Weingarten Realty Investors
Q1 2008 Earnings Call Transcript

Published: 8 May 2008

[Operator:]

Good morning. My name is Pamela and I will be your conference operator today. At this time, I would like to welcome everyone to the Weingarten Realty first quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Richard Summers, Vice President of Investor Relations. Sir, you may begin your conference.

[Richard Summers:]

Thank you, Pam. And, good morning and welcome to our first quarter 2008 conference call. Joining me today are Drew Alexander, President and CEO; Stanford Alexander, Chairman; Martin Debrovner, Vice Chairman, Johnny Hendrix, Executive Vice President; Steve Richter, Executive Vice President and Chief Financial Officer, 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. I would like to request the callers to 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 would now like to turn the call over to Drew Alexander.

[Andrew Alexander:]

Thank you, Richard. Good morning, everyone. I would like to review some of the results for the quarter. We achieved FFO per share of $0.78 per share in the first quarter, up 5% from the first quarter of last year. A significant accomplishment for the quarter was the closing in a new $228 million joint venture with AEW Capital Management. Of note, we believe the key take away on this transaction is that the cap rate demonstrates to the market that the company's net asset value is understated. Steve will go into the details on this in a few minutes. Leasing activity in our existing portfolio remains strong with the volume of new and renewal leases at the same level as the first quarter of last year and rental growth on a same space basis up 15%. Rental growth on new retail leases was up more than 27%, among the highest growth rates we've ever achieved. Johnny will be going over the existing operations in more detail in a few minutes. Looking at the big picture, while we continue to produce good results and make progress on our strategic objectives, we're definitely seeing the impact of the slowing economy and have adjusted our strategy and goals. Slower retailer expansion has caused us to revise our stabilization dates on a number of new development projects and to lower our completions forecast for 2008. Robert will provide more detail in a few minutes. Our acquisition deal flow has dramatically slowed, while we continue to see some disposition activity. While the economy is challenging, we have a quality portfolio with over 70% of our properties anchored by supermarkets, great associates, an excellent development pipeline, and a strong balance sheet. So, I'm confident we can successfully weather this downturn. Also, we do not believe this challenging economy will be as bad as what we experienced in the mid to late 80s when the vast majority of our properties were in the Oregon. I'll now turn it over to Steve to review the financial results for the quarter.

[Steve:]

Thanks Drew. We cannot target a good first quarter results, maybe consensus estimate of $0.78 of FFO per share. The growth of approximately $0.04 per share was a result of the following four items. The impact of $95 million of completion from our new development program over the past year adds a little more to a penny a share to this quarter FFO. Secondly, continued strong growth in joint venture fee income, which was $1.6 million for the quarter, up more than 50% from the level of a year ago, which is a direct result of our ongoing success in developing new joint venture relationships. Third, the impact of 1.8 million shares of stock, we repurchased in the third and fourth quarter of last year, which increased this quarter as FFO per share by little less than $0.02 per share. And finally, the net impact of lower interest expense, which included a $2.8 million gain on the settlement of a forward hedge offset by a number of other smaller items. I would also note G&A expenses for the first quarter were up less than 4% compared to the prior year. In summary, we had a solid quarter, but as Drew, mentioned we have realized in our revenue impact of the slowing economy. Coming to the future, last quarter we gave 2008 guidance of FFO per share in the range of $3.21 to $3.27 per share, representing growth of 5% to 7% over 2007. We are reaffirming that guidance, although it maybe towards the lower end of that range. Of note, are four specific changes to our guidance. Number one, we have reduced additional new development investment to a range of $250 to $300 million from $275 to $325 million. We now estimate that new development completions for the year are $110 to $130 million. We are also reaffirming our guidance for merchant building gains in the range of $0.14 to $0.20 per share. And, Robert will provide a little more insight in the new development program in a few minutes. Secondly for acquisitions, our 2008 plans call for all investments to be made through joint ventures at a gross volume of $300 million to $500 million. In the first quarter, we closed our acquisitions of only $300,000 and given the current market, we are hopeful that there will be some modest opportunities later in the year. Third, our 2008 plan includes dispositions of $450 to $600 million for both one of property disposition as well as the recapitalization of our functional sale of existing assets to JV. We are comfortable that we can achieve the total volume, but we will remain flexible after the mix between one of transaction and recap deals. And fourth, as reported this quarter we realized only a 0.8% increase same store NOI. We think, it will be tough to achieve our original 2008 guidance of 2.6% to 3% in same store NOI for 2008, given the current environment, but expect that for the year to be in the range of 2% to 2.5%. Before I turn the call over to Robert, I want to point your attention to the portfolio recapitalization joint venture that we close in the first quarter with AEW. This is a very important transaction and we accomplished several objectives. One of which was to increase our debt capacities. Additional benefits including property management, leasing and asset management fees, plus we receive to promote our performance enhancement. Another important benefit of this transaction is the opportunity to demonstrate to the investment community that they undervalued our existing portfolio. The cap rate on this transaction was in the low to mid 7 and WRI good portfolio with supermarket sales over $500 of goods. We believe that most analysts would say these assets will be in the bottom half of our portfolio given the income levels and the facts that the anchors are generating net national operators. We believe this transaction demonstrates that the 7.6% average one year forward our Cap rate assigned by example of the funds coming up is extremely high and significantly under state our NAV. I would ask the folks on this call that focus on NAV to take another look at the Cap rates used to generate our net asset value. I would now like to turn the call over to Robert to talk about the new development program.

[Robert Smith:]

Thank you, Steve. The company now has 35 properties in various stages of development. We've invested $382 million to date in the projects currently under development and estimated our total investment when they are completed to be $657 million. We do have an additional six new development sites under contract that should we go forward with those projects, have a final investment of $76 million. From this pipeline, we are projecting that 15 of the 35 projects will be stabilized by the end of 2009 and these centers are currently 81% leased including tenant-owned square footage. For the remaining 20 projects stabilizing in 2010 and beyond, we have committed national or regional anchors were 15 to those projects. We have adjusted the projected stabilization date on number of projects in our development pipeline. The impact of this delay has only decreased our average return on investment on our projects under development from 9.2% at the end of 2007 to 8.9% currently. Naturally, this delay is impacting our projected completion schedules well and as Steve reported we are lowering our guidance for 2008 for the range of $110 to a $130 million. We remain confident that we will be able to achieve our 2009 goal of approximately $250 million to $300 million in completions. Even though we had very little merchant billed income for the quarter, we continue to make progress on several merchant bill transactions. We are confident that we will produce to merchant billed income for the full year inline with our original guidance of $0.14 to $0.20 per share. Conditions on the credit markets in the national economy are leading to fewer development opportunities. To offset future impact to the slow down, we are expanding the marketing to local developers, where we can provide them with equity required to complete their projects. We are hopeful that we will see some opportunities in this area later in the year and believe that it is a great way to leverage our expertise and increase shareholder value. In summary, while we are fighting buying the headwinds of the economy, we still see quality retailers willing to commit to new locations but like previous down cycles it takes a little longer to get deals completed. We continue to look at new opportunities however, our pro forma returns have increased given the current environment and we expect it to take a while for the market to adjust a higher yield requirements, but as always we are patient long-term investors. For more information on all of our projects underdevelopment I would direct you to our supplemental as well as our website at www.weingarten.com. On the website you will find a description of each of our development projects including current site plans, trade area, demographics, maps, aerials, as well as other important information about each of our projects. I will now turn the call over to Johnny to discuss the performance of our existing portfolio.

[Johnny Hendrix:]

Thanks, Robert. Good morning to everyone on the call. I am disappointed with the same store NOI results we delivered this quarter. At the same time, I do see some very positive metrics. Leasing production in our existing portfolio has remained consistent in renewal leases over the last several quarters. We have been able to maintain a leasing velocity and over the large majority of cases we are re-leasing spaces at a higher rate. In the first quarter, we completed 288 new leases and renewal totaling 1.7 million square feet. This is very close to the same production from a year ago. We had strong rental rate increases of 15.3% on a GAAP basis and 12.5% on a cash basis. The primary driver for rental rate increases were new retail leases which increased 4% to 27% on a cash basis. These increases were not the result of a single transaction but were spent through the entire portfolio. I would also note, these increases in new leases were among the best we've ever experienced in my 22 years with Weingarten. As Steve mentioned earlier, our same property NOI for the company overall rose 0.8% for the first quarter. Following five executive quarters about 3% and an average same store NOI growth of 3.6% for the last three years, we're disappointed with the results. Just for clarity, I will note our same store NOI is 85% of our overall net operating income and includes reserves for bad debt and does not include termination fees. The slower the normal, same store NOI growth is the direct results of an overall decline in retail occupancy to 94.8% from 95.4% a year ago. I mentioned on our last call, we did expect occupancy to go down during the first quarter. However, we did not anticipated that we go down as much as it did. It may help to go over some of the components of the occupancy declines. We had an unusually high number of junior boxes expiring that would not be renewed, approximately 95,000 square feet, which represents 32% of the increased vacancy. We elect to determinate some weaker tenants in spaces where we believe we have long-term upside by increasing rents for about 45,000 square feet or 15% the total. In addition, we purchased two shopping centers in 2007 with large vacancies approximately 80,000 square feet, representing 37% of the overall increase. We believe these properties have great upside, but the acquisitions did increase the vacancy in the portfolio. Finally, as I mentioned earlier, we did experience some higher than anticipated fall out from small tenants, primarily in California and Florida. This higher than expected fall out primarily occurred in January and February, but has moderated in the last 30 to 45 days, as occupancy was flat from February to March. The store closings in January and February resulted in an unusually higher reserve for bad debt in the first quarter, but in April our 18 accounts receivable has come back in line with our five year leading average. The fall in occupancy was not isolated to any specific region, but the California and border markets saw the highest decline offset by strong increases in Texas. Both CompUSA and Hollywood Video closed four stores in our portfolio during the first quarter. Again long-term, these are opportunities as we will release these basis for higher rentals, but in the short term it lowers occupancy in our same store NOI during the remarketing period. We have released one of the CompUSA stores and are in serious negotiations for two others in the portfolio. As you know, Linens 'n Things did file bankruptcy last week and has announced closing of 120 stores, which represent 20% of their total store count. We have 10 Linens 'n Things stores and none royalty additional closing lends. Our exposure is somewhat limited to Linens as three of those stores have no deal guarantees and two others are in joint ventures where we average an ownership around 37%. I think, it would be unrealistic to predict a short recovery in occupancy, but as I mentioned earlier we are experiencing slowdown in fallout and the leasing velocity in April continues to be strong. This resulted in a slight uptick in occupancy since the end of the quarter. Our projection for a 2% to 2.5% same stores NOI growth for 2008 as Steve mentioned earlier, anticipates no increases in occupancy through the balance for 2008. Overall, our portfolio is well diversified, both geographically and by retailer. No single tenant is more than 3% of our NOI and the top 25 make up list in 23%. Over 70% of our revenue comes from national and strong regional tenants. Our top tenants like Kroger, Ross, Publix, T.J.X. are some of the best retailers in the county and are positioned to take advantage of current economic conditions to increase market share which will be listed in the shopping centers we own. Sales for our super markets and discount clothing retailers have continued to increase in recent months. Over 70% of our NOI comes from shopping centers with the supermarket component and we continue to see more frequent shopping trips by consumers, which will benefit our smaller shop tenants and give us a competitive advantage during challenging economic times. We are excited about the upcoming ICSC National Convention in Las Vegas later this month. We will have around 800 meetings and expect to further strengthen our relationships with national retailers and learn more about how we could take advantage of current conditions. We know retailers are cautious about expanding and have pushed back some openings. But we also expect our existing portfolio to benefit from a slowing of redevelopment projects. We have continued our portfolio reviews with major tenants like Ross, T.J.X, and Staples. We will have around 50 portfolio reviews this year. The relationships we build for regular contacts with our customers gives us an advantage over local shopping center owners, as retailers have confidence we can deliver on our commitments. We had a challenging quarter, but we have a very strong tenant base and talented, experienced associates ready to meet the challenge ahead. I would now like to turn the call back over to Drew.

[Andrew Alexander:]

Thank you, Johnny. In summary, we had a good quarter with 5% FFO growth per share. We are feeling the impacts of the slowing economy. However, as I said earlier, with quality properties, a great group of associates, a new development program with excellent properties, and a solid balance sheet, we will weather this downturn like all others in our sixty-year history and we will be happy to take questions now.

[Operator:]

Thank you. (Operator Instructions). Thank you your first question is coming from David Fick with Stifel Nicolaus. Please go ahead. Mr. Fick your line is live.

[David Fick:]

I am sorry, had you on mute. Can you give us some detail on where specifically the occupancy drop came from? Is it small shop and what kind of small shop is it?

[Johny Hendrix:]

Yeah, David it came from a number of places geographically as I mentioned earlier, it came from California, Florida, and probably more specifically, Sacramento in Northern California. As I said earlier, there are number of components, if you look at the tenant type. We did have some smaller tenant fall out, a lot of casual dinning restaurants who are local folks. In addition, we did have some of the larger boxes that we knew we're coming up that did fall out. I would note that we have, since the end of the quarter released about 45,000 square feet of those boxes and two of them, we are cutting up in to smaller spaces and we're going through some of the entitlement processes in both California and in Florida.

[David Fick:]

What kind of back staff or replacement users are you seeing in terms of demand?

[Johny Hendrix:]

You know, some of the discount rating were, is setting in. We have one of those spaces particularly, that did go vacant was released to roll offs, and we have some smaller attendance in some of the spaces that we are cutting off.

[David Fick:]

Are you generally able to maintain run rate rents in those deals?

[Johny Hendrix:]

That's a good question and actually, we are increasing the rents and that add to capital.

[David Fick:]

Okay, great, I'll circle back in.

[Johny Hendrix:]

Thanks

[Operator:]

Thank you, your next question is coming from [Tom Bowman] with Goldman Sachs. Please go ahead.

[Tom Bowman:]

Yeah guys, I'm here with Jay and [Salon] as well. My first question just relates to your full year guidance, you guys have now lowered your expectations with regard to occupancy, development completions and same store NOI growth for the full year, but you're still maintaining your guidance. I'm just curious what makes you comfortable with that guidance range given the changes in your outlook for those aforementioned factors.

[Steve Richter:]

I think the first thing out of the development program does not have a significant impact on FFO for 2008. That's really because most of that of the completions were in the latter part for the year anyway. So, that's what give us comfort and as on the operating side as Johnny mentioned in his remarks in terms of same store, we realized that if we can achieve the $22.5 same store NOI growth that will pick up what we need from the existing portfolio.

[Tom Bowman:]

Okay thanks guys and [Salon] has a follow up question.

[Salon:]

Yeah guys just on the merchant build gains, what can we look forward in terms of timing throughout the year given what's going on with the credit markets and also could you give us a sense of where those assets are, where in your development pipeline those are?

[Steve Richter:]

Right, yeah, we're looking a number of different things and remember the merchant build consists of three components, past sales, banks, restaurants, anchor tenant sales, the sale of shopping centers, which can either be in whole or part of, as we said if you look through our supplemental, certainly things that are in small towns, we'll probably sell the majority of, the analysts that have observed that a lot of the changing guidance and leaving the range where it is, it's very dependent on the merchant build and that's an accurate statement. We studied the schedule intensively. At this time we feel we can execute within that original guidance range. It will be more weighted to the end of the year. We do think that the centers that we are working on have a quality that they will be saleable in this credit market while there is some risk there, and it is something we think we can accomplish.

[Robert Smith:]

I do incline to that. This is Robert. About 60% of that schedule is based on shopping center sales, the rest is on land or pad sales. And on the shopping center component, those projects are stabilized or near stabilized, and we are already beginning to market those, but we are in pretty good shape I think on getting that.

[Unidentified Analyst:]

Hey guys. Just one very brief follow-up. It looks like a substantial percentage of your development pipeline is in Florida. Given the challenges that that market is experiencing right now, can you provide an update with regard to how development leasing is going and how those developments are doing more broadly.

[Andrew Alexander:]

I would - a tremendous detail direct you to inlet to website in order to pay We are actually inland to the west side in order to pay (inaudible) in the supplemental. But generally speaking we are quite pleased the markets that we are in, Florida as well as the markets that we are generally developing have strong housing populations today, have strong anchors; Target, Wal-Mart supermarkets. And while things are not maybe as good as they were momentum wise a year ago, they are still very good and we are very pleased given the quality of the properties.

[Unidentified Analyst:]

Okay. Thanks a lot for that color guys.

[Operator:]

Thank you. Your next question is coming from Michael Bilerman with Citi. Please go ahead.

[Michael Bilerman:]

Hi, good morning and if you could go out on the phone with me as well. Steve I just wanted to come back to this guidance issue for a second. I think you talked about $0.78 this quarter, and I think you said you had a $0.03 gain from a hedge, unwinding the hedge. So that sort of takes it down to $0.75 and you back out your $0.01 in merchant build and you are short of on this $0.74 run rate. And I guess putting anything aside, that sort of takes you to $3 for the year and you add back your forecast of $0.14 to $0.20 of merchant build that sort of gets you to sort of mid to high teens 313 to 319. And so I am just trying to determine what gives you confidence to be able to get up the guidance, even if you hit the high end of your merchant build range of $0.20, you are still below the targeted guidance range.

[Steve Richter:]

I think there’s a bunch of issues that would account for that. We had some strong bad debt numbers in the first quarter. We think that we will, our G&A will not be quite as strong as we originally projected, because we obviously doubt a little bit with the economy and how things are running there. We still see opportunity out there. You have to also look at a lot of the changes that we have made in guidance, don’t really have a lot of immediate impact on 2008 FFO. We also have somewhat as normal, but we have a decent amount of time but not commence leases that's where we feel comfortable with the existing portfolio and the guidance that Johnny gave in terms of same store.

[Michael Bilerman:]

May be you can just drill in a little bit on the bad debt. How much bad debt did you have in the quarter, and where you sort of targeting in for the year. And may be just talk also a little about lease termination incomes. I know that tends to be volatile and may be that is going to impact your run rate a little bit.

[Steve Richter:]

Yeah, we had about a $1.5 million of bad debt in the first quarter, which is, we think very strong on it and obviously I don’t expect that to continue at that kind of revenue.

[Michael Bilerman:]

What is it, half of that. I mean where does and what's the normalized rate of that debt for you?

[Steve Richter:]

Well looking backward that’s more than double. That probably even a little bit more than that. But that’s where, in these current times where it's very difficult to know exactly what the future may hold on that number.

[Michael Bilerman:]

And then on the lease termination side?

[Steve Richter:]

We didn’t have any unusual amount of lease termination in the first quarter. As I was saying, there is not strong amount being moved back in terms of seeing that anything other than normal.

[Michael Bilerman:]

Okay. And this is the last question and we'll queue back up. Just on the bad debt? The increase in bad debt, is that related to the Hollywood and CompUSA or is that separate from those tenants, and you may have additional sort of straight line write-offs and additional bad debt going forward?

[Johnny Hendrix:]

Yeah, this is Johnny. The bad debt that you mentioned does include all of the bad debt including the Hollywood and what we have with CompUSA.

[Michael Bilerman:]

Okay. Thank you. We'll re-queue up.

[Operator:]

Thank you. Your next question is coming from Christine McElroy with Banc of America. Please go ahead.

[Christine McElroy:]

Hi, good morning. Just with regards to the five projects in your in-process pipeline or in anchor has not yet committed. Can you comment on how far along the projects are at this point, meaning have you purchased the land and started construction? Can you also kind of describe what the normal process is for a development project? What percentage pre-leased do you need to be before you put a shovel on the ground?

[Steve Richter:]

Those particular projects that we have purchased, we are in negotiations with several different anchors on most of the project. I would say as far as strategic guidelines, that like everybody else with the slowdown in the economy we've gotten more conservative, but it is something that we think we know that real estate, so we don't really set hard and fast target that through the years we have worked very well with a number of anchored tenant. And when we have a strong location and several people interested, we have occasionally pulled the trigger on those things. Obviously with the slowdown in the economy as you all heard it on several of the other call, the market is a lot more flexible today in terms of the landowners. So, on the go-forward basis, one doesn't have to do that as much. So it works out, as things work away through the market, the opportunities that we see over the next year or so we think we'll be able to be more flexible on landowner side.

[Andrew Alexander:]

(Inaudible) we are under negotiations with anchors on three of the five now, so that and that's moving along.

[Christine McElroy:]

Do you have purchased the land but have you started the construction yet?

[Andrew Alexander:]

No we have not started the construction but we did purchase the land.

[Christine McElroy:]

Okay. And then on your 2008, 2009 stabilize yields, it looks like they average about 9.6% and the total pipeline is in the upper 8% range. Does that mean that on the projects in 2010 and beyond you are targeting yields in the low to mid 8s, am I looking is that the right way? And has competition for sourcing new deals become that much tougher that you continued to have to concede deals?

[Andrew Alexander:]

While it is driven by the fact we think we've been as judicious as we can and looking at some of the timing that as we pushed some of these properties out it has lowered our returns from where we initially got into the project. As I've spoken to a number of folks on the call, one of the things about retail to keep in mind is it doesn't lower it as much as one might think, because all we're doing is adding into the cost of (inaudible), which is roughly speaking 25% of the develop. But it does, negatively impact a little bit as you push the development out here so.

[Christine McElroy:]

So assuming that some of these projects are in your merchant build pipeline in a rising capital environment that really put a lot of pressure on the kind of margin that you're targeting?

[Andrew Alexander:]

Defiantly, it puts pressure on the margins, but in our cases we think we will have a process. We think there is still a fair amount of room. All has it, we budget that pretty conservatively intend to be there. We're not using to raising your thing in market cap rates when we analyze the potential gain in these things.

[Christine McElroy:]

Thank you.

[Operator:]

Thank you. Your next question is coming from Christeen Kim with Deutsche Bank. Please go ahead.

[Christeen Kim:]

Good morning. Drew you mentioned that you guys are sort of adjusting your strategy given tougher market condition, could you provide a little bit more color on what you are doing differently now?

[Andrew Alexander:]

There are number of things. Johnny mentioned the portfolio reviews one of the things. My 30th anniversary as a fulltime associate is next week and that through the years that we work together both fulltime and before that is always stressed. The importance of the relationships and we have a lot of relationships with almost everyone that matters in our space. So it's a time to take advantage of our size to have the approximate 50 portfolio reviews that Johnny and Patty Bender and her team are working on to take advantage of ICSC and really focus on the existing portfolio, using those relationships, the quality, our properties that we have and take advantage of that. As we alluded to, we experienced life in Texas in the middle and late 80s. We are not stranger to downturn. When you look at the way we diversify the portfolio over the last few years, I think we are in very good shape to rather when it comes to develop and again, I think we have been maximizing the relationships, maximizing the strength of our market research and the quality of locations. As far as opportunities, we do see as Robert alluded the opportunity to increase our partnership to invest in a more passive what we call a preferred equity program where we can help a small developer get a deal across the finish and take advantage of things. So the other strategic change we've made as we alluded to is that the acquisition market is really very much on the sidelines for us here. Working on some joint venture opportunities that we are optimistic might have some ways towards the end of the year, but things are quite slow there. Disposition is a lot more work and we do battle with some lead trades on deals but we are still working on a number of things. And as Steve mentioned, do feel we can make some progress on the dispositions area. So, when you look at the components of our goal strategy, I think the major components of it are all still very important to us, but we certainly had to make some changes in light of the environment.

[Christine McElroy:]

Right. And did you guys buy any stock back in the first quarter.

[Andrew Alexander:]

No, we have not.

[Christine McElroy:]

Given what you guys have reiterated in terms of your discount NAV, just wondering why you decided not to buy any stock back?

[Andrew Alexander:]

I think that we will continue to look at going forward in light of the opportunities that we see in capital sources etcetera. But it’s something that we will continue to look at opportunistically. But we really don’t want to comment specially over the year alone.

[Christine McElroy:]

Great, thanks.

[Operator:]

Thank you. Your next question is coming from Michael Mueller with JPMorgan. Please go ahead.

[Michael Mueller:]

What's your build gains $0.40 to $0.20 for this year? What portion of that could likely come from sales to your joint venture partners versus something that is little more dependent upon either anchors or third parties?

[Steve Richter:]

I think, if I heard that you cut out the very first part, but I think what you were asking was how much or where will be buyers coming for the merchant build gains. And as Robert mentioned earlier, there are a couple of different components on sales of the complete shopping centers. It is possible that we could sell some of those to joint venture partners at this point. As you mentioned we are just beginning to market those assets. The rest of the market build income are typically the acts of the anchors and then as Drew mentioned the past sales which does or not generally are assets that our partners are acquiring.

[Michael Mueller:]

Okay, do you think the bulk of that range is more likely to come from the sale of full centers as oppose of Parkland parcels?

[Steve Richter:]

Right now it's possibly in the 60-40 range with sellers complete with shopping centers again that's 60%.

[Michael Mueller:]

Okay, thank you.

[Operator:]

Thank you. Your next question is coming from Carol Campbell with Celluliod Lions. Please go ahead.

[Carol Campbell:]

Good morning. Looking at your income statement I saw an increase in depreciation expense over the previous year and over the fourth quarter. Can you explain to me why it increased so much?

[Steve Richter:]

Yes under the accounting rules we are remodeling or repositioning our property in Albuquerque and we tore down an existing building and took the value that some $8.4 million through depreciation.

[Carol Campbell:]

Okay, that makes sense. Thank you.

[Operator:]

Thank you. Your next question is coming from Philip Martin with Cantor Fitzgerald. Please go ahead

[Philip Martin:]

Good morning everybody.

[Richard Summers:]

Morning.

[Philip Martin:]

A question just to get a bit more detail on your small shop space. If you could just go in to a bit more detail on the health of the small shop space. I mean obviously had a disappointing quarter in terms of same store growth. I know there were a few junior box issues in there that you don't expect going forward. But, same store growth going forward, you seem reasonably confident given the 2% estimate and again the health of the small shop space is at least a concern to me.

[Johnny Hendrix:]

Yeah Phil, this is Johnny. Overall I think it's important to remember that the portfolio had 70% of our net operating income coming from strong regional and national tenants. So the overall population of small tenant is relatively small. I also want to kind of reiterate, maybe I didn't emphasize it enough earlier that we have seen the aging receivables come down to what I would consider to be normal level on par with our five year moving average. And so, I'm certainly encouraged by that. In terms of going forward, we are, I think, have been fairly aggressive in addressing the weaknesses that we have seen, and I think, we are through of at least the majority of what we would anticipate to see in that area.

[Philip Martin:]

How long do you think, and I know that, it's a hard question to answer, I'll ask it anyway. But how long do you think, they could, your small shop space could sustain a weak economy, I mean, knowing what you know about your market etcetera. How well prepared are your small shop space to sustain a weakening economy?

[Andrew Alexander:]

This is Drew. As you say I think, it's a really tough question, and the best answer I can think of is, if in middle and late 80s we were 90% plus, 95% plus in very petrochemical dependent market. Houston lost 10% of its jobs, a very, very serious depression. Our occupancy stayed comfortably over 90%. Today the portfolio is much stronger, much more diversified, much higher percentage in national and regional tenants. So I can't really answer your question plus the problem is in the middle and late 80 lasted a good five years. I can't really answer your question except to say that we really don't see it heading to be anywhere close to as that it was during the late 80s.

[Philip Martin:]

Okay that's a good point

[Johnny Hendrix:]

This is Johnny. I was just going to add to that, that geographical diversity of the portfolio today are certainly at an advantage and while we did see the weakness in California and Florida we saw tremendous strength in Texas, which is really going to offset some of that.

[Philip Martin:]

Okay my last question, Johnny you had mentioned two properties that were acquired in 2007 with some vacancy.

[Johnny Hendrix:]

Yeah.

[Philip Martin:]

I was wondering if, do you remember or have the acquisition cap rate of those properties.

[Johnny Hendrix:]

Yeah I don't remember those off hand. One of them is primarily just small shops space that's adjacent to an existing property that we own and we are positioning that property to actually demolish it and actually built some apartments on later on. So I kind of see that as a bit of an anomaly.

[Philip Martin:]

Okay.

[Johnny Hendrix:]

The other one was the Perimeter shopping center in Atlanta where we have a 50,000 square feet of vacancy when we bought it. We have some good interests from four different retailers for that space. So we are thinking we are going to be able to turn that around and I know that in our underwriting we did not pay full price for that vacant space.

[Philip Martin:]

Is there a rough guess as to what the range of the acquisition cap rate was at that point?

[Steve Richter:]

My guess very rough would be probably on an existing somewhere sevenish or sixish, which may stabilize after we lease this place and as Johnny said we think it will be a very good deal for us.

[Philip Martin:]

Okay. Okay, I appreciate the answers. Thank you.

[Operator:]

Thank you. Your next question coming from Rich Moore with RBC Capital Markets. Please go ahead.

[Rich Moore:]

Well, good morning guys. On real estate tax, Steve those were up significantly over last year. Is anything special in there?

[Steve Richter:]

Yeah. But not really, Rich. That real estate taxes; different states obviously have different rates structures and depending upon where you buy assets, it is not always comfortable to what the existing portfolio are on a first booked basis. Also I would tell you that the revenues drop as well. So we are recouping that difference. So it's not, it doesn't go to the bottom line.

[Rich Moore:]

Okay. I mean I get the flowing a little bit and I am wondering if that isn't the same story NOI as well, right?

[Steve Richter:]

That's correct.

[Rich Moore:]

So higher taxes would cause some impact to same-store NOI growth. Right?

[Johnny Hendrix:]

This is Johnny. It could, but you are recovering most of your taxes.

[Rich Moore:]

Okay, and so then when I look at your new same-store NOI growth gains I just did a little arithmetic while I was sitting here and it seems like the last three quarters of the year are essentially going to be what your old guidance was. So if you take out this first quarter, which seems very light at 0.8%, the last three quarters of the year are going to average 2.5% to 3% to make the whole thing average to 2% to 2.5%. So, are you basically saying that except for a weak first quarter you basically see the rest of the year growing NOI at roughly the same kind of pace you previously thought?

[Steve Richter:]

Yeah, I think most of the increases in same store NOI are coming from steps and auctions. And from that perspective I think those will be pretty similar in what we had budgeted and again, we are seeing some increased velocity. And I think that is generally, probably a correct statement.

[Rich Moore:]

Okay, so it's really the bad debt this quarter or may be some other things for the rest of the year, it’s kind of like what you thought before?

[Steve Richter:]

Yeah, and I think what we had talked about, last quarter was relatively flat occupancy after a slight tick-down in the first quarter. As Johnny mentioned, April was actually pretty good. We are going into ICSC with the lot of meetings. At this moment, as best as we can foresee and things can certainly change, I think, your map is fundamentally correctly, Rich. But we think that the rest of the year will be better than the first quarter was from a same store occupancy perspective.

[Rich Moore:]

Got you, okay and then, on the new ventures guys, I am trying to understand exactly, that is not consolidated, is it Steve. Is that unconsolidated as well?

[Steve Richter:]

You are talking about the AEW transaction?

[Rich Moore:]

Yeah, exactly.

[Steve Richter:]

No, it is consolidated. We actually guarantee the debt on that, Rich we call that to be consolidated.

[Rich Moore:]

Okay, I got you and then, is that closed? Is that actually closed?

[Steve Richter:]

That is correct. It closed in the fourth quarter.

[Rich Moore:]

Okay, and did you remember the date roughly so we can put that out, if you have in handy?

[Drew Alexander:]

March 20th.

[Rich Moore:]

March 20th. Okay and then the last thing guys, being from Albuquerque I am curious which center is that you are redoing in Albuquerque.

[Drew Alexander:]

Wyoming Mall

[Rich Moore:]

Which one to say?

[Drew Alexander:]

Wyoming Mall.

[Rich Moore:]

Wyoming Mall, great, thank you guys.

[Steve Richter:]

And Wal-Mart is close to that. They are well under construction. You will recognize it when you pass it.

[Rich Moore:]

Wonderful, great, thanks.

[Operator:]

Thank you. Your next question is coming from David Fick with Stifel Nicolaus. Please go ahead.

[David Fick:]

Hi, guys, maybe this have been heard this time. Good morning, I am certainly back on David’s earlier question Johnny, as video, restaurant, mortgage company demand has diminished for the small shop space. What type of tenants are you seeing with incremental demand for that type of space?

[Johnny Hendrix:]

Just kind of thinking on where we are leasing space, certainly we are getting some ready-to-wear and we are getting some amount of service tenants for those spaces. Banks are certainly still in the market and increasing that demand.

[David Fick:]

Even for [in line] space?

[Johnny Hendrix:]

In cap, which is really where the video stores were.

[David Fick:]

Okay, thanks. And Steve, I think you have mentioned before that G&A would not be quite as high you would have expected. Was there a headcount reduction?

[Steve Richter:]

From first quarter last year and first quarter of this year that was up ever so slightly like, if my memory is right, less than 1%. From year-end there is a headcount decrease here.

[David Fick:]

Do you expect that to continue?

[Steve Richter:]

I would say that we will continue to evaluate that. I think that again I'll get the full year of that as we move forward through the year. But I think probably the first quarter is from our perspective at this point a good run rate.

[David Fick:]

Okay. Thank you.

[Operator:]

Thank you. Your next question is coming from [Tom Bowman] with Goldman Sachs. Please go ahead.

[Tom Bowman:]

Steve, just a quick clarification on the $0.14 to $0.20 of merchant build gains, is that included in the $450 to $600 million guidance for dispositions?

[Steve Richter:]

That’s actually separate.

[Tom Bowman:]

Okay.

[Steve Richter:]

That the merchant build gains are coming solely from the new development program whereas the disposition are a combination of one-off transactions as well as any type of recapping we may do with a joint venture.

[Tom Bowman:]

Okay. And then on merchant build assets could you tell us of the completed shopping centers. How many of those were stabilized right now?

[Steve Richter:]

I'm not real sure that any of them are 100% stabilized at this point. If you look at the supplemental on 2008, you would get pretty good grip on where we are, most of those are at or near new stabilization right now, but I'm not sure I understand what question you were trying to get to there.

[Tom Bowman:]

Okay. I'm just trying to get an idea of the lease-up necessary in the step that you are looking to sell in the merchant build gain guidance?

[Steve Richter:]

We are in a pretty good shape. We had very low lease-up and risk, if they are not stabilized they are very close.

[Tom Bowman:]

Yeah.

[Steve Richter:]

And that what we already marketing.

[Tom Bowman:]

Okay. All right thanks guys.

[Operator:]

Thank you. Your next question is coming from Michael Bilerman with Citi. Please go ahead.

[Ambika Goel:]

Hi this is Ambika with Michael. Can you view your G&A guidance for the year?

[Steve Richter:]

Yes as I just mentioned Ambika I think that the first quarter is part of the best run rate guidance I think we could get to the top.

[Ambika Goel:]

Okay. And then the development yield that you gave in the supplemental, is that including the profits from selling profitable store sales.

[Robert Smith:]

It is more I'm not sure how you are defining including but it's more of an economic, so it doesn't---

[Ambika Goel:]

Is your cost reduced essentially by the profits from selling those merchant builds, which were therefore increase, your yield?

[Robert Smith:]

The basis is reduced but not necessarily, entirely the profits.

[Ambika Goel:]

Okay. And then I'm not sure if you went over this, but the industrial occupancy, that dropped. What was the specific reason for that?

[Robert Smith:]

Just a minor tenants moving round up in a consequence the industrial portfolio is strong across the footprint.

[Ambika Goel:]

Okay. And then in the California and Florida vacancies of small tenant, what sectors were those and I think casual dinning was one segment and what are the potential tenants that would replace that space?

[Johny Hendrix:]

As we've talked about before, I think it were ready in bank. Casual dinning certainly was once of the sectors also in those markets, service business is related to residential real-estate, real-estate offices and lending offices are certainly negatively impacted. Ambika Goel - Citi Okay. And then my last question, on occupancy, you said you're expecting to beef up later in the year. Can you quantify the difference between economic occupancy and the percentage of lease and how that margin, I guess will change the difference between those two during the year?

[Johny Hendrix:]

We typically have signed but not commence leases that range in, plus or minus 1.5% and it's a little above that right now.

[Steve Richter:]

Yeah. We would make it this as giant 12.8%. Now, I also would want to mention that when we look at our overseas day, we're recording on leases that are commenced during the quarter. If you look out into the future, the leases that are signed, but not commenced that we have are somewhere around 15% increases in rental rates. So, we certainly are encouraged by that also. Ambika Goel - Citi Okay, great. Thank you.

[Johny Hendrix:]

Just back on the industrial, if folks are interested, it looks like we signed leases. We want a good portion of that. A strong space in our Virginia portfolio. Some of it is artificially low because we bought some value added properties last year that were under leased, that we think we can lease up and again with the diversification we are in good shape. Houston, it's interesting to note, it's 97.5% leased, again evidencing that the strong oil at this time in this city.

[Operator:]

Thank you. Your next question is coming from Chris Lucas with Robert Baird. Please go ahead.

[Chris Lucas:]

Hi, good morning guys. Just a quick follow up on, actually just on the joint venture, can you give us some color on the funding for the mortgage loan and just in terms of how the terms look compared to something you would have done 6 months ago in terms of the advance rate, their underwriting of the portfolio in terms of the cap rate that they used to establish value for the advance rate and the spread?

[Johny Hendrix:]

Okay, Chris, in terms of the actual loans, we were left with a hedge of 5, 7 and 10-year average, a third each in terms of the way we structured it. It was a live company loan. Very attractive. It was a 537 coupon. I don't remember it. You got a lot of questions and I don’t remember the answers.

[Chris Lucas:]

At least the other two would be advance rate and what sort of cap rate they use to get to the value to come up with the advance rates.

[Johny Hendrix:]

Yeah, I am not really sure exactly what their underwriting says relative to the cap rate.

[Chris Lucas:]

Okay. Great. Thank you.

[Johny Hendrix:]

They of course are new to purchase price and as we said before, the purchase price is in the low-to-mid sevens depending how one adjust the NOI for reserves etcetera.

[Chris Lucas:]

Okay thanks.

[Operator:]

Thank you. Your final question is coming from Jim Sullivan with Green Street Advisors. Please go ahead.

[Jim Sullivan:]

Leading reinvestment proceeds along the coast, from the comments on the call, it sounds like the market that you traded out of or holding up pretty well and the markets you traded into are the once that are giving you problems, what lessons or comments can you make regarding that strategic decision and the implementation of it?

[Andrew Alexander:]

This is Drew. It is one of those things that if one do prefect timing on everything, I wouldn’t work this hard. I think long-term being diversified is a good thing for the company. Our western region had very strong positive contributions to our, we think as personal or a corporate record of the 27% old versus new. I am optimistic that there will be better opportunities in California and in Florida with the turmoil that's been seen right now, clearly a lot of consumers there got out ahead of themselves in terms of the housing market, but I think if one looks at the long-term demographic, geographic trends California and Florida are going to be very strong market and we love and have always loved Texas and still have, it's still a very strong market for us. So, your observation is correct. Our timing may not have been perfect, but this is a long-term business and we are very comfortable that these are good long-term assets.

[Jim Sullivan:]

Okay, thank you.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Drew Alexander for closing

[Drew Alexander:]

I am sure a lot of you are running on to other calls, and I appreciate your attention questions. We think we had a good quarter out. It will be not as good as we would like, and we think we're very well positioned for the future and thank you all for your interest.

[Operator:]

Thank you and this concludes today's Weingarten Realty First Quarter 2008 Earnings conference call. You may now disconnect your lines and have a pleasant day.