Regency Centers Corporation — 2024 Q1

[Technical Difficulty]

We cannot hear the question. I don't know if it's us or if it's.

Hello, can you hear me now?

Lizzy, you're breaking up a bit.

So I was asking [Technical Difficulty] if any of the benefit to same-store flowed through in the first quarter? Just seeing if maybe you [ saw ] any upside [indiscernible] or additional sources of accretion might have exceeded your expectations as we're through the early part of the year.

I think, Lizzy, you're still breaking up a little bit in the early parts, but I think I understand the gist of your question. Maybe cadence on earnings given the beat in the first quarter versus the run rate for the balance of the year. I think that's what I heard you ask.

That's helpful. And I apologize for the connection issue. Just as a follow-up, I know you all said that you're viewing external growth opportunities opportunistically, and there's a lot to go on the development, redevelopment front. But just curious on maybe what kind of opportunities would look most -- the most interesting to you today, maybe what you're seeing out in the market. More color on that would be helpful.

I'll take that and allow Nick to come over top of me if he wants to add a little more detail. Really unchanged, our investment strategy, whether it's for acquisitions, which we've had recent success with or whether it's for development, is aligning with our operating portfolio. So above-average quality with regards to merchandising mix, the tenants and to the extent that we can add our expertise to make that happen, we're looking for those opportunities as well. Grocery anchored primarily and also in great trade areas with above-average demographics.

Thanks, Michael. As I -- as we look into the balance '24, 2% to 2.5% guide range. We still have a lot of confidence in that expectation. It's going to hover around, it's going to hover within that range quarter-over-quarter and really pretty consistent, I would say, as we look through the balance, and I appreciate you highlighting the fact that Q1 did have a unique anomaly in the prior year basis.

I'll just add, and I promise, Mike, I won't give guidance for 2025. But what I would like to add, Michael, if you just go back and you look at long-term growth rates, same property NOI growth, AFFO growth rate, I picked 5 years, you will see that Regency is at the top of the sector with that. And that is the result of our strategy. It's all of the things, right? It's our unequaled strategic advantages that I talked about in my prepared remarks. And with that, given 2024 is a temporary dip from those long-term expectations, we would expect 2025 would kind of make up for that. And that -- with the growth of 2025 that we expect all else being equal with regards to the economy, we would still -- we will rise to the top of the sector.

Listen, I hope for the right reasons, I hope it grows, and I'm looking at Alan when I say that and he'd say the same thing. I think we have a lot of conviction in our leasing team's ability. We know our properties and how well they are desired by the [indiscernible] and we have a lot of conviction in continuing to lease at a high rate.

Juan, this is Alan. Thank you for the question. We've always taken the long-term view of intense asset management. And so to answer your question, we're absolutely all about what is the right long-term decision for the asset, for the portfolio and for the future success of Regency. It's interesting. I said last quarter that we moved 3 office supply stores out of our portfolio. I'm not so sure that I actually identified who's replacing them. But to take those units and replace those with Sprouts in one location, HomeSense in another location, and a Baptist Health medical facility in a third location.

Let me take it first, and then I'd like Alan to give some color on what you've seen in the portfolio. But from my perspective, the Urstadt portfolio is performing right on plan. And we had high expectations for the portfolio, and the team is doing a remarkable job of delivering on those expectations. So just to reiterate that, we called for about 1.5 points worth of accretion. We're going to deliver that and that we haven't come off plus or minus that expectation. And there's a little bit of timing noise from a cadence perspective as I indicated in the first quarter, and that will level off by year-end. Is additive or would have been additive, had we called it same property by about the same amount I mentioned last quarter, which we said we're up to about 0.25 point. So I'll leave it at that. And if Alan has a comment.

Yes. Juan, the only thing I would add is we continue to be thrilled with the expanded platform, but I am personally probably more thrilled with the great people that have come into the organization as a result of it. And we did have another productive quarter. We signed about 50 transactions in that portfolio. And as I said, the last few quarters, there's runway there. We are going to grow that 93% formerly leased portfolio and leverage the platform, certainly that we have, and that is the hyper focus of the company right now relative to that acquisition.

This is Viktor Fediv for Greg McGinniss. So we've noticed that your new leases, tenant allowances and landlord work as a percentage of new base rents have increased both on a quarter-over-quarter and year-over-year basis. Just curious, was it something unique this quarter or it's a current market environment. So you need to provide higher TAs and [ landlord ] work to get new leases done.

Viktor, this is Alan. Thank you for the question. The short answer is we're not seeing any material shift at all, although there is a slight elevation this quarter. I'll start on the renewal front. The elevation you see there is one tenant that we did a turnkey relocation to make way for a larger junior box. If you take that one out, our capitals are absolutely in line with historic levels. And again, I think that ties back to the intense asset management mindset of what's right for the asset.

I think it's -- yes, it's important to just reiterate that, our strategy and our approach hasn't changed. We're very judicious with our leasing capital and do believe that, that is clearly leads to again, ample free cash flow growth, but also helps drive our AFFO growth, which if you were to look at long-term AFFO growth, we do lead the sector.

And then as a follow-up, could you please provide some additional color on the remaining $75 million of dispositions. So far, both dispositions in '24 were in Florida. And apart from properties being noncore, was it also driven by just relatively more attractive pricing than transaction market in Florida now, and should we expect other dispositions be within the same submarket or there are no other noncore assets in that submarket.

Viktor, this is Nick. I appreciate the question. As you referenced, I mean, you answered part of the question in your question, which is we are always looking to fortify our growth profile. And we're always looking to potentially sell noncore, nonstrategic assets at attractive cap rates. And so as we look into the future, as you see in our guidance now, we do expect to continue to sell assets at attractive cap rates, recycle that capital into more accretive opportunities that we may see. And so it just so happened, these 2 were in Florida, but I would now tell you, strategically, we are trying to exit Florida, as you know, we have a tremendous portfolio in Florida.

Ronald, this is Nick again. I appreciate the question. So let me talk first to the first part of your question, which is about the acquisition we've now guided to. And so that asset, we're very excited about. It's a 76,000 square foot shopping center in Westport, Connecticut at CVS anchored, and for those of you recently on our tour in the Northeast, you'll be familiar with it. The center directly across the street from our Trader Joe's asset that we own at the corner of Compo Road and Post Road. And so just a tremendous opportunity to bring a great asset into a region that we already are really, really familiar with and excited about, again, adding to that great portfolio. And so that asset was fully marketed. And so we competed in on-market process. And I think given our reputation and our presence in the market definitely helped us and related to that competition. And so excited to get that closed here very, very soon, maybe even as soon as today.

I'll answer that just very high level and to the extent that my partners here want to add any more specific color, but it is both. I'm glad that you added that at the end. I mean, I think you can see with our leasing success and results, the health in the portfolio and where -- we can say, some records are meant to be broken and we continue to drive our percent leased higher and higher. And that SNO pipeline is real. And so that does create real visibility to rent that will commence and we also have been really successful with our redevelopment pipeline. And Mike talked about those in the prepared remarks and in one of the questions. And we have real visibility to that also being additive in 2025. So it's all of the above.

This is Ravi Vaidya on the line for Haendel. I hope you guys are doing well. We've heard from you and your peers that the leasing environment is very strong and robust. But I just wanted to ask, particularly around [ Med care ] and urgent care centers and things along that line. We've started to hear some softness in demand from some of the operators there, notably Walmart. And just wanted to hear your thoughts on what you're seeing from a leasing demand perspective.

Ravi, it's Alan. So our current medical exposure is about 7% of ABR, and that has grown from 5% where we were pre-COVID. We are very comfortable not only with where it is, but certainly comfortable if it were to continue to grow. Interestingly, we signed nearly 20 new medical leases in the first quarter, and that was our second highest category for new leasing from a square footage perspective. And it was largely dentists, optometrists, physical therapy, primary care and it included a new ground lease that we also did with the largest primary care operator in Houston, where they're going to build a new medical building where Regency didn't even invest any capital on that.

Ravi, it's Mike. Maybe I'll give you a bit of a boring answer, but we don't see any change. I've been pretty -- we've been pretty consistent on this topic for some time. 11% area is kind of our run rate, and that's all CapEx, right? So that's maintenance and leasing capital. And we don't see that changing on balance, on average over the long run. You're going to have periods of time where as you're adding to commenced occupancy as we are now where that could increase over that line -- that average line, again, because of the volume of activity you're doing, but the team does an incredible job of ensuring that we're investing the right amount of money into the operator's business, and we're getting a fair -- market-leading rent in those cases and market-leading terms and they're just very judicious with our capital spend, and I think that's appropriate.

And I do just -- I want to reiterate because it's an intentional strategy to maximize rent while limiting leasing capital, trying -- staying within our parameters of our expectations and it's the strength of our asset quality and our shopping centers that allows us to do that, and we are successful in doing so. And it is a reason that we -- it does drive our AFFO growth.

Yes, I think this will help you, Craig. We don't need to sell the properties to afford or pay for the Westport acquisition. That is -- we have the free cash flow in position, we have the balance sheet capacity. We have -- on a leverage neutral basis, if you take our free cash flow expectations, we have over $300 million of kind of investment capacity at our fingertips, so to speak.

I think -- I mean the $25 million that we've added, we have visibility on all of it, and it's on the market, it's actively being discussed. The $25 million is going to be back-end weighted. And I think I still have a lot of confidence that we're going to execute on that plan. The other transactions are known. They're going to occur. These aren't speculative disposition assumptions. These are -- these are actionable disposed that we have a lot of confidence in.

Timing, I'm going to look to the team to help me out, but Q3 -- end of Q3 estimate on the $70 million roughly is how I would think about it.

And Craig, we also announced that we did another disposition in the second quarter, it was Tamarac, and we disclosed that in the press release. It's just not in the transaction list yet.

Let me just take it generally first, and then I'll let Alan talk about the actual discussions with tenants. I mean the future is always uncertain, right? And in today's world, the macroeconomic, I don't know any of us can predict what is going to happen. But what we do know is that we have high-quality centers and our trade areas have been to this point, and we expect to be able to -- and we expect to continue especially given the types of, the types of uses within our centers, right? It's value, convenience, service that we would expect that our shopping centers, the trade areas, the consumers and our trade areas are going to be capable of absorbing the macro pressures that we're seeing today.

Sure, Ki Bin, this is Nick. Appreciate the question. You're absolutely right. We do not land bank as a strategy for our development program. And so we are very, very thoughtful about derisking these projects as part of our diligence while we control the real estate prior to closing. And so our process is we make sure we have control of the real estate. We make sure we have really high-quality tenants committed to the projects, especially our grocery tenants. We work through the entitlement process. We work through the pricing exercise. And as we've talked about in previous quarters, it is a challenging environment to bring all of those pieces of the puzzle together, but it is a core competency of ours, and our teams continue to do a really, really tremendous job of finding those opportunities across our platform, across the country.

I'll start, and then I'll let Nick finish. I think you've been following us since you do -- you have seen that the percentages were more weighted towards redevelopment in the recent past, but we have created a ton -- we've generated a ton of momentum in the ground upside. And again, this goes back to the renewed appreciation for bricks and mortar and for being close to customers' homes. And for the retailers to be able to service their customers through all channels, and one is for the customer to walk through the front door and also to buy online and pick up in store all tailwinds for our business. And you're correct, and I appreciate the acknowledgment that development has been a differentiator for us and a competitive edge, for as long as I've been at the company, and I've been here almost 28 years. And we have an extremely successful track record in that regard. And that matters because we have an experienced, talented national team with these relationships that is helping us find and Nick and the team reminds me all the time, and I'm not saying that it's not easy, but that's what makes us so good. And so that I would expect that we're going to continue to see more momentum on the ground upside. Redevelopments will also continue to happen, as Alan talked about. We intensely manage our existing portfolio, and it's an important part of fortifying our future NOI growth. But I do expect that you're going to see ground-up grow over the next few years.

And all I would add to that, Floris, is as Mike alluded to earlier, and we continue to be very vocal about, the great news is, for us, it's not an either/or process. We are an enviable position with our capital that we are going to take advantage of opportunities that we see in our existing portfolio. And as you see in our in process, the team has found a lot of opportunities at very accretive and attractive returns to invest new capital into our existing portfolio. But we also are going to continue to take advantage of every opportunity we see on a ground-up basis that we know we can derisk and we can put a shovel on the ground at an attractive return there. And we have capability. We have the team that's across the country focused on that, and we have the capital. And so we are blessed to be in a position of not choosing between the 2. We're going to do both.

Sorry, I was just going to reiterate, Nick, what you already said earlier, and that was the 7% to 9%, the target threshold hasn't changed for developments. And acquisitions are going to -- it's going to vary. It's going to depend on the total return, if you will, what's the future growth right? We acquired Nohl Plaza, which had a tremendous amount of upside and a much lower cap rate, for example.

Linda, this is Alan. I don't have the actual number of what percent were grocers, but there certainly were a number of transactions that are in there. The target that we had mentioned in Norwalk, we are very excited about the first Whole Foods Daily Shop. I think that was announced here a few months ago in Manhattan, which will be opening likely in the fourth quarter of this year. And if you haven't heard about that concept, that's their new quick and convenient shopping experience for that urban customer. We've got a couple of public deals that are under redevelopment right now. So I would tell you there's a pretty significant amount of grocer activity that is within that number. We're excited to get both of those Kroger deals -- excuse me, Publix deal is open, which are down in Atlanta. And so it's a significant part of it. Second part of your question? I'm happy in a moment with it.

We're not grocer penetrated. We're 80% grocery-anchored. And I don't think we see that number materially changing from this point forward. The bias here is around grocery, and we'll continue to pursue grocery-anchored shopping centers as a rule. But I don't think you're going to see that go materially or change materially from here.

I appreciate the question. This is Nick. I'm glad you actually pointed out that it is part of the master plan community because to us, these partnering and working with master plan developers is a real competitive advantage of ours. And so if you put yourselves in the shoe of a master plan developer, one of the most important things you can have to make sure that you continue to sell high-quality homes to high-quality purchasers is retail amenities and grocery being a really important part of that. And so in the communities that we're servicing, these are wealthy areas with expected high purchase prices for the homes. And so they want high-quality grocers. We have the relationships with the high-quality grocers. We have the expertise to design those assets at a really high level. They know we have the capital to build them. And they know we anticipate owning those. And so we're making every decision along the way from a long-term ownership perspective. And so when you put your shoe -- yourself in the seat of a master plan developer, we're really one of the best partners that you could hope for to execute on that important amenity.

Tayo. Listen, I think it's timing. Really on every -- just about every line item in our outlook, we've delivered on a full year basis, what we anticipate delivering but some of that timing was front loaded. Again, I'll just reiterating the percent rent. That's kind of a classic first quarter issue, but it occurs largely in the first quarter. Again, over half of our percentage rents are earned -- and the balance is coming from other line items like other income, where the income streams within those line items can be nonlinear. And it just so happens that some of that was occurred in the first quarter, for example, rather than our plan, which was in the second.

I'm happy to take it. And RJ, I appreciate the question. The team did a nice job, really nice job enhancing our disclosure. So thank you for the kudos. I would encourage you to look at it on a look-through basis. That's my simple answer to it. And I understand that redevelopments are hybrids. They are -- they can be challenging to differentiate between maintenance capital and added capital. We -- as we think about our bucketing, it is -- we're densifying the site. We're adding GLA. We're significantly repositioning the asset within the market. And when that occurs, we are designating that as a redevelopment. If it's straight lease-for-lease, box-for-box [ refinancing ] that space as is, that's leasing CapEx, and we're going to put that into the leasing bucket. But I would encourage you, as you think about Regency versus others, put it all in, call redevelopment capital. We're happy for you to do it and then compare us on an apples-to-apples basis, and we like how we stack up.

I think what Mike is trying to say is that whether you look at it on just the leasing only, we're at the low end. And if you bump -- if you throw everything together, we're still at the low end. And it goes back again to just our intentional approach to leasing capital.

I can appreciate that you probably are getting questions from that. But we don't have any new information. We're reading what you're reading -- and it has not -- it doesn't -- the timing of it isn't impacting our operations whatsoever. They're still operating as 2 separate companies. They're talking with us as 2 separate companies. I mean -- and they're key customers of ours. So we do have real -- we do have good relationships with them, but they're not allowed to give us any inside information.

Thank you all for joining us this morning. Appreciate your interest, and have a great weekend. Thank you.