Regency Centers Corp (REG) 2005 Q2 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 second 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. (OPERATOR INSTRUCTIONS).

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 everyone. On the call this morning are Hap Stein, Chairman and CEO, Mary Lou Fiala, President and COO, Bruce Johnson, CFO, Chris Leavitt, Senior Vice President and Treasurer and Jamie (ph) Shelton, Vice President.

Before we start I would like to address forward-looking statements that may be addressed on the 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 Corporation with the SEC, specifically the most recent reports on Forms 10-K in 10-Q which identify important risk factors which could cause actual results to differ from those contained in these forward-looking statements. I will now turn the call over to Bruce.

Thanks, Lisa, for putting us through that. Good morning and thank you for joining us.

Regency's second quarter results built on momentum created in the first quarter. As you'll hear from Hap and Mary Lou, the fundamentals remain strong in each facet of the business and the addition of the First Washington properties only improves an already exceptional portfolio.

My presentation will include a lot of numbers. So I ask your patience as I go through the activity in the quarter.

FFO per share in the second quarter grew to $1.01, a $0.26 increase or nearly 35% over last year. This growth was driven by 3 primary reasons. Increased NOI from (indiscernible) properties, stabilized developments and new acquisitions. Second, higher transaction profits and, third, greater fees as a result of the First Washington transaction.

As you are aware, on July 20, Regency raised guidance for the second quarter. FFO per share of $1.01 is $0.06 higher than the upper end of the second quarter guidance issued in May. The following explains the components of this variance.

Nearly $0.03 from greater than expected NOI what are approximately $0.025 came from non-cash income from the First Washington transaction. Specifically, straight line rent and the impact of FAS 141 the marking-to-market of low market rents. In addition, $0.04 from one-time fees related to the First Washington transaction. You'll note on page 39 of our supplemental that the (indiscernible) transaction related expenses have been reduced to $1 million from the original estimate of $5 million. The original estimate included costs associated with raising equity. This in effect increases our fee income for 2005 by 65% of the difference.

And, finally, $0.02 of earlier than expected transaction profits. This $0.09 was offset by higher G&A, greater interest expense and a negative impact from higher weighted average shares. A major component of higher G&A was made earlier than planned, filling new positions related to the First Washington acquisition. Interest expense was higher than planned due to lower-than-expected capitalized interest and higher variable interest rates.

Weighted average shares were higher because of the application of the treasury method on the forward equity offerings for the difference between our average price for the second quarter and the committee (ph) issuance price. At settlement, only the actual number of shares issued will be reflected.

For the year, we raised guidance by $0.04 to a range of $3.59 to $3.67 (ph). We expect an approximate full year impact of $0.05 from the non-cash items that I just discussed in addition to the $0.04 from the additional fees. This $0.09 will be offset by higher G&A, increased interest expense, increased dispositions, and reduced transaction profits.

It is important to note that the majority of these offsets are a direct result of the First Washington transaction, without which gross still would have been in the 8% range. G&A for the year is expected to be $1 million higher than guidance given last year. If you'll recall, even before the First Washington transaction, we gave guidance that we expect G&A to be $4 million higher this year as a result of additional lowering of restricted stock and the implementation of FAS 123.

When we announced the First Washington transaction, we said we would add another $3 million. In total, G&A will be $8 million higher in 2005. We've increased planned dispositions by $50 million for the year to take advantage of a favorable market. We also expect lower transaction profits as the timing of some developments sales have changed. While a few (indiscernible) development sales have been accelerated to '05 some have been postponed until 2006 with a net impact of reduced profits for this year.

For example, one sale was deferred until 2006 so the Phase II portion of the project could be completed enabling us to fully realize the value created.

Subsequent to quarter end, we completed several capital markets transactions. We closed a new $350 million 10-year debt offering in July at an effective rate of about 5.5%. On Monday of this week, we settled most of the $200 million forward transactions and Tuesday, closed a $75 million, 6.7% preferred stock offering. These transactions, together with the common stock offering and approximately $165 million of property sales, have raised nearly $800 million in capital. The proceeds were used to replace higher interest rate debt and preferred units, repaid a bridge loan from First Washington transaction, and reduced the outstanding balance on our line of credit.

As a result, over 93% of the Company's debt is fixed and a balance of our corporate credit facility has been reduced to roughly $100 million.

Depreciating capital market activity, reducing and paying off our line of bridge (ph) debt with a track of long-term debt and matching our equity raise with a large acquisition reflects the Company's conservative philosophy with respect to our balance sheet.

Now Mary Lou will discuss the excellent results of our operative portfolio.

Thank you, Bruce, and good morning.

Regency's operating portfolio continues to perform impressively. Occupancy remained above 95% for the 10th consecutive quarter. Year-to-date rent growth was 10% and same-store NOI growth was at 3.9%. We do expect same-store growth to temper due to lower termination fees in third and fourth quarters compared to last year. In fact, in 2005 termination fees are expected to be $1 million less than they were in '04.

Without this negative impact, same-store NOI growth would be 30 basis points higher or in excess of 3%, which clearly demonstrates the quality of our portfolio.

You will note that we have raised our same-store guidance to a range of 2.7 to 2.9% to request an additional 10 to 15 basis points of growth generated from the First Washington portfolio. To update you on First Washington, the integration has been seamless. All data was fully integrated by closing and we have filled the majority of our additional positions.

With the expansion of our platform and numerous development opportunities, we plan to expand the Philadelphia office and we have opened a new office in Chicago. In the Chicago office, it is a combination of experienced Regency employees and hiring of existing First Washington property management team and talented new hires with local market knowledge will enable us to maximize performance of our 18 operating properties and capitalize on new development opportunities.

Moving on to Winn-Dixie, as you most likely know they have announced closing 326 stores in connection with their Chapter 11 bankruptcy. Regency helped three of those stores, all three in joint ventures. An auction was held for these leases in late July. Publix bought one of the leases and with Publix as an anchor there should be greater potential for increased NOI at the center. Regency's joint venture with Macquarie about the second lease in order to regain control of the space.

This Winn-Dixie lease had 10 years remaining at a rental rate of less than $5.00 per square foot with option for an additional 30 years at the same rate. We will terminate the below-market Winn-Dixie lease and relet net the space, capitalizing on the opportunity to increase NOI.

The third lease has not yet been sold but will be up for sale at a second auction next week. We are optimistic that it will be sold to a vibrant retailer such as Kroger, Earthfare, or Trader Joe's. At quarter end Regency had three other Winn-Dixie stores in their portfolio. One of those remaining three centers was just sold last week at a cap rate of 8.65%.

As you know, our strategy has always been to proactively manage our retailers and call low growth in our at-risk centers, redirecting these funds into projects with strong leading anchors. One such anchor is Target. Target has become an increasingly significant component of our operating portfolio and our development program. We currently have 13 operating locations, four Targets under development and 18 in our development pipeline. Since Target anchor centers attract the same side shop retailers as centers anchored by our top grocers, Regency is able to leverage its PCI relationships in these centers.

At their annual meeting in May, Target announced that 650 new stores are planned over the next five years. As a preferred developer in several markets we anticipate to continue to play a meaningful role in their expansion nationally.

I will now turn the call over to Hap to continue the discussion of development as well as provide an update on our capital recycling and joint venture strategy. Hap.

Thank you, Mary Lou, and good morning to all.

As you have heard from Mary Lou, Regency's high-quality portfolio -- which now includes exceptional centers that we purchased from First Washington -- is generating robust and reliable growth at the same property net operating income.

While the numbers speak for themselves, I do want to take a moment and commend Mary Lou, Bruce and the team for making this the smoothest merger and best integration in Regency's history.

Now I will elaborate on Regency's development program. Based on the strength and transparency of the pipeline we are confident that we will start $300 to $350 million in new developments this year. The combined medium and high probability pipeline consist of 86 projects totaling in excess of $1.7 billion and is anchored by strong retailers such as the 18 Targets that Mary Lou just mentioned, 12 Kroger's, 12 Publix's, three additional HEBs which are targets for joint ventures with them and our first Wegmans.

The high probability pipeline is larger today than it was at this time last year totaling 53 projects which represent $850 million in estimated development cost. 16 of these representing an estimated $200 million in total cost of completion our project where Regency already owns the land but we're waiting for final lease execution or final months -- final entitlements before commencing construction.

Another 30 projects of nearly $500 million are already under contract. The projected yield of the combined pipeline exceeds 10%, in spite of escalating construction costs and intense competition which are placing pressure on returns.

At quarter end, we had 28 developments in process with an estimated cost at completion of approximately $500 million and an unexpected yield of a low under 10%, a slight decline from last quarter. The key factor behind this decline is the fact that we stabilized to five properties with costs of $75 million and the stabilized return of 11.7%.

Accounting for these high yielding stabilizations the expected yield on the in-process developments dropped only 15 basis points. This 15 basis point drop was directly attributable to 2 projects in California -- one in Santa Barbara, one in San Francisco Bay area of Alameda. Both are irreplaceable properties. Although we like to build in protected markets, these locations are generally, specifically in almost every way much more difficult from an entitlement and a design standpoint.

Santa Barbara which is -- which has Whole Foods as an anchor -- is located in maybe the most difficult market in the country in which to develop. Alameda, which is anchored by Nob Hill -- the specialty grocery division of Raylee's (ph) -- is a waterfront property in the Bay Area, where we had to substantially augment in what was already a very elaborate design. The resulting average yield on these two properties is close to 8% and it needs two extremely desirable markets at a cap rate of 6% which is pretty darned conservative in today's market the value created is nearly $16 million.

Excluding Santa Barbara and Alameda, the yield from in-process developments would be well in excess of 10%. Close to 10 1/4%. While our developments continue to perform well, the acquisition market remains a real challenge. We have been able to find a handful of market transactions such as our acquisition in Chicago last quarter of a Jill anchor center. We have two more centers under contract we expect to close this month. However, our marketed deals, individual buyers are driving prices to new historic high (indiscernible) of the resulting lower returns and they are 25 to 50 basis points lower than they were last quarter amazingly -- making competing for acquisitions extremely difficult and caused us to reduce our acquisition guidance.

The third component of Regency strategy -- in addition to the high-quality operating portfolio and value-added developments -- is capital recycling and joint ventures. Year-to-date we've sold approximately $165 million in operating properties, developments, and out parcels. It should be noted that this includes a sale of 1 Power Center for almost $60 million at a cap rate of 8.5%. This cap rate reflects the decision that we made to secure a presale at the commencement of the project back in February of 2003.

As Bruce mentioned, we have increased our planned disposition in 2005 to a range of $225 to $275 million to take advantage of the current favorable market; and as a result we have reduced our average projected cap rate to 8%.

Regency's joint venture partnerships have enabled us to profitably grow the platform. With the addition of First One Washington Regency's ventures have over $4 billion invested in 176 properties, covering nearly 22 million square feet of GLA, and are generating a substantial amount of fee income.

Indeed in 2005 these fees will be $27.5 to $29.5 million of which $14 million are one-time transaction related fees and all but $1 million which has already been recognized.

I want to note that in 2006, total fees should be slightly lower by 75% of recurring property management and asset management fees. In 2007 we expect fees to return to the same level as this year with all being recurring. And very profitable I might add.

In summary, with our performance in the first half of the year, we are on track to meet our objectives in each of the three key facets of our business. Our high-quality portfolio, developments, and capital recycling and joint ventures.

These strategies combined to position Regency for FFO per share growth in excess of 13% in 2005 and then growing 6% off this new platform in 2006 and by 8% beyond in 2007 to 2008. At the same time, net asset value is being compounded at comparable rates of growth on the same cap rate basis.

We appreciate your time and we will now answer any questions that you may have but ask you to please limit your questions to two consecutive ones.

(OPERATOR INSTRUCTIONS) Michael Bilerman with Smith Barney.

Good morning. Jonathan Litt is on the phone with me as well. Hap, you mentioned that the Gilroy I think was subject to a presale agreement at an 8.5 cap. How many of your other developments that you are waiting to sell or with the current pipeline have similar agreements where you really couldn't capture that (MULTIPLE SPEAKERS)

Very very few, Michael. We -- I think we were a bit too cautious at the time, thought we at the time had gotten pretty favorable pricing on a presale of a Power Center obviously since then all cap rates have reduced dramatically. And we have -- I can't think of any offhand where we have a presale in place.

For Bruce, I just want to make sure I understand about what is going on in terms of changing guidance. If I look at the schedule you provide in the supplemental on page 38 it looks like your fees and commissions went up by $4 to $5 million -- about $0.07 -- and you decreased your transaction profits by 1 to 3 million so that's $0.03 negative. So that equals $0.04. Then how much is the actual non-cash income?

Let me just interrupt. Remember you need to take 65% on the transaction side.

So the transaction profits listed here but the third party seasoned commissions you have listed 27.5 to 29.5. That's your share, right, on page 38 -- (MULTIPLE SPEAKERS)

That's correct. That's correct.

That went down from -- went up, sorry, from 22.5 to 25.5 last quarter. It went up 4 to 5 million bucks.

Correct.

So the net of the transaction profits and third party fees is a positive $0.04. But then there are other adjustments you talked about -- the non-cash, G&A dispositions, interest rates. Can you break out the impact of those individually?

Chris -- can you -- ?

Michael in our prepared remarks and we will be happy to go over them. We did break out the positive impacts. We have -- about $0.05 from the non-cash income, $0.04 is additional one-time fees from the First Washington transaction. That is $0.09 of positive impact. In addition to what you just said about the -- that overlaps what you said the increase fees here and we are offsetting that $0.09, basically, with $0.05 of negative impacts. And I mean it's real -- it's higher G&A. We stated on the call to $1 million higher. So the rest is really just a combination of higher interest expense and lower transaction profits. That gets you to an increase of $0.04.

But the $0.04 increase in fees there is on top of that another $0.03 from other places? Because your third party season commissions went up 4 to 5 million from quarter to quarter.

Correct and then we had the non-cash income. Of an increase of $0.05. We could talk about it (technical difficulty)

The fees and commissions went up by $0.07 it appears not $0.04. I was trying to figure out where the other $0.03 came from.

And that it is offset by a reduction in transaction process. Higher interest expense, higher G&A, higher planned dispositions.

Paul Morgan with FBR.

Just following up on that. If it's possible for you to break that out it's kind of difficult at least for me to follow all of those changes. If it is possible for you to break that out, that would be appreciated even in more detail than I know you already do you in your guidance page. But going to developed pipeline could you provide a little detail in terms of the geographic mix and the mix of grocery anchored and non-grocer anchored in your extended pipeline? Whether that is much different from what you have been building in the past year or two?

Sure, Paul. No. 1, we have 15 to 20% of the pipeline of the high and medium probability pipeline in the mid-Atlantic; about 20% from Southeast; 25 to 30% is in the Pacific and a little over 30% from Central region. Then I would say that there is a higher percentage of larger community centers than we have had in the past. In the past it's typically been 20 to 25% and I would say that that has increased to probably about 40%.

Related to that do you see, given that -- it seems like the growth in the low probability, medium probability pipeline is going faster than your starts projections. Could we see you potentially increasing the projections for starts over the next couple of years and is that related to your 8% growth or -- ?

Our expectation, Paul, is to start $300 to $350 million of starts. We certainly have a pipeline. We have a lot of activity, enough of a pipeline that's very very transparent, to make that happen but -- and the question what typically happens on these things or very well can happen is they can be delayed because of delays in the entitlement process, delays in getting the anchors to finalize their decisions. And that's the reason why we're expecting the $500 million of high probability starts that will probably -- by the end of the year that will be somewhere in the neighborhood of $300 to $350 million.

It's very possible. But things have a way of slipping from a time standpoint but it's an impressive -- both in the size and the quality of the developments.

Are you getting more cautious in terms of translating what your pipeline is into starts?

No that's what (indiscernible) Paul that is basically what our experience is and it is our best guess.

Chris Capolongo from Deutsche Bank.

I guess sticking with developments, Hap, do you think the geographic and type -- geographic profile and types of centers you're building make it more or less likely that construction costs might actually increase and yields might fall?

I think that we are obviously in an environment where we are seeing significant increases in construction cost. We are experiencing those, based upon the pipeline that we have. We are still projecting yields in the 10% range, but given the increase in construction costs, given the intense competition for developments, we also do a number of our developments originating from our contacts and local developers and joint venturing with them.

Given what their expectations are, I think it's a very real possibility that we could see development returns trend down to closer to 9% over the next three or four years but what is amazing to me is what's under construction is averaging 10% in that is for delivery and '05, '06 and '07. The pipeline where there is a construction risk is returns are averaging over 10% and then you can just add two to three years to that so for the foreseeable future we ought to be to 10%.

But I think it would be almost irrational, given the factors that are out there, not to have some expectation of a reduction in returns over time.

Also just looking at the project listing and realizing that when centers are stabilized they come off the list and they are really just on the balance sheet. How much do you have on the balance sheet that at one point that was constructed over the recent past that you could sell for profit? That's not on the development list. If anything.

Probably at least several hundred million dollars. I don't have a specific number but it's -- we'd probably of the 1.2 billion we completed in those returns have been in excess of 10% over the last five years. We probably still have 5 to $600 million dollars and I think that several hundred million dollars of that would still qualify from the development standpoint.

Ross Nussbaum with Bank of America.

First question. Of the development pipeline, you talked about the two projects in Oakland and Alameda and in Santa Barbara. And it looks like from the first quarter to the second quarter the yields on each of those projects came down about 100 bips due to rising gross construction cost primarily. I guess the question I have is, what would have caused such a dynamic increase in construction costs from your estimates in the first quarter to where we are today, considering you are already on the land and you are already underway on construction?

I mean for instance, a couple of things. In Santa Barbara, I mean, we are in an environment -- let's keep this in mind -- where you are seeing rapidly escalating construction costs. In Santa Barbara, that is accentuated by the time it takes to deliver materials and the difficulty of delivering materials from the L. A. area to Santa Barbara. That is No. 1.

Secondly, we've got -- this is an infield and tents site we are building a parking garage over Whole Foods and Circuit City; and the design of that is such that that's a more intricate design.

Thirdly, what's being required from the local -- we are next to some stream (ph) there from a site work standpoint, from a design standpoint. The local authorities continue to put additional design requirements on us. Same thing has happened in Alameda, where we got a prevailing wage. We've got to pay higher wage and and I think we underestimated what that extent might be because this is in the Oakland area.

Secondly, we've got a trail along the water that is -- we had a pretty elaborate design but you can't believe how goldplated that the authorities made us do with that.

Thirdly, we got our design back from our anchor tenant. It included a mezzanine in the Nob Hill store. Just factors like that, that have just escalated the cost beyond our wildest dreams on those two projects and those were two kind of pretty unique markets.

I still do want to reiterate, while we are not overly happy about 8% returns on the developments, these are pretty much two exceptions that have occurred. But as I indicated if we were to sell those at 6% cap rate -- and we believe the markets for those centers today would actually be closer to 5% -- the value created would be well in excess of $16 million and even owning those at 8% returns to very unbelievably irreplaceable assets, we think that is going to be good for our shareholders.

Second question is, probably, for Mary Lou. Can you talk about the economics of building centers anchored by Target vs. grocery-anchored centers? Are you going to own those boxes or are they going to be shadow anchored? How is it going to work?

Yes, for the most part, if you look at the properties that we own today we leased to Target, I think about 3 of them, and the rest of them they own. So it is rare that Target will actually do a lease and for the most part that they do their own property. So that's how that will lay out so the positive for us, obviously, is imagine it's a fact that with the demand from our PCI tenants with the Target that we get the same retailers and they get the same traffic as they would with a number one grocer in the trade area.

Ross, what is also important to point out that we are developing a center in northern Virginia not only with Target as an anchor. We also shoppers fit warehouses in anchors. So you have the dual anchor and almost all of our Target anchors or at all of our Target anchored centers we have other secondary anchors that are in there. In many cases, they -- not only do you have Bed, Bath and Beyond as anchors but in many cases we also have a supermarket anchor. As a matter of fact I mentioned the Wegmans anchored center. We are doing our first Wegmans which is in the pipeline which will close and it's not a start yet should close before the end of the year. Target helped us recruit Wegmans. As a matter of fact, relocated on the site to accommodate Wegmans.

And who owns the land on the Target?

No we will not own the land under the Target but we'll own the land -- we're still getting probably even higher percentage of credit leases in that center and in other centers, in spite of -- like I said the center we're doing in northern Virginia, the one that comes to mind it's Target, Shoppers Food Warehouse, we have almost the same percentage of credit income.

So when you are quoting your development starts does that include the cost ability in the Target or that excludes (MULTIPLE SPEAKERS)

As a matter of fact we reduced our net cost that we mentioned. The deducts out the cost or the amount we receive from Target when they buy the land.

Jeff Donnelly from Wachovia Securities.

Mary Lou, I was curious if you could update us on First Washington, in particular, if you could break out how that portfolio has performed this quarter and maybe year-to-date? Usual metrics on cash front increases and same store and align and maybe how that deviates from your budget?

What's interesting is it's fairly consistent. So far right growth and first question (indiscernible) portfolio has been double digits as well. So we are pretty excited about that. They've been actually just a bit higher at reg growth in our core portfolio. Same store in OI. We planned it to be in excess of 3% and we are hitting our target on that as well. So we are happy to see the portfolio is performing exactly on plan. Exactly on our target.

We look forward to the future running that portfolio in some of the redevelopment opportunities that we see. We're happy with it.

Bruce, if I can ask you a two-part question? On the integration of First Washington -- based on Mary Lou's comments, she answered my first part -- at the property management accounting level. That is complete in the integration no call it lingering costs or integration we anticipate there. I guess that was the follow-up. When had you guys previewed I guess new technology, you were going to try to put into the hands of your property managers to free them from their desks and spend more time in the market. Is that in-place and are you seeing any preliminary -- (MULTIPLE SPEAKERS)

Still doing our analysis I mentioned -- that was all one question, Jeff. We're still looking at that and determining the best way to go. Really it's the product that we want to use. Is it going to be an IBM or what is it going to be?

With respect to the G&A related to the first Washington transaction, essentially all of the people have been hired but we still have a couple of holes. I mean, it's very much at the margin.

That integration is pretty well complete.

Michael Mueller with J.P. Morgan.

Couple of questions but wondered. Could you also clarify something? When you were talking about $0.025 of non-cash straight line income, straight line of 1.41, you mentioned $0.05 for the full year. Was that full year as in 12 months or full year as in '05?

'05.

The source of the higher same store NOI coming from First Washington. Where exactly is that coming from?

Predominantly rent growth.

Yes it is. Pretty much on plan in terms of what we anticipated in our expensing and the rent growth is higher than we originally had planned. So it's mostly rent growth.

Mostly written growth. The other question was have you mentioned a dollar amount for the high probability pipeline of 53 projects? What was that amount again? Because I know it was 1.7 billion for the 86.

$800 million. And that isn't just for high-probability projects. That is for '05, '06 and '07. The amount for '05 is $500 million and as we indicated, expectation would be that we will start 300 to $350 million of that.

From UBS, Ian Weissman.

A quick question to follow-up on your discussions about your Target deals that you are doing now. Is the incentive for doing these deals higher rents from your PCI tenants. Are you getting higher rents on those deals as opposed to your grocery deals?

It depends on the location. I would say that's more dependent on the location but Target is a great anchor. So -- .

Is it at all -- and maybe it's market-specific but is it all in negative outlook for grocers? And doing more of these (MULTIPLE SPEAKERS)

I think the point is that -- two things. No. 1 the grocers -- and I think this is a good thing -- are as much internal focused today. Safeway's focus today is on doing a lot of redevelopment for lifestyle look. A lot of -- there's a lot of focus on improving margins and being more competitive with Wal-Mart and with other supermarket chains.

I might add most of these Targets are not superstores; but what we're basically doing is we are using our core competencies from a development standpoint -- our relationships, our market knowledge -- to take advantage of that and to augment our what had been primarily focused supermarket developments. We also, as Mary Lou mentioned, can leverage our PCI relationships from a leasing standpoint. And we have been developing Target centers as Mary Lou mentioned for the last five or six years. It's just continuing to accelerate.

The one thing that I would just add to that and what happened -- the team have done both with the grocers and now with Target as you start doing developments with a major anchor like a Target or a major grocer and you perform, you come in on-time, they are happy with the quality, the reputation continues to grow and as it has done with Target where we had a great deal of our initial target development for it in the Southern California -- now that relationship has grown all across the country because of performance.

And I think some of that is just because of Regency's performance on the development side.

Eric Rothman with Wachovia Securities.

I was curious. I noticed in the list of dispositions you sold -- Braelyn (ph) Village. That was part of a branch portfolio, was it not? What was the story with that? Was that envisioned at the offset and how does the 8 2 cap rate compare to what that was purchased at?

It's Lisa. If you'll recall when we announced the branch acquisition about, I guess, October a year ago, we identified four shopping centers for disposition at the time and we've actually sold three of the four. The fourth is, actually, I think the fourth actually sold this quarter as well and they sold basically for what the value allocated. We actually had a slight gain on the property.

So I guess the -- .

Braelyn was a very high performing Kroger with a Kmart and it's just along with our typical -- with our strategy we just used that as a higher risk shopping center and identified that for disposition at the outset.

All the other boxes that could've replaced Kmart were already in the market and the center was basically off-line.

From Goldman Sachs, Carey Callaghan.

It's John Kennedy here with Carey Callaghan. Wondering on your long-term development pipeline if there is any more -- if you're changing the mix at all? Focusing any more on hard-line retailers like Home Improvement?

Yes we had done developments with Home Improvement in the past and there were a few developments that are in the pipeline that include like Home Depot's and Lowe's. That has been a -- we developed a center in St. Louis that had Lowe's as an anchor along with SteinMart. So there's not anything new but I think we will continue to have Home Improvement uses.

Yes I guess I'm just trying to figure out whether groceries will drop in the mix? With all of your developments with Target it looks like they are typically co-anchored with a grocer.

And that is -- you are absolutely right. I would say that there might be some slight drop but as Bruce just pointed out to me you were looking at the same demographics that are going to track the same PCI tenants and in (indiscernible) the same sustainability of income and there may be some more, may be some larger community centers in there. But they will typically be co-anchored with a grocer or maybe they -- we are doing a few -- some development with Wal-Mart Super Centers as the anchor but that's a supermarket anchor. And so I don't see a dramatic change in the ongoing operating portfolio.

On Target you talked about their long-term plans for how many stores they want to open. How far out are they talking to you about?

We are looking at opportunities that some cases are three to four years out and some -- the $800 million high-probability pipeline as I mentioned 500 million is in '05. $300 million, it's important to note, is for '06 and beyond which means it will take -- those will be deliveries in '07, '08 and '09.

Final part of that question is you mentioned that you are preferred developer for them in some markets. Could you give us any detail on which markets they are?

Let me just make sure that we state this. That is preferred with a lower case p. We are doing a lot of work for them in California and as Mary Lou mentioned, we just completed a center within the last year near Denver; and we are working with them on opportunities in Pennsylvania and other markets throughout the country. Other opportunities in Texas and I mentioned Virginia, Michigan -- on several opportunities -- Florida, we are now working with them on a few of them. Ohio -- so throughout the country.

Greg Andrews with Green Street Advisors.

If the acquisition of First Washington helping out with your search for developments in the markets that they were stronger in? For example the Washington D.C. area.

Whenever you have -- today it's interesting to note, I think five years ago we may not have owned any properties in the Washington D.C. market. Today including our joint venture partners' interest we have nearly $1 billion. Washington D.C. is now our largest market from a cap -- from a total investment standpoint. And that has to help our development team from an active -- I think activity begets activity. I think we saw that. We've seen that in Philadelphia with acquisitions. We've seen that in Houston when we bought the (indiscernible) portfolio. We are now completing a joint venture with HEB (ph) and so even though we got a pretty strong product line already in place and development program and our Washington D.C., Greg, I think it will continue to accelerate as a result of the First Washington acquisition.

Just a follow-on, I see you added one project in the quarter in that market with a Harris Teeter. How are they -- I think of Washington as a market dominated by Giant and Safeway. How are they faring in the DC market and what's their strategy for competing there?

I think what they have seen is Giant is taking (indiscernible). It has not -- lost market share to Safeway, primarily, but I think Harris Teeter has picked up on that. Giant -- and I think Harris Teeter sees a tremendous opportunity in the upper income areas which is where we obviously like to be and have ramped up their store opening program. They are one of the more aggressive supermarkets in that market.

I might add we also -- there could be that's a location that multiple supermarkets can also take.

Michael Bilerman with Smith Barney.

I had a follow-up. On the transaction profits for the balance of the year you are forecasting about 15 to 19 million. What is the split between the third and fourth quarter?

Approximately 3 million in the third quarter and the balance in the fourth quarter.

And most of that is already under contract -- the vast majority.

In terms of the third party fees and commissions, Hap, I think you said in your opening comments it would dip slightly next year with 75% of those recurring which would equate to about 20 million bucks? Is that right?

This year's guidance is 27.5 to 29.5 but a 7.5 drop is more than slight in my mind.

You said with 75% of that been recurring. (MULTIPLE SPEAKERS) recurring number.

Correct. That's correct.

Thinking about the balance of this year. (MULTIPLE SPEAKERS) Still got to follow-up on the fees and commissions going up $0.07. But we will leave that be. The third party fees and commissions for the balance of this year is about 7 to 9 million. So why wouldn't it and I think you mentioned there was another $1 million of First Washington fees to come. Why wouldn't the number be higher? Is it First Washington management fees? I'm trying to figure out how you get to 5 million a quarter and 5 6 being recurring but only 3.5 in the balance of this year?

(MULTIPLE SPEAKERS)

I'm not sure I understand the question, Michael. We forgot exactly (MULTIPLE SPEAKERS)

Let me say that -- I will make a comment here now and by the way, we try our best to provide information that will help you in your analysis. So it becomes frustrating for us if we don't do that and then when you ask a question sometimes that we don't understand, it's even more frustrating for us. Because we think we got all the information there you need to effectively run your models.

That may not be the case but we try to a large extent to make your jobs easier not harder.

That is very helpful and I'm just trying to put all the pieces together --

I understand that.

So if we go with the $20 million recurring fee number. That is the basic we are starting with from '06. Right?

Right.

For the balance of this year you're forecasting 7 to 9 million of additional third party fees and commissions based on booking 20.2 million year-to-date with a forecast of 27.5 to 29.5.

Right.

I think, Bruce, Hap had said there is $1 million more First Washington coming in.

Yes. Transaction related.

So that would mean there's 6 to 8 million of recurring fees in the balance of this year. (MULTIPLE SPEAKERS)

So how do you get from 3 to 4 million of recurring to 5 million starting out of the box they (indiscernible) in '06?

If you will recall -- again that is why we still have that 1 page in the supplemental trans detail to Bruce's point to try to help you all out -- trying to detail the fees. Two sort of anomalies for the First Washington transaction you got to remember to keep in mind and they are, one, we are not receiving any property management fees for the mid-Atlantic region because the First Washington team is still managing those. We will take those over in the middle of next year. And then also the asset management fee has been deferred for the first 18 months. So we are not receiving any this year nor any next year which is why in '07 it picks up again.

So you'll get and (MULTIPLE SPEAKERS) your assumption is mid next year.

We will increase our property management fees.

By about $1 million bucks and then your asset management fees goes up another million in the fourth quarter. So that would be the extra $2 million? Just want to make sure (MULTIPLE SPEAKERS)

I can't give you anything more specific than what we've given. It is laid out on page (technical difficulty) of the supplemental.

Effectively what happens at the end of the date is the recurring fee income in 2007 will approximate the total fee income, some of which is not recurring in 2005.

Because you will get the benefit of this asset management fee kicked out.

That we had not been collecting in the prior year. Correct. That is it.

I think I get it.

Maybe that's where the missing link is.

I think the First Washington properties definitely kick in, I was taking the 20 and dividing it by 4 and I was getting confused between the 5 million and the --

Right. We are sorry we are making it difficult.

Ross Nussbaum with Bank of America.

2 follow-up questions. One is where you stand with Macquarie on their buying an additional 10% stake?

That's something they are probably still giving some thought to. I think they expect a decision to be made by the end of the year one way or another; and we are comfortable either (indiscernible) 35 to 25% of the portfolio. So either way is fine with us. The only thing we're asking them to do is make a decision sooner rather than later so we can plan accordingly. And we require if they don't -- if they don't increase their ownership than we would have to end up selling $100 additional million of properties.

Any sense of which way they're leaning?

No. I mean --

Or yes and you don't want to tell me.

The answer is no. I don't think they are in a decision to make any commitments right now and I think that's the issue and I think when they are are in a position to do that they will make that decision and I think my expectation is, is once they get the portfolio performs for a quarter -- a full quarter -- then they will be in a better position to make a decision.

The other question I have is I just want to make sure I understood this correctly. When you were originally expecting 5 million of offsetting one-time expenses here in the second quarter and I guess you only incurred 1 million. Why was that again? I may have missed that.

When we put our original projections together we included all of the cost related to the entire transaction, including the cost associated with raising equity. However, under GAAP (MULTIPLE SPEAKERS)

Raising equity for debenture.

Right, for debenture, so under GAAP the costs associated with directly raising equity are netted into that equity transaction and what we did originally was treat it as an expense against the fees and since then, we readjusted our models.

So you're saying it's showing up on the balance sheet not the income statement?

Yes that's correct.

From FBR, Paul Morgan.

One extra question. I think, Hap, you mentioned or maybe I just read into a change in the market and there's a little bit less discrimination about the quality of centers in terms of pricing for acquisition. And maybe that's translated into your increasing your disposition guidance. Is that accurate when you say that's changed over the past year in terms of the quality discrimination?

That there is a little bit less of one?

Yes.

I think there is just a tremendous amount of capital that wants to get into shopping centers today. And that's across all levels of quality and cap rates have come down across the board.

Paul, we would say that we think there should be wider spreads between the different quality levels of retail than there are today.

We're taking full advantage of that to sell any properties we think may have lower growth profile going forward.

I guess I'm saying have you seen anything in that spread that is narrow or no? Or just everything is getting impressed?

I think -- well. What's happened though is if you compare with five years ago or seven years ago, you couldn't sell some of these properties and, today, you can pretty much sell everything and in some cases we mentioned selling a Winn-Dixie shopping center at close to an 8.5% cap rates. And we literally couldn't sell that center five years ago. And 5 years ago the cap rate for an ace center in the Orlando market was 8.5%.

There are no further questions in the queue, Miss Palmer. I would like to turn the conference back to you for any additional or closing remarks.

Thanks, all. Just want to thank everyone. We appreciate your time and as always we are around to answer any follow-up questions. Thanks.

That concludes today's conference.