Regency Centers Corp (REG) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Regency Centers Corporation First Quarter Earnings Conference Call. During the presentation, all participants will e in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. As a reminder, this conference is being recorded Thursday, May 9, 2002. I would now like to turn the conference over to Bruce Johnson, Managing Director and CFO. Please go ahead, sir.

Thank you, Stephanie. Thank you and good morning. Before we start, please bear with me as I read the Safe Harbor statement. In addition to historical information, this conference call contains forward-looking statements under the federal securities law. These statements are based on current expectations, estimates and projections about the industry and markets in which Regency operates management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain credit risks and uncertainties, which are difficult to predict. Actual operating results may be affected by changes in national and local economic conditions, competitive market conditions, weather, obtaining governmental approvals and meeting development schedules, and therefore, may differ materially from what is expressed or forecasted in this press release.

With me on the call this morning are Martin E. Stein, Jr., Chairman and Chief Executive Officer; Mary Lou Fiala, President and Chief Operating Officer, and Lisa Palmer, Vice President, Capital Markets. I hope that all of you have had the chance to read our press release and review our supplemental financial information. If you have not received a press release or supplemental information package, you can find both on our website at www.regencycenters.com, or you can contact Miriam Giles at 904-598-7675.

For the first quarter funds from operations were $0.65 per diluted share, at the upper end of the FFO range we provided last quarter. Growth generated by increased same property NOI, higher third party fees from our joint venture relationships and that new NOI from resup [phonetic] of in process developments was fully offset by lower year over year recognition of year long profits. Lower transaction profits was in line with Regency's strategy to sell fewer core developments, which we believe will improve both quality of the platform and earnings. Net income for common shareholders for the first quarter increased to $0.42 per share from $0.39 per share for the same period in 2001, an increase of 7.7 percent. This increase is a result of the gain on the sale of four operating properties. Adjusted funds from operations declined 6.9 percent in the first quarter caused by a higher streamline [phonetic] rent, and increase of leasing commissions and tenant improvements. Increase in leasing commissions and TIs as a result from increased number of new leases signed this year compared to the number of new leases signed in the same period in 2001. 157 new leases were signed in the first quarter totaling approximately 531,000 square fee, an increase of more than 130,000 square feet in new leases compared to last year. This is just a timing variance. We expect annual adjusted funds from operations to be in line with the projected annual EBITDA growth. Net interest expense increased almost $3.5 million compared to the fourth quarter in 2001. This increase was the result of higher growth interest caused by higher debt balances [indiscernible] $250 million of short-term on January 18th, , as well as lower capitalized interest caused by higher NOI of in process developments, and lowering our capitalized interest rate.

Mary Lou will now discuss the operating results of our core portfolio. Then Hap [phonetic] will update you on our investments and dispositions activity, balance sheet, and our financial outlook for the Company. Mary Lou.

Thank you, Bruce and good morning. The fundamentals of our core portfolio remain sound and we continue to achieve sound operating results. In the first quarter, we signed 310 new leases and renewal leases for approximately 980,000 square feet of which 743,000 square feet were operating properties only. On a same space cash basis, average rental rates increased 11.6 percent over 16 percent for new leases and nearly 9 percent for renewals.

The strong rate growth that we obtained this past quarter, as well as over the past 12 months continues to generate same property NOI growth. Same property NOI growth was 2.2 percent for the quarter. Higher rental rate revenues generated over 3 percent same property growth, but this was [indiscernible] by a slight decline in same store occupancy. The decline in same store occupancy is primarily a result of two large bankruptcies that we experienced in the latter part of last year, Wacamaw and [indiscernible]. Although we have signed a letter of intent for the Wacamaw space, and one of our home life spaces, we expect them to maintain same store occupancy at current levels, as the K-Mart store closing will begin to have an impact later this year. The two of our four K-Mart stores that are closing as a result of bankruptcy are still open at this time and are current on their rent. However, we expect that these stores will close by the end of the second quarter. The K-Mart store closing and an unexpected level of early move-outs were already incorporated into our plan. And therefore, we remain optimistic that we will still achieve same property NOI growth of 2 to 2.5 percent.

The operating trends in our portfolio that we consider being key indicators of the health of our portfolio have suffered no significant deterioration. Accounts receivable over 90 days for the first quarter was 1 percent of revenues, equal to the first quarter of last year. Less than 1 percent of our total [indiscernible] moved early this quarter, as well as in the first quarter of 2001. 73 percent of our tenants with expiring leases renewed. 310 leasing transactions were completed in the first three months compared to 269 transactions in the first quarter of 2001.

The one measure where there was a modest difference was tenant improvement and they averaged $2.13 per square foot. We will continue to track these measures and to monitor the health of our tenants as well as to continue the steady focus on strengthening our relationships with our premier customers in national, regional and local retailers that are the depressed [phonetic] operators in their merchandising category. We believe the quality of our tenant base and the strength of our tenant relationships will continue to help insulate us from the consequences of the uncertain economic environment and the impact from Wal-Mart. Hap [phonetic].

Thanks, Mary Lou. Let's now turn to investments and sales. The Company completed five [indiscernible] anchor developments in one single tenant property with total net completed cost of $93.2 million. These developments were on average 96 percent leased with a stabilized net operating income yield on total net completed cost of 10.1 percent. The build to suit [phonetic] was one of four single tenant properties that were sold at an average cap rate of 9.12 percent with proceeds to Regency of $10.4 million.

The Company started six new developments included the ground up development of one Albertson grocery anchored center, four public anchored shopping centers and the redevelopment of an operating property. The Company also acquired a shopping center after the end of the quarter. Tall Oaks [phonetic] Village Center, which is a giant anchored shopping center in Restin, Virginia, which as you know, is a neighborhood submarket in the Washington D.C. area that enjoys extremely attractive demographics and high [indiscernible] entry. The Company currently has 36 shopping centers under development or redevelopment, and two existing project properties undergoing major renovations. The estimated total invested capital at completed for these 40 projects is approximately $508 million on a gross basis, and $417 million on a net basis, which is total cost less the proceeds from our out parcel sales and tenant reimbursements. When completed, these developments could generate an unleveraged return on investment in excess of 10 percent and most important of all, create between $45 and $75 million of value.

In the first quarter, we signed 57 leases for these in process developments comprising more than 200,000 square feet. In total, these developments are 73 percent pre-leased with an additional 5 percent committed under letter of intent and engaged in final lease negotiations. This means that our developments are 66 percent funded and 78 percent leased and committed.

We have experienced approximately a $5 million increase in the redevelopment cost of El Cerrito. El Cerrito is a redevelopment of a shopping center that is located in a prime dense [indiscernible] market east of San Francisco. The increase in net project costs which are now estimated to be $53 million, primarily results from the following. The City requirements that were added after the commencement of development, our own underestimating of that site work and construction costs for this extremely complicated redevelopment and the cost and timing to open two additional anchors. Final negotiations are underway with these anchors which are Trader Joe's and Coplans [phonetic] Sporting Goods. The timing for the projected opening of Trader Joe's and Coplans should move the stabilization of El Cerrito into 2003. We believe that these two tenants, especially Trader Joe's, which is a high volume specialty grocer, as a matter of fact, they're producing over $30 million in 10,000 square feet in our Emeryville [phonetic], California investment. They're going to be a terrific additions to an already strong tenant lineup which contains Albertson's, and Albertson's opening was phenomenal, Bed Bath & Beyond, Barnes & Noble, Ross & Starbucks. Even with the additional costs we still expect the unleveraged return on invested capital to be 10 percent which should result in the creation of $6 to $9 million of value. Without a doubt, even if we had known about the additional $5 million in costs, we would have gone forward with what we think is going to be a fantastic project.

The overall health of our in process developments, including El Cerrito, is quite strong and the pipeline looks extremely promising as well. During the quarter, Regency also opened offices in Washington D.C. and Philadelphia. Talented and experienced investment, leasing and construction officers are leading Regency's initiatives to profitably build a major platform in the mid-Atlantic region. While there are challenging barriers, and that's what we like about the market, to effectively grow a significant presence in these markets, the pipeline of developments and acquisitions, when added to the base that we have is extremely promising.

We've also made excellent progress on our recycling program, the dispositions of operating properties and joint ventures. Four operating properties were sold during the quarter for net [indiscernible] for Regency for approximately $34 million, which represents a 9.25 percent cap rate and produced approximately a $3.2 million non-FFO gain. Two of these properties were sold to our joint venture with McCrory [phonetic] Countrywide [indiscernible] of Australia, which we plan to continue to grow. Regency retained 25 ownership interest in these properties.

Also at year-end, five operating properties were under contract for sale for approximately $60 million at a 9.75 percent cap rate. And I'm happy to report that three of these transactions have already closed. In addition, we're currently negotiating the contracts for another eight centers for total sales from these eight centers of nearly $90 million.

Now let's turn to Regency's balance sheet and financial position. We continue to maintain a significant amount of financial flexibility to fund growth while maintaining our investment grade rating. At the beginning of this year, the Company issued $250 million of 6.75 percent tenured notes and used the proceeds to pay down the Company's credit facility. At quarter end, there was $410 million of available capacity under the $600 million line of credit. And our debt to asset ratio, once again at cost, was 42.8 percent. Our coverage ratios remain sound at 2.8 times for interest only and a fixed charged ratio of 2 times. Over 85 percent of our assets in NOI are unsecured. indiscernible] stockholders agreement between Regency and Security Capital was amended to extend the notification and termination dates which standstill provisions 90 days, which means that notice to terminate the standstill provisions now must be received by July 14, 2002, in order to terminate this provision on April 10, 2003. I think it's extremely important to reiterate that Regency truly is enthusiastic about our new strategic alliance with GE Capital.

In summary, the Company is on track to achieve its operating and investment targets for 2002. The fundamentals of the core portfolio and in process developments remain solid and the prospects for the development and acquisition pipeline and venture program work real good. Regency's focus will be to generate growth from the operating properties, complete to lease up of the in process developments, expand and enhance the quality of the platform and the related income stream and returns through developments and acquisitions and cost effectively finance investments by recycling assets and through core investment partnerships. For 2002, we're comfortable with the funds from operations per share range of $2.91 and $2.94, and with the range of $0.67 to $0.69 per share for the second quarter. We now will be glad to answer your questions.

CALL INSTRUCTIONS). Our first question comes from Mike Mueller, CIBC World Markets.

Hi, good morning. A few questions. Mary Lou, I think you mentioned that the TIs in the quarter were $2.13 a foot. You seem to say that's a little bit high. What's more of a normalized run rate for that and then why were they high?

It's about $1.75 typically. And we're going to go back to our normal rate. That was just a quarter and some things where we spent some money and that. It'll go back to $1.75.

Okay. Also, in terms of the relief you spread, looks like on a cash basis, there were about 11 to 12 percent, and listening to other conference calls, it seems like many of your peers are getting spreads in the 5 to 7 percent range. I was just wondering, this 11 to 12 percent, is this something that you see continuing throughout 2002. One, and two, why are the spread higher?

I think that it's going to be, overall, we're going to be more like 6 to 8 percent. I think the true numbers, looking at the renewal percents which were at 9 percent, the 16 percent again, we some things, that worked for us this quarter. So I think that's a little bit high, but probably, conservatively, more of a 6 to 8 percent is where we'll end up. But I will say, I think it's attributed to the quality of the portfolio and the relationships that we've had and our focus on the better grocers, demographics, and our PCI customers. So, I think, hopefully, we'll continue to perform at a strong level.

Mike, we actually increased guidance in that area from 3 to 5 percent to 6 to 8 percent.

Okay. And last question, can you give us any more color on the 13 properties you mentioned were up for sale from which you've already sold. Can you give us geography or just any other details?

That's the properties that are on disposition list pretty much throughout the country. There's a few in California, a few in Texas, and a number in Florida and a couple in Georgia.

Okay. Thanks.

We fell real good about the progress that we're making with the disposition program. It's picking up some good ones there and then we're being able to take advantage of a pretty strong market from interest in shopping centers.

Okay. Do you have a cap rate on the eight that just went under contract for $90 million, ballpark?

It's in line with guidance, Mike.

Okay. Thank you.

Jeff Donnelly with First Union Securities.

Good morning, guys. Couple of questions. indiscernible] leasing out of things, Hap, specific to Winn Dixie, obviously they announced away with store closing in Texas and Oklahoma and though I don't believe you folks are directly impacted, how does this affect your thinking and what are you hearing from Winn Dixie because they're a significant tenant for agency?

You may remember, Jeff, that two years ago Winn Dixie tried to sell their Texas - Dallas properties to Kroger, but the SEC wouldn't allow the transaction to go through. They've done a couple of things that I think are very helpful, I think this pulling back and focusing on the markets where they're doing better is good, they have reduced their dividend, I think in the last quarter they reported level of same property revenues for the first time in a while, so there's some positive things, but at the same time, as you also aware, they are not from a shopping center development or acquisition standpoint, are number one - are favorite supermarket chain because they don't meet the criteria to dominate the markets they're in, especially in the better demographic areas which we think where we can build sustainable competitor advantages in. A number of the centers that we are selling and have so, are our Winn Dixie anchored shopping centers.

Okay. And just one other question, as it pertains to your development activity, there's been a lot of space that's come up in the market, particularly in the anchor box segment thanks to K-Mart, and I'm sure that will just continue to increase over the next 12 to 18 months given the news we're hearing from most retailers. Have you seen this result in any pricing difficulties for you guys on new developments, you know, just providing an alternative for anchors out there in the marketplace?

Today, we have not seen any impact from either from a pricing on rental rates on the anchors, nor from the Oklahoma side shop basis. Obviously, with all the dynamics in the retail business, and just remember, Jeff, as you know very, very well, this is not, you know so to speak, anything new. I mean, we've been - when you look back at the shopping center business from Grants to Woolworth's, this has been the nature of the business, but - so you have to be very careful - what's happening there in the dynamics with Wal-Mart - the continued expansion of Wal-Mart, of Target, the supermarket chains, just reinforces our strategy of sticking dominate grocers in better demographic areas, or in [indiscernible] areas.

Great. Thanks, guys.

I am showing no further questions at this time, please continue with your presentation or any closing remarks.

We appreciate your time and your interest in Regency and wish everybody have a great day. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect and thank you for participating.