Earnings Call Transcript - REG Q3 2025

Operator, Operator

Greetings, and welcome to Regency Centers Corporation Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Thank you. You may begin.

Christy McElroy, Host

Good morning, and welcome to Regency Centers' Third Quarter 2025 Earnings Conference Call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, 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. 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-K and 10-Q filings. In our discussion today, we will also reference certain non-GAAP financial measures. The 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 website with additional information, including disclosures related to forward earnings guidance. Our caution on forward-looking statements also applies to these presentation materials. As a reminder, given the number of participants we have on the call today, we respectfully ask that you limit your questions to one and then rejoin the queue with any additional follow-up questions. Lisa?

Lisa Palmer, CEO

Thank you, Christy. Good morning, everyone. We're proud to share another quarter of outstanding results, highlighted by strong same-property NOI growth and earnings growth. These results reflect the continued success of our team in leasing space, commencing our SNO pipeline and driving rents higher amid robust operating fundamentals and strong demand at our shopping centers. Our tenants remain healthy, which is evident in sustained sales strength and historically low bad debt. Our earnings growth is further amplified by the successful execution of our capital allocation strategy this year. Our investments team has accretively deployed more than $750 million of capital into high-quality opportunities, including acquisitions, ground-up development, and redevelopment. By year-end, we expect to have started around $300 million of projects, bringing total starts to an impressive $800 million over the past 3 years. I am so proud of our team for this accomplishment. I'll let Nick talk in just a few minutes about the specific development projects we started in the third quarter, but I want to emphasize again how ground-up development is truly a key differentiator for Regency. We are the only national developer of grocery-anchored shopping centers at scale in an environment of otherwise limited new supply. We are building the types of assets that we would acquire, and we're doing so accretively and with manageable risk, creating meaningful net asset value with yields well ahead of market cap rates. Given our exceptional results and a continued strong fundamental backdrop, we are raising our full-year earnings growth outlook and reflecting that strong performance, increasing our dividend by more than 7%. Our strong and consistent track record of dividend increases over time is very important to us in driving total shareholder returns while also maintaining a substantial level of free cash flow. Before turning it over to Alan, I want to say again how proud I am of our team's performance this year. And as we look ahead, we believe our competitive advantages position us well to drive sustainable cash flow growth from our essential grocery-anchored shopping centers in suburban trade areas with strong demographics to our leading national development platform, strong balance sheet, and the best team in the business.

Alan Roth, CFO

Thank you, Lisa, and good morning, everyone. Our team did an incredible job producing another quarter of outstanding results, growing same-property NOI by nearly 5% with strong base rent growth as the primary contributor at 4.7%. This outperformance is a culmination of a record amount of new leasing in recent years and accelerating rent commencement from our SNO pipeline, combined with favorable bankruptcy outcomes and historically low levels of bad debt. Our tenant base is healthy. And across our portfolio, we continue to experience significant demand from nearly all retailer categories and for both anchor and shop spaces. Our same-property percent leased rate sits at 96.4%, and we remain confident that we can exceed prior peak levels in this favorable retail environment with limited new supply and sustained strong demand for our high-quality space. Looking ahead, our leasing pipeline is robust, fueled by interest from vibrant restaurants, leading health and wellness brands, off-price retailers, and, of course, our best-in-class grocers. In fact, we signed 3 new grocer leases in the third quarter alone, unlocking exceptional redevelopments that will drive enhanced merchandising and better foot traffic to these assets, all at highly accretive returns. Our same-property commenced rate increased by 40 basis points in the quarter to 94.4%, with 8 anchors rent commencing, including several key openings at redevelopment projects. At our hub at Norwalk asset located in Fairfield County, Connecticut, the long-awaited Target opened in the quarter to strong crowds. We also opened a brand-new Publix at our Cambridge Square asset in Atlanta and a Nordstrom Rack at our Pine Ridge Square Center in South Florida. All of these retailers reported exceptional openings, and we couldn't be more pleased with the upgraded merchandising and success we've seen at each of these projects. While we've made meaningful progress converting our SNO pipeline into lease commencements, we are also actively backfilling our pipeline with newly executed leases. Our 200 basis points of pre-leasing now represents approximately $36 million of signed incremental base rent. Additionally, we have another 1 million square feet of leases in negotiation, representing visibility to continued strong leasing activity. We also continue to have great success driving higher rent growth. Cash re-leasing spreads were strong at 13% in Q3, while GAAP rent spreads were near record high levels at 23%, demonstrating our ability to achieve strong mark-to-market rent growth while also embedding meaningful annual rent steps into our leases. Importantly, we are also being prudent with our leasing capital investment. In closing, I am so proud of our team's great work. Strength in retailer demand, leasing fundamentals and tenant health indicators remain favorable, and we have great visibility into continued above-trend same-property NOI growth in 2026.

Nicholas Wibbenmeyer, CIO

Thank you, Alan, and good morning, everyone. As Lisa mentioned, this was another very active quarter for accretive investment activity. We're seeing great momentum in starting new development and redevelopment projects, executing on our in-process pipeline as planned and continuing to successfully source acquisition opportunities. Since our last update a quarter ago, our most significant progress has been in growing our development and redevelopment pipeline. We started over $170 million of projects during the third quarter, bringing our year-to-date total to more than $220 million. Our starts in the quarter included 2 exciting new ground-up projects. Ellis Village will be a 50,000 square foot Sprouts-anchored center located in the Bay Area at the front door of a thriving master planned community. The Village at Seven Pines will be a 240,000 square foot Publix-anchored center in the heart of Jacksonville's well-established retail node. The property will serve as the commercial hub of an iconic master planned community that will also include over 1,600 homes. Given our success in bringing projects to fruition, we now expect approximately $300 million of starts in 2025. As the only active national developer of high-quality neighborhood shopping centers, leading grocers remain engaged with us on new projects across our platform. Our team continues to execute well on our in-process development and redevelopment projects, which now totals more than $650 million, with strong leasing activity and blended returns exceeding 9%. On the transaction side, we had another active quarter as well. As mentioned on our last call, we acquired the 5-property $350 million RMB portfolio in South Orange County at the beginning of the quarter. As a reminder, this was an off-market OP units deal with the value proposition of owning Regency stock playing a meaningful role in seller motivation. We've already fully integrated these centers into our platform and are seeing them perform very well. We also purchased our JV partner's interest in 3 grocery-anchored centers during the quarter, including 2 in Houston and 1 in Northern New Jersey. We welcome these opportunities to convert to full ownership of high-performing centers and strong markets. In closing, our team is actively working to source attractive opportunities and further build our future investment pipeline. While the opportunity set for new development projects remains limited, our flywheel effect is real and our ongoing success uniquely positions us to take advantage of future opportunities to create value.

Michael Mas, CFO

Thank you, Nick. As you've heard this morning, the Regency team delivered another outstanding quarter of results, driven largely by the strength of our leasing efforts, the health of our tenant base, and the value we're creating from capital allocation. This is reflected in earnings and same property NOI growth that again exceeded our expectations. As a result, we now anticipate same-property NOI growth of 5.25% to 5.5% with the increase driven by lower credit loss and higher rent commencement from our SNO pipeline. Notably, within that expectation, we have decreased our credit loss guidance range to 50 to 75 basis points. This higher organic growth is driving our increased full-year outlook for earnings per share with our new ranges now calling for growth of mid-7% for Nareit FFO and mid-6% for core operating earnings. And as Lisa mentioned, we also raised our dividend by more than 7% this quarter. Our balance sheet remains strong with leverage squarely within our target range of 5 to 5.5x. We are generating significant free cash flow to continue funding external growth, and we have nearly full availability on our $1.5 billion credit facility. You'll recall that late last year, we issued $100 million of forward equity. To update you on timing, please note that we settled $50 million in August and we will settle the balance by the end of October. Looking ahead to 2026, we plan to provide detailed guidance when we report Q4 results in February, but I want to offer some early thoughts on our current expectations for growth as we work to finalize our plan. We expect same-property NOI growth in the mid-3% area, including a credit loss environment similar to 2025. We expect total NOI growth in the mid-6% area, which includes our expectation of delivering approximately $10 million of incremental NOI from ground-up development projects currently in process. As Lisa and Nick discussed, development is an important differentiator for Regency as you consider our external growth prospects, and we are gratified to realize a more significant impact from these successful projects as they lease towards stabilization. Nareit FFO growth is expected to be in the mid-4% area, representing continued solid growth after taking into account the impact of current year and planned 2026 debt refinancing activity, which collectively is expected to have an impact on growth of approximately 100 to 150 basis points. Organic same-property NOI growth of 5.25% to 5.5%, an internally funded and growing development and redevelopment pipeline, evidencing Regency's unique competitive advantage, an A-rated balance sheet prepared to weather all seasons and an outlook for continued growth even through the realities of today's higher rate environment, it's clear that Regency's best-in-class team is operating on all cylinders. We are happy to take your questions.

Operator, Operator

Our first question comes from Greg McGinniss with Scotiabank.

Viktor Fediv, Analyst

This is Viktor Fediv on for Greg McGuinness. Can you provide some color on this 11 asset distribution transaction with your JV partner? What options does this transaction open for Regency?

Nicholas Wibbenmeyer, CIO

Sure, absolutely. This is Nick. Appreciate the question. Regarding GRI, I would start with the fact that they've been a very, very good and long-term partner of ours, and our interests have been aligned for many, many years. And that portfolio aligns completely with our strategy, and we like every asset we own with them. The only challenge sometimes with these long-term partnerships is there's not a perfect way to capital recycle. And so this allowed us to do a mini DIK in order for them to own 6 assets, they now have full control over. And we now own 5 assets at 100% that we are excited about owning and anticipate owning long term and excited about the partnership on a go-forward basis, again, because they've been great partners. We expect them to continue to be aligned with our interest on the portfolio we continue to own together.

Operator, Operator

Our next question comes from Michael Goldsmith with UBS.

Michael Goldsmith, Analyst

Mike, I appreciate the early parameters for 2026, if you will. You pointed to the same-property NOI growth in the mid-3%. What's changing from the environment that you're seeing there? Or can you help bridge to get there? And then also, you mentioned you expected a credit loss environment similar to 2025. Does that mean like your expectations at the start of 2025 or this historically low bad debt that Lisa mentioned at the beginning of the call, is that applied for next year?

Michael Mas, CFO

Sure, Michael. Let me start with the second point and clarify before addressing the first about the bridge. We anticipate next year's credit loss provision to resemble what we experienced at the end of 2025. I would describe this as a continuation on both fronts, whether related to bankruptcy losses or uncollectible lease income, which is performing better than historical averages. Our roster of tenants is as strong as it has ever been. Regarding the bridge, you need to understand 2025 to fully appreciate our current outlook, which we continue to refine and feel quite proud of. If you consider 2025 and the components driving this year’s growth, which targets a range of 5.25% to 5.5%, we’re seeing a significant amount of occupied space that we've absorbed, the highest in our history. Kudos to the team for building and delivering that SNO pipeline through 2024 and into 2025, exceeding expectations along the way. We've rapidly absorbed space and are nearing peak occupancy levels. Additionally, we've seen a significant improvement in our recovery rate, contributing about 100 basis points to our 2025 recovery. So, reflecting on 2025, I project a mid-3% area of same-property growth next year, primarily driven by base rent, which is quite strong on top of good growth in 2025. We remain very confident in our outlook.

Lisa Palmer, CEO

Yes. And I would just like to emphasize that. I think Mike said it really well. But mid-3% same-property NOI growth a year after what we're doing this year and then adding on top of that the contributions that we're getting from development with a 6% NOI growth, we feel really good about how well positioned we are for our future growth.

Operator, Operator

Our next question comes from Cooper Clark with Wells Fargo.

Cooper Clark, Analyst

Great. I appreciate the early '26 thoughts. I guess how should we be thinking about the potential on development and redevelopment starts into next year, considering an increasingly competitive transaction market and strong leasing? And then I would also appreciate any color on the mix between ground-up and redevelopment as you think about starts moving forward.

Nicholas Wibbenmeyer, CIO

Yes, Cooper. I appreciate the question. This is Nick. So I think there's a couple of pieces to that. So let me just actually step back for your benefit and others. It wasn't that many years ago, we were talking about starting between our development and redevelopment program, $1 billion over the next 5 years. And now fast forward and as we look over our shoulder here as we round third base in 2025, we will have started $800 million just in the last 3 years. And so as we've been articulating, we continue to feel really good about finding more than our fair share of investment opportunities in our development and redevelopment program. And so I would say, as we look forward, we would expect to continue to find more than our fair share in that run rate, we feel good about as we move into 2026. And the team is working every day to find even more opportunities. And where we find those, we'll take advantage of those. And then in terms of the divide between development and redevelopment, look, wherever we can invest our capital accretively, we're going to lean into. But because of the success we've been having on the development program, as you can see, the split is starting to lean into the ground-up development. And so I expect that to continue. If you look at our in-process today, this is the first quarter in quite some time, our in-process developments outnumber from an investment standpoint, our redevelopments. And so we have now flipped the script where the developments are outweighing redevelopments. And as I look more near term into 2026, I would expect that to be the case as well.

Operator, Operator

Our next question comes from Samir Khanal with Bank of America.

Samir Khanal, Analyst

Mike, I noticed on your net effective rent page that there seems to be an increase in leasing on the anchor side compared to shop spaces. Over the last few quarters, the focus has mostly been on shop space. Could you explain this shift? Did you receive any boxes back, or is this related to some development initiatives? I'm trying to understand why the balance has changed in favor of anchors.

Alan Roth, CFO

Samir, this is Alan. I appreciate the question. So no, it's just an anomaly for the quarter. We happen to do more anchor transactions. It's not development-driven per se in the quarter. And again, I'd say 10 anchor transactions came in. That's what's also skewing, I think, with the lower rent that you're seeing. But importantly, that I'd slide you over and go look at the cash rent spreads and the GAAP rent spreads that happened for the quarter. So nothing more than coincidental timing that a lot of anchor transactions happened to come through the queue in quarter 3.

Operator, Operator

Our next question comes from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem, Analyst

I just want to touch on acquisitions because we definitely appreciate the early '26 thoughts on same-store. But on the acquisition front, just number one, just on just cap rates or IRRs, just what are you guys seeing in the market and how that's trended? And we also noticed a lot of the JV transactions in the quarter. I guess, you still have over 100 assets in those JVs. Is there more incremental willingness to sort of sell or buy those assets out?

Nicholas Wibbenmeyer, CIO

Appreciate the question, Ronald. Let me start with your second question first, which is the joint venture side. The short answer is yes. I mean the assets we own, whether we own 100% or we own with partners, we're excited about owning them. And so where there's an opportunity with our partners to buy out their interest, we're constantly having those conversations. And where the stars align, we plan on taking advantage of that. We are obviously set up to transact quickly, and we're having those conversations on a very regular basis. So excited about the ones we were able to execute on last quarter. We can't perfectly predict when our partners want to exit the future. But again, we expect that to continue to be a pipeline on a go-forward basis. And then in terms of cap rates, I'll just reiterate the good news for us, given the development program we just spoke about based on Cooper's question is, I would just reiterate, we don't have to acquire assets to grow. But where we can find the opportunities to lean in, where they match our quality, match our future growth profile, and we could fund accretively, we're leaning in. And as you can see, that's led to over $0.5 billion of acquisitions this year. But that's becoming more difficult in this environment because there is capital flowing into our sector, no question about that. And so I would have told you last quarter, we'd probably be talking cap rates 5.5% to 6% on most core assets. Now from what we're seeing in the market, I would say it's more of the minus side on 5.5%. There's a lot of capital chasing these opportunities. And so we're going to continue to be true to our business plan, make sure we're investing our capital wisely, but also excited to see so many people finally waking up to understand how defensive and quality our NOI streams are.

Lisa Palmer, CEO

I would like to emphasize that we greatly value our long-term partners, and that commitment was recently demonstrated when Oregon invested additional capital in us. We've been able to continue acquiring assets in partnership with them, which shows that relationship is growing. We appreciate our long-term partnerships and often find ourselves as the best buyer when a partner wants to exit, creating opportunities for us.

Operator, Operator

Our next question comes from Sydney Rome with Barclays Bank.

Unknown Analyst, Analyst

I was wondering if you could give a little bit of color on what your expectations are for rent spreads and if you expect them to continue to be around this percentage or...

Alan Roth, CFO

Sydney, thank you for the question. Look, I'm really proud of the trajectory we have been on and how committed the team is to ensuring not just these elevated levels of rent spreads, but even more importantly, the GAAP spreads that we always talk about and the continued embedded rent steps. So I don't necessarily have a target on it per se. But what I would say is I look back at Q3 new shop leasing, 85% of our shop transactions had 3% or higher in terms of embedded rent steps and 25% of our new shops had 4% or higher. So the teams are really embracing that long-term sustainable approach with these embedded rent steps while on top of that, getting that 13% rent spread that you have seen. I will take as much as they are willing to give, and I just believe in this sort of supply-constrained environment, we have an opportunity to continue to lean in.

Operator, Operator

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Todd Thomas, Analyst

I just wanted to revisit the mid-3% same-property NOI comments. You said that that's the base rent component primarily, so contractual rent steps and cash re-leasing spreads. Do you expect a further contribution from the SNO pipeline in 2026? And can you also speak to what sort of contribution you might anticipate from redevelopment in '26? Is that going to be sort of a neutral impact year-over-year? Or do you still expect there to be some additional growth on top of that from redevelopment?

Michael Mas, CFO

Sure. Thanks, Todd. I'm happy to go into more detail here, but I'll save some specifics for our full plan presentation in February. To reach mid-3%, we will need to see an increase in occupancy. We believe there is still potential to improve our commenced occupancy percentage, which currently has a 200 basis point gap compared to the historical average of around 175 to 180 basis points. We are confident about narrowing this gap by 2026, which will contribute to the base rent growth I've mentioned. This also includes our redevelopment efforts. In 2025, our redevelopments positively impacted growth by over 100 basis points, and I expect this trend to continue into 2026. The focus is on absorbing space and improving commenced occupancy, with the rest of our growth coming from rent increases. Alan has effectively outlined our position in the marketplace regarding contractual rent steps and cash re-leasing spreads. I hope this information is helpful, and we will provide further insights on this outlook in February.

Operator, Operator

Our next question comes from Craig Mailman with Citi.

Craig Mailman, Analyst

Maybe just a 2-parter here. As we think about the breadcrumbs you laid out for next year for same-store and implicitly total NOI growth and maybe even FFO. Just looking at your same-store occupancy, you guys kind of ticked a little lower than where you peaked out at. Is there room to push that lease rate higher? Or are we going to close the gap to the historical spread by just commencing and you kind of are at the frictional level for that leased occupancy? And then just the second piece for Mike, I know you said 100 to 150 basis point drag from refinancing. Are you guys giving any consideration to putting some term loan debt in the stack, which is from what I'm hearing from some of your peers, pricing in the mid-4s, which would kind of compress that headwind a bit?

Alan Roth, CFO

Craig, it's Alan. I'll take the first part and let Mike color up the second part. I do believe that we can pierce through the occupancy of where we are. That 20 basis point drop this quarter really was attributable to the Rite Aid bankruptcy and us getting 10 Rite Aid spaces back in the quarter. But as we look at, again, as I think I said on one of the prior questions, strong demand, limited supply. I think there's certainly upside there. And I think what we'll probably see that come from largely is on the anchor front. We're at 98% leased. And as we look back at peak levels there and I look at the pipeline of deals that is in process right now for those anchor transactions, there's real opportunity there. And what is even further encouraging to me is when we look at kind of who those tenants are and Five Below, Barnes & Noble, HomeGoods, J. Crew Alta, there's just a whole lot of them that are out there that are materially engaged and just great operators that will be really fantastic adds to our portfolio.

Michael Mas, CFO

So hard pivot to the balance sheet, and I appreciate the question. Yes, we consider all forms of capital as we think about refinancing our obligations. And the 100 to 150 basis point impact on refinancing is a pretty wide range that we're sharing today largely because we're still considering what options we may take for 2026. The 2025 financing activity has already been executed. So we know what that impact is next year that the balance of our expectation will be driven on the solution we choose, term loans, converts, vanilla bond offerings, all of those are always considered by Regency. We will make the best decision at that point in time depending on the market conditions. Let me lastly say that with the credit position that we're in from an A-rated balance sheet and the extreme pricing we can achieve on just the vanilla bond offering with a 10-year term, I do think you squeeze out a lot of that potential opportunity that others may have as they consider their alternatives.

Operator, Operator

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

Juan Sanabria, Analyst

I have a two-part question. First, you mentioned a one million square foot pipeline in your remarks. Could you provide some historical context for that? Is it influenced by the anchor opportunities you've mentioned? Second, was there anything unusual regarding bad debt this quarter that contributed to growth? Do you expect any similar assumptions for 2026, considering you believe bad debt will be comparable next year to this year?

Alan Roth, CFO

Juan, I appreciate that question. The 1 million square feet is consistent with several previous quarters, reflecting the strength of the current environment. There is no significant imbalance between anchors and shops when we look back at the data. The pipeline is filled with great retailers, including some junior box players that we are engaging with. We are also involved in multiple transactions with brands like Warby Parker, Jersey Mike's, Mendocino Farms, Joe & the Juice, and many other excellent operators across the country. We emphasize qualifying the right operators, as merchandising is very important to us. We do not lease to just anyone. While I take pride in the 1 million square feet and the numbers in the pipeline, I am equally, if not more, proud of the quality of the retailers involved.

Michael Mas, CFO

Regarding the issue of bad debt, I believe you are referring to our uncollectible lease income line item. This quarter has been interesting because this line item reflects the collection rate from our cash basis tenants. We experienced higher collections from this group of tenants this quarter. In fact, we were able to collect on some receivables from tenants who had previously moved out and had been written off long ago. I want to commend the operations and legal teams for successfully pursuing these owed amounts, which contributed to this positive anomaly. Year-to-date, we are performing in the 20 to 25 basis point range for uncollectible lease income as a percentage of total revenues. Historically, we've mentioned that our averages are in the 40 to 50 basis point range. Therefore, we've been functioning at historical lows for a couple of years now. Our current tenant base is exceptionally healthy and thriving, and we believe this trend will carry into next year. We anticipate that uncollectible lease income will remain below our long-term historical averages in 2026.

Operator, Operator

Our next question comes from Michael Griffin with Evercore.

Michael Griffin, Analyst

On the developments, I'm curious if you can give us a sense of where you're underwriting rents, both for anchor and small shop versus where current rents are in the market? And then maybe stepping back more broadly, we've heard about this dearth of new supply in strip land. And clearly, Regency is a differentiator on the development side. I mean, I realize you don't want to give away all the secrets, but how are you all able to make the math pencil? Is it the land basis? Is it the proximity to population areas like these master planned communities? It just seems like you're able to make this work, whereas others out there in the market aren't able to.

Nicholas Wibbenmeyer, CIO

I appreciate your question, Michael. This is Nick. To address your second point, there's no secret strategy. It really comes down to a lot of hard work over many years that has positioned us where we are now. Our success is strongly tied to the relationships we've built. We maintain excellent partnerships with top grocers across the country. As an example, we're working with Whole Foods, H-E-B, Safeway, Publix, and Sprouts, and are currently redeveloping projects with Kroger. These relationships have been developed over decades. We also have the capital necessary, which we are strategically allocating as we discuss. We are fortunate to have strong free cash flow and a solid balance sheet that allows us to seize opportunities, and this is crucial for sellers to know that we are committed and have the capital available. Finally, it’s really about expertise and diligent work across all elements of our pro forma. Our experienced professionals are dedicated to refining every detail, from construction costs to underwriting, ensuring profitability. So while there’s no secret strategy, we take immense pride in our recent accomplishments and our outlook. While we face competition, particularly from local developers who are pushing us to improve daily, we are confident in our ability to secure opportunities. Regarding rents, you’re correct—there are two sides to every pro forma: costs, which we manage effectively, and income. Given our operational platform and our active leasing agents monitoring our developments, we are proud of our team’s skill in forecasting income for these projects. Internally, we emphasize not wanting to underperform while also not expecting to exceed expectations. We aim for our teams to grasp both aspects of the pro forma, and as you can see, we are exceeding expectations more often than not thanks to their excellent efforts.

Lisa Palmer, CEO

I really appreciate Nick's answer, but because he's so much more intimately involved, I think he just described the secret sauce. I wouldn't underestimate what that is because it's our team and the decades of experience and track record that have built those relationships. Nick is a part of that, so it's not something that's easily replicated.

Operator, Operator

Our next question comes from Haendel St. Juste with Mizuho.

Ravi Vaidya, Analyst

I'm Ravi Vaidya on the line for Haendel today. I wanted to ask about capital recycling. Can you offer more commentary on the decision to sell the asset in Miami? What was the competitive process like? Were there a number of bids? And was there anything in particular about the asset or the market itself that led to this decision?

Nicholas Wibbenmeyer, CIO

Ravi, I appreciate the question. I'll start again, just high level. Again, given where we're at from a capital standpoint, we don't have to sell anything, and we really like our portfolio. So I always start answering disposition questions with that. Now that being said, we're always looking at assets that we believe are nonstrategic. And they may be nonstrategic from a format perspective, which you've seen some of these smaller assets we sell at or nonstrategic from a future IRR perspective. We obviously have a future view of capital and income on these assets. And so the Miami asset would fit into that second bucket where our view of the future IRR didn't align from a strategic standpoint based on what we believe the market would pay for that asset because that market is in such high demand. And so yes, there was a deep pool of bidders that did allow us to drive pricing we thought was appropriate to transact and recycle that capital. And then I would just say, again, when you look at high level, we're selling just over $100 million of assets this year, just over a 5.5% cap rate. but we're buying over $500 million at a 6%. And so our capital recycling right now is accretive, not dilutive. And we're proud about that because we own such a great portfolio, we can take advantage where we feel like those stars align to exit an asset that we're not in love with from a future IRR and reinvest that capital in assets we think have high single-digit, if not double-digit IRRs.

Operator, Operator

Our next question comes from Wes Golladay with Baird.

Wesley Golladay, Analyst

I just want to go back to the developments. You're doing a lot more, it looks like this quarter with master planned communities or next to master planned communities. Are the grocers leading you there? Or are you putting more emphasis on being next to those projects? And then for a development start, are you still targeting around a 50% pre-lease level?

Nicholas Wibbenmeyer, CIO

Thank you for the questions, Wes. We are focusing on master planned communities, and our grocers are also targeting these areas. To be candid, master plan developers are approaching us. This aligns with my earlier point that having a high-quality grocery anchored shopping center is crucial for many of these projects. It's not just about finding a reliable retail partner for a top-tier development; it's also essential for them to know that we will own and operate the center for the long term. We appreciate the chance to collaborate with master plan developers and build mutually beneficial partnerships. In many cases, we've completed several transactions with the same developers, and I believe this trend will persist in our future projects, as evidenced by our recent success. I did not address the second part of your question.

Wesley Golladay, Analyst

Are you targeting pre-lease...

Nicholas Wibbenmeyer, CIO

Yes. The prelease, absolutely. Again, and when you talk about derisking, that's what we're also excited about in our development program is we really do derisk these assets. And so they're fully entitled. They're designed, they're bid. We have a real understanding of the visibility on the cost side. And to your point, they're tremendously pre-leased. And so the anchor is always in place. And so depending on the size of the anchor compared to the overall project, it's not always right at 50%, but it's a large portion of that NOI is guaranteed. But again, if you look at our in-process pipeline, the team is just doing a phenomenal job. I'll point to 2 projects where our anchors aren't even open, shops at Stonebridge, our Whole Foods-anchored project in Connecticut and Jordan Ranch, our H-E-B-anchored project in Houston. Neither of those anchors are open yet, and both of those projects are already over 90% leased. And so it just gives you, again, the sense of the demand in the market for these new projects we're building.

Operator, Operator

Our next question comes from Linda Tsai with Jefferies.

Linda Yu Tsai, Analyst

A 2-parter regarding your SNO pipeline. The 1 million square feet of leases in negotiation, any initial thoughts on how much that could further contribute to your SNO pipeline? And then with your SNO pipeline having compressed in 3Q, is the expectation that it continues to compress in '26?

Michael Mas, CFO

I'm happy to take this for Alan. Currently, we have a 200 basis points spread. Based on my earlier comments, I believe we have the potential to continue compressing that SNO pipeline into 2026. However, as Alan mentioned regarding our prospects for establishing new levels of percent lease, there is a possibility that we maintain or even expand that SNO pipeline. I hope this is helpful, Linda. As we normalize or stabilize our occupancy, I believe the discussions around SNO pipelines will diminish, and it will transition into regular leasing activity, where we are replacing a significant amount of GLA each year due to natural attrition—some of which is determined by the tenants themselves, and a lot driven by our leasing teams who aim to enhance the tenancy in our shopping centers.

Operator, Operator

Our next question comes from Mike Mueller with JPMorgan.

Michael Mueller, Analyst

I guess, Mike, what's prompting you to talk about '26 this early? Is it something looks off with the '26 estimates that are out there where you just don't want people to have sticker shock with the 3% to 3.5% same-store number after this year's great print? Or is it something else?

Michael Mas, CFO

Mike, I was a bit surprised by the question. It seems like we've consistently shared our outlook at this time of year. We need to consider the COVID period separately, as it changed many dynamics. We take pride in our ability to offer transparency about our future expectations, especially in this quarter. In the past, we held December Investor Days where we provided forward-looking guidance. We've integrated that practice with our Q3 results for a year or two now. I hope this is useful. I understand there may be a desire for more detailed information, and we look forward to sharing those details later. I'll leave it at that.

Operator, Operator

Our next question comes from Floris Van Dijkum with Ladenburg Thalman.

Floris Gerbrand Van Dijkum, Analyst

My question is sort of related to the occupancy. Obviously, you're 10 basis points off your peak in both leased and commenced. You've got a big pipeline coming up. There's not a whole lot more you can push in terms of your anchors. I mean, you did allude to the fact that it's 98% and your peak is probably closer to 99%. My question is partly related to your most valuable space, your shop space. How much more can you push occupancy in your shop? And maybe also talk about your renewal percentage today? And where do you see that trending going forward? It sounds like you think there might be more churn going forward as you keep raising rents, but curious to hear your comments.

Alan Roth, CFO

Floris, thank you for the 2-part question. I don't know maybe it's a trend here for us to always answer the second one first, just from a memory perspective. But the renewal retention, we've always hovered around 75-ish percent. And I am very comfortable with that number. It's an opportunity to retain exceptional retailers, and it's an opportunity to also infuse additional higher-quality merchandising and higher rents into the portfolio. So on the edges, sometimes it's 70%, sometimes it's 85%. But typically, we're in that 75%. And I'm really, really comfortable with that in terms of active and engaging leasing. And so you'll also find that from a new leasing perspective, we are leasing occupied space. We have a few tenants on our watch list that for some time, we've been thinking we are getting space back. We have leases sitting there executed waiting to get some of those spaces back. And so again, that's the proactive mindset. I'm not going to guide to a percentage per se in terms of where we ultimately can go, but we're going to continue to be creative. And one example I would give you is the fact that we are invoking some relocation provisions and leases to relocate a successful tenant that the community knows is there that's doing really well, such that they can occupy a perhaps more challenging space to us to lease on the market, which then unlocks the ability to lease their space, right? And so the team is out there, I think, really creatively doing everything they can to continue to still grow occupancy and pierce through that. And again, in this environment, I feel really comfortable and confident, coupled with the quality of our assets to continue to be able to do that.

Operator, Operator

Our next question comes from Paulina Rojas with Green Street Advisors.

Paulina Rojas-Schmidt, Analyst

So as it has been mentioned a few times, your commenced occupancy is near peak levels. When I look at your presentation, the last time your occupancy levels were this high was around 2014, 2018 when commenced occupancy actually stayed elevated for a long period. So I'm curious how does retailer sentiment today compare to that period? What similarities or difference are you seeing between then and now?

Lisa Palmer, CEO

I believe I heard you mention consumer sentiment. Is that related to retailer sentiment? The way I would address this is that a lot has changed over time, and retail is always evolving. After the Global Financial Crisis, there was considerable demand for new store growth. Then we experienced a dip during the retail apocalypse discussions and concerns over e-commerce impact on our business. When COVID hit, it really generated a renewed appreciation among our retailers for the importance of physical locations. Although they were pulling back on new store expansions from 2017 to 2019, the pandemic made them realize the value of those locations being close to their consumers. Simultaneously, consumers have also expressed a renewed appreciation for not just online shopping but for the experiences we offer at our centers, including our fresh look and curated selection of high-quality merchants. Since 2014, we've faced limited supply. We've had favorable conditions post-pandemic, with retailers recognizing the need for physical locations. We have been the only national development platform operating at scale for some time, and this limited supply works in our favor. As Alan mentioned repeatedly, he believes we can increase our commenced occupancy for all these reasons, and I have complete confidence in our team's ability to achieve that. So thank you all for your time with us today. And once again, I just want to give a shout out to the Regency team. Really proud of our results year-to-date. Thank you all.

Operator, Operator

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