Regency Centers Corp (REG) 2002 Q3 法說會逐字稿

Good morning my name is Amorites and I will be the conference facilitator today. At this time I would like to welcome everyone to the Regency third quarter earnings conference call .All lines have been placed on mute to prevent any background noise. After the speaker's' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question press the star and number two on your telephone keypad. Thank you and now I will turn the call over to Mr. Bruce Johnson, Chief Financial Officer. Sir, you may begin.

Thank you and good morning on this Election Day. With me on the call are Martin Stein, Jr., Chairman and Chief Executive Officer, Mary Lou Fiala, President and COO, Chris Leavitt, Senior Vice President and Treasurer and Lisa Palmer, Vice President of Capital Markets. Before we proceed, I will take a moment to 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, and based on 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 conference call.

I hope that you have all had a chance to read our press release and review our supplemental financial information. If you have not received the press release or supplemental information package you can find both on our Web site at www. Regencycenters.com on you can contact Merriam Jowls at 904-598-7675.

Regency delivered another quarter of solid results. The positive fundamentals of our operating properties, good progress in our developments, and a strong investor demand for grocery-anchored shopping centers drove these results. Third quarter earnings per share were 46 cents compared to 45 cents in the third quarter of last year. Year-end earnings per share were about 0.6, also a penny above last year's number. Third quarter FPO per share 73 cents, four cents above consensus. Year-to-date FFO per spare was 2.07, which was a 3% increase over the same period last year. The drivers of FFO growth during the quarter were same store in Ohio growth of 3.8% from higher profits from development sales reflecting in an attractive sale market.

These positive growth components were offset by the dilute of earnings impact caused by higher than expected dispositions, higher interest cost caused by a higher percentage of fixed debt and lower capitalized interest. Higher GNA costs caused by an early accrual for incentive compensation. We expect the increase in GNA at year end will be less than 4% over the previous year. Mary Lou will now report on the operating results of our core portfolio. Then we'll update you on our disposition activity and outlook for the company. Mary Lou.

Thank you, Bruce, and good morning. The core portfolio continues to perform exceptionally well. Same property NOI growth was 3.8 % for the quarter and 2.8% year-to-date. Higher rental revenues accounted for nearly all of the growth, at same store occupancy was roughly flat. At quarter end same store occupancy was down only 10 basis points from 93.9% to 93.8%. Nearly all of this is attributable to the two Kmart leases that were rejected. Kmart vacated these stores effective July 1st.We believe our portfolio is well positioned to continue to achieve this steady same-store growth, as rental growth also remains strong. Average rental rates increased 12% on a cash basis in the third quarter. Year-to-date, average rental rate increases have increased over 10% on a cash basis. This 10% increase is a on a base of over 2 million square feet. In fact, in the first nine months of the year, we executed 727 lease transactions at our operating properties, representing nearly 2.2 million square feet. Our renewal percent of ex-expiring leases remains healthy at approximately 76%.

Additionally, our team is has executed over 200 leases at development properties. Another 800,000 square feet of lease activity. Given these results, we anticipate same-store growth to be at 2.75 to 3% greater than our previous guidance of 2 to 2 1/2%. We believe the quality of our tenant base and the strength of our tenant relationships are fundamental differentiating factor for Regency and will help insulate us from the challenges of today's economy and retailer environment

Retailers are currently very much in the state of flux. Retail sales growth has slowed even as more consumers watch and wait for stronger signs of improvement in the economy, as well as in the stock market. Many retailers are experiencing little to no same-store growth and are being cautious with expansion. We know that we're not immune to the effects of this environment, the economic slowdown, retail failures, and store closing and even the impact of Wal-Mart. As a result, we remain cautiously optimistic. We continue to keep a close eye on all of our tenants, including the grocers and monitor the health of all of them to proactively address any of the issues as they arise. We are very focused on sustaining the high level of performance that we've enjoyed this year to ensure that the portfolio remains well positioned for future internal growth. Pat?

Thanks, Mary Lou. And good morning. Let's now turn to Regency's investments and sales. The company completed four grocery anchor developments and started five new projects during the third quarter. The completed developments were, on average, 95% leased with a cash on cash yield of 10.4% and a stabilized NOI yield for the shopping center of 9.8% on total cost, after allocating land basis for out parcel proceeds. Year-to-date, the company has completed 19 projects that were over 96% leased upon completion. This is a testament to the health and quality of our developments.

In August, as we mentioned in the last earnings call, we acquired a portfolio for $98 million in the woodlands near Houston, Texas. The Woodlands, as many of you may know, is a 27,000-acre master plan community. The portfolio consists of four grocery-anchored shopping centers totaling over 500,000 square feet. Kroger anchors three of the centers and Randall's anchors the other center. Kroger and Randall's are rated Rand number one and number two respectively in the Houston market. We believe these are irreplaceable assets located in a wealthy and growing community with average household income over $100,000 and strong barriers to entry.

As a result of these attributes, it should enable us to substantial increased rents resulting in significant growth prospects above the 8 1/2% going in return. And long-term we expect these centers to perform considerably better than the assets that have been sold as part of Regency's sell funding financing strategy. This acquisition also positions Regency to accelerate our development program in Houston. We are still seeking additional third party acquisitions with comparable attributes to the woodlands with a partnership in the state of Oregon. As many of you are aware, the market for institutional quality grocery anchored centers has been extremely competitive with shopping center trading cap rights from below 8% to 8 1/2% in our target markets. We have several opportunities in the pipeline that are conservatively forecasting that we will not close on these until after year-end.

At the same time, Regency has taken advantage of the intense demand for grocery-anchored properties and to accelerate our disposition program to generate over $250 million from sales to third parties and contributions to ventures of operating properties and developments. Eight recently completed shopping center and single tenant developments were sold during the quarter for $70 million, which represented a 8.6% cap rate and produced $6 million in gains net of taxes. Three operating properties were also sold during the quarter for approximately $33 million, which represents a 9.3% cap rate and produced approximately $1.8 million in non-FFO gain. This brings our total property sales, both developments and operating properties for 2002, to $258 million.

Now let's turn to the balance sheet business related a lot to the progress that we're making on our sales program. The acceleration of the disposition program that we've just been discussing of our operating properties has reduced leveraged. At quarter end Regency's debt total assets was 41.7% this is on a cost basis business down from 42.2% at the beginning of the year. We expect leverage to decrease even more by year-end. Additionally, the percentage of fixed debt has increased to 89% from 72%. This combination of a lower percentage of variable rate debt together with the impact from asset sales that reduced leverage has been diluted but we're pleased with the results and impact it's had on the balance sheet.

In summary, and in total, we're very pleased with our performance for the year. The fundamentals of the core portfolio in process development remains solid. And the prospects for the development pipeline and venture program look good. Regency remains on track to achieve FFO per share in the range of $2.90 to $2.92 per share. The most accomplish the following key objectives to meet the range. Same property NOI growth of at least 2.8%. The sale of 29 out parcels for $24.5 million., plus the sale of six development properties for $83 million. We're pleased to note that all the outparcels and development properties except one are under contract and that one contract should be executed by the end much the week. And finally, we expect to start an additional $150 million, at least $150 million of identified new developments. At this time, we welcome your questions.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Jim Sullivan of Prudential Securities.

Good morning, thank you. Hap, just wanted to talk to you looking forward both with respect to the development starts in '03 and beyond as well as the profit margin on what you have under contract. Is the profit margin on the development for sale profits likely to be consistent with what we've seen so far year-to-date?

Yes. .Jim, we expect the profit margins to remain consistent with what we've experienced year-to-date.

Okay, and in terms of starts, you're saying that, you commented at the end I think is that you expect to start 150 million of new developments. To what extent are you seeing the slowing economic environment retail sales trends having any impact on the appetite for new store openings by your traditional customer base, number one? .Number two, kind of an adjunct to that, are you seeing in your markets any competition from the vacated space, whether it be from Kmart or others, that might have a negative impact on starts going forward?

Jim, the environment, competitive environment and the impact of the economic slowdown is making new development for more challenging. The supermarkets are slowing the growth somewhat. It is competitive out there. But fortunately, to date and based upon the pipeline that we see in the future, we think that our development seems to be getting more and more of our fair share. So while you've got to be sanguine about the prospects out there, and I think this is kind of healthy that the supermarkets are slowing down somewhat. We do feel cautiously optimistic about our ability to generate $300 million plus in starts on an annual basis.

and is there any regional shift in terms of where those starts are taking place that -- that you've noticed? .

No, I mean, we have, from our standpoint, we have been able to grow with Publix in the southeast and have benefited from growth in Dallas and Denver and also have a significant amount of development going on in the California market. And am real expect excited about our prospects and as you may know we have opened up offices in Washington, D.C. and Philadelphia and the team up there have done a remarkable job. So we feel real good about our development prospects throughout the country.

Okay, then, finally, in terms of the same story, NOI growth, I think the principal factor that was cited in the commentary was the releasing spreads. And I guess to some extent that's presumably a function of healthy sales trends. I wonder if Mary Lou could comment on looking out to '03 and maybe beyond whether this current high level of pricing flexibility that you're experiencing is likely to be sustainable.

I think if we look at our guidance for '03, we have lowered, you know, to date we're at over 10% rental rate growth and we're I think between 5 and 8%, 6 and 8% for '03, so we expect it to slow down a bit. I think there's a couple of things going on, Jim. One is the national retailers are clearly more attracted to the centers with the top grocers. And they have I think they're more proactive than they used to be as opposed to just opening stores to open stores. Obviously, they need to open stores and become profitable and so they're really looking at grocery store sales in making their selections.

That helps us with our portfolio. Secondly, I think part of the reason you're getting stronger growth is because of the economy being difficult and the retailers are less apt to relocate locations if it's a good performing store because they're looking at down time in their current location, the capital it takes to build out another store, and then retraining that customer to go to the new location. And all in all, they're finding out that it really is a tough sell into in today's environment. So I think those are the key factors that have enabled us to be able to keep the momentum with rental rate growth. And I think it will soften somewhat next year. But I don't think it will be dramatic.

Okay. Good. Thank you.

Thanks, Jim.

Again, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad. Your next question comes from Alissa Azina of Salomon Smith Barney. My that question has been be withdrawn. Again, I'd like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad. Your next questions comes from Alissa Azina of Salomon Smith Barney.

Good morning I'm sorry, how are you?

Good morning.

I know you touched on before the higher GNA costs, could you just repeat what you said earlier?

Higher yeah, higher GNA costs, this is Bruce, Alissa, caused by earlier accrual for incentive compensation which relates to when we -- when we achieve earnings, effectively.

Oh, okay. And also, too, your guidance calls for $30 million of acquisitions for '03.Is this due to an acknowledgment that cap rates are too low?

No, that would represent our share of a joint ventures we would do with Oregon, effectively.

But we've got to be caution about -- you know, given the low cap rate environment, you know, and the very competitive environment for buying shopping centers, our expectations are that, you know, a limited amount of acquisitions are going to occur in this kind of environment.

True, true. Thank you. And one more question. Are you tempted at all to boost your asset sales whether they're operating at the merchant building buildings given where cap rates if are high and if so does that imply you'll be retaining less than the 60 to 80% that you indicated earlier this year.

Well, we have you know, I think as we mentioned we have accelerated the sale of operating properties and we're selling a decent number development. So we you know -- we're well, so to speak, ahead of plan right now and expect that pace to continue for the year end to take advantage of the current market environment.

Okay, very good. Thank you very much.

At this time there are no further questions.

If there aren't any further questions, we appreciate your taking the time and your -- and your interest in the company. Thank you very much and everybody have a great day.

Thank you for participating in today's teleconference. You may all now disconnect.