Regency Centers Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 15 speakers on the call.

Operator

Greetings and welcome to Regency Centric Corporation's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christy McElroy.

Operator

Thank you. You may begin.

Speaker 1

Good morning, and welcome to Regency Center's 2nd quarter 2024 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer Mike Moss, Chief Financial Officer Alan Roth, East Region President and Chief Operating Officer and Nick Wibbenmeyer, West Region President and Chief Investment Officer. As a reminder, today's discussion may contain forward looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. 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 from 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 in 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. Comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our web site with additional information, including disclosures related to forward earnings guidance. Our caution on forward looking statements also applies to these presentation materials.

Speaker 1

Finally, given the number of participants we have on the call today, we kindly and respectfully ask that you limit your questions to 1 and then rejoin the queue if you have any additional follow-up questions. This will allow everyone who'd like to ask a question an opportunity to do so. Lisa? Thank you,

Speaker 2

Christy, and good morning, everyone. We had another great quarter, driven by continued strong operating fundamentals and active and prudent capital allocation. While we recognize that the macro environment remains uncertain with mixed economic signals and inflationary pressures on consumers, our business continues to show strength. Consumers may be shopping with a new level of price awareness, but that can be a benefit to our high quality centers and our high quality tenants given a focus on necessity, service, convenience and value. Sales and traffic trends remain steady and leasing demand continues to be strong.

Speaker 2

We are taking advantage of this solid and consistent tenant demand to drive rent growth and leasing activity with strong new and existing tenants. This is evidenced in our record shop lease rate and our sizable S and O pipeline. This will provide momentum and lease commencement into 2025. Our continued leasing success is a testament to the strength of Regency's high quality grocery anchored centers and strong suburban trade areas with limited new and available supply. Our value creation pipeline also supported by the strong tenant demand and focus on high quality assets in demographically compelling areas is one of the most exciting aspects of our business today and one that truly sets Regency apart.

Speaker 2

Our team continues to make meaningful progress sourcing new projects with another $250,000,000 of expected starts in 2024 as well as executing on and delivering our existing pipeline. The strength of Regency's platform and ability to self fund our program with free cash flow had enabled our long track record of success. We also continue to acquire shopping centers when able to that are accretive to our quality growth and earnings. As previously disclosed, we acquired Campos Shopping Center in Westport, Connecticut in May and we are currently under contract to purchase an additional asset in the Northeast. I can't stress enough the importance of our balance sheet strength and liquidity position and providing us with an ability to be opportunistic across the spectrum of capital allocation strategies, which is why in addition to sourcing select high quality, high growth acquisition opportunities at upper single digit IRRs, we were also able to take advantage of a meaningful disconnect in public and private market values this past quarter with the execution of a $200,000,000 share repurchase.

Speaker 2

As many of you are well aware, along with our standards of quality and balance sheet strength, corporate responsibility is also a foundational strategy for Regency. This past quarter, we published our annual corporate responsibility report highlighting our 2023 achievements as well as our future goals and strategy. Our best in class program is evident in the progress we've made toward our goals, but also in the recognition we received from third parties, including ranking 6th overall and 1st in the real estate industry for Newsweek's Most Responsible Companies list and our continued recognition by GRESB for sustainability and disclosure leadership in our sector. I appreciate the efforts of all Regency team members in helping us achieve these important accomplishments. In closing, now that we are more than halfway through the year, with the strength in leasing activity and results that we've seen thus far, we are raising our eye level and our full year guidance range.

Speaker 2

Mike will go into more detail,

Speaker 3

but we've been able

Speaker 2

to move the needle on several fronts, including same property NOI, development activity and accretive capital allocation. I want to reiterate the importance of Regency's strategic competitive advantages, which position us favorably to continue to outperform over the long term as we have historically. These advantages include our high quality assets and strong trade areas with favorable demographics, the strength of our operating platform and experience and talent of our people, a value creation pipeline that gives us more leverage to drive growth and the balance sheet strength that allows us to opportunistically allocate capital, which we did very strategically in the Q2. Alan?

Speaker 3

Thank you, Lisa, and good morning, everyone. We continue to have great leasing and operating success, reflecting the positive tenant demand environment for high quality shopping centers and strong trade areas. We are seeing this robust demand from both new and existing tenants in a wide array of categories, including groceries, restaurants, health and wellness, off price and personal services. Our success is evident in the continued depth and momentum in our leasing pipeline as well as in our ability to drive rents and occupancy higher and improve our expense recovery rate, all while still maintaining judicious capital spend. During the quarter, we held our same property percent leased at 95.8%, while increasing our same property percent commenced by 10 basis points to 92.3%.

Speaker 3

Our S and O pipeline sits at 350 basis points and represents approximately $49,000,000 of incremental base rent. As we've discussed previously, the timing and commencement of this pipeline will largely impact the Q4 of 2024 and into 2025. Notably, beyond our signed pipeline of exciting retailers, we have another 1,300,000 square feet of leases in negotiation. In the quarter, we were also able to drive strong blended cash rent spreads of more than 9%. GAAP and net effective rent spreads were in the upper teens, demonstrating our ability not only to drive strong mark to market increases, but also continued success negotiated embedded contractual rent steps in nearly 100% of our leases.

Speaker 3

Our average rent steps on all leasing activity in the quarter was 2%, but importantly, we achieved a record high of 2.7% rent steps in new lease transactions. Collectively, these efforts drove same property NOI growth of 3.3% in the second quarter, excluding term fees and COVID period reserve collections, while our base rent growth contribution remained very healthy at 2.9%. Before turning the call over to Nick, I wanted to address the recent Kroger and Albertsons announcement regarding the 579 stores they intend to divest to CNS Wholesale Grocers if a merger occurs. Regency has 11 owned locations on the CNS list out of the 104 combined Kroger and Albertsons locations in our portfolio. Further detail will be provided as we learn more, but regardless of the outcome of the proposed merger, we are very comfortable with the underlying lease obligations and we continue to feel great about the quality of our real estate for all of these locations.

Speaker 3

In closing, as our portfolio occupancy approaches prior peak levels, combined with limited new high quality supply and the strong trade areas in which we operate, our space is becoming more valuable. The strength in our leasing pipeline remains unabated, driven by continued appetite from retailers to expand. Our leasing and operating teams are firing on all cylinders, leveraging the current environment to deliver what we believe will be long term sustainable performance in the years ahead. Nick?

Speaker 4

Thank you, Alan. Good morning, everyone. We remain very active growing and executing on our value creation pipeline, starting $40,000,000 of new redevelopment projects in the 2nd quarter at yields exceeding 10%. Additionally, subsequent to quarter end, we started an exciting new ground up development project in Houston called the Jordan Ranch. This 160,000 square foot HEB anchored center will serve as the retail component within a thriving master plan community.

Speaker 4

We are developing the center in a joint venture with the master plan developer with Regency's investment being approximately $23,000,000 bringing our year to date starts to more than 140,000,000 dollars As we've discussed on prior calls, master plan developers continue to appreciate the value and benefits of bringing Regency, an experienced developer, owner and operator of high quality retail centers into their project. At the same time, we and our tenants recognize the benefits of developing our grocery and shopping centers directly adjacent to new high quality suburban residential communities. We also continue to make great progress executing on our in process pipeline, which now totals nearly $580,000,000 Leasing activity remains robust with projects currently more than 90% leased at blended returns exceeding 9%. Turning to transactions, we have seen a recent pickup in activity in the private markets as well as deeper bidding pools. Our teams are actively underwriting opportunities that fit our investment strategy as well as return, growth and accretion requirements.

Speaker 4

In May, we closed on the purchase of Campo Shopping Center in Westport, Connecticut, which is adjacent to our Trader Joe's anchored Campo Acres Center. We also currently have a grocery anchored center in the Northeast region under contract, which you'll note we've included in our updated acquisition guidance and on which we look forward to sharing more details post closing. While cap rates have remained relatively low for high quality centers and compelling opportunities at high single digit IRRs are limited opportunity set in today's market, we have been able to source these select assets where we believe we can drive accretion both to earnings as well as to our long term growth rate. Looking ahead, our teams remain focused on continuing to source high quality incremental investment opportunities, including accretive acquisitions like these, as well as further building our value creation pipeline. It's true that it is difficult to find and execute new ground up development opportunities at accretive returns, but this is where we believe our ability to create value is a meaningful differentiator for Regency.

Speaker 4

Our national platform and deep relationships combined with our low cost of capital, liquidity and balance sheet strength enable us to be one of the only developers right now who can fund projects and execute at scale. You've heard us talk about our objective of starting more than $1,000,000,000 of development and redevelopment projects over the next 5 years. With $250,000,000 of projects started in 2023 and another $250,000,000 planned to start in 2024, we are confident in our visibility to achieving this goal. Mike?

Speaker 5

Thank you, Nick, and good morning, everyone. For the Q2, we reported NAREIT FFO of $1.06 per share, core operating earnings of $1.02 per share and same property NOI growth, excluding term fees and COVID period reserve collections of 3.3%. During the quarter, recognizing the meaningful disconnect between public and private market pricing, we executed on the opportunity to repurchase approximately 3,300,000 shares for $200,000,000 representing an average price of just over $60 per share. We bought our shares at an implied cap rate of roughly 7% compared to where we are seeing private market values today for high quality grocery anchored centers in the 5.5% to 6.5% range, sometimes even in the low fives. This opportunistic investment was accretive to earnings and was afforded to us by our strong balance sheet and liquidity position.

Speaker 5

Importantly, we remain well within our strategic leverage range with an expectation to end the year around the midpoint of our 5 to 5.5 times net debt and preferred to EBITDA target. We also maintain flexibility to continue sourcing new accretive investment opportunities, including redevelopments, new ground up developments and acquisitions. Turning to our forward guidance, I'll refer you to the details on Slide 5 through 6 in our earnings presentation and highlight some key changes. We increased our core operating earnings midpoint by $0.03 per share, which now implies close to 4% growth this year at the midpoint, excluding the COVID period reserve collections in 2023. As we show on Slide 6 in the presentation, this increase is driven in effectively equal parts by a 25 basis point increase in our same property NOI growth range now at 2.25% to 2.75%, and increase in expectations of non same property NOI largely related to accelerated contributions from ground up developments and the positive impact of capital allocation activity, net of financing, including the share repurchases I discussed previously.

Speaker 5

We also increased our NAREIT FFO range by $0.05 per share at the midpoint or an incremental $0.02 above our core operating earnings provision, matching the increase in our guidance for non cash items. As a reminder for modeling purposes, as you think about the mechanics of our interest expense and interest income for the balance of the year, recall that much of the proceeds from our January bond offering were parked in similar yielding deposit accounts as we awaited the $250,000,000 June maturity date. Therefore, the impact of refinancing this debt at a higher rate will come through earnings in the second half of this year. Looking beyond year end, we continue to point to the embedded growth elements we see over the next 18 months to 24 months coming from our leasing and redevelopment progress. As Alan mentioned, our S and O pipeline sits at 3 50 basis points, representing approximately $49,000,000 of annual base rent, of which about 65% is scheduled to commence by the end of this year.

Speaker 5

As these lease commencements are weighted to the 4th quarter, the resulting NOI growth will largely occur next year. And part of this commencement is within our redevelopment pipeline, where we continue to expect an outsized benefit to same property NOI growth in 2025 from delivering completed projects with the positive contribution likely to exceed 100 basis points, which is double what we would have experienced in past normal years. Finally, we continue to be very proud of our sector leading balance sheet and liquidity position, which provides Regency with the cost of capital advantage and the ability to invest opportunistically. Our debt is nearly all fixed rate. Our weighted average maturity is close to 7 years.

Speaker 5

We remain within our targeted leverage range of 5 times to 5.5 times net debt and preferred to EBITDA and we expect to continue generating free cash flow of more than $160,000,000 annually. Supported by our financial position, we often reference the available options within our capital allocation toolbox that we utilize for various reasons and at different times. And in the second quarter, we had the unique opportunity to purposely employ nearly all of these tools successfully and accretively from leasing to operations to investments to capital allocation and balance sheet management wrapped together with an increased outlook on current year earnings, Regency's unequaled strategic advantages were on full display. With that, we look forward to taking your questions.

Operator

Thank you. At this time, we'll be conducting a question and answer Our first question comes from Michael Goldsmith with UBS. Please proceed with your question.

Speaker 6

Good morning. Thanks all for taking my question. From a capital allocation perspective, you kind of did it all in the past quarter. You bought, you sold, you repurchased stock and you started to ground up developments. And 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 cost you to buy back shares?

Speaker 6

Thanks.

Speaker 2

Great. Thanks, Michael. Appreciate the question. And I appreciate the recognition that we basically used really every kind of tool, if you will, in the toolbox for capital allocation. Our goal, our objective is to create value for our shareholders.

Speaker 2

And we remain very consistent in our belief that the best use of our capital is to our development and redevelopment program. And we absolutely believe that. We are in the position very intentionally that we had the capacity, the balance sheet strength, the liquidity to do it all this quarter. And we've been talking about that for quite some time now, how we've been on the we are on the offensive and we were able to execute that. And as we mentioned in our prepared remarks, so in my history with in the sector with the company, all the stars need to align to successfully execute on a share repurchase program and they did for us.

Speaker 2

So we bought back our shares at an implied cap rate of 7% and this disconnect between public and private market pricing has been much more permanent than we ever imagined. And so we were able to lean into our balance sheet strength because while we are very active in the We are seeing assets, shopping centers, grocery anchored of the quality that we would like to invest in, in the 5.5% to if you're lucky, Nick likes to say it a lot, the needle in a haystack, bring in those that are 6.5%, but those are rare. We're seeing a lot more and had a lot more conviction that are trading in the mid-five that are trading in the mid size cap rate range. And that made the share repurchase an excellent use of our capital. And I'd love for Nick to touch a little more on the transaction market and what we're seeing.

Speaker 4

Absolutely. Thank you, Lisa. And appreciate the question, Michael. As Lisa alluded to, we're seeing the bid pools are much deeper than they were a quarter ago. So things that are on market now have very deep bidding pools.

Speaker 4

We're staying very disciplined to what we've always articulated, which is the opportunities that we're going to pull the trigger on have to be equal or accretive to our quality and our growth profile and we have to fund accretively. And so the opportunities that we've disclosed so far this year, you can see those ongoing yields there in the mid-6s. We're very comfortable they check all those boxes, but there have been a lot of opportunities on the market that have traded that are well below that cap rate and did not check all those boxes and we stayed disciplined to making sure we are ultimately driving accretion. And so we've seen banks trade in the low fives even.

Speaker 2

Thanks again, Michael.

Operator

Our next question comes from Jeff Spector with Bank of America. Please proceed with your question. Great. Thank you. I do have

Speaker 4

a question on markets, but I know it's one question. Can I just confirm on the repurchase program to clarify the $250,000,000 that's still left?

Speaker 5

No, Jeff. So Jeff, we as a practice like to just and our Board likes to have an open repurchase program authorized

Speaker 3

by the Board at about a

Speaker 5

level of $250,000,000 So our activity in the quarter exhausted the previous authorization. So we've simply refreshed the authorization for another 2 years at $250,000,000 capacity.

Operator

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

Speaker 6

Hi, good morning and thanks for the time. I noticed the small shop occupancy ticked down a little bit sequentially. Just curious for some color behind that. 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?

Speaker 3

Juan, good morning. I'll say good afternoon. It's Alan. I appreciate the question. The short answer is no.

Speaker 3

There is no concern over the underlying fundamentals. We feel great about where we are in terms of the health of those regions, both national and local mom and pops. I would point you to how we're thinking about foot traffic being up 6% year over year, year to date. Sales are remaining healthy, again, both in the national and local level. Retention rates are also above 80%, which is slightly above what our historical trends have been.

Speaker 3

So as we put all of that together, we feel very comfortable that where we sit today, the portfolio is certainly healthy and I think that's largely a testament to how our teams go through a very rigorous qualification process for durability of occupancy.

Speaker 2

When we think about it, it's interesting. It seems like it shouldn't be this way. But when we're in the position of strength that we are in, we are much more comfortable getting space back and because we're able to re lease it at higher rents and with better merchandising. So we are when a lease comes up for renewal, if the tenant isn't necessarily going to pay what we want them to pay, we are happy to move

Operator

on. Our next question comes from Greg McGinnis with Scotiabank. Please proceed with your question.

Speaker 7

Hello, this is Srikar Faidu on with Greg McGinnis. I just wanted to ask on the credit side. So you have now $300,000,000 on revolver. Are you on the market now for new debt issuance to cover that? Because we've seen a 20 bps decline today and more than 50 bps decline within the last month.

Speaker 7

So just curious what's your thoughts on that?

Speaker 5

I appreciate the question. First, I'd say we're very comfortable with our liquidity today. We recently recast our revolver, so we have $1,500,000,000 of capacity. You're correct, we are at $300,000,000 drawn on that facility. That's largely attributed to the active investment investments we made in the Q2, largely also standing on our repurchases.

Speaker 5

We're monitoring the capital markets as you would expect us to. We do have a bias towards public unsecured financing on a long term basis at a fixed rate and we'll continue to monitor those markets. It is I mean the past 48 hours have been somewhat choppy and we have seen a pretty significant rally on base treasury rates. But as you would expect, oftentimes with that type of movement, you start to see a little bit of weakness from a credit spread perspective. So just expect us to be highly attentive and attuned to where the market is going and we will turn out that facility when we think it's appropriate.

Operator

Our next question comes from Craig Mailman with Citigroup. Please proceed with your question.

Speaker 6

Hey, apologies if someone asked this. I got dropped off the call. But just on the development side, you guys have been in a pretty good position here having the liquidity to start projects and clearly higher interest rates made it difficult for peers. But given kind of the pullback in the tenure here and potentially lower rates going forward, Do you feel like 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?

Speaker 4

Hey, Craig, this is Nick. I appreciate the question.

Speaker 5

Yes, look, as we've talked about

Speaker 4

a lot, there's a lot that goes into finding these development opportunities and executing on them. And you've heard me say it time and time again, capital is one of those key components. And so if capital does become available that does open up some opportunities for others. But let's not forget the other 2 needed ingredients, which is relationships and expertise to find and execute on these opportunities. And so we continue to have the best relationships in the business with not only the key tenants that are expanding, but also the brokers and landowners in those markets that we're looking to expand in.

Speaker 4

And clearly, our team has the expertise coast to coast. And so regardless of capital markets, we feel really about our ability to get more than our fair share of these opportunities as we look forward. And our shadow pipeline continues to grow as we're getting arms around these opportunities.

Operator

Our next question comes from the line of Samir Khanal with Evercore. Please proceed with your question.

Speaker 8

Hey, good morning, everybody. I guess, Mike or Lisa, can you expand on the opportunities that exist on the shop space? I'm just trying understand how much more you can push on occupancy. I mean, you clearly will have one of the best growth in the strip sector next year, right? And I'm just trying to see from a whether it's 1st.

Speaker 8

Biddle or just trying to see how much more incremental growth there could be versus kind of what you've already put out for 2025 at this point? Thanks.

Speaker 2

I think the team might be petrified if I answer this question because I'll just keep pushing and pushing and pushing. So I'll let Mike answer it.

Speaker 5

Let me start and Alan you can color my comments up. But just kind of fundamentally Sameer, Page 7 in our quarterly investor materials is really helpful. And I think that's what gets us so excited about our near term prospects for growth. And I would point you to the percent commenced bullet on that line. And what we're indicating is that compared to our historical prior peak, we have 2 20 basis points of commenced occupancy opportunity.

Speaker 5

That dovetails very nicely that the $50,000,000 of SNO pipeline that the team has built and that we know we're going to deliver starting in the Q4 of this year and largely into 2025. And there's runway beyond that. As I look at that chart and think about the post GSE recovery period, you can see significant increases in percent commenced achieved over about a 2 to 3 year period. And as all else being equal, as I think about the quality of our portfolio, the quality of our leasing team and the demand we're seeing, we don't see that there's any reason why we can't replicate that process going forward over the near term. It's going to be it'll take longer than 1 year to make 2 20 basis points of GAAP differential, right?

Speaker 5

You're still going to have churn. You're still going to have move outs. As Lisa said, we're going to be very differentiating with our tenant selection. So it will take more than a year's worth of time, very excited and bullish about our growth prospects from here.

Operator

Our next question comes from Dory Keasten with Wells Fargo. Please proceed with your question.

Speaker 9

Thanks. Good morning. Your tenant watch list 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 just any refinements you've added to the process over the last

Speaker 3

year? Dory, yes, this is Alan. I appreciate the question. It's very rigorous. We do not just lease for occupancy.

Speaker 3

We're very thoughtful and deliberate in our approach to how we think about our retailers. I would say that our watch list is comprised of roughly 150 basis points of ABR. But if you think about what the industry has experienced this quarter, Conn's filing for bankruptcy, we have 0. Eastern Mountain Sports, we had 1. Rue 21, we had 1.

Speaker 3

Big Lots announced store closures, although not yet filed for bankruptcy. Again, we have 1. And so I sort of look at that and go, this is exactly what we have asked of our leasing teams on how to think about, in aligning with the right retailers. And I feel great about where we stand on that front.

Speaker 2

I go back to how I think I started the answer first question answer that our objective in every part of the business is to create value for our shareholders. And we can also create we also do create it by applying those principles and concepts to our leasing program and ensuring that we are merchandising for the long term, not just for the short term.

Operator

Our next question comes from Haendel St. Juste with Mizuho. Please proceed with your question.

Speaker 3

Hi, good morning. This is Ravi Vaidyan on the line for Haendel. Hope you guys are doing well. Just wanted to touch on the CapEx and the TI. For new leases this quarter, it was a bit elevated versus previous quarters.

Speaker 3

Is there anything one time in there? And how do you expect this to go how do you expect this to trend going forward? Thanks. Robbie, appreciate that question. The answer is, feel very good about the approach of how we are prudently managing capitals.

Speaker 3

I would just bring us back to net effective rent as a percent of GAAP rent. And we're in that 80% to 85% range that we're very comfortable with. I would also say when you look at total comparable, capital for the quarter, it is lower than our trailing 12 months. So the team is prudently managing it. We're growing rents appropriately.

Speaker 3

We're focused not just on rent spreads, but the embedded rent steps as well. And I don't see any shift in underlying fundamentals or trends to your question.

Operator

Our next question comes from Ki Bin Kim with Truva Securities. Please proceed with your question.

Speaker 3

Thank you. Good morning. So I mean it looks like you're setting up for a pretty good growth year in 2025. If you look at the snow pipeline of 5% upside And of course, there's some upside from contractual rent stuff up, so up 140 basis points and then if you add on lease spreads. So you can get to a pretty big number.

Speaker 3

Obviously, not everyone renews, but can you just talk about some of the factors that might bring down some of those positive growth factors? And if you have any kind of large known tenant move outs that might occur in the foreseeable future? Thank you.

Speaker 5

Hey Ki Bin. Number 1, I appreciate you articulating our wheel of growth very well. We spent a lot of time communicating that, so thank you. And we have spoken to the plus 100 basis points of same property growth attributed to the activation or redevelopment pipeline that we anticipate next year, which is about double what we would expect in a historical average year. We are set up for growth.

Speaker 5

I talked a lot about the ethanol pipeline. I talked about where we stand from a percent commenced perspective. I appreciate the direction that you're indicating. I'm going to stop short of providing any guidance for next year and there's more to come on that front as we dig into our plan, effectively as soon as this call is over, as we get back to work. But some headwinds, there's always going to be move outs.

Speaker 5

You're always going to you're not retaining everybody. And I think we're doing an awesome job of selecting who we want. Bankruptcies are always going to play a role. Historically speaking, that could range anywhere from 30 to 60 basis points on a look back basis, depending on who files and when. Timing is a big factor in that.

Speaker 5

But I don't know that I would anticipate our credit loss provision being wildly different than what we're experiencing now. So more to come is where I'll end it, but we are very we're looking at 2025 the same way we did last quarter. We have a lot of positive momentum building into next year.

Operator

Our next question comes from Ron Kamten with Morgan Stanley. Please proceed with your question.

Speaker 10

Hey, just a quick two parter. Just on obviously this earnings season, we've seen a lot of institutional capital since you're looking at the open center open shopping center space. Just if you could comment on either on the acquisition front or just in general as you're seeing institutional capital, private equity and so on and so forth coming to more into the space? And then my the second part is, I had sort of a follow-up on that occupancy gain slides on the peak commence where you have 2 20 basis points. Any way to double click, whether it's market or assets?

Speaker 10

Can we get a second layer of where that upside is really concentrated in? Thanks.

Speaker 2

That was a sneaky way to ask 2 questions. I think Nick really did already address the I believe the transactions market, but maybe as Nick has just touched, because he mentioned that the pools were deeper. So just maybe Nick, the composition of the kind of the bids that we're seeing, if it's any different, if it's changed at all?

Speaker 4

Absolutely, Ron. Appreciate the question and good morning. No question the bidding pools are much deeper for assets that we're pursuing and looking at and evaluating. And so where maybe before there were 3 to 5 bids, now there's 15 to 20 bids on assets. And so we're definitely watching funds flow into our asset class for all the reasons we're bullish on and that might just articulated in.

Speaker 4

As you would appreciate, a lot of those bidders are institutional, whether it be pension funds, whether it be private equity backed, etcetera. And so no question seeing a lot of institutional capital pursuing assets right now.

Speaker 5

Hey, Ron. Take a look at Page 8 of our investor presentation for the quarter and I think you'll get some good composition with respect to our existing SMO pipeline. And there you'll see that it's roughly 60% shops, 40% anchors. And from a timing perspective, we also detail that about only about 15% of that income is going to be recognized in 2024. Up to 90% of that income will be recognized next year sticking to our bullish posture on 25%.

Speaker 5

I would say though that as we think about moving the needle on occupancy, we have some room to run on the anchor front and we've got some really exciting opportunities that the team is working on. And I thought, I know Alan may want to color up some of that activity.

Speaker 3

Yes. I mean, I guess, Ron, the only thing I would add to that to put definitive occupancy to it is, we're at 97.2% and our historic peaks are 98.5%. So there is certainly runway there. There's been a couple of, I'll call them stubborn deals that have been out there that are really right at the goal line right now. So I feel great about the trajectory of where we are.

Speaker 3

I look at that F and O pipeline and I would say the top 6 that are sitting there are grocery stores that we're really excited to get online, and that will also provide for some ancillary, center of gravity and synergistic merchandising to go with it. So future is looking great there.

Speaker 5

Thanks,

Operator

Sam. Our next question comes from Floris Van Ducham with Compass Point. Please proceed with your question.

Speaker 11

Hey, good morning guys. Lisa, I wanted to ask you questions more of a bigger picture question perhaps, but I think you're probably uniquely positioned to be able to answer something like this. Obviously, there's the news that Blackstone is looking at one

Speaker 5

of your

Speaker 11

peers. There's the private formations, the fact that interest rates are likely coming down in September. You talked a little bit about your implied cap rates at being at 7% back when you bought back the stock. Obviously, your stock price is more than 10% higher, so it's gone down a little bit. But I'm curious to get your sense, I mean, from where are cap rates in the shopping center sector headed in your view?

Speaker 11

And do you think that we could see some of the cap rate expansion retrace itself over the next 12 to 18 months as capital comes in, as interest rates come down and frankly as growth and IRR from assets still appear pretty interesting?

Speaker 2

Florence, thanks for the question. I would go back to the conviction that we had with regards to the what we believe a meaningful discount to private market values. We would not have executed the share repurchase. So, I don't believe that cap rates are rising in the future. And with cost of financing potentially going down, if we see that, I think that our product type grocery anchored, higher quality shopping centers, we've seen it throughout.

Speaker 2

What we thought should be a time when cap rates would rise, that cap rates were really sticky. And that's because our product type offers that sustainability and stability of cash flows. So we have conviction that cap rates are going to stay where they are and if anything and that's in the private market perhaps with more capital coming into the sector. I think the scenario you described would say cap rates should go down, not up.

Operator

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

Speaker 12

Hi. On the 100 basis points of positive contribution from re devs coming online in 2025 being 2x the average, Could you just expand on some of the underlying drivers? Does it have to do with underwriting higher than expected rents?

Speaker 5

No, Linda. It's really project specific. Going back a little bit in time, recall, our development redevelopment pipeline, which we talk about in totality, over the last several years have been more balanced to redevelopments. And if you go back several years, that's us kind of working through much of the opportunity that we acquired in the equity run merger, frankly. So these projects are now largely well on their way.

Speaker 5

They've been constructed, they've been leased and we're delivering that income into same property pool. So it's more a function of the quantum of the projects than it is the rate on the rents, which by the way adds to our transparency and visibility. We feel really good about delivering those centers.

Operator

Our next question comes from Tayo Okusanya with Deutsche Bank. Please proceed with your question.

Speaker 13

Hi, yes. Good afternoon, everyone. Congrats on the quarter. In regards to commenced occupancy, curious if you could help us think about what that could look like going into 2025? Again, occupancy is already pretty high.

Speaker 13

You have a very large, smooth pipeline, but you're also going through very strong leasing as well. So just kind of curious where you think that could end up going over the course of the next 12 months and what snow could look like over the next 12 months?

Speaker 5

Hey, Tayo, I appreciate the question and I promise we'll get much more visibility in 2025 on a granular level at when it's the right time. But again, I'll point you to that Page 7, 2 20 basis points, I'll reflect you to our historical commence occupancy changes in that. And in really good years, we can move that number by about 100 basis points. And if you recall, it's in our investor materials, but every 10 basis points of percent commenced increase can contribute up to 15 basis points of same property growth. So that's where we get comfortable indicating that the contribution of redevelopment, which is moving commenced occupancy would be in 100 basis points.

Speaker 5

100 basis points through the 15 bps would get us about 150 basis points of potential growth. Again, timing matters here. So I don't want to get too into the weeds on 2025. But I think that should help. You understand and appreciate the opportunities set in front of us.

Speaker 5

And I would just encourage you to spend some time on that Page 7 in our investor materials.

Operator

Our next question comes from Alek Fabian with Baird. Please proceed with your question.

Speaker 5

Hi, good morning and thanks for taking my question. I'm kind of curious about the competition that Regency is seeing in the Northeast. And is there anything specific to the region to explain what's driving the increased activity there?

Speaker 2

I'm not sure we understand the question. Increased Transaction activity?

Speaker 5

Yes, sorry, the increased transaction activity.

Speaker 4

Yes. I would just tell you a couple of things. This is Nick. Appreciate the question, Howard. So couple of things.

Speaker 4

Obviously, the acquisition of UBP has kept our team up there very, very active and has increased our presence throughout that market. But a lot of it is also just timing. And so although this quarter we were very active in the Northeast and very happy with the opportunities that have been presented, We're seeing a lot of activity across the country. And so as we move into future quarters, I think you'll see that activity be geographically dispersed more than it was this past quarter. So continued opportunities are presenting themselves in each of our markets at this point.

Operator

Our next question comes from Mike Mueller with JPMorgan. Please proceed with your question. Yes.

Speaker 14

Hi. I guess between Erstat, the Westport acquisition and the Northeast Center you have under contract, Seems like you put a lot of capital to work up here recently. When you're looking at the broader pipeline that you see today, are the opportunities more geographically diverse or still kind of concentrated?

Speaker 4

Mike, yes, we're definitely seeing opportunities coast to coast. And so it is just timing related this quarter as it relates to the Northeast. And our team up there is doing a great job continuing to find opportunities, but I know the Southeast region, the West region, the Central region is anxiously awaiting for some announcements on opportunities they're working on as well. And so we feel good about the opportunities we're seeing all around the country at the moment.

Operator

We have reached the end of the question and answer session. I'd now like to turn the call back over to Lisa Palmer for closing comments.

Speaker 2

I want to thank all of you for spending the last approximately an hour with us. We appreciate your interest in Regency. Have a great weekend, all. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.

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Earnings Conference Call
Regency Centers Q2 2024
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