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Weingarten Realty Investors (NYSE:WRI)

Q2 2008 Earnings Call

August 1 2008 11:00 am ET

Executives

Richard Summers - VP of IR

Drew Alexander - President and CEO

Stanford Alexander - Chairman

Johnny Hendrix - EVP

Steve Richter - EVP and CFO

Robert Smith - SVP and Director of New Development

Analysts

Tom Baldwin - Goldman Sachs

David Wigginton - Merrill Lynch

Craig - Merrill Lynch

Michael Mueller - JPMorgan

Ambika Goel - Citi

Philip Martin - Cantor Fitzgerald

David Fick - Stifel Nicolaus

Jim Sullivan - Green Street Advisors

Richard Moore - RBC Capital Markets

Chris Lucas - Robert Baird

Jeff Donnelly - Wachovia

Operator

Good morning. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weingarten Realty second quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Richard Summers, Vice President of Investor Relations. Sir, you may begin.

Richard Summers

Thank you, Natasha. Good morning, and welcome to our second quarter 2008 conference call. Joining me today are Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President; Steve Richter, Executive Vice President and Chief Financial Officer; Robert Smith, Senior Vice President and Director of New Development; and Joe Shafer, Vice President and Chief Accounting Officer.

As a reminder, certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company's SEC filings.

I would like to request the callers to 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 would now like to turn the call over to Drew Alexander.

Drew Alexander

Thank you, Richard. Good morning, everyone. We achieved FFO per share excluding a non-cash preferred share redemption charge of $0.79 in the second quarter, up 5% from the prior year. Our high quality portfolio properties continues to perform reasonably well in this challenging economic environment, with same property NOI growth of 2%, occupancy of 93.6%, and average GAAP rental rate increases of 17.2% for the quarter. As a matter of fact, our rental rate growth is in an all time high.

Johnny Hendrix will review the results from our existing portfolio in more detail in a few minute. We continue to make good progress on our new development projects, including merchant building activity. We recorded merchant building gains of $0.07 per share in the second quarter. Robert Smith will be reviewing our new development progress in more detail in a few minutes.

Dispositions of non-core properties totaled $87 million in the second quarter and $106 million for the first six months of 2008. Acquisition activity continues to be extremely slow, as both buyers and sellers wait to see where prices will settle in this softening economy and challenging credit environment.

I'd now like to turn it over to Steve Richter to review the financial results for the quarter and our full year guidance.

Steve Richter

Thanks, Drew. We turned in a solid second quarter operating results. Excluding the non-cash preferred redemption charge, our adjusted FFO per share was $0.79, a penny above consensus estimates and up 5%, or $0.04 per share, from the second quarter of last year. The growth of $0.04 per share primarily came from our existing portfolio and the new development program. The 2% same property NOI, that Drew referred to above, added $0.02 per share to this quarter's FFO, even after a slight decrease in occupancy. The impact of $107 million of completions from our new development program over the past year, added approximately a penny a share for the quarter.

Merchant build gains for the quarter totaled $0.07 per share, up $0.04 per share from the previous quarter. The FFO growth from the existing portfolio and the new development program was partially offset by the additional cost from preferred shares issued since the second quarter last year and the decrease in the new development interest capitalization rate, which result in a decrease in interest expense versus the prior year.

From a capital perspective, during the quarter we reopened our 6.5% Series F preferred shares and issued an additional 6 million shares at a discount, raising a $118 million. The effective cost of this capital is 8.25%. The proceeds were ultimately used to pay off approximately 60% of our variable rate Series G preferred shares, and subsequent to quarter end, we refinanced the remaining $80 million of the Series Gs using our revolving line of credit.

As a result for the quarter, we wrote off part of the original issuance cost for the Series G preferred, resulting in a non-cash redemption charge of a penny per share and we will realize the balance or an additional a penny per share in the third quarter.

Turning to the future, we are reaffirming our 2008 guidance for FFO per share in the range of $3.21 to $3.27 per share, representing growth of 5% to 7% over 2007. Although as we said last quarter, we are guiding towards the lower end of that range. Our guidance also excludes the impact of the $0.02 per share of preferred redemption charge I just mentioned.

We are reaffirming new development completions of a $110 million to $130 million. We continue to project merchant build gains in the range of $0.14 to $0.20 per share. As one might expect, we have numerous merchant build transactions that are currently working.

During the first six months, we generated $0.07 per share or half of the lower end of the guidance range. We still feel we can achieve the lower end of our range, but acknowledge it is a difficult and uncertain market. This quarter, we reported same property NOI growth of 2%. We are reaffirming our full year guidance in the range of 2% to 2.5%. And Johnny will provide more details on that in just a few seconds.

I would now like to turn the call over Robert Smith to talk about our new development programs.

Robert Smith

Thanks, Steve. Having completed two projects and adding two new projects since last quarter, the company has 35 properties in various stages of development. We've invested $390 million to-date in the projects currently underdevelopment and estimate our total investment when they are completed to be $622 million. From this pipeline, we are projecting that 13 of the 35 projects will be stabilized by the end of 2009. These centers include tenant-owned square footage are currently at 79% leased even after taking two stabilized projects out of the pipeline that were move than 97% leased.

We recently stabilized two outstanding grocery anchored shopping centers that were part of our new development pipeline, Raintree Ranch Center in Phoenix and Sharyland Towne Crossing in Mission, Texas. Raintree Ranch is a 140,000 square foot center anchored by Whole Foods and Sharyland Towne Crossing is a 489,000 square foot center anchored by Target and HEB Grocery. These two centers have a combined Weingarten investment of $56 million, a weighted average yield of 9.1% and current occupancy levels in excess of 97%.

As Steve reported, we are reaffirming our completions guidance for 2008 in the range of a $110 million to $130 million. Our merchant build activities contributed $0.07 of FFO per share in the second quarter. We are reaffirming our merchant build guidance of $0.14 to $0.20 per share but expect to be in the bottom end of that range. This is a very challenging transaction market and we are acknowledging the risk that some transactions planned for 2008 could slip into 2009.

Conditions in the economy are leading to fewer development opportunities as well. To offset the future impact of this slowdown, we are expanding the marketing to local developers where we can provide them with equity that may be required to complete their projects. Beginning to see some opportunities in this area, but I believe that it is still too early to invest at these risks adjusted returns because they're not yet at our required hurdle rates.

We have to see more opportunities later in the year and believe that it is a great way to leverage our expertise and increase shareholder value. We did add two less typical, small new projects in the second quarter, which will have a total investment of $12.5 million upon completion, Epic St. Augustine in Jacksonville, Florida and the Shoppes at Wilderness Oaks in San Antonio.

We purchased Wilderness Oaks and planned to parcelize this freeway front-edge site by selling to pad users. Epic St. Augustine is anchored by the 16 screen Epic Theater and will be surrounded by specialty shops, consisting of approximately 17,000 square feet of retail space. Epic Village will be complemented by other restaurants and boutique shops with an emphasis on family entertainment. We are projecting both of these projects to generate double-digit returns on investment.

In summary, while we are fighting the headwinds of the economy, we still see quality retailers willing to commit to new locations, but like previous down cycles, it takes longer to get deals completed. We continue to look at new opportunities. However, our yield expectations have increased given the current environment and we expect it to take a while for the market to adjust a higher yield of requirements. But as always, we are patient long-term investors.

For more information on all of our projects underdevelopment, I would direct you to our supplemental as well as to our website at www.weingarten.com. On the website, you will find a description of each of our projects, including current site plans, trade area demographics, maps and aerials, and other important information about each of the projects.

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

Johnny Hendrix

Thanks, Robert, good Morning to everyone on the call. We are continuing to see tremendous pressure on consumer spending. High fuel prices, falling home equity, higher food costs, and tentative employment environment, are all weighing on consumers, encouraging or even forcing them to reduce discretionary spending. This can be observed with consumers moving down the price value spectrum, searching for greater value and lower prices.

Instead of going to a sit-down restaurant, they are eating fast food or going to the supermarket and eating at home. Instead of buying full price clothing, they are willing to wait for a sale or seek out discounted apparel. Retailers selling at a discount like Ross, T.J.maxx along with price clubs like BJs, and super markets like Kroger, Safeway, and Publix are driving in this environment.

These are the retailers that had been consistently increasing sales and market share over the last several quarters. This atmosphere had slowed retailer growth, but it has not stopped retailers from expanding. In recent months, we had signed leases with Ross, Michael, Books-A-Million, TJX, McDonald's, Docks, Dick's Sporting Goods, Office Maxx, Coles, New York 24 hours business and many others. Our leasing velocity has been very strong. We signed 320 new leases and renewals, totaling 1.6 million square feet this quarter.

We are also reporting leases commenced during the second quarter have very strong rent increases of 17.2% on a GAAP basis and 12.2% on a cash basis. The primary drivers for these increases were new leases, which increased more than 20% on a cash basis. This is the second consecutive quarter we are reporting strong rent growth.

We have every indication that both our rent growth and leasing velocity will continue. The number of leases we have between the letter of intent stage and signed is slightly ahead of our two-year average. And leases that are already signed and not commenced have a 15% increase in rents.

The consumer slowdown has negatively impacted our occupancy, forcing marginal or undercapitalized retailers out of business. While the company as a whole was flat at 93.6% in Q2 versus 93.7% in Q1, the retail portfolio was down more significantly to 94.2% in Q2 versus 94.8% in Q1. This reduction was primarily due to two closed supermarkets whose leases expired during the second quarter.

Looking forward, I think we will see retail occupancy however close to where it is today through the balance of 2008, as our leasing velocity will be offset by more store closings, including the several bankruptcies working through the system today, as well as some continued small Shoppe fallout. Specifically addressing bankruptcies, we had 10 Linens N Things stores. While none have closed today, we do expect two will be closed during round two of their store closings. One, we own a 100% of and the second we own 50%. The timing of these store closings is still uncertain and could be late this year.

We know there will be around three of closings but expect that next year. We have three Shoe Pavilion stores, which are pretty new, but our projected occupancy accounts for one of those to close. We have three goodies, which we expect to remain open. We do not have any Steve & Berry's locations and have only one Mervyn's, which is a ground lease in a 50:50 joint venture, and has a (inaudible) entity in the middle. We have three Bennigan's Steak and Ale leases, one is the joint venture with our pro rata share at 15% and one of the other two we have leased to a bank. I think all in all, we are in pretty good shape with bankruptcies.

Our same property NOI rose 2% for the second quarter. Retail was up 2%, and industrial rose 2.3%. Our same property NOI does not include lease terminations, but does include bad debt and prior year adjustments.

Our population of properties includes properties we have owned for at least 12 months as of January 1st. we are currently reporting 84% of our NOI as same property NOI and have 4 of the 276 shopping centers we have owned for over a year excluded. These are properties where major construction is occurring, and we will not include these properties until one year following stabilization of the redevelopments. The majority of the 2% gain comes from contractual rent steps, increased rent from renewals. Bad debt was up for the quarter versus last year, but that increase was only a couple of $100,000 and was offset by an increase in recoveries.

As Steve mentioned earlier, we are maintaining same property NOI guidance of 2% to 2.5% growth for the full year. This obviously means we will have to average close to 3% for the second half of 2008. The uptick will mostly be weighted toward the fourth quarter, as many of the new leases we have signed in the first half of the year will be commencing late in the third and early in the fourth quarter. Even though occupancy will remain steady, we are anticipating an increase in commenced leases which should positively move our same property NOI. We also have significant rent steps occurring late in the third quarter.

Overall, we are confident our diversified portfolio will continue to perform during these challenging times. Over 70% of our NOI comes from shopping centers with a supermarket component. Our top tenants by revenue are Kroger, TJX, Ross and Safeway. These are the retailers taking advantages of these challenging economic conditions. We have an experience team of associates, who are focused on executing everyday. I am optimistic we can meet the guidance targets we have set out.

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

Drew Alexander

Thank you, Johnny. Just a few quick summary points before we turn to question. We feel we had a good quarter considering this economy with 5% FFO per share growth adjusted for the non-cash preferred redemption charge we spoke about. In these challenging times, we remain extremely focused on leasing and maintaining the occupancy of our portfolio, completing our existing new development pipeline, and executing dispositions and joint venture.

As you can see from our results so far this year, we continue to make progress on these fronts. Like everyone in our sector, we are feeling the impacts of the slowing economy. We also appreciate that things could get worse and that would certainly affect us. However, we do take comfort in the fact that over 70% of our shopping centers have a supermarket component and that is the most recession resilient product type in the REIT space.

Additionally, we've a great group of associates, a strong new development program with good properties and excellent balance sheet. So, I am confident we can also take advantage of opportunities as well as weather the challenges in this difficult environment, just as we have during similar times in our 60-year history.

Operator, we'd be happy to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from Tom Baldwin of Goldman Sachs.

Tom Baldwin - Goldman Sachs

Good morning, guys, how are doing?

Drew Alexander

Good, Tom.

Tom Baldwin - Goldman Sachs

My question relates to some of the activities you guys had during the quarter on the capital front. Just curious what you're thinking was with regard to paying down the Series G using the reopening of the Series F at an effective rate of 8.25%. I know you guys didn't include the charge associated with that action in your guidance, which suggests this was kind of only a recently contemplated action. Can you guys elaborate a little bit on what you're thinking there was?

Steve Richter

Tom, I think from the onset given the structure of the Series G, it was a flooding rate preferred. And from that perspective, it's obviously not intended to be a long-term security. So we fully expected to take that out. The preference was to do that with another preferred; however, as you may well be aware that market is quite struggling with all the financial institutions that have issued billions of dollars of preferred since the downturn or really quite frankly this year.

We were able to raise $120 million with the opening of the prior Series, the Series F and that money effectively did cost us 8.25% but that was well below where we could have issued a new preferred at that time. So are in terms of, actually it wasn't anticipated. I would say, yes, it was anticipated. The payoff, the split between $120 million and then that we pay down when we receive those proceeds versus the recent pay down of the remaining $80 million was just a matter of working through our cash projections and assuring ourselves where we were.

In terms of the guidance, we did take the redemption charge of a penny a share in this quarter because we did pay off the $120 million during Q2 and then subsequent to Q2, we paid off remaining $80 million which will result in another a penny in Q3.

Drew Alexander

And I would also say as to, how to count that. It is something that certainly there are different views and that's where we feel the general tradition in the REIT space is to not consider in FFO, but we wanted to be very clear about it. We appreciate that others could see it differently.

Tom Baldwin - Goldman Sachs

Okay, thanks. I guess, just a follow-up there. I am still a little bit curious as to why you guys decided to do this. I guess, from my understanding, it's safe to assume that the cost of the capital that you used to pay down the Series G most likely exceeded the cost of capital on the Series G itself given where LIBOR currently stands?

Drew Alexander

The Series G, I think we made it clear when we did it, was generally fails to be sort of short term and it had provisions in it towards the end of the year, it got extremely expensive. So, yeah, we paid it off a little earlier before it got very expensive. But it is something that looking, as Steve said that our capital needs is very clear that we don't need it and it was a little more expensive than our revolver.

Tom Baldwin - Goldman Sachs

Okay. Thanks a lot. And my final question relates to merchant building. You sold 10 assets during the quarter to generate those $0.07. Can you just elaborate a little bit on what the average size of those assets was on both GLA as well as the average cost, the average price at which those assets were sold?

Drew Alexander

I don't know that I have the math in front of me, but I know there is lot a of sales of land partials to principally fast food pads and others. So, a lot of what's being sold is a land, so the cost or the sale per square foot relates back to the land.

Tom Baldwin - Goldman Sachs

Okay. Thanks a lot guys.

Operator

Thank you. Your next question comes from David Wigginton of Merrill Lynch.

David Wigginton - Merrill Lynch

Good morning, guys. I am here with Craig. Your management income appear to be a little lighter than we had anticipated this quarter. Does the number fully reflect the assets from the AEW JV that you executed in the first quarter?

Drew Alexander

No. Well, in the second quarter, you have the full effect of that, yes. I believe that the guidance that we gave originally in terms of management fees has to do with, obviously we were assuming heavier acquisition goals and most of that was going to be in joint ventures that we were anticipating additional fee income there which is probably the difference that you may be realizing.

David Wigginton - Merrill Lynch

Okay. I guess, it was up about a 175,000 in the quarter and the JV was executed at the end of the first quarter and I think there are couple $100 million of assets with respect today.

Drew Alexander

It's included in the FFO. However, the way because AEW is fully consolidated, it doesn't show up in that single line item. So, the fee income is inclusive in the FFO, but it does not show up in that one line.

David Wigginton - Merrill Lynch

Okay, great. And then just the final question, how is the third quarter transactional activity looking at this point, I guess both from merchant build standpoint and whether you have any non-core dispositions plan?

Drew Alexander

We have a number of both merchant build and non-core dispositions planned as we have hopefully tried to be as straightforward as we know how. We have a lot of things working. We are continuing to work on those and we're hopeful that we get some deals done both in the non-core sales and the merchant build sales. We also appreciated and acknowledged tough market out there. All deals are much more tentative. Financing is harder and longer. People renegotiate more. The closing ratios are less. We traded a lot. So it is something that we are optimistic that we can come in around at a lower end of the merchant build and the one off guidance.

But it's also something that we remain committed to doing the right long-term thing. And if we get, we traded for something that's reasonable then we'll probably go ahead and do the deal. If we get retraded on something that we think is excessive than we are going to make the right long-term decision and that could cause us depending upon the magnitude and the timing of it to not hit some of these numbers. So it is something that, we have real good clarity on what we did this quarter. We know we have a lot of things working. It's not clear what we will actually be able to accomplish in the third and fourth quarter. We have a lot of things working but it's a very turbulent market.

David Wigginton - Merrill Lynch

So, is there anything under contract at this point or nearing?

Drew Alexander

A lot of things are under contract but it's also something that until things close today especially we don't count it is done.

David Wigginton - Merrill Lynch

Okay, great. Thank you. I think Craig has a question.

Craig - Merrill Lynch

The total return on the 35 projects slips slightly from the ROI estimates from 89 to 87, I really think it would be a lot of things at this figure. What was that that drove that slightly down?

Robert Smith

Yeah, I will respond to that. This is Robert. Obviously, there is some REIT pressures today, the retailers have some pretty good leverage in this current environment. We're dealing with that. We're trying to balance speed with rate and continue to get the right kind of momentum and right kind of thresholds achieved. So it's really going to be a combination obviously at the rent end of the stabilization dates and how long it takes to get things done. But we feel pretty confident about how we kind of invested and the level of slippage in stabilization dates. We were to stabilize two of our projects. So, we're pretty comfortable with holding and where we did in this environment.

Drew Alexander

Also if you are looking to supplemental, what we have left to do this year, we're comfortable with what we have to do next year. We're fairly comfortable with especially next year's large project.

Craig - Merrill Lynch

I did notice the lack of slippage in time. That was very impressive. Thank you.

Operator

Thank you. Your next question comes from Michael Mueller of JPMorgan.

Michael Mueller - JPMorgan

Hi. Let's think for a second on the gains. Can you talk about, if we look back since you've started booking the development merchant building gains over time, what's been the mix of the gains coming from the sale of shopping centers versus land sale gains and how you envision that mix changing it all going forward, say particularly in the second half of the year?

Drew Alexander

I think and I don't have the numbers in front of me. I think it's mostly been other than shopping centers, whether it's pads to fast footers or pads to anchors. Going forward, we do see it more as some shopping center sales. We also have some anchor ground leases that in this environment, especially it probably makes more sense to sell those than to keep those. And over time, it's very tough to do right now. Over time, we would like to get into selling into joint ventures more. But as we discussed given where the core market, where the institutional market is, that's quite challenging.

Steve Richter

I would add that our pipeline is fairly young as you know, and so it's going to be while before the shopping center, the larger shopping center components play into the merchant build schedule. The goal ultimately is to have a fairly balanced mix of land and shopping centers sales going on, but with the impact on our pipeline with the current economy, that balancing act may be a little bit further out than we had hoped.

Michael Mueller - JPMorgan

Okay. So it sound like second half is kind of more the same as it pertains to how the first half looked?

Steve Richter

Yes.

Michael Mueller - JPMorgan

Okay. And second question, can you just comment on second half of the year expectations for either distributions or contributions going into the funds from your balance sheet, is anything planned?

Drew Alexander

We are working on some different joint ventures, but again it very much remains to be seen whether or not we'll get things done in this market. There is some interest in portfolio properties that we have right now from several strong folks that we're talking to at this exact moment. The level of interest that we have from a good number of very serious people who have done a lot of good due diligence looks quite good and we are very encouraged, but it's also something that most folks are looking at some amount of leverage these days, and we're a good sponsor. These are good folks. So I think we have every reason to expect that money will be available, but I really had to take in these times to get out of head of myself in terms of counting anything before it's done. So, it is something that today especially, things are very uncertain.

Michael Mueller - JPMorgan

Okay, great. Thank you.

Operator

Thank you. Your next question comes from Michael Bilerman of Citi.

Ambika Goel - Citi

Hi. This is Ambika with Michael. I am just looking at your core FFO exchange and access, the preferred charge is about $0.74 basically what's implied in guidance is that it ramps by approximately three pennies in the back half of the year and you commented that same store NOI was going to ramp, but you're going to have the additional debt issuance cost from the higher costing preferred. So I just wanted to see if there is anything else that I am missing there that would get you to that ramp, that's embedded in guidance the low end?

Steve Richter

Ambika, in our guidance, I mean we projected the cost as I mentioned and Drew mentioned earlier, we fully anticipated refinancing the bridge preferred that we ultimately did and those costs are built in. As Johnny talked about we do anticipate some pickup in the same store NOI and to be honest when you get down to a penny or so, it's difficult to project out our cash flow is that close.

Ambika Goel - Citi

So there is no other drivers in the back half of the year that are going to accelerate one-time fee income or any other one-time items?

Steve Richter

Not, anything other than we've mentioned there. I mean, as Drew mentioned, if the joint venture opportunity that he just talked about closes you have potentials and fees. In terms of new development activity, you can have some additional income pickup from the stabilizations that further or completions that further come on line in the new development program. There will be some pickup. As I mentioned, we picked up a penny a share from that in Q2. So, I mean it's nothing other than the normal programs that we have talked about. No.

Ambika Goel - Citi

Okay. And then on the out personal sales that you have had and then [clucking] in earnings. Do you have an idea of the bank of out parcels that you have that you canceled in order to generate merchant build gains and land sale gains?

Drew Alexander

I know that what we have working if everything were to happen is well in excess of the guidance that we have given. So what we have done is move forward down a lot of path that if everything happened smoothly, we would be at the upper end of things. So, our job as managers of the company is to sort of, pick the best deals and run the company to the best job that we can.

So, there are a lot of things out there, such that we are not really that dependent one or two deals, which, as I have said before in this market is, it's tentative as some of the interest can be and some of the different sponsors who are out there and the tick money that they have in their funds flows etcetera. We think it is prudent to have a lot of different things working, so that we have maximized the likelihood that we can hit the guidance we talked about. But I also hope we have been clear that these are probably some of the murkiest times in the financial markets that we've experienced and you'd certainly have to go back to 20 years ago to find the time when things were as rough.

Ambika Goel - Citi

Okay, great. And then on the disposition side, are you maintaining your previous guidance and does that include the potential sale of the stabilized developments?

Drew Alexander

I would say, we are maintaining our previous guidance but, with all the caveats I have given here before, I would underline them even a couple of more times that it is something that, when it comes to the one-off dispositions, the possible contributions to joint ventures, it is something that we think and we feel we can achieve, but the confidence level, the comfort level is just not on the firmness of foundations in these financial markets.

Ambika Goel - Citi

Have you adjusted your pricing expectations on the disposition side?

Drew Alexander

I would say, yes, and that's something that we are trying to be reasonable. But as I said before and as you guys know, I think everyone on the call knows there are not as many transaction, not nearly as many transactions, as there were a couple of years ago. So the data on what is a spare price is not as good as it was couple of years ago. So, we have adjusted where we thought it was reasonable, but we also want to avoid any sort of distressed sales situations. So, it's a lot more complicated, it's a lot more day-to-day, making individual decisions on individual deals, and we are sensitive that we don't want to get into any sort of distress sale situation.

Ambika Goel - Citi

Okay. And then just my last question, can you quantify how much you've changed your cap rate expectations on dispositions?

Drew Alexander

I would say for the really good triple net lay stuff, you probably about 25 basis points and for the lesser quality stuff, 50, maybe even 75.

Ambika Goel - Citi

Okay, thank you.

Operator

Thank you. Your next question comes from Philip Martin of Cantor Fitzgerald.

Philip Martin - Cantor Fitzgerald

Good morning.

Drew Alexander

Good morning.

Philip Martin - Cantor Fitzgerald

First question for Johnny. The incremental NOI from leases that have been signed but not yet commenced. Can you quantify that for us?

Johnny Hendrix

We have about 350 basis point spread between leases that are signed and not commenced. I couldn't tell you exactly what that number is, but it's probably about $3 million. If you look at the same store NOI, we probably have somewhere around 200 basis point spread and that number is a little bit higher than it has normally been and that's probably the best that I can do for you in terms of the numbers.

Philip Martin - Cantor Fitzgerald

Okay. What percentage of the rents are with bankrupt tenants? And I can probably get those write off?

Johnny Hendrix

It's very low. I couldn't really tell you. I went through the bankruptcies with you in terms of, I would say that's 90% of the bankruptcies or more 90% of the bankruptcies we have. So, all in all, on a pro rata share, it's very low.

Philip Martin - Cantor Fitzgerald

Very low, okay. And have you seen any increase in late pays compared to a year ago?

Johnny Hendrix

We're tracking our outstanding base minimum rate, on about every 10 days we get a little report on it, and it's really fallen back in line with where we were on a five year moving average. So I'm encouraged by that. At the same time, I'd say that we are continuing to see people falling out and leaving the spaces sooner than they have in the past. I mean, I think they've have given up sooner than they did two years ago. So we're continuing to see some fallout, but our outstanding base minimum rent is tracking more in line with our 5-year average.

Drew Alexander

Yeah. Just a follow-up on that. I think that as Johnny mentioned, we track it on compared to a month ago compared to last year and then the five year average and we are sitting right on top of that. The other points that I'd make is that we're a little right around a half of percent of revenues today whereas, and have never in the history, well I'd I say the history of the company and at least my 28 years, you have never been about 1%. So I think things are challenging, things are tough, but quite frankly in the mid of late eighties with our portfolio, we saw things worse than they are today.

Philip Martin - Cantor Fitzgerald

Okay.

Drew Alexander

Well, I can deal with that offline, but, okay, thank you very much.

Philip Martin - Cantor Fitzgerald

Thank you.

Operator

Thank you. Your next question comes from David Fick of Stifel Nicolaus.

David Fick - Stifel Nicolaus

Good morning. Just following back on Ambika's question, you spend a lot of time on it, but I didn't hear answers really. When we annualize your first half FFO, you get the 312 a share. I know you have always been conservative in guidance, but we can’t get a model there based on the factors you have given us and I know there is lot of moving pieces, but it just seem to us that its going to be really tough to meet guidance for the balance for the year?

Steve Richter

Well, Dave, I can only repeat what basically I said, with Ambika in terms of if you look at the new development completions, you look at the existing portfolio strength same store, as Johnny mentioned we have quite a big coming online in the latter part of the year, late third quarter and in Q4 in terms of leases that are signed and not commenced. And we expect to pick up. We also as he mentioned we have not projected and we have some clarity in terms of why we feel that way but we have not projected substantial loss in occupancy. So, there continues to be a growth in the existing portfolio. So I am not really sure, haven’t studied your models, but where we still -- again, as Drew has mentioned on several occasions we don’t what the balance of the year holds economically but based upon that we are comfortable.

David Fick - Stifel Nicolaus & Company

I know you guys always under promised and delivered and sure you wouldn’t be setting at trip wire for yourself here so

Steve Richter

Consciously Dave, we have tried to call it best as we can in terms of the -- we've done $0.07 of merchant build, so we feel pretty good about that. The bottom end of our range is $0.14. We think we have a good chance of achieving that given the amount of deals that we have working but you know it is something we agonized over specific language of are we comfortable, etcetera, because it's hard to be comfortable with anything in these financial markets. So, the biggest variable by far, is how the merchant building goes, if you think about the $0.14 as the bottom of the merchant building gain, we've done $0.07, how that transpires. Johnny has got a little better clarity that he can look at the tenants to sign leases he knows very intimately where the construction stand and what the leases about commencement and he knows that by and large, those tenants are regional and national credits that are good for it. So the commencing of the leases that we’ve signed that part of things we do feel pretty good about.

David Fick - Stifel Nicolaus & Company

Great second question, your leasing volume was up nicely, spreads were good. I'm wondering what’s the TI load is at this point and how your net effective is moving?

Steve Richter

The net effective is really moving at about the same rate as the overall increases. We are not seeing a significant increase in TIs, certainly on renewals there is almost none in most of the spaces that we are re-leasing are already build out spaces that really don't need a lot of TIs. We have seen some increase in what we call lease space expense where we actually are going in, initially soon as the new tenant or the old tenant closes, but it's on a per square foot basis the same as its been, the real increase has been as just more volume.

David Fick - Stifel Nicolaus & Company

Right. G&A didn't trend up sequentially, have you had to start expensing any compensation to your development pullbacks. Number 1 and number 2, what is your current land carry, how much land you have there that you have decided not to proceed development on, and value?

Steve Richter

We have about $50 million in the help or development category and that I think that’s four projects, David. In terms of the G&A cost, there is a little bit of stabilization if you will, and there we also have, if you ask specifically, are we expensing more on the new development side, the answer to that is no. I mean the development program moves forward and that side has not been adjusted. We have adjusted some staffing levels and so there is a little bit of one-time cost and therefore for that, element, but nothing significant.

David Fick - Stifel Nicolaus & Company

Okay, great. Thanks guys.

Operator

Thank you. Your next question comes from Jim Sullivan of Green Street Advisors.

Jim Sullivan - Green Street Advisors

Hi Nick Vedder here just a quick question. Drew, you made the comment earlier that you have been actively selling anchor leases can you comment on why that makes sense in this sort of environment?

Drew Alexander

No, we haven’t been doing it but we have a couple of triple net ground leases with good credit tenants that I think when one looks at the componentization of a shopping centre I think the value of triple net closely lowest lease in the market is such that to me to own that long-term relatively flat lease on our balance sheet, I don't think it makes sense. So it isn’t something we have done that much as in the past but I think we have talked about the notion of componentizing shopping centers on a couple of different calls and is something that I see as doing more of in the future.

Jim Sullivan - Green Street Advisors

Okay and just looking into your development schedule it looks like lot of your projects have shadow anchors, can you comment on how those of those shadow anchors with the tenants have been moving in or if there is a set timeframe that they to have to move in and what that sort of does to your piece of incentive that you own.

Drew Alexander

Yeah, most of the work that we do is just see detail on the schedule is with some fairly large big companies, Target, Wall-Mart, Coles, etcetera, it varies. I would say generally the anchor does has some flexibility and generally there is some risk that they could postpone an opening but it's something that it's just very rare in terms of their cycle and the long-term orientation of a company like Target, I mean it's, I don’t want to say never, but it's just unusual that once its in their system that they change that, and again nobody knows what the economy holds over the next months or years, so it is something that, it's always possible in the future.

Jim Sullivan - Green Street Advisors

What percentage of your ownership is out there?

Drew Alexander

We calculated that before 30% if I remember correctly, is that in new development or overall?

Jim Sullivan - Green Street Advisors

Its in new development?

Drew Alexander

Robert, remember its when you subtract the junior anchors that the Maxx's etcetera that [Shoppe] faces about 30% there I think is lower.

Robert Smith

I think it's lower I think it’s in 20.

Robert Smith

I know you calculated before but its exactly it's a and that might include some and so that is when you look at existing, I'm saying, I don’t think it's anyway near the (inaudible).

Drew Alexander

Its pretty it's relatively conservative and we are getting more conservative, does that help?

Steve Richter

Like everybody else when it comes to looking at new things, we are very sensitive to the amount of shop space suspect's budget.

Drew Alexander

And I think some time when you talk about shop space, a major (inaudible) could be the small spaces but we are talking about mom and pop type, entrepreneurs and I think that is not -- I think it’s a low as -- well as low as 30% when you recognize these are large companies with the head falls bases.

Jim Sullivan - Green Street Advisors

All right, thank you.

Operator

Thank you. Your next question comes from Rich Moore of RBC Capital Markets.

Richard Moore - RBC Capital Markets

Hello, Good morning guys. The portfolio you guys have in the market, is that still roughly about $300 million, is that what you are thinking?

Steve Richter

That’s the current thought, yes.

Richard Moore - RBC Capital Markets

Okay. And is that still core assets, is that kind of a make up?

Drew Alexander

Yes.

Richard Moore - RBC Capital Markets

Okay, Drew what is the -- my understanding was, there was really nobody looking for core assets and

Drew Alexander

You know there aren’t, as I tried to say before there is certainly not as many people as there were a year or two ago. But we’ve got several people four or five folks that have expressed very serious interest and done a lot of diligence were in the process of meeting with those folks in the tours etcetera and we'll have to see what happens. So we are optimistic and hopeful but we also appreciate in this market, nothings done till its done.

Steve Richter

I might add to that, that these are very, very strong super market are in credit where people seems that the people that we have interested seeing they be very interested in is that there is no surprises that can happen at a couple of years to (inaudible) and the very top part of our portfolio and people are looking for super market -- where they know that actually super markets are doing much better today because food prices have gone up and people are really more at home.

Richard Moore - RBC Capital Markets

Okay

Steve Richter

And they are looking at these particular core type properties is sealing that they are very stable and these particular ones do have good contractual upside potential.

Richard Moore - RBC Capital Markets

Okay, very good so would you say there is some new blood in terms of the investors table that you have now some different groups than they already…

Drew Alexander

Yeah, most of the investors that we are talking to are people we have not here before done business with.

Richard Moore - RBC Capital Markets

Okay, great and then Steve I have a question for you on these OP units, remind me again why sometimes they go in sometimes they go out, it has been a couple quarter really it is not that often but would they just I guess there entire diluted over something but I don’t understand why those wouldn’t be in all the time?

Steve Richter

Yeah, Rich when the net income of the company is less than the dividend the OP unit of the fully diluted calculation results in the OP units being entire diluted and therefore they are not added back for the fully diluted calculation. It’s a fairly be more happy to walk you through it -- anytime you see the net income from the company being less than the dividend is what causes that, on a per share basis.

Richard Moore - RBC Capital Markets

That’s great. Okay good I got you Okay great thanks guys

Operator

Thank you. Your next question comes from Chris Lucas of Robert Baird.

Chris Lucas - Robert Baird

Good morning, guys.

Drew Alexander

Good morning

Chris Lucas - Robert Baird

On the dispositions and particular the merchant build, have you provided financing on any of those transactions?

Drew Alexander

I think one is what -- we came up, with various that at the other day one very small one. We looked at it on some others and I would say, if we can do a deal that we think is reasonable with a healthy down payment, 25%, 35%, be involved in the management short-term deal that we probably have the interest rate increasing to give the persons an extra incentive we would consider doing it in select circumstances. But we are certainly sensitive to the pitfalls that could happen there and I can't imagine us doing it in any big dollars.

Chris Lucas - Robert Baird

Okay. Thanks. And then Steve, can you just give us a sense as to what the bad debt reserves were this quarter versus last quarter and say a year ago?

Steve Richter

Actually this quarter to last quarter were about flat, and then I think compared to a year ago they are down slight, we had some recoveries a year ago that kind of offset. So, they are up slightly, but from a practical standpoint if you back out the recovery they are up couple of hundred thousand dollars.

Drew Alexander

By $2,000

Steve Richter

$2,000

Chris Lucas - Robert Baird

On a year-over-year basis?

Steve Richter

Yes.

Chris Lucas - Robert Baird

Okay, and then was there any lease term fee income during the quarter?

Steve Richter

Not material.

Chris Lucas - Robert Baird

Okay thanks a lot, guys.

Steve Richter

Thank you

Operator

Thank you. Your next question comes from Jeff Donnelly of Wachovia.

Jeff Donnelly - Wachovia

Good morning, guys. I guess alluding from the Stanford's comments earlier, I mean, I know the lion share of your tenancy, tends to be concentrated in national and regional tenants, but because of the locals or the mom and pops do play an important role in bringing your occupancies up and 200 basis points. I am curious, it maybe this is a question for Johnny. What sort of feedback are you hearing from that local tenants and do you sense they're under disproportionate pressure or is that maybe just more conventional was them in the business?

Johnny Hendrix

Jeff, this is Johnny. I do think that these small shops are definitely under more pressure and certainly is harder for them to finance inventories, harder for them to get the same terms that some of the majors are getting. I think that, that is why we're seeing TJ Maxx and Rocks and Marshalls and people like that continuing to grow in market share. That doesn’t mean that, we don't have a good number of small tenants who are well financed. We do and I was looking at a lot of the leases that we have most of them are national or strong regional players in terms of the new leases that we are signing. But it's about the same make-up, the same breakdown in terms of the smaller shop tenants, their mom and pop tenants that we've always had. And, these guys seemed to be well financed.

Jeff Donnelly - Wachovia

Does that puts you guys under maybe more pressure at the margin, at least in some of them asking you for giving TI dollars, maybe those mom and pops to the extend they want to open new stores or putting new leases, are you guys hearing that?

Johnny Hendrix

I think all retailers and there is always, an ask for more dollars, and I think what we are really seeing now is actually, the spaces that we have available are better spaces than we had available a year and half ago. And a lot of the leverage that we have is actually on our side, certainly in spaces where it may not be as desirable.

You might have to do something a little bit more, we have not seen a significant increase in TI dollars, and really I would say even in terms of the larger tenants we haven’t seen a huge increase in the economic demands that they have made in rents or in TIs a lot of the leverage that they are attempting to use today is more. And kind of other lease terms. And I am not saying in every case that's a situation because you do have isolated situations where, if there is only one tenant for a space then they know it and you know, they are going to come at you with everything. But all-in-all we have been able to keep the TI dollars at a reasonable rate.

Jeff Donnelly - Wachovia

Have you seen other landlords, or may be just tenants also asking, I guess on a non-financial terms? You kind of touched on of my next question. Either it's signed some letting operating covenants co-tenancy rates, in this environment may be where retailers are less certain about their futures. They are pushing those terms more?

Johnny Hendrix

The retailers are pushing those terms more. It certainly is, tumultuous time for them and in a lot of ways they are nervous. And again it really goes back to the quality of the space that's available in the market. Most of the retailers who are focused on that are public companies also and they need to grow and they have pressure on them to open some new stores, not as many as they did a year ago. So, in some way yes it does balance out, but yeah there is more pressure and there is more discussion around those non-economic terms.

Jeff Donnelly - Wachovia

And just one last question, and then I am curious to say it to you guys see the relationship but effectively at the state of Florida out of there recession but Texas continues to fare relatively well on American growth I am kind of guess the reasons but I am curious that you sort of see similar trends or may be of retailers or recession in a sense that in your Texas markets you continue to see more leasing strengths of our retail business formation and conversely more closing or is it take a longer time for it to manifest and your (inaudible).

Steve Richter

It's interesting because we were looking at some of the numbers the other day in terms of occupancy and if you look at our eastern properties we were actually up a very very small amount for the quarter. We are sitting at around 96% at least for that area and really the pain has been in the direction of occupancy we were close to 98% a year ago in the central region we are somewhere around 93% and the velocity of leasing has gone up, we have increased occupancy but we are still at 93%.

What you really see is you still have a less available space on the market in Florida than you have in Texas. The demand is increasing in Texas for space there is no question about that but the supply curve is right on top of it, and keeping up with the demand you still have really a higher vacancy in the central region, then you have in either California or in Florida.

Jeff Donnelly - Wachovia

All right. That's helpful. Thank you.

Operator

Thank you. Your final question comes from Michael Bilerman of Citi.

Ambika Goel - Citi

Hi, this is Ambika. Just for the follow-up. Could you give some more color on the vacancies that you had, the midsize tenant fallouts, what specific sectors they ran and how that trend is progressing into the third quarter?

Drew Alexander

Ambika, I would tell you that the only thing that is clear to me is that, it's unclear. I'm looking at the second quarter fallouts and there were 72 tenants in the portfolio that fill out, 16 is kind of the highest category amongst that and it is not a huge percentage of the overall square footage, 16 restaurants. So, I'd say restaurant seem to be the most in terms of what's falling out. Other than that I'm looking at different categories, apparel, health, and beauty medical, sports and leisure, video and there really is no specific piece.

Clearly some of the discretionary things whether it's home improvement items or suffering but only have three home improvement stores that are closed. Discretionary item, shoe stores are having some issues, but my apparel stores don't seem to be a predominant piece. It seems to be pretty well across the Board and I would say in terms of what we are leasing, you are seeing about the same, just not any specific area. Let's say it's focused on discount. We do have -- it seems to be a lot of health and beauty and a lot of fitness type stores.

Ambika Goel - Citi

And how was that follow trended through this month so far till July?

Drew Alexander

It seems to be about the same Ambika. I think the last call, I said that I was hopeful that it was slowing down and it did for a month, but I would also say that it seems to have continued and I don't see that it's slowed down at this point.

Ambika Goel - Citi

And can you quantify, I guess, the amount of rent that has been lost to these tenants so far?

Drew Alexander

I can tell u that in the like-for-like '07 versus '08 second quarter, it was about $700,000.

Ambika Goel - Citi

Okay, great. Thanks a lot.

Operator

Thank you. At this time, I would like to turn the floor over to Drew Alexander for closing remarks.

Drew Alexander

I want to thank everybody on the call. As we said, we think it's a good quarter considering this economic environment. We are optimistic about what we have decided for the rest of the year, but we do appreciate in these tumultuous times that we need to remain flexible and diligent and we will stay focus on doing the best we can. Thank you.

Operator

Thank you this concludes today's call. You may now disconnect.

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