Regency Centers Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2024

There are 15 speakers on the call.

Operator

Greetings, and welcome to the Regency Centers Corporation 4th Quarter 2023 Earnings At this time, all participants are in a listen only mode. A brief 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, Christy McElroy, Senior Vice President, Capital Markets. Thank you, Christie.

Operator

You may begin.

Speaker 1

Good morning, and welcome to Regency Center's 4th 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 Livenmeier, 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. 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 those suggested by these forward looking statements we may make.

Speaker 1

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 at our filings with the SEC, specifically in our most recent Form 10 ks 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 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.

Speaker 1

Lisa?

Speaker 2

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 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.

Speaker 2

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 $250,000,000 of new projects with a healthy pipeline of future projects that the team continues to build. We are on track to start $1,000,000,000 or more of projects over the next 5 years. My hat is off to all involved in our team. You have heard me say it before, I believe we have the best development platform in this sector.

Speaker 2

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 IRSA Biddle acquisition in August. The integration into Regency is now essentially complete. Kudos to all involved for affecting such a smooth and seamless transition. Our ability to grow through developments is also a testament to the strength and stability of our balance sheet, which in turn enabled us to successfully on our $400,000,000 bond issuance and revolving credit line recast in January.

Speaker 2

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 America's Most Responsible Companies list, where Regency ranked 6th overall in the United States and 1st in the real estate and housing category. Our company has been included in this list for all 5 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.

Speaker 2

Before turning it over to Alan, I do want to reiterate that we believe the strength in leasing demand over the 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?

Speaker 3

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 percent 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 Q4, we executed nearly 2,500,000 square feet of leases with activity from categories including groceries, restaurants, health and wellness, off price and personal services.

Speaker 3

Our leasing pipelines continue to be robust, representing another 1,000,000 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 percent and our pre lease spread widened further to 280 basis points as a result of our leasing success in the quarter.

Speaker 3

This pipeline of executed deals now reflects more than $40,000,000 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 0.4% in the 4th quarter. That represents an impressive 150 basis point increase in shop leasing year over year, Reflective of nearly 1,400,000 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.

Speaker 3

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 releasing and lead times on redevelopment projects. For example, some of the Bed Bath spaces that we've re leased We'll not rent commence until the Q4 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.

Speaker 3

We expect to move our portfolio leased 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'm 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? Thank you, Alan.

Speaker 3

Good morning, everyone.

Speaker 4

We continue to experience strong momentum in our development and redevelopment program As our investment teams were active in the Q4, with additional projects breaking around in Q4, we ended 2023 with just over $250,000,000 in This is the

Speaker 5

highest level of starts in

Speaker 4

a single year for Regency in nearly 2 decades and demonstrates the incredible in progress our team has made in sourcing new projects and ramping up our pipeline to achieve our goals. Among our 4th quarter starts is $23,000,000 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 $15,000,000 project

Speaker 3

will bring a

Speaker 4

new Publix as well as extensive improvement to the center. As of year end, Our in process pipeline is growing to $468,000,000 and overall our execution remains on time and on budget With expected blended returns of more than 8%, our in process projects are 89% pre leased 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 a creative redevelopment and bring exciting new merchandising to reinvigorate a center.

Speaker 3

We have several examples of those within

Speaker 4

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 2 compelling transactions in the 4th quarter. As disclosed previously, we closed on the acquisition of Knoll Plaza in Orange County, California in October. And as a reminder, we bought the center as a future redevelopment project. And in December, we acquired the Longmeadow Shops in Massachusetts.

Speaker 4

This 100,000 square foot neighborhood center It's 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

Speaker 3

more than $1,000,000,000

Speaker 4

development and redevelopment projects over the next 5 years. While it is difficult to get developments to pencil, we continue to be uniquely suited and remain optimistic about 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 our high quality centers and within our trade areas. As Lisa just said, Regency has the best development team in the business Our free cash flow and balance sheet give us the capability to fund projects and continue the success we enjoyed in 2023. Mike?

Operator

Thank you, Nick, and good morning, everyone.

Speaker 5

I'll start with some highlights from our full year results, walk through details related to our initial 2024 guidance 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 pay and occupancy remained the largest contributor to our NOI growth rate at 3 60 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.

Speaker 5

Excluding the timing impact of curly 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 is in the 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 move outs and some junior anchor move outs following lease expiration. Given the longer lead times open new anchor tenants, we expect our average commence occupancy rate to be down by about 50 basis points year over year in 2024, impacting same property NOI growth in the short term.

Speaker 5

But more importantly, due to robust tenant demand, we have been releasing 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 24. 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.

Speaker 5

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 20 24 maturities with a new $400,000,000 bond priced at 5.25 percent. Notably, as you consider our guidance range for interest expense and preferred dividends, please note that it is shown 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 is upsized by $250,000,000 to a $1,500,000,000 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.

Speaker 5

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 5.5 times net debt to EBITDA. And following the prefunding of our 24 maturities, our next unsecured bond maturity is not until November of 25. We have ample capacity on our newly upsized revolver and expect to generate free cash flow north of 100 $50,000,000 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

Speaker 4

value. With that,

Speaker 5

we are happy to take your questions.

Operator

Thank you. Thank you. Our first question is from Michael Goldsmith with UBS. Please proceed with your question.

Speaker 6

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 Thinking about anchor leasing coming online at the end of 2024 and into 2025 and potentially more normalized comparison kind of going forward, Should that algorithm look better going forward?

Speaker 5

Thank you. Hey, Michael. You pack a punch with one question. There is a lot in there. So let me unpack some of that.

Speaker 5

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 to the 2.5 largest contributor there.

Speaker 5

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 COBRA collections of about $4,000,000 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.

Speaker 5

Lower termination fees is about $0.02 and of course the 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 really we 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.

Speaker 5

But We feel really good about the direction of our percent leased. 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 Q1 of this year, a decline in commenced occupancy of about 80 basis points.

Speaker 5

Much of that the vast majority of that we can see it's bankruptcy filings, it's move outs from Rite Aid, it's the move outs from Bed Bath and Beyond. We have couple of high rent paying leases in Manhattan that are expiring and we've got great activity on the release of those spaces, but we're 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 releasing this space about as quickly as we can get it. By year end, our commence occupancy rate should be north 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.

Speaker 5

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 commence occupancy rate coming back online and moving our growth forward.

Speaker 6

Mike, thank you so much for the thorough response.

Speaker 2

Mike, if I may just one second. Just to come back to what we did say in our prepared remarks because the takeaway, so there's a lot of words because there 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 move outs is very short term in nature.

Speaker 2

This is not something that is permanent. Certainly nothing that we're seeing right now. As I 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.

Speaker 3

You can

Speaker 2

ask your second question, Michael.

Speaker 6

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 UVP portfolio? Is that growing a little bit Still than the core?

Speaker 5

It is. Just looking at 24% on a standalone basis, the growth rate in that portfolio is north of the 2% to 2 point It would be accretive, if we have included it in the same property portfolio, it would have been additive, I should say, by about 5 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 leased rate and the team has assimilated the assets into the Regency platform.

Speaker 5

They are making great progress and we're excited about the prospects there, but that growth rate is slightly additive.

Speaker 6

Thank you so much for the thorough responses.

Speaker 2

Thanks, Michael.

Operator

Our next question is from Doreen Kaston with Wells Fargo. Please proceed with your question.

Speaker 1

Thanks. Good morning. I know your acquisition guide currently sits at 0, 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?

Speaker 4

Appreciate the question. Yes, I'll just I'll give you a little color of 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 needle in the haystack.

Speaker 4

We did find as you know in 2023, but As we turn 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 2023. And As always, we're very active in underwriting and understanding those opportunities. And it 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 2024.

Speaker 4

But As you know, we do not guide to those since we do not have clear visibility.

Operator

Our next question is from Jeff Spector with Bank of America.

Speaker 7

Great. Thank you. And thanks for the comments on 'twenty four, I know there's a lot to get done, but comments into 'twenty five, right, because I think investors, the market is kind of Trying to look past, let's say, some of these headwinds in 2024 in terms of a higher longer term growth rate for that same store NOI. Can you remind me, 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, etcetera, to again drive that higher seems during a while, let's say, into 2025 and beyond.

Speaker 2

Thanks, Jeff, for the question. We do provide and have really always provided kind of our same property NOI growth model, if you will, Wheel, 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% 3% annually. And the primary component of that is going to be contractual rent steps and cash releasing spreads. Occupancy, whether and in this case, we have percent commenced occupancy in 2024 coming down.

Speaker 2

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 in 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.

Speaker 7

Thank you. And then a more detailed question. Can you talk a little bit more about 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.

Speaker 7

Thank you.

Speaker 4

Sure. This is Nick. Appreciate the question, Jeff. I'll start with just your question related to the cap rate and valuation. And again, We talked about needles in the haystack and using every tool we have in our tool belt and this is one of those opportunities where the seller approached us.

Speaker 4

They were looking for a units transaction and as can appreciate a Unis transaction. They care about the currency they're getting and therefore, they wanted Regency currency. They were a fan of ours from afar. And so for planning purposes, they were ready to transact. They'd owned the asset for decades.

Speaker 4

And so, we were excited about the opportunity. And, as you can see from a valuation standpoint, this thing is a +ormatise8 Going in yields are very attractive from a yield standpoint as well as quality standpoint. And so, we're excited about the future of that opportunity.

Operator

Our next question is from Craig Mailman with Citi. Please proceed with your question.

Speaker 8

Hey, thanks. Maybe I just want to follow-up. I know it seems like the call has been kind of focused on what the longer term earnings power is, given just how good fundamentals are. And I guess, maybe want to come out from a different way, Lisa. You've seen kind of the perfect storm of minimal supply, good demand, and that's helped push market reg growth.

Speaker 8

But inflation has also been A big piece of that the last couple of years as kind of top line for a lot of your tenants has taken off. As Inflation starts to moderate back to more normalized levels. I mean, are you seeing any pushback on the market rent growth kind of being able to be sustained into 'twenty five, I know it's sort of purely for 'twenty six, particularly with some cost pressures maybe in the labor side that's hitting some of the fast casual, fast food guys that may hit some other type of tendency?

Speaker 2

I know you had addressed me with that question, Craig, but I think it's best to allow Alan to handle that.

Speaker 3

Yes, Craig. No, I appreciate the As I said in our opening remarks, 10% is our highest total annual rent growth in 7 years. But We prefer to emphasize the GAAP growth as a better measure and we had some impressive spread this quarter 20% total, over 50% on new deals. But to your question, from an inflation perspective, we're approaching peak occupancy. So I think when we get there or even when we're near that as we are now.

Speaker 3

I still think that pricing power is there and expectation is that the teams can continue to push on both the spreads and the steps as we go forward. We are getting more steps and we're getting steps in more deals now And we're getting higher steps. Approximately 95% of our new deals had steps and 70% of those had 3% or higher. So again, I think the focus is there and I believe that given where occupancy is that trend can continue, Craig.

Speaker 2

And again, I would just come on top. When you think about our business model and our value proposition to our investors, It is the sustainability and the safety of that growing cash flow stream, which translates to our core operating earnings growth and then dividend growth. And I know that we're getting far removed from the 2020 year, But I think it's really important to remember that we went through, I mean, a time the entire world went through a time that none of us had ever experienced before and we did not cut our dividend. And I think that that's really important when you again you about the value proposition for our investors. It's core operating earnings growth plus dividend growth to get to total shareholder returns in the 8% to 10% range.

Speaker 8

No, that's helpful. And I don't know, maybe this one's for Mike. I don't want to direct it to any one person. But Interest expense headwinds have been an issue. You guys have successfully sourced some acquisitions and you have potentially a building of redevelopment ongoing over the next 5 years.

Speaker 8

I'm just trying to get at when you see coming through the numbers, the snow pipeline really kicking in, Average occupancy, the timing of some of these anchor box backfills kind of normalizing out, When maybe the headwinds moderate enough that you start to see kind of the leverage multiplier on same store kind of flow through the earnings. Is that in the next couple of years? Or do you really have to get through of the continued repricing of the debt stack?

Speaker 5

Another power packed question. And I appreciate it, Craig. We do have some headwinds to our growth rate this year and we kind of we just ran through them, clicked through them, and I think we understand those in 2024 and again happy to dig into any of those that you'd like to. But I do see the power of our existing free cash flow and the ability for us to put that capital directly into our growing and exciting excitingly growing development and redevelopment pipeline, which will add to our growth rate going forward. Beyond and we actually have from a leverage perspective given our balance sheet position at the low end of our targeted leverage range, We actually have on the leverage neutral basis even more capital driven again by that free cash flow to put into our acquisition intense and Nick did a nice job of explaining how we think about acquisition activity going forward, which will add to our core operating earnings growth rate.

Speaker 5

But then you've kind of put all that together combined with the normalization and continue growing of our commenced occupancy through 2024 towards the end unfortunately and into 2025. I think those elements will reflect themselves in a core operating earnings growth rate That is at least meeting the objectives that Lisa outlined of being 4% on core operating earnings with a commensurate increase in dividend growth. And if we can do better on the margin and all elements of our business, rent growth, maybe even push those occupancy records even a little bit higher, all of those should result in maybe a slightly even more amplified vision of growth.

Speaker 8

Yes, that's helpful. Appreciate The color. Thanks.

Operator

Thank you. Our next question is from Samir Khanal with Evercore ISI. Please proceed with your question.

Speaker 9

Hey, Mike. Good morning. I guess on the integration with Erstad Diddle, I know you've talked about the 0.5% accretion for a while now. But as you've had time to digest this portfolio, what potential further upside Are you seeing maybe from an internal growth standpoint on the occupancy side? And also what about the opportunities to unlock some of the redevelopment opportunities there?

Speaker 5

Hey, Sameer. I'll reiterate the beginning, we've articulated the strategy behind this merger as being a portfolio that looks like Regency's assets. And on a long term basis, we see a growth rate that looks like Regency's growth rate. But in the near term, one element that we liked about the opportunity was This ability to bring that rent pay and occupancy higher than it currently exists. And I just articulated, In fact, this year we are seeing an additive growth rate from a same property perspective because of that movement in commence occupancy.

Speaker 5

So There's not that doesn't what you didn't hear me say is, there's a big redevelopment heavy component of this merger in the near term. But I'm not we're not dismissing that either. We do see we know it's a leasing exercise right now, But as we're leasing up this portfolio, we have an eye towards the future as we do in our across all of our assets. And we are constantly looking to find value add accretive redevelopment opportunities for really well located pieces of commercial real estate and that's what we bought. And so we're pretty excited about the long term prospects there.

Speaker 5

Okay. And then

Speaker 9

Okay. And then I guess my question second question is around the health of the consumer and the local shop segment. I mean, I appreciate the comments on the consumer being resilient and you're not seeing impact to the business yet. But when you look at credit card debt, it's at record level. You delinquencies that are up.

Speaker 9

I guess, what are you seeing not just on the shop segment, but kind of The local side of that. Thanks.

Speaker 2

I'll take it, if Alan would like to add. Please feel free, Helen. But generally speaking, again, think about our portfolio and the types of shopping centers, we own neighborhood community shopping centers, tend to be more convenience, value, necessity, service. So the consumer and in the trade areas that we do mostly operate in, there's not been a lot of job losses. So people are They still have their jobs and they are still earning wages and therefore they're still spending.

Speaker 2

And when people do cut back, they tend to not cut back at their neighborhood and community shopping centers first. They may trade down, which sometimes also will benefit us. So we're not going to say that we There will never that we won't feel any pressure from consumer spending declining. But again, we have long term leases and we can absorb and our tenants because they are high quality, good operators can also absorb Some decline in sales. Sales do not need to grow every year for a tenant to be able to pay their rent.

Speaker 2

Our tenants are great operators. And It has been in my experience, we have gone through many cycles at Regency, and there have been more moderate recessions. So even if we were to enter into a recession, there have been more moderate recessions where we really didn't feel any pain as a result of that. And then there are ones that are much more significant like the GFC and COVID and we did feel that pain. But I don't see that in I don't have any visibility to a recession of that type or that type of decline in 2024.

Speaker 2

So don't expect to feel much pressure.

Speaker 3

And Sameer, I would just add just from an operator's perspective, we're going to look first to our AR balances, they're healthy. We're going to look next to sales reports, they remain strong. We're going to then look at are we seeing elevated levels of assignments, we're not. And so I think sort of all of those things also dovetail into The consumers reaction at least within our portfolio right now.

Speaker 4

Thank you.

Operator

Thank you. Our next is from Greg McGinniss with Scotiabank. Please proceed with your question.

Speaker 10

Hey, good afternoon. You've spoken about finding ground up developers who maybe lacked the capital to get construction started. Do still see that as an opportunity for investment this year or are there other non traditional opportunistic investment opportunities, A lot of opportunities that you're looking to pursue this year.

Speaker 4

Greg, this is Nick. I greatly appreciate the Yes, I mean, I'll just say it this way again. We have the benefit of every tool in the toolbox available to us when it comes to Sourcing, development, acquisition, investment opportunities overall. And so, there's no doubt construction loans are definitely still hard for people to get. So we are continuing to be engaged with smaller developers.

Speaker 4

But many times they need more than just Debt capital, they need expertise, they need relationships, to fix their cash on cash returns. And so debt And equity is in play in those conversations. So we continue to have dialogue related to that. And more times than not, those conversations turn it to some sort of equity participation given we can bring more tools to the overall deal than just debt. That being said, when appropriate, we will lean in to deals that we want to own long term.

Speaker 4

We closed a transaction where we are just providing senior in mezz debt on a potential future acquisition And it may have future development opportunities as well. And so, again, we go into these conversations with every tool in the tool belt and bring them out and we're excited about the future potential.

Speaker 10

Great. Thanks. First, second question here, it's a bit of a different type of asset from your shopping center bread and butter. But what's your confidence in releasing those Manhattan vacancies that you talked about? And is 1017th Ave potentially addressed this year as well?

Speaker 3

Greg, yes, you for that question. So I think as Mike mentioned in his opening remarks or maybe it was in the early parts of the Q and A, Those rents, as you know, are very high in Manhattan and we did lose 2 key tenants, a former food employee in middle of last year and then a CVS that vacated just last month. We get it back, we lease it. And I think that speaks to the strength of the real estate. We do have signed transactions Solve, the Third Avenue, premises that unfortunately sort of ties into that story of down rent occupancy in 24 where it's not going to come back online until the Q4 likely of this year.

Speaker 3

And as to Second Avenue, we're negotiating a lease there as well. So, the real estate certainly is strong enough for us to find those replacement users, Feel very good about that, but it is impacting us in 2024. As to Barneys, we continue to pursue all avenues, leasing it, demising it, redeveloping it or evaluating the sale. And so, for us, we're going to act upon what makes the most best financial sense, and it's certainly a top priority for us.

Speaker 10

Thank you.

Operator

Our next question is from Ron Kamdem with Morgan Stanley. Please proceed with your question.

Speaker 11

Hey, 2 quick ones. So I'm looking at the supplement and I see Avenida and Biscayne and Cambridge Square was added. Maybe can you provide an update on West Bard Square? That looked like $450,000,000 Is that still coming on in the next sort of 12 to 18 months. And even beyond that, how are you guys thinking about potential sort of new, starts in development given the strength of the balance sheet?

Speaker 4

Ron, greatly appreciate the question. So start with West Bard. Really happy to announce that Redevelopment continues to progress very well. Giant, which is the grocer that we relocated and built a new flagship for them just opened in the last couple of weeks and is doing tremendously well. So if anyone is in the DC area, I would highly recommend you all checking out that asset as we're very proud about the continued redevelopment potential as the team is doing a nice job keeping us on time and on budget.

Speaker 4

And then as you sort of zoom out and look The wider scope, we feel really good about our development and redevelopment pipeline. As we mentioned in our prepared remarks, We started over $250,000,000 in 2023, which was the highest amount of starts in quite some time, But we're not done. We still see a very strong pipeline as we look into 2024 and beyond. And it's all aspects of the business. It's redeveloping our existing portfolio.

Speaker 4

Sometimes it's carried out rebuilds of grocers, as you've seen with Cambridge, as you mentioned. Other times it is putting these junior boxes back in production in one way or another as Alan and I alluded to in our prepared remarks. And then last but not least, it is ground up net new ground up opportunities that are extremely difficult to pencil. There's no question about that. These are difficult transactions to pull together.

Speaker 4

But as you saw us execute in 2023, we are doing it and we're excited about the potential to continue with several projects, Some sooner rather than later, we hope to announce one here in the next couple of weeks in the Northeast. That would be a phenomenal ground up opportunity. Our team is rounding home base right now. So Excited that pipeline we expect to grow and hit as we've articulated our $1,000,000,000 of starts plus or minus in the next 5 years.

Speaker 2

So many of you know I played softball and my favorite softball team actually opened the season today and this is a softball. Give me another opportunity to say The best team in the business, the best platform in the business, our leverage free cash flow funds it, that is a competitive advantage for us and it's something we're really proud of. And I expect and I'm confident that we will continue to execute and perform. Thanks for the question. That was great.

Speaker 11

Great. Just if I could sneak in my second one. Just closing the thought on the same store NOI. One specifically, I think you talked about the 80 basis point dip in 1Q. What's bad debt that's factored into the same store NOI guidance how that compares to sort of historical?

Speaker 11

And then just a bigger picture, is the messaging that because this was Sort of an odd year. As you sort of flip the calendar, we should be thinking more about sort of the same store NOI translating to core earnings growth And sort of the mid singles digits and so forth, just making sure that's still the messaging? Thanks.

Speaker 5

Yes. Appreciate it, Ron. So from a credit loss perspective, I think, is how I'll take your question. We are Planning for 75 to 100 basis points of and that's a by the way, that's a metric on build revenues, but we are planning for 75 to 100 basis points of credit loss. That is very similar to what we planned for.

Speaker 5

And in fact, we kind of ended the year towards the lower end of that range in 2023. Roughly half of that credit loss provision is I'd call bankruptcy related and the balance roughly to traditional bad debt expense. I think to extend your question beyond kind of as we deal with the drop in commence occupancy in 24 and Alan alluded to some of the reasons for that. But as we solve them pretty actively throughout the course of the year, Yes, we're going to it's about driving that commence occupancy rate, closing that gap on that S and O pipeline. That is what's going to translate to top line earnings growth on a core basis.

Speaker 11

Thanks so much.

Operator

Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Speaker 8

Hi. Just maybe a softball here, Lisa, given your recent comments. But just curious on Why do you think you guys are able to find a decent amount of development start opportunities when if we listen to some of your peers, they're saying market rents have to grow 40% to 50% for new developments to pencil. Where is the disconnect, I guess, in those two comments?

Speaker 2

I've never seen Nick play softball, so I'm a little afraid of this answer, but I'll let him answer.

Speaker 3

Thank you, Juan. I appreciate

Speaker 4

the question. With that set up, now I'm nervous what my answer is going to be. No, I'm kidding. No, It is a great question, Juan, and both are true. And so I just want to keep stressing that.

Speaker 4

It is very, very difficult to find land that is priced appropriately, tenants that want to pay enough rent to make sense for that land cost and that construction cost. And so It is extremely difficult and I want to stress that and it is finding needles in a haystack. But because it's so hard And because you have to have all of those tools in your tool belt is why I am so excited because as Lisa has said time and time again, and I couldn't agree more. We have the best team in the business. We have 23 offices waking up every day working with our critical grocery partners, helping them grow their business and they want to grow their business.

Speaker 4

And so they are sitting at the table with us shoulder to shoulder with the land sellers, With the contractors helping us collectively, I'll figure out how do we make these deals pencil so that they can get that new stores opened. And so Although there are very few opportunities where that calculus comes together to make financial sense, it's not 0. And we continue to get more than our fair share. And so it's because it's so hard to find those opportunities that excites me because We can execute on and we will continue to.

Speaker 8

And where do you think we should think of yields for new starts that you may find in 2024?

Speaker 4

Another great question. As you've seen, our in process pipeline, as you can see, is in that 8% plus range on a blended basis. I would expect that to be the continued blended rate. That's not say some opportunities that we want to lean into that we think are really compelling that we won't see the numbers start with a 7 from an initial yield standpoint. And so I'd say that's where our eyesight is, is 7% on the low end of the range for really compelling risk adjusted returns.

Speaker 4

But on a blended basis would we're going to wake up tomorrow and see a bunch of new supply coming on market because of how difficult it is 1st and foremost. And then number 2, I just want to stress how much we do de risk these opportunities before we close and put a shovel on the ground. And so we have entitlements in hand before we close. We are substantially pre leased especially with our grocers and other anchors as you've seen in our pipeline. And so that pre leasing is really to high quality anchor tenants.

Speaker 4

And then last but not least, our construction drawings and bids are in hand. And so Again, those are the key pieces of the puzzle to have in hand to give us the confidence that these yields do make sense. These projects can move forward. And as you've seen, our teams have done a tremendous job and I appreciate the daily efforts of once we start making sure we bring them online, on time and on budget. And as Lisa has alluded to, we have a very strong track record of doing that given that history.

Operator

And one more follow-up,

Speaker 8

if you don't mind. Anything unusual in the Q4 on the OpEx side flowing through the same store that kind of impacted the growth rate for the quarter that we

Speaker 4

should be aware of taking forward?

Speaker 5

Yes and no. So on a full year basis in 2023, I think our growth rate was about 7% on OpEx. Insurance is a big part of the story, Wong. I think you're pretty well versed in what the property insurance markets feel like today and we're not immune from that impact, inflation has been an impact as well. As you know, we're largely triple net.

Speaker 5

So we're able to pass through successfully the vast majority of any including those in insurance to our tenant base and you can see that in our recovery rate, which has held its own. We did have a unique item in the Q4 on real estate taxes where We had a kind of a burn off of a brownfield credit in a real estate tax line item. I don't know if you're picking that up in your analysis, but Yes, that was one unique item in the Q4. That won't so that credit won't recur going forward.

Speaker 8

Thank you.

Operator

Our next question is from Anthony Powell with Barclays. Please proceed with your question.

Speaker 12

Hi, good morning. I guess a clarification question on the junior anchor comments, the ones that moved out at least expiration, were these all Manhattan and other kind of watch list tenants or are there other bunch of tenants in that bucket? And if so, why did they move? Why did they, I guess,

Speaker 3

Anthony, this is Alan. I appreciate the question. So it was Manhattan bankruptcies, but on top of that, There was many intentional move outs as part of our intense asset management approach. And so I would give a few examples. I know a number of you live in or around Connecticut and Norwalk by way of example.

Speaker 3

We've got a retailer that's going to stop paying rent here next month and we're going to be down the entire year and we are bringing Target into that that's not going to open until likely Q2, Q3 of 2025. Phenomenal merchandiser, great and Highly accretive transaction, and something that was absolutely the right long term decision for us yet impacting 2024. I would also take a couple of office supply examples. We had 3 of them in fact that we intentionally made the decision to replace them 1 with Sprouts, 1 with HomeSense, 1 with a Baptist Health Medical facility that I think Nick had mentioned in his remarks. And again, this is just an opportunity to enhance merchandising, provide durable occupancy, with enhanced tenant credit and get really significant rent growth.

Speaker 3

And so that is our proactive way of really thinking through this and just from the sort of that uneven climb comment, it's coming offline here in 2024 from a rent paying perspective and filtering its way back in year end and into 2025.

Speaker 12

Okay. If I get to my next question, so you look at 2025 and 26, you have like 7% of your anchors, I guess, lease operations in those 2 years. Are you going to keep doing this and maybe pushing tenants out for higher rent or is this kind of the peak of this activity in 2024?

Speaker 3

I mean, look, I would just say from a practical perspective, we are constantly looking at our entire portfolio for opportunities to appropriately remerchandise, drive accretive returns, focus on redevelopment opportunities. That's always been part of our mantra and we're going to certainly continue to do that.

Speaker 2

And I would just add that over the long term, we'd come back to our components of same property NOI growth and would still expect to be in that 2.5% to 3% range.

Speaker 12

Okay. Thank you.

Operator

Our next question is from Ki Bin Kim with Truist Securities. Please proceed with your question.

Speaker 3

Thanks. Just want to go back to Juan's question about OpEx expenses. I guess, at high level, I know you explained some of the causes a little bit, but I guess how concerning is the increase in expenses as it pertains to your business and ability to push rent? And does that actually start to impact the way you think about where you want to own properties, whether that be local politics or how these local governments are run?

Speaker 5

I appreciate the question, Ki Bin. Listen, from a on a go forward basis, The directionality of our OpEx and the growth rate in that line item hasn't changed our capital allocation thoughts at all. We continue to want to grow our portfolio across the entirety of our regions. In fact, there's in particular, Phoenix, we'd like to dive into and add To the extent we can find some opportunities in that region and add that to the Regency portfolio, but kind of no change from a capital allocation perspective as a result of the increases. I'll let Alan comment on the pressure that may or may not exist on rent growth.

Speaker 3

Yes. I would say Ki Bin, generally speaking, we're not seeing the pressure to rent growth. Does it play a small part? Sure. I mean, at the end of the day, our retailers certainly look at their overall occupancy costs.

Speaker 3

And so when you kind of layer all of that in, again on the margin, I think that could certainly have a small little impact, but it's just not material enough at this point to really change I think the realities of where we are. Okay. And then a quick follow-up here. The 50 basis points drag from the commence occupancy, is that roughly equivalent to the NOI drag?

Speaker 5

Let me break down the NOI drag a little differently, which I think will help you out. So Safe property NOI growth, let me go through the puts and takes to everyone's benefit. 2% to 2.5%, again base rent is going to be the largest positive contributor to that growth rate and in fact about the same range and that's rent steps, lease spreads and the commencement of the shop occupancy helping support that growth. Redevelopment contributions are going to be 50 basis points to 75 basis points to the positive. And then here's your question on the offsets.

Speaker 5

It's really coming from 2 primary areas, bankruptcies is about 50 basis points of drag in that area. And that's both actual announced known bankruptcies as well as the potential for bankruptcies in 2024. And then the Manhattan assets that we've spoken about today at length is dragging us by about 30 basis points. So that 80 bps Ki Bin that I just summarized for you, that's essentially tied to that rent that commenced occupancy drag in the Q1.

Speaker 3

Okay. Thank you.

Operator

Our next question is from Linda Tsai with Jefferies. Please proceed with your question.

Speaker 13

Thanks. I'm not sure if you answered this with the previous line of questioning, but you said, 2025 is setting up Based on lease timing to be a disproportionate year of growth in NOI, so does that mean 24% should be disproportionately above your long term 3% target?

Speaker 2

I think you meant to say 2025 in your question, not 2024. Yes,

Speaker 5

we're not meeting our objectives in 2024 that we articulate on a long term basis. And that we frankly, I mean, hold our we're pretty serious about holding ourselves accountable to. And in 2025, yes, to the extent and again, we're not giving 25 guidance Linda, but to the extent we The portfolio delivers what we see it delivering at the end of this year, going into 25% and compressing that commenced rate, bringing that growing S and O pipeline back online, yes, that should translate into above average, core operating earnings growth, All else being equal and I stress all else being equal. We're going to have a bond to refinance again in 2025. I mean there are other elements to the plan that certainly incorporate that will impact that result.

Speaker 5

But I think that the idea and the direction that you have in mind is correct.

Speaker 2

And the other big part of all else being equal is we can't control any geopolitical or economic uncertainty, but all else being equal, We agree. That's why I'd come back to over the long term. 2 years isn't a long term, but it's an average. We would expect to be in that 2.5% to 3% average same property NOI growth.

Speaker 13

That's very helpful. Thank you. And my second question is on the Rite Aid and Bed Bath and Beyond that contribute to the economic Anchor occupancy declined. Can you just give us an update on where you are in the various stages of signed leases versus working on backfill still?

Speaker 3

Linda, happy to answer that question. This is Alan. So the team has made really great progress. I'll start with Bed Bath and Beyond. 9 of our 12 are executed.

Speaker 3

And again, so a number of those won't be coming online until later in this year, but really great retailers REI, RH Outlet, L. L. Bean, Fresh Market, T. J. Maxx, I mean, there's some just great users that are backfilling these and we've experienced rent spreads that actually exceeded what we anticipated north 40%, while also keeping our capital levels, as I mentioned in my remarks at a very, I think, judicious level for those.

Speaker 3

So the remaining 3 are all in negotiation right now. So we are beyond the point of prospecting. We hope to wrap those up in relative short order and really have all of those back open in RentPay. With respect to Rite Aid, we had at the time of filing, 22 locations, including those that came through the UBP merger, 6 of those have been rejected, 5 are closed, one is in the closing process. And again, I think a testament to how our team proactively gets out in front of me, 2 of those 6 locations are already leased, 1 to a hardware store, 1 to a fitness operator.

Speaker 3

And so We're actively pursuing the remaining 4 and we're going to stay on our front foot relative to the balance of that portfolio as Rite Aid continues to go through the process as they haven't officially exited bankruptcy.

Speaker 13

And how do we think about those rents For Rite Aid, are they sort of all over the map? Are they above or below market?

Speaker 3

Yes. Interestingly enough, I like the way you They are all over the map. However, I will tell you that we are double digits certainly from a mark to market. I'd say Generally speaking, 15% to 20%, but there's some really massive ones that can be in there. There's some flat ones.

Speaker 3

But generally, I feel really good about certainly the upside depending on those that we get back.

Speaker 13

Thank you.

Operator

Our next question is from Mike Mueller with JPMorgan. Please proceed with your question. Yes. Hi. Just a really quick one here.

Operator

Your 93.4 percent small shop leased rate, What's the commenced level that goes along with that? And where do you think that commenced level can grind higher to, if at all?

Speaker 5

Let's see here. We are at $89,900,000 commenced shop occupancy. Our the SNO on the shops is 3 50 basis points at year end. How much higher what record are you going to set, Alan?

Speaker 3

North, we're going to continue to take it north, Mike. I would I mean We're

Speaker 5

getting pretty close.

Operator

Let me help out. Yes.

Speaker 5

We're getting pretty close to I mean, we're in thin air as I've used the words to describe the level of leased rate that we have in our shop space. I like to think we can continue to grind it higher. We have great centers with really good spaces that are still available a great leasing team. And we'll keep pushing the commence is just going to follow, right? So we're going to we are going to deliver on these leases.

Speaker 5

On balance, all in, that spread on a normal basis, including anchor should be 175 basis points between leased and commenced.

Operator

Okay. So that spread applies to small shops too?

Speaker 5

The small shop spread will be wider. The anchor spread will be narrower. We'll get back to you Mike on what kind of long term spread is.

Operator

Okay. Okay. Appreciate it. Thank you. Our next question is from florist Van Dijkm with Compass Point.

Operator

Please proceed with your question.

Speaker 14

Hi, good afternoon. It's Ken Billingsley for Florist. Quick question on your guidance for 24. Given the same economic conditions that are supporting core business. You're guiding to $100,000,000 in dispositions at approximately a 5.5% cap rate.

Speaker 14

Can you provide some color as to why you're seeing That given your confidence in this cap rate?

Speaker 4

Ken, this is Nick. I appreciate that question. As you know, our guidance on disposition is when we have clear visibility to that. And so as we've stated Over the last several years now, we feel really good about our portfolio and don't have the need to sell assets that have risk, but we still have non strategic assets that we will prioritize for sale. And so those assets in the guidance, we do have visibility to that pricing.

Speaker 4

They're non strategic. And for instance, a couple of them are single tenant. And so we feel good about that guidance and we feel good about that cap rate given the assets have selected to be disposed of.

Operator

Great. Thank you. Thank you. There are no further questions at this time. I'd like to hand the floor over to Lisa Palmer for any closing comments.

Speaker 2

Thank you all for your interest in Regency and I hope everyone has a great weekend. Thank you.

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Key Takeaways

  • Regency achieved record small-shop occupancy of 93.4% in Q4, executing nearly 2.5 million sq ft of leases and maintaining a robust 1 million sq ft pipeline in LOI.
  • Same-property net operating income grew 3.6% in 2023—driven by base rent gains, redevelopment contributions, and 12% cash rent spreads in Q4, with 10% full-year spreads the highest since 2016.
  • The development platform started over $250 million of projects in 2023 and targets more than $1 billion of starts over the next five years, with in-process assets 89% pre-leased at blended returns above 8%.
  • Balance sheet strength was bolstered by a $400 million bond issuance at 5.25%, an upsized $1.5 billion revolver and low net debt/EBITDA leverage, underpinning self-funded growth and acquisition capacity.
  • Anchor vacancies—driven by bankruptcies and lease expirations—are expected to depress commenced occupancy by about 80 basis points in early 2024, weighing on same-property NOI growth guidance of 2–2.5%.
AI Generated. May Contain Errors.
Earnings Conference Call
Regency Centers Q4 2023
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