Regency Centers Corporation (NASDAQ:REG) Q4 2023 Earnings Call Transcript

Regency Centers Corporation (NASDAQ:REG) Q4 2023 Earnings Call Transcript February 9, 2024

Regency Centers Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Regency Centers Corporation Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christy McElroy, Senior Vice President, Capital Markets. Thank you, Christy. You may begin.

Christy McElroy: Good morning, and welcome to Regency Centers’ fourth quarter 2023 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Alan Roth, East Region President and Chief Operating Officer; and Nick Wibbenmeyer, West Region President and Chief Investment Officer. 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, either 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. 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. Lisa?

Lisa Palmer: Thank you, Christy, and good morning, everyone. We had another strong quarter in Q4, finishing off an exceptional year for Regency. I’m so proud of the success and what we were able to accomplish, a direct result of the hard work of our dedicated and talented team. Tenant demand across our shopping centers remains robust and this is most evident in our record shop occupancy and in the strength of our leasing pipeline. As we look ahead, we believe the current macroeconomic backdrop supports the continuation of positive trends for neighborhood and community shopping centers. This favorable retail demand environment has also served as a great foundation for driving success in creating value through our sector leading development program.

In 2023, we started more than $250 million of new projects with a healthy pipeline of future projects that the team continues to build. We are on track to start $1 billion or more of projects over the next five years. My hat is off to all involved on our team. You have heard me say it before, I believe we have the best development platform in the sector. Our experienced team and ability to create value through this platform and the ability to self-fund with levered free cash flow are unique competitive advantages for Regency. It was also a big year on the transactional side, highlighted by the closing of the Urstadt Biddle acquisition in August. The integration into Regency is now essentially complete. Kudos to all involved for effecting such a smooth and seamless transition.

Our ability to grow through developments and transactions is also a testament to the strength and stability of our balance sheet, which in turn enabled us to successfully execute on our $400 million bond issuance and revolving credit line recast in January. Our ability to access low-cost capital is reflective of the quality of our portfolio, our track record and the strength of our lending relationships. Most of you on this call also know that I’m very proud of Regency’s best-in-class corporate responsibility, reputation and practices. I’m also grateful when the efforts of our team are recognized, such as in Newsweek’s most recent Americas Most Responsible Companies List, where Regency ranked 6th overall in the United States and first in the real estate and housing category.

Our company has been included in this list for all five years of its existence and this is the highest ranking any real estate company has ever achieved. For the benefit of our shareholders and all stakeholders, we are committed to adhering to our corporate responsibility principles in all areas of our business. Before turning it over to Alan, I do want to reiterate that we believe the strength in leasing demand over the past 24 months or so is showing no signs of abating. Consistent job growth and moderating inflation are driving consumer resiliency in our trade areas. We also continue to experience tailwinds favoring brick and mortar retail in strong suburban markets, supporting a positive retail environment ahead. Alan?

Alan Roth: Thank you, Lisa, and good morning, everyone. We had another quarter with great operating results and leasing momentum capping off a very active 2023. Our teams are taking full advantage of the healthy retail environment that has continued into 2024. Our success was evident in same-property NOI growth of 3.6% in 2023, excluding COVID period reserve collections and termination fees, with base rent growth being the most significant driver, a function primarily of driving rents higher, commencing shop occupancy and bringing redevelopment projects online. In the fourth quarter, we executed nearly 2.5 million square feet of leases with activity from categories including grocers, restaurants, health and wellness, off-price and personal services.

Our leasing pipelines continued to be robust, representing another 1 million square feet of potential new leases in LOI and lease negotiation. We achieved cash rent spreads of 12% on a blended basis in Q4, including 35% spreads on new leasing. Full year 2023 cash rent spreads of 10% was our highest annual level since 2016. GAAP and net effective rent spreads were above 20% in the quarter, demonstrating our ability to obtain contractual rent steps in our leases while also being judicious on CapEx spend. Our same-property percent lease rate was up another 30 basis points in Q4, ending the year at 95.7%, and our prelease spread widened further to 280 basis points as a result of our leasing success in the quarter. This pipeline of executed deals now reflects more than $40 million of base rent for leases yet to commence.

I’ve said in the past that records are made to be broken and the team drove our shop leased rate to yet another new record high of 93.4% in the fourth quarter. That represents an impressive 150 basis point increase in shop leasing year-over-year, reflective of nearly 1.4 million square feet of shop space leased, our highest shop volume in more than a decade. Our anchor lease rate also ticked higher in the quarter and ended the year up 10 basis points over 2022 despite the impact from bankruptcy related closures. Our teams have made great progress remerchandising this space with exceptional retailers and at higher rents. And in some cases, our ability to recapture this space has acted as a catalyst for long awaited redevelopment projects. As I look towards 2024, it will take some time to see the benefit of this re-tenanting activity given the 12 to 24 month average downtime associated with anchor re-leasing and lead times on redevelopment projects.

For example, some of the Bed Bath spaces that we’ve released will not rent commence until the fourth quarter of this year. So even with our substantial leasing progress, our anchor commenced occupancy rate ended 2023 lower by 60 basis points, and as a result, we will feel the impact of these vacancies in 2024. That said, the work we’ve done to date means that we have meaningful visibility into our anchor commencement trajectory. We expect to move our portfolio lease rate even higher in 2024 as demand for space in our high quality centers continues unabated. This will ultimately drive an elevated level of anchor commencement in late 2024 and into 2025. In closing, I am really proud of the tremendous work and success of our team over the last year and I am excited for another great year of leasing activity as the current retail environment is enabling us to create meaningful long-term value at our shopping centers.

Nick?

Nick Wibbenmeyer: Thank you, Alan. Good morning, everyone. We continue to experience strong momentum in our development and redevelopment program as our investment teams were active in the fourth quarter. With additional projects breaking ground in Q4, we ended 2023 with just over $250 million in starts. This is the highest level of starts in a single year for Regency in nearly two decades and demonstrates the incredible work and progress our team has made in sourcing new projects and ramping up our pipeline to achieve our goals. Among our fourth quarter starts is the $23 million redevelopment of Avenida Biscayne. With this project, we are excited to bring additional shop space to one of the best pieces of commercial real estate in South Florida, adjacent to our existing Aventura Square shopping center.

In the quarter, we also began the redevelopment of Cambridge Square Atlanta. This $15 million project will bring in new Publix as well as extensive improvements to the center. As of year-end, our in-process pipeline has grown to $468 million and overall our execution remains on time and on budget with expected blended returns of more than 8%. Our in-process projects are 89% preleased on average, reflecting the tremendous work of our team and continued strong demand from high quality retailers. I’ll reiterate Alan’s comments about anchor recapture, as it can often be a catalyst to unlock creative redevelopment opportunities and bring exciting new merchandising to reinvigorate a center. We have several examples of those within our in-process redevelopment pipeline today, including Baptist Health at Mandarin Landing, Sprouts at Circle Marina Center, REI at Walker Center and Publix at Buckhead Landing.

Moving to acquisitions, private transaction activity remains light, but our teams were still able to close two compelling transactions in the fourth quarter. As disclosed previously, we closed on the acquisition of Nohl Plaza in Orange County, California in October, and as a reminder, we bought this center as a future redevelopment pipeline project. And in December, we acquired The Longmeadow Shops in Massachusetts. This 100,000 square foot neighborhood center is fully leased to a strong national merchandising mix of tenants and serves as the premier shopping and dining destination within its trade area. Looking ahead to 2024 and beyond, our team is focused on further building our value creation pipelines and achieving our goal of starting more than $1 billion of development and redevelopment projects over the next five years.

While it is difficult to get developments to pencil, we continue to be uniquely suited and remain optimistic about finding and executing attractive opportunities. Demand continues to be strong among best-in-class grocers, as well as other retailers and service providers looking to grow their footprints in our high quality centers and within our trade areas. As Lisa just said, Regency has the best development team in the business and our free cash flow and balance sheet give us the capability to fund projects and continue the success we enjoyed in 2023. Mike?

Mike Mas: Thank you, Nick, and good morning, everyone. I’ll start with some highlights from our full year results, walk through details related to our initial 2024 guidance range and finish by discussing recent balance sheet activity. We reported Nareit FFO of $4.15 per share and core operating earnings of $3.95 per share in 2023. Year-over-year growth in core operating earnings per share was nearly 6%, excluding the timing impact of COVID period reserve collections, driven in large part by same-property NOI growth of 3.6%. Base rent, following significant gains in rent paying occupancy remained the largest contributor to our NOI growth rate at 360 basis points. Turning to our initial guidance for 2024, I’ll first refer you to the helpful detail on Slides 5 through 7 in our earnings presentation.

Excluding the timing impact of COVID period reserve collections last year, the midpoint of our 2024 range reflects core operating earnings growth of more than 3%. The largest contributor to growth continues to be same-property NOI, for which our guidance assumes a range of 2% to 2.5%. Base rent growth this year will continue to be driven by embedded rent steps, positive re-leasing spreads, additional rent commencement of shop leases and deliveries of redevelopment projects. However, anchor space recapture is expected to impact our commenced occupancy rate in the near term, primarily a result of bankruptcy related moveouts and some junior anchor moveouts following lease expiration. Given the longer lead time to open new anchor tenants, we expect our average commenced occupancy rate to be down by about 50 basis points year-over-year in 2024, impacting same-property NOI growth in the short-term.

But more importantly, due to robust tenant demand, we have been re-leasing this anchor space just about as quickly as we are recapturing it and we expect our overall portfolio lease rate will trend higher throughout the year. We will begin to benefit from this outsized anchor rent commencement activity beginning in late 2024. In addition to same-property NOI growth, our earnings range also reflects previously discussed accretion from the UBP merger as well as positive contributions from recently completed ground-up developments. As we discussed last quarter, the impact of higher rates and debt refinancing activity remains a headwind to core operating earnings growth this year. That said, we are very pleased to gain greater visibility on this impact as we took advantage of an attractive debt capital markets window in early January to prefund our 2024 maturities with a new $400 million bond priced at 5.25%.

Notably, as you consider our guidance range for interest expense and preferred dividends, please know that it is showing net of expected interest income. January proved to be a busy month as we also closed on the recast of our revolving credit facility, which was upsized by $250 million to a $1.5 billion total commitment, which included a tightening of our borrowing spread by 15 basis points. In an environment where access to capital is even more precious and banks are being incrementally more discriminating, we are proud of this result, a reflection of Regency’s performance track record, portfolio quality and balance sheet position, as well as the strength of our long-standing banking partnerships. Our recent activity has further fortified our sector-leading balance sheet and liquidity position.

We remain at the low end of our targeted leverage range of 5 times to 5.5 times net debt to EBITDA. And following the prefunding of our ’24 maturities, our next unsecured bond maturity is not until November of 2025. We have ample capacity on our newly upsized revolver and expect to generate free cash flow north of $160 million this year. This liquidity, balance sheet capacity and differentiated access to capital allows us to further grow our development and redevelopment pipelines as both Lisa and Nick discussed, and remain opportunistic as we look for incremental avenues to drive growth and value. With that, we are happy to take your questions. Thank you.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Michael Goldsmith with UBS. Please proceed with your question.

Michael Goldsmith: Good morning. Thanks a lot for taking my question. As we look at the algorithm for 2024, is it that same property NOI growth is solid? And then there’s some puts and takes related to the merger and debt refinancing and a normalization of some factors that just may limit the flow-through. So I guess my question is what gets you to the low and the high-end of the range this year? And then thinking about anchor leasing coming online at the end of 2024 and into 2025 and potentially more normalized comparisons kind of going forward, should that algorithm look better going forward? Thank you.

Mike Mas: Hey, Michael, you pack a punch with one question. There is a lot in there. So let me unpack some of that. And if I don’t get to it all, I’m certain that others will have similar questions. So just to recap what you said there from a core earnings perspective, big moving parts, and you’ve got it largely correct. Same-property NOI growth is the largest and has been the largest contributor to our earnings growth rate. So at the midpoint, we’re looking at a core growth rate of just over 3%, same-property growth, as you can see, 2% to 2.5%, largest contributor there. Very proud to deliver the UBP merger accretion estimate of 1.5% to our growth rate, and that’s been consistent, as you know, since we announced the transaction back in May.

We continue to deliver upon that underwriting. The headwinds, of course, and you alluded to some of them, but let me just click through them for the benefit of everyone. No further COVID collections of about $4 million, that’s $0.02 a share. By the way, we’re extraordinarily happy for that headwind to be behind us. And kudos to the team for collecting on that rent. Lower termination fees is about $0.02, and of course, the results of our recent debt financing, which we’re also extraordinarily pleased with, is another $0.02 of headwind to earnings growth. To your follow-up question, just let me start here. The puts and takes of outperformance — underperformance relative to the midpoint, listen, it’s going to come through the NOI plan, and specifically within the NOI plan, it’s going to come through move-outs as it typically does, occupancy and our assumptions around that.

We’ve really — we’ve put together this occupancy plan, this leasing plan, and later in the call, I’m sure Alan will jump in and give us some color. But we feel really good about the direction of our percent lease. When you look at the top line kind of surface level, we’re going to move percent leased up towards our 96% target by about 20 basis points this year. And on the surface, that looks like we’re moving in the exact right direction, consistent with the dynamics we’re seeing in the marketplace, which we spent some time on the prepared remarks describing. But it’s what’s happening beneath the surface, uniquely in 2024, which is causing some of that drag. And we are going to see in the first quarter of this year, a decline in commenced occupancy of about 80 basis points.

Much of that, the vast majority of that, we can see it. It’s bankruptcy filings, it’s moveouts from Rite Aid, it’s the moveouts from Bed Bath & Beyond. We have a couple of high rent paying leases in Manhattan that are expiring, and we’ve got great activity on the re-lease of those spaces. But we’re going to feel that occupancy decline early in the year. And then to finish it up on your impactful question, as I said in the remarks, we’re re-leasing this space as about as quickly as we can get it. By year-end, our commenced occupancy rate should be north of where we started. We should be up by about 20 basis points on that rate, on a spot basis again. But it’s that downtime, it’s that average, it’s that impact of timing that’s going to weigh on our 2% to 2.5% growth rate.

So lastly, ’25 is looking — from an algorithm perspective, ’25 is looking like a disproportionate year to our standard 2.5% to 3% run rate. If all — again, there’s a lot to say here. I’m not giving ’25 guidance, but if all can kind of hold together here, ’25, we should see the benefit of that commenced occupancy rate coming back online and moving our growth forward.

Michael Goldsmith: Mike, thank you so much for the thorough response.

Lisa Palmer: Michael, if I may just one second, just to come back to what we did say in our prepared remarks, because the takeaway, there’s a lot of words because it was a lot of — it was a big question. The health of our business is really good. The demand is really strong. And we said that in all the prepared remarks. And the downtime that’s associated with these anchor moveouts is very short-term in nature. This is not something that is permanent. Certainly nothing that we’re seeing right now. As I’ve said in my remarks, as Alan did, we’re not seeing any signs of the healthy demand for our space abating whatsoever. And I think that’s a really important thing to remember.

Michael Goldsmith: Thanks for that. And maybe —

Lisa Palmer: You can ask your second question, Michael.

Michael Goldsmith: Maybe I’ll keep it very short. You’re looking for NOI growth of 2% to 2.5% for the core portfolio. How are you thinking about growth in the UBP portfolio? Is that growing a little bit faster than the core?

Mike Mas: It is. Just looking at ’24 on a standalone basis, the growth rate in that portfolio is north of the 2% to 2.5%. It would be accretive if we have included it in the same-property portfolio. It would have been additive, I should say, by about 25 basis points to that 2% to 2.5% range. We like — and it’s consistent. What we saw in that portfolio was a leasing opportunity. That portfolio was about and is about 200 basis points shy of our lease rate. And the team has assimilated the assets into the Regency platform. They are making great progress and we’re excited about the prospects there. But that growth rate is slightly additive.

Michael Goldsmith: Thank you so much for the thorough responses.

Lisa Palmer: Thanks, Michael.

Mike Mas: Appreciate it, Michael.

Operator: Our next question is from Dori Kesten with Wells Fargo. Please proceed with your question.

Dori Kesten: Thanks. Good morning. I know your acquisition guide currently sits at zero, but can you talk about the volume of centers you described as of interest to Regency out there today? And would you be surprised if you ended the year as a net acquirer?

Nick Wibbenmeyer: I appreciate the question. Yeah, I’ll just give you a little color to what we’re seeing in the market. We’re definitely seeing a little pickup. As you heard us say time and time again in 2023, there was definitely a lot less opportunities out in the market. We were happy with the needles in the haystack. We did find, as you know, in 2023. But as we’ve turned the page now into 2024, we are seeing more activity out there. I’d say, it’s still below historical norms, but definitely a pickup from ’23. And as always, we’re very active in underwriting and understanding those opportunities and goes back to what we always say, when we find opportunities that are equal or accretive to our quality and our growth rate and accretive to earnings, we’re going to pounce. And so we are hopeful to continue to find needles in the haystack as we move through ’24. But as you know, we do not guide to those and so we do not have clear visibility.

Dori Kesten: Got it. Thank you.

Operator: Our next question is from Jeff Spector with Bank of America. Please proceed with your question.

Jeffrey Spector: Great, thank you. And thanks for the comments on ’24. I know there’s a lot to get done, but comments into ’25, right, because I think investors, the market, is kind of trying to look past, let’s say, some of these headwinds in ’24 in terms of a higher longer-term growth rate for that same-store NOI. Can you remind me, like, do you have a company goal target for that same-store NOI? And second would be what other key initiatives are you working on, whether it’s portfolio composition, technology, et cetera, to, again drive that higher same-store NOI, let’s say, into ’25 and beyond?

Lisa Palmer: Thanks, Jeff, for the question. We do provide, and have really always provided kind of our same-property NOI growth model, if you will, as we affectionately call it, it’s in our materials. And we do target over the long-term to grow same-property NOI by 2.5% to 3% annually. And the primary component of that is going to be contractual rent steps and cash re-leasing spreads. Occupancy, whether — and in this case, we have percent commenced occupancy in 2024 coming down. Occupancy is one that will move that up or down. And then also we have had a really successful track record of adding to that same-property NOI growth through our investment and redevelopment dollars. So that is our long-term goal. And I know — most of you know this, I’ve been with the company a long time.

I do believe that throughout the years, we have continued to evolve and leverage all tools, technology to get better and to continue to improve processes and also continue to ensure that we are sustaining that long-term NOI growth, which is, as Mike commented, the largest contributor to core operating earnings growth.

Jeffrey Spector: Thank you. And then a more detailed question. Can you talk a little bit more about The Longmeadow Shops, the acquisition in December? Can you discuss anything around the cap rate, seller motivation, value-add opportunity? Any color on that asset would be helpful. Thank you.