Regency Centers Corp (REG) 2002 Q2 法說會逐字稿

Good morning. I will be your conference facilitator today. At this time I would like to welcome everyone to the Regency Centers Corporation Second Quarter Earnings Conference Call.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question, press star and then one on the telephone keypad.

I would now like to turn the call over to Mr. Bruce Johnson, Chief Financial Officer. Sir, you may begin the conference call.

Thank you. Welcome to Regency's second quarter conference call. With me on the call is a Martin Stein, Marylou Fiala, Chris [Lovitz], treasurer, and Lisa Palmer, Vice President of Capital Markets.

Please bear with me as I read the disclaimer.

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, and based on management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance, and involves certain credit risks and uncertainties which are difficult to predict. Actual results may be changed by various conditions, weather, governmental approvals, and may differ materially from what is a expressed or forecasted in this conference call.

I hope you all had the chance to read our press release, and review the supplemental financial information. If you have not received this information package, you can find both on our website at www.regencycenters.com.

Regency experienced another good quarter. Our operating properties continue to perform very well, and our investments, financings, and property sales continue to positively position Regency for the future.

I want to quickly summarize the results for the quarter. Second quarter FFO per share was 69 cents. Increase of 6.2% over last year. Year to date FFO per share was 1.34. Which was 3% increase over the same period last year.

We still expect to achieve FFO per share growth in the 5% range for the year.

With respect to net income, second quarter net income per share was 38 per share, chaired to 41 cents. Due to addition 2.4 million dollars share. Year 20 date net income was flat while there was a favorable impact on sale of operating properties including the impact of the 2.4 impairment reserve previously mentioned. This was outweighed by higher depreciation expense, and higher number of diluted shares.

Marylou will now report, and then [Hap] will update you, and outlook on the company, and comment on the non-renewal of the (inaudible) provisions and corporate governs.

Thank you, Bruce, good morning. The corporate portfolio continues to deliver solid results. In the first half of the year, same store NOI grew by (inaudible) higher renal revenues accounted for the growth. In fact had there not been a decline in same - same store growth would have been approximately 3%. I want to stress it was average occupancy that was down and by quarter end same store occupancy was actually improved over last year.

Next quarter occupancy will drop slightly from the improved level as a result of the two Kmart closings that vacated July 1st. They were planned, and we do expect to achieve our target occupancy for the year. In fact, full year's same store growth should be at the high end of our previous guidance of 2 to 2.5%.

We believe our portfolio is well positioned to continue to achieve this steady same store growth as renal growth remains strong and occupancy remains stable. Year to date average renal rates have increased by 9.3%, and at quarter end our operating properties were 95% leased.

In the first six months of the year, we executed 493 lease transactions at our operating properties representing 1.4 million share feet. It's important to note that 42% of these leases representing nearly half of the square feet was new lease transactions.

This is significantly more than last year's numbers.

Our renewal percentage of (inaudible) remains healthy at approximately 75%. But we have had a greater number of early move outs in the first half of year compared to the prior year. These were expected but as a result total dollars spent in tenant improvements will be slightly higher this year versus last.

We have been able to release the spaces at higher rents. Year to date tenant improvements on new leases average 3.70, actually less than the (inaudible) during the past two years.

(inaudible) combined, (inaudible) have averaged higher than last year's number as a result of this mix of new British renewal leases.

As we have discussed, we believe one the key reasons for the solid results is simply the strong underlying fundamentals in our portfolio. These fundamentals are products of clear and focused investments and operating strategy. Regency strategy to invest in grocery anchored shopping centers that enjoys competitive advantage (inaudible) or to the infiltration of the center's locations continues us to enable to attract the best tenants and generate higher sustainable rents.

In summary, we are very pleased with the performance of our corporate portfolio in the first half of the year as we met or exceeded our key operating targets. For the remainder of the year we will focus on sustaining this high level of performance, insuring that the portfolio remains in a great position for internal growth. [Hap.]

The company started two new projects during the second quarter. The completed developments with total net completed costs of 66 million dollars run average 93% leased with a stabilized net operating income yield in excess of 10%.

Year to date the company has completed 15 projects that are currently over 95% leased, a testament to the health and quality of our developments.

The company currently has 29 shopping centers under development or redevelopment, and one existing property undergoing a major renovation. The estimated total invested capital at completion of 30 projects is approximately 460 million dollars on gross basis, and 390, after tenant reimbursals. When completed, these developments should generate an unleveraged return on investment (inaudible) 10%, and create between 45 and 70 million dollars of value. In total these developments are 74% preleased with an additional 6% committed under letter of intent and engaged in final lease negotiations. As a result our developments are 68% funded and 80% leased and committed.

The company also is enjoying a very strong backlog of future development opportunities and expects to meet our objectives of over 300 million dollars of new development starts for the year.

In April, as mentioned in the last earnings call, we acquired the [TOLEX] village center a giant anchor in West Virginia. You know the submarket in Washington, D.C. that enjoys high barriers to entry. After the end of the quarter the capacity created by the faster progress on our recycling program enabled the company to acquire a portfolio for 95 million dollars in the Woodlands near Houston, Texas.

The Woodlands as most of you may know also, is a 27,000 acre master plan community that has consistently been one of the top five selling master plan communities in the United States. The portfolio consists of four grocery anchored centers, totaling over 500,000 square feet.

Kroger anchors three of the centers, and Randall's anchors one of the centers.

And Kroger and Randall's are ranked number one and two respectively in Houston. These are irreplaceable assets located in a wealthy and growing community with average household income over 100,000 dollars and most importantly with strong barriers to entry.

These attributes should enable Regency to substantially increase rents resulting in significant growth prospects above the 8 and a half initial return. Long-term we expect these centers to outperform - or to perform considerably better than the assets being sold as part of Regency's self-funding financing strategy.

Almost as important, this acquisition positions Regency to accelerate our development program in Houston.

We are still actively seeking additional third party acquisitions with our partnership with the state of Oregon. The market for institutional quality grocery anchored centers has been unbelievably competitive with shopping centers trading at cap rates from below 8 percent to 8 and a half percent in our target markets. We anticipate investing 50 to 100 million dollars by year end for the partnership in which we would maintain a 20% ownership.

Our acquisition focus will be on opportunities like the Woodlands where rather than competing with sometimes more than 20 other bidders, Regency's relationships and other capabilities provide some competitive advantage.

On the flip side, the strong market for grocery anchored properties has facilitated the excellent process in the center recycling program through the sale of operating properties. Eight properties were sold during the quarter for approximately 97 million dollars which represented a 9.3 percent cap rate and produced approximately 1.6 dollar non-FFO gain. This brings total operating property to 131 million dollars, and we are well on our way to achieving our plan for the year.

In summary, we are pleased with our performance in the first half of the year and we are on track to meet our operating and development goals. But much still needs to be accomplished by year end to achieve FFO per share in the range of 2.90 to 2.93. These key objectives include, number one, executing a releasing plan to achieve same property NOI growth of 2.5%.

Second, completing the lease up of the inprocess developments forecasted to stabilize this year.

Third, closing on the committed and contracted four outparcel and development sales that will generate over 20 million dollars in profits.

Fourth, starting an additional 200 million dollars of new developments. And finally, acquiring 50 to 100 million dollars of grocery anchored shopping centers for the Oregon coinvestor partnership.

I want to briefly discuss the (inaudible) agreement and GE Capital. In July, as you are aware, security capital notified us that it elected not to renew the stand still provisions of the stockholders agreement when the provisions expire in April of 2003. Given the severe restrictions that stand still I am poses on capital shareholders rights, the notice to not renew was obviously not a surprise.

Also, Joe [Parsons] has been elected to Regency's board of directors. He is President of North America Equity Holdings for GE Capital Real Estate. He will replace John Kelly as one of Security Capital's three members on their 11 member board. We would like to take this time to thank John. We will miss John, but at the same time we are excited to have Joe who has a broad range of investment experience join our board. Joe and his colleagues at GE have been extremely supportive Regency's management and the company's proven strategy.

On the subject of corporate governance, I want to emphasize that much of the form and substance of the New York Stock Exchange recommendations are already in place at Regency. Historically we have endeavored to be proactive in our controls and have striven to make Regency transparent to investors. In fact, Regency has been recognized by many as having one of the highest levels of disclosure in the industry. Importantly the majority of our board is independent, not management or security capital or GE. Our audit, compensation, and new corporate governance and nominating committees are all comprised solely of independent directors. These independent directors will convene regular executive sessions.

As a matter of fact, the independent directors met after the August 6 meeting. At the November meeting, the board at our next meeting in November, the board will formally address the expensing of options and other matters related to executive compensation including ownership targets to Regency's officers and directors. As reported in Regency's 2001 annual report, if options were expensed in 2001, earnings per share would have been reduced by 1 cent per share.

Beginning this quarter, Bruce and I will certify the company's financial statements. These will be included in an exhibit to the company's 10-Q.

We were prepared to certified the statements prior to the passage of (inaudible).

Going forward, we will continue to demonstrate the company's commitment to doing what is right in the area of corporate governance. At this time we welcome your questions. 00:15:55

Thank you. At this time I would like to remind everyone that if you would like to ask a question, please press star and then the number one on your telephone keypad now. Your first question comes from Matt Ostrower of Morgan Stanley.

Good mornings. Can you explain a little more why you are bringing down - you are bringing down Q3 number, and up Q4 a little bit. What's the rationale for that?

That's just the timing of the anticipated sales which once again, every one of them is currently contracted for or under negotiation. Land sales and center sales to joint ventures and for sale development sales. Still, a lot to accomplish. But it is important to note for management and should be for investors that the buyers or joint venture partners already identified and were a long way towards closing those transactions.

Okay. And then your yield on the Woodlands acquisition, it sounds like you are quite optimistic on the growth rate of those assets. Could you give us a sense - I mean I know there is some prediction here. But what do you think the yield on that will look like and call it two years from now? Will it be up to 9 or 9 and a half by that point?

I think we will be in that range. The key thing is these are irreplaceable assets. We think there is great growth prospects that are extremely sustainable, and also it will better position us from a development standpoint in this market on a going forward basis.

Did you not have to compete with [Weingarten] none of the other [reads] for that acquisition?

It was a limited competition and as I mentioned, we have looked at some acquisitions when there have been over 30 bidders. The demand for grocery anchored shopping centers, especially institutional quality is unbelievable today.

Thanks so much.

Your next question comes from Michael Mueller of CIBC World Markets.

Hi, good morning. A few questions across a number of topics. First of all, can you peg what retain cash flow should be this year, give us ballpark.

Basically, we are talking in the ballpark of 30 million dollars. I think what we were last year, was about 26 million, 25 million. In that ballpark.

Okay.

We think that grows in the neighborhood of 15% per year.

Okay. Can you break down the portfolio contribution of NOI by market, for example, west coast versus southwest, versus southeast?

As far as growth?

Contributions to total NOI for the company. How much comes from the west coast -

Hold on.

We have that. If you want to ask your next question while we get the information for you.

And the acquisition goals that you were talking about, 50 to 100 million this year, that's gross cost not Regency's cost, is that correct?

Right.

Your cost will be 20% of that.

Correct.

To answer your question on NOI, just looked at the numbers, it is almost 50/50 to the dollar.

So 50 west coast and 50 southeast, southwest.

That - in the east we include mid-Atlantic, Midwest, and southeast. And on the west coast we would include both central region, which is Denver, Dallas, and the whole west coast.

Okay. And then the final question you were talking about leasing costs going up (inaudible) capitalized commissions going up a little bit this year. Can you give us a little color on what you think the full year number could look like?

Yeah, the full year will look at about same at 2.30 cents a foot. And the reason is as I mentioned for that being higher is one, we have had more leasings, the mix of new leases versus renewals, and obviously new leases require higher TIs. We have had a few big box projects, where we have had expansions, for instance, of a Kroger that are in this year. And some of it actually has do with timing of the actual leases versus the expense of the TIs. Overall we should be right around 2.30 a foot.

Just to follow up. We actually - for your information, we actually plan on going forward basis to have that in the 2 dollar range. So we are in the two dollar to 2.50 range.

Last year was a historical low year for us.

Your next questions comes from Ross Nussbaum of Salomon Smith Barney.

I want to follow up on the question regarding Woodlands. Where specifically do you see the above average growth coming from. I missed that.

Above average growth should come from our ability to increase renal rates, especially in the controlled environment where you control all four shopping centers. Very unique opportunity in this business.

What was it about the way these were managed previously that the rental rates aren't where they are supposed to originally?

Institutional from a little bit more of entrepreneurial. And with our contacts in the business, and PCI, premier customer initiative we are very - you can all - you can always tell how a center will perform by the level of excitement on the part of the leasing management team. This may be the (inaudible) of our group in the market there.

I thought I heard you mention something regarding out parcel sale profits to the tune of 20 million. I may have -

That was a combination of out parcel sales, for sale development sales, and sales of developments to joint ventures: I think those percentages are in line with the previous guidance that we had given. I don't think there has been any change there from the quarter.

Okay. In terms of out parcel sales it is looking like somewhere between kind of a 4 million dollar number each quarter for the remainder of the year?

I think it would be weighted more toward the end, Ross, as opposed to being split evenly.

Okay. Bruce, G and A was up not only quarter over quarter but year over year, is there anything special -

Nothing really different. We are allocating incentive compensation a little bit differently. We are using revenues. Allocation of long-term (inaudible).

So what happened this quarter -

We would expect by the way that our G and A would be similar to what it was last year on the (inaudible) basis.

How does the change in the compensation specifically affect it this quarter? Could you walk me through that?

Well, we are using the methodology we used previously had been based on FFL allocation, now we are using revenues.

What prompted the change there?

We think it is more reflective of how our people are paid, etc.

Same question on interest and other income that was also down quarter overquarter, year over year. Was there any reason that was off?

Clearly, I think lower interest rates is part of that. We had result of dead amortization as a result of a payoff of a mortgage.

And finally, Marylou, can you talk about the leasing environment compared to what you are seeing the PCI tenants vis-a-vis local tenants.

PCI tenants definitely have the tone of being more conservative in the classification of opening locations. So they are being wiser, they are making sure both in the PCI as well as the growth that they are not cannibalizing existing store sales, comp store sales, and profits are extremely important. There are categories that are still growing fast and furiously. Coffee is still growing fast, food in general is growing fast.

So overall there is caution, but we are still seeing some nice growth. With the side shop tenants we saw for fourth quarter and for first quarter kind of a whole tentative attitude of what's going to happen. Fourth quarter sales were not great but better than they expected, first quarter starting to rebound, and we are starting to see more in the mom and pop side shops, more in the normalcy of thinking of opening stores and starting to. It is starting to come back, but it is still cautious. In general is how I would say it. But I think it is good business decisions they are making. In some cases, they are going too fast.

Are you sensing it will be a more challenging year over the next 12 months over the past 12 months?

I have to say we spent a lot of time talking about this. Our leasing team feel extremely comfortable for the next six months that we will more than exceed our leasing goals both in terms of renal rate revenues, and leasing - hitting our plan for second quarter in terms of square feet that need to be leased. I have a meeting, honestly in the next two weeks with the east and west team to talk about next year and how we see that. We still feel pretty optimistic because I think the thing is - I think Regency is quite honestly getting some credit for the program that in the reality of what has been developed over the past three to four years, you know, strong demographics, the best grocers, and now the side shop tenants year over year as you see traffic is a bit better. Honestly, we have great relationships with these people that are now saying, where they are doing relocations they are giving us their relocation list and first and foremost we are seeing if we can meet their needs for 2003, and we have started the process already.

I am cautiously optimistic.

Thank you.

Your next question comes from Paul Puryear of Raymond James and Associates.

Good morning. [Hap,] could you comment on the acquisition market and where you think prices are relative to replacement cost? I guess the real question is do you think assets are getting overpriced?

That's a very good question, Paul. It has been a very, very stable asset class, one of our - over a long period of time. But I have never quite seen asset pricing be as strong as it is right now.

A lot of it is related to the perceived and I think real safety and security in the sector. On relative preference whether it is public companies or the properties are performing very well.

Secondly, the interest rates today are at historically low basis over a long period of time. And I think you have got to factor that into the pricing equation.

But as a operating company, you know, we see opportunities to take advantage of it from a sales standpoint. And I think we are going to try and be as intelligent as we can on the acquisition front with either recycling our own capital or coinvesting with other investors with their capital and trying and take advantage of the low interest rate environment. But go into investment opportunities where we think we have got some type of competitive advantage.

On that subject, could you comment on the expected acquisitions, you know, purely for the Regency account in the second half of the year?

From our standpoint it would be related to available capacity based upon the speed and how well we may be doing with our recycling strategy, with our sales, and with our dispositions. So unless that accelerates we are not expecting anything at this point in time. But if there is, you know, that acceleration then maybe if we can find the right opportunity we might take advantage of it.

Just a couple other things. Could you comment on land prices and, you know, whether you are seeing - what kind of escalation you are seeing?

Land prices from a development standpoint have, you know, are at a reasonably high level right now. But we are not seeing any further escalation on that.

I will say given the current acquisition market we feel very pleased to be in the development business because we are being able to generate institutional quality developments at 10% returns in relationship to the same properties that they were acquired would be in the 8% range.

And one final thing. Could you - someone give us the interest income number for the quarter.

Just a minute, Paul. Interest income was 615,000 dollars. 616 rounded.

Great. Good quarter, guys.

Your final question comes from Greg Andrews of Green Street Advisors.

Good morning. Follow up on Paul's question on land prices. As you, you know, talked about the backlog for development and as you put new development or initiate new development starts, do you think the yields are going to hold up at the levels that you have seen in the last year to two years at that sort of 10 and a half initial yield stabilized?

We feel like we can average in excess of 10%. I think there may be some, once again with interest rates where they are, there may be some compression. But - I don't want to underestimate, Greg, it is a competitive development market, but we expect to get more than our fair share and we expect to be able to generate returns in the 10 plus percent range. We think that will hold up. There may be some compression, but we think it will stay in that range. We haven't seen anything that would indicate otherwise yet.

Okay. And it sounds like the aggregate amount of development that will be underway at any point going forward is gonna be roughly equal to where you are now at net 390 million. Is that about right?

No, Greg, I think part of what is going on right now is you are seeing the assets we started effectively in 2001 which was a large number of starts, as you recall.

Right. Over 600 at one point.

Yes, but in terms of starts it was 450 something million as I recall that year. What happened, those are rolling off. We started at 60, 70 million last year. Effectively that was - I am sorry. 2000 was 450, and last year was 150. We are catching back up. Stabilized number probably 300 million in starts. But I think what you will see is in process start to increase again from where it is today. I would say this would be a low point.

Okay. Yeah, I mean because it occurred to me, you know, with your CIP number actually down pretty substantially, I think like almost 100 million, you know, late last year, you know, that would release a fair amount of - of, you know, capital, that you would be getting a return on. So that ought to give you a nice popped FFO if it stays down that low.

Right. But I think you will see that continue to - this number will grow as we again start these projects we are expecting to start this year. And so far they have indicated in its - Hap indicated in the pipeline we are looking at development is quite strong now.

Is there any particular graphic in that pipeline?

We opened up an office in Washington and Philadelphia. Two markets with exceptional high barriers to entry. We have some good pipeline there that we are real excited about. We have got a number of public developments underway in the southeast. We are making some headway now in the Houston market. We have a good pipeline in the Denver area, and a lot going on in northern and southern California.

Okay. So pretty much all over?

Right.

Great. And then one - I noticed on the balance sheet the operating properties held for sale is now zero. Is that - is that indicative that there is really not much left in the operating portfolio that you are seeking to sell?

Greg, this is Chris. Under FAS 144, where we carried a portfolio of assets in the line item, since the end of year 2000, under the new guidelines, primarily do you believe you will sell these assets within 12 months. We don't meet the criteria. Therefore, we were advised to move that out of that line back into our held for use or land and building so to speak, and began depreciating those again.

Okay. So those were actually shifted out of that line item not actually sold?

Right.

Last question I noticed in the supplemental, the yield of [El Sarito] Plaza that you talked about last quarter being lower than expected is now showing back up. But overall cost of the project hasn't really changed. Is there anything, you know, any good news there?

Yeah, the - I think that the Trader Joe's and Copeland's lease is signed or about to be signed. So the items that we talked about last quarter, the progress is being made there. And we still expect to have that center with overall returns, you know, somewhere close to 10%. And we have identified some other upside there. So we are still - I think some significant values is being created there.

Okay. Great. Thank you.

There is a follow-up question from Matt Ostrower of Morgan Stanley.

Some of your peers have I guess - (inaudible) industry is stable enough to give initial 2003 guidance. Is there any reason why you guys wouldn't feel comfortable doing the same?

Matt, I guess right now we feel that our FFO per share growth will be in the 5% range for next year.

Thank you. Very helpful.

There are no further questions at this time. Would you like to have closing remarks?

I appreciate everybody joining us on the call. And we look forward to visiting you during the quarter or on the next call. Thank you very much for your time.

Thank you for participating in today's conference call. You may now disconnect.