By Michele Lerner

Martin "Hap" Stein, Jr., chairman and chief executive officer of Regency Centers Corporation (NYSE: REG), earned his nickname because he was a happy baby, and with a wonderful family and successful business that moniker has rightfully stayed with him. Started by his parents 40 years ago, Regency Centers now maintains an ownership interest in 262 community and neighborhood shopping centers that contain almost 30 million square feet. The company has a total market capitalization of almost $4 billion. Portfolio recently spoke with Stein about the evolution of his family’s business, the changes in the retail sector and whether any of his three daughters will be following in his footsteps.

Portfolio: Your family has been involved with neighborhood retail centers since the 1960s, and you've been personally involved since 1976. What have been some of the biggest changes in the business in that time?

Stein: Obviously much has changed for Regency and in the shopping center industry since Regency was founded in 1963 by my parents, Joan and Martin Stein. As a matter of fact, a lot has changed in just the last 10 years since Regency's $108 million public offering.

Regency started out with a regional mall anchored by May and JC Penney. Our focus has shifted to neighborhood retail centers anchored by grocery stores. The largest change in the industry is that Wal-Mart is now an enormous challenge to both department stores and supermarkets.

Another significant change is that until 10 years ago most neighborhood shopping centers were anchored by both a 30,000 square foot grocery store and a 10,000 square foot drug store. Today most supermarkets are 50,000 to 60,000 square feet and contain a pharmacy, while the drug stores have moved from in-line space to out-parcels. Strong grocery chains like Publix have not only grown their store size, but also have expanded into new markets like Atlanta during the last 40 years.

Another change is the emergence of specialty retailers and restaurants that are now occupying the space in shopping centers. These restaurants and retailers include Panera Bread, Quiznos Sub, Starbucks, The UPS Store and Baja Fresh.

Portfolio: How is the neighborhood retail sector performing in this turbulent economy? More specifically, what is the biggest challenge facing Regency in 2003 and into 2004?

Stein: Property fundamentals are strong. Regency has experienced good same store rental rate growth and a 95 percent occupancy rate. The challenges to the sector as a whole include the growth of Wal-Mart and the ongoing soft economy.

Together these factors are taking a toll on both the large supermarket chains and the weaker grocery operators. As a result, the larger chains are becoming even better operators and more cost competitive. Kroger, Publix, Safeway, Albertsons and H-E-B realize that they must also offer better customer service and an attractive assortment of perishables to compete with Wal-Mart and other chains. The stronger supermarket operators will prosper, while the weaker ones will fail.

In addition to making sure that the dominant supermarkets anchor Regency's portfolio, Regency's key focus is to continue servicing the growth needs for both the dominant grocery chains and the leading side-shop retailers. Regency's development program not only provides for the growth needs of our customers, but is also creating significant value for our investors. The developments result in 20 to 25-year leases from the supermarket anchors, new state of the art shopping centers and attractive returns.

We're committed to maintaining a strong balance sheet that provides the financial flexibility that we need to continue to grow Regency's development and joint venture programs. Regency has a talented and deep management team with experience and outstanding development, leasing and property management capabilities. With 18 offices across the country, we have both a national range and local expertise.

Portfolio: Having expanded beyond its Florida roots into 46 metropolitan areas, what factors go into deciding where Regency will add a new retail center? On the other end, what factors go into deciding which retail centers to sell and when to sell them?

Stein: We don't build any shopping centers on a speculative basis. Prior to commencement of construction we have a signed lease from the anchor and we have researched demand from the leading side-shop retailers.

Obviously a key ingredient in Regency's expansion decision is having a center anchored by a dominant supermarket within that market. Another key factor is good real estate, which means being in a good location on the right corner. We always focus on demographics and try to build or buy in areas with above average income and/or dense infill population. With a good, strong anchor, a prime location and healthy demographics, our experience is that centers will also be attractive to leading side-shop retailers like UPS, Starbucks and Baja Fresh. When we're buying centers we also focus on which grocery stores are the number one, two or three in the market and what their sales figures look like.

When we decide to dispose of a center the decision is basically just an inverse of the above, usually based on either declining supermarket sales or a significant change in demographics, which would adversely impact net operating income. We are very active at culling our portfolio and take a disciplined approach to this. We are constantly recycling the funds from the bottom 10 percent of our portfolio by disposing of properties and using the proceeds to purchase or develop new centers.

Portfolio: You mentioned the importance of ensuring that a leading grocery store serves as the anchor of each retail center. How has this contributed to the success of your company?

Stein: The key to a sustainable earnings model is having a strong anchor tenant with strong sales because that tenant will likely be there a long time and will attract other tenants to keep our occupancy high. A strong anchor tenant brings in better side-shop retailers.

Portfolio: Your nickname "Hap" is well known in the industry. Where did that come from?

Stein: Since I am Martin Jr., my parents gave me the nickname. They thought I was a happy baby. But they also chose the nickname because they admired Henry "Hap" Arnold, who was commanding general of the Army Air Forces during World War II.

Portfolio: You earned your undergraduate degree at Washington and Lee University in Virginia and then attended Dartmouth College in New England for your master's degree. How would you compare living in Jacksonville with your college experiences "up north?"

Stein: Washington and Lee and Dartmouth were both great university experiences and both are located in wonderful college towns (Lexington, Va. and Hanover, N.H., respectively). Washington and Lee has a great honor system and camaraderie, plus it is a wonderful teaching college. Dartmouth College is unique among business schools because it has a very collegial atmosphere, and both schools offered a very close-knit community. I returned to Florida because of the opportunity to be in the family business, and fortunately my father decided to hire me.

At that time Regency owned an energy plant in addition to the regional shopping center. When I showed up for work on the first day in a coat and tie, my father informed me that I would be working in overalls instead at the energy plant. For my first six months at Regency I worked in overalls, learning the business from the inside out. It was a great experience and I definitely learned a lot of life lessons and lessons about working with people.

Portfolio: What do you do to get away from work and relax?

Stein: I love to play golf and to jog, plus I enjoy traveling with my family. We have a house in Colorado near Vail, where we enjoy spending as much time as we can. When we're in Colorado we ski and enjoy the outdoor life, but we also enjoy spending time in New York City where one of our daughters lives.

Portfolio: What are some of your favorite books?

Stein: I enjoy reading a lot, and spend time every day reading The New York Times. I especially like Tom Friedman, who focuses on foreign policy and the Middle East in his articles. As for books, I recently read "Founding Brothers," which I highly recommend. I studied history in college so I still find history books interesting. I read "The Killer Angels" several years ago, a historical novel which inspired Ken Burns to do his Civil War series. I also recommend William Manchester's two volumes on Winston Churchill.

Portfolio: I hear congratulations are in order since your oldest daughter is getting married. Do you foresee any of your three daughters following in the family business?

Stein: My oldest daughter, Ashley, is getting married in Colorado. She lives in New York City and just finished a course at Sotheby's in American art, so she'll probably be working in an art gallery. Kimberly, our second daughter, just graduated from the University of Georgia and will be moving to New York soon to go into the fashion retail business. Our youngest, Kelly, is a sophomore at Southern Methodist University in Dallas studying advertising.

They all have their own interests, so I don't think any of them are likely to go into the family business.

Portfolio: You and your wife must be very proud.

Stein: My wife Brooke and I have been married for 29 years, and she has been a wonderful wife and mother. She's created a wonderful home, been active in the community, raised three great daughters, and been a great friend and companion to me for all these years. We married just after I finished at Washington and Lee, so she came with me when I headed to Dartmouth for graduate school.