Regency Centers Corp (REG) 2015 Q2 法說會逐字稿

Greetings, and welcome to the Regency Centers Corporation second quarter 2015 earnings call.

(Operator Instructions)

As reminder, this conference is being recorded. I would now like to turn the conversation over to your host, Mr. Mike Mas, Senior Vice President Capital Markets. Thank you Mr. Mas, you may now begin.

Good morning, and welcome to Regency's second 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 begin, I would 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.

Thanks, Mike. Good morning, everyone, and thank you for joining us. Regency's team continues to produce impressive results in each key facet of our business. Our portfolio is performing at high level, as demonstrated by nearly 96% leased, including small shops at more than 91%. As you'll hear from Brian, the team is succeeding in both growing rents and driving future rent steps. Which combined with the increase in rent paying occupancy, have helped us to achieve NOI growth of 4.4% for the first half of the year. This follows three years of 4% NOI growth. The portfolio is well positioned to sustain future NOI growth by benefiting from historically low levels of new supply, robust tenant demand across our markets, the substantial purchasing power in our infiltrate areas, the drawing power of our anchors, and our fresh look initiative that is further enhancing the merchandising and place making of our centers. As was evidenced by the impressive performance of our in process developments, Regency's best-in-class development team continues to demonstrate its expertise by delivering exceptional shopping centers, at compelling spreads to the cost of acquiring centers of comparable quality. We know firsthand the challenges and time it takes to develop a great shopping center, particularly the best ones that are located in infiltrate areas with strong anchors. We will maintain high levels of patience, discipline, focus and persistence to ensure that Regency will continue to deliver projects that exceed the high bar we have set.

Brian will discuss our development progress in more detail. Finally, as Lisa will discuss, our balance sheet remains extremely strong, and provides us with substantial flexibility. We are committed to continuing to cost effectively finance our investments through disciplined match funding, and by astutely accessing the public markets on a favorable basis. Lisa?

Thanks, Hap, and good morning, everyone. Our overall financial results were solid again this quarter. With core FFO per share of $0.75, representing an increase of 5.6% over the second quarter of 2014. Same property NOI growth, excluding termination fees, was 4.3% for the quarter. Base rent continues to be the driver, as move-outs remain low and commenced occupancy increased to nearly 95%. Redevelopments contributed a net positive impact of 50 basis points this quarter. Through the second quarter, same property NOI growth has exceeded expectations. Though it is expected to moderate slightly over the next two quarters, as we face higher comps from the back half of 2014. As a result, we have revised our full-year guidance for 2015 accordingly. We now expect same property NOI growth, excluding termination fees, to be in the range of 3.6% to 4.1%, and core FFO per share in the range of $2.95 to $2.99. I also want to note two other forward looking updates. As Brian will discuss in more detail, we lowered development start guidance for the year to a new range of $75 million to $125 million. It is important to highlight that our shadow pipeline remains robust, and this change in guidance is not indicative of projects falling out but just delayed timing of starts. One result of these delays is a reduction in development and leasing overhead capitalization for 2015, which does impact net G&A. We now expect the quarterly net G&A run rate to increase just modestly in the second half of the year. And still, we will finish the year at the upper end of our previously communicated range of $60 million to $63.5 million.

Moving to the balance sheet and our liquidity position. We continue to cost effectively improve Regency's already strong balance sheet, through organic earnings growth and disciplined match funding of investments. Developments in acquisitions will continue to be funded primarily through the sale of properties, while equity will be used as a source of capital only when we believe it is priced favorably. As a reminder, the forward equity offering completed in January remains outstanding. We still intend to settle a portion for the acquisition of University Commons in Boca Raton, Florida which is expected to close in September. We also plan to settle a piece of the offering when we address the refinance of our $350 million unsecured bond maturity, which we paid off earlier this week using our line of credit. After we exit our blackout, we will access the market to source new long-term debt when conditions are appropriate. But we do remain well-positioned to remain patient.

To afford us a balance sheet providing this flexibility, we diligently monitor future commitments, including development spend and debt maturities. To maintain ample capacity should an opportunity arise, or should we encounter unforeseen disruptions in the capital markets. Consistent with that objective, we amended our $800 million revolving line of credit this quarter, reducing the borrowing spread and extending the maturity date. In all, our strong balance sheet was recognized by Moody's when they upgraded our credit rating to BAA1, validating the enhancements we've made over the last several years. Brian?

Thank you, Lisa, and good morning, everyone.

Over the last several quarters, the hard work and talents of our local team have continued to translate into tangible operating results, which is evident in the numbers again this quarter. The operating portfolio once again benefited from historically low move-outs, but also experienced the highest number of new leases signed in many quarters since 2013. This momentum pushed the same property portfolio to nearly 96% leased, a 40 basis point improvement over the prior year and 20 basis points sequentially. The primary contribution was from small shops, which increased over 91% this quarter. This represents a gain of 80 basis points over the prior year. With a portfolio so highly leased, low levels of new supply and the continued demand for quality space, the team is laser focused on driving rents and executing yield with higher and more frequent rent steps. At the same time, as part of our first look initiative, we thoughtfully select the best retailer or restaurant for each space. Rent growth for shop space was double digits for the third quarter in a row, and we have successfully executed embedded rent steps in 90% of our leases over the past four quarters. Our progress incorporating rent steps into more over leases coupled with our consistent rent growth, has been instrumental to our success in achieving same property NOI growth in excess of 4%. Not only for four consecutive quarters, but potentially four consecutive years.

Turning now to our ground-up developments. This quarter we completed our Fountain Square project in Miami. This 180,000 square foot center is located in one of the most densely populated areas of the Miami Metro market, that also benefits from the huge daytime population from Florida International University. The center is anchored by Target, Publix Ross and T.J. Maxx. The success of this project yielding a return of over 250 basis points to market cap rates and approaching 96% leased, is a good example of what our best-in-class development teams can produce. The momentum from this successful project is leading the future investment opportunities in the highly desirable Southeast Florida market. The $180 million of ground-up developments currently under construction are generating average returns of 8%, and approaching 92% leased and committed. The Village at La Floresta, anchored by Whole Foods and located in a master plan community in Orange County, continues to impress me as it attracts top-tier operators with the ability to support higher rent and returns an original underwriting. La Floresta will feature unique, fresh local restaurants like Mendocino Farms, Urban Plates and a fast casual seafood sensation looking to grow its presence in Southern California. In addition, this project will feature place making enhancements, including an outdoor amphitheater and permanent space for a farmers market designed to increase shopper dwell time and enrich the retail experience.

CityLine market in Dallas, also anchored by Whole Foods, has such strong retail demand that as phase 1 approaches 100% leased, we're now negotiating leases on 95% of the retail space for phase 2 project soon to commence. Adding to the already impressive mix of retail, restaurant and service uses.

Looking forward with a shadow pipeline of likely starts in excess of $500 million over the next few years, plus an even greater amount of additional opportunities we're working on, we expect to secure great projects that fit our disciplined criteria to start an average of at least $150 million to $200 million of developments and redevelopments annually. Hap?

Thanks, Brian and thanks, Lisa. In closing, I remain very proud of the progress our team is making at building a great company. The critical ingredients are portfolio, development program, balance sheet and culture are combining to make it a company that measures up to the title of Jim Collins book Delta Last. Thank you for your time, and we now welcome your questions.

Thank you.

(Operator Instructions)

Christine McElroy, Citi.

Lisa, I wanted to follow up on your comment regarding the refinancing of the $350 million of unsecured that you just paid off with your line. I just wanted to get a sense for how long you expect to hold that on the line, given how much accretion will obviously result from that the longer that you do before you do another bond offering. And maybe you can give us a better sense for, again, timing of a bond offering and size and expectations around yield, would be helpful.

Sure, Christy, it's more important to us to secure the financing than to worry about any -- the short term earnings accretion. So we just need to wait till we come out of the blackout, and we'll be ready to go. But as I said in my prepared remarks, we can remain patient because we do have the flexibility to do so. But we expect to be ready as soon as possible. And as we've talked about in the past, part of the forward equity offering we do intend to use and address to not do as large of an offering. So the offering will be in the $250 million probably to $275 million range.

Okay. So you'll pull the forward offering or the proceeds proportion of that when you do the bond deal? At the same time.

Correct.

Okay. And then with RioCan embarking on a strategic alternative process versus US assets, effort are you familiar with that portfolio? And if they go to market with some of that, would your be interested in a portion of it, given the concentration and taxes on your [live feed]?

Somewhat, we obviously have read about that. Somewhat familiar with the assets, we're familiar with the assets. And we'll evaluate them, but they'd have to meet our criteria. And be -- not only do something that makes sense from a financial standpoint, but also be up to the quality criteria that we have.

Thank you.

Craig Schmidt, Bank of America.

I wondered if you could give out maybe a little bit more color on the delay timing of the starts that led to the lower development starts?

Sure, Craig. As we said, our stated objectives would be to have an average annual delivery for the development and redevelopments of $150 million to $200 million. But it can be lumpy, and that's really what you're seeing. There's no change in the projects, they're all still on track. It's just typical development delays which have pushed some projects into 2016. And some are a flip of the coin whether they will happen in December or January, around those time periods. So the issue isn't the opportunities just hit the timing of the starts.

But if you want to get specifics on what exactly happened, we have got about eight projects we were working on that we're hoping at the beginning of the year would happen in 2015. Three of them are mixed use, so you're dependent on the other uses to some extent. And if there's an issue there, then you're going to get delayed as well. Two our master plan communities, where there are some issues the master plan developer is still working out. One is a zoning change, and the city pushed that into 2016. One had issues with the anchors in terms of what I perceive to be way too much risk in some of the lease terms. That looks like it has since been worked out. And then one for sure we'll start this year.

But as I look at what is going on, as I mentioned in the prepared remarks. There is no shortage of projects. We're working on $650 million of developments between now and 2017. So which I would say about $500 million are ground-up. And at this point in time, I feel confident that $350 million to $400 million are likely. It's not a guaranteed, but they're looking good. Of which about $250 million to $300 million are developments.

Hap, that's helpful. It sounds like the anchors are getting more appetite in terms of opening ground-up. Is that true?

Well the specialty grocers for sure, the regional grocers, they are on fire. The boxes are still cautious and conservative, which I think is good for the industry. They want spaces, and all the portfolios are full and everything. But you don't see a whole lot of box development just because the rents on those particular uses haven't got back up to where they were pre-recession. But the grocer side, there's a lot of activity.

Okay, thank you.

Thank you, Craig.

(Operator instructions)

Jake Harlington, Green Street.

In your prepared remarks, you mentioned that the Florida development was leading to future opportunities in the area. Can you elaborate on that a little bit?

Nothing particular, it's just -- well we did a couple of things. I would say in the development world, success begets success. And that project was so successful that we are seeing opportunities come to us either through brokers or potential joint venture partners. We're still working through those. But we do have a project, for example, that was target excess land that they took out to an RFP, and we were successful in getting that taking care of. We won that, and double equity of Whole Foods development. And then just some other things that are percolating along that probably aren't far enough to talk about.

Okay. And maybe just switching to JVs. I was looking at your supplemental from 2010 where you had 180 properties in a JV, and I guess today we're sitting at 119. Some I'm wondering where you think that number is going to be in the next five years?

Jake, this Lisa. As we've talked about in the past, we like our stable of JV partners. And at this time, there is really no intention of significantly growing them or reducing them. So we would expect that each of our partners may -- we follow the same strategy in terms of recycling, so you may see some recycling through those, but probably right about the same number of properties.

Okay, thank you.

Thank you, Jake.

Michael Mueller, JPMorgan.

Just a quick one on leasing spreads. So they're coming out high single digits this year. Last year, they were little bit more in the low teens. I was wondering if you'd talk a little bit about either what was propping them up last year or why the modest deceleration?

Well it all has to do with the anchor leases, the new increases. When you talk about last year, in the second and third quarter we had four anchor leases that their average size was greater than 40,000 square feet, and the combined -- or the average rent growth of the four was about 135%. So as you know, the new anchor lease is what moves the needle. Both because of the size of the spaces, as well as the fact that those are old leases and have the biggest mark-to-market. In 2015 -- well in the last three quarters, we have done a total of three anchor leases -- new anchor leases. And they have been small. The three of those average 15,000 square feet. So with the anchors being 99% leased and our renewal rate for anchored being 90%, what we're really getting in the last three quarters is mostly renewals of anchors. And of course the renewals are fixed option rents, and they are more flattish.

The new leasing in the last quarters has been almost entirely shops. That's why, if we look at the shop rent growth, it's been double digit the last three quarters. In fact, this quarter increased 20 basis points. And then the other thing I would just say is it's not that we are not doing new anchor leases, it's just that a lot of them are non-comparable. So where the rent growth is not getting factored into the -- or where the increase in rent is not being considered rent growth. An example would be Valley Center up in Baltimore, our center up there. There, we have got a Staples box that we're splitting and releasing both spaces, and the cash spread on that are greater than 50%. But that kind of stuff is not showing up in rent growth, because it's not considered non-comparable.

Got it. Okay, that's the color. Thank you.

Thank you, Michael.

Rich Moore, RBC Capital Markets.

It's been a long earnings season. And, Brian, I thought I heard you say -- but I probably didn't, that your thinking you're going to do 4%, plus same store NOI growth for the next four years? (Laughter) That's fantastic guidance.

I think, Rich, that was in Hap's opening comments. And I think he mentioned that we have done 4% for three consecutive years, and 4% is in the realm of possibility for this year, given our range of 3.6% to 4.1%.

I got you. (Laughter) This is the best guidance I'd ever heard. But I want to ask you guys too. That occupancy level that you're at is I have as a record for all the year that I've been keeping track of you. Is that as high as you can go? Is there like this space remaining, the small shop space remaining, whatever it is, not terribly leasable at this point? That it's left over?

I don't think so, Rich. You know we increased shops 80 basis points year over year, and the leasing environment remains really strong. Demand clearly exceeds supply. The renewals, as I mentioned, that are very strong, are 81% for the portfolio. But also the highest renewal rate we've ever had for the shops, but our pipeline of new leasing is also every bit as strong as it has been. It's actually a little bit higher than the last four quarter rolling average, and we did the highest number of leases, as I mentioned in my prepared remarks, this quarter that we've every done. So rents are still rising. Pricing power is good. We're seeing to retailers taking tougher spaces. We're seeing improvements in the weaker markets, so I don't know why we can't just keep going.

And, Rich, I'll add a little bit of color to that. When we've done some analysis, we have a lot of history. And with our existing portfolio, when you look at the properties that -- we reached our peak prior in the 2007-2008 range. And when you look at those properties that we still own today, that we owned then, and that's not counting the really high quality properties that we've added through acquisition and development. We actually sustained north of 96% with those properties for over a year. So we have significantly improved the quality of our portfolio over the past five to six years. And I think with that, we should be able to sustain a higher peak that we have in the past.

In one thing I was going to add about the environment too. Just a little bit of color. My perspective is, I think this is the best environment for landlords that we have seen. Not necessarily for developers, but for landlords. And it's not because it's easy and the retailers are giddy and opening stores wildly. In fact, it's just the opposite.

It is really a battle. The retailers fight hard, which is why it's taking us longer to get spaces leased and then to rent paying. You're seeing them take approvals back to committee where they're changing their return threshold. And tenants that we've signed leases with, maybe a dozen leases, want to start from scratch on the lease negotiations. So I think that's just really healthy for the sector. The retailers are cautious and deliberate, but they do have a desire to grow. And it's one of the reasons why the supply is -- the growth in supply is so limited.

You said that very, very well. We totally agree. That's really important, it is a very healthy environment from our perspective.

That's great color. Thank you, guys.

Thank you. At this time, I will turn the floor back over to Management for closing comments.

We appreciate your time and your interest in Regency, and wish that everyone has a great rest of the week and weekend. Thank you very much.

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