Regency Centers Corporation (REG) Earnings Call Transcript & Summary

Welcome to day 2 afternoon roundtable sessions. It's my pleasure to moderate this next roundtable with Regency Centers. With us today is to my far right, Mike Mas, CFO; in the middle, Christy McElroy, SVP Capital Markets. And I'm here with my colleague, Andrew Reale. So similar to the other round tables, we've been giving the companies an opportunity to just provide an overview of the company. There is a mix of investors in the room. Some, I'm looking at faces, are probably very familiar and some might be newer to the story, and then on top of the overview, if there's any particular messages you're trying to get across at the conference, I don't think you provided an operating -- quarter-to-date operating update, and then strategic positioning. And in this room, we've happened to host a lot of your peers. So hopefully, we'll be able to see some of the similarities, but differences as well.

Yes. And I appreciate that, Jeff. And thanks for having us. Really appreciate it.

Today's conference has been great. Thank you.

I'll make some comments just to do some table setting, if that's okay, and I really appreciate to have my partner here, Christy McElroy, and you'll from her as well today as we get into Q&A. So again, from a table-setting perspective, you heard it on our earnings call last month, those who are closely monitoring, we had another strong quarter, benefiting from positive retail fundamentals, robust leasing demand across our entire portfolio of high-quality, grocery-anchored assets. We signed over 2 million square feet of leases in the quarter. Cash rent spreads exceeded 9%, which is meeting our strategic objectives. Our SNO pipeline, our signed-but-not-commenced pipeline is standing at nearly $50 million of rent that's providing a very visible and transparent amount of momentum as we head into 2025 from an NOI growth perspective. I'm most excited about the prospects we've had on our development pipeline. We've grown that to close to $600 million in-process projects. Our blended yields are in the 9% area on that side of the business. In fact, and we're talking about it post quarter end, we've started 2 new projects that we've announced subsequent to our earnings release. One is an H-E-B anchored center in the Houston market and the other is a Safeway anchored center in Northern California and East Bay part of the country. And this is our expansive platform, our deep tenant relationships, all of that combined with our competitive cost of capital and our balance sheet strength is what truly differentiates us from our sector peers, and those in the -- in our industry in general, as we continue to make great progress allocating our capital. We are excited by those prospects and continue to build that pipeline. To remind everyone, we do have a strategic objective of putting out about $1 billion of development and redevelopment investment over a 5-year period. So we're well on our way to achieving that objective. We often discuss the importance of our strong balance sheet and our liquidity position. And in the second quarter, we put those words into action, and we capitalized on the significant disconnect between the public and private market values that we have been seeing earlier in this year. Regency executed on a $200 million share repurchase in the quarter. From our perspective, that ability to invest in Regency like assets from a quality standpoint at a roughly 7% implied cap rate made a lot of sense in a world where we're consistently seeing cap rates in our sector trade in the 5.5% to 6.5% area, sometimes even inside of that, approaching 5%. And just a few weeks ago, we also took advantage of a favorable window in the capital markets on the debt side. Coming off of our Moody's credit rating upgrade to A3 earlier this year, we issued $325 million of notes at a 5.1% coupon, about 123 basis point credit spread. Importantly, through the repurchases and after the financing of the same, we remain in the 5 to 5.5x area from a debt-to-EBITDA perspective, which is right in that sweet spot of where we want to operate our portfolio and our balance sheet. So we continue to have flexibility to source new developments, source and fund new redevelopments, and when appropriate, source and fund new acquisition opportunities. So we're excited to finish the year. We're even more excited as we look to turn the page into 2025. Our high-quality portfolio, which is intentionally allocated across strong trade areas with a focus on necessity, value, service and convenience, we think, plays really well in today's economy. Our growing development pipeline, capitalizing on our leading market position and track record and our sector-leading balance sheet, and best-in-class Regency team, all of the above providing us the foundation for continued growth looking forward as we look to capitalize on today's tailwinds in the grocery-anchored shopping center landscape. So from -- those are the remarks we'd like to share today. We'd be happy to take your questions. Any other questions in the room?

Absolutely. And again, we want to make this interactive. So if there are questions, just shout out or raise your hands. I guess let's start with the portfolio. Again, just to try to differentiate between you and some of your peers, I mean, we do our own retail ranking analysis and Regency does rank tops. We have several different attributes that we gauge this on demographics, exposure to #1 grocer. I guess, can you talk a little bit more about that and where you are today? Why is that important? We continue to receive that incoming question, even at this conference, a good healthy debate on why do demographics matter in shopping centers?

Sure. So with -- you've kind of set me up perfectly. Our intentional kind of strategy comes in 2 dimensions, right? So it starts with a trade area of focus. And then we balance that with a format focus. So from a trade area perspective, very intentionally identifying the strongest trade areas in the country. Generally speaking, high income, high densities is the simple formula. But we intentionally mix into that is a supply view. So looking for low levels of retail supply on a per capita basis, low levels of GLA from a grocery perspective as well, and then high barriers to entry. So pushing that through our proprietary DNA model that we use internally to identify the 3-mile or so trade areas that we want to invest in. We pair that with what we believe is the right kind of format strategy. So smaller format, neighborhood-centric assets with a grocery component, and higher propensities of shop space, those are our biases, I would say. We have anchor space in the portfolio. We like the durability of that income stream, but there is a slight bias in Regency strategy to neighborhood and smaller format grocery-anchored shopping centers. In today's economy, as you suggest, that's maximizing both the disposable income from a trade area strategy and combining that with this necessity-based merchandising strategy. So grocery stores, moderately priced restaurants, liquor stores, haircuts, nail salons, personal services, coffee, all of the daily, monthly, weekly necessities that our consumer -- our end consumer uses in their life. We think that combination provides durability, safety, but it allows us to play some offense too. And our product type right now is right in the sweet spot for retailers.

Okay. I mean, we are seeing limited new development. So just to ask, does that mean that every market has these barriers to entry? It's really -- as we think about the strategy, is it more of a focus on the format and the grocer, or you would argue and say, "Okay, yes, we've had limited development, but it's not a fair comment to say, okay, every market has barriers to entry that we will start to see some development in some markets"?

Yes. All of the above. I think there will be less supply growth in our sector. There has been less supply growth. There will continue to be less supply growth, certainly compared to our sector 15 years ago. Within that context -- so that's good. That's good for our in-place portfolio. That's good for those who own high-quality grocery-anchored retail environment. However, there will be population growth in select markets. There will be grocers who are looking to expand into new markets. And in that more limited supply environment, Regency will get more than its fair share of that investment opportunity set, again, given our differentiating advantages of our relationships with landowners, our deep relationships with tenants and our capital access and availability, and not to mention the cost of the same. So that -- it's a really nice setup right now to -- from a supply perspective to -- for Regency to find opportunities to grow within that, yet at the same time, protect and increase the value of our in-place portfolio and assets.

So from your ownership or whatever analysis you're doing, simply owning the #1 or #2 grocer in, let's just say, weaker demographic markets, that's just not something you're going to entertain or do?

Not part of our strategy and weaker can be debated, I mean that's a relative term, right? So -- but we are...

Lower income.

We're not lower income.

But lower income than your portfolio.

Than our portfolio. We're targeting -- as we think about incremental new investment activity, we want to compare it to Regency today. So it's consistent with what we own today or better, quality, growth, and can be fund that accretively. That's the simple formula of how we think about investing capital.

Are there any other questions on demographics that I'm missing? Because again, it's been a big topic now for 2 years, I'd say, and something that it comes up a lot, whether people appreciate or not, and it goes into the, what multiple people are really to pay for a company or not. I guess, please go ahead.

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Yes. It's a good question. Part of the response to that is the consistency of Regency's portfolio tends to lead to the same conclusion, right? We -- intentionally, our assets generally look the same, no matter where they're located geographically. So those trade areas are very similar. So I don't know that I could give you a fulsome picture of what a lower demographic trade area performance would look like in our portfolio because the majority of our assets are in that higher echelon. We aren't seeing much by way of differentiation geographically, whether the north or south from a Sunbelt perspective, we get that question often. We're not seeing much differentiation across the tenant type, really on the margins. We're seeing some positives in medical and health-related uses on the shop space. We're not seeing entertainment, theaters, very lower allocations within our portfolios and weaker performance. We continue to believe that, that combination that we offer higher incomes, higher densities, higher disposable income, combined with lower like necessity-based retail is the right formula.

Is it simply to you feel again through history that will provide the most resiliency during a downturn and/or is it are we seeing a differentiation in cap rates that in between...

I think they go together. I think you're seeing...

I think you historically have. But I think in today, all we keep hearing is this range is a very tight range, but is there a difference?

I think -- so 5.5%, 6.5%, as I said before, sometimes better than that for our product type, something looks like a Regency Center, grocery-anchored neighborhood format. As you kind of move out this format spectrum and potentially in the trade area spectrum from a quality perspective. So larger format maybe larger and lesser quality trade area, you start to move north of that on the valuation side. It's a little bit hard for us to comment because from a strategy standpoint, we don't target those -- we don't follow them as closely. But the data that we're looking at and the intel we are seeing is that it does gap out from a valuation side.

And then safe to assume all of the $1 billion and again, how much is that is ground up?

There's an ebb and flow. When we talk about our development and redevelopment capacity, we talked about them together. There was a period in time where it was more biased to readout. Today, it's the biases to ground up. I would anticipate going forward that there should be more than half of that coming from ground up development as we think about that $1 billion target.

If you think about the $250 million that we're targeting in terms of total blended development, redevelopment, we tend to ebb and flow between, call it, $50 million to $100 million, maybe a little bit more than $100 million of redevelopment, but that's largely dictated by what the opportunity is within our own portfolio, right? And a little bit of kind of core plus what we can find in acquisitions, but that's largely within our portfolio. But the -- as we think about that $250 million, as Mike said, the majority of that -- more than half of that will come from ground up, as we've grown that pipeline.

And the ground up, safe to assume you're sticking with the criteria, but can you give some examples? Is it some emerging markets? You talked about population growth like, yes.

I think the 2 starts in the quarter are the perfect examples, right? You have -- and some themes that are developing. Master-planned communities are great partner relationships for Regency to develop with. So these are landowners developing large swaths of opportunities that are going to include multiple uses, single-family home, multifamily, maybe a regional office, maybe a hotel use, and they need a retail amenity for that grand and that larger scale investment. That situation is where you can find that combination of land price, rent and construction costs that make the formula for a developer work so that we can hurdle over our yield requirements. Another example, the recently announced Safeway anchored center. Safeway as owner of the land, right, looking to partner with a developer to then agree on a land value and a rent that will compensate for the construction cost that will, again, meet our yield requirements. So the benefits of Regency and why we can find these diamonds out there in a less -- in an environment where there's list of element happening is our scale. We have development expertise with real history and development acumen in all of our markets. So we're looking constantly everywhere, where there might be growth. Our relationships with those best-in-class grocery operators looking to expand. And then again, coming back to our capital. It is harder -- the vast majority of development in our space happens locally with private developers and is definitively harder, and more expensive to access capital sources. We have free cash flow as our dedicated capital source to fund our development business, and it's earmarked, it's prioritized to fund that development arm of our business, and that's a major differentiator in the space.

Can you explain the process on, I guess, land acquisitions, entitlements requirements, I guess what's the -- what are the steps for Regency in terms of land banking?

Yes, I appreciate that. So it's good.

Go-no-go.

Yes, there's no spec development at Regency from a risk mitigation perspective. We're not closing on a piece of land without entitlements in hand. The anchor leases executed and committed, and largely most of the shop space, at least under LOI or some visibility to demand. Luckily, we're either buying out our construction contracts or have meaningful quotes in hand. So from a risk perspective, the team does a phenomenal job of managing that risk down to a level, where now you're left with lease-up risk. There's always some risk in the site work when you put the first shovel on the ground. To compensate us for that, we're looking for at least 150 basis point spread between the yield on the investment, and what we would circle as market cap rates in the community. And for that spread, and we're doing better than that today. For that spread, we think we're being more than compensated for the value for the risk we're taking.

And so these are options on the land?

You're effectively partnering with a landowner and put the pieces together.

Are you seeing opportunities for even more development where these developers, maybe they do have a great site entitled prospects for leasing, but they don't have the capital where you could step in at that point?

100%. It is a unique point in time in this where we find ourselves today, where we have -- where we are, there are local private developers who have projects in their hands, and we're getting called in to help maybe figure that out. And that conversation can be in the form of capital, that conversation can be in the form of expertise across the board. And we are I think we're great partners. I think we can find ways to help unlock the opportunity that's presented there. It's not without work, and these will take oftentimes take some rework, whether it's the lease itself, whether it's the value of the land, whether it's the construction, whether it's the design. But we've had quite a few success stories where that trade is happening.

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So there are capital opportunities for us to invest in different portions of the stack. Regency from Regency strategy perspective, we will use that lever, but only if the asset qualifies for ownership. So it's not -- we aren't standing up a lending business that there are others who are, Regency is not doing that. But if there's an asset where the only way to be involved is through capital for a brief period of time, maybe with an option to buy, we will absolutely consider that.

I'm happy to talk to Chairman today of another company and we're talking about growth opportunities for companies and best platforms, including fund business. And she's in bottom line, is that something that Regency would consider doing in a bigger way, again, some leveraging the platform, your expertise?

I'll start, and I'd like you to finish because we have some news there. We have harvested some smaller JVs, roll them up post-COVID to this point. So USAA, we have a partnership with, we've bought them in. CalSTRS, we had a partnership with, we've bought them in, that's not a trend that I would expect to continue. We -- the ending significant joint venture partners with whom we have work with our Oregon and CalPERS via First Washington, great partners, long duration, great relationships, both of which are looking to actually grow in the space, not shrink. So I would continue to expect that those partnerships will grow. In fact, we have some capital that we've raised with Oregon.

Yes. So one of our largest in the state of Oregon has and which we tend to, as we're looking at acquisitions, we have a rotation -- we provide them an opportunity to take a look at that acquisition on a rotational basis. It's about every other acquisition and whether or not they want to participate. There's a little bit more equity left in their current commitment. They've just re-upped their commitment by another $150 million of equity, which provides over $300 million of additional buying power in terms of total investment. So as we think about partnerships, we think about them in 3 ways, capital, right, expertise and access to opportunity. Expertise is more about non-retail nonstrategic types of investments opportunity, as Mike mentioned, where we otherwise wouldn't have access to that opportunity, and then capital, we don't necessarily need the capital. We can do this on a wholly owned basis, but Oregon is a great partner. They love what we invest in and the type of real estate that we invest in and it allows us an opportunity to maybe get a little bit of -- a little bit more ROI above what we can potentially get from a going in cap rate on a traditional acquisition, especially on core properties. So it's a great partnership. We're really happy to have grown that and look forward to the future with them.

And so do you prefer then to keep these investments, these partners separate, so it would be a separate joint ventures. It's not one fund?

Yes.

Correct.

That's the preference.

That's the preference.

We did a fund to create GFC and yes.

Yes, line of interest in a bilateral JVs.

So it seemed like in shopping centers, it could be this big opportunity to fund -- again, I know it was done before world [ financial ] because the times have changed. And we keep hearing since ICSC, the capital chasing shopping centers that maybe a fun today could be appealing, but it sounds like what further the joint venture strategy?

There's a lot that you have to think about in terms of leveraging the platform, right? And in some property verticals, it may make a little bit more sense where there's lower touch, more commodity-like assets. I think about industrial, when I think about self-storage, you can leverage your operating platform to have a fund structure or a larger JV structures. In a business like ours, which is more active management at the property level, higher touch, you have to consider the balance, and the trade-off between leveraging your platform, And what you're giving up to gain that greater size.

Fair use of time, you're saying. Okay. That's a great point. Mike, you started off that you're excited up about '25. And this last earnings call, I don't know, all these years I've covered Regency might have been the most excitement I've heard from everyone. And on the call, you talked about hitting on all cylinders, including the share buyback. So -- and then obviously, investors want to hear about growth and they hear that you're excited. What are the differences today, let's say, versus a year ago or 6 months ago?

Yes. So part of that excitement was coming off of the front half of '24, which had some circumstantial and somewhat intentional vacancy that we had to work through. And that message not only disappointed maybe some in the room or some of our investors, but disappointed us. We had some pretty waiting lease expirations. Two, in particular, were in this market in Manhattan. It's not part of our strategy. It's kind of atypical leases, but high kind of dollar value leases that expired and the tenants chose not to renew. Together with some circumstantial intentional redevelopments, where we took anchor leases offline. And in fact, the deal in Norwalk where we converted a Walmart into a Target-anchored center at a significant rent increase. But it comes with some downtime and some lost rent, and working our way through that trough of earnings potential, led to more maybe of a deflated kind of attitude that you may have been picking up on. And we've worked through that. What never changed though was the percent lease target at the top. We maintained our percent leased, that's not rent paying occupancy, but percent leased at the top through that change. And then very quickly, we could see that, that commenced occupancy rate, which now stands at 350 basis points of SNO, was going to start to quickly compress, and we hit that pivot point at the end of the second quarter, highly transparent, highly visible outlook on the top line from an NOI perspective and a base rent perspective. And then the conversation then turns to the hole in the bucket. What's happening with move-outs, what's happening with bankruptcies, what's happening with bad debt expense. And from a tenant health perspective, when you think about those considerations, you think, well, we're still only 1.5% to 2% of watch list tenants in the portfolio. It's very low. We still are running at bad debt ratios at historical averages, which is about 50 basis points of total revenues. From a -- so you have a -- and from a move-out perspective, our retention rates are on the higher end of historical average is 80% on a retention ratio basis. So you feel really comfortable about not losing rent paying occupancy, and you combine that with growing top line base rent projections. And it's not too hard to feel pretty good about yourself going forward. And then you mix that in with this growing development pipeline, which -- as an aside, and Christy loves to make this point, it's a great one, doesn't come through same property growth. It's external growth from a metric perspective. But it's $250 million of starts in '24. I think we're going to replicate that again in '25 -- I mean, sorry, '23, I think we're going to replicate that in '24. So that's 2 consecutive years of $250 million. That will eventually come into our earnings over time as we deliver that space. It's hard not to be excited. And then you look at the street values, you look at our -- which led us to our repurchases, we feel pretty good right now down in Jacksonville as we tell our story and kind of stand behind it from a repurchase standpoint. We are looking forward to giving guidance out on a more formal basis later, and we will do that. But our expectations right now are appropriately high.

And as you think about that runway and we like to show this slide in our deck showing peak occupancy, peak leased and commenced levels relative to where we are today. We do have about 220 basis points of potential runway in our commenced occupancy to get back to peak levels. As Mike has said many times, in a really great year, we're probably at about 100 basis points of movement. So as you think about that 220, it might take a couple of years, a few years, but that's kind of where our levels are. And while it's difficult to look at the SNO pipeline and say, this is exactly how I'm going to model it, you can look at it and say there's a tremendous amount of leasing momentum in the pipeline and that barring any massive bankruptcy, as Mike mentioned, the hole in the bucket, we should be able to continue to move that needle forward heading into 2025.

And then over the past couple of years, I think there was also just noise from the pandemic, onetime items, and everyone, right, We passed that like when we...

We are largely past that. I mean when you -- so yes, we're past that. We're still -- in 2024, we're still comping against some prior year collections and some noise in noncash. But we also -- so once we get into '25, we'll be past that. We will be past the COVID noise. There's still some -- I mean, within noncash, there's still some kind of movement, right? We've had some move-outs, which is on purchase accounting assets, so where we've taken some accelerated mark-to-market revenues, which have impacted our noncash. So there's a little bit of that in there, but largely when it comes to onetime items, we're kind of -- we're largely past that. I mean, the biggest things are just kind of the pieces as we head into '25, the biggest piece is related to same property, which we've talked about then kind of this debt refinancing headwind that we're all facing throughout the REIT sector as we think about refinancing our debt. We had -- we did a bond deal in January to prefund our debt maturities that were coming due in June. We were able to offset that carry in deposits for the first half of the year, and then when we paid down this high-3s debt with low-5s debt in June, we will start to see that impact in the second half of the year, and then that will carry into '25. But as you think about going forward, refinancing impact, we don't -- we have some mortgages due next year, but the largest -- our largest maturity next year isn't until November. So we are intentionally lucky in that we have a very staggered debt maturity schedule and among the lower levered in the space. And so we're in a really good place and on top of that, as we've talked about and as Mike talked about in his opening remarks, we do have a cost of capital advantage, especially on the debt side relative to our peers, given our credit ratings, given our standing in the bond market and fixed income community. But we've got a pretty low spread there on our debt.

That's great to hear because I mean, I'm assuming, us, the sell side, buy side, everyone's been modeling, right, the refi, higher rates, right? And it's -- this time of the year, come November, the last couple of years in shopping centers, we've just paid be aware of this next year, there's tough comps. So it sounds like, for the most part, when we're looking at '25, it's a bit cleaner, '25 over '24?

Well, from a debt refinancing perspective?

No, no, just general.

In general.

Oh, just general. It's definitely cleaner.

I think the debt everyone understands, everyone gets it was across, I mean, many sectors, many companies, but in particular, the last year.

Prior year collection, [ collections ] behind us. We have a little bit of transition from the M&A we did in '23, but small. We're largely behind it or in front of us, sorry.

So just from a mindset standpoint, if you go back a year ago to today, in the next couple of months, you start your budgeting process end of the year the mindset is positive, push, grow?

Yes. I'd like to simply say it feels like the pluses are exceeding the minuses, and we have the foundation of growth in the SNO pipeline. That's where we start. We have to deliver that, we will. We'll manage the best of our ability, and this is a big unknown in the plan is BK watchlist, what's going to happen in that side of the business. Move-outs, that's the hard work of putting the plan together.

What's your Dollar store exposure?

Dollar store exposure, it is small.

Yes, it's pretty small.

Let's look at -- we'll get that to you.

Dollar Tree is one of our top 25, but that's really the largest exposure in there. Yes.

I mean, within the watch list, The Container Store at 40 bps from a single credit is the highest one.

Yes. So our watch list is, as Mike said, about 2% today and Container Stores at the 40 bps, but that also includes tenants that have recently emerged from bankruptcy too. So it's very manageable, pretty minimal.

We've talked about and this is all included in the $50 million of pre-lease, but delivering on those redevelopments, right, and that being a 100 basis point or better positive contribution to our same property growth rate next year. Historical averages is 50 basis points or better. So another really kind of positive year of delivering space. But that's -- again, you can't add the $50 million plus the 100 basis points, they are similar concepts.

And we may have missed the returns on all of those the devs, the redevs right? The returns are staying?

All in, it's in the 7% to 9% area. The two projects I talked about earlier 7.25% for two ground-up projects. So depending on the project, you're in that band.

Were there any issues there that when it comes -- these projects are coming online, your one, they're dilutive because of capitalize anything like that. No risk on that. Okay. Great. Okay. All right. Good. I know we're out of time, maybe if there was one other question, if not, we have 3 rapid fire questions, rapid answers. I'll let Andrew handle that. Thanks, Andrew.

First, do you expect real estate transactions to increase when the [indiscernible].

Yes.

Okay. And when do you expect them to pick up, fourth quarter this year, first half '25 or second half '25?

Fourth quarter.

Second, how would you characterize demand for space today improving, steady or weakening?

Steadily high, steady.

And finally, how would you characterize your AI spending plans over the next year higher, flat or lower?

Flat.

Great. Thanks for Regency team. Thank you.

Thank you.