Regency Centers Corp (REG) 2003 Q2 法說會逐字稿

Good afternoon. My name is Brandy (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regency Centers Corporation's second-quarter 2003 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.

I would now like to turn today's call over to Ms. Lisa Palmer, Senior Vice President of Capital Markets for Regency Centers. You may begin ma'am.

Good afternoon, everyone. Before we start I'm going 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 beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties. These could cause actual results to differ from those expressed or implied by such statements.

Such risks and uncertainties include but are not limited to changes in national and local economic conditions, weather, financial difficulties of tenants, competitive market conditions including pricing of acquisitions and sales of properties, changes in expected leasing activity and market rents, timing of acquisitions, timing of development starts, and the timing of sales of properties and out parcels. Also, risks include obtaining governmental 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, www.RegencyCenters.com. 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 results in the REIT industry. Please see our supplemental information package on ourwebsite at RegencyCenters.com for a reconciliation of these non-GAAP financial measures. This reconciliation -- it reconciles, it is the most directly comparable financial measure calculated and presented in accordance with GAP. On the call this afternoon are Martin Stein, Chairman and Chief Executive Officer; Mary Lou Fiala, President and Chief Operating Officer; Bruce Johnson, Chief Financial Officer; and Chris Leavitt, Senior Vice President and Treasurer. I will now turn the call over to Bruce.

Regency has had a precedent setting quarter. This quarter saw the successful placement of the largest equity offering in REIT (ph) history with the sale of 34 million shares of GE Capital. GE Capital through its acquisition of Security Capital was the largest shareholder of Regency stock totaling over 57 percent of the company's outstanding shares. The offering was divided in two parts, a common stock offering of approximately 26 million shares and a mandatory convertible security issued by Citigroup, convertible into approximately eight million shares of Regency stock.

As part of the common stock offering Regency repurchased $150 million of stock or 4.6 million shares. At the closing of the transaction the shareholder agreement between Regency and Security Capital was terminated and Joe Parsons (ph) resigned from our Board of Directors. We will not be replacing his seat leaving our Board of Directors at ten, eight of whom are independent directors. Our second quarter results reflected continued growth in the key areas of funds from operations, net income, same property NOI, and rental rate growth.

FFO for the quarter was 70 cents per share and $1.35 per share for the first six months of the year. Our year-to-date FFO per share of $1.35 is one penny ahead of last year despite negative impact from last year's aggressive disposition activity, and lower level of capitalized interest, the cost associated with the early redemption of $75 million of preferred units in the first quarter, slightly higher G&A and a slightly higher number of weighted average shares. As a side note, our G&A is higher as a result of the timing of the accrual for incentive compensation and unplanned professional fees related to the GE transaction.

We intend to realize savings in other areas that will enable us to end the year at an increase of less than 4 percent above last year for G&A. Offsetting the negative impact that I just referred to, were four cents of growth from same property NOI, six cents of growth from our 2002 acquisitions and stabilized development, and 12 cents of growth from increased third party fees and development profits.

Net income for the quarter was $25.6 million, a $3.4 million increase over the second quarter of last year. Year to date net income was $43.6 million or 72 cents per share. After accounting for discontinued operations, net income was $40.5 million or 65 cents per share, an 11 cent increase over 2002. Now I will turn it over to Mary Lou to talk about our operating portfolio.

Good afternoon to everyone. (indiscernible) quarter was market by growth and sustained strong (indiscernible) demand. Same property NOI growth was 3.2 percent for the quarter and 2.4 percent for the year. Occupancy reached 95.3 percent. We continue to experience above expected rental rate growth, 9 percent for the quarter and 9.3 percent for the year. During this quarter we leased over 1.1 million square feet. This mirrors last quarter's leasing results and put year-to-date GLA at 2.3 million square feet.

Our renewal percentage remains strong as well at 73 percent. Additionally, our early move outs are down over 117,000 square feet compared to last year this time which we quite frankly think is significant especially with the economy and this makes the leasing results even more impressive as less space has turned over. As a result of these healthy fundamentals, we are raising our same property growth guidance. We believe that we will end this year within a range of 2 1/4 to 2 3/4 percent.

We also had a very successful ICOC (ph) this past May. The number of meetings are up from last year as were the meetings with the National Heads of Real Estate of our Premier Customer Initiative tenant. We closed more deals this year than last for a total of 54 leasing transactions and over 200,000 square feet. We had 78 meetings for our available out parcels. This year we have begun to acquire PCI systems and processes to our out parcel opportunities.

We are focusing our efforts on selling or leasing these pads (ph) to the best national and regional out parcel users. We have sold or leased multiple out parcels to users such as Bank of America, Chase Bank, Chiles, Wendy's and Sonic, just to name a few. In conjunction with our Premier Customer program, we are constantly reviewing tenant performance and keeping an eye on the retail industry. This provides us with the data for which we feel helps us understand and proactively act on trends in our business. This guides us in our leasing decisions and in the use of our capital as it relates to our tenant improvement.

We have compiled a list of retailers, who's hot and who's not. For example, the quick service restaurant category and the sandwich shop have shown significant growth in comp store sales this year, they are hot, while the video and the electronics and vitamin categories face challenging times as substitute distribution channels proliferate. Some of the other hot tenants include Panera Bread as they expand West, Baja Fresh and Payway in the quick service restaurant category, and Subway, Quiznos and Togo' in the sandwich category. Combined, these six tenants have signed 23 Regency deals so far in '03.

And in addition to these retailers we continue to see great results from some of our other PCI tenants such as Curves for Women whom we have signed 20 deals in the past 17 months and Great Clips where we have signed ten new leases so far this year. As a part of Regency's success is recognizing those retailers that are experiencing great sales but also staying ahead of the curve, in our case, of identifying retailers that are new to the neighborhood retail concept.

In most cases they may be existing retailers but retailers that our new to our sector. We have begun to study mall retailers and are targeting those retailers that we feel may prosper in neighborhood community centers. The occupancy cost of malls are becoming so high that many retailers are willing to test the grocery anchor center concept as a platform for their growth. We want to be their landlord of choice when they make that move so we are proactively pursuing these retailers.

For example, we met with Kay Jewelers in Vegas and they are strictly a mall retailer today and they subsequently came to Jacksonville for a meeting. They visited one of our centers in Jacksonville and sent a letter of intent for a space within ten days of that meeting. The center is only one of three test sites of grocery anchored center locations for Kay. I will now turn the call over to Hap to give us an update on our developments and investment activity as well as our capital market activity and the outlook for the company.

Thanks, Mary Lou, and good afternoon. Clearly our operating portfolio remains extremely healthy and the fundamentals are very strong. At the same time we continue to advance our development program, our joint venture partnerships and our capital recycling program. We started the development of two new projects this quarter. The first is Phase II of Vista Village at a protected in-fill area near San Diego. At Vista Village over 31,000 square feet of the second phase has already leased, Staples, Chiles, and San Diego National Bank.

Only one box remains and we have a significant amount of interest from a number of specialty grocers. Current projections indicate that the returns will be in the 10.5 to 11 percent range on the entire project with significant value creation. The second development started this quarter is our fourth Publix in Alabama, a demonstration of our ability to aid in the expansion and growth of not only the best side shop retailers but also the dominant grocers.

These two developments bring a total in-process development pipeline to 32 properties in ten states. The estimated total capital at completions of these projects is over $560 million on a gross basis and nearly $441 million on a net basis. When completed these development projects should generate an unleveraged return on investment of 10 to 10.5 percent. They are currently over 80 percent leased and committed and only 50 percent funded.

Demands for the shop space in our current developments really is compelling with the first six-month leasing activity more than doubling the activity of a year ago. The development pipeline is promising and the outlook for 2000 development -- outlook for 2003 development starts remains on track with guidance. It is important to note that historically our development program has been quite successful. Since 1994, Regency has developed 70 shopping centers at a cost of over $800 million, producing attractive returns on target with underwritten estimates in excess of 10.5 percent. A major catalyst of our program has been the merger of Pacific Retail Trust in 1999.

Since that time we've completed 51 properties at nearly $600 million investment, vested and produced an average NOI yield of 10.5 percent which is less than a ten basis point variance from the original underwritten return. We believe that the knowledge, experience and depth of the Regency team has allowed us to develop a recipe for successful development that enable us to not only manage development risks but also to generate attractive returns and to create significant value for our shareholders.

During the quarter Regency acquired two new properties. Addison Town Center was purchased in May through Regency's joint venture with State of Oregon. Addison is a redevelopment located in a protective in-fill market within the Dallas metro area. The center was originally anchored by Winn-Dixie and Kmart. Target purchased the Kmart parcel and it expected to open later this year and the Dixie lease was assigned to Kroger to open in May. This investment offers us the opportunity to enhance our return on investment as we return -- as we retenant the center. At the second acquisition Regency increased its presence in the Washington D.C. market through the purchase of a Safeway anchored center located in Woodbridge, Virginia.

In 2003 we are continuing to execute our center recycling strategy. In the second quarter Regency sold six completed developments at an average cap rate of 8.5 percent, total proceeds to Regency of $49 million. Five of these developments were sold to the joint venture with Macquarie demonstrating their strong interest for high-quality development property. Since the inception of the partnership just two years ago we have sold 14 developments and contributed seven operating properties into the venture.

We expect this partnership to continue to grow substantially in the future. Now let's shift gears to capital market events. In July, Regency entered into a forward starting swap transaction for $96.5 million to partially hedge the 10 year fixed-rate financing expected to occur in April of 2004. If there is no significant change in Regency's spread over treasury, the all-in coupon should be approximately 5.6 percent. As Bruce mentioned, this quarter GE Capital sold its entire stake in Regency and in the process Regency purchased $150 million of stock or 4.6 million shares to help effectuate this very important transaction.

We are pleased to have worked with GE Capital to reach a comprehensive solution to the question of their ownership position in Regency. We feel that the resolution is extremely beneficial to all shareholders. As previously disclosed we funded the share repurchase by drawing on our line of credit but expected the long-term impact of the transaction to generally be balance sheet and earnings neutral by increasing our operating property dispositions and contributions to our joint ventures in 2003. We are now taking steps to return the company to pre-buyback leverage levels, improve our fixed charge coverage and to further strengthen the balance sheet and enhance Regency's financial flexibility in order to continue to grow the company's development focused investment and joint venture program.

Just prior to the start of this call, we issued a press release announcing a 3 million share overnight offering that is expected to raise approximately $108 million plus the underwriters' overallotment. The equity raised is part of a multifaceted strategy to fortify Regency's balance sheet to a level that is even stronger than prior to the GE transaction. The strategy also includes an acceleration of our joint venture and disposition programs that has increased plant operating property sales by $125 million. We expect approximately half of these sales to occur in the fourth quarter with contributions to the joint venture with Macquarie-CountryWide, with the remainder to occur as additions to Regency disposition program next year.

As part of the plan the proceeds will be used to redeem all of the $80 million perpetual preferred units that are now callable and to reduce outstanding debt. Even with the impact of the offering we still expect FFO per-share to be in the range of $3.02 to $3.08 for the year and third-quarter FFO per-share to be in the range of 79 cents to 84 cents. Obviously in order to achieve the upper end of the range, Regency needs to meet its objective for same property NOI growth and development starts and complete all planned development and out parcel sales at targeted pricing, all of which are already identified.

Overall, the quarter was marked by positive growth and change. The fundamentals of our (indiscernible) business remained extremely healthy, but most important of all, Regency is better positioned to ramp up our future sustainable FFO per-share growth rate and generate attractive returns on equity while reducing transaction profit as a percentage of FFO.

We now welcome your questions.

Matt Ostrower of Morgan Stanley.

Good afternoon. Just to clarify a couple of things. In the quarter you had a really a large development gain on the order of $6 million. When you put that together with land sale gains, it looks like you sort of increased gains on a year-over-year basis by about 8 pennies. In given that we had only one penny of growth in the quarter, is really the rest of that attributable to -- the other seven pennies really, is that attributable to dilution from asset sales, is that really the right way of looking at that?

I think the answer is correct in that regard. We are still seeing the dilutive impact of the disposition that occurred in the previous year.

And then your tenant recovery ratio went down this quarter. Is that just an aberration or is it a new run right?

No, it's just timing.

So you still expect to be in the 80, 81 percent range?

Our guidance is from 78 to 82 and we expect to be right around in that 80 percent recovery rate.

Just going back to gains for a second. Can you -- I think in the past you have talked about what you're targeted gains for the year are. You gave land sales exclusively in your supplement. I don't think you give development sale gains. Can you give us a general sense for -- it sounds like you are keeping those expectations constant. Can you spell those out again?

Lisa, help us out in that area if you can. I'm not sure we've given guidance in that area.

We, last quarter I believe we said on the call that we expect it to be about on par with last year, somewhere in the $25 to $30 million range for a combination of development profit plus out parcel sales gain.

You sort of referred, I thought at the end, to accelerating the company's growth rate. Can you be a little bit more specific about what is supposed to push that up from here? Obviously delevering offers the opportunity to relever later on but beyond that what is really changed here about the business plan that will actually get FFO growth up higher and what are you talking about in terms of a new targeted long run FFO growth for the company?

Part of the ramp up, -- let me say this, leveraging up the balance sheet is not part of our current plans to ramp up our growth rate. Let me be clear about that. We think that financial flexibility is extremely important there. The key components to that obviously are going to be continued growth in same property NOI, similar to the range that Mary Lou gave, the 2.25 to 2.75 percent. We think that once we get beyond the dilutive impact of the operating property sales at the level they were last year, that will help.

But the other two key, other three key drivers of that in addition to same property NOI growth, are going to be the growth in free and clear cash flow, number one; the stabilization of our new developments as they come on, number two; and thirdly, the continued growth of our joint venture program that will allow continued growth in fee income.

Great. Any sense -- if you had thought of a long run growth rate in the past of X, is this now X plus something?

I believe that with the next two years, we are at 5 percent right now, we'd like to think that we can get that rate, that growth rate, up by about 200 basis points within the next two years, maybe more by the third year. And at the same time and I think this is important to state, that reducing development profits as a percentage of FFO down in the 12 percent range.

And then finally, just any -- it's sort of interesting you bought back a whole bunch of stock in the GE transaction and now you are issuing a whole bunch of stock. How do we sort of reconcile that? Is it opportunistic?

To a certain extent but obviously we have given a lot of thought and when we bought the $150 million, repurchased it as part of the GE transaction, remember that was the key component to effectuate this transaction and to make it happen and get rid of the overhang. We thought that was critically important. And at the same time as we are considering our options as far as financing that, we had the preferred units that became callable.

In our view, as a combination, a comprehensive plan that includes the equity issuance, the continued ramp up of our joint venture program and an acceleration of our disposition program by an additional $75 million, the combination of those three things, it was an opportunity to significantly strengthen the balance sheet, improve our fixed charge coverage ratio and provide flexibility and opportunity to continue to fuel the growth of our development and joint venture program.

Thank you very much.

Jim Sullivan at Prudential Securities.

Thank you. I wanted to follow up a couple of Matt's questions. First of all in terms of same-store NOI, the same-store NOI metric here was very strong at better than 3 percent even though the operating cost recovery rate declined pretty sharply from what it was in the first quarter and what you're forecasting for the year. What your full year forecast is, your full year forecast now is that the same-store NOI number is going to come down from where it is this quarter even though the operating cost recovery rate is going to be some 300 basis points higher. Can you explain the interplay between that as well as your occupancy rate in your spreads? I'm just trying to rationalize how you get to that end result?

First of all the fluctuations in the recovery rate really deal with timing issues and it's nothing more than that. Our rental rate growth is a key component to our staying at the same property NOI growth as well as our contractual rent increases, so the combination of that. We are not seeing a huge increase in occupancy change but the predominant growth is coming out of rental rate growth as well as the bumps and steps in leases existing in the portfolio which amounts to approximately 25 percent of our total GLA.

Okay, so the increase as you go sequentially from first quarter to second quarter, the same-store NOI growth rate went from 1.6 to 3.2 even though the operating cost recovery rate came down. That would suggest as you raise that operating cost recovery rate over the second half to the full year guidance that your NOI growth, your same-store NOI growth, would be expanding further above 3 percent. And therefore full year would be somewhere around three or better. Is that --

If we felt comfortable with that we would have changed that number.

Okay.

Bruce, let me add one thing. I think one thing you have to factor in as we move through the rest of the year, what you are really seeing is a comparison of the prior year, so as we continue to add more quarters to our years you're going to see those cost recovery percentages come back in line with each other. And so it might be more of a factor as you are comparing to last year than it is in the current year.

What percentage of the total portfolio is in the same-store pool?

About 20 million square feet.

So that is about two-thirds, I guess. I've got another question regarding the summary of the valuation, the earnings in valuation guidance at the end of the supplemental. As we move from the end of the second quarter to the current guidance here, the guidance for disposition on operating properties went from from 100, to a range from 100 to 125 at a cap rate of 9 to 10, to a range of 250 to 275 and a tighter lower cap rate range of 9 to 9.5, and yet when we look at the per-share guidance that would imply that the gain on sales of operating properties would be higher. If you look at the per-share guidance what you are backing out for gain on sale on operating profits declined from 9 cents a share down to, I think it's 5 cents a share. Can you just explain how that works? It seems counterintuitive.

First of all, the 250 to 275 guidance for disposition of operating properties is really pre the announcement of an equity offering. Had we not done the equity offering we would have raised our disposition, as Hap we had talked about. If the equity offering is successful and we do price it tomorrow, in fact you will see that number come down by about 75 million, so that the disposition will be 175 to 200 million.

And then with regard to forecasting, we really don't forecast the loss or the gain on the sale of our operating properties. It is non-FFO. What that is is what we are aware of at this time, for those that are really under contract or that have already been sold.

The guidance, the per share guidance on 32, page 32, is not based on the same assumptions as what you have in the kind of summary of earnings guidance.

Correct. We'll be putting out a new, basically a new supplemental, which really just has the last two pages will be updated reflecting the equity offerings. So the per share -- the reconciliation of (indiscernible) guidance to net income will change as well as on the guidance, earnings and valuations guidance page, that one variable for the dispositions of operating properties will also change.

Another point, and this is kind of general, Hap it touches on some of the comments you made earlier, but cap rate trends, again if we look at what's been happening on a quarterly basis going back through 2001. Obviously cap rates on dispositions as well as yields on developments have been coming down for the company. We may or may not be at an inflection point here with increases in the ten-year interest rate. I wonder what your view is on the direction of yields on development going forward over the next year as well as cap rate trends on disposition?

On development yields we have been able to maintain yields in the range of 10 percent despite of the fact that (indiscernible) in effect acquisition yields for comparable A quality properties are in the 7 to 8.5 percent range. So we have been very, very pleased that we've been able to continue to maintain that and hope to be able -- and the pipeline indicates that we will. Obviously there is the potential for some type of compression of those yields but we haven't seen it to date, Jim.

Related to what the cap rates may be in our dispositions, as you know, we are -- we have stated that our plan is to sell approximately $100 million in operating properties a year which translates to about 10 percent of the portfolio. I think as I mentioned in my remarks we are going to -- we accelerated that last year. We are going to further accelerate at this year as part of this multifaceted approach to increasing our balance sheet strength. It kind of depends on what properties you are selling. We are typically selling in effect from the bottom of the portfolio and those cap rates have ranged from sub eight to above ten percent. We are not being, we are taking advantage of, we did last year and we will continue to this year as far as taking advantage of this very attractive, historically attractive sale market.

When we look again, if we look in the supplemental and we look at the summary of activity from 2001 through the second quarter of '03, the cap rates realized on dispositions as well as the yields on development, the trend for declining cap rates in yields, is really not representative of what you are hoping to achieve for the full year? So I mean for example if you look at NOI yields on net development costs, it has come down from 10.4 percent in '01 to 9.4 percent in the second quarter of '03, disposition cap rates gone from 9.6 down to just under 9 percent in the second quarter of '03.

I know that the guidance for the full year has higher numbers than those actuals that you have reported in the first and second quarter. But those trends would, obviously they have been favorable. Cap rates have been declining for us, most property types, and it has been very helpful for development sales program. It seems to me that if interest rates, if the ten year rate continues to rise, that cap rates on most real estate property types are going to rise as well. This presents kind of a risk that the development pipeline, if it is ultimately sold, may not realize this high a cap rate. That is kind of my point. Is your view is that it is not a concern.

I think that in affect what you are saying is the compression between a development return and cap rate in effect if financing costs go up and alternative forms of investment for real estate become more attractive which may push cap rates up, could reduce the margins somewhat. I think that is possible. But we still feel good about the development model, our overall business model. And also one of the reasons that we, if part of that plan is reducing that percentage of transaction profit as a percentage of RFFO (ph). Even with a move of 100 basis points in the ten year treasury Jim, we are still talking about long-term mortgage financing rates of less than six percent. These rates are still at historically low levels.

Sure, I realize, still attractive. Question as well, I guess to Mary Lou. In terms of same store sale trends, do you have any update from your tenant base?

Yes, we do. It still is pretty consistent. Soft goods is starting to improve a bit although that is a small percent of our portfolio. Grocery store sales continue to be off a percent or two. The whole food category is up almost 6 percent comp store sales, so that continues to be good. The service industry meaning dry cleaners, hair salons and that kind of category group, is up just slightly over last year.

So in the one area that is still difficult and again it doesn't affect our portfolio, (indiscernible) hard goods continues to be off substantially (technical difficulty) quarter. Overall, it's not a great time for retail sales. It is really why we are pursuing some of these mall tenants. Our growth has been in the restaurant service business in our centers and we really believe there's opportunities to bring some of these tenants into our centers.

Very good. I will yield to some other people.

Matt Ostrower of Morgan Stanley.

The swap that you guys took out, is that against -- the refinancing that you are using that for, is that refinancing a variable-rate debit or fixed-rate debt?

Fixed-rate debt, 7.4 percent. Maturity is April '04.

Okay. As I understand it, the impact of that swap would not currently be felt on the income statement, is that true?

That is true.

Okay. And then finally, just another detail. The NOI from your development assets, are those, is that NOI going through the income statement at this point?

Yes.

Thank you very much.

If there are not any further questions, we appreciate your participation and interest in Regency. Everybody have a wonderful afternoon. Thank you very much.

This concludes our conference for today. You may now disconnect.