Regency Centers : 2023 2Q Transcript

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EDITED TRANSCRIPT

REG.OQ - Q2 2023 Regency Centers Corp Earnings Call

EVENT DATE/TIME: AUGUST 04, 2023 / 3:00PM GMT

OVERVIEW:

Company Summary

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AUGUST 04, 2023 / 3:00PM, REG.OQ - Q2 2023 Regency Centers Corp Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Alan Todd Roth Regency Centers Corporation - Executive VP of National Property Operations & East Region President

Christy McElroy Regency Centers Corporation - SVP of Capital Markets

Lisa Palmer Regency Centers Corporation - President, CEO & Non Independent Director

Michael J. Mas Regency Centers Corporation - Executive VP & CFO

Nicholas Andrew Wibbenmeyer Regency Centers Corporation - Executive VP & West Region President

C O N F E R E N C E C A L L P A R T I C I P A N T S

Anthony Franklin Powell Barclays Bank PLC, Research Division - Research Analyst

Craig Allen Mailman Citigroup Inc., Research Division - Research Analyst

Floris Gerbrand Hendrik Van Dijkum Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst Ki Bin Kim Truist Securities, Inc., Research Division - MD

Linda Tsai Jefferies LLC, Research Division - Equity Analyst

Michael Goldsmith UBS Investment Bank, Research Division - Associate Director and Associate Analyst

Michael William Mueller JPMorgan Chase & Co, Research Division - Senior Analyst

Ronald Kamdem Morgan Stanley, Research Division - Equity Analyst

Viktor Fediv Scotiabank Global Banking and Markets, Research Division - Associate

Wesley Keith Golladay Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Sanket Agrawal Evercore Inc. - Equity Research Associate

Eric Borden BMO Capital Markets - Senior Associate

P R E S E N T A T I O N

Operator

Greetings, and welcome to the Regency Centers Corporation Second Quarter 2023 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Christy McElroy, Senior Vice President of Capital Markets. Thank you, Christy. Please go ahead.

Christy McElroy - Regency Centers Corporation - SVP of Capital Markets

Good morning, and welcome to Regency Centers' Second Quarter 2023 Earnings Conference Call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Alan Roth, EVP National Property Operations and East Region President; and Nick Wibbenmeyer, EVP and West Region President.

As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties.

It's possible that actual results may differ materially from those suggested by these forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and 10-Q filings.

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AUGUST 04, 2023 / 3:00PM, REG.OQ - Q2 2023 Regency Centers Corp Earnings Call

In our discussion today, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance.

Our caution on forward-looking statements also applies to these presentation materials. Today's discussion may also contain forward-looking statements about the company's pending merger with Urstadt Biddle, including forward pro forma earnings accretion estimates and projected timing of the merger close. While we currently expect the transaction to close in mid- to late August, the closing remains subject to shareholder approval and conditions being satisfied or waived. Lisa?

Lisa Palmer - Regency Centers Corporation - President, CEO & Non Independent Director

Thank you, Christy. Good morning, everyone. We appreciate you joining us. We again had a really strong quarter, in fact, one of the strongest and most active quarters in Regency's history. Our success came from all facets of the business, including leasing, development starts and, of course, the Urstadt Biddle merger announcement in May.

I said many times since we emerged from the pandemic, that Regency is so well positioned for sustained growth and that we're on our front foot ready to capitalize on opportunities. Our achievements in the second quarter reflect this. They reflect the exceptional work of our team, supported by the strength of our portfolio, the current retail environment and our balance sheet position.

As we all know, there is still uncertainty in the macroeconomic landscape, but at Regency, we've not seen any signs of softening. As evidenced by our results, the fundamentals of our business remain very healthy and operating trends are strong. From a leasing perspective, tenant demand is robust, and the second quarter was one of our strongest quarters ever, and it's supported by sustained momentum in our LOI and lease negotiation pipelines.

Tenant bankruptcies are playing out as we expected, but importantly, our exposure to these retailers is limited. From a capital allocation perspective, most of you know that we have been acutely focused on ramping our development and redevelopment activity back to our strategic goal of a pace of $200 million to $250 million of average annual investment.

I'm really proud and gratified by the success demonstrated by such a strong second quarter for new project starts. Nick will discuss our activity in more detail, but creating value through development and redevelopment has always been a core competency of Regency, and it is a competitive advantage for us that is often overlooked.

As I've said before, I believe we have the best team and platform in the business. And with ground-up development, we can really move the needle in an environment where new supply of high-quality centers is lacking. Even as we ramp our activity, our pipeline will continue to be self-funded on a leverage-neutral basis with free cash flow, driving accretion and a sustainable component of our earnings growth above and beyond the organic same-property NOI growth that are high-quality,well-located properties are generating.

With regard to Urstadt Biddle, we're proud of this transaction and are excited to integrate both the shopping centers and many of their people into Regency. These centers align so well with our own and meaningfully expand our presence in these strong trade areas in the Northeast. The teams on both sides are working hard to effect an efficient and timely merger close.

As Mike will discuss, we expect it to be immediately accretive to our core operating earnings, and we also look forward to unlocking value within the combined portfolio under the umbrella of our leading national leasing and asset management platform. Another highlight of the quarter was the release of our annual corporate responsibility report in late May. This report is a synthesis of our commitment to ESG and the many initiatives driving us forward. We are extremely proud of the progress that we continue to make towards achieving our long-term goals. The principles of our program are embodied throughout our organization and are integral to achieving our strategic and financial objectives.

Before I turn it over to Alan, I'll reiterate that Regency is very well positioned in this environment given the strength of our assets, the trade areas in which we operate, supported by the solid fundamentals of the grocery-anchored suburban shopping center business today.

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AUGUST 04, 2023 / 3:00PM, REG.OQ - Q2 2023 Regency Centers Corp Earnings Call

Our liquidity and balance sheet position will allow us to remain opportunistic driving sustainable cash flow growth going forward. Alan?

Alan Todd Roth - Regency Centers Corporation - Executive VP of National Property Operations & East Region President

Thank you, Lisa, and good morning, everyone. We continue to benefit from a strong retail environment as demonstrated by another quarter of fantastic operating results, particularly on the leasing side. New leasing volume year-to-date is 40% above our historical average. And in the second quarter, we achieved our highest shop new leasing volume in over 10 years.

As a result, we increased our shop leased rate by another 60 basis points sequentially to 92.7%. Our overall same-property leased rate is up 10 basis points in the second quarter despite 60 basis points of occupancy loss due to bankruptcy, further validating the strength and quality of our portfolio.

Exceptional second quarter leasing activity also came with strong cash rent spreads of 12% on a blended basis and nearly 30% on new leasing. Our continued success with contractual rent steps is reflected in our GAAP rent spreads of 20% on a blended basis. This strength in our operating trends helped us drive another successful quarter for same-property base rent and NOI growth.

Tenant demand is coming from a broad range of categories, including but not limited to grocers, off-price, medical, restaurants and pet services. Our signed but not occupied pipeline represents over $30 million of annual incremental base rent, and our same-property occupancy spread remains wide at 250 basis points.

Even as executed leases commence each quarter, we continue to replenish our SNO pipeline with the execution of new deal. As we look ahead, our leasing pipelines remain full, with another 1 million square feet under LOI and lease negotiation.

Our second quarter activity did include a mix of larger space deals with longer lease terms, which resulted in elevated per square foot leasing CapEx. But importantly, net effective rents remain in line with our historical average.

With regard to backfilling our former Bed Bath & Beyond spaces, we are executing our vision and making excellent leasing progress. You'll recall that our exposure at the time of the bankruptcy filing a quarter ago was 50 basis points of ABR.

Two of our locations were purchased at auction by Burlington and Michael, and we have fully executed leases on 3 additional spaces. We have significant interest on the remaining spaces and our team is actively negotiating with multiple prospects, including the in-process pursuit of redevelopment projects at a couple of the locations.

Overall, we anticipate marking them our rent by approximately 20% to 25% on average for our former Bed Bath stores. As we've noted previously, we feel confident in our ability to re-lease our high-quality real estate when tenant bankruptcies occur often at higher rents and upgraded tenancy.

In closing, we recognize that our success in the second quarter is not only reflective of the current environment and the strength of our assets but of the hard work of our best-in-class leasing and operating team. We see that momentum continuing as we work in the coming months to integrate Urstadt Biddle's people and high-quality properties and create even more value through the combined portfolio. Nick?

Nicholas Andrew Wibbenmeyer - Regency Centers Corporation - Executive VP & West Region President

Thank you, Alan. Good morning, everyone. We had a very productive and gratifying quarter for development and redevelopment activity. We started several exciting new projects and made great progress on leasing and construction across our $400 million in-process pipeline while maintaining costs, returns and timing consistent with our underwriting.

We also continue to build our future pipeline of projects and see meaningful opportunities for incremental investment. In the second quarter, we started 12 new development and redevelopment projects totaling $175 million. That is an impressive amount for Regency, and I'd like to thank our development teams for their efforts.

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AUGUST 04, 2023 / 3:00PM, REG.OQ - Q2 2023 Regency Centers Corp Earnings Call

As these projects start to reflect years of hard work behind the scenes, getting us ready to commence construction at these sites. The first project I'd like to highlight is SunVet. The $90 million Whole Foods-anchoredground-up development on Long Island that we spoke about last quarter.

The properties in (inaudible), New York and located on the heavily trafficked east-west artery of Sunrise Highway, which is the dominant retail corridor in the market. Construction commenced on the 170,000 square foot center in May, and we anticipate Whole Foods opening in 2025.

We already have signed leases with Starbucks as well as Citibank and have seen significant leasing interest from many other best-in-class retailers. In the second quarter, we also started Phase 3 of our redevelopment of Serramonte in Daly City. This project will allow us to transform the Northeast quadrant of the property, including the redevelopment of the former JCPenney space with a world-class Asian food market as well as the development of 2 new small shop buildings adjacent to Macy's.

We continue to see significant demand throughout all components of this asset and look forward to even more value creation in the future. We also commenced redevelopment of our Whole Foods-anchored, Mandarin Landing in Jacksonville, which will include a new 25,000 square foot Baptist Health Medical Center, additional shop space and a new two-tenant pad building.

In addition to the development and redevelopment starts, I'm appreciative and proud of the work our teams have done completing 5 projects during the second quarter, which will collectively contribute more than $5 million of annual rental NOI. The largest of these projects was our $55 million redevelopment of the Crossing Clarendon in Arlington, Virginia, where our leasing and construction teams did an amazing job further solidifying the asset at the center of gravity in the Rosslyn-Ballston corridor. The project is now 100% leased with an incredible tenant mix, including a new state-of-the-art flagship lifetime, which had a very successful opening a few weeks ago.

Looking ahead, our teams are laser-focused on sourcing new investment opportunities. These include redevelopments within our existing portfolio as well as new ground-up development projects. The 3 cornerstones of Regency's development strategy, our capabilities, our capital and our contacts are more relevant than ever in the current environment.

Our leading grocers continue to expand, and we are one of the few developers that have the ability to help them execute on their desire to locate with a new high-quality shopping centers throughout the country. We continue to build our pipeline to achieve our strategic objective of more than $1 billion of project starts over the next 5 years of our expertise and our long-standing relationships, combined with our access to capital, uniquely position us to capitalize on opportunities. Mike?

Michael J. Mas - Regency Centers Corporation - Executive VP & CFO

Thanks, Nick, and good morning, everyone. I'll start with highlights from our second quarter results, walk through a few changes to our current year earnings guidance, provide some estimates for accretion related to our pending Urstadt Biddle merger and finish with some comments on our balance sheet position.

We grew same-property NOI by 3.6% in the second quarter after excluding the impact of COVID period reserve collections. Importantly, the largest driver of growth continues to be base rent, contributing 380 basis points to the NOI growth rate in the quarter. As we've continued to stress on previous calls, base rent growth is the most important indicator of our portfolio's performance.

And in Q2, our growth was driven by the combination of embedded rent steps, positive releasing spreads, growth in occupancy and redevelopments coming online. Turning to 2023 guidance. As I'll refer you to the helpful detail on Slides 5 through 7 in our earnings presentation. Driven by another strong quarter of leasing, incredibly strong, if I may add, and greater clarity around the current operating environment and bankruptcy impact. We've raised the bottom end of our same-property NOI growth range as well as our ranges for NAREIT FFO and core operating earnings.

With more certainty at the margin, we have eliminated some previous downside scenarios. Our updated same-property NOI growth range is now 3% to 3.5%. While we've maintained our total credit loss assumption at 60 to 90 basis points, we now expect a greater contribution from average commenced occupancy, benefiting from strong shop leasing through the first half of the year and absorption more than offsetting the negative impact from bankruptcy closings.

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