Regency Centers Corporation (REG) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights strong financial performance, strategic acquisitions, and positive growth outlooks, including a 6% NAREIT FFO growth. The Q&A reveals strong tenant health, high retention, and strategic positioning in grocery-anchored centers. Though some expense recovery rates may decelerate, overall financial health and strategic initiatives are robust. The reaffirmed guidance and credit rating upgrades further support a positive sentiment, likely leading to a 2-8% stock price increase in the near term.

Key Financial Performance

Same Property NOI Growth Exceeded 7% in Q2 2025, with base rent contributing 4.5%. This was driven by robust leasing activity, record low shop move-outs, favorable bankruptcy outcomes, accelerated rent commencement timing on key anchor tenants, and improved expense recovery rates.

Commenced Occupancy Rate Increased by 40 basis points quarter-over-quarter, driven by rapid tenant commencements within the SNO pipeline.

SNO Pipeline Incremental Base Rent $38 million at quarter end, reflecting a leased and commenced occupancy spread of 260 basis points.

Cash Rent Spreads Achieved 10% for new and renewal leasing in Q2 2025, with GAAP rent spreads nearly 20%. This reflects mark-to-market rent increases and success in embedding contractual rent steps in leases.

Investment Activity Over $600 million of accretive capital deployed year-to-date, including a $357 million acquisition of a five-asset portfolio in Orange County, California. The portfolio is 97% leased and includes over 600,000 square feet of retail space.

Development and Redevelopment Pipeline $500 million in-process with blended project returns exceeding 9%. Nearly $50 million of new projects started in 2025.

NAREIT FFO Growth Raised full-year growth guidance to more than 7%, driven by higher commenced occupancy, strong lease commencements, and accretive investment activity.

Core Operating Earnings Growth Raised full-year growth guidance to over 6%, supported by elevated occupancy and investment activity.

Leverage Maintained within the target range of 5 to 5.5x, even after the portfolio acquisition, supported by a $400 million bond offering at a 5% coupon.

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Operating Highlights

Acquisition of shopping centers: Acquired five shopping centers in South Orange County, California for $357 million, enhancing presence in a supply-constrained market.

Development and redevelopment projects: Executing $500 million in-process development and redevelopment pipeline with robust leasing activity and blended project returns exceeding 9%.

New projects: Started nearly $50 million of new projects this year, with visibility to at least $250 million in 2025, focusing on ground-up development.

Market positioning: Strengthened position in Southern California with the acquisition of high-quality retail assets in a premier suburban submarket.

Tenant demand: High-quality properties commanding strong tenant demand from grocers, restaurants, health and wellness, and other categories.

Same property NOI growth: Achieved over 7% growth, driven by robust leasing activity, record low shop move-outs, and accelerated rent commencements.

Leasing activity: Achieved cash rent spreads of 10% and GAAP rent spreads of nearly 20%, reflecting strong rent growth and contractual rent steps.

Expense recovery rates: Improved expense recovery rates, contributing to NOI growth.

Capital allocation strategy: Deployed over $600 million in accretive capital year-to-date, aligning with growth and earnings objectives.

Balance sheet strength: Maintained low leverage and access to low-cost capital, supporting strategic growth opportunities.

Corporate responsibility: Released annual Corporate Responsibility Report, highlighting progress and strategic direction.

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Risk or Challenges

Market Conditions: The company faces potential risks from high-profile bankruptcies in the retail sector, which could impact occupancy rates and credit losses. Although the company has narrowed its credit loss guidance, these bankruptcies remain a concern.

Regulatory and Financial Risks: The company has assumed $150 million of below-market debt with a 12-year maturity as part of a recent acquisition. While this is currently advantageous, changes in interest rates or financial conditions could pose future risks.

Strategic Execution Risks: The company is heavily reliant on its ability to source and execute high-quality investment opportunities, including acquisitions, redevelopments, and ground-up developments. Any delays or failures in these projects could impact financial performance and growth.

Economic Uncertainties: The company’s performance is tied to consumer spending and economic conditions, which could be adversely affected by broader economic uncertainties or downturns.

Supply Chain and Development Risks: While the company has successfully completed projects on time and on budget, any future disruptions in the supply chain or cost overruns could impact its development pipeline and financial outcomes.

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Guidance & Outlook

Full Year Growth Outlook: The company raised its full year growth outlook for same property NOI, core operating earnings, and NAREIT FFO due to strong results, substantial progress in leasing, and opportunistic capital allocation.

Same Property NOI Growth: Guidance range increased to 4.5% to 5%, up 115 basis points at the midpoint, driven by higher average commenced occupancy, strong lease commencement activity, and higher expense recovery rates.

NAREIT FFO Growth: Raised by $0.06 per share at the midpoint, representing full year growth of more than 7%.

Core Operating Earnings Growth: Raised by $0.05 per share at the midpoint, representing growth north of 6%.

Capital Deployment: Over $600 million of accretive capital deployed year-to-date, including a $357 million acquisition of a five-asset portfolio in Orange County, California, which is 97% leased and strategically aligned with the company's growth strategy.

Development and Redevelopment Pipeline: $500 million in-process development and redevelopment pipeline with blended project returns exceeding 9%. Visibility to at least $250 million of new project starts in 2025, primarily in ground-up development.

Lease Commencements and Occupancy: Current year lease commencements largely derisked, with momentum to build future lease pipeline into 2026. Commenced occupancy rate increased by 40 basis points quarter-over-quarter.

Credit Loss Guidance: Narrowed to 75 to 85 basis points due to greater clarity on high-profile bankruptcies.

Capital Raising Plan: Substantially derisked following a $400 million bond offering in May, with 7-year notes at a 5% coupon. Leverage remains within the target range of 5 to 5.5x.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:How is the management thinking about the contribution from various components into the second half for same-store NOI cadence?

A:Management expects base rent to continue being the largest contributor. However, credit loss elements such as BK move-outs from Party City, Joann, and Rite Aid, as well as uncollectible lease income, are expected to put pressure on growth rates in the second half. The first half had exceptionally low uncollectible lease income, but the second half is expected to see slightly higher levels, though still below historical averages. Additionally, there were unique contributions in Q2 from percentage rent and other income, which are not expected to repeat.

Q:What are the drivers of the 7%+ same property NOI growth during the quarter, and how does management view its sustainability?

A:Drivers include peak leased occupancy, continued runway on commenced occupancy, and positive impacts from redevelopments. Management expects above-trend growth to continue into 2026, with redevelopments contributing over 100 basis points to same property growth in 2025 and potentially replicating in 2026. The SNO pipeline is also compressing positively, with accelerated rent commencements.

Q:What gave Regency Centers a competitive edge in successfully executing the SoCal acquisition?

A:The seller chose Regency Centers due to the quality of their currency (UPREIT transaction for tax optionality), the quality of their operations, and the opportunity to partner on future developments. The seller valued Regency's ability to maintain best-in-class shopping centers and their vested interest in the community.

Q:What is the outlook for development opportunities and yields?

A:Management sees strong demand from best-in-class grocers for physical presence in their markets. They expect to start $250 million or more in ground-up developments this year, with yields in the 7%+ range. They acknowledge challenges in finding deals but are confident in their relationships, expertise, and capital.

Q:How sustainable are the better expense recovery rates seen in the quarter?

A:The recovery rates are expected to decelerate slightly due to a one-time element in Q2 from the annual reconciliation process, which added about $1 million. Going forward, recovery rates may fall by 100 basis points compared to Q2, but higher average in-place occupancy is driving fundamental increases in expense recoveries.

Q:What are the growth opportunities within the SoCal acquisition portfolio, and are there any incremental CapEx requirements?

A:The portfolio, 97% leased, has growth opportunities through small redevelopments, such as a vacant Rite Aid and a soon-to-be vacated CVS. Management expects a growth rate north of 3% for the portfolio. There are no additional acquisition opportunities within the master-planned community, but there is potential for future retail developments.

Q:What are the plans for the $100 million remaining forwards to be settled in the second half of the year?

A:The capital will provide additional capacity for development, accretive acquisitions, and rolling up smaller joint ventures or DownREIT transactions. Management views it as added capacity to support growth initiatives.

Q:What is the outlook for tenant health, particularly for small shops?

A:Tenant health is strong, with positive foot traffic, low ARs, and strong sales. Retention rates are higher than expected due to supply constraints and productive stores. Tenants are resilient and adapting to challenges like tariffs by negotiating with suppliers, sourcing goods differently, or passing costs to consumers.

Q:What is the outlook for credit loss assumptions for 2025 and potential troubled tenants for 2026?

A:Credit loss assumptions for 2025 have been lowered due to more clarity on bankruptcy outcomes, such as CVS taking over some Rite Aid locations. Tenant health remains strong, with historically low AR levels and a retention rate of 75-80%. Management expects some bankruptcies but is confident in re-leasing spaces quickly and often at higher rents.

Q:What is the outlook for leasing and occupancy costs?

A:Renewal spreads include options, and negotiated renewal rates are higher without options. Management is pushing occupancy costs higher due to limited supply and strong demand. Tenants are adapting by investing in their businesses and finding ways to afford higher costs. Contractual rent steps and rent spreads remain strong.

Q:What is the outlook for future acquisitions and portfolio diversification?

A:Management is open to acquisitions that are accretive to earnings, growth, and quality. They are comfortable with their current portfolio diversification but are open to expanding into markets like Nashville. They emphasize that acquisitions are not necessary to meet growth objectives but are pursued when compelling opportunities arise.

Q:What is the disposition guidance and rationale for asset sales?

A:Disposition guidance remains at $75 million, with a cap rate of 5.5%. Sales include a grocery-anchored shopping center with lower growth potential and non-strategic assets like small office buildings. Proceeds are reinvested accretively to fortify future NOI growth.

Q:What is the outlook for the acquisition environment and potential opportunities?

A:Management sees a marginal pickup in acquisition activity due to strong demand for grocery-anchored shopping centers. They remain selective, focusing on opportunities that align with their growth and quality objectives. They expect more assets to come to market after Labor Day.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the magnitude of potential future large-scale OP unit deals, stating that such opportunities are rare and require a mindset similar to M&A. They also did not provide clear specifics on how much more room there is to push occupancy levels higher, only stating that they believe they can continue to surpass prior peaks.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

REG Transcript

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