Regency Centers Corp (REG) 2016 Q1 法說會逐字稿

Greetings and welcome to Regency Centers Corporation first-quarter 2016 earnings conference call

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mike Mas.

Good afternoon and welcome to Regency's first-quarter 2016 earnings conference call. Joining me today are Hap Stein, our Chairman and CEO; Lisa Palmer, our President and Chief Financial Office; Mac Chandler, Executive Vice President of Development; Jim Thompson, Executive Vice President of Operations and Chris Leavitt, Senior Vice President and Treasurer.

Before we begin 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.

Thanks, Mike. Good afternoon and thank you for joining us.

Regency's team continues to execute well on the critical components of our well-honed strategy. The underlying fundamentals of our portfolio remain very healthy. This is evident by growth in core FFO per share of 8%, strong rent growth and occupancy and same property NOI growth of over 4% for the seventh consecutive quarter. We continue to reap the benefits from the quality of our portfolio, amplified the tail winds of favorable market conditions.

Retail supply remains tight while demand for space and prime locations continues at a rational, steady pace. We are experiencing particularly strong demand from quality quick serve restaurants, health and fitness users, specialty and leading traditional grocers, discount apparel retailers, and pet stores. And while the fundamentals are healthy for most of the retail, restaurant and service companies that are represented in our centers, fallout from industry and store rationalization will continue.

We are now obviously witnessing this play out in the sporting goods sector which included the bankruptcy filings of both Sports Authority and Eastern Mountain Sports. While there will likely be some near-term impact to our NOI growth, the quality of our real estate affords us the ability to capitalize on these opportunities in the long run. Replacing a struggling operator with a more productive one has been and always will be better for our long-term NOI growth rate.

Turning to development, our industry-leading local teams continue to source compelling new development and redevelopment opportunities, building a pipeline that positions us to start and deliver an average of $200 million or more of exceptional projects. This quarter we started one ground up in project in Houston, located in a master-planned community that includes Exxon's world headquarters, a large-scale redevelopment near Aventura Mall in Miami, and completed two Whole Foods anchored centers; one and Metro DC and one in Dallas.

As I've said before, the development business is not for novices. And the environment remains competitive for the limited opportunities that made our criteria. With that said, I believe that we have the right team to capitalize on the expansion of specialty and best-in-class traditional grocers.

They continue to find investment opportunities, supported by this expansion with demand from shop and category leading junior anchor retailers. As I look forward, and while we have a keen eye on the mature state of the recovery and understand the volatile nature of the capital markets, I'm confident that we are well positioned to continue our positive momentum.

Whether we find ourselves in a prolonged recovery or in an economic downturn or whether the pace of store rationalization accelerates, my confidence stems from the outstanding quality of our portfolio, our disciplined and proven development capabilities, our rock solid balance sheet, and extremely talented team focused on growing shareholder value.

Lisa?

Thank you, Hap, and good afternoon, everyone.

NAREIT FFO for the quarter was $0.86 per share, this includes approximately $7 million of gains on sale of land parcels, as well as pursuit costs related to acquisition activity which I will address later. These items, together with expected additional acquisition pursuit costs, are incorporated into our new NAREIT FFO per share guidance range of $3.22 to $3.28. This is an increase of $0.04 at both ends.

As Hap noted, core FFO for the first quarter increased 8% over 2015 and the same property NOI growth once again exceeded 4%. Consistent with prior quarters, base rent continues to be the largest contributing factor. We do expect same property NOI to moderate throughout the remainder of the year as we face higher comps from percent-commenced, CAM reconciliations and the potential impact of the recently announced bankruptcies.

I also want to caution that the second quarter has the potential to fall below the bottom end of our guidance range as the second quarter is the quarter where a majority of our prior-year reconciliations are finalized. But with that said, our full-year 2016 same property NOI growth guidance remains unchanged at 2.75 % to 3.5%. With respect to the recently announced bankruptcies the legal process remains fluid, between Sports Authority and Eastern Mountain Sports we have five locations at risk.

We fully reserve against any unpaid pre-petition rents. After a second situation, specifically as it relates to these two tenants, and studying the competitive position of our impacted locations, we developed what appears to be a reasonable set of assumptions and probabilities supporting our same property growth-rate range. These assumptions include a combination of accepted and rejected leases but do not include a scenario for full loss of rent at every location.

From an occupancy standpoint, the same property portfolio rose back above 96% leased, with shop space right at 92% leased. Move outs and bad debt remain low and we avoided the usual first quarter seasonal dip in occupancy. This is a very good proxy for the underlying tenant health in our portfolio. As our portfolio achieved higher occupancy levels, we are able to be very selective with merchandising and leverage pricing power through embedded rent steps and strong releasing spreads.

In fact, rent growth for new leases signed during the first quarter was 50%. This was primarily driven by the release of one of our Haggan boxes that we purchased out of bankruptcy to release it to one of the top specialty grocers in Southern California. It's another classic example of where bad news is great news when you have the opportunity to remerchandise or to redevelop quality real estate as we have accomplished time and time again.

Turning now to capital markets activity. We seek opportunities to enhance our balance sheet by astutely accessing capital to efficiently fund investments, as we did with the forward offering completed in March. To that end, we're pleased to share some high-level information on our pending acquisition activity as well as offer some general guidance on when we intend to draw down our forward equity.

We currently have great visibility into two acquisition opportunities. The first includes the retail portion of an iconic mixed-use property in Metro DC, strategically located in the Arlington area. Which most of you do know, that is one of the premier neighborhoods in that region.

Consistent with our mixed-use strategy, we are partnering with Avalon Bay, one of the most well-respected REITs in the industry. They will own and operate the residential component. The retail segment features several key anchors and with many leases below-market there is exceptional NOI growth potential with even further upside from redevelopment.

The second opportunity is located outside of Seattle in a highly desirable sub-market that will augment our platform, which is already deep in that market. This property will be a perfect addition to our Northwest portfolio. Combined, these acquisitions show an approximate $325 million in total purchase price and we expect to close on each before the end the second quarter.

For each closing we intend to draw down a portion of our forward equity offering while at the same time expanding our existing term loan facility to provide for an additional $100 million of debt capital. Our new amended loan will have similar pricing to what exists today but will mature in 2022, adding 2.5 years to the existing maturity date. The remaining forward equity proceeds will be available for additional acquisitions between now and June of next year.

Finally, we closed on another great shopping center during the quarter. Garden City Park located on Long Island, not only increased our present in Metro New York but also presented us with an immediate redevelopment opportunity. This well-located center offers significant upside with below-market rents and re-merchandising potential.

We plan to begin work on the redevelopment within the next 60 days. Most importantly of all, the NOI growth an unlevered IRRs of Garden City in the two pending acquisitions are accretive to our portfolio. To wrap it up I'm very pleased with this quarter's results and the accomplishments our team has achieved.

I thank you for listening and we now offer your questions.

Thank you.

(Operator Instructions)

Jay Carlington, Green Street Advisors.

Thanks for taking the question. Just a follow-up on Sports Authority and Eastern Mountain. Can you give a little bit more color on the assumptions you're expecting there and how that impacts same property NOI growth in 2016?

Sure. I'll address what happened in the first quarter and then I'll let Jim talk about the individual stores -- with what were comfortable with saying anyway, publicly. In my prepared remarks you'll -- hopefully, you heard that we do fully reserve all unpaid pre-petition rents. So for the first quarter that was approximately $250,000.

If you look at that in isolation that's less than 20 basis points. However, obviously you can't necessarily just look at that in isolation. We evaluate the health of all their tenants and the remaining tenants, minus except maybe Eastern Mountain Sports and Hancock Fabrics and a few others that are struggling a little bit, are extremely healthy.

And going forward I think, I'll just repeat what I said the prepared remarks, that we are assuming that we will have -- we already know for example our low [earn as], I'm starting to talk into what Jim might want to talk about, but our -- we have one location that was on the closure list and so we would expect that we would get that back. But in the others we just have a mix of assumptions as to when that store may close, if at all, and we are assuming that some of them may be accepted.

So again, just to reiterate those assumptions are incorporated into the range of 2.75% and 3.5%. I'm not sure I can give you that much more detail, Jay.

Okay. So maybe as a quick follow up, you mentioned the Q2 weakness you are expecting. Is some of that from Sports Authority or that is more the comps that are impacting that?

It's really -- it's all three. Higher comps from percent commenced, it's higher comps from CAM reconciliations and then it's also the bankruptcies.

Okay. And maybe switching gears on the acquisitions. Is there a rough split you can give on Seattle and DC in terms of the size and then can you maybe talk about what type of IRR your underwriting for those acquisitions?

The Seattle -- we increased our guidance to a high end of $340 million. We've already closed on one property in the first quarter. So basically the Seattle asset -- we're not allowed to disclose the purchase price for the Market Common in Clarendon at this time. Once we close on that we will be able to do that.

I would tell you that the Seattle asset is in the range of $35 million to $40 million for purchase price. And then in terms of underwriting, just again, I would reemphasize that the NOI growth and the IRRs on both of these assets are accretive to our portfolio and also I will give you some color for current market. Assets of this quality today, if you were to talk to some of the brokers that are in the market, they will tell you that in gateway markets, they are trading at 5.5% unlevered IRRs and for Market Common Clarendon, ours is 75 to 100 basis points north of that.

And for the Seattle asset, add another 100 bps to that. We feel really good about these acquisitions and the returns that we're getting as we are able to add value with the expertise and the talent we have from our team.

And the Long Island return, Lisa?

The Long Island return is even better than that. Double-digit IRRs.

Unleveraged?

Unleveraged. All unleveraged.

Okay. Thank you.

Thank you, Jay.

Jeff Donnelly, Wells Fargo Securities.

Good afternoon, folks. Question on leasing spreads. I'm just curious about re-leasing spreads, specifically on in-line spaces. Are you able to break that out for us, for new and renewal -- you know, away from just the anchor activity?

Jim Thompson.

Yes, on the shops-based leasing we're at basically 12.1% growth on the new. And on renewal, I'm not sure. Let's see, 12%. I guess 12% on the renewal per shops-based. And shops-based is defined as smaller than 10,000 feet.

That's great. And maybe sticking with you is, I'm just curious how you're thinking about, I guess I will call it, maximum occupancy or your next goal because you're pretty close to I think what was a 92% goal on small shop leasing and wondering if that's as far as you think you can push it? Or is there another goalpost that Regency is going to set in terms of where it wants to be?

I'm sorry, I'm stepping on his toes again but -- (Laughter)

We've come to expect that from you, Lisa.

Come on, I'm prepared for this. I can't wait to answer it. Thanks for the question Jeff.

I think many of you have probably heard me say this before. We own 212 properties today, so 212 out of our whole portfolio that we owned back in 2006, which was our prior peak. And that same poll of properties for 2006 and 2007 was 96.7% and 96.6% leased.

So basically maintaining percent leased above 96.5% for over 4 quarters at least, so I do think we have and little bit more runway and it's -- you can't underestimate how much we've improved the quality of the portfolio from 10 years ago. So with that, I'll let --

Was that shop occupancy? (Multiple Speakers)

She stole my thunder. (Laughter)

I'm sorry, was that shop occupancy you quoted or was that overall occupancy?

That's overall occupancy. So the shop occupancy was north of 92%.

Okay. Understood. And maybe can I ask just one other follow up. Is that because you mentioned the 212 properties.

I think Regency has about 50 properties located outside of the top 50 MSAs. It's not a big part of value or a big part of base rent but many of those properties have rents that are in line or even above the average base rents of your top 50 markets. So do you see those assets or markets as a source of funds down the road? Or -- it strikes me they might have a weaker return on investment profile than your top 50 assets.

I believe one of those markets, for instance, is Raleigh-Durham. It's outside of the top 50 markets, Jeff, and we feel very, very good not only about our portfolio in Raleigh but the upside in that. So, you have to be careful about where that might be. I think we feel good about the upside throughout our portfolio and we're continuing to evaluate as we've proven in the past to sell those assets and shopping centers that have lower long-term growth profiles.

And the only other color I would add to that is, often the college towns in university towns will be outside of the top 50 and we've enjoyed significant growth in a lot of those assets as well.

Great. Thank you.

Thanks, Jeff.

(Operator Instructions)

Lina Rudashevski, JPMorgan.

Hello. What are your plans for refinancing your perpetual preferred stock that's coming due next year?

The perpetual preferred doesn't actually have a maturity date. That's what we really like about it. So we have no intentions right now to -- if they're callable next year, but no plans to do that right now. That's the thing we really like about preferred stock.

And the call option, which is ours, is forever after a five year period.

Got it. Thanks.

Rich Moore, RBC Capital Markets.

Good afternoon. First thing, Lisa, I'm a little curious. The -- you guys have always been a core FFO sort of place and I'm really big on using NAREIT FFO but I got used to the idea that I was supposed to use core FFO with Regency and now you're citing NAREIT FFO. Are you switching, I guess, the focus to NAREIT FFO which I think would be great, by the way, but I'm just curious if you are?

Appreciate your opinion. No, over the past at least year, and probably longer, we've been providing both and providing guidance on both. We think both are relevant metrics and as long as we provide all of the information and are fully transparent so that you all see what is in core FFO and what is not, we will continue to report both.

The only reason we noted NAREIT FFO in the press release is because we updated that range. So we only update the ranges that are impacted.

Okay. Good. (Multiple Speakers) Got you. Thank you. And then I'm curious on Houston. We've heard all this concern about Houston and it clearly hasn't come to pass and you guys have, I think, roughly 5% or so of AVR there. How is Houston in doing? You've obviously started another project there? And do you have any specific same-store NOI growth metrics for the market or anything you can share specifically on Houston?

Yes, on our portfolio itself, obviously, it's one of our stronger portfolios. We've got 7 of the 10 properties are located in master-planned communities. Out of that portfolio, we're 98.7% leased today.

Q1 we were 6.6% same-property NOI growth, so we feel very good about that market today. Our retailers are experiencing strong sales which continue to drive expansion and we're real comfortable with the market today.

This is Mac. Thanks, Jim. It's part of the reason why we like the Spring Ridge development. It shares similar characteristics. It's got high barriers to entry being in a master-planned community.

It's anchored by one of the top groceries, named Kroger, on a long-term ground lease -- and we've seen the results. We've got great pre-leasing activity.

We're 71% leased to date so when you include committed, we are over 80%. We love that and we think that's really why we're in Houston and we'd love to see more opportunities similar to this one.

Okay. Good. Thank you. And I sort of have the same question, if I could just real quick, kind of as a follow up on the San Francisco/Oakland MSA, as well, because now that is the new hot spot where San Francisco's going to become a ghost town and the world's going to end because of technology; and I'm just curious whether you guys are seeing any softness there?

I can speak to that. This is Mac. We are not and I think that's in large part because of our centers. We have great, well-located centers. They are with great grocers.

They are necessity-based retail in large part. So part of what makes San Francisco unique is the tremendous high barriers to entry. There has not been over building in this last cycle or really in past cycles up to now.

It's a very supply constrained and our centers are performing really quite well. And we're not nervous about that market. It's one of our best portfolios.

Okay. Great. Thanks, guys.

Anthony Hao, SunTrust.

Good afternoon, guys. Sorry, I missed part of the call, so maybe someone already asked this question. But can you comment on why the lease occupancy at Village at La Floressta went down by 200 bps?

This is Mac. It's pretty simple in this case. We actually had signed a lease with a nail salon and prior to us delivering the space to them, they ran into some troubles on some other locations and they basically backed out of the lease. And we have backups we're already talking to, so that's the simple reason it has to do one tenant.

Talk about the Whole Foods opening and where we are from leasing standpoint even though the center is just being completed.

Yes. Whole Foods opened last month and they are doing tremendous. Well above their projections. If you get a chance the center is at North Orange County. It's one of our best developed, best looking assets and that's merchandise assets. We're 90% leased. We could at least it really two or three times over. We've turned away a lot of tenants.

We've been very patient. We've held out on a couple of our the best spaces and we really see no issue with getting those last spaces leased up. It's really one of our gems. And if you're in Southern California, please take a chance and stop by.

One last question. I know that Sports Authority did not have a huge impact on the portfolio since you guys only have three stores; but have you guys addressed those stores already? And are there any potential upsides for those boxes?

Yes, we've already talked about this.

Sorry about that. It's okay then.

I'll let Jim talk about the real estate.

In general I would not expect to see a lot of upside but at the end of the day we're comfortable with the real estate and feel like there will be good demand for our retail backfill.

And as we said in our prepared remarks, which you may have missed, that to replace a struggling operator with a better operator is going to be better for the long-term growth of that center.

Okay. Thank you so much.

Thank you.

Greg Schweitzer, Deutsche Bank.

Just going back to Clarendon, I apologise if I missed this, but it in terms of the upside from the below-market leases that you mentioned with the retail component almost fully leased, when do some of those leases roll over where you can realize this gains?

We have a retail component -- there's also an entire bank of building which has upside as well. I don't know, Greg, if you have had an opportunity to actually visit the center, it's across the street --

In addition to the 300,000 square feet?

No. That's what we're buying. So there's different parts -- Whole Foods is across the street too. There's different parcels within the center.

The main retail component is anchored by Barnes & Noble. And I'll reiterate what I said in the prepared remarks, that would be a fantastic example of where bad news would be great news. We love to get that space back.

The center was built a little over 10 years ago. We would expect that we're going to start to really realize some of that growth -- it will certainly increase over the next 12 months but I think you're going to see the bigger step probably in 2018, is when we are really going to start to see the growth in the NOI.

Okay. And then on the potential redevelopment that you mentioned. Could you share any details on the scope or what you're thinking about there?

We are really early in the process so there are many different alternatives. So, it's just a little too early to share much detail but it could potentially be retail and perhaps multifamily on top. It could be all retail.

There could be the potential of moving some of the tenants to that -- the other existing tenants to that location, but again, it's way too early. And we could lease it to one user.

Okay. Thanks a lot.

Thank you very much.

Chris Lucas, Capital One securities.

Good afternoon, everyone. A follow-up on Market Common. There's an office component to that I believe, is that correct?

Lots of vacant building, Chris, and that what we -- so we really are evaluating the different alternatives as to what we may do with that parcel. And no decisions have been made.

Okay. And then --

No matter what we do there will be significant upsides, obviously, from what is today. Because it's zero today.

Can you guys disclose what the relationship is as it relates to percentage ownership between you and Avalon at this point in terms of what's been discussed?

Chris, It's not -- I think the way we've seen it written about and talked about as a joint venture and although technically we will close as a JV, the idea is to condominium-ize immediately. So we will have -- so, hold on, I just want to get the structure out of the way. So we will have physical ownership and legal ownership of only our component.

We've can't, at this point in time, unfortunately, talk about purchase price details and the diversification of that between the multifamily and the retail but are looking forward to doing that upon closing and you will see a press release at that point in time.

We get all the economic benefits. We will get all the economic benefits from the retail. Avalon Bay will get all the economic benefits from the multifamily and we expect to have the thing totally broken out before the end of the year.

I'll reiterate what Mike said. As you know, typically we're not -- we don't hold things this close to the vest. The sellers are really sensitive about releasing the purchase price prior to closing so as soon as that happens, more than happy to share that information publicly.

Can I just go back and tie, though, the office building ownership into that, where does that --

That's 100%.

That is yours? That is your upside?

Correct.

Okay. Thank you. That's all I needed.

We look at that as Lisa said, we look at that as a vacant building with a significant amount of redevelopment upside.

Correct.

There are no further questions at this time. At this point I'd like to turn the call back to Hap Stein for closing comments.

We appreciate your time and wish that you have a -- wish you a great rest of the week and a terrific weekend. Thank you very much for your interest in Regency.

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