Regency Centers Corporation (REG) Earnings Call Transcript & Summary

Welcome to Citi's 2024 Global Property CEO Conference. I'm Nick Joseph here with Craig Mailman with Citi Research, and we're pleased to have with us Regency and CEO, Lisa Palmer. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com, and enter code GPC24 to submit any questions. Lisa will turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.

Great. Thank you, Nick. Thank you, Craig. Thank you for having us. Always one of the best conferences of the year. We appreciate all the attendance of all the investors. So with me today are Mike Mas, our CFO. I think everybody knows Christy McElroy pretty well, who sat on the side of the table for many years. Christy is our SVP of Capital Markets; and Katherine McKee, to the far -- my far right, for those of you in the room, Director of Investor Relations. First, I'll address the 3 reasons for an investor to buy our stock today so that I then can talk about each one, maybe a little bit more. So one, I think as we all know that follow the sector, the open-air shopping center environment and particularly grocery-anchored shopping centers really is thriving. And Regency has a really high-quality, well-located portfolio of mostly grocery-anchored neighborhood shopping centers. And then specific to Regency, number two, our sector-leading development program. We really are creating real value for our shareholders from the ground up. And then three, our sector-leading balance sheet and liquidity position, which provides us with a cost of capital advantage to act and invest opportunistically, including the number two funding the sector-leading development program. So please allow me just talk about those a little bit further in my opening remarks. So as I said, the open-air business, shopping center business truly is thriving. And especially for operators of high-quality, grocery-anchored neighborhood and community centers like those that we own. We continue to experience really strong operating fundamentals, including robust tenant demand across our national portfolio of 480 centers. We ended 2023 close to 96% leased with record shop occupancy of 93.4% leased. So then moving to the development program. We continue to see great success in our development program and that truly is a key differentiator for Regency. Many of you have heard me say that certainly more than once. We started more than $250 million of new development and redevelopment projects last year and we have nearly $470 million of projects currently in process. Our team continues to work really hard and successfully to further build our pipeline as we look to achieve our strategic objective of starting more than $1 billion of projects over the next 5 years. Our ability to successfully execute on high-quality ground-up shopping center development projects is a differentiator. It is a competitive advantage, and we are differentiated with our long-standing relationships with high-performing grocers, our access to capital, consistent free cash flow and the best in the business, experienced talented development team located in our offices across the country. We're also proud, reason number 3 of our sector-leading balance sheet and liquidity position as that provides us the ability to pursue these value-creating investments. And in January, we fortified our balance sheet even further. We took advantage of an attractive debt capital markets window to prefund our 2024 debt maturities. We issued $400 million of senior unsecured notes priced with a coupon of 5.25%, which looks really good today. We also closed on the recast of our revolving credit facility, which we upsized to $1.5 billion and tightened our borrowing spread by 15 basis points. We have nearly full borrowing capacity on that today. And for those of you that have been following Regency for a long time, and I see a couple of familiar faces in the room that I know that's true, you know that we working diligently over many years to firmly establish this balance sheet strength and track record of low leverage which is why we are especially proud and gratified by Moody's upgrade of Regency to an A3 credit rating just last week. We are currently the only A-rated open-air shopping center REIT and one of only 10 REITs in the entire sector, a truly great accomplishment and a testament to our disciplined financial strategy. So as we look ahead and we look into 2024 and beyond, we believe the macroeconomic backdrop remains supportive of the continued positive trends in the neighborhood and community shopping centers. The quality of our portfolio, the health of our tenants, the pipeline of developments and redevelopments, the strength of our balance sheet and the experience and dedication of our team, truly position Regency well to drive long-term earnings and dividend growth and create value for our shareholders. And with that, we look forward to taking your questions.

Perfect. So the 4Q call, I think a lot of us were coming at it from a bunch of different ways to try to get at once you get through '24, maybe what is the opportunity for Regency and strips in '25 once some of the downtime from Bed Bath & Beyond for some peers are kind of in the rear view. And I think you guys teased out maybe some views on that, Mike, on same-store and AFFO, but maybe go into that a little bit more your level of excitement on the flywheel and the opportunity for the company.

I'll start, and I'll let -- and I'm going to try really hard not to provide any future guidance because I'll get kicked under the table beyond 2024. But I will -- so let me just speak very high level and something I think that we're all familiar with, and we have it in our investor presentation, our same-property NOI growth model. We believe the quality of our shopping center, the consistency, the ability to drive market rent growth, rent spreads. And with stable occupancy, we should be able to deliver 2.5% to 3% of same-property NOI growth on a long-term basis. And we feel really good about that. So we do know what our guidance is for 2024 below that target and the fundamentals of the business are really healthy and haven't changed. So I don't believe this is providing guidance and it's consistent with what we said on our call, that means that 2025 should be outsized as we picked up because our percent leased, you heard me just say in the opening remarks, 96% leased, we end the year and 93.4% shop percent leased. So the business is healthy. We do have some downtime that we're dealing with anchors in 2024, but we are releasing those and that rent will commence either later '24 or 2025, which would lead to outsized same-property NOI growth in 2025.

Maybe just to dive in -- just a little bit of color on '24 in particular. There are some circumstantial anchor move-outs that are carrying a heavy weight from an NOI perspective. We had 2 leases in particular, in our Manhattan -- very small Manhattan portfolio, disproportionate base rents, causing some of that decrease in fact, having a 30 basis point negative impact to our same property growth this year. I would also remind everyone we have not yet included the portfolio acquired from Urstadt Biddle into our same property portfolio, that would have had an offsetting '25 basis point impact, positive impact. And we are -- by the way, from that -- in that portfolio, we are very much looking forward to continuing to drive occupancy growth early days are very positive, confirming our underwriting. And there was about a 200 basis point differential between that portfolio as percent leased and Regency, and we look forward to closing that gap over time.

The leasing environment, you guys have done a nice job on shop occupancy anchors are well leased as well. You had mentioned 2.5% to 3% of sort of a stabilized portfolio. What does stabilize mean from a shop occupancy perspective? Where do you think you can get that? And until you get there, how much growth could we see embedded in the portfolio?

So again, from a shop occupancy percentage, 93.4% leased at the end of the year is a record high, but I will quote Alan Roth, our Chief Operating Officer, records are made to be broken. And we really do believe that with the health of the environment and the sector generally, that we can continue to push that and I'm not going to put like what I believe is -- it's difficult to say what frictional -- I don't want to call it structural occupancy, but frictional occupancy is in shop percent leased. We have some proactive move-outs when we're trying to strategically upgrade the merchandising or if we're working on a redevelopment, but we can go higher.

And I know you guys don't have much to add exposure, but could you walk through that as sort of -- walk through how much of that would have been embedded in your guidance specifically versus maybe just an umbrella kind of assumption for bad debt?

I'll do the best I can, Craig. So we have 8 locations in the JOANN portfolio. It's only 20 basis points of our total ABR. Let me take the question through a credit loss discussion. We have 75 to 100 basis points of credit loss embedded in our plan for '24. Importantly, this is coming from 2 areas in particular, right? We have bankruptcy-related move-outs, that will impact the top line from a base rent perspective, and then we have traditional ULI bad debt expense that will come through as an expense line item or a contra revenue line item to the P&L. I'd like to think of the ULI percentage as more of a shop space, bad debt expense and then that bankruptcy-driven provision is really for these targeted specifically identified potential negative impacts. News is that a reorganization is in play. Regency does very well when reorganizations happen. We typically have the better performance stores within these portfolios and we typically retain tenants. However, what we will do, Craig, is go through specifically one by one and assess the likelihood probability of that space coming back to us, whether it's performance at the store level, whether it's the rent that they're currently paying, and then -- and whether it's the tenor of their lease as well. And we'll make an assumption and those assumptions are what's comprising that 75 to 100 basis point credit loss provision.

So I mean just to clarify, while the news of the reorg is current this week, it was not a surprise to us. JOANN is one that's been on our watch list and taken into consideration when getting to all the numbers that Mike just walked through.

That's helpful. We have a question coming in. Just -- what's the mark-to-market and small shop portfolio and anchor portfolio today?

So in 2023, we had highest rent spreads in -- since 2016 so we are definitely seeing really -- again, this goes back to the demand for the space and also the percent leased rising. It's a supply demand. I was an Economics major in college, and it's basic economics. And we expect that we're going to continue to see that for that -- for those reasons because of the fact that the limited space available and healthy demand in the shop center. Double digits again would be great.

I think we can probably get to your development shortly, but just your economics comment. At what point do you think kind of the positive leasing environment and the high occupancy spurs supply broadly?

I don't -- that's not the limiting factor today. I think the limiting factor goes to reason number 3, right, the cost of capital on the balance sheet. And we -- because there is demand for new space, for stores. We had several Regency team members at the ICSC Open Air Conference last week. And there's many retailers that attend that as well and just hearing there -- it's anecdotal, but just hearing their continued demand and need for new stores and limited supply. It's the developers that are not able to access capital at least at the cost that would make it make sense. And that is, again, where we have the advantage. So I don't believe it's demand that's limiting the supply, it's the access to cost of capital advantage, make it work.

And so how does that play into your development opportunities given your cost of capital?

As Mike said several times yesterday, we hope that this environment continues because we're able to -- we are able to develop and take advantage of that and use our low cost of capital, use our relationships and started $250 million of quality developments and redevelopments last year and have visibility to continuing that momentum this year.

Can you walk through some of the economics there versus the acquisition market and the developer profit that you can get?

So we're targeting 8% returns on average. There are some that will be below, some that will be above and we are -- the transaction market today is still pretty thin but for the quality properties that we would want to own, and we have bid on some and have lost. We are still seeing some trade at sub-6 cap rates. So if we -- even if we are in the low -- if we're the plus or minus 75 to 100 basis points from the 8, so even take it down to the low end of 7, we are still north of 100 basis point spread from an acquisition cap rate today. And so creating real value and how we approach development from the risk is really removed. We don't take -- we generally never say never, but we generally don't take entitlement risk. We have our anchor lease executed. So the risk is when you put a shovel on the ground, but that's such a small percentage in terms of the site work of the actual total costs. So historically, over the last -- gosh, 10 years when we were developing those spreads were north of 300 basis points. So they have compressed, and we would like to see that at a minimum of 150 basis points, but development is not something you turn on and off, you have to continually work it, especially with the relationships. And again, we have the best team in the business. And while we're north of 100 -- at least 100 basis points spread today, I expect that that's going to -- we're going to be able to continue to push that back to the target.

Just to add on a little bit there. We do still believe, though, that Regency can be a very successful developer and meet our strategic objectives, while the general industry still has pretty muted supply growth. So I think that set up can -- both ends of that equation can exist. And in fact, that's what were -- that's what would be -- what we would like to see continue. Is this continued suppression of overall growth, but Regency finding those needles in a haystack and those pockets of opportunity to meet our needs from a strategic perspective.

Maybe talk a little bit about how you guys think of cost of capital, given the cash -- free cash flow that you throw off, now your A-rated balance sheet, what that does for kind of the pricing matrix relative to these development returns that also give you a little bit of comfort here with your low levered balance sheet.

Sure. So we -- given the priority of development. We've kind of structured our balance sheet to afford us an opportunity to maximize free cash flow. So we're going to generate about $160 million of free cash flow in '24. The priority from an investment perspective will continue to be our development and redevelopment program. On a leverage-neutral basis, that $160 million should translate into about $300 million of capital available to invest which to -- when compared to the comments, Lisa made about our strategic objectives. That's more of the capital that we need to satisfy what we think we can do on the development front. Anything excess there can be used to either acquire shopping centers. We can park it on our balance sheet and continue to build more capacity for future investment, buying back stock. We have done that in the past, it is an option in our toolkit. We have the balance sheet that's prepared for that activity. It's not our highest priority line item. But when we see an opportunity, we won't hesitate to act on that. And then beyond that, Craig, it's about -- to the extent we're investing more than $300 million in a year, is it accretive to our quality? Is the opportunity accretive to our growth rate? And can we fund it accretively with new capital, both debt and equity on a leverage-neutral basis. We keep it really simple. That formula has worked for us for many years. We'll continue to apply that. I think our track record speaks for itself and the opportunity set, while limited on the acquisition front, we're prepared for it to grow and we have the access to the lowest cost of capital to take advantage of that.

Maybe one last one on development. SunVet, one of your bigger projects going on right now. What's the leasing progress look like out there?

Again, from the very beginning, right? We had the anchor executed even prior to closing. And it is -- I think for those that are in the room who are familiar with it, we say ground up, it's a redevelopment of an old retail site. So the demand and the neighborhood for that for retail is already really healthy there, and we continue to make progress. It's really early in the development stages. Shopping center developments, just like multifamily or other office, the small shop spaces generally, you like to hold off a little bit until you get further along in the progress of the development because as the tenants can actually visualize and see it and touch the space, you tend to get better rents.

Perfect. And maybe we're getting some questions here just about the general leasing environment, which has been very good. Just a couple of questions on how traffic has kind of progressed here year-to-date but also the back and forth, I think some of the perception is because the supply is so tight and vacancies are so tight that rent should just be pushed even harder. Can you talk about the -- kind of the dance between occupancy cost ratios, maybe other economic considerations within the center from getting rid of encumbrances of co-tenancy and other issues to unlock some value kind of how you see that whole value equation kind of play out on top of just kind of the traffic?

I'll start. If anyone wants to add any color. So from a -- in actual kind of lease terms, favorability, I think given our size and our scale and our relationships, we have good leases. And yes, we may acquire properties that perhaps we inherit leases and in fact, during COVID, when tenants were asking for a little bit of help in deferrals. It's one of the first things we did in terms of -- like excluding and removing some of those non landlord favorable terms that may have been in leases that we inherited/acquired. So generally speaking, I feel really good about our lease and how -- and what we have with our tenants. With regards to the ability to push tenants, rents, we recently did some work and looked at tenant sales, inflation and rent spreads and not surprisingly, they track pretty well, which is what you would expect. So our merchants, our retailers, rent expense is a line item in their financials. And it really is -- it is driven by how much they are producing in sales. And so to the extent that we have tenants that are productive, have high sales, continue to keep up with inflation, margins are still healthy. We can continue to push rents with inflation. Inflation certainly plays a role, but so does the supply/demand. And what we are hearing also anecdotally from tenants is they're willing to pay a little bit more to one stay in productive centers or be in productive centers knowing that they're going to be able to drive more foot traffic and therefore, drive more sales. So we're definitely -- that equation is in our favor today. But there is a limit. You can -- we can't push rents to the sky, if they're not growing their top line sales.

And from a volume perspective, how is that kind of -- I know volumes were very good in '23. How is that translating into early '24 kind of activity?

I would just say no changes to our expectations for the year, Craig. The portfolio continues to see high quality demand. As Lisa mentioned, the consumer is healthy. The tenants are trying to build out their footprints. The tenants appreciate the quality of our locations and I would just comment back to the rent growth equation. If you just look at our track record and map rent spreads versus occupancy rates, they're tracking with each other. And as that continues to compress and our vacancy continues to become more scarce, we believe that we'll continue to have the pricing pressure to allow us to continue to grow rents beyond that. So that's leaning into renewals. There's no other quality locations for a tenant to relocate to. The cost of moving is as high as it's ever been. We realize that. The tenants appreciate that. We will find the right rent to make sure that we're meeting our objectives as well.

And maybe on the other side of rent is the expense side, right, inflation has obviously been a pressure point there. One of the questions is, what percentage of leases use fixed CAM charges have you always use this method?

We are not a fixed CAM company. We have studied it. We continue to study on a periodic basis. We believe in complete pass-throughs of our -- all of our operating expenses. We think it aligns our interest with the tenants. We -- very strongly believe in maintaining a very high standard of quality within our shopping centers. And we don't -- the disincentive from a fixed CAM perspective. In that regard, we have put in the con column as we evaluate pros and cons of the approach. But not to say we won't move in that direction at some point. Again, we just continue to look at that, and it hasn't impeded our ability in the marketplace to attract tenants.

Can you talk about some of the bigger pressures, whether it's insurance, taxes walk through it.

I mean in a higher inflationary environment, we've seen pressure throughout but we've been able to push that through, given the contract terms that we have. Insurance has been the highest growing line item over the past 2, 3 years. It is a smaller component of our overall cost structure to a tenant, and we are largely recapturing that through rebuilds to our tenants. And as vacancy lessens, that recapture rate continues to grow. I think it was worth about $0.01 per share, i believe last year given the vacancy we had in the portfolio. So that increase of insurance costs would be non-recoverable because of vacancy. We anticipate a better renewal year this year. That doesn't mean that we think insurance rates are going to go down, but we don't think the increases over the past several years will recur in 2024.

Sure. We have another question coming in. What percent of your portfolio is discretionary? And one example is apparel.

Very limited. I'm going to let Christy give the exact percentage. But our -- Mike whispered 5%, I'm not sure of the exact percentage, but most of our -- it's grocery-anchored, value, necessity, convenience, service, Mike is right, it's 5%. But it's -- it is -- and let's -- history lesson. Let's go back to 2018, 2019. If you were listening to the Regency calls or any other of our peer investor calls, there's a lot of concern, right? It was the retail apocalypse and retail physical locations were basically all going to die off and then -- and it was because it was the threat of e-commerce and Amazon, Walmart really was already in there, but then COVID hit, and they're really through those years and challenges that we all experienced as consumers and the retailers experience with their businesses became a renewed appreciation for the physical location. So consumers like to shop. They like to go out. They like the social interaction. And the retailers realized it's really expensive to deliver to the home. And the best and most profitable means of delivering -- not literally, but getting their goods to the customers, instead of customer walk in the store. So retailers invested in their in-store experiences, invested in fulfilling online orders from their stores. And really, today, how should we feel even so much better about the physical locations, bricks and mortar than we did 5 years ago. So it's -- the environment is really healthy and the neighborhood community shopping centers close to the home are critical to the entire retail ecosystem.

And you guys mentioned Urstadt now you've had under your belt for several months. As you guys are really digging into kind of lease structures, lease terms of some of those legacy leases versus what a Regency typical lease structure will look like. Are you finding any lower hanging fruit than maybe you've even thought going in regarding terms, bumps? Anything there that would add to your accretion relative to what you originally underwrote?

Largely, my answer would be no -- Urstadt middle management team did a wonderful job of managing the portfolio, the professional leasing and management. We're bringing a little bit of amplification to that. And I think where that comes from is a little bit broader reach from a tenant perspective. They're being so hyper local and hyper focused on that region. I think our perspective of bringing tenants who maybe are new to the marketplace and we know their success within the portfolio. We can introduce them to these assets, one. The contractual rent bumps are -- in that portfolio are slightly less than ours. We believe that we will continue to bring that. We've been doing this for 15 years now pushing contractual increases. So that discipline within the leasing team will continue to grow within that portfolio. And again, I'll just come back to the real opportunity here is heads down, increase the leased occupancy and the commenced occupancy rate, close that 200 basis point gap. These are very high-quality shopping centers that largely fit our strategy and look like Regency assets from a trade area DNA perspective. The team is excited to get their hands on them. Early days. I wouldn't say there's no negative surprises and no positive surprises. We're getting what we thought we were buying, and we're really proud of that.

I would just reiterate, great company, great culture, great properties. Size and scale does make a difference in our business and had the management team that was in place at Urstadt Biddle had our size and scale, there probably be less of a gap between the 2. But the reality is we have a lot more data, access to data, as Mike said, it was a result of having over 9,000 tenants across the country. And that access to data allows us to analyze it and then, therefore, invest in processes and systems that we can actually capitalize on how best to optimize lease terms, as we talked about, lease structures, speed of processes even matters because you invest in systems. So all of that, as Mike said, that's the amplification that we can add to a really good portfolio brought over 29 really excellent team members that are fitting in well and it is providing exactly what we thought -- which was 2024, appreciate accretion.

Obviously, it's a very fragmented industry. But to your point, what's the consolidation opportunity from here, either private or even on the public side?

We are -- we have capital. We have the balance sheet to invest. It is one of the advantages. So we're constantly looking. But as Mike said, so I do believe that scale matters, but we are of a size that we don't need to grow, to capitalize on scale. We've kind of crossed the threshold. So we're not going to grow just for growth's sake. We're going to remain very disciplined. So checking the boxes that Mike articulate it later. So as we're looking, whether it's a single property acquisition, a portfolio of properties or a company, is it accretive or at least equal to the quality of our portfolio? Is it accretive or at least equal to our current growth rate and is it -- can we finance it and fund it accretively? So is it accretive to earnings with -- while remaining within our balance sheet targets. Those opportunities are limited. But it doesn't mean that they're 0. We continue to really, really mine all of them.

Great. A follow-up to a comment you made a few minutes ago, just about the portfolio and exposure to apparel. But I think the question is specific to consumers moving more towards experiences versus goods and how that plays into your centers?

So -- we are primarily grocery-anchored neighborhood community centers. We do have -- primarily grocery anchors, services, convenience, fitness. We don't have a lot of experiential tenants. It doesn't mean we have 0. But generally speaking, the close to the neighborhoods aren't going to have the large -- again, doesn't mean we have 0 like the pin stacks and the pickleballs. So we'll look to add it where it makes sense. We like to think of our shopping centers. We have to create an environment that people want to come and do want to gather, be together, we have our strategy, we call the next third place. You have your home and whether it's your home office or your office, office and then your local neighborhood shopping center.

We'll move on to rapid fire. So what same-store NOI going to be in 2025 for the shopping center space?

3%.

Will strips have fewer, more of the same number of public companies this time next year?

Same.

And then best real estate decision: buy, sell, build, redevelop or repurchase stock?

I'm going to say develop, redevelop is the same for us. Develop, redevelop.

Perfect. Thank you so much.

Thank you.