Weingarten Realty Investors
Q2 2011 Earnings Call Transcript

Published: 4 Aug 2011

[Operator:]

Good afternoon. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weingarten Realty Second Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to Kristin Horn, Director of Investor Relations.

[Kristin Horn:]

Good afternoon, and welcome to our second quarter 2011 conference call. Joining me today is Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President and COO; Steve Richter, Executive Vice President and CFO; Robert Smith, Senior Vice President; and Joe Shafer, Senior Vice President and Chief Accounting Officer. As a reminder, certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company's SEC filings. Also, during this conference call, management may make reference to certain non-GAAP financial measures such as FFO or funds from operations, which we believe help analysts and investors to better understand Weingarten's operating results. Reconciliations to this non-GAAP financial measure is available in our supplemental information packet located under the Investor Relations tab of our website. I would also like to request that callers observe a 2-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.

[Andrew Alexander:]

Thank you, Kristin, and thanks to all of you for joining our call. I'm pleased to announce the results of another solid quarter. We remain focused on continued improvement in our operating properties and our results for the quarter are reflective of this effort. While the economic recovery is moving slower than all of us would like, we're pleased with a steady, albeit modest progress we're achieving. We discussed in our last call the tremendous job we've done in leasing our available big-box space which now stands at 96% occupancy. We likewise indicated that the key to continued occupancy improvement was to lease small shop space. I'm pleased to announce that we've made real progress in this area during the second quarter, increasing our small shop occupancy by 120 basis points to 86.3%. We are hopeful that this trend will continue but we realize that the economic recovery remains fragile and inconsistent. Leasing velocity was strong in Q2 and the fallout of small shop tenants continued to decline. So both contributed to our improved occupancy. We're seeing this across the portfolio, though some regions bear specific mention. Florida has been a strong performing region. Florida employment trends have been positive, slightly outperforming the national average contributing to our occupancy improvement. Our California portfolio has been a top contributor. Retail selling of property NOI in California in Q2 is a positive 4.5% due primarily to an increase of over 200 basis points in commenced occupancy since the second quarter of 2010. While the collapse of the residential housing market had a devastating effect on the state's economy, the quality of our California properties in high barrier-to-entry markets has fueled this strong rebound. Those of you who attended our Analyst Day in April or listened to our first quarter call are aware that we outlined a new strategic plan. Most significantly, we announced the planned disposition of $600 million of assets from our secondary portfolio and an improvement in Same Property NOI to a forecasted 5% in 2012. As to the improvement in NOI with 3.5 months having passed since Analyst Day, we still believe this forecast is realistic. Most of this will come from leases that are signed, but not yet commenced. Another large contributor is contractual rent steps. We estimate 75% of the forecasted Same Property NOI increase is complete. With continued modest improvement in the economy, we believe the positive momentum in small shop leasing and fallout will allow us to generate the remainder of the increase. As to our accelerated disposition effort, we currently have over $400 million of assets in the market and have significant interest on a large number of them. Since April, we've closed on 2 sales totaling $29 million, one in Rockwall, Texas and the other in Kansas City, Kansas, our last property in that MSA. Since our Analyst Day, we've made significant progress in the execution of our new strategy. As mentioned, we announced this effort in mid-April, started putting packages together in May and are now marketing the properties. We're committed and focused, however, as always, we remain patient and disciplined in our approach. I'll now turn the call over to Steve to discuss our financial results.

[Stephen Richter:]

Thanks, Drew. Weingarten reported funds from operation or FFO per share of $0.30 for the second quarter of 2011. Recurring FFO was $52.5 million or $0.44 per diluted share for the quarter. Reported FFO was adjusted for $0.18 per share of impairment, a $0.03 per share gain on the acquisition of a partner's interest in a shopping center and $0.01 per share of proceeds from a litigation settlement in arriving at recurring FFO. All of these details are outlined on Page 5 of our supplemental package. As we discussed in our May 5 conference call, the company realized an impairment loss during the second quarter on the Sheridan financing transaction of $0.15 per share. In addition to Sheridan, we recorded an impairment of $0.03, related to the sales Drew mentioned in Rockwall, Texas, in Kansas City and a tract of land under contract for sale in North Carolina. Also during the quarter, we acquired our partners' 50% interest in Palm Coast Landing, a property we developed in Palm Coast, Florida. As a result of this acquisition, we recorded a $4.6 million gain which essentially represents the realization of our preferred equity return in the development. We were required under GAAP to recognize the gain under consolidation of this entity. Moving to the balance sheet. Subsequent to quarter end, we paid off the remaining $118 million of our 7% bonds. On Monday, we repaid $77 million of the $131 million of the 3.95% convertible debentures which were put back to us by the holders in accordance with the agreement leaving us with the balance of $54 million. The remaining bonds can be called by us at any time. As of today, we have only $44 million of remaining maturities this year so the balance sheet remains in great shape. Given the improvements we have seen in the last year or so in the credit markets, we have begun the early renewal of our $500 million revolving credit facility. We anticipate extending the term as well as lowering our borrowing spread and facility fees. Additionally, we are also working on a 1-year term loan that will provide some additional capacity, allowing us to stay short term with this debt which provides future flexibility in utilizing the proceeds as we execute the accelerated disposition program. During the second quarter, Standard & Poor's revised its outlook on WRI to stable from negative and affirmed our BBB credit rating. In addition, Moody's affirm its rating of Baa2 with a stable outlook. We are pleased with the improvements in our outlook from S&P, and believe this is a reflection of the strength of our balance sheet and the deleveraging that will occur with the accelerated disposition strategy. I would like to end my prepared remarks with reiterating our 2011 guidance. We continue to expect recurring FFO to be in the range of $1.72 to $1.82 per share. Same Property NOI should be about flat to positive 1%. We project occupancy to be about the same as we saw at the end of the second quarter to slightly up by year end. And finally, we believe growth and retail rents will be in the flat to negative 4% range. On the acquisition side, things have been very competitive. Year-to-date, the company has closed $68 million of deals and has only one shopping center for $12 million currently in negotiations. Weingarten has consistently said that we would be patient while we have participated in the processes for many of the better quality assets that have come to market, we have not seen pricing at levels that provide our shareholders adequate risk-adjusted returns. We are looking to invest in assets within major metropolitan markets inside our existing footprint with above average income and population density. Today, we're seeing good quality supermarket anchor shopping centers selling at cap rates in the 5.75% to 6.75% range. It also appears that some of the underwriting standards are eroding as investors are scrambling to buy good product. If the pace we have experienced here today continues, we do not anticipate meeting our full year 2011 acquisition guidance. However, there's always seems to be more on the market towards the end of the year so it's possible that we can hit the bottom end of our range of $125 million to $175 million, but it could be closer to $100 million for the year. Our original disposition guidance was $75 million to $125 million for 2011. Year-to-date, we have sold $46 million of assets and currently have $25 million under negotiations for letters of intent. As Drew mentioned, with our accelerated disposition program, we have $400 million of assets that are in the market today. We do not anticipate -- excuse me, we do anticipate exceeding our disposition goal but it is difficult at this time to determine by exactly how much. Given our disciplined approach, we will not buy or sell these assets, and therefore, do not anticipate selling all these properties this year. Now I'd like to turn the call over to Robert to discuss development.

[Robert Smith:]

Thanks, Steve. We continue to make progress on our projects under development and in our continual efforts to provide more useful information to investors, you will notice that we have improved the content on Page 10 of our supplemental package to include new development completions to date as well as an estimated completions for future periods with projected ranges of returns at NOI on those completions. We believe this additional information will provide greater clarity in estimating future revenue streams from our development program. During the second quarter, you will also notice that we added a new project and a new phase of an existing project to our development pipeline. I'll highlight those additions in a moment, but first I wanted to mention that the occupancy on the 10 projects that were under development as of the end of the first quarter increased almost 3% from just under 69% to a little over 71% during the second quarter. This is a positive indication to us that development lease up is improving, and we are encouraged by this progress. In addition, we have seen positive developments at several centers of late. At 300 West in Salt Lake City, the shops adjacent to Target are almost 90% leased and will come online during the third quarter of this year. At our Decatur development in Las Vegas, WinCo has started its site work and is forecasting to open its store during the second quarter of 2012. This has sparked a lot of interest from Pad and junior anchor retailers. Our most significant progress has been at our development in Tomball, a suburb of Houston. At the Analyst Day in April, we announced the sale of attractive land at Kohl's, which together with the Academy Sports and Outdoors that is already open, has generated tremendous interest in this project. In fact, in June, we finalized leases with Marshalls, Ross and Community Bank which has triggered the aforementioned new phase that we are tracking in our development pipeline. With Marshalls scheduled to open before the holidays and Ross scheduled to open in the second quarter of 2012, we anticipate the existing small shop space to be the beneficiary of increased leasing activity. Also in the second quarter, as I alluded to earlier, we closed on a new project. A Kroger shadow-anchored shopping center development in suburban Atlanta called the Chula [ph] market. Kroger actually brought this opportunity to us which is a great indication of the strength of our relationship with this important customer. Construction leasing has commenced and we anticipate stabilization in late 2013. I believe the progress described on these specific projects exemplifies the long-term value created through the development process. Now I will turn the call over to Johnny Hendrix to discuss operations.

[Johnny Hendrix:]

Thanks, Robert. Good afternoon, everyone. We continue to move toward a better operating environment. Our major retailers, supermarkets and discount ready-to-wear stores are still healthy and seeing good increases in sales and profits. While economic news over the last few days has been disappointing, the necessity and value-oriented retailers which dominate our portfolio have proven they can successfully operate in this environment. We've recently signed or negotiating leases with small space users like AT&T, Gigi's Grill, Have it Burger and Rue 21 along with large users like HomeGoods, Petsmart, Dick's, Saks 5th OFF [Saks OFF 5th], Dollar Tree, Alta [ph] and Cost Plus. We're optimistic that retailers still have an appetite for growth which will translate into positive operating metrics for us. During the quarter, we generated Same Property NOI increase of 0.2% for our retail portfolio. While this is modest, it is the fifth consecutive quarter of positive growth, improvement in commenced occupancy and small shop fallouts in California and South Texas were the primary drivers of this increase. Our retail reg growth was a negative 0.9%. While we continue to see good leverage with renewals which were up 2.7%, reg growth for new leases was down 8%. As I mentioned on the last call, we've been very aggressive signing short-term leases where we can increase rents in the next few years and leases with built in rent steps. So far this year, 80% of our shop leases have rent steps built in to the lease. These steps don't show up in the rent growth we report but they do have tremendous economic impact. We expect rent step increases for our entire portfolio to be $3.4 million in 2012. This is another reason we're confident in the 2012 Same Property NOI projections Drew mentioned earlier. Our aggressive leasing is paying off. The company produced an increase in occupancy of 30 basis points over last quarter. The most notable headline is the quarter-over-quarter increase of 120 basis points in occupancy of retail spaces under 10,000 square feet from 85.1% to 86.3%. It's very encouraging this improvement came from both leasing production for small spaces as well as reduced fallout for spaces under 10,000 square feet. During the second quarter, we leased 177 retail spaces under 10,000 square feet. This represents the most shop spaces we've leased during any quarter over the last 4 years. Overall, the company leased 212 spaces for $9 million, really an outstanding quarter. We saw a good production from all of geographic regions, but really an exceptional improvement in Florida, which is refreshing. Florida represents only 15% of our retail portfolio and during the quarter produced close to 30% of the leasing production. As I mentioned earlier, we also saw a significant improvement in shop fallout during the quarter. We lost 106 tenants under 10,000 square feet. The fewest shop space fallouts of any quarter since 2006 and 25% fewer than we've averaged over the previous 3 years. We still have room for improvement with our fall out, but I am pleased things are getting better. I'd like to touch briefly on our industrial portfolio. Occupancy ended the quarter 88%, up from 87% last quarter and up from 86% a year earlier. Same Property NOI today is a negative 2.5%. This is primarily a result of some bad debt and new leases that have not commenced. Overall, the industrial group's performance is in line with the industrial markets where we operate. Clearly, the industrial sector continues to struggle. However, we believe it has bottomed out and that we can make progress going forward. It's important to note, the industrial sector performance is more closely correlated to the economic recovery than our retail business. So a lot will depend on how the recovery progresses. We do have more clarity as to the future of Borders and Blockbuster. Specific details of our exposure to these retailers are outlined on Page 45 of the supplemental. Borders has announced a plan to liquidate the company by September 30, at which time, they will close all their remaining stores. We have 3 Borders and 1 Waldenbooks, and we have good interest in all these locations from several retailers so we feel comfortable that within a reasonable period of time, we will have re-leased these locations. We also understand Blockbuster's future a little better. Blockbuster closed 9 locations with us during the quarter. We anticipated these closures and have already signed leases for 5 of these spaces and are negotiating letters of intent on 2 more. This network is the successor to Blockbuster, and we expect they will keep most of the remaining leases. We are negotiating with various agreements for some of the remaining 16 leases to stay short term and modify economics. We'll have the right to terminate and modify leases early when we find replacement tenants. The closing of the remaining Blockbuster and Border stores will not have a significant impact on net operating income in 2011 and is built into any future projections we have historically discussed with you. We do not currently have any unapproved, unreserved money outstanding from either tenant so no bad debt will result from future lease terminations. In summary, we're making steady progress. This progress does sometimes feel fragile, but we continue to move forward. We've increased occupancy, we've increased retail Same Property NOI for 5 consecutive quarters. We've increased shop leasing and shop fallout is getting better. We're also moving forward -- looking forward to additional improvement of our operating metrics as we continue to execute our accelerated disposition program. And with that, I'll turn it back to Drew.

[Andrew Alexander:]

Thanks, Johnny. As we move into the second half of the year, we anticipate the economic recovery will continue its sawtooth pattern. Overall, our economic forecast is for a continued recovery although a very modest one. Given the value nature of our retailers, our great supermarkets and our strong locations, we're confident we will continue to produce improvements in operating results. Big-box demand continues to be strong and small shop absorption is increasing. Leases signed in 2010 are beginning to commence in the financial impact of these signings will be realized in 2012, hence our confidence in strong Same Property NOI growth in 2012. With limited new supply and good quality centers, demand for our space has improved. We're progressing nicely on property sales and New Development leasing and all these factors point to increased future profitability, thanks to all the Weingarten associates that worked so hard to achieve these results and thanks to all of you for joining the call today and for your continued interest in Weingarten. Steve, we'd be happy to take questions now.

[Operator:]

[Operator Instructions] And your first question comes the line of Ki Bin Kim from Macquarie.

[Ki Kim:]

Going over your kind of 2012 soft guidance versus 5% same store NOI growth, can you just kind of walk through that assumption again and the various components of it of that 5%?

[Andrew Alexander:]

As we've mentioned, this was a forecast that we made at a very high level at the Analyst Day in April. It is something that we remain comfortable with, subject to the fact that we don't think the economy is going into a double dip. As I said, mostly driven by the fact that we have an unusually large number of big-box leases that we've signed, but we haven't commenced. The other bigger contributor to that is the steps that I talked about and then the shop leasing that we've just done and the fact, that it appears to us that things are getting better on the shop front. I mean, Steve, is there anything else you could add.

[Stephen Richter:]

Yes, the only other thing that I would add is we do have New Development NOI that will come on during next year as well.

[Ki Kim:]

But that's not part of same-store pool, is it?

[Stephen Richter:]

No, it is not. The New Development properties are not part of the same-store pool.

[Ki Kim:]

And so can you give us a sense of timing. It seems like there's about almost a 300 basis point gap between signed and commenced and that has been pretty steady for the past 5 quarters at least. When does that start narrowing and what is the structural gap from a historical standpoint?

[Andrew Alexander:]

Most of that is a result of the leasing that we did last year. We have about 900,000 square feet of space inside of that signed and not commenced. We expect around 800,000 square feet to commence over the next 6 months because most of the retailers are focused on the holiday season. So a lot of them will be opening in October right before Thanksgiving. If you were to put that in a model, I would probably just put it out evenly over the next 6 months or have it commenced in the next 6 months. That actually is somewhere around $1 million a month in extra revenue on an annualized basis so we do have a big slug of that coming in the next 6 months.

[Ki Kim:]

Okay. And I'm just trying to go through your numbers on the industrial same-store NOI decline, especially in light of increased occupancy, could you give us a break out in terms of like how much was driven -- how much of that was driven by bad debt expense? The 5% decline.

[Andrew Alexander:]

I don't have the specific numbers in front of me. That's the big chunk of it and the fact, as I said, a lot of the occupancy, we don't have the economic benefit of yet, those leases haven't commenced.

[Operator:]

Your next question comes from the line of Craig Schmidt with Merrill Lynch.

[Craig Schmidt:]

When I look at the regional mall performance on same-store NOI and the strips, I mean, the malls have done somewhat better. And I'm thinking is it the small shop space that has been holding the companies in the strip space with a little bit more modest same-store NOI growth?

[Andrew Alexander:]

I think it's that as well as fact that the majority of the malls, they don't own the anchors. So when they get an improvement in their shops, it's moving the needle a lot more. Anchored shopping centers are great and provide for more economic stability, but you can't move things up in an up cycle as quickly.

[Craig Schmidt:]

But my sense is that you're thinking that the improvement you showed in the second quarter will continue in the third and fourth quarter?

[Andrew Alexander:]

We think so. And again, I want to attempt to be as clear as I can and we're not economists. Our best guess is that the recovery continues very modestly but the recovery continues. I think our retailers plan long term. The mood was certainly better in May at ICSC than it has been over the last few weeks, I would say, in terms of the economic news. So our forecast is that things continue to improve, albeit very modestly.

[Craig Schmidt:]

Okay. And then just looking at your last -- release in over the last 6 quarters, I've seen you've been most active in front of the off-price area, TJX and Ross Stores and then Dollar Tree, it has grown from 29 stores to in the 40s. I'm just wondering, is there a geographical orientation to the dollar store pick up or is that evenly spread out to your portfolio?

[Andrew Alexander:]

Craig, it is very evenly spread throughout the portfolio. Dollar Tree has, I think, open to buy somewhere around 300 stores so they have been very aggressive across the country leasing space. And most of our portfolio is dominated by discount ready-to-wear at supermarkets which do lend themselves to be good co-tenants with Dollar Tree.

[Operator:]

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

[Laura Clark:]

While you're gaining ground from an occupancy standpoint, releasing spreads continue to be weak. Is it fair to say that your focus on leasing today is on occupancy and not growing or pushing rent?

[Andrew Alexander:]

I think that's a decision that -- I think I said this before it's typically made on a space-by-space basis, most of those decisions are made at a regional level by the folks who are in the parking lot. But I would tell you that, that is definitely a trend that we are going to lease the space even if we lease it for a little bit less right now. There are certainly exceptions, and we have shopping centers that have wonderful occupancy today maybe 1 or 2 spaces available. And those spaces, we will hold out but in centers where we have 3 or 4 spaces available, we are moving toward leasing the space as opposed to holding out for rent.

[Laura Clark:]

Okay. And then, if you -- what was the releasing spreads for new leases be, if you included your noncomparable leases in that number?

[Andrew Alexander:]

I don't have that number, Laura. If you wanted me to get back with you, I will.

[Laura Clark:]

Yes, that will be great.

[Andrew Alexander:]

I'm not sure even how we get that number but we can talk about that later.

[Operator:]

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

[Jeffrey Donnelly:]

Johnny, you had some success in Q2 just boosting up small shop occupancy. And I was curious what is driving that pick up in your view. Is that sort of seasonal gains and shoe leather or is it a different focus on maybe service tenants and -- or it could be a sign that credit availability is picking up for retailers.

[Johnny Hendrix:]

My guess is, is that it's a little bit of all of the above. Certainly, I want to give credit to our associates who are doing a wonderful job leasing space. At the same time, I do believe there is a little bit more credit available when I think a lot of what we've done with shop space is with franchisees, and they do seem to be having some credit available from the franchisor. It's probably a little bit of all of that. Up until the last couple of days, I did feel like the economy was marginally getting better. I'm not sure of that today.

[Jeffrey Donnelly:]

And then just a follow-up on disposition. I think one of the assets that you sold in the quarter marked your exit from I believe it was Kansas City. Are there many more markets you think you'll end up exiting over the next 12 months and does that provide any -- I guess I'll say -- tangible benefit on the G&A or cost-saving side?

[Johnny Hendrix:]

Yes, there are several markets that we've outlined that we'll probably exit over the next 12 to 24 months mostly up through the central part of the U.S. And I certainly believe it will generate some cost savings in terms of operations.

[Jeffrey Donnelly:]

But anything that's particularly material or do you think it would be more kind of minor at the margin?

[Johnny Hendrix:]

I think it would be more in the margin.

[Jeffrey Donnelly:]

And then just a last question, I guess for Steve. I'm just curious more on your opinion as we've seen the treasury rates coming pretty meaningfully in the last even 30 days. I know it might be anecdotal this early on but how much of that compression do you think is transferred to financing rates that you think are available to you or that you've seen? Or do you think spreads are blowing out a little bit to off with that compression and base rate?

[Stephen Richter:]

Jeff, that's an interesting question and issue around that because ordinarily or historically, one would expect spreads would widen out as treasuries tightened and got down to levels that we're talking about. And interestingly enough, I think, they have a little bit, but the relationship said differently of 30 days ago, I could sell 10-year money at say 200 basis points. Maybe today, it's 205 or 210. It's not dramatic at all when you look at treasuries have come in probably, I don't know, 30 basis points, 40 basis points in that length of time. So as of right now and there hasn't been a lot of unsecured debt done in the REIT space, but from every indication on the few deals that have been done in talking to bankers, it's held. So, as a CFO, I guess, you'd love to finance in this environment. Our challenge is just finding opportunities for investment.

[Operator:]

Your next question comes from the line of from Tayo Okusanya from Jefferies & Company.

[Omotayo Okusanya:]

My question has basically been answered.

[Operator:]

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

[Vincent Chao:]

I just had a question on the regional same-store NOI growth breakout. The total number for retail has been relatively consistent in 0.2% to 0.5% but there's been some pretty big swings period to period in the regions. And I'm just wondering if you could provide some color on what's really driving that like for instance Western region, which would include California's strength this quarter was up quite a bit, but then the mountain region was down.

[Johnny Hendrix:]

When you show a breakout by region, you have a relatively small base and modest amounts of bad debt or a tenant falling out can move the number pretty significantly. In California specifically, it's increased occupancy and very specifically, we had redone a Safeway store or renewed a lease where we put Safeway in and took the old the tenant out. There are a couple of other larger ones. You will see more of that from California in the coming quarters. And then when you look at kind of a negative in Florida, it was a lot of little things, where $250,000 will move the needle. So it's not anything real specific. In the mountain region, of course, you remember ultimate electronics terminated 3 leases with us at the beginning of the quarter and those were all 3 in the mountain regions, so of course, they felt the impact on that.

[Vincent Chao:]

Got you, that's very helpful. And just in terms of bridging the 5% for next year versus sort of the 0.2% this quarter and sort of that like you said the low 0.5% or so for the last 3 quarters, are a lot of that just coming from those commencements that are signed but are expected over the next 6 months?

[Johnny Hendrix:]

Yes, it's those and leases that have already commenced this year where you'll get the full year effect or those. You're right, you do have a significant amount of it is rent steps, but the leases that are still to commence and then the leases that have already commenced but you'll get the full year effect of it. You still have a good amount of work to do on it.

[Vincent Chao:]

Okay. And just one cleanup, if you don't mind, can I get the lease terminations for the quarter? Sorry, if I missed it earlier.

[Johnny Hendrix:]

There were a 106 small tenant lease terminations.

[Vincent Chao:]

No, I'm sorry the debt to dollar, lease termination fees?

[Stephen Richter:]

I think it was $1.2 million.

[Johnny Hendrix:]

Overall, if you look at -- I noticed several analysts made a comment in those regarding other income which was really includes lease cancellation income but that was not the unusual fees. The litigation settlement of $1.6 million was included in the other income that causes that and obviously we backed it out of recurring. So we think that that's onetime and the balance of it was the lease termination income, but we're on budget there, but we don't see that as unusual.

[Operator:]

Your next question comes from the line of David Wigginton from DISCERN.

[David Wigginton:]

Just, Drew, I wanted to circle back to your comment on the same-store NOI for next year. I know you guys have modeled in a modest recovery. I wonder what kind of sensitivity analysis you've run on that. And if we do say get back into a recession or economic indicators continue to weaken what -- I mean, what type of range do you think your same-store NOI would come in that instance?

[Andrew Alexander:]

Again, we're in the process now of going through our very detailed budget o,f, space by space all projects. So no, we haven't in any sophisticated way model it out. So obviously, it's a function of how bad the economy could get. And as we've tried to be clear, that our assumptions, our forecast, our estimates are based on this extremely modest recovery but avoiding a double dip. So it is something. We got into lots of bankruptcies and occupancy dropping tremendously. It could be a lot worse given the credit profile of our tenants, the fact that they survived this long the value nature, we think it's pretty unlikely but...

[David Wigginton:]

Right. Okay. So maybe it's better to ask this way, I know you guys have a lot of defensive tenant base with grocers and discount retailers, I think Johnny commented pretty clearly on how well they were able to operate relative to maybe nondiscount type of retailers. But in the event that things do get worse, I mean, what type of sensitivity I guess do you envision from on your lease spread occupancy, those types of things. I mean are you -- you commented on occupancy or increasing so tenant fallout has decline and what not but, I guess, what is the level of sensitivity of the 5% growth based on weaker economic conditions?

[Andrew Alexander:]

Again, I think it all depends. The period that we saw in 2008 and '09 with the loss of Circuit City, Linens 'n Things and Goody's and Mervyn's was pretty tough and I think the likelihood that something like that gets repeated is pretty small. The leases that we have signed both the renewals and the shop leases and the anchor tenant leases contractually commit about 75% of the Same Property NOI increases. So it is something that we feel pretty good about 2012 being better. I do want to be careful that we don't over focus on this 5%. And if things end up bad and we end up with achieving 4%, I would still consider that a very good thing that we would be pretty happy about. I think a normalized Same Property NOI improved in an anchored portfolio is 2.5% or 3%. So we still as we sit here today feel comfortable with the 5%. It is certainly something that could fluctuate to the downside, if we have lots and lots and lots of unanticipated bankruptcies, but when we look at the credit profile of the top tenants and the other tenants, we think that's pretty unlikely.

[David Wigginton:]

So it is just safe to say that the risk of the downside or you're estimate is basically tenant fallout at this point. Is that correct?

[Stephen Richter:]

That's correct.

[David Wigginton:]

Okay. And then on the regional, just circling back to the regional performance. Johnny, you mentioned Florida is doing well. Southern California -- I'm sorry California was doing well the Western region. I mean is that continued strength. I mean have you seen that in July and into August so far or is it slowing up at all or is it increasing -- is the momentum increasing?

[Johnny Hendrix:]

No, I feel at -- again, what I said earlier, I actually changed my script over the last couple of days with the economic news and what's happening in the market. But honestly, on Friday, when I left here I felt like it was continuing forward and things were going to get better and I still believe that, it's just I think a little tainted with the last couple of days.

[David Wigginton:]

Right. Is that purely result of the improving economic conditions in those markets? And is that what's driving, I guess, the lower fallout rate among the small shops in your opinion?

[Johnny Hendrix:]

Well, the average small shop tenant that is under 5,000 square feet with us has an average occupancy of over 10 years. A lot of them are second and third-generation immigrants and they are going to do whatever they can to stay in business. Now I honestly think what we've gotten down to is a lot of the tenants who are weak have fallen out and those were stronger and have a better operating model, lower cost or better value proposition for other consumers are doing better and continuing to operate. It does feel like their sales are getting better even the smaller shops and the service tenants.

[David Wigginton:]

Okay. And so one last question. So the strength that you're seeing in Florida, when does that actually get reflected in your portfolio, do you think?

[Johnny Hendrix:]

Probably towards the end of the year, maybe even early next year because a lot of that strength in Florida has really occurred in the last 2 quarters of leasing and generally, it takes us around 6 months to get somebody open.

[Operator:]

Your next question comes from the line from Michael Mueller from JPMorgan.

[Michael Mueller:]

I had a question about the year-end occupancy guidance. I think you said something like similar to Q2 or maybe slightly above. Were you talking about the lease percentage or the occupancy because I'm just trying to tie that together with, I guess, all the box leasing coming on that's going to help to drive the 5% next year.

[Stephen Richter:]

That's occupancy but it's based on leased, Michael. It's leased.

[Michael Mueller:]

Okay. So if we're looking at the Q2 occupied percentage of I think 89.6%, where do you see that being by year end?

[Stephen Richter:]

We don't focus as much on that. As johnny mentioned the signed and not commenced leases, you have a bunch of that, that occurs. I don't think we have it around on top. We can get back to you on that.

[Johnny Hendrix:]

It will be somewhere around the 100 basis points. Again, we have about 800,000 square feet of space that will commence between now and the end of the year. Obviously, there's some in and out there. There some fallout, that is quite a bit of space to commence between now and then.

[Stephen Richter:]

And you'll obviously lease some more space between now and then.

[Operator:]

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

[Richard Moore:]

I know you have or at least had a portfolio that you had for sale as part of your disposition program. And I'm curious do you still have that for sale and what do you think of the prospects for getting a portfolio sold in this environment?

[Johnny Hendrix:]

Rich, this is Johnny. We do have a portfolio of 19 shopping centers that's in the market today. We have not made or had a call for offer on those assets yet. We anticipate that we will in the next 8 to 10 days, and I guess we'll know more then. We have, I don't know, somewhere around 400 CAs that have been signed to people that are looking at them. We have a war room that we can look at the activity and it certainly seems to be pretty significant. It is possible that we don't sell the portfolio as one single entity and that we break it up a little bit and we'll just have to see what happens when we get the offers in, in the next couple of weeks.

[Richard Moore:]

Okay. But it sounds like, Johnny, you feel pretty optimistic there's good interest.

[Johnny Hendrix:]

Yes, I really do.

[Richard Moore:]

Okay. And then on the development side of things, guys. As you look forward, do you think there's any -- I know you have a few things going on that are new in the development front. Do you think there's any real development start type activity coming up over the next, say, 6 to 12 months?

[Andrew Alexander:]

I would say that we expect some, Rich. This is Drew. I don't think it will be a huge in the grand scheme of things. We're going to remain disciplined in terms of entitlements and pre-leasing. It is something that I continue to think has good long-term value for us. But again, it does very much depends upon the overall economy. We're going to work through the pipeline that we have of lands that we bought back in the more go-go days. And even in that case are going to be selective about how much we move out. How quickly the tenants are starting to look at higher rent that would support increased capital, but I don't know that they're all the way there in too many cases. So I think in 2012 their starts will be -- there'll be some, but it won't be a big number.

[Richard Moore:]

So Drew, even the modest or the -- it sounds like pretty good enthusiastic response by small shop guys as far as not leaving and also adding space doesn't quite gets you to the development front just yet.

[Andrew Alexander:]

We're not back to the rent levels that support a whole lot of new development. It does make the existing space more valuable. And I think we will see a time when the tipping point in the old versus new rent spreads but I don't think we're there in too many cases for rent levels, either from anchors or shops space to support a lot of new development.

[Operator:]

[Operator Instructions]

[Andrew Alexander:]

We're not seeing anybody in the queue. We very much appreciate your interest in things. Oh, I have one more question. Nate, go ahead.

[Nathan Isbee:]

Just getting back with year-end occupancy. You're saying it's going to be flat. But at the same time, you only have about 75% of leasing done to get to the 5% next year. So how is that going to work. You just expecting a quick lease up in the beginning of '12?

[Andrew Alexander:]

I think it will be flat to up slightly and that's where again -- We have talked about this one in one, Nate, that we are generally comfortable with the 5% but I want folks to understand it's a very high level of number that we are still comfortable with. So again, if it comes in 4.5%, we'd be thrilled. If it comes in 4% plus, we would still be happy. So we're still comfortable with it. We're not backing away from it, but it isn't something that we have space by space done. We're in the process of doing those budgets now and we'll probably have some more feel for that around the time of the next call and/or the next [ph] meeting. So again, it's something we're comfortable with but it hasn't been done to the precision that I guess some folks on the call might...

[Nathan Isbee:]

Sure. But just to clear, I mean you still have to do a decent amount of incremental leasing to get there, correct?

[Andrew Alexander:]

We do have to do some as well and more significantly we can't have the economy turn south on us and start having a lot of increases and fallout.

[Nathan Isbee:]

No, I understand. I'm just looking -- I'm just thinking from the leasing side, if you're going to be at flat between now and year end where you're going to get that additional...

[Andrew Alexander:]

You are correct. We do have to continue to lease some more space to make the 5%. When Steve said we expect occupancy to be flat or up a little for the 5% to happen, it would have to be up -- occupancy would have to continue to tick up.

[Operator:]

There are no further questions at this time. I'll turn it back for closing remarks.

[Andrew Alexander:]

We thank you very much for your interest. We are also around, if there are other questions and thanks so much for your interest in Weingarten Realty. Thank you, all.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.