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Weingarten Realty (NYSE:WRI)

Q2 2014 Results Earnings Conference Call

July 25, 2014 11:00 AM ET

Executives

Michelle Wiggs - Vice President IR

Drew Alexander - President and CEO

Stanford Alexander - Chairman

Johnny Hendrix - Executive Vice President and COO

Steve Richter - Executive Vice President and CFO

Analysts

Jeremy Metz - UBS Securities

Christy McElroy - Citi

Jay Carlington - Green Street Advisors

Juan Sanabria - Bank of America

Jonathan Pong - Robert W. Baird

Ki Bin Kim - SunTrust

Tammy Fique - Wells Fargo Securities

Michael Mueller - JP Morgan

Jim Sullivan - Cowen

Carol Campbell - Hilliard Lyons

Rich Moore - RBC Capital Markets

Operator

Good morning, and welcome to the Weingarten Realty Second Quarter 2014 Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Michelle Wiggs. Michelle, you may begin.

Michelle Wiggs

Good morning and welcome to our second quarter 2014 conference call. Joining me today is Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President and COO; Steve Richter, Executive Vice President and CFO; and Joe Shafer, Senior Vice President and CAO.

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 call, management may make reference to certain non-GAAP financial measures, such as funds from operations or FFO, both recurring and reported, which we believe help analysts and investors to better understand Weingarten's operating results. Reconciliation to these non-GAAP financial measures is available in our supplemental information package located under the Investor Relations tab of our 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.

Drew Alexander

Thank you, Michelle, and thanks to all of you for joining us. We are very pleased to report another fine quarter. operations remained strong with another very good same property NOI growth number at 3.5%. Occupancy continues to increase bolstered by historically low tenant fall out and rental rates on new leases and renewals continue to rise.

This performance is a clear indication that our portfolio transformation is producing the kid of results we expected when we implemented this strategic plan three year ago. Since that time we significantly transformed WRI by disposing of 1.2 billion of non-core assets and redeploying some of those proceeds into $500 million of high quality properties in high barrier to entry markets. Since 2011 we have increased recurring FFO and our dividend every year, even though the transformation has reduced NOI by almost $50 million.

As we have mentioned before, 2014 will effectively mark the completion of this important initiative. Johnny will detail our disposition status, but the summary is we're extremely confident that we will meet our 2014 goals and by year end our transformation will be complete.

As to the recycling of this capital and the high quality assets, the acquisition market remains extremely competitive, we have a couple of opportunities in the pipeline and we continue to look at every deal, but as always, we remain very disciplined.

Turning to new development, we are pleased to announce we purchased the land for Wake Forest Crossing in Raleigh. As discussed in our Investor Day presentation in December, we will develop a $108,000 square feet of new buildings. We have signed leases with T.J. Maxx and Michaels with two other anchors very close to signing leases. This is an expansion of an existing shopping center owned by others that has over 200,000 square feet which includes a food store and the Kohl’s. Our investment in the project will be about $16 million and should be complete by the third quarter of 2015. Additionally, our Hilltop development in Washington DC continues to progress nicely with Wegmans now under construction and scheduled to open in mid 2015.

We're also very pleased to announce The Whitaker, our exciting infill project in West Seattle has cleared the last significant entitlement hurdle with the approval of the Master Use Permit and is now ready to move forward. This six storey mixed-use project is being co-developed with Lennar with our 63,000 square foot retail portion anchored by Whole Foods market. Our investment is about $28 million in completion is estimated to be in the third quarter of 2016. As indicated last quarter, there is more activity in new development. We certainly don't expect to be under construction of a lot of new products soon. But we are seeing activity that is more than just talk and our experienced team is ready as opportunities arise.

I'll now turn it over to Steve to discuss our financial results.

Steve Richter

Thanks Drew. I am happy to report that WRI turned in another solid quarter. Recurring FFO was $0.51 per diluted share for the quarter, up from $0.49 in the second quarter last year. FFO for the quarter benefited from the improved commenced occupancy which increased by 90 basis points from the same quarter of the prior year and the impact of our prior year acquisition.

Recurring FFO also benefited from the redemption of our preferred F shares in June of 2013 as well as the favorable impact of our ongoing refinancing of debt maturities. Offsetting these increases was a dilutive effect of our disposition program in 2013 and 2014 which cost us $0.03 per share of FFO compared to the second quarter of last year.

Reported FFO for the second quarter increased to $0.53 per share from $0.37 per share in 2013. Included in the ‘13 amount was a write-off of preferred redemption cost of $0.13 per share. Additionally included in the reported FFO is about $0.02 per share of deferred tax benefit related to the sale of land held for development that has been excluded from recurring FFO.

Turning to the balance sheet. At quarter end, the company's net debt to EBITDA was 5.7 times, down from 6.24 times in the second quarter of 2013. Net debt plus preferred EBITDA, which many of us agree is a more important measure of leverage, was a strong 6.16 times and debt-to-total market cap decreased to 33%. One contributor this continued improvement in the increase activity in our land held inventory. Since the beginning of the year we have sold $7.1 million of land and transferred another $4.8 million to operations for development, both of which contribute to our improved financial ratios.

As we have mentioned we’re working on other tracks and expect to continue to make progress monetizing the land held. The transformation of our balance sheet from three years ago has been significant as recognized last month by Moody’s who upgraded our outlook to positive from stable.

Additionally subsequent to quarter end we called for redemption the remaining $90 million of our 8.1% notes. Through significant refinancings and restructuring of our debt over the last few years, we have totally transformed our balance sheet and are well positioned for growth opportunities as they arise.

As to guidance, we want everyone to understand that our back end loaded disposition program will cost us NOI and FFO in the second half of 2014 and therefore remain comfortable with recurring FFO of $1.95 to $2.01 per share for all of 2014. We are reducing our guidance for acquisitions to a range of $50 million to a $100 million, but are reaffirming the remainder of the guidance we provided last quarter. All of the guidance details are included on page nine of our supplemental. Johnny?

Johnny Hendrix

Thanks, Steve. Even as economic conditions have been mixed and retailer demand still modest, we continue to gain leverage as existing inventories remain very low and new supplies extremely limited.

Our transform portfolio primarily supermarket anchored centers with discount clothing in major metropolitan market continues to perform well. Today, our supermarkets average $556 a square foot in sales, this translates to 65,000 to 70,000 customers every month just coming to the supermarkets. That's why our centers are the first choice for many retail and service tenants.

When we were in New York last December, we reviewed some of the opportunities we were working on to replace a few of our anchors. For the projects we highlighted was the Westchase Shopping Center here in Huston. Today, we're announcing, we signed a lease with Whole Foods market for a new 45,000 square foot store. This is a fantastic replacement for the Randall's, whose lease expires this month.

Once the redevelopment is complete, we estimate we'll pick up a net of $10 million in net asset value. I expect Whole Foods to open in early 2016, so we'll have a little downtime. But this is a good example of the short-term paying and long-term gain we talked about at our Investor Day. The portfolio same property NOI continues to perform at the top end of our expectations and at the top end of our peer group. Weingarten Same Property pool represents about 94% of the total company net operating income.

At quarter end, we increased same property occupancy the 95.2%, so it's clearly a significant part of our NOI growth. We also increased base minimum rent in our same property pool by 3.5%, a great indication of the strength of our portfolio. Over the last 10 quarters Weingarten has averaged 4% in same property NOI. Another significant contributor to our same property NOI performance has been the decrease in fallouts. We only lost 89 tenants in the second quarter the fewest since 2005, we have better properties and we have better tenants and that is clearly contributing to our performance.

We have a great operating platform and we are efficient at leasing space but we are always looking to get better. Our shop centric program which is basically tools for prospecting and processing leases really highlights our strong platform. We just added electronic signatures to the program allowing our tenants to sign leases digitally. This easily reduces the leasing cycle by five days, it gets tenants open and paying rent faster and provides much greater efficiency allowing leasing executives time to work on new deals rather than chase signatures.

This is a little thing that demonstrates how we are focused on executing everyday. As for occupancy we increased to 94.8% during the quarter that’s up 60 basis points from a year ago and 30 basis points over the last quarter. Shops improved at 88.6% and remain at primary focus. We still have some opportunity increase occupancy going forward to around 95% to 96% although there could be some variability before we reach stabilization.

The recovery in Florida has been very impressive our occupancy there is 95.8%. California is 96.2% and Texas is 95.4% these three states represent 60% of our company’s NOI. As a reminder about a third of our portfolio is in Texas. In the past 10 years 29% of the nation's net new jobs were created in Texas. Houston and Dallas have produced the highest percentage of job growth in the top 20 metros. And with our low cost of live in a pay check in Houston goes farther than any other major metropolitan area.

Rent growth continues to improve. The company produced rent growth of 9.4% overall with new leases at 10.9% and renewals at 8.9%. Overall about 90% of all our leases signed during the quarter had increases. A good indicator that we continue to gain leverage. All the outstanding operating metrics, we've been posting show the impact that our transformation has had on Weingarten's portfolio.

On page 41 of the supplemental, we've highlighted the change from the beginning of 2008 to the present in many of our key metrics. Average base rent per square foot has increased by 26%. Average household income has increased by 17%. The number of college graduates is up 22%. And these improvements are for the entire portfolio, not just the difference between the properties we bought and sold.

So, you can see the impact of the transformation is profound. As for dispositions we see very strong demand for our non-core centers. So far this year we sold $100 million with a cap rate of 7.3%. We've also built a large pipeline which gives me confidence, we will be above the midpoint of our guidance range of $300 million to $400 million. Obviously it will mostly be back end loaded.

Today, we have 13 properties under contract for $86 million. We have 13 additional properties with letters of intent for $144 million and the company is actively marketing another $330 million. This pipeline of $560 million will give us the ability to maximize values as buyers negotiate and assures we will achieve our guidance. Again we feel very good about our status here. Most of the assets we are marketing are listed on our website so you can see exactly what we're trying to sale.

On the acquisition side of the equation we remain disciplined. We're looking in the primary markets where we already have a presence. We're looking for high incomes, good density and high education levels. We want the assets that would rank in the top 30% of our portfolio. We require new assets to be accretive within a few years and we want annual growth around 3%.

We're seeing this type of asset trade for cap rates in the range of four and three quarters to 5.5%. We have a couple of properties under contract now and we're working through due diligence process. So there is no guarantee we will close.

While external growth is challenging we found great opportunities to create value in our existing portfolio. We have eight active redevelopment projects and expect to stand around $44 million with projected incremental returns between 11% and 15%. We have a list of those projects on page 14 at the supplemental with a short description of the work.

Also there are 13 near-term pipeline projects with an estimated investment of $34 million. I'll expect to start work on most of those redevelopments within the next six to 12 months. They are all projects where we are adding square footage and revenue and ultimately improving the net asset value of the property.

So we're excited about the progress we've made this quarter and looking forward to the second half of 2014. Drew?

Drew Alexander

Thanks, Johnny. It was a good quarter, good progress on the transformation, great operating metrics, especially the 3.5% same-property NOI growth; progress on the new development front; monetization of some of our land held inventory; some opportunities for acquisition; increased redevelopment activity and upgrade from Moody’s; FFO growth in spite of NOI loss to dispositions. I am proud of our team and all of our accomplishments; great people; great properties and a great platform equals great results. I want to thank all of you for joining the call today and for your continued interest in Weingarten.

And operator, we’d be very happy to take questions now.

Question-and-Answer Session

Operator

Thank you Drew. We will now begin the question-and-answer session. (Operator Instructions). And from UBS Securities, we have Ross Nussbaum on line. Please go ahead.

Jeremy Metz - UBS Securities

Hey, good morning. It’s Jeremy on with Ross. I am trying to get a little bit of understanding; you talked about historically low tenant fall outs at a nine year low but the small shop I can see was flat year-over-year. So I am just trying to get a little bit of feel for closings are at a big low, demand is holding, I would have expected to see that occupancy pick up a little bit?

Johnny Hendrix

Hey Jeremy, this is Johnny. Good question. Some of that is impacted by the dispositions that we’ve had over the last little bit and we’ve had relatively high occupancy in the shop space there. And then some of that is just -- some of it has cycled. And you can see our spread between commenced and signed occupancy has gone up a little bit and some of that is in there.

Jeremy Metz - UBS Securities

Okay. And then just in terms of same-store NOI, you reaffirmed your guidance range of 2.5 to 3.5, you're trending at the very high-end of that right now. Just thinking about the back half of the year, is there anything that we should expect, anything driving expected slowdown or is it just tougher comps, or do you think some of those store closing then maybe having them in the first half of the year, maybe pick up in back half for the year?

Drew Alexander

Yes Jeremy, you really hit it with that last part of the question. And what we talked about in New York was, we were going to have some of our anchors and sub-anchors who we were going to be replacing in a couple of Office Depots and that is happening. And when you look at the Randall store, the lease expires this month and we won't have the Whole Foods online until 2016. So, there is a little bit of a drag on some of the tenants that we’re replacing; and that's really the primary piece of in terms of same property NOI.

Jeremy Metz - UBS Securities

Great. Thank you.

Operator

From Citi, we have Christy McElroy online. Please go ahead.

Christy McElroy - Citi

Hi, good morning everyone. Given that you’re now expecting a meaningfully higher level of dispositions in 2014 versus acquisitions, Johnny you referenced the pipeline of 560 million. At NAREIT when we talked about capital recycling, you talked about the possibility of special dividend given a tax simplification. Can you provide your updated thoughts on that and if you did do a special dividend what would be the timing?

Drew Alexander

Good morning, Christy. It's Drew. That is a distinct possibility and I think a lot of it is really hard to forecast specifically but it is a distinct possibility. It gets into -- if we find other acquisitions, how much we can 1031 even some of the land parcels that we are looking at in new development are expensive enough that it probably makes sense to 1031 those. So other than that it’s a possibility, I don’t know that we have a whole lot of color on it, but we will as we go into the end of the year and towards next year.

Christy McElroy - Citi

Okay. And then as I think about sort of your portfolio overall and your ability to push rents versus occupancy, can you talk about which market do you have the greatest pricing power where revenues are being driven by upside in rents at this point versus markets in your portfolio where you still have some sort of overall market vacancy where you are able to get occupancy higher but you still get price pressure at it?

Dew Alexander

Yes Christy, we have clearly done very well in Texas. If you look at what’s pushing the rent growth, we are probably around 15% in Texas overall. We have done very well in Florida. We have very good leverage there; a lot of the space has been taken up. California has been a little bit lower. And most of the issue is California is not the demand associated with the spaces but the level of the rent was at on the last turn where we are moving some rents from $60 to $55 and it’s still high rent but it’s difficult to get the rent that we got at the peak there in California. And then I would say generally, the major metropolitan areas that have high density, high income, we're doing very well in markets where secondary or tertiary markets maybe in some of the properties in Louisiana. We are it's more difficult to push rents in those areas.

Christy McElroy - Citi

That's helpful. Thank you.

Operator

From Green Street Advisors, we have Jay Carlington on line. Please go ahead.

Jay Carlington - Green Street Advisors

Great, thanks. Andrew, can you maybe comment on any interest in pursuing one of your local peers that's evaluating strategic alternatives and you had any interest there in the past?

Drew Alexander

Good morning Jay. Yes, I would say we are definitely interested at the right price. You know those folks, seeing them a lot talk if I had some what I could describe as very casual conversations overtime about I am reading, and would it make sense to combine their good properties and I would say right pricing, right other things. We would definitely have an interest.

Jay Carlington - Green Street Advisors

Okay. And Johnny I'm kind of looking at the dispositions through the year and how you think about that going forward? And I think the in average cap rate 7.3% maybe a year ago that was north of 8%. So, are these higher quality properties that’s left in the pipeline or is just cap rate compression and how do you see? And are you seeing any changes in the buyer approval?

Johnny Hendrix

Yes, Jay several good questions here. First of all, I think that cap rates have gone down generally in secondary, tertiary markets probably 50 basis points over the last 9 months to 12 months. And I think that's a lot of what you are seeing.

Actually I would comment that the quality of the properties we're selling today is less than the quality of the properties we sold last year. So, overall a lot of that cap rate compression.

In terms of the buyer pool it's pretty much the same group of folks. But I would tell you that we're starting to see some institutional demand trickle into the secondary markets cities that have a million or so. And that demand is highly focused on supermarket anchors and with the higher volumes. But it certainly is part of what is pushing cap rates down and increasing demand in those markets.

Jay Carlington - Green Street Advisors

That's great thank you.

Operator

From Bank of America we have Juan Sanabria on line. Please go head.

Juan Sanabria - Bank of America

Hi, good morning Drew I was just hoping you could help us think about dispositions with an eye towards 2015 I know you said we're basically done at the end of this year with a disposition pool but given sort of your guidance for this year and what's left to be potentially on the market. whatever you don't sell this year will that be looking to be sold over the course of 2015 or how should we be thinking about that?

Drew Alexander

Good morning Juan, again several good questions in there. I think a lot of the specifics will have to play by here in terms of how we end up this year and how you count things that close in the first quarter of next year. What we talked about in New York which is I think a very good way to look at it is we think ongoing that dispositions pruning capital recycling is a big part of our strategy. And what we talked about in New York is sort of a stabilized after the transformation would be about 125 million to 175 million. So the mid-point of that is obviously about 150.

And we think the spread between what we're buying and the quality that we'll be selling then will have narrowed. As Johnny mentioned the spreads on really good trophy properties have dropped quite a bit. So I think the best way to think about ongoing dispositions would probably be around 7, which is lower than where we’ve been recently even with the improvement in cap rates that Johnny just spoke about.

Juan Sanabria - Bank of America

Great thank you. And with regards to developments you said that there is -- it's more than talks you kind of mentioned that last quarter as well. Can you comment on sort of the bid-ask spread on the necessary rents to get the developments depends a lot and maybe what markets your maybe closer to being able to actually harvest some opportunities you talked about, some land purchases that you could be used to 10.31 offsets that are pretty chunky. So where exactly are you seeing the best opportunities?

Drew Alexander

We’re active across the entire footprint and very comfortable investing in the major metropolitan areas in the 12 states that we’re looking at from Washington State to Washington DC and obviously with active projects in both Washington State to Washington DC those are great markets for us. Houston as we talked about again, and New York is very hot but part of the problem there is competing with the apartment folk. So we’d love to do more here but it’s extremely competitive. So obviously we move forward on the project in North Carolina we’re looking at things in Florida, elsewhere in Texas, Arizona and California.

So as we tried to articulate we do think it’s something real, we do think there will be more activity but it will definitely be a trickle. It’s hard to put an exact number on that bid-ask spread, but I would say there are still a good 10%, 15% difference between what you need in a lot of projects and where the tenants are and with the economy being okay not great they don’t have that tremendous pressure to increase their opened to buy. So I think it’s something real but as I said last quarter it’s not a flood, it's a trickle.

Juan Sanabria - Bank of America

And should we expect more mix use just given the cost of land? I know you specifically reference Houston just curious on your thoughts there. And I will leave it at that.

Drew Alexander

I think that will be a trickle as well, but yes it will be more. I mean that's where a lot of the retailers, the millennials are today is a much more urban lifestyle. So projects like we're doing in West Seattle and involved in Washington D.C. will play increasingly important role in the company's development pipeline.

Juan Sanabria - Bank of America

Thank you.

Operator

From Robert W. Baird, we have Jonathan Pong on the line. Please go ahead.

Jonathan Pong - Robert W. Baird

Hey, good morning guys. TI for square foot at the little high third over $19 for new lease this quarter. Was that just a function along our lease terms or whether a few larger leases that may have skewed that a bit?

Johnny Hendrix

Hi Jonathan, good morning. Yes, you hear on there is really two leases that moved that [head’s mark] where we actually took in what we call some no front space or some space that hadn't been occupied by the last tenant and combined some shop space with it and the cost of that was a little bit more than what we traditionally would see.

Jonathan Pong - Robert W. Baird

Got it, thanks Johnny. And then with the reduction and acquisition guidance. Can you give us an update on your thinking about what you're going to do with the comparable first this year?

Drew Alexander

That’s something Jonathan we look at constantly, it will depend upon the results of what the disposition acquisition program comes up net towards the end of the year. There is a possibility I would acknowledge that. But at this point I think it's too early to call one way or another where we wanted to implement.

Jonathan Pong - Robert W. Baird

Okay. Thanks guys.

Operator

From SunTrust, we have Ki Bin Kim online. Please go ahead.

Ki Bin Kim - SunTrust

Hey thank. Just a quick question on market rents. What do you think market rents are probably doing this year in Texas for junior box space or small shop space? And how does that flow into maybe the forecast given what’s expiring next year and the vintage of the expiring leases next year? What do you think we could see possibly from a rent spread perspective?

Drew Alexander

Hey Jonathan.

Ki Bin Kim - SunTrust

Ki Bin.

Drew Alexander

I am sorry Ki Bin. I think it’s hard to generalize all of the spaces in Texas. I can tell you that generally speaking rates are up and they are up for the year somewhere around 10% to 15% for the quarter. Given the low supply and the low amount of new development that we are seeing coming into the market I have to believe that we will continue to see pressure on prices and we’ll continue to see prices rise, even today as strong as Houston is you are just not seeing a lot of new development because of the competition we have with other uses in the high density populated areas.

Ki Bin Kim - SunTrust

And I just want to clarify when you say 10% to 15% are you talking about market rents or are you talking about the spread from expiring to resigning?

Drew Alexander

Yes I was talking about the spread on expiring. You’ve probably seen if you are looking at an annualized number today 3.5%, 4% increases in rent.

Ki Bin Kim - SunTrust

Okay and…

Drew Alexander

On good properties.

Ki Bin Kim - SunTrust

Okay. And just one follow up. When I look at lot of strips -- I mean the data really is more probably geared towards the junior box users and anchors. But it doesn't really seem like retailers are pushing up great sales numbers. But when it comes on rent taking for spaces, what do you think matters more in a market like Texas, where supply is low? Is it just a lack of supply and multiple bidders or is it at the end of the day for the sector to do better, do we just need a lot more robust sales coming from the retailers themselves?

Drew Alexander

Well, certainly more robust sales would be helpful. You are absolutely correct, we are seeing multiple sales reports that are some are good, some are not so good, Kroger sales are up 4% the last report that they gave but some of the other junior boxes are far less. We're definitely seeing a little more business with the home improvement and in furniture. A lot of that is because of the residential boom that we've had going on.

Overall, I think we need both, we need to continue to have a low supply and certainly will need a little bit more robust sales for things to pick up more dramatically.

Ki Bin Kim - SunTrust

Alright. Thank you.

Drew Alexander

Thanks.

Operator

From Wells Fargo Securities, we have Tammy Fique on line. Please go ahead.

Tammy Fique - Wells Fargo Securities

Yes, I was just curious, it looks like last quarter, you were close on a $42 million acquisition. Can you talk about if that's still in process and if not, what happened?

Drew Alexander

Good morning Tammy, it's Drew. I don't know the specifics of the deal you are referencing is mentioned. We have some deals in the pipeline; some things have been taken a little longer than ideal. So, it maybe the deal is still working. Johnny reminds me there was a deal in Phoenix that we’re working on that didn't past due diligence.

Tammy Fique - Wells Fargo Securities

Okay. Thank you. And then I guess how would you characterize the additional $250 million of projects that went into the disposition bucket this quarter versus last quarter. I guess just sort of thinking that with the $400 million of decisions that you planned for the year at the top end that you were kind of getting through the transformation process. I guess if you could just sort of characterize may be what would cause you to add another $250 million to that pipeline that would be helpful. Thank you.

Drew Alexander

Tammy, what we’re seeing is in a lot of these secondary markets, a lot of negotiation, not only on the front end but then after due diligence. And really I think in order for us to maximize the value to our shareholders, we elected to add a few more properties to the list. These are properties that are in secondary markets like a Lexington. And we are eventually going to exit those markets. And I think we’ll be able to make a judgment later on if we continue marketing those and if we close some of the other stuff that we currently have under contract or negotiating letter of intent with.

Tammy Fique - Wells Fargo Securities

Okay, great. Thank you.

Operator

From JP Morgan we have Michael Mueller online. Please go head.

Michael Mueller - JP Morgan

Yes, hi. Drew in your prior comments about asset sales in response to a question, I may have missed it, but did you basically clarify in terms of saying on a go forward basis we think we’re going to have this level of recurring assets sales? How do you think about that especially in an environment where it seems like acquisitions are still large to come by?

Drew Alexander

Yes, I hope to and I am happy to try to do that again. What we talked about in New York in sort of the stabilize go forward world where we see pruning the portfolio and dispositions as an important part of our business that would be somewhere in the 125 to 175 cap rates, call it about a 7, my own view is that acquisitions, there will be something out there but it is conceivable that if acquisitions was nothing, then we’d be at the lower end of that on a sort of stabilized basis.

Michael Mueller - JP Morgan

Okay. That was great. Thanks.

Operator

From Cowen, we have Jim Sullivan on line. Please go ahead.

Jim Sullivan - Cowen

Good morning, thank you. It would appear given how difficult the acquisition market is that the redevelopments as alternative or incremental source of capital seems to be much more accretive. You indicated 10% to 15% yield on these. And I just want to be clear that what you have in the pipeline, I think the average project size is about $5 million. But you’ve talked about in near-term I think the average investment per project was a little bit less. But you do identify in that in your stuff that there is more than 70 projects that you’re actively looking at. I wonder if there is kind of, Drew or Johnny, if there is kind of an annual run rate that you think you can do here in terms of deploying capital at those kind of yields?

Drew Alexander

Yes Jim, good morning. Yes, we kind of would look at somewhere around $30 million as probably an average run rate. Over the last several years that’s kind of been where we’re at. When you look on page 14, you have $43 million but that won’t be done all in a single year and then you’ve got the properties back behind that.

Jim Sullivan - Cowen

Now, in terms of the size, when you define and this is maybe a Steve question. But when you define your same property NOI excludes by definition any redevelopment. So I just want it to be clear there is Steve, kind of some dividing line between one project is major enough to do excluded or do you simply exclude is that's a definition had a sense every redevelopment?

Steve Richter

No, Jim, good morning. Let me clarify the distinction is not this in redevelopment if excluded from same property pool. Actually the way that we define kind of what gets included in redevelopment is when we're changing the footprint of the shopping centers. So with we're building a building, tearing down a building et cetera is really kind of what drives that and I think it's noted in the supplemental which ones are include, no.

So but I guess back to the point is that, there is some of the redevelopments that are included in same-store and some of them are not.

Jim Sullivan - Cowen

I see.

Drew Alexander

Jim probably a good example would be Brookwood in Atlanta. I'm tearing down a former Home Depot building and building a new floater building and a new LA Fitness building. Well, I have renewed that property from my same property NOI. Here in Houston we're tore down a pad that was a restaurant and we're putting a little floater building in there. But kept that property in my same property NOI and I've been consistent about it, I’ve kept in the end, well I'm tearing the building down and I'm going to leave it, when I add the new building. So that's kind of the new onside there small, if it's kind of the ordinary course of what we're doing in business and then we'll probably leave it in if it's bigger we're going to tear down some major a building area, then we’ll take it out.

Jim Sullivan - Cowen

Okay. And then finally from me in terms of the same property NOI, your retail portfolio of course comprises a variety of product types or categories as we think about it from smaller grocery-anchored centers to larger community centers and tower centers and I just wonder as we think about the relative same property NOI growth for the property types is there any material difference in terms of the growth rates that you are seeing is there more potential going forward for more growth in one property type than in another or is the differential in same property growth more kind of a regional issue?

Drew Alexander

Jim, there does tend to be some difference in property types. We have looked at it a couple of occasions and I think the supermarket anchored centers grow at a more steady and constant rate than the more power centers seem to grow kind of jerk along like there will be big increase and then they will be flat for a little while. Overtime, they seem to be around the same, and that’s really kind of how we have seen same property growth in those two property types. Relative to regional areas, the great thing about being diversified is sometimes Texas is hot sometimes Florida, sometimes California and overtime it does seem all even out.

Jim Sullivan - Cowen

Okay very good, thank you.

Operator

From Hilliard Lyons we have Carol Campbell online please go ahead.

Carol Campbell - Hilliard Lyons

Good morning. Can you talk about the health of your mom and pop centers?

Drew Alexander

Yes Carol, it's interesting the companies number of mom and pops tenants has gone down pretty dramatically over the last several years. Today, we're about 77% national and regional tenants in a lot of franchises in that.

Overall the ones that have survived this financial crisis seem to be doing well. And that's why the fallout is relatively low. They seem to have access to cash. I've even heard kind of going back to some of the home ATM plan. So, I feel pretty good about kind of what's happened in the ones that have survive, seemed to have good sales, good business plans and things seems to be going pretty well with them.

There is not a lot of new business formation in that category today. And I think there is a lot of fear in terms of government taxes and regulations and other things. So, hopefully they will gain some confidence and we'll get that business kind of coming back.

Carol Campbell - Hilliard Lyons

Are you seeing the tenants that are surviving are they in a specific category like food or services or where are those tenants mostly located?

Drew Alexander

I can say that, there is almost none of them in retail. So you cannot compete with Ross and Marshalls and TJ Max and Wal-Mart. Where you really seeing the formation of mom and pop business is services. Some in the medical services, but a lot of the other services insurance, nail salons different kind of things like that. And that's really almost all the new business formation that we are seeing today.

Carol Campbell - Hilliard Lyons

Okay. Thank you very much.

Operator

From RBC Capital Markets we have Rich Moore online. Please go ahead.

Rich Moore - RBC Capital Markets

Yes, hi good morning guys. So Johnny, as follow-up to Carol’s question, you guys have been doing national tenant leasing for small shops for quite some time and that's kind of been the way things have been going. And I am curious at this point if may be some of these locations, I mean you've seen these vacancies, may be some of these small shop locations and you're saying there is really won't ever be leased I guess that is not in the right spots. And so we don't see the kind of jump in occupancy that we might hope for?

Johnny Hendrix

I hope not. Our plan is certainly to lease them and I think we do have good quality spaces that are still available. To get to that 95.5% on need to lease a little bit over 200,000 square feet of shop space. I think that we can do that. And I think we'll over time be able to manage through that.

Rich Moore - RBC Capital Markets

So, you are still seeing the interest from the national guys for the smaller spaces?

Drew Alexander

Oh definitely, yes. That's where -- from the national guys that's really where the business coming from. You got Chipotle, SUBWAY, Vitamin Shop, Sally Beauty. So you still have a lot of those folks who are out there looking for space.

Rich Moore - RBC Capital Markets

Okay, great. Thank you. And then just a quick follow-up on the redevelopment. You guys identified 73 long-term projects, you called them in the supplemental. And I am curious is that just -- do you have little something to do on every one of the assets and the portfolio or do you actually have 73 identified projects I guess?

Drew Alexander

Yes Rich, this is -- the 73 projects, there are 73 projects that we have identified where there are opportunities for redevelopment. Now some of these could be building a pad, some of these could be carrying down buildings and going vertical. Now, it's going to be a long time before those things are realized because we have to -- have issues with other tenants and tenant that we -- it will just take a long time to work through. So, what we’re trying to do is identify just over a period of time one of the projects we’re working on. We do review those projects on a regular basis, those projects; we are working toward redevelopment clauses in most of leases so we can do something at the time as appropriate.

Rich Moore - RBC Capital Markets

Okay, great. And so this gets you to the $30 million of redevelopment annually kind of target?

Drew Alexander

Right.

Rich Moore - RBC Capital Markets

Yes, great. Thanks very much.

Drew Alexander

Thanks Rich.

Operator

And from SunTrust we have Ki Bin Kim back on line. Please go ahead.

Ki Bin Kim - SunTrust

Thanks. Just a quick one. Can you just walk me through how complicated or maybe easier it would be if you did pursue some kind of public acquisition to use OP units to make that transition for the sellers on the kind of tax issue, is that an easy process or is that -- and is it guarantee that long as you work through or is there a lot of hurdles regarding that, potentially?

Stanford Alexander

It’s pretty simple, plus if you’re just doing a merger, you’re trading stock for stock, you don’t even need to go through the exercise of OP units. The stock for stock is a like kind of [exchange].

Ki Bin Kim - SunTrust

Okay. That’s it. Thanks.

Operator

And from [West Main Partners] we have [Adam Joseph] on line. Please go ahead.

Unidentified Analyst

Good morning, guys. Couple of questions as it relates to the Safeway and related entities. Where are you on exposure with the number of those properties? And how should we think about as those leases come off to us? You obviously trade it up in a big way by replacing probably underperforming rentals with the great rental with Whole Foods. How should we think about that? And if I can ask kind of a third question or two, what other conversations you’re having with them and what are you doing proactively to maybe alleviate any potential problems that they might have in their portfolio line up? Thanks.

Drew Alexander

Right, we've been in very close contact with Safeway and with our friends at Randall's, we've obviously had a very long history with them. And I wouldn’t say that the vast majority of the 7 Randall's we have remaining or very good stores. And I'm really not concerned that Randall's will close them and not do something with them. Probably the biggest issue for me is will I'll be able to take advantage of an opportunity if something did happen to Randall's.

Now I will tell you that they have been adamant that they are going to continue to operate their stores in Houston. And hopefully with Albertsons and Safeway, they will be able to pick up sales. So I feel good about overall the stores that we have with them and what we'll be able to do. My guess is, if they we're going to close, they would sale most of those stores to another operator.

Unidentified Analyst

Okay. So in the total portfolio of Safeway and related companies Randall's and the other brands, you have seven properties that classify as exposure per se?

Drew Alexander

No and I apologize if I misled you. I have seven Randall stores, I also have, I'm sorry. I have 17 total Safeway stores.

Unidentified Analyst

Safeway and related brands correct?

Drew Alexander

Right, right. And again in terms of the merger, I don't see that we're going to have a lot of issues, we're not in areas where Albertsons and Safeway overlap much. And so I think that we will be in pretty good shape and again it's not really something that I've been tremendously concerned about, because of the quality of the properties that we have with them.

Unidentified Analyst

Okay. And finally the supporting tenants in those centers where you have the Safeway and related brands are you getting any comments from your other tenants as to how they see this potentially falling out or happening or being replaced is there any feedback you are getting from some of those kind of long standing supporting tenants that’s around those stores?

Drew Alexander

I think for the most part people are encouraged that they would bring in a new operator and that would be able to maybe even increase sales over a period of time I think they are doing a fine job with the stores today and Albertsons hopefully will improve that.

Unidentified Analyst

Great, excellent I appreciate the feedback thank you.

Operator

(Operator Instructions) Okay, looks like we have no questions at this time. Drew, I am going to hand it back to you for final remarks.

Drew Alexander

Thanks Brandon, I appreciate everybody’s attention and interest in Weingarten and your participation in the call and we are certainly around if there are any follow up questions. Thank you so much, have a great day and great weekend.

Operator

Ladies and gentlemen this concludes today's conference. Thank you for joining. You may now disconnect.

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