Regency Centers Corporation (REG) Earnings Call Transcript & Summary

Good morning, everyone. This is Mike Mueller from JPMorgan. And I'm thrilled to be hosting the Regency Centers panel here today. And I apologize for the technical issue on my end. As of right now, I'm audio only. But with me today in the conference room with Regency, we have Lisa Palmer, President and CEO; Mike Mas, CFO; and Christy McElroy, SVP of Capital Markets. So why don't we turn it over to Lisa for some intro comments, then we'll start the Q&A. And hopefully, if you have any questions, please feel free to chime in, and we'll get to as many as possible. So Lisa?

Mike, thank you. And I think I am on the screen, but I'm standing, and I hope all will accept that. I have a little bit of back issues still, which has been happening since February. So good morning, all, and thank you for joining us today. With that opening, 2020 has been so far from typical that it's been that, this meeting, this conference isn't typical either. And I'm not just talking about the fact that we can't see Mike and that I'm standing or that it's virtual. But typically, the November NAREIT conference is pretty boring. We'll sit in meetings and talk about perhaps what happened the last couple of weeks. But given that it's right after earnings and in our sector, how much could possibly really change in a couple of weeks. However, this year is different. We've had positive vaccine news and we've had the unfortunate rise in COVID cases. And so this has resulted in the tightening of governmental restrictions in some markets. So a lot has actually happened in the last 1.5 weeks. But even with those opposing forces, our outlook still remains pretty much consistent with what we communicated to you with earnings. Albeit, we do have a little bit more optimism despite my worse back issues today, that there's an end to this pandemic somewhat in sight. So let me start with -- let me reiterate what we talked about on our recent earnings call. We have made meaningful progress since the beginning of this pandemic. Our teams worked really hard to get our centers and our tenants open and operating. We're collecting rent, we're executing deferral agreements, and all of this is to maximize our ability to succeed in the long term. As of the end of October, we had collected 86% of our third quarter rent and 87% of our October rent. We are also, again, reiterating what we talked about a couple of weeks ago, really pleased with the uptick in new leasing activity, especially in the third quarter, obviously, and with renewal leasing volumes in line with historical levels. The retailers that have the most active leasing space, it's exactly what you expect, it's in categories and in geographies with fewer or no restrictions in place as well as operators, and this has been a real pleasant surprise, that have successfully adapted to the current environment and are performing really well. Let me go back to collections just for a minute. Our strongest categories remain grocers, drugstores, banks and home improvement. While we continue to have the lowest collection rates among those tenant categories that have not been able to fully reopen or operate at full capacity due to local restrictions. And the restrictions that do remain in place in markets around the country are putting a strain on these impacted tenants and it's especially -- we get -- it's especially visible in our Pacific Coast region, which comprise nearly half of our uncollected rent in the third quarter. So again, in that context, let me reiterate what we talked about just a couple of weeks ago. We have seen a direct correlation between tenant reopenings with increased rent collections and executed deferral agreements as restrictions are lifted. Where tenants are able to open and operate safely, we are seeing the customers return. We're seeing them engage with our local neighborhood businesses. We're seeing them come back to our shopping centers. And that is really evident in the recovery foot traffic that we do measure. But and this is how it started with the opposing forces. COVID cases are rising really around the country, and we're starting to see more local and state governments reimpose restrictions rather than ease them. And as such, the short-term still remains really uncertain. Most of these new restrictions are being placed on the tenant categories where we are already seeing lower rent collections, but we still can't ignore that there will still be some impact, especially among our local shop tenants and especially in the Pacific Coast region. But with that said, and this is what -- again, how I opened just this morning, there is a little bit more optimism. The vaccine news provides a light at the end of the tunnel, and we know we're going to get to the other side of this and we know and are confident that in the properties that we own and in the tenants that we have chosen, that we are really well positioned. We certainly didn't expect the situation that's happening now, but we did expect there to be another cycle, and we were prepared for that, and we came into this, really well positioned. Our strategic advantages have never been more critical. And you've heard them, but I'm going to repeat them again. So I think it's really important. These are: first, our geographically diverse portfolio of high-quality, grocery-anchored open air centers, that serves the backbone of our communities with a focus on necessity, service, convenience and value; second, our strong but flexible value-creating development pipeline that has allowed us to quickly adapt to the evolving retail landscape; third, our sector-leading balance sheet and liquidity position, which has really afforded us the financial flexibility throughout this pandemic; and last but certainly not least, our people, located close to our tenants in 22 offices around the country. And it's times like these when the value of the experience and relationships becomes most apparent and most important. And with that, Mike, I'll turn it back to you, and we welcome your questions.

Great. Maybe just a real high level one just to start it off with. I mean, you remember the GFC, obviously. I mean, how would you kind of compare and contrast what you saw then, what the headwinds were like then and with what you're seeing today?

It's -- there's -- it's such apples and oranges, but at the same time, there are some similarities [Technical Difficulty] Regency coming into this pandemic. It's a much different company than we were pre-GFC. Our balance sheet was exceptionally strong, with over $160 million of free cash flow, that's really meaningful. And we couldn't say the same back in 2008. The quality and the health of our tenants, much stronger coming into this than we were back in 2008. And for those that are new to us, you may not know, but from 2010 through 2014, we had a very focused strategy to improve the quality of our portfolio and the quality of our tenant base, and we made incredible progress during that amount of time in selling assets and also in upgrading our tenant base. We continue to be very disciplined with that from 2015 to the start of this. So that has really put us in a better position. So that's really important and a really important foundation as we think about the cycle. This cycle, what's different is that it happened so fast. And whereas 2008, 2009, 2010, it was much slower in terms of how employment began -- or unemployment began to rise and therefore, consumer spending started to fall, which impacted the health of the tenants that I just talked about that weren't already as healthy as we already had this time. This was just so fast. So it's really hard to compare the two. We don't -- we do believe, and you've heard us say this, it's going to be an extended recovery. The other thing that's different, though, is that there's -- it's really -- the impact is really disparate between different ZIP codes, if you will, and our properties tend to be located in the markets where employment levels are still pretty high, which is -- will be really important to our recovery. But again, you've heard us talk about, we're not expecting that as soon as there's a vaccine and it's widely distributed, and it goes back to normal, that it's going to be a V shape, and we're going to bounce right back. I think it's still going to take time for the consumer to fully return for the tenants to fully return to health.

Got it. Got it. And I guess, I mean, going back to -- it seems like theme from 3Q earnings was very strong leasing activity. And would you say that there is some element of pent-up activity from a super quiet 2Q? Or do you think it was just a strong Q3, it stood on its own, and that's continuing into the fourth quarter?

Mike, great question. I think there was some element of pent-up demand. I think in the second quarter, everyone was really standing still, and there's a bit of shock in the system. So certainly, we had some spillover, I think, into the third quarter. But we were going through our quarterly asset reviews internally. And our -- and Jim, our Chief Operating Officer, asked that exact same question each time. And very -- and remarkably, there was a lot of activity that sprouted and began late in the second -- early in the third quarter, and we were able to bring it to a close. So we were, I guess, surprised is the right word. We were pleased and surprised by the quality of our third quarter leasing activity and certainly saw that as a green shoot looking forward. And again, that demand has also been broad-based. We signed leases with service providers, with fitness operators. And these are categories that have been very challenged, obviously, in this environment.

But I would expect that, that extended recovery is going to apply to our tenants as well. And they're not going to immediately rebound to pre-COVID new store opening levels that it's going to be a ramp-up. So while I do believe that we're going to see continued momentum and really good leasing demand, I would not expect that it would immediately rebound to pre-COVID.

Got it. And maybe just thinking about leasing when you're selecting new tenants or even looking at acquisitions, I mean, has this experience with COVID made you think differently about the tenant mix in any way? Whether it's essentials, whether it's nonessentials, fitness, theaters, just anything that you're giving a little extra thought to or thinking about differently than you would have a year ago?

The answer to that is absolutely, but it's not a big part of -- in terms of where the changes are, it's on the margin. We really like the merchandising mix of our centers in terms of the percent that's essential and restaurants and services and convenience. But there are going to be very few categories that we believe may be and likely to be permanently impaired from the pandemic, dry cleaners being one of them, especially with the trends of more remote work. I think that there will be less demand for dry cleaning services and theaters are absolutely still a really big question mark as well as any other entertainment-based uses. So there are -- those uses, so again, really small part of our business, though. I think in total, that's probably less than 3%. And -- but it's something that we're certainly thinking about much more closely than we would have pre-COVID in terms of doing any new transactions with those uses. Beyond that, our business is always evolving, and it is -- from an anchor standpoint, our leases are 10 to 20 years, but our local shop space average maybe 5 years. And we do have continuous turn in those, right? Every 1 out of 4 tenants will not renew at the end of their lease and that's when you see new innovation and new uses and new concepts, and we expect that, that will continue. And think that there will absolutely be innovation that will come out of the pandemic. And so there may be uses that will rise that will -- you'll see in your local neighborhood shopping center in a couple of years.

Mike, are you still there?

The mute button works really well on this phone, sorry about that.

Thought you dropped off.

I was afraid I was going to have to start asking questions.

Yes. Well, actually I have one for you. It wasn't too long ago, you were on my side of the table, and you had a view of what was going on, on the ground. Now you obviously work for Regency. And I'm just curious about maybe how your view has evolved based on seeing everything so much closer on the ground versus a little bit more removed to where I am.

Sure. I certainly can't give you my view, that would be tantamount to guidance. But no, I can certainly give you my difference in perspective, right? I mean for sure, when you're on the sell side, you're much more sort of in the flow and you hear everything that's going on as opposed to hear you're more in the weeds. And so it's just a very, very different perspective. But also, I mean, Mike, as you know, and you and I have talked about this in the past, I mean, I was always very focused on disclosure and transparency. And I would say being here, not that -- I'm very biased clearly, but I have a new appreciation for Regency's strength in that regard and commitment to transparency. But just also how much work goes into it, right? All these things that I was asking for, and you were asking for, everyone on the sell side, especially in regard to COVID disclosure, there's so much that goes into it. So I would say I have it definitely a new appreciation for that.

Got it. That's interesting. Maybe, Mike, on the uncollectible reserve, it looks like it's about 10% of revenues. Can you give us the high level on how you attack this? I mean, do you think of this -- when you look at this number as being more of, okay, this is an accounting output? Or this is really what we think we could lose in terms of go-forward revenues? And just kind of how do you determine who gets reserved? Who gets moved to cash and things like that?

Yes. It's a great question, and this is in that category of the appreciation for how difficult these things can be. There's no easy button here. It's a lease-by-lease assessment, Mike, and we went through all 9,000 of our tenants, one by one, accounting perspective, field perspective operations, credit quality, prior performance, what category are they in, what type of shopping center are they in from a higher -- our highest quality shopping centers to maybe some of our quality core centers as we call them, what type of restrictions were imposed upon these tenants in the local, all the way down to the county level. You can imagine how complicated that could be. And then at the end of the day, what we've come to is today, our cash basis tenant pool is approximately 24% of our ABR. The collection rate on those tenants is -- has risen from 42% in the second quarter to 64% in the third and to 66% and -- through October. As I think about to the crux of your question, the inverse of that collection rate is obviously evidencing itself in our 10% reserve rate. How do we think about that going forward? Well, on one hand, we have this great medium to long-term positive news in the form of this vaccine that is certainly making that light at the end of the tunnel even brighter. But in the near term, we know that restrictions on the tenant's ability to operate is the #1 correlating factor to our collection rate. So well, I wouldn't say that I believe the inverse of that collection rate to manifest itself as the potential for those tenants to move out. I do want to caution ourselves that in the near term, that 64% collection rate, our cash basis tenants is going to have a bit of a stiffer headwind as we move through the winter and as we might try to think about these advanced restrictions. So I just want to make that point. Let's -- a little bit about the restrictions as well. The teeth in those restrictions aren't necessarily as sharp as they were in April today as we see them. As an example, in California. In April, there was no -- if you were running a personal services, hair and nail salon, you were not allowed to open. That is different than today. If we see some rollbacks in restrictions, as we understand that today, services, personal services will be allowed to open. All of them have refined their operations. They have their PPE in place to the best of our knowledge and watching their behavior. They've really dialed in how to serve their clients queuing outside, bringing them into the store safely. So while I think the teeth may be not as sharp with this type of rollback, it'd be inappropriate to ignore that correlated factor to cash collections.