our shareholders.


    My confidence that we can successfully navigate the land mines is rooted in my faith in Regency's inherent assets: a strong balance sheet, a quality, recession-resistant operating portfolio, excellent tenant, lender and partnership relationships, value-creating investment capabilities, and especially a superb team of dedicated professionals. Our journey will involve one slow step at a time and sometimes require us to find new ways to overcome obstacles. But we will prevail and thrive again. Thriving is what Regency is all about.

    Sincerely yours,