Regency Centers Corporation (REG) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our conference meeting with Regency Centers. Regency Centers owns and operates a high-quality open-air center portfolio, well located and influence infill suburban trade area. With us today is Lisa Palmer, President and CEO; Mike Mas, CFO; and Christy McElroy, Senior VP, Capital Markets. [Operator Instructions] I'll now pass it on to Lisa to start us off with an introduction overview of Regency Centers. Lisa?

Thank you, Craig. Good morning, everyone. I will try to keep this brief because the time we have is actually briefed together, so hopefully, we can get to questions a little bit faster. Also really quickly, as much as I personally really do enjoy the conveniences of these virtual conferences the last 1.5 years, I think that I do miss seeing everyone in person. And I hope that -- and I'm really looking forward to that we are able to be live again hopefully in the near future. But with that said, on to Regency, as we have been speaking with you and communicating throughout the year, our business remains on a really positive trajectory of improvement over the entire year. And even despite concerns around the uptick in virus cases in recent months, our portfolio of foot traffic remains at or above 2019 levels in all of our regions as of the end of August. I'll remind you that rent collections were 96% for Q2 as of our last earnings call and leasing demand and activity remains really strong, again, across the portfolio in all regions and in all categories. As we have discussed over our last 2 earnings calls, we have pivoted to offense from a capital allocation perspective, the strength of our balance sheet and access to low-cost capital truly gives us a competitive advantage in developing and acquiring on an earnings and quality accretive basis. We currently have nearly $350 million of development and redevelopment projects in process, and our pipeline supports another $150 million to $200 million of annual spend over the next 5 years. And additionally, this is a good reminder because it was such a great transaction. Earlier this quarter, we successfully acquired our JV partner's 80% interest in a 7-property portfolio for almost $180 million, and we continue to look at additional acquisition opportunities across the country. We've all been through a lot of disruption personally and professionally over the last 18 months. But as a company and as an industry, I can honestly say that I feel better about our business today than I did pre-pandemic. We're going to continue to face challenges going forward. But just like our tenants, we've learned to adapt, we've innovated, and I truly believe that we are emerging and will emerge and have emerged smarter and stronger. I'm confident that our high-quality portfolio of over 400 neighborhood and community shopping centers that are located in suburban trade areas with compelling and attractive demographic attributes are really well positioned to thrive in the post-pandemic world. And with that, Craig, we will -- we welcome questions.

Great. Thank you for that. Look, this summer, retailers and landlords really benefited from real higher traffic, sales improvement and really strong leasing metrics. Obviously, the question in our mind is, has the delta variance and the raising COVID cases had any impact on traffic? And are you seeing any hesitancy from retailers in terms of leasing new space?

As I mentioned in the opening remarks, we are -- I mean it's slight. It's in the -- we posted a new presentation. Page 7 of our presentation shows our traffic data. And you'll see a really, really, really slight downtick in foot traffic, but it's still at or above 100% in all of our regions, which I think is the most important thing. And from the conversations that we're having with our tenants, with our retailers, with our service providers, we are not seeing that hesitancy. And it goes back to, again, what we've spoken to you all or how we've spoken with all of you, as we have seen businesses allowed to operate consumers have reengaged and they're coming back. And we do believe that being close to people's homes, where people are spending a lot more time in these days is a real positive benefit. And we also believe that, that's a trend that's going to be a little -- is going to be more permanent as people even return to the office, believe that the vast majority of the consumers in our trade areas are going to be working in businesses and with companies that will offer some hybrid remote. So they're going to be spending more time in their homes and therefore, will be closer to the neighborhood shopping centers.

Okay. And the elevated leasing volumes, how much of that is a growing universe of tenants or the pie growing versus you stealing market share where tenants are using the pandemic as a way to trade off into better properties.

It's hard to -- Craig, it's hard to differentiate between the 2. We know that both are happening. But it really is hard to give you an answer with any precision yet. We know that we're seeing evidence that within our trade areas, tenants are always looking to trade up in the Regency Centers. And the pandemic gave many tenants a unique opportunity to do so. About half of our centers or 100% -- we have been 100% leased for a long period of time. And through the pandemic, that may have given an opportunity to a local operator or a regional operator to jump into a very high-quality center with a very highly producing grocery store. So we saw some of that for sure. We also continue to see expansion across -- from region to region, a great concept out of California moving into other markets on the East Coast in the restaurant space, as an example, we're seeing fitness operators take advantage of this unique point in time to build out their footprints, which we're looking back was one of the more gratifying types of transactions. We saw a very impacted category from a collection rate perspective, yet they were still looking to expand their footprint. I think that speaks to the quality of our locations, speaks to the long-term viability of that category. So it's all of the above.

And I think it's -- there's also an intersection of the 2 of those. So now that there is space and high-quality shopping centers, there were retailers and service providers and shop tenants that were expanding that didn't have the opportunity. So if you think of it as a Venn diagram, there is the intersection of the 2 as well.

Great. And then are you looking to change any part of your merchandise mix, whether it's more restaurants, more discretionary or whatever in terms of this elevated leasing period?

I think pre-pandemic, we were already beginning to see on the margin, a trend towards -- if you were to go back and listen to our calls, in 2019. So a lot of activity in the health and wellness arena, and we increased our percentage of tenants in that category slightly. It's still not extremely large. I think you're going to continue to see that. There continues to be a focus on -- from consumer preferences, consumer behaviors on health and wellness. So we will continue in that direction. But beyond that, I mean, restaurants are still an important part of the merchandising of our shopping centers. And as many of you have heard us say over -- for as long as I've been at Regency, the greatest amount of new leasing activity, the greatest amount of move-outs and neighborhood shopping centers will -- and remains to be as a restaurant space. And I don't see that changing.

Okay. And then I know you mentioned in the opening remarks, you're pivoting to office. Maybe you can talk about the multiphase Westbard project as well as your expansion of the existing project in Richmond. And the Giant that you started on in the first phase, does that open before the rest of the center?

Yes, it will open the rest of the -- before the rest of the center. So Westbard, for those of you that aren't familiar with it, is a shopping center that we already own Bethesda, Maryland. And as Craig alluded to, it's multiphase mix of uses. And it's -- I mean, to going back to how I described our shopping centers, I mean you talked about a trade area with compelling and attractive attributes. This is -- this could be the poster child for that. It's a really compelling trade area. So Giant was in much need of a refresh. The whole center was facing interior, and we are redeveloping the entire center. We're going to have retail anchored by Giant and then also adding apartments. There will be some townhomes that are going to be added, and then also a senior living component. So it is multiphase. Giant will open first and the future phases will start around 2024. It is something that we're really excited about. And I'm confident that upon completion we're going to have and already do, but we'll have even more of the most dominant shopping center in that trade area.

Maybe I'll follow up with the Richmond part of the question as well. We -- and our pivot to office, Craig, we were -- what we were very proud of was our financial position in the midst of the darkest times of pandemic. We were able to continue to invest capital where it needed to be invested because we saw the tenant demand. And our Richmond development in Carytown is a perfect example of that. That is the demand for new space in that particular market was to a level where we need to deliver another phase of the project and we're going to do that on top of an already delivered public into the midst of the pandemic that was very well received by the local community. So we're excited about that project. We continue to spend capital in the Boston and our Cambridge asset and at the Abbott. It's ready for occupancy, and we're really happy with the building pipeline there. We continue to build out our project in -- outside of D.C., where now we've actually signed a lease of lifetime to derisk that entire building, and they're taking basically 90% of the center of the building there. So that's a really exciting progress for us. So the pivot to office over here has been about maintaining that development pipeline. Our free cash flow even with paying out full dividends through the pandemic was there and at a healthy level for us to finance. We did sell some properties to kind of further bolster our balance sheet position, but nothing strategic to our future. So we feel really good about being perfectly positioned to take advantage going forward.

Great. And then how has the transaction market changed from over a year ago. Are you seeing more product launch to the market for sale?

It has changed. We are seeing more product. But at the same time, we're also seeing more capital come in. So classic supply demand. There's more demand and supply, which is compressed cap rates and increased values. And I would say I spoke about our acquisition of our JV partners in the 7-property portfolio, I think that, that was such an attractive, compelling opportunity for us because we were fortunate to get a little bit ahead of that cap rate compression, I believe that if we were to do that today, we wouldn't have been able to complete that in the mid-5s. So we continue to see cap rate compression. And even from the beginning of the year, I think that for the quality product that we are looking to acquire, it's probably compressed, close to 50 basis points since the -- in the past 9 months.

And then on the development and redevelopment side, it sounds like you're more interested in pursuing redevelopments, maybe not, let us know. What are you thinking about roundup development here at this time?

I wouldn't say that we are more interested necessarily. But I mean I will reiterate, I've said it many times. We think about the best use of our capital, we have essentially 3 buckets for that external or internal, if it's redevelopments growth. So we have the ability to grow and deploy capital to shopping centers that we're already familiar with. We already have the history with. We understand them that tends to come with lower risk, which is why if you ask me about to choose between 1 of the 3, I'm going to choose the shopping centers that we're most familiar with, that we've been operating, that have a history that we know are going to be dominant centers going forward. Ground-up development is still an important part of our business. And we -- it's all about opportunities. So Richmond, while had we owned it, it would be a redevelopment because it was in an existing shopping center that we essentially had a close grocery store, and we've pretend it to add publics to it, but it's still considered a ground-up development for us because it was not a center that we owned. We started just this year, ground-up development public in Jacksonville, Florida and H-E-B, outside in Houston. So we are very much committed to it, and it's really the opportunity set. And we have the team in place. We have 24 offices across the country. And I believe we have the best development team in the business, and they're sourcing these opportunities. I anticipate that you're going to continue to see a select number of ground-up development start over the next 12 months. And then acquisitions were also very active and we've always been active in that arena. Our most recent acquisitions, we purchased Pruneyard in the Bay Area, Market Common Clarendon in Arlington, the D.C. Metro area. Again, I think our platform, our operating platform and our -- the foundation, the people in the offices, the local experts in the markets with the relationships help source those opportunities, give us a competitive advantage in operating those properties and then the balance sheet and the cost of capital that Mike spoke about is it also gives us another competitive advantage as we pursue those opportunities.

Great. And then talk about your current net debt-to-EBITDA ratio, and what is the range that Regency is comfortable operating within for that net debt-to-EBITDA measurement?

Sure. We're -- at quarter end, we're at 5.3x. We've talked about our target operating level is right there. We want to operate in the low 5% area, 5% to 5.5% area. We think that's the right balance for Regency Centers. We think that, that produces the right level of free cash flow that we can then reinvest in our development and redevelopment pipeline. And we think it also allows for us to be opportunistic to the extent we see an acquisition opportunity where we may be able to lean into our balance sheet and be competitive. So we're there. We'd like to continue to operating that level going forward. I will be remiss not to also mention that through the pandemic, we never peaked above 6. So again, some of those measures we took to bolster our position while still maintaining our dividend payout, we're quite proud of. And again, nothing was sold of any kind of strategic significance noncore assets, single-tenant assets where we were able to maximize value.

Okay. I believe you have 100 -- roughly $100 million free cash flow annually.

That's right.

And you have active ATM?

That's right, Craig. And that $100 million and hopefully growing levels are above $100 million on a leverage-neutral basis is satisfactory to fund our development and redevelopment activity. So that free cash flow at a cost of 0 is going into the 7% plus or minus, yields, which that is the amplifying factor of the FFO growth story of Regency.

Okay. Great. This next question touches on BOPIS and curbside, but I'd be remiss not to mention Lisa Palmer for this conference, who was the moderator for a panel called Bricks & Clicks too. And she had not only a landlord, but a retailer and a consultant, all given their views, and I thought it's a very quick and efficient way to really feel comfortable about where and how important this curbside and BOPIS effort is. So I definitely want to thank the Regency team including you, Christy, in terms of putting together that panel. I found it just an excellent summarization of all the things that are happening and could happen. In any way, how many assets in your portfolio have a BOPIS or curbside feature? And then what are you hearing from your retailers in terms of new last mile initiatives they want to put into place at their stores.

You were the...

Yes. I'll take the latter part of that question first. And I think I appreciate the comments, Craig. I actually found the panel as perhaps informative as you did, too, and appreciate the perspectives from Brian, at Bricks & Mortar, Rachel and then Michael Simon from Target. One of the things that we have been speaking about, again, pre-COVID was the need for retailers to really adapt and innovate to satisfy the needs of their customers. And we always talk about Amazon wanting to own their customers. And the reality is that -- when you think of their strategy, it's multichannel. And we've seen an acceleration from Amazon in terms of wanting that physical presence, which again is just validation that you need all. And I think that what COVID did is it accelerated the retailers' actions, if you will, and really trying to, again, serve their customers in each of those channels, whether it be walking into the store for their customers, so an in-store experience, BOPIS, curbside pickup or home delivery. And I think I'll just reiterate what Michael said on the panel because I think that it is so informative and 95% of Target's digital sales are fulfilled from their physical stores. And I think that, that is really important. And that is why you're continuing to see all retailers, not just Target, but also Walmart and Amazon, really be very deliberate about their real estate strategy and the location of their physical stores and how important it is to be in the high-quality shopping centers in the right trade areas because then they're able to service their customers, and they're going to continue to adapt and innovate. So BOPIS and curbside pickup is just -- it is a component of that, and it's an important component of that. They still want to incent the customer to walk in the store because it's -- and he also -- I won't give you all of the stats then people won't go listen. But he also spoke on the panel about the profit margin of the different means of getting their goods to their customers. And clearly, their most important component of the story is getting people to come into the store because it's the most profitable way for them to get their goods to their customer. And then second would be BOPIS and third would be home delivery. So with that, it is certainly continuing to be an important part of our shopping centers. And I would say other than kind of street retail, it's in nearly everyone.

If you -- and, Craig, it's 100%. If you include the programs run by the retailers themselves and then the facilitating program that Regency offers, where we earmarked some parking spots to benefit the retailers, it's 100% BOPIS capability across the platform. We have some real inherent competitive advantages, right? We're close to the customer, number one; and two, the format of an open-air shopping center grocery anchor is just the head-end parking right in front of the store. It is -- that inherent advantage is very challenging to replicate in another asset type in the retail world, right? So...

And we're close to people's homes.

Yes. The first part where if in...

Where we are, yes.

Where we are. So we're taking an advantage of both of those fronts and the retailers are recognizing that advantage as well.

Great. And then do you think that we're going to continue to see more M&A activity in the script REIT space?

I cannot predict the future. But I believe that the reason why we have seen more is that there is the recognition and acknowledgment that there are real benefits to scale. Fortunately, I think Regency has already have a size that we already do benefit from that. And that's -- so smaller companies may continue to pursue strategic alternatives. It's possible. But again, I don't know that I can definitively say that there's going to be more.

Sorry, I saw another company is throwing their hat in the ring this morning from the grocery-anchored portfolio perspective. Maybe, Mike, you can talk a little bit about your bad debt reserves for third and fourth quarter of this year.

Sure. Well, I'll be careful with that question. We'll talk about that more in detail when we release results. But maybe what I'd like to offer maybe and where you might be getting at is on our cash basis tenancy, when might we be converting tenants back to accrual basis of accounting, if I read that question correctly. We have 28% of our tenants currently on a cash basis of accounting. That's as a percentage of our ABR. We have -- soon to have 9 months of 2021 under our belts. And what we -- from a policy perspective and as we indicated on our last call, we will begin the process of evaluating those tenants for reconversion back to accrual accounting. Some of the items we'll be looking for will be a track record of payment. We want to see 3 consecutive quarters of current -- on current rent. We want to see no outstanding deferred rental agreement unpaid, right? So a very clean AR and balance sheet for that -- receivable for that tenant. And when we see those factors and then the forward-looking creditworthiness of that tenant or that concept looks strong, we don't -- and in fact, we don't have a choice. That's you're meeting the definition of the lease standard and you should be on an accrual basis of accounting. So I do believe that we will start to see conversions start as early as the third quarter of this year. For a little bit of a point of reference, 13% of those -- of that 28 percentage points as of 6/30, we're already current. So they were meeting those standards that we just identified. So just to give you a feel for not all of those -- I don't -- I think will convert, but if the performance of those tenants over time continues, I think we'll start to see that. For everyone's benefit, no impact to cash collection rates because they're current, no impact to earnings as a result because we are collecting their rent. The impact will be to FFO on a noncash basis. So the reinstatement of straight-line rent will be what we're all looking for. We have no conversions in our existing guidance. So we have not prospectively planned for any of those conversions.

Great. And then maybe you could tell us a little bit about your ESG efforts, including diversity, gender pay grab -- pay gap and increased tenant community engagement.

I'm happy to take it. And pardon me, I'm -- we've made a lot of strides this year. So I'm going to read some of the points because we've done such a great job as a company. We did publish our fourth annual corporate responsibility report in June. I encourage everyone to find that on our website. I think you'll enjoy reading that document. We certainly are very proud of it. The highlights you'll find there is, we did develop and we have implemented a more robust diversity equity inclusion strategy. Very proud of that internally. Our gender pay gap as we reported, is now essentially 0. So we've again, put great effort into fixing that issue to the extent it existed on a marginal basis. We did make further progress on our Board diversity and refreshment initiatives. We announced that together with our last quarter results and, unfortunately, after proxy season. The introduction of ESG metrics were introduced for executive compensation. So we're all aligned and rowing in the same direction. We did issue our first TCFD compliant report on climate change risk. Again, proud of that. Now the next level of that will be implementing that to our long-term strategy. And then we've had outperformance in our existing targets for the reduction of greenhouse gas emissions, energy efficiency and waste diversion. We continue to make progress on our medium and long-term goals there. So very proud of the progress across our corporate responsibility initiatives. And again, you'll find much more detail in our report that's on the web page.

And I think, the most important thing is that we have been focused on these efforts before these efforts had names. In terms of -- we had -- we were one of the first companies to have a Vice President of Sustainability and it goes back into the mid-2000s. We were only the second U.S. company to do a green bond with Bank of America being the first. So we were the first real estate company. We did that in 2014. And with regards to DEI, again, I mean, if you were to go back and look at Regency's strategic plans from years ago, we talked about diversity and we didn't call it DEI. Again, it was before things really had terms. So it is ingrained in who we are. I think if you go -- if you really know us and know that we -- yes, we have values on our website, but we live those values. And we value our people. We value the diversity in our people and we also really value doing the right thing and connecting to our communities, and that is how we act every day in every aspect of the business.

Okay. At this point, I'd like to turn to 3 rapid-fire questions, if we may. The first question is, which of the following is the greatest challenge facing U.S. REITs today? A, Fed action and higher rates; b, supply chain issues, which we would include labor and logistics; and c, below to non-traded REITs. Which is the greatest challenge?

I would say b, and more of the labor for our business than supply chain.

Are you hearing anything from retailers concerned about holiday and labor?

What was the first -- what was it before you said anything?

Holiday sales and the labor possible shortage.

Not yet.

Mid-20 year.

I'm not hearing it either, but it seems to be an issue for newspaper reporters. Anyway. The second question, over the next 5 years, which market will outperform Urban Coastal or Sunbelt?

I think they're all going to perform well. But I think I may -- I'm not sure I know exactly what Urban Coastal is, but I would say the markets that are going to outperform, the ones that are starting from a lower point. So that's probably Urban Coastal because I think they took more pain.

Okay. You're exposed pretty well to both those regions, correct?

That's -- and that is intentional, yes.

Okay. And then for the company's office plans, and that means just Regency, your plans post-pandemic. Will you, a, have no changes from free pandemic?; b, leave it up to the teams?; c, offer hybrid?; or d, go full remote?

It's actually a combination of the 2. I think it's really important to have input from the team. But we will be hybrid.

Will be hybrid. Okay. How many -- what percent of your management team is in the office today?

So we have been -- with our headquarters in Florida, we actually have been open on a voluntary basis for 15 months. And most of our offices were opened at least by the end of July of 2020, again, on a voluntary basis. And then we brought everyone back in the summer of this year. So June, July, but on hybrid, and we're still not at full capacity in our more dense markets. So it's a rotating 50% capacity.

Great. And then, I guess, during the course of the call, you highlighted some differences between you and your peers. What is the most significant difference between Regency and the other 17 public strip REITs?

I think we talked about this. We have strategic -- what we call our strategic advantages. And it's the combination of all of them which really differentiates us. So it's the high-quality portfolio. It's our development and redevelopment expertise. It's our balance sheet strength and it's our people in our offices. And the combination -- because we have 24 offices across the country, national platform, expertise in the market. When you put all 4 of those together, I think that, that is what separates us from our peers.

Super. Well, I think this brings us to the end. I want to thank Lisa, Mike and Christy for agreeing to come on this roundtable. I hope that you have a great rest of the year and a great rest of the conference. And again, thank you very much for appearing.

Thank you, Craig.

Thanks, Craig.

Thanks to the whole Bank of America team for supporting this event. Appreciate it.