Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Regency Centers Corp (REG, Financial) reported strong operating fundamentals and active capital allocation, driving another great quarter.
- Leasing demand remains robust, with record shop lease rates and a sizable SNO pipeline providing momentum into 2025.
- The company continues to acquire high-quality shopping centers, enhancing its portfolio and growth prospects.
- Regency Centers Corp (REG) executed a $200 million share repurchase, capitalizing on the disconnect between public and private market values.
- The company maintains a strong balance sheet and liquidity position, enabling opportunistic capital allocation and investment.
Negative Points
- The macroeconomic environment remains uncertain, with mixed economic signals and inflationary pressures on consumers.
- Small shop occupancy ticked down slightly, though the company remains confident in the underlying fundamentals.
- The company faces competition in the acquisition market, with deeper bidding pools and institutional capital flowing into the sector.
- Higher interest rates have made it difficult for peers to start new projects, potentially increasing competition if rates decline.
- The company has a significant SNO pipeline, with the timing and commencement of leases impacting future quarters.
Q & A Highlights
Q: From a capital allocation perspective, you did it all in the past quarter. Can you talk a little bit about your capital allocation priorities and maybe just touch about what the cap rates are in the acquisition market for Regency-type centers versus kind of how you were looking at the implied cap rate of where your stock was trading and cause you to buy back shares? Thanks.
A: (Lisa Palmer, President, CEO, & Director) Our goal is to create value for our shareholders. We believe the best use of our capital is our development and redevelopment program. We bought back our shares at an implied cap rate of 7%. The disconnect between public and private market pricing has been more permanent than we imagined. We are seeing assets in the mid-5 cap rate range, making the share repurchase an excellent use of our capital.
Q: Can I just confirm on the repurchase program to clarify the $250 million that's still left?
A: (Mike Mas, CFO & EVP) We have an open repurchase program authorized by the Board at about a level of $250 million. Our activity in the quarter exhausted the previous authorization, so we've simply refreshed the authorization for another two years at $250 million capacity.
Q: I noticed the small shop occupancy ticked down a little bit sequentially. Is there any signs of stress that you're seeing on the small shop side in particular with the local mom-and-pops or is that still relatively healthy?
A: (Alan Roth, East Region President & COO) There is no concern over the underlying fundamentals. Foot traffic is up 6% year over year, sales remain healthy, and retention rates are above 80%. We feel very comfortable with the health of our portfolio.
Q: Are you on the market now for new debt issuance to cover the $300 million on revolver?
A: (Mike Mas, CFO & EVP) We are very comfortable with our liquidity today. We recently recast a revolver with $1.5 billion of capacity. We are monitoring the capital markets and have a bias towards public unsecured financing on a long-term basis at a fixed rate.
Q: Given the pullback in the tenure here and potentially lower rates going forward, do you feel it gets harder for you guys to source or at least a more competitive environment as maybe construction financing becomes an option for others going forward?
A: (Nick Wibbenmeyer, West Region President & Chief Investment Officer) Capital is one of the key components, but relationships and expertise are also crucial. We have the best relationships in the business and the expertise coast to coast. We feel good about our ability to get more than our fair share of these opportunities.
Q: Can you expand on the opportunities that exist on the shop space? How much more can you push on occupancy?
A: (Mike Mas, CFO & EVP) We have 220 basis points of commence occupancy opportunity compared to our historical prior peak. Our SNO pipeline represents about $50 million of annual base rent. We are very excited and bullish about our growth prospects from here.
Q: Your tenant watchlist exposure is quite low versus peers. Can you hit on the highlights of the process you go through in evaluating tenant credit pre-signing and any refinements you've added to the process over the last year?
A: (Alan Roth, East Region President & COO) We do not just lease for occupancy. Our watchlist is comprised of roughly 150 basis points of ABR. We are very thoughtful in aligning with the right retailers and feel great about where we stand on that front.
Q: On the CapEx and the TI for new leases this quarter, it was a bit elevated versus previous quarters. Is there anything one time in there, and how do you expect this to trend going forward?
A: (Alan Roth, East Region President & COO) We feel very good about how we are prudently managing capitals. Our net effective rent as a percent of GAAP rent is in the 80% to 85% range. We are focused on growing rents appropriately and do not see any shift in underlying fundamentals or trends.
Q: Where are cap rates in the shopping center sector headed in your view? Do you think that we could see some of the cap rate expansion retrace itself over the next 12 to 18 months?
A: (Lisa Palmer, President, CEO, & Director) We believe cap rates are going to stay where they are, and with more capital coming into the sector, cap rates should go down, not up. Our product type offers sustainability and stability of cash flows.
Q: On the 100 basis points of positive contribution from redevs coming online in 2025 being 2x the average, could you expand on some of the underlying drivers?
A: (Mike Mas, CFO & EVP) It's more a function of the quantum of the projects than the rates on the rents. These projects are now largely well on their way, constructed, leased, and delivering income into the same property pool.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
