Everybody, why don't we get started? Welcome to the Regency Roundtable. Very happy to have Lisa Palmer with us today, CEO of the company. Christy McElroy, head of Capital Markets. Lisa, why don't I turn it over to you for some opening remarks?
Thank you, Samir. Good afternoon, everyone. Just because I'm joined with Christy McElroy. I actually played softball when I was a teenager with Nina McElroy. I often-
Okay.
I often want to call-
Everyone calls me McElroy.
It's also Rory, right? Rory. Is it Rory? For those of you that are golfers. Thank you again. Appreciate you having this great conference. We had a nice room upstairs with windows versus where we are right now. Regency is having an exceptional year. Hopefully, you all have had the opportunity to follow us along. Strong NOI and earnings growth, which is supported by really strong operating, robust fundamentals. Importantly, disciplined capital allocation. Tenant demand across our grocery-anchored shopping centers remains broad-based. I think you also know the availability of high-quality space remains very limited. Again, playing into our favor, that combination continues to give our leasing team meaningful negotiating leverage. That's allowing us to drive contractual rent growth and cash re-leasing spreads above our historical averages quarter after quarter.
Again, if you follow us along, you always hear Alan say, "Records are meant to be broken." We're moving our occupancy beyond prior highs. Reflecting that momentum, as well as improved visibility into the balance of the year, we did raise our 2026 earnings guidance with our second quarter results, including our Same Property NOI growth, Nareit FFO, and Core Operating Earnings ranges. Our development program continues to be a highlight of our capital allocation strategy and an important differentiator for Regency. Today, we have nearly $700 million of development and redevelopment projects in process at blended yields of approximately 9%. Importantly, our pipeline of future opportunities continues to expand. The success of the platform, the track record, that's what continues to create additional opportunities for us to source great projects.
As a result, we continue to increase our annual pace of development and redevelopment starts, which we now expect to approach $400 million this year. Again, against the backdrop of very limited new retail supply, our ability to consistently source and execute high-quality projects anchored by leading grocers at attractive returns represents a durable competitive advantage for us. We are also delivering these centers at substantial spreads to market cap rates of at least 150 basis points. That is generating meaningful NAV creation in addition to earnings accretion. At the same time, we are still active in the acquisition market, but because development is our primary external growth driver, we have the ability to remain selective and patient in what continues to be, even today, a highly competitive transaction environment.
That discipline is supported by our sector-leading balance sheet. Our A ratings from S&P and Moody's, growing free cash flow, and nearly full availability on our $1.5 billion credit facility provide us with significant financial flexibility. That strength gives us efficient access to low-cost capital and the ability to fund our investment pipeline without relying on equity or dispositions, and still retaining capacity to pursue additional opportunities as they arise. In summary, I am really excited and energized by Regency's position and the opportunities ahead of us. High-quality real estate in compelling suburban trade areas, a differentiated national development platform, a sector-leading balance sheet, and the best team in the business really do collectively set Regency apart. With that, we are happy to take questions.
Before I talk about macro and the consumer, that $400 million of annual development spend, is there a sort of balance sheet capacity to even expand that at this point, given that unique advantage you have?
We are generating approximately $190 million of free cash flow, and with the growth in EBITDA and with our low leverage of the existing balance sheet, the answer would be yes, without significantly impacting that. With remaining leverage neutral, we get to $400 million.
We have the ability to do even more. Today, while our starts are $400 million, the development spend is still a little bit less than that. We still have capacity to execute on opportunities as they arise.
How many costs in that regard? Development costs, construction costs.
Construction costs have generally remained relatively stable since the big increases that we saw during the COVID years. While there is different line items that are moving maybe in different directions, the overall cost is just natural increases. Fuel prices are certainly driving increased line item costs. At the same time, it is being offset by other.
About tariffs and practices.
We didn't.
Immigration.
We really didn't see much from that at all.
Thank you.
I mean, Lisa, you talk about-
your development, ground up development program, that is truly unique in the space compared to peer. Why haven't your peers been able to replicate something like that?
It is really difficult business. One, I have been with the company 30 years this week, and development has been a core competency and really something that we are just really good at for as long as I have been here. Even during kind of the thin times, we do have our investor presentation out there. On page 23 of our investor presentation, you will see from 2012 through 2019, the amount of starts was definitely compressed relative to where we are today. There was a variety of things happening. We are coming out of the GFC, and there was also the pressure from e-commerce and what is going to happen to physical stores. Retailers were entrenching and spending more internally than they were on expansion plans. But during that period of time, we were still developing. We kept the muscle of the company.
I said this earlier today, we have three MDs of investments. One in California, one that is responsible for West, South, Southwest, one that sits in the Southeast that is responsible for Southeast, Midwest, and one that sits in Washington, D.C. for Mid-Atlantic, Northeast. They have all been with us for that whole time. When the pandemic hit and COVID hit, there were several structural changes that we are still benefiting from today. That is, retailers were forced to get their goods to their consumers through other means. What that did is it gave them a renewed appreciation for their physical footprint, because the most profitable way for them to get their goods to a consumer is to have the consumer walk in the door, pack their own goods in the cart, and check out.
The next most profitable way is to service that customer from the store, whether it was an order online, pick up in the store, or order online, pick up in the parking lot. As a result of that, coming out of it, and you can, again, it really does correlate very well with our success. They put their foot on the gas pedal for expansion plans. There is now more demand from the retailers. At the same time, you had the consumers who during a period of time, I have always said, "You can buy anything you want sitting in your house." During those years, consumers also developed a renewed appreciation for shopping. Not everyone loves to shop, but a lot of people like to shop.
The combination of the two, along with some other shifts in terms of out-migration from inner urban to suburbs, all were structural tailwinds for our business and allowing us to really build the momentum in that business, and then relationships with our tenants, relationships with master plan community developers. That same team that I just talked to you about that was already in place, that already had the expertise and the track record, and our cost of capital. Those four together, really, the success is beget success, and we continue to build on that momentum.
Are you seeing signs of ground up anywhere other than nationally, besides Texas? We've kind of heard about that. Anywhere else?
We're active in, I think we have several in California that are in process. We have got several in the-
No, but competition.
There's, yeah. The market's still pretty fragmented.
Okay.
We take an inventory of every shopping center that's been developed with the grocers that we would like to do business with in markets in which we would like to develop.
Yeah.
We are the largest at scale nationally, but still less than 20%, probably, of the full market share of all new shopping center developments of our investable centers, not even talking about the total. So there's competition. It just tends to be more private regional developers with access to private capital.
What would be the split of, in terms of how you source these development opportunities? You mentioned local master community developers and whatnot, but how much would be just from land that you've had on your balance sheet or options on your land versus is it all coming from local families who bring you on a deal, a local developer? Just how should we think about the different sources?
Yeah. Approximately two thirds is ground up development. We don't land bank for large new ground up developments. Do we have some land that is part of or adjacent to an operating shopping center? Yes. It's minimal. That would be in a redevelopment bucket. It would be added to there. About 60% of our in-process is from master plan community relationships and developers.
I think call it about two thirds of our pipeline is master plan.
Great.
What does that mean from a pre-leasing standpoint? Before you kick off, how much of it, you've got the grocer.
Have to have the anchor lease. If it's more than one, typically, if we have a couple junior anchors, to have the anchor lease execution before we'll take down the land. Then depending upon the start, every opportunity is different and unique. Mike Mas, our CFO, loves to call, they're snowflakes. It does depend. It depends on the market, depends on how much space you're building. But we can be pre-leased anywhere. What I'm saying, sometimes it's good to keep it off the market because you'll generate a lot more excitement once the other retailers start to see a Whole Foods coming to life in a beautiful new center.
But it can range anywhere from, I don't know that we have any minimums, but it's going to range anywhere from. Yeah. We feel really good about our pipeline in terms of what percent pre-leased we are. The success in the last couple of years, I think, is evident if you just go look at what we've delivered. We've delivered them very close to 100% leased at completion.
The $400 million pipeline, that's ground-up development and redevelopment?
Yes.
Correct?
What is the split within that pipeline between the two? How do returns compare? And maybe if you could, I guess, just talk about the redevelopment densification opportunity. Anything on that front.
There's $400 million. That's $400 million of starts, nearly $400 million of starts that we expect in 2026. Right now, our in-process pipeline is nearly $700 million. That's going to be, call it right now, ground up is about 400 of that. So 400, 300 is about the split. As you think about our new starts, it's going to be about two-thirds ground-up development, one-third redevelopment in terms of volume. And our target for ground-up development is to be at least 150 basis points above market cap rates. And generally, for the type of product that we are developing and acquiring, that's going to be 7% plus for ground up. And redevelopments, that really varies. And again, if you look at what's in process, we're at a blend of nine. So that tells you that some of our redevelopments came in at much higher returns than others.
But they're going to be slightly higher. There's often not land basis involved. It may be all 100% incremental NOI, that there wasn't anything before. So it's difficult to compare the two.
Maybe shifting a little bit to the consumer and the macro. Your portfolio skews to sort of the higher income areas, right? Are you seeing a sort of a difference in performance between the highest income centers and the rest of the portfolio?
We are not seeing really any significant differences across any markets or trade areas or kind of neighborhoods, if you will. Our product type really lends itself to perform well in all economic cycles. Especially, even if you think about we are in compelling trade areas, and if you look at it on a relative basis, what you're saying, what would be on the lower end of the spectrum for us are still good, compelling demographics. Population density with average household incomes. It's the combination of the purchasing power. Peter Linneman is on our board of directors. I will quote him if he's listening. I want to make sure that he knows that I'm attributing this to him. He does a quarterly webinar, and I love to listen to his insights. The K-shaped economy is talked about often, as it should be.
As he has always made sure that people really fully understand is when you think of K, it sounds like it's a declining spending. Even the pressures that the moderate to lower end consumers are feeling, they're still spending, and their spending is still growing, just not at the rate of the upper part of the K. If you think about, again, the product type where we are, it's necessity, convenience, and value. We're still capturing the purchasing power of those consumers. We're really well positioned in all the neighborhoods in which we operate.
How do you think about sort of the consolidation of the grocery space? As you think about how does that change landscape for you, both in terms of tenant risk and opportunities to sort of strengthen your portfolio?
The grocery business, it is certainly where our focus is. We are primarily grocery anchored, so it is something that we have always studied, evaluated, monitored, and understood as best as we possibly can. For as long as I have been at the company, it has always been one of the areas where we focus. I will go back to the 90s, and I remember for those of you that may have been involved in any part of retail or retail real estate, there was a W that everybody was talking about. It was Webvan. Everyone was petrified that Webvan was going to put all the grocers out of business. Hap Stein, our then CEO, I remember being in meetings with him sitting here like Christy is sitting here with me, and he would say, "There is another W that we should all be talking about.
It is not Webvan, it is Walmart." Walmart actually in 1999, I think is when they really began to enter the grocery business. It has been a competitive business for as long as it has been in existence, even before I joined Regency. Our strategy is what we focus on and remain very disciplined, ensure that we are leasing to owning shopping centers that have the better operators. Back in those days, it had to be number one or number two market share in the trade area. We are probably more to the number one with specialty grocer today. So creates a little bit more of a competitive moat for the grocers. Ensure that for the assets in which we are investing, whether it is acquiring, holding. Every day we hold a shopping center, we are making a capital allocation decision or building a new one.
Is it one of the better performing stores within that grocery chain? There is also then the, is it just really great real estate? We are very proactive in our asset management. Every day that we hold a shopping center, we are making a decision, and we know that, and it is how we approach the business. So we feel really good about the strength and quality of our grocery anchors. For those that may not be the best performing or highest productivity, they are sitting on really good land that we would be happy to get back.
Stop there if there is any questions.
I have a question. Different stocks have pulled back, right? The retail stocks in second quarter earnings. I do not know if it is the macro pressures with the 10-year at 5% or oil prices, but there was a quote from a CoStar director of real estate analytics. She came out simultaneously when we started to see a sell-off. I would not say this is the reason why, but I just wanted to see if you could push back on this. The quote is, "While retail fundamentals remain healthy by historical standards, softer consumer spending growth, elevated interest rates, and greater tenant cost pressures have reduced landlords' ability to push rents at the aggressive pace seen earlier in the cycle." Are you seeing any kind of slowdown in any way, shape, or form across-
We are not yet. I assume everyone that is listening could hear the question. The question was really are we seeing any type of slowdown or softening in our ability to kind of push and to drive rents? And the answer is no, we are not. If anything, we continue to see that strengthening. We continue to increase our percent leased, and we are getting, as I said even in my prepared remarks, our ability to drive contractual rent growth, so the rent steps within leases, and the cash re-leasing spreads. It is better than historical average each quarter. Never say never, and we say it all the time.
We know we are not 100% immune to economic cycles, and if there is a pullback and we are really well-positioned, I think we are more resistant than the rest of the retail sector because of the quality of our portfolio and because of the property type in which we own and operate. Can you tell us about your watchlist today? I will let Christy take that.
Thank you.
Our watchlist is about, at its historical average, about 2% of ABR, which is where we've seen it the last few years. As we do guide to uncollectible lease income, so bad debt as a percentage of NOI, as a percentage of revenues, and that is about. We have guided to below 50 basis points. Year to date, we are running in the kind of low to mid-30s. So we are doing really well on credit loss right now. We started the year with a couple of uncertainties from a tenant perspective as far as bankruptcies, and we have outperformed that and we have had some really good resolutions on that, and you have seen us raise guidance partially as a result of that. Right now, our watchlist looks good.
Who is on it?
Who is on our watchlist?
Yeah.
Without naming names, I think it is largely from a tenant category perspective. It is going to be the bigger box junior anchors that you would imagine. Some of the names that, largely one in particular that was on our watchlist earlier this year that sort of resolved, is still on our watchlist. And we are continuing to watch those tenants that have continued to show signs of potential credit issues, in addition to those that have recently emerged from bankruptcy.
How about gyms?
Fitness is on our kind of secondary watchlist. There are some fitness providers that are on our watchlist.
They are doing well today.
Yeah.
Thank you.
I mean, we're watching credit risk tenants. We're also watching those that are downsizing, and those that may close stores at lease expiration. We're watching our tenants on all fronts on many levels. And we're considering that in our leasing as well as in our forecast.
What about external acquisitions? It's been tricky in grocery-anchored shopping centers as cap rates have kind of compressed and stayed low. Do you have any thoughts on how interest rate trends may ultimately impact the cap rates for transactions? Is there any potential window that could open up for you to be more acquisitive as we move forward? I won't go into my detailed history lesson because Christy would probably kick me under the table. But you really can find all that data, right, with regards to interest rates versus inflation versus cap rates. From the '80s on, it's kind of all over the board with cap rates, except for one short period of time, are typically going to be above the 10-year Treasury rate. I know that's not a shock to anybody. But the spread between the two has really varied over the last 50 years.
I think obviously a lot of it has to do with what are expectations. Right now, even with the 10-year at 5%, you're absolutely right. Cap rates have compressed, and the quality of the property of which we would buy is in the low to mid-fives. So very small spread over the 10-year Treasury. Is that going to sustain and is it going to stay there? I don't have the answers to that. I do know what's important to us. When we are allocating capital, we have to make sure that we can fund it accretively. So that's number one. If we can't, then we will step away. If we can fund it accretively, then we look at the merits of the actual investment opportunity itself. Is it accretive to our growth rate? Is it accretive to the quality of the portfolio?
If you believe that interest rates are going to stay at 5% or go higher for an extended period of time, I think you'd have to expect that cap rates are going to move with it. But I don't have a crystal ball to know if that will happen or when. If they come back down, I feel pretty confident to say that I think cap rates would stay where they are.
But to date, we've not seen-
We haven't seen any change. We're still seeing-
Yeah.
Right. Development's even longer term, so those returns take even longer to move. Acquisitions, the only way you're going to see are the ones that are going to go under contract from this day forward. Those that are under contract and closing today aren't necessarily a good proxy for that because they went under contract when interest rates were at a different level. If it stays 5% or higher over a period of time, you might see some movement, but I don't think you're going to see significant movement because they're still, for all the same reasons I just talked about. It's a hard asset with sustainable, steady cash flow growth with relatively, knock on wood, low risk. So the risk reward for investing in neighborhood grocery anchored shopping centers is still attracting a lot of capital.
The only other thing I would add is that if we do start to see some movement in cap rates, you're probably going to see it where more of the levered buyers are playing, which is the larger assets.
I guess given where pricing is today, how do you think about pruning assets and potentially redeploying disposition proceeds?
We always evaluate every kind of tool in the toolbox. We like our portfolio. We do believe that growth is better for delivering and creating value for our shareholders than shrinking. We can grow more efficiently than we can shrink efficiently, and therefore that is certainly our focus. But to the extent that there's big dislocations, we would absolutely look at it, and have in the past.
I heard a statement from one of the industry peers that wasn't in shopping centers today. They were asking about M&A and apartments is bigger and better. His comment was, "No, better is better," which was insightful. You're big.
Ours is, yeah.
Can you talk about growing. Growing what?
So-
Why do I care that you are bigger if you can grow your cash flow and your NAV by doing what this gentleman suggests?
We agree with whoever that was. We actually say bigger is better, but better is best. That is what is so great about our position today. We do not have to grow, but when we are generating $190 million of free cash flow that we can invest in developments that are at least 150 basis point return wider than what the market cap rate is. We are creating value as we develop those. That is a good business, and it is one we are going to continue to focus on. There are efficiency benefits to the size that we are. I do believe we are at a threshold size where we are gaining those. If you were to pick, say, we put together a portfolio of $250 million to sell to buy back shares, we would actually go backwards with inefficiency.
Whereas as we are adding shopping centers, we are not adding people every time we develop a new shopping center, so we are gaining efficiencies with that. So bigger is better is best.
Maybe on the balance sheet, I know you've got about $500 million coming due.
How should we think about the timing and structure of the refund?
Sure. As you mentioned, we do have a $525 million bond coming due on February 1st. We also have some mortgages, some consolidated mortgages that we will look to finance with corporate debt as well as funding our growth pipeline, funding our growth capital with some of the acquisitions we are doing, but more notably with our development and redevelopment pipeline. So we have got some work to do over the next, call it, nine to 12 months from a debt financing perspective. As we are looking at our options, we are looking at all alternatives.
We are looking at the bond market, and we will look for attractive windows to the extent that we choose to go that avenue. We are looking at the term loan market. We are looking at the convertible market. And we have seen a lot of REITs access the convertible market. We have looked at that.
We like to think about it in terms of if we look at it from a debt instrument perspective to refinance our debt. We need to look at it as a bond instrument, as a debt instrument, and with that, we would issue a capped call with that to increase the conversion premium to make sure that it makes sense. The effective rate on something like that, given Regency's volatility, given Regency's dividend yield and dividend growth. The effective rate ends up being higher, and it is comparable to where we can issue five-year debt. So on that basis, given the risk reward, it does not necessarily make sense for Regency given our access to low-cost debt capital. And if we look at it purely on an equity instrument perspective, then it does not make sense for us today either.
But we are looking at all avenues, and the good news is we've got some great options and great access to capital.
What would five-year unsecured paper look like these days?
So five-year. Where's the five-year? I've been focusing more on the 10-year.
Give me a 10-year.
10-year, we are at about 85 basis points over.
85 over for the 10-year. Okay.
Yeah. If we are looking at five-year, call it 60 or 65 basis points over.
Thanks.
I know one of the questions we get, I know it is early to talk about 2027, and I know there is no guidance. We always
I know to sit back for this one.
Try to think about building blocks.
To growth in the next year. So help us, kind of walk us through. If Mike was here, I would ask him this.
There is absolutely zero chance I am giving you 2027 guidance today. No, but the building blocks to growth are-
are similar to this year.
Yeah, exactly.
But I'll let Christy go. Yeah.
No, the building blocks are similar to as they've been in years past. When you think about Same Property NOI growth, and we've been talking a lot about this today, the primary driver of our same property growth is our ability to push rent. When you think about what goes into that, yes, it's cash re-leasing spread. It's the mark to market that we're getting on our leases when we roll them. But it's also the contractual rent steps that we're embedding within our leases. I think that's really important when you think about a company like Regency, given the amount of shop space that we have, because we are getting 3% plus on more than 80% of our leases.
We are getting 3%, 4%, 5% annual bumps in these shop spaces. We are doing better on anchor as well, and I know that that has been a big question. So we are getting, call it 1%-1.5% average annual increases on our anchor space. On that shop space, because those rents are growing year after year, we are closer to market. When you get to the expiration of that lease, which is always going to put us in the middle of the pack from a cash re-leasing spread perspective. A lot of people ask us what is the most misunderstood thing. I think the focus on cash re-leasing spreads is one of the most misunderstood things. We will always be in the middle of the pack, but we will always be ahead of the pack on GAAP re-leasing spreads.
We are generating 20% plus GAAP re-leasing spreads, and that is what is driving the majority of our Same Property NOI growth, more than 250 basis points plus. On top of that, we are investing capital in redevelopment. We spent a lot of time talking about ground-up development as well as redevelopment. Redevelopment is a great contributor for us for Same Property NOI growth. On top of that, we do have occupancy. We have had great success growing occupancy, and we still have some runway there. If you think about where we are relative to historical averages, we have exceeded our peak on our lease rate. If we get back to our peak levels on anchor space, because we have exceeded on shop space. If we get back to our peak levels on anchor space, we can get at least another 20 basis points on our lease rate.
From a commenced perspective, which is really what is driving Same Property NOI growth. Right now, we are at about a 240 basis point spread. If we can track that back to historical levels of 180 basis points, that is another 60 basis points of runway. On top of that, another 20 basis points potentially if we get back to peak levels on lease rate. Lisa is kicking me under the table, calling it peak, but we have shown that we can move beyond peak. Beyond that, so that is Same Property NOI growth.
The building blocks beyond that, again, we spent a lot of time talking about ground-up development, and ground-up development is going to add another 100, call it 125 basis points, especially as we get closer to those stabilized levels, if we can continue to generate $350 million, $400 million of starts and spend. So those are the building blocks.
Debt refinancing is obviously a little bit of a headwind right now. Factoring all of those pieces in, those are the building blocks that we have the most visibility on. On top of that, to the extent that we are able to invest capital, to raise capital, and invest that capital accretively. Because we can do all of this without issuing any equity. If we can issue equity and invest that capital accretively through acquisitions, that is additional growth on top of that. We have shown the ability to do that.
And that earnings growth will translate to dividend growth.
Right.
The dividend growth will follow and match earnings growth.
Got it. Okay. Rapid fire questions. We have three. One, if long term rates stay higher for longer, which has the biggest impact on your sector? We can say sector earnings. Higher refinancing costs, lower transaction activity, or less new supply?
Higher financing costs.
Yeah.
Okay. Number two, over the next three years, will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no?
No.
Number 3, next year, same story, NOI growth for the sector, higher, the same, or lower?
The same.
Okay. Thank you so much.
Thank you.