Regency Centers Corp (REG) 2015 Q1 法說會逐字稿

Greetings and welcome to the Regency Centers Corporation first-quarter 2015 earnings conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Mas, Senior Vice President of Capital Markets. Thank you, Mr. Mas. You may begin.

Good morning, and welcome to Regency's first-quarter 2015 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 would like to point out two additional disclosure items in our supplement. First, the added disclosure of the impact of redevelopment on same property NOI growth, on pages 7 and 11. And second, an added reconciliation of net income to AFFO on page 10. Because AFFO definitions can differ, our intent is to highlight for our shareholders certain non-cash income and expense items, as well as capital expenditures.

I'd also 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 question and answer portion of our call in order to give everyone a chance to participate. If you have additional questions, please rejoining the queue.

I will now turn the call over to Hap.

Thank you, Mike. Good morning, everyone and thank you for joining us. We had another really good quarter and the results speak for themselves. So I'll be brief before passing you along to Lisa and to Brian.

The combination of successful execution of the four main components of our strategy will continue to distinguish Regency. First, our high-quality portfolio is well positioned to sustain superior NOI growth. This is supported by another strong quarter of operating results, including NOI growth that exceeded 4% and follows three full years at this level. Second, we're making progress on a visible pipeline that supports our ability to deliver $100 million to $200 million of development and redevelopment starts and deliveries in 2015 and in future years. In a few minutes, Brian will share with you more details on our efforts to create great shopping centers and compelling value.

Third, our balance sheet remain strong. And as Lisa will discuss, we're astutely enhancing it through organic earnings growth, cost-effective match funding and opportunistic capital markets activity. And most importantly our talented team remains highly engaged, with developing and employing best-in-class operating systems and continues to successfully execute this strategy. That said, we understand this is a marathon and gold medals are not handed out for short-term results. I have no doubt that Regency's exceptional team will continue to differentiate our Company with high levels of performance in each of the key aspects of our strategy, delivered consistently over extended periods of time.

Lisa will now walk you through our results.

Thank you, Hap, and good morning, everyone.

Our first-quarter results were very strong. Core FFO per share was $0.74, representing an increase of more than 7% over the first quarter of 2015. Same property NOI growth excluding termination fees was 4.4%, which includes a net positive impact from redevelopment of 120 basis points. Although we benefited from moveout levels that were lower than we typically experience in the first quarter of the year and also better than expected percentage rent, base rent growth of 4.2%, driven by last year's robust leasing and double-digit rent spreads continues to be the largest contributing factor to same property NOI growth.

The low moveout volumes in the first quarter, along with the additional percentage rent, will have a positive impact on full-year results, allowing us to raise the low end of our guidance ranges for same property NOI growth by 20 basis points and Core FFO per share by $0.02. With respect to G&A, our first quarter is moderately higher than the projected remaining quarterly run rate. Development and leasing capitalization are expected to increase modestly through the year as leasing activity and development starts increase, providing a quarterly net G&A run rate closer to $15 million over the remaining three quarters. We continue to expect that we'll finish the year within the original range provided of $60 million to $63.5 million.

As Hap said, maintaining and further enhancing Regency's conservative balance sheet is a critical component of our strategy. We'll rely heavily on organic earnings growth as we generate results like we have over the past several quarters. We'll also continued to match fund our new investments, with the primary source of capital for development and acquisitions being the sale of lower growth properties. And importantly, when matching an acquisition, the disposition will have a comparable cap rate as the acquisition, but a lower growth profile. Also, when the use and pricing make compelling sense, we will opportunistically use equity as a funding source, like we did with the forward offering completed in January.

As a reminder, the forward structure allows us to draw down proceeds and issue the shares through the end of the year at the per share closing price on the offering date of $67.40. We expect one of the identified uses for the equity offering, which is the acquisition of University Commons in Boca Raton, Florida, to close in the third quarter. We will draw down the necessary proceeds at that time, effectively matching our capital needs with the funding source from both a cost and timing perspective. We will also settle a piece of the forward offering to address a portion of our unsecured bond maturity in August and to fund development spend throughout 2015.

Brian?

Thank you, Lisa. Good morning, everyone.

Our portfolio is performing better than ever, which is apparent in our consistently strong results. We continue to focus on leasing to high-performing grocery anchors, best-in-class operators and unique restaurants and retailers that differentiate and activate our shopping centers. And in doing so expand our trade areas and increased shopper traffic.

Our centers are located on great corners in affluent suburbs and infiltrate areas with substantial purchasing power and barriers to entry. This combination provide sustainable, competitive advantages that allow us to capitalize on landlord-favored market and leverage the high-quality real estate in our portfolio. This portfolio strength is demonstrated by our same property NOI growth that once again exceeded 4%. The health of our tenant base is evident in percentage rent that surpassed expectations, due to higher than forecasted sales volumes. It's also apparent in our rent growth, which has approached or exceeded double digits for some time now. This quarter, rent growth on new leases was nearly 30%, coming entirely from shop space.

Another indication of our portfolio strength and tenant health is a low level of moveouts, which were well below our expectations for the first quarter and have trended at low levels for the past four quarters. In fact, as a percentage of occupied space, this was the lowest quarter of moveouts that we have on record, which is particularly noteworthy, given the typical seasonality of higher moveouts in the first quarter of the year. As Lisa said, this will have a positive impact on earnings, which allows us to improve our outlook for the remainder of the year.

I'm also pleased with the strides that our industry staff development team is making on our pipeline, which gives me confidence in our ability to meet our development and redevelopment goals. Although [ground up] starts this year will be back-end loaded, for each of the projects we expect to start, we either control or own the land with signed leases where we have firm commitments from the anchors. As we've said on prior calls, the success of Regency's development program is occurring despite the dramatically lower level of new shopping center development starts and our own stringent criteria and disciplined focus.

Persimmon Place is a prime example of exceptional quality, performance and compelling spreads of our in-process developments and redevelopments, which totalled $300 million. The Whole Foods anchored center that is yet to open is already 96% leased and committed. Unique to this Whole Foods offering will be a wine tasting and tap room, a noodle bar and a build-your-own-pizza venue. Adjacent to Whole Foods, Persimmon will feature a large outdoor plaza area that will accommodate live performances and connect the center to the community.

These place-making enhancements, along with our lineup of fresh-look tenants capture the theme of our center, which plays to the Bay Area food and wine culture. Specifically Sur La [Table] will bring a unique culinary offering, along with two new and exciting restaurant concepts, Urban Plates and Pacific Catch. The projected return of 7.5% represents a spread of approximately 300 basis points above the cap rate at which we could purchase this irreplaceable shopping center. In closing, I'm extremely pleased with this quarter's results and excited about the team's focus and how well Regency is positioned for the future.

Thank you for listening. We will now turn the call over to the operator for question and answer.

Thank you. We will now be conducting a question and answer session.

(Operator Instructions)

One moment please while we pull for questions. Jeff Donnelly, Wells Fargo.

Good morning, folks. Thank you for the additional disclosure around the redevelopment contribution to NOI. Can you tell us what's embedded in your 2015 NOI guidance from the redevelopment contribution?

I can't give you an exact number. I can give you a range. When you think about what we expect to do on an ongoing basis, a target of somewhere between $30 million and $50 million of redevelopment annually, it will -- that should add with our disclose returns of 7% to 10% -- that should add somewhere in the range of 50 to 100 basis points annually to our growth rate. And then in 2015, we're on the higher end of that.

Maybe just a follow-up. It might be a two-parter. The last call, I think you guys were talking about having a 92% objective for occupancy in your small shop leasing. It pulled back in the quarter. I suspect it was seasonal step back. Are you guys still confident in that objective? I noticed the same thing with your leasing spreads are a little lower. Is it just a one-time blip that's more seasonal? Just curious what your take was.

Yes, Jeff. It is seasonal. We lost as you know ten basis points in the total occupancy. And we usually for the first quarter, we lose about 24 basis points. So less than half of what we usually lose in the first quarter.

In the small shops, we lost 30 basis points. And that's also about half of what we normally lose in the first quarter. So we're not worried about the leasing. It's actually very strong. We've got lots of demand. Our pipeline is right where it's been in other quarters, last quarter rolling's average. It all looks good.

And I would add that, Jeff, if you look back this season, first quarter 2015 over first quarter 2014, we actually did more leasing transactions in the first quarter of this year than we did last year. It was primarily in the small shop space. So that actual square footage was just a little bit lower, like 70,000 square feet lower. And then also our new lease rent growth for the quarter, 4 spaces vacant less than 12 months, is close to 30%, so that did not decelerate.

Okay. Great. Thank you.

Thank you, Jeff.

Craig Schmidt, Bank of America.

Thank you. Where do you guys expect cap rates for opener centers to trend? Do you think they'll further compress in 2015? Or what do you see going forward?

You know, Craig, we haven't been very good about predicting that. I wish I had the [patience] to do it. What's happening right now is after been steady, what I would say for the last while, last several quarters, at 5%. I think would be continued influx of private capital, particularly foreign capital, we're seeing those cap rates go down. I'd say the average now is easily 4.75%, 4.75% to 5%, depending on growth. And IRR's now dipping below 6.5%.

There's a couple of transactions that are out there right now. Both give good examples. They're both very expensive. One was over $100 million. The other one in the $90 million range. And those look like they're going to be going in the mid 4%s, and the IRR's going to be down in the low 6%s. It's just very competitive out there.

From our perspective, once again, as Lisa alluded to, our strategy, anything we're going to be buying is going to be match funded. So if we happen to be buying a lower cap rate deal, we're going to be selling a lower cap rate center. But the center that we're selling is going to have a much lower growth profile and upside prospects than what we're going to be buying.

Okay. And this is more of an industry-wide question than just a focus on Regency. What you see as the biggest impediments to seeing an increasing ground-up development in the strip category?

Well, there's several things that are making it really tough. First of all, for the short-term, the grocery pipelines are pretty full. There's a lot of overhang out there. If you look at Chicago, you've still got 29 vacant Dominick's. I think on the West Coast, you still have concerns on the part of grocers. Not concerns, but there may be opportunities to pick up some Haggens.

So I think unless you have a really, really good grocery anchor opportunity for the grocers, they're not going to go for it, which I think is healthy for the industry. And I think when you look at the projects that we're doing, it makes you feel better about them. I think just the areas that we're looking, where the retailers are looking, they're still focused on the infill, the denser, closed-end locations, and those are just very, very difficult to do. I think you got to have a lot of capital to do it. Nobody seems to be venturing out into the emerging areas. And land prices continue in those areas to get higher. For example at La Floresta, if that were to come on the market today, I think the land price would be more than double what we paid for it, and the returns would probably closer to 6% than where we're at in Persimmons.

And that's our Whole Foods center in Northern Orange County.

Okay. Thank you.

Thank you, Craig.

Christine McElroy, Citi.

Hello. Good morning. Just wanted to follow up on Jeff's question on small shop occupancy. I think last year, just a clarification -- last year, you thought about a 200 basis point move higher from trough in Q1 to peak in Q4 in that lease rate. So I'm wondering, given that you had the lower moveouts in Q1, what your expectations are for that small shop lease trajectory for 2015? You didn't change your overall occupancy forecast for year-end, but does that Q1 activity give you more confidence in the higher end of the range at this point?

I think at least in terms of where we think small shop occupancy can go, I don't think we've changed our opinion on that at all. I think we can get to 92%. I think we can get about that. As I mentioned, Christy, the demand is definitely still there. The biggest thing that's been holding us back, frankly besides first quarter, is just a lack of moveouts. I mean it helps our occupancy, but it doesn't help us with new leasing. So I think we can continue to get there with the demand we're experiencing. It's a question of how high it goes.

And when you get there.

Okay. And regarding Juanita Tate Marketplace. I'm wondering, can you discuss the nature of that sale and the pre-negotiated yields? Will that $7 million gain on the sale in Q2 flow-through FFO in the second quarter, since it was recently completed or will that be considered an operating property?

I'll handle with the first part and then let Lisa handled the second part of that quick question, Christy. But since history's really relevant here on Juanita Tate. That deal literally started 21 years ago, when I was at a prior company. There is a local nonprofit community organization called Concerned Citizens for South Central Los Angeles, and they very much needed and wanted to have a grocery-anchored neighborhood center in their community. There was nothing around. There was no fresh food offerings, so they had no idea how to do it. They had this land under contract, and so I worked with them for a couple of years to show them the development process, try to help them get through it.

When I moved over to Regency, our predecessor company two or three years later, it was just clear they weren't going to be able to get through this, so we took the project on ourselves. But the area back then, 20 years ago, was nowhere near the area it is today. It has evolved into a much better area. And frankly the concern back then was once we developed it, we knew it would be successful. The demand was huge and the supply of competing centers didn't exist. But we were frankly concerned about the safety of our property managers going to the property. So, the only way at that time we were interested in doing this is if we had a commitment to sell it up front.

Concerned Citizens of South Central Los Angeles always wanted to be part of the project. They always wanted to maintain ownership of the end of the day, so we negotiated this. And at that time, the development returns were in the neighborhood of 12.5% and we negotiated about a 25% profit margin. I think it was 10% cap presale that we negotiated. It obviously took far longer than anybody could imagine, just a difficulty of developing in real urban areas.

And so what we did is we continued to adjust the spread, to maintain pretty much the profit margin. But we would love today to own this. I mean, if we were starting all over, this would be a property we would want to own. Frankly we were hoping that the deal would fallout, but we gave our word. We had a commitment to this nonprofit and we're honoring it.

And it certainly doesn't represent a change in strategy to merchant development.

With regards to whether it was in or out of FFO, in the spirit of trying to adhere even more closely to NAREIT defined, it will not be part of FFO. So, we will not be including any gains on sale of properties.

Okay. Thank you.

Jay Carlington, Green Street Advisors.

Hey. Good morning. Just to follow up on that. If it was pre-negotiated, why wasn't it disclosed?

While I think you never knew for sure if it was going to happen. Concerned Citizens themselves does not have any financial strength, so they had to partner up with somebody for the long-term ownership in the purchase of it. And one of the grants, the Section 104 grant had to be approved by the redevelopment agency to transfer to the new buyer. So it was unclear whether that was going to happen. As I said, we were kind of hoping it would fallout. It was just too low level of certainty.

Okay. Just switching gears here. So I guess granted your one disposition this quarter was extremely small. But looking at that at a 9% cap, and you take into account Juanita Tate and Auburn Village at, call it a low 7% and mid 6%s. You're looking at blended cap rate of low 7%s or high 6%s on those sales. How do we think about that, in the context of matched funding with University Commons at a 5% cap?

I'll gladly take that question. First, we didn't change our disposition guidance. So our guidance cap rate is still 6.5% to 7%, number one. Number two, as I said in my prepared remarks, and hopefully we've been communicating for the past -- I don't know how many -- four to eight quarters to the match funding strategy. The disposition of those lower -- when you think of the Regency's quality, Regency's lower quality may not be lower quality to all, but Regency's lower quality shopping centers.

That's funding our developments, so 6.5% to 7% cap rate on those dispositions basically are funding our developments where our returns are higher than that. So that's a positive spread. University Commons, we would match fund that with the sale of a more comparable cap rate property. In this case, we actually match funded that with equity. So that's not in our disposition guidance because we're going to drawdown on our forward equity to fund that acquisition.

Okay. That makes sense. And just to double check on the guidance, the redevelopment development spend. Is it still 25% on redev and the rest on development?

I'm not certain that we've actually given that guidance. You mean just the spend or the starts?

Just the dollar amount on the spending guidance that you've given. I think it's been mentioned on the last call that roughly 25% of that would be redevelopment, but maybe that's not the case.

Yes. It might be a little north of that.

Okay. Thank you.

Thank you, Jay.

Thank you.

(Operator Instructions)

Vineet Khanna, Capital One Securities.

Okay, Bev. Thank you for taking my questions. Just first on the active development pipeline. It was stable, quarter-over-quarter. How is the shadow development pipeline trending?

Well, as we mentioned in the prepared remarks, it's going to be back-end loaded. We expect that we're going to do $100 million to $200 million. Of those, probably $70 million is going to be redevelopments and we feel very good about those. In order to get the guidance, we've got to do ground-up developments of between $30 million and $130 million. We're working on nine projects that could happen in 2015. I think some of those look real promising, and they total $140 million. So we clearly have the properties and the opportunities.

The real challenge is not, will they happen so much, but the timing on these. And the reason for that is we've got some that are mixed-use. We're dependent upon the multifamily or other use. Some of them are part of a master plan community, where the developer has to perform certain responsibilities and request a rezone. And the final one, we're actually dependent on what happens on adjacent parcels. So everything, as I said, it feels real good. It's just a question of timing. We hope that they all come in the fourth quarter and that is my expectation.

That was helpful. With regards to leasing in the quarter, I know there is some seasonality there, but can you talk about the renewal ratio as a percentage of overall expirations? And how that was overall? What's for anchors and small shop?

The renewal rate was over 75% in total, which is higher than average. The shop setting, we're 66% and that's about average. And the anchors, we're almost 90%.

Okay. Great. Thank you for taking my questions.

Thank you, Dennis.

Jim Sullivan, Cowen Group.

Sure, good morning. Thank you. Hap, I'm curious. We've been seeing more grocers take space in the past few years in both power centers, as well as open more stores in mixed-use urban locations. Given your very strong relationships with grocers, how aggressive will you be at considering either of these alternatives for future grocer unit growth? And which is your preferred focus of the two? And when I say preferred focus, I'm not thinking in terms of power centers. Not thinking so much about ground-up development but rather potentially value-added acquisitions, given the impact that putting a grocer in a power center can have on the value of the property.

Jim, I think that value-added acquisition opportunities is next to redevelopments, because they ultimately become redevelopments, would be investment priority one. So that's where we're foc -- that's our primary focus on those that we think are going to make sense and have upside potential. We're also expanding our net to include mixed-use projects that make sense. Not necessarily the urban, dense urban vertical developments, but primary focus on horizontal and somewhat on the near urban, with some amount of verticality to that.

So just for example, the standalone grocer that we're seeing go into some of the urban locations, where it's just a grocer. That kind of development is less appealing?

That is less appealing. We'd like to have -- we're looking at an opportunity where we're on the ground floor with a grocer. And then on an adjacent building, we have an opportunity to purchase the ground floor, which will give us an opportunity to have and include shop space, retailers and restaurants. And that's more our cup of tea, where we think we can really add value on the site shop space next to a strong grocer. And also have all the activity around and all the daytime population from around the vertical development that either adjacent to or part of the development.

Okay. Great. Thank you.

Thank you, Jim.

Michael Mueller, JPMorgan.

Yes, hello. Looking at the 2015 development start guidance, the range in the upper end of the yield expectation looks like it moved up a little bit. I was wondering if you could just talk about that. Is it just one project or some view that yields could be a little higher, going forward?

Yes, Mike. This is Mike Mas. I apologize for that. That was a -- we -- the guidance from last quarter for -- was actually 7% to 8.5%. I think the email that you probably received our supplement from included a 7% to 8% range. And it was corrected within two minutes of that distribution, so there has been a change to our expectations on yields.

Okay. Thank you.

Thank you, Mike.

Thank you, Mike.

There appear to be no further questions at this time. I'd like to turn the floor back over to management for closing comments.

We appreciate your taking the time on the call and your interest in Regency. And wish you have a great rest of the week and a great weekend. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.