Regency Centers Corp (REG) 2006 Q2 法說會逐字稿

Good morning. My name is Paula Kymes and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regency Center Corporation second-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like the turn the conference over to Lisa Palmer, Senior Vice President, Capital Markets.

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 and Treasurer; and Jamie Shelton, Vice President of Real Estate Accounting.

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 with the SEC, specifically the most recent reports on Form 10-K and 10-Q, which identify important risk factors which could cause actual results to differ from those contained in these forward-looking statements. I'll now turn the call over to Bruce.

Good morning, and welcome unfortunately to another hot day in the East. As you will hear in more detail, Regency had another solid quarter, as fundamentals remain strong in each key facet of our business. FFO per share in the second quarter was $0.93, which is higher than originally planned, primarily as a result of earlier than expected sale of a completed development. As this was a timing variance, full-year earnings guidance remains unchanged in spite of a $500,000 unexpected impairment charge in the second quarter.

You may have noted that our guidance indicates an increase of gross transaction profits by $4.7 million. This is the result of a gain on a land sale which had a 50% minority partner and was fully consolidated. Our guidance page also includes a $4.7 million line item offset just below the gross profits for this minority interest, so there is no net change in transaction profit guidance.

Even with the higher than expected transaction profits for the quarter, FFO per share was still $0.08 lower than the second quarter of 2005. But if you recall, the second quarter of last year included a $14 million onetime acquisition fee, or $0.20 per share related to the First Washington transaction. As you noted, guidance for 2006 third-party revenues is $28 to $30 million. This is inclusive of the $6.8 million deferred acquisition fee earned this quarter. It's important to note that we expect that same level of third-party revenues, $28 to $30 million, on a recurring basis in 2007.

G&A remains on plan at approximately $5 million higher than 2005, primarily due to the acquisition of the First Washington portfolio. In fact, G&A as a percentage of total revenues under management is 5%, down from 5.4% a year ago. Capital cycling activity remains brisk.

During the quarter, we sold two operating properties out of our joint ventures, along with six out parcels, generating total proceeds to Regency of over $31 million. As I mentioned, we also sold a completed development, one of the former Shopco buildings that was purchased last year. The building was sold to J.C. Penney for $9.2 million at a cap rate of 6.1%, resulting in pretax profit margin well in excess of 50%. Regency has already generated almost $400 million from the sale of operating properties, developments and out parcels for resegment into new developments and acquisitions.

Capital recycling and a strong balance sheet are key components of our business model. And, as a result of a very successful recycling program, the balance sheet is strong and provides us a great amount of flexibility for our investment activity. I'll now turn the call over to Mary Lou.

Year to date, Regency's pro rata same-store NOI growth is 3.4%, with the expectation that this will remain steady for the rest of the year, which should result in us ending the year at the upper end of our guidance, which was 3.25 to 3.5%. Our growth has averaged over 3% for the last eight years. We believe this is a reflection of our strategy of focusing on dominant anchors, above average demographics, and best in class side-shop retailers. This strategy has led to sustain high occupancy and strong rent growth, resulting in reliable NOI growth.

Over the same eight-year period, rent growth has averaged in excess of 10% and over 13% this year. Clearly, the focused strategy and the quality of our centers facilitate the success of our tenants through increased traffic and healthy sales. Because of dominant locations, leading anchors and the fact most of our retailers primarily sell necessity goods, even with the general slowdown, we expect sales within our centers to remain healthy.

The notable success of our PCI program is also product of this strategy. These national and regional best in class retailers posted a 17.5% rent growth this quarter versus 11% for non-PCI retailers. And perhaps more compelling, the renewal rates over 86% versus 77% for non-PCI.

As you know, the PCI program is centered on relationships. We have recently cultivated our relationship with Trader Joe's, a specialty grocer that is a perfect fit for our centers, as we target the same customer in terms of demographics. We have a handful of Trader Joe's stores in our portfolio today, and they all do exceptionally well, in excess of 30 million in sales and over $3000 per square foot. We added two stores last year and are in the process of adding two additional stores in Raleigh and in Atlanta, which are Trader Joe's first stores in North Carolina and in Georgia. The Raleigh location, the Shoppes at Kildaire, was a Winn Dixie-anchored center. Winn Dixie closed the store and their bankruptcy proceedings shortly before we acquired the property. We purchased the leasehold interest for $1 when it went to auction last August. With control of the property, we were able to [back-sub] the space at significantly higher rent, with leases to Trader Joe's and Staples, resulting in double-digit returns on our investment.

A quick update on the Albertson's stores in our portfolio. We've been notified that three of the stores will close. Two of these three stores are at exceptional centers and we're more than confident that our stores will be replaced with stronger tenants. We're also hopeful that we will be able to capitalize on below-market rents. At the third location, which is a shadowbox store, there's already interest from a regional grocer.

Our operating strategies continue to enhance the performance of our First Washington portfolio, and I just can't tell you how pleased we are with that portfolio. Year-to-date, we've achieved 3.7% same-store NOI growth, and 14.8% rent growth in this portfolio. It's truly a tribute to our team and our system.

As a whole, the supermarket chains are doing well. Kroger reported comp store sales of over 7% for the quarter, Safeway over 5.5%, and Publix over 5%. Our anchors continue to perform well and our centers continue to do well at over 95% occupancy, 13.1% rent growth, and 3.4% same property NOI growth.

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

Thanks, Mary Lou. Regency's investment program continues to perform at a remarkable level with the development program in particular hitting on all cylinders. On the development side, the team is fully engaged with approximately $2.6 billion of activity in the works. This compares with 2.2 billion last quarter, so a really sizable increase. The 2.6 billion is broken down into projects under construction totaling 767 million and a development pipeline of approximately $1.8 billion of potential starts. I'll touch on both of these in a moment.

During the second quarter, the development team started six new projects -- Culpeper Colonnade, a Target-anchored center south of Washington D.C.; the Walgreen's portion of Hibernia Plaza, a project here in Jacksonville that will ultimately be anchored by Publix; Lebanon Center in Nashville, Tennessee, another Publix-anchored center; Marketplace at Briargate, located in Colorado Springs and anchored by King Supers, which is a division of Kroger; [Oakleaf] Plaza, also here in Jacksonville. This is a Publix-anchored center that will serve a new planned community in the rapidly growing area south of the city. And finally, the fourth phase of our successful Vista Village project in San Diego market. With these additions, at quarter end, we had 41 projects under construction with estimated net cost of completion of approximately $767 million. The projects are performing very well. Specifically, the leasing is progressing nicely with the projects 77% leased and committed compared to only 48% funded. This puts us on track to have the project substantially leased by the time the centers open.

The returns are holding up very well with returns of 9.6% before JV partner participation, and 9.4% after. At this average return with current cap rates in the 6% range, the profit margin would exceed 50% for these in process projects, thereby creating over $350 million of value.

The cost increases we've seen in past quarters have largely abated. Total net cost increases quarter-to-quarter were $3.4 million, or about a half of 1% of the in-process costs. Of that $3.4 million, 2.4 million was related to increased investment such as adding GLA or converting a ground lease to a build-to-suit, all of which provide incremental income and additional investment returns. Thus, there were hardly any real net increases.

There were cost increases, to be sure. We had 20 projects with cost increases that totaled 9.7 million and we had 21 projects that are either right on budget or had cost savings, and those savings totaled $5.1 million. Thus the costs before JV participation increased by 4.6 million on a net basis. 1.2 million of this was covered by our development partners in the form of reduced participation, leaving us with a net cost increase for the entire portfolio of 41 in-process developments of $3.4 million. Given that there are $767 million worth of projects under construction, it's a very small amount.

Cost fluctuations are part of the business, so let me focus another moment on this issue just to give some additional color. Three projects of the 41 accounted for $4.1 million of the cost increases. So this is not a widespread issue. If you ignore the $5.1 million of cost savings and focus only on those projects that had cost overrun, those overruns fall into three categories. Approximately one-quarter of the overruns are really additional investment. As I mentioned for -- these would includes things like adding GLA or converting a ground lease to a build-to-suit. Another 25% are costs related to permitting issues, mostly interest carried from the delayed permits. Finally, about half are real cost increases, whether they are hard costs or increased carry from the pushbacks and rent commencement dates unrelated to permitting.

You may have noted in the supplemental that development completion guidance was reduced by approximately 100 million for 2006. We had four projects that were previously identified as stable at the end of the year that have been slightly delayed. The projects are doing fine and we expect them to be completed in the first quarter of 2007. At three of these four centers, the delay was mostly the result of permitting issues. Across the country, but particularly in Southern California, permits are taking much longer than they used to.

The fourth project was our Alameda Bridgeside development that we've discussed before. Alameda, which is anchored by Nob Hill, a specialty grocery division of Raley's, is a waterfront property in the Bay Area, where we've had to substantially augment an already elaborate design. As a result, we slowed down the construction start in an attempt to find ways to save building costs. In the end, we were successfully in creating a cost sharing agreement with Nob Hill, [so] a very satisfactory solution, but it did come at the expense of some lost time.

There were other pushbacks on rent commencement dates. There are several reasons for this. In some cases, again, it was permitting issues, whether it be a state highway administration delaying getting the sign-off, or in the case of our Merrimack project, a delay in getting the approval to build the second building. In some cases, it was elective. At Rio Vista, for example, the CVS Sav-On merger gave us an opportunity to switch to a better drugstore, which is the right thing to do, but again it came at the cost of some time. Some of the delays were tenant-driven, such as changes to prototypes or a grocer on a ground lease simply taking longer to build a store. And some of the delays were related to leasing. In one case, Walgreens changed its real estate manager, and that caused a six-month delay.

At Orchard, we fully negotiated an LOI with a restaurant that was going to ground lease a parcel. We started a site design, we were working on the lease when they abruptly changed their mind. But in the end, things worked out for the better. We ended up with a build-to-suit building there, and it's fully leased today with a Starbucks and a restaurant.

So while there are individual instances of delays or cost increases, the big picture is that there are 41 developments totaling $767 million. They're still generating an attractive return of 9.4% on invested capital. As I mentioned earlier, this will create over $350 million of value.

The Shadow pipeline is large, robust and visible with more momentum than ever. The pipeline continues to grow and now totals approximately $1.8 billion of potential future starts versus $1.4 billion that we reported last quarter. Nowhere is it more true than a development program that success breeds success, and that is clearly what is going on with our development efforts. The opportunities we're seeing and taking full advantage of are better than ever and we believe this is a trend that will continue in our favor.

Of the $1.8 billion pipeline, we classify approximately 500 million of this pipeline as high probability starts for 2006 with expected returns of 9.5 to 10%. Although we've only started 53 million in the first six months, we remain very confident that we will achieve our goal of 400 to 500 million of development starts this year. It's really just a question of when, not if. And the amount of projects that could slip into the first quarter 2007 we view as minor. In terms of 2007, we already classify about the same amount, 500 million, as high probability starts.

Looking at the 2006 2007 high probability pipelines, over 50% of the projects are grocery-anchored, and about 40% are anchored by Target or Wal-Mart, with two-thirds of those being Target anchored. Of the grocery-anchored projects, we are working with all the leading grocers. For example, again in the high probability pipeline, we're working on three Whole Foods, two Wegmans, two HEB's, six Publix, four Krogers, two Super Values, one Safeway.

We've also made significant progress toward our acquisition goals for the year. Subsequent to quarter end, the Regency Macquarie joint venture used 1031 proceeds to purchase Merchants Crossing, a Publix-anchored center in Florida at a cap rate of 7.1%. Year to date, we've purchased over $100 million of high-quality properties in an extremely difficult acquisition environment, and have either placed in escrow or are actively negotiating purchase contracts on another 150 million.

In summary, I feel extremely good about the development program and am more optimistic about its future than any time since I've been here. Hap?

Thank you, Brian. Before I comment on how well Regency is positioned for the future, I would like to briefly discuss the opening of Sun that is in the initial stages of marketing. The Sun, which focused on larger format community centers, which today represent approximately 25% of Regency's portfolio. Over the past several years, Brian and his team have been able to profit from Regency's growing relationships with major anchors such as Target, Wal-Mart and Home Depot. The presence of that team and their markets to the local sharpshooters in our key markets, and the momentum, as Brian said, breeds success -- that's created by a successful development program.

With community centers representing over 50% of our current in-process developments, and over 70% of our $1.4 billion shadow pipeline, an open-end fund that will purchase an 8% interest in stabilized developments at fair market value seems to be an ideal vehicle to cost effectively finance a growing community center program. Specifically, the fund would allow us to fully realize the development value to maintain a 20% ownership and control the management of these high-quality centers and to grow recurring third party revenues from an infinite life vehicle. More detail will be provided when the fund is closed, which we expect to occur in the fourth quarter. You should also know that given there's always strong demand for quality centers, we are extremely comfortable with alternatives in the unlikely event that there is a delay in the closing of the fund.

Bruce, Mary Lou and Brian so well articulated how each key component of Regency's operations is performing exceptionally well. As a result, Regency's future prospects have never been better. The high quality portfolio is producing superior same property rental rate and NOI growth. Attractive returns and substantial value are being realized as developments are being completed. And the $1.8 billion pipeline will create an incredible/phenomenal amount of future value.

There is substantial growth in recurring third-party revenues from joint ventures. Capital recycling has already generated nearly $400 million to the sale of operating properties, developments and out parcels. And the balance sheet is strong.

In my mind, the table is beautifully set for Regency to continue to sustain compound growth and funds from operations and net asset value per share at a rate that should be extremely gratifying to the shareholders of Regency.

We appreciate your time, and we'll now answer any questions you may have.

(OPERATOR INSTRUCTIONS). Ross Nussbaum, Banc of America Securities.

It's Christine McElroy here with Ross. As you're talking to investors about raising equity for the open end fund, can you maybe discuss some of the economics that you're targeting with regard to fee income structure? And do you plan to contribute all the community center development to the fund or leave a portion wholly-owned?

Let me just say, the economics, more to come as we close or get closer to closing. But we would plan to contribute all of the future community center developments that we complete. And that way there would be no, in effect, implied or perceived conflict.

Okay. And then the timeline for the initial equity to be invested, you're targeting about three years?

We would -- we've got a $900 million shadow pipeline that we expect to complete in the next three years, and we envision having that money -- that capital deployed and those $900 million worth of investments over the next three years, plus have about $300 million of capacity for additional developments or third-party acquisitions.

This is Bruce. Perhaps a little bit more color on the fees. I think what we can say about this, we would expect to be somewhere in the market area, and I think you could refer to ProLogis to be in the ballpark.

Sorry if I missed this, you did quite a bit of preleasing at the Shops at Highland Village over the last quarter. Can you give us some color on some of the larger additional tenants that you signed?

I'll just give you a summary of where we stand with the leasing on that in general. Right now, 56% signed, 13% in lease negotiations soon to be signed. We've got three that are moving the lease negotiations, have been approved by their respective real estate committees, and then we've got about 16% are in the LOI stage. So about 87% of the retail space, and then when you factor in the office, about 80% --

Brian, just if I can add a little bit? Some of the things that we've got signed, we've got Chico's signed, we've got Talbots signed. The majority of the Limited concepts with Victoria's Secret and they're actually adding a concept on it. We just signed this week [Sur la Tab]. So it's just seeing both in terms of the hard goods as well as the soft goods that we're seeing great momentum across that center. It's strong.

That's in addition, Brian, to AMC, Barnes & Noble, Ann Taylor and Banana Republic.

Thank you.

Christeen Kim, Deutsche Bank.

You mentioned before that the acquisition environment remains very difficult, but you were able to get one in for your own portfolio this quarter and you left some room for the rest of the year. Are you seeing any changes in the acquisition market, whether it be the mix of buyers, or any movement in cap rates?

We're seeing a change in the buyers in the sense that the leveraged buyers are out of the market now, and they were the ones who drove a lot of the business maybe a year or two ago. We're also seeing a softening in the B and C properties, but I would say that the A properties have stopped -- declined, the cap rates have stopped falling, but they've stabilized, but have not ticked up the way they have in the B and C quality.

Not as many buyers for A's, but the prices are still being hit.

How much of a softening have you seen in terms of cap rates in the B and C quality assets?

I'd say the B's, maybe 25 basis points or so. The C's we don't track as much because we don't go after those properties. But I think -- depending on the quality, it could be 50 to 100 basis points, just depending on how bad they are.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Citigroup.

This is Lisa. I'm sorry to interrupt, you John, just one thing before we go any further. I failed in my responsibility to communicate that we have to limit to two questions going forward. So you're welcome to come back on at the end, but two for the single call.

Just in time for me and John for two questions. (multiple speakers). Just thinking about the pipeline a little bit, you talked about the 1.8 billion forward pipeline and obviously some stuff got shifted, pushed back in the current pipeline. Have you seen much movement in delays or issues with the forward development pipeline?

No, just across the board, the biggest delays that we're getting really don't have anything to do with finding the properties, getting the anchors ensued. So the real big issue on these things are the entitlements. Especially now that we have so many larger community centers, the environmental impacts are greater, so you have much more scrutiny. The project we have now in Southern California, the French Valley development, for example, you've got local agencies that review it, state and federal. And so I think -- and what's happened is the counties are just much slower in getting through their backlog. So that's the biggest form of delay we face.

And then thinking about just guidance for a second, you've talked pretty strongly about how operations are coming in ahead of plan, lease spreads, occupancy, same-store, it sounds like all the gains and the fees are coming in in line with where you are. What's holding you back from raising guidance?

Michael, if you'll note, in my comments, I indicated that we left guidance where it was in spite of the fact we also assumed a $500 million unexpected -- excuse me, $500,000 impairment charge this quarter. So effectively there was a penny increase.

Right. Is there anything else going on that may be stopping you?

No. I would say, in fact, the comments upfront, where everything is operating at the highest levels.

But it's also important to note we have rental rate increases. The positive impact of those rental rate increases occurs in future years.

To that point, though, what we experienced in this second quarter is we're going to feel mostly in 2007.

And the same thing with the, in effect, the development pipeline.

Thank you.

(OPERATOR INSTRUCTIONS). Mike Mueller, JPMorgan.

A couple things. I was dropped earlier, so I apologize if you answered this. But going back to the open-end fund, is it expected that this would be funded or seeded with any existing operating assets, or you'd effectively be ramping up dispositions, or will it just focus on marginal developments that are going into the fund?

It will focus on our community shopping center development pipeline. That will be the primary focus. And as I've said, the pipeline today is $900 million, so that will be the primary focus. In addition, there will be $300 million of additional capacity; it's contemplated for additional developments that may be completed within the next three years, and for some room for acquisitions.

Just to clarify slightly Michael, the pipeline that Hap referred to includes in-process as well as identified pipeline projects.

Okay. But it's not -- you're not taking a chunk of existing operating assets (multiple speakers).

No.

The other question, just thinking about now that you have an identified take-out fund, or you may have an identified fund to take out the developments, any expectations that gains as a percentage of FFO will change at the margin, either on the upside or the downside, considering you have -- there seems to be more visibility on this line item now?

For sure, there will be a lot more visibility in that regard. But that will depend on the amount of community centers that are completed. But as we said, I think that kind of the sweet spot that we're shooting for is under 20% from transaction profits and somewhere in the neighborhood of 15% percentage of funds from operations.

Great, thank you.

Ralph Block, Focus Financial Corp.

Is the apparently improving performance of some of the large supermarkets that you mentioned earlier, is that translating into perhaps increased supermarket interest in some of your new developments?

I think it does. As I mentioned earlier, when you take a look at the pipeline, we're seeing a lot more activity from particularly the national chains. In the past, they've been pretty dormant and now they are very active. So I think it does.

And are there any that -- where the interest would be significant in terms of expanding your development pipeline?

We're doing as much as we can. I think the fact that they are stepping up more is reflected in the fact that our development pipeline has increased from 1.4 billion to 1.8 billion.

Ralph, as Brian mentioned, there's six Publixes that are in the pipeline, four Krogers, only one Safeway. Safeway continues to focus on their lifestyle renovations, which we think is a good thing. And we also find that the supermarkets, in spite of the fact that they are more -- looking to open more stores up right now are still focused on organic growth and we think that's a good thing.

I hate to do it to you, but I've got to be consistent. We're going to have to limit it to two questions to everybody. Please feel free to get back in the queue.

Eric Rothman, Wachovia.

I wanted to explore rising construction costs a little bit more. I know you mentioned there were 20 projects where you saw some cost increases. I guess can you help us understand a little bit better exactly where those increases are coming from, and what's driving it? Are you seeing any plateau there?

As I mentioned, the net increases are only $3.4 million. But if you take just those projects that had the cost increases, I mentioned about a quarter of them are related to additional investments, so those don't count. About a quarter of them are related to really the interest and the fees associated with delayed starts due to permitting problems, not problems, but delays. And then of the real bust, about $5 million, only 3 million of those were hard costs. The rest were formula-driven like contingency, overhead and so forth or interest. Of the 3 million, really what we're seeing is that the building costs have stabilized. The tenant improvements are -- there was a study done for chain store (indiscernible) that says that they are up slightly. We haven't seen too much of that. The biggest problem we've had would be in the site area, which is always a risk.

At Silver Springs, for example, we budgeted -- we have a $20 million site budget, and we had about $1.8 million of additional costs related to rock. We knew there was rock there, we built it right next to a quarry, and we did incredible amounts of testing. But when we drilled the very deep trenches, we ran into about three times more rock than we expected. So I would say site costs are where we've seen the increases this quarter.

Great, thank you very much. Have you seen any willingness, or I should say maybe some demand from tenants to trade higher TI dollars for higher rent? In other words, is there cost to build out their own space, either on existing leases or new leases?

No, we don't do that. We've kept the TI's pretty consistent, and we just don't do that.

Jonathan Litt, Citigroup.

I had a follow-up question regarding the development profits overall for this year. Even when you back out I guess the out-parcel sales, the minority interest, it seems that out-parcel sales is running a lot higher than it has been and the development profits are being pushed back. Is that just holding on a little bit longer for the fund to come into play?

I think that's really related largely to larger parcels of land and specifically on two larger parcels this year. Normally our parcels, if they're what I call two [wide] parcels in the sense they're up front and so forth, those are going to generate somewhere in the ballpark of $300,000 per transaction. But what's going on right now, there were some larger transactions in the land side.

Okay.

Historically, out-parcel sales gains as a percentage of total transaction profits have been in the 20% range.

Right. It seems a bit higher though, now, right?

It has been as high as 25% in the past, and it could reach that this year.

And then thinking about the fund for a second, if you think about 900 million of costs, what sort of value are you attributing -- I guess this will be done by an appraisal (multiple speakers)

Yes.

So just ballpark, you are thinking about like a 6 cap, so about 1.5 billion value?

It will depend on the cap rates at the time. You can do your math, I'm not sure that all will be -- first of all, it's going to be funded over the next three years. That's when the developments will be completed. So as developments are being completed, they will be contributed. You tell me what cap rates are going to be over the next two to three years.

What sort of leveraging are you going to put into the fund?

It's probably contemplated in the 50 to 60% range.

So I guess (multiple speakers) is it fair to assume then -- quick follow-up. Is it fair to assume that the development profits may go down, but your fees will go up effectively from -- if you sell it outright, you would sell 100%; here, you're only going to sell 80. But (multiple speakers)

There's tax deferrals related to contributing it to joint ventures, so -- and we're already contributing a decent percentage of incomes of our development profits comes from contributions to joint ventures. So I'm not sure that that necessarily changes the mix one way or another.

Eduardo [Abush], Millennium Partners.

I think you touched on this, but I wanted some clarification. In terms of the development profits, I mean the guidance seems to be up $0.07, and you alluded to the fact that you did not raise guidance for some reasons. Could you just repeat that please?

This is Bruce. If you look at the guidance page, you'll note that our gross transaction guidance increased by $4.7 million versus last quarter. But there's an offset, which is really for the minority interest. This is one property -- rarely do we have a situation like this. We have a minority partner on a property that we fully consolidated, and we needed to offset his 50% interest in that deal. So that's -- we gross it up, and then on the guidance page took it back out. That's exactly the same guidance as we'd given last quarter.

Which is also why -- if you were to look on the income statement in the limited partners interest and consolidated partnerships, that number is up significantly quarter-over-quarter. Because the run rate for that would be more like the first quarter. But there is the $4.7 million gain in that line item this quarter.

Okay. And then on the other hand, you have less utilizations, so a little less [in line] from that part but you're still maintaining your guidance even though. So you have something -- something better is going on somewhere else.

Well it's really coming from the operating portfolio.

Ralph Block, Focus Financial Corp.

Just one more question. As you look at tenant sales in your various communities, have you seen any changes in trends from Q1 to Q2 in terms of which centers are performing better regarding upscale, moderate income?

For the most part, we're focused on better income, and we get sales on an annual basis. And so it's difficult to say. However, if you look at retail sales in general, it had overall moderated. Total retail sales from first quarter was 8.3%, second quarter 6.8. But if you look at the categories in our sector, the grocers overall produced at 4.2%, drugstores run at 6%, food and restaurant at 7.5%, so the necessity businesses are continuing to perform very strong.

And I think it's a combination of a couple things, but one of the things that I think helps our business being so necessity driven and in the neighborhoods is the fact that with increased gas prices that people are not willing to spend the money on gas, and it's more psychological than real. They would rather pay a little bit more at their neighborhood center than put more money in their gas tank. And I think that's why our sector has performed even better than the overall retail sales environment.

Interesting, thank you.

Mike Mueller, JPMorgan.

Another one for Mary Lou. Is there any reason why the higher rent growth you're seeing this year and the higher NOI growth should slow in '07? I guess particularly since it seems like you're going to be putting more of the larger community center developments into the fund going forward?

Well, you know, if you look at it this year, it's been incredibly strong. And if we break out kind of how we get our NOI growth, about 1.5% comes in from contractual rents that are already built into the leases and the rest comes from rent growth. So that's kind of where our NOI growth has historically come from. So I would, based on the past eight years, see us at that same level that we have performed, which is averaging about 3%.

As far as how we're doing going forward, and will we maintain it. Some of the things that skewed it in this past quarter was we had two big deals. One was a Whole Foods deal, where the rent went from $1450 to $2625, and another Pet's Smart that went from 927 to 21. So you can have a couple deals that skew it. And that can skew it from quarter to quarter. So we've averaged 10% rent growth and it's a 3% NOI, and I see no reason why it won't be at that level. We're working on budgets, so we'll know more after we do a bottoms up budget in the next quarter.

That's it, thanks.

There are no further questions in the queue at this time. Mr. Stein, I'd like to turn the conference back to you for any additional or closing remarks.

Once again, we thank everybody for taking the time to learn a little bit more about Regency, and wish all on the call, have a great rest of the week.

That concludes today's conference. We'd like to thank you all for your participation.