Regency Centers Corporation (REG) Earnings Call Transcript & Summary

Everybody, why don't we get started? Welcome to the Regency Roundtable. Very happy to have Lisa Palmer with us today, CEO of the company; Christine McElroy, Head of Capital Markets. Lisa, why don't I turn it over to you for some thoughts.

Thank you, Samir. Good afternoon, everyone. Just because I'm joined with Christy McElroy. So I actually our SVP of Capital Markets I actually played softball when I was a teenager with Nina McElroy I often want to call. Thank you, again. I appreciate you having this. Great conference and we had a nice room upstairs with Windows versus where we are right now. Regency is having an exceptional year. Hopefully, you all have had the opportunity to follow us along. Strong NOI and earnings growth, which is supported by really strong operating robust fundamentals and importantly, disciplined capital allocation. Tenant demand across our grocery-anchored shopping centers remains broad-based. And I think you also know the availability of high-quality space remains very limited. So again, playing into our favor. That combination continues to give our leasing team meaningful negotiating leverage, and that's allowing us to drive contractual rent growth and cash re-leasing spreads above our historical averages quarter after quarter. If again, if you follow us along, you always hear Alan say Records are meant to be broken. So we're moving our occupancy beyond prior highs. -- reflecting that momentum as well as improved visibility into the balance of the year, we see our 2026 earnings guidance with our second quarter results, including our same property NOI growth, NAREIT FFO and core operating earnings ranges. Our development program continues to be a highlight of our capital allocation strategy and an important differentiator for Regency. Today, we have nearly $700 million of development and redevelopment projects in process at blended yields of approximately 9%. And importantly, our pipeline of future opportunities continues to expand. The success of the platform, the track record. That's what continues to create additional opportunities for us to source great projects. And as a result, we continue to increase our annual pace of development and redevelopment starts which we now expect to approach $400 million this year. Again, against the backdrop of very limited new retail supply, our ability to consistently source and execute high-quality projects anchored by leading grocers, at attractive returns, represents a durable competitive advantage for us. We are also delivering these centers at substantial spreads to market cap rates of at least 150 basis points. That's generating meaningful NAV creation in addition to earnings accretion. At the same time, we're still active in the acquisition market, but because development is our primary external growth driver, we have the ability to remain selective and patient in what continues to be even today in a highly competitive transaction environment. And that discipline is supported by our sector-leading balance sheet, our A ratings from S&P and Moody's, growing free cash flow and nearly full availability on our $1.5 billion credit facility provide us with significant financial flexibility. That strength gives us efficient access to low-cost capital and the ability to fund our investment pipeline without relying on equity or dispositions and still retaining capacity to pursue additional opportunities as they arise. So in summary, I'm really excited and energized by Regency's position and the opportunities ahead of us, high-quality real estate and compelling suburban trade areas, a differentiated national development platform, a sector-leading balance sheet and the best team in the business really do collectively separate Regency apart. And with that, we're happy to take questions.

Before I talk about background, the consumer, that $400 million of animal development spend, is there ability -- is there a sort of balance sheet capacity that you can expand that at this point given that unique advantage you have?

So we're generating approximately $190 million of free cash flow. And with the growth in EBITDA and with our low leverage of the existing balance sheet, the answer would be yes, without significantly impacting that with remaining leverage neutral, we get to $400 million. So we have the ability to do even more. And today, our development -- while our starts are $400 million, the development spend is still a little bit less than that. So we still have capacity to execute on opportunities as they arise. .

So having the costs in that regard development costs, construction costs. .

Construction costs have generally remained relatively stable since the big increases that we saw during the COVID years, while there's different line items, that are moving maybe in different directions, the overall cost is just natural increases. So fuel prices are certainly driving increased line item costs. At the same time, it's being offset by other.

Both the tariffs and --

We really didn't see much from that at all.

Thank you. I mean, Lisa, you talked about your development -- ground-up development program, I mean that's truly leak in the space compared to peer. Why haven't your peers been able to replicate something like that? .

It's really difficult business. And 1 -- so I've been with the company 30 years this week, and development has been a core competency and really something that we're just really good at for as long as I've been here. And even during kind of the thin times, right? So on page -- we do have our investor presentation out there, Page 23 of our investor presentation. You will see from 2012 through 2019 the amount of starts was definitely compressed relative to where we are today. And there is a variety of things happening. We're coming out of the GFC and there was also the pressure from e-commerce and what is going to happen to physical stores and retailers were entrenching and spending more internally than they were on expansion plans. . But during that period of time, we were still developing. We kept the muscle of the company. So I mean I just -- I said this earlier today. We have 3 MDs of investments, 1 in California, 1 that's responsible for West Southwest, 1 that sits in the Southeast, that's responsible for Southeast Midwest and 1 that sits in Washington, D.C. for Mid-Atlantic, Northeast. They've all been with us for that whole time. So the ability -- so then when the pandemic hit and COVID hit there are several structural changes that we're still benefiting from today. That is retailers were forced to get their goods to their consumers through other means. And what that did is it made -- it gave them a renewed appreciation for their physical footprint. Because the most profitable way for them to get their goods to a consumer is to have the consumer walk in the door, pack their own goods in the cart and check out. The next most profitable way is to service that customer from the store whether it was an order online, pick up in the store or order online, pick up in the parking lot. And as a result of that, coming out of it, and you can, again, it really does correlate very well with our success, they put their foot on the gas pedal for expansion plans. And so there is now more demand from the retailers. At the same time, you had the consumers who during a period of time, I've always said, you can buy anything you want sitting in your house. During those years, consumers also developed a renewed appreciation for shopping. And not everyone loves to shop, but a lot of people like to shop. And so the combination of the 2, along with some other shifts in terms of out-migration from inter-urban to suburbs, all were structural tailwinds for our business and allowing us to kind of really build the momentum in that business and then relationships with our tenants. -- relationships with master plan community developers. That same team that I just talked to you about that was already in place that already had the expertise and the track record and our cost of capital. And those 4 together really the success is beget success, and we continue to build on that momentum. .

Are you seeing signs of Roundup anywhere thanationally besides Texas? I mean, we've kind of heard about that. Anywhere else? .

We're active in -- I mean, I think we have several in California that are in process. We have got several in competition. Well, there's -- yes. So the market is still pretty fragmented. And we've taken inventory of every shopping center that's been developed with the grocers that we would like to do business with in markets in which we would like to develop. And -- we're still -- we are the largest at scale nationally, but still less than 20% probably of the full market share of all new shopping center developments of our investable centers, not even talking about the total. So there's competition. It just tends to be more private regional developers with access to private capital.

What would be the split of -- in terms of how you source these development opportunities you mentioned local master community developers and whatnot. But how much would be just from land that you've had on your balance sheet or options on your land versus it all -- is it all coming from local families to bring you on a deal, a local developer. Just like how should we think about .

Yes. So approximately 2/3 is ground-up development. So and we have -- we don't land bank for large new ground-up developments. We have some land that is part of or adjacent to an operating shopping center, yes. it's minimal. That would be in a redevelopment bucket, it would be added to their -- and about 60% of our in process is from master plan community relationships and developers.

And call it about 2/3 of our pipeline is master plan.

So what does that mean from a pre-leasing standpoint, before you kick off, like how much of it do you get the gross .

I have to have the anchor lease. And if it's more than one, typically, all -- we have a couple of junior anchors to have the anchor lease execution before we'll take down the land. And then depending upon the start every opportunity is different and unique. Mike Mas, our CFO loves to call their Snowflake. So it does depend. It depends on the market. It depends on how much space you're building. But we can be pre-leased anywhere -- sometimes it's good to keep -- what I'm saying, sometimes it's good to keep it off the market because you'll generate a lot more excitement once the other retailers start to see a Whole Foods coming to life in a beautiful new center. But it can range anywhere from -- I mean, I don't know that we have any minimums, but it's going to range anywhere from -- it does put it -- we feel really good about our pipeline in terms of what percent pre-leased we are. And the success in the last couple of years, I think, is evident if you just go look at what we've delivered, we've delivered them very close to 100% leased at completion.

So the $400 million pipeline, that's ground-up development and redevelopment. -- correct -- so what is the split within that pipeline between the 2? How do returns compare? And maybe if you could, I guess, just talk about the redevelopment densification opportunity, anything on that front? .

So there's $400 million -- that's $400 million of starts -- nearly $400 million of starts that we expect in 2026. Right now, our in-process pipeline is nearly $700 million. So that's going to be call it right now, ground up is about 400, so 400, 300 is about the split. As you think about our new starts, it's going to be about 2/3 ground-up development, 1/3 redevelopment in terms of volume. .

And we're targeting -- our target for ground-up development is to be at least 150 basis points above market cap rates and generally for the type of product that we are developing and acquiring, that's going to be 7% plus for ground up and redevelopments that really varies. And again, if you look at what's in process, we're at a blend at 9. So that tells you that some of our redevelopments came in at much higher returns than others, but they're going to be slightly higher. You typically -- right, it's -- there's often not land basis involved. There may not -- it may be all 100% incremental NOI that there wasn't anything before. So difficult to compare the 2.

Maybe shifting a little bit to the consumer and the macro I mean your portfolio is skewed to the higher income areas, right? But are you seeing sort of a difference in performance between the highest income centers and the rest of the portfolio? .

We are not seeing really any significant differences across any markets or trade areas or kind of neighborhoods, if you will. And our product type really lends itself to perform well up there if there's any questions -- so stocks are pull back, right, the retail stocks and second quarter earnings. I don't know if it's macro pressures with the 10 year 5 or oil prices, but -- there was a quote from the CoStar retoreal estate analytics. -- about simultaneously started to see sellout I say this is the reason why. But as wonders if you could push back on this. to is while retail fundamentals remain healthy by historical standards, softer consumer spending growth, elevated interest rates and greater tenant cost pressures and reduced landlord's ability to push rents at the aggressive in the segment. Are you seeing any kind of slowdown in any wish or form Were not yet. I assume everyone that's listening could hear the question was really, are we seeing any type of slowdown or softening in our ability to to kind of push and to drive rents. And the answer is no, we're not. If anything, we continue to see that strengthening. We continue to increase our percent leased -- and we're getting -- as I said even in my prepared remarks, our ability to drive contractual rent growth, so the rent steps within leases and the cash releasing spreads, it's better than historical average each quarter. I never say never, and we say it all the time, we know we are not 100% immune to economic cycles. And if there is a pullback, and we're really well positioned. I think we're more resistant than the rest of the retail sector because of the quality of our portfolio and because of the property type in which we own and operate.

Can you tell us about your watch list today?

I'll let Christy take that.

Our watchlist is about its historical average about 2% of ABR, which is where we've seen it the last few years. as we do guide to uncollectible lease income, so bad debt as a percentage of NOI as a percentage of revenues, and that is about -- we've guided to below 50 basis points year-to-date, we're running in the kind of low to mid-30s. So we're doing really well on credit loss right now. We started the year with a couple of uncertainties from a tenant perspective as far as bankruptcies, and we've we've outperformed that. And you've seen -- we've had some really good resolutions on that, and you've seen us raise guidance partially as a result of that. So right now, our watch list looks good.

And who's on our watch list without naming names.

I think it's largely from a tenant category perspective, it's going to be the bigger box, junior anchors that you would imagine. -- some of the names that largely 1 in particular that was on our watch list earlier this year that sort of resolved is still on our watch list, and we're continuing to watch those tenants that have continued to -- have continued to show signs of potential credit issues. -- in addition to those that have recently emerged from bankruptcy.

About gyms? .

Fitness is on our kind of secondary watch list. There are some fitness providers that are on our watch list .