Regency Centers Corporation (REG) Q2 2015 Earnings Report, Transcript and Summary

Greetings. Welcome to the Regency Centers Corporation Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the following presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mike Mas, Senior Vice President of Capital Markets. Thank you, Mr. Mas. You may now begin.

Good morning, and welcome to Regency’s second quarter 2015 earnings conference call. Joining me today are Hap Stein, our Chairman and CEO; Brian Smith, our President and COO; Lisa Palmer, our Chief Financial Officer; and Chris Leavitt, Senior Vice President and Treasurer. Before we begin, I would like to address forward-looking statements that may be discussed in the call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by Regency Centers Corporation with the SEC, specifically the most recent reports on Forms 10-K and 10-Q which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We also request that callers observe a two question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue. I will now turn the call over to Hap.

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

Thanks, Hap, and good morning, everyone. Our overall financial results were solid again this quarter with core FFO per share of $0.75, representing an increase of 5.6% over the second quarter of 2015. Same property NOI growth, excluding termination fees, was 4.3% for the quarter. Base rent continues to be the driver as move-outs remain low and commenced occupancy increased nearly 95%. Redevelopments contributed a net positive impact of 50 basis points this quarter. Through the second quarter, same property NOI growth has exceeded expectations, though it is expected to moderate slightly over the next two quarters as we face higher comps from the back half of 2014. As a result, we have revised our full-year guidance for 2015 accordingly. We now expect same property NOI growth, excluding termination fees, to be in the range of 3.6% to 4.1% and core FFO per share in the range of $2.95 to $2.99. I also want to note two other forward-looking updates. As Brian will discuss in more detail, we lowered development start guidance for the year to a new range of $75 million to $125 million. It is important to highlight that our shadow pipeline remains robust. And this change in guidance is not indicative of projects falling out but just delayed timing and start. One result of these delays is a reduction in development and leasing overhead capitalization for 2015 which does impact net G&A. We now expect the quarterly net G&A run rate to increase just modestly in the second half of the year. And still, we will finish the year at the upper end of our previously communicated range of $60 million to $63.5 million. Moving to the balance sheet and our liquidity position, we continue to cost-effectively improve Regency’s already strong balance sheet through organic earnings growth and discipline match funding of investments. Developments and acquisitions will continue to be funded primarily through the sales properties while equity will be used as a source of capital only when we believe it is priced favorably. As a reminder, the forward equity offering completed in January remains outstanding. We still intend to settle a portion for the acquisition of University Commons in Boca Raton, Florida which is expected to close in September. We also plan to settle a piece of the offering when we address the refinance of our $350 million unsecured bond maturity which we paid off earlier this week using our line of credit. After we exit our blackout, we will access the market to source new long-term debt when conditions are appropriate. But we do remain well positioned to remain patient. To afford us the ability [ph] of providing this flexibility, we diligently monitor future commitments, including development spend and debt maturities to maintain ample capacity should an opportunity arrive or should we encounter unforeseen disruptions in the capital markets. Consistent with that objective, we amended our $800 million revolving line of credit this quarter, reducing the borrowing spread and extending the maturity date. In all, our strong balance sheet was recognized by Moody’s when they upgraded our credit rating to Baa1, validating the enhancements we’ve made over the last several years. Brian?

Thank you, Lisa, and good morning, everyone. Over the last several quarters, the hard work and talents of our local team have continued to translate into tangible operating results which is evident in the numbers again this quarter. The operating portfolio once again benefited from historically low move-outs but also experienced the highest number of new leases signed in any quarter since 2013. This momentum pushed the same property portfolio to nearly 96% leased, a 40 basis point improvement over the prior year and 20 basis points sequentially. The primary contribution was from small shops which increased over 91% this quarter. This represents a gain of 80 basis points over the prior year. With the portfolio so highly leased, low levels of new supply and the continued demand for quality space, the team is laser-focused by driving rents and executing deals with higher and more frequent rent steps. At the same time, as part of our fresh-look initiative, we thoughtfully select the best retailer or restaurant for each space. Rent growth for shop space was double-digits for the third quarter in a row and we have successfully executed embedded rent steps in 90% of our leases over the past four quarters. Our progress incorporating rent steps into more of our leases, coupled with our consistent rent growth, has been instrumental to our success in achieving same property NOI growth in excess of 4%, not only for four consecutive quarters but potentially four consecutive years. Turning now to our ground-up developments, this quarter, we completed our Fountain Square project in Miami. This 180,000 square foot center is located in one of the most densely populated areas of the Miami metro market that also benefits from a huge daytime population from Florida International University. The center is anchored by Target, Publix, Ross and T.J.Maxx. The success of this project yielding a return of over 250 basis points to market cap rates and approaching 96% lease is a good example of what our best-in-class development teams can produce. The momentum from the successful project is leading to future investment opportunities in the highly desirable Southeast Florida market. $180 million of ground-up developments currently under construction are generating average returns of 8% and approaching 92% leased and committed. The Village at La Floresta anchored by Whole Foods and located in a master plan community in Orange County continues to impress me as it attracts top-tier operators with the ability to support higher rents and returns than original underwriting. La Floresta will feature unique, fresh local restaurants like Mendocino Farms, Urban Plates in the best casual seafood sensation looking to grow its presence in Southern California. In addition, this project will feature place-making enhancements, including an outdoor amphitheater and permanent space for Farmers Market designed to increase shopper dwell time and enrich the retail experience. CityLine Market in Dallas, also anchored by Whole Foods, has such strong retail demand that as phase one approaches 100% lease, we’re now negotiating leases on 95% of the retail space for our phase two project soon to commence, adding to the already impressive mix of retail, restaurant and service uses. Looking forward with the shadow pipeline of likely starts in excess of $500 million over the next few years, plus an even greater amount of additional opportunities we’re working on, we expect to secure great projects that set our disciplined criteria to start an average of at least $150 million to $200 million of developments and redevelopments annually. Hap?

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

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question is from the line of Christine McElroy with Citi. Please go ahead with your questions.

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

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

Okay. So you’ll pull this forward offering or the proceeds, the portion of that when you do the sub bond [ph] deal?

Correct.

Okay. And then just with Riocan embarking on a strategic alternative process with US Trust, are you familiar with that portfolio and if they did go-to market with some of that, would you be interested in it, the portion of it given the concentration [indiscernible]?

Obviously, we’ve read about that. Somewhat familiar with the assets. We’re familiar with the assets. And we’ll evaluate them. But they have to meet our criterion B, not only do something that makes sense from a financial standpoint, but also they have to be the quality criteria that we have.

Thank you.

Thank you, Christine.

Our next question is from the line of Craig Schmidt with Bank of America. Please go ahead with your question.

Yes. Thank you. I wondered if you could give maybe a little bit more color on the delayed timing of the starts that led to the lower development starts?

Sure, Craig. So as we said, our stated objective would be to have an average annual delivery for development and redevelopment of 150 million, 200 million. But it can be one payment [ph] and that’s really what you’re seeing. There’s no change in the project. They’re all still on track. It’s just difficult to know the delays which have pushed some projects in the 2016 and somewhere a flip of the coin whether it will happen in December or January, around those time periods. So the issue isn’t the opportunity. It’s just the timing of the starts. But if you want to get the specifics on what exactly happened, we’ve got about eight projects we’re working on that we’re hoping at the beginning of the year would happen in 2015. Three of them are mixed use, so you’re dependent on the other uses to some extent. If there’s an issue there, then you’re going to get delayed as well. Two are master plan communities where there’s some issues in the master plan developers are still working out. One of them is a zoning change. And the city pushed that in 2016. One had issues with the anchors in terms of [indiscernible] being way too much risk in some of the lease terms. That looks like it has since been worked out. And then one for sure will start this year. But as I look at what’s going on as I mentioned in the prepared remarks, there’s no shortage of projects. We’re working on $650 million of development between now and 2017 of which I’d say about well $500 million are ground up. And at this point in time, I feel confident that $350 million to $400 million are likely, it’s not guaranteed, but they’re looking real good, of which about $250 million to $300 million are developments.

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

Well, the specialty grocers, for sure. The original grocers, they’re on fire. The boxes are still cautious and conservation [indiscernible] is good for the industry. They want spaces and all the portfolios and everything, but you don’t see a whole lot of box development just because the rent from those for a particular use haven’t gotten back up to where they were pre-recession. But the grocery side, there’s a lot activity.

Okay. Thank you.

Thank you, Craig.

Thank you. [Operator Instructions] The next question is from the line of Jay Carlington with Green Street. Please go ahead with your questions.

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

Nothing particular. It’s just we get a couple of things. I would say in the developed world, success begets success. And that project is so successful that we are seeing a lot of opportunities come to us either through brokers or potential joint venture partners. We’re still working through those. But we do have a project, for example, that was target excess land that they took out to an RFP and we were successful in getting that taken care of. We won that and that will likely be a whole food development. And then just some other things that are percolating [indiscernible] not to talk about.

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

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

Okay. Thank you.

Thank you, Jay.

Thank you. Our next question is from the line of Michael Mueller with JP Morgan. Please go ahead with your question.

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

Well, it all has to do with the anchor leases, new anchor leases. We talked about last year in the second and third quarter, we had four anchor leases that their average size was greater than 40,000 square feet and the combined or the average rent gross of the four is about 135%. So as you know, the new anchor leases is what moves the needle because of the size of the spaces as well as the tax of those are all leases and have the biggest mark-to-market. In the last three quarters, we’ve done a total of three anchor leases, new anchor leases. And they’ve been small. The three of those average 15,000 square feet. So with the anchors being 99% leased and our renewal rates for anchors being 90%, what we’re really getting in the last three quarters is mostly renewals of anchors. And of course, renewals are fixed option rents. And they’re more flattish. The new leasing of the last three quarters has been almost entirely shop. That’s why if we look at the shop rent growth, it’s been double-digit the last three quarters. And in fact, this quarter, it increased 20 basis points. And then the other thing I would just say is it’s not that we’re not doing new anchors leases. It’s just that a lot of them are non-comparable. So where the rent growth is not getting factored into the - or where the increase in rent is not being considered rent growth. An example will be [indiscernible] centered up in Baltimore center up there. There, we’ve got a Staples box that we’re splitting and re-leasing both spaces. And the cash spreads on that are greater than 50%. But that kind of stuff is not showing up in rent for [indiscernible] is not considered non-operable.

Got it. Okay, that’s good color. Thank you.

Thank you, Michael.

Our next question is coming from the line of Rich Moore with RBC Capital Markets. Please go ahead with your question.

Yes. Hi, guys, good morning. It’s been a long earnings season. And Brian, I thought I heard you say, but I probably didn’t that you’re thinking you’re going to do 4% plus same-store NOI growth for the next four years? That’s fantastic, guys.

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

We should make it 4% in consecutive years.

All right, I got you. I got you. So this is the best guidance I’ve ever heard. But I want to ask you guys, the occupancy level that you’re at that I have is a record for all the years that I’ve been keeping track of you. Is that as high as you can go? I mean is there sort of like the space remaining, a small shop space remaining or whatever it is, not terribly leasable at this point that’s left over?

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

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

One thing I will add about the environment too, just a little bit of color from my perspective is, I think this is the best environment for landlord that we’ve seen, not necessarily for developers, but for landlords. And it’s not because it’s easy and retailers are getting and opening stores wildly. In fact, it’s just the opposite. It is really a battle. The retailers fight hard, which is why it’s taking us longer to get spaces leased and then to rent paying. You’re seeing them taking approvals backed committee where they’re changing their return threshold. In tenants that we signed leases, it went maybe a dozen leases. One start from scratch on the lease negotiation. So I think that’s just really healthy for the sector that retailers are cautious and deliver - but they have a desire to grow. And it’s one of the reasons why the growth in supply is still limited.

We totally agree. And that’s important. It is a very healthy environment from our perspective.

It’s great color. Thank you, guys.

Thank you. At this time I’ll turn the floor back to management for closing comment.

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

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