Weingarten Realty Investors
Q2 2009 Earnings Call Transcript

Published: 31 Jul 2009

[Operator:]

Good morning. My name is Molly and I will be your conference operator today. At this time I would like to welcome everyone to the Weingarten Realty second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Kristin Gandy, Director of Investor Relations. Please go ahead.

[Kristin Gandy:]

Good morning and welcome to our second quarter 2009 conference call. Joining me today are Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President; Steve Richter, Executive Vice President and CFO; Robert Smith, Senior Vice President; and Joe Shafer, Vice President and Chief Accounting Officer. As a reminder, certain statements made during the course of this call are forward - looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company’s SEC filings. Also during this conference call management may make reference to certain non-GAAP financial measures such as Funds From Operations or FFO, which we believe help analysts and investors to better understand Weingarten’s operating results. Reconciliation to this non-GAAP financial measure is available in our supplemental information package located under the Investors Relation’s tab of our website. I would also like to request that callers observe a two - question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have any additional questions, please rejoin the queue. I will now turn the call over to Drew.

[Drew Alexander:]

Thank you Kristin and good morning everyone. Our team has made tremendous progress in strengthening our balance sheet, right sizing our development pipeline and leasing space. In our industry, some people forecast the worst is behind us and some say we have worse conditions ahead of us. As we stated in Erie [ph] last month, unless global economic conditions deteriorate even further, we remain cautiously optimistic and our operations have reached levels such that we think the worst is behind us. With that said, we believe that 2009 and much of 2010 will remain challenging, and we anticipate the recovery will be realized slowly and quite inconsistently. Pressure on rental rates and intending retailer bankruptcies are a serious concern, and our occupancy remains steady and we are encouraged by leasing activity which further supports the quality of our portfolio. Before I turn it over to my colleagues to review the key areas of our business, I want to mention an award that we recently received. In April, this year, Weingarten received the distinguished honor of being named one of the 100 most trustworthy companies by Forbes. Forbes in conjunction with audit integrity and independent financial analytics company scanned more than 8,000 companies traded on US exchanges. Audit integrity finds that its 100 most trustworthy companies have consistently shown transparent and conservative accounting practices and solid corporate governance and management. We very much appreciate this recognition. I’ll now turn it over to Steve Richter to review the financial results for the second quarter.

[Steve Richter:]

Thanks Drew. Funds from operation or FFO on a diluted per share basis was $0.61 per share for the second quarter of 2009, compared to $0.76 per share for 2008. Net income on a diluted per share basis was $0.35for the second quarter of 2009 compared to $0.76 per share for the same period last year. These results were achieved even after our recent secondary offering, which diluted this quarter’s FFO by $0.14 per share, which was partially offset by the gains from the redemption of the convertible bonds. The decrease in net income was primarily the result of a decrease in the gains on sale of properties from $41 million in 2008 to $11 million this year. Weingarten has made enormous strides repositioning our balance sheet. During the second quarter, and subsequent to quarter end, we significantly improved our liquidity by reducing our debt maturities to very manageable levels. We have included a pro forma debt maturity schedule on page 13 of the supplemental, which lose the converts from a contractual 2026 maturity date to 2011 reflecting the bondholder’s foot option, and further adjusting the maturity schedule for the portion of the tenders that closed subsequent to quarter end. This schedule demonstrates that we have substantially eliminated any debt maturity issues. As reported on June 1, we tendered for a portion of our near term unsecured notes in convertible bonds with the extended tender offer expiring subsequent to quarter end; the result of this process was a huge success. The tender for the unsecured notes expired on June 9, and resulted in a $103 million of notes being retired. On June 29, we announced an increase in the size of the tender offer for the 3.95 convertible bonds by approximately $78 million. Under this revised offer we agreed to repurchase up to $325 million of the bonds. On July 13, the tender expired resulting in $320 million of convertibles being retired. Because the converts had a put option to the company in 2011 the purchase eliminates the potential of a large spike in our debt maturities. To summarize if you add a $120 million of converts that were purchased in the open market before the tender, to the $103 million of debt and the $320 million of converts purchased during the tender, we have retired $543 million of total debt realizing an economic gain of $38 million since the fourth quarter of last year. Considering several advances that occurred subsequent to June 30, that were reported in our press release and discussed on this call as of today, we only have a combined $135 million of debt maturities to the balance of this year in 2010. Currently we have $240 million outstanding under our revolving credit facilities. This fall, we will commence the formal renewal process of our $575 million revolver, which expires in February 2010. However, the company does have a one year extension option. We remain confident that we will be able to extend the term while maintaining the vast majority of our capacity. We anticipate most of the participating banks will remain in our revolver and we have several new relationships that may join the syndicate. Our access to the capital markets, specifically the debt markets have improved significantly in the last six months. The unsecured debt markets have reopened to us but the spread is still wide versus secured debt that can be attained through life insurance companies and banks. As previously mentioned, we have a number of secured financings under way. The lenders continue to be extremely relationship sensitive with respect to whom they choose to transact business and are sensitive to project quality. This does well for us as we have strong relationships with the financial community in great properties. As reported last quarter, we have been working on several secured transactions. The first is the life insurance company financing for $71 million secured by five shopping centers. The loan is for seven years at a 7.4% rate and has a 55% loan to value. We closed this loan earlier this week. The second life company financing is on several industrial prosperities. This is a $58 million loan with a ten year term at 7% and also has a 55% LTV. We have locked rate on this loan and expect to close it before quarter end. Furthermore, we have two secured transactions that we are working on with banks. The first is for a $33 million secured loan on two shopping centers. This loan is for four years with a one year extension option. It is at a floating rate of 375 over LIBOR with a 1.5% LIBOR floor. We have an improved term sheet and credit committee approval. The second loan is a secured loan; a new banking relationship is expected to be $100 million loan with a coding feature of up to a $150 million at our option. This is a three year term loan plus a one year extension option at 350 over LIBOR with a 1.75% LIBOR floor. Again we have a greater term on this transaction. If all these transactions are completed we will have to close $375 million of secured loans in 2009 and then we’ll integrate well with our current maturity schedules in a structured and manageable way. Also in accordance with our current business plan for the balance of the year, assuming the completion of only $125 million of additional dispositions, this will result in a zero balance under our revolver at the end of the year. We remain well in compliance with all of the various debt covenant, the most restrictive of these covenants currently is the amount of secured debt we could add to our balance sheet, and as of June 30 of 2009 WRI could increase secured debt over $675 million before this would be an issue. As we discussed at [Eerie] our success in securing new financing and the equity offering earlier in the year has diminished our need to complete the two joint ventures initially proposed in our business plan. We did not get an offer we felt was compelling for the industrial of JV, so we would have taken that transaction out of the market. Once conditions improve we may consider remarketing these assets. We are continuing to evaluate offers on the southeast retail JV; if we are successful this transaction could have a value of $175 to $225 million assuming an 80/20 JV agreement. We have interest in these properties, but additional capital from JV are no longer a part of our 2009 business plan. One off dispositions remain challenging; we closed $51 million sales in the second quarter at an average cap rate of 8.1% for a total of a $100 million for the first half of the year. Subsequent to June 30, we closed an additional $11 million resulting in a year to date total of $111 million of disposition at average cap rates of 7.7%. Over half of the dispositions have been triple net leases, which excuse the cap rate lower, we currently have $46 million under contract and a $134 million under signed letters of intend, and including these transactions that have not closed, we have over $450 million of assets currently in the market for sale. As noted, at Eerie based on dispositions that have closed to - date and the deals currently in process, we expect to make substantial progress towards our earlier guidance of selling $300 million by the end of year. However, given the success that we have made repositioning our balance sheet we do not feel the same pressure to sell and let’s expect to close that year at less than $300 million in total dispositions. Finally, we are conforming full year FFO guidance of a $1.88 to $2.12 per share. This guidance excludes the $25.5 million or $0.22 per share of accounting gains from the redemption of the convertible notes. However, when the gains are added back full year FFO would be in the range of $2.10 to $2.34 per share. The $25.5 million of gains includes $8.9 million recognized on transactions completed in the second quarter plus a gain of $16.6 million from the tender offer to the convertible bonds which closed subsequent to quarter end. Please note that these gains are accounting gains in accordance with GAAP and do not agree with the economic gains I discussed earlier. Our 2009 FFO per share guidance, before gains of $1.88 to $2.12 per share includes the following six assumptions

[Robert Smith:]

Thank you, Steve. Well, there is progress on our ongoing efforts on the development pipeline. We continue to face a tough retail environment, which is making efforts challenging. We are pleased however, with the progress that we are making on the 2009 stabilization and the general level of lease up on 2010 stabilizations. We currently have 24 properties under development representing $625 million in total growth investment upon completed were $449 million at Weingarten share. We have invested $392 million on these properties as of the end of the quarter, thus we are 87% funded. Despite the depressed retail market conditions, our overall lease out increased slightly from 49% to 50% of the net GLA in the development pipeline, and it’s 68% inclusive of anchor tenant if not owned. Return yields are holding steady at 8.1%, however, if market conditions continue to deteriorate and make the further erosions in yields. During the quarter, Orange Street market reached stabilization representing a total investment of $11 million and a final ROI of 8.6%. There are four remaining development project that are all estimated to stabilize by the end of the year. Second quarter total dollars invested in the development was $14 million. In addition, the stabilization dates on three projects in our pipeline will push back an average of 2% to 4%. The average occupancy level of the remaining property scheduled to stabilize in 2009 excluding Orange Street market, currently stands at 52% net or 72% gross lease. As mentioned in the press release, subsequent to quarter end, we sold a building at ClayPoint Distribution Park, when you factor this in the actual occupancy for the remaining properties projected to stabilize this year is 82% net and 90% gross. The average occupancy level of our properties that are projected to stabilize in 2010 currently stands at 74% net and 83% gross. We currently have several development properties in the land held for development groups, representing a total investment today of a $112 million net of partnership interest, which reflect an average per square foot investment of approximately $5 per square foot. We continue to evaluate the markets and the effect of the national recession on the demand for new retail space and we have also recently commenced a thorough examination of our new development program, which will be completed in the third quarter. We will look at each of the 24 properties currently under development as well as the land held for development and determine if additional properties need to be moved to land held for development and whether any changes in our business plan necessitate additional property impairments. While we don’t anticipate further material merchant bill gains for the balance of the year, we did compete the sale of our interest in meadows and a couple of other small pad sales during this quarter, which netted a gain of approximately $2.9 million. Additionally, the ClayPoint sale will produce a gain of approximately $700,000 in the third quarter. These transactions when combined will bring our total merchant bill gain for the year to approximately $0.14 per share. Also during the second quarter we achieved completions of $31 million. Earlier in the year, we provided guidance in the range of $100 to $130 million for the full year, and currently our projections estimates volume towards the bottom of this guidance range. Going forward, we anticipate that the distress in the industry will lead to possible opportunities that we can enjoy in the future. In fact given our improved liquidity status, we are positioning the company to move forward in offensive strategy of again growing the company as we believe meaningful levels of opportunities will begin to materialize in 2010. We will focus on core assets, value add and redevelopment opportunities in our primary markets, while we can take advantage of distressed pricing and buy our considerable expertise, our relationships in the company platform to create value. We’ve already begun to communicate this message to our banks, our brokers and Wall Street community to ensure appropriate exposure to this growing yield flow. I will now turn the call over to Johnny to discuss our existing portfolio.

[Johnny Hendrix:]

Thanks Robert. Good morning to everyone on the call. Retailers continue to operate in a difficult environment. According to the Census Bureau, US retail sales during the second quarter of 2009 were down 9% from the second quarter of 2008. Last year’s tax relief stimulus checks clearly impacted the year-over-year comparisons. More recent results indicate flat US sales with the second quarter of 2009 up 0.8% over the previous quarter. Supermarket sales across the US increased at 1% year - over - year, while supermarkets reported in Weingarten portfolio have increased a solid 4%. Consumer confidence and the unemployment outlook will widely continue to dampen sales. Consumers continue to trade down to more value oriented retailers, which benefit our discounters such as Wall Mart, TJ Max, as well as our many supermarket operators. I mentioned last quarter that several of the watch retailers were back in the market. We have been successful marketing several of our vacancies to them. At the end of 2008, we had 30 vacant big boxes. Circuit City and Goody’s terminated their leases with us in January, and by the end of the first quarter, we had 38 vacant boxes. During the second quarter we had two more boxes terminated, which means during 2009 we’ve had 40 big box vacancies. We completed transactions on eleven of these spaces during the first half of 2009 with retailers like Staples, Big Lots, Ultimate Electronics, Dollar Tree, Stein Mart and Nordstrom Rack. As of the end of the second quarter, we have 29 vacant boxes available. We are negotiating leases on six of those spaces today, and are in the layer of intent space on six more. The 12 spaces represent approximately a 100 basis points in occupancy. Based on their projected openings we are not anticipating any significant revenue from any of these big boxes this year. Overall, leasing is going quite well. For the quarter, we executed 380 transactions with annual revenue of $17.1 million. This was 158 new leases with annual revenue of $9.2 million and 222 renewals with annual revenue of $7.9 million. The $17.1 million of overall production was slightly ahead of Q2 2008, which produced revenue of $16.5 million. We are continuing to proactively prospects of retailer utilizing a variety of marketing challenge including internet sources, wires, mail outs, magazine advertising. We are also continuing to execute portfolio reviews in good old fashion call calling, maintaining broker relationships. We are seeing success with value oriented retailers, quick serve restaurants, medical service and personal service retailers. Occupancy moved up slightly for the retail portfolio in the second quarter from the first quarter showing the incredible efforts and determination of our team as well as the quality of our portfolio. Retail occupancy increased from 91.7% in the first quarter of 2009 to 92.1% at the end of the second quarter. This is still significantly below the 94.2% we had in the second quarter of 2008 but positive traction is occurring even in these difficult conditions. Overall, occupancy fell to 90.9% from the 91.5% during the previous quarter as a result of several bankruptcy related fallouts in the industrial division. We would expect occupancy to continue within 50 basis points of its current level in the balance of 2009. While the retail group did not see a large bankruptcy during the quarter we do have several smaller tenants like Washington Mutual and camera reject leases. In addition, mini shop tenants have not been to able to hold on in fall out that these retailers had continued and close to the same page we’ve seen over the last nine months. We are losing around 170 tenants per quarter, which is 50% higher than I would consider normal. Subsequent to the quarter end [Inaudible] supermarkets filed Chapter 11. They are regional supermarket chain based on Phoenix with 158 stores. We have two stores with them and do not anticipate termination of these leases. I still believe we would see more bankruptcies to the end of 2009, but due to our diversification and tenant mix, our exposure should be minimal. Collection of minimal rent has improved slightly over the last couple of quarters. We tracked the outstanding rent each month and prior to the recession, 3.6% with a normal percentage of minimal rent outstanding at the end of each month. That unselected percentage grew 5.39% at the end of December 2008 and has migrated down to 3.76% at the end of June of 2009. We are hopeful this positive trend will continue. We received several calls from analyst and investors asking if we intend to take additional reserves for bad debt. We believe we are appropriately reserved today and I believe more is warranted. We recognize during the third quarter 2008 that small tenant fall out was increasing rapidly. At that time we reserve appropriately and during the third quarter conference call in October of last year we discussed how all that fall out and related bad debt was impacting our same property NOI. We continue to reserve the questionable receivables and expend more than $5.9 million in the fourth quarter of 2008. Bad debt for the second quarter of this year was $1.9 million versus 800,000 from a year ago. And year to date we have extended a total of $4.7 million of bad debt. Our FFO guidance for 2009 has an additional $5 million of bad debt built into it for the remainder of 2009. Over the years we had followed a very regimented process for reserving bad debt and that has served the company well. It may be helpful to walk through our collections process. First, we initially call our tenants if we have not received rent by the seventh day of the month. Second, we send the call letters to tenant if we have not received rent by the 20th day of the month. Third, we initiate the appropriate legal actions, if we have not received rent by the last day of the month. This varies by state, it could range from a walk out to a notice to pay or quit. We automatically loose our rent when it’s more than 30 days past due and it takes approval by management to delay this process. I meet monthly with members of our property management, collections, leasing and legal opinions to review the status of all our past due accounts and actions being taken to collect rent, which could vary from working through payment plans to regaining possession of our space. We have consistently followed this process for many years. Same property NOI for the quarter was down 5.6% overall. Retail was down 6% and industrial was down 2.2%. Year - to - date this puts us in a minus 4%. We are expecting this will improve through the balance of 2009. Signed leases commencing in rich depths for existing tenants over the next two quarters will contribute an additional $3 million to the same property NOI, moving us to around negative 2.5% for 2009, this calculation assumes around $5 million of additional bad debt for the balance of 2009, and does not include any revenue from new leases we would sign and commence in the third and fourth quarters. Lease terminations seem to be the largest component we do not accurately forecast. As of today, we have terminated 17 leases with 224,000 square feet accounting for a reduction of $1.8 million in the same property NOI. This does negatively impact same property NOI as we have lost the rental revenue, but the termination fee will offset those reductions for this year’s FFO. Considering all factors we are moving same property NOI guidance within range of minus 2% to minus 3% for the year. This revised guidance assumes none of our major tenants filed Chapter 7 and immediately liquidate, as we believe that would be unlikely. Just a reminder Weingarten does include bad debt expense in same property NOI but we exclude termination fees in straight line rent adjustments in our calculations. We include all property owned for 12 months as of January 1, expect those that are undergoing a major remodel. The population of properties include in our same property NOI is 90% of our overall net operating income. Rate growth, which compares newly commenced leases to former rents for the same space has increased 12% on a GAAP basis for the quarter. This is very good given the current conditions. I expect rent growth will remain positive next quarter benefiting from several large leases signed last year. The look for rent growth could be negative for the fourth quarter and into 2010 as the big boxes we have signed commenced. Overall, leases, which are signed and not commenced show an 8% reduction from former leases. To analyze separately, the 11 boxes we have signed this year will have a 25% reduction in rent compared to former tenants. While the operating results have been less than we had come to expect over the last several years, I am convinced Weingarten Associates are working at their full potential to maximize value for our shareholders. The teamwork is outstanding with all our associates pitching in, adjusting their role to do whatever it takes to get leases signed, get it open and increase revenue. I’d like to thank them all for their efforts. I will now turn the call back over to Drew.

[Drew Alexander:]

Thanks Johnny. I think the great strength of this company will be evident in our performance results for 2009 and beyond. Our ability to manage and lease large portfolio property in any economic environment is key to creating shareholder value. Weingarten has historically been discounted when the quality of our assets are compared to our peers. While I appreciate it can be hard to change perceptions on our portfolio, there are several points I want to make to address these perceptions. Over the last seven years, Weingarten has acquired $2.6 billion developed over $550 million and sold $1.2 billion worth of assets. These transactions have allowed WRI to fine tune our high quality portfolio in many high barrier entry sub markets within key growing metropolitan areas. I invite all to review our assets either on the ground or through our website. Reviewing the value in our properties it is critical to consider that we operate in the Southern and Western United States. So income comparisons need to be adjusted for the lower cost of living. Additionally, one needs to recognize the densities for lower even in built up areas resistant to competition in these areas. The quality of our portfolio is further demonstrated and that for the top seven markets and which we operate our shop rental rates are on average 25% higher than market competitors. This analysis is derived by using the annual base rents and is located on page 21 to 23 of our supplemental and comparison to lease quarterly data. We have a long history as a hands on manager of properties. We are constantly remerchandizing or upgrading our assets to keep them at the top of their respective market. Like so many others, our former business plan did not anticipate this severe downturn. However, we have significantly levered the company, right sized our development portfolio, and continue to fine tune our high quality portfolio. We believe we made near the bottom and are beginning to focus on future opportunities. Weingarten is moving forward with what it does best, leasing space and two supermarkets and necessity based retailers in our high quality retail centers. We have been proactive in our approach how we’ll continue to look at operations with a long term view. We appreciate we had a long script this morning; we felt we had a lot to cover, and operator with that we will now take questions.

[Operator:]

(Operator Instructions) Your first question comes from Jay Habermann - Goldman Sachs.

[Jay Habermann:]

I guess just to start, Steve could you dig in a bit more I guess on the asset sales? I mean you talked about what’s under contract in the LOIs, but sounds like you’re pulling back a bit on your original guidance, can you give us a sense of pricing and just where interest level is coming at this point?

[Stephen Richter:]

Yes, I could probably answer that Jay. I think the last part of the question might be easier. We are primarily talking to entrepreneurs, local developers who have banking relationships. We try to target assets that have a value of under $14 million and that’s something that they have been able to handle. We’ve also sold some of the properties to private REITs and they do seem to be having cash inflows and have the money to buy. In terms of kind of going forward, I think the issue that we have is we want to be more selective, can afford to be more selective as we move forward through the rest of the year and say no more often in the negotiations with the buyers.

[Jay Habermann:]

Okay. Can you get a little specific in terms of pricing, what you are seeing? You talked about 7 - 7 cap rates on the triple net lease, but what’s the further interest?

[Stephen Richter:]

I think the quality of the assets ranges pretty dramatically. I think generally it would be between 8 and a 9 on assets that were or maybe even a 9.5 on assets that we are moving forward on.

[Jay Habermann:]

Okay. My second question is on the industrial portfolio. Can you guys speak to the fall out you saw there in the leasing, what types of tenants, are those more a local or is that regional types of tenants?

[Drew Alexander:]

It’s Drew. It’s a little bit more local. We also had some different auto parts folks in some different markets. In California, we had some people who were a little exposed to foreign trade and high end electronics world.

[Jay Habermann:]

Drew, what’s your anticipations sort of in the back half of the year?

[Drew Alexander:]

I think things very firmed out and we are hopeful that we will maybe inch that forward a bit.

[Operator:]

Your next question comes from Quentin Velleley - Citigroup.

[Quentin Velleley:]

I’m here with Michael Billerman. Just looking at your operating expenses, which were up about $4 million sequentially, and the NOI margin dropped from about 69% last quarter to 64%, is there anything else in operating expenses that might be a one off in addition to an increase in bad debt?

[Stephen Richter:]

Quentin, I think, mostly due to more occupancy/bad, more occupancy than bad debt quite frankly, there is about a $1.5 million of deferred comp that shows up in expenses as well as if there is a direct offset in interest income. So, I know that I’ve seen a note or two about the increase in interest income, which is part of the answer there. But back to the operating expenses, there also interest cap for new development project is also based upon some of that coming online, but also the postponing of some of those projects that we transferred for future development.

[Quentin Velleley:]

Okay, so with the portfolio operating expenses the run rate for the remainder of the year will probably remain about at the same level as the second quarter.

[Stephen Richter:]

Yes, I would say so.

[Quentin Velleley:]

Just a second question, could you just speak a little bit more in relation to the help of the shop tenant across the various geographies, and also in your grocery anchored asset versus some of your box or junior anchored assets.

[Stephen Richter:]

Yes, Quentin, we have looked at where the fallout is coming from on a national basis and it doesn’t seem to be in any specific area that is worse than the other. So, I don’t know that there’s a whole lot to be gained from that. The shop tenants are primarily the ones that we are losing in the 170 a quarter that I mentioned, about 30% of all of our leases are small shop tenants and they are disproportionately falling out.

[Operator:]

The next question comes from Michael Mueller - J.P. Morgan.

[Michael Mueller:]

First of all in terms of the guidance and ignoring all of the gains and just looking at the 188, 212, I think it was, the tender offer was accretive that you’re selling less JVs, and can you tell us in terms of the prior guidance it didn’t change, did you anticipate doing the tender offer in that guidance or is this something new?

[Stephen Richter:]

No, it wasn’t obviously in the original guidance. I think, again a couple of things, you have weaker performance from existing portfolio, the fallout in occupancy and so forth there, as well as the new development, the NOI that we projected to come online there as Robert reported that we are guiding to the lower end of guidance which pushes out that revenue to the end of the year and you just have less amount of time to get the benefit of that revenue in 2009. Those are the primary reasons for the difference.

[Drew Alexander:]

We also have the secured financing that our interest rates that are higher than if you’re dealing with the tender than the effect of the convert, so.

[Michael Mueller:]

Okay, so those are the offsets. Okay, can you tell us what the lease termination fees were that were referenced, what they were in the quarter?

[Stephen Richter:]

I think year to date they are $2 million.

[Michael Mueller:]

Okay. And on the 12 boxes that are either under the letter of intent or in negotiations, can you give us a sense as to what the spreads are on those compared to prior rent levels, as it’s down 20, 25, 30%?

[Stephen Richter:]

Yes, it’s about the same 25%.

[Operator:]

Your next question comes from Carol Kemple - Hilliard Lyons

[Carol Kemple:]

At this point that has the number of tenants on your watch list decreased to has it stayed about the same or is it focused more towards the smaller tenants?

[Stephen Richter:]

Carol, the watch list has really remained about the same, certainly - we probably added a few of this, the smaller tenants, I would say that as we’ve been watching this some of them have been able to get some loans or inject capital into the company. So we are encouraged, but it’s still something that we look at every month.

[Operator:]

Your next question comes from Ross Nussbaum - UBS.

[Ross Nussbaum:]

A couple of questions. Drew, you talked about, I believe the big box rents on those newly signed being down 25%. Is that right?

[Drew Alexander:]

Yes.

[Ross Nussbaum:]

How do you think that relates to where big box rents have fallen in your markets overall? Do you think on average the big box basis are down roughly 25% or can you give us a sort of a sense of where that’s checking out?

[Drew Alexander:]

I think it’s pretty consisting in, it was actually Johnny who mentioned it, and he could certainly comment, I think it’s pretty consistent across the portfolio that from peak to the day you see those 20 - 25% decline. You are looking at rent, sort of back to where they were several years ago. So when you’re dealing with a renewable or the replacement it’s a function of how long ago the lease was done. So, as Johnny mentioned in Q3 given what we know is going to commence we are expecting at this point to see an increase. But that’s driven by some unique factors. But it does seem to us that the consistency across the platform is in that 20% measurable.

[Ross Nussbaum:]

And in terms of your view where small shop rents have fallen thus far, it looks like all the leasing spreads on renewals for yourself and your peers have, let’s say gone from the 10 to 15% range on a cash renewal spread down to let’s say flat to fivish percent. Do you think it’s correct to surmise that market rent from small shops are down tennish percent and so where do you think they go from here?

[Stephen Richter:]

Ross, I think probably not down quite that much, I would probably say 6% or so. Our leases that we’ve signed and not commit so far this year are down about 4%. So I think that’s probably a better range for the small shop tenants. In most cases, we have a little better leverage in the negotiation on a smaller tenant especially one who is renewing, unlikely that they are going to want to spend a capital or relocate for a little bit of reduction.

[Ross Nussbaum:]

Okay. Then on the industrial side, it looks like a little over 20% of the leases rolled next year, where do you think the market is on the ramp on the industrial space next year?

[Stephen Richter:]

I think it will be modestly down, a lot of that depends upon how the economy firms up. My guess is it will modestly down, but it is obviously very economically dependent.

[Ross Nussbaum:]

And final question, I’m taking from your comments you think the worst is potentially behind us here. To me that’s a read through potentially on occupancy levels but obviously we are going to see the effect of what happens on rental rates as leases roll here going forward, when do you think we see shopping center rent start moving higher again? We’ve seen forecast that say it’s not going to happen until 2012 or ‘13, I’m curious if you think it’s sooner than that?

[Stephen Richter:]

That’s obviously very difficult question in terms of the economy and when the consumer return was bigger and people get a lot more clarity on the employment picture and everything else, it could easily be 12, I would be a little more hopeful that it’s 11, but we’ll see.

[Operator:]

Your next question comes from Jeff Donnelly - Wells Fargo.

[Jeff Donnelly:]

I guess if I could build on Ross’ questioning and maybe some through Johnny. Thank you for your earlier color on leasing environment, but on small shop in particular, landlords clearly are losing negotiating leverage out there, and I guess I’m curious aside from rent, what are their form or I guess their concessions taking, is there an increase preference from tenants for moving allowances say over a free rent or are they sort of cast constraint and they need that help or what are you guys seeing?

[Stephen Richter:]

Jeff, we have not really seen that much in those sort of concessions, most of the allowance of the money that we are spending, we are spending on the assets that we have. Keep in mind, I think we have significantly higher quality assets than generally the rest of the markets that we are in were somewhere around 25% higher rent, and we just haven’t seen that sort of concessions, most of it has been in the minimum rent as opposed to free rent or any other sorts of allowances.

[Jeff Donnelly:]

Are you seeing competing landlords trying to get more aggressive the folks that you believe own like a selective property in that regard?

[Stephen Richter:]

Yes, they can. For tenants that are in the spaces today, Jeff, it is very hard for them to rationalize a move from an existing space that they may have invested in themselves to some other space that is either less or even equal quality, and they are just not going to increase their sales that much. That’s where I would say we have I think more leverage on a smaller tenant because they are just not in a position to be able to afford some new. I think we see a lot more momentum where tenants are moving up in quality than tenants moving down in quality.

[Jeff Donnelly:]

This one, I guess it’s either for your Drew or for Johnny is, I think the concern out there is that the depth of demand and particularly among junior box, say 20 to 50,000 square feet seems pretty shallow, and not speaking specifically the vacancies or situations in your portfolio. Just more about the industry, how do you feel about I guess the outlook there, do you think that there is a temporary interruption in demand, because there are the regional operators or tenants that are there expand or may be upsize their concepts to absorb those vacancies and time, or do you think it’s possible that maybe the junior box, if you will, segment of the industry could be over built for an extended period?

[Johnny Hendrix:]

I will guess its somewhere in the middle Jeff, that I think it ties into the broader economy that when people start feeling better about their jobs and the consumer confidence and there is greater stability, I think there will be a somewhat more significant push. This downturn began back in 2007, it has gotten worse and I’m hopeful, as I said, two plus years into it that we are about at the bottom. But that it takes another two years or so, so that we have a total of four or five years in a tough environment that wouldn’t be unprecedented when you look at Texas in the middle and late 80s and other downturns. So I think we will see a rebound, I don’t think it will be very quick and I think we are positioned very well if it’s medium or longer in the recovery.

[Jeff Donnelly:]

I’m curious just as a last question. Can you share I guess where the thinking is today for some of those sorts of retailers. I think some of your competitors have advocated that folks such as the Best Buy or a Bed Bath are looking to take advantage of the vacuum that’s out there, the lack of competition to expand and drive unit growth, is that something that they are really after right now or are they still continuing to be kind of cautious on unit growth as they look forward two three years?

[Stephen Richter:]

Jeff, I think that, yes, I think they are definitely going to be cautious given the market conditions, but they clearly are taking advantage of upgrading space. About 40% of the eleven boxes that we executed this year are relocated from areas close by. But there is some increase in store growth with Maxx and Martials and Ross, with Dollar Tree, Nordstrom Rack doing quite a few deals now, and we are seeing Hobby Lobby really move up in terms of quality of space.

[Jeff Donnelly:]

Actually since you mentioned those are relocations, do you have any sense on that move, was it driven more by sales production or what their prior deal was effectively definitive leaving versus coming to you guys?

[Stephen Richter:]

Yes, mostly it’s driven by the co - tenancy within those shopping centers in the specific locations of the access, the visibility.

[Johnny Hendrix:]

But they are moving to centers where they project higher sales, yes, that’s the main reason they are looking to move. Because as you now discussed Jeff, it’s really more about the sales than it is the rent.

[Operator:]

Your next question comes from Nathan Isbee - Stifel Nicolaus.

[Nathan Isbee:]

Just following up on earlier question you mentioned before and an answer that you were not seeing any material trends in terms of geographic or anything of this sort in your portfolio weakness. Have you noticed any trends in terms of center age, and I guess more specifically like for instance the $550 million that you have developed versus all of the properties in your portfolio?

[Drew Alexander:]

I think it very much depends upon the quality of the properties. So, if we have and we don’t have too many, but if you have something that is new, whether we bought it or built it, it’s on the periphery of an area that’s a little bit green and you were banking on a little bit of growth that has suffered. Those are the areas that people tend to approach for their homes; those are the areas that the foreclosures are higher. So, it all at the present depend upon what state those are in, but those things have suffered. Fortunately, as I said, we don’t have too much of that. Most of what we own has good population densities, good barriers to entry, etc and that’s why I think that they are on balance across the whole geography, things have held up, but it’s much more depended on the individual center and the conditions around it than the state that it’s in. But as you observed the things that were built on the periphery, planning on growth they are under a lot more stress.

[Nathan Isbee:]

Okay. Just one more question here. The negative six same store growth, I’m just to trying to understand that occupancy is down about 200 basis points, I know you talked about, in the release about the average occupancy being lower, if you could just give a little more detail on that?

[Stephen Richter:]

The other thing you need to remember, the occupancy that we are reporting as signed occupancy, and the actual occupancy, the commenced occupancy is a little bit lower than that. We have about 300 basis points spread between signing commence right now.

[Nathan Isbee:]

Okay, so your physical occupancy today is only 89%?

[Stephen Richter:]

Right.

[Nathan Isbee:]

And where was it last year at this time?

[Stephen Richter:]

It was about 200 basis points.

[Operator:]

Your next question comes from Rich Moore - RBC Capital Markets.

[Richard Moore:]

On office depot you seem to be having a little bit of difficulties, you guys have I think about 26 office depots, if you had any conversations with them or are you concerned I guess at all about office depot?

[Stephen Richter:]

They are very significant tenants, with conversations with them all the time. They are working with a number of different thing, they’ve got a nice equity infusion not too ago, so we continue wish them all the best.

[Richard Moore:]

So no signs yet Drew that there might be some closings in that portfolio?

[Drew Alexander:]

They closed a number of stores around the company; it was in their press release. Couple of hundred? But given the quality of our portfolio I know it’s faired very well.

[Stephen Richter:]

I don’t think they have closed as many.

[Drew Alexander:]

No, we haven’t closed any stores as they have closed.

[Richard Moore:]

Okay. It sounds like you’re not expecting them to probably. And then Steve on the tax benefit, what is that again?

[Stephen Richter:]

Rich, we have an NOL and a TRS that was increased when we filed the 2008 tax return. There was the tax affecting us against was a little awkward if that NOL was there.

[Richard Moore:]

Okay. So we don’t get any more of that, is that right?

[Stephen Richter:]

That is actually a little less but it will be adjusted.

[Drew Alexander:]

Now, I think going forward Rich, there should not be any income coming out of the TRS in the near future. So I think you can kind of flat line that going forward

[Richard Moore:]

Okay great, thanks guys. Then what are your guy’s thoughts on TALF. I mean it’s obvious that you could take a look at it, if you are selling client, I mean where are you with that?

[Drew Alexander:]

Well, we would look at it, Rich, I think several things. Number one is, given where we can borrow in the live company market with the bank or the banks secured, it’s 30, 45 days ago it was clearly a lot cheaper. I think the communication that we received on the calps, not so much the AAA tranche but the difference they get from 40% to what’s probably 55% or 60% in the live company market, that second tranche if you will, I call them SBs, that appears to have gotten somewhat cheaper, but I still think you are looking in the high sevens to eight for taut money and that’s on a like-for-like and you got to add cost associated with dealing with the taut process in addition to ongoing fees they are after to manage those that loan. So, we just don’t think right now it makes any sense to do anything on touts given our access to the live company market. I would just add and I made this kind of commenting when they read it that we are not sure that it the best place to be doing business is with the government right now, but I’m not so sure that they are listening to the call.

[Stephen Richter:]

Hey, Rich, on the interest or on the income tax, we do have a $3 million a year in franchise tax. So I said flat line the TRS, but you’ll still have another $1.5 million in the last six months from Texas margin tax.

[Operator:]

Your next question comes form Alex Barron - Agency Trading Group.

[Alex Barron:]

I wanted to ask in terms of the small guys that you guys are seeing that are leaving your shopping centers, what percentage of those guys do you think are leaving because they are going bankrupt or out of business versus what percentage are kind of jumping across the street because somebody gave them I don’t know a better deal?

[Stephen Richter:]

Yes Alex, we are tracking that as you might imagine, and I would tell you that the vast majority of the tenants who are leaving are not moving to another location, but they are going out of business. I would say that’s over 90%.

[Alex Barron:]

Okay. That’s helpful. I guess you partially answered one of my other questions, and you said there was about a 300 basis point difference in physical occupancy versus leased occupancy due to new leases that haven’t started paying rent. How many tenants are dark but are still paying rent that are maybe in that occupancy number as well?

[Stephen Richter:]

That’s not a number that I have with me, it’s not very high. I mean I would say less than a 100 basis points and probably less than that.

[Alex Barron:]

Okay. My last question was I’ve noticed a number that Publix has been put and also Albertson’s has been closing down grocery stores, wondering if you guys have been impacted by that and why you think that might be happening and what affect does that have on your other smaller tenants if you are seeing some of that in your shopping centers?

[Stephen Richter:]

We have one shopping center that, two shopping centers that Publix bought Albertsons in Florida and certainly is a negative impact on the tenants today. We’re certainly looking forward to the time when Publix opened their sales would be much higher and the tenant should be able to on a long term basis benefit from that.

[Operator:]

Your next question comes from Chris Lucas - Robert W. Baird.

[Chris Lucas:]

Just a quick question on debt financing Steve I think commented that the debt financing market had return and there was some concerns at that time that might lead to a more flexible view from the retailer’s perspective. Are you seeing that at all at this point in terms of how they think about bankruptcies as an option?

[Stephen Richter:]

Not really Chris, debt financing is more available in talking to the banks, it’s obviously more for the larger tenants than the smaller, and fortunately we have not seen any of the large boxes file bankruptcy. So, I think it’s yet to be the determined.

[Chris Lucas:]

Okay. And just a little bit more detail on same store number. I guess this quarter would be the one that where probably were lightest a year ago in terms of your bad debt reserves versus a comparative today. If you sort of broke out between the impact of occupancy to your same store number for this and then the bad debt reserves, can you give a little bit more color on that?

[Stephen Richter:]

Yes, it looks likes we are getting the comparables for the balance of the year are much easier than the beginning of the year, and it looks like we are going to be able to make up about $3.5 million on the comparable for the bad debt the rest of the year.

[Operator:]

There are no further questions at this time.

[Stephen Richter:]

I want to thank everyone. We feel all things consider this as a very good quarter. We made a fantastic progress on our liquidity needs and we are in challenging times but as we said before we are hopeful that we are getting closer to better times for everyone. So, thank you all for your questions and your interest. We’ll be around if folks have further questions. Thank you very much.

[Operator:]

Thank you. This does conclude today’s conference call. You may now disconnect.