Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Weingarten Realty Investors (NYSE:WRI)

Q3 2010 Earnings Call

November 1, 2010 10:00 am ET

Executives

Andrew Alexander – President, Chief Executive Officer

Stanford Alexander – Chairman

Johnny Hendrix – Executive Vice President, Chief Operating Officer

Stephen Richter – Executive Vice President, Chief Financial Officer

Joseph Shafer – Senior Vice President, Chief Accounting Officer

Robert Smith – Senior Vice President, Development

Kristin Horn – Director, Investor Relations

Analysts

Michael Mueller – JP Morgan

Quentin Velleley – Citigroup

Craig Schmidt – Bank of America/Merrill Lynch

Laura Clark – Green Street Advisors

Carol Kemple – Hilliard Lyons

John Sullivan – Cowen Group

Rich Moore – RBC Capital Markets

Vincent Chao – Deutsche Bank

Jay Habermann – Goldman Sachs

Chris Lucas – Robert W. Baird

Operator

Good morning. My name is April and I will be your conference operator today. At this time I would like to welcome everyone to the Weingarten Third Quarter Earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. Ms. Kristin Horn, Director of Investor Relations, you may begin your conference.

Kristin Horn

Good morning and welcome to our third quarter 2010 conference call. Joining me today are Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President and COO; Steve Richter, Executive Vice President and CFO; Joe Shafer, Senior 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 funds from operations, or FFO, which we believe help 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 under the Investor Relations tab of the website.

I would also like to request that callers observe a two-question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue.

I will now turn the call over to Drew Alexander.

Andrew Alexander

Thanks, Kristin. Good morning everyone and thank you for joining Weingarten’s third quarter conference call.

As we all know, the economic recovery throughout 2010 has been slow and inconsistent. While things are generally better in our world, strong retailer growth will come when the anemic job market sees steady increases. However, as I have discussed, WRI’s operations have stabilized and have been experiencing upward trends for several quarters now.

I appreciate we have had some bumps in the road like Blockbuster, but much of the fallout was expected and factored into our operations and earnings guidance.

As always, we will continue focusing on maximizing operations. While we will also pursue growth opportunities, we do not feel the market has opened up as much as many anticipated. Few good quality assets have traded in the acquisitions market, and when they do, there are many bidders competing.

With that said, we are pleased to announce that we have closed several acquisitions during or subsequent to quarter end and have a reasonable pipeline. As we have stressed, we are focused on markets where we have local expertise – our boots on the ground – as we feel this local knowledge is key, especially in this rocky operating environment.

We also want to continue to stress that we’ll be patient in our approach and only acquire assets that are accretive to FFO and add long-term value to our shareholders.

I’d now like to turn the call over to Steve Richter to discuss the financial results.

Stephen Richter

Thanks, Drew, and good morning to everyone. Weingarten reported Funds From Operations, or FFO, per diluted share of $0.40 versus $0.25 per share during the same time period in 2009. Excluding the non-cash impairment of $0.04 per share, FFO for the quarter was 53.6 million or $0.44 per diluted share, which was $0.02 ahead of Street consensus. I would note, however, that a penny of this was from lease cancellation income.

We continuously review our portfolio for impairments which includes obtaining updated broker opinion of values for any land held for future development locations where we believe market values may be deteriorating further. Our in-depth review during the third quarter resulted in two additional properties incurring small impairments which totaled 4.9 million or $0.04 per share. Half of the impairment charge resulted from a tract of land that is in our land held for future development and currently is under contract to be sold.

While our intent is to develop our excess land, we are occasionally presented with opportunities to sell the land. While I believe we have properly assessed the value of our excess land for impairment purposes, if we are presented with opportunities to monetize some of these properties at reasonable discounts to market value, we may take advantage of those opportunities which could result in additional impairment charges.

The Company’s balance sheet is in great shape. We ended the quarter with net debt to EBITDA at 6.5 times, and a fixed charge coverage of over 2 times. We have invested our excess cash position through various acquisitions and retirement of outstanding debt, and our $500 million revolver is available to fund future growth opportunities.

Let’s now move on to guidance for the remainder of the year. Last quarter WRI chose not to update guidance as the mood in the overall market was pretty bleak and the financial world was talking about the possibility of a double dip. While we still feel the economy is struggling, we have generated solid results for the first three quarters of the year; therefore we are raising FFO guidance excluding impairments to $1.67 to $1.71 per share from $1.58 to $1.70 for the full year 2010. Including impairments, year-to-date we expect FFO per share to range between $1.50 and $1.54 per share.

As folks may remember, we have a very bottom-up budgeting process that at this point is not complete, so we will reserve providing full-year 2011 FFO guidance with all the details until next quarter. However, given our current view that the economy will improve slowly throughout 2011 and what we have seen thus far from the portfolio, the Street consensus of $1.76 per share for 2011 FFO should be within our range upon the completion of our budgeting process.

At the end of the third quarter, our retail occupancy was at 92.6%. We have the holiday season to digest and the fact that we have several big boxes that expire over the next couple of quarters that will probably cause our occupancy to bounce around a little. But given the quality of the portfolio, we are comfortable we will see increasing FFO in 2011.

Johnny will provide more color on the portfolio’s performance after Robert, who is up next to cover new developments.

Robert Smith

Thanks Steve. The development landscape was quiet during the third quarter with no material changes to the status of existing projects under development or in land held for development, except for the impairment that Steve referenced earlier. Projections for 2010 are relatively stable, and leasing for 2011 is performing well at this point.

Leasing interest in 2012 completions have started to pick up, and while it is too early to determine how that interest will play out, we do have a positive story that represents this trend at our Ridgeway Trace Center in Memphis, Tennessee. This is an infill site that formerly contained an apartment complex which we rezoned and redeveloped with Target. Phase 1 of the project, which includes Best Buy, Sports Authority, and PetSmart, is 100% complete and already stabilized; but recently we began construction of two multi-tenant outparcel buildings that represent about 22,000 square feet as part of Phase 2, and these buildings are already 75% preleased. And I’ll note that quick service restaurants, which are an important part of our leasing efforts these days, represent many of the deals completed during our preleasing at the site. Additionally, we are in negotiations with an 18,000 square foot junior anchor to hopefully kick off the balance of Phase 2 sometime next year.

So we’re excited about this and continue to believe that with our seasoned staff, the benefits of strong retailer relationships, an attractive existing portfolio and a ready to implement land held for development pipeline, that we are in a good position to capitalize on opportunities as the development markets emerge.

Now I will turn the call over to Johnny Hendrix to discuss operations.

Johnny Hendrix

Thank you, Robert. We continue to be encouraged by the steady improvement in both retail sales and the operating results of our shopping centers. Many of our retail tenants posted strong September sales, leading us to be optimistic about the holidays ahead. The consumer is still focused on necessities and value, and this plays right into the strength of our portfolio which is dominated by supermarkets and discount ready-to-wear retailers. Kroger, our largest tenant, posted same-store sales increases of 2.7%. Publix reported a 2.4% increase, and Whole Foods was up 1.3%.

Our discount ready-to-wear retailers continued to increase sales even against strong comps for 2009. Ross, our third largest tenant, increased same-store sales by 6%; and TJX, our second-largest tenant, saw an increase of 1% which puts them at a 5% increase year-to-date. The presence of these strong retailers driving traffic through our shopping centers provides a competitive advantage for our leasing executives as well as our properties.

Our retail portfolio produced a 2% increase in same property NOI primarily on the strength of improving occupancy from a year ago and the opening of junior boxes we have leased over the last 18 months. If we excluded bad debt from our calculation, our retail same property NOI would have remained a 2% increase and the Company would have increased to 1.8%. Year-to-date, the same property NOI for retail properties is slightly positive, which is at the top of the range we provided in our guidance. I’m anticipating another increase in the fourth quarter which would result in us being positive for the full year.

Our definition of same property NOI is included in our supplemental on Page 24. Just 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 remodel. WRI’s current population of properties in our same property NOI calculation accounts for over 86% of our overall NOI. Our same property NOI calculation does include bad debt and accounting adjustments, but we do not include lease termination fees or straight-line rent. And most importantly, we are consistent with the application.

As I said before, occupancy year-over-year is improving. We have increased the retail properties’ occupancy by 50 basis points from 92.1% in Q3 ’09 to 92.6% in Q3 2010. Sequentially the Company improved slightly and retail occupancy remained unchanged. Southern California and Houston saw the most improvement.

Retail spaces over 10,000 square feet are 96.8% leased; and spaces less than 10,000 square feet are 85.8% leased. Consequently, we’ve stopped publishing the big box leasing summary as we feel leasing our junior boxes has normalized. Our primary focus today is on leasing shop space.

The third quarter occupancy numbers we reported include the fallout of seven Blockbuster stores which have been terminated following their bankruptcy filing. In line with our normal practice, our third quarter reporting takes into account fully reserving for all accruals in past due rent on all Blockbuster units. The specifics of our exposure and terminations are outlined on Page 45 of the supplemental. As of the second quarter of 2010, we reported 42 Blockbuster stores. Six of those were franchise units, and since they are not in bankruptcy, going forward we will not include them in our Blockbuster numbers.

Seven of the Blockbuster stores have been terminated. This leaves us with 29 stores. We have had preliminary discussions with Blockbuster and I anticipate we will lose another 8 to 10 stores over the next three to six months. The average Blockbuster rent (audio interference) per square foot, and these are generally the best spaces in most centers, so I believe we will release the vast majority of the units we get back over the next 9 to 12 months at about the same rent we’re getting today.

Overall, our fallout in bad debt is improving. We had 123 tenants fall out this quarter. That’s about 14% better than a year ago. It’s still higher than I would consider normal but I am encouraged we are seeing steady improvement.

As Steve mentioned, we have several boxes whose leases expire over the next couple of quarters that we do not expect to renew. This includes a Home Depot and three bookstores. While these closings could results in a slight reduction in occupancy after the first quarter, we have prospects working for each location and expect to release them all in 2011. These closings are built into the guidance Steve mentioned earlier, and I don’t see them as long-term issues; but we did feel it was appropriate to highlight them.

I also want to make a point that these closings are not an indication of weak real estate. These are densely populated sites. One of the bookstore locations is in our Centre at Post Oak in Houston, immediately across the street from the Galleria Mall. This is arguable the best retail location in the State of Texas, but we do expect Barnes & Noble to close during January.

Most of the major retailers in our portfolio have done an excellent job shoring up their balance sheet and have manageable maturities, so I don’t anticipate any major bankruptcies that would affect Weingarten over the next 12 to 18 months.

Rent growth, comparing the rent for newly-signed leases with the former rent of those spaces, continues to be negative. It’s down 2.4% for the Company overall in the third quarter. Retailers continue to enjoy a negotiating advantage in most circumstances. This advantage has diminished over the last 12 months but remains a drag on our rent growth. Renewals were down 1.8% and new leases were down 3.6%.

While the rent is not as much as we want, I’m very pleased our boots-on-the-ground strategy continues to produce excellent leasing results. In the third quarter, we leased space to Nordstrom Rack, IGA Supermarket, Sweetbay, and (inaudible), but most of the space we leased was shop space. We leased 171 spaces for 489,000 square feet as compared to 175 spaces for 490,000 square feet in the prior quarter. This really highlights our focus on small shop space. That’s where the vacancy is and that’s the space we’re leasing.

As we transition our focus to shop leasing, Weingarten’s boots-on-the-ground strategy will continue to provide our leasing executives a competitive advantage. We have local experts who can move quickly and make informed decisions. Today with our accelerated leasing process, we can have an executed lease within 24 hours of the time a local retailer chooses to move forward with us. As an example, we had a hairstylist move out of a location in Atlanta on the 23rd of September. We met a prospect at this space on the 27th and fully executed the lease on the 28th, and tendered the space on October 1. This is not an unusual situation. Last quarter, we signed 70 leases utilizing this process. It’s a good example of how we’ve adjusted to compete for local retailers.

We continue to see the quick serve restaurants and frugal fashions driving a lot of the leasing. There did seem to be a surge in the category we call At Your Service, which includes dry cleaners, tutoring services, and insurance. The healthy living category, including health services and fitness, also continued to do well.

We’re looking forward to finishing 2010. It’s been challenging but also rewarding to see our associates execute as effectively as they have. Drew?

Andrew Alexander

Thanks, Johnny. As I mentioned before, we’re focused on operations and growth. Reviewing our growth efforts, as Robert mentioned, we’re making progress on new development and feel there is good future value creation from our development expertise. Looking at acquisitions, as mentioned, deals are very competitive. We are looking for core product, value-added deals, and redevelopment opportunities in our tenant targeted markets. We’ve been active and I’m comfortable that we will meet, if not exceed, our guidance of 75 to 125 million in acquisitions for 2010.

We acknowledged in our initial guidance last February that this would be back-end loaded, and that will be the case. Year-to-date, we have closed 68.9 million of investments. This includes two assets we closed subsequent to quarter with a total WRI purchase price of $40.7 million. We currently have a pipeline of $130 million either under contract or in the letter of intent stage. The average cap rate for the properties we’ve closed year-to-date is around 7% and we expect to have an average ROI in Year 3 of approximately 9%.

One of the assets we closed subsequent to quarter-end is the Stoneridge Shopping Center in Moreno Valley, California. It’s an interesting story, so let me share some of the background with you. The center is anchored by a Super Target and Kohl’s, which own their own stores, and also includes Best Buy and Office Max. We were invited to enter into a joint venture on this deal through a longstanding lender relationship as an equity infusion was desired; and it was also felt our leasing and property management platform would enhance the property. We made an equity investment which has a preferred return, plus we participate in the overall upside creation. We’re quite pleased to complete this preferred equity investment.

Given the amount of loans maturing over the next few years, we feel there will be other opportunities to make good investments with creative structures throughout the capital stack. We are confident we can use our local real estate knowledge, our lender and tenant relationships, our structuring skills, and our access to capital to create a win-win situation with owners while also achieving good returns for our shareholders.

Cap rates have continued to compress as secured debt has become more attractive, resulting in more money chasing the properties that are coming to market. We will remain disciplined and invest only when we can make our shareholders a reasonable return.

So in summary, we feel it was a good quarter with improvements in occupancy, positive same property NOI, and good investments that will profitably grow the Company. The WRI team is proud of the strides that we have made this year despite the lackluster national economic conditions.

In reviewing material for our Board meeting, I noticed something interesting. In every state where we have a regional office, the NOI results were positive for the quarter. This reinforces to me how our operating philosophy of boots-on-the-ground helps create shareholder value. We will continue the momentum and lease more space, as Johnny tells the team on a daily basis. We feel things are slowly getting better and we know we are well positioned for the future.

Thank you so much for your interest in WRI and we are happy to take your questions.

Operator, we’re ready for questions.

Question and Answer Session

Operator

At this time, I would like to remind everyone in order to ask a question, please press star followed by the number one on your telephone keypad. Again, that is star followed by the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

And our first question comes from the line of Michael Mueller with JP Morgan.

Michael Mueller – JP Morgan

Good morning. Two questions here. First of all, Page 24 in the supplemental, you give details in terms of the leased occupancy as well as the occupied space. Can you just talk about—I think it’s about a 200 or 300 basis point differential between what’s signed and what’s in place today. Can you talk about the time for those numbers to converge?

Andrew Alexander

Hey Michael. What we have seen over the last couple of years is about 300 basis points in occupancy that we have signed and not commenced. Prior to that, it was about 150 basis points. It seems like it can take anywhere from 6 to 12 months to convert a signed lease to occupancy, depending on the size of it. You know, the smaller space is obviously at the shorter end of that, and larger on the other side of it. But I anticipate that is going to remain in that 300, 250 basis point range as we continue to lease space.

Michael Mueller – JP Morgan

Okay. And then secondly, Drew, you talked about on the acquisitions—I think this was commentary on the stuff that had been closed already, going in yield about 7, but you said Year 3 at about 9%. Can you talk about—just get a little more color on how get from 7 to 9? What was the occupancy level on the products you bought, et cetera?

Andrew Alexander

It all depends on the properties that we bought, Michael. We bought a number of properties that are a little more value-add. I think the occupancy we’ve talked about on each one, so obviously the majority of that increase is coming from occupancy increases, but some of it is we do a pretty good underwriting of the NOI so a modest portion is coming from the rent growth. And then the Stoneridge deal, the return on our preferred equity, we think, is pretty reasonable as well.

Michael Mueller – JP Morgan

Okay, so that’s in there. Okay. Thank you.

Operator

And our next question comes from the line of Quentin Velleley with Citi.

Quentin Velleley – Citigroup

Good morning. Just in terms of the same store NOI, it was pretty good to see the 2% increase across the retail properties, but unfortunately the industrial was down around 5%. But if you look at the occupancy decline, it’s only around, I think, 80 basis points. So I’m just wondering whether there was something else in the same store NOI numbers for the industrial outside of occupancy losses.

Steven Richter

It’s mostly a little bit of excess bad debt, Quentin.

Quentin Velleley – Citigroup

Okay. And then as you’re talking about the preferred equity investments, how should we think about sort of what kind of volume of capital you’d be looking at using, and what kind of preferred returns you’d be getting on that capital?

Steven Richter

I think the preferred returns that we’ve targeted all depends on the risk, would be in the high single to low double digits. As to what sort of volume, you know, that’s a really hard thing to forecast because it is something that there’s lots and lots and lots of debt maturing, but finding the right lineup of the good location, a modest amount of equity will fix it. I would just hesitate to take a stab. You know, we’re going to look at everything – core deals, value-added deals, redevelopment deals, starting development – and just sort of access everything on a risk-reward basis, and I would really not want to hazard a guess as to what buckets will have how much money.

Quentin Velleley – Citigroup

And are they sort of likely to be investments in properties that have current LTVs of sort of 60 or 70%, or are they more like 80 or 90% LTV properties?

Stephen Richter

I think where one starts is not as significant as where one finishes, so that’s where—you know, we’re not going to be investing in the capital stack above 70%. So I think you could see some things in the future where you’re buying a discounted note, where the lender is taking a haircut, or otherwise where the project could have been at 90 or even over 100% of LTV. But we’re not going to invest a whole lot of money above around 70%, that’s for sure.

Quentin Velleley – Citigroup

Okay, got you. Thank you.

Stephen Richter

Thank you.

Operator

And your next question comes from the line of Craig Schmidt with BOA/Merrill Lynch.

Craig Schmidt – Bank of America/Merrill Lynch

Hey, good morning. I was wondering if you could give further color on your Barnes & Noble exposure, sort of like you did for Blockbuster in your prepared text, like how many may close and how you feel about the releasing.

Johnny Hendrix

Craig, we have 11 Barnes & Noble stores. Two of those bookstores that are closing are Barnes & Noble, which would take us down to nine stores after the first quarter. The balance of the stores kind of expire over the next five years or so fairly evenly. It’s a tough question because Barnes seems to be in a situation – and they have specifically told us that they are going to reduce their store count – and this seems to be a pretty strong focus of the company. And I think Borders is in much of the same situation. We have six Borders stores and we’ll have five after the first quarter. I think they’re going to continue to look strongly at closing the stores that come up in the next couple of years, so we probably will have several of them through 2011.

Craig Schmidt – Bank of America/Merrill Lynch

And releasing – would there be a hit to the releasing rate?

Johnny Hendrix

Generally these bookstores were done with really high build-out, and they have high rent; so it’s likely that many of them will have reduced rental from what they’re paying today. And I would probably—you know, if I was going to make a guess, which I think you’re probably hinting at, it would probably be somewhere around 20 or 25% less.

Craig Schmidt – Bank of America/Merrill Lynch

Okay. And then the fallout of the small shops definitely seems to have normalized or stabilized. What’s it going to take to get the small stores to start opening new ones again?

Johnny Hendrix

Well of course, you know, we are seeing some new ones opening, so we are leasing a lot of space and there is a lot of new space opening. I think to accelerate that we’re going to need jobs, number one, and we’re going to need a situation where they have some access to financing. A lot of the shop space we have is national tenants and regional tenants, and those people are generally in good shape as they look for financing to pay less, or even the Subways have access with their franchisees. You know, where we really have an issue is the local mom-and-pop who just doesn’t have access to financing, and that’s what we’re going to have to see to really accelerate that.

Craig Schmidt – Bank of America/Merrill Lynch

Thank you.

Operator

And your next question comes from the line of Laura Clark with Green Street Advisors.

Laura Clark – Green Street Advisors

When you think about your longer term leverage goals, do you have a specific debt to EBITDA target; and if so, can you talk about why you chose this specific target?

Stephen Richter

We think that where we are currently at about 6.5 times is, we think, is a good position. We certainly would not want to go in excess of 7 times. Why did we choose that? I would tell that between the rating agencies and the overall REIT market, that seems to be a comfortable position today; and I would acknowledge that net debt to EBITDA does seem to be the metric that most people are using today to gauge leverage in companies today.

Laura Clark – Green Street Advisors

Okay. And secondly, following up on what you were saying on the small shop side, can you talk about what—I guess what areas of the country and where in your portfolio you’re seeing the most strength on the small shop space?

Johnny Hendrix

Sure, Laura. Houston, you know, like I said before, is doing well and Southern California, surprisingly, is doing well. We’re frankly very well leased in both Phoenix and Las Vegas and Atlanta – in the high 90s in all of those markets, so there’s not a lot of improvement available. But generally speaking, Southern California, Houston; and we are getting some traction in Florida, but that’s probably still our biggest challenge.

Laura Clark – Green Street Advisors

Okay, great. Thank you.

Operator

And your next question comes from the line of Carol Kemple with Hilliard Lyons.

Carol Kemple – Hilliard Lyons

Good morning.

Andrew Alexander

Good morning, Carol.

Carol Kemple – Hilliard Lyons

This has kind of already been answered, but I was just wanting to know if you’d really seen any change with the mom-and-pops. Do they have any more access to capital in the lending environment now than they did, say, at the beginning of the year?

Stephen Richter

Carol, I would tell you that the ones that have survived obviously have some sort of access to financing. Most of that is through the vendors and not with the banking institutions; and we have not seen much change in that. We do believe the ones that have survived are going to probably make it through because their sales are improving, but not a lot of outside financing available for them.

Carol Kemple – Hilliard Lyons

So would you expect your fallout from the mom-and-pops to be about the same as a percent of total stores as you would for your national tenants in the first quarter?

Stephen Richter

I would expect it would be probably greater.

Carol Kemple – Hilliard Lyons

Okay. Okay, thanks.

Operator

And your next question comes from the line of James Sullivan with Cowen Group.

James Sullivan – Cowen Group

Yes, good morning. Two questions. First of all, the—on a regional basis looking at the same store NOI performance, it does appear that the better performance that we saw in the eastern region in the second quarter has become more generic in the west, mountain and central as you characterize it. And I’m just curious if you’re confident that those other three regions are now kind of fully participating in the recovery that you saw earlier in the east region?

Johnny Hendrix

Jim, yeah, I do feel that we are gaining occupancy in all of those regions and ultimately occupancy is the driver that is going to move same property NOI.

James Sullivan – Cowen Group

And then secondly in terms of your development returns, I did notice in terms of by year, I think the ’10 development projected yields on stabilization ticked up slightly, but for ’11 and ’12 they ticked down slightly, and I just wondered what was going on there? Was there—is it more cost-driven or is it just how the projections property by property work out? Is there anything generic that you conclude from the lower yields in ’11 and ’12?

Andrew Alexander

No, I don’t—this is Drew. I don’t think there’s anything generic. I think it’s just some small differences. As has been noted, the pipeline has been right-sized and it’s pretty small, so some pretty small movements can move things around a little bit. And obviously the further out you get, there is still some uncertainty. But the ’10 and ’11 pipelines, especially, we think are in very good shape.

James Sullivan – Cowen Group

Okay, good. Thanks.

Operator

And your next question comes from the line of Rich Moore with RBC Capital Markets.

Rich Moore – RBC Capital Markets

Yeah hi, good morning guys. I wanted to ask you on the development front, it seemed like for a while we were waiting for the big box guys to start paying more rent, and that has come back. And then we were waiting for the small shop guys to kind of come back to life, and that has come back. So do you think we’re going to see new development starts in ’11, or where do you stand on that sort of thing with the tenants?

Robert Smith

This is Robert. I would say it’d be very modest in ’11 and ’12. We really—you know, on a macro level, we have not reached equilibrium in supply and demand on some—you know, on specific isolated submarkets, you can find it. We’ve got our guys out there canvassing for those sort of opportunities, and we’ll find a few but it will be very modest and the impact from that, really, won’t materialize until ’13 and ’14 and beyond. And I don’t see a sustainable, robust development pipeline picking up again for a few years.

Rich Moore – RBC Capital Markets

Okay, good. Thank you. And then on the industrial portfolio again, Drew, the base rents were also down, the average base rents. I mean, how is that portfolio performing and how do you guys feel about hanging onto it, and what you’re thinking about it going forward?

Robert Smith

Well we’ve, of course, been in the industrial business for 40 years. We know it pretty well and it’s something that over the years has produced some very good returns for us. Looking at our—call it 87% occupancy across the platform, it’s pretty consistent with the other industrial REITs. The industrial space is more of a commodity and tenants in that business are very, very reluctant to expand. We’ve been particularly hit in the San Diego market where we have some wonderful property but affected by some of the manufacturing process and insurance—improvements, actually, in the insurance regulations in Mexico; and then we’ve also been hit in Atlanta. In studying the markets where we operate, we do better than market averages in the majority, so it’s a business that we know well and understand and are comfortable with it, but it is struggling right now.

Rich Moore – RBC Capital Markets

So should we look for that to turn positive, you think, in the next couple quarters in terms of the operating metrics?

Robert Smith

I think that’s very much a function of the broader economy. In looking at things, it does seem that things are moving. Obviously there’s no space being built anywhere. You know, shipping volumes show a little bit of rebounding, but it is a tough lag. Absorption across the country was pretty flat in the third quarter, so yes, I think there will be improvements but industrial is very, very tied to the overall economy.

Rich Moore – RBC Capital Markets

Okay, very good. Thank you, guys.

Operator

And your next question comes from the line of Vincent Chao with Deutsche Bank.

Vincent Chao – Deutsche Bank

Good morning. Just a follow-up question on the small shop side. I thought I heard you guys say that it was about 85% occupied the end of the quarter, and I just wanted to confirm what it was last quarter. I thought it was 87.

Andrew Alexander

Vincent, I’ll have to get back with you on that number. I don’t have that in front of me.

Vincent Chao – Deutsche Bank

Okay, that’s fine. And then—just my second question is just on the acquisition pipeline. Drew, you’d mentioned 130 million, I think, under LOI or under contract, and maybe doing a little bit better than your guidance for 2010, I guess. As we think about 2011, is that 100 millionish type of run rate, is that a reasonable level to expect in 2011 or is too early to tell?

Andrew Alexander

It’s really too early to tell but it’s certainly not an unreasonable level. I mean, that’s where—as I said before, we’re going to be very disciplined. We’re going to look at a lot of different things. We’re going to evaluate each one, but it’s tough to put a specific number on it. But the 100 million is not an unreasonable number.

Vincent Chao – Deutsche Bank

Okay. And then the returns that you had shared with us, the 7 and the 9 for the ones that are already completed, is that sort of fair in terms of what’s in the pipeline?

Andrew Alexander

Yes, it is; but what I tried to illustrate was it definitely depends upon the kind of property. If we find a good core deal that’s underwritten well, it’s going to be a lot lower. If we do a preferred equity or a value-added, it’s going to be higher. So when I look at the pipeline, there’s all different kinds of deals so on any given quarter, where we end up is a function of what deals happen and what deals get slowed down.

Vincent Chao – Deutsche Bank

Okay, thanks. I was just trying to get a general sense. Appreciate it.

Andrew Alexander

Thanks, Vincent.

Operator

And your next question comes from the line of Jay Habermann with Goldman Sachs.

Jay Habermann – Goldman Sachs

Hey everyone. Johnny, I think in your comments you mentioned occupancy would bounce around for the next couple of few quarters. I’m just curious – can you quantify potentially what, I guess to the downside, how much you think you could decline; and then I guess conversely, as you think out over the next 12 months, where you think occupancy could end up to the upside?

Johnny Hendrix

Jay, we are continuing to complete our very thorough analysis of the budget for 2011. We haven’t finished that but I can tell you that generally the first quarter is a month when you will see the highest fallout of tenants. And then we have, I think, a very coincidental situation with some of these larger boxes that are not going to renew their lease, so it’s possible we could see 100 basis points of occupancy fall. I don’t know that it will be that much but it’s possible. But—so that, I think, would be kind of the downside part of it. But I think we’ll get back with you with a more precise estimate at the end of—in our next call.

Jay Habermann – Goldman Sachs

Okay. And then in terms of—you mentioned the leasing of the junior anchor spaces has normalized. I’m assuming you’re referring to just the velocity of deals versus rate, but can you give us some sense of maybe how rates are trending from the lows of, say, a year ago?

Johnny Hendrix

Jay, I don’t know that I’ve seen a tremendous change in the rental rate for the boxes. Some of the change that we’re seeing in our old versus new—you know, when we look at the changes as we got into a situation where we’d leased some of the spaces that had a little bit lower rent overall. Generally I think you’re about the same in terms of your rental rate for the boxes; and yes, you were correct - I was more directly referring to velocity.

Jay Habermann – Goldman Sachs

Okay, and then lastly for Steve – on the impairment side, are we pretty much through the end of this at this point, just based on the land and the write-downs you took this most recent quarter?

Stephen Richter

Jay, I would tell you I wish I knew the answer to that question. If—I think that we continually monitor all the land held properties, as I mentioned in the prepared remarks, we go through that pretty continually and get broker opinions of value letters where we think that markets may be deteriorating further. Quite frankly, this time we had one asset that was in that category, and then secondly we had half of the impairment came from a land—a property that we have under contract to sell, so short of the economy going a lot further south, I would think the answer is generally yes but I can’t say that with any level of 100% definitiveness.

Jay Habermann – Goldman Sachs

Okay. Thanks guys.

Operator

And your next question comes from the line of Chris Lucas with Robert Baird.

Chris Lucas – Robert W. Baird

Hey Johnny, I know coming out of ICSC, there was a lot of optimism related to new store concepts and a lot of new demand coming out of there. Have you seen, or what’s your sense as to the new store, new concept demand; and is that meeting what expectations are? How would you rate that relative to expectations?

Johnny Hendrix

Chris, you know, we came out of ICSC and, I think like a lot of times, roaring with optimism. I probably would say that the new concepts have not moved as quickly as we would have hoped they would, and that doesn’t mean that they’re not going to impact us on a kind of mid to longer term. I think the announcements that were made at that time are still being worked through by the retailers, and I think we’ll start seeing those on into 2011 with some of the smaller stores, more flexibility, and a larger appetite for space. We are negotiating some of those today, but we just haven’t gotten to a great a velocity as we had hoped for, I think, coming out in May.

Chris Lucas – Robert W. Baird

Okay. And then on the—just sort of maybe a follow-up in terms of the development side, can you give us a sense as to what your thoughts are on the redevelopment side in terms of volume—dollar volume in ’11 and ’12?

Andrew Alexander

Drew again. As I sort of said before, we’re going to look at all types of opportunities and risk-reward assess each one of them. So redevelopment, I would just say generally it won’t be a big number because it takes a lot for the stars to line up that you have a property that you can buy and that everything works out. So we’ll look at it well, we’ll analyze it right, we’ll do some but I don’t think it will be a huge number, and I would hesitate to guess specifically.

Chris Lucas – Robert W. Baird

Okay, thank you.

Operator

And again, it is star followed by the number one on your telephone keypad to ask a question.

Andrew Alexander

Seeing nobody pop into the queue, I’d just like to say thank you very much for your interest in the Company and participating in our call. All the best to everyone.

Operator

Thank you for participating today. This concludes today’s conference. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Weingarten Realty Investors CEO Discusses Q3 2010 - Earnings Call Transcript
This Transcript
All Transcripts