Regency Centers Corporation
Q3 2008 Earnings Call Transcript

Published: 12 Nov 2008

[Operator:]

My name is Cynthia and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regency Centers Corporation third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. (Operator Instructions) I would now like to turn the conference over to Lisa Palmer, Senior Vice President of Capital Markets.

[Lisa Palmer:]

On the call this morning are Hap Stein, Mary Lou Fiala, Bruce Johnson, Brian Smith, [Chris Levitz], and [Jamie Shelton]. Before we start, I’d like to address forward-looking statements that may be addressed on this call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in these forward-looking statements. Please refer to the documents filed by Regency Centers Corporation with the SEC, specifically the most recent reports on Forms 10K and 10Q which identify important risk factors that could cause actual results to differ from those contained in these forward-looking statements. I will now turn the call over to Hap.

[Martin E. Stein:]

Regency is currently operating in an environment that combines an unprecedented crisis in the capital markets and a recession. Although the fact that the atmosphere is difficult is no surprise, I for one have been taken aback by how severely and rapidly the financial markets have frozen. Historically we’ve been very accurate with our guidance, and notwithstanding the current tough and uncertain realities especially as they relate to the transaction side of our business, it is personally very disappointing to me that we will be well below our prior estimates of earnings for the year. Before Bruce, Brian, Mary Lou and I describe how this mêlée is impacting our business, the steps that Regency is undertaking to preserve our balance sheet, and strategies to prosper in the future in the short- and long-term implications to the balance sheet and earnings, I do want to comment on a few key results and Regency’s attributes which I really believe are relevant to our future. The signing of 600,000 square feet of new leases

[Bruce M. Johnson:]

In this day of recognition I salute our veterans. Regency’s FFO per share in the third quarter was $1.21 nearly 25% higher than this period a year ago. We exceeded consensus in our own guidance largely because of lower accrued incent compensation and earlier-than-anticipated development profits. While the third quarter exceeded guidance, we’ve reduced our expected range of FFO per share guidance for 2008 to $3.90 to $4.35 per share. The main driver of downward revision and the wide range is transaction profits. The previous guidance included expected transaction profits of $63 million to $78 million. The new guidance range assumes transaction profits between $26 million and $50 million. Components of the transaction profits that have been impacted are

[Brian M. Smith:]

Before I discuss our thoughts on development in this environment, let me quickly review the performance of our in-process developments and discuss the remaining 2008 development sales. Leasing continues to be soft but it’s certainly not dead. In the third quarter we leased 341,000 square feet of development space. That’s about 45% more than the average of development leasing done in the first two quarters of this year. Stabilized returns on the $1.1 billion of in-process developments on a quarterly apples-to-apples basis are up 5 basis points. If we assume we can’t lease another square foot of space, the current return on invested capital is approximately 6%. Although leasing the in-process portfolio in the middle of this downturn is a challenge, there is reason for optimism. The best retailers are signing leases but only in projects where they can expect to generate strong sales. Our best weapon in leasing space then is to prove to the prospective lessees that our superior locations generate high foot traffic created by strong anchor sales volumes. Let me give you three recent examples of where this is in fact happening. About five weeks ago Kohl’s opened 47 stores across the country. Two of those were stores we developed for them in South Florida. One of the stores opened is the number one highest volume store of the 47 nationwide and it continues to enjoy that same position today. The second store we developed for them is in the top 15 of those 47 stores that were recently opened. Similarly in our shops at Stonewall project in Northern Virginia, Wegman’s recently had one of the best openings in its history with overflow crowds too large for its parking field. In fact we got word this morning that Staples said that their store there is “on fire.” That’s their quote. I think these projects are good examples of how even in difficult economic times thoughtfully conceived projects in superior locations with top tier anchors can result in robust sales and there’s nothing that attracts retailers like strong demonstrated sales. On the disposition front we’ve got eight development properties on the market at an estimated total price of $115 million and if all sold could generate as much as $21 million in gains. Of these eight properties, two are currently under contract with a third nearing contract execution. All three of these are single tenant buildings so there’s very little due diligence challenge or risk for the buyers and therefore these sales have the highest probability of closing. The gains associated with these three sales would be approximately $6 million. In addition we are actively negotiating letters of intent with interested buyers on two other centers which represent nearly $9 million in gains and are reviewing offers on three other centers w hose gains would total $6.5 million. As Bruce said, these are unprecedented times. Going forward caution is the order of the day and we are being highly selective in the opportunities we pursue. All investments are viewed in the context of the balance sheet and will not proceed if capacity is an issue. The projects we do pursue will be those that retailers want, that consumers want and that our co-investment partners ultimately want to own. In short, projects are being evaluated based on the ability to quickly and profitably recycle capital. As for specific directions to our team we will continue to focus on the most desirable markets with the strongest demographics anchored by the top retailers. No real change there. We will not be pursuing mix use projects nor will we buy land to hold except for extraordinary opportunities. We’ll be doing a higher percentage of grocery-anchored centers catering to nondiscretionary shopping. We will further reduce the amount of shop space we build. It’s already down but it’s going lower. In early 2007 shop space in our in-process projects amounted to 33% of the GLA. Today our in-process projects average 19%, our 2008 starts will average 16%, and our 2009 starts look to average just 13%. We have significantly raised return requirements. As Hap indicated we expect new developments to be underwritten at returns 200 basis points higher than the expected cap rate for the proposed development and that actual cap rate will reflect all risks and market conditions unique to that project. Return thresholds will be increased again to the extent cap rates and/or the cost of capital increase. We will give special consideration to projects where the land is already owned, developments with lower risk profile, and where we have prior firm commitments to anchor tenant customers. Given the increased return requirements, our development pipeline is being retooled. Returns will rise to acceptable levels or we’ll drop the pursue. A meaningful portion of the pipeline consists of projects where Regency already owns the land and we expect eventually to move those holdings into production. Where proposed projects fail to make the cut, there will be write-offs of pursuit costs. The total amount of at-risk dollars that controls the entire pipeline of projects is $11 million. For projects that don’t currently meet our new hurdles, the at-risk dollars total about $6.6 million. We fully expect that we’ll be able to restructure many of these projects and dramatically reduce the amount of potential write-offs. While the amount of development is being significantly curtailed until the capital environment improves, we will continue to pursue these investments under the right terms as we are in my opinion entering a period of immense opportunity. In today’s environment development is significantly less risky than it was a year ago. Today land prices are down, construction costs are soft, and with a complete lack of competition we are pretty much able to negotiate whatever terms we need. For the first time in about 15 years we can negotiate to tie-up properties for as long as necessary and put off closing until we have all entitlements and significant leasing in place. This is in marked contrast to market peaks where the developers had virtually no negotiating power with landowners and were forced into taking increasing amounts of risk. Today cities are willing to work closely with us on reasonable terms and retailers are bringing us many exclusive opportunities. In short we’re entering the sweet spot of development that comes around very rarely and in those periods developers can create extraordinary value. The only weak ingredient in this model today is retailer sales but the projects being pursued will not be delivered for several years when that demand is back. These opportunities no matter how good will not be undertaken at the expense of the balance sheet. The bottom line is that Regency’s development program is being retooled and slowed. The volume of development starts and at least the amount of Regency’s investment will be reduced as a result of higher return guidelines, tougher underwriting standards, the need for transparent takeout commitments or real financial partners, and limits on capital commitments. Projected starts for this year have been reduced to $180 million. The remaining $30 million is scheduled to come in at 10%. The amount of development that is started next year very well could be less or more based on how successful we are in executing our financing plans. I do want to point out that most developments that would be started in 2009 would not be stabilized until the period of 2011 to 2013. Furthermore, it’s important to remember that any development we do will involve considerable pre-leasing. Of the remaining 2008 starts we are currently 84% pre-leased and the projects we hope to start in 2009 I expect will be approximately 80% pre-leased as well. The days of closing without this kind of leasing are long gone. [Inaudible] Regency is extremely well positioned for profitable growth when the economy returns to normal. In addition to traditional investment opportunities we’re very likely to see banks, mezzanine lenders and hedge funds taking back huge amounts of unfinished developments. They will need to team with a strong company with development and operating capabilities to see their way out of these projects. As I’ve said before, anchor tenants will turn to the handful of companies that have performed for them during difficult times. Not only do the best retailers still need to expand, they need reliable development partners of which there are few today. The development business is not one that easily can be started and stopped and restarted again as development takes years to hatch and future returns will become more attractive as landowners find [inaudible] and land prices drop. Hopefully by 2011 development starts can be returned to the $300 million to $400 million level with margins of about 200 basis points thereby creating significant value.

[Mary Lou Fiala:]

Regency’s necessity driven market grocery-anchored operating portfolio is holding up remarkably well in the face of an increasingly challenging environment. Occupancy for our pro rata share of the portfolio was 94.3%. Rental rate growth was in double digits at 13.8% for the quarter and 11.6% year-to-date. 1.2 million square feet of new leases and renewals were signed during the quarter and NOI growth for the quarter for Regency’s wholly-owned portfolio and shared partnership was 2.3% and 2.5% year-to-date. The total portfolio posted 2.6% NOI growth year-to-date. Occupancy has dropped from 94.6% last quarter to 94.3% in the third quarter, a decline of 30 basis points. There has been a slight uptick in move-outs in the operating portfolio this quarter but year-to-date are 110,000 square feet higher than last year largely attributable to two Linens N Things. The portfolio is performing solidly on a regional basis. Strong markets for us continue to be California where average same-store growth is over 4%, occupancy is 98% and rent growth is over 20%. The Northeast is another very solid market with same-store growth of 2.5%, occupancy nearly 95% and double-digit rent growth. Texas is also strong with NOI growth of almost 3%, 94% occupancy and again double-digit rent growth. And honestly I’m pleasantly surprised to see how well the Florida portfolio is performing. Despite the tough economy, NOI is positive and the portfolio is 94+% leased and rent growth is over 8%. Our tough area honestly is the Midwest and it continues to be the most difficult market with flat NOI and low rental rate growth. To quote Hap, our portfolio looks pretty darn good. We’re still leasing over 3.5 million square feet of space and due to strong anchors and better demographics, the sales at our centers are good and the retailers are healthy. As the consumer turns to value and necessity retailers, several retail categories continue to see sales increases. Grocers are up almost 6%, drugstores over 3% and discounters over 4%. If you were to review these results in a vacuum, you could assume that this year’s not much different than any other. But given the credit crunch retailers are not able to access the capital needed to expand and grow their business. Downtime for vacancies is increasing in both new developments and the operating portfolio and therefore putting downward pressure on rents. As a result we are forecasting year-end occupancy to be between 93.8% and 94% on a pro rata basis. For the most part with the exception of exposure to five Linens N Things and two Circuit City stores impact from bankruptcies have been minimal. Even on the short run where these move-outs hurt our numbers, there’s still good news. In Santa Barbara we’re replacing the Circuit city with Whole Foods at significantly higher rents and across the country as we look at these spaces we’re proactively working with retailers like Fresh Market, Marshalls, Nordstrom Rack, Best Buy to fill these larger spaces. It may take a little longer and we may have some short-term pain, but these are strong retailers in strong centers. In addition to major retailer bankruptcy, odds are high that over the next few months Regency will experience an increase of move-outs in local tenants as well. But excluding grocers we do not have any significant tenants that are over 1.5% of our revenue. Our geographic and tenant diversity will continue to minimize the impact of retailer failures in the future. The leasing teams are totally focused on returning the operating portfolio back to 95% while continuing to increase rent. Our preference for better operators is even greater during a recession. Existing tenants are being proactively approached for early renewals. The leasing team is spending even more time cold-calling retailers in competing centers about upgrading their space in Regency’s better performing centers. These same programs are being applied to achieving 95% occupancy for development. For the remainder of the year we’ve narrowed our same-store guidance to a range of 2.4% to 2.7%. It’s important to note that in October we received a termination fee of $2.5 million that does add 70 basis points to our full-year same-store growth. The same-store growth range excluding termination fees is expected to be about 1.7% to 2%. We’ve raised our rent growth guidance to 9% to 11% given our performance year-to-date even though we’re expecting moderated rent growth in fourth quarter and continuing into ’09. While I have confidence in the guidance given for the remainder of this year, we believe that next year’s going to be even more of a challenge. At this time my best guess is that in the face of the recession we may have flat same-store NOI, and in my mind if this environment our portfolio maintains occupancy of 93% to 94% and sustains the same level of NOI or perhaps even see some growth, it’s a testament to our high quality and sensitivity driven portfolio that’s truly built to withstand the strong headwinds coming our way and that in the next two years we can get back to our 95% occupancy and our normal 2% to 3% same-store growth.

[Martin E. Stein:]

I do want to close with what I believe are two important messages. First, I feel extremely fortunate to be working with an experienced cycle-tested deep leadership team which is totally dedicated to meeting the unprecedented challenges which we are now facing. The tough decisions are being made like renegotiating land contracts, walking from projects that have been worked on for months and at times many years, and especially reducing headcount. These steps are being taken to preserve the balance sheet while at the same time we enhance Regency’s franchise as the premier operator and developer, intensely manage our portfolio and position Regency to take advantage of compelling opportunities to create significant value in the future from developments and acquisitions. I also think it’s fitting to end the call by finding perspective regarding survival versus thriving. If you’d indulge me for a minute and let me read from an excerpt from an op ed column in the September 28 New York Times by one of my favorite writers [Tom Friedman]; many of you may have read it; but I do want to read it again. “When I need reminding of the real foundations of the American dream, I talk to my Indian American friends who’ve come here to start new companies. Friends like K.R. Sridhar, founder of Bloom Energy. He emailed me a pep talk in the midst of this financial crisis, a note about the difference between surviving and thriving. ‘Infants and the elderly who are disabled obsess about survival,’ said Sridhar. ‘As a nation if we just focus on survival, the demise of our leadership is imminent. We are thrivers. Thrivers are constantly looking for new opportunity to seize and lead and be number one. That is what America is all about.’” Finding the path to thrive has never been tougher. The mountain that we are climbing is very steep. It’s got some landmines on it and the fog is really thick. At the same time we can’t overlook the fact that we start this climb with some amazing resources

[Operator:]

(Operator Instructions) Our first question comes from Quentin Velleley and Michael Bilerman - Citigroup.

[Quentin Velleley:]

In terms of your current development pipeline, you spoke about return hurdles and so forth increasing on that and the potential for some write-downs. If you’re going to make some merchant gains in the future, could you just maybe speak about what you’re expecting in terms of net development margins on those existing projects?

[Brian M. Smith:]

If we do a 200 basis point spread, that equates to about a 29% profit margin. If we built a 10 and contributed an 8, that would be 29% profit margin.

[Michael Bilerman:]

That’s really on the future stuff?

[Brian M. Smith:]

Yes.

[Michael Bilerman:]

How about the $400 million that’s delivered and the stuff that’s scheduled to deliver over the next year?

[Brian M. Smith:]

Depending on the cap rate, the stuff that we would expect to deliver next year would be in the neighborhood of at 7.5%, you’re probably at 20% and if you’re at 8% you’re getting down around 15%.

[Quentin Velleley:]

You mentioned Macquarie Countrywide which obviously has some difficulties at the moment. If Macquarie Countrywide becomes the fourth seller of assets, would you be a potential acquirer of those assets or is it more likely that you would inject equity into the joint venture?

[Martin E. Stein:]

The possibility of us being an acquirer of some of their positions is a possibility and it’s also a possibility there may be other investors that may be buying their positions.

[Quentin Velleley:]

Is this something that you’re actively thinking about at the moment?

[Martin E. Stein:]

I think they’ve announced that they are actively involved in considering both entity transactions as it may relate to the partnership and the possible sale of assets. As I said, we’re working with them closely and expect that something can be accomplished on a basis that’s going to make sense to Regency.

[Operator:]

Our next question comes from Christy McElroy - Banc of America Securities.

[Christy McElroy:]

Bruce, you talked about appetite among lenders for doing deals on grocery-anchored centers. Can you give some color on the appetite in pricing for doing deals on larger community or power centers, and when you complete and stabilize one of these centers are you typically putting on permanent debt before contributing it to the open end fund?

[Bruce M. Johnson:]

I’ll answer the last question first. We’re trying to do that simultaneously to the extent we can although you’ll note that we contribute the assets to Oregon in the process of doing that mortgage financing that I referred to in my comments. Larger centers are more difficult to finance today in general. The sweet spot would be $10 million to $15 million per center from a loan perspective. To the extent you get above that you start to get a little push back from lenders that want to do that. You just narrow the amount of lenders that would do that. Current spreads today are probably for our types of property are probably in the 350 to 400 basis point range but I’d say between now and the end of the year you’ll see less activity just because we’re at the end of the year and I think there are a number of lenders that are waiting to see if there’s more clarity even on their side of the capital markets.

[Lisa Palmer:]

I’d also add on the larger community center side Bruce is absolutely correct in terms of the larger dollar amount it gets a little bit tougher and you may have fewer players but still the most important thing is the quality of the tenant and the credit quality of the tenants that are in the shopping center. If you’ve got a community center, for example with Target on the lease, you’d be able to get a loan on that as easy as you would with a public company. Analyst Then Hap, you talked about opportunities out there that are becoming more attractive, can you provide just some additional color on what types of opportunities you’re seeing in the transaction market today if any? And, how much distress or what kind of pricing you guys really need to see out there before committing capital more aggressively.

[Martin E. Stein:]

We indicated that we kind of feel that longer term in general and better assets may price better than this but in general, cap rates are moving to 8% so we would need to see in effect it would have to be accretive to that. There may be some distress sales that we are aware of where you might see some opportunities in that regard but we can’t speak to any of those right now because they haven’t occurred but we believe there is good prospects that that my evolve in the months ahead. Analyst Did you say they are moving to 8% or they have moved to 8%?

[Martin E. Stein:]

We’re saying that we expect them to move to the 8% range because with obviously cap rates being lower for infill properties and more coastal markets and cap rates may be higher for what you may call more commodity type product.

[Lisa Palmer:]

I think I would just add that it’s so difficult right now to really know where cap rates are because there are so few transactions occurring. I think that’s the most important thing and because of the capital markets, once the capital markets start to clear up a little bit in fall there will be a clearer picture as to where cap rates are going to go.

[Martin E. Stein:]

You might just share the full range of appraisals on the Oregon.

[Lisa Palmer:]

We’re still in the process of getting all the appraisals that determines our promote for the Oregon partnership and cap rates if I need to be honest have come in on these appraisals from 6.25% to 8.25% so it definitely varies and clearly the appraisal market as some people know sometime lags the actual market.

[Operator:]

Your next question comes from Jay Habermann – Goldman, Sachs & Co.

[Analyst for Jay Habermann:]

Just turning to the balance sheet and your available capital at this point, you’ve mentioned in the past that you’d be open to providing seller financing to get deals done in the event that the opportunity does arise. What are your thoughts on this today and have they changed at all from a capital preservation standpoint?

[Bruce M. Johnson:]

No, I think we’re still in the same position with respect to providing seller financing, we do it on a same basis where we look at who we are dealing with and the type of property that we are selling and the likelihood for repayment. Our general rules are 35% equity, in other words we wouldn’t do more than 65%, there could be some variances in that and we’re trying to basically target market rate deals. Basically using points or basis points over whatever the treasury is. Our view on that is that still is important on our capital recycling plan where you wouldn’t get any money if you didn’t sell the assets without the seller financing so we’re going to generate 35% of the proceeds in terms of capital recycling from that respect. Now again, that money would be used on a sparing basis.

[Analyst Jay Habermann:]

Turning back to [inaudible] build for a second and your outlook for 2009 and 2010, I guess how should we be thinking about gains as a percentage of your earnings going forward? Would you consider at this point of removing gains or merchant build gains from your guidance all together with anything recorded being incremental to base line earnings?

[Martin E. Stein:]

We’re going to have more definitive guidance on our call at the end of the year, our year-end call and we’ll try to provide as much guidance as we can as far as transaction gains. We do believe that even under some more conservative assumptions that a certain amount of gains can be generated but more to come on that. I think as I said I think the guidance that we provided, that Bruce has given for 2008 is probably a pretty good range or starting point for guidance for 2009 and my kind of inclination right now is it ought to be somewhere in that range.

[Analyst for Jay Habermann:]

Then just to follow up, the lower end of that range then being sort of the baseline or the conservative just looking at what to expect in terms of the lower end versus the higher end of that range?

[Martin E. Stein:]

Like I said, the range - for right now we haven’t given guidance but as I indicated we’re looking somewhere in that range of $390 to $435 and we’ve have a pretty good preliminary look at the numbers but we’d like to have another in effect 90 days for there to be a little more clarity in the capital markets before we provide any additional guidance.

[Operator:]

Your next question comes from Louis W. Taylor – Deutsche Bank Securities.

[Louis W. Taylor:]

Hap, or Bruce or Brian can you talk just a little bit about the deals you’ve got on the market for sale? Are any of them going to third parties or what percent is going to third parties? Just give us a sense for buyer profile and their source of equity?

[Brian M. Smith:]

They’re all private buyers. We’ve got two of them are all cash buyers and the remaining ones of the ones we expect to close will be seller finance.

[Bruce M. Johnson:]

But remember a lot of these are single tenant occupied buildings. I think there are two multi tenant buildings, large what you call typical shopping centers.

[Brian M. Smith:]

Three that are under contract are all single tenants. The ones that we’re negotiating LOIs, one is a single tenant buildings the other is grocery anchor centers and the ones that we’re evaluating offers right now are grocery anchor.

[Louis W. Taylor:]

But private buyers I mean institutional, are they families, are they local?

[Brian M. Smith:]

Families, local people not institutions.

[Louis W. Taylor:]

Then second question just pertains to just development leasing, I mean how much is really actively in negotiation today for the vacant space that maybe takes occupancy maybe second quarter or later next year? Or, is that environment really just pretty quite right now?

[Brian M. Smith:]

Like I said we did 341,000 square feet of development leasing this quarter which was 45% more of the average of the prior two quarters. Now, whether that indicates an uptick or not I don’t know. I think it feels pretty consistent with what it’s been for the first two quarters. The projects that are the best located that were not built in the markets depending on future growth continue to lease well and those that were built in markets that did require a little more housing on the ones that were slow. One of the projects we’re going to be doing in the fourth quarter would address one of those. For example, in Culpepper Virginia we have a project where the housing market is slow, we have a Target anchored and what we’re going to be doing there is that one of ours starts is just to build an [inaudible] grocery store and no shop space and just create some additional foot traffic to hopefully help the sales of that center and therefore the leasing.

[Louis W. Taylor:]

I guess where I was going with that is how much has the leasing environment changed in the last 30 to 45 days as opposed to what happened in Q3.

[Mary Lou Fiala:]

It really hasn’t changed that significantly in the last couple of quarters. The thing that’s changed is the time it takes to lease up the space. It’s changed, as I mentioned even in the operating portfolio and looking at some of these move outs that we have, Circuit City and the bankruptcy from Linen n’ Things, we’ve got create deals going on with a lot of good retailers. Out of the spaces that we have I think there are two that we don’t have anything going on. Whether it’s a development or an operating portfolio, it’s taking us a longer time to lease up but we’re still seeing strong activity and I think Brian said it very well, that most of our developments are leasing up at a reasonable pace, slower than it has been but a reasonable pace. We just have some out there that depending on housing growth that is very slow and very difficult. But, not a significant change in the last 30 to 45 days.

[Martin E. Stein:]

The bottom line is to date there’s still a pretty resilient heartbeat out there. It’s not as strong as it was obviously a year ago and there’s a chance that things may slow further. I think that our projects are now that we moved out to 40 months from putting the spade in the ground and a couple of years ago our average was like 24 months and we rigorously go over the portfolio every quarter and I think we’re being pretty conservative in our assumptions but could things slow further? The answer is absolutely that’s possible.

[Lisa Palmer:]

The thing that’s out there that really has changed is the fact that the inability for people to get credit. Where we’re seeing the challenge isn’t the fact that we have our PCI retailers who quite frankly many of those sectors are having nice mid digit comp increases over the previous year but where you’re depending on a franchisee to open a location, they have the franchisee, the franchisee today just can’t go to the bank and get the credit. So it may take $350,000 to $500,000 to open a location but they need that and they can’t get it. That’s the primary reason that we’re seeing a slow up both in developments and in operations.

[Operator:]

Your next question comes from Jeffery L. Donnelly – Wachovia Securities.

[Jeffery L. Donnelly:]

Bruce and Hap, I know you’re reluctant to give 2009 and beyond guidance at this time but I’m curious if you annualized your Q4 ’08 FFO excluding transaction profits you’re at about $3.40 a share and that seems to leave a pretty wide gap from the $3.90 to $4.35 I think Hap you said in your comments. I know you don’t want to be specific but can you at least in very broad strokes give us a rough sense of how you feel that $0.50 to $0.70 share differential?

[Bruce M. Johnson:]

My answer would be is that there clearly is going to be some transaction related business in that, that would be the component of our plan and in addition you’ll see reductions in G&A that occur that our [inaudible].

[Martin E. Stein:]

And you’ll see some growth in what somebody might call non-transaction FFO.

[Jeffery L. Donnelly:]

G&A reduction Bruce, just to be clear beyond your run rate in Q4.

[Bruce M. Johnson:]

Yes. [Inaudible] $6.2 million difference.

[Jeffery L. Donnelly:]

The second question I guess for Brian and Marylou, in your development pipeline you’ve been managing down your small shop space obviously for some time, does that tell us that in your core portfolio we should expect greater retention and releasing issues among small shop tenants than in big box? Then I guess just within the small shop side, do you think your mix between PCI and mom and pop tenants is going to shift around at the margins?

[Mary Lou Fiala:]

First of all our renewal rate on our core portfolio is over 80%. Even if we look at next year and 2009 we’ve already early renewed about 15% of those side shop tenants. Our rental rate growth and renewals have been extremely strong year-to-date, over 12%. So, the answer to your question, yes renewal is a focus, maintaining occupancy is key and that’s true whether it’s in an in process development and it’s true in terms of or operating portfolio. As far as is it going to shift on the margin, yes it will shift on the margin. What we’re doing today is because of the fact that our franchisees are not able to get credit and we can’t grow as quickly as they would like or we would like in our portfolio we are focusing on real strong regional players in a market that are in a center that quite frankly don’t have the characteristics that we have both in terms of our anchor sales, demographics and many cases density and we’re going out there and our guys are out there cold calling these people and moving them in and showing how much stronger they’ll perform in a Regency Center. We’re seeing some nice success with that but it will only be on the margin and as soon as this credit crunch breaks loose – I mean, we’re real happy with where we are with our PCI retailers. But, that’s what’s making it change but still we have not lost sight at all in terms of really keeping the tenant quality high.

[Martin E. Stein:]

Let me get back to Jeff’s question and I think that we do expect some growth in non-transaction related FFO to occur as developments lease up, and some of that leasing has already occurred, we’re just not getting the income from that right now because those leases come in to place from G&A savings. So, I think if you take transaction income aside, we are expecting some pretty meaningful growth in what I call non-transaction related FFO. That doesn’t include much growth in same store.

[Operator:]

Your next question comes from Michael W. Mueller – J. P. Morgan.

[Michael W. Mueller:]

Bruce, can you clarify your comments on G&A? If we’re looking at the G&A that’s actually hitting the P&L, it’s not capitalized, how much lower is what you’re talking about it could be in ’09 versus ’08?

[Bruce M. Johnson:]

’09 over ’08 is $6.2 million net.

[Michael W. Mueller:]

And that’s expense?

[Bruce M. Johnson:]

Correct. That would be the amount that we showed that would be expense difference.

[Michael W. Mueller:]

Then if we’re looking at I guess the margins Brian laid out for maybe 15% to 20% on the development gains next year lower than what it has been running, it seems like volumes would have to be a little bit higher. Can you just talk about, I know you don’t have the crystal ball right now but when you look at what could be contributed or sold next year, does it look like it’s going to be a mix of stuff going to the take out fund as well as third parties? Or, is it more heavily skewed one way or the other?

[Bruce M. Johnson:]

There will be a component that is going to effectively meet, two properties that will meet the open end fund and the rest will be third party base [inaudible] beyond to the funded [inaudible] if that get’s expanded.

[Lisa Palmer:]

We’ve gone as far as to give you that exact number for the fund contributions on that balance sheet attached to these slides, of what we expect in terms of the cash coming in.

[Bruce M. Johnson:]

We’ve also identified and as I indicated, one of the key initiatives that we have is to have a joint venture or co-investment partnership in place as it may relate to grocery anchored shopping centers.

[Operator:]

Your next question comes from Nathan Isbee – Stifel Nicolaus.

[Nathan Isbee:]

You had spoken before about the higher development yields that you’re going to be demanding on the future projects, can you just address the current land inventory much of which was bought above current market value and your ability to get to those higher yields using that land?

[Brian M. Smith:]

The things that would keep the returns from immediately getting up to the level we’re talking about, one of those reasons is the land held. Overall, for the projects we think will go forward we’ve got about $350 million of ultimate development costs and the return on that would be probably in the low 9s in terms of 10s. We’ve got some projects that are mid 10s to almost 12% but overall they look pretty darn viable in the low 9s.

[Nathan Isbee:]

So talking about that 200 basis point spread it doesn’t make sense to build those to a 9% or low 9s?

[Brian M. Smith:]

No.

[Bruce M. Johnson:]

Wait a second, it does make sense to build those because in effect we’re converting the land in to an earning asset.

[Nathan Isbee:]

I guess in a perfect world you never would have bought it but now you have it you could find a way to monetize it?

[Bruce M. Johnson:]

Yes.

[Operator:]

Your next question comes from [Avi Learner] – Robert W. Baird & Co.

[[Avi Learner]:]

I was wondering, related to your joint ventures are you seeing any interest either from new partners or expanding or extending relationships from existing partners?

[Martin E. Stein:]

I would say that there is a good change that it will be an expansion from an existing partner or partners.

[[Avi Learner]:]

That’s in negotiation or are you pretty close?

[Martin E. Stein:]

More to come on that regard. As I indicated, this is something that’s important for us and now is not exactly the best time to be having discussion right now with folks and we’re going to do this on a proactive but thoughtful and diligent basis.

[Bruce M. Johnson:]

This initiative is not a new initiative, actually it’s something we’ve been talking about for over six months. It’s something that’s been on our to-do list for some time.

[[Avi Learner]:]

Secondly, with regard to those projects eligible for the open end fund, are you taking any steps either promotions or TIs to generate more leasing velocity in those projects?

[Mary Lou Fiala:]

No, we’re really not. I think we’re in pretty good shape for the projects that will be contributed in to the fund and we haven’t really seen a tick up in that at all so no.

[Operator:]

Your next question comes from Michael Bilerman – Citigroup.

[Michael Bilerman:]

The note receivable balance went up about $35 million, was that a note relative to the developments that were sold in the quarter, or was that something else?

[Bruce M. Johnson:]

That was related to the properties we contributed to the Oregon fund.

[Mary Lou Fiala:]

In fact, in Bruce’s comments he noted the $43 mortgage at a 6.85% coupon that we are very close to getting commitment for. That is to repay the $35 million note for Oregon.

[Michael Bilerman:]

And you don’t adjust anything on your gain calculation when you provide seller financing?

[Bruce M. Johnson:]

No, as long as it is market rate financing.

[Michael Bilerman:]

Then just coming back just to make sure I understand 4Q relative to what has happened this year and next year, the G&A specifically I think you talked about it being – just trying to back in to it it’s about $16 million in the fourth quarter, if total G&A was up $3 million for the year?

[Martin E. Stein:]

That would be close enough for drill I think.

[Michael Bilerman:]

Then you’re saying when you look at totality for next year you’re going to be $6 million less?

[Bruce M. Johnson:]

Yes.

[Michael Bilerman:]

Is there anything in the fourth quarter that would be affecting that a $0.85? In Marylou’s comments I heard something about lease term fees. I don’t know if that was already received or to be received or anything on out parcel gains?

[Mary Lou Fiala:]

It was received.

[Lisa Palmer:]

In October.

[Mary Lou Fiala:]

In October right, so it was in the fourth quarter but we’ve already received it in October. We obviously didn’t state it in third quarter numbers.

[Michael Bilerman:]

And that was $2 million?

[Mary Lou Fiala:]

It was $2.6.

[Michael Bilerman:]

Is there an expectation at the low end of this guidance for additional lease term fees or any out parcel gain?

[Bruce M. Johnson:]

No, not from our perspective at this point.

[Operator:]

Your next question comes from Jim Sullivan – Green Street Advisors, Inc.

[Jim Sullivan:]

Can you help me understand a little bit better which assets under development are merchant building assets? As I’m looking at the dispositions during the quarter it’s more confusing than it has been as to what you consider to be merchant building and what you don’t especially with respect to assets on which you’ve taken depreciation.

[Mary Lou Fiala:]

I’m not sure we understand the question. I think historically that we’ve always said that everything we build we’re willing to hold long term and clearly some of these single tenant properties that are currently on the market and expected to be sold were identified at the beginning as likely candidates to be sold at completion although we’d be comfortable holding them. So, there’s really no merchant build program.

[Martin E. Stein:]

Jim, are you specifically referring to the four assets that we’re contributing to partnerships?

[Jim Sullivan:]

Yes. It looks like where there were gains over gross book value those were merchant building and where there was a loss in one case it was not considered merchant building. I’m just trying to understand that.

[Brian M. Smith:]

You referred to a loss?

[Jim Sullivan:]

Yes, Independence Square.

[Bruce M. Johnson:]

I think Independence was really tied in with a portfolio sale that we did with Waterford which was driving that loss but I think it was a very, very slight amount, wasn’t it?

[Jim Sullivan:]

That’s the confusion, what’s an operating property versus a merchant build property for purposes of your accounting.

[Bruce M. Johnson:]

Which schedule are you referring to?

[Jim Sullivan:]

This call has gotten long, I’ll take it offline with you but I think that would be helpful to have some clarity?

[Bruce M. Johnson:]

We’ll look at that Jim. I think I understand your point now and that’s a fair comment.

[Jim Sullivan:]

Then secondly, Brian I’ve heard comments on the call with respect to the development pipeline about further reducing the amount of shop space which would seem to be the right thing to do but hurt your overall yield because of the differential in rents. Then I’ve also heard comments with respect to extending the lease up period which would seem to increase your carrying costs yet when I look at the development yields that you’re showing I believe they’re down 3 basis points this quarter versus last quarter. How could you reduce the shop space and extend the lease up and not negatively impact your yields on what’s underway by more than say 3 basis points?

[Brian M. Smith:]

Well, first of all most of that Jim we did in prior quarters. We’re at 40 months this quarter but we were pretty close to that last quarter, it might have been just a couple of months different. So, we’ve already taken those impacts which already lowered the returns down to where they are right now.

[Bruce M. Johnson:]

Just to be clear, the reduction in shop space is on the pipeline, the increase in the lease up time is on what’s in process which is already what’s underway Jim.

[Jim Sullivan:]

Finally, the lease termination fee, can you provide a little more detail on that, that’s a pretty big number?

[Lisa Palmer:]

Yes, we had a shopping center in Austin Texas that was an Albertsons. So, we accepted their lease termination fee. It was one of those leases where a third party had owned it, we’re very happy to get $2.6 million, we’re already working on another anchor that’s a strong anchor that would go in to that space so it really is a win/win. Like I said, we’re seeing this a lot and I think it just helps everybody to understand, some of these vacancies that have come open and available we really feel are huge opportunities to upgrade the quality of the retailer in our centers and this is an example of one of them. So, in the short term it’s painful, in the long term it’s real good news and we have a lot of good news that I think you’re going to be seeing over the next year and especially the year after.

[Operator:]

Your next question comes from Michael Bilerman – Citigroup.

[Michael Bilerman:]

On the $400 million of stabilized developments that are sort of held to sell or to hold, what’s the current yield on that? Specifically, is there more upside to go as you think about leasing up or is it really the leasing from –

[Bruce M. Johnson:]

I think the range is 9% to 9.5%. I’m pretty sure the $400 million is north of 9%

[Michael Bilerman:]

Already?

[Bruce M. Johnson:]

Already and they’re already over 95% leased.

[Lisa Palmer:]

Mike, my best guess would be it’s slightly north of 9.5%.

[Bruce M. Johnson:]

It is north of 9%.

[Michael Bilerman:]

And you’re really thinking then on the $1.1 billion of the sort of construction in progress of which you’ve already spent which is obviously a very low yield today, under 2% as you are just in the lease up process that that’s where, even if you don’t sell these assets next year, as you start to lease up and get more income you’ll get that FFO accretion?

[Bruce M. Johnson:]

Right. We refer to that as new development NOI. That doesn’t show up in same store.

[Brian M. Smith:]

But if you take the amount that are leased today and the cost to complete exclusive of any future phases that we’re not committed to today, the current in place return is real close to 6%. Also, I want to note something else, getting back to Nate’s question about land, to the extent we’ve got about $175 million, $200 million of land on the books, to the extent that we’re able to convert that land to 9% returns that’s $18 million a year in FFO, not gains but constant FFO that is out there. Obviously to the extent those assets could be sold is a portion of that but – even though, yes could we buy those assets at lower value today, yes but I think for the most part we feel real good about the future potential of those land assets that we own.

[Michael Bilerman:]

Then my last question is just some of the downside analysis Bruce that you prepared which is very helpful, that assumes zero development starts in 2009 and 2010?

[Bruce M. Johnson:]

That is correct. What we show you is effecting the guidance for 2008.

[Michael Bilerman:]

Where you are today?

[Bruce M. Johnson:]

The $30 million is the only new component that is in that analysis.

[Operator:]

At this time there are no further questions. Mr. Stein I’ll turn the conference back over to you for closing comments.

[Martin E. Stein:]

We appreciate your time and you can be assured that we are focused to move Regency forward in these challenging times but feel that we’re going to be well positioned as I indicated not only to survive but also to thrive. Everybody have a great day. Thank you.

[Operator:]

Ladies and gentlemen this will conclude the Regency Centers Corporation third quarter 2008 earnings conference call. We thank you for your participation and you may disconnect at this time.