Regency Centers Corporation (REG) Earnings Call Transcript & Summary

Good afternoon. I'm Todd Thomas, Senior Equity Research Analyst and Head of KeyBanc Capital Markets Research team. I'm pleased to moderate the panel today for Regency Centers. I'm joined today by Lisa Palmer, President and CEO; Alan Roth, East Region President and Chief Operating Officer; and Mike Mas, Chief Financial Officer. Regency is a shopping center REIT that went public in 1993. Company owns a high-quality open-air predominantly grocery-anchored shopping center, about 480 centers spanning more than 61 million square feet across the United States. I'll stop there. That's the extent of my introduction. I'll hand it off to Lisa to go over a company overview, and then we'll jump into Q&A. I'll get the questions started. Feel free to raise your hand, and we'll take questions from everyone in the audience.

Thank you, Todd. Appreciate that. Good afternoon, everyone. I'll try to keep these brief because it's a short time, and then we can get right to questions. So consistent with our update, which is now about a month ago with our first quarter results, we continue to see real strength in the operating environment across our portfolio of, as Todd said, grocery-anchored neighborhood and community centers. The fundamentals of the business remain really robust, and that is supported by secular tailwinds that really are favoring our high-quality assets that are located in attractive suburban trade areas. You'll hear hopefully through some Q&A with Alan that leasing is really active. We have an extensive pipeline of future deals. We continue to drive -- congrats to the team. Really strong rent growth on both new and renewal leases. And this strength was really evident coming out of ICSC conference in Las Vegas now just a couple of weeks ago. The tone remained really vibrant, meeting -- we had over, I think, 400 meetings in our booth, which is up over last year. We continue to see really strong demand from industry-leading national grocers with whom we continue to partner as they execute on expansion plans and also strong demand from categories such as restaurants, health and wellness and off-price retailers. The one thing that I really love to talk about on the development front, we continue to have great success growing our development program with nearly $500 million of development and redevelopment projects in progress in addition to a really full pipeline of projects. Our ground-up development program is a key differentiator for Regency. We're the best in the business. We target $250 million or more of annual new starts within this value creation platform. And importantly, it is self-funded with levered free cash flow. So in addition to that ample free cash flow that is supporting and funding this value creation development pipeline, we have nearly full availability on our line of credit, which is $1.5 billion. Our leverage remains within our targeted range of 5x to 5.5x net debt to EBITDA, and we have a well-laddered debt maturity schedule. This strength of our balance sheet and liquidity position really has enabled us to grow our platform, to drive external growth, and this includes being opportunistic in pursuing accretive acquisitions. We were really gratified to see the benefits of this sector-leading balance sheet come into play when we took advantage of a favorable window in the capital markets last month to access the bond market. Our competitive cost of capital advantage was really evident in the pricing that we were able to achieve, a function of our balance sheet strength in addition to, and this is something that we're really proud to share and to say, the only REIT in the shopping center sector with an A credit rating from either Moody's or S&P. We have both. We have an A both from Moody's and also from S&P. So in closing, we believe Regency is really well positioned to create long-term shareholder value, outperform across cycles due to our unique and unparalleled combination of strategic advantages, including my team will laugh as I like to round up. Todd said 480 shopping centers. I will say, our high-quality portfolio of nearly 500 neighborhood and community centers located in top trade areas. Our experienced team in more than 20 offices across the country, again, our self-funded development and redevelopment platform with the best team in the business and our sector-leading balance sheet and liquidity position. So with that, Todd, we look forward to your questions and to the questions from the attendees here. Thank you.

All right. Great. Thanks. So you mentioned ICSC. You were just there a couple of weeks ago. It's still -- in Las Vegas. It's one of the largest conferences for the retail property industry for those that don't know. Maybe we can just start there. A lot of uncertainty in the macro, geopolitical affairs, tariffs and so much more. What were conversations like with the retailers as it relates to leasing demand? And can you talk a little bit about what you're hearing from them and how conditions are trending today?

Yes. I will have Alan take this again, Alan, Chief Operating Officer.

So Vegas was another exceptional show. As Lisa mentioned, we had nearly 400 meetings, and there was about 25,000 attendees, which is pretty consistent year-over-year. Walked away very positive. Our booth was extraordinarily active. It's a very important place for us to continue to build relationships and evaluate new deal opportunities. There were really no geographic areas that were better than others. We're seeing activity in our pipeline in a robust manner across the country. We're seeing it from a lot of different categories as well. And grocers are plentiful, really expanding in all of the trade areas. And you're seeing some grocers like Sprouts enter new markets, particularly up in the Northeast. We're seeing off-price being very active. TJX, Burlington, Ross. Ross is another tenant that is new to the Northeast pursuit as well. Again, so you're seeing their continued push and growth into new markets. Restaurants remain extraordinarily active, particularly QSRs, and we had a lot of meetings with folks that we are doing a lot of business with, and that's Shake Shack, CAVA, Mendocino Farms, Chipotle, just to name a few, right? I mean I can't certainly with 400 meetings, hit them all. Fitness is still active. And it's fitness on the boutique side, whether it's the smaller solid cores and pure bars of the world or it's the larger ones like a Planet Fitness, very active. And I'll tell you what I was a little bit surprised and encouraged by as well is there was every bit of a half a dozen just in our booth of those, I'm aware of new concepts also that were floating around. And so despite some of the macro conversations that are out there in terms of volatility, we walked away very optimistic. It was a very productive show for us, and we're very encouraged by the pipeline that remains full.

If I might just add, I think the important thing to note, and I said it in the opening remarks, the fundamentals in our sector are really strong and have been for quite some time. And part of -- and I said secular tailwinds, well, what are those secular tailwinds over the last 5 years. One of the largest contributing factors to that secular tailwind is the limited new supply that has come online going back 15 years. And as a result of that, there's very -- there's limited available quality space. So even with the uncertainty that elevated, I'll say, in early April, the retailers still have growth plans and still want to expand and still need to expand for their own businesses. And that is -- that's the strength that we are seeing, especially with the quality portfolio that we do have. And I think that, that's an important -- again, that's one of the secular tailwinds. We also have a renewed appreciation from the customer of a physical presence, right, bricks and mortar, which coming out of COVID when they were forced to just buy online and then a renewed appreciation from the retailers themselves for that physical presence close to their customer because it's more profitable for them to service their customer from the store that is the last mile. So I think all of those factors are contributing to, even with heightened uncertainty, the strong demand for space.

How about the grocery industry specifically, which is a big part of the shopping center space in general. I mean, how are grocers faring? There's been a lot of competition, a lot of growth, a lot of unit growth across the industry, whether it's specialty, organic, ethnic, traditional grocers. What's your assessment of the grocery industry today, which is, again, sort of core to the shopping center business and your development platform?

I'll start and Alan can color it up when I finish. For as long as that I've been at Regency, which is I -- this I will round up nearing 3 decades. The grocery business is a really tough business, right? It's a low-margin business. And our strategy has been consistent over those 3 decades, partner with the best operators and the best operators continue to not just survive but thrive. And investing in the store experience, investing in servicing their customer online, buy online, pick up in store, investing in delivery. Again, though, I will tell you that they understand from the cost structure that it is more profitable for them to bring the customer into the store and let the customer do their own picking and putting in the cart. So the physical bricks-and-mortar presence of the grocer is vitally important to their success, and they understand that. And as a result of that, they are continuing to expand nearly every grocer.

Yes. I would just add that I think given that there are so many that are expanding and the intense competition within that space, they are all having to elevate their game to provide a better experience for the consumer or they will become irrelevant. And specific to Regency, we generally are aligned with the #1 or #2 grocer in a trade area or a specialty grocer that provides a special offering. As we look at year-to-date data from a foot traffic perspective, it's up specific to the grocers as well. And so for us, within our portfolio, we're proud of the volumes that they generate and the quality of the operators that are within the portfolio, giving us the ability to really merchandise with some exceptional adjacent retailers in that space.

Some of the -- you talked about some of the secular drivers or tailwinds that you're seeing to the business, good leasing environment. It sounds like not a lot has changed since April 2 with regard to tenant demand. I mean how do you think about the growth algorithm for the portfolio? Mike, maybe this is for you. How -- can you talk a little bit about some of the drivers of growth and how that's evolved over the last few years to what you're seeing today and what you're expecting for this year?

Sure. So let me start just from a steady-state algorithm basis, then I'll distill it down to this year. So just business model, steady state, we aspire to grow the same-property portfolio by 3% plus or minus every year. That's our objective strategically. I would call that occupancy neutral. You lever that modestly as we do with our balance sheet, as Lisa alluded to earlier, that's going to get you another point of earnings growth. And then you add to that this best-in-class development program where you're adding new NOI, you're manufacturing new NOI by reinvesting your free cash flow, you're going to generate another 100 basis points of growth in that area. So you're at a 5% kind of algorithmic growth story, plus or minus. Then you find yourself fluent in the business cycle with rising and falling occupancy, which can either detract from or in this case, as we currently sit in '25 and looking into '26, we're adding occupancy. We have hit peak percent leased. We aspire to maybe even blow through that, but we have not hit peak commenced occupancy yet. We still have room to run. We have 300 basis point spread between top line percent leased and commenced occupancy. Steady-state run rate is 180 basis points, plus or minus. So that tells us that we have room to continue to commence occupancy while minimizing tenant fallout and tenant risk, which could be another question that we could dive into. To Lisa's point on the strategic initiatives on development, $250 million or more of starts per year, we have achieved that for 2 consecutive years. So that starts in '23 and '24. I like our setup and I like our prospects to do that again in '25. That NOI will also begin to come online comparatively. It has in '25. More importantly, it will continue to come online in '26. So I think we're set up pretty well here from an earnings growth perspective. And then going forward, as we achieve steady state, I think we're also set up very well to perform on a relative basis.

And on top of -- and I should say, a result of that performance on the earnings growth, the dividend growth is...

Replicate that with [indiscernible].

So we have -- and I know it's getting to be a little bit more in the distant past, but it's still something that we are very proud of the fact that through the pandemic, we did not cut our dividend. We maintained our dividend. We paid it every quarter, and then we grew it 2 years past. And as we grow earnings, the dividend growth should match that.

Maybe we can talk real quick about the tenant watch list a little bit, Mike, you mentioned that we might talk about it and maybe we can get out of the way real quick. But what's the watch list look like? It is retail. The business is always evolving. There's always some tenant churn and turnover. But how do you feel about the health of the tenant base today?

We feel great about the health of the tenant base. I think we feel as good as we have felt in a rounded 30-year kind of look-back period. It always -- but to your point, it's evolutionary. It's going to hover in the 150 to 200 basis point range, generally speaking. Tenants are going to evolve. tenants are going to fail. It's part of our business. But as far -- as we look across our watch list, it's the same as it has been. But other factors, post-COVID recovery, COVID isn't that far away. COVID cleared out much of the weaker retailers. So we're growing off of a very strong base. Post GFC, this company has recycled a tremendous amount of assets that recycling -- the recycling days are long behind us, but we're very proud of the quality of the shopping centers that we currently own. So that combination of owned assets and hand-selected tenants that are currently occupying our assets gives us the comfort that we will be pretty resilient on the move-out front.

And the results speak for themselves, and I saw Alan reaching for the microphone. So I'm going to let -- I know exactly what you're going to say. I'm going to let you say it.

So I would tell you that durability of occupancy is something we are very proud of. We're very intentional in how we merchandise our assets. And when you think about the watch list, look, bankruptcies are a normal part of the industry. It happens. But when you look at Q1 results, Regency is the only one in our peer sector that actually grew rent-paying occupancy in the first quarter. And that's not an accident. And that really is largely driven by the limited exposure that we have had to a lot of the names we all know that are out there that have been filing -- have recently filed for bankruptcy and how we're very intentional in how we qualify our operators. And look, we're not immune, certainly to bankruptcies. We're not immune to store closures, but I was very proud to see that our rent-paying occupancy actually increased while I think the sector was facing a little bit of headwinds in the first quarter.

Does anybody have any questions? All right. Maybe we can talk a little bit about the development platform. You talked about targeting $250 million of starts a year. You have a pretty healthy pipeline today. There hasn't been a lot of new construction, though, across the retail industry for a number of years now. How are you sourcing deals? How are you making deals pencil today?

Yes. It's -- development is not easy. And there's no question that there has been limited new supply. Again, I said over the last 15 years, which is benefiting our operating metrics and fundamentals. Development is not something that you can turn on and off. You can't build something overnight. And Regency has always been in the development business beyond my 30 years, going back to -- Todd said we've been a company since 1963, public since 1993. It's in the DNA. And as a result of that, the experience, the team is who it starts with. So the team, the experience of the team, the track record of the team and the company, the reputation matters. So the reputation then builds with the relationships. So the relationships with the grocers, which you've heard Alan talk about, the relationships with master planned community developers, the relationships with homebuilders, that same team, again, that is across the country has relationships with local people in the business, land sellers that really provide that source of opportunities. And again, it's -- and our cost of capital. And it's a recipe of the combination of all. It's not necessarily just one individual thing. You need them all and again, cannot build it overnight. So we have been successful in sourcing those opportunities, as Mike said, $250 million each of the past 2 years with visibility to doing it again this year. Not easy, really proud of the team. And because of all of those relationships and the ability to source the land, we target a spread over what we would consider market -- it's a minimum threshold of market cap rates of 150 basis points for ground-up new development. There have been times -- there have been periods of time during my tenure with the company where that has really expanded. When we were developing to 7% returns on invested capital and market cap rates were 4%. Today, for the quality, let's say, of what we would buy and develop, say, 5% to 5.5% and that 150 basis points, if you take the top end of the 5.5%, 7%. So that's a threshold, but we've been doing better than that. And again, it's -- someone called it today and earlier our secret sauce. I just gave you the recipe for it. But the recipe is really hard to copy.

Why are we not seeing more development really start to pick up in the open-air shopping center space. The grocer demand is pretty healthy. The demand, small shops seems pretty healthy. What are the challenges to really getting development off the ground here? Why are others not doing more ground-up development?

Again, I'll just go back to exactly what I just said. Those are things that you can't build overnight, and it's what has taken decades of our track record and experience to build. And as a result of that, we have been successful. You could say that lower interest rates might drive more people into the business. Higher rents could drive more people into the business, and there will be more competition. But even if those things do happen, I would still say we have the best platform in the business, and we will get more than our fair share and continue to be able to achieve our goals.

What about acquisitions? Where do acquisitions stack up today in terms of your capital deployment initiatives? And how do the returns compare to what you're seeing for development?

I'll take it. Yes. So the priority is going to continue to be development and redevelopment. And the way we've organized our investment thesis is that the free cash flow on a leverage-neutral basis will be prioritized for our development business. That being said, we will have excess free cash flow, leverage-neutral free cash flow that can be deployed into acquisitions. What we are looking for on acquisitions are definitive consistent quality, consistent to accretive growth profiles. And thirdly, and most importantly, we want to make sure we're allocating capital on accretive to earnings basis. And the third one is where it becomes more difficult. And the third one is the pricing of real estate has become so efficient commercial real estate, grocery-anchored commercial real estate that our ability to drive earnings growth there can be more limited, which is why we are so grateful and appreciative of this development business that we've built over many decades of time. We have a prioritized earnings -- definitive earnings accretive place to invest our free cash flow. That being said, our track record would tell you that we will find opportunities in the acquisitions market. We are leveraging the same dispersed platform that we do on development to source acquisitions. We will find the needles in the haystack across the country where we can make that -- those 3 -- we can meet those 3 objectives, and we can deploy our capital accretively and add high-quality grocery-anchored shopping centers to the portfolio.

I think that clarifying what Mike said, the third only is difficult if you check the first 2 first. It's easy to go find a 6-plus...

Lower quality.

Lower quality shopping center acquisition. But we -- consistent with quality and consistent to accretive to our future growth rate. Once you check those boxes, that's when third becomes a little bit more challenging.

Let me just add some color because I'm sure people are interested. We are often asked where do we see cap rates today in the private market and maybe you were alluding to that. We're easily seeing cap rates range from the low 5s to the low 6s kind of all day, every day for the quality that Lisa described and especially if there's a grocery-anchored component there, making that -- it's a highly efficient transactions market right now, private and public. We had a hand up over here.

Yes, sure.

[indiscernible].

I think the question is how we value retail investments with this shift to online?

Yes.

So the percentage of retail sales for e-commerce has certainly grown. And we were -- that was happening pre-COVID. And there's no question we saw a step up like an acceleration of that -- the market share of retail sales moving to online. But I'll go back to what I said earlier. What we also all learned, and I say all, the owners of shopping centers as well as the customers as well as the retailers and service providers is it's that renewed appreciation for the physical presence. And I said this before, you can buy anything you want from your home. But what people learned, what the customer learned during COVID, they actually like to shop. So there's a difference between buying and shopping. And so that's the renewed appreciation for the customer. And it's why when we talk about how we operate our shopping centers, it's not just lease to anybody that's going to fill the space. We think about merchandising, we think about placemaking. We want to make sure that our shopping centers are an inviting place for people to shop. They want to come there. They have so many choices. So that's the consumer, that's the shopper. And then on the retailer side, again, learned very, very quickly through COVID, how expensive it is to fulfill the orders from a distribution center home delivery. And Target is the one that is probably most transparent with the percentage of their online sales that they fulfill from their stores. It's north of 95%. So there's still an incredible value to being close to the customer and servicing the customer from the 4 walls of a physical store.

Any other questions?

[indiscernible].

Yes, that's a great question, certainly in light of Rite Aid filing for a second time. So we have not signed a new drugstore lease in nearly 10 years. There's obviously been some significant consolidation. We had nearly 5% of our ABR was in the drugstore sector. At one point, we're 2.5-ish percent now. So consolidation continues. I think you probably read that CVS through this bankruptcy is acquiring 60 stores from Rite Aid in the Pacific Northwest, notably Washington and Oregon to expand their footprint in that market. But beyond that, again, I think you're going to start to see further consolidation of closed stores. And those remaining stores, although still need to go to auction, it will be some grocers that take the larger footprint ones. It's going to be the Five Belows, the Altas, the Sephoras. There's going to be a whole lot of different concepts that are going to step in and take those. I would tell you that consolidation will continue. TBD on Walgreens, right, Sycamore Partners announced that acquisition that will close Q3, Q4. But at the end of the day, it's something that you got to keep a watchful eye on as you do sort of a lot of the sectors that seem to be contracting a little bit and we'll see where it takes. But at the end of the day, I will also say ours are end caps, they have drive-throughs and they're highly sought-after real estate. So I can speak for the drugstore locations within our portfolio. We feel really good about the backfill prospects of those spaces, just given where they're located, both in the trade areas, but also where they're located within our assets.

Any other questions? Time for one more maybe.

Say with the tenant theme. I guess among your largest tenants are Kroger and Albertsons. Their merger agreement was called off last year based on the resistance by the antitrust regulators. We've got a new administration, new regulators. Recently, we saw Nippon Steel their deal with U.S. Steel together. Do you see any likelihood of a reignition of the Albertsons and Kroger deal and what you might be doing to prepare for that if there is?

I don't know that I can predict that. I think it's unlikely. But if it were -- just as we talked about it, while they were in negotiation, there were benefits to both outcomes, either a merged company or 2 separate companies, and that would still be the same. And very similar answer to the drugstore question, the real estate in which we own feel really comfortable. We have the grocery locations of both of those tend to be in the higher -- they're in the upper quartile of productivity in their chains. So -- and if you hadn't heard my answer before, a merged company, more powerful, stronger operator. And we would have -- they would have become our largest tenant and feel really good about that. Separately, we have 2 strong operators that are able to provide even more expansion and competition within the market. So I think it's unlikely, but if it were to -- if they were to come back together and try again, we, again, would be comfortable with either outcome.

All right. That concludes the panel. Thank you, everyone, for joining.