Regency Centers Corp (REG) 2016 Q4 法說會逐字稿

Greetings and welcome to the Regency Centers fourth 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. Michael Mas. Thank you. You may begin.

Good morning, and welcome to Regency's fourth 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. In accordance with SEC rules, we've provided a reconciliation of these non-GAAP measures to their respective and most directly comparable GAAP measures, which may be found in the tables included in today's earnings release.

As an added note, 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. Finally, please understand that given our pending merger with Equity One, we will be unable to answer any questions related to that transaction and refer you to our filings for the latest information.

I will now turn the call over to Hap.

Thanks, Mike. Good morning, everyone, and thank you for joining us. 2016 was an exceptional year for Regency on all fronts.

As I've said many times, Regency's year in and year out performance is the direct result of four tried and true principals. First, the irreplaceable portfolio of high-quality assets driving superior NOI growth. In 2016, NOI growth was a strong 3.5% representing the fifth consecutive year of growth at or above this level.

Second, a development and redevelopment driven investment strategy executed by an experienced and disciplined team producing great centers that add meaningfully to our NAV per share. In 2016 we profitably executed on our strategy, starting $220 million of high-quality developments and redevelopments at attractive returns.

Third, a fortress balance sheet that supports our growth, allowing us uninterrupted access to capital at the most advantageous pricing. Throughout 2016, and in January of this year, we strengthened our balance sheet even further through the prudent use of capital markets, resulting in one of the most pristine balance sheet's in the business.

Finally, Regency's talented, dedicated and deep team; the best in the business. As always, I want to thank my colleagues for their hard work and dedication. The results of their exemplary efforts have led to average growth in core FFO, over the last three years, of almost 8%. And total shareholder return over that same period, at the top of our peer group.

Before I turn the call over to Mac and Lisa, let me remind you why we are so excited about our pending merger with Equity One. The transaction combines two high-quality, highly complementary platforms and firmly establishes our position as the preeminent national shopping center Company with several unique advantages.

We will own an unparalleled portfolio with an excellent mix of first-class neighborhood and community centers, with a grocery anchored focus. As important, this merger deepens our concentrations in affluent and in-fill trade areas with strong demographics to attract leading retailers.

Combined, these factors will produce better merchandising and higher rental and occupancy rates, driving stronger organic growth. Also, the two portfolios have significant overlap in many of the country's most attractive metro areas, providing us with enhanced planned presence and economies of scale; contributing to the transactions substantial synergies.

In addition, considerable value from an unmatched pipeline of development and redevelopment opportunities will be unlocked by our experienced team. The merger preserves our balance sheet strength and flexibility, maintaining our access to multiple sources of capital at the lowest cost.

The result of these compelling attributes will be a more diversified cash flow stream, with better NOI, better earnings and better NAV growth potential. I cannot overstate our excitement and enthusiasm and we look forward to closing the merger and creating substantial value for many years to come.

I will now turn the call over to Mac Chandler.

Thanks, Hap, and good morning. 2016 was an impressive year for development and redevelopment. During the year we started 16 new projects representing a total investment of more than $200 million at a blended 7.6% return. Despite significant competition for the best projects, we continue to source and execute on compelling opportunities in target markets that enhance our high-quality portfolio.

I will quickly highlight a couple of our recent developments. In December, we started Chimney Rock Crossing. A 218,000 square-foot center located within an affluent New York City suburb; anchored by Whole Foods, Nordstrom Rack and Saks Off 5th.

This location will create a true regional draw, creating a dominant center for both best-in-class anchors and shop tenants. We took ownership of the property with complex entitlements in place, and anchored leases substantially negotiated, which greatly mitigated its risk.

The Village at Riverstone, located within Houston's fastest growing master planned community, also started in December. It will be a dominant Kroger-anchored center, aligned with leading national and regional restaurants and restaurant providers, already more than 80% leased and committed before even starting construction. This project will be an outstanding addition to our premier Houston presence.

These terrific new additions total more than $100 million of net new investment. At year end 2016, our in-process developments and redevelopments represented a total investment of nearly $300 million, yielding a rate of return of nearly 8%.

Our ability to continue to execute on these great projects is a testament to our industry-leading national development platform, which is driven by enduring relationships, local market expertise and attractive cost of capital. This is why we're able to consistently source and deliver on the most compelling investment opportunities.

As we look forward to 2017, I am enthusiastic about our pipeline. To that end, we have great visibility into a couple of first-half 2017 starts. The first, a [Wagners] anchored center in the DC market, and the second, a Whole Foods opportunities located outside of Chicago. In addition, we have other promising opportunities that are progressing nicely in target markets like Seattle, Miami and Raleigh.

Likewise, I'm particularly excited about the prospect of sharing with you our vision of Equity One's redevelopment pipeline in the months to come. I would now like to turn the call over to Lisa.

Thank you, Mac. Good morning, all. Our high quality portfolio continues to perform extremely well.

At year end, our same property percent leased was more than 96%, including 93% for shop spaces. This is especially impressive given the team's accomplishments in the face of a handful of retailer bankruptcies.

The benefit of such a strong portfolio, running at historically high occupancy, continues to translate into better merchandising and pricing power. Leasing spreads for the quarter were in the mid-teens, including (inaudible) of more than 20% for new deals.

This strength in core fundamentals, led to same property NOI growth for the year of 3.5%, including nearly 4% in the fourth quarter, primarily driven by growth in base rent. As a reminder, for 2017, we do anticipate moderating same property NOI growth impacted by last year's bankruptcy related store closings. While we have largely backfilled these anchor boxes, the new tenants won't be up and running until the second half of this year.

Turning to the capital markets; maintaining a fortress balance sheet continues to be a foundational principle for Regency. As we enter 2017, we have the strongest balance sheet in the Company's history. Subsequent to year end, we issued our first ever 30-year bonds, with proceeds of $300 million at a 4.4% coupon. These proceeds will be used to fund the full redemption of our 6 5/8% preferred stock. This issuance and the redemption significantly improves free cash flow and fixed charge coverage.

At the same time, we also issued $350 million of 10-year bonds at a 3.6% coupon. These proceeds will be used for certain transaction costs related to the pending merger, including the refinancing of some of the in-place Equity One short-term debt. Importantly, in the unlikely event that the merger does not close, these bonds include a mandatory redemption option.

As a result of the 30-year bond offering and the savings from the redemption of the preferred stock, we increased core FFO guidance by $0.02. At the same time, you will also note that we reduced NAREIT FFO guidance by $0.07, which is incorporating the one-time costs related to the preferred redemption.

More importantly, please note that we have not included any impact of the 10-year offering in the updated ranges, as any merger-related impacts are currently excluded from all guidance metrics. We intend to update guidance to reflect the impact of the merger in the coming months.

For acquisitions guidance, you will note that it has not changed from previous disclosure, but I did want to clarify that we do have a shopping center under contract in the Northeast, which we hope to close in the coming months. And as a reminder, the majority of the remaining $90 million in proceeds from our March 2016 forward-equity offering will be used to fund this acquisition.

To echo both Hap and Mac, 2016 was a great year on many fronts. We look forward to a tremendous 2017 as we are extremely excited about the prospects of not only closing the merger, but especially integrating and operating the combined Company.

That concludes our prepared remarks and we now welcome your questions.

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

(Operator Instructions)

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

Good morning. Thank you. I wondered if you could comment on retailers' appetite to participate in redevelopments. Is that interest growing, holding steady or somewhat decreasing?

Thanks, Craig. This is Mac. I'll be happy to answer that. I think steady to growing.

Retailers are constantly looking for shopping centers that are relevant, that are contemporary and we see -- have a robust pipeline of active redevelopments and ones that we're working on. Some in the near future, but some also many years away; so it is a healthy trend of retailers continuing to want to take part in an active redevelopment.

Then just on transactions, are you noticing that transaction pace is slowing nationally or what is your read on transactions for 2017?

You talking about capital markets transactions or you talking about leasing transactions?

I'm sorry. Buying and selling of shopping centers. Maybe not necessarily so much your outlook, but national, if it is staying as active as 2016 or slowing?

We haven't seen any material change, and if you think about the arena that we play in, it's a much smaller set on the buy side than national. We may not even necessarily see everything that is coming nationally because I think it's pretty clear to our broker relationships to seller relationships of the higher quality that we are targeting to buy.

But at this point in time there's still a lot of capital pursuing the higher quality, premier shopping centers and we continue to see demand for the lower growth, slightly higher cap rate properties that we intend to sell.

Okay. Thank you.

Thanks, Craig.

Our next question comes from Christy McElroy from Citi. Please go ahead.

Hello. Good morning guys. Lisa, in thinking about the components of your same store NOI growth in 2017 realizing the slower growth rate is mostly bankruptcy related from 2016 closures, what are you assuming for re-leasing spreads? And has anything changed in terms of pricing power and lease negotiations given the tougher retail environment?

I will start that and Mac or Jim, if anybody wants to add any color after. For same property NOI growth we do have the headwinds of the bankruptcies. We felt that a little bit in the latter half of 2016 as well.

We also -- we're also going to be in 2017, comping off a relatively higher other income line item. I think you probably saw that in our actual results. We had a rather large easement payment, actually at one of our future redevelopments that Mac just alluded to.

But with regards to rent spreads, it's still really healthy, robust demand and we would expect that leasing spreads will be very similar to what we've achieved in the past few years, which is double digits. I think that over time you may see us maybe stabilize in the high single digits, but we are still assuming that we are going to have very healthy double-digit rent spreads.

The only thing I would add is, I think at 96% leased, we still have -- we're enjoying pretty strong landlord leverage and with the quality of the portfolio we -- feel good that the spreads are going to maintain around the levels we have been doing.

Okay. And just at higher level. In your conversations with grocers, especially some of the specialty grocers, how often does the topic of online meal kit providers and the growth of that business come up in discussions as a future competitive threat in the context of the overall threat from e-commerce to grocery?

Christy, this is Mac. I'll be happy to answer that. We hear it in conversations. The grocers, particularly specialty grocers, are well aware of it but it hasn't dampened their expansion efforts or their desire to open new stores.

Some are trying to do it themselves, some are outsourcing, as we all know, but it hasn't affected their core business. It's a unique component of that business. It's not the first topic of conversation but eventually it comes up but it's not prominent in their thoughts.

Ironically, their focus from a new store standpoint is in dense infill and urban areas, which is where there is more online competition. Like Mac said, they are not unmindful of it, as we are not, but at the same time; they are being highly selective, but it doesn't seem like it -- they've still got healthy demand for space.

Thank you.

Thank you, Christy.

Our next question is from Jeremy Metz from UBS. Please go ahead.

Hello, good morning, guys. I know you specifically cannot talk about the Equity One deal here but one of the attractive aspects is obviously the robust development pipeline. They had a lot of it was mixed-use and densifying sites.

Maybe a question for Mac, but I was hoping if you could just more broadly talk about taking on bigger mixed-use projects. In today's environment, given the increasing pressure on retailers, the possibility for slowing demand for space and a couple of us noticing increasing [shadow] supply we are hearing about.

I will try to answer this in a broad sense as opposed to specifically to Equity One. The best way to perform on larger scale mixed-use projects is on properties you already own. Because you can be thoughtful and patient and you can wait for the best possible outcome in terms of entitlements, in tenant mix and design. Those are easier to execute on and we prefer those a lot.

You are still seeing larger scale mixed-use projects come out of the ground, that's apparent by the cranes you see in every major city. But unless those projects were conceived years ago. There's still many people who have equal number of projects that are on the boards and we will see if they come out of the ground. The appetite doesn't appear to be accelerating or decelerating so it's still pretty steady. There is a clear demand from tenants and consumers to be in the [products].

We will be starting, knock on wood, a mixed-use development -- within the next quarter. Just once again, Jeremy, our focus -- and we had substantially enhanced, between Mac and his team and the teams throughout, our capabilities from a mixed-use standpoint.

But our focus is on being better at mixed-use; to get to the retail portions of those mixed-use opportunities whether they are within our own portfolio or on new development opportunities.

Meaning to continue to partner with the best in class developers and operators for the other sectors that would be part of the mixed-use.

Like we did with Clarendon with Avalon Bay. Like on this opportunity we expect to start in the next quarter.

Got it. Appreciate that. Then, Lisa, one for you. You mentioned adding a shopping center under contract and using the outstanding [fort] to fund that, so in terms of the $0 million to $90 million of disposition. Should we think about that only happening if you identify additional acquisitions from here and therefore, maybe more of a source of funding, if you find additional deals?

The dispositions will fund our development and we do have developments in process that have spend that will happen this year. It is not even necessarily related to the new starts, although we have great visibility as Mac said in his prepared remarks on the call, to several of those as well. You should think about free-cash flow, which was almost a $100 million in 2016 and the [dispose] funding our developments.

Anything under contract today?

The one that we have -- you mean acquisition that we have under contract in the Northeast? We will use the equity to fund that.

I'm sorry. On the disposition front. If you had anything under contract?

We do not.

We had a late close in December and that was one that could have been in the first quarter of this year.

Correct. The larger -- the Pima Crossing that you saw our disclosure. It was close to $50 million.

Got it. Thanks.

Thank you, Jeremy.

(Operator Instructions)

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

Thank you. Can we just get a quick update on some of your development projects? Notice that a couple of your projects, the expected yields went down. Any commentary on there?

This is Mac. I'd be happy to answer that.

We feel really good about our in-process pipeline. It is performing well. We really have no specific problems to talk about.

We did take a case in our Northgate project where we converted a pad, which prevented ground lease and converted it to building a building that caused their cost to go up but that is pretty standard fare. Our returns are solid and we are hitting our underwriting. We feel good about that.

I think it is new development that we brought online that was a lower return. That's not so much shifts in what was already in process.

Yes.

I may be looking at the wrong column. Never mind about that one.

I'm not sure how much you want to talk about the merger, but just broadly speaking; I was wondering if since the announcement if there was any type of new things that you've learned, whether it be synergies or the way you want to run the corporate structure overall? Any kind of commentary on that?

Hap is looking at me. We would love to talk about it.

We are really excited about it, but unfortunately at this point, we are really limited in what we can say and since announcement, we are two separately operated companies and we have been operating that way and are required to operate that way. We cannot wait to talk about it and we will do that at the appropriate time.

Totally understandable. All right. Thank you.

Thank you.

Our next question comes Florian van Dijkum from Boenning. Please go ahead.

Great. Thank you. Question for Hap or Lisa.

You guys -- you are about to embark on this merger, you've got -- fortress balance sheet, 4.4 times debt to EBITDA, envy of most of the sector. You've got all the markets that everybody wants in the coastal markets and you will increase that with -- if you add the Equity One.

The question I have is, what are your biggest worries, what are the biggest concerns? What do you think are the biggest risks to the business?

Let me just say, that I think we indicated before, while we are not unmindful of the economic challenges that are out there, of the disrupters that are out there. But there is still a strong conviction on our part that well anchored, well located, community and neighborhood shopping centers; particularly those that are grocery anchored, are going to continue -- there is going to continue to be strong demand from the better retailers for those shopping centers.

That is number one. Number two, we believe that our development program is a great way to build great shopping centers and redevelop great shopping centers at attractive returns on capital that are adding to NAV.

I think if you have a high quality portfolio and a right size and thoughtful development program and a fortress balance sheet; that is the best way to navigate an experienced management team to the challenges that are going to be out there. I think we're going to be very well positioned, to the extent there is a downturn or storm out there, to weather that storm and even profit from those opportunities.

Does that mean that you feel pretty good where you are but you are nimble enough to be able to withstand any sort of unforeseen events? Is that how we should read that answer?

To think that any entity in the world is going to be totally immune to changes in technology, to changes in economic conditions, I think that is not going to be the case. But at the same time, I think we are extremely well-positioned to not only survive what may happen economically and what may happen from a -- in a very changing world.

I think it is a tried and true formula and I think not only to survive but to thrive. That doesn't mean that we are going to sit back, as we say to ourselves we are -- we think we are good, but we think that there is an opportunity to continue to improve in every aspect of our business -- on a journey of building a great company.

Great. Thanks Hap.

Thank you.

Our next question comes from Michael Gorman from BTIG. Please go ahead.

Thanks. Good morning. Just a question on disposition.

If you look back over -- call it the last five years or so, you've sold or counting the 2017 guidance, you've sold about $1.2 billion in assets, ranging from 6.5% caps up to sub 8%. I'm just wondering, as you look at the portfolio today; what if anything is left in that potential disposition bucket as we go through 2017 and start looking out into 2018 and beyond?

We've significantly reduced the number of properties and the percent of the value of our company that would fit into that 6.5% to 8% cap rate and I mean significantly, by virtue of selling close to $1 billion in properties. We have very little left there, but shopping centers and neighborhoods, Hap alluded to a little bit, are constantly evolving and changing and there are always going to be centers that are going to be towards the lower quality, lower growth end of the spectrum in our portfolio.

It is infinite, if you will, but it is a really small percentage of what we own. When you think about our strategic funding model, we will use dispositions to continue to fund our development spend and we will; when appropriate, access the capital markets as we did in 2016.

The best way I can answer is, it is a very small part and what we would consider the lower end of our spectrum, is a pretty high bar because I think we have one of the best portfolios in the business.

Lisa, if I take your comments, is it fair to say that going forward it is more -- less about -- it will be less about getting rid of a lower quality bucket and more about pruning and trading out what you consider to be the bottom end versus what is a better top-end development? If there is future funding for developments out of dispositions, the cap rates could be even lower than what we are seeing right now?

That is going to be property specific. Even looking at the properties that we sold last year, we sold some that had a five in front of it so yes, that is the case. It is not only necessarily lower quality but it's lower growth because part of the model is to recycle the lower growth. It may be because they are lower quality but it could be because there's not a lot of inherent growth in that asset so recycling capital from lower growth into higher quality, higher growth properties.

Great. Thank you.

Thank you, Michael.

(Operator Instructions)

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

Good morning, everyone. Just a big general question. As it relates to the amount of time it gets -- between a lease is signed to when rent commences -- has there been any shift, either more quickly or longer in that process say over the last year or so?

Chris, this is Jim. We really haven't seen any noticeable difference quite frankly. It does take time. It's probably -- probably tougher on the front end to have tenants -- really they are very focused, they are very picky, but once you execute to delivery, we are not seeing an expanded period of time.

Okay, and maybe if you -- expand a little bit on the Chimney Rock development. The yield is definitely lower than what we are used to seeing from you guys from a ground-up perspective. What was the underwriting approach and what is unique about this that has value add beyond the expected going in 6.5% yield?

Sure, Chris. It really it's a risk-adjusted return. That is really the big picture way of looking at.

A family that has owned the site for a decade or so, spent a long time getting a very complex array of entitlements; including some very expensive off sites. Which would not only entitle but actually deliver to the site. They also brought along with the opportunity, really all four anchor leases, which were substantially negotiated in final lease form. One of them was actually signed.

From a risk-adjusted basis we were comfortable stepping into that project. The site was also 30% graded. It had some very complex grading that went along with that and risky. Because they had taken on the first turn of it, they had mitigated the risk out of the project and determined how much backsoil was there, which they moved and remediated. When we stepped into it, it was not completely a layup, but very much different than a typical development. We felt that return was appropriate.

Still a good 150 to probably 200 basis points spread between that and what we can sell it today. Got good growth. They did a good job negotiating the four anchor leases so they have good growth. Good visibility towards the shop leasing and we're getting really good quality tenants, with good growth and we love the location a lot too. This is a high -- high barrier to entry location, very affluent and this will be a one-of-a-kind center. It is the closest Whole Foods within a 30 minute drive time and we feel really good about the ability to attract a lot of very affluent customers.

I would say that I agree with Mac that it is 200 basis points. Instead of saying where we could sell it today? But where we could buy today? Because this is a center we will own -- for a very long time.

Great. Thank you.

Thank you, Chris.

Our next question comes from Christy McElroy from Citi. Please go ahead.

It is Michael Bilerman. Lisa, you mention you are operating two separate companies today and you want to get closer to the merger to share more information. Can you let us know what the plan is in terms of timing of sharing that information?

I don't know if you are planning a larger conference call post-merger or are you just going to wait for 1Q results? Just so that we know at what point you are going to come out with a more fulsome document and opportunity for us to ask questions.

The shareholder meetings are February 24 and then I'm certain that you read every page of the merger agreement so you would then know that the scheduled close would be March 1, based on the number of days post-shareholder meeting. Then at this time our plan is to wait until our first quarter earnings call.

Certainly if that changes, you guys will know. There is a lot of complexities around the non-cash mark-to-market and we just want to be sure that we have it -- all of that fully done so that we can give 100% disclosure rather than feed it out to you guys in pieces. You know we are very committed to being very transparent and we will do our best to give the best disclosure, at the right time.

I will reiterate what we told all of you when we made the announcement in November and in subsequent investor meetings. We still expect it to be accretive to core, even before that incremental non-cash mark-to-market and we expect it to be even more accretive to same property NOI growth than it is to core FFO.

I don't think the non-cash - because it is non cash, it has really no impact on the valuation. I don't think the Street really cares too much about that.

I think they care more, you can see from the questions on the call, about the integration, the development, the redevelopment, operating structure, personnel, things like that. I'm just curious as you -- will you host a more in-depth analyst day to go through the go-forward as these two entities come together?

Michael, this is Mike. A more fulsome analyst day and investor day is certainly in our minds. We haven't hosted one in quite a long time and this would absolutely be the time to reengage on that front.

We are working on plans. Those plans would likely be -- include an event towards the end of the year and we are looking forward to that very much. Introducing our thoughts around many of these projects that we will be inheriting, as well as our go-forward plans for the combined company.

Lastly, in terms of the transition as we think about it, how much of the senior executive team from Equity One will come over? The deal closes March 1. Should we expect any transition from the C suite team or is it more lower level, market level people that you are assuming, at least initially?

It would be no -- Mac has pretty clear that there would be no C suite coming over to the combined company and the additions would basically be operations folks at the field level and back-office, which will either be new employee hires or Equity One folks.

Even on a transitionary period? There is no one coming over for a period of time at all?

Not from the C.

Not from the C suite.

Thank you.

From a transition standpoint we would obviously address what is necessary to operate the properties, to do the appropriate amount of accounting and to transition from a -- on the redevelopments.

Thank you.

There is a lot of work to be done but we feel very comfortable with what our plan is and more to come on specifics.

Thank you. This does conclude the question and answer session. I would like to turn the floor back over to management for any closing comments.

We appreciate your time and wish you a good rest of the week and a great weekend. Thank you very much.

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