Weingarten Realty Investors
Q2 2010 Earnings Call Transcript

Published: 6 Aug 2010

[Operator:]

Good morning. My name is (Liz Vindett), 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) Thank you. Ms. Gandy, you may begin your conference.

[Kristin Gandy:]

Good morning and welcome to our second quarter 2010 conference call. Joining me today are Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President and COO; Steve Richter, Executive Vice President and CFO; Joe Shafer, Senior Vice President and Chief Account 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 helps 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 investors’ relations 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 additional questions, please rejoin the queue. I will now turn the call over to Drew Alexander.

[Drew Alexander:]

Thanks Kristin. Good morning everybody and thank you so much for joining us. This quarter’s operating results are much like last quarter and that they’re relative straight forward and predictable. Our overall quarterly results are ahead of consensus estimates excluding the impairment related to our new development in Sheridan, Colorado. Steve will provide some additional information on Sheridan later in the call. As we’ve been saying for a couple of quarters now, Weingarten’s operations have stabilized and tenant fallout has slowed from a high level scene just a year ago. As Johnny will discuss in greater detail, leasing velocity is relatively strong but at the same time, there is still a decent amount of economic uncertainty. Overall given our leasing velocity, we expect modest occupancy improvements. Generally we are pleased with the results we have generated in 2010 and at this point are comfortable with our forecast for the remainder of the year. We started 2010 with cash in our balance sheet and our line of credit totally available. While we never thought the growth opportunities would be large as some discussed last fall, we did feel the deal flow would be greater than it has been to-date. The volume of good quality supermarket-anchored centers coming to market has been far below historic levels. Real estate transactional volume has increased from the full-year 2009 lows of $5.1 billion to an estimated $6.5 billion for 2010 according to real capital analytics. However these levels are still way below the average of $27.5 billion for the years we saw in the prior five years. Good quality assets are limited. We remained focus on the ten markets we have targeted for growth and we’ve looked at virtually every asset that has traded in those markets. Many of these assets we quickly passed on as they didn’t meet our criterion, on others we passed the pricing differences, usually because of differences in the net operating income often caused by our expectations of rent roll event. There is a lot of industry discussion about cap rates, of interest to us are the very wide differences in underwritten net operating income. As we have mentioned before, we are using our experienced leasing and asset management people who know their markets. We’ll use a detailed space-by-space methodology to underwrite retail centers. We’re prudent in our approach using our experience to be a realistic as we’re looking to make money and create shareholder value versus growing for growth sake. Johnny will review the acquisition market in further detail. But in summary we are working on a number of deals and believe we will meet our guidance range of $75 million to $125 million of acquisitions for the year. Steve, would you please take us through the financials.

[Steve Richter:]

Thank you Drew. This quarter was relatively quiet on the capital side as Weingarten continues to look for uses of our excess cash. During the quarter, we were able to repurchase $19.8 million of our near-term debt. These slightly above par purchases created a small loss on the retirement of that debt, however it was a great use of our excess cash. Excluding the non-cash impairment on Sheridan that I will review in a moment. During the second quarter, Weingarten reported funds from operation or FFO per diluted share of $0.42 versus $0.61 during the same time period in 2009. Including the non-cash impairment FFO for the second quarter was $0.29 per share. Now let me review the non-cash impairment taken on Sheridan. Sheridan is a new development on the south side of Denver and like all of our projects details can be found on our website. The project is anchored by a Target, Costco and Regal Movie theatre. It was developed in conjunction with the City of Sheridan who issued public bonds in order to pay for part of the site improvements. As is the case with the many recent development projects, rental rates fell and leasing slowed as the economic downturn evolved, reducing our projected return on this project. In order to take operating control we restructured the joint venture resulting in a change in the accounting which cost us to move from the equity method to a full consolidation. Under the new accounting rule included in ASC 805, that took effect last year, we are required to bring the asset and liabilities of the joint venture on to our balance sheet at fair value as if we had purchased the property. Many would look at this $15.8 million non-cash impairment as a loss on our mark-to-market type valuation. I also would like to point out that recognizing the above mentioned impairment improves the pro forma return on the overall new development program from 6.8% to 7.8%, obviously as a reduction in the cost. Now let’s move on to guidance for the remainder of 2010. We remain comfortable with our FFO guidance of a $1.58 to $1.70 per share, excluding the impairment on Sheridan. As Drew mentioned, our operations are stable. Our leasing velocity is steady and as Johnny will discuss further, our acquisition opportunities are beginning to come to fruition. I would now like to turn the call back over to Drew to discuss the new development program.

[Drew Alexander:]

Thanks Steve. This quarter oncoming development is Robert Smith is home recovering from a minor surgery. We certainly wish him a speedy recovery. Our development program continues to progress, stabilizations are on track and we’re comfortable with the returns on investments shown on page 10 of the supplemental. As Steve mentioned the reduction in our investment in Sheridan increases the projected ROI. We’re pleased to report leasing remains steady with occupancy and new development increasing 120 basis points quarter-over-quarter. With the ICSC RECon convention in Las Vegas, their indications that retailers are on the lookout for new locations as the economy gradually pulls itself out of the recession. While few new development projects are justified at this point, we do anticipate bringing back smaller phases or parts of the land held for future development property back into the development pipeline as market conditions want. An example of this is our Ridgeway project which increased in scope this last quarter. This first phase of this project in Memphis, Tennessee will be online this year with Best Buy, Sports Authority and PetsMart. Target owned by them is also in the project. So we recently increased the size of Phase II of this project which we expect to finish in 2012. We should start construction on the first part of Phase II later this month. We added about 36,000 square feet which is mostly in two free standing buildings in front of the center. This addition is an increase in our investment of about of $2.5 million, we’re over 70% pre-leased in this edition. So we’re quite comfortable with the increase. So this is just an example of how we will prudently over time put the land held for future development to work. Additionally, our development team continues to look for redevelopment in distress projects with a few projects currently in the early stages of due diligence. The return of robust new development is still a few years away we’ll remain patient and selective in the meantime. We have a core new development team which we’re very confident will add value to shareholders overtime. Johnny, why don’t you tell us about operations?

[Johnny Hendrix:]

Thanks Drew. Good morning to everybody on the call. The retail environment is improving. Weingarten’s retail occupancy is getting better, same-store NOI is positive and leasing velocity is good. The retailers that dominate Weingarten’s portfolio, supermarkets and discounters continue to do well. We’re seeing supermarket activity growing both in new stores and expansion of existing stores. Over the last six months, we’ve signed new leases which Sprouts in Fort Worth, Sunflower in Denver and Sweetbay in Florida. (Inaudible) the Hispanic community grocer just opened in Las Vegas at our College Park Shopping Center. Those of you on our Investor Tour in May saw this store under construction. We started to build out a two Kroger expansions in Memphis and are in the very early stages of looking at two new developments with Kroger. Harris Teeter just agreed to expand by 9000 square feet at our Falls Pointe Center in Raleigh. We just signed an agreement with Whole Foods to expand by 6,500 square feet at our Bull City Shopping Center just across the street from Duke University in Durham. We’re also negotiating another Whole Foods expansion in Florida. So while new deal activity is slower than historical levels, grocers are quite active in expansion and remodel (ph). The discount retailers in our portfolio also increased in sales and looking to expand. Ross is expecting 3% to 4% same-store sales growth through the rest of the year. TJX has been seeing consistent sales growth through 2010, (inaudible) only reported 3.1% sales growth for June and (inaudible) reported 6% increase for the first quarter. We’re seeing consistent interest from all these top retailers for our vacancies. Shop tenants are not seeing the same sustained sales growth. The struggling economy and lack of capital puts the net risk of failure. But this group of retailers has proven to be resilient. They’ve been able to reduce overhead and most that have survived to this point will weather the balance of this recession. During the second quarter, retail occupancy rose 40 basis points to 92.6%. Industrial fell 150 basis points resulting in the company’s overall occupancy falling slightly to 90.8%. Keep in mind our average rent for retail space is $13.53, while industrial is $4.86. And retail shopping centers represent 90% of our net operating income. So the economic effect of these changes are positive. On the retail side, we saw improvement across the board from each of our four regions. The most improvement was in Phoenix, where we are now almost 98% leased. According to REIT’s (ph) that’s over 900 basis points better than the average Phoenix occupancy. This is a real testament to the quality of our properties and our boots on the ground in Phoenix. It’s a lot like the Las Vegas story we talked about on the Investor Tour. Our assets were mostly and very densely populated neighborhoods and our teams in both cities are very good at operating our property. So even though the overall market is week, our properties are performing quite well. While we’ll continue to experience higher than the historical fallout for shop tenants, the phase has dropped by about 50%. During the second quarter, we lost 198 tenants for 437,000 square feet. This year we lost 110 tenants for 227,000 square feet. It’s kind of hard to say that losing a 110 tenants is good, but it’s a heck a lot of better than last year. We’re still comfortable with that guidance of a 91% average occupancy for 2010. Leasing production continues to be quite strong. We signed leases on three more boxes this quarter which means we’ve leased 63% of all the boxes available over the last 18 months. At the end of the second quarter, only 22% of our vacancy is made up of spaces greater than 15,000 square feet. So naturally a recent focus has been leasing small shops that make up most of the vacancy. We leased a 173 retail spaces for 462,000 square feet during the quarter. This is compared to 158 spaces 690,000 square feet during the second quarter of 2009. We’re executing more leases to smaller spaces. To-date, we’ve completed 80% of our renewals for 2010 which is well ahead of our typical pace. We’ve also completed 25% of our renewals for 2011. Regionally we saw good leasing production on North Carolina and Northern Florida. I also wanted to mention that subsequent till the end of the quarter, we signed a lease with Nordstrom Rack in our market at Towne Center in Sugar Land, Texas. This is the second location in the Houston area and both are Weingarten center. Rent growth (ph) continues to be challenging. We reported a decline for the company of 2.7%. As suggested in the last conference call that there could be a tipping point balancing the negotiating power between the landlord and the tenant. I still believe that will occur in 2011 but I’m concerned the saw-tooth recovery might delay the momentum we’re seeing towards that tipping point. Rent growth for retail renewals continues to be a while spot, they increased 1.2%. This means the vast majority of our tenants are renewing and we’re getting rental increases. This is another indication of the quality of our shopping centers. Same property NOI was positive for the first time in seven quarters. Overall we were up 1.2% for the company and 1.1% for retail. The most significant factors contributing to this improvement was the steady occupancy over the last 12 months and positive comparison to bad debt. Through the first half of 2010, same property NOI was minus 0.7%. I expect to finish the year at the upper end of our full-year guidance of zero to minus 3%. As Drew mentioned, we’re methodically sourcing and analyzing acquisition opportunities. We did purchased one small industrial property in San Antonio for $7.8 million in the first quarter. This should not signal any movement in our mix between industrial and retail. It was an opportunistic buy of an under leased property. We operate in industrial property across the street and feel like we can lease the vacant space relatively easily, creating good value and producing a high single digit return on investment once it’s stabilized. On the retail side, we have three shopping centers under contract totaling $53 million with an additional $22 million negotiating in letter of intent stage. We may not close all of these, but we’re confident we can achieve our 2010 guidance of $75 million to $125 million. There is a lot of capital chasing a few quality projects for sale today, putting a lot of pressure on cap rates. It’s starting to look a lot like 2006 all over again. Maybe not quite so frothy, but pretty close. For our part, we’re going to remain discipline and deploy capital only where we think it makes sense. There are still significant CMBS and bank maturities coming due in 2011 and 2012 and we’re anticipating in 2011 and 2012, banks will need to deal with loan defaults brining quality deal to the markets. We will remain patient, continuing to look for unique opportunities that can be accretive to our shareholders. Drew, I think you have a few more comments.

[Drew Alexander:]

Thank you Johnny. While we’re not economist, we do feel the economy is slowly improving. We are positioned for whatever happens in the economy and feel we are weathering the recession well. Our supermarket and discount oriented anchored shopping centers have performed pretty well through this downturn. Our confidence in this future is rooted in four fundamentals. The quality of our assets, our long experience and successful track record, our strong relationships with retailers and our superior associates, who continue to lease space and professionally manage our assets. We are quite focused on our existing assets and on profitable growth as to acquisition and new development growth we’re confident that our strategy of using our boots on the ground and focusing on our ten primary markets is the right strategy to create long-term shareholder value. Thank you very much for your interest in our company and we’re very happy to take your questions now.

[Operator:]

(Operator Instructions) Your first question is from the line of Michael Bilerman with Citigroup.

[Greg Schweitzer– Citigroup:]

Hi, I’m Greg Schweitzer here with Michael and Quentin. Could you talk a little bit more about the acquisition opportunities that you have seen in the ten markets that you’re focused on? You mentioned continued disconnect in pricing, perhaps you could provide a little bit more detail on how much that has moved over the past quarter or two?

[Drew Alexander:]

Sure, like we said the volume is quite low. We’re probably seeing more disagreement over the projected net operating income which is really the focus of most discussions with sellers today. We’re taking a very conservative approach in trying to markdown the rents to current levels and make sure that we end up with an NOI that’s pretty close to what we’re projecting. Cap rate wise, its being pretty consistent in the major metropolitan markets maybe 6.25 to 7.25 for good grocery anchored shopping centers.

[Greg Schweitzer:]

And has the type of seller changed at all?

[Drew Alexander:]

I don’t think so, I think it’s – I wouldn’t say there is consistently a single type of seller, most institutions are not selling so I guess maybe those all individuals but I wouldn’t say there has been any change in that.

[Greg Schweitzer:]

Great and then maybe on to developments, could you talk a little bit about how you think about shop space as you slowly start to step back into development and how think this will ultimately evolve for the industry?

[Drew Alexander:]

Like everyone else I think we are taking a very prudent and focused look on a property by property basis, and being very selective about how much shop space we build as, Johnny mentioned, there are still some issues with the mom-and-pop tenants and shop tenants and how much credit they can access. As we talked about at the Analyst Presentation in Las Vegas, there are a lot of smaller tenants, quick service restaurants etcetera, who are doing deals and especially for space out in front with good access, they’re still pretty good demand. So it’s very much a case by case analysis, I mean generally speaking, the amount of shop space that somebody is planning is down significantly from a project that was conceived five years ago. So over time that will definitely call us some pricing changes and some return changes in the makeup of the traditional development.

[Greg Schweitzer:]

Thanks and then just lastly, on the industrial portfolio, I am not sure if I missed this but was there anything larger one time debt that drove that increase in same store NOI and the decline in occupancy?

[Drew Alexander:]

Not particularly, no.

[Greg Schweitzer:]

Okay, thanks very much.

[Operator:]

Your next question is from the line of Lindsay Schroll with BoA.

[Lindsay Schroll:]

Good morning. How are the mom-and-pops approaching the holiday season? Are they trying to push out the deal that they need to order inventory by to see if they’re wanting improvement, or the one day environment improve or what do you think is going to happen this summer as they make those purchases for the holiday season?

[Drew Alexander:]

Yes Lindsay, in most of the markets we’re seeing even though it is a difficult environment for the mom-and-pop tenants, they are seeing some improvement from especially from last year, and I think they are encouraged by what they’re seeing. I do believe they’re reducing their cost and their overhead wherever they can, and they are pushing out expenses to as far out as they can, so I think naturally they would want to do that, there are some limitations in terms of being able to put in orders though, but I think that is probably a good observation.

[Lindsay Schroll:]

Okay and then turning to the junior boxes, we’ve heard that retailers are becoming more flexible in terms of the prototype, that they’re looking for, has that translated at all into the pricing for those spaces? Could we go down to mid 20s I think or 20% that I think we’ve talked about earlier in the year?

[Drew Alexander:]

Yes, I am sorry Lindsay, I missed kind of the last sentence there, you said.

[Lindsay Schroll:]

Well I was just wondering if the pricing had improved at all from the junior boxes as people are coming – if retailers are coming back for the second time looking at the space again, are you seeing any improvement in the pricing.

[Drew Alexander:]

I think overall we have seen improvement in the pricing of the boxes. Whether or not that is directly related to the additional demand that’s being created by the flexibility that retailers have, I’m not certain. I would say that for the most part our projects all over the country are in densely populated areas, and really this is the type of shopping center that retailers are focused on today. They do not want to depend on the future growth but they want the property to be – to have a density of population that they can do sales immediately and this does, I think will help us improve our rents over a period of time.

[Lindsay Schroll:]

Okay, thank you.

[Operator:]

Your next question is from the line of Jay Habermann with Goldman Sachs.

[Jay Habermann:]

Good morning everyone.

[Drew Alexander:]

Good morning.

[Jay Habermann:]

Additional question on the acquisition that you’ve looked at and have turned down at this point. Can you give us specifically how much you think current rents will need to roll down, I guess how much more downside do you think will need to take place in terms of, in-place rents getting to current market?

[Drew Alexander:]

Yes, that’s almost impossible to give you a broad answer on it, we’ve looked at shopping center recently where most of the leasing occurred in 2006 and we rolled the rents down maybe 20% at the same time we looked at a shopping center that most of the leasing occurred in 2000 hadn’t been a lot of turnover, so there actually was rent increase is available. I think you just got to look at it on a space by space, tenant by tenant situation and make a determination there and that’s where I think a lot of the boots on the ground for us. We have big people in these markets who understand the rents; it is really helpful for us to be able to get to the right NOI.

[Jay Habermann:]

Okay and just turning to occupancy for the second question. Can you give us some sense you’re maintain the 91% forecast for year-end over average I guess for the year, but can you give us some sense, do you see any fallout potentially in the back half of the year, either from store closings I mean with potentially Barnes & Noble, Blockbuster or any other tenants that you have concerns about?

[Drew Alexander:]

We are very concerned about Blockbuster and there has been so much in the news about them. We do have in our forecast some reduction of space that they’re leasing for us. We have 42 stores, and I think if we they were to file bankruptcy they probably would reorganize and we might end up with about half of the stores we have with them today, and again that isn’t our forecast and we do think that will happen. I don’t see anything else major happening through the rest of the year.

[Jay Habermann:]

Okay, thank you.

[Operator:]

Your next question is from the line of Nathan Isbee with Stifel Nicolaus.

[Nathan Isbee:]

Hi good morning. Just going back to that question on the industrial same store NOI, I mean the occupancy was down 170 bps year-over-year so can you just walk through the math how the same store NOI was up 2%?

[Steve Richter:]

Hi Nate, I think they’re getting some of the specifics, but I will tell you that the industrial business there are large leases and it doesn’t take one or two deals to sway the overall numbers one way or the other. So if you renew one tenant or lease one space that has slightly better rent, they can swing it dramatically and versus, you lose one tenant and occupancy goes down.

[Drew Alexander:]

But I think the NOI is mostly up due to the absence of some bad stuff from the prior period?

[Steve Richter:]

Right, bad debt mostly.

[Nathan Isbee:]

Okay, all right. And then just going to the guidance for a second, you said that you’re not comfortable with same store NOI towards the higher end of your flat to negative three, from what I remember earlier in the year, there were some additional national bankruptcies that you were assuming beyond Blockbuster. So is it safe to say you’re now comfortable towards the higher end of your FFO guidance?

[Steve Richter:]

Again Nate, it’s all a function of timing and what happens when, we are comfortable with our guidance and haven’t seen any need to change it. At this point there are too many variables but we generally think things are getting better,

[Nathan Isbee:]

Okay, I mean but what would have to happen given where you see the world going for the second part of the year for you to finish towards the bottom half of your guidance?

[Drew Alexander:]

To get to the bottom half of the guidance we’d have to be more than anticipated fallout.

[Nathan Isbee:]

Okay so assuming your same store expectations now, you are more comfortable towards the high end of your guidance?

[Drew Alexander:]

Depending upon the fall out, yes its – everyday that goes by where something bad doesn’t happen, I guess more comfortable or less uncomfortable but there is still four or five months left in the year.

[Nathan Isbee:]

All right, thanks.

[Operator:]

Your next question is from the line of Ross Nussbaum with UBS.

[Ross Nussbaum:]

Hi guys, good morning.

[Drew Alexander:]

Hi Ross.

[Ross Nussbaum:]

A question on the second quarter leasing, of the – let’s call it 800,000 square feet plus you signed in the second quarter. How did that breakout between anchors and small shops, and I guess where I am going with this, is I am trying to figure out how you’re leasing spreads differ on anchors versus small shops and as it relates to the fact that they are going forward you’re going to be having more small shop leasing?

[Steve Richter:]

I don’t have that exact number, I’m happy to get that get back to you on what that would be. My sense is that it probably was about what we had available maybe 30% that was the bigger spaces.

[Ross Nussbaum:]

Do you think roughly speaking that the rent spreads in small shops and anchors you signed in the quarter? Do you think they’re roughly similar or is there still a wide discrepancy?

[Steve Richter:]

For the year, I mean I don’t know if this will surprise you but for the year we actually have a better spread for boxes than we do for the small shops. For the year, we’re down 11% on new leases for the shop space and we’re up almost 10% for the boxes.

[Drew Alexander:]

Another thing Ross that I think…

[Ross Nussbaum:]

Do you think just of the age of the boxes?

[Steve Richter:]

Yes.

[Drew Alexander:]

The thing that’s interesting Ross is the driver of it is the location not the size of the box though, so I mean you’re also – you’re looking at something that’s driven by the specific location within the shopping center and the specific market, so it’s not – the primary driver gets back to the quality of that real estate.

[Ross Nussbaum:]

Yes and that was where I was going next because your eastern region did so much better on a same store NOI basis than the rest of the country. So is it that simple that the east is doing better than the rest of the country right now?

[Drew Alexander:]

It’s also I think a function of as Johnny mentioned in Phoenix and Las Vegas, we didn’t have the drop that was as nearly bad as people thought because we kept as Johnny mentioned, pretty good stability in Phoenix and Vegas, so California did get hit a little bit, Florida especially North Carolina, as Johnny mentioned got hit a little bit and have come back. So if you’re looking at the same property NOI on just a quarter-to-quarter basis the east looks good. If you looked at an over a longer period of time, as Johnny said the Vegas and Phoenix I think would pleasantly surprise most people because they didn’t drop nearly as much as the our properties didn’t drop nearly as much as the overall market.

[Steve Richter:]

We had a little bit more bad debt in Florida in 2009 and that weighs on that also.

[Ross Nussbaum:]

Got it, one I think disclosure item that might be helpful is potentially breaking out the same store revenue growth from expense growth in the supplemental because I think it sounds like a lot of the questions on the industrial front are just – trying to get their arms around, how you get our back growth with occupancy decline and is the bad debt expense would explain it but perhaps supplemental would take those questions away.

[Drew Alexander:]

I appreciate the suggestion.

[Ross Nussbaum:]

Thanks.

[Operator:]

Your next question is from the line of Vincent Chao with Deutsche Bank.

[Vincent Chao:]

Hey good morning everyone. Just building on that can you just provide us what the same store NOI growth would have looked like X provisions?

[Steve Richter:]

Yes, X bad debt, it was been flat for the quarter.

[Vincent Chao:]

Flat?

[Steve Richter:]

Yes.

[Vincent Chao:]

And then what would it have been in the last quarter?

[Steve Richter:]

I am not sure but, it’s probably about the same ratio, there wasn’t a big difference in the quarter.

[Vincent Chao:]

Okay and I guess in terms of going forward, I am assuming some of that is just maybe better recoveries than anticipated just some others have reported. In terms of the go-forward guidance, what kind of the bad debt assumptions are you making in terms of may be on a percent basis, percent of revenue?

[Drew Alexander:]

One has to be careful because with these numbers and I don’t mean to get too granular here but the policies within the different companies when you’re comparing regarding how they accrue the revenue and therefore when it goes bad, how quickly do they stop accruing because you can accrue a lot of revenue and then you generate all the bad debt. If you don’t have to accrue the revenue you don’t recognize a bad debt. Weingarten has policy that, we stop accruing the rent pretty quickly so therefore our bad debt numbers are pretty small. To give you just another stat, is we are currently for the last six quarters running less than one – right about one-third of 1% of rental revenues are bad debt which I know is very small compared to some of the other REITs that may have reported but again I think it’s our policy not to accrue it as opposed to accrue it and write it off. So one has to be careful how you go about that. In terms of our guidance, as Johnny mentioned he shared with you the watch list kind of perspective that we have going forward, we do have some incremental bad debt but I’d also tell you we’d use our same conservative philosophy rather going forward rather than accruing a lot of rent, we don’t accrue that rent. So hopefully that helps.

[Vincent Chao:]

Okay and I guess in terms of a third of a percent is that going forward, are you assuming the debt comes down at all or is it going to stay consistently I guess.

[Drew Alexander:]

No we see that pretty consistent from here.

[Vincent Chao:]

Okay, and then in terms of fallout, can you remind us what is your Winn Dixie exposure is if any?

[Drew Alexander:]

Yes I have five Winn Dixie stores.

[Vincent Chao:]

Okay.

[Drew Alexander:]

They announced the store closings recently two of our stores are on that list.

[Vincent Chao:]

Okay and that’s reflected then I guess.

[Drew Alexander:]

Yes, we do feel really good about the stores we’re getting back. We had anticipated we would be getting them back and we’ve already started some discussions with a number of retailers on those locations and I think we’re hearing some positive things. So I feel good that we’ll be in fine shape on those and Winn Dixie still has some lease term above that locations.

[Vincent Chao:]

Okay and just since you’ve brought up lease terms, is the termination fees in the quarters, can you tell us what that was?

[Steve Richter:]

Yes it was really low, I don’t have for the quarter, I have for the balance all of 2010 so far has been $334,000. I would expect that that would increase back to a little bit higher level about the end of the year I think we had budgeted somewhere around a $1 million for that and I think we’ll actually be a little bit over $1 million.

[Vincent Chao:]

Okay, and then just on the acquisitions that you actually made during the quarter. Can you just give us some color about the distribution center that was purchased? What was the rational there, is it a six cap rate I think?

[Steve Richter:]

I’ll answer that one but can we agree it’s the last since I think you’re way past the two.

[Vincent Chao:]

Yes, I’m sorry yes sure.

[Steve Richter:]

As we kind to get into in the script it was opportunistic deal, it’s very under leased, we have property nearby and we think we can get the stabilized cap rate into the high single digit neighborhood. Happy, for you to get back in the queue or happy to follow.

[Vincent Chao:]

Sure, yes I’m sorry, thank you.

[Operator:]

Your next question is from the line of Michael Mueller with JP Morgan.

[Michael Mueller:]

Yes, hi couple of questions, first of all on the acquisitions. Are they pretty much marked for being on balance sheet or for part of joint ventures?

[Steve Richter:]

Yes for the most part, we’re looking at things that are on our balance sheet. We do have, we are looking at some things that might be joint ventures but vast majority will be on balance sheet.

[Michael Mueller:]

Okay and then the commentary about the spreads, I mean if we look at the year-to-date level being down, it looks like about, yes about the 3% and 2% for the quarter. So I mean the expectation for the back half of the year?

[Steve Richter:]

Yes, a lot of is depends on a space by space basis, one big space can move it pretty dramatically, but I think it will be about the same, I don’t see those leasing spreads improving dramatically for the rest of the year.

[Michael Mueller:]

Okay thank you.

[Operator:]

Your next question is from the line of Chris Lucas with Robert Baird.

[Chris Lucas:]

Hi good morning everyone.

[Drew Alexander:]

Good morning Chris.

[Chris Lucas:]

Drew, can you just give us a sense because you are looking out over the next call it 18 months, how you’re development team is spending their time on terms of planning as it relates to development versus redevelopment versus sort of the finishing off of the existing projects, and when should we start to see I guess redevelopment activity start to accelerate?

[Drew Alexander:]

That’s a very – we get that a lot of thought but that’s a very difficult question to answer, they are focused on doing everything they can on both the existing portfolio as well as we are fielding some offers that we think are reasonable, that could result in the sale of some of the land to users at prices that we think are fair so with the entitlement process and everything that certainly spend time there. We are and do think we will develop some of the land held so they’re certainly working on the pre-leasing of that, again we’re going to be pretty selective about that. We have seen some and as I mentioned are working on some, what we think are good redevelopment opportunities and likewise are in some discussions with folks to take over and get involved in some partnerships but I would say so far the opportunities there, people haven’t gotten to the point that it makes good economic sense to us as Johnny mentioned in his prepared remarks, we’re very cognizant of the amount of debt maturities that come up next year and the year after so we’ll just continue to be patient. So I think there will be some would hesitate to even guess at a number. We’ve also been approached by some of our major tenants to get involved in some developments where small mom-and-pop developers can’t pull it off and that’s a nice think that I think will benefit us and some of the large well capitalized companies, and I absolutely they’re having a team of development people who will create value for the shareholders and also makes us a better company, makes better tenant relationships but it’s just too tough to put a number or a specific percentage around it.

[Chris Lucas:]

Okay and then I don’t know whether you guys on the industrial portfolio have in the past gotten swing space request from retailers through the holidays, is it too early for that or are you seeing any enquiries at this point for that kind of activity?

[Drew Alexander:]

We see some of that from time to time, and it’s a nice addition to things but I don’t know that it’s significant in the overall cash flow of the company.

[Chris Lucas:]

But is that something – I guess I am just trying to understand I don’t think there was much of it last year, I am just trying to get a sense from retailers as there whether there is or maybe an expectation for a greater demand this coming year given a slightly improved economy, is there any sense that would happen.

[Drew Alexander:]

Maybe up ever so slightly, but I can’t imagine it significant, I mean generally speaking they want to get merchandise in the stores and generally speaking they’ve made pretty good improvements to their logistical supply so the likelihood that they need to warehouse a lot of stuff offsite for months is pretty limited. Lot of them will stack the trailer or to or ten behind the store versus rent stay. So I can’t imagine it will be significant.

[Chris Lucas:]

Okay, thanks a lot guys.

[Operator:]

Your next question is from the line of Laura Clark with Green Street Advisors.

[Laura Clark:]

Good morning. On the debt pay down, you paid down roughly $90 million of debt for the first half of the year and given you current acquisition target and what you have in your contract to-date, should we expect a slowdown in debt pay downs in the second half of the year?

[Steve Richter:]

Well I think that’s an excellent observation and I would say generally the answer is yes, we’ll continue to be opportunistic and if we can find something that really makes good sense for us we will do that however we feel like that with the momentum we have and seeing a little bit of opportunity in the acquisition market to put that capital to use, we don’t see have a lot of excess cash if you will going forward.

[Laura Clark:]

Okay great, and then on development, can we pick up in the overall development yield be completely tied to the write down of the Sheridan development of you see an improving outline of the other projects as well?

[Drew Alexander:]

It’s mostly Sheridan, a little bit the addition at Ridgeway and a little bit improvement in some things but it is mostly Sheridan.

[Laura Clark:]

Okay, great. Thank you so much.

[Operator:]

Your next question is from the line of Jeffrey Donnelly with Wells Fargo.

[Jeffrey Donnelly:]

Good morning folks, I got a little bit late so I apologize if you might have address this, but many landlords are talking about how junior anchors are finding it difficult to locate space and increasingly having we’re finding that people are trying to rework shop space to accommodate junior boxes. How wide spread do you think that trend to refurbishing shop space could be, I mean is it, I think if it is efficiently pervasive to make a dent in occupancy in the next year or two and I guess separately how do you think about investing space or investing money I should say in $15, $20 grocer (ph) space to refurbish towards $8 to $10 worth of space.

[Drew Alexander:]

I think it will make a dent in occupancy whether or not its huge dent it’s hard to say, I think Jeff it comes down to the individual shopping center and whether or not it makes senses, generally speaking we’ve always been sensitive to the amount of shop space. In a project, so generally speaking we don’t have centers that have just an inherent structural long-term huge amount of shop space. Part of the issue that I went to before of, why some of the redevelopment deals don’t make sense now, but I think might make sense is the future as the current owner may not recognize that that transformation needs to take place. So as Johnny was talking before about the boxes being more cooperative on smaller sizes, I think a lot of that is the beginnings of the tipping point in pricing where the tenants are really a lot more collaborative with us trying to hold down the overall costs. So what they can contribute is maybe they’ll take a little less frontage, they will use something, they will try to come up with a (inaudible) a different prototype because they want to hold our cost down because they realize landlords aren’t desperate and aren’t going to spend a tremendous amount of money for the cheap rent. So I think between the generally economy getting better, people repositioning things, the flexibility of the junior boxes, we will definite – and the fact that no new space or little new space is coming on the market, we will see improvements in occupancy across the whole country.

[Jeffrey Donnelly:]

And just another question actually on leasing is, can you talk about what the trend is being in shop space leasing activity this year or in the last 12 months. Particularly in more housing impacted markets in your portfolio like the Phoenix or the Inland Empire. Have you seen the move outs in those markets and maybe (inaudible) requests and you’re seeing any improving in demand.

[Steve Richter:]

Yes, Jeff again if you missed the first part of the call we talked a little bit about Phoenix, we’re actually almost 98% leased. What we’re seeing is that the locations that have good density are doing well, no matter what market they are in. The locations that are in the outer edges of the city, that were depending on growth, population growth are not doing quite as well and that is where most of the fallout is occurring.

[Jeffrey Donnelly:]

Thanks guys for touching on that again.

[Operator:]

Your next question is from the line of Rich Moore with RBC Capital Markets.

[Rich Moore:]

Hello guys good morning. I just wanted to follow-up on Jeff’s question for a second. What would you say retailers in general are looking for more space, I mean where are they, and not so much at your centers necessarily but geographically where do you think retailers are focusing and concentrating at this point?

[Drew Alexander:]

Rich, well they are looking at our centers.

[Rich Moore:]

No, I know they are.

[Johnny Hendrix:]

But they’re looking for density, that’s really what’s fuelling on, I think we are seeing the same thing in Arizona, in Nevada, in Florida, in Texas wherever there is good density, retailers will be flexible with us, they will negotiate in a collaborative way and we can make a fair deal. Where there is not density, it’s not so much and they don’t really care so much if they do that deal or not they got a lot of those that they can do if they don’t this one and they move on. We have seen some good progress in our Florida assets, our Atlanta assets are doing well, Carolina is doing well. So I think – I wouldn’t even say there is a geographic point that’s doing better than the others for us, it’s more location specific than anything.

[Rich Moore:]

Okay, all right good. So you don’t see Johnny a need for the retailers to have been in Houston or has to be in some particular market all of a sudden.

[Johnny Hendrix:]

I think that’s right Rich, they’re coming back in and they’re looking at the markets they’re already in, where can they can fill in space so they don’t add any more overhead and they, but they can add say up to the bottom line.

[Rich Moore:]

Okay, all right, good. Thank you. And then as you – as these guys come up for renewals, what are the conversations like, I mean are you able to renew at what had contractually agreed on before or are you giving pushed back and threats to leave and that kind of thing or how would you characterize now versus say the past few quarters?

[Johnny Hendrix:]

I will tell you that those discussions are a lot less contentious than they were several months ago, several quarters ago. For the most of if a tenant has an option we are not going to negotiate that option. And for the most part they have been exercising those options. And again a lot more collaborative discussion about what we can do and how we can help each other. So I’m feeling a lot better about those discussions these days.

[Rich Moore:]

Okay, very good. Thanks guys.

[Drew Alexander:]

Thanks Rich.

[Operator:]

And your final question is from the line of Nathan Isbee with Stifel Nicolaus.

[Nathan Isbee:]

Yes, Steve on the balance sheet, can you – there is a few moving pieces this quarter, out of this debt service guarantee asset line there, those receivables went up and then your notes (ph) receivable from both these joint ventures went down. Can you just walk through a few of those?

[Steve Richter:]

Yes Nate, that all has to do with the Sheridan issue, the guarantee that you’re talking about has to do with the way we recorded our obligation for debt service payments on the $97 million of the bonds and without getting in extremely granular on the detail of accounting, real quickly the – at the end of the day we took off 270 some odd million dollars of assets and we removed a like amount of liabilities, part of that was in debt and part of that was in other liabilities because if you look at the balance sheet, the net investment in JVs number basically remained fairly consistent. So at the venture level there was no equity in that joint venture that we brought on. So it all – all that movement has to do with Sheridan and if I probably confuse you even further, I’m more than happy to talk to you offline but it has to do with the way that Sheridan got recorded.

[Nathan Isbee:]

Okay, thanks and then can you break out the retail occupancy move this quarter between small shop and the larger boxes?

[Steve Richter:]

Yes, Nate it’s mostly small shops because that’s mostly what we lease this quarter.

[Nathan Isbee:]

So if you look at your small shop occupancy went from where to where, and your larger box (inaudible)?

[Steve Richter:]

Well I can tell you that my small shop occupancy is currently 87% and my boxes is 97%, that’s about where I was last quarter.

[Nathan Isbee:]

Okay, thanks.

[Steve Richter:]

All right.

[Operator:]

There are no further questions.

[Drew Alexander:]

If anybody else has a question just pop onto the queue, we’ve got few more minutes, happy for some more if there are any. Not seeing any, so I appreciate everybody’s interest and attention and as mentioned before we’ll all be around this afternoon if there is other questions offline. We very much appreciate your interest in Weingarten Realty and thank you so much for your participation in this call.

[Operator:]

This concludes today’s Weingarten Realty’s second quarter earnings conference call. You may now disconnect. Copyright policy