Welcome to Citi's 2025 Global Property CEO Conference. I'm Nick Joseph here with Craig Mailman with Citi Research. We're pleased to have with us Regency's CEO Lisa Palmer. The session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC25 to submit any questions. Lisa, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
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Okay, good. I thought the green light would light up. Sorry. Thank you, Nick, and thank you for having us. We really love to come to this conference. We think it's one of the best, if not the best. I'll say that quietly, throughout the year. So joining me today are Mike Mas, our CFO. Most of you know Christy McElroy on this side of the table for many years now, or several years, SVP of Capital Markets, and Katherine McKee, Vice President of Investor Relations. As we recently reported and discussed on last month's conference call, 2024 was another outstanding year for Regency. We drove strong Same Property NOI and earnings growth as we continue to benefit from healthy, robust operating fundamentals. Tenant demand is extremely healthy across our portfolio of nearly 500 high-quality, grocery-anchored neighborhood and community centers, which are located in top trade areas around the country.
This healthy demand was evident in a record 9.4 million sq ft of space that was leased last year, a ton of exceptional work by the team, and a record high same property lease rate of, I would like to say, nearly 97%, but 96.7% at year-end, and importantly, we're seeing this activity and momentum continue into 2025. S o one, and so I'm sort of answering your questions, but I'll summarize it in terms of the reasons to buy Regency, and I will summarize at the end. S o one, we have a high-quality portfolio, which allows us to generate strong and consistent organic growth over the long- term, and then two, Regency's development program has always been a key differentiator to driving earnings growth and creating value. During 2024, we started more than $250 million of new development and redevelopment projects for the second consecutive year.
In 2024, roughly half of those were new ground-up developments. We have nearly $500 million of projects in process today and are having great success sourcing additional projects as we build our shadow pipeline. Regency's combination of established industry relationships with leading national grocers, retailers, and master plan developers, Regency's experienced team in key markets across the country, Regency's access to and cost of capital, and Regency's successful development track record all provide us with a unique competitive advantage for executing on and delivering high-quality projects. Many of you have, I'm sure, heard me say this, and I'm really proud to say this. I can say I believe, but I know we have the best national platform for the development of high-quality grocery-anchored shopping centers national in the country. We are also, so number three, we're also very proud of our sector-leading balance sheet and liquidity position.
We have ample free cash flow, a well-laddered debt maturity schedule, a $1.5 billion line of credit with near full availability, and our leverage remains within our targeted range of 5-5.5x net debt to operating EBITDA. Last week, I hope many of you did see the S&P upgrade of Regency's credit to an A- rating, and that follows our upgrade to an A3 rating from Moody's about a year ago, so Regency currently has the only A- credit ratings from either Moody's or S&P in the open-air shopping center REIT sector, an accomplishment that we are really proud of and puts us among a small group of elite blue-chip REITs. It's a testament to our team's long track record of financial discipline combined with the strength of our fundamentals and growth profile. Our conservative balance sheet position provides us a significant advantage.
It affords Regency a low relative cost of capital, greater stability in earnings, greater stability in dividend growth through cycles while enabling us to actively pursue and execute on accretive investment opportunities. Looking ahead as a result of these differentiating strategic advantages, we are really well positioned to continue to benefit both from strong organic growth as well as accretion and value creation from our investments. So in summary, the top reasons to invest in Regency today are an organic growth outlook from our high-quality portfolio, our value-creating national development platform, the only A-rated balance sheet in the sector, which positions us well through all cycles for playing defense and for playing offense, and an exceptional team that pulls it all together. So with that, we look forward to taking your questions.
Great. Thank you. I'm sure we'll hit on all four of those reasons, but maybe just starting on the value-creating national development platform. I think we've met with a lot of your peers thus far at the conference, and one thing that they've consistently said as a benefit to being in the shopping center space is a lack of new supply. And so obviously, there's the micro opportunities on a site-level basis versus the macro of kind of this national limited supply coming on. So what is it that you're able to do to find unique sites to drive value through that development that maybe we're not seeing kind of on a larger scale of why we're not seeing more supply on shopping centers broadly?
And so it goes back to the hopefully you all listened you took notes on the four things, the four kind of advantages. Development isn't something that you can come in and out of. You can't. It's not a switch. You can't turn it on and off. And Regency has been committed to it. I've been with the company. I'm in my 29th year, and it has and even prior to that, prior to being a public company. In Regency's DNA is development. And as a result of that, we have developed those relationships with the retailers, with the grocers, and where we've been having a lot of success recently with homebuilders and with master plan community developers and owners. We have the team, and it's across the country. And that limited supply is clearly fueling the health in the sector and helping our operating portfolio.
And it's also helping us when we are successful in securing the land and securing a grocer or an anchor for our developments. It's fueling success in the development program as well.
Lisa, you mentioned the credit upgrade last week. How does that maybe this is more for Mike, but kind of what does that do for pricing from a spread perspective as you guys look to raise incremental capital? How much more flexibility does it give you on that front from a spread perspective to where you guys are building, redeveloping, deploying?
Sure. Appreciate the question, Craig. So the market is pretty efficient. So the immediate benefits of the upgrade are largely priced in, but what you'll see is a durability in a low cost of capital for Regency through cycles. And that benefit for the A-rating will ebb and flow and will expand and contract depending on the market conditions at this point in time. Importantly, the banking community was already recognizing the quality of our balance sheet, so there's no immediate positive impact to our cost of capital on our revolver. But we do anticipate benefiting from it, just to Lisa's point, an overall lower cost of capital through cycles and over extended periods of time.
In terms of flexibility in running the balance sheet, right, to maintain that A- rating now, does it change at all your leverage targets or anything on that front?
No change. You know, we've long said we're going to operate this company at five to five and a half times leverage. The rating will come or the rating won't be there. That's, but we're going to stay committed to that level of leverage. It's the right target for us. It's the right support for the development program that Lisa articulated. It's the right support for our income stream over time.
And I'd reiterate, it also positions us well, as I said, through cycles, right, defensively. And I mean, I know that it's now five years ago, but really proud of the fact that we did not cut our dividend during the pandemic. And there have been times where we may float below five, and we have in the past. And when that happens, now we have incredible capacity to play offense and to really capitalize on opportunities that perhaps others may not be able to.
Lisa, what are you going to be able to definitively say 97% leased instead of
I like to write off all this.
almost 97% leased? What does the leasing pipeline look like today? You guys had a very strong volume in 2024. There's clearly a little bit of potential headwinds on the horizon. How do you think about that as you guys are looking at your pipeline today versus thinking about where we can go from here in the next couple of months, given some of the uncertainty?
So we still have plenty in our signed not occupied to commence rent, and that certainly will be a benefit as we bring those tenants online. The leasing pipeline is still really healthy. We have less space to lease on the shop space, so it's not as full as it would be with more space, but it's still really healthy. And there's no doubt in my mind that we still have room for occupancy percent leased increase on the anchor side. And I have full confidence in the world that you're going to hear Alan say another record high percent leased. So there's still room for us to run. At some point, there is going to be a stabilization. There has to be some frictional vacancy in our portfolio as we proactively asset manage and redevelop. But I don't believe we've reached it yet.
As you guys think about kind of the spread between lease and occupancy, how should we think about that going as well as you kind of hit a lease rate where it's just frictionally hard to go to?
175 basis points ± is kind of a standard run rate, historically speaking. We're at 300 basis points today. So there's compression in our future. To Lisa's point, driving that commenced occupancy rate to historical highs is the focus of the company right now. We are anticipating we can move that needle in 2025 by about 75 basis points, providing the foundation for that, what I characterize as above trend, same property growth of 3.2% to 4% this year.
Mike, as you think about your flywheel for same store to Y growth, right, you have that 125 basis point narrowing of lease to occupancy coming over the next couple of years. You guys still have a good amount of redevelopment coming through the door. Escalators are continuing to move up gradually, right? Where should we think about a good same store level for Regency over time and the industry, frankly? Because one of the questions I get a lot is fundamentals are great and we're getting 3%-4% same store, right? When do we reprice higher? Kind of walk us through some of those components of where really the opportunity is to go in your portfolio in the next two to three years, given kind of the timing it takes to roll through leases and have redevelopment kind of deliver.
Yeah, and you're referencing a pretty popular slide in our investor materials, and I'd encourage everyone to go take a look at it. Christy's flashing it here. So our same property kind of growth algorithm, you know, the top half of that wheel is fundamental growth from lease mark to market of our leases and then embedding contractual increases. And just doing that on an occupancy stable basis, we should drive 2%-2.5%± growth over time each year. And that's coming from averaging about 10% on cash rent spreads and slowly, but certainly, to your point, moving the needle on embedded contractual increases in our leases. And that is a larger mountain to climb, but the team is doing a remarkable job of improving those increases in our contracts as we get them.
But to your point, Craig, about 10% of your leases are maturing each year, so it takes time to move that. The bottom side of that wheel is where we are today with tremendous amounts of opportunity. So we're moving rent-paying occupancy north. I talked about 75 basis point opportunity in 2025. That's a direct impact and a positive impact to same property growth, allowing us to have our eye level at a 3.6% midpoint. And then we supplement that with a little bit of capital. We are a great active asset manager investing into our own assets through redevelopment. And that, on average, can contribute about ± 50 basis points to growth. In fact, this year, we are anticipating that contribution to be north of 100 basis points.
So that is the fruit of the labor from two, three years ago, organizing the redevelopment portfolio and then now delivering that into the same property portfolio in 2025.
I'll just add to, I mean, to your, I think, where you were trying to go with your question, Craig, is that can that.
Rerate.
Yeah, re-rate to a higher level, and I don't know, but what I will tell you that I know that with the quality of our portfolio, if it does re-rate, we should be at the upper end of the new re-rating, and we have a lot of dialogue with our retailers, with our customers, which are our tenants, and there's a healthy tension today with limited supply and their ability to pay rent because they're as inflation, you know, with the inflation over the past several years, their top line did grow, but I know all of you follow the retailers. Many of their margins were compressing. We are successful when our tenants are successful. We are successful when our tenants can drive sales and can be profitable and reinvest back in their businesses.
So again, healthy tension as our retailers, I think, also become more sophisticated and are able to cut costs out of other parts of their business than they should be able to pay more rent. And with the limited supply and limited available space for them, they may be forced to do that. And in that case, it may re-rate. I don't have a crystal ball to know if that's going to happen, but what I do know is if it does happen, we will benefit from it and we will be on the upper end of that.
And that healthy tension, right? You have the grocery side, which is, we all know, the very low margin business, higher volume. Then you have the shop side of things. The conversations between the grocery anchor and a Publix, which has better margins than most grocery stores, right? The big cash balance versus some of the bigger franchises or chains on the small shop. And I know you don't always get the financials to know exactly where OCRs really are, but you have other tools now with Placer and other things. I mean, how far away do you think you guys are sometimes in knowing the full picture and getting that maximized rent versus being at the mercy of the limited information you get, right? And so everyone cries poverty until everyone's always got money when they're really pushed against a corner.
But to your point, you don't want to put tenants out of business or put them in a financial position where they're not going to succeed.
Right. I think we get pretty good information. If it's not contractual reported sales information, the team on the ground has great relationships with the business owners, the store managers for the national chains. And I believe we are pushing and we're doing more leveraging more data, as you mentioned, Placer, in really driving the tenants and retailers to what we believe is setting new markets, if you will, and rents that they're able to pay and still be successful. It's good dialogue to negotiation.
You know, retail is changing a little bit on the small shop side with med tenants and others. I mean, where are you seeing some of the really more active tenant verticals versus people that are less active today? What's the spectrum and who's the most active in your portfolio?
So restaurants always have been for, again, as long as that I've been at Regency, they also tend to be those that have the highest failure rate. That's part of the business. So our largest percentage of move-outs and our largest percentage of new leasing is in the food and beverage sector. We've been doing, as you mentioned, medtail, but incrementally more medical, not just medtail, but primary care offices. I think one of the trends coming through 2020, 2021 is people, and I know many of you probably are familiar with the concept of Blue Zones. People want to stay and live their lives within 15 minutes of their home. And that's everything. That's their medical care. That's their work. That's their shopping. And so as a result of that, we see a lot of health systems bringing more to the trade areas in which we operate.
So that's been incrementally more active. And then the others are what you'd expect in a neighborhood necessity service-based shopping center. We still have fitness, which remains really strong, healthy operators, and a variety of other services and retail categories.
Any questions from the audience? So you guys actually had one of the smaller bad debt reserves amongst your peers, 75-100 basis points all in. Talk about structurally how you guys are always kind of getting there for some people who may not be as engaged in the story, the differences between some of your portfolio concentrations versus others. As you look, right, with the increase of Medtail or others, are you feeling like you're getting full up in some of these other categories where you now need to think about rationalizing on the next kind of batch of leases? Is there any worrisome signs on the horizon for any one vertical?
I'm going to first let Mike clarify the bad debt.
I can clarify bad debt and maybe speak a little bit to why I do think our credit profile is different than others and historically has been lower. We are guiding to 75-100 basis points of credit loss embedded within that 3.2%-4% Same Property estimate for 2025. It is important to understand how we think about credit loss. It is really three buckets. It is foundational and fundamental, just classic bad debt expense we call uncollectible lease income. And that is your everyday run-of-the-mill tenants moving from accrual to cash basis, essentially, and not paying their rent. That historically averages in the area of 50 basis points. We did better than that last year, very healthy operating environment. We are planning for ± 50 basis points again this year. We add to that losses from bankruptcy-related move-outs. So that is not coming through bad debt expense.
They're coming through the base rent line item. The tenants have moved out. Our number includes those who have filed bankruptcy in 2024 and are no longer in occupancy in 2025 and those that speculatively may file in 2025. So it's important to understand it's an all-encompassing fulsome credit loss reserve that you should compare Regency to others. And to your point, Craig, I still believe even with that fulsome assumption, it is comparatively low. And I think to tee that up to why, it is by design. The inherent bias at Regency from a format perspective has always been grocery-anchored neighborhood shopping centers fundamentally.
What that does is it’s a slight lean to smaller format grocery-anchored and small shop tenants, which over time have proven to be more flexible by design, servicing the communities and very resilient, and has afforded us the opportunity to avoid watchlist tenants using air quotes, which tend to be today those larger format, bigger box exposures. We have box exposure. We like co-anchors within our shopping centers, but we have fewer and less exposure than other portfolios do.
Looking at the portfolio, you guys have some of the biggest exposure in the portfolio are California and Florida, right? Two states where insurance rates are kind of in the news, especially post-fire in L.A. and hurricanes in Florida. I mean, how are you guys managing that exposure? I know your OpEx, I think, was up 1% on the same store basis last year, but as we go forward and there may need to be changes on the regulatory standpoint from exposures, like what are you hearing so far from your carriers? How are you guys going to mitigate that for kind of tenants? Do you run a higher deductible so you don't have to push through as much? How are you guys facing that?
I'll start and Mike can add, fill in any gaps. So what we are hearing from our brokers, which is really the liaison with our carriers, is that we don't expect the hurricanes of last year. I think we have pretty good clarity that we don't expect insurance rates to change much from that, and then for the fires, still unknown if there will be an impact on 2026 once the reinsurers absorb everything and what will be the kind of cascade after that but we, again, are hearing early indications that 2025 shouldn't be significant increases, so future unknown. How we think about at a higher level of exposure in terms of California and Florida, so we certainly look at it. We look at all markets as we're crafting our investment strategy.
The trade areas in California, the trade areas in Florida continue to experience good income growth, good population growth. There's a reason why people are moving there and want to live there. So as we think about and mitigate our risk, every new investment dollar, whether it's even a dollar into our existing assets, we are certainly looking at climate-related risks, utilizing third-party vendors for that assessment. And we think about our overall exposure. The important thing is that insurance rates as a percentage of total occupancy costs are not that significant. And while a dollar is a dollar to a tenant, it certainly matters. And if you increase their insurance costs by 20%-25%, it may impact your ability on the margin of how much you can increase their base rent. But knock on wood, it hasn't hindered us so far. If you have anything to add.
No. The last point is a really great one. Just on average, if you think about our ABR across the portfolio, we're in the mid-20s, $24. Insurance as a cost of the tenant is under $1 per sq ft. So not to dismiss it as a risk in a rising line item, it has been, but it isn't the most impactful component of their occupancy cost.
You guys have always kind of, I guess, targeted about $250 million of spend a year on capital deployment, whether that's really through three avenues, maybe four if you include buybacks. You were at least a little bit more successful at sourcing some acquisitions more recently. I mean, Lisa, I guess from the next dollar deployed, how would you rank kind of development, redevelopment, acquisitions?
Development is a clear number one. I believe that especially with our approach, while yes, it's riskier, it's why returns are higher, the processes we have in place and going back to the experience, the track record, we really do mitigate a lot of that risk. So the spread on the return, 150 basis points+ over acquisition returns. Number one, development. Then the rest are going to depend on what's the current return, right? If our best use of that capital is an acquisition over if the return on invested capital over the spread of our cost of capital, if the best use of that capital is to buy back our shares, we'll do that. If the best use we're always actively managing our portfolio. That's a part of the business. We expect that we will continue to do that.
That also will generate returns. In terms of kind of the next, it depends on where we're getting the best returns.
And you guys kind of took down or put in place a $100 million forward ATM issuance, right, $3 ago. So you left a little bit of money on the table. But how do you think about the need for capital? Kind of where are you today to fund that? You guys have close to a $500 million development redevelopment pipeline. And how do you think about that forward locking it in for the future where you know your cost of capital is versus potentially spot ATM, particularly with you guys having a pretty advantageous relative cost of equity versus peers?
Yeah, we appreciate it, and so everything starts with our free cash flow. It's how the entire balance sheet is organized, how we think about capital allocation. We start with that $170 million area of forecasted free cash flow this year. On a leveraged neutral basis, that's giving us well north of $300 million of investment capacity. We've talked about our targets from a development perspective. They are in the area of $250 to potentially $300 million a year, so we have plenty of liquidity and capital raised to feed that development machine. To Lisa's point, it is our priority. At the same time, we feel really good about the prospects to continue that development program. We feel good about our ability to potentially grow that development program should great opportunities emerge. We are constantly looking at the acquisitions market. We're identifying properties that are accretive to our growth profile.
And when we see an opportunity in time to raise a little bit of capital to keep our leverage position where it is for the reasons we talked about earlier, we'll take advantage of that and we'll allocate that capital wisely. I think our track record speaks for itself that capital will be raised and deployed accretively to our growth rate and to our earning into the cost of the same. And so we just kind of rely on that track record and keep pulling those levers as we see them emerge.
Yes, we won't raise equity dilutive to shareholders without a clear use of the proceeds that checks those boxes.
From a G&A or capitalized perspective, you mentioned the team, you mentioned the development opportunity. Are you scaled internally enough to really increase the development side of the business right now?
The answer is, can we do more than we're doing? Yes. It's opportunity limited, not resource limited. At some point, you would need to add. But today, it depends where the project comes and the geography, how many are already in that region. So there's several variables in there, but would feel good of pushing the 250+ if the opportunities were there.
How do you guys think about the cost kind of moving on the construction side, hard cost, soft cost, with some of the immigration policy changes, potentially tariffs hitting material costs? Is it enough of a movement potentially to change yield enough to have you guys pull back on ground-up development, focus more on acquisitions? Kind of how does that play into your thinking? And how much of a buffer do you guys have in, right? Because there's always downtime from underwriting, carry costs. Kind of as you think about your initial yields versus where you end up, how much kind of wiggle room do you typically underwrite?
We think about it a lot. We monitor it very closely, and I wouldn't be surprised if our national VP of construction isn't putting his head down on the pillow at night and dreaming about tariffs. But we have not seen any impact today. It doesn't mean we won't, but our team is really experienced. If you think about how much construction costs increased over the last four+ years and we were able to manage through that and still deliver successful developments at seven-plus returns, I mean, we don't have our head in the sand, but I'm confident that we'll be able to work through if we do begin to see construction costs rise again. Because of our ability to negotiate with the landowners, the ones in processing, we're locked in, we're good, and so the new development's coming, we'll be able to negotiate and work through.
Again, head not in the sand, something we're monitoring really closely, but I'm not worried about it.
Any questions in the room? The $250 million maturity you have coming up, it's really your only one next year. It's close to 4%. Kind of what are the plans today as you sit from a potential timing perspective? Depending on where your equity goes, would you kind of think about using some equity on that to pay it down, or would it total refinance?
Our plan currently is to access the bond market probably in the second half of the year. And based on where our indicative spreads are today, based on where the 10-year is, it's looking at today, we could price in the low fives , very low fives , but remains to be seen. But that's our plan right now is to refinance that and pay off whatever we have on our line at that point in the back half of the year.
Yeah, not only do we foundationally desire to manage the balance sheet to 5-5.5x , but we're very in tune with the maturity profile. Lisa made the comments at the opening. So you'll see in our towers, no more than 15% of our exposure is maturing in any particular year. What that means is we'll have the ability to just refinance us and mark to market as the balance sheet rolls.
All right. So we have our rapid-fire questions to end the session. What will same-store and OI growth be for the shopping center sector overall next year in 2026?
For the sector?
Sector.
2.5%.
Will there be more, fewer, or the same number of public companies within shopping centers a year from now?
I think there will be the same.
Great. Thank you very much.