Regency Centers Corporation (REG) Earnings Call Transcript & Summary

[Audio Gap] start. Lisa Palmer, President and CEO; Mike Mas, CFO; and Laura Clark, SVP of Capital Markets. I'm going to turn it over to Lisa to provide a brief introduction, and I will kick off the Q&A after you're done, Lisa. Go ahead.

Perfect. Thanks, Christy. I tend to lose my voice. Sorry about that. Hopefully, I'll make it. If not, I'll pass it over to Mike. Good morning. Thank you for joining us. It's so hard to even start. It's certainly been a challenging time in the history of our business and in the history of our country. A few short months ago, I don't think -- about a few short months ago, we were actually probably at Christy's conference and Michael's conference, the Citi Conference down in South Florida. And I don't think any of us could have possibly imagined that we would be here today attending probably all of our first ever virtual conference, holding meetings and presentations from our homes and offices around the world. But as we all know, the pandemic has really disrupted nearly every part of our daily lives. And throughout these past few months, Regency's top priority has been and continues to be ensuring the well-being of our team members, our tenants and the people and the communities that our properties serve. All of our 400-plus properties remained open and operating over the past few months. And in really short order, our team was able to make contact with our over 8,000 tenants once mandated closures were put in place. It's pretty remarkable that at the end of April, approximately 60% of our tenants were open and operating. And as of today, over 75% are open, and the number is growing every day. We're beginning to see states lift restrictions. And as we do that, we are preparing our centers and working with our tenants to ensure that they're able to reopen as safely and as successfully as possible. For example, we are installing pickup and go zones at select properties with highly visible signage to assist tenants with curbside pickup in an easily identifiable area of the property. We're also adding social distancing signage and details to sidewalks, tenant storefronts and common areas. I think really importantly, as our markets, our centers, our retailers and our service providers are reopening, we're really encouraged by the initial consumer response. We are seeing pent-up demand and better-than-expected traffic for many categories, including personal services, and I was one of those that participated in that, such as hair and nail salons, apparel, home decor and dine-in restaurants, just to name a few. There's really good foot traffic, and we're hearing that anecdotally against across all of our markets. As it always has, the retail industry will evolve, and it's going to continue to do so in the post pandemic world. Regency is a company that has been thoughtfully built and managed over the last 50-plus years to evolve with the industry. And I'd like to think that we've also been thoughtfully built and managed to have the ability to stay a step ahead. So that will allow us to withstand challenges and adversity. Our company has an unequaled combination of strategic advantages, which has never been more relevant than it is today: our people, our portfolio, our development program and our balance sheet. Our portfolio has a focus on necessity, service, convenience and value. More than 80% of our neighborhood and community shopping centers are anchored by a grocery store. And through this time, the importance of essential retail has never been more evident. With local teams in 22 offices throughout the country, we have boots on the ground. Spendings were close to our tenants, and that has been critically important as our teams have worked tirelessly next to them, assisting them, providing resources to them. Our pipeline of high-quality developments and redevelopments has been deliberately structured and managed by our talented teams to provide us with critical flexibility and project scope, timing and cost. And lastly, one of our greatest advantages is Regency's strong balance sheet, featuring low leverage, a low payout ratio with the highest level of free cash flow in the sector, pre-COVID and more than ample liquidity to satisfy our commitments. But at the same time, we continue to carefully monitor and manage all future capital requirements, including development spend, property level expenditures, G&A and dividends. I'm really proud of how Regency has navigated this crisis thus far. And just as Regency's team and portfolio has successfully prevailed through various cycles and other disruptions over our history, I know that as we advance through this year and then for the future thereafter, we will continue to thrive and be a leader in our sector. With that, Christy, I will turn it back to you. We welcome your questions.

Great. Thanks, Lisa. And just to let everyone know, you can submit questions on the webinar, and I will ask them for you. And then we're planning to end right at 10:00 a.m. So I wanted to start off, you guys provided an update a couple of days ago. You had provided an update on your May collections, which are trending similarly to where April had been trending at the time that you initially released those. Can you talk about how -- in the context of your expectations going forward, how collections have correlated with the reopenings of stores, especially nonessential stores and among different property types and geographies?

Sure. First, I think it's important to note that while May collections are approaching 60% and April is closer to 70% at this kind of same -- in the same time period, if you will when we reported April collections, we were about the same -- at about the same level. However, as we've been talking about, we don't expect that the tail of the collections will be as strong, and it's very -- it's likely that May collections will come in below April. And it's also possible and likely that June may be less and lower than May. And there's various reasons for that. One, there were several tenants that paid April rent that were closed, and they did it honoring their contracts or lease. And a good thing, knowing that we were going to need to work and partner together to figure out a solution to allow them to reopen successfully when they did have the opportunity to reopen. And what that means is working on deferral agreements. So while April was paid looking at deferring future months' rent. And so that's one reason why May and June are expected to be lower than April. We also, as you noted in the question, Christy, there are geographies where they haven't reopened yet, and there are some of the local tenants, which represent about 25% of our portfolio that also paid in April, honoring their leases, but there's only so many months that they're able to essentially dig into their savings, if you will, and their reserves to pay rent while they're not open and not achieving any -- 0 sales. So as we progress, as we reopen, we do expect that we will begin to see a wider separation between markets that are open and markets that are closed. At this point, it's not as discernible as you may think. It's more highly correlated with the financial strength of the companies.

Maybe you can talk a little bit about how you're approaching dealing with national and regional tenants that aren't paying versus your local mom-and-pop shops?

Yes. As we've talked about on our earnings call, we have a really targeted strategy. It's not a blanket one solution for all. And part of that is a result of -- in which part of the retail sector are our tenants operating in. We know that some are going to be more difficult to resume, if you will, pre-COVID operations based on some of the social distancing guidelines, such as entertainment and fitness and restaurants. And so different tenants, different uses, may need more help as we move through this and also come out of it. And so we are working with our tenants. It's really important. It's a very partnership-oriented approach. I believe Regency has some of the best highest quality open-air shopping centers, and I think most would agree with that across the country, which means the retailers want and need to be in higher quality real estate. So they want and need to partner with Regency. At the same time, Regency wants and need to partner with the highest quality operators. So we do need each other. It is a partnership-oriented approach, leases are contracts, and we do expect that rent will be paid, but we are willing to work with our customers, our clients, our retailers, our service providers to find something that works for both of us.

There's been a lot of talk about restaurants, given that there's a lot of nuances and those -- many of which have been able to operate on a limited basis. Are you exploring any specific rent structures that would -- in terms of your deferral conversations that would allow them to have variable rents at during some periods of time as a bridge to ultimately paying back those deferred rents?

Again, it's really -- we know that restaurants are an important part of the neighborhood community shopping center, an important part of many of our centers, fabric of the community, oftentimes a secondary draw or a secondary anchor, if you will, and that restaurants already operate relatively thin margins and the social distancing guidelines are impacting them pretty severely, especially with occupancy restrictions even as they reopen. So we are willing to work with them. And there's also a lot -- there's a lot of working capital that's needed to reopen a restaurant. And I've learned a lot more about operating a restaurant in the past few months than I've ever known before. It's not even just as simple as restocking inventory. But simply even some of their equipment, if it hadn't been running and working for a period of time, may need to be replaced. And so there's a lot of expenses. And the answer to that is never say never. It's certainly not preferred to go full percentage rent but as an operator, as a good operator pre-COVID, and we have confidence that they're going to be a good operator post-COVID, which is likely the case. Again, we're going to be willing to work with them to keep them in that space, to keep them as part of the center, to keep them as part of the community because it's important to us. And the reality is that in many cases, we wouldn't be able to find a tenant that could potentially do as well as they do. And it certainly will be more costly to do so.

We had a question -- another question come in from the audience. Can you talk about the Ocado-Kroger deal? Are you going to do a sale-leaseback of the robotic grocery warehouses after they've built? And do you anticipate the location of these warehouses to be near population centers to focus on direct delivery or will they deliver to stores?

We're not building any Ocado warehouses. So there's no sale-leaseback opportunity. What Kroger has announced essentially that the warehouses that they're building are not really close to the centers that we operate. They're not close to the neighborhoods. They're not close to the communities. I think that we -- when I think about Regency's business and what might be more impactful for our business, it's not necessarily the mass automated warehouses as much as it is the micro fulfillment centers. We are beginning to see that and do believe that the pandemic may even accelerate that. And in those cases, the most publicly known are Ahold and Albertsons in terms of how much they are doing R&D with micro fulfillment centers, whether it'd be as part of their existing stores or adjacent center stores and in some cases, even across the street.

I mean, clearly, online penetration of grocery has increased here during the pandemic. I mean, I would imagine it settles somewhat higher than it's been in the last year or so, but probably lower than what it's been during the pandemic. What's your view on where it ultimately settles out?

I've always known that I agree with you more often than not, Christy.

Sorry, I probably should have asked you the question instead of...

That's okay. I do agree with you. I think that there's no -- we were already moving that way. And the -- it's not just grocery, it's all retail and all service providers, and they're leveraging technology and leveraging convenience, which has really always been a big part of owning neighborhood and grocery-anchored community shopping centers to serve their customers because they need to satisfy them in an omnichannel way. And the other thing that you heard us say, and it's still, if anything, the pandemic has highlighted this, it is really costly, much more costly than having the customer walk in the stores, really costly to deliver the goods. And then the next step is having someone else just pick them and bring it to the customer out in the parking lot of the curbside. So the most cost-effective way for any retailer to get their goods to the customers, have the customer walk in the store and pick them themselves. And then there's also evidence that when that happens, customers' basket size is bigger. So there are numerous reasons why retailers are incented to continue to try to bring the customer in the store. And we do see that. So with that said, I agree with you. I think that the -- all -- the pandemic has accelerated the changes that were already taking place, the widespread adoption, the comfort of ordering online and picking up in-store is much larger today than it was 3 months ago. And that the percentage of orders that are satisfied that way will certainly be much higher throughout this and then even at the end of this than it was pre-COVID. But to your point, Christy, it was already headed that way, it's just going to get there sooner.

Yes. Fitness operators have, obviously, been hit here. I mean, what -- is your view that there's more of a structural change here? Or is this just temporary? I guess, what's your -- as you think about the assessment of risk around a fitness operator post-COVID as you're negotiating and signing leases, does that change?

I think that -- specifically for fitness, I do think that it is more temporary than permanent, especially when you think of the customer that is walking into those -- through those doors and their objective for doing so. They're generally going to be healthier and very concerned about it. What I think is going to be the permanent change and I think this is true for places of work as well as places -- gyms and all other retailers that when people aren't feeling well, they're not going to be going out in public. And our culture has been that you work through that, right? It's almost like a -- it's a badge of courage if you can work while you're sick. And I think we're going to see that less often. I think that you're going to see more respect for others. And so with that, I believe people, over time, this isn't going to happen right away, are going to get much more comfortable that the environment that they're in is safer. And so I do know that we've seen evidence throughout the markets that are already opening where we've had some large-format gyms as well as some of our smaller fitness operators, like my favorite, Orangetheory that had opened. And the customer, again, traffic has exceeded expectations. And people do want to exercise. And there are a number of people that may not come back, and they decide to buy a Peloton Bike or Peloton treadmill. But I don't think it's enough to permanently change the future of the industry.

And Christy, just...

Question is -- yes, go ahead, Mike.

And Christy to finish up on fitness, I think, it's important also to -- I think I completely agree with Lisa. And when I look at our rent roll, it's 4% of our rent roll. It's pretty small. And if you think about the 4%, over half of that is boutique fitness, which is small store sizes offering more of a custom approach to fitness. I continue, given what Lisa said, which I agree with, I think, we collectively still think that this is a growth vehicle. I think the theme -- the macro theme of healthy living will continue to grow. And I think at the end of the day, it is the best defense to what we're dealing with here from a pandemic perspective. And I think people will continue to want to have that delivered some in the home, but many will want it to be delivered outside of their home.

And out of this, there will be innovation as well. And the better operators are going to continue to adapt. And they -- I don't -- I really don't view it as a permanent impairment of the number of customers that, that can move through fitness, boutique operators as well as large-scale operators.

We had another question on the webcast. Could you talk about innovation in the way parking lots are designed? It seems like the current parking lot setup are best for customers walking in and out but are not optimal for buy online, pickup in-store?

Gosh, there's so many ways you can answer that question because how far in the future do you want to go? I mean, because I can envision a time when there's many more...

Autonomous.

Yes, thank you, autonomous, I couldn't find a word, autonomous vehicles, where they literally even stack up in the parking lot, and you don't even have to have room for a person to step out of the vehicle. So I would say in the short term, we are continuing to -- it's going to be a case-by-case basis, not every shopping center looks exactly the same. And some may need more modifications than others to make it better for the customers, better for the retailers to be able to deliver their goods through that curbside, buy online, pick up in the store or in the parking lot, and we will do that. We're exploring ways that we can leverage technology to make it a more integrated approach, so that it's not just individual tenants that are able to leverage platforms. So there's absolutely going to be innovation, and Regency is exploring and working towards improving our ability to help our tenants and our customers. We're doing kind of the basics, if you will, today in terms of making sure that we are identifying areas within our parking lots with good signage and communicating with our tenants so that we're able to assist both the tenants and the customers and making that an easier process for them. But that will continue to evolve, and it's going to evolve along with -- as the rest of transportation evolves and the changes that are going to be there.

We have about 3 minutes left. You guys are, obviously, in a great immediate liquidity position. You did a bond issuance just recently last month. After you reported earnings, you paid down the line of credit with the bond issue but you are still holding a higher cash balance. Can you talk about sort of how you think about that holding that cash balance from a dilutive -- earnings dilution perspective, and also just from a -- maintaining that immediate liquidity from a risk perspective going forward?

Sure. I'll take that. It's -- you're exactly right. The sequence of events was the bond offering, we have paid down our revolver, we are holding a significant amount of capital on the balance sheet at a relatively -- at this point in time, we believe a relatively low-cost given the potential for the first risk that we're concerned with would be a double dip. So obviously, if there's a return to store closures because of another breakout of the virus, we feel like this temporary additional liquidity is important. As now we don't have that in our base case, we actually are very pleased to watch the opening of the U.S. economy and I think in the markets that have been more opened than others, the evidence is there that this thought process should and will continue. As we continue to see more evidence of that and see more states open, what we'll do from a liquidity standpoint is immediately focus our target, our eyes on the 2022 maturities that we do have in our capital stack. We do have a term loan and a bond issue there. The capital that we raised in the bond market on a 10-year basis could be used to retire that capital, which would put us in an exceptional position to having a fully undrawn line of credit and no material debt exposure or maturities for about 5 years. And we think what that allows us to do with the entire organization can continue to be patient, we can continue to focus internally on our own portfolio getting our tenants back up, up in operating and moving that rent number up as high as we possibly can to pre-COVID levels. And then, also, it allows us to kind of focus on our dividend policy as well.

And I'll add also this point which you -- sorry.

Go ahead. No, go ahead.

I was just going to say, is that also the point at which you potentially start feeling more comfortable restarting the development pipeline and spend?

Yes. Let me -- I'll take it because I'll tie in what I was going to say. I think it's really important to remember how we entered this in terms of the strength of our balance sheet and the fact that we -- in 2019, we had free cash flow north of $170 million or approximately $170 million. That provided us -- that put us in a position to be patient and then all of the activities that we have accomplished over the last 3 months with the forward equity offering, with the debt offering and having the capacity of the line, all of that combined really does was a -- is a major factor and the fact that we were able to payout dividend in the second quarter. And a major factor that we can spend $80 million to complete those developments that were near completion. So as we look forward to answer your question about when we resume development, we also have to assess each and every one of these developments as to what are -- how they've changed in terms of scope, costs and underwritten NOI. We still believe in the long-term viability of each one of them, we think they're going to be great investments. But as to when, that's too difficult to assess at this point in time.

Awesome. Well, thank you, guys so much. Thank you, Lisa, Mike and Laura, and thank you, everyone else, for joining on the line, and have a great rest of the day.

Christy, thank you for hosting. We really appreciate it.

Thank you. Take care, guys.

Thank you, Christine. Thank you.