Regency Centers Corporation Q3 2009 Earnings Call Transcript

Oct.30.09 | About: Regency Centers (REG)

Regency Centers Corporation (REC) Q3 2009 Earnings Call October 30, 2009 2:00 PM ET

Executives

Brian Smith – President & CIO

Martin Stein – CEO

Bruce Johnson – EVP & CFO

Mary Lou Fiala – COO

Chris Leavitt – SVP & Treasurer

Jamie Shelton – VP Real Estate Accounting

Lisa Palmer – SVP Capital Markets

Analysts

Christie McElroy – UBS

Michael Bilerman - Citigroup

Nathan Isbee - Stifel Nicolaus

Samir Khanal – Morgan Stanley

Ian Wiseman - ISI Group

Jeffrey Donnelly - Wells Fargo

Craig Schmidt - Bank of America Merrill Lynch

Michael Mueller - JPMorgan

Jim Sullivan - Green Street Advisors

Jay Habermann - Goldman, Sachs

Christopher Lucas - Robert W. Baird

Samit Parikh - Oppenheimer

David Fick - Stifel Nicolaus

Ryan Levinson – PSM

[Alex Barrett – Agency Trading Group]

[Chris Summers – Green Light Capital]

Operator

Good afternoon. At this time, I would like to welcome everyone to the Regency Centers Corporation third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Lisa Palmer, Senior Vice President Capital Markets.

Lisa Palmer

Good afternoon. On the call this afternoon are Martin Stein, Chairman and CEO; Mary Lou Fiala, Vice Chairman and COO; Bruce Johnson, CFO; Brian Smith, President and Chief Investment Officer; Chris Leavitt, Senior Vice President and Treasurer; and Jamie Shelton, Vice President of Real Estate Accounting.

Before we start, I first want to be sure that everybody on the phone know that even though I have a dog named [Jeeter], I am a true blue or red Phillies fan. Seriously, before we start, I'd like to address forward-looking statements that maybe addressed on the call.

Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes, and results may differ materially from those expressed in these forward-looking statements.

Please refer to the documents filed by Regency Centers Corporation with the SEC. Specifically, the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

Bruce Johnson

Thank you Lisa, recurring FFO per share for the third quarter was $0.70 which was within the guidance that we provided last quarter. We’ve begun reporting recurring FFO to provide more clarity and to aid in future projections.

Obviously our attempt at clarity created some confusion. However hopefully this additional disclosure will prove helpful in the future. During the quarter Regency recognized an impairment charge of $103 million related to land and operating properties held for sale.

After these impairment charges and other non-recurring items FFO per share for the third quarter was negative $0.58 per share. I would like to comment on the company’s impairment policy. In accordance with GAAP assets held for long-term investment are carried at depreciated costs unless a triggering event or changes in circumstances indicate that the carrying amount may not be recoverable.

Such events include but are not limited to, decisions to sell properties, the probability of future development or sale of land held, as well as material changes to leasing assumptions in our in-process portfolio.

Of the 11 land investments that we impaired this past quarter the most significant occurred on the Murrieta Marketplace and Petaluma projects. Last quarter we postponed the construction of Murrieta Marketplace when Target announced that although it had closed on the purchase of its pad and we had commenced site work, this location was under review.

In the last 30 days Target notified us that they are postponing this location until 2014 putting Lowe’s lease at risk of cancellation and delaying the time and the future cash flows. The result was a $36 million impairment.

During the third quarter the uncertainty of entitlements and Target’s approval altered the probability and timing of development at Petaluma resulting in a $27 million impairment. After the write-down Regency’s new basis in the 504 acres is $123 million or an average of $5.60 per square foot.

Earlier this week Regency finalized the formation of a new co-investment partnership with USAA and simultaneously sold seven Regency shopping centers to the partnership with an eight center that will close within 30 days.

The net proceeds to Regency will be $104 million. Regency’s ownership in the USAA partnership will be 20% and the company will maintain property and asset management responsibilities. Prior to closing the USAA partnership locked rein on a seven-year interest only mortgage at 6.8%.

The transaction was sized to balance the dilutive impact of the dispositions while creating a partnership with enough critical mass to enable Regency to have an additional reliable source of external capital to fund potential opportunities.

Let me give you our view on the status of our receivables and reserves, we are comfortable with our policy and the adequacy of reserves. The reserves have been increased by more than $2.2 million and more then cover 100% of all accounts receivable greater then 60 days.

Fourth quarter FFO per share is expected to be in the range of $0.63 to $0.68. This includes nearly $5 million of severance charges not previously included in full year guidance. Recurring FFO per share for the quarter is expected to be $0.54 to $0.59.

For the full year of 2009 recurring FFO per share is projected to be in the range of $2.63 to $2.68. Because we did not provide recurring FFO guidance last quarter we placed a reconciliation on our website for your review.

Looking forward to 2010 based on preliminary projections and operating environment that remains uncertain while we expect to experience a more modest decline in same property NOI as we feel the full year impacts of lower occupancy and pressures on rents it will be nearly offset by increases in non same store NOI.

We will continue to incur a higher interest expense and G&A as the result of lower capitalization combined with the dilutive impact from the April equity offering.

Mary Lou Fiala

Thank you Bruce, we’re nearing the closing of one of the most challenging years for retailers in memory. The recession of 2009 shocked the consumer and the retailer into a state of paralysis and self preservation.

Retailers closed stores, reduced inventories, and cut staff, while consumers stopped spending and increased savings. And although results may hover along the bottom for a while there are signs of recovery on the horizon.

Consumer confidence has risen from its floor, retailers are emerging as smaller, healthier companies that are better equipped for the current economic environment. And a number of Regency’s [PCI] tenants are continuing to expand and some are planning to open more then 50 and in some cases more then 100 stores next year, including Panera Bread, Great Clips, Chick-fil-A, Panda Express, Massage Envy, TJX, and Petco.

And even Subway which is in kind of a league of its own right now looks like they’re going to open 1,200 locations next year. And grocers, specifically Kroger and Publix are continuing to expand at a healthy clip.

On the flip side, small shop mom and pops are still having difficulty obtaining financing and many are struggling to survive. Although allocating some of the TARP money to local business banks if it occurs should help.

The stronger operators are surviving and we’re capitalizing on the opportunity to relocate these retailers into our centers by mapping out our needs and increasing our marketing efforts to attract the best local retailers.

So we joined the National Franchise Association and we’re using media outlets like Twitter to communicate to our retailers and we’re cold calling the top local tenants especially in weaker competitive centers.

These operators recognize the benefits of being in centers with stronger anchors. Over 80% of our centers are anchored by market-leading grocers producing annual sales of $25 million or $490 per square foot. And so far this strategy has proven successful.

For example, Bikeline, a regional bike store with 14 locations in the Philadelphia area upgraded to our Gateway Shopping Center anchored by a Trader Joe’s and expanded their space to 3,200 square feet. And another local operator located a 3,500 square foot business to the Shoppes at Fairhope Village have recently completed development anchored by Publix from an unanchored center just a few miles north.

And in summary I’m encouraged by some of the positive signs that we’re beginning to see especially the signing of 1.4 million square feet of new leases and renewals in the third quarter. The change in activity beginning in June, since June is rather dramatic and since then we’ve averaged 46 new leases per month which is comparable to last year and represents an increase of nearly 60% from the level earlier this year.

Brian Smith

Thank you Mary Lou, our operating portfolio was 93.2% leased at the end of the third quarter, up 20 basis points from the second quarter. This was mainly due to the disposition of Kingsdale, a property that was 43% leased.

The sale of this asset increased the percentage of lease space by 50 basis points and offset the net decrease in occupancy. We continue to experience pressure on rents particularly in Virginia, California, and Florida.

It does feel like in most markets rents are at or approaching the bottom. When we compare today’s rents with rents on the leases that expire during the next few years, it appears there is minimal if any, downside in the overall portfolio.

I do want to point out that we are managing our rental rate declines such that the most significant negative spreads are found in the 160 leases signed year to date with terms of 12 months or less. Keeping the lease terms short allows us to work with good tenants in difficult times without locking us into long-term rents based on current economic flows which is the right way to run the business.

Conversely longer term leases, those with terms greater then three years are being signed with the stronger retailers. These longer term leases represent 60% of all the leasing activity year to date and the rent spreads associated with these leases are essentially flat.

Simply stated, we are keep our big rent declines to very short-term leases. As Mary Lou mentioned the pick up in leasing activity needs to be highlighted. In fact for the operating portfolio the third quarter was the best quarter of leasing that we’ve enjoyed since the first quarter of 2008.

We leased or renewed 1.4 million square feet of space in the third quarter and 3.8 million square feet of space year to date. Similar to last quarter, the majority of these deals are small shops averaging 3,400 square feet.

By category, food and restaurants make up the majority of these new leases. I also want to mention the continued success of our PCI program. The renewal rate of our PCI tenants is 88% compared to 69% for non-PCI and we’re actually seeing positive rent growth from the PCI tenants.

As we move out troubled tenants, we are backfilling those spaces with strong operators who have survived and even thrived in spite of the economy. For example a mattress store on a pad recently requested rent relief but we had little confidence in the tenant’s outlook.

We refused that request, moved out the tenant, and replaced it with Sonic, a big upgrade in quality. Furthermore as Mary Lou stated we continue to receive interest from tenants currently located in inferior competitive locations looking to upgrade to a center with thriving anchor sales.

I’d like to turn now to an important step we are taking to right size the organization and enable the company to more effectively achieve its key objectives. We are reorganizing by moving from a functional structure with separate operations and investment groups, to one that is more regionally focused and market oriented.

The managing directors Jim Thompson, John Delatour, and Mac Chandler are responsible for all aspects of the business. Each is extremely experienced in all aspects of real estate operations. Reporting to these managing directors will be market officers who will have hands on responsibility for the asset management and leasing functions.

This move creates the structure and the incentives for our very best and most experienced people to work more closely in partnership, utilizing their combined talent, judgment, experience, and relationships to meet the needs of the operating and in-process portfolios.

We believe there are many other benefits to this structure. More experienced professionals will be involved in less management and more direct negotiations as a result of a flatter organization. We will operate in the field as one team, bringing together the best talent within the operations and investment groups.

The people with development expertise will no longer focus exclusively on external developments but will look within our own portfolio for opportunities to grow same store NOI. It creates a leaner and meaner organization without taking away needed muscle in the critical parts of the business especially leasing.

It allows us to right size our development teams while retaining a core competency that will be vital to responding to the myriad opportunities likely to present themselves whether they be internal or external value add candidates.

The move to our greater efficiency without compromising effectiveness translates into long-term cost savings as we significantly cut back on staffing retaining only the best talent. Upon completion of this reorganization, we will have reduced the size of the organization by approximately 30% with the development group having been reduced by more then 75%.

The overall reduction in staffing is already translated to a $43 million cost savings in direct salaries and benefits over the two year period beginning 2008. As a result of lower capitalization and severance charges however net G&A in 2009 is expected to be $4.5 to $5 million higher then in 2008.

As you are aware delayed anchor openings slow progress on leasing, lower rents, and prices on out parcel sales have significantly impacted development returns and values. At the same time we made some notable achievements in the in-process portfolio during the third quarter.

The grocers in our newly opened projects are doing extremely well. The sales at Whole Foods in Santa Barbara have been so high that they have asked us not to proceed on a planned out parcel building and instead allow them to lease the ground related to this building for much needed additional parking.

The Publix at Shoppes at Fairhope had the second strongest store opening in company history. Similar success stories were reported by [inaudible] and by [King Super]. We began construction on Seminole Shoppes, a relocation of an existing Publix store that is generating sales of over $920 per square foot in a [dense and fill] market with average annual household incomes of over $80,000.

Construction bids came in 25% below budget and rents appear stronger then anticipated suggesting that we could potentially outperform projected returns. This will be a typical prototype of our ground up development in the future.

Strong grocery anchor with limited shop space in dense markets with strong demographics. In closing while its been a quarter of mixed results and continuing challenges, I am excited about the future particularly the reorganization which should allow us to better respond to the demands of the industry.

Martin Stein

Thank you Brian, 12 months ago we all knew that given the capital market’s crisis and the deteriorating economy we were in for an extremely arduous journey. Today a year into that journey it has become evident that the economy has fallen farther and the related adverse impacts on the fundamentals of the shopping center business have been more severe then we anticipated.

In spite of the unfavorable conditions Regency has achieved several noteworthy accomplishments. The strength in our balance sheet and its obvious that the capital markets have thawed, one of the pleasant surprises and several linings more then been anticipated, by successfully tapping the institutional investor, common equity, sale and mortgage markets to raise nearly $640 million of capital.

We are projecting that we will have over $250 million of cash and not a penny outstanding on our line of credit at the end of 2009. CalPERS purchase of a 65% interest in our co-investment partnership eliminated the refinance risk associated with the maturing CMBS debt in that portfolio. \

Furthermore an option to increase our ownership in that portfolio is one of the best opportunities that I’ve seen in my career. As Bruce said the average basis on approximately 500 acres of land held for development is now $5.60 per square foot and most of the parcels have real anchor interest, are entitled, and offer good prospects for development in the future.

And as Mary Lou and Brian have said in one of the toughest leasing environments in memory we signed nearly 1.1 million square feet of new leases and 2.7 million square of renewals. Finally I believe that there will be substantial benefits from the new organizational plan beyond the significant savings in gross G&A cost.

The new organizational structure will enable the team to more effectively and efficiently achieve our strategic goals and operational objectives, increase accountability and allow for more personal management of our portfolio.

While there are many indications that the economy has either hit or is close to the bottom, I and the management team have no allusions that due to lower levels of consumer spending and a likelihood of future job losses, when we do start to experience a recovery and we will, it will most likely be a fragile, fragile, and gradual one in which we are going to be operating in for several years.

Not unmindful of the obvious challenges that we are facing, I am confident that during the next several years Regency will successfully execute the following key strategies. First and foremost we will preserve and grow net operating income by increasing rent paying occupancy in our operating and development portfolios minimizing any further rent roll downs and there’s a huge amount of imbedded growth to be harvested from increasing occupancy to 95%.

While we have $250 million of cash on hand, no outstanding balance on the line, a strong balance sheet, manageable debt maturities, and access to external sources of capital, we would like to further enhance the key ratios when it makes sense to do so.

The bank lines will continue to be managed as a short-term source of capital. We will utilize our market presence and lender relationship to take advantage of investment opportunities when they arise at attractive pricings that are accretive to earnings and to NAV.

In that regard as soon as we have completed the review of the final 2010 budgets and we’re comfortable with the expected future performance of the portfolio we will exercise our option to purchase MCW’s interest.

In spite of recent setbacks in our development program, development remains an important differentiating core competency that will enable Regency to create future value albeit on a more selective and modest scale and with more focus on [end fill], internal redevelopments, and distressed opportunities.

Most important of all we will preserve our special culture and engage and motivate our newly organized team which in my view is second to none in the industry. In closing the reset button has been pushed and values, rents, and NOI have returned to where they were several years ago.

The management team and I are undaunted by the challenge of building on what will hopefully be the bottoming of the economy next year. I sincerely believe that Regency has all the critical ingredients to begin to grow earnings and intrinsic value again taking Regency back to a high performance level.

Before the call is turned over for Q&A, I want to vary from the script a bit. As everyone knows Mary Lou will be retiring as Regency’s COO at the end of the year and this will be her last participation on Regency’s investor calls.

So Mary Lou on behalf of Regency’s customers, shareholders and 400 employees, I would like to take a moment to express our sincere gratitude and appreciation for the fabulous contribution you have made to Regency’s success.

You are the shopping center industry’s leading expert on the retail business. As evidenced by Regency’s PCI program you’re an innovator. You’re and intensely focused, [inaudible] leader. People manager extraordinaire. Mentor to many. Wonderful Chief Operating Officer. Value added partner. Inspiration to all who know you. And how you’ve balanced a successful career with your love and devotion to family and you’re a special friend.

The last 10 years you’ve [blessed] Regency in your role as a top executive and we now look forward to continuing to receive your insights as one of Regency’s Directors and especially through our ongoing friendship. We thank you.

Mary Lou Fiala

Thank you Martin, I’d like to take a moment to thank all of you for the last 10 years, over 10 years that we’ve had. I can’t tell you how great I feel about leaving this team and the operating portfolios in the hands of Brian Smith.

And I continue to have overwhelming confidence in Martin’s strong leadership and vision for the future direction of our company. Bruce has been a valuable partner to me and I know that he’ll continue to be with Brian as well. And Martin, Brian, and Bruce have been not only wonderful colleagues, but dear friends over the year.

I believe that Lisa Palmer’s capital markets expertise is the strongest in the industry and her experience and leadership skills make her a valuable mentor and role model to both men and women in our company as well as the industry.

And the entire team has just done a wonderful job to help all of us. The operations groups has been tested this year and the challenges have made them stronger and better equipped to manage our portfolio. And I can tell you I am generally excited about the company’s new organization, allowing for increased focus and attention to our portfolio, more accountability and more importantly, utilizing our development expertise to redevelop and revitalize our older centers.

This is an untapped resource for us that’s already proven to have great value. And I’m also looking forward to my new role on the Board that I’ll be able to maintain the relationships that have been built over the years and continue to be a useful resource for Martin, Brian, and Bruce and the entire team.

I want to thank you for the faith you’ve had in Regency, the partnerships that we formed, and I’m confident that the changes that Brian outlined today will produce future earnings growth. Bruce I think you have a few things that you want to add. Thank you all.

Bruce Johnson

Thank you Mary Lou, I’d like to make a correction with respect to some of my comments regarding recurring FFO. Unfortunately I misstated the numbers. So for recurring FFO per share for the fourth quarter is expected to be $0.53 to $0.58, and for the full year of 2009, recurring FFO per share is projected to be in the range of $2.59 to $2.64.

These ranges tie to the guidance in our supplemental. At this time we’ll entertain questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Christie McElroy – UBS

Christie McElroy – UBS

Just following up on that comment about your recurring FFO guidance, you’ve got it going from $0.69 in Q3 to let’s call it $0.56 at the mid point in Q4. I know $0.06 of that are the severance charges, but can you just help me reconcile that difference as it relates to which transaction profits you’re considering recurring versus non-recurring and is some of that downside in core given that your occupancy guidance suggests that you see a potential for declines in the quarter.

Bruce Johnson

First of all, no transaction profits would be in recurring, or severance charges.

Christie McElroy – UBS

No transaction profits at all.

Bruce Johnson

Or severance charges.

Christie McElroy – UBS

Okay so how, its going from $0.69 down to call it $0.56, can you just reconcile that difference.

Bruce Johnson

Just roughly I think NOI is going to be about $6 million, $3.5 million of that relates to one-time related to our insurance cap that we recognized in the third quarter. And then you’ve got primarily term fees that we’re getting that amount to almost another $2 million, from term fees in the development as well as the same store portfolio, which accounts for the majority of that $6 million.

Much of its in a seasonality basis and then if you look at the asset management fees and from our JV’s that amounts to another $2 million effectively.

Christie McElroy – UBS

So none of that is core, kind of your occupancy—

Bruce Johnson

Its all core, it’s the difference between the two in terms of reduced fees that relate to our asset management fee reductions as well as, Chris was there a [promote] in there as well.

Chris Leavitt

No promote. What we had was we’ve experienced a decline in the over portfolio values that are the basis of the asset management fee calculations. In the third quarter there was a recalculation in the asset management fee through a negotiation with Macquarie that it caught up the fee based on the values prior to the GRI acquisition and revaluation of that portfolio.

And that added about $900,000 of asset management fees to the third quarter that don’t reoccur in the fourth quarter. On top of that we have significantly higher leasing commissions that are recurring on a quarter to quarter basis and we’ve reduced those expectedly some commissions by about $700,000 in the fourth quarter.

So that makes up the combined lower fee income that we consider to be recurring fee income for the fourth quarter roughly $1.8 million.

Bruce Johnson

Recurring basically we had no development profits, no major transaction fees, no severance costs, and no impairments. Those are the major components of--

Chris Leavitt

And one thing I’ll add on the NOI comments Bruce made is although we’re lower as it relates to our insurance profits in the fourth quarter we collect those profits routinely in the third quarter of every year and if you look back historically you’ll see the same spike in that line item in the third quarter by about the same amount.

Christie McElroy – UBS

On the development schedule, I noticed the new disclosure this three year yield, I’m just wondering if you can say what exactly that means and how it compares to the NOI yield that’s your partner participation, because you’ve got at 5.4 versus 7.6.

Lisa Palmer

Actually I think we’re going to try to clarify that a little further, the three year yield is basically its our definition of when we move properties from in process into the operating portfolio. So what, footnoted on that schedule that it is the earlier of three years from the last anchor opening or four years from site work and so what we’re trying to show is that when we do move these properties into our operating portfolio that’s the return we’ll be achieving at that time.

And then the final, the NOI yield after partners participation is when we lease it up. And its just that in the environment with the delayed leasing, typically they would have been the same because we would have been moving it into the operating portfolio when it was 95% leased, but we’re moving it in when they’re slightly lower leased.

I think what we’re going to provide or what we will provide to you to help clarify that further to when that occurs is maybe the date of that three year yield actually occurs.

Christie McElroy – UBS

That would be really helpful because I’m just looking at Shoppes at Highland Village, its 2.84% is that the current yield.

Lisa Palmer

No that’s the three year yield. So that says that when, I think that date is sometime in 2011 if I remember correctly. So that would be four years from when we started construction we’re going to move that, it may even be as early as 2010, we’ll move it into the operating portfolio and at the time that we do that, that’s the expected return.

Bruce Johnson

And that reflects as does every other return whether it be at stabilized or on a three year basis our current projected returns and what we’re assuming that even though it hasn’t occurred yet, that and other properties wherever we expect to see rent roll downs we’ve already incorporated those into the returns.

Chris Leavitt

There’s about $8.3 million of roll downs related to Highland Village alone just in 2010, 2012.

Operator

Your next question comes from the line of Michael Bilerman - Citigroup

Michael Bilerman - Citigroup

I think you mentioned that for the short-term leasing you were doing in the portfolio that the rental spreads were much weaker, versus just your longer term leases, could you maybe out of the leasing that you did in the period could you breakout what the short-term leasing was and give us some understanding of what the spreads were on that short-term leasing versus your longer term leasing.

Brian Smith

Yes we broke it down for less then 12 months and year to date that rent growth was about negative 13% and represented about 15% of the deals. From 13 to 36 months it was about negative 7% and that represented about 25% of the deals and as I mentioned from 37 up, it was 60% of the transactions and it was pretty flat. It was about minus 0.6.

And all together those will give you the negative 3.6% rent growth year to date.

Michael Bilerman - Citigroup

And then I think you made the comment that the next year you saw minimal downside, does that infer that we can expect to see flat growth for next year outside of the new leases.

Brian Smith

Yes, I wouldn’t say it would be necessary flat, but let me explain what we did. What we did was we took an analysis of all the leases that expiring over the next two, three years and we looked at what those rental rates are, and we did that for both retailers smaller then 10,000 square feet and we did it for those greater then 10,000 square feet.

Then we went back and looked at 2009 leasing to date and figured that’s a reasonable proxy for what market rental rates are. And when we did that we found that on the shop tenants we were actually, the expiring leases would have been slightly above market, not very much at all. So there would be a little bit of room, I think there’s like 3.5% roll down from those.

And then on the anchors when you did it that way, it looked like they were actually significantly below market which would allow for substantial rent growth. Now the problem is the, it was such a small sample set with the anchors what we then did is we went back and we talked to all the people in the field, asked them what they thought the rental rates were for the anchors when those specific leases renewed and it was pretty flat.

So when you put it all together I’d say that our belief and what we were looking for in doing that was, is there significant risk that there’s going to be additional rent roll down and the answer to that is no. So where we see it coming I’d say somewhere from flat to slightly negative.

Lisa Palmer

I’ll just add that we provide the lease expiration schedule in our supplemental that when you look at the anchor rents and you see that they might be low many of the tenants have options. And so it may seem that there’s some upside, but in many of those cases we will won’t be able to capitalize on that even if market rents are higher then that.

Martin Stein

And the key underlying assumption, and this obviously varies by market, the key underlying assumption here is that rental rates have stabilized, are close to a floor, it kind of feels that way but we’re still in a, with unemployment increasing, there’s obviously some risk on the other side.

Michael Bilerman - Citigroup

And just to clarify that [13%] down, that was a year to date number I think, what was it for the third quarter.

Lisa Palmer

I believe it was negative 7.4%.

Michael Bilerman - Citigroup

This is for the short-term stuff. So I’m just wondering whether it got worse in the third quarter or whether you were doing more of it in the third quarter versus the earlier part of the year.

Brian Smith

We don’t have that. When we started taking a look at that, its not as dramatic as year to date. We rather wanted to focus on the longer term data if you will then just the short quarter.

Martin Stein

So you got a better representation.

Operator

Your next question comes from the line of Nathan Isbee - Stifel Nicolaus

Nathan Isbee - Stifel Nicolaus

First of all Mary Lou I wanted to wish you the best, last quarter and I can appreciate that you’re talking about leasing velocity picking up, but last quarter you talked about the small shop tenants who just stopped paying rent. Could you just talk a little bit more about that. Has that continued.

Bruce Johnson

I think really things haven’t changed a lot. I think it is the same, what’s interesting, Brian indicated I think that the restaurants we were doing more deals with the restaurants but we’re losing, more move outs with restaurants then any other category as well.

So its still the same kind of environment that they’re having and tenants if they don’t, they just finally give up at the end of the day. So I’m not sure that’s changed a lot. I think the biggest change we’ve seen is the change in activity on the leasing side and specifically new leases.

Mary Lou Fiala

I would agree, I think that as far tenants’ inability to pay its been pretty consistent for the past couple of quarters and I think its still going to be difficult unless some financing opens up to some of these people that they’re just not going to be able to pay it, which is all incorporated into all of our plans.

I think the other thing is is that in terms of rent relief requests, if you look at—

Brian Smith

The rent relief requests are way down. If you look at what we have gotten this quarter, its about 50% less then the rent relief requests from last quarter and about 75% lower then what they were in the first quarter so they’re down dramatically.

Nathan Isbee - Stifel Nicolaus

And as a follow-up, have you seen any of those that have stopped in June, have you seen any of them reverse course and start paying again, have you seen any of them recover.

Bruce Johnson

There’s probably some of that but not a lot. What we see happen sometimes is they see that they be a threat of being starting legal proceedings against them, and then they’ll send us a check.

Brian Smith

We did have an example, we took one tenant all the way through to litigation and got a judgment against them for $50,000 and then it was national retailer and then that national retailer showed up with a check. So obviously people are pressing us and testing us and in this case we took them to the matt and got where we needed to be.

Nathan Isbee - Stifel Nicolaus

And then the new co-investment partnership that you formed, I’m just curious given your somewhat negative experience this year with the Macquarie JV, your whole thoughts about as acquisition opportunities present themselves over the next year or two why you would go that route to acquire versus acquiring on balance sheet and funding with new equity.

Martin Stein

Once again what it gives us is is multiple sources and it makes sense to acquire on balance sheet, we have no obligation to do that. To the extent it may not make sense to acquire on balance sheet we can do it in the partnership. So it gives us tremendous amount of flexibility and in addition to the extent there’s a huge opportunity, we’ve got our partnership with CalPERS, we’ve got our partnership now with USAA, so we think its, and we also wanted to mention, as I stated, we wanted to minimum size the things as Bruce indicated to give us enough critical mass to do what we wanted to do, [pertaining] to opportunities in the future.

And I think to be honest with you our experience with our MCW partnership, I think that number one they’ve been great partners. They did have some financial issues but to be able to bring in CalPERS as a partner which strengthened MCW but also we got a great partner there who wants to continue to expand and I think given the option that we’ve got and any fees and promotes that Regency’s been paid, that’s been a very favorable experience for Regency.

Nathan Isbee - Stifel Nicolaus

Let me ask it different, if you had a $250, $500 million portfolio come to you today, are you more likely to do it on balance sheet or off.

Martin Stein

Our preference would be to do that on balance sheet depending on that making sense, and if we could, especially if we could do that in a way to where we could combine that with an opportunity to enhance our balance sheet. But that may or may not be available to us, especially in the uncertain environment that we’re in. That would certainly be our preference.

Operator

Your next question comes from the line of Samir Khanal – Morgan Stanley

Samir Khanal – Morgan Stanley

Just wondering about your thoughts on retailer bankruptcies and store closings going forward and can you give us some sort of update on your exposure to the movie rental retailers given the accelerated closings on that side.

Brian Smith

We’ve got obviously the two big ones there, you’ve got Blockbuster and you’ve got the Hollywood Video one, Blockbuster we have 71 locations not counting the new Neptune Beach one and our exposure, we found out there that they’re probably going to be looking to close about 12 of their units over 2010 and 2011.

We’ve already got seven of those closures built into our plan so there’s not much to worry about there. We looked at the rent for those expiring leases. The 12 spaces that we would lose on a pro rata basis about $1.1 million worth of risk and we think that we can release those at almost the same rent.

Remember we’ve always said that that’s some of our best space in the center. So we’re forecasting right now that the releasing rents would be about 1.5% less. Hollywood Video, we’ve got 17 of those in our portfolio, one of those they’ve already committed to continue to pay rent, the other 16 they are negotiating with us if you will.

We think its mostly a rent relief play. Again if you look at our opportunities what to do with that space, we’ve looked at them space by space and if we were to do what Hollywood wants to do there’d be about a $4.20 per square foot roll down which translated into about $200,000 of pro rata rent reduction.

If we were to release those spaces we think there’d be a minimal reduction, maybe $0.50 $0.60 or about $28,000 pro rata impact. So the Blockbuster is real, there are 12, they just notified us about that yesterday. As I said we’ve got most of that baked into our plan and then with regard to Hollywood we think its more of a rent negotiation play.

Samir Khanal – Morgan Stanley

And just in terms of cap rates, do you think we’re getting closer to price discovery for shopping centers and where do you see cap rates for assets in the coastal area versus the interior market.

Brian Smith

Well what’s changed this quarter is that the A quality grocery anchor centers and the kind of markets you’re talking about, the coastal markets, the urban markets, just the A quality markets, we’ve probably seen a 25 to 50 basis point decrease in that. There is a lot of capital out there chasing the highest quality grocery anchor centers.

For example here in Jacksonville there is a Publix anchor center and it just went to market and got 36 bids, 20 of which are going to best and final, and that one will probably settle out at about an 8.0% cap rate.

So we think the core high quality grocery anchor centers have fallen from maybe 8.5 to the low 8’s. Everything else pretty much starts with a 9 after that if you’ve got a community center, if you’ve got grocery anchored in the secondary tertiary market or if you got B or C quality properties, you’re probably talking 9.

The biggest difference being those kind of properties its going to be very difficult to get financing and a lot of seller financing is required for those. So really positive outlook if you’re looking at dispositions of A quality properties, not so good if you’re looking at B or C.

Operator

Your next question comes from the line of Ian Wiseman - ISI Group

Ian Wiseman - ISI Group

Just to clarify I think last June you discussed how your development and you did no further leasing, you would be yielding about 6%, maybe I just misunderstand this three year yield but what has dropped, what’s changed in the drop down to 5.4%.

Bruce Johnson

You mean from 6% to 5.4%.

Ian Wiseman - ISI Group

You said I think in June that if you did [nothing] your development yields would be about 6% so it just looks like that keeps slipping, I wonder whether its tenants pulling out or something has changed.

Brian Smith

On the current returns which we were talking about before, there’s really not much change. In fact they’ve gone up. I don’t remember what the exact number is, its—

Martin Stein

So the question is June of—

Lisa Palmer

I think what you’re confusing is that some of those three year yields could be early 2010 and so we may have a lease in place, but not rent paying yet and its not expected to be rent paying until later in 2010. So they’re really different numbers. The current yield is what we referred to is that there’s no further leasing, which hasn’t changed very much.

Brian Smith

I think there’s been very little change in that regard.

Lisa Palmer

It’s all a matter of how much lag there is between rent commencement from lease execution say and in some cases there’s a pretty lengthy amount of time.

Ian Wiseman - ISI Group

Staying on this development question, but if you look across the $3 billion of real estate that you have developed, let’s say since about 2000 and I would say that you’ve targeted 9 to 10% returns, I’m not sure you’ve done the math but where would your development portfolio be yielding today.

Martin Stein

2010.

Ian Wiseman - ISI Group

I’m saying since 2000 you’ve done about $3 billion of development, you’ve always targeted 9 to 10% stabilized returns, I’m just wondering in the properties that you have delivered to date, what would the current yield on those developments be.

Martin Stein

Its interesting, one thing, one number that I can tell you is we’ve recognized since 2000 $300 million worth of recognized profits and that does include, that just includes what we’ve sold, and that doesn’t include what’s unrealized.

Lisa Palmer

We don’t have it handy here in the room.

Ian Wiseman - ISI Group

But what would you say that if you were targeting 9’s today, they’re really just 7’s.

Martin Stein

We went through a period from about 2000 to 2007 where everything we started and delivered was in the 9.5 to 10.5% range. Not everything but on average. And its been this, we’ve still got—

Lisa Palmer

All of our completed developments are currently yielding about 10.2.

Brian Smith

I was going to say we had a slide, in the company presentation that talked about what the returns were on like it was like 121 properties was underwritten at 10.3 and delivered at 10.2.

Martin Stein

A substantial amount of value creation and realization unfortunately we’ve given a large amount of it back.

Ian Wiseman - ISI Group

And just housekeeping, your other operating expenses spiked in the quarter to $3.2 million, what is the run rate on a go forward basis, and what was the cause of the spike.

Bruce Johnson

I think its real estate taxes primarily but again—

Ian Wiseman - ISI Group

We have a separate line item for real estate taxes, I just wonder what’s in that other operating expenses/income.

Martin Stein

There was some more snow removal this year.

Bruce Johnson

You’re talking specifically third quarter aren’t you.

Ian Wiseman - ISI Group

Yes.

Chris Leavitt

Our utilities were up significantly. Snow removal was up significantly.

Ian Wiseman - ISI Group

Okay so is that a, should temper that on a go forward basis then, is that fair to say.

Bruce Johnson

Yes, I would temper that on a go forward basis.

Chris Leavitt

I would say to you that if you were to average the last three quarters, that would be a better comparison, comparative run rate going forward.

Operator

Your next question comes from the line of Jeffrey Donnelly - Wells Fargo

Jeffrey Donnelly - Wells Fargo

Mary Lou it goes without saying that you will be sorely missed, and Lisa I’m a Red Sox fan and for his safety and mine, I could never name by dog Jeeter. I’m curious, I’m not sure if you’re able to talk about it but looking out you’ve got about 2.2 million square feet of anchor expirations coming in 2011, 2012. I noticed a little bit of a ways off but it’s a little more then twice the volume of expirations you have in just about any other year that’s rolling, I guess I’m curious given the realities of the junior anchor market that’s out there right now, how are you thinking about retention, approaching those tenants for renewals, how should we be thinking about rents as we come up on those maybe in 2010.

Brian Smith

I think that it goes a little bit to what I was saying before is if you look at, we’ve gone through a lot of the, in the next two, three years, those anchors that are expiring and looked at their rates and again a lot of those did have options and looked at what we think the current market is and we just don’t see that there’s that much of a roll down.

It is a tougher environment on one hand, there’s a lot of space out there in the market and the anchors have enjoyed some pretty good leverage. But what I will say too is that they want to be in the centers more then ever that are generating the top sales. I’ll give you an example.

We have a property in Southern California in the Inland Empire, Falcon Ridge, and they are one of the national apparel guys who’s probably the toughest you can deal with who’s on a co-tenancy situation and they came to us at the expiration of the co-tenancy and said we want to renegotiate a lower rent.

We’ll we knew they were doing well, they were generating the sales and we just said no to that and they’re staying and they’re paying full rent. So I guess I feel while it may be a challenge, its going to be okay. The other thing is the age of the centers makes a big difference and a lot of those are expiring.

Those leases are significantly older and especially with the anchors since they have long-terms and the leases were set, the lease rates were set many, many years ago. The places where we will see the biggest challenges will be those, just like in his report this quarter, the markets that enjoyed the highest rental rate growth. California we did more of the big boxes. We enjoyed the highest rates and there, Florida, and DC is likely to be the place where you see the biggest roll downs.

Lisa Palmer

I just happened to have the analysis that Brian referred to earlier right in front of me in terms of how we looked at the next three years of expiring rents, and we have it broken down by anchors. Even though we’re showing I think its north of 2.2 million square feet of anchor rent expiring through 2012, all but 400,000 of that have options.

And we show with the [inaudible] expiring average base rent, take 2012 for example, its $9.64. We’ve estimated that current rents, actually be a dollar north of that. But again a lot of those have options so we’re not going to be able to really realize that full potential.

Brian Smith

One thing I want to point out too is if you kind of look at right now, I’d say let’s hope that this is about as dark as it gets, and we’ve got two situations we could talk about where we’ve got a lot of anchor activity. In Southern California we’ve got our Granada Hills redevelopment and there we’ve got a vacant or will be vacant Steinmart and we’ve got the old [Ralph] space.

And we’ve got six retailers competing for that. We’ve got 20 boxes in total and if you look at the leases that we’re working on right now, those [LOI’s] that we would experience 9% rent growth. And sometimes rent growth doesn’t tell the whole story. For example in the Bay Area, we’ve got, we’re doing leases with anchors, again the toughest apparel national guys, $19.00 whereas in most markets they’re single-digits.

Now those are lower then they were but I think its still indicative of pretty strong centers.

Jeffrey Donnelly - Wells Fargo

Concerning cash rents, the declines have certainly been significant thus far and we’ve seen that around the country, I guess I’m trying to figure out I guess I’ll call it temporary or lasting the declines have been and maybe you can separate it this way but when you look at your markets around the country how much of that decline do you think is a function of a condition of over supply of space in the market versus just weakness in retailer sales and profitability and their ability to pay the market rents. I guess 51 is maybe a more lasting condition then ones more temporary. Are you able to break that out for call it anchors versus small shop.

Brian Smith

With the anchors we think a lot of it is temporary which is exactly why we’re doing the short-term leases because we think that things will improve there and we do not want to be locked in for a long period of time. I think for the anchors, do you have a feel on that one Mary Lou.

Mary Lou Fiala

Yes, I think for the most part it is a bit of both. So there’s no doubt about it. But most of our centers are located, they’re older centers, they’re in dense markets, better incomes, and I think right now its less of a supply and demand issue and more of negative comp store sales, wanting rent relief, doing what they can to try to survive through this.

Which is why we’ve had greater negative growth. We’ve taken the approach of the fact that with these tenants that we think are strong tenants that we’re going to go ahead and for 12 months give them rent relief knowing that as things turn around and if in fact it’s an operator that we believe in that we will then be able to go back and continue to get nice rent growth.

And we think this is the right way as Brian said in his comments to run the business. And so it looks, definitely that in the short-term we have lower rent growth, in the long-term I think it’s a winning strategy.

Brian Smith

One of the things we’re doing to again to give you a little bit of color on it, we have, the retailers are also telling us especially small shops that they think its temporary. We have a center in Virginia Beach and there was a small restaurant there, really great restaurant in the market and they were interested in going to one of our centers and they were going to put a lot of dollars into the space to get their restaurant going but they just said in the short-term we’re worried about sales.

We’d like to come there. If you could help us out in the short-term, we’ll make it back up to you. And in that case we signed the lease that was about 51% negative rent growth but it was in a center, the space had been vacant for four years. We’ve put them in there. We’ve structured the lease so that within three years those rent steps go back up 50%.

So I think it just goes to the mindset of the retailers in this case which is its temporary.

Operator

Your next question comes from the line of Craig Schmidt - Bank of America Merrill Lynch

Craig Schmidt - Bank of America Merrill Lynch

First I just wanted to say to Mary Lou the whole REIT team here hopes you have a happy retirement and I would ask you if you were travelling but I don’t want to lose a question.

Mary Lou Fiala

Thank you so much and after this call you can, we can talk and I’ll be glad to give the whole deal. And its not a question.

Craig Schmidt - Bank of America Merrill Lynch

The question I did have though is in the past year, how many of the anchors that would have owned their own space have postponed store openings like the Target in Murrieta.

Brian Smith

Well the only ones that I can think of that is really postponed is Target, some of the others have pushed out their, some of them were co-tenancy situations that were tied for example to, at our Deer Springs project we had Home Depot and we had several anchors who were tied to its opening so they may have been pushed out a quarter.

But Home Depot is opening I think next month and everybody opens with them but the only one that has said we’re just not going forward with this was the Target at Murrieta.

Craig Schmidt - Bank of America Merrill Lynch

But do they have, I assume they have that right then. They can just, they own their own pad.

Brian Smith

Well that’s the problem is when you do, when they buy their own pad, they demand a lot more in the way of, now we have some rights in those cases where if they terminate and they don’t proceed we can also buy the pad back but that’s not what we want to do in this market right now.

Operator

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

Michael Mueller - JPMorgan

I want to go back to a prior question on the Q3 to Q4 reconciliation, just think I’m missing something here, I want to see the moving parts again. I think you mentioned it was about $5 million of lower NOI which is about $0.06 a share, couple of million of lower fees which is maybe $0.02 a share or something, that’s about 8 out of the $0.14 to $0.15 drop off and I’m not sure if you mentioned what the—

Bruce Johnson

You’ve also got the impact of the USAA transaction which is effectively two months, $104 million, eight and three quarters.

Michael Mueller - JPMorgan

Okay and that’s a couple of cents on top of that. So that’s probably 10 or 11. Anything else in there.

Bruce Johnson

I think that covers the differential. I think—

Lisa Palmer

That’s gets it to the high end of the guidance and something beyond that would just be potential further move outs. We just don’t know.

Bruce Johnson

That’s probably what you missed and I didn’t mention it to Christie when she asked the question.

Michael Mueller - JPMorgan

Okay, and then looking at the development page and I don’t believe this was touched upon earlier, the yield on the in place portfolio dropped it looks like 30, 40 basis points, somewhere in there this quarter, was there anything in particular that was driving that or was it just a little bit here and there.

Brian Smith

Are you talking about the 7.58% yield.

Michael Mueller - JPMorgan

Yes.

Brian Smith

Actually on an apples to apples basis the change was only one basis point. As we always have with these there’s, we move some properties in we move some out, some stabilize so but if you look at just the same properties, its just a one basis point difference.

Operator

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

Jim Sullivan - Green Street Advisors

Just had a quick question related to a prior question, you mentioned looking at some opportunistic acquisitions or possibly if you were to do a deal you’d look to do it on balance sheet as opposed to in a joint venture just curious are any of your joint venture partners currently expressing any interest to you to do more deals.

Martin Stein

Yes, USAA would have loved to have done double, triple, quadruple the size of this partnership. They would have done it for $500 million.

Bruce Johnson

I would CalSTRS and CalPERS are in the same position, both have expressed an interest in expanding.

Jim Sullivan - Green Street Advisors

So then in terms of your flexibility of doing it on balance sheet versus doing it in these partnerships, I know before you had a capital allocation process where you worked on sort of a rotation basis, is that still what it would be going forward.

Martin Stein

We have no requirements with CalPERS or with USAA. We do with the [open end] fund but I don’t think in CalSTRS in Oregon, but Oregon is fully invested, CalSTRS is only five lines.

Operator

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

Jay Habermann - Goldman, Sachs

Just given that you’re doing more deals on a shorter term basis, could you speak maybe to the down side in occupancy this could result in over the next 12 months given that retailers in general still seem to be pretty cautious and then also how are rents on these deals being negotiated.

Brian Smith

Well mostly short-term leases that they’re being done again are being done at our behest. They’re not being done because they want the space long-term. We don’t want to tie up, tie ourselves up by doing rents based on the current distress in the economy and the market, and have that continue to burden us for many years to come.

So I don’t see that as an issue. Leasing hasn’t been the problem for us whatsoever. As I mentioned this has been the best leasing quarter in, since the first quarter of 2008. What’s been dragging on us would be the move outs. And so I guess, I would probably answer it by saying what’s going to happen with the move outs going forward, there’s some unknowns.

None of us know what’s going to happen in terms of bankruptcies but we’re going to see our move outs continue. In the past we used to average about 1.5 million square feet. This year we’re going to be a little over 2 million square feet. We think that will settle down next year to maybe back to 1.8, 1.85 million as we start moving some of these problem tenants out.

So right now we are in the process of evicting those that are kind of our deadbeats. That’s going to take time. Some of the states are just very difficult to work with. But that will cause us to probably continue to drift a little bit lower and then bottom out.

Mary Lou Fiala

Just to add to what Brian said, is if you look at our tenants that we’ve done these 12 month leases with its primarily if you remember when we talked about rent relief requests and how we did it, we looked at their balance sheet. They had to come up with a business plan. We really looked at, do we see that they’re viable tenants. So the question is do we see a big risk in terms of decline in occupancy with these people that we’ve structures these leases.

No we don’t see a big risk and I think Brian addressed the rest of your question.

Brian Smith

You did ask something about the rents and how things are structured, there’s really for the most part no difference between our TI’s, they’re very close to what they have been. They’re very reasonable. We’re not buying it up. We’re not giving free rent. There is some creativity that goes on out there. I mentioned the one where we got 50% rent growth over the next three years.

We’ve also got a situation out in Maryland where we’ve got one of our centers where the anchor went dark and we convinced a retailer to go in there, a good retailer, and we set the rent low but as soon as we get an anchor tenant in there, that rent bumps up pretty significantly.

So doing some creative things like that.

Jay Habermann - Goldman, Sachs

You mentioned Virginia, California, Florida, as some of your weaker markets, is that where the bulk of the shorter term deals are occurring and I guess can you give us some sense of the magnitude maybe in some of your worst effected markets.

Brian Smith

I don’t have the breakout of the short-term leases in terms of what market those are in, we could get that for you but I don’t have that.

Operator

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

Christopher Lucas - Robert W. Baird

I just need a real quick question, earlier in your comments you had talked about one of the transition revenue items related to a third quarter seasonal effect upon is it an insurance recapture program, could you explain that for me.

Bruce Johnson

We effectively do first dollar coverage through a captive in our portfolio so we don’t have a deductible amount and that’s billed through to our tenants. To the extent that we have profits after what the expenses were with respect to that captive insurance entity, it shows up in the third quarter.

Christopher Lucas - Robert W. Baird

So it’s a true up in the third quarter and that is in your recurring FFO number.

Bruce Johnson

That is in the, as it always has been. Its something that we did every year.

Christopher Lucas - Robert W. Baird

And for this quarter that number relative to prior quarter run rates is, what was that.

Bruce Johnson

This quarter $3.5 million which is about the same as its been in prior years.

Christopher Lucas - Robert W. Baird

And that’s in the other income line.

Bruce Johnson

Yes. We moved it into the other income.

Operator

Your next question comes from the line of Samit Parikh - Oppenheimer

Samit Parikh - Oppenheimer

My question is in regards to the new joint venture, can you describe the quality and location of these assets, maybe relative to your overall portfolio and on the 8.75 cap rate was that on in place NOI or was that a forward looking NOI.

Martin Stein

It was basically in place NOI. It’s a representative portfolio basically from a quality standpoint, pretty close to that and it was across the country and remember the transaction, the pricing was basically negotiated in the second quarter when things are not, there wasn’t quite as much clarity as there is right now.

Samit Parikh - Oppenheimer

And then on the 6.8% interest only debt that you got on those properties, just wanted to see if you could give some clarity on what you’re seeing in the debt markets. Is pricing pretty much around 7% on seven to 10 year debt and based on that what are your thoughts on the sustainability of these rates going forward to next year.

Bruce Johnson

In terms of our forecast the 10 year is probably, we use the [Chathams] forward curve in terms of what our projections are and I think as I recall its up about 20 basis points by the end of the year. So what we’d see is that go up even though effectively its not a spread over treasury, its actually a fixed rate.

So we’ll probably see that 7% number hold through the next six months. As you are aware we have a big tranche of financing that’s coming due related to our joint venture in GRI that we’re in the process in fact and working through right now.

But we expect that that would still be, the 7% range is kind of a good number for the next six months.

Operator

Your next question is a follow-up from the line of Michael Bilerman - Citigroup

Michael Bilerman - Citigroup

Going back to the joint venture you mentioned that you USAA had a desire to make that joint venture a lot larger, is it open end, can they increase the size of that joint venture and what were the fees and just wondering if there is a promoted interest.

Martin Stein

There’s a promote, there’s an asset management fee, there’s property management fees.

Michael Bilerman - Citigroup

And what size could the joint venture potentially increase to.

Martin Stein

It could increase by several hundred million dollars and as Bruce and Lisa have been reminding me, we also have a partner that has been on the sidelines in CalSTRS. It looks like they’re coming back into the market. So and CalPERS is very active so to, right now our preference number one is to do something on an on balance sheet standpoint to the extent that we can do that. But secondly we’ve got multiple sources, external capital from end place partnerships.

Michael Bilerman - Citigroup

In terms of this whole structural move down to the regions and moving a lot of the investment groups, how far along are you in that process and any time organizations go through large changes there’s always some bumps or hiccups in the road, and I guess how can we get comfort that in the next 12 months we’ll be able to see, or we won’t be able to see any of those hiccups.

Brian Smith

Well for those reasons we’ve been working pretty methodically. We’ve been working on it for quite some time. I think we’re ready to implement. Let me talk a little bit more deeply about it because the changes really just reflect the field operations, kind of the transactions if you will.

A person who is on the development side and has 20 years experience and has great anchor relationships, solid judgment, everything, there’s no reason why we can’t bring that kind of talent on to our operating portfolio to help with that and vice versa.

What we’re not changing would be the property operations platform. That is run on a national level. So we have consistent policies, collection procedures, contracts and things like that. So that group will continue to report to John Delatour who handled it before. So no change there.

Also on our national transactions group which did acquisitions, dispositions, they get very, very involved with the joint ventures, are part of our capital market strategy, they’re part of our balance sheet strategy, they continue to operate on a national scale.

So really all we’re talking about would be the field operations on the transaction side. The other thing that should give you comfort is these people are now responsible for all NOI in the field. It doesn’t matter if its developmental NOI, it doesn’t matter if its operating property NOI. They’re responsible for it and if you look at the people we’ve got running it, we’re fortunate to have guys who have worked on both sides of the business for many many years and they’ve got great experience.

Jim Thompson used to run half the country for the operations. He will now run one third of the country. John Delatour has been doing it on both sides. He’s been doing investments, he’s been doing operations. He’ll have the center part of the country as well as the national property management platform and then Mac Chandler, we brought him back specifically because of his experience, knowledge of those markets and I think we’re just very, very fortunate and those people should give you great comfort.

So while some things have changed, not everything has changed.

Martin Stein

And the key thing is the line leasing people, the line leasing officers aren’t changing. We’re changing their focus and we’re enhancing their focus, tightening their focus is what we’re doing. And my expectation I think it’s a good question, but my expectation is not, the downside of it I think its going to give us a better chance with a greater focus, I think as we mentioned before.

From harvesting the imbedded growth in the development portfolio of the $15 million plus of NOI from signed leases and taking that portfolio from 78 to 95% leased, there’s another $15 million plus of NOI, I think it enhances our ability to harvest that imbedded value there.

Mary Lou Fiala

First of all this is so well thought through and it was thought through with a great group of people and Brian and I together worked on this and I can’t feel any better about it is why I made that comment. But I think one of the things that is so good about what’s happening is we have removed some layers. And so now you have people who have more experience in the business who are going to be directly involved as opposed to just managing.

And Brian said this, but really involved in more of the leasing, more hands on. I think everybody is going to be much much more hands on because you’ve got these people with anywhere from 10 to 16 plus years of experience who spent more of their time managing in the past, because they had bigger territories, now will have smaller territories but really focusing on those markets inside and out, with years of experience that will help benefit us.

So I think unlike what normally happens I’ve been through nine mergers and not that this is a merger but I’ve been through a lot. I have to tell you I can’t feel any better about it, about the process, about the results, about the talent.

We’ve always been, proud of ourselves in the depth of management and talent and this is just a perfect indication whether its Brian, the president in running both operations and investments, and then having his three guys who are more specialists and now they’re going to be [inaudible] of their smaller market.

And then taking that all the way through. It’s the same guys, its what we’ve [inaudible] all along and I’m confident that you’re going to see these results. And you’re not going to see hiccups as a result of this change.

Michael Bilerman - Citigroup

And if I could just follow-up on a previous question in terms of the leasing, if you looked at the supplemental on page 25 you looked at your weighted average lease term over the last four quarters, you’ve gone from 49 to 48 to 47 and then this past quarter it dropped down to 4.2 years with the largest negative rent spreads. And so when you talked about 15% of, I don’t know if you’re using the two million square feet or the 3.5 million total with the 100% of the JVs but 15% of leasing being under 12 months, I’m assuming that there was a much much greater percentage of that occurring in this quarter and I’m just wondering I know and you said you want to take a more longer term view, but I think what we’re trying to get at is there a difference or a trend in how you’re approaching the leasing today relative to how you were doing it at the beginning of the year.

Brian Smith

All I can say, we’d have to dig into those numbers to answer specifically what you’re talking about, but there’s no difference other then what we talked about. We’re focused on, let’s be honest, I think for all companies, in the really great markets you didn’t have to worry so much about tenant quality because you signed somebody up, if it didn’t work you, you replaced them.

That view has changed and that’s a significant fundamental difference in the company and we’re doing everything we can now to proactively move out the weaker tenants and replace them with the stronger.

The only other issue that we’re doing that I would say is different is just making sure that if we have those retailers that we want to keep but its going to take significant rent write-downs that we’re going to do that on a short-term basis so as not to cut off our nose but other then that, there’s no change.

Martin Stein

And because of the market conditions as they have deteriorated from a year ago or six, nine months ago, that’s become more of a part of our strategy.

Operator

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

David Fick - Stifel Nicolaus

I’m tempted to ask what the reorganization, what Martin and Bruce are going to do, but my question is just a follow-up on the Publix, Kroger comments. The question is this, you observed at both Kroger and Publix are still in the market, I’m just wondering is there any specific that you, not that you would disclose but are you in conversations about specific deals in specific locations that could turn into potential development upside in the next year and are they willing to meet pricing that’s logical in this market.

Brian Smith

We are talking to them on a case by case basis of any opportunities that may make sense to them. We’ve talked to Publix about a few redevelopment opportunities within our own portfolio and we’re going forward with that. And we do have discussions going on but our pipeline is very small. In fact we don’t have any new, we have one new development that’s in the high probability pipeline for the next year or two.

So we’re talking, its still early. In fact Publix expressed to us one of their biggest problems is they want to do 35 to 55 new stores. But they’re having trouble getting developers to give them so stores so we are in conversations.

Martin Stein

We are doing a major redevelopment with them in our own portfolio. Secondly I remind you that, this quarter or the last quarter we were aware of sales of a couple of centers where they had a first right of refusal. We went to them and said you’ve got a first right of refusal. Two fabulous centers that we bought at a 9 plus percent cap rate and they are, we’ve got a half a dozen I think it is, joint ventures with them. We joint venture with Kroger in the past so there’s very strong relationships and I think we have an in place joint venture with Kroger.

We’ve got very strong relationships with both of them, with both stores.

Brian Smith

If we could do more, Neptune Beach is one I talked about in my opening comments, you know we’d be all over that. The ones that don’t work for us would just be those that we’re not comfortable with the amount of shop space they may take or something about the market, but they’re very interested in expanding.

Operator

Your next question comes from the line of Ryan Levinson – PSM

Ryan Levinson – PSM

I just wanted to, I was just wondering the same exercise that you went through breaking down the rent growth on the hole, on the total leases, on the total new leases, new and renewals, I was just wondering if you could do that specifically just on new leases.

Brian Smith

You just wanted to know the breakdown of—

Ryan Levinson – PSM

What the rent spread was for less then 12 months and then the rent spread for 13 to 36 and then 37 and greater months.

Brian Smith

For new and renewal, I don’t have that.

Ryan Levinson – PSM

But just to clarify and this was the negative 13, negative 7, negative 0.6 that was for total leases.

Brian Smith

Yes, for total leases year to date.

Ryan Levinson – PSM

My second question, I’m just confused. Looking at this longer term and I’m a little confused as to how even if Q3 lease rates are the bottom which I don’t believe, but I’m just confused as to how you would have flat lease spreads in your in line space when you’ll be renewing 2005 through 2007 vintage leases that had clearly escalated several dollars from where we are today.

Brian Smith

I think you’re talking about a national portfolio. First of all we have said that the rents in California, Florida, DC where we’ve had some of the biggest run ups, those are coming down. But we’ve also got markets where there hasn’t been that kind of rent acceleration and those are showing more positive rent growth. So I think it all just averages out. But we have gone through space by space and looked at it.

Martin Stein

But just remember what we did was, some of these rents may have been vintage, 2000, 2003, what we did was we just used the leases that we’ve signed so far this year as a proxy for market.

Ryan Levinson – PSM

Year to date this year or Q3 this year.

Martin Stein

Including Q3, including Q2.

Ryan Levinson – PSM

Year to date average.

Lisa Palmer

We also we got input from our field, it wasn’t a simple just take an average.

Brian Smith

The other thing I want to say is we didn’t do this specifically to forecast rent growth, we did this to quantify whether we have much risk of significant roll down and based on that we got several data points that said that our average rents this year across the country are about $21.00 for less then 10,000 square feet and we compare that to what’s rolling you see that we’re right there.

And as Lisa said and as I said earlier, you’re talking about 3.5% potential roll down just based on looking at that way.

Ryan Levinson – PSM

And just so I’m looking at this on like for like basis, the $21.00 is your year to date—

Lisa Palmer

The $21.99, $22.00. Brian is doing it from memory, I have it right in front of you.

Martin Stein

And remember also I just want to reiterate one thing real quick is the leasing activity has accelerated during the last two quarters so we’ve had more of the number one not only is it two thirds, but its, just from a pure calendar standpoint, but its back end weighted, the amount of leasing activity.

Ryan Levinson – PSM

Back end, you mean the 22 is back end weighted to, its more current. If you could just clarify for me then, I’m assuming that you probably have about half of your 2010 leases completed by now.

Bruce Johnson

It is not like the original mall business, its probably in the 10 to 15% range.

Ryan Levinson – PSM

But at this point in time beginning of November I would assume that you have a pretty good lead as to what the first half of 2010 is going to look like, just wondering what you’re thinking, does this $22.00 look like its going to hold. You have 15% of your in line space rolling over and that’s why I asked.

Martin Stein

I think as Bruce indicated, we expect to see some further roll down in rents in the, carrying into 2010.

Ryan Levinson – PSM

Roll down from the 22 level here.

Lisa Palmer

I think perhaps, all the comments on the call, we don’t really know. It feels like we might be at the bottom today in some markets but how can anybody be sure.

Martin Stein

And that’s the reason why we’re not going to give guidance until January and we’ll give more specific guidance then, our February call.

Lisa Palmer

I think that’s the limit of the questions.

Ryan Levinson – PSM

I know but you didn’t have an answer for my first one so I felt like that was, I was going to come back to you offline. So I just wanted, if I could just clarify because I still don’t feel like I understand what the answer was. But is rent going to roll down from the 22 level or from the, if I look at page 39 of your supplemental what the in place base rents are, is it going to roll down from that level.

Lisa Palmer

The 22 is what Brian said is what current markets are today, what you see in the supplemental is what’s expired.

Ryan Levinson – PSM

That’s your spread.

Lisa Palmer

Yes.

Ryan Levinson – PSM

Okay so just, I don’t want to put words in your mouth, I just want to make sure I’m understanding what you’re communicating, that the 22 that you could see rent roll down from the 22 level.

Lisa Palmer

No we did not say that.

Ryan Levinson – PSM

I’m glad I asked then.

Lisa Palmer

Please call me after the call.

Operator

Your next question comes from the line of [Alex Barrett – Agency Trading Group]

[Alex Barrett – Agency Trading Group]

Mary Lou, best wishes on your retirement, I just had a question, do you have a breakdown of your new leases between small and large tenants, like in terms of square feet.

Lisa Palmer

We actually in the supplemental, maybe you’re looking for more then this, we do have a leasing specifics page. Pages 25 and 26 so you can see whether its would be for our [inaudible] as at 100%. We show that there and then we also, that’s the actual new and renewal and then for anchors and in lines we just have the lease expiration tables.

So I don’t know if that’s enough.

[Alex Barrett – Agency Trading Group]

I’ll follow-up with you offline.

Operator

Your next question comes from the line of [Chris Summers – Green Light Capital]

[Chris Summers – Green Light Capital]

I’m trying to better understand the change in the fourth quarter guidance from the last quarter to this quarter, it looks like you’re expecting FFO now to be lower by about at least $12 million from what you thought fourth quarter might be a few months ago. I’m wondering if you could kind of point out some of the larger items that are bringing that down, for the recurring component.

Bruce Johnson

Have you seen the schedule on the left side.

[Chris Summers – Green Light Capital]

I have not.

Bruce Johnson

I think that will fully explain the difference in the recurring. What we provided there was if we had provided that same recurring guidance last quarter so you can have an apples to apples number because it is not a decrease.

[Chris Summers – Green Light Capital]

What one time items were included in the fourth quarter on the last call then. Because the last quarter your fourth quarter guidance was basically like $0.75. What items were in there that aren’t recurring.

Lisa Palmer

We have about a $13 million promote that is expected to be paid in the fourth quarter. That was in our normal, the last quarter we didn’t give recurring FFO guidance. I think that might be what’s confusing you.

[Chris Summers – Green Light Capital]

So that promote you don’t expect to have happen next year.

Lisa Palmer

It will happen in the fourth quarter, but its not recurring.

Bruce Johnson

Its not recurring which means we don’t expect it to occur next year.

[Chris Summers – Green Light Capital]

So the property is really running at like $0.55 a quarter of FFO currently.

Martin Stein

You mean on a recurring basis.

[Chris Summers – Green Light Capital]

So I look at it all things being the same, $0.55 times four is $2.20, maybe that’s a good starting point to think about 2010.

Lisa Palmer

I don’t think that we want to commit to that, but our guidance for the fourth quarter for recurring FFO is $0.53 to $0.58 and that is recurring. So there’s no non recurring items in that.

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.

Martin Stein

Thank you very much for your time and everybody have a great weekend and those with kids have an awesome Trick or Treat. Happy Halloween. Thanks, bye.

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