Regency Centers Corp (REG) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Regency Centers Corporation fourth quarter 2005 earnings conference call. [OPERATORS INSTRUCTIONS]

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

Thank you. Good morning, everyone. On the call this morning are Hap Stein, Chairman and CEO, Mary Lou Fiala, President and COO, Bruce Johnson, CFO, Brian Smith, Chief Investment Officer, Chris Leavitt, Senior Vice President, Finance, and Jamie Shelton, VIce President of Real Estate Accounting. Before we start, as always, I'd 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 these 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 and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in these forward-looking statements.

I'll now turn the call over to Hap.

Thank you, Lisa, and good morning. As you'll hear in more detail from Bruce, Mary Lou and Brian, 2005 was a exceptional year for Regency. The accomplishments speak for themselves. First, same-store growth was 3.1%. This means that the growth rate during the last seven years has averaged over 3% and never been less than 2.5%. Second, $300 million of developments were completed at a 11% return, creating over $150 million of value. Third, all aspects of the development program have grown substantially. Nearly $400 million of developments were started. These new starts are now part of $735 million of developments that are in process. The $1.5 billion shadow pipeline is robust and is visible.

Most impressive and most important of all, the combination of in-process developments and the shadow pipeline, which amounts to over $2.2 billion, will deliver significant value at attractive returns for the foreseeable future. Fourth, $2.8 billion of high quality centers were acquired, primarily the irreplaceable First Washington portfolio. As a result, Regency's operating platform now totals 393 centers containing 46 million square feet. Joint ventures have grown to $4.3 billion, an increase of 300%, more than doubling fee income to $28 million. Fifth, this growth was cost-efficiently funded through Regency's joint ventures and capital recycling initiatives in several key capital markets transactions, which further enhanced an already strong balance sheet with very minimal shareholder dilution. Return on invested capital was over 10% and return on equity over 14%. The bottom line for these accomplishments was a 13% increase in FFO per share. Based upon these excellent results, future outlook and low payout ratio that was 60% in 2005, the Company increased the dividend by 8.2% to $2.38 annually, which represents the 11th consecutive year of dividend increases. I am extremely proud of Regency's wonderful team that produced these remarkable results.

I'll now turn the call over to Bruce.

Thanks, Hap, and good morning, and go Steelers. [LAUGHTER] Regency did have a great fourth quarter and an outstanding year. FFO per share in the fourth quarter was $0.94 and $3.64 for the year, or as Hap said, 13% per share growth. With this FFO growth, we were able to generate significant free cash flow of 40% over last year to $75 million. And in 2006, we expect another double-digit increase in free cash flow. For the first quarter of 2006, we expect FFO per share to be $0.75 to $0.80 and $3.78 to $3.80 for the year. G&A is expected to increase by approximately $4.5 million. A driver of this increase is a full year of additional staffing related to the First Washington purchase. So even though G&A is increasing, G&A as a percentage of revenues under management is actually declining. Subsequent to year-end, Macquarie purchased an additional 10% of the First Washington portfolio for $270 million, nearly $160 million of debt and roughly $110 million of equity proceeds to Regency. In addition to this $270 million, we expect to dispose of another $130 to $230 million of operating properties, bringing total dispositions to four hund -- to $400 to $500 million for the year. The proceeds from these dispositions will be recycled into our developments and acquisitions, and to strengthen our balance sheet.

I will now turn the call over to Mary Lou to discuss our operating portfolio results.

Thank you, Bruce, and good morning. The quality of the operating portfolio continues to generate impressive results and reliable same-store NOI growth. With an increase of 3.1% in 2005, we've averaged over 3% growth over the past seven years. The fact that the growth rate has never been less than 2.5% during this period is a testament to the reliability and predictability of Regency's portfolio. What's even more impressive is that 3.1% same-property growth was accomplished while maintaining occupancy at 95%. Rent growth in 2005 was again north of 10%, averaging double-digit growth for the last five years. To be able to achieve such consistently exceptional results is a testament to Regency's investment and operating strategies. In our view, Regency's 400-property national portfolio is clearly one of the best in the business.

In 2006, we expect to build on this year's success with the same-store NOI increase of 3 to 3.5%. Since June, we've applied Regency's operating strategies to the First Washington portfolio, and we're really beginning to see the results. Same-store growth for this portfolio exceeded 4%, and we expect similar growth in 2006. As we mentioned, there are numerous opportunities to drive growth through upgrading the tenant mix. We were able to increase rent by over 13% for all the tenants and 21% for PCI tenants. You should note that our strongest rent growth comes from our best-in-class operators. PCI works. These results are impressive, given the short timeframe, and are only an indication of what's to come in the next few years, as leases expire and we're able to renovate and completely remerchandise and reposition these centers.

We've focused our discussion with you on First Washington over the last six months, but at the same time, there's just as many opportunities throughout the rest of the portfolio; for example, Cameron Village in Raleigh. Cameron is a large center built in the 1940's, encompassing six city blocks and, truly, constitutes the heart of Raleigh retailing. In 2005, we tore down a parking deck that covered one of the buildings and updated the facade. The tenants affected by these demolition never experienced a sales decrease, and one merchant even had a record year. We're expecting double-digit same-store NOI growth next year, as a result of this renovation, a successful leasing plan, and very, very strong rent growth. Again, we believe this is only the beginning of great things to come at this center, as we evaluate opportunities to maximize the value of this irreplaceable real estate.

It was announced last week that Albertson's will be sold to a group consisting of SuperValu, CVS and court -- consortium led by Cerbe -- Cerberus Capital and Kimco. We are encouraged by SuperValu's purchase of Albertson's stores, as we believe SuperValu to be a good operator and believe their plan is to maintain the integrity of Albertson's strongest banners. It's our understanding that approximately 22 of our 31 stores will be purchased by SuperValu. These stores are doing well, with average sales of $445 per square foot and are surrounded by average household incomes approaching $90,000. The remaining nine stores will be purchased by the Kimco/Cerberus group, with four of the centers currently being marketed for sale.

I'll now turn the call over to Brian to discuss our investment results and our pipeline.

Thanks, Mary Lou. 2005 was also a great year for Regency's investment program. We grew our joint ventures to $4.3 billion, through $2.8 billion of acquisitions. We completed nearly $300 million of developments at stabilized returns over 11%, and we are started nearly $400 million of new development projects. The 24 projects started during the year represent a 43% increase over 2004 starts. These projects are well-diversified across the four regions, and are anchored by the best grocers and major anchor retailers. The expected returns are nearly identical across the regions and slightly lower than we've seen in the last few years, but still very strong at 9.7%. At end of the quarter we had 39 projects in process, representing estimated net costs of just over $735 million and expected NOI yield of 9.5%.

Behind these in-process projects is a shadow pipeline of over $1.5 billion. Several things are pretty remarkable about this pipeline. First, its size. There are $400 million of project starts identified for 2006, which we identify in the high probability category. Generally speaking, to be designated high probability requires that we control the opportunity and have a high degree of confidence that entitlements will be in place and anchor tenants secured by the end of the year. Backing up this 2006 high probability pipeline is another $1.1 billion in high probability starts for 2007 and medium probability starts for both 2006 and 2007.

Second is the diversity of the pipeline in terms of the mix of anchor tenants. Of the 81 projects in the pipeline, 35 are grocery anchored with the leading national and regional players. For example, nine of the projects are expected to be anchored by Kroger, 11 by Publix, three by Whole Foods, two by HEB, two by Stater Brothers, two by Giant (on hold), and one each by Safeway, [Railly's], WinCo, and Wegmans. Of the larger community centers, 21 are expected to include Targets, while Wal-Mart will be represented in nine, Home Depot in six, Lowe's in five, and Kohl's in three.

Finally, despite the extremely competitive development environment and the rising cost of construction, the development returns remained some. The weighted-average return on cost for the 2006 high probability pipeline is just below two -- 10%. While we should expect continuing pressure on the returns, the spread between development and exit cap rates remain very healthy and well above historical norms. The powerful combination of the $735 million of in-process developments and a pipeline of $1.5 billion is poised to deliver an average of $400 million of completed developments annually over the next four years. Assuming a 9.5% return, a very conservative 7% terminal cap rate and 2% cost of sales, this $400 million each year, or $1.6 billion in total, equates to over $525 million of baked-in value creation at a profit margin 33%

In 2006, we also have a sharper focus on acquisitions. We're expecting to exceed the $100 to $200 million of guidance for acquisitions through our joint ventures; or, in some cases, on a wholly-owned basis, if the project's located in a strategic market or purchased as part of a 1031 exchange. It's a difficult and competitive market, but we're confident we can get there. We now have a dedicated team nationally, led by our most experienced acquisition officer, who has 22 years in the business. Off-market transactions are where we've been most successful, and are often the result of great relationships. The sheer size and strength of Regency's development teams that are entrenched in the local markets will lead to these kinds of relationship-driven opportunities. I'm excited about the challenges ahead of me and my team. Our investment team is focused and their anchor relationships and market presence were stronger than ever, positioning Regency's investment program for future profitable growth.

Hap?

Thank you, Brian. The built-in value coming out of the development pipeline truly is extraordinary. And Regency is extremely fortunate to have a talented team that is brilliantly executing Regency's strategy, generating reliable growth in net operating income from a portfolio of exceptional quality to pro-active management, capital recycling, and substantial value creation from both developments and joint ventures. However, we will remain both focused and nimble, as there are challenging issues and risks that we face in operating and developing operating and developing shopping centers, and the current favorable economic environment can change.

There's a tremendous amount of competition to buy and develop quality shopping centers, as Brian just discussed. Construction costs are continuing to rise. Dislocations will remain in the supermarket industry. There are a number of obvious clouds on the horizon that could impact the economy. Even in the face of these risks and challenges, I have never been more confident that Regency real -- will realize our vision, which is ambitious, that over the next three years, we'll achieve same-property growth over 3% each year, take development starts from an average of $300 million a year to $500 million annually, and efficiently execute Regency's capital recycling and JV strategies. Regency has never been better positioned to achieve our goals. Our team, which truly is an all-star team and is time tested, along with our strategies, which are proven, position Regency for another outstanding year in 2006 and for the foreseeable future.

We appreciate your time and will now answer any questions you may have, but please limit those to two at a time.

Thank you. [OPERATOR INSTRUCTIONS] First we'll go to Michael Bilerman with Citigroup.

Good morning.

Good morning, Michael.

I had a question on same-store and a why, just trying to break down the forecast of 3 to 3.5%, and how much lease-term fees or your contractual rent bumps are affecting that number?

Well, let me kind of go through it with you. You know, we said occupancy's going to be about the same as it has, so that's not -- we expect to get 8 to 10% rent growth. so you'll get a portion of it from that. Built-in fees are about 1.5% of that 3%, just based on contractual numbers.

Built-in rent increases.

Built-in rent increases, I'm sorry. And then beyond that, Michael, you're going to have -- we'll have some strong termination fees, as we reposition some of the First Washington portfolio. And then, to help you get to the numbers, if you look at this past half a year, we've had real strong results in some of the things I talked to you about in terms of our rent growth. You'll see in the income, because we've leased things earlier than we expected and at higher rent, so we get the benefit that have in terms of our same-store number, although you don't see it actually in the rent growth number for next year. It's really a balance of 1.5% of building contractual steps and the remainder will be through rent growth, some termination fees, and things that we've already accomplished that'll make next year stronger than we've performed historically, given guidance.

Right. And just as a follow-up to that, what is the gross number of lease term fees? And if I remember, the 1.5 of contractual rent, that's probably a little bit higher from what it has been historically. Is that the effect of First Washington and where those leases --

No, Michael, that's just a -- that's a historical look in terms of how we look -- and we've looked back at our portfolio for the last three or four years, and it can range between the 1.5% range for our -- for the kinds of properties we own.

Yes, that's pretty normal.

And the lease term fees, the actual amount?

No, we don't disclose that, Michael.

But a significant majority of the growth is coming from contractual rent increases and from rent increases.

And in current rent increases, yes.

And in addition, as we've said, I think the track record over the last seven years and what our anticipation is to be here three years from now, to be able to say that we've grown 3% year average over a 10-year period. And you don't make that from -- you can't have something that sustainable from -- if you're relying totally on, you know --

No, I just ask -- the key, Michael, if you look at our performance with the quality and the demos and the quality of our anchors and our new centers in development, that we've been able to perform at 3+ % for the past seven years, with double-digit increases -- rent growth for the past five, just shows you the sustainability of our income. And as Hap said, our goal absolutely is to continue that for the next several years.

Go ahead, Lisa. I'm sorry.

I think --

Two questions.

-- you squeezed in three.

Well, I was just -- you know, the reason --

The question police.

Well, I think the reason on the same-store growth is typically, at the beginning at the year, you have averaged 3%, but typically you more conservative, where you forecast at 2 to 2.5%, so I was just trying to understand. This year you've come out 3 to 3.5%, which is great, but I --

You know, what's exciting for us is the fact that, if you look at our portfolio and understand that some of the things that you're going to see next year -- and I'm very proud to say this with our operating standards -- is the fact that we're able to look at First Washington and add real value. And I think when we bought First Washington ,there was a lot of questions of because it was low-managed, what can we do. And we're seeing -- as I said, we're going to see over 4% growth in First Washington in '06. And Cameron Village, as I mentioned,, is just one example, but there's many. And that was part of our branch two acquisition last year, and we're going to see significant double-digit increases in that. So, I think it is a testament to the team and our operating platform on how we run the business, to be able to see increased growth. And if you look at Regency's core portfolio, it's pretty consistent, right around that 3%. So the pop's going to be out of our acquisitions being able to add value.

And a lot of it's already back in.

Great, thank you.

And next from Deutsche Bank we'll go to Chris Capolongo.

Hey, good morning.

Good morning, Chris.

Hap, I just was wondering if you could comment on the increase in your starts goal? And, I'm wondering, does that have more to do with the greater available opportunities because of your wider network now, or is it that you're getting more market share in terms of development opportunities?

I'll let Brian speak on that specifically, but from my perspective, there are three keep things here that that's occurring. Number one, we're building on the momentum of the past. The market presence, the anchor-tenant relationships, especially the relationship with Target, we've got the team it in place. And I think one of the key parts of the team is our new Chief Investment Officer, Brian Smith.

Yes, Chris, what I'd say is, you know, as we've said many times in the past, success fuels success. And what happens is between the retailers and the brokers,whenever they have an opportunity, particularly a difficult opportunity or a large one that requires pretty significant up-front capital expenditures, they're bringing it to the group they think can perform for them. So, we've seen a lot more momentum just created by the fact that we have some very successful and visible projects, and that the retailers -- we always hit their opening goals. So I just think it's more that than anything else. We've got a good team out in the field and we continue to hire good people, and we're just seeing more opportunities.

And then, Bruce, just quickly on the tax provision, I'm just -- could you walk through why it seems to be a pretty low number for the year relative to last year, and what your expectations are going forward next year?

Yes, we were able to contribute a coup -- three properties into our joint venture that allowed us effectively to defer taxes out of our CLP, and a lot is effectively to lower the tax that we thought we were going to have in the -- in our taxable subsidiary.

Okay, thanks.

Thanks, Chris.

And next we'll go to Craig Schmidt with Merrill Lynch.

Good morning, gang.

Morning, Craig.

I was wondering, what do you think from your perspective [inaudible] NOI development yields will be in 07? Obviously, we're seeing them tighten, and I was just wondering if you think that tightens continues as you go into 07?

Craig, I think that they should still be in the 9.5 to 10% range -- the 9.5 to 9.75%. The biggest problem with the cost increases, I think, is behind us, and that problem was that we were caught by surprise last year. Everybody was, by the magnitude of it and the suddenness of it. Now we are underwriting the projects, you know, a lot -- not more carefully, but with more money for those kind of increases. We have a lot of contingency in it. And a lot of the 2007 starts are already in our pipeline, so we don't have the land risk there. So, I don't see see a significant deterioration in the yields.

What do you think happens on the competent environment? Do you think that some of your competitors fall out as it gets tighter, or does it stay as strong as it's been?

Well, it's-- it is competitive. I'm not sure. As long as the spreads stay where they are, I don't think that's going to change. But, again, what we're seeing is a lot of projects that are not competitively bid, unlike the acquisition side. We're seeing a lot of deals that we surface just through relationships. We've got people -- we have a lot of joint ventures and the joint ventures partners want to make sure the economics are right there, since they have a participation in the back end.

A number of our joint ventures are with the retailers. We have several with HEB in place, and several with Publix.

So the relationship's obviously paying off. You're doing a good job, they come back to you, so --

Right.

Okay, thanks a lot.

Thanks, Chris.

We all made it sound easy. [LAUGHTER]

And next from Morgan Stanley, we'll hear from Matt Ostrower.

Morning. A couple of questions. One, the CapEx, at least the way that we look at it, looks like it was up some this quarter. Is there -- is that what you noticed, as well?

Yes, it was ups some. Typically, if you look at -- the way we look at it, it's about $0.35 a foot. Definitely we are seeing increase in construction cost, just like they are on the development side, and so you're going to see it more at the $0.40 range. But I'll also tell you that both this quarter and you'll see a little bit more next year, truly going back in on some of our A++ centers and spending some money. And I'll give you this real quick, a couple examples. Last year at Preston Park, it was out-flanked by two malls. And it's a lifestyle center, it's fabulous real estate, and quite honestly, it got a little bit tired, so we invested some capital in that, and we're seeing -- greatly seeing it there.

Next year, we'll have a center called Westlake Village that we'll be spending some capital on. It's just unbelievable. Incomes well over $120,000, very, very dense. Just irreplaceable real estate and a wonderful lifestyle center. So we're just seeing in a couple of cases where we're going to upgrade these A++ centers to keep them that way. But I think per your question and from your runrate, I think that $0.35 to $0.45 range is where we're going to be. And I'd love to go back to the $0.35, but I think with construction costs, you're not going to see us back at that rate, at least for a while.

And with the addition of some of these premier mall investments, it may even be a little higher than that.

Okay, great. And then, Bruce, I know you addressed at the beginning the dispositions volumes. I didn't -- maybe you could review. I don't fully understand why we're talking so bigger number this year than last?

Well, first of all, the guidance that we've given is $400 to $500 million. That includes the $270 million that we've already done. That is a disposition, effectively, with Macquarie Countryride -- CountryWide related to the First Washington portfolio. That means on an incremental basis, we have -- we're giving guidance that will do somewhere between $130 million to $230 million in operating property dispositions for the remainder of the year, some of which is a carryover from the prior year. We have, as an example, on a pro rata basis approximately $80 million that are under contract that we would expect to sell within the -- my guess is the nex -- close within the next 90 days. All of these I think are hard at this point.

Thanks.

Thanks, Matt.

And next we'll go to Dennis Maloney with Goldman, Sachs.

Hi, good morning. I was just wondering if you could offer some color in terms of what you're looking for in '06, in terms of tenant bankruptcies and how that would compare to 05?

Yes, that's interesting. Tenant bankruptcies [inaudible] are actually down this year in '05 versus previous years, so we're not seeing a lot of problems. Our retailers, in general, are doing pretty well, and if you look at sales and the categories and food and services that we have, comp-store sales are expected to be, you know, pretty consistent with the way that they have historical, although some of the things have been lower. As a result of [motor], you'll see softening in sales. But overall, I would expect it to be fairly consistent with the way it has, and we don't see anything on the horizon that affects us, that in our view that we haven't anticipated.

Great. And then, in terms of preleasing in your shadow pipeline, would you describe your progress here as in line with historical norms? Are you seeing any pullback at the margin, for the tenant interest?

We're not seeing any pullback. In fact, it's as strong as ever, if not stronger. The apparent lack of leasing on the predevelopment I'll address, though. First of all, we added $300 million of new starts in the fourth quarter, so those projects, almost by definition, are going to have less leasing. Wwe've got the Silver Springs, the Highland Villages. They're large centers that -- where there's a lot of leasing to be done. If you look at those, Highland Villages we're showing 8% leased, but we've tot 40% in lease negotiations and we've got another 34% in letter-of-intent stage, so there's 82% there, total, that's not really reflected in the 8%. Silver Springs, same way. We're going to be 84% leased on a gross basis within the next -- probably next four to six weeks.

We've got three ShopKo's, which, of course, we bought as an opportunity play, and those are 0% leased. And then we've got the unanchored centers and Phase II to existing centers that are well-leased and have anchor tenant, so we show -- there is no anchor tenant in those Phase II's. We made a couple mistakes in the information we put out. Highland Village and Silver Spring we're showing as 0% leased, and we did not reflect the fact that both of those have signed agreements with Target. So, if you took out the Highland Village and Silver Spring and those ShopKo's, we'd be at 70% prelease and 40% -- 47% funded. So it's still looking good to us.

Great, thank you.

And next from J.P. Morgan, we'll hear from Michael Mueller.

I'm sorry about that. A couple questions. First of all, for development stabilizations, can you update us in terms of what you're expecting to be the mix of what you hold versus what you sell, and as it relates to what you sell, how much do you anticipate it going into JV's?

Mike, it's Lisa. As you know, that really varies, you know, year to year. And the best thing that we can tell you is we've given guidance on development pro -- development profits or transaction profits of $41 million to $46 million. So we've got some identified that will be contributed to JV's, or maybe possibly third-party sales. So it could range from one or two properties, like we had this year, to maybe five pro -- all JV's rather than third-party sales. It's -- unfortunately, it's just very difficult for us to give you guidance on that.

Okay. I guess secondly, in terms of JV acquisition guidance, you mentioned at $100 to $200 million, but I think Brian said you expect to beat that number. Just wondering if you can tie those two together, and is there anything in particular that's on the horizon?

The difference is that our guidance -- it's a very challenging environment, and given the challenge in the environment, we're setting modest expectations of $100 to $200 million from a forecasting standpoint. But we've got additional focus, and it's our belief that we're going to benefit from that initial -- we and our partners are going to benefit from that additional focus, and we're going to --- whether it's portfolio or off-market transactions, but it isn't -- we wouldn't say if there were, but it isn't like there's anything pending that's creating this. It's just the focus of the team.

Okay, thanks.

And next we'll go to Eduardo Bush with Millennium Partners.

Sorry, hi. Good morning.

Morning.

In terms of the cost increases, have you seen any difference in terms of different geographies?

Well, yes. Let me address that for a minute. The quarter-to-quarter cost increases on the in-process developments is $5.5 million. If you accept for a moment that those were all actually cost busts, the amount of that's not very significant. It's 1.2% of $459 million of in-process developments. If you look at all 26 projects that are under construction, two projects account for that $5.5 million. So 24 projects actually netted on budget, which is awfully good in this environment. And from a portfolio perspective, the full -- the total 26 properties fell by nine basis points. So the two projects that are causing the overruns are French Valley in Southern California, and Forest Ranch in Southern California. If we had used the contingencies in those projects to address the cost overruns, we would've reduced the overall bust by 44%. There's $2.4 million contingency in each of those, and instead of adding it to the -- or drawing down from that, which is the way you typically do it, we left it unchanged ,and we went ahead and added cost to it. so I think that's very conservative.

Second if you look at French Valley, which has the largest overrun of $2.2 million, only $480,000 to do to with any kind of overrun. $923,000 was to convert a ground lease to a build-a-suite, for which we got development returns on that, so it really was an additional investment. And, then, $865,000 was additional contingency, it wasn't overrun. So, Forest did have some overruns for us. It was because we started that in '04. We were delayed 15 months, mostly because of the fires in San Diego County that created such a huge backlog for the permitting of houses and everything. And then the county required significant changes, like adding fire access roads during construction and things like that, as a reaction to it. So, the bottom line is I don't think the cost increases are a problem. Where we -- direct answer to your question, where we're seeing more than anywhere is in California. The seven top -- the projects with the seven highest overruns were all in California, but as I said, they really came down to just those two.

And lastly, could you remind me what your original guidance was for '05?

For which?

For the year for 2005, when your first guidance in '04, do you remember?

You mean --

For FFO or for --

For FFO.

Oh, gosh, Eduardo, before First Washington. So it's probably three, four --

340 to 346 or something.

Okay. Thank you very much.

Thank you.

And next from UBS, we'll hear from Scott Crowe.

Good morning, everybody.

Morning.

Hi. My question is about the [say] business. Obviously, you got it to level out in 2006. I'm just wondering, given the fact that you've its cap rates down about the level of the Macquarie deal, [inaudible]. How competitive is Australian capital these days and what are the chances of another big JV with Macquarie [inaudible]?

Well, the JV is in place. The joi -- our joint ventures are in place. And there's a significant amount of capacity that's already committed on the part of both Calister's and Oregon, and I think that Macquarie CountryWide would continue to like to invest and grow its investment with Regency in the U.S. It's a very comp -- it's very competitive out there, and the most competitive capital still seems to be 1031 buyers, individual buyers. And then, advised open-end funds seem to be extremely competitive out there, and we're just try -- that's the reason why we're looking for off-market transactions and have the additional focus that Brian talked about.

In terms of competitors, what kind of leverage ratios are you seeing in terms of those acquisitions?

The individual investors are probably closer to 80% and the institutional investors are in the mid-60s, 60 to 65%.

And would that make you think about increasing your investments [inaudible], at all?

The important thing to look at is -- important point to note here is that we look at our ratios on a see-through basis so, I mean, to the extent that we have a partner that wants to use more leveraged capital, we will do that. But we're going to look at our ratios, you know, assuming that higher level of leverage, which'll have an impact, in effect, on other aspects of our financing.

Great, thank you very much.

Thank you.

And moving on, we'll go to Eric Rothman with Wachovia Securities.

Hi, good morning. Just two quick questions for you. With respect to the same-store NOI, 3 to 3.5%, how much have you under written, or any, with respect to savings on the expense side?

No, it's not coming out of expenses at all, Eric. It's really coming out -- as I said, some of it contractual, 1,5% of it's contractual, the rest of it will come out of rent growth, termination fees and some of it's as a result of a very successful second half of this year, that you'll see in the income -- and maintaining occupancy.

Okay, great. And then, respect to the development pipeline and, I guess, the increase in materials cost and labor costs, have you seen that's been localized to the Gulf area with respect to rebuilding, or have materials and labor costs kind of risen everywhere?

We're seeing it everywhere. I think the material costs you're seeing everywhere, but what's really hurt us in the past would be more the labor costs. And the labor costs have been more dramatic in California, just because the contractors are so busy. I mean, it's a double-edged soared. In Southern California, you've got the most population growth, we've got the highest rent growth, and that's where everybody's busiest, so that's good for us. But the downside is that the contractors, they don't need the business. So it hurt us a little bit last year, like I said. I think for what we've seen so far, we've got it under control, though.

Is there any possibility that in your Texas and Florida development that that might be slowed up, as rebuilding efforts get underway?

It's possible. Yes, but everything we've just put in -- what do you call it -- under construction and everything, we have bid out since Katrina, and the numbers reflect hard bids on all those.

Great. Thank you very much.

Thank you, Eric.

And we do have a follow-up with Michael Bilerman with Citigroup.

Michael?

Can you hear me?

Yeah, now I can.

Sorry about that.

We can hear you now.

In terms of -- I just wanted to talk a little bit about the acquisition disposition market. You're acquisitions, obviously have come down in cap rates over the the last few years, but your dispositions have -- outside of the sale of First Washington have really stayed in that 7.5 to 8.5%, and that's what appears that the dispositions are going to be like for the rest of this year. Has there been a change in terms of how investors are looking at the weaker or the riskier properties, relative to what you're buying?

I think that, number one, that our cap rates owner dispositions have come down, as the market has come down over the last couple years. And we expect that to be the case, as we've been more successful and more proactive about culling the portfolio. Having said that, there is definitely a -- I'd almost say a growing discrepancy in the market between, so to speak, 'A' quality and 'B-', 'C' properties.

How much of the portfolio do you think -- I mean, you've been culling in this bottom piece every year. How much more do you think you have to go, in terms of some of these weaker assets?

We think it's significantly less than 5%. I mean, we internally do a rating of our portfolio and it is coming down. It's -- it's information we don't share. But it's a very rigorous analysis that's bottom up, and it is coming down substantially.

Yes, Michael, I'd make another comment there. I think that at end of the day, because we actually -- we look at our -- we analyze our properties every year, go through a very diligent process with our investment and operations team, to make sure we understand what the risks are, if there are any risks, and we take the appropriate steps. That's one reason, if you look at our portfolio, we don't have a bankruptcy problem, because, typically, we're selling ahead of time. What that means, in essence, that we're always probably going to -- a property that may have been a 'B' last year could fall into a 'C' category in the subsequent year, and the 'C's' are the ones we're selling.

That's what I was going to add, Michael. When we look at it, we don't necessarily stand back and have our crystal ball and go, what tenant's going to go bankrupt. But we study sales per square foot and look at trending -- negatively trending sales. Even though, as a percent of our total, it continues to get smaller, but you're never going to be done. You're going to have a change in demographics, a change in retailers. Things are going to change, so I think, to our credit, because we started out several years so aggressive, it continues to be a smaller percent of total, but you're never done.

But it is really getting that percentage gets smaller. And I will also say, when you combine the -- this is from our perspective, but when you combine the quality of the new investments from developments and from acquisitions plus the dispositions, there's been a pretty nice compounding of the net asset value on a per share basis. Once again, some information we don't share. And I reiterate -- because Brian and Bruce are giving me hand signals, [LAUGHTER] that 5% 'C' number is well below 5% of it. I was just trying to be careful there.

In terms of the dividend, I think you've foreshadowed that you'd start getting the dividend up with FFO growth. Where does this sort of take you now, and where should we see a trend over the next few years?

Let me try to answer this. I think what was significant this year is there was no return of capital this year. And what we've indicated to the market, while next year the FFO growth is going to be kind of in the 6% range, beyond that we expect to be in the 7-8% range, so we'd expect your dividend would probably have to increase in order to basically meet the legal test to do that.

On top of that our --

It'd be in the same range as what your FFO increases.

And the payout ratio is -- was 60% last year.

Do the gains affect it at all, in terms of what you're -- when you're flipping the developments or the land sales?

Yes, they do. Obviously, gains could effectively use up your ability to effectively meet the legal requirements.

And just the last question on first quarter guidance.

Michael, Michael, I'm going to let you it, because you're the only person I've given a hard time. [LAUGHTER]

That's this quarter. $0.75 to $0.80, I guess that assumes that there's no transa -- or very limited transaction processes?

First quarter guidance.

$0.75 to $0.80. Yes, and if you'll recall, first quarter of last year we had a couple of properties, developments that did sell that had pretty large gains. So from first quarter '06 over first quarter '05, there's a significant difference in transaction process.

Right, and if you just -- if you strip out your $0.18 this quarter, you're basically at $0.76. Because your fees are going to be higher from First Washington, it's almost as nothing. Is that a fair way to think about it? Nothing of development or out-parcel.

I'm not sure we should respond to that. I think that that --

Yes.

The guidance is the guidance.

The guidance is the guidance, so --

Okay.

Thank you.

And we do have a follow-up from Matt Ostrower from Morgan Stanley.

Thanks, my questions were answer.

Thanks, Matt.

Moving on, we'll return to Dennis Maloney with Goldman, Sachs.

Hi, two real quick questions. Just curious where you guys are getting mortgage rates these today, in terms of spreads to treasuries? And then, secondly, do you run land sale gains through your same-store NOI calculation?

I'll take those mortgage rates. We're out in the market right now, actually putting a mortgage on Hilltop, which is one of the properties we just contributed to Macquarie. Spreads, 60 to 65% LTV, or less than a hundred basis points.

And land sale gains, the answer is absolutely not. We do not.

Perfect, thank you,.

You're welcome.

And Miss Palmer, there are no further questions. I'd like to turn the conference back to you for any additional or closing remarks.

Once again, we appreciate everybody's interest in Regency, taking the time to be on this call, and wish everybody have a great super bowl weekend.

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