Regency Centers Corp (REG) 2005 Q3 法說會逐字稿

Good morning, my name is Stacy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regency Centers Corporation’s Third Quarter 2005 Earnings Conference Call. This call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A session. [Operator Instructions.]

I would now like to turn the conference over to Lisa Palmer, SVP Capital Markets. Please go ahead, ma’am.

Thank you, Stacy. Good morning everyone. On the call this morning are Hap Stein, Chairman and CEO; Mary Lou Fiala, President and COO; Bruce Johnson, CFO; Chris Leavitt, SVP and Treasurer; and James Shelton, VP-Real Estate Accounting.

Before we start, I would like to address forward-looking statements that may be addressed on the call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes, and results may differ materially from those expressed in these forward-looking statements. Please refer to the documents filed by Regency with the SEC; specifically, the most recent reports on Forms 10-K and 10-Q, which identify important risk factors which could cause actual results to differ from those contained in these forward-looking statements.

I will now turn the call over to Bruce.

Thank you, Lisa, and welcome to Super Tuesday and the morning after. This morning I will highlight third quarter earnings. Mary Lou will discuss operating results, as well as elaborate on recent developments within the grocery industry and how they affect Regency. Hap will then follow up with a discussion of our development program, capital recycling activities, and Company strategy.

Regency had another great fourth quarter. FFO per share in the third quarter was $0.80, and $2.70 on a year-to-date basis, a 20% growth over last year. Clearly, a significant part of this growth has been driven by our expanded joint ventures and the significant amount of transaction-related fee income. Year-to-date, we’ve recognized $14 million in one-time fees. However, even without these fees our growth would still be nearly 10%. As a result, we generated significant free cash flow, up 57% year-to-date to $55 million, with an expected free cash flow of $70 million, or approximately $1.00 per share, for the full year.

Our balance sheet is in great shape, with over $800 million raised through property sales, the recent 10-year bond offering, and the sale of common and preferred shares. At quarter-end, our unsecured line of credit balance was $125 million, and our debt-to-assets ratio was approximately 40%. Additionally, fixed charge coverage has increased to 2.7 times year-to-date.

I’d like to pause for a moment and point out a slight change to the development schedule in the supplemental package. We are now showing our development yields before and after taking into account partner participation. Partnering with landowners, local developers, and even brokers has been an integral part of Regency’s development program. Rather than paying more for land or to the local developer up front, we try to share the value realized at the back-end. The bottom line is that Regency is still realizing returns after these partnership participations at close to 10%.

I’d also like to note that we remain on track to achieve our objectives. We’ve tightened our range of FFO per share guidance, expecting 2005 FFO per share to be in the range of 360 to 364, with a fourth quarter range of $0.90 to $0.94 per share.

I would also like to note a correction that we posted on the supplementary report on page 6 related to the disclosures of our pro-writer share of JV straight-line rent and market rent amortization. On a year-to-date basis, our correct share of straight-line rent should have been reported as $1.5 million versus the amount in the supplemental of $2.3 million. Our correct share of market rent amortization should have been reported as $2 million versus the amount in the supplemental $2.3 million.

I’ll now turn the call over to Mary Lou to discuss our operating portfolio. Mary Lou?

Thanks, Bruce, and good morning. The fundamentals of our operating portfolio are very strong across the entire country. Year-to-date same store NOI grew 3.2% and rent growth on a same space cash basis was over 10%. For the year, we have increased the upper end of the same store NOI growth guidance to 3% and raised rent growth guidance to 9 to 10.5%. Hap insists that I remind you that 2005 will be the 7th consecutive year in which the same property NOI growth has exceeded 2.5%. These upward changes are a reflection of the exceptional quality of our portfolio, a quality derived from the philosophy by which we run our business.

Every year we evaluate and grade each of our properties. We look at grocer sales, and trends are all considered. Whether it’s an Albertsons, a Winn Dixie, or a Publix, we look at the underlying value of the real estate, whether there is a viable replacement grocer or a tenant and whether or not we would want to own the center if something did happen to the grocer. When Albertsons announced that they are considering a sale of the company, we were not concerned because of our proactive valuation analysis.

Four of our 32 Albertson centers were already on the disposition list and we’ve recently added one more. The remaining 27 Albertson centers in our portfolio are good real estate and we wanted to own it long-term. Average income surrounding these centers is over 87,000 with this population. These stores average $400 per square foot, which works for any grocer. If we were to get these spaces back, the majority would have rental upside and would be released to another grocer, or in some cases, a strong regional big box user.

It should be noted that the majority of our stores are in Albertsons’ strongest markets, with 19 locations on the West Coast, 3 Acmes in Philly, and a new Shaws development in New Hampshire, and a couple of Jewels in Chicago. You may have also heard of Safeway’s closure of 26 underperforming stores in Texas. Regency did have 2 of those and both of those were in our JV.

I want to now turn to First Washington, where the portfolio has truly exceeded our expectations. Rental rate growth was 13.9% for the quarter. For the full calendar year, we’re expecting same store NOI growth from this portfolio in the high 3% range. In 2006, we anticipate same store NOI for First Washington portfolio to be in line with our original expectations in excess of 3%. Again, the quality of this portfolio is driving the outstanding performance.

We were able to showcase a few of the First Washington properties on our recent investor presentation tour in Washington, D.C. Those of you who attended saw firsthand Regency’s incredible growth in the mid-Atlantic. In a short time frame, we utilized 2 key corporate strategies – development and joint ventures – to profitably deploy over $1.7 billion of capital into an irreplaceable portfolio in a region with high barriers to entry. The attendees also experienced Regency’s underlying strength – the true talent and depth of all of our regional teams, Regency’s local sharpshooters.

I’ll now turn the call over to Hap.

Thank you, Mary Lou.

First, I’d like to comment on our development program that is generating attractive returns on invested capital. Five projects stabilized in the third quarter, representing net development costs of about $50 million and an impressive net operating income yield of over 11.5%. These properties were 97% leased.

We also started 9 new developments and redevelopments with an expected yield of 10% on an estimated $90 million of cost. With these new starts, Regency now has an over $550 million of invested capital and 33 in-process developments, which are expected to yield 9.8%.

At an exit cap rate of 6.5%, and I believe all these centers might sell at cap rates below that, the value creation on these developments is over $280 million. Also, I want to point out that the return is 9.8%, even after subtracting the nearly $200 million of developments, which have already stabilized so far this year at 11.3%. With the addition of the value from these developments, the value created from the 2005 in-process developments, would total $340 million.

Our development pipeline has never been stronger. In spite of the intense competition, continuing increases in construction cost, and the slowing growth of many of the supermarket chains, the shadow pipeline totals $1.4 billion, with an expected yield of nearly 10%. One of the key reasons for Regency’s ongoing success is the diversity of major retailers that are anchoring our developments. This year’s development starts and the high probability pipeline include 10 centers that will be anchored by a target – 7 by Publix; 5 by Kroger; and 4 by Wal-Mart.

As a result of this robust pipeline, we expect to have a productive fourth quarter. When combined with the over $100 million of developments that we’ve already started, the pipeline has encouraged us to raise the upper end of the development starts guidance for the year in the range of $300 to $400 million.

As part of our capital recycling strategy, we continue to capitalize on a current low-cap rate environment in demand for grocery-anchored shopping centers. Year-to-date, Regency has sold 15 properties for over $250 million. These assets sold at an average cap rate of approximately 7.4%, and that included a large asset sale on a pre-sale basis at an 8.5% cap rate. The funds are being redeployed into the development and joint venturing of better quality shopping centers at attractive returns on investor capital.

Let me now elaborate a little on the newly created position of CIO. I’m extremely excited about Brian Smith’s promotion to his new role. Brian’s promotion makes compelling sense, given the substantial growth and promising future prospects for Regency’s development and acquisition programs – together with Brian’s talents and impressive track record.

During the last 5 years, Regency Investment Group, which has grown to over 100 people, has acquired nearly $4 billion and completed a development of $1.7 billion of shopping centers. Brian is uniquely qualified to build on this momentum, the Company’s presence, and key markets and the excellent relationships that we have fostered with major retailers to lead Regency’s investment program to the next level. He is a gifted professional and an exceptional leader.

Many of you have had the opportunity to meet Brian and the top-notch team that he has built in the Pacific and mid-Atlantic regions. As CIO, Brian will be able to focus 100% of his efforts to managing and growing Regency’s development and investment business. His promotion will enable me to direct all of my energies leading Regency’s overall corporate strategy and actively working with Mary Lou, Bruce, Brian, and the entire organization to achieve Regency’s ambitious investment operating capital markets and financial objectives.

In summary, every facet of Regency’s business is strong, as the Company is hitting on all cylinders. At the same time, we realize that there are a number of factors that might change the direction of the favorable wins that have been at the back of the real estate industry in general and the shopping center business, in particular, and create a more challenging future environment.

Investor wariness of rising oil prices, higher interest rates, and the possible end of the housing boom seems to be reflected in the recent pullback in the pricing of REIT shares in general and the community retail sector, in particular. No one knows for sure how these events will unfold and what impact they will have on consumer spending in retailer expansion plans.

What I do know is that Regency is fortunate to have a deep and cycle-tested management team. The team is brilliantly executing Regency’s strategy, generating reliable growth in net operating income from a portfolio of exceptional quality through proactive management and capital recycling and creating substantial value from developments and joint ventures. I also believe that the rationale for Regency’s strategy becomes even more compelling in the face of the uncertainty that might play out in the economy and shopping center industry.

The successful implementation of Regency’s sound business model should translate into FFO per share growth in 2006 of 5 to 6% to a range of $3.78 to $3.85. Achieving this objective will be pretty gratifying considering it’s on top of the 13% growth that is expected to occur in 2005. As important, I expect Regency to sustain a future growth rate between 7 and 8%.

We appreciate your time and we’ll now answer any questions that you may have. We would ask that you limit on each time you’re up your questions to one question plus one follow-up. Thank you.

[Operator Instructions.] Matthew Ostrower, Morgan Stanley.

So, Hap, with having more time, the way that you do now, should we expect more in the way of large acquisition or M&A activity? I’m only half jokingly asking that question.

I didn’t hear your question, Matt.

Oh. The question is with more time, give me a sense, I’d love a better sense for what you are going to do with the extra time. Should we be expecting you to be looking at more in the way of larger strategic transactions as a result?

If strategic transactions make sense, we’ll take advantage of them. If they don’t make sense, we won’t. We’ve been fortunate to benefit from a number of strategic transactions in the last 5 or 6 years, and we would see that potentially another part -- continuing to grow our joint venture business and we want to continue to grow our development business. I think the key thing is we’ve got a very ambitious program in front of us. Number one, starting with our -- continuing to grow our portfolio, both in-house and with our joint ventures, continuing to grow that program. There is some fighting potential out there. And then continuing to take our development program up to the next level.

Okay, great. And then on the development side, each quarter you disclose what the expected yields are in aggregate for the pipeline as it stands today and that’s come down about 50 bips over the last, I guess, 9 months or so. How much further should we expect that to come down? And when you look at that on a sort of bigger picture basis, is there sort of a floor that you would tolerate in terms of development yields to make that business still viable?

Matt, just to reiterate, so far this year we stabilized $200 million of developments at yields in excess of 11%. So that’s had an impact on reducing the remaining pipeline, or the remaining in-process development yields, to 9.8%. So that’s number one. We’ve also mentioned that there are a lot of pressures on returns. Competition, the sellers today have very, very high expectations. Land costs are going up. And thirdly, construction costs, we’ve seen significant increase in construction costs. At the same time, as I mentioned, our pipeline of over $1 billion, returns are in the 10% range. Is it reasonable to expect development returns to continue -- I mean to come down into the 9’s? I think that’s a reasonable expectation. But even if that happens, we’re still creating substantial value for our shareholders. And there is a lot of room there.

Can I follow up to that?

Yes.

What if they go into the 8’s, I guess is my question?

In general, I would not expect our average yields to go into the 8’s. Is it possible that given the risk/reward equation on a potential investment, would we do it at a sub-9? The answer to that is yes. But do I see our average returns going below 9%? The answer is not today.

Andrew Rosivach, Credit Suisse First Boston.

I know I’m cheating because you are going to give more detailed guidance later, but for your’06 numbers, if we backed off some of the more variable range components, like the transaction profits, or the third-party fees, what would kind of your core growth rate be?

Number one, we would plan on giving more detailed guidance for ’06 in January. But it is important to note that the 5 to 6% growth is on top of transaction fees, which will come down pretty meaningfully in ’06 from ’05.

Right. What I’m guessing is, when that comes down, do you think you are going to have an overall non-fee growth rate of say 10?

If you recall, Andrew, last quarter we did give a little more detailed guidance on the third-party fee line item, saying that next year we would actually see a decrease in that line item. This year, the guidance is 27.5 to 28.5. And last quarter, we said that we expected that to be more in the low $20 million range. So we are actually going to see a negative impact on that line item next year.

Right. Okay, so I guess the answer to my question is going to be the core number will be higher than 5 to 6?

I guess a reasonable --

Working the numbers, I think that’s probably pretty close, Andrew, but I’d like to actually look at it specifically. I think the way to back end to that is again, as Lisa was using, look into the fee income that would be -- that we’ve given pretty good guidance on for next year.

And that’s, I mean, to go a little further on your reasonable assumption, if you would say the core number will be greater than that, I think that is a reasonable assumption if you include the JV’s, because you have to remember we did almost a $3 billion transaction this year that will have a full impact next year.

Michael Bilerman, Citigroup.

Bruce, you went over a correction in the supplemental on the pro rata share of straight-line income and below mark-to-market adjustment. Were the numbers for the third quarter, which totaled about $3.5 million, was that number correct?

Mike, I’ll take it because I have it right in front of me. The correct number for the third quarter only was about $851,000 for pro rata share at JV straight-line rental income. And the third quarter number for the above and below market rent amortization was $1.7 million.

And how much was that on a per share basis?

It’s $2.5 million, so I think it’s slightly over $0.03.

And so is it fair to assume then that there would be at least $0.12 embedded in your 2006 guidance for non-cash sources?

I think that -- I’ll let Bruce --

Michael, no. You need to remember that when you record FAS-141 adjustments, specifically related to above and below market rent amortization, those rents are amortizing based on the remaining terms of the leases that they relate to. So you can’t assume that the amount next year is equal to the amount this year. Generally, it runs off pretty quickly. In our case, it’s run off over, I believe, over a period of 3 to 3.5 years. The most significant portion is in 2005, even though it’s only a 7-month period. But we expect those numbers, and we’ll discuss that further next quarter, but those numbers will start running off pretty quickly as we move into ’06 and beyond.

Okay, and then just on the disposition program, I guess, based on your supplemental, looks like you have, call it $180 to $250 million of sales anticipated in the fourth quarter. Can you give us just a little bit of color on what sort of assets, markets, yields that you’re expecting on that sort of volume?

Michael, in terms of the yields, you’ll notice we really haven’t changed that guidance in our supplementals. So we still expect the dispositions for the year to average around 8% on a cap rate. And since I’m talking, I’ll just go ahead and handle the whole dispositions questions. In terms of, if you look at the list of assets that we’ve identified for sale, as we’ve always talked about, we take a look at what we believe may be high risk or low growth centers, and it’s really across all markets in the country. You’ll see it sell some assets in D.C., you’ll see it sell some additional assets in Texas, and then a handful in a couple other markets.

Well, as I mentioned, 4 of our disposition assets are Albertsons that we had identified earlier on that we felt were centers where their sales were not as strong, the incomes aren’t quite as strong as our overall average. And, as I mentioned, we added an additional one to that list. But the original Albertsons, the 4 were in our plan the whole time. It’s just the one that we’ve added.

Can I follow up to that, which is when are these sales going -- I mean, are you targeting most of it to happen late in the year or --

Late in the year.

Some of them could get pushed, Michael, into the first quarter of next year and that’s the reason why the guidance is pretty wide. But we have a good number of centers out there. Some of those centers are under contract. Still seem to be benefiting from a very favorable sales market. We would expect to close those centers by the first quarter of next year and then we’ll have a reasonably ambitious program for next year. Probably at a lower level than ’05.

A much lower level [voices overlap].

[Operator Instructions.] Craig Schmidt, Merrill Lynch.

In looking at same-store growth, it looks like the first quarter was 5%, the second was 2.8%, and then it’s 2.2%. I wonder why that continues to get squeezed, and it sounds like you’re still quite optimistic about the future of the same-store growth.

Yeah, we are. To be honest, Craig, some of this gets skewed by the fact that termination fees, and one, that you are up against big numbers, and it just so happens that in the third quarter, and you’ll see a little of this in fourth as well, that we were up against some larger termination fees than we were in the first half of the year. But I think the key is, as I mentioned, is that same-store growth, we’ve raised our guidance to 2.8 to 3%. We raised our rental rate growth guidance up to the high end of 10.5%. But from 9 to 10.5%. And our occupancy is higher and we raised the guidance on that. So if you look at the health of the portfolio, we’re going to have enough air, as we’ve said, and we’re very happy with the way the portfolio is performing. So it’s a really a timing issue and that’s it.

And barring something unforetold in the holiday season, would you expect to be in the same range going into ’06?

We’ll give guidance on that in January, Craig.

Matthew Ostrower, Morgan Stanley.

Mary Lou, you talked a little bit about what you thought Albertsons meant for your business, but can you put into a broader context, is it a symbol of anything for the overall grocery business?

You know, I’ve talked about this quite a bit, is that in terms of the national debt, we feel, in general, that there is going to be more consolidation I think in the industry. There is also an opportunity for us by having more specialty in strong regional grocers and other retailers. So I think from an Albertsons’ perspective, I wouldn’t predict how that’s going to play out. And I guess, somewhat selfishly, we just look at what does it mean to us? What it boils down to location, location, location and how strong is that real estate? What can you do with it? And we’ll wait and see what happens. There is a lot of speculation out there, but we’ll wait and see. And we look at it from our end and say are we comfortable owning these shopping centers whether they are an Albertsons or someone else?

Let me follow up on Mary Lou’s comments. I think the key point is it’s an acceleration of a trend where groceries -- supermarkets have strong franchises in markets, like Albertsons does in Chicago, like they do in Southern California, like they do with Shaws in New England, and Acme in the Philadelphia mid-Atlantic market. They are going to prosper. And where they don’t have strong franchises and strong market presence, they are going to fail. And you are seeing that.

And this is a -- whatever happens, where they are weaker, in some of the markets in Texas and Florida, there are going to be issues. But where they’ve got strong franchises, they are going to be able to -- they, or whoever the successor is, they are going to be able to compete. And I think you can just go across the national landscape and you can look at who the strong players are and the strong markets and those will be the survivors, along with Wal-Mart and some of the specialty grocery stores. And where they’re not, you are going to continue to see the shakeout.

You know, Matt, we looked at this, and as I mentioned, the sales in the Albertsons and the 27 that we intend to keep are over $400 a foot. And when you go back in time and you look at doing the same analysis as we’ve done for the past 5 or 6 years, grading our portfolio, and you stand back and look at the Winn Dixie portfolio, whereas we only ended up with a handful of Winn Dixies, in this case, we are so much more comfortable with the Albertsons real estate. And it goes back to what Hap said, they’re dominant in their markets and it’s inherently strong locations.

Michael Bilerman, Citigroup.

Just a follow-up on the ’06 guidance. For the transaction, and you can comment on the third-party commissions, but the transaction profits, net of tax, tends to be a pretty large number. It’s been basically flat the last 2 years. It’s fair to assume that that’s what embedded into your ’06 guidance?

Mike, as we said, we’ll give more specific guidance in January.

You know, Hap, 30% of your income comes from these fees, transaction profits, and it’s a big number. Obviously, you can construe your guidance different ways, depending on that piece of it. I would think that that’s one number that you’d want to get out there so that we can clearly understand the guidance.

We appreciate your comment there. We endeavor to be as transparent as we can, but in the past, and I think we’ll continue to do this, and we may do it sooner, but we typically give full-year guidance for the following year on our January call. And we’ll see if there needs to be a change to what we’ve done in the past in that regard. But we try to be as transparent as possible on a going forward basis. But, Mike, as we’ve indicated, we feel that all the elements are there to build on a 13% growth, where we did have some large one-time fees and still have a pretty darned good year in ’06.

And I don’t mean to harp on you and I think the transparency is very good. It’s just trying to put all the pieces together driving up to your number. And I guess we’ll find out in January what the assumptions behind it are.

Chris Capolongo, Deutsche Bank.

Just wonder what you’re seeing from your local and smaller tenants? How is business doing?

Surprisingly good. I mean, it continues to be strong. We’re seeing, across the board, our national people, which is the bulk of our portfolio, continuing to be strong. We’re seeing the categories of business. Soft goods continues to be strong; food continues to be strong. I mean, it’s amazing. And if we look at our AC, we’re at the lowest percent of revenues that we’ve ever been in, even with putting First Washington into that. So we’re pleasantly surprised. It’s good.

I’ll tell you, I think part of it has to do with our philosophy of truly having better incomes and the better anchors producing above average growth – sales per square foot and having this inlying tenants that play off each other. And what we see, and continue to see, that our move-outs are down and our receivables are low and overall their sales are good, so happy with the results. Don’t see any slowdown. I just left Atlanta ICMC and the activity was unbelievable and the opportunities, so we’re very pleased.

Knock on wood. We expect it to continue.

And that’s how it would manifest itself first to you, in the form of an AR issue, or would you start getting some more, I guess, grassroots complaints coming up the pipe?

You know, it’s a balance. You look at everything. You look at the numbers to see are there real issues and are there people behind on their payments. And you go at the ICMC and you sit down with all your retailers and work with them and see are their growth plans as strong as they were. And then you look at the Mom and Pops and some of those and see are you starting to see more complaints and a slowdown. So it’s an art to some extent, not necessarily a science, and you have to look at everything.

One of the key items we look at, Chris, is non-planned early move-outs.

It appears we have no further questions at this time. I’d like to turn the conference back over to our presenters for additional or closing remarks.

We appreciate you taking the time to join us on the call and look forward to seeing all, if not most of you, in Chicago. Everybody have a great day. Thank you.

And this does conclude today’s conference. We thank you for your participation and you may disconnect at this time.