Regency Centers Corp (REG) 2005 Q1 法說會逐字稿

Good morning. My name is Paula and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regency Center Corporation First Quarter 2005 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. The question and answer session will be conducted electronically. To ask a question, please do so by pressing star one on your touchtone telephone. Also, if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. I would now like to turn the conference over to Lisa Palmer, Senior Vice President, Capital Markets. Please go ahead, ma'am.

Thank you Paula and good morning. On the call this morning, I have Stein, Chairman and CEO; Mary Lou Fiala, President and COO; Bruce Johnson, CFO; Chris Leavitt, Senior Vice President and Treasurer, and Jamie Shelton, Vice President of Real Estate Accounting. Before we start, I'd like to address forward-looking statements that may be addressed on this call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by Regency Centers with the SEC, specifically the most reports on Forms 10-K and 10-Q, which identify these risk factors, which could cause actual results to differ from those contained in the forward-looking statements. I will now turn the call over to Bruce.

Thank you, Lisa. Good morning and thank you for joining us. Regency's first quarter results were exceptional. The fundamentals were strong in each key facet of our business. Same property net operating income, the performance of in-process developments, the growth of the development pipeline, and capital recycling and joint ventures. For the first quarter FFO was $57.3 million with FFO per share growing by 31% over the first quarter of last year to $0.89. Components of this growth were $0.07 from new investments and via both wholly owned and joint venture investments, net of NOI reductions for dispositions, $0.05 from growth in same property NOI, $0.15 from increased profits from development and outparcel sales, $0.03 from increased fee income, and a penny from lower interest and preferred costs. This $0.31 increase was offset by a $0.10 reduction due to higher G&A expense, reduced straight-line rent income, and increase in weighted average shares. The nearly $3 million year-over-year increase in G&A was in line with our plan and primarily a result of expensing of stock options, the accrual of incentive comp related to higher level of FFO per share growth, and adding a new layer of restricted stock grants.

In 2005, we expect G&A to be more than -- $7 million higher than it was in 2004. This is a $3 million increase over the last quarter's guidance and is directly a result of the new staffing plan for CalPERS First Washington acquisition. The $3 million increase is consistent with the underwrite of a portfolio. Despite the absolute increase, G&A as a percentage of revenues under management is expected to decrease from 5.6% to 4.9%.

For the year, FFO per share is expected to be in the range of $3.55 to $3.63, consistent with the 4 t0 6% accretion guidance that we gave in conjunction with the announcement of the First Washington acquisition. With respect to the CalPERS/First Washington acquisition, we are on track to close this acquisition on June 1. From an operational perspective, as Mary Lou will discuss, we are ready to close now. What is driving the timing is the assumption of approximately $100 million of mortgages. We have locked the interest on nearly all the new mortgages to be closed. The weighted average interest rate on the approximately $1.7 billion of new debt, including 20% portion that will be flowing is under 5%. Regency's equity requirement will be initially funded through its $275 million Bridge facility and its existing line. On a permanent basis, the equity required would be financed by the closing of the $200 million forward equity sale and the accelerated operating property sales we've announced over the next 18 months.

You may have also known that we've increased our expected debt offering this year from $150 million to $200 million. During the quarter, the Company entered into a forward-starting swap transaction, much like we did last year, to hedge this $200 million ten-year notes that we're planning to issue in July. The effective rate is expected to be in the range of 5.6% to 5.7%. The new notes will be used to pay the $100 million of notes maturing that month and reducing our line balance. In order to better provide disclosure and transparency, we have made a number of enhancements to our supplemental financial information beyond the new cover page, which is posted on our website. Most of these enhancements like pro rata operating statistics relate to our joint venture activity. You will also note that we have added an earnings and valuation guidance as page 38 which outlines the CalPERS/First Washington Portfolio acquisition fee schedule. In addition to the fees that are outlined in the addendum, we will also be offsetting transaction related expenses, that will total $5.4 million and be paid at closing. These are the same fees and expenses that we disclosed at the announcement of the transaction. We will post a corrective supplemental reflecting this maybe following the call. I will now turn the call over to Mary Lou to briefly highlight our operating results and update you on the integration of the CalPERS/First Washington Portfolio.

Thank you so much, Bruce. Good morning everyone. Regency had a strong first quarter with our key operating metrics exceeding plan. Occupancy remained high at over 95%. Rent growth continues to be a driver as same-store growth and approached 10% for the quarter. Approximately half of our run rate growth stems from contractual increases in the leases. The balance is from higher rents, and new and renewal transaction. Same-store NOI growth for the quarter was 5% with over 50% of this growth generated from high rent and the remaining from increase in favorable occupancy, better favorable net expenses, and termination fees.

Based on past experience, termination fees are relatively stable year after year. As a result, we expect to receive fewer termination fees throughout the remainder of the year. We also expect by year-end, our recovery ratio will be in the 78-80% range. Consequently, same-store growth should moderate somewhere in the 2% range for the remaining quarters, resulting in a full year growth of 2.5-2.8%, somewhat higher than our previous guidance. The fact that Regency has been able to achieve same property NOI growth in excess of 2.5% for 6 consecutive years is a testament to the quality of the portfolio and the effectiveness of the operating system. These impressive results have been attained while occupancy has remained in the 95% range.

A disciplined approach to our investment, operating, and recycling strategies has enabled Regency to build an extremely high quality portfolio in outstanding markets throughout the country that generates stable reliable growth. Now, let's talk about the tremendous progress on CalPERS/First Washington, our acquisition. The first quarter results were strong as Regency's. Occupancy remained at 96% and rent growth was comparable to Regency's at nearly 10%, and we are on target to achieve a 3 plus percent same-store NOI.

In speaking of this, as Bruce mentioned, we have made tremendous progress on our integration plan with CalPERS/First Washington. The more time that we spend on the properties, truly the more excited we become about the opportunities for our future growth. As I have mentioned before, one of the major opportunities of this acquisition is applying our industry leading operating systems, our premier customer initiative, in particular to their desirable in-field location. 67% of First Washington's portfolio has lead to national or regional retailers compared to Regency's 78%. We see an opportunity to not only introduce new retailers into this portfolio but also to increase rental rate at the same time and our renewal rate as well. As we have seen, in Regency's portfolio, national and regional retailers have a higher retention rate and we expect to increase the renewal rate in their portfolio from their current 65% to a number closer to ours at 78%.

From a leasing and property management perspective, Regency and First Washington are operating as one team where if we could cause the First Washington's asset management, there is a Regency's leasing officer in each market directly overseeing all leasing. We have already assumed management and leasing in two centers, one in North Carolina and another in Florida from a third-party manager and have negotiated the hiring of First Washington's Chicago team to manage all of Regency's properties in that market. Bruce also mentioned that new staffing that will be required as a result of the acquisition. With a few exceptions, all positions have been sold. At closing, Regency will assume all accounting and financial reporting. By mid-May we will have integrated all data into our systems. We've realized the challenges of integrating a 101 properties, but we are confident that we will achieve our investment and our operating objectives from this portfolio. Hap?

Thank Mary Lou and good morning. As Bruce and Mary Lou reported, Regency's first quarter results were exceptional. Each component of Regency's business is performing extremely well, especially the high-quality operating portfolio, which once again produced outstanding results that was described by Mary Lou. At the same time, Regency's shareholders continue to profit from the successful execution of our development, capital recycling, and joint venture strategies. Regency's in-process developments, totaling over $600 million are 80% leased and committed while only 56% funded.

At projected returns of 10.3% and assuming a 7% market cap rate, the estimated value created from these developments should be approximately $250 million and the higher probability pipeline of over $500 million is the largest ever. Last year at this time it was $350 million and we were real pleased with that. The depth and quality of the pipeline makes us confident that we will achieve 300 to $350 million of new starts this year at average returns in excess of 10%, once again, using the 7% cap rate that translates the $300 million of new starts into a $100 million of future value. However, the challenge to maintain this level of development at these returns has never been greater.

In addition to slowing supermarket growth, competition for development opportunities intensified, yet other developers are now accepting much lower returns on the premise, the cap rates will remain as stark lows. Downward pressure is not only intense on returns, but it is also reducing the time sellers are allowing for due diligence as well securing entitlements and anchor leases. The key to Regency's proven track record and future success in the current environment is our team of 24 investment officers, who are strategically located in key markets throughout the country, who have in-depth knowledge of the local markets, it is a benefit from excellent relationships with leading retail anchors.

The team not only works closely with Regency's traditional supermarket anchors, Kroger, Publix, Safeway, and Albertsons. It is also building strong relationships with HEB, will soon be working on several joint ventures, target who is anchoring the most centers in our pipeline, Stater Brothers, the Dominant Grocer in the Inland Empire, and Wal-Mart. Also critical to our future development and success is the team's ability to partner with the landowners, brokers and local developers who control these precious development opportunities. Speaking of intense competition, cap rates for acquisitions continued to fall to unprecedented levels, 8 centers are trading in the 5.5 to 7% range.

In spite of this, Regency has had some success, we've been able to leverage our relationships with sellers, negotiate the purchase of quality centers. Beyond the CalPERS/First Washington portfolio, we would like to see a modest amount of additional acquisitions this year. We closed our on center in Chicago, it is a dual-anchored center with Macquarie countrywide and 2 others under contract which we have targeted for joint venture with CalSTRS. The under Regency will enhance about 100-150 basis points. The 7% unleveraged going in return is worth noting that none of these three acquisitions were purchased in a wide bid situations, which should become unbelievably friendly. In addition to talented management the other essential asset that enables Regency to execute these strategies effectively as we do is the Company's strong balance sheet.

We remain committed to a conservative approach to managing the balance sheet. As we believe it will position Regency to continue to grow shareholder value in the long term and be less susceptible to changes in the capital markets like rising interest rates and falling stock prices. As Bruce mentioned earlier, we executed a hedge on April 1st, fix the rate on $200 million of 10-year notes that we plan to issue this summer. In our view, fixing interest rates for 10 years of 5.6% to 5.7% is no-brainer, it makes compelling sense in this environment, especially when you consider the uncertainty in interest rates that is out there. At the same time, we maintain a strong balance sheet. We are committed to being prudent stewards of shareholder capital. In our view, Regency's track record of self-funding our investment, investments is pretty darn impressive.

Over the last five years, we've invested over $2.3 billion in new developments and acquisitions and issued less than $100 million in equity including partnership units. During the same period, the rating agencies have maintained Regency's investment grade ratings. We feel that issuing $200 million of equity to fund $2.7 billion acquisition of CalPERS/First Washington portfolio, it's consistent with Regency's sound investment and financing strategy. These proactive measures to maintain a strong and conservative balance sheet let us sleep very soundly at night. Before my concluding remarks, I do want to take another moment to pat us on the back again because Regency was one of 34 out of 3000 public companies that achieved the highest Corporate Governance rating from GMI. We are proud of the recognition given for how seriously we take our role as stewards and the importance we place on transparency. We realize that these responsibilities are ongoing.

During the last year, we've taken the following steps; move from a staggered board to annual election of all Directors, started expensing options in both the directored stock ownership guidelines that we think are among the strongest in the industry. In addition, Regency received two clean opinions on SOX 404. In summary, the first quarter was an excellent start for Regency in 2005. In spite of the challenges, we are extremely excited about each component of Regency's business. Jamie, Lisa, Chris, Bruce, Mary Lou, and I are blessed to work each and every day with an exceptional management team. That team will stick to Regency's tried and true strategy, which we expect to generate returns on equity in excess of 13%, produce FFO per share in excess of 10.5% this year, and it is our plan to have FFO per share in 2006 of about 6 to 7% from the plateau that we are setting this year, and then return to Regency's target of 8% growth in per-share funds from operations. We appreciate your time and will now answer any questions you may have. We do ask that you limit your questions to two at a time, and if you still have questions you can always return to the queue for additional questions.

[OPERATOR INSTRUCTIONS]. Chris Capolongo, Deutsche Bank.

Mary Lou, I was wondering, if you could give zero in on the NOI growth. Was the lease term fees higher in the quarter because it really a seasonal impact or were there any big ones in there?

I'm not -- what do you mean exactly?

For the NOI growth, 5% in the first quarter, you said..?

Let me just break down for you. The NOI growth in the first quarter was overall 5% and as I said 50% of that came from pure rate growth, then we had a bit of occupancy increase quarter-to-quarter, first quarter to first quarter of last year, so we had a little higher occupancy. We did have some favorable net expenses. When you look at what our recoveries were and what we actually expensed, there was some plus to that, and then the rest of it was really one-time termination fees. And if you look at our annual, we typically do about 2 million a year in termination fees and this quarter, we had a significant amount. So, if we take that average over the next quarters, we are not going to see this kind of increase. So, the increase in occupancy, increase in the -- higher rents are sustainable, which will get us to more of a normal 2% growth, but there were some special things this quarter, obviously, that brought us up to the 5% growth.

So, there's nothing abnormal or large?

No.

Okay. And then, I was just thinking through expirations, the anchor expirations in '06 and '07, maybe it's too soon, but just give thoughts on in looking at those centers, how well are they doing, is there any risk there at all?

The First Washington portfolio?

No, just in your own portfolio, anchor expirations step up a little bit --?

No, I really don't see anything. I mean our expirations are pretty consistent year after year, and I don't see anything out of the ordinary at this point in time.

Okay. Thanks.

Chris, I might just give you a little bit more color on that. We're really a little bit more proactive in just 1 to 2 years out. We're concerned about anchors, because it's too late to dispose the property at that point if you've already got the problems. So, we spend more time and have certainly -- we've only got a year to allow for this kind of disposition level. That means we're comfortable with it.

Right, that's a good comment.

Thanks very much.

Steve Sakwa, Merrill Lynch.

Good morning. I just wanted to know if you could clarify your comment about that 6-7%,

growth. Are you suggesting that that's off of the, I guess, artificially high number this year because of the fees or is that off of a more normalized number? I'm just a little confused.

Well, Steve, just to clarify, we don't -- artificial, we don't quite like that word there, but the point that I'm making is, is that includes all of the fee income that we expect to receive including from the First Washington transaction. So, as I said, we're going to be at in fact a higher plateau, the guidance range that we've given is 355 to 363, and from that plateau, we expect to grow in 2006 in the 6-7% range, and it's our hope to grow at -- return to the 8% growth thereafter, so from an effect, from the new level that we were giving guidance for this year.

Right, I guess when I say artificial, you have got some very large fees that are coming in off

of a large transaction unless you assume that you will replicate that kind of a deal in '06 --?

Steve, it's not our assumption that we'll replicate that kind of a deal in '06, but what we're saying is that our plan would be to grow off of that base, including those fees in '05 to somewhere in the 6-7% in '06, and then hopefully 8% thereafter.

Okay.

Steve, this is Bruce. It may be helpful for you to refer to the addendum guidance there in terms of -- because some of those relate to the timing of when fees are going to be recognized. As an example, the asset management fees, basically we aren't going to receive until -- for 18 months. So, some of that effect will get -- there's some timing issues, but not all that occurs in '05 is an example.

No, I understand, I will circle back off line because I think at least we felt like we had handled that at the time of the First Washington deal, we brought those fees out. So, I won't believe we're at that point here. Just as I looked at the development schedule, there were a couple of projects where costs shot up quite a bit, and I guess I was just not sure why you're still showing some projects that have in effect '03 delivery days, still on the development schedule, and I just wanted to know if you could maybe comment on that?

Ms. Fiala, do you want to make a shot at that?

Sure. I'm not sure exactly what properties -- where the cost shot up --?

Well, I think Clayton, when I looked up last quarter to this quarter.

In Clayton, we've gone, we've finalized our redevelopment plan, and it's going to be a -- we're going to put in a division of in there. And this is good news, because we're going to achieve, make that into a first-class brand new shopping center. So, that was the rational of what's happening in the Clayton.

Got you. I guess the cost went up by over 20 million, the square footage only went up by maybe 18,000 --?

Yes, but we're taking a old tired center and going in there with a brand new supermarket, relocating Longs Drugs, doing a major renovation as a result, that was the reason that occurred there. And in fact, we're going to have a brand new center at the end of the day. In some other cases, that may not be as dramatic, what we're doing is we're converting an outparcel sales to land leases and that will result in a -- we don't get the benefit from a cost-reduction standpoint. And in other cases, we're adding also square footage.

And I'll comment, Steve, on the deliveries of '03. It's actually when the anchor was opened and started paying rents. And then, the ones that were open in the latter part of '03, the Company policy is basically regardless of what percent lease that is, after 18 months, it rolls into the operating property portfolio. There are two on here that would fit that 18 months, and both cases there are actually redevelopments. Like for example, the Publix in Birmingham, Publix started paying rent much earlier before we started doing some of the work on this center. So, you will see that roll off next quarter.

Okay. So, we should expect to see -- or we could see things up here for 18 months and then it rolls out regardless?

Correct. But typically I think that you've sat for some of our presentations, I mean our centers are actually stabilizing typically within 12 months after anchor opening. So, these -- you are basically -- you are highlighting our difficult centers that we've had problems with, we're not perfect all the time.

Okay. Thanks.

Thanks Steve.

Michael Bilerman, Smith Barney.

Hi, good morning this is David Carlyle with Mike and John . I was wondering if you could help me understand your new guidance a little bit better. You raised the '05 guidance $0.16 to $0.17, from what you had prior to the First Washington. The First Washington deal is having about $0.19 of the income? I guess you raised your third party leasing commissions. That is about $13 million. It appears that your guidance should be about $0.02 to $0.03 higher. What is the cause of the discrepancy?

Well there are increased costs that show up in the G&A that we disclosed. That would be part of it. Share count it changes--

--and also if you noted in Bruce's comments, it was an over sight on our part to not include the offset expenses basically to the when we put up the supplemental yesterday, and that was Bruce was talking about when he said or going to show a version, It's basically it is adding that pious over $5 million in fees that can offset acquisition fees this year.

And even when you add in the higher growth and rental growth as a percentage of rent that you are expecting? You still will get $0.03 lower.

Where I guess, my answer would be, we are comfortable with what we have worked around and we think that it's very consistent with the numbers that we had talked about earlier and in fact the numbers are very similar to what we talked about earlier and we have actually delayed closing for obvious

Bruce, it's John , what are the implications for'06? Clearly this is going to burn off. Are we going to basically be looking at flat year over year?

What we indicated John, was that we expected to grow from this level by 6 to 7% in '06 and then backup to 8% in the following year.

I am sorry, I missed the beginning of the call; I was on the CPL call. The 6 to 7% is off of your '05 level and that is -- what's driving that because you haven't replaced the fee income this year?

Some of the fee income occurs in '06 and continue growth in same property in net operating income and the other drivers of growth including developings coming online.

How much of it is --

We're referring to the guidance there John, that's how we added the fee, page and guidance. Page 3 of the supplemental. Because a lot of it is -- what you will find there is a lot of timing is -- you apparently came on after I made the response to Steve, but effectively, just as an example, I ask that management please don't kick in until 18 months, probably management feels fees can scale up and some of the acquisition fee is deferred and you will see that outlined in the addendum that we put in the supplemental.

Fees will also -- would be driving a big chunk in your next year's growth, from the First Washington deal? To come back to -- I heard a little bit on the Clayton deal, what is the now effective yield on the Clayton deal?

It's actually if you look in the supplemental right around 9% and that -- it's an acquisition redevelopment, that was not a ground up development.

So, even with the increased cost you still think you are going to hit that 9?

Yes, I think the initial return was significantly less than that. And the incremental returns posted 10.

Great thank you

Andrew Rosivach, Credit Suisse First Boston.

Hi, guys. Just another question on the fees. What I am trying to do is marry the third party fees and commission on your guidance of 22.5 to 25.5, which seems to have gone up about $12 million from last quarter to the numbers that you have got on page 38. Obviously some of it is because you have got to speak million numbers, some of it is deferred. I am guessing it has something to do with the expense comments you've had Bruce? But is there any kind of quick and easy way to tie those 2 numbers together?

Look, don't forgot the 65% recognition.(multiple Speakers)

So basically take your total fees, subtract our (audio disturbance) our expense offsets, multiply that by 65% and you should be in the ballpark.

Okay. And the fees that I would use, I'd have to subtract off 14 million as well, right? You know I can get that this year.

That is a deferred

Okay, and just in terms of timing, how much of that is getting included in your second quarter of 87 and 96?

If you fees are on, basically the acquisition fee that we are earning this year will be earned at closing. So that would be in the second quarter number as well as the due diligent fee. The debt placement fee will actually occur as the mortgages close, so that could be spread between the second quarter and third quarter. We expect that we are going to close maybe a third of the mortgages in the second quarter.

Okay. Terrific. Thanks guys.

Andrew I just make one of the comments on the fees side. This is for John as well. For up to two years, our is going to effectively one half of the portfolio. For the initial 6-month period it would be 3% and then it would be 2.5% beyond that. That effectively comes out of our property management fees. So our fees again do scale up over time. This is part of the answer to the questions that have been raised earlier.

(OPERATOR INSTRUCTIONS) Matthew Ostrower, Morgan Stanley

Talking about 2006 guidance a little bit more, can you talk about your assumption as it relates to gains in that year? One of the things recurring theme has been -- I guess an overall goal of driving down the representation of gains within FFO. Would you be getting to your 2006 growth, I know gains have to be a part of that as they've been for many years, but would it be safe to say that this will be another deferral in terms of reducing the representation of gains in order to be able to build up that 6% growth rate you are driving for?

I think the gains are going to be in the same ballpark they will be in 2005.

Okay.

Percentage is not absolute.

Okay. That would include as well as development I assume?

Yes, that's correct. When we look at that, we look at both, that's correct.

We do expect that there will be some as percentage sum modest reduction from where we were last year from 2004 to 2005. 2006 ought to be in the same range and then hopefully that will be another step down in from 2006 to 2007.

And then staying on the topic of development gains for my second question, you look to -- I won't break the rules guys.

I would there too?

I am very supportive of that. Would you -- it looks to me like your margins and your tax rate were very good on the development side of the equation this quarter. Is that something that you observed as well, am I looking at the numbers the right way and if so can you discuss what might have been there?

Actually Chris. Chris spent a lot of time and his group is just working with that old issue not only on a historical -- we actually charge in taxes on an accrual basis, but also on a forecasting basis. Chris, give some color.

Actually, our first quarter from a tax provision standpoint ran about just slightly more than 17% of the gross profit. I think if you look back historically, that was down from the fourth quarter, but it was significantly higher than all the previous' quarters prior to that. I think if you go back historically, you look and see the tax provision percentage to the gross was actually down below 15% and for years it was down below 10%. What that really means is our margins are more positive because we are effectively paying more taxes. What you are seeing in the first quarter, I think is a pretty good representation of what you will see all year. Obviously, as we move through the year and we sort of hit that plateau of gross profits over the expenses and then we start adding pure or higher margin profit. As we go to the year, our effective tax rate will go up. We try to factor in all expectations from an expense standpoint when we allocate our tax provision, but I think what you are seeing in the first quarter is not extraordinarily low or anything pushing it down. I think, it's a good run rate going forward.

Okay. So is it safe to say-- I know this is a follow-up. Is it safe to say that on that profitability, which seems to be getting better over time, this is a product of the growing spread between development and acquisition (cap and as you continue to deliver developments on low land, we should continue to see those margins expand or at least stay at the sort of higher than usual level?

If we could maintain 10% development returns and the capital markets from a sales standpoint stay where they are, you will continue to see huge margins.

Okay great. Thank you.

Thank you, Matt.

Jeff Donnelly, Wachovia Securities

Good morning, Hap. Actually, this is a follow-up to that. I was coming -- your in-process development pipeline a little differently. I was looking at projects where the anchor opened after the year 2005 versus on those that had opened before. And those projects were opened after the NOI yield was about 9.7% or about a 130 basis points below those that were opened prior to 2005. Is that a good way to look at or could we get a sense of percentage, if you will of your developments and is that 130 basis point compression, maybe the extent of the yield contraction we should see on developments?

Actually, Jeff, I really think it is on a case-by-case basis. And it's unfair to talk in averages. I mean, if you look at the 4S project, which has an '06 opening, I mean the yield was not as nearly a 11%. And then you have, the Clayton has a 9% return, but that's because it is an acquisition REIT development. The Shops of Santa Barbara is a Phase II and that's got -- that's a post '05 opening and that's got a return in the 8% range.

I don't think, you can use that data. I think the date it's more, which we don't publish is the date we started working on the project. 4S is an example, we have been working on for a number and number of years and which is one reason why we have maintained -- and pulsates in a monopoly position and so we are able to get a control of the yields better there, but I think that's more relevant than the dates we see in this--

And I would also add though you have talked about the 500 million plus high probability pipeline that still is showing returns in the 10% range. So it's on a project-by-project basis, you can talk averages. It's probably unfair. It's -- as Hap mentioned on the call, it's beyond that $500 million where we believe we are going to start to see more pressure on those returns.

And just so we are all talking apples-to-apples. The in-process developments, which you call the pipeline, Jeff, and those are developments that are under construction, underway, in lease, the pipeline that we refer to are properties that we would do have under contract, expect to have under contract, and we think that there is a reason, reasonably half probability that we will close one this year, and as Lisa mentioned for various reasons about the in-process developments and half probability developments, they may vary in returns, but in general the returns are in 10% range. But, as we noted in our comments, we are seeing a lot of pressure not only on returns, but also on the timing and on the part of seller saying, you've got to go ahead and close now with a minimal amount of diligence, we are not going to get time to fully get your entitlements and/or get the commitment from the anchored tenant.

Okay. Yes, I agree with Bruce's comments that it probably matters more when the project began as opposed to when it is delivered, but as you said that's not disclosed here. But I guess, I would add though that, I don't think it's necessarily unmeaningful sample, just because the way that actually splits out in almost 60, 40 in terms of the dollars in the development pipeline.

We are not seeing that in the -- once again for the most parts. We didn't like -- use the trend line that was going from 12 to 11 and it's 10 now and we see it's going to 9.5. It's been pretty constant, if you look at the last 5 years of those developments that we have completed, it's been in the -- at the property levels, it's been about 10.5% has been about the average. And I think the probability pipeline will continue to support that. So there is a lot of transparency going out a year, 2 or 3. It's beyond that where we got a little bit of a challenge on hand. But it's always been challenging out there and I think our team is doing a terrific job to continue to sustain that development program.

Okay and thank you. And Mary Lou, could you comment me on how the First Washington portfolio has performed, I guess the year-to-date or as the recent of date you can give us from operations standpoint, I mean, specifically occupancy, cash rent increases or same in line.

Sure. They are at about 96% occupied, which was -- we thought they would be at, rental rate growth is just about 10%, which is being consistent with that portfolio and right now they are slightly over their plan for the quarter and on target to exceed their plan by a small amount, I think for the year and which would be over 3% plus same-store growth. So, we are very happy with the way that the portfolio is performing. And we have looked at obviously all these properties and identified probably, a dozen or more over the next several years that we think that there is significant upside an opportunity where we are going to get some nice growth. So our plan of doing 3 plus percent NOI from everything that we see today, we are so excited about and we feel very confident that we will be able to achieve those numbers.

Is that a cash rated growth and is there any mechanism to adjust pricing at closing to the extent of any material change?

Well, first of all it is a cash rent growth and as far as the mechanism, not really.

At this point there is not. We are very comfortable with how we've underwritten and how the number -- and how everything is looking relative to what we expected in underwriting?

But, Jeff I will tell you, we have spend a lot of time obviously over the past couple of months, literally looking space by space and what we underwrote it at, and what the rents are, what is the timing of releasing spaces, where we think we can get, and we really just couldn't be anymore comfortable with the portfolio in total.

And, I might add, Mary Lou, Jim Thompson, and Brian Smith made a presentation to our board yesterday as far as some of the redevelopment opportunities, and they are well beyond our expectations. Hear there was a lot of smiles in that boardroom yesterday, and there is a lot of smiles on the -- as a mater of fact the core is on a property tour right now. Lisa was just out there with them yesterday and they've seen a lot of smiles, thus I understand.

Ross Nussbaum, Banc of America.

Good morning, everyone. First question, your cap rate and disposition that you are forecasting year of 8.6% seemed a little high to me. If you have to look at your whole portfolio, let us say the 4 billion plus of consolidated assets, what percentage of your portfolio do you think that that kind of the cap rate would be applicable to?

Less than 5%.

Okay, so if I kind of think about your comment on the 5.5 to 7% cap rates on Class A assets, clearly in your mind that is the overwhelming majority here?

Absolutely. We got through -- otherwise I can answer that. So easily as we actually go through that process not portfolio every year in December in terms of grading the properties as well as assign a cap rate to it.

Okay, second question is, if I recall correctly you have got an option to acquire an additional stake in the First Washington deal from Macquarie. Can you talk about where that stands right now?

No, we don't have an option to -- they have an option to buy -- there has been a discussion about that and maybe some consideration -- but there is no written option there, there is no obligation on their part to increase their own share from 65 to 75%.

Right, so it is on there -- there we have to buy additional stakes. So at this point there is no color, you can add on whether or not that is going to happen?

No color on that right now, Ross, at all.

Carey Callaghan, Goldman Sachs.

Why don't you talk a little bit about your volume relationship with Target? As I look at, you mentioned that Target was anchoring the most centers in your pipeline?

Pipeline is not something that we disclose. What is disclosed is the end process developments, which are those developments that are already under construction and lease out.

I see. So, it is definitely things that are under negotiation or opportunities your exploring as well?

Right.

Okay, now is this mostly for sale or for them to be a rent-paying tenant?

For the most part Target would earn their pay.

Okay, we wouldn't really expect them to creep into your top-10 tenant list over at least the next 5 years from this pipeline?

Obviously from the realm of revenue received, no.

Okay. Now, is there a -- is this having any strain? I know that the grocers that are your biggest rent paying tenants aren't necessarily growing, expending, they are certainly relocating. Is this affecting relationships with some of your largest grocery tenants that you are doing a lot more development for Target?

No, as a matter of fact, they love having Target as co-anchor.

Target as a co-anchor, obviously without their aspirations to have the super stores with grocery...

And, most of the time that is the case. But I would say that Target is a great co-anchor for....

If you look at the four that are in process, developments for Target, three of them have groceries, you know, co-anchors.

And I might add that we are working on a development that Target is the anchor, and they are helping us to attract a measurable blockbuster supermarket to the center. So they are actively working on our behalf in that regard. Of course they see the synergistic relationship there.

Can I deduce from this, at least with your relationship with Target, they are not as -- they don't aspire as much as Wal-Mart does to try to make every store that they've built be a superstore?

Not at all, although they do carry a lot of health and beauty aids, and lot of other ancillaries, supermarket stuff that does compete with them, but I would say a small percentage of their....

If you listen to the Target people, and you listen to the Wal-Mart people, the Wal-Mart people absolutely see themselves as a grocery store carrying general merchandise. Target definitely sees them as a general merchandise store, and has done a very good job at home as well as in ready-to-wear and fashion, and convenience products, and at times grocers. But they don't see themselves -- that is -- that is their strength and their focus. Their focus of driving customer traffic is the general merchandise and having everything that they could pick up conveniently. So, that is their strategy and they have executed extremely well.

Okay, it is very helpful. Thank you.

Steve Sakwa with Merrill Lynch.

Bruce, I was just wondering if you could maybe go back to page 38 and at least what I had from that acquisition fees was that, you are going to probably earn about half of that when the deal closed and that out of that sort of first 50% tranche, I guess a structuring fee was paid to . Is that still -- I'm sorry?

That's correct.

Okay. And then the other 50%, I guess I had sort of assumed that it was deferred and paid out over a number of quarters and it sounds like it may be more sort of compressed into '06 just --?

What I said is we expect -- 9 million would be in '06 and then remaining are the deferred, subject to earn out, which would be -- $5.2 million would be available to be paid at the end of the third year to the extent that we met our earn-out requirements.

And just to be clear, the 9, I guess, is on the gross, you could really only record 65% of 9?

That's correct.

Okay. Thank you.

Ross Nussbaum, Banc of America.

Thanks. My follow-up was, I just wanted to clarify this, the 5.4 million in January --?

You've got a smile on your face!

I do have a smile on my face.

And Ross, I do too!

I'm smiling at Lisa. The 5.4 million transaction expenses that you are going to incur, is that a second or third quarter event?

That will happen at closing as well.

So, that's a Q2 event?

Q2 event. Correct.

Is that -- I don't recall you discussing that when you first announced the transaction. Is that something that kind of a -- was not --?

No, that would not be new, that really is predominantly related to arrangement fees paid to McQuarrie affiliate.

Gotcha. Okay. Thank you.

Jeff Donnelly, Wachovia Securities.

I have a smile as well.

How many -- actually how many follow-up questions are permitted, Lisa?

You get two more this time.

Thank you. Actually, Mary Lou, I was just curious of your take on this. Just there are so many pundits out there today calling for slowing economy. I was curious if just Regency -- are you guys seeing either in your leasing pace or I guess I will call your tentative prospect leasing volume, does it bear that out? I mean do you have a view on what you see now there?

We've been fortunate. You know like -- I'll go back to the fact that our strategy has paid off for us and for you all is that the retailers are definitely identifying high quality and making sure that they are growing in a high quality portfolio, appreciating the strength of grocery store sales and the co-tenancy that we provide in our centers. And so, we are not seeing a slow down and as a matter of fact I tell you that hiring the First Washington, I'm not telling how many calls we've gotten from our national retailers to meet with us how can we grow in those centers and to take, you know, from our view, our level of national and regional players. Certainly there retail has slowed down to a certain extent, I think overall retail has dropped a percent from the end of last year to the first quarter this year, it's overall about 2.3% in total retailers and a really varies by category. Soft goods continues to be good. Power centers have had a difficult time. Groceries, for the first quarter, for the first time in a while, are really starting to see some nice increases. I'm pleased to see that because that has been a tough business for the last couple of years and I'm starting to see that they are starting to turn the comp store sales around. So, it is, you know, I think it depends on the product you have, it depends on your tenant mix, and I really believe it's the quality of real estate. And the fact that we've been able to maintain the 95% plus occupancy, you know, six plus years, and some of our peers have done equally as well with high quality. You're just seeing kind of this fabrication of quality versus bad quality and what's happening to the real estate.

I guess a similar question for Bruce. Some of the other management teams out there, particularly the retail REITs are making bets on the shape of the yield curve, some of them are preparing for the worse and no change at all. I guess what way do you have -- what direction do you think they kind of may take and I guess you know what the risks and opportunities for Regency over the next, call it, 2 years and maybe more specifically a housekeeping question --?

I have a newsletter that I put out weekly, Jeff, that you want to get in, I guess on all of this. Unfortunately, we don't know. I think Hap expressed the philosophy of the Company very well. And if you look at historically, we have been extremely conservative. Hap often says we make a decision to pull a rating lock and all of a sudden rates go back down. But we are very comfortable in terms of our strategy taking advantage of what we consider a low interest rate environment and taking advantage of fixing debt for as long as we can. Our preference would be to do -- go longer in tenants, in fact, there was a market there for it, but -- so if you see all of the issuances we've done in the last 5 years, I think, have been 10-year issues.

Needs a new CFO to time those locks better.

I've been encouraged by the CEO.

Just one follow-up on that, Bruce. There are about $175 million of maturities in the next 12 to 15 months, I think around 8% yields, the lion's share I think has come in this July. Are you going to roll those refinancings into the activity you expect to recast First Washington into the balance sheet?

No, not on that balance sheet as such, I mean, you will see being taken up by the -- I told you we went from 150 to 200 for guidance on that, in fact it is taken up there, and we'll just look at -- often times what happens is that, if we have an individual mortgage that rolls over, we just pay off with our line and just sit there until we are ready to issue more debt. We like to have debt go out in tranches of a 150 or better at the time.

But, as Bruce mentioned, I don't know whether you caught it, we have locked $200 million of 10-year financing for this summer, 85, 65 .

Steve Sakwa, Merrill Lynch.

I want to use my second follow-up question.

Be careful.

When you're talking about '06, and I realize you're not giving a lot of detail there, but does your sort of assumption of that growth rate, kind of assume that things like third-party fees and merchant building gains would be kind of flat from '05 levels or does that assume any kind of acceleration in that business?

In general, we expect a modest reduction in gains as a percentage of funds from operations from '04 to '05 and we expect in general the development gain as a percentage of funds from operations to be a little bit less. So, in fact we are growing up this new level even though we are having some modest reduction in gains as a percentage of funds from operations and we expect to be about -- '06 to '05 to be about the same.

Okay, but I guess in absolute dollars, it could be flat, it's just as the

I think you'll find. I'm sorry, this is Bruce. You'll find because the percent will be about the same, the absolute will be higher in '06 compared to '05.

Okay. So, the absolute dollar. So, your projections are that the merchant development gains will actually increase in dollar volume?

I mean, because if the percentage is the same, and once again, it's a lower percentage from '04 to '05, we will drop about 6 to 7% and you would expect it to grow by about 6 to 7%.

And Mr. Stein there are no further questions. I would like to turn the conference back to you for any additional or closing remarks.

Once again we appreciate your time, your interest in the Company though everybody has got an extremely busy schedule, so everybody have a great day and great week. Thanks very much, bye.

That concludes today's conference. We do thank you for your participation.