Regency Centers Corp (REG) 2002 Q4 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Regency Centers Corporation fourth quarter and year-end earnings conference 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. If you would like to ask a question during this time, simply press *, then the number 1, on your telephone keypad. If you would like to withdraw your question, press *, then the number 2 on your telephone keypad. Thank you.

I will now turn the call over to Bruce Johnson, CFO and Managing Director. Mr. Johnson, you may begin your conference.

Thank you, Melissa, and good morning to all on the call. Before we start, please bear with me as I read the Safe Harbor Statement.

In addition to historical information, the information provided in this conference call contains forward-looking statements under the federal securities law. These statements are based on current expectation, estimates and projections about the industry, and markets in which Regency operates, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from the express or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in national and local economic condition, financial difficulties of tenants; competitive market conditions, including pricing of acquisitions and sales of properties and out-parcels; changes in expected leasing activity and market rent, timing of acquisitions, development carts, and sales of properties and out-parcels; weather; obtaining government approvals, and meeting development schedules.

During the quarter, Regency's corporate representatives may reiterate these forward-looking statements during private meetings with investment analysts, the media and others. At the same time, Regency will keep this information publicly available on its website, www.regencycenters.com. The public can continue to rely on this information as still being Regency's current expectations, unless Regency publishes a notice stating otherwise.

With me on the call this morning are Martin Stein, Jr., Chairman and Chief Executive Officer; Mary Lou Fiala, President and Chief Operating Officer; Chris Leavitt, Senior Vice President and Treasurer, and Lisa Palmer, Vice President, Capital Markets.

I hope that you've all had a chance to read our press release and review our supplemental financial information. If you have not received the press release or supplemental information package, you can find both on our website at www.regencycenters.com, or you can contact Diane Ortolano at (904) 598-7675.

As you will hear from Hap and Mary Lou, Regency experienced another good year in 2002. For the fourth quarter, funds from operations increased to 84 cents per share, an increase of 10.5 percent over FFO in the same period last year. For the full year, FFO increased 4.7 percent to $2.91 per share. The components of this growth were 9 cents, or $6.8m from the stabilization of new developments and 2001 acquisitions, 6 cents or $4.6 million from same property NOI growth, 4 cents or $3m from increased development profit, and nearly 2 cents or 1.2 million from growth in fees, mostly from our joint venture relationships.

These sources of growth overcame an approximately 8 cents or $6m loss of NOI through the disposition of operating properties. Net income for the common stockholders for the fourth quarter was 58 cents per share, up from 45 cents per share for the same period in 2001. For the year, net income for the common stockholders was $1.84 per share, compared to $1.69 in 2001.

Adjusted funds from operations creates 2.5 cents per share for the year, less than our FFO growth, primarily as a result of higher building improvement expenditures and two transactions with larger than normal tenant improvement commitment. In 2002, we spent 37 cents per square feet on building improvements, compared to 28 cents in 2001. We expect this cost in 2003 to be more similar to 2002 than 2001.

The two lease transactions with above-average TI's were big box win tenant renewals that resulted in very favorable rent growth for this date.

Free cash flow as measured by adjusted funds from operations less dividends increased to over $27m, and return on equity as measured by FFO divided by book equity before depreciation increased to 12.9 percent.

Regency's results are reflective of the following. First, strong operating results from our high quality diversified portfolio of neighborhood retail centers, such as high occupancy, 3 percent same-store growth and double-digit rent growth. Second, Regency's investment program with over $300m in new development starts for 2002 and the successful completion of 25 center developments totaling over $287m. And finally, as well, the company's execution of our self-funding capital strategy, which cost-effectively funds our investments, while further strengthening our balance sheet. Regency received nearly half a billion dollars this year from the disposition of operating properties, developments and out-parcels.

Based upon the company's operating results and future prospects, the Board increased the dividend by 2 percent to 52 cents per quarter and $2.08 annually. This is the company's ninth consecutive annual dividend increase.

Mary Lou will now discuss the operating results and some fundamentals of our core portfolio; then Hap will update you on our investments and disposition activity, our balance sheet, and the financial outlook for the company. Mary Lou?

Thank you, Bruce, and good morning to everyone on the call. In 2002, higher rental revenues generated same property NLI growth of $4.6m or 3 percent on a same space basis encompassing over 3m square feet in leasing transactions. Average rental rates increased 10.8 percent, 9 percent for new leases, and nearly 12 percent for renewals. This was the second consecutive year of double-digit rent growth, a critical component of the company's fourth quarter - fourth consecutive year same store growth equal or greater to 3 percent. Additionally, we are still achieving favorable results in what we consider key indicators.

Accounts receivable over 90 days for the fourth quarter was .9 percent of revenue, in line with the same figure from the fourth quarter of last year. And 77.4 percent of tenants with expiring leases have renewed, up from 71.7 percent renewal rate last year. These numbers are tremendous in light of the weak overall retail holiday season.

Consumer concerns over the economy, particularly the stock market, the threat of war, the uncertainty of political issues, have caused the Consumer Confidence Index to tumble 5.4 percent in December to nearly the lowest levels in 9 years. Retail trade eliminated 104,000 jobs from their December payroll, their most important month. Even in this environment, and in the shadow of the continuing threat of K-Mart closing, we were able to maintain a high level of occupancy. The quality locations and the tenant list found in Regency Centers are happy tenants who weather rough economic conditions, resulting in their re-leasing of space.

Our results in 2002 once again reinforce the benefits of the company's strategy to focus on our premiere customers, the national regional local retailers that are the best operators in our merchandising category. For over four years now, the PTI program has enabled Regency to grow the best-in-class retailers throughout the portfolio. In 2002, we added [Crew's for Women] [phonetic] to the program, and we opened 12 stores in just one year. Also in 2002, we enhanced our relationship with Quizno's, resulting in an addition of 12 new stores, more than doubling their presence in our portfolio. Our ability to create solid relationships with the best-in-class retailers has not only helped us to strengthen our tenant mix and enhance our center appeals, but more importantly, has also enabled us to generate a higher quality, more sustainable income stream from our in-line tenants. The renewal rate for TCI tenants was 88 percent, versus 77 percent for the portfolio as a whole. Move-outs as a percent of GLA was 1.5 percent for PCI tenants, significantly less than the 4.4 percent of GLA for the entire portfolio.

Finally, rent growth for PCI tenants was also in double digits, in line with the portfolio. We believe the quality of our tenant base and the strength of our tenant relationships is a fundamental differentiating factor for Regency, and will help to insulate us from the consequences of a sluggish and unpredictable economy. However, we know that we are not completely immune from retail failures and store closing. We're closely monitoring faltering tenants; for example, Warehouse Music, which just filed Chapter 11, and K-Mart -- although combined, the two represent only 7 locations and slightly under 200,000 square feet of Regency's total portfolio. We'll continue to scrutinize our tenants' sales house in order to be able to proactively head off any adverse consequences on our portfolio.

2002 was a strong year and we could not have achieved such results without a great team of employees. Regency was recently named Employer of Choice, based on an employee survey that evaluated nine key metrics, from the company's culture to how meaningful the employees view their work. Regency was one of only one of eight companies in the country to receive this prestigious award.

We look forward to another profitable but challenging year ahead. Hap?

Martin E. Stein, Jr.: Thank you, Mary Lou, and good morning. During the fourth quarter, Regency continued to make substantial progress with our development, joint venture, and center recycling programs. The company started the development of 9 new centers. 5 were located in California, 2 in Colorado, and 1 each in Florida and Texas. The 5 California developments, which will be anchored by Whole Foods -- which is a new relationship that we're very excited about, Target, Kohl's, and CVS, have estimated net development costs at completion in excess of $100m, and with an average forecasted and OI yield that exceeds 11 percent. The Colorado centers will be anchored by King Supers, a grocer chain that is dominant in that market. Republic's will anchor the Florida site, while the development in Texas is an expansion of an important relationship of ours with HEB. As a matter of fact, HEB will be our 50 percent partner on this development.

It's important to note the diversity of the anchors in the pipeline. Relationships with most of the leading grocers and other leading retailers allow Regency to selectively allocate our investment dollars to developments that are located in attractive markets and that have strong anchor tenants. Multiple relationships and expertise across the country is enabling us to receive more than our fair share of development opportunities, even in these more challenging times.

Regency currently has 34 developments and redevelopments that are in process. The estimated total invested capital at completion of these projects is in excess of $600m on a gross basis, and a little over $500m on a net basis, which is total cost less the proceeds from out-parcel sales and tenant reimbursements. When completed, these developments should generate an unleveraged return on investment of 10 to 10.5 percent, and create between $75m and $100m of value. Including tenant owned GLA, these developments are 74 percent pre-leased with an additional 5 percent committed, and once again, as you may remember, we count committed as those spaces that are under Letter of Intent and engaged in final lease negotiations.

As a result, our developments are less than 50 percent funded and almost 80 percent leased and committed. We continue to achieve strong leasing results throughout our in process development, which speaks to the quality of these developments.

The development pipeline for 2003 also promises another year of growth. Our investment officers have already identified opportunities well in excess of our $300m plan for the year. The probability of closing on these opportunities varies from project to project, but we remain optimistic that we'll be able to achieve our goal for development starts in 2003.

Regency also acquired two centers in the fourth quarter for our partnership with Oregon. The first is a Pavilion's, which is a division of Safeway, and a Save-On Drugs anchor center in Seal Beach, California. The infield center is located in the heart of an affluent beach community and offers a great opportunity in the future for redevelopment.

The second, Village Center in Dulles, is located in a suburb of Washington, D.C., that is one of the most affluent counties in the U.S., and is the second largest retail market in the eastern half of the country. This dominant community center has 305,000 square feet and is 98 percent leased, and the purchase solidifies our presence in the D.C. market.

In 2002, the company's for-sale development program generated $21m of profits, and when you combine this $21m with our out-parcel gains, total profits from development sales were approximately $28m. We sold 25 for-sale development properties, at an average cap rate of 8.5 percent, with total proceeds to Regency exceeding $200m. As you will note in the supplemental, where we indicate [technical difficulty], we expected sales to stabilize developments to be in the range of 40 to 80 percent. We anticipate continuing to take advantage of the sale market in 2003, which is currently even more favorable than last year.

We also sold 28 operating properties throughout the year, with proceeds to Regency of approximately $258m, which produced approximately an $8.8m non FFO gain. Eight of these properties were sold to the previously established joint venture with Macquarie Countrywide Trust of Australia, where Regency has a 25 percent ownership interest that we retained in the property.

It's worth noting that we've made substantial progress towards exiting tertiary markets. 96 percent of Regency centers are now located in the top 100 markets in the country. Based upon these results, the company had an excellent year executing the center recycling strategy, effectively generating capital for redeployment into developments and acquisitions for joint ventures. Clearly, our success was aided by a strong demand for grocery-anchored properties. In addition, we believe that it makes compelling sense to sell lower quality and lower growth centers, and to reinvest the proceeds into high quality developments and acquisitions, especially as part of ventures. We expect these developments and acquisitions to generate attractive returns on our equity capital and sustainable growth in net operating income.

Now, let's take a brief look at the company's financial position. At year end, we had over $500m available under our unsecured credit facility, and our debt-to-asset ratio was a little in excess of 40 percent. Our coverage remains sound at 3.1 times for interest only and a fixed charge ratio of 2.1 times. Nearly 82 percent of our assets and NOI are unsecured. We continue to maintain a significant amount of financial flexibility to fund growth without compromising our investment grade rating.

In summary, in spite of the continued sluggishness in many sectors of the economy, Regency had a strong 2002. The fundamentals of our core portfolio and the in process developments remain sound and sound-plus. Regency's center recycling strategy has continued to be an effective way to enhance earnings while continuously improving the quality of the portfolio and the quality of the earnings stream. Though we remain cautious in this economic environment, and one needs to be, we are optimistic about the outlook for the grocery anchored sector, and our value-creating capabilities, both on the operations and investment side.

For 2003, we maintain our previous guidance of FFO per share in the range of $3.02 to $3.06, and with the range of 62 cents to 66 cents per share for the first quarter. It's important to reiterate, especially in the current economic environment, that the guidance is based upon a number of critical assumptions including, but certainly not limited to, continued NLI growth, progress with our development program, and the closing of the sale of a number of developments, operating properties, and out-parcels. We now welcome your questions.

At this time, I would like to remind everyone, in order to ask a question, please press *, then the number 1, on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Michael Billerman with Goldman, Sachs.

Good morning, gentlemen, and [simultaneous speakers]. Congratulations on the quarter.

Thank you.

I was wondering if you could tell us in terms of development profits what rolls into the 302 to 306 guidance?

Last year, I think our number was about $27m, combined out-parcels and development for-sales. And I think the number will be in that range in our expectation, if we achieve our plan for 2003; somewhere in the $25m to $30m range.

And is that tilted the same way towards back-ended as it was in this previous year?

Yes, Michael.

Okay. Just a couple of other questions. When we were looking at the top-paying list in the quarter, we noticed some things that came off, and part of it may have been due to asset sales, but I was wondering if we could get some clarity. It seemed that Walmart and Barnes & Noble dropped off the list?

Yes, and quite frankly, both of those were a result of asset sales. As you've seen, we're continuing to sell our non-core developments like Emeridge, and Barnes & Noble is part of that. And then we're looking in tertiary markets, where we have locations that obviously we don't want to own, and Walmart was the result of some of those as well. So you're going to see somewhat of a mix change. Hollywood Video also came off, as you noticed, and that was a result of some of these asset sales as well. So nothing significant - we had high renewals; everything else is strong. Just a result of our disposition program.

Does that [simultaneous speakers] from the number of tenants paying above half a percent of annualized base rent? The total number went from 23 to 17.

That's a result of sales.

Okay. And you mentioned, Bruce, in your comments, the building improvement cost in the quarter being high. What was the driver of that?

Well, building improvement was basically three facades that we were doing. As I indicated in my comments, the number for 2003 will be more like what it was in 2002 as opposed to 2001.

Okay. And lastly, on the tenant recovery, is there anything that caused that to be a little bit lower than anticipated?

That's really the result of the fact that when we expense it, we expense it on a cash basis, but the tenants actually pay on an accrual basis. So if you look at overall, our recoveries have been very consistent. We continue that, if you look at our guidance going forward. So nothing significant there.

This is a question that continues to come up. Our guidance in that range is 78 percent, 82 percent. If you look at us historically, our recapture rate is 79 to 80 percent.

Great.

Our next question comes from James Sullivan with Regency Centers [sic].

Good morning, guys. [General laughter.]

Hey, welcome to the company!

I have a question for you on the same store numbers. Your forecast for '03 of 2 to 2.5 percent is the same as you got at the end of the last quarter, but your rental growth forecast has been reduced considerably from a range of 6 to 8 percent down to a range of 3 to 6 percent. The first part of the question, why is the rental growth number being reduced? And secondly, how are you achieving the same internal growth rate with that reduction?

A couple things. One is, as you know, we had very strong rental growth in third and fourth quarter, which obviously that's going to affect your overall same-store growth for '03. And we only turn about 8 percent of our leases, so even if we get lower rent growth, that is effect '04, and you'd see very little impact in '03, and that 2 to 2.5 percent range covers it.

Why do we believe that there's potential slowdown in rent growth? We're just being cautious. I mean, I just think you can't bury your head in the sand and think that the type of double-digit increase in rent growth that we've been receiving year after year, that at some point in time, our sector in that portfolio won't be somewhat affected by it. So it's really just being cautious, Jim. Nothing that we know, and nothing that we see today, but we're just trying to be conservative.

Mary Lou, a related question to that. When you look at your '03 expirations, you made the point about what rolled. It does seem to be a somewhat smaller role than typical. I'm not sure that that's because you've already renegotiated some leases or not; I don't know if you actually reduced that '03 number as you negotiate them. But a question: how much of your '03 schedule of expirations have you already kind of negotiated or committed to? At this point?

For the most part, we've had a fairly decent, so far, first quarter, in terms of renegotiating those leases. But not that much, quite frankly.

Not that much? Just a point of clarification, I guess, Bruce probably answering this. Same store growth and rental growth - are they both in cash or GAAP basis?

Yes, they're on cash basis.

Both on cash.

Thank you for the clarification.

Okay. A question in terms of your margins on the asset sales, it did seem to be the case generally that the cap rate on what you sold in the fourth quarter was lower on average than what you had sold throughout the year, and I know that part of Hap's comments about cap rates coming down - is that what that's a product of, or is it more a result of the type of asset that you sold and where it was located?

A combination of the two. But it is a very favorable environment to be a seller in right now, and we certainly took advantage of it last year, both as far as some of these developments, which you might consider to be higher quality properties, contributions to joint ventures, and then some of our lower quality operating properties. But primarily cap rates, but it's also a combination of, as you said, what the returns might have been on the property.

And so should we expect that your margin on asset sales in terms of development for-sale centers would be probably higher next year than it was this year?

I think we expect to continue the current margins that we've had, and to the extent that we can expand those margins, that would be very nice.

And one other question about the type of center that you're selling and the cap rate. Have you seen - and I know that of course, historically you've specialized in the grocery market centers, but you have begun to do more in power center type projects - I know that they're still very much a minority. But have you seen cap rates come down more on power centers?

Cap rates have also reduced significantly on power centers.

Is it sort of, in your view, kind of the same level you've seen with the grocery anchor?

No, not quite; I mean, you're seeing top quality grocery-anchored centers selling below 8 cap rates, but you're seeing the power centers selling below 9 cap rates right now. As a matter of fact, one of which we sold is -- the power portion of one of the centers, the big box portion, sold at like an 8.5 cap rate. There's very, very little [indiscernible] of that growth.

Okay. Final question. Mary Lou, you didn't talk about tenant sales trends. What can you tell us about what you know, either about the side shops or the grocers?

On the grocer sales, overall are fairly flat and that's a result of the economy as well as Walmart. Side shop tenants, we're still seeing good growth from all the food resources; the Subways and a lot of the service business continue. When I say good, I mean 2 to 4 percent. Certainly not the 8 to 10 percent that we were seeing before that. Discounter sales are still slightly above last year, but not nearly the trends that they were. You're seeing apparel growth, which we don't have a lot, continue to slump. You're seeing the Warehouse Music, the Radio Shack, Hallmark and GNC's - those are continuing to have sales declines. So I would say, probably if you look overall at our centers, comp store sales are probably flat to slightly up. And that's an estimation, but that's probably pretty realistic.

And you've got to remember, we don't get monthly sales reports like the other malls do.

One of the things that we're doing, Jim, that I think will be interesting, is we have an event in March, in Jacksonville, where we invite our PCA tenants when we're doing a real estate round table with the President and Chairman and the head of real estate of a good portion of our PCA tenants to talk about retail sales tenants; what they think, how they see their growth plans, where they're closing markets, etc. So probably next quarter, I'll be able to give you more specific indication of where they're coming from.

Good. Okay, look forward to it. Thank you.

Thanks, Jim.

Your next question comes from Paul Puryear with Raymond James.

Hey, good morning, great quarter. Hap, on the subject of Walmart, could you talk about that a little bit? We're hearing so much about it, obviously. But I guess specifically, any comments from the grocery anchors that you deal with and what they think about Walmart's positioning in the market.

You know, I think they're very focused on Walmart, and I think that they're focused on competing as many ways as they can. For instance, you all may have read in Chicago that Safeway - this is kind of an remarkable announcement - announced that they were going to sell the Dominick's chain because they couldn't get labor concessions from the union. So they're focused on that but I think that we still believe that our strategy of focusing on dominant supermarket chains, not only in specific markets but in the sub market and trade area that have significant sales and going into areas where we've got to track the demographics seems to continue to be a proven formula for sustainable success, and in conversations with the supermarkets, they've reinforced that.

So, who do you see as being the most vulnerable, given their positioning, relative to where Walmart's position themselves on the marketplace?

I think wherever you see a supermarket chain that is a laggard in the market, whether it's a national chain or a local chain, and wherever you see a chain not producing, maybe except in an infill area, but not producing significant sales in a particular corner, a particular neighborhood, I think they're susceptible not only to Walmart but to their other competitors. And I think those, from what we've found, are the key metrics. Because we've had Walmart superstores open up across the street from $25m to $30m producing supermarkets, and even though there's a blunt for a year or two, they rebound pretty quickly. But where we've seen difficulties is where those stores have been doing significantly below $20m in sales. Or have been a weak player in the market.

One more question. Could you just comment on, in the for-sale market, who are the buyers? And are you seeing any change in the makeup of the buyers?

There's an unbelievable amount of 1031 money and capital, especially in California, that is out there. But you are also seeing a number of institutions, so I guess that's probably primarily individual money. But you're seeing a tremendous amount of institutional capital that's out there on the part of the pension funds. So it's a significant amount of capital, and that's one reason why our expectation for acquisitions is in the $100m or less range for the year. And that might even be difficult to achieve, given the tremendous demand and unbelievable pricing, for us.

Okay.

And when we've been able to move - one of these greatly encouraging things, and even though, as Bruce mentioned, it was pretty darn dilutive to our FFO last year, but we moved out close to $200m of property that were either obviously lower quality properties or where we felt they were, so to speak, a Walmart risk. Or possibly, you know, some other supermarket dynamic risk.

Okay. Thanks.

Your next question comes from Matt Ostrower with Morgan Stanley.

Morning. Just to go back again on the development for-sale profits; would you say that those results were in line with what you would have expected three or six months ago?

Yes.

Okay. And you did say that margins have increased? Or did margins come in higher than you were expecting? They're in general, improving, right?

Margins are improving.

Okay. And can you explain - it looked to me like there was some kind of a tax true-up or something that happened there; there was a positive tax contribution?

Yes, effectively, the company tries to be extremely - as most companies would - tries to be extremely tax-efficient with respect to whether we're paying taxes; that was a significant variance obviously from last year, because we had a provision for taxes in 2001, as you know. But we're just more efficient. We try to do all of our joint venture sales on a tax-deferred basis, and we have less taxable income effectively in the third party sales, which is where this tax is generated.

That was a true-up, then, effectively?

Yes, exactly. And I wouldn't look at that as being a run rate situation.

Right. I guess what is confusing to me -- and it sounds like the development for-sale business produced what you were expecting - but when you sort of include the taxes and higher margins and everything, it looks like that came in pretty darn robust; maybe, certainly above my expectations, I would guess a little bit above yours; net net including the taxes. And yet you're reporting for the same store NOI that was basically in line, maybe a little bit above, what we were originally expecting, and the results sort of came in as expected. So I just sort of wondered why there wasn't a little bit more of a positive surprise because of the robust development for-sale component.

Primarily, we sold a lot of more properties, and that put pressure on the bottom line there. We had 8 cents we had to overcome just in the disposition side.

Right. Were the development sales - I looked at your numbers last night; they looked pretty much in line - were they a little bit ahead of what you were expecting originally? In the fourth quarter, I mean?

Not specifically in the fourth quarter. I mean, effectively what we did in the fourth quarter is what we thought we were going to do in the third quarter.

Okay. And just a couple more detailed questions. The revenue line - there was a sequential decline; that was purely a product of sort of dispositions of core assets net of the acquisition activity?

Yes.

Okay. And the finally, it looks to me like non-real estate depreciations are ticked up, if I'm measuring that the right way? Can you explain anything about that, or am I not looking at that the right way?

When I saw the question, I wasn't sure you were looking at that the right way. I think that may effectively be an increased leasing commissions. The non-real estate depreciation is a relatively small portion of --

What I'm doing is, I'm subtracting the GAAP depreciation on the income statement from your FFO reconciliation schedule, which is sort of a different --

Then I think it's leasing commissions.

Okay. And just on a more general level, you mentioned Safeway's decision to exit Chicago. Can you sort of expand on that a little bit? My guess is it will be sort of interesting to see if there's a buyer for Dominick's. Do you have any doubts about that? I think you guys have one asset with the Dominick's, but just in general, does this tell us anything about the supermarket environment? Dominick's, I would imagine, since they're in your portfolio, you would view as a pretty dominant type of grocer?

Yes, but we view that that chain will be sold off and Safeway will - maybe not monetarily; this is from afar guess - but they'll sell it off; they may break - for example, somebody may buy the inner city property, and that may be a different property buyer than who buys the suburban stuff. But what we found, for instance; Albertsons exited Nashville, and the Albertsons that we had was purchased by, when Publix moved into the market - so once again, and that was in a great location - so if you're in the right location, in the right corner, in the right neighborhood. And that happened to us - we had a number of A&P's in Atlanta, and every one of those is now operated by a successful Public's.

Right. So it will be about location in this case as well.

Absolutely. But I'm sure there will be lower-performing stores that will be shunted. And I think also, as a result of this over the next period of time, that the unions are going to have to recognize the competitive situations that the supermarkets are in. Because not only was, from what I understand, was the total wages and benefits paid by Dominick's higher than Walmart, but it was also higher than their number 1 competitors, Jewels.

Right. Okay, thanks, guys.

Your next question comes from Ross Nussbaum, with Salomon Smith Barney.

Hi, good morning. I want to follow up on a couple of Matt's questions, actually. Bruce, this depreciation issue - we picked up on it as well. Your non-real estate depreciation in the fourth quarter, if you just take depreciation from the income statement and then the real estate depreciation from the FFO reconciliation doubled from $2m to $4m in the fourth quarter, year over year. So it doesn't look like it was the leasing commission amortization.

Again, without actually looking at your numbers, I don't come to that conclusion from our own numbers. So I can't explain why yours are different. The component of that number, typically it's depreciation from real estate, depreciation on non-real estate, and you know, that number basically would not be at that level. I mean, [simultaneous speakers] the depreciation for non-real estate was a total of $1.9m for the year.

The income statement has depreciation of $20.2m in the fourth quarter? And your FFO reconciliation shows depreciation expense on real property of $16.2m That's a $4m difference. If $2m of it was the non-real estate depreciation, I guess what was the other $2m?

I think the difference is that we sell assets, and it was somewhat of a timing difference between third and four quarter, but if there's any depreciation for GAAP purposes that's required on development properties, we don't add that back for FFO purposes. And that's always going to drive our depreciation expense, for the GAAP to be higher than depreciation expense for FFO purposes. That might be some of that difference that you're looking at. As well, we also accelerated depreciation on certain costs, whether they be in building improvement costs or commissions costs associated with the closing of K-Mart. And I think that that play was also a driver of that increase.

Okay. Turning to Chicago and what happened with Dominick's, I was kind of interested there because Dominick's was really a strong number 2 player to Albertsons - I mean, it looks like they had 20, 25 percent market share. Does this kind of put a chink in your armor in terms of your theory that, really the number 1 and number 2 grosser are safe from the Walmart threat? Because Dominick's was a pretty decent number 2.

I would say that the answer to that is no because that chain is going to be sold, and the locations, especially those locations that are producing, and it includes our two centers, you know, well in excess of $20m in sales. But it does indicate that the economics - there are a lot of factors involved in the economics of a supermarket chain, and these chains are very focused on that. And I think these locations will be taken over by the buyer.

I would say one thing, though. I think that Dominick's was a very strong player. Safeway, however, as strong as they are as a grosser, had a difficult time -- and they would be the person to say it - with that merger. They changed the content to their private label, and got rid of a lot of name brands, and turned off the consumer to a pretty strong extent in that market. So I think at this time, Safeway was facing decreasing company store sales; also then, obviously the negotiations with the unions paying higher labor costs, then competing with a Walmart, but primarily with Albertsons Jewel. And really feeling it was the best thing for them to walk out of that market.

I do believe, as Hap said, because we've seen this over and over again, if you have the right real estate, with the right average household income, right density, typically a stronger grocer in that market, which you have to look at it as a strong grocer in that market, will take that space. But there will be some closings where that isn't the case in the Chicago area. So I think you have to look at the whole package; it's an operating issue as well as a union wage issue.

And I think the union wage issue is as much symbolism that Safeway is very focused on this, and they're trying to send a shot across the bell, to the unions that they're dealing with, that they've got to get their wages over the next several years competitive with Walmart and their other competitors.

Okay. On the development side, if you're looking at, let's call it flat gains from outparcels and developments for-sale, kind of on a combined basis, looking at the last page of your Supplemental, it looks like your outparcel sales you're forecasting an increase. Should that imply that you're going to see lower profits from developments for-sale?

Yes.

Okay. And then the final question on the development front is, I look at your guidance for the full year of '03 and there's a 4 cent variance there. And Hap, I think you had said earlier that you're targeting to sell anywhere between 40 and 80 percent of your developments? And to me, it seems like your FFO guidance would be a little wider given that range on what you may or may not sell on the development side.

At this point in time, Ross, as we said, $3.02 to $3.06 is dependent upon our ability to implement our plan and to be able to sell the properties that we're targeting for-sale to sell. We still feel reasonably comfortable that we can do that today, but if something happens out there from either a lease-up standpoint -- which we feel good about today, but that can change - or in the capital markets, that would change. But if we're able to implement our plan, then the range ought to be in the $3.02 to $3.06 a share range. But I think you've got to remember that there are a lot of transactions that need to occur to make that happen.

Do you think it's a fair statement that you're selling more developments today than you thought you would have, 12 or 18 months ago?

Yes, I think we are taking advantage of a pretty attractive market.

Thank you.

Your next question comes from Jeff Donnelly with Wachovia.

Good morning, guys. Most of my questions have been answered. I just have a few follow-ups. Bruce, on the phasing of outparcel sales, is it safe to assume that the gains you guys are looking for will be back-ended into, say, Q3 and Q4 of '03?

Yes, that's been the historical record, and that's what we expected in '03 as well.

Okay. And then I guess one for Hap is, and I think something else had touched on this earlier - in 2002, the cap rates on your dispositions and operators were in the mid 9 cap range, and given where we're seeing pricing in your 8 to 8.5 cap expectation on acquisitions, do you feel that your 9 to 10 percent cap rate guidance for '03 dispositions is conservative, maybe by 50 basis points?

No, because remember, we're taking the, in effect, the very bottom part - you know, if we were selling the top part of the portfolio, you may be seeing some stuff with 7's in there. We're taking the very bottom part of the portfolio. You may note, if you look at the Supplemental, in the fourth quarter, as a result of what we sold in the fourth quarter we no longer have any properties in Mississippi. And the cap rate on the shopping center in Columbia, Mississippi, or Leesedale, Mississippi, is significantly different than a cap rate in Orange County, California.

So that has more to do with it and you know, we're being as proactive as we can be. I think the cap rates probably varied what we [indiscernible] in the fourth quarter, between 7.5 percent cap rate on a center that we had, a Publix-anchored center that we had some real concerns about - and something in the low to mid teens. But we think that the average rate is going to be between 9 and 10 percent. And it could be, Jeff, interestingly enough, if we're more successful selling the bottom 1 percent of the portfolio, that number could be closer to 10. And if that number is - I could maybe call it the 90th percentile from a quality standpoint - that number could be closer to 9.

I wouldn't expect you to match your acquisition cap rate, but the pricing out there has gotten pretty [saucy] [phonetic], even in some markets that you describe as quite tertiary.

Yes, but not for - for example, with a Shadow-anchored -- I mean, I couldn't be happier at a [phonetic] Shadow-anchored Walmart, Winn Dixie-anchored shopping center. And we feel real good, because we are really going out there and selling that bottom 1, 2, 3 percent of the portfolio.

I guess a question for Bruce would be, on your recovery rate, 82 percent in the top end of your '03 guidance - how achievable do you think that rate is, considering where it's been in the last 2 to 3 years?

It's very achievable. I mean, that's how we negotiate our leases; it's very easy to predict. you know, effectively what you lose in the number - the friction in that number - is effectively the fact that your majors aren't paying the full share of property management fees, and sometimes not a full contribution to insurance. So basically, that's where your friction is. So you know what it is. If you look historically, you'll see that on an annual basis -- and Mary Lou talked about the reason we have quarter to quarter variances, is because we're paying expenses on a cash basis and we're accruing the recovery that we'll gain from our tenants. So there's a difference in what that happens. At the end of the year, then we match it all up. And that's what happened. So I would expect that we would continue on an annual basis to average 79 to 80 percent. We use the range of 78 to 82 percent because that's kind of where it falls quarter to quarter.

Okay. And just one last one. Is there any update you can provide - just thought I would ask - on standstill agreements in your discussions with the major shareholders?

Standstill agreements. Like with G.E.?

Right.

The standstill agreement expires in April, and I think the important thing to reiterate there is that the standstill agreement operates in April; we've had a very good working relationship with G.E. They're a member of the Board also, voted with the rest of the Board to declare the quarterly dividends, so an indication of the cooperation that's going on there. And that you have a group of independent Directors, as a whole Board, but a group of independent Directors that will always be in the majority of the Board, who are acutely focused on maximizing shareholder value and protecting the interests of the public shareholders.

Thanks, guys.

Your next question comes from Greg Andrews with Green Street Advisors.

Good morning.

Good morning.

I guess Jim Sullivan was so pleased to hear you were Employer of the Year that he decided to - [general laughter].

He's joining us. Anybody else?

You might find a few others out there, too. A lot of my questions have been answered here, but one of my big questions is - I applaud the policy of your actions in disposing of the more vulnerable properties, and it does seem to have a pretty big impact in terms of diluting your earnings, but it's probably the right long-term move. I guess my question is, how long does this go on? I mean, I see for '03 you've got $100m to 125m.

As compared to about $185m to $200m in '02.

Yeah, I mean - obviously, conditions have changed, and there will always be something new, but from where you stand today, how much of the portfolio are you targeting over the next few years beyond this next year for this kind of sale?

Greg, I think that the bottom 2 percent today will, in effect, probably - I think we've gotten rid of about half of the problematic centers; we're probably getting rid of half of the remainder this year. But I would think that on an ongoing basis, that the company will continue to take the bottom part of the portfolio. The good part about what's going to happen in the future is that rather than dealing with, in effect, 9 to 10 percent cap rates, versus the point that Jeff Donnelly was making, which is as opposed to more market-oriented cap rates, we think that the quality of the portfolio - that part of the portfolio - and once again, I'd put a part of our portfolio up against anything out there, even now more so than two years ago - but those cap rates ought to be coming down in relationship to market. So I think that you'll see this recycling continuing to be part of our strategy; it's just that we're kind of facing the music right now, and the difference between the bottom 1 percent and the top 1 percent of the portfolio is pretty significant from a quality - from a cap rate standpoint, but we're narrowing that gap quickly.

Okay. So just to kind of recap, '02 was probably somewhat of a watershed in terms of both the volume and perhaps the cap rate - how high the cap rate was for those dispositions. And it probably won't be - the volume won't be as high going forward.

Right. But I would say that - something in the $100m range, we think is something that is a healthy discipline to implement. And as a matter of fact, if you take that $100m across $300m of assets, in effect you're selling the bottom 10 percent of your portfolio every three years.

Right. No, I think that's great, and I'm frankly somewhere surprised that [technical difficulty] appears doing something similar. In terms of the development yield, the bigger that to my mind used to be about 10.5; now it's 10 to 10.5; it makes sense to me that there would be some slippage there, given that cap rates are coming down. But I guess I'm impressed with the fact that you're maintaining the volume of starts that you are, at a time when it seems like some of the anchors, particularly the grosser, are pulling in their horns. I understand, for example, that Safeway's cap ex budget is probably down 25 percent. Is that making it harder for you to find the development deals and the good returns?

It is more challenging out there, but like you, I'm very pleasantly surprised and I think that is a real credit to the investment team that we have in place, in key markets throughout the country and to the relationships that we have with the leading supermarket tenants - I mean, supermarkets in the country. I mentioned HEB, our joint venture. We've got a joint venture going with Publix. We've had joint ventures in the past; we have a current joint venture with [technical difficulty] in place.

And I think that speaks volumes about the quality of the relationship and then the quality of our people, that I think we're going to continue to get more than our fair share. What is also kind of interesting though, as you indicated, is there may have been, and we discussed this at our Board meeting, about a 25 basis point slippage in shopping centers [technical difficulty] - in their cap rates. And when you compare that with probably about a 50 to 100 basis points slippage in cap rates on the acquisition side, I think it's pretty remarkable that we've been able to hold that off. But what we're seeing on the pipeline, which as we indicated is well in excess of a $300m plan, knock on wood, we've been able to continue to hold the returns at a reasonable level. And a pretty spectacular level when you consider the values being created there.

Okay. And I think Barbara had one or two follow-up questions?

I just had a question on interest income. How much was recorded in '01 and '02?

In '01, we recorded $5.7m of interest income, and 2002 we reported $2.4m.

And that is recorded in interest expense, correct?

Yes, we reported net interest expense.

Right. And the decline - what was the cause of that? Just lower rates?

Primarily we had a significant balance of net receivables outstanding for the entire year of 2001, where we did some direct financing on sales. The majority of that receivable paid off [technical difficulty] created that reduction of overall interest income.

Okay.

Thanks.

Your next question comes from James Sullivan with Prudential Securities.

You lost us already, Jim, huh?

Yes, let's talk about this Employer of the Year stuff. [General laughter.] No, actually, partly related to that - your SG&A number, we talked about it in the third quarter; it was, of course, a good deal higher on a year over year basis in Q3; it's come back down in line here in Q4. But for the full year, it still is a little bit higher as a percentage of revenues than it was the prior year. What should we expect going forward in terms of increases in this line item?

I think you're going to continue to see some increases. Maybe not quite as high as the increase you saw this year. Remember that this year specifically, we opened two offices as part of our mid-Atlantic expansion, and the costs associated with those offices, with new employees, etc., is part of the increase for this year.

So would you guesstimate that in the low single digit or mid single digit increase next year?

Mid single digits.

Okay. And then final question from me, in terms of your joint ventures, if you could just remind me, how much capacity is left in those joint ventures to acquire assets, and if there is a cap on each one?

The long one we have, really, a commitment on with Oregon; that's $70m. So that's $70m left in that, although they've expressed an interest that they might like to do some more. That's kind of a 'might.' And then the other joint ventures with Macquarie, there is active interest in doing more activity with them.

And to what extent are the criteria different between those two JV's?

Well, right now, Oregon is acquisition JV. Macquarie is basically has been, and as you know, in the last year, we did a number of joint venture developments with them - development sales, where we achieved the full value on the property.

Okay, very good. Thanks.

At this time, there are no further questions. Are there any closing remarks?

We thank everybody for your active participation this morning, and I can see that we need to ask Lisa to time this call next time in conflict with - [general laughter] --

[Laughing] - with somebody else.

No, it's very nice to have the active participation and we appreciate that, and appreciate your continuing interest in the company. Thank you, and everybody have a great day.

Thanks.

Thank you for participating in today's Regency Centers Corporation fourth quarter and year-end earnings conference call. You may now disconnect.