Regency Centers Corp (REG) 2003 Q1 法說會逐字稿

Thank you. Good morning. Welcome to our first quarter of 2003 earnings conference call. I hope you've 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, you can find both on our assemble site at www.regencycenters.com or contact Diane Ortolano at 904-598-7727.

Before we start, I'd like to 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 management's belief and assumptions. Forward looking statements are not guarantees of future performance and about certain known and unknown risks and uncertainties. These could cause actual results to differ materially from those express or implied.

Such risks and uncertainties include, but are not limited to, changes in national, local, and economic conditions, financial difficulties of tenants, competitive market conditions, including pricing of acquisitions and sales of properties and out parcels, changes in expected leasing activity and market rents, timing of acquisitions, development starts, sales of properties and out parcels, weather, obtaining government approvals, and meeting development schedules.

During the quarter, Regency's corporate representatives may reiterate these forward looking statements during private meetings with investors, investment analysts, the media and others. At the same time, Regency will keep this information publicly available on its web site. The public can continue to rely on this information as still being Regency's current expectations unless Regency publishes a notice stating otherwise.

During this call, management may refer to certain non-GAAP financial measures which we believe to be meaningful when discussing the rate industry. On our call this morning, Martin Stein Jr., Chairman and CEO, Mary Lou Fiala, President and COO, Bruce Johnson, CFO, and Chris Leavitt, SVP and Treasurer. This morning, Bruce will first recap the quarter's financial results, then Mary Lou will review our operating results and leasing activity. And finally Hap will discuss our development program, investments, and capital market activity. Bruce.

Thank you, Lisa. For the past year and a half, we have been cautiously optimistic about our performance in the uncertain economic environment. While we remain cautious, we are pleased to report a very successful first quarter. Our results reflect a focused strategy and sound business decision.

At quarter end, our operating portfolio was nearly 95% lease. Rent growth was a healthy 9.7%. And same property NOI growth was 1.6%. These results translated into funds from operation of $40.3 million or 65 cents per share. Our FFO per share of 65 cents is equal to the first quarter of last year despite an 11 cents negative impact from last year's aggressive disposition activity and a 2 cent impact from a slightly higher number weighted average series in an early redemption of $75 million of preferred units.

This 13 cent decline was offset by 2 cents of growth from same property NOI, 8 cents of growth from our 2002 acquisitions and stabilized developments, and 3 cents of growth from third party and development profit.

Net income for the quarter was $17.9 million. A $6 million decline over the first quarter of last year. This was primarily attributed to an $800,000 loss on the sale of operating properties, opposed to a $3.2 million gain last year, a $4 million swing. And a $1.9 million charge to net income for the original issuance cost associated with an early redemption of $75 million of preferred unit, which Hap will discuss in more detail later. Now I will turn it over to Mary Lou to talk about our operating portfolio.

Thank you, Bruce, and good morning. We are very excited as we progress through 2003. The first quarter results were strong, and we remain confident that we will meet our expected results for the year. In spite of a weak economy, we actually increased or occupancy in our operating portfolio over year end to 94.4%. We achieved 9.7% rent growth, a positive surprise and same store NOI of 1.6%.

As a result of positive impact from higher occupancy and last year's strong rent growth, we are optimistic we may be at the high end of our 2 to 2.5% guidance for same property NOI growth. In fact, we would have been at 2.8% this quarter had it not been for timing of certain recoverable operating expenses.

Leasing activity was strong through the quarter with 273 new and renewal leases signed, representing over 1 million square feet of space. TIs for these transactions are quite low, at $1.62 per square foot. We expect TIs to be more like historical numbers during the rest of the year, with estimated average TIs for 2003 at approximately $2 per square foot.

Our renewal rate remains strong for this quarter, over 70%. And we had over 200,000 square feet less moveouts in this quarter than the first quarter of last year. We believe this is a result of the side shop tenants being more selective about their locations and their strategy to stay in centers with more productive grocers. As you know, focusing on the most productive grocers and targeting locations of high average household incomes are key components of our strategy.

During the quarter, we received independent research with encouraging results that support this strategy. The researchers analyzed grocer sales by grocer type -- chains, specialty grocers, super centers, and warehouse clubs. And also by segmenting supermarket sales by household income. The research found that households with income less than $50,000 will travel longer distances to shop super centers and warehouse clubs. Higher income households are less likely to make the drive as convenience is a more important factor. This is intuitive, but more promising is the impact on spending at grocery stores as opposed to super centers and warehouse clubs.

Households with incomes less than $50,000 spent 0.4% less at supermarkets in 2002 than the prior year, whereas higher income households actually increased their spending at supermarkets by over 3%. This trend was seen in prior years as well. And we expect it to continue in 2003.

Based upon this research and our operating expertise, we feel comfortable that our focus on the top grocers and on higher income neighborhoods will continue to be profitable even in uncertain times and in the face of continued threat to the grocers from super center proliferation and the retrenchment of grocery chains.

The first quarter also marked the time of the year where we convene our annual PCI meeting. 2003's session included a real estate roundtable with 12 of our PCI tenants, the leading retailers in the respective industry, including Publix, Stein Mart, Panera Bread, and Dollar Tree among others. Along with our operations team, the group discussed topics such as the impact of super centers on the traditional grocery industry and what effect, if any the retailers have felt, consolidation and retrenchment in the grocery store industry, and other several issues currently impacting the shopping center environment.

These open forums help us stay in touch with our retailers and to better understand their needs and their challenges. Our relationships with these leading retailers were certainly enhanced, which should translate into continued growth in the number of locations in Regency's portfolio.

Another goal of the roundtable was to begin to change the retailers' thinking about the makeup of a shopping center. We believe a combined mix of best side shop retailers creates a secondary anchor for the center. Basically, another major traffic draw into that center. Many retailers have exclusivity language in their leases that may make it more difficult for us to achieve this myth. By discussing this openly and presenting evidence to support our belief, we actually had a couple of tenants in current lease negotiations that were set on their exclusive language yield to the concept to remove exclusives from their leases. As I said in the beginning, we are very excited about this year. Things look promising. At this time, we are on target to achieve all of our operating goals. Hap.

Thank you, Mary Lou, and good morning. Clearly, as Mary Lou discussed, the fundamentals of our operating portfolio remain extremely healthy. At the same time, we continue to advance our development program, our joint venture partnerships, and our capital recycling initiative.

During the quarter, we stabilized five properties with net completed cost of approximately $73 million. These properties are 96% leased and committed. We started the development of two projects -- a Sav-on drug store in southern California and an Albertsons-anchored shopping center outside of Portland in Minville, Oregon. These two projects have an estimated net development cost of over $12.5 million with an average forecasted NOI yield on that cost in excess of 10%. This brings the total in process development pipeline to 31 properties in 12 states.

The estimated total capital at completion of these projects is over $545 million on a gross basis and nearly $433 million on a net basis. We have been able to maintain our development returns even at acquisition cap rates, as you know, have fallen. When completed, these development projects should generate an unleveraged return on investment of an excess of 10%, further increasing the spread between development returns and the market price, if we were to sell these centers upon stabilization.

The end process developments are currently 79% leased and committed and 52% funded. The demand for the shop space in our current development is compelling, with the first quarter's leasing activity more than doubling the activity a year ago. The development pipeline is also promising, and the outlook for 2003 development starts remain on track.

During the quarter, Regency acquired Frankfurt Crossing, which is a Jewel-anchored center outside of Chicago. As you know, Jewel is the market leader in Chicago, and the average estimated household income within one mile of the center is in excess of $125,000. The site also includes two out parcels for future sales as well as an expansion track that will be completed in 2004, enhancing our return on investment.

In 2003, we are continuing to execute our center recycling strategy, maintaining the company's balance sheet while cost-effectively financing our development program. In the first quarter, we sold four properties in an average cap rate of 8.1% with total proceeds to Regency of over $23 million and sold seven out parcels recognizing nearly $2.5 million in profits.

One of the centers sold was a nine court development, a Food Lion anchored center in North Carolina that we identified last year as one of the few Regency developments that was experiencing slow lease-out. In fact, we sold it prior to stabilization in order to take advantage of today's strong demand for grocery-anchored centers. As a result, we still realized a very small gain on the sale.

Since we did experience a typical amount of costs associated with abandoned projects during the quarter, our development profit line item actually shows a small loss. For the full year, we still expect development profits and outparcel gains to be in the $25 to $30 million range. A substantial number of the developments that are targeted for sale or venture are already in due diligence. Most of the out parcels that have been identified for sale are under contract or at least have a firm commitment.

As Bruce mentioned earlier, in late March, Regency redeemed $35 million of preferred units at 9% and 40% of 8.75% preferred units. Because these were both portions of private placements completed in 1999 and 2000, with five-year noncallable provisions, which weren't in play at the time, we paid a 1% premium of $750,000 to call them early.

We also expensed $1.9 million, the pro rata portion of the original issuance cost. We did this to take advantage of the opportunity to replace this capital with less expensive permanent financing. In fact, in early April, subsequent to the end of the quarter, we issued $75 million of 7.45% preferred stock. As a result, our future distribution is only $75 million are reduced by over $1 million annually.

On April 3rd, which was after the completion of the preferred stock offering, 92% of our debt was fixed with a debt to market cap of 36% and debt to assets cost of 41%. We also had almost $500 million available under our line of credit. We continue to maintain a significant amount of financial flexibility to fund our growth without compromising our investment rating.

In summary, due to the strong fundamentals of the operating portfolio, continuing progress with our value-added development program, and the positive momentum from Regency's self-funding, recycling, and joint venture initiatives, we are optimistic despite uncertainties in the general economy and the supermarket business. Regency will remain focused, relying on a proven strategy -- good real estate and good markets, focusing on the dominant anchor in densely populated high-income areas.

We believe this will continue to insulate the company in a challenging environment. We remain comfortable with our 2003 FFO per share guidance in the range of $3.02 to $3.06 and with a range of 65 cents to 70 cents for the second quarter.

It's interesting to note that 2003 marks Regency's tenth year as a public company, but our 40th anniversary as a company, and we plan to celebrate with success and profitability. We welcome your questions.

If you would like to ask a question, please press star then the number 1 on your telephone keypad at this time. One moment for your first question. Your first question comes from Michael Bilerman, Goldman Sachs & Company.

Good morning.

Good morning, Michael.

Just had two questions. I was wondering if you can go over, you know, some of these out parcels that are under contract, whether you know the quarterly breakdown of how this is going to be recognized.

Michael, we're just giving guidance on the gross number, and we give guidance on what we expect to do for the FFO for next quarter. But beyond that, we don't give any guidance on the actual timing of outparcel sales.

Last year was heavily weighted to the end of the year. What sort of distribution would we see this year?

We would expect it would still be more weighted towards the end of the year.

Okay.

Which I think is the same guidance we gave the last quarter. On the conference call.

Even though there is $2.5 million booked in the first quarter?

That's correct.

Any update on any tenants that you've become more worried about?

Things have stabilized actually across the portfolio. I mean, the ones that we continue to watch are categories -- you know, the vitamin category, where we think there's an over distribution, electronic category. But beyond that, you know, we don't have a lot of soft goods. We're very grocer, service, and food. And those businesses, although they're not extremely strong, seem to be kind of leveling off. And when we talked to our group at our roundtable, they were pretty comfortable that things have kind of flattened out.

And, obviously, retailers are always optimistic, but optimistic that starting third and fourth quarter, that they'll do well. I think another indication that people are doing a little bit better is the fact that our move-outs were significantly less than the first quarter of last year, about 200,000 square feet less. So we're seeing stability.

Okay. Great. Thank you.

Your next question comes from Ross Nussbaum, Salomon Smith Barney.

Rental revenues, minimum rents were down sequentially. Was that just due to asset sales or was anything else going on there?

I would say that's all asset sales.

And on the outparcel sales, you said you sold seven during the quarter. Do you have any goal for the year in terms of the gross number of asset sales? Of outparcel sales, rather?

We've given guidance in the profit area, but not on the -- are you looking for the gross amount of the growth value?

Yeah. I'm just trying to figure out kind of per outparcel, you know, what the profit is. Or what your expectations are for the year and if the first quarter is kind of in line with that.

Well, it's in line with what our expectations were. Actually, timing might have been a little bit earlier from our plan standpoint. Our profits can range anywhere from $100,000 to $700,000 in outparcel projects. Again, depending on how large they are and so forth.

There's about a 20 to 30% margin, profit margin.

Thank you.

Thanks, Ross.

Your next question comes from Andrew Rosivach.

Good morning, guys. Just one question. Do you have any additional preferred debts this year, and do you have any ideas of what you think you might do with it?

We have $80 million that would be callable on June 23rd.

And I guess the coupon on that is 8 1/8. I guess you would be able to creatively refinance that given your next deal.

That should be the case, but we've made no determinations what we should do at this point in time.

Is any of that contemplated in your guidance, or would that be a potential source of upside?

I would say none of that is contemplated in our guidance.

Thank you.

Your next question comes from Matt Ostrower.

I may have missed it. Can you give a little bit more color on the development project, the $350,000 loss.

We're having a development pipeline of several $100 million. Not every development gets started. So there are abandonment costs with unsuccessful development starts. And that's part of the nature of the business, and this is a recurring item that we have. It's just this quarter we did not sell -- the place that we happened to put it -- I guess it's in our supplemental is contra to development profits. That's where it falls.

It's in our view the best place to put it. There weren't any development profits this quarter, but as I mentioned, we -- we are in due diligence with substantial number of our -- you know, of our for sale developments and for venture developments. So we still feel pretty good, or feel very good about the guidance that we provided. Obviously, that's still a lot of transactions that need to be closed.

Right. And on your dispositions this quarter, I think you said 8.1% going out yield, which included this identified lion center that has been one of your weaker sort of things to sell. It just strikes me, your guidance in your supplemental has been still in the 9 or 10% range for dispositions going forward. I wonder if that's not a little bit too conservative.

We're still in the process of number one -- a couple of things. Number one, a number of starting contracts, so we have a pretty good idea of where it is and where it's going to be. Remember a number of these centers are at the real bottom end of the portfolio, and we're going to probably not realize as attractive a cap rate on those.

Matt, I think it's Lisa. If you look at the food lion we sold, the cap rate on that was sub 8. As Hap mentioned, it was sold before stabilization, and it was only 70% leased.

Right.

That percentage on that amount of NOI earned at that point in time.

Right. So it wouldn't necessarily be so attractive.

Right.

And two of the other three we sold were north of 9.5% cap rate.

So you're still comfortable with the 9% disposition guidance?

Yes.

And, Bruce, question for you on depreciation. Your depreciation and amortization line along the income statement is, I think, $18.9 million, and then your reconciliation to the FFO, when I add depreciation and a separate amortization line item, I get to a higher number than that.

You need to go to joint venture line item. This is an add back that would relate to our portion of the joint venture side which is offset by the depreciation. Those two would be about $400,000.

Great. And then I guess I just lobbed the question out about GE. Nothing to say about that?

About --

Ever heard of those guys?

You had to ask. Anyway, look, you know, the stand still agreement is expired but the nature of the relationship hadn't changed. As everyone might know, Joe Parsons, who's president of North American equity holdings of GE capital real estate and Ron Blankenship who is still vice chairman of security capital group, are on the board. They're extremely supportive directors.

Beyond that, we don't see any reason to speculate, you know, what GE or what we together with GE might do. Our focus is on operating the business and creating value and growing earnings for all our shareholders.

Okay. Thanks.

Your next question comes from Jeff Donnelly.

Good morning, folks. Hap, concerning your entry, recent entry into the mid-Atlantic region with the new office, I was curious if you could tell us how your pipeline of acquisition and development opportunities has changed say maybe year over year and where you see yourself in that market, perhaps a year from now.

I think within the last year, I think we grew -- we closed on two acquisitions last year, one in a joint venture that totaled close to $70 million. We've got a -- and we completed a couple of developments last year. So we now got -- in the D.C. market, for instance, got an investment of over $100 million, and we've got a very strong pipeline.

We've opened up an office there, got terrific folks up there, both from the investment and the operations standpoint. And even though it's -- the good news and bad news about the market is it's difficult to grow up there, but the pipeline of what we've got going on up there is very encouraging, especially on the development side.

And I just am curious. For your anchors, now that for most people last year's results are in, do you guys have an update on where anchor sales are in your portfolio for 2002 versus 2001?

Yeah, we do. Overall, anchors -- our grocery store anchors produced over $23 million in sales versus the previous year of $22.6. So some of that, I would say, is our strategy of calling out poor performing locations with poor performing anchors. But store sales over our anchors are just about flat.

I guess it really -- from our perspective, it reinforces our strategy of staying focused with these top retailers withdrawing density and high average household income. So even in the market times where our sales are flat and slightly down in overall sectors that you still have a $23 million average grosser in your portfolio. So that's the year-end update on that.

And I guess continuing actually with grocers, Mary Lou, I was curious, first, what are your thoughts on Winn-Dixie, and are they making headway in getting their house in order? More broad than that, performance in the grocery business has become increasingly uneven, I think, in most recent quarters. I was curious if you folks looked into maybe alternative lease structures of grocers to insulate yourself or increased corporate guarantees, or are there grocers -- I don't expect you name them -- that perhaps you're avoiding today that perhaps 12 months ago you were not?

I think overall -- let me start with your question on Winn-Dixie. I do believe that Winn-Dixie is doing a good job from the locations that I've been in, and if you look at their numbers, they're starting to see some improvement. I think in general, you just have to be concerned with grocers where there's a lower average household income and very Wal-Mart super center vulnerable, and then they don't have the dollars per square foot going in the same that the competitors. I think that you have to be concerned.

So it's not so much necessarily the name on the grocery store per se, it's more the location. And what type of sales per square foot can they sustain. In terms of special things with the grocers and guarantees on that, they are being as cautious as we are, and they're making sure that they're protecting themselves, as we are. So, actually, things are pretty much as they always have been with our grocers.

Okay. Thank you, guys.

Thanks.

Your next question comes from Mike Mueller.

Hi. Two questions. First of all, the 9.7% rent growth. I assume that's a releasing spread. Can you tell me if that's GAAP or cash?

Cash.

Cash. Okay. And second question, can you just cut up your NOI by region?

Well, you know, we don't -- we look -- east and west, if you look at it, it's very, very similar. And rents on the pacific typically are higher than they are in the rest of the country, but when you look at it, what's really interesting, and the more we dig into this, because it's such a corner business -- yes, rents in the pacific are a little higher, the NOI would be a little higher.

Beyond that, if you look at it, throughout the country, because of our strategy to build the best grocers and really focusing on the side shop tenants, our rent growth across the country is so similar it's unbelievable. So we're not seeing this huge difference that there's one market carrying another. It's pretty much the strategy works no matter what market that you're in. So we've been very fortunate.

Okay. And one question relating to the supplemental, the CAPEX on page 5, can you just walk through your definitions of what you include in the nonrevenue enhancing versus the total?

Yes. Mike, that's a good question. We used a different definition of that, and we used to refer to that same line item as operating before. But using operating number, what we want to make sure is that people understand that -- we want to make sure what we're not including in that number is, in fact, the leasing commissions and the tenant improvements that relate to developments that are still not yet complete, which would be identified as first generation space, and which we actually have a budget for in our development budgets. But they're already in a stabilized operating mode.

So we changed the definition. It really isn't any different than how we've dealt with in the past. What we do not include in that number, in the revenue enhancing number, would be those costs associated with our development projects that are now in the operations side.

This is Lisa. I'm going to clarify a little bit more. The thing, as I mentioned earlier, we're stabilizing, we're calling property stabilized when they're 93% leased. We're moving them into the operating property portfolio. At 93% leased, we still have several spaces to lease in each one of them. So we haven't -- they're still shells. We haven't done the build-out for those spaces. It wasn't we changed the definition. It was a little bit of mislabeling by calling it operating properties only.

If we're looking at leasing commissions, non-revenue enhancing at $1.4 million versus $2.2 million total, the difference is?

Developments.

Developments.

Okay. Thanks.

Your next question comes from Patrick Beedy(ph).

Yeah. This is Patrick Beedy at Investco. Mary Lou, just a little clarification in your initial statements. You talked a little bit about VCI roundtable and a research report, where what I heard is you're saying that consumers who have incomes of $50,000 or less are more concerned with value as far as grocery shopping, and then higher income consumers are more concerned with convenience. Is that correct?

That is correct.

Can you expound upon that?

Well, you know, what's happened is that, if you think about it, your family with average household income of $25 to $50,000, you don't have the luxury of putting convenience over price. You know, you have a family. You have to shop. You're going to get the best price that you can and do one-stop shopping and be able to get really everything done, and you'll go to Wal-Mart or these other super centers.

As you move up in income, everybody would like convenience to be the most important thing, but you have that option, and you have that luxury. So you'll go to your neighborhood center. Then as the higher incomes continue to grow above that $50,000, more where we are in the $80 to $90,000, then what you're able to do is you care not only about convenience, but you care about quality products as well as the shopping experience yourself. So you're seeing sort of this bifurcation of these customers because they have options.

Okay. Thank you.

You're welcome.

There are no further questions at this time.

We appreciate everybody's interest in Regency, and thank you very much. Everybody have a wonderful day.