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Weingarten Realty (NYSE:WRI)

Q4 2008 Earnings Call

February 23, 2009 11:00 am ET

Executives

Kristin Gandy – Director IR

Drew Alexander – President & CEO

Steve Richter – EVP & CFO

Robert Smith – SVP

Johnny Hendrix - EVP

Analysts

Michael Bilerman – Citigroup

Jeff Spector – UBS

Jay Habermann – Goldman Sachs

Lou Taylor – Deutsche Bank

David Fick – Stifel Nicolaus

Jeff Donnelly - Wachovia

Mike Mueller - JPMorgan

[David Williamton – McQuery Capital]

Karen Kemple – Hilliard Lyons

Chris Lucas - Robert W. Baird

Rich Moore - RBC Capital Markets

Jim Sullivan - Green Street

Peter St. Denis – Unspecified Company

Alex Baron – Agency Trading Group

Operator

Good morning at this time, I would like to welcome everyone to the Weingarten Realty fourth quarter 2008 earnings release conference call. (Operator Instructions) I would now like to turn the conference over to Kristin Gandy, Director of Investor Relations.

Kristin Gandy

Good morning and welcome to our fourth quarter 2008 conference call. Joining me today are Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President; Steve Richter, Executive Vice President and CFO; Robert Smith, Senior Vice President; and Joe Shafer, Vice President and Chief Accounting Officer.

As a reminder, certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.

Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company's SEC filings. Also during this conference call management may make reference to certain non-GAAP financial measures such as fund from operations or FFO, which we believe helps analysts and investors to better understand Weingarten’s operating results.

Reconciliation to this non-GAAP financial measure is available in our supplemental information packet located on our website.

I will now like to turn the call over to Drew.

Drew Alexander

Thank you Kristin and good morning to everyone, while the economy and credit markets have been an influence on Weingarten and its performance, I would like to reiterate that this is not the first time this management team has weathered an extremely difficult economic storm.

The average tenure of Weingarten’s senior management is 22 years of service just with our company. Our team has seen ups and downs and learn from each cycle. In mid to late 2007, we implemented action to prepare the company for weakening real estate fundamentals and some of the decisions we made in order to preserve our balance sheet were challenging to say the least.

Over the last 12 to 18 months we have reduced our staff on several occasions, minimized expenditures in our development program, and increased our liquidity position through the sale of common equity, new borrowings in the secure debt market, one-off property sales, and closing multiple new joint ventures.

Like many of our peers our fourth quarter results were impacted by market conditions and include a number of one-time items recorded in response to this challenging environment. Steve will provide more color on these items. Today we will discuss our fourth quarter and full year result, provide you with insight on what we think 2009 might look like, and continue the discussion of our liquidity provided in our last call.

Our existing portfolio of properties performed reasonably well considering the economic environment. Occupancy at year-end was 92.6% which was a decrease of 110 basis points from the prior quarter and when combined with the increased bad debt expense resulted in same property NOI decrease of four-tenths of a percent for the year.

With the softening of the new development market we remained focused on completing our existing pipeline specifically we stabilized a phase of a project this quarter in Florida, representing $13 million of our pro rata investment. Additionally in November, we entered into a joint venture with a subsidiary of Hines REIT, where they would acquire from us a 70% interest in a portfolio of 12 shopping centers.

The aggregate transaction price was approximately $271 million. The transaction closed on multiple days. To date we closed on 10 of the properties for approximately $228 million. The purchase of the remaining two properties will be closed upon finalization of their loan assumptions within the next 30 days.

In December this joint venture also completed a $100 million secured financing on the properties. I will now turn it over to Steve to review the financial results for the quarter and the full year.

Steve Richter

Thank Drew, we reported FFO of $0.14 per share for the fourth quarter, however after adjusting for all the non-recurring items that I will discuss in detail, FFO per share was $0.72 for the quarter. For the full year, reported FFO was $2.44 per share after adjusting for the unusual items FFO was $3.11, compared to $3.06 in 2007.

Turning to the various non-recurring items, the majority of which are also non-cash and related directly to the diminishing economy and the impact it is having on our retailers. We realize we have a number of unusual and one-time items this quarter and thus have summarized these on page five of our supplemental information package and a copy was also included in the press release.

After a thorough review of our portfolio we concluded that impairment was necessary on certain assets in our new development program. Therefore we recorded an impairment charge of $46.1 million net of taxes or $0.54 per share. This charge is non-cash and relates almost exclusively to land held for future development. Additionally in the fourth quarter we wrote off predevelopment costs of projects we no longer intend to pursue totaling $13.8 million or $0.16 per share.

For the full year we wrote off $16.8 million of predevelopments costs or $0.20 per share. These charges are also non-cash in nature. We have no remaining pursuit costs at risk on our balance sheet today. During the quarter we incurred severance costs related to our reduction in workforce totaling $1.5 million or $0.02 per share.

The workforce reduction involved management and staff level associates from across the company which in effect has reduced the overall number of associates by 20% from a high of about 500 associates during mid 2007. For the year severance costs totaled $2.4 million or $0.03 per share. Additionally the implemented a salary freeze on all officers and other highly compensated associates. Furthermore we have performed a thorough review focused on reducing our overhead in general.

Also effecting our overhead costs were losses on assets held in a grantor trust for the supplemental executive retirement plan which we discussed on our last quarterly call. These non-cash losses totaled $2.7 million or $0.03 per share for the quarter and $5.1 million or $0.06 per share for the year. Subsequent to year-end these assets were sold thereby eliminating future fluctuations in earnings.

We also previously reported non-cash charges related to the retirement of our preferred G shares of $0.02 per share earlier in the year and an additional $0.02 per share of unusual expenses from hurricane Ike. Lastly at various times during the fourth quarter we purchased $37.8 million in face amount of our 3.95% convertible debentures. This generated gains on the extinguishment of debt of $10.7 million or $0.13 per share during the quarter.

This was a use of liquidity but creates shareholder value with a very attractive yield of [put] date and currently assists with our 2011 maturities. Even though our 2009 and [2010] debt maturities are minimal in scope amounts we think it is prudent to address the heavier 2011 and beyond maturities.

Bottom line, after adjusting for these non-recurring mostly non-cash items we generated FFO for the quarter of $0.72 per share compared to $0.78 in the prior year. In late December we were served with a lawsuit alleging that we are in default under a completion guarantee on a shopping center in Denver, Colorado.

Currently the complaint costs for us to purchase bonds issued by a public redevelopment authority that funded public infrastructure in or around the shopping center totaling $97 million. We believe we are entitled to an extension under the completion guarantee through June, 2009 and will ultimately cap our commitment to purchase the bonds at no more then $48 million.

We have recorded a $41 million asset and contingent liability on the balance sheet for this potential obligation. The bonds are current as to their debt service and we are not in default. While there is no assurance as to the outcome of this lawsuit we believe we will prevail.

Debt maturities in 2009 and 2010 are $97 million and $128 million respectively. We feel these maturities are very manageable given our current liquidity position and our focus will be on maturities coming due during 2011 and beyond. During 2011 we have $537 million remaining in our 3.95% convertible bonds that if current market conditions continue we believe will be put to the company. In addition we have $200 million in unsecured public bonds and $103 million or normal debt retirements.

When one adds our revolving credit line which effectively expires in 2011 assuming we exercise our one-year extension option, these combined maturities total over $1 billion. We recognize that securing financings for debt maturities in 2011 will be a multi year process.

We believe that with the remaining capacity under our revolver, additional unsecured loans, the capacity to borrow against our unencumbered asset pool, and dispositions, we have more then adequate capital and liquidity to service our debt and operate the company until credit markets become more assessable.

In October we issued $100 million of common equity providing new liquidity. As Drew mentioned earlier in the fourth quarter we completed our latest joint venture with the Hines REIT. This transaction will provide $142 million of new liquidity and for 2008 our new joint ventures will provide $375 million of additional liquidity.

At quarter end we had $383 million available under our revolving lines of credit and are working with a major lender on a preliminary term sheet for an unsecured term loan in the $100 to $200 million range. We currently have over $400 million of assets on the market for sale, many of which have recently been added and we are pleased to report that $78 million are currently under contract. We are also working on a couple of additional proposed JVs including $100 million portfolio of an industrial asset that is currently in the market and another retail joint venture in the $200 to $300 million range that we expect will hit the market within the next several weeks.

Additionally we have letters of intent for well over $100 million in new loans with financial institutions regarding secured financings on our $2.7 billion of unencumbered operating properties at historical costs. The terms of these secured loans from the live companies generally have interest rates in the 7% to 7.5% range with seven to 10 year terms and 50% to 60% loan to value ratios.

For smaller secured loans with the regional and local banks we have been offered terms in the 6% to 6.5% range for five years or less. We are in preliminary discussions for additional commitments from both the live companies and regional and local banks.

The transactions outlined above total over $900 million in new and additional liquidity. We are pursuing every alternative and acting prudently utilizing a reasonable timeframe to position ourselves for whatever uncertainties the future might hold.

Now let’s move onto guidance for 2009, we believe FFO will be in the range of $2.30 to $2.60 per share. This includes gains from merchant development sales of $0.10 which even in this market we feel comfortable including. Our 2009 business plan anticipates same property NOI will be flat to down 2% for the year.

We expect new development completions of $100 to $130 million for 2009. Starting in 2009 we have the effect of the new accounting for convertible debentures which result in a non-cash increase in interest expense of $0.10 per share. One other item of note is that we expect to incur additional interest of $0.08 per share from the reduction of capitalized interest from the new development program.

This is primarily a result of reaching fair market value on several tracks of land held for future development and partially a decrease in development activity. Additionally we estimate the run rate for G&A expense to be about $36.5 million per quarter in 2009. In projecting our 2009 FFO, some [will want] to annualize the $0.72 for the fourth quarter that we provided in the supplemental as a 2009 run rate.

Please note that this was not a normalized fourth quarter but just identifies all the non-recurring one-time items. FFO for 2008 was $3.11. Adjusted for the non recurring items and if one breaks out the $0.10 for the convertible interest accounting changes that start in 2009, the $3.01 for 2008 would be comparable to the 2009 and using the midpoint of our guidance of $2.45 would result in a decrease of about $0.56 per share. This decrease comes from several factors including the full year effect of the 2008 dispositions of $0.20 and the additional interest cap of $0.08 I previously mentioned.

Also our 2009 business plan has another $0.18 of FFO reduction for dispositions in joint ventures I outlined above along with $0.06 of dilution from our equity offering last October. This reconciliation leave a reduction of $0.04 per share from further deterioration in operations and increased financing cost in 2009.

Our 2009 business plan improves our liquidity by about $275 million. This additional liquidity results in a reduction in our revolver which today is the cheapest cost of capital and does impact our 2009 FFO results.

I’d now like to turn the call over to Robert Smith to talk about our new development program.

Robert Smith

Thank you Steve, in the fourth quarter the company completed one significant development, Palm Coast Landing at Town Center Phase I, which is a 50% joint venture. This is a 359,000 square foot power center located in Palm Coast, Florida, and is anchored by a Super Target, Ross, TJ Maxx, Petsmart, Michaels, and Books a Million.

Our investment in this center totaled $13 million, produced a yield of 9.7% and has a current occupancy level in excess of 97% including tenant owned square footage. The good news in spite of the sinking national economy and the harsh leasing environment, is that we achieved completions of $146 million for the year exceeding our guidance of $110 to $130 million.

Likewise we were pleased that for the full year the company stabilized six projects with a total investment of $90 million and returns averaging 9.1%. Although we did not complete a merchant build transactions in the fourth quarter our merchant build efforts for the year contributed $0.09 of FFO per share after tax.

As mentioned in prior conversations the development and lease up of shopping centers lends itself very well to a phasing strategy. As a means of providing more clarity on the progress of our development program we have decided to formalize that approach and have elected to phase six of our larger properties as reflected in the supplemental report found on page 17.

We currently have 25 properties under development representing $471 million in total investment, upon completion at WRI’s share. We have invested $366 million with only $105 million to complete all of these properties, thus we were 78% funded as of the ended of 2008. From this pipeline we are projecting that five of our 25 projects will be stabilized by the end of 2009 representing an investment of $80 million at approximately a 9.1% ROI.

Our industrial team feels comfortable with the single industrial asset in this grouping and the four shopping centers are currently 92% leased including tenant owned square footage so this goal is certainly reachable.

As a reminder stabilization refers to that point in time when we have finished a phase or a project. Completions refers to the incremental amount of project investment that comes on line as leases commence over time. For 2009 we project $100 to $130 million in completions.

In conclusion we remain focused on finishing our current projects, which requires only $105 million of additional investment to complete, and although there are no new project starts planned for 2009 we have maintained a core group of development associates who’s capabilities and relationships keep us well positioned to be an open air center, development leader with the return of the development markets.

I will now turn the call over to Johnny to discuss our existing portfolio.

Johnny Hendrix

Thanks Robert, Weingarten’s operations are not immune to these recessionary times. But our portfolio is very resilient and as Drew mentioned earlier we’ve been through tough times before. I am confident we will remain a strong company. My confidence is primarily based on the strength of our properties.

Over 70% of our revenue is derived from shopping centers anchored by supermarkets. Our supermarkets average over $410 a square foot and generate over 15,000 customers a week. These customers also pass by the cleaners, tax preparers, quick service restaurants, and other retail tenants in these shopping centers.

These are the best retail properties to own in this environment. In addition we have a strong and well-diversified tenant list. You can see on page 14 of the supplemental most of our top 25 tenants sell groceries or discounted products and are in good shape. No tenant represents more then 2.2% of our revenue and the top 25 tenants represent less then 22%.

Consumers today are shopping for necessities and discounts and that’s what our tenants sell. While most of our tenants are strong, some retailers have not been able to cope with this recession. The most significant concern for our existing portfolio is the fall out of large boxes. At year-end occupancy was 92.6%. That breaks down to 93% for our retail portfolio and 91.6% for industrial.

This equates to a reduction of 110 basis points from the previous quarter and can primarily be attributed to the liquidation of Shoe Pavilion, Linens and Things, along with the termination of two Circuit City stores. These three tenants represented 332,000 square feet or 65% of the decline from the third quarter.

We expect a further reduction in occupancy as Circuit City and Goodies have both filed for liquidation. These two retailers represent 315,000 square feet and will account for further reductions in the occupancy of 67 basis points. [Reece] economists forecast that occupancy will drop below 90% during 2009 in the retail sector. While we don’t expect our occupancy to fall below 90% I would expect it to move around 90% by midyear and increase slightly through the balance of 2009.

During the fourth quarter we reviewed every tenant’s account and analyzed the likelihood that they would be able to pay the rent accrued through 2008. We believe it is prudent in today’s environment to calculate a much higher reserve as the likelihood of retail failure is greater. This resulted in over $3.5 million of bad debt write-off in the quarter.

Unlike some of our peers and this fact is important, Weingarten includes bad debt in same property NOI as we feel it gives a more precise representation of results. Consequently same property NOI for our retail properties was down 3.7% for the quarter. Industrial properties were down 1.6%. For the year we were down 0.4% company wide.

Note that if we calculated same property NOI without using bad debt, we would have reported a 0.9% increase for the year. As you know, same property NOI is not defined by GAAP and is subject to significantly different calculations within the REIT industry. To be clear our definition of same property NOI includes all properties we have owned for at least one year as of January 1, except for properties in various stages of a major remodel.

WRI’s current population of properties in our same property NOI calculation accounts for over 86% of our overall NOI and excludes only four properties in various stages of a major remodel. Our same property NOI calculation does include bad debt and accounting adjustments but we do not include lease termination fees and most importantly we are consistent with the application.

Concessions tend to be a hot topic in recessionary markets. While Weingarten has experienced tenants asking for concessions, the problem is manageable. We will entertain [if we] have a rate concession is a tenant demonstrates this will be the only way it can continue its lease and the reduction will be meaningful.

Our staff requires a full review of that tenant’s financials including sales, tax returns, and bank statements. We are also requiring non-economic concessions from the tenant in return like recapture agreements for elimination of options or other lease modifications which give us greater control of our space allowing us to benefit as the economy improves.

This procedure also tends to weed out tenants not really needing reductions. We may provide a concession if the tenant is in good standing and we truly believe some relief in rent will save their business. It is important to note these circumstances are not common. The number of concessions we have granted today has not been material.

I am pleased that even with the downturn in the economy our leasing activity remained good in the fourth quarter. We executed 125 new leases in the quarter with $6.2 million in annual base minimum rent. For 2008 we signed 584 new leases which is only five less then 2007 and represents $175,000 more in annual base minimum rent.

We have recently seen this velocity slowing as retailers continue to exercise caution opening new stores in this difficult economic climate. There are some retailers still expanding and they are primarily retailers offering necessities and discount prices. We are seeing activity from specialty supermarkets like Fresh and Easy, 99 Ranch, Sunflower, and Sprouts. We have recently signed leases or are working on transactions with all of these supermarkets.

Restaurants offering inexpensive family outings are growing, examples like Chinese buffets, sandwich shops, burger restaurants, pizza buffets, and other low cost Italian food restaurants. As I said earlier retails offering products at a discount are also expanding. We signed leases with City Trend, Dollar Tree, and two with Ross during the fourth quarter. We are also making good progress on our renewals for 2009.

To date we have renewed about 65% of our tenants who’s leases would have otherwise expired in the next 12 months. The average rent increase on these renewals is 10%. We have been able to maintain good rent spreads achieving a 9.3% increase on a GAAP basis for leases commencing in the fourth quarter. Leases signed and not commenced have a spread above a 9% increase.

I would look for leasing spreads to decrease as we sign new leases in 2009. Our budget estimates leasing spreads will increase 5% in 2009. In summary 2008 was a challenging year and I think we will experience a similar environment through 2009 but we have a very experienced and focused group of associates executing the basic fundamentals like cold calling, leasing space, collecting rent, and maintaining our centers every day.

I am confident that due to the quality of our shopping centers which are primarily anchored by supermarkets, our portfolio will continue to remain resilient.

I would now like to turn the call back to Drew.

Drew Alexander

Thank you Johnny, as I mentioned we all take comfort in the initiatives that have made this company strong for over 60 years through both good and difficult times. Weingarten has a truly superior management team, a diversified high quality portfolio that is strategically located in metropolitan areas and over 70% of our net operating income comes from shopping centers that have a supermarket component, the most recession resilient product type in our sector.

Some REITs have either reduced or have paid some of their normal dividends in common stock. We realize that the REIT model is a total return investment vehicle and shareholders have come to expect their quarterly cash dividend. Our Board did discuss a variety of options and made the decision to pay this quarter’s dividend in cash.

Using the midpoint of our 2009 FFO guidance of $2.45 per share, the $2.10 dividend if it were to be annualized represents an 86% pay out ratio. Going forward we would prefer to continue to pay our dividend in cash but these are unpredictable times and we will do what is in the best long-term interest of our shareholders.

Due to the level of our taxable income we do not have the ability to significantly reduce our dividend as has been seen by many other REITs. We are in a very challenging economic environment which is impacting our results in the short-term. In this environment we have kept our focus on leasing and maintaining the occupancy of our existing portfolio, completing our existing new development pipeline, deploying our capital wisely and on increasing our liquidity.

We all know that we will emerge from this recession. I feel this company is and will be extremely well positioned to perform well as we have great properties, people and basic operating practices. Before we turn to questions I want to remind everyone that Weingarten’s annual analyst and investor day is taking place on March 30 and 31 here in Houston. Before the tourist and Houston assets, the management team will discuss the 2009 strategy further, should anyone have any questions or need any logistical help please feel free to contact Kristin.

We are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Bilerman – Citigroup

Michael Bilerman – Citigroup

You talked about how not annualizing fourth quarter wouldn’t be the right methodology, that the $0.72 is really not a good core run rate and I’m just trying to understand why, what’s in $0.72 that may be propping up those results that wouldn’t continue as you move into 2009.

Steve Richter

There’s a bunch of issues that run through Q4, you have going both ways, you have the effect of the dispositions both in terms of one-offs as well as the JVs that are partial months in there. You have things like percentage rent is higher in Q4 then in other quarters. There is a host of issues in there that again we were not attempting to present that the $0.72 was normalized as a run rate as much as just trying to identify the non-recurring items.

Drew Alexander

I think as Steve mentioned in 2008 you have continuing into 2009 the full year effect of the dispositions, the full year effect of the joint ventures, the full year effect of the stock that we sold and as you turn to 2009 we anticipate a pretty significant deleveraging effort in the two joint ventures we talked about, some one-off dispositions, and the financings with insurance companies and others and the short-term effect of this is to pay down our revolver with is 1%. So to sell properties at cap rates in 8 to do secured loans at 7 and to use that money to pay down our revolver at one, is in the short-term very harmful to FFO growth.

Michael Bilerman – Citigroup

And that, effectively those efforts is what references the $0.18 of dilution that you’re talking about.

Drew Alexander

Correct.

Michael Bilerman – Citigroup

And that I assume is maybe a midyear convention so its really $0.36 on an annualized basis.

Steve Richter

It would be spread out throughout the year but assuming midyear for modeling purposes is a reasonable estimate.

Michael Bilerman – Citigroup

What did you assume on the $125 million of continuous equity program.

Drew Alexander

We haven’t officially assumed that. That was something we’ve had before and we decided to put back into place just to have belt and suspenders and different accesses to capital. Our main plan is to focus on both the sales, both in one-off dispositions as well as in joint ventures as well as in the financings.

Michael Bilerman – Citigroup

So that’s not in guidance.

Drew Alexander

That’s correct.

Michael Bilerman – Citigroup

On the land you have, $46 million, if I look at the land held for development on the, I think its about [inaudible], roughly similar to the quarter, I’m wondering if you can reconcile exactly where the write-down occurred and whether you’ve changed or moved any assets around.

Steve Richter

The impairment flows through in several different places, you can see on the P&L you have $52.5 million, there’s another $3.3 million that flows through the JV equity and real estate JV and partnership items, and then there’s a tax effect of about $9.7 million that nets down to the $46.1 million or the $0.54 per share. So that shows up in several different places. When you look at the balance sheet again most of that will hit the land held for future development line or property but you also have a piece that’s in the JVs as well.

Michael Bilerman – Citigroup

I guess it was more so on your disclosure on page six of the supplemental you have land held for development and then you have land under development, and the land held for development went up and the land under development went down by $70 million. We’re just trying to understand—

Drew Alexander

There were a movement of several properties out of land under development during the quarter to land held for development at which point in some cases it was impaired and other cases it wasn’t so there was a combination of two things. You move some costs into land held for development and then we impaired them.

Operator

Your next question comes from the line of Jeff Spector – UBS

Jeff Spector – UBS

Over the last couple of years one of the key strategies you implemented was to migrate NOI from the central region to higher growth markets. Do you still feel that this was a good decision.

Drew Alexander

I’d have to say yes. If you look at Florida and California, we have certainly had some issues there but they’re still also very strong and we think very well positioned for the future. Likewise the center part of the, our central region is increasingly Texas which is a market that we are very comfortable with and again we encourage you to come to the tour and everyone to get a better handle of things because the properties that we have, we do feel have very strong barriers to entry and are very good properties.

We are very comfortable with the footprint of the company. Obviously if we had perfect knowledge of the events and what was going to change we like a lot of people would make some decisions differently but Florida, California, Carolina, are and will be very good markets for us.

Jeff Spector – UBS

I guess then going forward are you going to try to be a little more aggressive in some of your core markets like Texas, you didn’t describe the properties that are included in your disposition plan but are you sticking with this current plan.

Drew Alexander

I think our plan is much more location specific. The by and large a lot of the dispositions are of older smaller properties and given the history of the company the majority of those properties especially by number tend to be in the center but that’s where a lot of the decision to sell a property has to do with size and in some cases the geography of accessing it. It is questionable if a company our size should involve itself in just small projects.

So that’s what drives a lot of the dispositions so these are good properties, they just don’t merit being in a company of this size. But it’s a very location driven strategy not, very bottom up not top down.

Operator

Your next question comes from the line of Jay Habermann – Goldman Sachs

Jay Habermann – Goldman Sachs

You have really pushed the merchant development as well as the geographic diversification and over time you’re not trading at roughly half the multiple of the peer group average, maybe specifically can you address this and just how this strategy might change going forward. I know Steve alluded to it in his focus on the balance sheet but it sounds like its more then that at this point.

Drew Alexander

I think the balance sheet is a lot of it. Merchant development is something that we’ve done some but we actually haven’t had nearly as much transaction income as some of our peers so we are, I don’t think its susceptible to the changes of that. The joint ventures and in creating assets under management of [fee] stream is and will continue to be, I would say we’re going to look to continue to acquire good properties in good markets with certainly a focus on both supermarkets and other discount oriented and other basic goods and services shopping centers.

I don’t think we see a major strategy change, more of a shift. We do think development will come back in a few years but it will be a while before that happens.

Jay Habermann – Goldman Sachs

Related to guidance, I think you talked about occupancy dipping to 90% and then picking up a bit in the second half of the year, can you give us some confidence as to why you see that trend picking up. It sounds like you could expect perhaps more fallouts, retailer bankruptcies as this weak economy persists.

Johnny Hendrix

One of the things that gives us some confidence is that we are having some success, some significant amount of interest in the boxes that fell out at the end of the quarter and even though we’ll see some more with Circuit City I just think that we will be able to lease some of those spaces, they probably won’t be able to commence until the fourth quarter or so.

Jay Habermann – Goldman Sachs

Can you give us some color on the asset sales, I think you talked about $400 million, how much of that is expected to fall in the current year or will be pushed maybe even to the next year.

Steve Richter

Well we wouldn’t anticipate probably a full $400 million that will actually close. If it’s a market where you’re having to put a lot of assets out there, our projections are somewhere in the $150 is what we would like to make sure that we get close in 2009 and in this market I’m hesitant to tell you how that falls throughout the year.

Having said that we’re [inaudible] as fast as we have and to the extent that we can get those done earlier in the year, that’s when it will occur, but in this market its kind of tough to predict at this point.

Jay Habermann – Goldman Sachs

And what sort of cap rates are you assuming.

Steve Richter

In the eight-ish percent range.

Operator

Your next question comes from the line of Lou Taylor – Deutsche Bank

Lou Taylor – Deutsche Bank

Along those same lines, in terms of the mortgages that you’re expecting to get done this year can you give us the dollar volume of what you think you’ll get done.

Steve Richter

We right now have a term sheet for a little over $100 million on one deal and I would tell you that we will look at doing another transaction say of comparable size as well. But we’re focused on the one that we currently have under term sheet right now to get closed.

Drew Alexander

We’re also talking to some, a number of different regional banks which is obviously a bit more labor intensive, and we’ll certainly take these things in sequence but I would think you could easily look at somewhere between $150 million to $300 maybe even more depending how things process.

Lou Taylor – Deutsche Bank

Is that from all the sources or just from the regional banks.

Drew Alexander

That’s assuming a couple of life insurance companies and some number of regional banks.

Lou Taylor – Deutsche Bank

And then the unsecured term loan is separate.

Drew Alexander

Yes.

Lou Taylor – Deutsche Bank

As it pertains to the development pipeline I know the spend is only about $105 million, do you have any flexibility to either delay or cancel any of those projects that, because you’ve got some delivery dates out to 2011 and 2012 or is that $105 pretty much locked in and you need to spend it.

Drew Alexander

I think most of it will be spent but it is something that we could see some further delays and deterioration. We have seen unusual circumstances where we’ve had leases signed with tenants that we have mutually decided it just makes sense to postpone building and that could continue to happen depending upon what the economy does.

Its part of why I think Johnny feels a little bit more comfortable that we will start to lease some space is the supply side on new development has come to a screeching halt and this has caused a lot of the tenants like the Ross’s who are still doing well to focus more on existing assets that are there so they can actually get deals done. And the rents are certainly cheaper so I think the development could, we could see a little bit of push out of that $105 million.

Operator

Your next question comes from the line of David Fick – Stifel Nicolaus

David Fick – Stifel Nicolaus

First an observation, it would seem that if you had provided a bit more detail on your guidance, your stock might not have been so weak this morning, just a few of the items that you explained especially related to interest charges and capitalization and the change in accounting would have been helpful I think. I’d like to ask about a continual equity offering plan you indicate it’s a belt and suspender strategy but first is it fair to say that you’re stock is trading below a fraction of what you would consider to be your net asset value and second if that’s the case, why would you consider any form of dilutive equity considering how strong your unsecured asset base is.

Drew Alexander

You’re exactly right, that we are well below NED, it is something we certainly don’t see doing a lot of if any and our absolute main focus is as we’ve discussed, raising assets, dealing with properties whether its selling them wholly, whether its joint venturing them or whether its financing them, that is absolutely our major focus.

David Fick – Stifel Nicolaus

But you would still consider executing this plan.

Drew Alexander

I would have to say we would consider it but its certainly not our major focus.

David Fick – Stifel Nicolaus

Have you noticed any differences in fundamental performance between your acquired assets over the last few years and your older portfolio.

Johnny Hendrix

Most of our older portfolio is in the central part of the US, primarily Texas, Louisiana. Those areas never reached the zenith that you saw in California and in Florida. They have not fallen as far but they never got as high either. I think generally Texas is in very good shape, the oil industry is certainly not as significant as it was in the 70’s and we have some pretty significant drivers, specifically in Houston with the port which is expanding, its going to add 32,000 new jobs, the medical center which is expanding is going to add 30,000 jobs, and I think that Texas is in good shape. The central part of the US is in good shape, just never got as high as the rest of the portfolio in Florida and California.

Operator

Your next question comes from the line of Jeff Donnelly - Wachovia

Jeff Donnelly - Wachovia

On the dispositions, specifically Hines REIT and I guess the asset [among] Louisiana, can you share with us pricing either per square foot or on a cap rate basis and then on the Hines piece how does the fee arrangement work for that joint venture and the secured debt you announced that you placed on the asset, was that recourse to either partner.

Drew Alexander

The cap rates on what see sold last year were in the 7’s, the Hines REIT has I would say a reasonable fee structure similar to what you see in other joint ventures, we get a property management fee, an asset management fee, and certain performance enhancements above some different hurdles. As you and I have discussed and as we’ve also discussed on this call, we don’t find the profitability of the fee streams to be as high as what gets talked about in the industry and certainly with a very strong company like Hines that insists upon a pretty thorough level of management that will be the case.

My own particular view is especially as we go through this downturn a lot of the institutions that are partnered with some of our peers will, the peers will either find out that they’re not as profitable or they’ll have some very disappointed partners so it is something that, to manage a midsize open air center, its not usually profitable at a 4 or 5% of revenue stream.

Steve Richter

The other question had to do with liability on the loan and we do have, it was not structured as using our balance sheet but we did guarantee that the deal, the life insurance company loan with the Hines for tax purposes to be able to defer some of the gain associated with that and that guarantee burns off over several years.

Jeff Donnelly - Wachovia

Pertaining just to leasing activity, certainly its rough out there but can you give us some more color on specifically with new leasing activity is like, I imagine the deals you announced, came in Q4 were really the result of probably contracts made in prior periods, so I’m curious what’s been the change in the number of maybe inbound inquiries around a small shop space and what sort of users are expanding in this market, are they locals, are they nationals, any color that you’re seeing in recent weeks and what we can draw from it for future quarters.

Johnny Hendrix

I will tell you that retailers are certainly harder and harder to come by. One of the things that I am seeing is is that the number of retailers that are successful in the markets that we’re in are migrating to our shopping centers from other locations. I think with this grocery store anchored centers as we have tenants fall out we do tend to get those smaller spaces released fairly quickly. It has been slower. We are also working on several initiatives looking at primarily medical uses that we may or may not have used before and we also are seeing a number of tenants that may not have been able to get into a shopping center in the past, moving into those centers today and I think you’re going to see more and more of that.

In terms of just the total numbers I think our leasing calls are down somewhere around 15%. And I think that our overall leasing velocity is down somewhere around 10%. We are doing a whole lot more cold calling then we have done in the past. We are executing some other marketing programs with direct mail and with the broker blast that you’d probably get a million of on your computer every day. And trying every avenue to find new tenants.

Operator

Your next question comes from the line of Mike Mueller - JPMorgan

Mike Mueller - JPMorgan

I wanted to just run over and summarize some of the moving parts in guidance that you touched on, I know you put some larger numbers out first but it doesn’t sound like all that may hit, are we correct in saying on the debt side for new capital raising the $100 million term loan plus $150 to $300 in new loans, in terms of asset sales I think you mentioned about $150 of wholly owned but in terms of the JVs you’re expecting all the JVs to close, or is that something comparable to putting $400 on the market but you only expect a portion to close.

Steve Richter

No we expect both of the JVs to close.

Mike Mueller - JPMorgan

And that would be selling call it a 70 or 80% interest.

Steve Richter

That’s correct.

Mike Mueller - JPMorgan

As you look forward to 2010 would you expect the pace of the net sales activity to slow some or would you expect that to continue in 2010.

Steve Richter

I wish my crystal ball was that clear. I would think we will continue to sell some assets in 2010 and not giving guidance on 2010 at this point, but the $150 million range is probably not a bad number.

Mike Mueller - JPMorgan

On the operations side, going from the 93% occupancy down to the trough of I think it was around 90% by midyear, can you talk about some of the components where the erosion is coming from, how much of it is Circuit City, how much of it is big box, how much mom’s and pop’s etc.

Johnny Hendrix

I think what I had said earlier was that Circuit City and Goodies is somewhere around 330,000 square feet on a pro rata basis so its about 65 basis points in occupancy. We are certainly looking at a list of tenants who could potentially fail primarily big boxes that would further reduce our occupancy. Which ones will go out I’m really not certain but I am pretty sure that we’ll see some more bankruptcies in the coming months.

Operator

Your next question comes from the line of [David Williamton – McQuery Capital]

[David Williamton – McQuery Capital]

You mentioned that you had bought some debt back in the quarter, I was just wondering if you’re still actively pursuing that right now currently.

Steve Richter

We’re always looking. Right now we have not purchased anything this year.

[David Williamton – McQuery Capital]

What’s types of discounts were you getting in the fourth quarter.

Steve Richter

We generally saw something in the, call it around the 70, 75, 73, 75 range.

[David Williamton – McQuery Capital]

And that’s a discount or that’s the—

Steve Richter

No that’s the base amount that we were purchasing on.

[David Williamton – McQuery Capital]

Can you just remind us where on the income statement that predevelopment write-off is at.

Drew Alexander

The predevelopment write-off about $12 million of it is in operating expenses, and then about $5 million is included in equity and earnings of joint ventures and partnerships and then you have a $3.5 million tax effect down on the income tax line.

Operator

Your next question comes from the line of Karen Kemple – Hilliard Lyons

Karen Kemple – Hilliard Lyons

At this point are you all looking for any non-traditional tenants to enter your properties.

Johnny Hendrix

Yes, I guess is the answer. We certainly, we talked a little bit about medical, depending on the shopping center, it could be some sort of kidney dialysis or some sort of clinic that we may not have done a year or two ago. Some of the shopping centers we may look at a call center or we may look at a large gym in place of one of the other tenants. So I think that we are searching high and low for tenants and some of them are non-traditional.

Karen Kemple – Hilliard Lyons

How much is their rent compared to a retailers rent, is it probably maybe 25% less or how would their rent rate compare.

Johnny Hendrix

I don’t know that there would be a number that you could say one way or the other. Some of them are actually much higher. We did an army recruiting office in a shopping center and the rent turned out to be significantly higher then what we had before. We did put some money in it but we were able to secure a 10-year lease so we felt pretty good about that. And there are some that are lower but generally office rents are higher then retail so we haven’t really seen a big decrease when we’re looking at medical.

Operator

Your next question comes from the line of Chris Lucas - Robert W. Baird

Chris Lucas - Robert W. Baird

On your goals for total capital raising for 2009 what’s the range that you’re looking at exclusive of any equity raise.

Steve Richter

How about as much as we can. No, I would probably tell you we’re in the, if you look at what the business plan actually has us completing and the way that we run the model is we run everything through the revolver and as we mentioned earlier that’s some of the negative effect on 2009 with that, but we wind up about $250 million net lower with the revolver.

Having said that we’re also re financing some assets so in total liquidity I would probably say somewhere in the $600, $700, $800 million range is what we would expect to achieve during 2009.

Chris Lucas - Robert W. Baird

And then the proceeds would be used for what, paying down the line and what else.

Steve Richter

Well, and when we’re re financing existing mortgages or debt it obviously is just a trade off but net in terms of what we expect to reduce our leverage or the revolver would be about $275 million.

Chris Lucas - Robert W. Baird

Just a point of clarification on the Circuit City leases did you take all of the bad debt expense that you would be writing off in the fourth quarter or are you going to be taking off more as the stores close.

Steve Richter

No we took it all in Q4.

Chris Lucas - Robert W. Baird

So what you have left with Circuit City is whatever revenue they’re paying you for the remaining stores that are open.

Steve Richter

That’s correct.

Chris Lucas - Robert W. Baird

On the dividend policy you talked about significant amount of taxable income, do you have a sense as to what the taxable income level might be for this year roughly range wise.

Drew Alexander

We think that we could reduce the dividend about $0.25 to $0.30 max. And again that’s based upon our business plan and predicting GAAP income or FFO is challenging but if you add in the tax issues and it becomes even more so, so that’s a soft number but that’s out best guess at this point.

Operator

Your next question comes from the line of Rich Moore - RBC Capital Markets

Rich Moore - RBC Capital Markets

I just want to understand real quick on a previous question, you’re saying that there’s $12 million of operating expense, non-cash, that won’t reoccur in the first quarter, right.

Drew Alexander

That’s correct.

Rich Moore - RBC Capital Markets

On the Hines venture, when did the properties close in the fourth quarter for purposes of NOI reduction.

Drew Alexander

I think it was right around—

Steve Richter

Call it mid November.

Rich Moore - RBC Capital Markets

Is there any contingent financing on that, any seller financing.

Steve Richter

No, the transaction, we closed initially the eight properties in the joint venture that did not have leverage on them, there were four that had existing debt that we have closed two of the assumptions, and in the meantime, in December we closed the live company loan, the $100 million and the proceeds all came back to the company for that and there’s two remaining properties left to be closed that again we’re waiting on the assumption process.

Drew Alexander

There was some but that’s where, when we closed that loan, that basically took it out.

Rich Moore - RBC Capital Markets

Okay I saw the [junk] of I think it was $67, $70 million in notes receivable on the balance sheet and I thought that might be some seller financing. We can talk about that later if that’s not what that is. As I recall I think you said last quarter that you had $3.4 billion of unencumbered assets at a 7.75 cap rate and now its—

Steve Richter

That was the total assets and that’s probably the best articulation, the difference between that and the 2.7 we’re quoting now is the 2.7 is actually real estate that we could go leverage as opposed to total assets.

Rich Moore - RBC Capital Markets

Okay so that wasn’t a case of raising the cap rate assumption at all.

Steve Richter

No, no, no its purely a matter of further refining exactly what’s available to be leveraged.

Operator

Your next question comes from the line of Jim Sullivan - Green Street

Jim Sullivan - Green Street

Given the challenging leasing environment what sort of differences in the terms or nature of new leases and aside from rent that are being signed today versus two years ago, are you seeing that could be more favorable for the tenant.

Johnny Hendrix

I think going forward we’re going to see more favorable rent for the tenants and I don’t think there’s any question about that. As far as lease terms, we have worked diligently to keep the lease terms as short as possible when we’re reducing the rent. I think you had asked about the allowances that tenants were getting during the last call and we really have not increased the tenant allowances at all on the tenants that we’ve been signing.

It is I think something to note though that if I’m paying $10 a square foot for a space the tenant is probably getting more because $10 buys a lot more construction today then it did a couple of years ago. I think in terms of some of the non-economic provisions the tenants might be able to negotiate more favorable terms but I don’t think its significant other then rent and we have tried to keep the terms as short as possible.

Jim Sullivan - Green Street

Shifting to the JV income statement it looks like operating expenses increased fairly dramatically in the fourth quarter, was that mostly bad debt expense, predevelopment write-offs or what was driving that.

Drew Alexander

The predevelopment write-offs primarily are recorded on the operating expense line.

Jim Sullivan - Green Street

Okay so in terms of the operating performance of the joint venture properties relative to the core portfolio, its roughly similar then.

Drew Alexander

Yes, they’re down a little bit from quarter to quarter but probably in line with the rest of the portfolio.

Operator

Your next question comes from the line of Peter St. Denis – Unspecified Company

Peter St. Denis – Unspecified Company

How big of a deal can you get done right now and perhaps how many deals have fallen through.

Drew Alexander

What kind of deal?

Peter St. Denis – Unspecified Company

JVs, asset sales, what’s the biggest deal you think you can get done.

Drew Alexander

I think on an asset sale we could get down whatever we want, most JVs make sense because of dealing with single pension funds in the $200 to $250 million range given the typical investment committee size at the different institutions. So if you go beyond that you get into club deals which can, are certainly feasible but can be a little more complicated.

Johnny Hendrix

On the on off dispositions, we’re seeing more activity in that $10 to $12 million price point for dispositions and I think that’s local entrepreneurs with a local bank believing they have a good deal. Institutions, the other REITs are pretty much out of the market today.

Peter St. Denis – Unspecified Company

How many deals have fallen through for you.

Johnny Hendrix

Individual one offs?

Peter St. Denis – Unspecified Company

Yes.

Johnny Hendrix

Quite a few, we had a close ratio of somewhere around 80% of contracts that we had signed in 2007 and it was probably closer to 50% in 2008. No deal is done until its done.

Operator

Your next question comes from the line of Alex Baron – Agency Trading Group

Alex Baron – Agency Trading Group

I wanted to ask you the occupancy you report, leased or physical and is there a big difference between the two.

Johnny Hendrix

The occupancy we report is the leased occupancy and generally we’re 150 to 200 basis points spread between the signed and commenced.

Alex Baron – Agency Trading Group

In terms of other large boxes that might be, that you are thinking about in terms of first quarter drop, does that include a Mervin’s, or a Hobby Lobby or something like that.

Johnny Hendrix

Certainly I have no inkling that’s there’s any issue with Hobby Lobby. As I recall they don’t have much debt at all. Of course we don’t have any more Mervin’s leases. We had one Mervin’s lease and it is included in our current occupancy that it was, it is a lease that, the store is guaranteed by—

Drew Alexander

We have rent from [Macerich]. When you go through our top 25 tenants on page 14 of the supplemental I think we are in pretty good shape but one does see some names that are talked about that we’re very focused on as well as we have a very diversified portfolio but there are some other folks that we’re paying very close attention to.

Operator

Your next question is a follow-up from the line of Jeff Donnelly - Wachovia

Jeff Donnelly - Wachovia

On the industrial portfolio I know it’s a small piece of the whole pie, but historically changes in occupancy there have been pretty lumpy are you able to get us out of, ahead of any issues that you might see in 2009 either because there’s specific tenants that concern you or there’s just industry exposure there.

Drew Alexander

I think from an industry perspective we’re in good shape. There is as you say some lumpiness and there is a big space that leases up over the next several months that its unclear what will happen there but as you say, its not really very much money, its just more it does effect the percentage of occupancy.

But from what we can see the way we’ve diversified the industrial portfolio and the joint ventures we have there, it’s a pretty good tenant lineup.

Jeff Donnelly - Wachovia

On the development pipeline, are you able to quantify where your current yield would be today as it is currently leased and as it relates to the stabilization dates you’re now projecting were those changed dates the result of a specific view on the market or leasing or even construction loan maturities or is really just your best guess at this point.

Drew Alexander

I think its very much an estimate. I think its very much an estimate in terms of pushing things out and as we said we feel very comfortable that the 2009 stabilizations will be achieved because we’re basically almost there. And beyond that it does get a little murkier and consequently the beyond that return on a current basis wouldn’t be that favorable because you just don’t have that many tenants in place. Likewise its not that much investment either.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Kristin Gandy

Once again thank you for participating in today’s call and as Drew mentioned the property tour will be taking place March 30 and if you have any questions or need logistical assistance, please feel free to contact me.

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