Regency Centers : 2021 1Q Transcript

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EDITED TRANSCRIPT

REG.OQ - Q1 2021 Regency Centers Corp Earnings Call

EVENT DATE/TIME: MAY 07, 2021 / 3:00PM GMT

OVERVIEW:

Co. reported 1Q21 results.

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MAY 07, 2021 / 3:00PM, REG.OQ - Q1 2021 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

Christy McElroy Regency Centers Corporation - SVP of Capital Markets

James D. Thompson Regency Centers Corporation - Executive VP & COO

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

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

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

Christopher Ronald Lucas Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst Craig Richard Schmidt BofA Securities, Research Division - Director

Derek Charles Johnston Deutsche Bank AG, Research Division - Research Analyst

Floris Gerbrand Hendrik Van Dijkum Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst Greg Michael McGinniss Scotiabank Global Banking and Markets, Research Division - Analyst

Juan Carlos Sanabria BMO Capital Markets Equity Research - Senior Analyst

Ki Bin Kim Truist Securities, Inc., Research Division - MD

Linda Tsai Jefferies LLC, Research Division - Equity Analyst

Mary Kathleen McConnell Citigroup Inc., Research Division - Research Analyst

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

Richard Hill Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS Tamara Jane Fique Wells Fargo Securities, LLC, Research Division - Senior Analyst

Paulina Rojas Schmidt Green Street Advisors - Analyst

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

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

Operator

Greetings, and welcome to Regency Centers Corporation First Quarter 2021 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Please -- thank you. You may begin.

Christy McElroy - Regency Centers Corporation - SVP of Capital Markets

Good morning, and welcome to Regency Centers' First Quarter 2021 Earnings Conference Call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Jim Thompson, Chief Operating Officer; and Chris Leavitt, SVP and Treasurer.

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

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MAY 07, 2021 / 3:00PM, REG.OQ - Q1 2021 Regency Centers Corp Earnings Call

subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by the 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 10-K. 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 additional disclosures related to forward earnings guidance and the impact of COVID-19 on the company's business. Lisa?

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

Thank you, Christy, and good morning, everyone. Thank you so much for joining us at the end of what I know has been a long week in earnings season. It's also been a long, and oftentimes, difficult past year. But as a company and an industry, we've really come so far.

First, as always, I'd like to thank the entire team here at Regency. I'm really proud and appreciative of what we've been able to accomplish over the last year. A quarter ago when we spoke to you, we were facing rising restrictions in parts of the country, contributing to continued uncertainty about the future. We are gaining ground, but still playing defense.

As I sit here today, I'm really pleased to report that we've turned a corner over the last 3 months. We are encouraged by continued improvement in the retail environment and in the health of our tenants. And you can see the evidence of that in our first quarter results. As well as in our revised forward earnings guidance. We've seen a continued trend towards easing tenant restrictions, which is especially impactful to our California properties.

Some categories and geographies still continue to lag. But overall, we are on an improving trajectory. These lifting restrictions that allow our tenants to open and operate are having the waterfall effect of improving foot traffic, and tenant sales as consumers are reengaging when they're able to. And in turn, we are collecting more rent and have seen an improving trend of rent collection. Mike will discuss this in greater detail, but the main drivers of our earnings guidance increase results from this improvement.

We expect higher collections on cash basis tenants as well as some additional recovery of 2020 rents that we had previously reserved. And we are also encouraged by continued demand with regards to leasing. Thinking a bit longer term, we believe there are clear tailwinds for our company and our sector as the pandemic has shined a spotlight on our business in a positive way. As we all have experienced the world with e-commerce retail sales spiking meaningfully, our tenants will clearly see and appreciate the value of the last-mile distribution capabilities that their stores in our centers offer.

And after spending months at home facing restrictions on interaction, consumers have a new appreciation for the environment and convenience of our open-air neighborhood and community centers. But all of that said, our heads aren't here in the Jacksonville sand. We acknowledge and appreciate that real challenges in brick-and-mortar retail still exist, and there will continue to be shrinking of retail GLA in the U.S. But well-located well operated centers like we own, will still be a critical component of the retail ecosystem, meeting the demands of retailers, service providers and consumers.

This renewed appreciation from both sides fortifies the long-term need for physical locations close to consumer zones. And then also the micro migration that's occurring with more people moving into the suburbs, this should provide a long-term benefit to our suburban shopping center portfolio has showed a more permanent shift toward part time, remote work, increasing daytime population foot traffic, close to the consumer's home.

Finally, as the macroeconomic and retail environment has shifted toward a definitive trajectory of improvement, as a company, we have pivoted from defense to offense. We are on our front foot. We are focusing on growth, not just organically, but putting capital to work externally. We are

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MAY 07, 2021 / 3:00PM, REG.OQ - Q1 2021 Regency Centers Corp Earnings Call

well positioned to take advantage of opportunities. We continue to have the best balance sheets in the sector with low leverage full revolver capacity and access to low cost capital.

Additionally, as you know I like to remind you, even with no reduction in our dividend throughout the pandemic, we are generating solid free cash flow, which we expect will only continue to grow with our revised outlook. From this position of strength, we continue to focus on value creation within our development and redevelopment pipeline. Recall that we added 2 new ground-up projects to our in process pipeline a quarter ago. And in the near future, we expect to add a couple more.

With the success we've seen with Phase 1 of Carytown, we plan to move forward with Phase II. We also plan to move our mixed-use multiphase Westbard project in Bicester, Maryland, into the in-process pipeline.

To finish up, we are still on the recovery path back to our 2019 NOI, but the pace on that path feels better. The environment is healthier and more certain today. And as a result, we have greater conviction and are more positive in our outlook. We are pivoting to office. We remain bullish on open air, grocery-anchored neighborhood and community centers. As I've heard several times over the past month or so, today is better than yesterday, and I'm confident that tomorrow will be better than today. Jim?

James D. Thompson - Regency Centers Corporation - Executive VP & COO

Thanks, Lisa, and good morning, everyone. I echo Lisa's comments and thank our Regency team for the successes we've been able to achieve during this difficult period. When the vaccine news was first announced last November, we began to see a light at the end of the tunnel in regards to pandemic. Seated here today, the tunnel is shorter, and the light is getting brighter.

We're not completely out of the woods yet. Governmental capacity restrictions remain in some of our markets, particularly on the West Coast. And just last week, we saw row backs announced in Oregon and Washington in response to increasing levels of cases. But overall, we are moving in the right direction. As stay at home orders and restrictions have been lifting on the West Coast in recent months, we are seeing that translate into higher foot traffic and rent collection.

This is similar to what we saw during 2020 in other markets across the country as they reopened. Speaking of foot traffic, as evidenced in the chart on Page 4 of our slide deck, foot traffic in our portfolio as a whole has recovered to 90% of 2019 levels in April. While in some regions, it's close to 100%.

Rent collections on current period billings have continued to improve at 93% in the first quarter and 94% for April. The West region still lags on foot traffic and collections, but is gradually catching up to the other regions and remains our greatest opportunity to drive future upside. As we've discussed on prior calls, we've taken a patient approach with deferral agreements, not pushing tenants into an agreement until they are open and operating.

And that strategy has proved to be the right one financially, and created a lot of goodwill with our retailers. Our goal is, and always has been, to get our tenants back to rent paying (inaudible) and to avoid space turning into vacancy which leads to downtime and capital to lease it back up.

As I've stated in the past, we liked our merchandising and tenant mix pre pandemic and working with these savvy operators is the best and quickest way to get their spaces stabilized and generating revenue again at or near pre pandemic levels. Turning to leasing. We are encouraged by the solid interest and activity that we're seeing. Active new leasing categories include grocers, medical, QSRs, health and beauty, fast food, home improvement, fitness and personal services.

We've also seen increased interest from traditional mall tenants moving to the open-air formats, including home concepts, specialty athletic retailers, eyewear and cosmetic retailers. Our new leasing volume in the first quarter was higher compared to Q1 2020 and in fact, was the highest first quarter new leasing volume we've seen in the last 5 years due to greater economic optimism as well as some likely pent-up demand from 2020.

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MAY 07, 2021 / 3:00PM, REG.OQ - Q1 2021 Regency Centers Corp Earnings Call

Renewal leasing volumes have remained consistent throughout the pandemic, so the first quarter pace was also ahead of historical trends for both shop and acre space. Our leasing pipeline is healthy. And we are seeing this growth in retailer activity across all regions, providing confidence in the sustainability of deal volume. Our recent spreads remain muted, a function of the current environment and the mix of leases we're signing today. We've continued to have success pushing rents higher on essential tenants and QSRs, but we're also making certain shorter-term concessions for nonessential tenants and table service restaurants to help bridge them through this more difficult period, putting pressure on our initial cash spreads.

We don't see this as the long-term or reflective of the direction of market rents. Our properties have always been able to command market-leading rents over time, and we don't see this changing. Additionally, the strong embedded contractual rent growth that we've consistently achieved over the last several years generally brings our tenants' rents closer to market ahead of lease expiration, compressing those initial spreads.

Encouragingly, we are still having a lot of success negotiating rent steps in our leases, consistent with historical averages. Lastly, on occupancy. Our commence rate is down 30 basis points sequentially. We normally see this seasonal occupancy decline in the first quarter but move-outs were actually lower than we anticipated. Some of the tenants fall out that we had expected may still occur in coming quarters, but more tenants also renewed their leases than we expected.

In summary, while this past year has been one of the most difficult and challenging in my career, it has also been incredibly rewarding to see our team rise to the challenge and successfully navigate this unique environment. We're on a definite road to recovery and our visibility and conviction levels have only improved as country continues to open back up. Mike?

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

Thanks, Jim. Good morning, and happy Friday, everyone. I'll begin by addressing first quarter results and then walk through the changes in our full year guidance. First quarter NAREIT FFO was $0.90 per share. Uncollectible lease income was positive in the quarter, as reserves on current quarter billings of approximately $18 million were more than offset by the collection of over $20 million of prior period reserve revenues from cash basis tenants, including those contractually deferred, you can see the breakout of our uncollectible lease income on our COVID disclosure Page 32 of the supplemental, which also shows that excluding prior period collections, we recognized as revenue 94% of our first quarter billings.

Our cash basis tenant pool stands at 28% of ABR today. That compares to 29% a quarter ago, slightly lower due to move out activity. We've not yet moved any tenants back to accrual basis accounting from cash basis at this stage of our recovery. Our same-property commenced occupancy rate declined 30 basis points sequentially, but more importantly, as we were able to collect as we were able to collect more from our cash basis tenants, our net effective rent paying occupancy, which we've spoken about on previous calls, was actually up over 50 basis points through the first quarter.

Same-property NOI, excluding lease termination fees, declined 1.6% in the first quarter compared to prior year. As a reminder, the first quarter of 2021 was the last quarter that we will be up against the more difficult preceded comparisons. Our balance sheet remains in great shape. As mentioned a quarter ago, in mid-January, we used cash on hand to pay down our term loan. And in early February, we recast our $1.25 billion line of credit, extending our term by another 4 years.

We finished the quarter with a more normal cash balance and full revolver capacity. And have no meaningful unsecured debt maturities until 2024. The secured mortgage lending markets, which were tough last year for retail in general, have continued to open back up and showed demand for high-qualitygrocery-anchored shopping banks.

Especially those anchored -- those owned by stronger sponsors. Subsequent to quarter end, we closed on a $200 million refinancing of a portfolio of secured mortgage loans on 10 assets held in 1 of our JVs. The blended rate was a very compelling 2.9%. From a leverage perspective, our net debt-to-EBITDA remains at a very comfortable 5.9x, even with the impacts of the pandemic on our trailing earnings. As we -- and we see a clear path back to the low to mid-5x range as our NOI continues to recover.

Turning to guidance. We point you to Pages 13 through 15 of our earnings investor presentation. Recall that a quarter ago amid continued rollbacks in restrictions in certain markets and general uncertainty in the overall environment, we provided our earnings guidance under 3 distinct

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