Regency Centers Corp (REG) 2004 Q1 法說會逐字稿

Good morning, my name is Kimberly and I will be your conference facilitator today. At this time I would like to welcome everyone to Regency Centers Corporation's first quarter earnings conference call. (Caller instructions) Thank you, I would now like to turn the conference over to Miss Lisa Palmer. Ma'am, you may proceed.

Thank you Kimberly, and good morning. Before we start this morning I would like to read the Safe Harbor Statement, as every quarter. 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 will not guarantee the are not guarantees of future performance and involve certain known and unknown risks and uncertainties. These could cause actual results to differ materially 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, financial difficulties of tenants, competitive market conditions which includes pricing of acquisitions and sales of properties and out parcels. Also changes in expected leasing activities and market rents, timings of acquisitions, development starts, and sales of properties and out parcels, as well as weather, 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 website, www.regencycenters.com.

During this call management may refer to certain non-GAAP financial measures, which we believe to be meaningful when discussing results in the rate industry. Please see our supplemental information package on our website for reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.

On the call this morning are Hap Stein, Chairman and Chief Executive Officer, Mary Lou Fiala, President and Chief Operating Office, Bruce Johnson, CFO and Chris Leavitt, Senior Vice President and Treasurer. I will now turn the call over to Bruce.

Thank you Lisa and good morning. We started 2004 with another successful quarter. By every measure Regency continues to perform at a high level. The operating portfolio fundamentals remain very healthy. In-process developments are performing well and the pipeline for new developments is larger than it's ever been. Our balance sheet remains strong as we effectively execute our self-funding capital recycling and joint venture programs. As a result, we continue to create significant value for our shareholders and we are well positioned to achieve our goal of increasing our sustainable per share earnings growth rate.

FFO for the quarter was $0.68 per share, a 9.7% growth over the first quarter of last year. The sources of this $3.5m FFO growth were $1.2m from same property NOI, $2.3m from stabilizing developments and acquisitions NOI, $1.5m from net development profits and fees and $3.9m from net interest cost reductions, including the prior year impact for preferred stock issuance costs. This $8.9m positive impact was offset by a $3.6m loss in NOI from last year's disposition activity, which we reported on last quarter and a negative $1.8m impact from the increase in G&A.

G&A was $1.8m higher this quarter as a result of timing of a third pay-roll period in March that fell in April last year and also the result of higher incentive compensation accruals in 2004. We accrue incentive compensation in relation to revenues earned and profits realized. We had higher revenues, greater profits, and higher FFO growth this quarter compared to last year. We still expect G&A expenses to be in line with plan and in line with last year's quarter's guidance of $3-5m increase in G&A for the year.

As recently reported, other financial highlights include the extension of our credit facility and the sale of $150m of ten-year notes. In addition, our free cash flow grew by 48% to $6m. We expect pre-cash flow for the year to reach almost $50m. We are comfortable that FFO per share will be in the range of $0.67-$0.70 cents for the second quarter and are issuing the same guidance of $3.10 to $3.20 for the year. This guidance assumes an estimated $4.1m of issuance costs for the early redemption of preferred stock, which we expect to occur in September.

You will note that we have added a line for transactions and products net of taxes of $30-35m per year in our earnings and financial guidance page. This is equal to our old guidance from last quarter. This guidance includes our total profits from our development activity, which consists of profits from development and out parcel sales, net of taxes and dead deal costs. I will now turn the call over to Mary Lou to discuss our first quarter operating results, Mary Lou.

Thank you Bruce and good morning. As Bruce mentioned our operating portfolio fundamentals are extremely healthy. Our occupancy remained high at 95.4%. Same property NOI grew at 2.3% and rent growth on a same space cash basis was a solid 8.5%. We continued to achieve strong rent growth with no increases in spending for our tenant improvement dollars. In fact, our first quarter TI's were below expectations and below plan at a $1.49 per square foot.

Leasing demand also continues to be strong. We leased or renewed over 1.2 million square feet during the quarter and our renewal percentage was a very impressive 81%, which is much higher than our average. And our accounts receivable over 90 days, another key indicator of the health of our operating portfolio, is at an all time low of 0.7% of revenues. We are pleased to continue to see the results of leasing to the best in class retailers. We also believe that our strategy of partnering with leading grocers and investing in top markets with above average demographics continues to provide us with insulation from Wal-Mart and its battle with grocers for market share.

Additionally, Regency's aggressive and strategic dispositions over the past two years have called the portfolio in better position for us to face the challenges in our industry. Our results reflect this fact and our grocer sales confirm that our grocers are competing very successfully. Our 2003 grocer sales per stores within three miles of a Wal-Mart Super Center were nearly $23m or $409 per square foot. In fact in Dallas, which is absolutely the most competitive grocery market in which we operate and a market in which Wal-Mart holds the number one market share position, Regency's grocers within a three mile radius of a Wal-Mart Super Center averaged over $22.5m in sales and had more than a 4% comparative sales growth in 2003 versus 2002.

As we have said in the past, we know that our portfolio is absolutely not immune to the effects of Wal-Mart but we do believe that our focused strategy does make our portfolio more resistant and produces sustainable NOI growth.

I will now turn the call over to Hap for a closer look at our investment activity and capital recycling results as well as a recap of our outlook for the year. Hap?

Thank you, Mary Lou, and good morning to all. The theme of our 2003 annual report is proud heritage and promising future. As I was thinking about the call I reflected on what Regency has accomplished during the last five years. I want to share with you three accomplishments that really do stand out in my mind. I personally feel that these achievements are not only remarkable but also speak both to Regency's proud heritage and promising future.

The first is the sustainable growth in Regency's net operating income that has resulted from Regency's focused strategy that Mary Lou just articulated so well. During the last five years, occupancy has averaged 95% and has never been below 94.8%. Rental rate growth on a same space basis has averaged over 9% and never been less than 7.8%. High stable occupancies and state rental rates growth has combined together to produce same property growth and net operating income that has averaged an extra 3% and has never been less than 2.7%. And this has occurred during a time in which the shopping center industry has faced a recession, major bankruptcies like Kmart and unprecedented consolidation and retrenchment on the part of supermarket chains due to accelerated competition, especially from Wal-Mart.

The second accomplishment, of which I'm also extremely proud, is the amount of value that has been created from Regency's development program during this five-year period. Over $1.5b of developments have been started. The return on total invested capital of the almost $1b of developments that have been concluded is 10.6%. Which I think compares pretty darn favorably to the underwritten returns of 10.7% on an absolute basis and is also very attractive.

Profits from development sales exceeded $125m and this brings me to perhaps the most amazing accomplishment. Since the start of 1999 we have funded the $1.5b of new developments and over $300m of acquisitions in a manner that, I hope you'll agree, has been particularly cost-effective and as a matter of fact to make the picture complete, we ought to include the $200m of centers that we acquired for our JV partners.

What is remarkable to me is that as of March 31, 2004, we actually had fewer weighted average shares for FFO outstanding than we did on December 31, 1999. So since 1999, we have created a huge amount of value from developments, grown our portfolio, increasing GLA under management by more than 20%, while significantly upgrading the quality of the portfolio without any increase in equity.

Our promising future lies in our ability to continue to do more of the same. Successfully creating value through our development program and funding these developments and acquisitions with our capital recycling and joint venture strategies. Regency's exceptional development team leverages its local market presence and close relationships with leading anchors to continue the broad development program.

The 2004 pipeline of high and medium probability developments exceeds a billion dollars. To put this into perspective, at the end of 2003 the pipeline was $700m, and a year ago it was $600m. In spite of a tremendous amount of competition, retrenchment on the part of several supermarket anchors, the ever increasing challenges in the entitlement process and 10-15% increases in construction costs, Regency's pipeline of new developments is larger than it has ever been. I'm pleasantly surprised that returns appear to be holding in the 10% range. We expect to have a very productive year and anticipate achieving or exceeding our goal of $300m in development starts in 2004.

This quarter we continue to execute our recycling model and dispose of lower quality or higher risk properties. We sold five operating properties at an average cap rate of 9.7%, a relatively low or a cap rate that we're happy with any way considering that two of the properties had dark anchors: a Kroger in St. Louis and a Wal-Mart in a tertiary Alabama market, which also had a co-anchor at Winn Dixie.

Non-strategic assets sales and sales to joint venture partners fueled our capital recycling engine and enabled us to make acquisitions and to develop projects with beneficially priced capital. In April we acquired a Safeway anchored neighborhood center located in Braemar Village, a master plan community 30 miles west of Washington DC. We purchased the center at just below an 8% cap rate, which we feel is very attractive pricing in today's market. Additionally, we purchased an adjacent five acres and we intend to develop the additional parcel, which will further enhance our returns.

In the first quarter we completed five developments with total net development costs, at completion, of a little over $97m and an NOI yield on development costs of 10.3%. At quarter end we had 33 properties in process with an estimated total net investment at completion of nearly $500m. When completed, these projects should generate an unleveraged return on investment of 10-10.5%. They are currently 79% leased and committed and 61% funded and as you are aware, cap rates for these new developments would currently be in the 7-7.5% range.

We also anticipate significant growth in our joint ventures in 2004. You probably noticed that we increased our JV acquisitions guidance from $150m to $250m. We have several promising acquisitions in the pipeline that we expect to close in the third quarter. The accompanying lower cap rate guidance reflects the range of cap rates high-quality centers in today's market. As you know, we will be able to generate attractive returns on our invested capital since these acquisitions will be made through our joint venture vehicles. Also of note, just yesterday the State of Oregon committed an additional $100m of equity to our partnership.

In summary, our first quarter results are extremely gratifying. But more importantly, in spite of the obvious challenges to our business, we are confident that the key components of our strategy, quality properties, rent-generating, stable, sustainable, same property NOI growth and deploying free cash flow and recycled capital at attractive returns in Regency's developments and joint ventures will enable us to successfully implement our business model and accelerate the future FFO per share growth rate. We now welcome your questions.

(Caller instructions) Your first question comes from Michael Bilerman of Goldman, Sachs.

Morning, hi, this is actually Allie Widman [ph] here with Michael Bilerman. I have a couple of questions for you guys. At the end you were talking the JV pipeline and how you'd lowered your expectations for acquisition yields. Is that sort of indicative of a new type of yield threshold going forward?

I think that is indicative of a new yield threshold for our joint venture partners on a going forward basis. And once again, even at the low end of that guidance, of say 7%, with the fee income that we get, we're generating attractive returns on our capital between 9 and 10%.

Okay, but would you say for the core portfolio the threshold for acquisitions would probably still be above that?

Yes.

Okay and then in terms of your development pipeline, it looks you have accelerated some of your development progress, doing maybe more this quarter than you had anticipated as of the end of last quarter. It also seems that you've bumped up some stuff from the end of, actually from '05 into maybe the end of '04. So that seems to have come up but it seems like your overall guidance for the amount of development coming online in 2004 has remained relatively the same as last quarter. So I was just kind of wondering what was going on there with the timing of your developments.

This is Lisa. We just had a couple of projects that actually leased up very successfully, that were stabilized in the first quarter that were originally projected to stabilize in the second quarter. And as you said, the total amount of stabilizations actually for the year stayed pretty much the same. I think we might have had one additional projected stabilization for this year.

Your totals did stay the same?

Yes.

But it looks like '05 came down, a little bit then?

I mean, it matches our total pipeline. So, I mean, of the stabilizations for this quarter, it's possible that we actually stabilized -- well, I didn't look at it, but my assumption would be we stabilized more in the fourth quarter than we expected to. So the actual pipeline, in process pipeline, is smaller than when we were originally making our guidance.

Okay, thank you.

Thank you Allie.

Your next question comes from Craig Schmidt of Merrill Lynch.

I have a couple of questions. One, the disposition seems to be ahead of pace. I wondered, I mean I can see the guidance and where you plan to be, I'm just wondering, if there is a possibility they'd be a little higher than usual? And I guess to step away from that, a question being is the competitive environment accelerating your need to kind of cull the portfolio or is it not having any impact?

Obviously this is a very attractive market in which to be selling properties and we are diligently and pro-actively looking at the opportunities here. But it's up a little bit because of the increase in our active joint venture acquisition activities and it's to fund that.

Okay, and also on rent growth. I think you did the 8.5% this year, but the guidance is the 4% to 6%. Are you expecting the rent growth to come in the second, third and fourth quarter?

You know it's really difficult to project when you look at it on one quarter because it is that, it's just a quarter and it can be skewed. If you remember last year in first quarter, we were a little bit lower and then as we -- in second quarter we continued stronger and we upped our guidance. So at this point in time it's a conservative approach but I'm still comfortable in our 4-6% and if we see that the trend continues, we'll look at that.

Okay, thanks a lot.

Thanks Craig.

Your next question comes from William Acheson of Prudential Equity Group.

Thank you, good morning.

Good morning.

Good morning Bill.

Hi. I wanted to ask about the apparent change in the timing of development gains. It appears to be a fairly big shift from what I think most of us have been assuming from the second quarter. We had been looking for a more even spread of the gainsand the deficit number doesn't interest me as much as what the reasons were. I'm assuming construction delays were not a large factor. I'm thinking that the more likely cause could have been the change in the interest rate/financing environment and I was wondering if you could go into that in a little detail. Did prospective buyers have to go back to the drawing board, so to speak, because of the change in the environment?

Bill, this is Lisa again. Actually we've had never given any guidance on the second quarter. On the last, I think if you'd read last quarter's transcripts, Bruce did make a comment that the transaction profits in 2004 wouldn't be as back-end loaded. I think people may have interpreted that and took our guidance of $30-35m and basically spread it evenly through the last three quarters. We had nothing change in our plans for our second quarter. So, I mean the guidance that we've given is right in line with what our plan has always been.

And I will also say that we feel extremely good about our development profits. A significant portion of those are through our JV program and we're in the process of negotiating those sales. Some of the timing on those may occur in the second half of the year and some may occur next year. But the properties have all been identified that make up the range that we're talking about, plus some and a significant majority of those are either under contract or in negotiations. So we feel very comfortable with the guidance. The timing is going to be what timing is going to be. It is no reflection of the impact of interest rates or any other issues like that.

Okay. I take it you haven't heard any thing from buyers saying that they might not be able to pull the trigger a little bit quicker, that they have to go back to their financing source. There's nothing of that matter that's happened?

Not at all.

Not at all. I don't know if it's surprising or not but we've seen no slow down in people we've talked to in the interest and investing and real estate in general and specifically in this sector. There's just a tremendous amount of capital trying to get into the sector.

That's very interesting. There were no development sales in the first quarter, at least according to the copy of the supplement that I got. What generated the $400,000 in development gains? Was that land sales?

Those were final reconciliations of costs to complete of sales that occurred in the previous year. We always go through a final reconciliation with punch lists and contractors. We accrue our estimated costs when we close on a property, but we always have some follow-on costs and we generally are conservative. That results in some small gains as we flow into the next quarter.

Okay, truing up then. The first quarter gains on out parcel sales were the largest in over two years. What, if any, of this amount might have been discretionary to sort of offset the slower development sales base?

None of it, it's all related to when we sell the property. A lot of that is bank out parcel sales that we're selling, which is very active right now. That's just related to when everybody wants to close.

The only area that we really have some levels of control over is the timing on the development of sales to the contributions to the JV, joint ventures.

The one thing I would add is the demand for out parcels today, with the restaurants and the banks, that quite frankly the timing is a probably a little bit better than historical just because there is such high demand for users.

Okay, I wanted to make sure I understood on the G&A expense, the guidance was and you repeated it, $3 and 3.5m higher this year. But the first quarter rate looked a little bit lower than one would expect. Should we expect it to be higher due to the new offices, Sarbanes-Oxley, stock options in the final three quarters of the year?

More of that would be related, Bill, to how we recognize incentive compensation. Since our profits would be more back-end loaded, we'll recognize more incentive compensation on a back-end loaded basis as well.

Okay, that makes sense. Getting back to Craig's question on the spreads and it does seem like you're being conservative. I mean 8.5% in the first quarter, it pretty much implied 3 ¾ -4% lease spread rate for the last three quarters of the year, assuming no shift in volume. I would imagine that that's one of the lowest lease spreads you've ever had, if that in fact happened. It's sound pretty low.

I think what you have to do, because in all honesty, the way we do budgets, it's a bottom up budget, by property, by space and where our folks think where we're going to come in and I think that quite honestly the number to focus on is same store NOI, which our guidance has been 2-2/5%. We came in at 2.3% and today I'd tell you I feel very comfortable that we're going to be at the high-end of that range. So it is a conservative estimate and again as I said, if in fact we see this trend continuing, we'll re-look at that.

Thank you very much.

Thanks Bill.

Again, ladies and gentlemen if you would like to ask a question press star one on your telephone key pad.

Your next question comes from Susanne Sworkin [ph] of Morgan Stanley.

Morning, we just have two quick questions. First one is on the higher JV acquisition targets. Given that you increased your guidance for that, why wouldn't you increase your target third party fees? And does that just have to do with the timing of the transaction?

It's really timing. As Hap indicated in his comments, we're talking about third quarter and if you've figured out what it would be, it's a relatively small amount that would occur that quarter. And we have given a range in that category, as you know.

Okay and our last question is what was your non-real estate depreciation for the first quarter?

It generally runs at about $450,000 a quarter and I think that's what you'll see if you look backwards. That's consistent through each quarter in '03 and prior to that.

Okay, thank you very much.

Thanks Susanne.

Your next question comes from Ralph Block [ph] of Bay Isle Financial.

Hi, good morning. Getting back to the Cap rate question, I would guess a lot of veteran real estate people would assume that Cap rates will start moving back up, particularly if we get an increase in interest rates by a 100 basis points or whatever. I guess we're already somewhat there. What is your expectation for Cap rates over the course of 2004?

Ralph, that's a good question. I don't know that I have good answer for it. Number one, one thing to keep in mind is most of the Cap rates, or pretty much all the Cap rates, on all of our developments for sale for 2004 have already been negotiated. I can't think of a single asset that we are planning on contributing to a joint venture or for a development for sale that has not already been negotiated. So that's already set.

Secondly, my own view is, and based upon conversations I've had with other people, you asked a philosophical question and the answer is going to be worth what you're paying for it, is that the next 50-75 basis points rise in interest rates is going to see very little, if any, increase in Cap rates. You might see that's taking a 10-year Treasury to 5%. When the 10-year Treasury goes from 5-6% I think you'll see a modest increase in Cap rates.

Beyond that, I think the correlation will get a lot more sticky and I think the reason is just the attractiveness of real estate in general and shopping centers in particular to investors out there. I mean, to a certain extent, I'd almost say that it would be a better environment with Cap rates for us a little bit higher, but who knows? We're not operating our business depending upon Cap rates staying low or them moving higher.

That's very helpful. One other question, in terms of replenishing your development pipeline as you get towards the end of this year. Do you have any kind of a handle or perhaps a guess on what types of retailers are going to be most important to you in terms of development 12-18 months out?

No, as I mentioned on the call the pipeline, Ralph, has never been stronger. A year ago it was -- we rate every prospective development either high probability or medium probability. I'd say over 75% of the high probability deals typically have gotten done and maybe 50% of the medium probability deals have gotten done. A year ago that pipeline of high and medium probabilities were $600m. At the end of the year, end of 2003, there was $700m.

It's a billion dollars today, so the pipeline for future activity has never been stronger and that is in the face of a pretty significant slow-down on the part of most supermarket chains as far as opening new stores. Then you might ask, well, it's counter intuitive that your pipeline is larger. And I think what it is, is it's a real credit to the track record that our development team has that's out there in the field, that's in the markets, the relationships that we have and the market presence that we have and in the relationships that we have with the supermarket anchors and with other key anchors that are catalysts for shopping centers like Target.

Would there be a shift then in terms of your anchors, a little bit away from supermarkets and towards drug stores or other discounters?

We've continued to do a modest amount of drug store either build to suits for the last 10 years and we've done a growing amount, but a decent amount of Target anchored centers and we've even done some centers where we've developed peripheral property around a Wal-Mart location. But I'd still say that 75% of our centers are going to have a supermarket anchor in there, although they may be a co-anchor along with Target.

I would also just add in terms of the inline tenants, we had just recently a retail roundtable with our top retailers and non-competing businesses talking about their business and ask questions about would they prefer to be in a Wal-Mart, would they prefer to be in a new Regency development with a top mainstream grocer. And the answer pretty clearly across the board was some of them want to be in both. But the majority of them still feel that their customers are going to shop at the better mainstream grocers in the kind of developments that we're developing and the kind that are in our pipeline whether they're dual anchored with a Target and grocer or just grocery anchored.

Okay. Thank you very much.

Thank you Ralph.

Your next question comes from John Harold of Green Street Advisors.

Hey John.

Hi, how you doing? I was wondering if you could comment on some of these other dispositions and how they didn't fit into your long-term portfolio. Is it just that the JV partner wanted to get out on a couple of these or are is there something else that presents them as being high-risk or low-growth?

A couple of them were with small JV partnerships that we had with OTR and it was not a big enough relationship where it made sense, that's Ohio States Teachers, for Regency.

That's what drove the decision as opposed to --?

That was part of the reason for the decision but in both instances we had declining super market sales and weren't too terribly excited about the long-term prospects of the centers.

Okay.

And the centers may end up doing fine.

Yeah, well, it looks like they had, I mean, on the surface it looks like they have good occupancy and reasonably good anchors so I wasn't sure if there was -- you didn't like that particular market or that particular center was…

In one case we liked the market a lot but that market was extremely competitive and the supermarket sales were trending downward even though it was a strong supermarket anchor. And the other one kind of the same story, plus the sales were not real strong on the part of the supermarket.

Okay and then on your Braemar acquisition. Was that a competitive process? Did you guys have an inside track on that? How did that one come about?

It's interesting, I think built this about, almost a year ago, nine months ago. We were the bridesmaids and happened to be sticking around the area and we closed on it quickly, but we put our money at risk very, very quickly. Obliviously our timing was good, because since that acquisition, I think Cap rates in that market have moved 50 to 100 BP.

Okay, and then I wasn't clear on the -- you mentioned or your guidance showed the increase in the JV acquisitions. Does that already reflect this $100m of new money from the State of Oregon that came in yesterday? it is that what it reflects or is that -- what should we add that in?

Let me clarify. What Oregon approved yesterday was $50m in addition to a prior $50m they'd approved within the last 60 days. But as of yesterday the total was $100m of new capital and there are some properties that are in the pipeline, none of which would be related to some of that capital.

We would expect to deploy that capital, my guess, in the next 18 months to two years, awfully soon.

Okay, thank you.

Thanks John.

Again, if you would like to ask a question please press star one on your telephone key pad now.

If there are no further questions, then we really appreciate your interest in Regency and thank you for joining us on the call. Everybody have a great day.

Ladies and gentlemen this concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.