Q4 2023 Regency Centers Corp Earnings Call
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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 question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Christine MC Elroy Senior Vice President capital markets. Thank you Christy you may begin.
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 Rock East region, President and Chief operating Officer, and Nick Live in our West region, President and Chief Investment Officer.
Minder today's discussion may contain forward looking statements about the company's use of future business and financial performance, including forward earnings guidance and future market conditions.
They are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by these forward looking statements we may make.
And the rest of it 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.
We did 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 is that.
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 then 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 and 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 our $1 billion or more projects over the next five years. My hat is off to all involved on our team you have heard me say before I believe we have the best development plan.
One in the sector.
Our experienced team and ability to create value through this platform.
And the ability to self fund with a levered free cash flow our unique competitive advantages for regency.
It was also a big year on the transactional side highlighted by the closing of the Ers that little acquisition in August the integration integrate and she is now essentially complete kudos.
Kudos to all involved for a second 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 revolver 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 note 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 or regency right six 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 it's showing no signs of abating.
Consistent job growth and moderating inflation are driving consumer resiliency in our trade areas.
We also continue to experience tailwind favoring brick and mortar retail and strong suburban markets supporting a positive retail environment ahead Alan.
Thank you Lisa and good morning, everyone. We.
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 three 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.
Hi.
In the fourth quarter, we executed nearly two 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 leased rate was up another 30 basis points in Q4.
Ending the year at 95, 7% and our pre lease 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 lease 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 one 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 re merchandizing, the space with exceptional retailers and at higher rents and in some cases, our ability to recapture the 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 tenancy 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.
Well 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 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 Commencements in late 2024 and into 2025.
In closing I am really proud of the tremendous work and success at 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.
Okay.
Thank you Alan and good morning, everyone.
We continue to experience strong momentum in our development and redevelopment program.
Our investment teams were active in the fourth quarter with.
With additional projects breaking ground in Q4, we ended 2023 with just over $250 million in starts.
Is the highest level of starts in a single year for regency in nearly two decades and demonstrates the incredible work in progress. Our team has made in sourcing new projects and ramping up our pipeline to achieve our goals.
Among our fourth quarter start to with $23 million redevelopment I needed. This game with this project. We are excited to bring additional shop space one of the best pieces of commercial real estate in South Florida.
Listen to our existing Aventura square shopping center.
In the quarter. We also began the redevelopment of Cambridge Square Atlanta is $15 million project will bring a new publics as well as extensive improvements to the center.
As of yearend our in process pipeline has grown to $468 million and overall, our execution remains on time and on budget with expected blended returns with more than 8%.
Our in process projects for 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 accretive redevelopment opportunities and bring exciting new merchandising to reinvigorate that centre we.
We have several examples of those lives in our in process redevelopment pipeline today, including Baptist Health in Mandarin landing Sprouted Circle Marina Center.
Are you I Am Walker Center.
And Publix at Buckhead Atlanta.
Moving to acquisitions, either 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 no Plaza in Orange County, California on October <unk>.
A reminder, we bought the sort of the future redevelopment pipeline project.
And in December we acquired a long meadow shops in Massachusetts.
100000 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 pipeline 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 and our high quality centers and within our trade areas.
Lisa just at Regency has the best development team in the business and our free cash flow and balance sheet give us the capability to pump projects and continued the success we enjoyed in 2023.
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Thank you Nick and good morning, everyone.
I'll start with some highlights from our full year results walk through the details related to our initial 2024 guidance range and finish by discussing recent balance sheet activity.
We reported NAREIT <unk> 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.
And in large part by same property NOI growth of three 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 five through seven and our earnings presentation.
Excluding the timing impact of Covey Period's 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 two to two 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.
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 falling lease exploration.
Given the longer lead time to open new anchor tenants, we expect our average commenced occupancy rate.
To be done 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 leased rate will trend higher throughout the year.
We'll begin to benefit from this outsized anchor recommencement activity beginning in late 2024.
In addition to same property NOI growth are.
Our earnings range also reflects previously discussed accretion from the UCP 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 almost impact as we took advantage of an attractive debt capital markets window in early January to pre fund our 2020 for maturity with a new $400 million bonds priced at $5 two 5%.
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 revolver 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.
In 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 five to five five times net debt to EBITDA.
And following the pre funding 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 a $160 million this year.
This liquidity balance sheet capacity and differentiated access to capital allows us to further grow our development and redevelopment pipeline.
Both Lisa and Nick discussed Andrew.
And remain opportunistic as we look for incremental avenues to drive growth and value.
With that we're happy to take your questions.
Okay.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question is from Michael Goldsmith with UBS. Please proceed with your question.
Yeah.
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 normal Asia normalization of some factors that may limit the flow through so I guess my question is what gets you.
Due 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 comparison kind of going forward should that algorithm.
Look better going forward. Thank you.
Hey, Michael you pack a punch with one question.
So there is a lot in there. So let me let me unpack some of that and if I don't get to it all I'm certain that others will have some of my questions. So just to recap what you said there from a core earnings perspective Bill.
Big moving parts in your you've got it largely correct same property NOI growth is the largest and it 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 each of the two and a half largest contributing contributor there very proud to deliver the Ub P merger accretion estimate of one five.
5% to our growth rate and that's been consistent as you know since we announced the transaction back in May we continued to deliver upon that underwriting the headwinds of course in U R. You alluded to some of them, but let me just quickly to them for the benefit of everyone.
No further covered collections of about $4 million, that's two cents a share by the way we're extraordinarily happy for that.
And to be behind us and kudos to the team for collecting on that ramp.
Lower termination fees is about to Samsung and.
Of course, the results of our recent debt financing, which were also extraordinary pleased with has another two cents of headwind to earnings growth.
To your to your follow up question, just let me let me start here the puts and takes of outperformance underperformance relative to the midpoint listen it it's going to come through the NOI plan and specifically within the NOI plan, that'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 Les.
Later in the call I'm sure Alan will will jump in and give us some color 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 gonna move percent leased up towards our 96% target by about 20% 20 basis points. This year.
On the surface it 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 that on the prepared remarks.
Describing.
But it's what's happening beneath the surface uniquely in 'twenty, 'twenty, four 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 that its bankruptcy filings its move outs from rite aid's as they move outs from bed Bath and beyond we have a couple of high rent paying leases in Manhattan that are expiring and and we've got great activity on the release of those.
Yeah as I said in our remarks, we're releasing this space is about as quickly as we can get it by year end or 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 is that average as the impact of timing that's going to weigh on our two to two 5% growth rate.
So lastly, 25 is looking from an algorithm perspective twenty-five is looking like a disproportionate year to our to our standard two 5% 3% run rate.
If all again, there's a lot to say here I'm, not giving 'twenty five guidance, but if all can kind of hold together here 25, we should see the benefit of.
Of that commence occupancy rates coming back online and moving our growth forward.
Mike. Thank you so much for the thorough response.
If I may just 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's 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 of their prepared remarks.
And the downtime that's associated with these anchor move outs is it 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 well.
We're not seeing any signs of a healthy demand for our space abating whatsoever, and I think that's a really important thing to remember.
Yes.
I'll keep it very short Youre looking for NOI growth of two to two 5% for the core portfolio. How are you thinking about growth in the U b portfolio is that growing a little bit faster than the core.
It is just looking at 24 on a standalone basis the growth rate in that portfolio is north of a two to two 5% it would be accretive if we haven't included it in the same property portfolio. It would've been additive I should say by about 25 basis points to that two to two 5% range, we like and that's consistent what we saw.
And that portfolio was a leasing opportunity.
That portfolio was about and is about 200 basis points shy of our leased rate and the team is 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 out of it.
Thank you so much for the thorough responses.
Perfect very helpful.
Our next question is from Dori Kesten with Wells Fargo. Please proceed with your question.
Thanks, Good morning.
Now your acquisition guidance currently sits at zero, but can you talk about the volume of Suntrust. You would describe as an interest to regency out there today.
Would you be surprised if you ended the year as a net acquirer.
I appreciate the question Yeah, I'll, just give you a little color to what we're seeing in the market is we're definitely seeing a little pick up as you heard us say time and time again in 2023, there is definitely a.
A lot of that opportunities out in the market, we were happy with the needles in haystacks, we did fine as you know in 2023, but.
As we turn the page now into 2024, we are seeing more activity out there.
It's still below historical norms, but definitely a pick up from 23 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 gonna pounds and.
So we are hopeful to continue to find needles in haystacks as we move through 'twenty four but.
As you know, we do not guide to those since we do not have clear visibility.
Okay. Thank you.
Our next question is from Jeff Spector with Bank of America. Please proceed with your question.
Great. Thank you and thanks for the comments on 'twenty four I know, there's a lot to get done.
But you know comments into 25, right because I think investors. The market is kind of trying to look past lets say some of these headwinds in 'twenty four 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 et cetera to again drive that higher same store NOI lets say into 'twenty five and beyond.
Thanks, Jeff for the question.
We do provide in half.
Really always provide it kind of our same property NOI growth model. If you will the 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 two 5% to 3% annually and the primary component of that.
That is gonna be contractual rent steps and cash re leasing spreads occupancy weather 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 in redevelopment dollars.
So that is our long term goal and.
Most of you know this I'd go with the company a long time I do believe that throughout the years, we have continued to evolve and leverage all tools technology and to get better and to continue to improve processes and also continue to ensure that we are sustained.
That long term NOI growth, which is as Mike commented the largest contributor to core operating earnings growth.
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 Capri seller motivation value add opportunity any color on that asset would be helpful. Thank you.
Sure. This is Nick I appreciate the question Jeff.
I'll start with just your question related to the cap rate valuation 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 they were looking for a units transaction and as you can appreciate the unions transaction they care about the currency theyre getting and therefore, they wanted regency currency. They were a fan of ours from afar. So for planning purposes, they were ready.
To transacted on the asset for decades, and so we were excited about the opportunity and as you can see from a valuation standpoint. This thing is a plus or minus 8% going in yield so very attractive from a yield standpoint, as well as quality standpoint, and so we're excited about.
The future of that opportunity.
Thank you.
Thanks, Jeff.
Our next question is from Craig Mailman with Citi. Please proceed with your question.
Hey, thanks.
Maybe I just wanted 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 I, maybe want to come out from a different way, we say you know.
<unk> seen kind of a perfect storm of minimal supply demand and that has helped push our market rent growth, but no inflation has also been a big piece of that the last couple of years is as kind of top line for a lot of your tenants has taken off as inflation starts to moderate back to more normalized levels would be.
Are you seeing any push back on the market rent growth kind of being able to be sustained into 'twenty five.
I'm truly for 26, I'm, particularly with some cost pressures maybe on the labor side, that's hitting some of the SaaS casual fast food guys with big hit some other type of tenancy.
Tendencies.
I know you addressed me with that that question, Craig, but I think it's best to fill out on to handle that yes, Craig No I. Appreciate the question as I said in our opening remarks, 10% is our highest total annual rent growth.
In seven years, but you know we prefer to emphasize the gap growth is a better measure and we add some impressive spreads this quarter, 20% total over.
Over 50% on new deals, but to your question for.
From an inflation perspective, we're approaching peak occupancy so I think when we get there or even more more near that as we are now.
I still think that that pricing power is there an 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 and more deals now and we're getting higher steps approximately 95% of our new deals had steps in 70% of those had 3% or higher. So again I think that the focus is there and I believe that given where occupancy is that that trend can continue Craig.
I would just come on top of when you think about our business model and our value proposition to our investors 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 we're getting far removed from the 2020 year, but I think it's really important to remember that we went through.
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 get when you think about the value proposition for our investors. Its core operating earnings growth plus dividend growth to get to total shareholder returns in the 8% to 10% range.
No that's helpful.
I Dunno, maybe maybe this one's for Mike all of our direct to any one person, but you know interest expense headwinds had been an issue you guys have successfully source of acquisition that you have.
The ability of the redevelopment ongoing over the next five years I'm just trying to get at what do you see coming through the numbers you know the snow pipeline really kick it in.
Average occupancy the timing of some of these anchor box back sales 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 the kind of the continued re pricing of the debt stack.
[laughter] another power pack question [laughter].
And I appreciate it Greg.
We do have some headwinds to our growth rate this year and we kind of it was just ran through them click through them and I think we we understand those in 'twenty, four 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 a growing and exciting excitingly growing development 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 a leverage neutral basis, even more capital.
Driven again by that free cash flow to put into our acquisition.
And Nick did a nice job of explaining how we think about acquisition acquisition activity going forward, which will add to our core operating earnings growth rate.
But that you've kind of put all that together.
Combined with the normalization and continue growing of our commenced occupancy.
324 towards the end of unfortunately, our into 'twenty five.
I think those elements war 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 in 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.
Vision of growth.
No that's helpful. I appreciate the color. Thanks.
Thank you. Our next question is from Samir Khanal with Evercore ISI. Please proceed with your question.
Hey, Mike good.
Good morning, I guess on the integration with Daryl I know you've talked about the one 5% accretion for a while now.
But as you've had time to digest this portfolio with 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.
Hey, Sameer.
Yeah, I'll reiterate the.
From the beginning we've articulated the strategy behind this merger is 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 Gregory.
But in the near term one is one element that we liked about the opportunity was this ability to bring that rent paying occupancy.
Higher than it is than it currently exists and I just articulated in fact this year, we are seeing a additive growth rate from a same property perspective because of that movement in commenced occupancy.
Theres not that doesn't what you didn't hear me say is there's a big redevelopment heavier component of this merger in the near term.
But I'm not we're not dismissing that either we do see we are we know what the leasing exercise right now, but as we're leasing up this portfolio, we have an eye towards the future as we do in our.
All of our assets and we are constantly looking to find a value add accretive redevelopment opportunities for really well located pieces of commercial real estate and that's what we bought in and so we're pretty excited about the long term prospects there.
Okay, and then I guess my question second question is around the.
The health of the consumer and the local shop segment I mean, I appreciate the comments on that.
On the consumer being real Brazil, Andy not seeing impact the business yet when you look at credit card debt is at record levels, you see delinquencies that are up.
What are you seeing.
Just on the shop segment, but kind of the kind of it.
The local side of that thanks.
I will tell you is allen would like to add.
Please feel free 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.
The consumer and the trade areas that we we do mostly operate in them.
There's not been a lot of job losses. So people are they still have their they still have their jobs and they are still earning wages and therefore, theyre still spending and when people do cut back they tend to not necessarily 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 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 in 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.
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 recession. So even if we were to enter into a recession there 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 a significant like the GSC and COVID-19 and we did feel that pain, but I don't I don't see that in I don't have any visibility.
Two a recession of that.
Type of that type of decline in 2020 for us So don't expect to feel much pressure 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 sales reports. They remained strong we're going to 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.
Thank you.
Thank you. Our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.
Okay.
Hey, good afternoon.
He's previously spoken about finding excuse me finding ground up developers maybe lacked the capital to get construction started do you 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.
Greg This is Nick I greatly appreciate the question.
Yeah, 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 small.
Other developers.
But many times they need more than just debt capital they need expertise they need relationships.
It takes 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.
More times than not those conversations turn into some sort of equity participation given we can bring more tools to the overall deals and just that that being said when when appropriate we will lean in to deals that we want to own long term.
We recently closed a transaction, where we are just providing senior and mezzanine debt on a 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.
Great. Thanks.
For second question here, it's a bit of a different type of asset from here.
Shopping center bread and butter, but what's your confidence in releasing those Manhattan.
At in vacancies that you talked about and is 101 seventh ads.
Essentially addressed this year as well.
Greg Yes. Thank you for that question. So I think as Mike mentioned in his in his opening remarks or maybe it was in the early parts of the Q&A.
You know those rents as you know are very high in Manhattan, and we did lose two key tenants are former food Emporium middle of last year, and then a Cvs that vacated just last month.
We get it back we lease it and and I think that speaks to the strength of the real estate, we do have.
Signed transactions to solve the third Avenue premises.
Premises that unfortunately, it sort of ties into that story down rent paying occupancy and 24, where it's not going to come back online until the fourth quarter likely of this year.
As to second Avenue, we are negotiating a lease there.
There as well so.
The real estate certainly a strong enough for us to find those replacement users feel very good about that but it is impacting us in 'twenty four.
As to Barneys.
We continue to pursue all avenues leasing at <unk>.
<unk> redeveloped, yet 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.
Thank you.
Okay.
Yeah.
Our next question is from Ron Camden.
Morgan Stanley. Please proceed with your question.
Hey, two quick ones. So I'm looking at the supplement I see avid need on Biscayne, Cambridge square was at it maybe can you provide an update on West Park square that looked like $450 million 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.
Ron greatly appreciate the question. So I will start with west part I'm really happy to announce that redevelopment continues to progress very well giant which is the grocery that.
We relocated and built new flagship for them just opened.
Last couple of weeks and is doing tremendously well so anyone's in the D. C area I would highly recommend you all checking out that asset we're very proud about the continued.
Redevelopment potential as the team is doing a nice job keeping us on time and on budget and then as you sort of zoom out and look at the wider scope, we feel really good about our development and redevelopment pipeline as we mentioned in our prepared remarks, we started over $250 million in 2023.
Which was.
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 redeveloped or existing portfolio, sometimes its tear down rebuild the crushers as you've seen with Cambridge as you mentioned other.
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. If theres. No question about that these are difficult transaction to pull together, whether 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 homebase right now so.
Excited that pipeline, we expect to grow and hit as we've articulated our $1 billion of starts plus or minus in the next five years.
So many of you know I played softball, and my favorite softball team actually open 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 leveraged free cash flow of funds that that is a competitive advantage for us and it's something we're really proud of and I expect and I am confident that we will continue to execute and perform.
Thanks for the question that was great.
Great and just if I could sneak in my second one.
Closing the thought on the same store NOI.
One specifically I think you talked about the $80 80 basis points step in <unk>, what's what's bad debt, that's factored into the same store NOI guidance and how that compares to just sort of historical and then just a bigger picture is the messaging that you know because this was sort of an odd year as you sort of flipped the cowen.
Or we should be thinking more about sort of the same store NOI translate into core earnings growth and sort of the mid single digits.
So for US just making sure that's still the messaging. Thanks.
Yes.
I appreciate it Ron so from a.
From a credit loss perspective.
I'll take your question, we are planning for 75 100 basis points of and by the way that's a metric.
Build revenues, but we are planning for 75 100 basis points of credit loss.
That is very similar to what we planned for and in fact, we kind of ended the year towards the lower end of that range in 'twenty three.
Roughly half of that credit loss provision as I I'd called bankruptcy related and the balance roughly to traditional bad debt expense.
I think to extend your question beyond kind of as we as we deal with the drop in commenced occupancy in 'twenty, four and Alan alluded to some of the reasons for that.
But as we solve them pretty actively throughout the course of the year, we're going to we're going to you know it's about driving that commenced occupancy rate closing that gap on that S. N O pipeline that is what's going to translate to top line earnings growth on a core basis.
Yeah.
Thanks, so much.
Our next question is from plants in Alberta with BMO capital markets. Please proceed with your question.
Hi, just a maybe a softball here it would be so given your recent comments, but just.
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 are saying market rents have to grow 40%, 50% renewed.
For new developments to pencil.
Where is the disconnect I guess in those two.
Comments.
Speaker Change: I have never seen Nick play softball, so I'm, a little afraid of this answer but I'll, let them out.
Thank you and I appreciate the question with that setup now now I'm nervous what my answer is going to now I'm getting.
No. It is a great question, one and both are true and so I just want to keep stressing that 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.
It is finding needles in a haystack, but because it's so hard and.
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.
I Couldnt agree more we have the best team in the business. We had 23 offices waking up every day and working with our critical grocery partners, helping them grow their business and they want to grow their business and so they are sitting at the table with us shoulder to shoulder with the land sellers with the contractor is helping us collectively I'll figure out how do we make.
These deals pencil so that they can get net new stores opened and so are there. The although there are very few opportunities where that cash.
Calculus comes together to make financial sense is not zero and.
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.
Where do you think we should think of yields.
For new starts that you made.
<unk> and 'twenty four.
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 key.
Continued blended rate.
Not to say some opportunities that we want to lean into that we think are really compelling that we won't see the numbers start with the seven from an initial yield standpoint, and so I'd say, that's where our eyesight is seven on the low end of the range for really compelling risk adjusted returns.
But on a blended basis, we would expect to see us continue to push north of 8% and I'll just I'll just stress again on the development side I do not expect we're going to wake up tomorrow, and see a bunch of new supply coming on market because of how difficult. It is first and foremost and then number two.
I just want to stress how much we do derisk. These opportunities before we closed and put a shovel in the ground and so we have entitlements in hand before we close.
We are substantially pre leased, especially with our groceries and other anchors as you've seen in our pipeline and so that pre leasing is really critical to high quality anchor tenants and then last but not least are 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.
The confidence that these yields do makes 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 leases alluded to we have a very strong track record of doing that given that history.
And one more follow up if you don't mind.
Anything unusual in the fourth quarter on the Opex side.
Flowing through the same store that kind of impacted the growth rate for the quarter that we should be aware of taking forward.
Yes, so on a year on a full year basis in 'twenty three I think our growth rate was about 7% on opex.
Insurance is a big part of the story.
I think youre pretty well versed in what the property insurance markets feel like today, and we're not immune from that impact.
Inflation, that's been an impact as well as you know we're largely triple net so we're able to pass through successfully the vast majority of any increases including those in insurance to our tenant base and you can see that in our recovery rate, which is which has helped us on we did have a unique item in the fourth quarter on real estate taxes, where.
We had a kind of a burn off.
Of a brownfield credit and real estate tax line item I don't know if you are picking that up in your analysis, but yeah that was one unique item in the fourth quarter that won't so that credit won't recur going forward.
Thank you.
Yeah.
Oh.
Our next question is from Anthony Powell with Barclays. Please proceed with your question.
Hi, Good morning, I guess, a clarification question on the junior anchor and junior anchor comments.
The ones that moved out at lease expiration when he's all Manhattan. Another round of watch list tenants or is it other parts of tenants in that bucket and if so why do they move.
Do they make it.
Anthony This is Alan I appreciate I. Appreciate the question. So it was Manhattan and 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, 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 project, it's not going to open until likely Q2 Q3 of 2025.
Phenomenal merchandiser and great in highly accretive transaction.
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 have three of them and the fact that we intentionally made the decision to replace them one with sprouts, one with home sense, one with a Baptist health medical facility that I think.
<unk> 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 and so that is our proactive way of really thinking through this and just from sort of that uneven climb comment it's come.
Offline here in 'twenty four from a rent paying perspective.
Filtering its way back in year end and into 'twenty five.
Okay and I guess my next question. So you look at 25% and 26, 7% of your anchors.
I guess the durations in those two years.
Doing this and maybe pushing tenants out for higher rent or is it kind of can you give us activity in 'twenty four.
I mean look I would just say from a practical perspective, we are constantly looking at our entire portfolio for opportunities to appropriately Remerchandised 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 and I would just I'd just add that over the long term it would come back to our components of same property NOI growth and we still expect to be in that two 5% to 3% range.
Okay. Thank you.
Our next question is from Keybanc, Kim with <unk> Securities. Please proceed with your question.
Thanks, just wanted to go back to <unk> question about Opex expenses I guess it is high level.
I know you explained some of the causes of it but I guess how concerning is the increase in expenses.
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 does how these local governments are run.
Hi.
I appreciate the question Keith.
From a go forward basis, the directionality of our Opex in the growth rate in that line I am Hasnt changed our capital allocation thoughts at all.
We continue to want to grow our portfolio across the entirety of our of.
Speaker Change: All of our regions and factors.
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.
No change from a capital allocation perspective, as a result of the increases.
I'll, let I'll, let Alan comment on the pressure.
That may or may not exist on rent growth, yes, I would say keep in 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.
So when you kind of layer all of that and again on the margin.
I think that could certainly haven't a small little impact but.
It's just not material enough at this point to really changed I think the realities of where we are.
Okay and then.
Quick follow up here, the 50 basis points drag from the commenced occupancy is that roughly equivalent to the NOI drag.
Let me, let me break down the NOI drag a little differently.
It will help you out so same property NOI growth when we go through the puts and takes.
To everyone's benefit two to two 5%.
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 shop in shop occupancy, helping support that growth redevelopment contributions are going to be 50 to 75 basis points to the positive.
And then here's your question on the offsets.
Coming from two primary areas bankruptcies is about 50 basis points of drag in that area.
And that's both actual.
Speaker Change: Announced known bankruptcies as well as the potential for bankruptcies in 2024.
Then the Manhattan assets that we've spoken about today at length is dragging us by about 30 basis points. So.
About 80 bps, keeping that I just.
Summarized for you that's essentially tied to that.
That commenced occupancy drag in the first quarter.
Okay. Thank you.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
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 disproportionate year of growth and NOI. So does that mean 24 should be disproportionately above your long term 3% target.
Oh, Thank you say 2025 in your question that 'twenty four.
We're not we're.
We're not meeting our objectives in 2024 that we articulate on a long term basis and that we frankly, I mean, we're pretty serious about hold ourselves accountable to.
And then 25, yes to the extent and again, we're not giving 'twenty guidance, but to the extent we the portfolio delivers what we see are delivering at the end of this year going into 'twenty, five and compressing that commenced rate bringing that.
Growing SNL pipeline back online, yeah that should translate into above average.
Core operating earnings growth, all else being equal and I stressed all else being equal we're going to have a bond to refinance again in 25 I mean, there are other elements to the plan that that certainly incorporate that will impact that result.
But I think that the.
It'd be a direction that you have in mind is correct yes.
The other big part of all else being equal as we cant control any geopolitical or economic uncertainty, but all else being equal absolutely agree and that's why I would come back to over the long term two years, there's been a long term, but it's an average we would expect to be in that two 5%, 3% average same property NOI growth.
That's very helpful. Thank you and then my second question is on the Rite AIDS in bed Bath <unk> beyond that contribute to the economic.
I think our occupancy decline can you just give us an update on where you are in various stages of signed leases versus working on backfill still.
Yes, Linda happy to answer that question. This is Alan.
So the team has made really great progress I'll start with bed Bath <unk> beyond nine of our 12 are executed.
And again, so a number of those won't be coming online until later in this year in this year, but really great retailers Rei RH outlet L. L Bean fresh market T. J Max I mean, theres. Some just great users that are back filling these and we've experienced rent spreads that actually exceeded what we anticipated north of 40% while also.
Keeping our capital levels as I mentioned in my remarks at a very I think judicious level for those so the remaining three are all in negotiation right now so we're beyond the point of prospecting, we hope to wrap those up in relative short order and really have all of those back open and rent paying with respect to rite aid.
Good.
We had at the time of filing 22 locations, including those that came through the EVP murder six of those have been rejected.
We're closed one is in the closing process and again I think a testament to how our team proactively gets out in front of me two of those six locations are already leased one to a hardware store.
One two a fitness operator and so we're.
We're actively pursuing the remaining four and we're going to stay on our front foot relative to the balance of that portfolio. As you know Rite aid continues to go through their processes. They havent officially exited bankruptcy.
And how do we think about those rents for rite aid are they sort of all over the map or are they above or below market.
Yes, interestingly enough I like the way you just stated that they are all over the map. However, I will tell you that we are double digit certainly from a mark to market you know I'd say generally speaking, 15% to 20%, but there is some.
Really massive ones that can be in there. There's some flat one so but generally I feel really good about certainly the upside depending on those that we get back.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is from Mike Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, just a really quick one here Youre 93, 4%.
Small shop leased rate.
What's the commenced level that goes along with that and where do you think that commence level crime.
<unk> tier two.
If at all.
Let's see here we are at.
89 nine commence.
Commenced shop occupancy.
Our <unk> on the shops is 350 basis points at year end.
How much higher and what record are you going to set out.
North we're going to continue to take it north Mike.
I would I mean pretty close yes.
We're getting pretty close to I mean, we're in scenarios.
The words to describe the level of leased rate that we have in our and our shop space I like to think we can continue to grind higher we have great centers with really good spaces that are still available and a great leasing team.
And we'll keep pushing the commensurate just going to follow right. So we're going to we're going to deliver on these leases.
On balance.
All in that spread on a on a normal basis, including anchor should be 175 basis points between leased and commenced.
Okay, so that spread applies to small shops.
The small shop spread will be wider the anchor spread will be narrower.
I will get back to you Mike on what kind of a long long term credit.
Okay. Okay I appreciate it thank you.
Right.
Our next question is from Floris Van <unk> with Compass point. Please proceed with your question.
Billingsley: Hey, good afternoon, Ken Billingsley for Flores quick.
Quick question on your guidance for 24, given the same economic conditions that are supporting your core business you are guiding to a 100 million in dispositions at approximately five 5% cap rate can you provide some color.
As to why you are seeing.
Given your confidence in this cap rate.
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.
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 there.
They are 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 those the assets have been selected to be disposed of.
Great. Thank you.
Yes.
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.
Thank you all for your interest in Regency, and hope everyone has a great with them.
Yes.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.