Regency Centers : 2023 1Q Transcript

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EDITED TRANSCRIPT

REG.OQ - Q1 2023 Regency Centers Corp Earnings Call

EVENT DATE/TIME: MAY 05, 2023 / 3:00PM GMT

OVERVIEW:

REG reported 1Q23 results.

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MAY 05, 2023 / 3:00PM, REG.OQ - Q1 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 Greg Michael McGinniss Scotiabank Global Banking and Markets, Research Division - Analyst

Juan Carlos Sanabria BMO Capital Markets Equity Research - MD & Senior U.S. Real Estate Analyst

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

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

Nicholas Gregory Joseph Citigroup Inc., Research Division - Director & Senior Analyst

Ronald Kamdem Morgan Stanley, Research Division - Equity Analyst

Samir Upadhyay Khanal Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst Elizabeth Y Doykan BofA Global Research - Equity Research 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 the Regency Centers Corporation First Quarter 2023 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christy McElroy, Senior Vice President of Capital Markets. Thank you, Christy. You may begin.

Christy McElroy - Regency Centers Corporation - SVP of Capital Markets

Good morning, and welcome to Regency Centers' First 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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MAY 05, 2023 / 3:00PM, REG.OQ - Q1 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 applied to these presentation materials. Lisa?

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

Thank you, Christy. Good morning, everyone, and thank you for joining us today. We are pleased to report another solid quarter with positive results. Yes, we acknowledge there is uncertainty in the economic outlook, especially given the recent bank turmoil. So we do continue to look for signs of softening in our business. But to date, we haven't seen it. Operational trends remain positive, and this is consistent with our update a quarter ago. And in fact, with 3 more months in the book, we have even more conviction in our outlook for this year. Tenant demand for space in our centers remains strong, sustaining the momentum in our leasing pipelines and also in our ability to drive base rent growth.

This is the case across our entire operating portfolio as well as within our development and redevelopment program. We've seen continuing outperformance in tenant sales as well, which have resulted in higher percentage rents, especially in restaurant and grocery. We believe this reflects strength in those categories as well as an ability of consumers in our trade areas to absorb elevated inflationary impacts. As we discussed in our last call, we are seeing more activity related to tenant bankruptcies, most recently with a widely anticipated filing from Bed Bath & Beyond nearly 2 weeks ago.

But none of this activity has been a surprise to us as these retailers have been on our watch list for some time. And as Alan will discuss, our teams have been proactive and we're seeing strong demand from tenants to backfill the space. Regency's relatively limited exposure to these bankruptcies is not by accident or luck, it is the result of proactive asset and portfolio management over a long period of time as the quality of our assets and locations gives us the advantage and the ability to be selective in the merchandising of our centers.

We believe that our in-place tenant roster today is as strong as it's ever been. One change that we have seen since our update last quarter is in regard to the transaction markets. You may recall that I commented that we were starting to see increased activity and competitive bidding situations returning. But that was pretty short-lived as within weeks after that, the transaction market was again impacted by uncertainty and instability in the financing markets. I was hoping that today we'd have more concrete data points to share with you, but transaction volumes remain very thin.

That said, we remain on our front foot from an investment perspective. As Nick will discuss in a few minutes, the team is hard at work finding new opportunities to invest our free cash flow and grow our development and redevelopment pipelines. This has long been a core competency of Regency, as many of you on this call are aware. And I'm proud of our industry-leading team and a long track record of successful execution. In summary, we believe that given the positive structural trends supporting continued tenant demand in suburban trade areas, we and the shopping center sector as a whole, are in an enviable position with greater resistance to potential adverse economic and capital markets impacts.

And further, we also believe Regency benefits from competitive advantages, including the exceptional quality of our assets and our people, our liquidity, access to capital and balance sheet strength that uniquely positions us to be opportunistic while still delivering quality results. Alan?

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

Thank you, Lisa. And good morning, everyone. The positive leasing and retail environment we experienced last year has continued as evidenced by another quarter of strong operational trends. Leasing activity remains robust with new leasing volume 20% above our historical first quarter average. Activity was led by continued strength in shop leasing, where occupancy was up another 20 basis points in the quarter on top of a 200-basis point increase during 2022.

Cash rent spreads remain healthy. And importantly, our GAAP and net effective rent spreads were both, in the mid-teens in Q1 and on a trailing 12-month basis. The GAAP and net effective rent spread metrics are the most reflective of our ability to drive base rent growth while prudently

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MAY 05, 2023 / 3:00PM, REG.OQ - Q1 2023 Regency Centers Corp Earnings Call

managing our capital investment and maximizing our return. We believe these mid-teen spreads are reflective of the quality of our shopping centers and locations, which gives us leverage and lease negotiations and allows us to limit leasing capital spend.

To that end, I would encourage you to review our new net effective rent disclosure on Page 20 of our supplemental. Embedded rent escalators are a huge driver of our rent growth, and we continue to have success driving these steps. Nearly 90% of all leasing activity and 93% of shop leases in the first quarter had embedded rent steps, which is our highest percentage on record for shops. So not only are we pushing the rate of contractual increases higher, but we're getting them in more leases. These positive operating results and activity contributed to another solid quarter of base rent and same-property NOI growth. Most importantly, it provides further conviction in our forward growth trajectory.

Leasing activity remains strong and our signed but not occupied pipeline is flat quarter-over-quarter at 230 basis points, representing $32 million of annual incremental base rent. So the leases that we are commencing each quarter, we are replenishing the pipeline with new leases signed. Notably, our new disclosure on Page 20 also includes enhanced information on our signed but not occupied pipeline. Today, we also have nearly 1 million square feet of leases under LOI or lease negotiation, further reflective of the strength and demand that we continue to see.

This activity includes square footage associated with recent tenant bankruptcies for which we've seen strong interest. The most notable of these is the recent filing of Bed Bath & Beyond, of which we have 10 locations comprising only 50 basis points of ABR. Five of these locations were included on last week's rejection list, which we had expected. Our teams have been proactively engaged on all of our Bed Bath locations with potential backfill tenants in anticipation of the opportunity to recapture and remerchandise the stores.

Demand is coming from several categories, including grocers, off-price retailers, home decor, sporting goods and medical uses. This is resulting in multiple retailers [buying] for many of these spaces, and we anticipate average mark-to-market of approximately 20%. In addition to Bed Bath, we continue to actively manage all of our at-risk tenant exposure. We own great real estate in some of the best suburban trade areas around the country and leasing demand remains strong.

We are not afraid to get spaces back in an environment of limited new supply growth and a surplus of great retailers that are actively looking to expand. In summary, our team feels really good about the continued positive momentum we are seeing in the retail operating environment. Nick?

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

Thank you, Alan. Good morning, everyone. We continue to make great progress executing on our development and redevelopment strategy, ending the quarter with $300 million of in-process projects. Leasing activity remains strong, and our team has done an excellent job of keeping our projects on schedule within budget. As we have discussed on prior calls, Regency is uniquely positioned to grow our investment pipeline by utilizing our 3 development cornerstones, our capabilities, our capital and our contacts are an equal combination of development expertise, our access to capital, given our extensive free cash flow and fortress balance sheet in conjunction with our expansive and deep industry contacts and relationships across our 22 offices, give us an unparalleled advantage to source and execute on attractive opportunities throughout the country.

For instance, we are nearing the finish line on the purchase of a development project in the New York Metro area. This nearly $90 million investment will be anchored by a best-in-class specialty grocer and located in an extremely high barrier to entry market. Additionally, this week, we also closed on the first phase of a retail development and a thriving 10,000-acre master plan community in Metro Houston. Although the first phase is smaller in scale at approximately $10 million, we do anticipate being able to grow the project in future years. We look forward to sharing more details on both of these projects when we add them to our in-process pipeline. Beyond ground-up developments, our investment team continues to execute on opportunities to create value within our current portfolio.

Subsequent to quarter end, we started Phase III of our redevelopment at Serramonte Center in Daly City. This $37 million project includes the redevelopment of the former JCPenney and the addition of 2 small shop buildings adjacent to Macy's. We have executed a lease with best-in-class South Korean food market and grocery operator for the former JCPenney space. And we're excited to bring their new concept to the Bay Area. This phase of the project sits at the highly visible front door of the shopping center and will bring the center to 97% leased. In summary, we remain encouraged by the opportunities we are seeing to drive future value creation and reinvest our free cash flow and are focused on continuing to build our development and redevelopment pipelines to north of $200 million of annual starts. Mike?

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MAY 05, 2023 / 3:00PM, REG.OQ - Q1 2023 Regency Centers Corp Earnings Call

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

Thanks, Nick, and good morning, everyone. I'll start with some highlights from our first quarter results, then walk through a couple of changes to our full year earnings guidance and assumptions. Excluding COVID period reserve collections, we delivered same-property NOI growth of 6.3% in the first quarter. The largest driver was base rent, contributing a strong 430 basis points in the quarter. Base rent growth is the most important indicator of our portfolio strength. And we continue to see positive impacts from embedded rent escalators, positive spreads on re-leasing space and higher occupancy year-over-year.

We also saw meaningful outperformance on percentage rents in the quarter, contributing 100 basis points to same property NOI growth despite tougher year-over-year comps, driven by continued strength in grocery and restaurant sales. Notably, percentage rents tend to be seasonal, with the majority of sales-based billings occurring in the first quarter of the year. The other meaningful driver to first quarter same-property NOI was a 130-basis point positive contribution from uncollectible lease income. We continue to isolate the collection of COVID period reserves from 2020 and 2021 to provide a better picture of normalized results.

But the realities of cash basis tenancy can create some variability in the bad debt line item from quarter-to-quarter. To that end and due to the better-than-expected collection rates on cash basis tenants, we experienced a positive contribution to uncollectible lease income this quarter as we collected on rents originally billed and reserved in 2022. The increasing collection rates and decline in receivable and reserve balances demonstrate the health and resiliency of our tenant base.

Turning to 2023 guidance. I'd like to point you to the helpful detail on Slides 5 through 7 in our investor presentation. We've increased both, our NAREIT FFO and core operating earnings guidance ranges, each by $0.04 per share, driven largely by the outperformance in percentage rents and uncollectible lease income in the first quarter. Collectively, these items also drove the 50-basis point upward revision in our same-property NOI growth guidance to a new range of 2.5% to 3.5%, excluding COVID period reserve collections.

I also want to spend a minute on our credit loss assumption, which we revised to a lower range of 60 to 90 basis points for the full year from 75 to 100 basis points previously. Notably, the midpoint of our new same-property NOI and earnings per share ranges now capture the potential for a full liquidation of Bed Bath & Beyond by mid-year. This scenario was previously contemplated in the low end of those ranges. However, this change was offset by first quarter outperformance and bad debt that I discussed earlier, which positively impacted our full year credit loss assumption.

On the capital side, in late March, we repurchased roughly 350,000 shares for $20 million at an average price just over $57 per share. This repurchase was executed to hedge the planned issuance of a like kind of Mountain OP units to the seller of the development project in New York that Nick mentioned earlier. I'll end as I typically do, highlighting the strength and afforded opportunity of Regency's balance sheet, the importance of which is never more evident than in times of capital markets' turmoil.

Leverage remains at the low end of our targeted range of 5x to 5.5x debt to EBITDA, we are generating significant free cash flow projected to be north of $140 million this year, funding our investments' pipeline. We have access to significant liquidity with our $1.25 billion line of credit. And there are no significant debt maturities for over a year. This position of strength allows us to be patient and opportunistic in this evolving environment. With that, we look forward to taking your questions. Thank you.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Our first question is from Michael Goldsmith with UBS.

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