Regency Centers Corporation (REG) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. Wes Golladay from Baird, and this is the Regency presentation. Please to be joined by Lisa Palmer, President and CEO. We got Mike Mas, CFO; and Alan Roth, EVP of National Property Operations in the Eastern Region President. Thanks for joining us. I'm going to now begin the presentation by turning it over to Lisa for a brief introduction of Regency.

Thank you, Wes. Good afternoon, everyone. All I can think about is what a difference a year makes because I think last year almost -- was almost to the day, I had injured my back like the day before I got here, and I could barely get through this presentation. I'm much better today. Although if you were to listen to my panel, that award they made me carry was really heavy. So Wes introduced Mike and Alan also, we have [ Katherine McKee ], Director of Investor Relations, [indiscernible], I think that's how you pronounce that, I sometimes get it wrong. Managing Director of the Northeast, she's only been with us for about 6 years, 7 years, and Christy McElroy, who's our SVP of Capital Markets. We just reported a month ago, we've had many investor meetings, so consistent with those comments from the reporting of those results. Our operational trends remain really positive for our open air, grocery-anchored shopping centers. Tenant demand for our space in our centers remains really strong and this is providing sustained momentum in our leasing pipelines as well as in our ability to drive base rent growth. And I know many of you have heard me say this and heard us say this multiple times, our portfolio does continue to benefit from post pandemic trends and tailwinds of suburban growth, micro migration and hybrid work trends. And yes, we do continue to monitor the recent uptick in tenant bankruptcies. We are certainly well aware of those. And what also appears to be a looming recession, although we had some differences of opinions in the last session. Regardless of that, we are not seeing signs of a slowdown in our business today. And this was reflected and underscored pretty significantly at the recent ICSC leasing conference a couple of weeks ago. So attendance there was really strong and our meetings were really upbeat and productive. So in those meetings, we had tenants that continue to look for further opportunities to expand at the same time that they are really facing limited supply of high-quality, well-located space. And that's a good equation. That works for us. We also continue to experience success in our development and redevelopment programs. We have approximately $300 million of projects currently in progress and a full pipeline of future projects. And as Nick said on our last earnings call, if you had the opportunity to listen to it, we remain really encouraged by the opportunities that we are seeing and extremely focused on continuing to build our pipelines to north of $200 million annually. And in fact, shortly after that call, almost concurrent with our very -- what I believe is a very exciting announcement which I'll discuss in a minute, we added another outstanding project to our pipeline. So we will be developing a Whole Foods-anchored center on the site of a former mall, [ SunBet ] Mall on Long Island. So again, fantastic opportunity. And I think it's important to note that we are able to self-fund this development activity on a leverage-neutral basis with our free cash flow which is over $140 million annually. And as I just mentioned and as many of you likely know, and some of you may live in the neighborhoods, we also recently announced the acquisition of [indiscernible] properties in an all-stock transaction, and that is expected to close later this year. That portfolio consists of over 70 properties located in premier suburban trade areas in New York, New Jersey and Connecticut. And I really have met a lot of real estate experts at this -- at this conference that have told me what we need to do with several of the properties, which -- takes to make sure we tell Alan. This established portfolio features neighborhood and community centers highly consistent, highly aligned with the characteristics, tenant mix and quality of Regency's portfolio. And importantly, the transaction will be immediately accretive to core operating earnings with little impact to our sector-leading balance sheet. So following the merger, we will remain at the low end of our target leverage range of 5x to 5.5x debt to EBITDA, and that's including the assumption of debt and preferred stock. We will and do look forward to sharing more details upon close later this year. As I think about it, Regency over the past 60 years as a company and over the last 30 years as a publicly traded REIT, really has established a strong track record of growth and value creation for our shareholders. And I'm really proud. The team is really proud. The company is really proud to be in a position in this environment to continue to be able to do that, to invest accretively to continue to create value through transactions like these for our shareholders. So with that, Wes [indiscernible] to answer your questions.

Yes, so maybe start diving into the tenant demand. Where are you seeing the most demand for expansion plans? And can you provide color on your leasing pipeline, the runway to get back to the prior leasing levels?

Yes, Wes, thanks for the question. Demand is really robust. And coming back from ICSC as Lisa mentioned, we had some great meetings across the Board, and it can be the junior anchor retailers, whether it's the apparel like the TGX and the Burlingtons of the world, sporting goods, furniture, grocery stores, et cetera. There's a whole lot of those. And we frankly don't have a lot of that space that's available, but they're out there expanding in the shop arena, it's really robust. We've got 1 million square feet of new activity in our pipeline right now in both LOI and lease negotiation. And when we look back at our quarter 1 activity, which typically quarter 1 coming off of the holidays, is usually not as robust of a quarter. Historically, and we were 20% above those averages. And as we look at April and May activity, the activity continues and the pipeline continues to be robust. So we feel really good about the direction of where it is. Our head is not in the sand. We've been trying to think for some time to Lisa's comment at the lunch and that they had. Is there a recession? Are we going into a recession? We're just not seeing that at the leasing level yet. And I hope the yet remains a never, but we're certainly monitoring that closely.

Got it. Then Bed, Bath & Beyond has been quite topical even at this conference early on. Do you expect any of the stores to be picked up at the auction?

So we have 5 of those -- we had 10 Bed, Bath & Beyond stores. Again, it's not -- it's roughly 50 basis points of our ABR. Five of those, we've already recaptured back and 5 of them are, in fact, going to the auction. We'll know in the next 30 days sort of how that plays out, but it's going to be a really interesting process. We've got some really good real estate in there that there's no doubt that there are retailers that will want to bid on those. But the amount of term that's left on them becomes sort of a variable that's unknown as to whether or not they're going to be willing to invest capital to do that or not. And so we're evaluating those. Certainly, they're evaluating those, and we'll see that all really come to a conclusion here in the next 30 days.

Okay. So this year, we already had a few bankruptcies, [ Tuesday Morning ], [ Party City ], Bed, Bath & Beyond. I guess what is the watch list going forward?

We've always been very aggressive on a watch list, and that's something that we take pride in a very aggressive and intentional asset management approach to our portfolio. And you mentioned 2 of them Tuesday Morning in Corner Bakery. Corner Bakery for those who are familiar with the concept called First Watch, which is now out of Tampa from my old stomping grounds originally in Ohio, but we had a lease sign with them before we even got that space back for Corner Bakery, again, being out in front of the anticipation of what was going to happen. We've put Five below and Barnes & Noble in a couple of our Tuesday Morning boxes. And so -- when we think about the future, I'm not going to predict what the bankruptcy world is going to look like in the future, but I can tell you that we're always out in front of our watch list tenants, monitoring their sales, monitoring their occupancy costs and we're not sitting back and waiting for news as to whether they're going to close that or whether a bankruptcy filing is going to happen. We're very proactive. And in times, it makes sense to approach them and see if they want to buy out of a lease, and there's other times where we may approach them and we'd be willing to buy them out of a lease. So we're actively watching that and feel really good about kind of where the platform sits right now.

Okay. Can we talk about pricing power? Are you getting back to peak occupancy levels? What does it mean for renewal spread, annual escalators? How is that going?

Is this mic on this all time here? Wes, come on. So we're at 95% leased right now. Our peak occupancy is 96%. We feel really good about being able to get back to that peak occupancy. Our shops were at 92%. Again, we think we can get back to the 93-plus percent of where it was. There's no doubt that once you get to that, certainly, pricing power becomes something to talk about. But we're not just focused on cash rent spreads. We're focused on GAAP rent spreads and net effective rent. And so we're very focused on embedded rent steps so that there's a sustainable approach to that. We're really proud of the first quarter, 90% of our shop leases had embedded rent steps in them. And so that's a really important component for us. So those GAAP rent spreads are in the mid-teens. And we're being very prudent in our capital approach so that we feel good about the overall net effective rent. And so do I think ultimately, cash rent spreads can go up as we think about getting to peak occupancy, yes. But we are looking at it in the totality of net effective rent.

And especially in the -- especially with inflation as well, would expect to be able to continue to drive rent. So it's a matter of supply and demand as well as inflation is the -- are at the fact that we have renewals and new leases to do is somewhat of a hedge against that.

Can we talk about that new disclosure, you did have the net effect of rent and how you can get nominal growth that you put the money in, but like what is your approach for the long-term growth? And how -- what is the right amount of CapEx to put into leases?

So we've been focused on -- I was waiting for Mike to answer that one. We've been focused on probably 10% to 11%, Wes of our NOI is capital driven. I don't really see that changing. I think that's been pretty consistent. It's ticked up a little bit recently. I think for 2 reasons, Inflation is number one. And number two, coming off of COVID with occupancy, we're doing a lot of leasing, a lot of driving occupancy right now. So -- but I think that 10% to 11% is pretty standard.

Yes, it [ is ]. That's more than just leasing capital. So the 10% to 11% of NOI would include maintenance capital as well for our centers, and you'll find that, that's been consistent over time for a long time, and I've been at the company for nearly 20 years, and that hasn't really changed. If our new disclosure, I appreciate you identify, and I encourage you to go look at it in our supplemental about 85% is what you'll find in our net effective rent. And if you do the work and compare that across the peer sector, you'll find that Regency is very judicious and how we think about investing capital into leases. That free cash flow -- maintaining that free cash flow is so precious to our business model. It's what's funding our development pipeline and that growth lever that we have and that we offer to our shareholders is unique in the space. We're really good at development, the tenant relationships, that access to free cash flow and the other capital sources we have and the team that we have in place prosecuting that side of the business, it's really critical that we maintain those levels of free cash flow.

And the quality of our space allows that.

You do have a higher cost of capital now, unfortunately. And so how have your capital allocation priorities changed?

Broken record -- number -- and I know that those that have followed us for a very long time, we've been as consistent with this as we have with how we approach CapEx. So the best use of our capital is exactly what Mike just said, it's into our development and redevelopment program and using our free cash flow, leveraging that on a leverage-neutral basis allows us to self-fund. So we don't have to access the equity markets to grow and to enhance that same property NOI growth so that our earnings is 4% plus add that to your dividend yield of 4%-ish and total returns of 8% plus. We think that's for the safety that we are delivering of that dividend because I'll have to remind people we never cut our dividend throughout COVID, and we have increased it twice since then -- Is a pretty good return in this environment. So that's one, best use of our capital, and that's ground up and redevelopments, repositioning of assets and also investing back into our own properties. And at the same time, we're always on the offense looking for new acquisition opportunities. And again, you've heard us say this often, if it can check the boxes, if you will. So assuming leverage neutral because our balance sheet is critically important to us. If it's accretive to earnings and if it is at least neutral or accretive to the quality of our portfolio and at least neutral or accretive to the future growth rate. We're going to -- we'll act on that. And we have been -- we've had the ability because of the intentional -- intentionality of the strength of our balance sheet to be able to do that. And we have a pretty -- we have a pretty strong track record of investing accretively, as I mentioned in my prepared remarks, over the history of the company.

Can we talk about that some of that project you mentioned at the beginning, timing, yield cost, how should we think about that?

Yes, we're really excited about that. So we obviously just announced that. I think as Lisa mentioned, the day after we announced the acquisition of [indiscernible]. So it is going to be Whole Foods anchored. We do expect to deliver 2 Whole Foods likely summer of 2024, so roughly 12 months from now. And it would be roughly a summer of 2025 opening. Total project costs are going to be in the neighborhood of $85 million to $90 million, and we expect to develop to roughly a 7% yield on that project.

And it sounded like things were a little tough to buy at the earnings call and then you bought a company, but just one-off transactions. How are those going?

Yes. The transaction market still remains pretty thin. They're still a bit of a gap in the bid-ask spread. So as you very politely pointed out, our cost of capital is higher. And we acknowledge that. And private because of the thinness of the transaction markets, kind of the price discovery just isn't there yet for the quality for the types of shopping centers that we want to buy, their [indiscernible] transaction with stock for stock, which is -- which makes that a much different equation.

Yes. Maybe just touch upon that. I think it was a 7% cap rate. You do not view that. I think on the conference call, you mentioned that is not representative of where transactions are today?

Again, I think it's a relative value. I think -- I don't know what you have for our NAV, but if -- my guess is if you looked at your estimate of Regency's NAV, our cap rate is well above where private again, very thinly traded, where private market cap rates are today. So it's a relative trade. I don't think -- it's not a look through for market cap rates.

Can you discuss the leasing and redevelopment and other opportunities for revenue upside beyond the $9 million of identified G&A synergies on the deal?

So sort you're asking [indiscernible] the kind of the rationale for the investment. Unlike the previous merger that we transacted with Equity One, this is more -- it's kind of -- it's right in front of us. It's a leasing exercise. It's -- these properties are look very similar to Regency's portfolio. Just about any demographic metric you look at, you will see extreme similarities to Regency. What you'll also see is a lease-up opportunity from a percent occupancy perspective. So they're about 200 basis points behind us on small shop occupancy, about 100 basis points behind us in total occupancy. But if you look at our respective histories and look at our historical highs, we're equal. So the mission in the near to medium term is it's a leasing opportunity for Regency. Beyond that, I think we do have collective confidence that in the medium to long term, our asset management team will identify as we will in Regency's portfolio, incremental tactical redevelopment opportunities. But again, is it isn't like the equity and you have a long -- you know our history with the Equity One merger where there was the more significant densification plays. This is much more kind of right in front of us leasing exercise.

[indiscernible] market rents that [indiscernible]

I think just as our portfolio has below market rents, you'll find below market rents within this portfolio as well.

And then maybe look at the capital structure of [indiscernible], was that attractive to you the preferred that was in place or just the debt that was in place?

Yes. And just to recap that, we are assuming the in-place preferred equity, which is roughly $200 million. We're assuming the in-place mortgage financing, which is roughly $300 million, both of which had pretty compelling interest rates and coupons. Again, similar to the stock-for-stock transaction, it's unique that Regency is able to assume a preferred equity issuance in that we're a public entity. So it separated us from a competitive standpoint, we believe, in our ability to transact. So I view the preferred equity as a feature of the transaction. 6% coupon should financing costs improve from here. We have an option of redemption later next year when those preferreds open up. So -- all in all, I think on balance, it's really good execution for us.

And then maybe can we talk about the demographics of the portfolio. The household income is a little bit higher, the densities -- or actually, the is above -- the density is lower, though. And so how should we think about that? And maybe at this point, also talk about how Regency cultivates the center, merchandise as a center, how do you optimize?

Alan is excited to answer this. He's grabbing the mic.

Just happy to answer it, which is part of why we're excited about the portfolio. But these are in high-income areas and just the makeup of the communities that they're in, the density is lower, but it does translate 2 things, higher barriers to entry. And so we feel really good about sort of the dominance of a lot of these assets in those markets. And if you look at retail GLA per capita, you'll note that that's also a lot lower in those markets than what you would see in some of these higher dense, even Regency markets. So feel very comfortable on that. And then to your question, Wes, about sort of remerchandising, I mean that's what we're really excited about is the ability to leverage our platform and leverage our relationships. And we've got deal makers in California and Dallas and Chicago, really all over the country, but they're really close, and they not only leverage one another, but they leverage the tools, the technology that we have to really see who are we in negotiation with? Who's expanding? What are average sales volumes and occupancy cost for these retailers? What kind of rents do they pay? Giving them a platform to really proactively think about merchandising their assets. And I think the [indiscernible] team has done a really good job over the years, and that's one thing that we're excited about is to give them access to everything at a bigger platform and be able to implement a number of those things to really enhance some merchandising and leasing. So looking forward to it.

All right. So Regency is not known for holding noncore assets, so you get a portfolio, do you have any [ gift ] with purchase that need to be disposed of?

No. Sure. Short answer is no. And it's rare that you can find a large portfolio of consistent quality that meets our very high standards. We don't need -- Regency doesn't have to grow. We are requisite size. We have large operating platform. We benefit from all the scale benefits that you can name. So it's very -- it's going back to Lisa's 3 checkpoints: consistent and accretive quality and this portfolio is consistent throughout. We will continue to sell properties as we always have, and you know as following us for so long. We will sell small amounts up to about 1% of our footings per year, just good kind of active portfolio management. We might sell a property from this portfolio. And we -- just as we might sell a property from the Regency portfolio, the legacy regions portfolio, it will start from the ground up asset by asset, looking for lower growth, lower quality and our disposition.

[indiscernible] is really small. So in their portfolio. So then as part of Regency's much larger portfolio, it's even smaller and not much different than kind of noncore we already have in our portfolio today.

Then you did highlight G&A synergies in the portfolio. How long will it take to realize those after you close? I think the closing is 3Q or 4Q?

Shortly after closing. Nearly -- there'll be some costs that will -- transition costs that will extend. But shortly after closing, we should realize the synergies.

And at this time, we'll take any questions from the audience.

[indiscernible]. Can you speak to [indiscernible] the balance between making aggression [indiscernible]

The question is the balance between, if I may think -- I'm going to try to paraphrase it being aggressive on acquisitions as well as with the potential looming recession. Again, the way we think about it is we have a track record, a pretty good track record of understanding how the types of assets that we want to own perform through different cycles. So when you're looking at acquisitions, what you look -- it really comes down to how are you underwriting the cash flows through what you may think may be some type of cycle. You've heard us say, I said it Alan reiterated it, we are not seeing that yet today, and we are not seeing any weakness in the demand for space, the rents that the tenants are willing to pay yet is exactly what Alan said, and he's hoping it may be never, and it may be never. But as we do look at acquisition opportunities, we're going in with eyes wide open. And again, we have a lot of experience in markets across the United States with the type of assets that we look to underwrite, and we just apply that experience. And if the numbers make sense and it checks those 3 boxes, whether it's a single property, whether it's a portfolio of properties or whether it's a company, accretive to earnings, accretive to quality, accretive to future growth rate, then we'll act. And so we have to have the access to the sources to fund it. And again, in [indiscernible] portfolio, that was easy, it was stock for stock. With regards to developments, again, we're using our free cash flow leveraged to allow us to get to the -- to be able to fund that $200 million or north thereof. And anything incremental above that will be evaluated on a case-by-case basis.

How should we think about the net effect of [indiscernible] So do they need a little bit more capital?

Yes, it's a good question. So in our underwriting, and we spoke about this on the merger call, we have planned for a slightly more capital load on the margin. And I think that represents 2 things. One, the leasing opportunity that I mentioned before. So some of that will be -- come from leasing capital, more activity. Some of that will come from Regency applying its portfolio standards to the assets. But I don't think you'll see the Regency total given the size of the [indiscernible] portfolio in relation to ours. You won't see a material move in our 10% to 11% range as a result of that incrementally higher capital look.

It's a pretty basic elementary question, [indiscernible] you made a comment that [indiscernible] good optionality [indiscernible] assuming [indiscernible] Why is that a better deal review [indiscernible] leverage and just unsecured debt [indiscernible]

Mostly, yes. I think the short answer is they're roughly the same cost today. We can do it.

[indiscernible] Forever.

Yes, and the preferreds are forever at this point in time. So that option out -- that's true. But we're so below our tax from a payout ratio perspective, we're very healthy. So we don't really need those deductions. We have carried preferred in the past. We refinanced those out of preferred into debt. And we would probably, in that same environment, operate under the same playbook. But right now that -- they're essentially the same.

What would you say the tenure would have to trade down to [indiscernible]

Depends what spreads do.

Yes. I was going to say the same thing. I'm thinking about total coupon. It probably had to be north of a 100 basis point spread between the cost of the preferred and the cost of long-term debt capital. One thing we wouldn't see -- you wouldn't see Regency does trade permanent capital for 5-year as an example.

How are you guys doing your job, like what brings you to work every day [indiscernible] of the properties?

I love that question actually because we were talking about this, this might have been a couple of years ago, right? When somebody asks will keep you up at night and I always say, we we'll get you out of bed in the morning. That really is -- I think the way to look at it. And -- that's an easy one, I think, for the 3 of us, and the 6 of us to answer. It's the people at Regency. We're very much into enjoying who we work with. I think Mike said 20-plus years, I've been at Regency 26 years. I mean it just kind of goes around and love who I work with. I love the industry and the fact that everything that I'm working on each day and throughout the day, it's a different situation, a different issue. It isn't kind of that one monotonous sort of approach. And so I love the industry and really love the people that I work with and I don't know I can talk for hours.

Yes. And I'll be happy to answer the question as well as what brings me to work every day? So I joined Regency. I said 27 years ago, and this is not [ enough ] for anyone who may have relatives or if any of my friends from CSX are listening. I had a choice between going to work for CSX or Regency, it was shopping centers versus trains. And I literally pick shopping centers because it's interesting and something that we can all relate to. It's all part of our daily lives, and I've stayed because of the people and the culture. And I'm biased, I've been there 27 years, but I think that we have a special company that works with special people, and it's fun.

Again I wouldn't say everyone move up the ranks and sell the old management as well. And it's been a pretty good culture from the outside.

25 years, 26 years, 20 years, 27 years. I think that's a statement about the culture of the company.

I think we have 1 minute left. Anyone? Okay. Can I get a bonus question in? Any exciting redevelopments that you're teeing up in the background? Anything?

Always -- I hope so.

Yes. Lisa told me to ask that.

Pipeline is strong and exciting. Yes. Always thinking about it.

And any consideration to date a little [indiscernible]

We've always and will continue to explore different avenues for growth, but we continue to come back to, we believe that for our company, the best value proposition for our shareholders is to be remain disciplined, committed to our strategy of open-air shopping centers, primarily grocery anchored in suburban trade areas.

All right. Thanks, everyone, for joining.