Regency Centers Corporation ($REG)

Welcome, everybody. For those of you who don't know me, my name is Michael Griffin. I'm a senior REIT analyst for Evercore ISI covering the retail REITs. I'm pleased to be joined by senior management from large-cap shopping center Regency Centers. And I'll turn it over right now to President and CEO, Lisa Palmer, for some quick remarks. I've got some questions here, and there are mics up here, so feel free to jump in during the Q&A. So Lisa and team, thank you very much.

Thank you, Griff. Good afternoon, everyone. I will keep these short because I'm certain that Griff's questions are going to be better than anything I may say to you. Joining me today, I have Mike Mas, our CFO; and Alan Roth, our Chief Operating Officer, East Region President. Consistent with our most recent earnings call, we are off to another really strong start in 2026. We delivered meaningful growth in both same-property NOI and earnings in the first quarter, and that's driven by healthy operating fundamentals and disciplined accretive capital allocation. These results really are a reflection of the disciplined strategy that we pursued over many years. We own high-quality centers in some of the country's most attractive suburban trade areas, anchored by leading grocers and other retailers that importantly serve consumers' daily needs. Those characteristics continue to support strong tenant demand, healthy leasing activity and meaningful rent growth across the portfolio. And really importantly, very little new retail supply is being added across the country. And so we believe the outlook for well-located neighborhood shopping centers like ours remains really compelling. We're also extremely excited about the opportunities within our investments platform. Development continues to be one of Regency's key differentiators and an important driver of our long-term growth. Our ability to source execute and deliver high-quality projects, again, in supply-constrained markets and environment is creating value today and positioning us for future earnings growth. As we look ahead, we remain confident in both the operating environment and Regency's competitive position. Again, the combination of a high-quality portfolio, a leading development platform, a strong balance sheet and an exceptional team continues to position us well to create long-term value for our shareholders. And with that, Griff, we're happy to take your questions and questions from the audience.

Well, Lisa, thank you very much for the prepared remarks. Maybe we can just start on the topic of leasing. I think as you've mentioned on previous calls and seems to be a throughput for Regency, you continue to benefit from both strong leasing spreads and high occupancy. Just given everything that's been going on in the macro right now, whether it's worries about inflation, elevated gas prices may be impacting consumer sales and traffic. I mean how confident are you that the current leasing and pricing momentum can be sustained?

Michael, I'll go ahead and take that. Great question. And I will tell you, this is probably one of the best leasing environments in my nearly 30-year career that we've been in. And you're absolutely right. If you look at our trajectory of both rent spreads and our embedded annual rent steps or GAAP spreads, that trajectory has been going in the right direction for quite some time. We are focused on the now. We're focused on the present, and we're going to continue to lean in, in this environment for as long as it will have us. That said, I think what's important is we are always very diligent in how we think about qualifying our operators, ensuring that it is the right merchandising for our assets and that durability does, in fact, matter. We are partners with our retailers, they are our customers. We're going to push in an environment like we have today, and we are pushing. But we're also going to be in a position where we will ensure we all thrive as we move forward.

And Alan, maybe on that pushing that you sort of highlighted the negotiations with the tenants just given the favorable supply/demand dynamic and backdrop that Lisa alluded to earlier, I mean, how does that benefit Regency from a leverage perspective in terms of working through either new or renewal lease negotiation? Just maybe kind of lay that out for us in terms of the pricing dynamic and the leverage that it feels like landlords have right now given the more favorable backdrop in terms of supply.

Yes. It's interesting. I would probably start with our ability to get great retailers to sign leases 2 to 3 years out. 6, 7, 8 years ago, we may not have had that. And it's an environment right now where retailers are locking in space because they know that, that lack of supply is there. They have the desire to continue to grow. And when we find that right retailer, we're signing deals on occupied space. And so let's put economics aside for a moment, we're getting the retailer that we want and the retailer is getting the asset that they want, and they're willing to sign a deal today that perhaps may not open until 2028, 2029. Using sort of the anchor front as an example, we've got a signed Nordstrom Rack lease and a signed Arhaus Furniture lease for 2 spaces that are currently occupied, where we proactively went out to re-lease space that we thought a tenant who was on our watch list was going to file bankruptcy. And ultimately, that tenant got acquired but that lease is out of term. And so it's an opportunity for us to enhance merchandising and these retailers are willing to wait for that. Beyond that, certainly, there is opportunities for a lot of levers to pull, right? And it may be a complex landlord work letter that is now a fixed tenant allowance contribution, again, speeding up the process to rent commencement dates. It might be outside rent commencement dates. It's nonmonetary provisions in our leases that we're leaning into from a leverage perspective right now. No exclusive or limited exclusive, no cotenancy or limited co-tenancy, again, giving us the ability to unlock revenue. So it depends on the asset. It depends on the tenant. But generally speaking, it's a really good environment to lean in where appropriate, but continue to do that in partnership with great retailers.

Obviously, a key value-add proposition and driver for Regency's business success has been being a dominant landlord for the top grocers in a given MSA area. I guess how important maybe is that relationship with key grocers in the market? And then how is that an incremental traffic driver to the center? And maybe you can benefit more on kind of the small shop leasing side there. Maybe talk about the grocery dynamics in the portfolio for a bit?

It's an important -- so the strength of the grocer and the amount of traffic that the lead anchor, which is the grocer in most of our shopping centers is critical to the success of the shopping center. And I've been at the company for several decades now. And it has -- we have remained disciplined with that in terms of partnering with and ensuring that we are leasing to and operating our shopping centers with the leading grocers for those markets. So it is critical. And importantly, so not only -- because the grocery business is a competitive, challenging business. It is important to be sure that we are working with and have relationships with we develop for, we own shopping centers with the leading grocers across the country, and it's going to be different in different markets, some specialty grocers, some traditional grocers. But importantly, we also have their most productive stores within our portfolio. So the quality of our real estate, the quality of our trade areas enables them to have highly productive stores within our shopping centers. Those highly productive stores generating that amount of sales clearly benefits the other merchants, the other retailers within our shopping centers because it's driving traffic which then translates to higher tenant sales, translates to the ability to pay higher rents, translates to the ability to have higher escalators within -- for annual rent steps. And it all ends with the ability to drive and sustain steady, same-property NOI growth.

How important is it being in an area within an MSA with the right demos, right? I think about Buckhead in Atlanta or Highland Park in Dallas, as an example, where you have big presences in your portfolio? Like how important are the demos to then driving, I think, profitability and sales for the tenants that then ultimately benefit from as the landlord?

The trade areas -- we have -- we track a lot of information. We have a lot of data sources that we use. The purchasing power within a trade area. So the combination of population densities and household incomes clearly are what enables the customer to spend money at your shopping center. But it goes a little beyond that. So you need -- you certainly need income growth. If there's income growth within the trade area, the customer's disposable income will grow and will enable them to spend more money, which will then translate to higher tenant sales. But it's also -- it's everything that Alan talked about in terms of -- and I say this all the time, consumers have choices. They do not need to come to your shopping center, our shopping center. They -- consumers can essentially get what they need without leaving their house for many things. And so we need to create a place, a thriving place, an environment that attracts the shopper, they want to come, they want to shop there, and they will spend time there and they will spend their dollars there. And that's placemaking, it is merchandising. It's a mix of merchandising. It's making sure that we do have the right grocer and in addition to the right grocer, the right mix of other retailers and service providers. It's -- there's no specific recipe that I could sit here and tell you that this is what it looks like in order to make it successful. But it's something that we have a tremendous amount of experience and a great track record, disciplined investments, so making sure that we are investing in the right shopping centers, we continue to own those and we operate them with the best team in the business.

Griff, let me just add to the supply dynamics -- to the trade area dynamics, supply is also a key factor. So we measure not only household densities and average household incomes, but we're looking at GLA per capita with and without grocery stores. And it's important to us to have high barriers to entry protecting the value of our assets and driving the best tenants to the same locations.

So Mike, maybe a segue to that on supply. First, I'd be curious to get your thoughts on number one, why high-quality shopping centers have been so supply constrained for so long? And then number two, I think a big differentiator for Regency is the ability to do ground-up development, why is that the case that Regency can execute where others can't?

Sure. We've seen a significant downshift in supply growth post GFC. So it's been 15-plus years of limited new supply. Some of the headwinds that tenants are considering as they look to expand their portfolios and us as a developer, construction costs are meaningfully higher. Land prices are meaningfully higher and best uses and the competition for land is different. Not every parcel of land can or needs to be a shopping center. We've had e-commerce penetration as well. All of these headwinds have produced this environment where we will, we believe we have and we'll continue to have lower new supply, which is helping support the valuations of our shopping centers and our assets. At the same time, we have been a developer for our entire company's existence. It is a competitive advantage. I believe -- we believe that even with the supply -- new supply constrained environment, our development business is even more valuable. Why is that? It's relationships with landowners, its relationships with master plan community homebuilders, tenant relationships, certainty of execution, which we've earned over decades of time. What does that lead to? It leads to deals and success begetting new deals and more success. Tenants pointing us to new opportunities. Landowners coming to Regency to execute. And you wrap all that around this balance sheet and this free cash flow in this funding vehicle where we can make commitments that are not dependent on financing. We have free cash -- levered free cash flow to support it. So we find ourselves in this period where we're going to continue to lean in on development and create real value for our shareholders at a time when there will be limited new supply, further supporting the value we're creating.

And it is that lack of meaningful new supply that's the great backdrop for our operating portfolio.

And I know we didn't touch on just now, but the redevelopment opportunity within the portfolio, it seems like that is a high-quality use of capital in terms of the returns that you're generating there. So maybe you can walk the audience through the opportunity set there, whether it's -- you're upgrading the tenant quality at a center, you're bringing in a higher, more productive tenant that's paying a more meaningful rent. Just maybe if you could talk about the redevelopment initiatives going on at a high level, that would be helpful.

Yes, I'm happy to answer that. Go ahead.

We will fight over this one. So we have always been very proactive asset managers. And it's an important part of growing same property NOI. And with a portfolio of 500 -- approximately 500 shopping centers, there will be opportunities annually for us to be able to invest capital back into our properties. And we're fortunate that we then have the ability that we are not necessarily just focusing on maximizing occupancy at any single point in time, but maximizing the long-term value creation and long-term NOI growth. And as trade areas evolve, as retailers evolve, there will be those opportunities. And again, we do proactively manage it. Oftentimes, you do need a triggering event to kick that off. But it has been a meaningful part of our long-term growth and our sustainable NOI growth for -- again, similar to development as for as long as we've been a company, and we'll continue to be.

Let me put some numbers around it, if you don't mind. So we have communicated about we see an opportunity of about $1 billion over the next 3 years in development and redevelopment. You can think of that as about 1/3 coming from [ redev ] and 2/3 coming from ground up, just to give a little bit of flavor to our forward profile and that internal redevelopment, it will be additive to our same property growth rate over time.

And Mike, can you remind the audience what your expectations for same property NOI growth are this year?

We're in the mid-3% area as a midpoint.

Sticking just on the external growth vein, you have had some acquisitions over the past year or so at, I think, relatively attractive cap rates just given how much of a bid there is for high-quality grocery-anchored centers. As you look at the competitive landscape and the strong private market bid out there for grocery anchored, how does Regency set itself apart in terms of growing externally through acquisitions? Is now a time to lean into that? Or is it more competitive and making it harder for acquisitions to pencil right now?

Acquisitions are really challenging and not the question you asked, but I will reiterate the best use of our free cash flow is to our development program and redevelopments, and that will be the highest priority to the extent in which we do then have further capacity to invest and to grow externally. We are active in the acquisition market, but there is a lot of capital pursuing high-quality grocery-anchored shopping centers. And again, it's what makes our development such a differentiator because these high-quality grocery-anchored shopping centers in the acquisition market are trading at cap rates, say, in the mid-5s, and we are able to develop shopping centers similar of quality, similar characteristics with a 7 in front of it. So we're creating real value with that. It doesn't mean we're not active. We are active. I appreciate you recognizing last year, we acquired a portfolio of shopping centers in Southern California at a very attractive cap rate. I think that may have been the one you were referring to. And that was off market. It was not marketed, and we were able to use units and the seller recognized and appreciated what Regency could offer by taking Regency currency essentially. So similar to development relationships, having those relationships within the markets, having a track record of success certainly will play into our ability to be successful in the acquisition market. For marketed deals, they're competitive and we will win some and we will lose more than we win in the marketed deals. Our cost of capital is an advantage.

I think a big topic in the market just broadly today is around AI and the initiatives that companies are undertaking to leverage AI within their enterprise. So maybe you can give us some examples, whether it's on the leasing side or development of ways Regency has been able to integrate AI into its work processes to make it more efficient.

Let me go first and then -- I saw Mike and Alan both lean in.

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I'll let them talk more specifics because I like to talk -- AI to me is just a subset of what we are focusing on and what we should be focusing on. Enterprise intelligence is what we call it internally, it's a foundational strategy, but that incorporates data analytics, all technology applications as well as artificial intelligence. And how I think about it is using those -- that enterprise intelligence really 4 objectives, if you will, as we apply those technologies and use data analytics, incremental revenue drivers, cost savings, better decisions. So can it help you make better decisions and make those decisions time to insight quicker. And that's -- those are the objectives in utilizing technology and artificial intelligence, and that is how we think about it. And we do have specific examples. And I think that the company has made tremendous strides over recent years in utilizing and leveraging analytics and technology.

You or me, Mike?

Go ahead.

Yes. No, I would just start, I am really excited. But we are -- we're in the early stages. I think we all need to acknowledge certainly that there's a lot more to come on this front, not just at Regency or the retail sector, but just in the overall macro environment. But a few things that we're seeing is certainly the opportunity to enhance operational efficiencies, speed to getting information to us. And just a few examples, gc.ai is a tool that we're implementing right now. And if you think about the old school ways of I'd like to do a coffee shop, but does [ Panera Bread ] have a coffee exclusive. Just by way of example, right, it's an opportunity to not have to reach out necessarily to the paralegal to abstract and just boom, you've got access to lease abstracts pretty quickly. When you're unlocking a redevelopment, and again, are there a whole lot of changes of common areas that we need different consents, how do you take 25, 30 shopping center leases to then quickly be able to abstract things and get answers faster to make things more efficient. So excited about that, leaning on tools from the project management perspective as well so that we can have access to better information faster, how can we slice and dice the dollars that we're spending in renovations and just property operations CapEx and slice it by region. And again, be able to lean on that as we think about forecasting as we think about projects that we want to do, again, I think it's an opportunity to do things faster. So there's a lot of different projects that are in process right now, and I'm excited about what's in play currently. But frankly, I'm more excited about what's -- what is ahead and what's to come.

I think one question that's worth just keeping in mind that maybe not as applicable to Regency as others in the retail space more broadly is just tenant credit and tenant health. So again, maybe not as applicable, but for maybe your portfolio, Lisa or Alan, how has tenant health or bad debt been trending? And I guess, are there any worries that if inflation picks up and there are some cracks in the consumer that it could worsen? Or maybe if you could speak about that a bit, that would be helpful.

I know you directed that there -- I'm going to take it. So our portfolio health is -- has been at an extraordinarily high level for some period of time. We're below 2% from on an ABR basis with respect to what we would call a watch list tenant that is below trend. Bad debt expense or ULI is trending below historical averages. An interesting phenomenon over the last 3 years is from my seat is the velocity at which bankrupt space is reabsorbed by the tenant community and that we're seeing more -- a higher frequency of leases being acquired in bankruptcy court, which is new over 15, 20 years. So it just speaks to the overall health of the environment and the lack of new supply that we were speaking about earlier. And tenants -- I mean we're even seeing filings of reorganizations where they're not turning back any space at all, which is, again, unusual, historically speaking. So there's this appreciation for the brick-and-mortar presence that tenants and even failing brands are trying to hold for as long as they can.

And Mike do you -- Sorry, go ahead.

I was just going to add because how you led into that question, may not be as applicable to Regency. It's intentional that -- it is the strategy that we've employed. It is the merchandising strategy, it's the leasing strategy that our tenant health is so strong. So it is very applicable. And the fact that when we do have bankruptcy events, that we fare really well on a relative basis versus the rest of the sector in terms of the -- because of our strong tenant health. And because of the -- and again, I'll go back to because of the individual stores, even within the chains tend to be the higher productivity stores within those chains, which then translates to better success and lower bad debt and lower failures.

I know we've got about 5 minutes left. Any questions in the audience? It doesn't look like it. Okay. Just wanted to ask one on the trade-off between occupancy and long-term NOI growth. I know Regency for a long time, has emphasized optimizing long-term NOI versus near-term occupancy which could include opportunities such as remerchandising or redevelopment. How do you weigh the cost benefit of, say, trying to renew a tenant at a lower renewal rate versus maybe recapturing that box and then ultimately being able to release it at a higher rate though it might put some near-term pressure on occupancies.

That is a great question. It's a complicated question. It is an art, not a science, I would say that. But look, there's a lot of things that we think through. And generally speaking, how can we create the most value at the asset level that's right for that community that delivers the most accretive returns. And so we may sit there and say, we just had a conversation actually earlier today about a tenant that we're [ confident ]. Do we keep them? Do we not keep them? So it is case-by-case, but long-term NOI growth is certainly the most important thing for us. These embedded rent steps are critically important to us for sustainable long-term growth, having the right durable tenant is very important to us. We don't -- I think one of the things I'm most proud of our team, we don't just lease to anybody. We have merchandising plans that we thoughtfully think about all of our assets, who should be in our shopping centers, what is our operating experience, what is their credit like? How will that benefit the rest of our asset and we are getting out in front of watch list tenants. We're getting out in front of emerging tenants that we want to be part of our portfolio. Every asset is unique, every market is unique. And it's a very thoughtful approach to how we execute.

I'm going to correct, Alan. It is both art and science because it is a -- it clearly is -- there's math involved as to what you believe is going to be the best investment and the best decision. The art is in the assumptions that are -- that are made based on experience, track record, and that is where having the platform, the team that I think we have a portfolio and a country full of wonderful artists that are feeding the assumptions into the science.

Really well said. I'm going to actually use that.

That's a great line. I know we've got a few minutes left here. So maybe, Lisa, just some parting thoughts for our audience. You look at the value proposition opportunity that Regency offers as a whole to use maybe a line I've used in the past, give your top reasons why you think investors should look at buying Regency stock today?

Our long-term growth outlook with the development platform that we have will and should, I'm confident, put us at the top of the sector in terms of earnings growth going forward. We have the best team in the business, and we have the balance sheet to fuel it.

Well, guys, if there's nothing else, thank you so much for your time. Thank you to Lisa, Mike and Alan, and enjoy the rest of your conference.