Regency Centers Corp (REG) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Regency Centers Corporation fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I will now turn the conference over to Mr. Mike Mas, Senior Vice President of Capital Markets. Thank you, Mr. Mas; you may now begin.

Good morning, and welcome to Regency's fourth-quarter 2014 earnings conference call. Joining me today are: Hap Stein, our Chairman and CEO; Brian Smith, our President and COO; Lisa Palmer, our Chief Financial Officer; and Chris Leavitt, Senior Vice President and Treasurer.

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

We also request that callers observe a two-question limit during the Q&A portion of our call, in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue.

I will now turn the call over to Hap.

Thank you, Mike. Good morning, everyone, and thank you for joining us. Later on the call, Lisa and Brian will cover the exceptional results that Regency delivered in all facets of the Business in 2014. I would like to first take this opportunity to briefly review the extent of what Regency's team has accomplished over the last three years.

We increased percent leased in our operating portfolio by more than 200 basis points to nearly 96%, while rent growth grew 12%. We achieved same-property NOI growth of 4% for three straight years. This was driven by the combination of our high-quality portfolio, historically low levels of new supply, and robust tenant demand across our markets from anchors, small-shop retailers, and restaurants.

We completed the development of more than $500 million of high-quality shopping centers that are generating average returns of 8%. With the current spreads between our development yields and existing market cap rates, we continue to create value for our shareholders by capitalizing on this distinguishing core competency. We astutely managed our balance sheet that compares favorably to other REITs, with a net debt to EBITDA among the lowest in the sector. And in spite of the investments to enhance the balance sheet, we averaged nearly 6% annual core-FFO-per-share growth. These achievements translated into returns for shareholders approaching 90%, which represents a substantial outperformance of the shopping center peer average.

Even though I'm proud of these results and Regency's progress, I'm even more excited about Regency's future prospects. Brian, Lisa and I firmly believe that we will continue to distinguish Regency, and grow shareholder value, by persistently executing Regency's tried-and-true strategy of: first, sustaining superior NOI growth from a high-quality portfolio that is primarily grocery anchored. Second, developing and redeveloping great shopping centers at compelling spreads. Third, enhancing a strong balance sheet through organic earnings growth and cost-effective match funding. Finally, engaging and focusing a talented team that is employing best-in-class operating systems.

Lisa?

Thank you, Hap, and good morning, everyone. Our 2014 results were strong. In summary, core FFO per share was $2.82 for the year, representing an increase of more than 7%. Full-year same-property NOI growth, excluding termination fees, was 4%, including a net positive impact from redevelopments of 70 basis points. And as Hap said, this marks the third consecutive year of 4% NOI growth.

Importantly, base rent growth continues to be the largest contributing factor. The portfolio averaged 95% leased throughout the year, ending at 95.8%; and spaces less than 10,000 square feet gained 90 basis points year over year, ending the year at 91% leased.

As Hap said, we are proud of how we've enhanced an already strong balance sheet by taking measured steps to deleverage, and capitalizing on opportunities. Cost effectively maintaining a conservative balance sheet through organic earnings growth and match funding remains a critical component of our strategy. The forward equity offering we completed in January, together with our fourth-quarter ATM activity, is consistent with this strategy.

In terms of the forward sale, the amount of capital was committed to us at the share price on the offering date, and then we will draw down the proceeds, and issue the shares over the next 12 months, as the identified uses occur. As for the use, we closed two acquisitions in the last weeks of December, and are working to close an additional acquisition opportunity. We will also fund development spend throughout 2015, and address our unsecured bond maturity in August.

In addition to this forward sale, we also raised approximately $55 million through our ATM during the quarter. With respect to our earnings outlook for 2015, as noted in our press release in January, the offering has no impact on our previously released guidance for core FFO per share. The only impact is to acquisitions and dispositions.

Our updated acquisition guidance range of $0 to $80 million captures the potential opportunity, and we reduced the high end of the disposition guidance by $65 million; in essence, a $145-million net increase in capital required for 2015. And the offering is the funding source for this capital requirement.

Brian?

Thank you, Lisa, and good morning, everyone. I also want to express how pleased I am with the fourth-quarter and the 2014 operating results, and the continued strength of the portfolio. I'm proud of the 5.3% fourth-quarter same-property NOI growth. And I'm certainly proud of the full-year NOI growth of 4%, but especially for achieving it three years in a row, and also ending the year at 95.8% leased.

What we've accomplished in terms of development is equally gratifying. In 2014, we started $160 million of new ground-up projects, and completed nearly $100 million of high-quality shopping centers at close to 97% leased. These four completions had an average return on incremental costs approaching 10%. I introduced most of these development starts on prior calls, with the exception of our fourth-quarter start, the Village at La Floresta.

La Floresta will be an 87,000-square-foot Whole Foods-anchored center located in North Orange County, California. It boasts very strong local trade demographics, with average household incomes of $105,000, and population of 113,000. The project is already 75% leased and committed, and is projected to generate a spread of approximately 250 basis points above private market cap rates. The fresh look design, tenancy, and place-making features at La Floresta will clearly place it as one of the top neighborhood and community shopping centers in Orange County.

Despite the heightened competition, I expect our development capabilities and presence in target markets, as well as our relationships with key retailers, will enable us to continue to deliver an average of $150 million to $200 million of development and redevelopments annually.

In terms of fourth-quarter acquisition activity, as Lisa said, we acquired two properties in December. The first, Indian Springs, is an H-E-B-anchored center located in the Woodlands master planned community north of Houston. We've owned a 50% interest in this property for some time, and we acquired our partner's remaining interest this quarter for nearly $27 million.

Our second acquisition was Broadway Market; a mixed-use center located in the heart of Seattle. The center encompasses an entire block in Seattle's most densely populated neighborhood, Capitol Hill, which has a population of 223,000, and average annual incomes approaching $100,000. It has 111,000 square feet of retail, and 30 residential units, and it's anchored by Kroger's QFC banner, with very strong sales volumes. These acquisitions, together with those previously announced, as well as the developments we've completed and the properties that we sold during the last three years, have combined to enhance a portfolio that, by all measures, was already one of the best in the country.

I'd like to briefly comment on Albertson's purchase of Safeway, and the merger between Staples and Office Depot. As you know, Safeway and Albertson's are divesting 168 stores. Six of those stores are in our portfolio, and will be acquired by Haggen. One of the properties is in the Seattle market, where Haggen has strong brand recognition as a good operator. The other five properties are in southern California, where Haggen will be new to the market. In any event, the real estate is strong, and the leases are at very low rents.

The office supply sector's problems are nothing new. We have been evaluating the situation for some time, and have proactively worked to reduce our exposure. Today, we have 11 fewer office supply stores in the portfolio than we did in 2009. The remaining 17 stores represent less than 1% of base rent. More importantly, they are located in great centers, with 15 of the 17 internally graded as A properties. We think there will be significant demand for these boxes, given the very limited supply of quality, junior-anchor space on the market nationwide.

In any event, we have plenty of time to deal with the issue, as the merger will not be finalized until year end, and only three of the leases have terms that expire prior to 2017. Tenant store closings are part of the constantly evolving nature of retail, which our teams anticipate. We aggressively and proactively manage our portfolio, and whether we're dealing with chain-wide problems or simply want to upgrade the merchandising mix, we're way up in front of the issue.

In summary, it's been a great three years. While I'm certainly proud of what we've accomplished, I look forward to continuing our progress, and producing the results we desire and expect. The quality of our portfolio, our teams dogged ability to execute on our strategy, and the current market backdrop give me confidence the positive momentum will continue into 2015.

Hap?

Thank you, Brian. Thank you, Lisa. I'd like to close by reaffirming our focus on excelling in each facet of the Business. Growing earnings, NAV, and shareholder value, and distinguishing Regency among our peers and within the REIT sector.

We thank you for your time, and we'll now turn the call back over to the operator for Q&A.

(Operator Instructions)

Craig Schmidt, Bank of America.

The 2005 same store NOI midpoint of 3.5% is lower than the 4% in 2014 and the 5.3% in your fourth quarter. I just wonder what are some of the factors that are impacting you to guide to that slightly lower performance?

Craig, it's Lisa. I'll start and look to Brian to add any color. First, I think I'd be remiss if I didn't say how proud we were of the fact that we did achieve 4% for three consecutive years and remind you, even pointing to some of our prepared remarks, that our strategic goal is to sustain 3% plus NOI same property NOI growth. And when obviously, you know our sector well, even that's not necessarily going to be easy for everyone to achieve. But we believe that we will be able to sustain 3% NOI growth because of the quality of the portfolio as well as some of the redevelopment efforts that we're doing.

If you think about the components of growth over the last three years we have had some lift from increasing our percent leased, and then also narrowing the gap of percent leased to percent rent commits. We've had some of that and that contributed to our 2014 growth. And then looking at 2015, we'll still gain some from having more rent paying tenants. But clearly that is decelerating just from the fact that we're nearly 96% leased.

Craig, I guess I would add that there's a few things going. We have really strong base rent growth that we're forecasting. I think we will continue to see the kind of results that we've been turning over the last three years in that regard. We may be conservative right now at this point in terms of looking at prior year recoveries and we're showing some drag there. Time will tell if we can do better than that.

We certainly hope so. And then, we're up against some pretty big other income things last year like a payment from Kroger in Ohio and an easement that we sold out in California. We haven't identified anything specifically to replace those, so there's probably a little bit of conservatism until we have better clarity on those.

Finally, I'll pipe in and say, it would be really nice on this call next year to be able to say, 4%, four years in a row and the team is really focused on enabling Brian, Lisa and I to talk about that.

Sounds like you'll be going for the four-peat. One question just because you do have a broad focus geographically. I know your Houston exposure isn't all that great, but what are your expectations as the impact on oil on those shopping centers and are you hearing anything to date?

I don't think Craig, that the impact on us is going to be meaningful at all. First of all, the economy overall is very diversified. It's been white-hot. I think it's fair to say that there's got to be a deceleration, but Houston's a strong market. Texas is going to continue to grow. I think the impact's going to probably be greater on office and multi family.

If you just look at our portfolio, it's been established there for a long time. It's been very affluent areas. Our average household income in that portfolio is $140,000 and we're occupied greater than 98%. They're also mostly master plan communities with the Woodlands and Cinco Ranch and the like. So you got some protection. I think if we had some land that we closed on with the expectation of maybe some office mix-use it might be a different story but there's none of that going on.

Ross Nussbaum, UBS.

Jeremy Metz on for Ross. Thinking about the small shop side of it, can you talk about have you seen an increase in mom and pops looking to lease space? Or is it still largely national and regional tenants taking space? Then second part of that, your occupancy is now 91% for the small space. How much higher do you think you can push that and what's baked into guidance for 2015?

We haven't seen much difference. I'll tell you the leasing is still about 20% mom and pops. I think it's important that we identify what we mean by mom and pops. None of the retailers or restaurants that we're dealing with would be first time operators that just decide to open up a business.

These are people who have been in business. It may be that they have one, two, three stores and we're really big on frankly, having local operators. Because if you look at the whole millennials, what do you read in all the research is that they like new, they like fresh, they like authentic, they like local. And they can react, particularly the restaurants faster than the national chains.

So we do about 20% and some examples of the people that we deal with would be, that we call mom-and-pops, would be Lily Rain in Houston. This was the guy who started the Francesca's chain. Took it public and then decided to leave that and he opened up his first store at our Woodway Center in Houston. Out in California, this guy, Chicken Charlie, he was on ABC News. Used to get tremendous publicity and press because of his operation, which he ran out of a food truck. We opened him at Balboa and have lines out the door and the press is covering him now just because of the sensation.

In terms of where we are now, we're at 91%, I think we should be able to blow through 92%. Don't know exactly how high it goes but I would tell you our pipeline today is stronger than it has been in some time. It's about 50% of the remaining vacant spaces have activity going on right now whereas the last four quarters average is more like about 43%. I think it's going to keep going and I'm not sure how high it gets.

Jeremy, I would just add from just a pure mathematical standpoint, if you look at our percent leased for our anchors being nearly 99% leased and our guidance for 2015 of actually the high end of percent leased guidance being 96.5%, that obviously all will have to come from small shop space.

Okay. Appreciate that color. Second one for me, Lisa, with the debt coming due, obviously you have, I think, $250 million of that hedged. It looks like with the Ford equity offering, you're obviously choosing to use that method to pay down some of that or to bridge that gap versus using the term loan that you have existing. Some of the thinking there versus using the term loan given what the rate it's at, it's pretty cheap, cost of capital there?

Just to remind you that we did decrease our disposition guidance so the equity's going to fund some of our new investment as well. And then we do have a $350 million bond maturity in August that we've hedged basically $250 million of that.

The acquisition opportunity that we've also identified as a use for our forward equity actually has a mortgage on it. So we'll be assuming some debt, taxes more or less fungible. So the debt that we're assuming on that property in essence is what we're going to be applying that and paying down the bond if you will. So instead of refinancing at the full $350 million, we'll probably do somewhere between $250 million and $300 million.

Does that make sense?

Yes. Appreciate the color. Thanks.

Christy McElroy, Citi.

Brian, just wanted to follow up on Village at La Floresta. Can you discuss the competitive landscape of that location? It seems like there's a fair bit of grocery presence already, including two Sprouts nearby. And then just given the number of Whole Foods deals you have in the pipeline, can you talk a little bit about the extent of your partnership with them in regards to development in new locations?

Actually, what's interesting about La Floresta is I wouldn't call Sprouts a full-service gourmet grocery store. This is the only full-service gourmet grocery store in North Orange County. The nearest Whole Foods is 15 miles away. What we're finding is because they is such demand for that kind of use that we're literally getting our pick of the litter when it comes to the small shops. Which is one of the reasons why we emphasized in the introductory remarks the merchandising aspect of our fresh look approach to this.

Whole Foods, as you know, we did five new development starts with them this year. We have come a long way with them. If you look at the end of 2008 we had four Whole Foods in the portfolio. Today, we have 17 and we have a pipeline of another 11. That's a combination of development, redevelopment and the acquisition that's coming probably this next quarter or this quarter.

We just think the world of them. Anytime we have a Whole Foods you can guarantee that it's an area that has both high income and high education because those are the two most important criteria they look for. And those are the areas obviously, where you have the ability to grow household income and hence drive sales and drive rents.

Thanks for that.

Lisa, just a follow up on some of the questions on same store NOI guidance. Can you just remind me, does your same store NOI growth include the impact of redevelopment? And then just looking at the 3% to 4% forecast in the components, can you give us a sense for what leasing spreads could look like this year? Does your higher occupancy give you more pricing power or if you get up into that 96% plus occupancy range is that incremental leasing? That harder to lease space that you could see lower spreads on?

Brian's going to take the leasing spreads. I'll follow up with the same property.

The leasing spreads we expect would continue to be strong. The fundamentals are strong, we know there's no new supply, where there's tremendous demand out there. We also know that from our own experience that as soon as you get to 95% leased, you definitely have more pricing power, just pure supply demand. I think if you look at 2014, the difference between those centers that were over 95% and those that were under 95% have about 420 basis points difference in the rent growth spreads.

We're starting to get -- we got pricing power in almost all of our markets now. I mean if you look even at the markets that have lagged to date, that have maybe been a drag on rent growth, North Florida, Arizona, Sacramento and Central Valley, all of those markets are now at least 95% having enjoyed real strong occupancy gains. I think it's certainly, there's nothing that would make us less optimistic that we deemed double digit rent growth for next year.

On the same property we do include the impact of redevelopments for the quarter. It was 100 basis points and 70 basis points for the full year, positive.

Jay Carlington, Green Street Advisors.

Lisa, I think you mentioned the strength in the base rate component this quarter. So, curious what's driving that? Is that higher rent steps or redevelopment or are there any one time items in there?

I'll let Brian, basically nothing one time. It's percent basically effective rent paying or percent commence, whichever term you want to use. That's significantly increased, and then also just higher percent, just higher rent steps. What the team has been really focused on getting midterm rent steps, more contractual rent steps, at a higher rate and we've made a lot of progress towards that. I'll let Brian add some color.

Again, I view it as sort of well balanced. We had some other income, as I mentioned earlier. The rent steps Lisa just talked to were very strong. In the fourth -- the rent's set for 2% for all leases, versus 1.3% for the whole portfolio. I'm not sure if that answers it.

It's across the board. It's the underlying fundamentals of basically base rent growing.

And base rent obviously, also impacted just by the strong rental rate growth we've had over the past year, as well. That's all -- everything contributing to it and we expect that to continue into 2015.

Maybe switching gears. I know we haven't talked about your land bank in a while. I'm just kind of curious that $56 million in market value you have there, what do you think has happened to that value of that land over the last year? And maybe as a follow up what's left in that bucket?

I don't think it's necessarily increased in value. It's down from about $150 million a few years ago. Probably one of the biggest pieces in it was a project that we're starting out in Southern California. It was going to be a development with Target, Lowes and several others, had it all leased, and then the market went bad. I think it looks like we've got activity on that. We would like to see that sell this year. Kind of hoping that we reduce that by another $10 million in 2015.

Is that all allocated?

I'm sorry, Jay, let me clarify. You were talking about the expansion land that's adjacent to our properties that's on our guidance page or were you talking about land bank? Because they're different. We mark land to market every quarter. But not if it's adjacent to an operating property and it's not basically on the balance sheet separately.

So, all that $56 million or so, that's just it's out parcels and land next to your current --

Correct.

Mike Mueller, JPMorgan.

Looks like you have about six co-investment relationships. If you are looking out say the next 3 to 5 years, does that number stay static, does it go higher, does it go lower?

I would expect that it would stay static. We're really happy with our partners. As you know, Mike, that they were an important part of our growth when you look back 15 years and over the past more recent years they've stay pretty static.

As a percentage of our NOI that's involved in partnerships is incrementally come down and I think it will continue to come down. We're not looking to add any new institutional partnerships at this point.

Are they expanding? What portion of them are expanding versus --?

I think they'd like to expand and we did the Broadway acquisition up in Seattle with our partnership with the State of Oregon. Also remind everyone, that we have distributions in kind in all of our partnerships. So to the extent that those partnerships, we end those relationships, and there's no desire to do that, we've got great partners, we would end up with our pro rata share properties.

Jim Sullivan, Cowen and Company.

I wonder Hap, given that the new development pipeline has been expanding and it's expanding in many different markets. I wonder if you can remind us number one, what kind of a limit, if any, do you have or do you think about in terms of how much of your capital you want to be allocating to ground up new development, number one? And then number two, I think Christy alluded to it earlier, clearly Whole Foods is expanding. I wonder if you could just give us a feel for the ground up development with the grocer anchored centers, is it because of the anchors entering new markets or is it because of the anchors looking to just have a newer, better footprint in an existing market?

I will make a quick stab at the second part of that question and I think the answer is yes. They're looking for better footprints, better infill locations and sometimes new markets, but the anchors' focus has been more infill and that's been aligned with what our current focus is. From a capital allocation standpoint, we have established a guideline or a limit of two times EBITDA as far as our exposure including our future commitments to development. And that's a little bit under $900 million. That's something that ought to grow organically as in effect our balance sheet grows.

At this point in time we're less than half of that number. We're still looking to -- looking for opportunities. But there's not as many opportunities that meet our criteria as far as the opportunity to develop great shopping centers at compelling spreads. We do feel in spite of competitive landscape, I think as Brian indicated and I indicated in my remarks, we ought to be up to average $150 million to $200 million of new developments and redevelopments a year. We could do somewhat more than that if compelling opportunities that met the criteria were available.

Jim, while we're heavy on Publix this year we're certainly not limited to just them. I think it was reported in one of the news outlets that we're working on a Wegmans opportunity and that's real. We think the world of them. We've got Kroger concepts that we're working on.

So we're doing a lot of different grocers. In terms of where we're doing them, we have some where it's a grocer moving into a new market. Those would be like the Publix like we started at Willow Oaks in the Carolinas as Publix moved up into Charlotte.

But by and large, it's high barrier markets where it's tough to get stores going and I think La Floresta is an example of that. Whole Foods has been tried to get into North Orange County for a long time. They're certainly well represented in Orange County and in the whole Southern California area but it just takes time to do those.

Same thing with Belmont in Washington DC. That's a master planned community that's been in the works for many years. That was our only opportunity -- essentially, there will only be one grocery center in that development. Mostly it's infill in existing markets but every now and then we have something like the Publix deal to go into a new market.

Ki Bin Kim, SunTrust.

Could you talk a little bit about your G&A costs run rate from the fourth quarter? It looks like the growth G&A went up pretty measurably but also your capitalized portion of that went up which made your net G&A look pretty static. I'm just curious what the run rate looks like going into 2015 and if there's any reasons why those things changed during the quarter?

No. The G&A was higher in the fourth quarter as a portion of our incentive comp plan that's not finalized until the fourth quarter. We'll always see more in G&A in the fourth quarter, assuming that we have a incentive comps pay, more in the fourth quarter than in the prior quarters. We do accrue for some but not for all. And then our guidance for G&A that we provided in mid December was flat to up 3.5% and that remains unchanged.

But the capitalized portion, is it just a pro rata movement?

Again, the capitalized piece is the part of the incentive comp that we don't finalize until the fourth quarter is related to our development program. And so a lot of that happened in the fourth quarter was actually capitalizeable incentive comp. It's just a result of our increased development activity. We would expect going into 2015 that capitalized development costs will actually be down some. But still not as high as $16 million but say in the $12 million to $15 million range.

That incentive comp is paid based upon development performance on the backend once the properties are complete and leased up and that's just so you know, it's the field that earns that earns that, well earns that incentive compensation.

And that all gets factored into the development yields that you disclosed right?

Of course, yes.

Last quick one. What is the average cash rent step ups for your portfolio on average?

I'm sorry. I didn't hear the question.

What is the average cash rent step up that your portfolio generates in any given year? In bed to box.

You mean the midterm contractual rent steps?

Yes.

For the entire portfolio, our mid-year rent steps are 1.3%. Although as I mentioned earlier, we have really been focused on that part of the business for the last couple of years. And for 2014, all the leases we signed had an average of 2% rent bumps and we get it 87% of the time, which is a lot higher than historically has been the average.

Our objective is to take that 1.3% contribution to NOI growth up to 1.5% or 1.6%.

Got it and thanks for that disclosure on the redevelopment NOI and that's it for me. Thank you.

(Operator Instructions)

Tayo Okusanya, Jefferies.

My question is around the acquisition outlook. Just curious, again if there are opportunities to do transactions of decently large portfolios in markets that you want to get more of a presence in? Very similar to what you were trying to do with AmREIT, whether those opportunities exist either in the private or public markets.

There's a limited number of large portfolio opportunities and or one off opportunities that meet our criteria that have superior NOI growth. And just once again, when we buy a shopping center, we're going to finance it primarily or our go to financing is, is it sell shopping center at roughly comparable cap rates that has a much lower growth rate.

It's a very competitive market out there and not a lot that meet our criteria. But our team works very -- Brian's team works very diligently to find off market transactions and has had a decent amount of success for finding great centers with good upside.

Just one more question on the small shop side. If we just talk about any change in regards to demand for new types of tenant for that space or is it still the same group of people who have been seen in the past 12 to 18 months?

I think it's pretty much the same. When you talk about the retailers that are doing well, those are the ones that are looking to expand and that is a long list. But primarily I would say the common thread would be anything that's related to health. Whether that's restaurants, whether it's exercise places, athletic apparel, massages, those are really the ones that are in big demand. There's very few categories I'd say that where the retailers are struggling and aren't really looking and you know that list. It hasn't changed. Toys, office, tanning supplies, dry cleaners, books, other than that, it remains very vibrant across the board.

We have no further questions in queue at this time. I would now like to turn the conference back over to management.

We thank you. We appreciate your time and wish everybody a great Presidents' Day weekend. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.