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Regency Centers Corporation. (NYSE:REG)

Q2 2008 Earnings Call Transcript

August 7, 2008 10:00 am ET

Executives

Jamie Shelton - VP of Real Estate Accounting

Hap Stein - Chairman and CEO

Bruce Johnson - CFO

Brian Smith - CIO

Lisa Palmer - SVP of Capital Markets

Chris Leavitt - SVP, Finance and Treasurer

Analysts

Michael Bilerman - Citigroup

Jay Habermann - Goldman Sachs

Jeff Donnelly - Wachovia

Paul Morgan - FBR Investments

Christine Mcelroy - Banc of America Securities

Michael Mueller - JPMorgan

Jim Sullivan - Green Street Advisors

Michael Gorman - Credit Suisse

Chris Lucas - Robert W. Baird

Operator

At this time, I would like to welcome everyone to the Regency Centers Corporation second quarter 2008 Earnings Call. (Operator Instructions). I would now like to turn the conference over to Mr. Jamie Shelton, Vice President of Real Estate Accounting. Please go ahead, sir.

Jamie Shelton

Thank you, Pauline and good morning. On the call this morning are Hap Stein, Chairman and CEO; Bruce Johnson, CFO; Brian Smith, Chief Investment Officer; Lisa Palmer, Senior Vice President of Capital Markets; and Chris Leavitt, Senior Vice President and Treasurer. Unfortunately, Mary Lou has come down with a stomach virus or food poisoning and despite her best efforts, was unable to join us this morning.

Before we start, I would like to address forward-looking statements that may be addressed on the call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by Regency Centers Corporation with the SEC, specifically the most recent reports on Form 10-K and 10-Q, which identify important risk factors, which could cause actual results to differ from those contained in the forward-looking statements.

I will now turn the call over to Hap.

Hap Stein

Thanks, Jamie. Good morning. Unfortunately, although Mary Lou is not really healthy right now, we expect her to be back on her feet. Lisa Palmer will be covering the operations portions of the call.

As we complete the first half of what we expected to be a very challenging year, the team and I would like to spend this time looking forward to the rest of 2008 and to the future. In addition to providing color behind the numbers, I'd ask the team to share Regency's strategies to meet the goals we set, given today's very challenging environment. The economic weakness seen among the capital markets are being expressed, moderated tenant demand, peer to capital availability, even riseng cap rates.

Bruce will begin with a description of the steps that are being taken to execute Regency's capital recycling strategy, [though] the balance sheet remains strong, with reliable access both internal and external sources.

Lisa, who as I mentioned will be filling in for Mary Lou will then highlight the resilience of the operating portfolio, both the expanding and contracting retailers and the impact on Regency's portfolio, plus the major measures which are being implemented to maintain 95% occupancy.. Finally Brian will elaborate in process development including the steps being taken into this 95% for maintaining occupancy and the increase scrutiny that has been given to new development opportunity to make sure that precious capital been carefully, diligently relieved. Bruce?

Bruce Johnson

Thank you, Hap, and good morning to Mary Lou and everyone else on the call. When the capital markets are in turmoil and availability is severely constrain capital just [came]. The need for a strong balance sheet and access to reliable sources of capital is more critical than ever. As a result key ratios, buying balances, future sources and usage of funds and the development inventory are being closely monitored to ensure that we maintain our strong balance sheet access to capital.

Thanks to a [considerable level] of our stewardship, the balance sheet is in great shape, there is currently 573 million of availability onto our recently upsize bank lines. In addition, assuming an average cap rate of 7% there is a $660 million of estimated total value from developments with approximately $180 million of estimated gains. These developments are currently 96% lease and together we have committed capacities from our co-investment partnerships provide a significant amount of visibility in meeting both Regency's future recycling and transaction profit objectives.

You'll note that we have modified guidance for contributions to co-investment partners. The revised guidance reflects a plan to contribute five centers and a gross value of $170 million. We'll contribute two properties for the open end fund by year end. Silver Spring Square and Phase IV of Vista Village and the other three centers are targeted for contribution to another co-Investment Partnership. To change the plan was the decision to delay the contribution one larger community center to the open end fund. Although the center was 95% leased last quarter and cost to 95% was rent, the rent payments for the last month, we have 270 days from that [trigger to deplete] the contribution.

We planned to use the allotted time to allow us to maximize value with additional leasing which we expect to happen in early 2009. With this delay contribution of a larger center in order to meet our capital recycling needs we've had a two smaller grocery anchored centers from our completed developed inventory through our plan.

Mortgage financing has entered books of the growth of the co-investment partnerships because CMBS market in disarray and banks suffering through their world publicized problems. Insurance companies remained the one reliable source for longer term financing. Insurance planners are focusing their limited capacity and making low leverage mortgage loans 50% to 60% of value on high quality assets to select by borrowers.

These conservative guidelines fit Regency’s co-investment partnerships very well and we have been working closely with a handful of companies with whom we want to grow our relationships. In fact, last month we received commitments in lock rate for almost $110 million of new and re-financed mortgages in average all in coupon rate of 6.3%. Progress is also made with the disposition of operating profits. During the quarter a seven property Mid Atlantic portfolio of [(NYSE:B) minus and (NYSE:C) centers] was closed.

The purchase price of $108 million represented a 7.75% cap rate. The [Emanuel's] anchored center in Texas was also sold by the Oregon partnership at a 6.5% cap rate or $13.8 million. We do feel that selling B&C centers will be more challenging in the months ahead.

Bank finance in the high leverage levels in the 75% range that buyers have typically required to purchase in non-investment grade properties appears to drying up. This may mean that on a select basis Regency may provide [the sellers time] as long as we have a meaningful investment by the buyer to move targeted properties from the operating portfolio.

Finally, I want to remind investors that it is less than $85 million of consolidated debt maturing to September 2010. Lisa?

Lisa Palmer

Thank you, Bruce. Good morning, everyone. Before I share with you the story behind the numbers, our view of the future and color on some of the key markets where our properties are located, it is worth noting how remarkably well Regency's portfolio is holding up in the space of the weakening economy and moderating of [retail] demand for space.

While our NOI growth for Regency's 100% own portfolio and share of partnerships was 2.2% for the quarter and 2.6% year-to-date., the total portfolio has 3.4% NOI growth in the quarter and 2.9% year-to-date. Occupancy for the whole portfolio remained above 95%. Rental rate growth was 9.2% for the quarter and 1.3 million square feet of new leases and renewals were signed.

We are specially gratified that our portfolio has remained approximately 95% lease. We believe that is a testament, not only to the quality of our real-estate, but also to the proactive measures we have in place to navigate the current retail environment.

Today, even more of a premium is being placed on the quality of the centers. [Post Street Park] in the Bay area is an example where we proactively replaced the struggling tenant. We terminated a 15,000 square foot national furniture store and negotiated a $600,000 termination fee. The new lease was executed in July with the new tenant at a 9% higher rent with no loss in rent during the transition period.

The other component of Regency strategy to maintain occupancy is to renew a high percentage of our existing tenants. Year-to-date, we've renewed 82%, which is impressive and higher than our historical averages. This includes proactively approaching anchors to renew early, as was the case with Target at Pleasant Hill and and [Randall's at Wesley and Plaza].

Pleasant Hill is located in the Bay area with high surrounding income. Target lease was set to expire in November of 2009 with no remaining firmer options. We signed a renewal at significantly higher rent and longer term. Renewing them really solidifies our presence early in our center.

Rent growth remains solid and we expect to end the year within our guidance range of 8% to 10%, and this growth is being achieved with only a modest increase in tenant improvements.

Maintaining 95% occupancy is the main challenge that we face in the operating portfolio, while tenant move-outs have not increased above historic annual average of about 3.5% of GLA, moderating tenants demand is increasing downtime.

This period with a year ago averaged approximately eight-month is now about nearly a month. However, it’s important to keep in mind that while demand is moderated, retailers still want to keep the good locations and quality shopping centers and both anchors and PCI tenants are still expanding into the best locations.

For example, as we all know, even though Starbucks announced the closure of 600 stores of which Regency only has six and even though they were the largest landlords, they are still slated to open seven new stores in our portfolio.

Not all retailers are impacted equally by the decline of discretionary spending, in fact some continue to grow. Luxury goods, department stores and apparel stores all saw a negative year-over-year sales growth in the first half of 2008. But grocery, drugs and discount stores saw a positive growth. And as we've said even during these tougher times these historically 90% of the categories in Regency centers have had a flat to positive comps in recessions but even more importantly this year over 50% of the retail categories in our centers are still enjoying 3% plus comp store sales growth.

Before I turn it over to Brian, I would like to give you a little regional favor. Florida and California are two states where the housing slowed down and potential fallout on shopping centers have garnered a lot of attention. Our business remains a corner business, although a few of our Florida centers are certainly experiencing a slowdown, occupancy for our operating properties in Florida remains above 95%.

Rental rate growth has been about 8% and same-property NOI is positive and forecasted to exceed 2% for the year. Regency has minimal exposure in California to the markets that been hurt by the housing crisis. Our California properties are enjoying strong same store growth of over 3%, 97% occupancy and rent growth across the state that averages double digits. Texas is another positive story. Occupancy is improving and thanks to the proactive early renewal and expansion of several anchors, same store growth is in excess of 2% and rental rate growth above 10%.

On the other hand, as we've discussed in the past, the region which -- what still appears the least promising future prospectus remains the Midwest. Same-property NOI growth is essentially flat in that region. However, it's of note that Midwest only represents 8.5% of Regency's total net operating income. The important thing is that we plan for these challenges.

There is downtime and pressure all round, moderating tenant demands and declining consumer spending but the persistence of our team, the inherit quality and cycle resistant nature of the portfolio and retailers' strong desire to operate in the best location gives us confidence that we can achieve same-property growth on Regency's share of the operating portfolio of 2.4% or higher. Brian?

Brian Smith

Thanks, Lisa. Well, as you heard from the others here today and on past calls, we are operating in a very different and challenging environment. Due at these times, the investment group is focused on; first, carrying out our role and preserving the company's strong balance sheet. We do this by working hard to stabilize the in-process projects to maximize their value.

Second, using this recycle capital to selectively pursue investment opportunities where we can create high quality shopping centers and generate track of returns. In terms of the in-process projects, we are fortunate to have a large, diversified portfolio of projects underway.

As I said last quarter, of the 48 projects that are in-process, there are 9 that have experienced weaker demand with the downturn in housing. Five of these are straight forward neighborhood centers whose grocery sales are good and we expect these projects to be solid long-term holds.

These involvements are 85% leased, the other four are larger community centers that because of their size and amount of small shop space will take longer to lease which is one of the reason why we are facing these larger projects.

Assuming no phasing and full build out these centers are nearly 70% leased. These larger projects are ones we believe in strongly and ones on long-term. Each enjoys the dominant location within its respective market and each has generated strong anchor demand. But the reduction in housing activity has slowed shop leasing.

Let me give you one example, Deer Springs in North Las Vegas submarket is very well anchored by Target, Home Depot, Babies and Toys "R"Us, PetSmart, Staples and others, without question it enjoys the premier location in that submarket. And when the housing growth returns it will be extremely successful.

We reduced guidance for 2008 stabilizations. What is driving the reduced completion guidance for the year are Anthem Highland in Las Vegas and Shops of Highland Village in Dallas. Anthem is 90% leased and Highland Village is 82%. But given the tougher leasing environment we don't expect them to reach 95% leasing threshold by year end.

Although it is taking longer to stabilize, some projects quarterly returns on the $1.1 billion of in-process developments on apples-to-apples basis are down only 10 basis points. Our Deer Springs project in the North Las Vegas sub-market accounts for six of those 10 basis points, while Red Bank in Cincinnati represents two basis points. The other 46 centers combined account for the remaining two basis points.

While the environment is tough we are making progress and on a portfolio basis we are holding our own. Returns have held up and there has been leasing progress. Still, we have much to do and are taking the following steps to ensure the success of these projects in today's world.

Where demand for shop space is soft, we will face the construction of the space. We have underwritten lower rents where we believe the market is new or where we believe its necessary to attract the right high traffic generating retailers. We are creating additional leasing incentives and have allowed more time in our models to lease up the space.

Finally, we are focusing even greater amount of our efforts on the leasing of the in-process projects by reallocating our more seasoned and top talent to focus on the more challenging projects.

Now the silver lining; we continue to see an environment that increasingly favors strong developers with solid retail relationships and the ability to fund projects of their balance sheets. These opportunities are getting better even in the phase of the current slow down as the competition disintegrates. The sum-up question is, whether the risks outweigh the rewards in today's environment and I would like to interject my thoughts on this.

First of all this is a cyclical business, projects we are working on now will not be open for years to come, at which point the current economic woes, will hopefully be a distant memory.

Second, there are always good development opportunities. But we take more work to find and the risk surrounding those opportunities must be weighed carefully.

Most of the anchor retailers are still expanding including many of the grocers such as Publix and Kroger but also Target, Lowe's Kohl's, off price software retailers off supply stores and others.

As we've reported quarters ago, these retailers would just as soon push all 2008 openings in the later years, but they are actively looking to fill 2010 and 2011 opening slots. We were very mindful of the risks and the environment in which we find ourselves, but we will not build for the sake of building and will only start new projects if they make a compelling sense.

So far this year we have moved almost $300 million in high probability 2008 starts. It’s either a lower probability category or we push them in the 2009 or beyond retailers want to open. I'll address specific 2008 starts at the moment, but first I would like to address, how we are tackling the risk we are facing.

First of all, we have raised our return guidelines for new development commitments 59%, to some projects already [touching] higher. The high returns will likely not start showing up until 2010 given long lead time required to bring a project to the point where it’s ready to start.

We've also tightened our underwriting with longer leased-up times and more conservative rents brands being a model. As has been discussed previously, we are planning fewer side shops spaces and are focusing on more infill demographics, and those areas with higher purchasing power, this is where the top retailers want to be. We are also requiring more pre-leasing before we close them [a land].

We are planning to start $300 to $425 million of new development in 2008, this is about at $100 million lower than our guidance last quarter hence appropriate given the comments we just made.

We currently expect to start 12 new projects this year and I do believe they are compelling. Four of them are bread and butter grocery anchored neighborhood centres. Three of the starts will be second or third phase as of existing successful projects with limited or some in one case no shop space to lease.

One of the projects we discussed last quarter is a rare opportunity to find property on the San Francisco Peninsula and a great infill location in East Palo Alto that enjoys extraordinary demographics. We purchased the vacant Home Depot Expo building so this investment contains no entitlement, development or construction risk.

Within weeks of closing on the purchase, we executed two anchor leases bringing the building to 100% lease. This investment should generate double-digit and millions in profits. At least four community centers, one is the Target [loads] anchored project that we were working on for years and got fully entitled but the project was stopped through a legal challenge. That litigation is now behind us and we are ready to go.

In Northern California, we'll build a center anchored by Target Toys "R" Us, Babies "R" Us and Nordstrom Rack. In fact, it’s a last parcel of retail land that we know of in the bay area situated on the interchange with an interstate freeway. And other is in the Metro Miami area in a very densely populated and under retailed area over 90% of this center is least or an active negotiation. Final project is located at the entrance to the best mall in the area with a half mile of the frontage on the city's main highway. Retailer demand there is incredible.

In short, these are in my mind compelling opportunities worthy of our capital investment. If necessary we'll delay any of these projects, as circumstances dictate we may add to them. This is quarter, we are approached either by anchor retailers or by financially strapped local developers with at least twelve very intriguing development opportunities. Turmoil creates opportunities and Regency is seeing a lot of opportunity in this turmoil.

Make no mistake about though margins particularly on the in process projects have been effected by downward pressure on rents, retailers, particularly the junior anchors, exercising leverage they believe they have and being very deliberate as in their decision making. Shop retailers in many cases are out of the market and cap rates are expected to rise.

But in spite of these pressures we still expect net margins to be approximately 20% after fully allocating G&A costs. Looking out in to the 2010 and 2011 pipeline, we should see somewhat expanding development returns thanks to lower land prices and [hidden] costs. Given the lack of competition and the resulting, plus our quality development opportunities are things the local partners are finding, we have a luxury of sorting the week from the [chart] is taking only the best of the available opportunities. Hap?

Hap Stein

Thank you, Brian, Lisa and Bruce. Regency did have a solid quarter, the growth and the value of the operating portfolio continues to be remarkably resilient. The end process developments in spite of the longer lease up tenants should create significant value even after factoring in our cap rates in lower margins.

There seems to be a number of extremely attractive new development opportunities, they are coming our way and would appear to be higher returns and higher margins. Most important of all between a large inventories of developments that are completed in lease, available capital from the co-investment partnerships the bank to sell all these, there is a tremendous amount of visibility and not only realize development gains but also to maintain a pristine balance sheet.

As good as these recent results look in the rear view mirror, the road ahead promises to be in to a place of pretty speed bumps from both the economy and from the capital markets. And Regency will certainly not be immune to the effects of longer lease-up time on occupancies and the operating portfolio and developments, lower development margins for higher cap rate, cautious vendors and co-investment partners. As you've heard from the team, proactive steps are been taken, to shore up [pre-payer] for worsening conditions in each part of the business.

The bank facilities were substantially expanded earlier this year and the co-investment partnerships have been in place as reliable take-out vehicles for developments. The capital markets team is working closely with the handful of permanent lenders to ensure the flow of mortgage loans for co-investment partnerships.

Regency's tried and true investment focus has enabled us to build a high quality portfolio. It should weather the storm in the downturn relatively well and we've been pruning weaker assets for years. Basing of the development pipeline is receiving a huge amount of attention. And achieving and maintaining 95% occupancy in the operating portfolio in new developments is the top priority for both operations and investments.

Although the number of opportunities from local developers and retailers look extremely interesting, new developments will be scrutinized to make sure that they are truly compelling investments for Regency.

G&A expenses and the number of employees are been fully and carefully monitored, while keeping the team engaged, focused and motivated.

Although this current downturn feels like it might be pretty nasty, the Regency's management team have been through this and I've been through these cycles before. As a matter of fact, many of the legacy shopping centers in Florida and California repurchased on what it now looks like unbelievably favorable basis after the last severe real-estate downturn that was caused by the [housing] melt down and the recession of 1990 and 91.

We believe that we continue to execute using sound cautious judgment and conditions don't deteriorate much further we can achieve FFO per share growth within the guidance range, which we provided for this year.

In addition and more importantly, we should be well positioned for the future to meaningfully grow FFO intrinsic value and push share basis to our strong balance sheet and access the capital, high quality assets, operating and development expertise and tenant and partnership relationships.

We also realized that is not too far from the realm of possibility where conditions in the economy and financial markets do deteriorate beyond even what our current conservative expectations are. And we are taking the necessary actions to make sure that if the unforeseen does happen, Regency will be able to withstand some pretty severe additional body blows until the cycle does and return in the right direction again.

We appreciate your time and I'll be glad to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question will come from Michael Bilerman with Citi.

Michael Bilerman - Citigroup

Good morning. If you could go out also with me as well. Brian it was very helpful in laying out your thoughts on development. Can you give just little bit more granular detail, you talked about lowering the amount of starts for this year and you talked about the project that have comprised the 300 to 400. Can you talk a little bit about the projects that delayed and then anything else as you went through that process when you looked at your potential '09 and 2010 starts that you decided to pass on or just delay indefinitely. Just give a little bit more color about those steps that you are taking.

Brian Smith

I think in some cases where we have the flexibility to just push them off at the end of it where we have long options periods and everything then if the retailers are saying that they would prefer to wait then we can accommodate that easily and we push them out. Some of the projects that we have just dropped would be those where the junior anchors may have tried to just exercise a little bit more leverage on us. That would have had an impact on the returns we decided it was not worth going forward with those.

However, for the most part, the pipeline remains about the same, its about 1.65 billion which is about 150 million less it was last year this time. That is because they like the opportunities, they like the location and everybody feels that we would push them off a little bit. We would like to do that.

Michael Bilerman - Citigroup

You talked a little bit about yields coming down, lower rents, additional incentives, more time to lease up, you have said 10 basis point on the active pipeline but 80% of that was two projects. So I am surprised you hear all this caution. However, then the actuality of it rolling through your yields, you cannot really see so I am just trying to piece it together. Is it more so on the future pipeline or you expect the yield as you move through this and as you start to see when rents will come out, will come down?

Brian Smith

I think on our active in process pipeline we have already reflected the head. I mean we rolled several of the projects down in prior quarters. This quarter Deer Springs took a much bigger hit because we lowered rents across the board. We have lowered it on anchored sub space and on ground leases so that was a big hit. However, most of them in number have already been reflected, we have pushed back our lease up period from 31 months at the beginning of the year to 39 months currently. So it is not a big surprise to us. I think going forward, we are just being much more cautions in our underwriting as I said we have got fewer shop space. We have already reflected the lower rents. That is why I think you are continuing to see a dip, rents slightly sub 9 in 2008 starts, 2009 should be somewhere about the same as 2010, we are already seeing right now returns of 9.5% to 10% range.

Hap Stein

We are able to exercise a little bit more leverage with land auctions.

Michael Bilerman - Citigroup

Then as a second question. I do not know if that was talked.

Lisa Palmer

I think that is two hours.

Michael Bilerman - Citigroup

That is considered too. I will get in a queue.

Brian Smith

You can get back and ask again.

Lisa Palmer

We will welcome you back.

Operator

Moving on from Goldman Sachs, we will hear from Jay Habermann.

Jay Habermann - Goldman Sachs

Hey good morning, here with John as well. You know obviously given your more cautious comments. I just wanted to zero in on the transaction based income you have baked in to your fourth quarter. Are you expecting a number around $1.70 based on full year guidance? Can you just give us a little bit more comfort obviously on the assets that will be sold or are you anticipating will be sold in and are you just sure of your comfort level there?

Lisa Palmer

Well, I will speak for the co-investment partnerships and have Brian or someone else speak to the third party sale. I think in Bruce's comments, he spoke about that we have a $170 million plan for contribution to our co-investment partnerships and you can use average margins on those, so they are how much of the transaction profits are going to be coming from those to buy the properties that we are selling.

Two of them are going to be going to the fund. We specifically name them, Silver Spring Square and Visa Village IV. Silver Spring is a target Wegmans anchored center that meets all of the criteria of must offer, must pay and Bruce referred to the 95% trigger date. While the trigger date on Silver Spring was in the first quarter of this year, so that absolutely will be fabulous to the partnership for year end.

The one thing that is going to be on the value. It is subject to appraisal. We do believe early indications that the appraisal is going to more than support what the price is going to be for that property. The second, Vista Village really just a small property, it is a Phase IV an existing property that is already in the front.

So the comfort level on those two is extremely strong than the other three are three first rankers, completed developments from our completed development inventory that we have talked about in past quarters. We have already are in the process of working with one of our other partners despite those and I would say the comfort level on those is north of 90%.

Bruce Johnson

Yes I am not sure we can say much more than we what we said other than the fact that we, you will note that the guidance remain exactly what was last quarter and we have just recently again went through all of those transactions that we expect to occur in the next two quarter period. Feel exactly as our guidance has indicated.

Lisa Palmer

We understand that is important for us to be transparent and perhaps have these transaction purposes visible as possible which is why we are really trying to give you as much detail as we can.

Hap Stein

All those centers are over 95% lease and pretty most being sold to third parties and we feel the cap rates were using our probably average 7% and plus.

Jay Habermann - Goldman Sachs

Okay that is helpful. Just second question you mentioned….

Brian Smith

Jay, just went over the comment there and then I did give us some background, which is the premises we are talking about the development in our inventory that is available because that is really where our transparency and comfort should come from with transaction process.

Hap Stein

It just reiterate that Bruce and I gave a number of $650 million with the properties were 96% leased and have a estimated value of 7% cap rate of $180 million.

Jay Habermann - Goldman Sachs

Okay. Then just second question, you mentioned the opportunities where some cash strapped developers have approached you. Can you give us a sense of what types of returns you might be able to extract there and even the dollar amount of those opportunities? How did that pipeline compare to, your existing development inventory?

Brian Smith

I do not have the exact number of them, but there is many, I got a couple of dozen of them, they we are working on right now. The returns are above what is our returns are as we talked about. They are now slightly sub nine, in many cases the returns are better, but you know you got put in the ones that stay in, so the net returns are averaging about where they are. We also where we can, connect, exert leverage for the seller and try to boost those returns. So, I see in the short-term over the next 6-12 months we are probably looking again right around nine, maybe a little less than nine, but for some of these opportunities that are further out, we are getting much better returns.

Hap Stein

Some others are baked into the pipeline. Some are in lower profitability right now as they work their way through.

Jay Habermann - Goldman Sachs

Okay. Wishing my best to Mary Lou for a speedy recovery. Thanks.

Hap Stein

Thanks Jay. I know she will appreciate that.

Operator

Next we will go to Jeff Donnelly with Wachovia.

Jeff Donnelly - Wachovia

Good morning and I have concern for Mary Lou as well. A question about occupancy and how you see it pacing out to the end of the year, can you give me a type of net absorption through year end and I was curious, if you could talk a little bit more about that and does your guidance anticipate, any cushion for more retailer losses between now and then?

Lisa Palmer

I will try to be my best Mary Lou. With regards to our occupancy it has remained unchanged, guidance that is and we do expect it to increase by year end. If you recall what we keep reiterating is that move outs are not higher than historic averages, its just taking longer to lease up.

The occupancy guidance that we give of 94.9 to 95.1 is at year end the point in time. So, what is going to happen is you are going to, our average occupancy throughout the year is going to be lower than last year, the main driver behind life same store NOI growth is going to be lower than its been in the past years. So, if we execute our plans then we would expect to be within the range for both occupancy and same store NOI growth. As I have said what we believe, we have conservative but realistic expectations for our operations going forward.

Brian Smith

However, obviously things could deteriorate…

Lisa Palmer

They could deteriorate if you do not release it back.

Jeff Donnelly - Wachovia

Great and for my second question this might have two parts to it. I am curious what is happening with the scale, the overall scale of the shadow pipeline and just in Brian's comments he mentioned that I think you have raised your yield requirement to 9%, can you just remind us what it was previously on development?

Brian Smith

We had about 8.5 to 8.75 going forward in the past and now we wanted to be a minimum of 9%. Really what we are just trying to do is maintain about 200 basis points spread over exit cap rates.

Hap Stein

20% margins what we are trading for on a net basis and I think quarter or two ago we raised the guideline to 8.75 from 8.5 which is where it was in beginning of the year. The other part of the question was the scale, the pipeline as Brian said the pipeline Jeff it is about the same as it is been.

However, it is from our prospective the in evaluating opportunities, the cup is now so to speak half empty and the underwriting requirements are tougher, so it is going to be tougher to take that $1.6 billion of developments for them to get though to becomes start.

Jeff Donnelly - Wachovia

Anyway, thank you.

Operator

Next we will go to Paul Morgan with FBR Investments.

Paul Morgan - FBR Investments

Good morning.

Brian Smith

Good morning.

Paul Morgan - FBR Investments

On the cap rates for the Cincinnati acquisition at 6.4%, I was a little surprised that how low that is and maybe you would talk about that. Then given the market there, what cap rate do you think that would have gone for if it were in DC or California or something and what does that say about where cap rates are generally?

Hap Stein

Well trends that they deal with basically contracts for about I supported though in December, we were the second highest bidder. We were not the highest bidder at the time, and it is taken us in to the quarter to end up closing. However I think that is one important factor as this reflects cap rates four, five months ago and vital throughout projects.

Brian Smith

Yes. It is a pretty great project and it is right at the best mall in that area. However, also there is some up sight in that. There are lots of things we had planned to go out and it has and we knew there is sight in that and then there is also an expensive parking field that allow for some potential new development expansion and then it wiped through that. So we think the returns will be significantly better than fixed rates.

Paul Morgan - FBR Investments

What do you think? How much that market location would have mattered and in this sense it was contracted for earlier, where do you think it would have? What is the difference between then and December and where do you think it would have traded now?

Brian Smith

Probably about 50 basis points and I think in California which still be in the part of the low six, its depending we are in California. The one thing that is happened with the cap rates is we use still and make blanket generic statements as to what they were and property was this. Now it has really become a function of two things, the quality of the asset, the A assets in the top block and the second thing would be which markets they are in. The A assets in the very best California and coastal markets are still trading in the low six's.

We have gone after a couple of projects and been incredibly surprised at how low the Cap rates are. However you move after those major markets and they start rising pretty quickly in the B and C properties are well into the mid seven sometimes, the high seven’s simply because financing is so difficult for them and then you have got the lack of interest only debt, which is reducing the cash yield pushing those returns up even more.

Hap Stein

It is also the important to remember as Brian indicated this is the best location in Cincinnati. There is a good amount of embedded growth and there is a some significant upside potential beyond that.

Lisa Palmer

I was just going to add, that it is really difficult to always to look at the Cap rates in isolation, because of all the factors includes the growth profile that will be better.

Operator

Moving on from Banc of America Securities we will hear from Christine Mcelroy.

Christine Mcelroy - Banc of America Securities

Hey, good morning. Lisa just following up on Jeff’s question since I hear you are wearing Mary Lou's hat on today. On leasing, I think I ask this question every quarter but just looking for an update on what are you seeing on the small shop side. Are incrementally more nervous today about bankruptcies and store closings there?

Lisa Palmer

Well first, I will say, I did not dye my hair blonde for the call. No, again, we are certainly monitoring really cost profile of all tenants and specifically moms and pops and our balance is very closely we have seen only a very modest uptick in bad debt expense. So going forward we are not seeing it yet, we are not necessarily expecting to, but again to explain, things could deteriorate further, but at this time we still believe that we are going to be in terms of historical trends, in terms of move assets of small shop space.

Bruce Johnson

Christy, we look at, we talked about move-outs forum and all those are similar but we also look at early move outs which is better indication in terms of – from my perspective in terms of what is going on with those types of tenants and that also has not changed.

Lisa Palmer

In terms of the bankruptcies, yes, of the smaller shops we had no impact and then the bigger boxes that have been announced, Brian, alluded to rentals and things, we had three of our rentals and things actually closing. We had Annie Bergen’s and I think that is really hit up the bankruptcy.

Christy McElroy - Banc of America Securities

Then it seems like the grocers and other need-based retailers have held up fairly well until now. Do you see the potential for any softness there given rising input costs and continued pressure on the consumer?

Hap Stein

First of all I think the industry has been very rationalized and I think where that would be expressed, would be in demand for new stores as it relates to development. However, there it is not like they are growing at fast paces in anyway. However, I think for most part the grocers we have, have dominant shares in the market and even though like the merchants right now, we are being straying a little bit, a lot of gross sales are doing pretty well and being able to withstand the trade-down even as consumers trade now.

Christy McElroy - Banc of America Securities

So, you are still the demand there on the development side?

Hap Stein

We are still seeing a modest amount of demand. Demand was not like, I mean, has moderated significantly from where it was three to five years ago.

Christy McElroy - Banc of America Securities

Okay.

Hap Stein

So its tougher to moderate and I think we would anticipate a continuing when that…

Christy McElroy - Banc of America Securities

Thank you.

Hap Stein

Thank you, Christie.

Operator

Next we will go to Michael Mueller with JPMorgan.

Michael Mueller - JPMorgan

Yes. Hi. Hap the two questions are first can you comment or give us a little more detail on concessions, I think you talked about them picking up moderately and are they more skew toward shops or anchor times and then second question, can you comment on the open end fund, the appetite to take on more grocery anchored centers as opposed to a larger format on community centers?

Lisa Palmer

Sure Mike I think what we used to comment on the call is that we have had a modest increase in credit improvement. We have not really had any rate concessions and we actually disclose our [TIs] on page 24 in our supplemental and you can just see for example second quarter of 2008 which is slightly higher than the first quarter and for the year, when I say modest I mean a modest increase in TI's on the quarter, its nothing significant than we at least look for.

Michael Mueller - JPMorgan

What we are hearing today from the tenants is larger request for TI's that we are sending off to some extent, we are seeing much more of that which is exactly what you just expect?

Lisa Palmer

I think that we expect more in the development.

Brian Smith

Yes as soon as the expense on the projects that some development projects were actually outperforming our pro forma from NOIs and in others not much I see we are right on the rental rates where we have made some concessions would be in the very large projects that have a lot of space to lease and we have areas where we need more activity than we will for the right retailer go ahead and cut a more aggressive deal than we had originally underwritten, example of that would be our BestBuy and our India project or up in Northern California in the [Yap Border] project.

Out front there is a lot of space, we needed a good anchor to generate activity there and there is a real demand the community for Jo-Ann Fabrics that went ahead and lowered grant there. That is more on an isolated basis as looking at each projects and what it means.

Lisa Palmer

As to the second question with the co-investment partnerships, they are certainly cautious. We all are, in today's environment, but they are still willing to acquire quality real estate and fortunately when you look at so the return thresholds of the two most active partnerships we have, but they are complimentary. One is very on current cap rates current yield focus and not so much on the actual growth whereas another one of our partners is less focused on the current cap rate and as long as we get the total returns and have the embedded growth in the property. However, again, they are cautious but the appetite is there.

Hap Stein

So they would be open to it but when they are outside, they must offer, must take, they are being very cautious.

Michael Mueller - JPMorgan

Okay, okay, thank you.

Operator

Moving on we will go to Jim Sullivan with Green Street Advisors.

Jim Sullivan - Green Street Advisors

Hi its [Jim Sullivan] here, just following up on the question about lease concession. Looks like the re-leasing spreads on the new leases that were signed over the past quarter were a lot smaller and narrower than they had been in the past. It also looks like the term that was signed was fairly large in about seven years. Can you talk about the new leases that are being signed and your effort to maintain occupancy if you are giving more concession, can you just talk about little bit more TI and what is your ability to gain that space or get that space back if the market does turn.

Lisa Palmer

Again let me just reiterate that we really have not been given great concession and our TI has only modestly increased. I mean again if you look at growth rate, it just on the margin and in terms of quarter, the rent growth for new leases, I think that was driven by one larger transactions more than other in an regular office set and if that is true, I will followup later, I will have Jamie comment on this.

However, we also said is that we do expect rent growth to be in the 8% to 10% range. for the year that remains unchanged. It has been slightly higher on our news here to date and that is because it is just a little tougher to get new tenants into the spaces. So therefore more deliberate in their decision making. We are not just achieving the entire rent growth, we are more focused on the quality of this tenant than the rent growth in the spaces.

Bruce Johnson

Just a follow up on Lisa's comment there. In some of the markets where we may have been holding out to sustain a higher rate growth that we did historically had, we are going ahead in leasing some of those spaces to quality tenants at a lower growth rate so if they can become rent paying and contribute to our operating portfolio NOI over the next twenty four months.

Jim Sullivan - Green Street Advisors

Are those tenants getting signed to longer weeks durations than they had in the past or it is somewhere in the trend?

Bruce Johnson

These are similar in nature, some of those tenants that may be a little but not significantly done with the change in nature of how we have always negotiated lease terms.

Hap Stein

This part may have been skewed but there are some wider spaces that were either renovated or they new leases signed.

Lisa Palmer

In some cases especially in some of our newly completed developments that may leasing first, if this would have fall in the rent growth that were releasing first generation space.

We are building in greater insteps in anticipation of the economy turning and tenants were willing to do that to get in to the space starting at a slightly lower rent but actually building a higher rent steps Q3 or abouts.

Operator

Next one will go to Michael Gorman with Credit Suisse.

Michael Gorman - Credit Suisse

Thanks good morning. Just a question going back to some of the co-investment programs, if you talk a little bit about plans for more asset sales out of the joint venture, are there any more opening market that are planned for the rest of the year, maybe how producible is the leverage there?

Lisa Palmer

Most comfortable say they have not reported, they have not had their calling yet, I do not think….

Michael Gorman - Credit Suisse

That is correct

Lisa Palmer

For the fiscal year I think it is probably best if, we do that jointly but I mean certainly we have said in the past that they had been focused on selling. We certainly have the same goal, we have joint goal of recycling capital and selling lower growth, higher risk factors, that will always continue throughout of our segment. We will look at that together in terms of selling beyond that I have said in the past and they we were focused on paying down the debt but I will differ until they report their quarter results I think later in this month.

Michael Gorman - Credit Suisse

Okay and this may fall under the same type of category, but can you talk…

Lisa Palmer

Not quite, I am sorry, I mean, our guidance includes our plans for that in term of our operating profits disposition, I mean that is one way for you to look at it.

Michael Gorman - Credit Suisse

That is it. then just in terms of the earnings power I mean can you a little bit about I mean this is pretty wide spread between what Regency itself is doing what the prior is doing, can you just talk about that, I mean is it function of properties in the portfolio or is that the function of their or that may be the 40% of the portfolio that is not related to your side of things, I mean what is dragging down their earnings growth?

Hap Stein

We have got a significant investments in hedging. It is totally different. The pay out ratios are different and et cetera, et cetera and I just do not think…………..

Lisa Palmer

Yes, I think and again I was just really quickly, I was deferred to their earnings release later this month, again in terms of our results, if you look at our percent lease and our same property NOI and our rent growth, we show both our 100% loans plus our share and that we also show the whole portfolio and it happens to be that this quarter the 100%, the numbers are slightly better which would lead to you believe that the numbers that our total invest partnerships are better which would lead you to believe that MacQuarie our largest partner in the total investment partnerships with 150 plus properties, you would expect that their operating statistics are going to be very strong.

Hap Stein

Right, and the fundamentals and what they earn in the partnership are performing very well and it is just a different vehicle, different structure, etcetera. As Lisa said, its just not appropriate for us to go beyond that.

Operator

Next from Robert W. Baird, we will hear from Chris Lucas.

Chris Lucas - Robert W. Baird

Good morning everyone. Just as a follow-up on that point, what are the contributing factors to the better performance on the same store basis of the co-investment partnerships relative to your pro-rata share?

Brian Smith

The typically one year you may have termination fees pointing into that but one year one portfolio performed better than you are up against higher numbers, the lower numbers and they have redevelopments in there but all in all the portfolio is over a period of time and perform just pretty comfortably.

Chris Lucas - Robert W. Baird

Okay and then just a quick question on G&A, Bruce, what are the contributing factors to the 7% sequential decline in GNA?

Bruce Johnson

Just less expense with respect to; recruiting, it was part of that, some of our travel, some of our non-table related, if you look going forward I would think you would see just so we do not get people using our run rate of whether what we are showing today that basically I think is going to be another $14 million for the next two quarters in net G&A.

Hap Stein

I will say there is a less scrutiny throughout the organization. The controlling and reducing G&A cost we want to do it without impacting the effectiveness of the organization especially as it relates to the leasing of vacant space.

Chris Lucas - Robert W. Baird

Great, thanks a lot.

Hap Stein

Thank you.

Operator

We do have a follow-up from Michael Gorman.

Michael Gorman - Credit Suisse

Thanks. I just had a quick technical question. Looking at the results for the quarter in the development profits, I was wondering what I am missing since the first quarter if I recall it was just zero and in the second quarter, why does the 2Q number not match the year-to-date?

Lisa Palmer

If that was zero I do not know. I have to follow-up on that.

Michael Gorman - Credit Suisse

Okay, thank you.

Hap Stein

Thank you, Michael.

Operator

There are no further questions in the queue. At this time I would like to turn the conference back over to Mr. Hap Stein for any additional or closing comments.

Hap Stein

We thank you for your comments and we all wish that Mary Lou gets well and as I said we expect her to be back on her feet within the next couple of days. Everybody have a great day. Thanks, Bye.

Operator

That does conclude today’s conference. We would like to thank you all for your participation

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Source: Regency Centers Corporation. Q2 2008 Earnings Call Transcript
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