Regency Centers - Earnings Call - Q3 2017

Transcript

Speaker 0

Greetings, and welcome to the Regency Centers Corporation Third Quarter twenty seventeen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Clark, Vice President, Capital Markets.

Thank you. You may begin.

Speaker 1

Good morning, and welcome to Regency's third quarter twenty seventeen earnings conference call. Joining me today are Hap Stein, our Chairman and CEO Lisa Palmer, our President and CFO Mac Chandler, EVP of Investments Jim Thompson, EVP of Operations Mike Moss, Managing Director of Finance and Chris Leavitt, SVP and Treasurer. I would like to begin by stating that we may discuss forward looking statements on this call. Such statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in forward looking statements.

Please refer to our filings with the SEC, which identify important risk factors that could cause actual results to differ from those contained in forward looking statements. On today's call, we will also reference certain non GAAP financial measures. We've provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplement, which can be found on our Investor Relations website at regencycenters.com. Lastly, we will be hosting an Investor Day on January 11 in New York. Invitations with additional details are forthcoming, and we look forward to seeing you there.

I will now turn the call over to Hat.

Speaker 2

Thanks, Laura. Good morning, everyone, and thank you for joining us. We are gratified to see that even with a more challenging retail environment, Regency's portfolio continues to perform well with leasing levels over 96% and year to date same property NOI growth of 4%. Evidence that Regency's well merchandised shopping centers located in trade areas with substantial buying power are positioned to attract better retailers, which are actively but selectively expanding their bricks and mortar footprints. In the ever changing world of retail, it remains apparent that a well located physical presence will continue to be critical to efficiently service customers.

Following the close of Amazon's acquisitions of Whole Foods, Whole Foods is reengaged and actively expanding again. We believe this is a validation by the world's preeminent online platform that bricks and mortar is a critical component to a retailer's success. The winning grocers, retailers, restaurants and service providers want to be located with other better operators in centers conveniently located in neighborhood and communities with strong purchasing power. While certainly not immune to accelerated store closures and the more deliberate manner tenants are expanding, we remain extremely confident in Regency's ability to sustain growth in same property NOI, earnings, NAV and shareholder value at or near the top of our peer group as we benefit from the following. First, owning a high quality portfolio distinguished by trade areas with superior demographics and barriers to entry, highly productive grocers with average sales of $650 per square foot, relevant merchandising and placemaking and a necessity, service, convenience and value focus.

Second, a conservative balance sheet that will be critically important will be a critically important advantage in either allowing us to profit from compelling investment opportunities or endure challenging economic and financial conditions. And most important of all, Regency's exceptional and deep team guided by our special culture coupled with their value add asset management development and redevelopment capabilities. Before I turn the call over to Jim, I want to let you know how fortunate we are that our properties and especially our people fared relatively well in Hurricanes Harvey and Irma and how much we appreciate their extraordinary efforts that enabled us to keep operating and to recover so quickly. Jim?

Speaker 3

Thank you, Hap, and good morning. As Hap indicated, in spite of store closures that are garnering headlines and a more deliberate pace of new store openings, our portfolio continues to perform well as retailer demand for top quality space remains healthy. In the third quarter, same property percent leased increased 20 basis points sequentially to 96.1. The majority of this growth came from shop tenants where we experienced a 40 basis point increase in occupancy and are at 92.5% leased. New rent spreads during the quarter were over 17%, and we continue to have great success negotiating embedded rent steps in our new leasing transactions.

Almost all new shop leases include annual rent steps averaging 2.5%. Tenant improvements and landlord work as a percent of average rent continued to be in line with prior years. While move outs remain at historic low levels, we are certainly aware of the potential for future store closures and are monitoring tenant performance and health.

Speaker 4

As you know, we have been

Speaker 3

in a heightened retail bankruptcy environment for nearly three years. During this time, Regency's portfolio has continued to outperform, posting same property NOI growth in excess of 3.5 with occupancy levels exceeding 96%. Our exposure to tenant bankruptcies and store closures has been minimal. And when we have received spaces back, we've had success in releasing to better operators at higher rents. We have leased or are in lease negotiation for nearly all of the spaces returned to us following bankruptcy over the past two years.

This year alone, out of our 9,000 plus tenants, we have only 21 store closures expected from BK. While we're closely monitoring trends and have ongoing communication with our top retailers, our track record demonstrates the portfolio's ability to withstand and succeed in this ever evolving and challenging retail environment. I will now turn the call over to Mac.

Speaker 5

Good morning, everyone. We continue to make excellent progress on developments and redevelopments, which are growing NOI and NAV and enhancing the quality of our portfolio. Our in process projects are performing well and attracting strong retailer demand as evidenced by gains in percent leased. For example, The Village at Tustin Legacy in Orange County is 97% leased and committed. The majority of our tenants are now open, including Stater Brothers and CVS, both of which reported strong brand openings.

In addition, our two Whole Foods projects in Northeast as well as our Wegmans project in Metro DC are approaching 90% leased and committed. And at Cerro Monte Center in the Bay Area, our 250,000 square foot expansion is substantially complete. All six of our new junior anchors have opened, traffic is up and the overall center is performing well. Subsequent to quarter end, we started Midtown East, a Wegmans anchored ground up development in the affluent Midtown neighborhood of Raleigh. Midtown East will be Wegmans' first store in the state of North Carolina.

Regency's first class team continues to source compelling development opportunities and mine put together in line with expectations. Although the development landscape remains challenging, our industry leading platform is well positioned to create value from both new development as well as redevelopment opportunities within our portfolio. We look forward to discussing future development and redevelopment opportunities in more detail at our Investor Day. Moving to dispositions and acquisitions. We are executing on our plan to sell 1% to 2% of our assets annually.

Through October, we have closed approximately $45,000,000 of properties and anticipate closing on an additional $180,000,000 by early twenty eighteen. Looking back, we have been very successful implementing capital recycling to further enhance the quality of our portfolio by supplementing cash flow to fund development and redevelopment and reinvesting into attractive acquisition opportunities, offering superior future growth. This recycling has resulted in a fortified NOI growth profile with greater long term value creation and reduced exposure to disruptors as evidenced by the minimal impacts we have experienced from tenant bankruptcies. We plan to continue to execute on our capital recycling initiatives on a basis that mitigates earnings dilution and the impact from the embedded tax gains associated with our dispositions. On the acquisition front, valuations pricing are strong from the quality centers we own, develop and buy.

As you can see from our increased guidance, we have recently sourced compelling opportunities that meet our high standards for quality and growth and will match the timing of our targeted dispositions. The centers, which are in various stages of due diligence, are located in our target markets of Seattle, San Diego and New York. All benefit from strong demographics, productive anchors and best in class shop tenants. These investments, along with the Northeast opportunity we have mentioned in the past, are valued at approximately $225,000,000 with anticipated closing dates spread over the next several months. I look forward to sharing more details on these premier centers in subsequent quarters after we have closed.

I will now turn the call over to Lisa.

Speaker 6

Thank you, Mac. The team posted another really good quarter. And most importantly, I want to echo Hap's comments. We are so grateful that our team members are safe following Hurricanes Harvey and Irma and that our property sustained minimal damage. And I also want to reiterate our thanks to the team for their amazing efforts following the hurricanes.

In the third quarter, we did take a onetime charge of approximately $1,900,000 or $01 per share related to repair and cleanup work caused by these hurricanes. Consistent with our practice for nearly ten years, gains and losses in our captive insurance program have been excluded from same property NOI. Therefore, the charges incurred this quarter are excluded from same property NOI. And given the non comparable nature of the events, the charges also added back to core FFO. Turning to 2017 guidance.

We are maintaining our same property NOI growth of 3.2% to 4% for the full year. The lower growth rate in the fourth quarter is driven by an anticipated decline in percentage rent driven by a handful of tenants as well as a tough other income and bad debt expense comp. Although we have experienced a moderate increase in bad debt expense year to date, it's important to remember that 2016 levels were far below historical norms and current projections are more in line with long term averages. We have also decreased our net G and A guidance for the full year by approximately $4,000,000 at the midpoint. With the merger, we plan to hire 70 new positions, but these additions took just a little bit longer to fill than initially expected.

We have now filled these positions and expect next year's net G and A to be in the $67,000,000 range. Despite this delayed hiring, the merger integration has progressed extremely well. And at $67,000,000 of net G and A in 2018, we will realize the $27,000,000 in synergies. Lastly, we have raised our full year NAREIT FFO and core FFO guidance, reflecting the later timing of our dispositions this year and the lower than expected net G and A expense. This concludes our prepared remarks, and we now welcome your questions.

Speaker 0

Thank Our first question is coming from the line of Christy McElroy with Citigroup. This

Speaker 7

is Katie McConnell on for Christy. Can you update us on the timing of anchor commencements, which are largely re leased at this point and the CapEx that is involved in backfilling some of that space? And then maybe if you could talk about how you're thinking about the potential for further tenant fallout as we go into 2018?

Speaker 6

Katie, this is Lisa. I'll let Jim handle more detail if he wants to add some color. But just from a general perspective, if you think about when we look at our same property NOI growth, an important thing that we can see, which you all can see, is that our base rent growth contribution to that in the first half of the year was in the mid-3s, and that's accelerating in the back half of the year to the high-3s. And some of that is driven by these anchor rent commencements. So I mean, I think that that's one of the key factors.

And from capitals, we're seeing really healthy net effective rent growth. So even though it is taking some capital to prepare the boxes, we're seeing rent growth at really, really healthy robust levels.

Speaker 3

Yes. Katie, the only thing I'd add is Sports Authority, we had five. We have four leased, and the fourth one will commence all of them will commence rent by the end of this month. So we're in good shape on our relets.

Speaker 7

Great. Thanks.

Speaker 8

Thank you.

Speaker 0

Thank you. Our next question is coming from the line of Craig Schmidt with Bank of America. Please proceed with your question.

Speaker 9

Yes, thank you. I just wondered in terms of the feeling in the transaction market, it looks like you have a number of high quality, more general markets closing soon. Are people more willing to strike deals before the end of the year? Or are you seeing little change in terms of just the cadence and appetite for transactions?

Speaker 5

Thanks, Craig. This is Mac. There is a typical seasonality that goes with transactions where people do want to transact by the end of the year. I don't see that being different this year versus past years. But there certainly is a steady appetite for people to transact both on buying and selling.

So not a big shift that we're seeing in that regard. So no not a whole lot of color to add to that question.

Speaker 9

And are you we have seen some of the projections for holiday twenty seventeen that seem relatively robust to past years. Are you hearing any of that same sentiment when you deal with some of your retailers?

Speaker 5

Well, in terms of retailer expansions, is that what you're talking about, Craig?

Speaker 9

No, just are they feeling better? I mean, we've heard that Halloween was up this year and that holiday twenty seventeen, depending on which estimate, anywhere from 3.5% to 4.5 out sales?

Speaker 3

I think I guess, too, it's so early tell. It is early to tell. Think when you look at the demand, our demand for space continues to be very robust. And that, to me, translates to retailers are doing continue to do business and comfortable growing their business. To the better spaces.

To the better spaces, obviously.

Speaker 2

I mean they are being more deliberate. They're being more selective, but the successful operators and tenants are continuing to expand at a pretty active pace.

Speaker 9

Okay. At Hap, congratulations on the ULI Visionary Award.

Speaker 2

Craig, thank you very much. It was as you know, in my case, it really does take a village and a team.

Speaker 9

Yes. It just means that because you're such a great visionary, you'll provide excellent guidance next quarter.

Speaker 2

I'll do whatever Lisa lets me do.

Speaker 9

Thank you, guys.

Speaker 8

Thanks, Greg.

Speaker 0

Thank you. Our next question is coming from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Speaker 8

Yes. Hi. I guess a quick question on operating trends. I mean, the same store stats and occupancy and everything really positive and your rent spreads are nice and healthy. But it looks like there was some moderation that's occurred over the past several quarters.

And just wondering what's the color behind that? Is it just your things are good, but you're just bumping up against tougher comps? Does it feel like you're going to level off at this level or we can see a little bit more on the moderation front? I mean, just any color there would be helpful.

Speaker 6

Hey, Mike. Good morning. I'll answer on the same property kind of NOI growth trend line, and then I'll let Jim address rent spreads because I think that that's they're the two areas that you what appears to be moderating. I'll reiterate what how I started with my answer to Christy or to Katie, in that our base rent growth is actually accelerating throughout the year. So the same property NOI growth moderation that we're seeing is some noise in some of the other line items.

We're up against tough comps for other income as well as bad debt expense, and we're expecting a decline in percentage rent. And some of that was translated and transitioned to base rent. So that is driving some of that base rent growth, but we'll take base rent growth we'll take base rent over percentage rent any day. So we're not necessarily seeing a moderation in same property NOI growth. It's just timing throughout the year.

Think, as you know, quarterly numbers are not going to be smooth. There's some lumpiness. We feel really good about our guidance range of 3.2%

Speaker 8

to four

Speaker 3

Yes. I think as to rent growth specifically, obviously, as I mentioned, our new growth was 17% for new deals, and renewals were at 5.7%. And there's a couple of things going on in the renewal. We had a very large pool, almost 84% renewed this past quarter. Several anchors were embedded in that renewal pool that had flat option renewals, which obviously drove the average down.

When you kind of look at the deals that we were able to negotiate, we were at 10% we drove a 10% rent growth number, which I'm very comfortable with and is consistent with expectation.

Speaker 6

And at the same time, we know that we're in a really challenging retail environment. And if we can achieve high single digit rent spreads, we'll be

Speaker 5

really happy with that. We'll take it. Agreed.

Speaker 8

Got it. Okay, that's helpful. Thank you.

Speaker 0

Thank you. Our next question is coming from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question.

Speaker 4

Looking at your occupancy, it's pretty high right now. Are you becoming more selective on who you allow into the center? And how is the quality of the demand overall versus prior years?

Speaker 3

This is Jim. Again, I think the our pipeline is robust, continues to be very solid. So we are seeing good demand. Yes, we are we continue to be selective in our merchandising. I think something we've taken a lot of pride in over time.

So we continue to look for the best retailers in given categories and folks that we believe will be relevant in the future in this changing environment. And we're finding good retail demand at this point.

Speaker 4

Okay. And then some of the peers have commented on delayed tenant openings. Are you experiencing this to any degree?

Speaker 3

As Hap mentioned, I think deals are taking longer from start to finish. A lot of negotiation, good retailers know they're good retailers, and we feel like we've got good product, and we know good retailers want to be a good product. And what that turns into is a detailed negotiation process.

Speaker 4

Okay. And then lastly, the company you acquired, Equity One, they used to have a slide in their presentation called fiftieth Birthday grocery shopping centers, where they'd get big upticks in these flat rents for the past fifty years. Are you seeing any of those roll next year, anything that will be meaningful on the new lease side?

Speaker 6

Wes, this is Lisa. I'll just just very generally, if you recall, when we first announced the merger and talked about the strategic benefits of the merger, one of the key items is the fact that we believe that it would be accretive to our same property NOI growth, which has proven out. And as a result of the fact that there was some embedded mark to market in the leases, and we are beginning to see some of those. Yes.

Speaker 2

And we'll

Speaker 6

more to come for 2018, but expect that we'll see some more benefit next year.

Speaker 4

Thank you.

Speaker 2

Thank you, Wes.

Speaker 0

Thank you. Next question is coming from the line of Vince Tibone with Green Street Advisors. Please proceed with your question.

Speaker 10

Good morning. The spread between physical and leased occupancy continues to widen in the quarter and remains wider than some of the recent norms. This seems at least partially driven by some of the sports authority leases you mentioned earlier, but is that the only reason? And when do

Speaker 4

you expect that spread to kind

Speaker 10

of tighten to where it has been in the past?

Speaker 6

Again, I'll let Jim give some specific color if he'd like to add after. But we're at two forty basis points currently. We're only at two twenty basis a quarter ago. So it hasn't increased that much. It would not be related to Sports Authority because those were already leased.

So it'd be related to some other new redevelopments that are underway because if you'll recall, we're already 98% leased in our anchor boxes. So it's like it's one or two anchor deals, and Jim can talk about those. But we've historically, we've been in a range of I mean, I think we've maybe once one quarter, we may have hit 150, but we're typically in the 200 to 180 to $2.50 range. So it's not out of the norm.

Speaker 3

Right. And Lisa hit on it. It's predominantly redevelopment with Saramonte being a big part of that 40 basis points kind of baked into Saramonte. And then obviously, the new leasing that we've done in the last quarter or two adds to that number. The good news is obviously that's a good tailwind going into 2018.

Speaker 10

Okay. That's helpful. Yes, Armani. Yes, totally makes sense. And then one more on just acquisitions.

It sounds like all of them this year are going to be in coastal markets. Is that solely where you're focusing your external growth? Or would you consider acquisitions of high quality assets in secondary markets? Like how do you think about what is the appropriate cap rate spread between coastal and noncoastal major markets?

Speaker 2

So Vince, as you're aware, our target markets include not only the gateway coastal markets, but also the stem markets and growth markets, the 24 terrific markets throughout the country. We really, really like the canvas in which we're able to own, operate, buy and invest, and we would certainly buy and invest in a and interested in a Raleigh as as we would or a Denver as we would in a in a market. It's just where these opportunities, most of which are have been we've been able to negotiate on a negotiated basis, which we're real pleased with. And to a certain extent, there is a difference between markets from a cap rate and from a development return standpoint, but you have other issues related to the quality of the trade area and a trade area with strong barriers to entry and population density and above average household income and a strong anchor is going to trade pretty strongly in pretty much every market throughout the country. And we're also looking at what's the embedded growth rate that's going to be there.

From a development standpoint, it depends on the risk involved and where the project is and when we get involved from a return standpoint. I don't know if you have anything that you want to

Speaker 5

add to that, Mac. Yes. It's really case by case basis. It's really almost more about the immediate trade area and the customers being served and job growth than it is the greater metro area. And that's so we're looking at all these different markets.

And by having a local presence in these markets, that really gives us an advantage. Some of these four out of five of the acquisitions that we're targeting were off market, as Hap said. So we've sourced these directly, and we think that's a real competitive advantage.

Speaker 6

If I May, and Mike is far enough away from me that he can't kick me. I don't to take any of our material that we plan to share at Investor Day. But we have done a lot of work for what we call our DNA project and would be very similar to what one house on the street has a TAP score. And we think that it's as Hat mentioned and Mac both mentioned, it's really important, the quality of the center. And then that has to actually interact with the quality of the market.

And we do have internal guidelines and thresholds and return thresholds related to those scores, if you will. So we look at it that way, and we will share more detail when we have our Investor Day in January.

Speaker 0

You. The next question is coming from the line of Linda Tsai with Barclays. Please proceed with your question.

Speaker 1

Hi. In your opening remarks, you

Speaker 6

discussed how Whole Foods is expanding post acquisition by Amazon. Do you have any color on how these stores might be different from when the stores were just owned by Whole Foods?

Speaker 11

What's the Amazon influence? Do you have any thoughts there?

Speaker 5

Linda, Well, this is Matt. It's pretty early, and they're not they play their cards very close to the vest by design. So we don't have a lot of great color to give you. What I can tell you is we've been working on a redevelopment in Suburban Virginia, very good quality location. They affirmed that lease.

They had a time to think about it. They recently stepped up to it. So we're seeing good positive signs about that, a lot of good body language, but you're not going to get a lot of details at this point. But we have close relationships with them and their teams and their brokers throughout the markets, and they are engaged. So we're working on future opportunities.

But still too early to say if their format is going to change dramatically. We hear lots of little things, but we haven't actually seen anything physically.

Speaker 2

I think this is the Amazon acquisition of Whole Foods is a really good thing for Whole Foods. They're reengaged. They're expanding a combination, I'd say, of robustly, but still on a very rational basis. We feel very, very good about future prospects to continue to do business with a grocer who's a terrific anchor as far as attracting better side shop retailers, restaurants and service users.

Speaker 6

Thanks. And then any changes in the average length of leases that are being signed?

Speaker 2

We have I've heard discussion about that from my friends in the industry talking about but more on the mall and fashion, etcetera, that we have not seen anything to date from in our with community neighborhood retailers.

Speaker 0

Thanks.

Speaker 3

Thank you.

Speaker 0

Thank you. It appears there are no further questions at this time. So I'd like to pass the floor back over to Mr. Stein for any additional concluding comments.

Speaker 2

We appreciate your interest and your involvement. And hopefully, you didn't stay up too late watching the World Series last night and your team won Enjoy what was a great World Series. And thank you very much. Take care. Enjoy the rest of the week.

Bye bye.

Speaker 0

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.