Weingarten Realty Investors
Q3 2009 Earnings Call Transcript

Published: 26 Oct 2009

[Operator:]

At this time I would like to welcome everyone to the Weingarten Realty Investors third quarter 2009 earnings call. (Operator Instructions). I would now like to turn the call over to Kristin Gandy, Director of Investor Relations. Ms. Gandy, you may begin the conference.

[Kristin Gandy:]

Good morning and welcome to our third 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 packet located under the Investor Relations tab of our Web site. I would also like to request that callers observe a two-question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have additional questions please rejoin the queue. Before we begin the call I would like to take this opportunity to warn the audience of a few items. Weingarten will be hosting a property tour in conjunction with the NAREIT annual conference in Phoenix. The tour will begin at 2

[Drew Alexander:]

Thank you, Kristin, and good morning everyone. As we all know, 2009 has been a very turbulent year. However, I'm very proud of the Weingarten team and the strides this company has made throughout 2009. As expected, WRI weathered this storm and we are seeing positive signs of stabilization on the horizon. Both our industry and WRI are not completely through the storm, but we feel we are through the worst of it. We have had a number of important accomplishments. Specifically, we sold stock thus raising capital through the equity markets. We completed both secured and unsecured financings. We closed dispositions of non-core properties and created a new joint venture, all while we maintained occupancy by leasing space. These accomplishments show the tremendous strength of this team and the quality of our portfolio. These transactions have dramatically transformed our balance sheet and provided new liquidity which positions us to capture investment opportunities going forward. As we indicated last quarter, we've also spent a great deal of effort and time completing a very detailed analysis of our development operations. While both Steve and Robert will provide more color later in the call, I will note that we have done a great deal to simplify and add transparency to our remaining development activities through additional phasing, transfers to land held for future development and the stabilization of properties. As a result of this analysis we also recorded impairment charges during the quarter. Excluding impairments we were very pleased with the operating results we posted in the third quarter. As always, Weingarten will focus on improving its core operations, but in addition, Weingarten will turn its attention towards the future and how we will grow the company's FFO. In the short term this will be challenging considering we are not seeing quality assets enter the market. We feel there will be some selected quality opportunities and we are beginning to scout for them. The progress Weingarten has made in 2009 would not have been possible without a total team effort. As you will hear later in the call, our associates are doing a magnificent job despite the obstacles that the economy and its effects on the consumer and the retail sector. I'd now like to turn it over to Steve to review the financial results for the third quarter.

[Steve Richter:]

Thank you, Drew. Funds for our operation, or FFO, on a diluted per share basis was $0.25 per share for the third quarter of 2009. Included in these results are non-cash impairments and reserves of $46.1 million or $0.39 per diluted share, which was offset by gains on the repurchase of our convertible debt of $16.5 million or $0.14 per share, as reported in our last call. Excluding these non-recurring items, FFO for the quarter was $0.50 per share compared to $0.71 per share in 2008. The weighted average number of shares outstanding increased significantly from 84.3 million shares in the third quarter last year to 119.4 million shares this year due to the equity offering in April. All in all, core FFO results were positive for the quarter. On the liquidity front we continue to execute our plans outlined in previous quarters, specifically reducing our near term debt maturities. Since the end of 2008 we have reduced leverage to 46% and our debt maturities are only $485 million through 2011. In total, including the revolver which currently has nothing outstanding, we have reduced our total debt maturities in 2010 and 2011 by $1 billion since December 31 of 2008. Contributing to this success we completed several transactions in the quarter. First, we tendered for our $575 million convertible notes that mature in 2026, but have a put option in 2011. On July 13, the tender expired resulting in $320 million of converts being retired. Currently, we have only $135 million of this security outstanding. Also in July we closed a $70.8 million secured loan on five shopping centers with a major life insurance company. The loan is for seven years at 7.4% and has a 55% loan-to-value. In August, we sold $100 million of 10-year unsecured notes with a five-year call option and an interest rate of 8.1%. With the completion of this deal we elected not to continue with the $100 million secured bank deal that was under negotiation that we discussed on the second quarter conference call. Right at the quarter end we closed a $57.5 million secured loan with another life company. The loan has a 10-year term at a 7.0% interest rate based on a 55% LTV and is secured by 10 industrial properties. Subsequent to quarter end we closed on the final secured financing deal in our liquidity plan. This is a $26.6 million loan from a bank secured by two shopping centers. This is a four-year loan with a one-year extension option at a floating rate of 375 basis points over LIBOR with a 1.5% LIBOR floor. Our financing philosophy is to limit the use of secured financing to our JV operations and use unsecured debt at the parent level. However, given that the unsecured markets were closed or extremely expensive earlier this year, we agreed to certain secured loans and felt committed, given our deep relationships with our lenders, to complete these loans after the unsecured markets reopen. We are extremely pleased to also announce that last week we closed on the first phase of the Southeast retail JV. In total, we will contribute six retail properties, primarily in Florida and Atlanta, valued at approximately $160 million and will retain a 20% ownership interest in the JV. The first phase of this transaction includes four properties with a total value of $114 million. The JV acquired these four assets on an all equity basis last week, which resulted in net proceeds to the company of $86 million. The venture is currently in the market to place secured financing on these four assets and anticipates a loan closing in the next couple of months. The remaining two properties have existing loans and the JV will acquire these properties upon the assumption of the debt. Once the financings are complete, the JV will be 60% leveraged. Our partner in the new JV is Jamestown, which is a highly respected German real estate fund manager founded in 1983. Jamestown has almost $8 billion invested in U.S. assets. As part of this transaction WRI will reduce – will receive fees and an incentive return above a hurdle. Regarding disposition, we closed $17 million of sales in the third quarter at an average cap rate of 8.4% and an additional $47 million subsequent to quarter end, bringing our year-to-date dispositions to $163 million at an average cap rate of 8.1%. During the third quarter due to the elimination of any liquidity issues, we intentionally slowed the disposition program due to the success we have had in the capital markets and the ability to successfully complete the Jamestown JV. Therefore, we are reducing our previous guidance of $300 million in one-off dispositions to a range between $200 million and $250 million in total dispositions for all of 2009. This guidance does not include the contribution the Jamestown JV. Also currently we have $96 million of dispositions under contract or various signed letters of intent. With respect to our $575 million revolver which expires in February 2010, we have made good progress with the formal renewal process and expect that we will renew the revolver before the normal expiration date in February of next year. We are fortunate to have very strong banking relationships resulting in strong commitment levels. However, given the reduced capital needs in the new development program and the current limited opportunities to acquire quality assets, we will likely opt for a somewhat smaller line from the $575 million current facility. As Drew mentioned earlier, we performed an extensive and detailed analysis of each new development project in our pipeline, evaluating the market conditions, leasing activity and near term potential for each project. As a result of this detailed analysis, we took several actions. First, four projects where building construction had not yet begun were moved to land held for future development. Second, we phased 11 projects thereby transferring portions of these properties to land held for future development. And lastly, we deemed seven projects stabilized. Some earlier than normal and moved these seven properties to operations. As a result, land costs including any applicable side work totaling $107.3 million were moved to land held for future development. Based upon our updated estimates of fair value on all of our new development properties, we recorded a non-cash impairment of $43 million net of tax. In order to help you understand where all the charges have been recorded, we have included on page five of the supplemental a breakdown of the various components of the impairment and other nonrecurring charges and where they are included in our income statement. Also as mentioned, we have deemed seven of our projects representing our pro rata investment of $79.3 million as stabilized. While not all of these properties met the traditional stabilization definition of 90% to 95% leased, development activities other than leasing were complete. Therefore, we have ceased the capitalization of interest and transfer these properties to our operating portfolio. The combined current yield on these properties is 7% based on in place net operating income and the aggregate gross occupancy of these properties was 93.1% at quarter end. After the impairment and transfer at this quarter, we now have 13 properties under development representing an estimated final investment of $242 million. Upon completion, we will have an estimated final yield of 7.3%. To further assist you in understanding all of these movements, we have included additional schedules on pages 19 and 20 of our supplemental that reconcile the estimated final investment for the properties under development from June 30 to September 30 by project and also a reconciliation of land held for future development. In addition, we recorded a non-cash impairment of $2.4 million or $0.02 per share relating to two operating properties reclassified to property held for sale during the quarter and a non-cash reserve of $700,000 against a receivable in one our JV new development projects. In summary, nonrecurring, non-cash items for the quarter include $43 million impairments from the new development program, $2.4 million of properties moved to held for sale and $700,000 on a reserve for a receivable for – all totaling $46.1 million after tax charges or $0.39 per diluted share. These charges were offset by gains on the repurchase of debt of $16.5 million or $0.14 per share. Our operating results were also affected by the dilution from the one-off disposition and increased interest expense from the new borrowing. Lastly, as a result of these changes in new development capitalized overhead for the quarter decreased by $300,000, which increased both G&A and operating expenses. Taking into account our expectation of future operations, the performance of the portfolio thus far, financing transactions during the quarter and the reduction in our dispositions targets, we are increasing our full year 2009 FFO guidance from $2.12 to $2.36 per share to $2.32 to $2.40 per share, excluding the $0.39 per share effect of the non-cash charges. We anticipate FFO coming in towards the higher end of our guidance range; however, FFO could be lower should we realize several bankruptcies during the balance of the year, which we do not anticipate. With respect to 2010, as we have mentioned before, we do a very detailed space by space budget and all that data has not been fully reviewed thus our range is a little wider than normal at this time. We project FFO per share for 2010 will somewhere between $1.54 and $1.78 per share. Some of the significant assumptions in this business plan include same store NOI is expected to be flat to down 3% in 2010 with occupancy averaging 91%, dispositions of 50 million to 100 million occurring ratably throughout the year, acquisitions or other new investments of $100 million, primarily in the fourth quarter of 2010, as we do not see any significant activity in the first half of next year. We anticipate $30 million of investment in the current 13 new development projects during 2010. Also G&A expenses for the year will be in the range of $6 million to $7 million. And of course we have the full year effect of the equity offering in April of this year. This FFO guidance assumes $1 per share annual cash dividend, which equates to a payout ratio of 60% assuming the midpoint of the FFO range. While we appreciate shareholders would like to see a dividend increase as – and we are encouraged by operations thus far, we will defer any decision on increasing the dividend but we'll monitor with our board market conditions and results in 2010. I'd now like to turn call over to Robert to talk about our new development program.

[Robert Smith:]

Thank you, Steve. While leasing is challenging, we are making progress on our developments. Currently our new development program includes 13 properties, which are collectively 70% net leased and 83% gross leased, and are projected to stabilize over the next three years. In the development portfolio, $242 million has been spent to date on these 13 properties. With the stabilizing and moving of parcels to land held for development, Weingarten's estimated cost dramatically reduces from the $449 million reported last quarter. Total incremental investment in the development portfolio was $22 million in the third quarter and $63 million for the year-to-date. Despite leasing challenges, we produced $110 million in completions, which meets our 2009 guidance of $100 million to $130 million. Other than the partial sale of Clay Point Industrial Distribution Center mentioned last quarter, there was no other material merchant development activity in the third quarter, nor do we anticipate any for the balance of the year. Total merchant bill gains for the year stand at $14 million after taxes. We are confident that the properties in our land held for future development in the long term are strong properties that we will develop when market conditions improve. We also believe these changes will allow us to focus on the remaining lease-up of our active projects. With the completion of our revised business plan and the right sizing of the existing development portfolio, we are turning our attention to scoring new opportunities for future investment growth. At this time it appears the distressed real estate investment market for quality retail will be delayed and smaller than originally projected. It may be some time before we see significant volume in transactions. Nevertheless, we believe there will be some opportunities to acquire quality properties at historically low prices over the next several years and we should begin to see opportunities emerge in the latter part of 2010. Finding and purchasing core properties, as well as value-add and opportunistic properties will be a very labor-intensive endeavor and require significant focused effort. It will demand strong real estate, underwriting and negotiating skills at both the local and corporate level as we deal with distressed owners and lenders in an unpredictable environment. Fortunately we have the platforms, capital, staffing capacity and expertise to handle these initiatives and Weingarten is committed to utilizing these resources to bring value to its shareholders and is excited about commencing these initiatives which should begin contributing to FFO by late 2010 or 2011. I will now turn the call over to Johnny to discuss our existing portfolio.

[Johnny Hendrix:]

As Drew mentioned earlier, economic conditions across most of our existing portfolio appear to be stabilizing. According to the Bureau of Labor Statistics, 50% of the states we operate in saw an improvement in the employment situation in September, which suggests that these markets have bottomed-out. While some states, including California and Florida, continue to show increasing unemployment, the rate of decline has slowed. Most economists project that the overall employment situation will begin to improve by the second quarter of 2010. Our expectation is that retail sales across our geographic footprint will remain at current levels until consumers begin to feel more comfortable with their jobs and income status which will then provide a platform for increasing sales for our retailers. Most retailers we have talked with have projected flat sales for Christmas, even against nominal comparables for last year. The Census Bureau and ICSC recently reported month-over-month and year-over-year sales for retailers are improving. The improvements are modest, but I think an indication things could be leveling out. It is encouraging to us that retailers anchoring Weingarten's portfolio, including supermarkets, general merchandise stores, discount clothing and restaurants, continue to out-perform other categories. Our supermarket operators have indicated to us that traffic within their stores has remained stable over the last several months, even as sales for some have declined slightly. During the quarter, consumers continued to trade down and overall food prices declined. This decline in food prices has reversed in the last several weeks, so we expect better sales from our supermarkets in coming quarters. Retailers are adapting to current sales levels, better managing inventories, reducing price points and reducing overhead costs to maximize margins. This need to reduce costs is affecting Weingarten's rent growth. We reported commenced leases increased overall for the quarter by 3.8% on a GAAP basis. This puts year-to-date rent growth at 8.1%. As we have said over the last couple of conference calls, we anticipate this metric to move to a negative number starting in the fourth quarter, as some of the leases that we have signed in the first six months in 2009 commence. New leases we have signed and not commenced are 13% below the previous tenants. Big boxes are down 17% and shop spaces are down 7%. Weingarten continues to aggressively market our vacant spaces using our relationships, technology, cold calling and retailer reviews. We have completed 50 meetings at retailers' corporate offices to date, and anticipate to have had 65 face-to-face meetings with retailers reviewing opportunities within our portfolio by the end of the year. These reviews include big boxes and smaller national and regional tenants. We've had reviews with Target, Ross, Staples, TJ Maxx, Nordstrom Rack, T-Mobile, Young brands, 24 Hour Fitness, Radio Shack, H&R Block and many others. Combined, these efforts have led to a successful quarter leasing space. The company executed 176 new leases and 217 renewals during the third quarter. This represents 496,000 square feet and 740,000 square feet, respectively. We are pleased with this performance compared to the third quarter of 2008, where we executed 157 new leases for 673,000 square feet and 148 renewals for 366,000 square feet. The reduction in square footage for new leases is primarily due to a lack of big boxes coming from new developments. By category, we are continuing to have success leasing shop space to restaurants, medical services, health and wellness and personal service retailers. Our leasing team has done an excellent job continuing to lease the large box vacancies, generated primarily from the fallout of Linens 'N Things, Comp USA, Goody's and Circuit City. We did have two additional big box tenants close during the quarter, which means that during 2009 we have had a total of 42 big box vacancies. We leased five of our boxes in the third quarter, which brings us to a total of 16 big box leases completed this year. We currently have two big box leases working in legal and letters of intent working on eight others. Overall occupancy for the quarter for the company increased to 91.9% from 90.9% in the previous quarter. Retail occupancy was flat for the quarter, ending at 92.1%, same as the second quarter. This is the second straight quarter we have not had a decline in retail occupancy and indicates a continued stabilization of our portfolio. Retailer fallout was slightly lower during the quarter, but is still significantly higher than historical norms. We lost 148 tenants during the quarter as compared to the 170 per quarter I mentioned on the last call. I believe occupancy will remain stable for the balance of 2009 at around 91% for the company. On the surface, bad debt improved dramatically ending the quarter at $650,000, versus the $1.9 million in the second quarter. This could be a little misleading, as we recorded $1.7 million in bad debt reserves for the quarter, but recovered approximately $1 million of bad debt we had recognized earlier this year and in 2008. Same property NOI for the third quarter was down 4% for both the company and the retail division. This is in line with our expectations and I continue to believe we will end the year within the lower end of the minus 2% to minus 3% guidance we discussed during the last call. It's worth mentioning that we generated termination fees of $2.5 million during the third quarter and have realized $4.6 million year-to-date. Weingarten does not include termination fees in our same property NOI, but the loss rental does negatively impact this metric. We will have lost $2.1 million in revenue during 2009 due to terminating these leases. In summary, our operations seem to have stabilized and I think we can see an improving future. We could realize more retail failures, but not nearly as many as we had feared. Thanks to all of our associates for their hard work they do and the accomplishments they have achieved in this challenging environment. I'll now turn the call back over to Drew.

[Drew Alexander:]

Thank you, Johnny. As I've discussed many times before, Weingarten has a seasoned and experienced management team that has worked diligently to ensure maximum value would be created through each transaction. It definitely took the entire team to achieve the good results during the third quarter, as well as the numerous transactions throughout the year. We are optimistic that operating fundamentals will improve, and as always our primary focus is on our existing portfolio, but we will also concentrate on creating shareholder value through growth. We are actively seeking future growth opportunities for the company; however, I believe that acquisition opportunities for core assets in good high growth and high barrier entry markets will be limited. We have the capital available both on our own as well as through JV. Given our relationships and track record with the institutional market, we feel JV capital is readily available for good growth opportunities. We remain focused on supermarket and discount-anchored shopping centers as they have once again proven in this downturn that retailers providing basic goods and services are extremely recession resilient. We also feel we will see some good value add opportunities where our team can create value for shareholders. As we move back to investing once again, I am determined to maintain a disciplined approach towards investing our capital in order to protect our balance sheet a liquidity and enhance shareholder value. With that operator we would be happy to take questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Jay Habermann – Goldman Sachs.

[Jay Habermann:]

Good morning everyone with [Johann] as well. I guess starting with development you mentioned obvious yields around 7%. And I guess as you look out to 2011, 2012, I means does it make sense to further scale back your future investments? I know in some cases you have limited investments at this point but it sounds like you're waiting for better returns from acquisitions and I am assuming there you're looking at returns closer to double digits. So, I guess how do you think about 7% returns on your capital today?

[Drew Alexander:]

It's something we feel that we get a very thorough job and very much right size things, so our best guess is we will go ahead with the 13 projects because the return on the margin, given that a lot of the land and the site work is already spent, is quite acceptable to us. As Robert mentioned, we think the land held for future development are good properties and I think they are definitely an asset at this point that I don't think is factored into the markets thinking too much so it is certainly a little bit of icing. So as we look forward, we do think there will be some growth opportunities but in acquisitions but our main focus will be on core properties where personally I don't think you will see double digit returns.

[Jay Habermann:]

Ok, and then also just sticking with development, I know you stabilized early the projects in the most recent quarter. You referenced a 90% plus occupancy, but on a net basis you're closer to 80%, 81%. Can you give us a sense for the timing I guess to close the gap there as you look at the part that pertains to you?

[Drew Alexander:]

We would think over the next several quarters but obviously that is a real tough crystal ball in terms of how much the economy stabilizes, how quickly.

[Jay Habermann:]

And then what sort of impact on your development returns are you seeing, either from reducing rates or the phasing of the projects?

[Drew Alexander:]

Well, those two things of course move in opposite directions that we elect to phase a property when we do not feel comfortable that the demand is there. The 7.3% that we have for the 13 projects that are left to be done we feel pretty good about. Obviously as to next year's properties we have very good clarity and we are pretty close to that 7% number as we sit today. And as I said before, our best estimates are we will go forward with those thirteen projects and add back some of the land held for future development projects as market conditions warrant. But obviously we have come through some tumultuous time and while we think that most of the bad is behind us, we do not think all of the bad is.

[Operator:]

Our next question comes from the line of Christy McElroy – UBS Securities

[Christy McElroy:]

Steve, I think you mentioned same store NOI in 2010 flat to down 3%. That is a pretty wide range. What are some of the biggest variances and expectations there? Is it mostly on the leasing side? And given that you have rising expiring rents over the next few years and the prospect for little market rent growth given supply, how are you thinking about releasing spreads over the next few years and sort of the associated impact on NOI growth? Could rent roll downs continue to be a drag such that even if you have occupancy gains you could be looking at several years before getting back to that 2% to 4% NOI growth levels?

[Johnny Hendrix:]

You know for the same store NOI during 2010, it is a wide range. And I think the biggest variable is how many tenants will go bankrupt. We generally have about the same amount of bad debt built into the numbers as we had this year. And so that's really the biggest piece. We also have gone through it several times and should have some kind of final meeting through the rest of this quarter to be able to bring that down a little bit. In terms of the roll downs of market rent, we are really already seeing that getting a little bit better. Probably during the first quarter, we were looking at paying rents for the boxes at about minus, at about 30% down. Today, we're seeing that more in the 15% to 10% down, in some cases. You're probably looking at about the same difference in the shop space. I think you're going to see a continued roll down of rents through 2010 and maybe even into the beginning of 2011. But I think that's probably the point where we start picking back up. Of course, there's not a lot of new space being built. And if we can keep the retailers in business, then we are going to have a reduced supply, which should give us a little bit more leverage in the negotiations.

[Drew Alexander:]

This is Drew. I actually think that tipping point Johnny refers to, and I don't know exactly when it'll happen, but I think it's going to be pretty dramatic because as he mentioned, there's no new boxes being added. The deals that we're doing are largely as a result of tenants relocating to good quality centers, which is what we have. So if the boxes are illuminated and the retailers many of whom are public and have the same growth pressures that all of us do, you'll see a return to rents that attract capital based upon new construction costs. So again, I don't know exactly when the change will happen, but I do think it will happen a lot quicker than most folks think.

[Christy McElroy:]

Just following up on your comments on bankruptcies, is there any tenant or category that you're specifically worried about?

[Johnny Hendrix:]

Yes, I think there's a number of lists out there that we look at. And I worried about a lot of different tenants. We've never really identified who was on our watch list and I'm not sure that would be of any specific benefit. I will tell you that generally the supermarkets, the discount clothing stores are doing very well. The stores that are selling furniture, some of the video guys are not doing quite as well.

[Christy McElroy:]

Sure. And then my second question, you talked about potential acquisition opportunities, how much flexibility balance sheet-wise would you say you have in sort of looking to put dollars to work? And in terms of entering a period of opportunity, what's the catalyst that causes these opportunities to materialize?

[Drew Alexander:]

The catalyst is something that we have a lot of internal debate about. It, I think, is the general view of this company that the discussions of the problems in commercial real estate are very overstated when it comes to the good quality supermarket and discount operated centers. So I think that while there will be some opportunities to buy some good deals at reasonable cap rates in properties that we want, I think in the world that we operate, I think they'll be somewhat limited. And therefore as to the first part of the question as to the volumes that we might be able to do, I don't see the balance sheet as a constraint because I think the opportunities will very much limit. And if I'm mistaken and there are more opportunities, I think we can absolutely get additional capital, whether it's through joint ventures other debt or other equity. I mean, if we can figure out what the exact pricing is as things settle down, I think this company has demonstrated that we know how to run this kind of property. So whether it's institutional, joint venture capital or public equity or public debt, I see the opportunities being a constraint, not the capital.

[Operator:]

Your next question comes from David Wigginton – Macquarie Capital.

[David Wigginton:]

Good morning. Last quarter, you had mentioned, Steve, I believe, that you had seen a diminished need to complete the joint ventures that you had talked about earlier in the year. Obviously after this quarter, you got the Southeast joint venture done. Can you maybe discuss a little bit what changed in your mind set from both getting the deal done and then also maybe from the offers that you had on the table at that time versus the offers that were done, that were on the table at the end of the – when the transaction was I guess, made?

[Steve Richter:]

I think just to clarify, Dave, that what I quoted in the, or what I said in the last conference call, which I understand having gone back and reviewed the script there was a typo in there that, because I specifically mentioned the industrial that we did pull the industrial JV from the market because we had not received offers that we thought were compelling. But then went on to communicate that the retail, we were continuing to work on the retail JV. So I think as noted, we did pull the industrial out of the market. So we don't see anything occurring there. But we continued to work on the retail and ultimately closed the transaction with Jamestown that we're very excited about.

[Drew Alexander:]

The Jamestown deal or the Southeast deal was originally 10 properties. As was mentioned, we've closed four out of what we expect to be six. So it was something we gave a lot of thought to. We decided to go forward with it and we're pleased. We think it was a reasonable transaction into mid-eights cap rate that with the fees and the promotes and the other things and the improvements to liquidity, it's a deal we're happy to have completed. But it is also something that it became a six center package instead of a 10 center, as we looked through the different properties and the pricing. Like with all of our other partners, Jamestown is a very large entity. There is no formal commitment to do anything with them in the future. But I think both sides are optimistic that this can lead to other business. So the possibility of a good future also entered into our thinking.

[David Wigginton:]

Are you able to tell us which centers? I didn't see that in the supplement or maybe I missed it.

[Steve Richter:]

We're happy to provide that offline for you, Dave.

[David Wigginton:]

Okay, great. And then just circling back to the acquisitions, Drew, you had mentioned obviously the yields on core acquisitions would probably be in the single digits. What's going to get you moving on maybe distressed or a value add opportunity from a yield standpoint?

[Drew Alexander:]

We have had a number of internal meetings. And quite frankly, while they're frustrating and it's difficult, I think everybody can appreciate that a difficult meeting working through growth opportunities is still a lot more fun than we've had in the last year or so. So we have a variety of things that look at returns in the 10%, 11%, 12% range depending upon the risk and the further upside potential. We use a proprietary model that is a combination of looking at returns in each of the years over the next 10 years, as well as an average of those, as well as an IRR. And at every deal, we're very sensitive to the risk and the going in and what are the hurdles that have to happen. And then what is the potential reward that comes with that? And again, I do think there will be opportunities. I think it will take a tremendous amount of human capital to look through all that dirt to find the gold nuggets of the projects that one wants to work on. And that's where I've taken over a lot of the existing development operations so that Robert can free up his time on the growth. On any existing property these days, you also have to be very sensitive to the meaning of cap rate because in the 30 years that I've been doing this, there's never been a wider range in the NOI between what the seller thinks and the buyers think. So in a world where some amount of rent roll down, some amount of vacancy is something that you have to think about, you could buy things that your second year ROI is below your first year ROI, which sort of invalidates the concept of a cap rate. But that's where we're very sensitive to looking very closely at every individual asset that we might consider buying.

[David Wigginton:]

So from management's perspective then is this going to be your primary growth driver over say the next two to three years?

[Drew Alexander:]

We will obviously continue to focus on the existing portfolio. We do think that new development will return and we have a nice inventory of good property. So when you look at same property NOI growth, new development, redevelopment and core acquisitions, I think they'll all be important parts of our growth strategy.

[Operator:]

Our next question comes from Quentin Velleley – Citi.

[Quentin Velleley:]

Good morning everyone, I'm here with Michael Bilerman. First question, just in terms of your big box vacancy and re-leasing, could you maybe discuss what kinds of tenants' incentive and rent rate periods you're having to give away to lease that space?

[Johnny Hendrix:]

Yes, Quentin, this is Johnny. There's not a whole lot of quote "rent breaks" like free rent or incentives like that. I would say that it's about the same as historical norms in terms of those situations. Obviously, the rent is less and I think the tenants are using the leverage that they have primarily to focus on the rent. There could be some non-economic terms that the tenants are revisiting that we've talked about for years with them and have been able to hold off on. But there really aren't any quote "rent breaks" in free rent or giving the tenant money for inventory or anything like that that you would think of as incentives.

[Drew Alexander:]

And I'd say as far as tenants, it's all the folks that Johnny outlined which are the basic goods and services folks. The other thing we're seeing, I think Johnny told me the other day, probably a little more than half of the boxes we've done are relocations, where people are moving from a weaker center to our center, which is a stronger center.

[Quentin Velleley:]

And so exactly how much space in the big box vacancies have you remaining to re-lease now?

[Johnny Hendrix:]

I guess we have –

[Steve Richter:]

Let us dig for that number. Is there any –

[Quentin Velleley:]

Yes, and I'm also after sort of what kind of a rate per square foot as a tenant incentive, what you're having to give?

[Steve Richter:]

Well, I think Johnny mentioned the rents are down about 17% on the big boxes that we've done. So it very much differs by the market that you're in, that out West you could be looking at $13, $14 down to $10, $11. And in the center part of the country, you'd be looking at $12, $13 down to $9.

[Michael Bilerman:]

How much space has that been on, in terms of this down 7% and down 17%? I think you mentioned down 17% on the boxes and down 7% on the shop space. That is stuff that you'd signed previously but has not yet commenced. I mean, what are we talking about in terms of the percentage of the portfolio that that's on and then how much more negative roll? It sounds like you suspect it to be negative next year, on next year's roll, of about 13% of your rents.

[Johnny Hendrix:]

I'm going to go back to Quentin's question I guess earlier. We had, over the quarter, 42 boxes that were vacant. We've leased 16 of them and so that's 26 of them that are left. That's approximately 750,000 square feet that are available. I'm not sure that I have the specific statistics that you're asking for, in terms of the percentage of it, of what all that is, in terms of the roll.

[Steve Richter:]

Typically turn about 14 – 12% to 15% of the portfolio each year. And that's where, as I said before, I think next year could be a little challenging. All depends on when the economy, as Johnny said, gets some traction. But I do think that rents will turn back pretty quickly to having to support new construction prices because, again, as I've said a number of times, in a number of different environments, retail is all about the sales. It's not about the rent. So people are not going to take an inferior location in most cases because the rents are cheaper. And one place this is pretty evident is in our renewals. We're still seeing increase. They may not be as big as they were before, but they're generally still up because people don't want to move from a good location. In some cases, they don't want the risk. In some cases, they don't want to invest the capital. And that's where, in the renewals, we're still seeing moderate increases.

[Quentin Velleley:]

And just a last question

[Drew Alexander:]

I think on a go-forward basis, Quentin, it depends the period that you're looking at. The 7.3% looking out in the future we think is a reasonable number. When those projects were green lit, that number was probably 200 basis points higher than that, somewhere in the middle nines. As we mentioned, what we stabilized, it averaged 7%. That was a function of projects that would naturally stabilize and some other things that we stabilized early. The best one, as I recall was in the nines and the worst one was in the fives. So it is something that I think we have clearly made some mistakes. I think the mistakes are as not as large a magnitude as sometimes folks think.

[Robert Smith:]

I would add that these changes that we implemented this quarter, a lot of the parcels that were moved to land held for development out of the active projects would have had a pretty positive effect on the return because a number of them were lucrative pads and things or ground leases that didn't require as much capital to be invested. So a large part of the reduction in the ROI on the average of the pipeline would be related to the land parcel move. But it's also – as part of that evaluation, we looked at all the underwriting assumptions and we made the adjustments. We did some rent roll downs. We did some extensions and stabilizations. So all that combined had an impact. Probably most of it was from moving the land. But I think it's a fairly – a comment that Johnny has made, the existing portfolio is showing less and less decline from the leasing fundamentals. And that ultimately is what we'll keep a bottom or a floor on the development portfolio down the road as well.

[Johnny Hendrix:]

I have some numbers that may help you in your previous question about the rents. We have 15 boxes that are currently signed and not commenced. So that's the tenants that are down 17%. That's 433,000 square feet of space. And we have 95 small tenants that make up the population of tenants that are down 7% and that's 242,000 square feet.

[Operator:]

Our next question comes from Samit Parikh – Oppenheimer Funds.

[Samit Parikh:]

It appears that you were able to close a few loans during the quarter and subsequent to quarter and with relative attractive interest rates. Could you speak further about the state of the debt markets currently and what your expectations are for rates, LTVs and capacity from both the banks and life insurers in 2010?

[Steve Richter:]

On the secured side, the life company market and including the banks quite frankly are very competitive. Rates have come in somewhere in the 25 to 50, maybe a little bit more basis points over the last, call it, 30, 60, 90 days. So I think those markets are still very strong. There is still a continuation of only looking – they are only interested in the most quality, the best product. Certainly the unsecured markets have opened back up. We executed our unsecured transaction at 8.1% on a five-year deal with a call feature. But spreads have certainly come in from there and I think we're probably closer to a 7% number for 10-year in the unsecured market today.

[Samit Parikh:]

And then on the core quality opportunities that you said you think might come up in maybe the fourth quarter next year, what unlevered IRRs would you need to expect to become active in that market?

[Steve Richter:]

I don't know that we're going to really peg that off an IRR. We're more looking at a stabilized ROI and, depending upon the quality, somewhere in the mid-eight to nine with an NOI that we're very comfortable with.

[Operator:]

Your next question comes from Craig Schmidt – BofA Merrill Lynch.

[Craig Schmidt:]

I'm just wondering, in terms of your acquisitions that may become available, let's say, a little over in a year's time, would you prefer to be buying grocery anchored centers, neighborhood centers or larger general merchandised anchored community centers? Or are you agnostic on that point?

[Drew Alexander:]

I would say we absolutely look at the quality of the real estate and would let that drive our growth decision.

[Craig Schmidt:]

And then, is it safe to assume that maybe 13 projects is a good run rate from looking forward at development, that as you burn through some you'll still add some on? Is that a number or would that number go lower or higher?

[Drew Alexander:]

I think it'll go lower for a little bit and then it will come back higher.

[Operator:]

Your next question comes from David Fick – Stifel, Nicolaus & Co.

[David Fick:]

I just want to ask one point of clarity on the accounting and the guidance. You are continuing to maintain in your guidance your merchant building gains but excluding the charges from land impairments and so forth?

[Steve Richter:]

That's correct, David.

[David Fick:]

How do you rationalize that considering that they're related and that you've been including as a core part of your business now for the last three or four years the merchant building business?

[Steve Richter:]

Well, I think the merchant build that NAREIT – that's an acceptable definition under NAREIT to include merchant bills in FFO.

[David Fick:]

Yes, but this is clearly a related part of the business so land impairments are a direct result and are matched against any gains that you have. It's not logical from a comparability perspective.

[Drew Alexander:]

David, what I would say is we try to put all the components out there because what we find is different analysts look at it different ways. So we just try to be very clear. This much was merchant build, this much was impairment, this much was gain on the repurchase.

[David Fick:]

I understand that, but in terms of guidance –

[Drew Alexander:]

Next year doesn't have any merchant build gains in it, and as I've said before, I'm happy to move towards a NAREIT model that doesn't have merchant build gains. David Fick – Stifel, Nicolaus & Co. Okay, I don't mean to be argumentative but I think it's clearly misleading in the way the databases trap it and because you guys guide that way we are, as analysts, forced to either report it or be thrown out of the data in accordance with how you guide. And that's a first-call issue perhaps but everybody seems to be going along with it and I think it's clearly misleading. Thanks.

[Operator:]

Your next question comes from Michael Mueller – JP Morgan Chase

[Michael Mueller:]

First of all, going back to the comments about the sentiment being a little bit more upbeat, would you say that that is driven more so by the box activity on the leasing side or does it really spill over into what you're seeing on the small shop side, particularly with the focus on the local tenants.

[Johnny Hendrix:]

I think yes in all of the above. We are excited about the activity we've had in the boxes and that we're getting some of these tenants open in the next couple of quarters is going to help the small shops. They are eagerly awaiting getting some of those tenants open. I think we're seeing some good retailers that are expanding on both a regional and a local basis in our shopping centers and we're just seeing a lot of activity. We're not seeing as many rent reduction requests and just not as much pain from the tenant's perspective.

[Michael Mueller:]

And something that's similar, maybe it's a question for Steve. Steve, looking at the CapEx schedule for the tenant improvements down significantly year-over-year compared to the past few years, in fact, can you talk a little about what you're expecting in the balance of the year and more importantly when you look out to 2010, 2011 with some of these boxes coming online?

[Steve Richter:]

Mike, I would tell you that again that you've got to be a little careful because the volume of big boxes and TIs have been affected because of the lack of new development leasing. So I think what you probably can go back to several years before new [government] cranked up to get a number. But as Johnny mentioned earlier we're not having to produce any incentives or fund a bunch of extra TI capital or anything like that, so I think there's nothing unusual there.

[Michael Mueller:]

But page 17 of the supplemental where you have tenant finish, that's for non-development, correct?

[Steve Richter:]

That's correct.

[Michael Mueller:]

That's the number I'm referring to where it's down 12 million year-to-date compared to call it 30 million to 35 million over the past few years. Where do you see that number trending as you move out and lease up some of those boxes, again, not on the development side?

[Steve Richter:]

Well, again, it will track. I would love to sit here and tell you that Johnny will lease up all of the big boxes next year and we inevitably will have probably some capital associated with that. What you see there is quite frankly the – we've leased, as he mentioned earlier, some of those boxes, but I think it's pretty much – I don't have a lot of clarity quite frankly other than what you see there in terms of going forward. There's nothing unusual.

[Michael Mueller:]

And last question going to the credit line, I think Drew mentioned it took for us to expect a slightly smaller credit line size. I guess the question is, is that because of what's available or is that more of a function of pricing?

[Steve Richter:]

No, I would tell you, I want to be very clear on this one is that we have enough capacity to renew the 575, quite frankly, have enough capacity if we wanted more, we could. It is a function of pricing, Mike. As one might suspect, the fees in both the spreads are pretty significantly increased over what we've seen historically and it's just a matter of it's pretty expensive to provide capacity, excess capacity, today that we really don't feel like we're going to need going forward. We will have a accordion feature in it so that if things change over the next couple of years we have the ability to increase it, but at this point it's just a function of pricing.

[Operator:]

Your next question comes from Carol Kemple – Hilliard Lyons.

[Carol Kemple:]

On your watch list for this year, how was your volume of tenants compared to what you would say for last year at this time?

[Drew Alexander:]

It certainly looks better. We were actually talking about that at the board meeting. I would even say probably less than half that we're seriously concerned about. We are still watching them. I'm sure you've kept up with the recapitalizations in the borrowings that the various retailers have been able to execute over the last six months, and it does make us feel a little bit better that they've gotten a little more liquidity.

[Carol Kemple:]

And what are your thoughts on dispositions for 2010?

[Drew Alexander:]

We're looking at $50 million to $100 million, I believe, in the guidance that Steve said. We're going to focus on non-core properties and enhancing the geographic footprint. We will probably market several times that number so that we have the ability to say no and negotiate hard, but with the liquidity enhancements that we've made, we don't feel the pressure to do a big number.

[Operator:]

Your next question comes from Ryan Levenson – PFM.

[Ryan Levenson:]

I need to go over a couple of things about your tenant finish and pardon my kind of slow wit in this Monday morning, but the tenant finish number of 12,964, that's the TI allowance, correct?

[Steve Richter:]

Correct.

[Ryan Levenson:]

And what GLA is that spread over?

[Steve Richter:]

Don't have that data point significant. We can get back to you on that.

[Ryan Levenson:]

Okay, what was the tenant improvement allowance per square foot on new leases?

[Steve Richter:]

It varies from nothing upwards.

[Drew Alexander:]

It's $20, yes?

[Steve Richter:]

Yes.

[Ryan Levenson:]

On average, for all new leases signed in the quarter, what was the tenant improvement allowance per square foot?

[Drew Alexander:]

We'll have to check that offline, Ryan, and circle back to you.

[Ryan Levenson:]

Okay and just from a mechanic standpoint how is that TI allowance handled? Is it a check cut to the tenant at the time of occupancy?

[Drew Alexander:]

Sometimes we build it out for the tenant, sometimes it's actually an allowance that we pay them after their open.

[Ryan Levenson:]

After, so after they've actually incurred the cost?

[Drew Alexander:]

After they've built it out, given us all the lien waivers and everything.

[Ryan Levenson:]

Okay, are there any situations where you'll consider something a tenant improvement allowance that, and just cut them a check, and just say you guys do with this what you will?

[Drew Alexander:]

Almost never.

[Ryan Levenson:]

Okay, so can I follow-up with you to get the per square foot numbers?

[Drew Alexander:]

Sure.

[Operator:]

Your next question comes from the line of Rich Moore – RBC Capital Markets.

[Richard Moore:]

Hi, good morning guys. So Steve the bad debt that we should put in, bad debt expense we should put in the fourth quarter, is about $1.7 million, again? Is that accurate?

[Steve Richter:]

That was the Q3 number that we added to. We have actually budgeted in our estimates or our projections $2 million, Rich, but again that depends upon what kind of tenant failures we have in Q4.

[Richard Moore:]

Yes, okay, and then so you were saying for 2010 you had similar sort of level, about a penny a quarter for 2010? The kind of thing you're thinking?

[Steve Richter:]

Sure.

[Richard Moore:]

Okay, all right, good and then…

[Drew Alexander:]

[Inaudible] of that, Rich, about $2 million.

[Richard Moore:]

And then on the loans, the mortgages that you did this quarter Steve, were those previously unencumbered or were those loans that had expired?

[Steve Richter:]

No, they were all unencumbered assets and we put new financing on.

[Richard Moore:]

Okay and did you have to do any recourse of any kind?

[Steve Richter:]

On a couple of them we have had partial amount of recourse, yes, but the majority not.

[Richard Moore:]

Okay then as more of these mortgages come due you were saying that mortgages and putting unsecured debt is less attractive. Should we anticipate that you're going to try to use unsecured debt to replace some of the mortgages coming due?

[Steve Richter:]

That's correct. At the parent level it has been our philosophy and continues to be at the parent level we'll use unsecured. If it's in a JV operation then we would go to the secured market.

[Richard Moore:]

And then the last thing on the revolver you guys said at one point, said you were hoping for around $400 million, I think that was a couple of quarters ago, for the size. Is that about what we should use or do you think it would be smaller?

[Drew Alexander:]

No, I think it will be that or probably larger as Steve mentioned before we can definitely do the 575. We could increase it as was mentioned at a previous speaker. It's a function of the cost. It's also a function of we just don't see the opportunities or the need but I would think it'll be 450 maybe 500 somewhere in that neighborhood.

[Operator:]

Your next question comes from the line of Chris Lucas – Robert W. Baird & Co.

[Chris Lucas:]

Hey guys, just real quick, Johnny, on the boxes that you've done leases for what's been the average lease term on those deals?

[Johnny Hendrix:]

I'm guessing a little bit but I would probably say somewhere around seven years because some of them have been five and some of them have been 10, so it's probably somewhere in between there.

[Chris Lucas:]

But no short deals?

[Johnny Hendrix:]

No, no, we don't count any sort of temporary leasing or anything. There's none of those leases that I, just thinking back through them, none of them that would be less than five years.

[Chris Lucas:]

Okay and then Steve can you maybe help characterize some of the impairment charges sort of between what is JV accounting related versus what is asset sales related versus what is sort of development versus looking at longer term assets just to give us a flavor for how the various impairments are broke down?

[Steve Richter:]

I would direct your attention top page five of the supplemental, Chris. I think we've detailed all those components out.

[Chris Lucas:]

But that's on a per share, I mean is there – it gets a little confusing especially on the JV accounting side.

[Steve Richter:]

Well, let me give you just some real quick numbers. On the impairment whole dollars the $0.32 is about – and that's from all the different pieces. That's about $38 million. The tax effect is about, well, it's about $5 million. The impairment is about $2.4 million on the assets that we've sold and about $700,000 on the reserves.

[Chris Lucas:]

So on the big impairments are those development only related items or are those –

[Steve Richter:]

That's correct.

[Chris Lucas:]

Okay. And then on the JV the various impairments there what is specific on those? Are those development assets or are those just assets that are being adjusted for that are stabilized?

[Steve Richter:]

All within the development program, Chris, but there were a couple of assets that were already in land held for future developments that were impaired and then the ones that got transferred got transferred land held out of the existing new development program.

[Operator:]

Your last question comes from the line of Jim Sullivan – Green Street Advisors.

[Nick Vedder:]

Hi, good morning. It's Nick Vedder here, just a quick question with respect to the new JV. Was there any seller financing or a preferred return that guaranteed for your partner?

[Steve Richter:]

No, Nick, we did close it under an all equity basis. So as soon as we secure the financing that will come out and as I mentioned in total once the other two properties, the loans are acquired it'll be about a 60% leverage.

[Nick Vedder:]

Okay and then there's no preferred return for your partner either?

[Steve Richter:]

No.

[Nick Vedder:]

Okay and then can you explain some of the key drivers for the increase in notes receivable from JV partners on the balance sheet?

[Steve Richter:]

Most of that is from the capital that we have spent on the continue and the development projects is the vast majority of that.

[Operator:]

And there are no further questions in queue at this time. Are there any further closing remarks?

[Drew Alexander:]

Thank you all very much. Look forward to seeing a lot of you at NAREIT. We'll be around if you have other questions. Thank you so much.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect.