Regency Centers Corp (REG) 2016 Q3 法說會逐字稿

Greetings, and welcome to the Regency Centers Corp. third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd like to turn the conference over to your host, Mr. Mike Mas. Thank you, you may begin.

Good morning. And welcome to Regency's third-quarter 2016 earnings conference call. Joining me today are Hap Stein, our Chairman and CEO; Lisa Palmer, our President and Chief Financial Officer; 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 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.

In addition, on today's call, we will reference certain non-GAAP financial measures. More information regarding these non-GAAP financial measures can be found in Company documents filed with the SEC. Further, with respect to our supplemental disclosure, please note the change in presentation of certain financial statements which now reflect updated SEC guidelines on pro-rata disclosure.

Finally, we request that callers observe a two-question limit during the Q&A portion of our call to allow 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 thanks for joining us. Our best-in-class team continues to perform at a high level, executing on our tried-and-true strategy that has consistently delivered impressive results in every facet of our business.

First, our operating portfolio, which by all relevant measures, is recognized as one of the best in the industry, is nearly 96% leased. This was achieved in the face of recent bankruptcies and anchor move-outs, and shop leasing remains vibrant, and move-outs low. Further, the anchor vacancies present our team with opportunities for upgrades over the prior tenants.

Our development and redevelopment pipeline is looking even more visible, further positioning us to deliver on an average of more than $200 million of annual new starts of high quality shopping centers at very attractive returns.

Third, reinforced by our recent capital markets activity over the past few months, we will benefit from a sector-leading balance sheet that affords us the flexibility to capitalize on compelling investment opportunities, and whether, and even profit from future disruptions in the capital markets.

And finally, our talented and [deep] team is focused on executing our proven business model that capitalizes on these distinguishing assets and, in turn, creating shareholder value through consistent gains in core earnings and net asset value per share. Mac Chandler will now provide an update on development.

Thanks, Hap, and good morning. Despite a highly competitive development landscape, Regency's industry-leading development team continues to source and execute on compelling opportunities that enhance our high-quality portfolio.

Our newest start, The Village at Tustin Legacy is evidence of our ability to extract significant value within our target markets resulting from our local sharp-shooter advantage. This ground-up development is located in the highly affluent [info] core of Orange County within the master-planned community of Tustin Legacy. The project will benefit from in-place, in-growing trade-area demographics, including a population of 200,000 and daytime population of 300 (sic - see press release, "300,000") and average incomes of more than $100,000. You can see this in our pre-leasing, as we are already at [82%] leased and committed after only three months of site construction. I'm confident in the high caliber of retailers and distinctive fresh look design that will enhance Regency's already premiere presence in Orange County.

Before turning over the call to Lisa, I wanted to touch on future development expectations. With good visibility into a fourth-quarter start of what will be an exceptional Whole Foods, Nordstrom Rack anchor development in the Northeast, and great momentum on several other projects in our pipeline, we have raised the top end of our full-year development guidance to $265 million. It looks like this momentum will continue into 2017, which would result in another year of delivering high-quality developments and redevelopments, and substantial spreads to our leased projects for trade. Lisa?

Thank you, Mac. Good morning, all. We continue to demonstrate the inherent strength of our high-quality portfolio, despite the headwinds from previously announced bankruptcies. The same-property portfolio is 96% leased, with shop space again contributing gains and nearing an impressive 93% lease. Same-property NOI growth for the quarter was just under 3%, moderating as we expected and also as we communicated on the last earnings call, but still a very strong 3.4% year to date. Further, with more visibility into the fourth quarter, we tightened the same-property NOI guidance range with a new range of 3% to 3.4%.

It is important to note, however, that we will continue to absorb the impact from bankrupt tenants in the fourth quarter and also in the first half of 2017 as we work to re-lease these anchor boxes. Given this impact, while I'm not offering formal guidance at this time, it is reasonable to expect 2017 same-property NOI growth to more closely approximate growth from the latter half of this year.

I did want to provide more detail behind our rent growth for this quarter. We executed a short-term anchor renewal with on-going landlord recapture rights at our recent market common acquisition. This will allow us to significantly upgrade the merchandising upon expiration or recapture of additional space. And, further, by taking this course of action, we are able to preserve income in the near term for a tenant that we had underwritten to vacate. We maintain control of the space and we will be able to improve the future growth profile of the center. We do not see landlord leverage softening at our centers.

Even after the impact from this strategic renewal, total rent growth year to date is approaching 11%. Additionally, our new-shop rent growth remained very strong, at 14% for the quarter. Overall, the leasing environment remains healthy, and with our premier real estate and limited supply, we continue to be able to push rents and negotiate mid-term rent steps to solidify embedded growth.

I'll conclude by touching on the updated guidance ranges for NAREIT and Core FFO. With more certainty surrounding bankruptcies and move-outs, we increased the low end of both ranges by $0.03, and raised the top end of each by $0.01. Thank you for listening, we now welcome your questions.

At this time we will be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from Jeremy Metz from UBS. Please go ahead.

Hi guys, good morning.

You talked about more visibility on the development front and you obviously took the high end of your development starts up and you mentioned you're thinking your private seller level in 2017. Are you more broadly seeing any bigger shifts in tenant mindset towards new development at this point?

This is Mac, Jeremy.

I wouldn't say a difference in a mindset. I think it's been consistent. Over the last several years, we've had a very healthy pipeline working with best in class tenants like Wegman's, Whole Foods, Publix, Kroger and our pipeline historically, and when we look out forward, it's still with projects like that. So we have opportunities that have been brought to us but we haven't seen a shift in the quality of the projects or the location. It seems to be really consistent with our strategy historically and going forward. No broad shifts there.

Okay. And then just on the shop leasing, we've heard about some of the fast casual dollar stores are pairing back openings. Can you talk about what you're seeing on the ground there and the leasing front of that segment. Maybe how much higher you think you can drive that 93% in the next 12 to 18 months?

Jeremy, Jim Thompson.

Obviously we're seeing very robust small shop leasing. We expect -- we expect there's still some run way there. We're seeing good -- continued good growth. I think the sectors that continue to be active are the fitness, the food, although there is some saturation in that category. We're seeing the new -- the new being replaced, replacing the old and it's kind of a normal cycle. We're aligning ourselves as we always do with who we consider the best in class in that sector. And continuing to freshen the portfolio.

Just, sorry just -- in terms of how much more you can even get out of that 93% increase, can we go to 94% to 95% here?

We're going to push it as hard as we can, but, you know --

I've trained Jim well. He's not going to give you any formal number.

I tried.

You know, we've talked about this before. The quality of our portfolio is so much better today than it was 10 years ago, and 10 years ago, we reached just north of 92% on the shop space percent leased. We're obviously north of that today. So it's really uncertain but we continue to see such strong demand for the space and even more importantly over the past, really two years, the number of move-outs in our small shop space continues to decline as a percent of space.

This year we're projecting move-outs of just about a million square feet, and which is almost -- it's a little bit higher than last year. But that's almost all coming from anchors. Our move-outs as -- in the small shop space are so small. So as long as we can continue to do some new leasing, I would expect that we're going to continue to see that percent small shop lease tick up.

The focus is not just on filling the space, but it's also on the quality of the tenant and the merchandise, and their ability to merchant, as a merchant.

Thank you.

Our next question is from Christy McElroy from Citigroup. Please go ahead.

Hi, good morning, everyone.

Just a follow-up on that question, Lisa, I think you mentioned shop rent growth of about 14% in Q3, or that might have been the year-to-date number. As you, you know, get close to that 93% number and potentially beyond, presumably you're getting to some of that tougher lease space. What should we expect in terms of potential impact of that on releasing spreads as you see -- you've said you're likely to go higher.

It's a great question, Christy and that's why it becomes a lot harder to project. But with the limited supply and the environment and with the quality of our portfolio and the high percent lease, even with that being potentially lower quality space, you would still anticipate that leverage is more in our camp than in theirs. So we still believe that even with that, we should continue to see high single digits to low double digits rent growth moving forward.

The rents in those spaces are starting from a lower base, too.

Right.

Okay, then in thinking about that decelerated pace of same store growth into 2017 that you talked about, presumably that's predominately impacted by some of the re-tenanting that you're doing with the stores that's already in other boxes.

How should we think about this trajectory? Should that pace be slower in the fist half versus the second half as you're replacing some of that down time and re-leasing that space? How should we think about that pace?

Absolutely. Because if you think about when those came off line, we had a lot of that income in the first half of the year. And assuming we are able to release those relatively quickly, even if we do that, we still couldn't get income until the latter half of the year. So the first half will certainly be lower than the second half of next year.

We are making good progress in finding better tenants to fill the spaces.

Okay. So that is the biggest impact? There's not anything else in there we should be thinking about in terms of drivers?

No.

Okay. Thank you.

Thank you, Christy.

Our next question comes from Craig Schmidt from Bank of America. Please go ahead.

Yes, I wanted to get your opinion on Lidl, the German discounter. From their point of view it sounds like they are trying to make a pretty aggressive push into the Southeast and the mid-Atlantic. On the other hand, when I talk to people on the ground, they seem somewhat skeptical. What's your take on their entry into the US?

Craig, this is Mac.

We have seen some evidence on the ground, they're clearly expanding and they're well-capitalized and appear to have a very aggressive appetite. But they're also quite secretive at the same time, so you don't see a lot of broad announcements as to where they're going. We have been talking to them about one site that we own in the state of Texas, and the conversations ebb and flow as they would with any other retailer.

I think there's quite a bit of room before we can really give you an honest assessment of how they are as a competitor and a threat and player. But clearly they're making some moves here around they're planning to do it in a big way. That's about as much as we can tell you.

Have anything to add?

That is really it. We know they're tied up and have purchased sites, they really haven't opened anything yet, so it's very difficult. They're clearly a force overseas, so they are an operator.

Okay. And --

I think if you look to the Fresh & Easy history, as Mac says, it's too early for us to project how it will all work out for them because I think we all thought they would do well prior to opening. Because you heard about how they did their market research and they had their people living in the US and studying consumer behavior and I think it's just an unknown of how that will translate to here.

The only thing I might add is their model is more of an ALDI model, which is very low-priced, high value and that typically hasn't affected us as much as some of the higher ends or mid market grocers. We're just in more affluent high barrier to entry locations. In that sense, they are something to keep in mind going forward.

I guess I tend to lean toward that view. When I look at what's happening in the UK and some of the established supermarkets there, how they've been impacted by their reach into that country, I just wanted to hear what you were thinking, so thank you.

Thank you, Craig.

Thanks, Craig.

Our next question is from Jay Carlington from Green Street Advisors. Please go ahead.

Good morning, guys.

Just to go back to the leasing spreads we're beating up here a little bit. Is there any noise in there, whether it's from re-tenanting in the sports stores or anything? Because it seems like a decent pull and trying to get a handle on the sequential deceleration we've seen over the past couple of quarters there.

You mean beyond what we mentioned in the prepared remarks?

Yes, the 5A, the mid single digit range that we see versus the low double digits the last couple of quarters. It's a decent pull, so I'm trying to get a sense if there's any -- if the rent increases that you're pushing through just aren't as aggressive any more.

No. I mean, I would again reiterate what we did say in the prepared remarks that when you do exclude -- that one lease that had a pretty significant impact. When you do exclude that, then we are in the double digits for rent growth. So that's -- I think that's -- you can't just ignore that.

That was a strategic renewal, newly acquired property that we had underwritten to vacate and we felt really good about being able to preserve some of the income in the short term while we worked to capture some of the other space back so we can re-merchandise a larger portion of the center. So I think that's really important.

Beyond that, I think it's also important to note the actual absolute -- it's a mix. As it often is. The absolute rent for our leases that we signed this quarter, some -- I think it's the highest in 12 months. If I -- I'm not looking at the supplemental, but if I recall correctly, the rent was $24 and last quarter it was a little low at $20. Again, from memory. But that's still much higher than we've seen. So it is a little bit of a mix issue, as well.

I probably missed that in the prepared. Maybe just a quick follow-up. Is there any sense -- I know the retailers don't give you sales but is there a sense of what their OCRs look like today versus a couple of years ago?

We don't get a lot of sales data. I look to Jim or Mac for maybe any informal feedback that they're receiving in the field? But we don't have that many tenants that report sales. Those that do typically tend to be the anchors and we're seeing them continue to have, even our grocers have healthy sales increases.

Right. I think you can see it in the renewals, if tenants weren't able to absorb their rent, they wouldn't be able to exercise their renewals that they are. They feel confidant about their business and they can make the ratios work and that's probably the best way to see it play out.

And you see pick up and move out.

All right. Thank you.

Thanks, Jay.

Our next question comes from Ki Bin Kim from SunTrust Robinson Humphrey. Please go ahead.

Thank you.

Going back to your development-start guidance, it's a pretty wide gap. What is the two large processes that you're contemplating and when you said next year might look very similar to this year? Does that mean the mid point, or the range should be similar next year, as well?

I'm going to repeat the question to Mac. I think he may have been distracted for one second. He's asking about the wide range of development starts and what did we add this year that is causing that to be a wide range.

Yes.

Really the big difference between this quarter and prior ones is we've been presented with an opportunity in the northeast, very compelling opportunity, where an owner of a site has been working on it for 15 years and titling it. It's really on about the 5-yard line and it's just about done. We have an opportunity that we really like to be able to step into a shovel-ready project, if you would, that's 50% pre-leased.

So we don't have 100% visibility to it occurring this calendar year but it looks very positive and we wanted to make sure your guidance included that if it were to close this calendar year. Going forward to 2017, I'd say the range is similar with previous years with $125 million to $225 million, but we like -- you know, $200 million, we would like to get it up to $300 million if we can find the right compelling opportunities that meet our disciplined approach. That's really the change behind this quarter.

Okay. And just a quick question on market rent growth, do you have a sense of, not leasing spreads, but what market rent growth has done in your portfolio in 2016, and maybe if you have a forecast of what you think market rent growth would be in 2017?

It's been pretty modest, market rent growth has been, and I think our expectation is for it to continue especially for high quality premier shopping centers.

If you just look at, basically act like the absolute dollars for rents that we signed, we are looking at double digit increases. But again, think about the universe of shopping centers and what a small percentage are owned by REITs, the REIT ownership tends -- they own the highest quality and the higher quality REITs own the higher quality of the high quality.

I think what we're seeing in our centers may not be a very good proxy for the entire market. But we do continue to see healthy growth and again, it comes back to we're 96% leased. We're almost 93% leased in our shop space. We have leverage, and we'll continue to -- we're going to continue to ride that while we have it because we know that's not going to last forever.

Okay, thank you.

Thank you.

Our next question comes from George [Harquint] from Jefferies. Please go ahead.

Good morning. Just wondering if you can comment on any recent trends in construction costs, how are they trending on a year-over-year basis?

Sure, George, this is Mac.

We watch it carefully. And we've seen some of these changes and anticipated them, so we've been fortunate that our development budgets have all held. We're seeing changes of, say, 3% to 6%, depending on the market and really tied mostly to a shortage in high-skilled labor and that seems to be a common thread throughout. I think we're underwriting it appropriately. We haven't been surprised by too much. We always underwrite an inflation and escalation factor for projects we know we're going to start several years out. Hopefully that helps.

And geographically, are you seeing any significant differences?

Certainly the coastal markets, the increases are more. Seattle is a market that's probably -- certainly one of the top two or three hottest markets, so we could do a bit more there. San Francisco, certainly, Silicon Valley. Those are sort of the big ones. We're not in New York Metro, but I imagine that's playing itself out as well.

Okay, thank you.

(Operator Instructions)

Our next question comes from Chris Lucas from Capital One Securities, please go ahead.

Good morning, everyone.

The follow-up question on Ki Bin's question about the development starts. Is there a discrete number of projects that get you to the high end? I'm trying to understand what the scale or the likelihood is as we think about year-end starts?

Sure. Chris, there's three projects that we're counting on that are ground-up projects. We think they're all going to happen but we can't say for sure because it's development and there are some ingredients that have to come together here in the next month, but the one that we added is about $70 million, that should give you some guidance.

There's another one, anchored by White Mint that we're working on, and a third one anchored by Kroger. Three pretty significant size projects, certainly the $70 million one is a little bit bigger than our typical one.

It's unlikely that they won't happen. There may be a decent chance they could get pushed into 2017, first quarter of 2017. No guarantee they're going to happen for sure, but we feel very confident that's going to happen. It is development. But there is a chance they could get pushed into 2017.

Yes, and is that the timing issue regulatory-driven? Government approvals, or is there something else that may be impacting the timing?

All three, it's actually regulatory approval.

And then just one quick question, on the timing or potential timing for the remaining 1.25 million shares under the Ford sales agreement, any sense in which we should be thinking about modeling those in?

Remember, we have until the middle of next year essentially to draw it down, and we do have some visibility into a potential acquisition in the first quarter of next year. I think anything prior to that at this point would be too conservative.

Okay, great. Thank you.

You're welcome.

Thanks, Chris.

I would like to turn the floor back over to management for any closing comments.

Thank you very much for your interest and time on the call. And enjoy the rest of the week and all the best. Thanks.

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