Regency Centers Corp (REG) 2004 Q2 法說會逐字稿

Good morning. My name is Satina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regency Center Corporation second quarter 2004 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.

[Operator Instructions]

Thank you.

I would now like to turn the conference over to Lisa Palmer, Senior Vice President, Capital Markets. Please go ahead, Ma'am.

Thank you. Good morning. On the call this morning are Hap Stein, Chairman and Chief Executive Officer; Mary Lou Fiala, President and Chief Operating Officer; Bruce Johnson, Chief Financial Officer; and Chris Levit, Senior Vice President and Treasurer. Please bear with me a moment while I 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 these actual results to differ materially from those expressed or implied in such statements. During the quarter Regency's corporate representatives may reiterate these forward looking statements during private meetings with investors, investment analysts, the media and others.

At the same time Regency will keep this information publicly available on its web site, www.Regencycenters.com.

During this call management will refer to FFO a non GAAP financial measure which we believe to be meaningful when discussing results in the REIT industry. Please see our supplemental information package also which is on our web site for a reconciliation of FFO to net income.

I will now turn the call over to Bruce.

Good morning and thank you for joining Regency's second quarter call and welcome to another big day of conference calls. As I indicated last quarter by every measure Regency continues to perform at a high-level. Fundamentals of the operating portfolio are sound with a percentage lease above 95 percent and rental rate growth at almost 9 percent, growth in net operating income is on track to reach 2 1/2 percent. The in process developments are generating attractive returns in capital and creating significant value.

For the quarter, FFO increased by 11.9 percent to $46.7 million or 75 cents per share. These results exceeded our plan, primarily due to the early recognition of gains from development sales on several closures that were accelerated to the second quarter, but originally planned for later in the year.

FFO year-to-date was $1.43 per share, 11.7 growth over 2003. Key components of this growth were 2.2 million from same-store NOI (ph) growth, 7.3 million from new investment NOI from all those developments that we're bringing onboard, 7.8 million from lower interest rate and preferred costs, and $2 million from lower impairment reserves.

These sources of growth were offset by a $7 million reduction in lost NOI from disposition; a $400,000 decrease in fees and profits; and nearly $3 million increase in G&A.

G&A expense remains in line with our 2004 plan but is expected to be approximately $4 million in 2003 by year-end.

The year-to-date increase is primarily the result of significant costs associated with implementing Section 404 of the Sarbanes Oxley Act with entire insurance and employee benefit costs and higher vesting cost associated with annual restricted stock grants as we enter the fourth year of the program.

Also of note this quarter, Moody's affirmed its Baa2 rating and changed the outlook from negative to neutral. And this week Fitch affirmed its BBB+ rating and also changed its outlook to stable from negative.

We are comfortable that FFO per share will be in a range of 78 cents to 82 cents for the third quarter and are maintaining the same guidance of $3.10 to $3.20 for the year. This guidance still assumes an estimated $4.1 million of issuance costs for the early redemption of preferred stock.

As you recall, 175 million of preferred units with an average rate of 8.9 percent are callable (ph) in September. With the market for Regency's existing preferred stock significantly lower, we plan on taking advantage of this opportunity to lower our preferred cost.

Now I'll turn the floor over to Mary Lou to discuss our operating results for the quarter.

Thank you, Bruce, and good morning. Operating results for the second quarter are ahead of plan across the board. Occupancy remains above 95 percent with renewal rates up slightly to 82 percent; and accounts receivable over 90 days is the lowest ever at .8 percent of revenue. Rent growth on a cash basis has been approximately 9 percent if you exclude leases that were executed at properties that we plan to sell this year, our year-to-date rate growth would be over 10 percent with average rents growing from (ph) $18.01 from $16.35 per square foot.

As you can see we've raised our rent growth guidance from 5 to 8 percent for the year. These rental increases came as a result of leasing or renewing over 890,000 square feet during the quarter, 638,000 of that square feet is in the operating portfolio and 250,000 square feet is in our in-process developments.

Rent growth together with the portfolio stabilized to maintain above 95 percent has combined to produce 2.3 percent growth in same property net operating income. I'm confident that same property NOI growth for the year will be at 2.5 percent. This growth has been achieved with tenant improvements less than $2 per square foot.

We have been able to achieve consistent occupancy strong rent growth and sustainable NOI growth in spite of an extremely competitive and challenging environment, given the impact of Wal-Mart. We have been able to perform at this high-level as a result of our high-quality portfolio and the ability of our grocers to compete against the Wal-Mart threat.

We've discussed in the past Regency's strategies to mitigate Wal-Mart danger to our retailers such as operating in higher income areas and focusing on the strongest side shop tenants. But for this safeguard to be fully effective, our grocers must strengthen their defenses as well. We do believe that our top grocers are making progress to enable them to be more effective and to compete.

Kroger, for example, has focused on a multiformat approach with their Fred Meyer banner that sells hard goods as well as furniture and clothing, alongside grocers.

They also have formats that compete on price mirroring Wal-Mart's everyday low pricing strategy. In all those stores, Kroger strives for a price margin differential with Wal-Mart of less than 10 percent.

Safeway's focus is to differentiate themselves due to concentration of perishables and an upscale mainstream shopping experience. They are investing capital into refurbishing their stores with improved, more upscale flooring and lighting that showcases their fresh produce. Albertsons has retrenched for markets which they're not even at No. 1 or No. 2 in the trade area and as you all know that's imperative for growth and survival against Wal-Mart.

They've also acquired Shaws ,which is an area outside of Wal-Mart's current focus and Target's higher demographics. Regional change such as HEB and Publix continue to effectively compete as well. Market leading grosses, combined with our PCI side shop, retailers create an attractive competitive center, producing sustainable NOI.

Our premier customer initiative continues to enhance the quality of our tenant base and our portfolio. We concentrate on and grow this program through such venues such as the annual ICSC meeting in May. The number of meetings in total as well as national heads of real estate for our PCI retailers and our latest focal point, our (indiscernible) users was the highest ever.

Since 2001 the number of retailer meetings has increased by 58 percent and over the same four years meetings with heads of real estate has increased by 30 percent. This increase in meetings not only generated an increasing number of new leases and renewals each year with the better retailers, but it translated into improved retailer relationship and attractive portfolio statistics such as rent growth and our strong 95 plus percent occupancy.

These benefits are also spilling over into our development. I will now turn the call over to Hap for a closer look at our development program, our capital recycling result as well as a recap of our investment activity during the quarter. Hap.

Thank you Mary Lou, and good morning. As Bruce and Mary Lou have articulated, Regency's high-quality portfolio and operating systems continue Regency's multiyear track record producing reliable growth in NOI. The second key component of Regency's strategy is to generate attractive returns on invested capital from our development program.

At quarter end, we had 34 developments in process, representing over 4 million square feet and an estimated $480 million of net development costs at completions. These developments are 65 percent funded and 81 percent leasing committed with an expected NOI yield on net development costs of 10 1/2 percent. The in-process development now include two new starts for the quarter. Regency Commons is a redevelopment of an infield location in the heart of Cincinnati, Ohio which is located in the main office corridor with a daytime population of over 70,000 people. We are experiencing significant demand from key PCI retailers. And the center is expected to generate a return on capital close to 12 percent.

Fortuna Village Center is a development in the Washington D.C. area that will be anchored by Target and Shoppers Food Warehouse. Fortuna is located at the entrance to a planned unit development in a suburb that is experiencing significant increases in population growth. Returns from Fortuna could substantially exceed 11 percent. Although only $27 million of developments have been started thus far this year we remain optimistic that we will meet our goal of $300 million in starts.

We have already closed on the land for over $100 million of developments, which we expect to convert to starts. In addition, the pipeline that we rank as high probability for starts this year remains extremely promising in spite of longer lead times to obtain commitments from anchors and the rigors of obtaining entitlements.

Two centers were acquired during the quarter. Braemar Village is a Safeway anchored neighborhood center that is part of a master planned community in the Washington D.C. area. We believe that we negotiated a purchase price well below what this high-quality center would command if it were actively marketed today. In addition the 5 acre expansion parcel adjacent to the property should provide upside to the returns.

The other acquisition was Belleview Square, an infield King Super anchored center in Denver. The center benefits from King Super's very robust sales, strong side shop retailers, and incomes in the area of over $100,000.

In addition we have six centers under contract for acquisition with one of our joint ventures that will expand our presence in Chicago and another very high-quality center under contract that will be 100 percent owned and will help Regency further establish the Company's presence in the Philadelphia market.

As a result of the expected increase in acquisitions we have increased targeted operating sales. This capital recycling together with joint ventures are very consistent with our strategy and represent the final key component for Regency strategy. Year-to-date, we closed over $125 million in total property sales. $90 million in operating property sales with third parties and joint ventures $23 million in noncore development sales with third parties and $14 million in land and now partial sales.

In summary the attractive returns from Regency's developments and joint ventures are combining with steady growth in net operating income from high-quality portfolios, generate sustainable growth and per share FFO.

We thank you for joining us on the call and we welcome your questions.

(OPERATOR INSTRUCTIONS) Paul Morgan with FBR.

A question on the development pipeline I guess. You're saying there's longer lead times required to get anchor approval. What is the landscape right now, in terms of the grocery stores looking to expand maybe? Who's -- a little color on who is aggressive? What markets may still be hot? And then how that plays into your ability to maintain the development start pipeline looking into next year?

Okay, Paul let me address the landscape (indiscernible) there. It kind of varies on a market by market basis. First of all we are doing significant amount of development with HEB in the Houston market and as you know HEB is one of the top supermarket chains in the country and that pipeline includes not only developments for HEB but also a joint venture that we've got going on with HEB.

Secondly even though many of the departments -- the grocery stores as I mentioned -- are retrenching somewhat, it a depends on the market.

Albertsons for example has committed a significant amount of capital to Southern California where their business is very very good. And the other interesting thing to note that we're seeing out there is if for instance, the labor situation may also impact development starts. And we've got a number of developments that we are working through with King Supers who is which was owned by Kroger.

Everybody remembers the settlement and dispute that occurred in Southern California. Kroger is in the process of renegotiating their labor agreement in Denver and I think a lot of the new developments are on hold as a result of that. To kind of backfill some of that opportunity that we're doing with Kroger and some of the others that may not be expanding as fast, we are doing a number of developments with Target and have a half-dozen developments more than half a dozen developments that are in one stage or another with Target as an aggressively expanding retailer.

But the point is is that the team that we got in the market and having 18 off, 18 offices development officers in many of those markets the Company is getting more then our fair share of a pie that is getting a little bit smaller.

Are those Targets that you mentioned larger formatted with food sales, (indiscernible) type thing?

Some of them are. Many of them are not. For a couple we're developing one in Southern California that has a Target and Stater Brothers. We are completing a development in a market in Colorado near Denver that has a Safeway and Target.

(MULTIPLE SPEAKERS)

And the Center and then, Lisa just reminded me given her University of Virginia background that we are developing what is going to be all these centers are wonderful but an especially wonderful center in her eyes a Harris Teeter, Target anchored center in Charlesville (ph) Virginia and that is not a Super Target.

Target does in all their stores have all the grocery store items and interesting to note except for perishables and they do a pretty good job identifying where there is a niche and where they feel there's a niche they will put in a Super Target.

The other question was about occupancy. Where do you think, looking back at the history of the Company and different markets -- what is high watermark for occupancy and what's kind of the minimal frictional level of vacancy in your centers.

We go back for the past five years the lowest occupancy that we've had has been 94.4 percent and our highest 95.4. So that's the range and I think that is a clear attribute to the quality of our centers because we do not take some of the hits as some of our peers did, go down to the high 80s low 90s. We have been very steady. We've been studying this and looking at where we feel that we can be -- our goal is over time and again it's more of a steady is can we take it up to 96 percent? And I think history will show you that that would be kind of a high end of the range but our guidance is to be in the 95 percent range. Pretty comfortable with that. But we're going to continue to push some of the centers and try to get it up a little bit higher.

Mary Lou what would the occupancy be if we were to successfully complete our disposition plan for the year?

We are at 95.3 percent. If we complete that we would be at almost 96 percent today. So that kind of gives you the story of where we are and that's why I think the 96 percent level is maybe attainable.

Russ Nussbaum with Bank of America.

Good morning. I'm here with Amy Doyen. Couple of questions. First when you provided your second quarter guidance last quarter it was 67 to 70 cents. You obviously came in at 75 cents. What happened that caused it to come in so much higher than your expectations?

The timing on development sales.

And must it just a property or 2 or was it more than that?

Two properties.

Just looking at your guidance on page 32 of the supplemental, you've done 9 million of transaction profits roughly year-to-date. You are guiding toward 30, 35 million. Obviously a lot of work to do in the second half of the year and that looks like it is really setting up to be kind of a reoccurring annual event. Could you give us some guidance into why is so back end weighted?

No. 1, the fact that we front ended some of this in the second quarter I think is indicative of the fact that I think pretty much every property that we expect to sell or contribute to the joint ventures identified and it's either under contract or negotiating price so we feel very good about being able to achieve the number. I mean, I won't say that there isn't heavy lifting involved in that but Russ is we've always delivered (indiscernible) on the transaction profits side and we've never felt more comfortable than we do today about completing our plan for the year.

Why is it so back end weighted and why can't this be a business that's more streamlined across.

The timing in addition to that there is the timing issue of when developments are completed and ready to be contributed to joint ventures is one big issue. And, secondly, we do get the benefit of the NOI during the period that we hold the asset before it's contributed onto the joint venture.

Just a clarification, the first (indiscernible) you got coming up for redemption in the third quarter is that preferred unit?

Preferred units yes.

And you've got some other I think 50 million beyond.

Yes that's correct.

And that's up in '05?

'05.

And what is the rate on those?

875 as I recall.

Gary Boston with Smith Barney.

Here with Jon Litt. Bruce, just bookkeeping or housekeeping what was your capitalized interest for the quarter?

We don't give guidance.

(MULTIPLE SPEAKERS)

It's on page 2 of the supplemental. For the quarter it was about 3.2 million.

I see it, thank you. In terms of your '05 expirations, just looking at lease expiration scheduled the average rent in place there is the highest in your whole schedule. Just wanted to get your sense on where you see rents rolling to on your expiration in '05 given the strength you've seen this year?

We're pretty comfortable with where we're going to be at. We just went to the process of looking at the rollover scheduled and rents and interesting to look at. If you look at kind of the rent for our under 4000 square feet we've been averaging about 8 percent growth and what's really swung it one way or the other to be double-digit or still a single digit has been the big boxes.

So we think probably next year we're going to be in the same type of range that we have been this year with what's rolling over.

Is there any difference in the mix next year in sort of small space vs. big box?

Actually less big box next year then it picks up in '06 and more of the small space. There is significant space affected could swing it and why we give a range.

A couple of questions. First on your development program. I assume that most of the work that you've already started you have bidded out and the costs aren't going to change. Maybe you could confirm that and also talk about what's happening to your construction costs and how that impacts you think your development program?

Good question, Jon, construction cost we have had increase rather substantially in the 15 to 20 percent range on new projects. It was interesting to note on a significant part of our costs is the anchor space and we are capping the contributions to the anchor space. So that significant part of the cost is not impacted. But knock on wood, we're still being able to maintain returns in excess of 10 percent.

I'm just trying to understand that so if you (indiscernible) as an example $70 million project are you saying that that 70 million is up 15 to 20?

Now remember that $70 million includes land. That includes soft cost.

What would then -- that's what I was figuring. What would be composite the increase on those the total (MULTIPLE SPEAKERS)?

It's about 50 percent of the cost but about 50 percent of that cost might be anchor space under which there are caps may be 60 percent of that. (MULTIPLE SPEAKERS) In addition to that let me also say a significant portion of that is site work. Site work cost is not going up that much. So you're probably talking about on an overall budget about a 5 percent increase. 5 or 10 percent increase.

And so that might pinch your yields a little bit?

It may but it hasn't today. I think there is that obviously risk that could happen but we've been able basically through (indiscernible) and the -- on the anchor space and through grants to continue to generate the returns that we are very pleasantly surprised with.

Projects that we've recently bid, we are still able to hold the yields that we have experienced historically.

Just looking at some of your developments at Gilroy (ph), it looks like it's coming on very successfully at 97 percent lease but then I look at like a Falcon Ridge which looks like the anchors opened even before the Gilroy one, yet the occupancy's just around 70 percent. Could you give a sense of how those assets (MULTIPLE SPEAKERS)--

Falcon Ridge is proceeding very very well. The center is not opened yet and we expect that center to be open at over 95 percent when it opens basically in the fourth quarter.

Similarly I guess it's Hollymeade in Charlottesville?

Holly Meade in Charlottesville is a center that we just just started construction on and so once again we expect that center to be -- when it opens I would be surprised if it weren't well over 90 percent occupied. Remember in that case it just commenced, we just commenced construction.

During the quarter you sold one asset to the fund at an 8 1/4 cap rate up in Portland. It seems kind of a high cap rate for your existing assets to be sold -- I assume there was some quality and/or locational issues. Is there more of that type of stuff for you guys to sell or should we suspect that most of the sales going forward will be more in the 7 1/4 cap rate range?

This is Lisa. I'll answer the question. The reason there was a 8 1/4 there's a (indiscernible) so it is really a secondary market and satisfied 1031 need toward debenture. We identified as most of you probably know the process is to identify assets. We identified three assets. And Cherry Park was kind of a sales thing. We sold at 91 percent lease actually. At 8 1/4 so typically going forward, you're going to see us sell 7 1/4 percent development to our partners. (inaudible)

Just a follow-up on that though I think on the guidance page is far as our dispositions which are the lower quality properties I think our guidance we're giving is 9 percent cap rates on those.

Yes Cherry Park is just a solid straight down the middle of the fareway (MULTIPLE SPEAKERS) asset and as I said we sold at 91 percent lease. If we were to have marketed to third party, we would have underwritten it, leasing up the vacancies and probably (indiscernible). But because it sold on in-place income that is an 8 1/4.

Michael Bilerman with Goldman Sachs.

Mary Lou, I noticed you didn't talk a little bit about Safeway or I missed it. Maybe you can talk about how they are doing relative to peers.

You missed it. I'm disappointed. No Safeway was hit the hardest (indiscernible) strike in Southern California. If you look overall their comp store sales I think are slightly below. Where they suffered historically was in their markets where they merged which was (indiscernible) and in those cases they are starting to see starting to correct some of the problems that they are having and you are starting to see them pick up.

The comment that I made in Safeway's comments was that what they're doing is they're taking the majority of their capital, and reinvesting it into existing locations, and focusing more on trading up especially where it comes to produce selection and quality. So better lighting from their view and definitely higher quality but one consistent strategy they plan to execute across the country. So I would tell you that I think Safeway has suffered more. Kroger in our view and from our numbers has competed clearly the best against Wal-Mart but as I said each grocer seems to be rethinking their strategy and coming up with a plan that hopefully will work for them and for us.

Is there a risk that Safeway -- if Kroger is moving closer in price point to Wal-Mart that Safeway is left on its own?

Well it's not that Safeway isn't aware of the price because if you talk to the Safeway people, they actually understand the need to be closer in pricing to Wal-Mart pricing strategy. But they've done a little bit more than try to get the everyday low price of Kroger has focused on that. They've done more of the high/low and more of the 2 for, 3 for, so when you buy multiple purchases of an item they're closer to Wal-Mart. So it's just when I was reporting looking at what is significant for this quarter they're rethinking their stores. And how they're going to merchandise them. And stock them is their big issue but every single grocer is aware that they can't just be out there on their own and price goods the way that they want.

An interesting fact about Safeway we actually have a database basically of every grocery store in the country and we are able to merge that with our demographic system and Safeway stores have one of the highest-ever household income within three miles of their stores and that's across all their brands. In fact Tom Thumb is one of the highest in their chain.

So it's anyone really has the opportunity to (indiscernible) as the high-end grocer. Safeway does have the opportunity to do that. It really is going to be whether they are able to execute that strategy.

Bruce, two questions. One is on Sarbanes 404, which you brought up. How is that process going? And how much more additional cost do you think there's been for you to actually make a comment on it?

Well the cost side first. I think that right now through with the six-month is about $300,000 we expect to be over $500,000, slightly over $500,000 by the end of the year in additional cost related there too. That does not include all the time that obviously our people are doing actually third party kind of consulting activity not out at KPMG but other consultants we brought in to make sure that we comply. And meet the deadline.

We feel real good about where we are. It's a lot of work and we've taken it very seriously here. Senior management -- Hap, May Lou and myself -- are very involved in making sure that we are going to meet the standards that are required under Sarbanes 404.

That's helpful, just on this preferred redemption I take it you want to reissue a new preferred, your floating rate debt picked up also. Is there an opportunity been to go with a larger preferred and get your floating rate debt back in line with history?

That's a potential that's something that we will do at the appropriate time. The preferred stock itself would be right now, if we marketed it, would be in the 70 1/2 range and there is still a pretty big difference between preferred stock and ten-year notes, as an example. I mean you're almost 200 basis points different. That's something that we look at at the appropriate time. We try to manage our line of credit debt to 50 percent of our total commitment amount.

And you also have to remember that we're forecasting 200 million in dispositions for the year and year-to-date we're less than 50. So as we sell those properties in the second half of the year we use those proceeds to pay down the line.

Then you'll juice it back up with some of the acquisitions you plan to make as well -- ?

And some of the developments, correct. But some of it is just timing as well.

With the historic ratios we expect to keep expected to continue to operate the Company in line with historic ratios maybe accounting variances.

While the increase in our fixed charge coverage ratio.

Chris Capolongo with Deutsche Bank.

Couple of quick questions. First in terms of acquisitions would you say that the volume of opportunities has picked up or remain flat or degraded? What's your take on that?

I think design with opportunities has increased as a result of -- so we are seeing very attractive pricing out there.

What type of sellers are you seeing?

Anywhere from developers to the portfolio we mentioned in Chicago is a regional real estate company. One of the better real estate companies up there that's also a developer. The property I mentioned in Philadelphia and the property that we just closed on in Denver are families that have owned property for a long period of time.

There's been some rumors about an Atlanta area portfolio that you're interested in. Can you comment on that?

We don't comment on things on rumors or speculation. There -- only those things that are certain.

And then Hap, you also mention the high to medium probabilities. Is there a number that goes along with say a two- or three-year period?

We've got a number that is in excess of $250 million for this year. Now there is the timing risk. I think as I mentioned we've already closed on land that we expect to convert to starts. Most of that we expect to convert the sheer. Take what we closed, land what we've started the land plus high probability, and we think there is a reasonably high possibility that we will achieve the $300 million in starts. I'll also say that the pipeline going beyond 2004 continues to look very encouraging. In spite of the issues that we covered on this call by your questions and in the script of higher construction cost, slower decisions part of a lot of the supermarket chains I think our team is doing a fabulous job out there.

William Acheson Prudential Equity.

I was just looking at the 2.6 million in developments sale gains on the income statement. That's the pretax number, correct?

Yes.

Okay then in the release you say you sold four development properties, 23.4 million. That looks like a 10 1/2 percent pretax yield. In your supplement you always give guidance for the pretax range. Which is 10 to 20 percent. This is at the bottom end of that range. Was there anything special that caused it to come in that low and what was the after-tax yield?

Actually the profit margin on those four development sales was just about 15 percent. You might recall that we said this previous quarter each quarter we have what we call dead deal cost that basically are netted out at that line and those costs run about $2 million a year. So it may not be smooth but the actual profit margin on those four deals is 15 percent pretax.

(MULTIPLE SPEAKERS)

Okay and then after-tax you're in the 7-12 percent range that you're normally?

Correct.

Are you releasing what the margins were on the sales to the Macquarie joint venture?

Yes just to the extent that we did announce that we sold Somerset Crossing to Macquarie in July and subsequent to quarter end at 7 1/3 cap rate. If you go back to previous supplementals you'll see what our development costs were for that property.

It well exceeds 15 percent.

Correct. Development costs of Somerset were about $17-$18 million. We sold it for $26 million.

Those numbers work.

Absolutely and just qualitatively we've had all the major shopping center REITs report here within a 48 to 72 hour period. I was just curious if there's any regulatory -- I hesitate to say pressure -- for you guys to get your earnings out quicker and that's why it's all fallen in a group?

Let me answer that I think it's a desire to try to report as early as we can. We do as you know we're going to have to file our Q by August 9th, so that there is some of that going on but we sympathize a little bit with analysts and investors that are jammed up trying to review everything and we're looking at is there an appropriate thing in terms of delay maybe a week so we spread this out a little bit more for everybody.

I was just curious if the regulators were (MULTIPLE SPEAKERS)--

There's nothing that we would make us do it here this week versus last -- next week, for example.

I was just wondering if they were getting more into the mix and haven't had enough of the Sarbanes Oxley and wanted to give us some more pressure.

Mike Mueller, J.P. Morgan.

Quick questions. You touched on dispositions. Just want to know where those sort of fit in terms of quality scale. Are those similar to the stuff you earmarked two years ago when you started the disposition program? Are they higher quality? How do they sort of shake out?

The disposition properties are (technical difficulty) lower quality non-strategic that we have exited from pretty much all the tertiary markets, including the secondary markets and now secondary and tertiary markets in Alabama and Mississippi so that's part of the strategy that is there. Wherever we see a risk we sell a property. We sold a property a year and a half ago in southern Florida. Publix anchored center and Publix just announced they are moving out of that center so that's a risk that we want to try to avoid. We sold a couple of Ralph's anchored center's in Northern California as a result of our concern about the risk related to Ralph. So those are the kinds of issues that we look at.

Is it fair to say that you guys are systematically calling the portfolio every year? Is it fair to say that the quality is stepping up each year?

In our view the quality of the portfolio -- both for the new investments and including, and especially in new developments and by what we're selling -- is continuing to meaningfully grow. And we also believe that our net asset value per share which we're not going to share our estimates with you is also growing in a meaningful basis.

Yes I believe that's an important point that Hap mentioned that what happens obviously is, theoretically, your cap rate would drop on a portfolio as a whole as you execute the strategy that Hap just went over.

To discuss this we've taken our exposure to Winn-Dixie from like 20 to now we are at 7 and I think we have one of those is -- we would love to get back into the process, I think Winn-Dixie is negotiating with respect to a prospective buyer on the center it's in the great infield location and then we got two on the market.

And one is under contract.

(OPERATOR INSTRUCTIONS)

Ian Weissman with UBS.

General industry question. Related to Dollar Stores which seems to be 1 of the fastest-growing concepts in the retail sector we've seen in recent years. Clearly they've become a formidable competitor to the grocers. What have you seen in your markets from Dollar Stores opening? And when you're looking to signing deals do you have any restrictions when signing a Dollar Store deal?

Let me touch a little bit about first of all why I think it's very strong business and it's a growing business and if you recall over the past several years how many -- two to three years ago we took a lot of our in line drug stores based when they were moving to Outparcels and we replaced those with Dollar Stores. What you're saying is because cost of the fact that the grocers are going into the same business in many cases and taking some linear feet and going into that business that there is definitely more friction between the grocers as well as the Dollar Stores. Can you put one in with the grocers? What kind of limitations both in terms of grocery store items they overlap and even now some of the Dollar Stores in terms of dollars quote unquote product. The Dollar Stores are seeing a big opportunity for instance Dollar Tree has expanded its space, where before they'd be in maybe 7 to 8000 square feet and they're looking at more 12-13,000 square feet and being a more general merchandising store at that price point. So, yes, there's restrictions from the grocers -- very difficult today going forward to put a grocer and a Dollar Store great replacement tenant where you have a big box and you can split it to put a Dollar Store and then another user next to it. And so I believe a very viable business. And some of them do a very good job.

Wouldn't you say, Mary Lou, that we have leveraged our good relationships with the anchor tenants to probably get more than our fair share of approval at putting in Dollar Stores even where there were restrictions in place?

We have. We've been able to get them to negotiate some deals where there are so many linear feet of grocery store items where there is packaged goods that we've been able to have them bend to a point. But they're getting tougher. They are getting tougher.

Are the only restrictions then SKU restrictions or the --?

That's interesting, that depends. Grocery store starts out that you can't put a Dollar Store. Period. You start working on negotiations and then it is more linear feet by category of what they can put in and what they can do. So it's a linear foot not necessarily the number of SKUs.

How many dollar store deals do you have out for the year and do you think you'll get done?

We only have a couple out right now and the two that we have out just what I said big boxes that we are dividing the space and putting in Dollar Stores. We have one up in Colorado that we've just negotiated a deal. And we have one other one that we're going to divide the space. So only a couple of deals at this point in time.

Eric Rothman with Wachovia Securities.

I just want to get a little bit more color on the dispositions in terms of the remaining $150 million. Should I assume that that will be split evenly over the next two quarters or more back weighted towards the fourth quarter?

It's pretty even.

And in terms of there are the lower quality non-strategic assets and I would estimate they're probably 4 percent of value by total assets by book value. What portion of your NOI do you think those assets are that you are selling is?

That we're selling this year?

Yes.

I think we're selling a little over 3 percent of I think of the NOI this year.

And then on -- back to the construction cost -- hope you can get a little bit more color there. The increase, are you seeing that mostly on the material side or is it on the labor side or is it a little bit of both?

Material side but you're in an environment where there's a lot of construction cost, lot of construction activity so you've got a lot of pressures on construction pricing that we haven't seen in many, many years. But most, specifically, from a material standpoint.

Have any of this predevelopment cost -- have those changed at all or has it gotten any more difficulty?

Well the challenge on the predevelopment side, Eric, is that there is demand for developments. On the one hand. And on the other hand, supermarkets are taking longer, entitlements are taking longer so it's critically important for our team to work very closely with the the landowners. They are critical part critical to our success of being able to keep the properties under control and as a result of that predevelopment costs could be rather substantial and as Lisa indicated we charged off $1.5 million $2 million a year because sometimes those developments don't pan out.

Has it gotten much more expensive to option land?

Yes.

And then just land costs in general. Where are those?

Land costs in general have escalated. But you haven't seen the type of increases in land costs within the last few months like we're seeing in construction cost. I mean they've already escalated to a reasonably high level.

Then, just lastly, with respect to the preferreds that's -- that's both the series B, C, and D. Is that right?

Those three series are what could be callable in September.

And then of course you would take the full D42 charge in the third quarter?

Correct.

(OPERATOR INSTRUCTIONS) Paul Puryear with Raymond James.

You spoke earlier about Albertson's. Could you just comment on your views on Albertson's as an anchor and are they in their competitive posture here and you see them being much stronger in some markets vs. others?

Absolutely, Mary Lou mentioned in her comments they've got a very focused strategy of being No. 1 or No. 2 in markets and where they've got a really good No. 1 or No. 2, a really good share in the market and like in Southern California they're making a lot of money they are investing a lot of capital. They're a great anchor. They got a prominent share, they're No. 1 in the Chicago market with their Jewel chain. They are terrific there. And in Dallas, I think next to Wal-Mart they've got the No. 1 share and they're a good anchor there. As everyone is probably aware they pulled out of Houston, San Antonio and Nashville which I think were good decisions.

And the Florida? In Florida they've not done as well either right?

It will be interesting to see what happens in Florida with Winn-Dixie and with Albertson's in the months and years ahead.

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

Once again, thank everyone for your time, your participation and your call and we wish everybody have a wonderful day.

Thank you. This now concludes today's Regency Centers Corp. second quarter 2004 earnings conference call. You may now disconnect.