Regency Centers Corp (REG) 2003 Q3 法說會逐字稿

Good morning, my name is Laura and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regency Centers Corporation third quarter 2003 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 star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Ms. Lisa Palmer, Senior Vice President of capital market.

Thank you, Laura good morning. Before we start, I'd first like to mention that we have no other press release that are now crossing the wires. That's just a joke. I would like to read the Safe Harbor statement. In addition to historical information this conference call contains forward-looking statements under the federal securities law. These statements are based on current expectations, 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 from those expressed or implied by such statements. national and local economic conditions, financial difficulties of tenants, competitive market conditions, including the pricing of acquisitions and sales of properties and out parcels (ph). Changes in expected leasing activity and market rents, timing of acquisitions, development starts, and sales of properties and out parcels as well as 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 investors, investment analysts and media. At the same time, Regency will keep this information publicly available on its web site, www.RegencyCenters.com. During this call, management may refer to certain non-GAAP financial measures which we believe to be meaningful when discussing results in the REIT industry. Please see our supplemental information package on our web site for a reconciliation of these non-GAAP financial measures for the most directly comparable financial measures come calculated and presented in accordance with GAAP. On the call this morning are Hap Stein, chairman and CEO, Mary Lou Fiala, Bruce Johnson, and Chris Leavitt, I'll now turn the call over to Bruce.

Thank you, Lisa, and good morning to all those on the call. September30th I ended another positive quarter for Regency. We believe our results and expectations for the remainder of the year demonstrate that our strategy of dominant [inaudible] tenants and attractive demographics and superior real estate provides an operating portfolio that benefits from these sustainable competitive advantages. As a result, we expect to continue to grow same property net operating income. In addition, substantial value and income are being created through disciplined execution of our capital recycling, development and joint venture strategies. These key ingredients of Regency's business model have positioned us to accelerate our FFO per share growth rate. FFO for the quarter was 78 cents per share, and $2.06 per share for the first nine months of the year. Unfortunately, last month, SEC's prodding, provided revised guidance for the calculation of FFO, which has added some confusion for investors and analysts. We try to mitigate this confusion with our October 21, press release. Hopefully the following comments bring more clarity to this issue. The revised guidance clarified original issuance cost associated with redemption of preferred stock, and impairment write down should be included in calculation of FFO. Historically we have added non-cash expenses into net income in our calculation of FFO, as many other companies did as well. In the first and third quarters of this year, we recognized a $1.9 million charge and a $1.2 million charge respectively for the original issuance costs associated with redemption of $155 million of preferred units. Also in the second quarter, we recognized an impairment write down of $2 million. In accordance with [inaudible] recent announcement these have been reversed from the FFO calculation for the third quarter and for the year to date. As a result, Regency's third quarter and year to date FFO include charges of 2 cents per share and 9 cents per share respectively.

Absent of these charges, FFO was 80 cents per share for the third quarter, and $2.15 per share year to date. Year to date FFO per share was $2.15 represents 7 cents of growth over last year's similar FFO per share calculation of $2.08. This 7 cents growth was achieved despite a 30-cent negative impact from Regency's aggressive sales activity in the last few years. Overcoming this impact were the positive results from the operating portfolio and the execution of development sales and joint venture strategies. We believe it has made compelling sense to take advantage of historically high demand low cap rates for shopping centers to sell and venture developments and cull lower quality and non-strategic centers from the portfolio that may be more susceptible to the risks of Wal-Mart and the dynamics of the supermarket industry. Now I will turn the call over to Mary Lou to talk about our operating portfolio.

Thank you, Bruce. And good morning, everyone. Strong leasing demand, same store NOI growth continued in the third quarter. Same property NOI growth was 3% for the quarter and 2.6% year to date, and occupancy remained high at 95.3%. Rent growth sustained its upward trend to 11.2% for the quarter and 10% year to date. This rent growth is on a same space cash basis. This puts year to date [inaudible] leased at 3.4 million square feet, an average of over a million square feet per quarter. Our renewal percentage remains strong at 74.3%. Additionally, our early move outs are nearly half compared to this time last year, making the leasing results even more impressive as less space has turned over. Our Premier Customer Initiative or PCI program continues to shine. Rent growth for PCI tenants year to date is 14.4%, compared to the 11% for the portfolio as a whole. The PCI group also had fewer move outs. 1.9% compared to the portfolio year to date of 2.3% and they both slightly higher renewal at 75% versus 74%. The PCI program is not only a driver of the operating results, but is also a great benefit to the development program. Each potential development we evaluate involves a thorough due diligence process that includes verifying the demand for the side shop space. With outstanding PC I relationship our team of leasing specialists is able to discuss with these potential developments with our PCI customers to better gauge the demand for the local space. As a result, of these relationships and the anchor commitment, a significant percentage is committed even before commencement of construction. As a matter of fact, of the 34 shopping centers currently under development, 83% of the GOA is leased and committed while only 65% is funded. The relationships that we have formed with these national regional PCI retailers have enabled us to build proprietary database that provides tenant profiling in terms of preferred space size, complementary uses, targeted demographics and preferred co-tenancy. This database enables us to identify the development opportunities that best suit a retailers growth requirements. As a result, we are able to strategically lease upward development and do it in less time.

The symbiotic relationship allows the retailer meet their expansion needs and enables Regency to develop a successfully leased shopping center with retailers hand picked to suit the demographics of that community. These relationships have also allowed to us improve processes at Regency, by working closely with the retailers and understanding what is most important to them. For example, through the introduction of hot dogs (ph), our proprietary lease creation software, we've created an electronic standardized lease creation program that enables us to tailor leases to a specific retailer's specifications. This saves time and negotiations, and has significantly reduced our downtime on vacant spaces. It's a proactive approach to leasing that has paid off in occupancy, but stronger rent growth, same store NOI, and even our renewal percentage. Before I turn the call over to Hap I'd like to touch on the southern California fires and the grocer strikes. Fortunately, the southern California fires did not damage any of our centers or any of our people's homes. But our thoughts and our prayers are with all of those who have been affected by this tragedy. And as for the strike, Regency Centers have been affected but not significantly. As you may know, the united food and commercial workers union has staged strikes against Safeway, VON's, Kroger, Ralph [inaudible] in a contract dispute over health care costs. We have seen shoppers trying to honor the strike, shopping elsewhere but as the strike drags on, shoppers are returning to their neighborhood stores out of convenience. We also feel that with the Thanksgiving holiday approaching, convenience will draw the shoppers back into the local supermarkets. We do not expect the strike to impact our 2003 performance in any material way. As in our view, the strike has positive implications. By this, I mean that it's important that the leading supermarket chains control their labor costs to better compete with Wal-Mart. I will now turn the call over to Hap to give us an update on capital recycling and our investment activity, as well as the outlook for the company. Hap.

Thanks, Mary Lou, and good morning. As Mary Lou and Bruce have reported, our operating portfolio continues to grow and to outperform. We attribute this success to Regency's disciplined investment strategy and operating system. We have applied the same discipline and value-added approach to our development, capital recycling and joint venture programs. This quarter we sold 6 properties. Three were dispositions of non strategic operating properties that sold for an average cap rate of 9.3% and generated proceeds of $18.7 million. Bringing total dispositions for the year to $48 million. Based upon properties currently under contract for sale, we expect to achieve guidance which is between 175 million and $200 million of dispositions. The other three properties sold in the quarter were previously stabilized developments, sold into our joint venture with Macquarie Countrywide at gross sales of $103.3 million and cap rates that averaged 7.6%. The relationship with Macquarie continues to grow has the demand for [inaudible] development continues to be strong. Since the inception of the partnership, just over two years ago, we have sold 17 developments and contributed 7 operating properties into the venture representing a value of $335 million. The proceeds from these dispositions are reinvested into our developments. Where significant value is being created. This quarter we started six new developments, which represent an estimated $52 million of invested capital at completion, with an estimated NOI yield of 10.6%. These six developments are in six different states, all with differing anchors, illustrating the strength and diversity of the company's development program.

Anchors include market leading grocers such as Publix, Kroger, Safeway, Stata Brothers and Albertsons and dominant discounters such the Target, Wal-Mart and KOHLS. This brings the total [inaudible] development pipeline to 34 properties in 11 states. The estimated total capital at completion of these properties is approximately 444 -- $440 million. When completed, these development projects should generate an unleveraged return on investment of 10 to 10.5%. As Mary Lou mentioned, there are currently 83% leased and committed and 65% funded. Demand for available space remains high with our 1.4 million square feet leased or renewed so far this year. In spite of a tremendous amount of competition, retrenchment on the part of several supermarket anchors and the ever increasing challenges in the [inaudible] process Regency’s pipeline of new developments is larger than it has ever been. As a result, we expect to have a very productive fourth quarter and anticipate achieving our goal of $300 million in development starts for both 2003 and 2004. The bottom line is that although development has never been more challenging, we're getting more than our fair share by leveraging our local market presence in close relationships with leading grocery and discount anchors to profitably grow our development program. At this point I'd like to take a minute to update you on recent board initiatives related to corporate governance. This quarter our board of directors approved additional enhancements to our corporate governance practices. Reflecting the company's commitment to being proactive stewards. The enhancements include the elimination of staggered terms for Regency's directors, the adoption of limits on other board memberships for directors and officers of the company and the amendment of stock ownership guidelines. The stock ownership guidelines were amended by increasing the minimum ownership requirements for independent directors to the greater of 5 times or annual retainer or $250,000.

These guidelines augment current policy in which the CEO, COO and CFO are required to own multiple of their base salary range from three to five times. In addition Directors and top management must retain 60% of the after tax value of tock stock-based grants and prohibited of selling shares from one year of auction or exercise vesting. We have also incorporated limitations for the number of other public company boards on which our company directors and officers may serve. We feel that these changes further align share holder and management interest. As we all know, and as Bruce discussed, third quarter brought a few changes from the accounting standpoint. FAS150 was implemented and indefinitely deferred [inaudible] in recalculating FFO. However, given the strong fundamentals in the operating portfolio, and the positive momentum with the development in out parcel sales the company is still comfortable with last quarter's 2003 FFO guidance of $3.02 to 3.08 per share. But as discussed in the October 21st press release, FFO clarification reduces our FFO per share by 9 cents. As a result, our FFO per share guidance is reduced to a range of $2.93 to 2.99 per share. For 2004, we expect FFO to be in the range of $3.10 to $3.20 per share. This guidance assumes an estimated $4.1 million of issuance cost for the early redemption of preferred stock. In summary, September did cap another successful quarter for Regency. And I am extremely excited about Regency's future. Our business model uniquely combines a high quality operating portfolio and operating system that is growing same property NOI with the ability to create attractive returns on capital from development and joint ventures. Most important of all, I am blessed to work with a wonderful talented management team that is making Regency's model reality each and every day and is positioning the company to meaningfully accelerate our FFO per share growth rate in the future. We now welcome your questions.

At this time I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a minute to compile the Q & A roster. Our first question comes from Michael Bilerman from Goldman Sachs.

I'm here with Carrie Callahan as well. I wonder if you could spend a moment on development. You've obviously been quite successful in this area, you have 250 million stabilizing in '04, another 150 in '05. Thinking about your development starts here coming in the fourth quarter, that would imply about 216 million of starts. How much of that has been already targeted and have you -- how do you feel with that level of development going forward?

Good morning, Michael and Carrie. All of those developments are under contract right now and it's just a matter of either finalizing a lease or getting through the entitlement process. As I indicated in my remarks, you know, it is very challenging today. There is retrenchment on the part of the supermarket anchors. The entitlement processes are getting more difficult everywhere, not just in California. But we feel very good about being able to start somewhere in the neighborhood of $200 million in development, in the fourth quarter. And at the same time, as I mentioned, the backlog in pipeline for what we consider high profitability, new developments for next year is stronger than it ever has been. So, it's really a tribute to our team, their local presence, their relationship with the supermarket anchors because we truly are getting more than our fair share. And which also, Michael, very encouraging to us is that the returns, you know, are still holding up in the 10% range, which means there's significant value creation opportunities there.

How do you think about holding the development versus selling it?

if it is a noncore development, build to suit, or there's not a supermarket anchor, and/or the lineup of our side shop tenants is not typical to we have in our portfolio, then we sell it. And if it's, you know, if it's core development, then, you know, approximately, you know, half of those give or take or some or whatever, are contributed to the joint venture and half are owned on a long-term basis, 100%.

Okay. If I can just spend a moment on development profits and out parcel sale gains, you had indicated last quarter about 25 to 30 million for the year. Given the guidance on the out parcels of 10 to 15 and year to date development profits of 16, how do you see that guidance now for the full year?

I think we still feel very comfortable with the guidance, that pretty much every transaction for sure is already identified. The vast majority of them are under contract right now, and there's still exceptionally high demand on the part of out parcel users. And there's obviously exceptionally high demand which we're taking advantage of, buying high quality shopping centers. You know, my might digress just a bit and ask Mary Lou to spend a couple minutes talking about how we have applied our PCI program to out -- for out parcel uses.

Since we're doing so much development in the out parcel availability has really grown and will continue to be a strong component of our business, we've had so much success and with our inline tenants we decided quite frankly to do exactly the same thing and identify what we believe the best in class out parcel users are, whether we could do a ground lease or a for sale with them, and have met with many of the key users, a lot of them banks, some of the restaurants, but around the country people like Panera Bread, et cetera, and have done exactly the same thing, plus their demographics, put it into our database and married it and sit down and work with them, we met with Wachovia a couple weeks ago in the southeast alone and their strategy is they want to be with Publix, so we identified six locations where Wachovia could work. So we're starting to see the momentum in that relationship now, helping them achieve their goals like we've been able to do with the inline tenants.

the bottom line is that we think through our out parcel sales program, using the PCI, and in addition to that, on the development sales standpoint, having the joint venture relationship with Macquarie provides to us a tremendous amount of comfort in addition to a very strong market, and comfort and transparency in our view toward the development sales program.

All right, thank you for that. It sounds, then, that you're probably going to be at the high end of that 15 million on out parcels and I would expect give than you have 15 million of development stabilizing in the fourth quarter that you probably will still have some development profit indicating that you would probably in the in excess of the 30 million between the two, in terms of total FFO contribution? Is that a fair statement?

I think our guidance is going to stand for us, Michael. I'm not trying to evade your question, but I think what we had said last quarter, we're still comfortable saying this quarter.

Okay, thank you.

Our next question comes from Andrew Rosivach of Piper Jaffray.

Good morning, everybody. Mary Lou, we're getting a lot of questions here about Winn-Dixie. Like to know what your perspective is on the future of the grocer, and also if you have any statistics on the productivity within your portfolio.

Well, you know, I always feel awkward talking about a retailer, so I'll just tell you kind of how we view it. you know, the sales as you know, were reported at a 6.6% sale decrease for the month, so their sales are definitely difficult. And as you know, we had 17 Winn-Dixies in our portfolio and to date we're down to ten Winn-Dixies and three of those are under contract for disposition. So, clearly it's just a grocer that is a concern. You know, they have done some things to try to improve profitability. It's just a tough grocer market, and then they compete with Publix, which is clearly the leading grocer and just a terrific operator, and then Wal-Mart coming in pretty substantially, going after the same customer as Winn-Dixie. So, you know, I don't want to predict anyone's future, but you know, I think it's a tough time for them.

Mary Lou has indicated, we're -- that's why it's important for a company to have a proactive disposition program. We've taken it to 17, hopefully it will be 7, and but the number of the remaining stores, we think, though, are in outstanding locations that will probably make sense --

Publix or another grocer, or those will be sold.

Gotcha. Thank you. And one question for Bruce. I'm just trying to get to -- and I got your guidance in front of me. What's a good run rate, especially subsequent to the latest Macquarie transaction for kind of a long-term basis what your fees and commissions can be with what you've done so far?

Andrew, it's Lisa, I'll jump in.

Okay.

and answer that. If you look, we've given guidance at 6.5 million for the year, and --

So if I back up to three quarters I get a run rate of --

So the run rate is basically, you know, one and a half million per quarter, however we did just add another 100 million to Macquarie, so you will see that tick up slightly. But at the same time, we are also in the process of selling some properties. So, net, net, out of the joint venture for the same reason we're selling things out of Regency's joint venture, things we feel may have some risk and we're taking advantage of the high demand for grocery anchor shopping centers. The run rate remains about 6.5 million for the year and we'll give guidance next quarter for 2004.

Sure. And then last, Hap, when you answered 3.10 to 3.20 including the 4 million of preferred redemption fees, what's the kind of pro forma source of proceeds? Are you going to do another preferred? And if so, what kind of rate do you think you'll get on it?

You know, our assumption would be that we would today be that we replace preferred with preferred. Our current preferreds are trading.…..8 and three quarters to 9 and a quarter. Our current public preferred [inaudible] in the 7% range and I got -- I just had a quote from an investment banker said he could do something under 7.

Great, thanks a lot, guys.

I just want to follow up on the initial part of the question which referred to you know, Winn-Dixie and as Mary Lou indicated, we've taken that numbers of Winn-Dixie from 17 to 7. As I indicated we were going to sell between 175 and $200 million we expect this year, similar range to what we did last year. The impact, as Bruce indicated, on the company's FFO on a gross basis and net of interest. I mean before any interest impact is $18 million and I think that the company's been able to sustain a 5% kind of apples to apples FFO growth rate and still overcome $18 million somewhat less than that when you -- but pretty low interest rate, I think it's pretty remarkable but it's also a testament to the company that we're going to do what's right as far as having a portfolio that is going to be able to sustain a level of same store NOI growth in excess of 2.5% on a go-forward base is.

Let me sneak in one more question. With the development starts really gearing up at the end of the year, can we also expect that you're stable of out parcels, if you will, heading into '04 is going to grow from the current level?

Yes., as a matter of course it does.

Okay. Thanks, guys.

Thank you.

Our next question comes from Matthew Ostrower of Morgan Stanley.

Good morning. Just a couple of detail questions, I guess. It looked to me like non-real estate depreciation ticked up. I assume that was not the preferred amortization, was it?

No. In that question, Matt, this is Bruce, that question basically that's been a brilliant add-back for the sale resulted from our development sales. So we don't double count profit.

Oh, I see..

an offset, effectively.

Okay. And then, on your -- talking about your balance sheet for a second. Do you have any plans to refinance a line of credit or I guess you talked about preferred -- potential preferred refinancing, what about debt refinancing?

That's a good question. We are -- we have the ability to extend one more year, that's up in April of 2004, we're having discussions right now about a new line, and so forth. I would expect the line amount to be somewhere between 500 million and 600 million. We had a one piece of public debt that's coming due in April of '04. We have hedged $150 million of that at 5.6%, and that would include the spread effect, we hedged the spread. So, we think that's what our rate will be and we have the preferred that are redeemable, 175 million in September of '04. Those are the big pieces. There are some individual mortgages also that roll over and we'll refinance those obviously as you can look at our supplemental and see what else comes up.

Given your expectations now, I assume no equity offering in 2004?

That would be correct.

Okay. And then, recovery ratio, looked like it was sort of -- I know it jumps around a little bit, but it seemed a little higher than we expect it anyway.

This is Mary Lou, in the third quarter what we typically do is reconcile our insurance reserves, that's why you see the lumpiness, but we expect it to be in the middle of our range, which was 78 to 82%.

Okay. And then I guess to end with a couple of conceptual questions. One, the Winn-Dixie that you sold, at least it looked on your supplement you sold is it for 11-plus cap rate. I guess, Hap, in my mind that sort of says the market sort of gets it about Winn-Dixie, and what does it mean, I assume that, you know, the stuff you sold so far has been hard enough to sell. What does it mean for the remaining 7 assets and is now the right time if the market is already expecting some potential credit problems there?

Let me say, that one Winn-Dixie that we sold was a lesson learned, so to speak, the name of the center was seven springs, we referred to it around here as seven sins and it had a closed Win-Dixie and closed Kmart. So 11.2% cap rate. That was the above and beyond investors looking into the price side of that. The point is, if we feel there is an issue with a property, and if the cap rate ends up being 11%, which I don't think they would be on remaining Winn-Dixies, we think it's the right thing to do, we'll sell but even, in spite of the fact that it truly is a bifurcated market between Publix, cap rates, which is in the 7 to 8.5% range and Winn-Dixie which are probably 150 to 200 basis points higher, 11% may be high for a good solid Winn-Dixie center.

It's important to note, as Mary Lou indicated, there are a number of these centers that are excellent real estate and we have we think have the potential to replace one of the more dominant grocers in the markets. So I don't think should sell all seven. One is in a joint venture and doing very well.

in effect the company only has full exposure to six.

and finally on Macquarie, I guess it would appear that some of the recent listings haven't been I guess fantastic, haven't been incredibly well received. Is that your perception, and the fact that there's been enough capital raising recently going on here in other JV formats from using Australian capital, does that affect your thinking at with about your own potential listing with Macquarie?

Matt, our intent is to continue to grow our joint venture with Macquarie, which may or may not end up having -- involving a list making our partner -- I mean our partner is already a list of property trust, Macquarie Countrywide. But whether we have a fully dedicated U.S. property trust that we co-manage, like pro lodge and DVR is doing with Macquarie, remains to be seen, but we do think there's a continual continued strong appetite on the part of the Australian market for high quality U.S. real estate. Like the venture that Macquarie has with Regency, and DDR, and with pro lodges. So when you look at the super anuation (ph) requirements over there and the place of real estate in the investment portfolio for most investors because they really don't have a sophisticated bond market, so there's a key role that real estate and enlisted property trust play in there. We continue to think they will be a suitable partner. Having said that, just to remind everybody, Regency also has a viable partnership program with the state of Oregon, so we will continue to have in effect two partnerships to enable us to access both the domestic institutional market and probably an overseas market like Macquarie.

Just to add a little color on the Australian investment side, Matt, clearly Regency is looked at as a very quality company. I'm not going to make comments about the other offerings but clearly Regency is identified in that market as a very quality company. As is Macquarie.

Okay, thank you.

Our next question comes from Ross Nussbaum, with Smith Barney.

I'm here with Jonathan Litt. A question on the properties being sold specifically to Macquarie, has there been any attempt to widely market those assets or do you just sit down with Macquarie and hammer out a deal?

We, number one, Ross, we think we've got a pretty good idea of what the market is, and we were selling -- in one case it was about a $70 million asset. We got a pretty good idea, we think, what the mark is because we're actively involved in both as a buyer and seller. So we think we know what that market is and then, it's also important to note that we save significant amount from a tax deferral standpoint and from a transaction cost standpoint, by contributing the properties to a joint venture like the one with Macquarie.

So you think at the end of the day you wouldn't get better pricing if you went out to the open market?

We know that for a fact is for sure on a net basis and we think we're getting a very good pricing, you know, on a kind of an absolute basis.

Does Macquarie have any desire to buy some of these non-core developments from you as well?

Macquarie-countrywide is interesting just to remind everyone; an Australian listed property trust that has a focus on owning grocery anchor shopping centers in Australia, so although we have some flexibility, there's limitation, I think, of about 20% of the assets can go into non-grocery anchor shopping centers, but the primary focus of our partnership with them and of the trust and if we do a new trust, a public trust it would be on grocery anchor, but there may be flexibility built in there.

and a technical question, Bruce. First stock redemption charge, did that show up in the preferred dividend line or where was it?

It shows up in the interest cost line.

Interest expense. Okay, thank you.

Thanks, Ross.

Our next question comes from Craig Schmidt of Merrill Lynch.

Good morning. I was wondering if the leaving for the small shops, is there increased demand. Your spreads are holding up well and our occupancy is starting to pick up still. Is it better than first half of the year, or would you say the same?

You know, it's interesting, the leasing activity has been fairly consistent. It's about a million square feet per quarter. So, you know, we've had some nice pops this year in terms of retailers come in. What we see in terms of trends is really a different mix. We are working with a lot more of the casual dining, food groups like payway and Baja Fresh and obviously Starbucks and Panera. We've done a lot of leasing with Washington mutual, Great Clips, curves for women, and Quiznos so we're continuing the momentum with kind of our core. And then we met this quarter with also some new retailers for us anyway, which as I mentioned for the out parcels but also we've worked with CHICO's and they're expanding their customer profiles similar to Regency's and produce over $800 a foot and then another retailer called ROBUCKS, which is they consider themselves the Star bucks of the smoothie industry so we're going to see how that goes. But we're encouraged by the overall leasing. It's been strong and I think it speaks more to the quality of the portfolio and our disciplined approach to best grocers, high incomes, and then putting these better retailers together. And you know, we're starting to get paid for it and have been over the past couple of years.

Do you think occupancy in '04 will be higher than the occupancy --

Our plan is to keep it right around 95%, which I think is pretty good for a national company to have their occupancy at that level. And so, our plan is to keep it. I think our guidance is right around 95%.

Great.

Thanks, Craig.

Our next question comes from Mike Mueller of J.P. Morgan.

Hap, you talked about targeted development yields of 10 to 10 and a half percent. I was wondering if you can reconcile that with supplemental -- you're showing be a blended yield on development pipeline about 10.68%.

I think we're talking about there is, I assume this is the case, is our expectation on going forward basis is the 10 to 10.5% range, and the 10.68% refers to the actuals to date.

Okay, for the in place pipeline?

Right.

Versus going forward. Okay. And I guess this is a question for Bruce or at least -- are there any notable transactions with respect to capitalized interest and that run rate?

No, I think basically, I think if you use that what we did in the quarter it would be pretty close. Would you agree with, that Lisa?

Yes.

Okay, thanks.

Our next question comes from Jeff Donnelly of Wachovia Securities.

Good morning, and Hap, I'm glad to know my peers at Wachovia are not locating their branches next to Winn-Dixie. Most of my questions have been asked and answered. I was curious, Mary Lou and I know this is preliminary, but I was curious what your thinking is on Eckerd's concerning this retail chain I believe is now in the Locke and in any event something does happen at some future point and you guys do get those stores back. You know, can you talk a little bit maybe about where the rents are in those stores, maybe versus market?

Yeah, in most cases, the Eckerd’s -- Eckerd space we have is at or slightly below market and it is up for a Locke and I recently read that CBS is looking at certain markets where they're intending to go purchase them, which I think would be great. Their real estate in our portfolio overall is pretty good. So, you know, I think that we only have a few that quite honestly we'd worry about, of what are you going to do with this space. But I think it's pretty good drugstore space in total and quite frankly that's where we're at right now, looking the everything, what would we do with it if they went dark and who else besides -- who buys them and what would happen. So, I'll give an update next quarter on what we think is going to happen, but we're pretty comfortable with the ones that we have, and the rents are reasonable, so I don't see a dramatic impact. At least in the long-term.

and I'll just add, Jeff, if you'll recall, I mean, I guess it was probably two or three years ago when they made the move to go to out parcels. At that time, I think we lost somewhere in the neighborhood of double-digit drugstores that were in line, and we're very successful in releasing those. Even if it were to happen we were to lose those Eckerd's stores it's something we've dealt with successfully before with the same type of space.

You know, we just had a center in Illinois that we had a Walgreen’s, inline Walgreen’s that moved it an out parcel and spent some money on it to get it to the white box, and condition, and what happened is we turned it into three units, and the rent that Walgreen’s paid was over $14, and now the averages of three new tenants are paying over 24. So I would see that even though you do function with some downtime, we've been very successful with the centers that we have.

Yeah, I guess I was asking in the context of is it sort of a opportunity for you more than --

I think it could be.

and I guess concerning '04, and I apologize if you stated this and I missed it, could you give us a sense of what you thought -- what you think your cash rent growth will be for next year, and could you put that in context of where it's coming out for this year. Because given how strong it has been and frankly there's been a sequential rise in the development yield that you expect on your in process developments. I guess I'm just trying to reconcile the strengths that we're seeing today versus what your expectations are, you know, at the margin just as witnessed by sort of a declining yield in our pipeline. I'm curious why you're being conservative or do you see something visibly that's going to tail off rent growth.

Your question deals with rent growth question.

Correct.

We have not given guidance on '04 at this point. If you'll look back at '03, you'll notice we started relatively low, and every quarter we've bumped up that guidance range in order to reflect what's actually happened in the prior quarter. We continue to be somewhat surprised by the strength of what's happening. I think there's only one company that has a higher rent growth than Regency does, and I think that's Federal. But we would expect our guidance will probably be slightly on the conservative side because we like to allow for in this area when we give guidance, but we haven't done so at this point.

You know, we have, this is one of the, I guess few areas I'd say we've been aggressive saying we're going to maintain that 95% occupancy, which I think the economy and environment that we've been in, and you know, possibly will be in, has been very aggressive. But the rent growth is something that we worked very hard with our tenants on in terms of making sure that they stay in their face and you know, we have the right mix of retailers and we're getting paid for. And it is an area we've been very conservative in. And I think we will be, because you just keep wondering, when the economy will finally affect these retailers. The flip side, I think we're getting paid for the quality of our portfolio. So, we haven't given guidance but we're pretty conservative in this arena.

I recognize that trees don't grow to the sky but looking at what Hap said was expected the margin for NOI yields on development versus what you were experiencing in current quarters for rent growth, it strikes me that's a source of conservatism for you guys. and one last question, I think there were about 5 to $10 million of gains for out parcels slated for Q3 and 04, halfway through this quarter, and holidays are ahead, I would imagine a good work of -- deal of that work has been done. Can you --

As I mentioned, we feel, you know, we pretty much all of the out parcel sales that we expect -- all the out parcels sales we expect to occur now and the end of the year are under contract.

Great, thanks.

Thank you.

Our next question comes from Bill Acheson of Prudential Securities.

Thank you. On the 2004 FFO guidance 3.10 to 3.20, you said that includes 4.1 million of preferred redemption cost?

Yes.

Okay. So that means that the adjusted guidance is somewhere in the low 3.20 range, then, I just wanted to make sure.

We -- the guidance we gave was basically included, included -- in other words, we're anticipating that we will redeem $175 million which we will expense 4.1 million at that time.

So, if we didn't have that in the guidance would be added, there would be $4.1 million.

Divided by 60 million shares higher.

So in other words in the low 3.20 range. What's the timing on the preferred redemption?

It would be September of 04.

Okay. Thank you.

That's a five-year age of all of those preferreds.

Okay.

and when they're called.

on the sale to the Macquarie joint venture, the 7.6% cap rate, I'm assuming that it was so low because two of the properties had California locations. Is that correct? I mean, were the California property cap rates significantly lower than 7.6% average?

the California cap rates were in the, you know, let me say, California property represented approximately 80 to 90% of the $103 million. So keep that in mind. But they were lower than 7.6%.

Okay. Hass Macquarie expressed a number for the potential appetite for deals out of our current development pipeline in 2004?

I think they have a very strong appetite to continue to grow our partnership.

And the partnership, just refresh my memory, is infinite life and there's no limit on the size of the investment?

That's correct.

Okay. And if I could understand what you mentioned a little bit before, talking to another analyst, you can, if you chose, sell them property types other than strictly speaking grocery centers, you could sell them a power center, for instance, and it's not limited by the relationship that they have with developers diversified, for example?

As long as the center is less than I think it's 300,000 square feet. It's kind of the understanding we had with Macquarie, apart from whatever their interest might be with DDR, but to date, 100% of the centers in our partnership are grocery-anchored.

Okay. On development stabilizations, I wanted to try to reconcile the stabilizations on page 15 of your supplemental, with the anchor. Opening dates on Page 14, and I don't want to get too involved here, of course, but I come up with net development cost associated with 2004 anchor openings, which isn't necessarily when it stabilized, of 150 million. And on page 15, you have the estimated stabilizations at 230 to 280 million. Is there a lot of stabilizations carrying over from 2003, anchoring openings into '04? I'm trying to reconcile the difference in the two numbers there.

Lisa, do you want to take that?

Bill, there is some of that, as well, with anchor openings in, you know, mid to late '03 and stabilizing in '04. It could also just be we've got several developments on there that you'll see where the anchor openings is in '04 and the percent leased is already north of 90%. So, it's really just a matter of when we're able to complete the center and at completion it's going to be stabilized. So, it's a combination of those two things.

Okay, great. Most of my housekeeping questions were answered. Same-store NOI for 2004, 3% still a good number, or have you not given guidance?

We have not given guidance yet.

G&A run rate for third quarter, 9% of base rent, .23% of gross real estate assets, about the same as the second quarter, is that the right run rate to be using?

I'll answer that. We, as you know in the past, we record our accruals for incentive compensation in relation to our estimates for revenue recognition, and through the third quarter we've recognized about 72%, so we expect that our G&A will be slightly higher but for most part in line with the third quarter.

Okay. Thank you very much.

Thank you.

Our next question comes from Michael Bilerman of Goldman Sachs.

Just a follow-up question here. Seasonality, I wonder if you could discuss with us at least conceptually for '04, if you look at this year between development profits and out parcel sales of the 25 to 30 million you've endorsed, 9 to 10 million came in the first half so a locality in the back shave. Half and starts coming down to the fourth quarter, so I'm just wondering, for next year is it going to be more balanced or is it going to be kind of a nail-biter next year?

Nail-biter I think would be too strong. We think it will be more back end loaded. We actually planned for back end loaded and have for ever since we've been public, really.

Okay. And then just because of when retailers want to open?

to some extent that's, that's correct.

Okay. and also conceptually, if you could, talk about …. you're seeing on part of developers, given the very healthy development spread you guys are capitalizing on, are you seeing more private sector or non-public developers, [inaudible] this activity as well, are you seeing more competition?

There's no lack of competition. As I indicated in my remarks, the shopping center development business is about as competitive as it ever has been. You add on top of that, surprisingly not every community wants to have a new grocery-anchored shopping center in their neighborhood. And so, the entitlement process is extremely challenging, but we've been extremely fortunate and once again, you know, I credit that to the talent of our people out in the field, have the relationships with the local communities, the local players in the markets, the joint ventures that we have with local developers and the outstanding relationships we have with the supermarket anchor companies.

Is it fair to say, Hap, looking out to next year or even '05, [inaudible] down just because of competition.

Our type line and our backlog, Kerry has never been larger. I guess there's some risk that could happen, but our expectation is to continue to add about $300 million a year. Now, you may remember, there is a certain amount of lumpiness. I think it was 2001 that our development starts were $480 million and the following year they were about 150 million. And then last year they were 300 million. And we expect them to be in the $300 million this year and next year. So, the last three years have been pretty stable and $300 million range but that number can be from a start standpoint, can be somewhat -- you know, can be somewhat lumpy.

Okay, thanks. I was wondering if I could just do, you may have mentioned this, I may have missed it on the leasing activity in the quarter, how much was split between new leases and renewals?

It was pretty even, actually. As far as new leases or renewals, and if you look at it throughout the country as well, we've seen strong leasing activity, really from east coast to west coast. So, it was just pretty much about the same.

and then, with cap ex seen to tick up sequentially with the same amount of leasing volume was that due to the mix of new renewals or mix of small shopping anchors.

the cap ex numbers, if you look at it on annual basis, we're about where we were a year ago, and so the quarter is a little higher but that's primarily timing. And then what's occurred which is really good news, we've had a good half a dozen centers with nice size box that we've gone ahead and invested capital, get it back to the white box condition, so we can release it and for example, we have a shopping center in southern California that we had a 9,000 square foot space, split it into two spaces, we're leasing it for $31, and now the one retailer is paying 36 and the other is 44. So, it really is, even though we have spent a little more money than we had the previous year, we're seeing just terrific results. So, it is a result of doing more leasing.

Our year to date CI number on square foot basis only 1.81 so we're below last year on a square footage basis.

and just to reiterate back to another point, Kerry, back to the point as far as the credibility and the comfort that we have with the sales. As I mentioned, Kerry, as a result of our PCI program, the fact that we have all of our out parcel sales that we expect to close between now and the end of the year, doesn’t mean some of them couldn't fall out but those are all under contract. In addition to that, from a development sales standpoint, you know, we think that our joint venture program with Macquarie gives us a tremendous amount of, you know -- a lot of comfort in that regard.

It sounds like those things are quite firm. I was just curious whether it would be a little more spread out in '04.

You know, it's interesting, we don’t plan from a development start standpoint, from start standpoint, we don't -- and it's kind of the wine gets served when the wine is ready, and I got an e-mail from one of our managing directors of investment and we weren't ready to close on a project this year, because of a -- you know, entitlement issue. He was 95% sure that everything would be resolved, 99% sure, there was very little risk but the right thing to do is not to close on that property this year. And those things happen. But it's also gives us a lot of comfort, the credibility and accountability of our team out in the field.

Thank you.

Thank you.

Our next question comes from Ralph Locke with [inaudible]

Good morning. I have a question on the Wal-Mart neighborhood market. Do you know what their having strategy is with their targeting, whether you've had any experience in your centers as far as competition from them?

We have. And Hap can certainly add to it. But, you know, Wal-Mart's major strategy is to grow the super center concept by over 200-plus stores a year. In Texas, they've opened up several of the Wal-Mart 40,000-square foot grocery store concept, and have been moderately successful with that. I think they go after more -- it's a lower income customer than we do. We actually developed one that quite frankly when we developed it, the lease up of the side shop was much slower than the typical Regency center. We just really want to see what happened with our PCI tenants go in there. So it's a lower demo than we focus on. And this is my own perception of it, and Hap can tell you what he knows. One of the things that I feel that Wal-Mart strength is obviously the one-stop shopping going in there and having this huge selection. But then if you go in and you think about it and you take the different categories and look at the selection within those categories, it's not a great selection, there's not a lot of high end brands, and so when they take a category like they, did and grocery sector, and you look at it, it's not a very excitement assortment. Their produce isn't as strong as the other grocers, and their brand identification isn't as strong. Now, I will also say they're smart and they always figure things out. But I have been rather unimpressed. They're not perfect, with that one concept. Hap, do you have any --

I think you covered it well, Mary Lou.

Okay.

Great. And another question kind of different but related. And that is, do you see the mix of your anchors and newly developed centers changing a little bit over the next three to five years, to maybe move a little bit away from the supermarkets toward maybe a little bit different concept?

You know, we will continue to do as much supermarket-anchor development as makes sense and we've also developed several Wal-Mart anchored super centers where we basically bought the land, sold to Wal-Mart and developed the outbuilding and done that very profitably. And thirdly we have several developments underway with Target and some are with supermarket anchors and some not. We think where we can have a strong anchor like a Publix, like Kroger, safeway and many markets, sometimes Albertsons, HEB, we're doing a lot of work with, in the Houston and Austin market. who is an excellent anchor, and Target. And some Wal-Mart.

Thanks.

Thank you.

Our next question comes from Don Harold of Freedman street advisors.

I had a follow-up on development deals you were talking about. You've talked about how they stayed remarkably high in spite of the fact that cap rates have dropped significantly, and you also talked about the fact that it's a very competitive environment out there for the development side. I guess it's surprising to me that spread is as high as it is. You know, I guess question one, is, you know, do you have -- what sort of the insight into that and two if the cap rates stay this low going forward, do you expect those yields to start to drop -- those development yields to start to drop back down to more normal spread between development yields and acquisition yields?

Don, that drop is very possible. I think that we've dropped our expectations, you know, somewhat. But, you know, to date, we've been pleasantly surprised. Some of it may have to do, like in California, one of the very positive things about difficult entitlement process and being able to be there and know the business and being to invest hundreds of thousands of dollars and sometimes in the seven-figure range, through the entitlement process, over years, as a matter of fact we're closing on a center in Dallas this quarter that we've had under contract or under discussions with the landowner for four years now. So, that -- so when you get to site -- get the site, there is some value there. And I think that we're being able to realize and capitalize on that. But that's not to say, you know, that there isn't some risk there that development yields will be squeezed in the future.

So you think part of it now is sort of the timing difference between when you bought the land or tied the land up a while ago and that happened previously, and since that time the acquisition cap rates have moved down in.

Some of it relates to properties that we've been working on for four years and some of it relates to stuff that we've just started working on. And to date what we're seeing out there is we're being able to maintain our yields. That's not to say that we won't see some compression out there in the future. Some of that may be timing, Don, but I don't think so. I mean, --

the spreads have widened as dramatically as they have.

Yes, and it maybe it's because the development business has gotten that much more difficult.

So you think there may be -- there possibly is some fundamental change that the spreads are increasing there?

That's what's happened to date. Now, how long that lasts, you know, I can't predict that in the future.

Okay.

if you can, you obviously are a smarter man than I, John.

I was wondering if you thought there was a fundamental shift there is all.

John, let me say this. Just maybe some more color. Even the deals that we see coming through when we call our investment committee, we still see those holding at about 10 and a quarter. You know that Hap used range of 10 and 10.5, so there hasn't been a significant -- if you look at this over the last year to 18 months, there really hasn't been a lot of movement south. In spite of what your instincts would tell you.

and in spite of willingness for the right development opportunities, we would develop, you know, at yields less than 10, but we've been able to maintain our, you know, returns.

Okay. Thank you.

Thank you, John.

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

Yes. I'd like to, number one, I'd like to thank everybody for joining us in the call, and your interest in Regency. And just to mention before you hang up, to remind people that we have an investor presentation at Boston, if for some reason you're not -- you want to come and have not so to speak signed up for that right now, please contact Lisa Palmer at 904-598-7636, or Diane at 904-598-7727. And thank you for this morning, and we hope to see many and all of you in Boston next week. Have a nice day.

This concludes today's Regency Centers Corporation's conference call. You may now disconnect.