Regency Centers Corp (REG) 2006 Q3 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 Centers Corporation Third Quarter 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After all the speakers' remarks, there will be a question-and-answer session. [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. Good morning, everyone. On the call this morning are Hap Stein, Chairman and CEO; Mary Lou Fiala, President and Chief Operating Officer; Bruce Johnson, Chief Financial Officer; Brian Smith, Chief Investment Officer; Chris Leavitt, SVP and Treasurer; 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 from those expressed in these forward-looking statements. Please refer to the documents filed by Regency Centers with the SEC, specifically the most recent reports on Forms 10-K and 10-Q. These will identify important risk factors, which could cause these actual results to differ from those contained in the forward-looking statements.

I'll now turn the call over to Bruce.

Thank you, Lisa and good morning on this beautiful Florida day. As you will hear in more detail, Regency had an exceptional quarter and has created real value for our investors in every aspect of our business.

FFO per share in the third quarter was $1 per share, ahead of our original guidance of $0.85 to $0.92, primarily as a result of the earlier than expected transaction profits and higher captive insurance earnings. Transaction profits were boosted by the sale of four completed developments to Macquarie in the third quarter, rather than the fourth quarter. This added $0.04 per share to FFO.

In addition, $0.03 came from our captive insurance program. Regency participates in a captive insurance program for the purpose of insuring the deductible for catastrophic losses. To the extent the losses incurred are less than premiums paid Regency participates in the net earnings of the captive. Current year net earnings were approximately $900,000 higher than expected. We also reduced our catastrophic loss reserve by $1 million after reviewing the loss projections prepared by a consultant. The current year net earnings are included in our same-store calculation as they have always been since they are part of our everyday operation. Historically, we've recorded these net earnings as tenant recoveries. This year and going forward, we'll record them as other income.

The increase in insurance earnings, stronger core operating growth, higher acquisitions and higher development starts will be offset by higher incentive compensation as a result of the out performance and lower NOI from our developments as a result of delayed stabilizations in a few projects.

As a result, we have raised our FFO guidance for the year to a range of $3.83 to $3.88. The disposition component of our capital recycling program was robust this quarter at over $164 million in operating property developments and out parcels sales. For the year, we are projecting gross sales of over $900 million to contribute $700 million to the capital recycling model, money that will be reinvested in developments and investments, as Brian will discuss later in the call.

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

Thank you, Bruce and good morning everyone. Our operating performance was very solid again this quarter. We achieved 4% same-property NOI growth in the past quarter on top of 3.4% growth in the first half of the year. Year-to-date same-store growth was 3.6% and rent growth was over 13%. Without the increased earnings from the insurance captive, the year-to-date growth rate would be 3.3%. As a result of our performance today, the guidance for same-store growth has been raised to a range of 3.5 to 3.75% and rent growth guidance has also been increased to 10 to 13%.

During the quarter, 1.6 million square feet of space was leased or renewed. Over a million square feet of this activity was renewal space equating to 79% renewal percent for the portfolio as a whole. If you look further into this number, the renewal percentage for our PCI tenants was 85% year-to-date as opposed to 77% for the non-PCI tenants. Rent growth is also higher in PCI portfolio at 14% on a renewals base and 29% on new leases versus 9 and 21% respectively for non-PCI tenants. It is a quantifiable result that our PCI strategy is beneficial not only to Regency, but to our valued customers.

You've heard Hap discuss the tangible value being created in our development program and there's also substantial value being created in our operating portfolio. If you take the incremental same-store growth since 2002, and cap it at a very conservative 7%, we've created nearly 700 million in value or $10 a share.

The First Washington acquisition and the remerchandising opportunities within that portfolio are key examples of what's driving this very real value creation. A specific example is the Shoppes of Kildaire in Raleigh, North Carolina. We knew the center offered tremendous upside as the tenant mix, including Winn Dixie, was not catering to the highly educated, affluent residents of the center's trade area in the infill market of Cary. Winn-Dixie had a lease that expired in June of 2006 with multiple renewal options at a base rent at $6.25 per square foot. We acquired the lease through bankruptcy for $1, and began an aggressive merchandising and marketing campaign to attract the best replacement retailers.

Trader Joe's had announced plans to enter the North Carolina market and John Pharr, our Southeastern Regional Officer, used his relationship with Trader Joe's to present Kildaire as their entry into North Carolina. Trader Joe's is well known for their private label and specialty offerings that are ideally suited to the discerning needs of the Cary residents. John met with Trader Joe's and negotiated a lease for $13.50 per square foot on about 19,000 square feet, making it one of their biggest stores in the chain. We relet the balance of the former box to Staples at $14.50 per square foot. Both Trader Joe's and Staples are due to open around Thanksgiving of this year.

These two deals result in over a 10% incremental return on cost, without factoring any increase in side shop appreciation. The center is now positioned to enjoy a significant remerchandising with our PCI retailers and continuous flow is one of the dominant infill location servicing the greater Cary market.

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

Thank you Mary Lou. Regency's investment program produced impressive results for the quarter and is on track for an exceptional year. There are several highlights worth noting. In the third quarter, Regency started nine new development projects representing $199 million in total future development costs. Underwritten returns were solid at 9.78%. There are 48 projects totaling $951 million now considered in process, compared with $767 million last quarter and are performing well in terms of leasing, cost control and returns.

In terms of the anticipated total 2006 starts, Regency remains poised to perform at the high-end of our new guidance of 400 to 520 million, with returns in the mid 9% range. While much work remains to be done, and city councils can always push entitlements back a month, this level of starts would represent the first time Regency has started $500 million of developments in any one year. The amount of starts is not only impressive, it is clearly sustainable.

The development pipeline representing 2006 anticipated development starts as well as the Shadow pipeline behind it now totals more than 1.9 billion or about 500 million more than in 2005. It also represents 39% growth or $540 million increase in the pipeline in just two quarters. About 57% of the Shadow pipeline or over 800 million, is already considered high probability, which demonstrates not only that the pipeline is large and growing, but also the predictability has grown dramatically over the years. In the pipeline there remains a diversified mix of neighborhood and community centers. We are seeing more activity by the national grocers than has been the case for the past couple years, while the community centers continue to attract many leading major retailers led by Target.

Average development returns appear to be holding between 9.5 and 10%. I said last quarter that the opportunities we are seeing and taking full advantage of are better than ever. We believe this is a trend that will continue in our favor.

On the acquisition front, Regency closed on five acquisitions in the third quarter, totaling more than $130 million. All five of the projects were purchased within our joint venture program with Macquarie CountryWide partnering with us on one and Oregon on the other four. Three other properties are under contract for fourth quarter closings. When the remaining properties close, third party acquisitions will total over 250 million for the year or 25 to 30% ahead of plan. We believe it makes compelling sense to use our joint ventures to profitably expand the portfolio by using partner's capital and receiving recurring fee income. All in all, extremely strong showing for the quarter.

Let me highlight a few of our development starts. Augusta Center in the Chicagoland area is a Menards-anchored center, which represents the first development start by our new Chicago development team. Menards with 200 stores is one of the leading home improvement operators in the Greater Chicago market.

Golden Hill Center in Paso Robles, which is in the central coast area of California, is a JV with the largest landowner in this high-barrier central coast market and we will develop close to 300,000 square feet anchored by Lowe's on the ground lease. The project will also include Tesco, the British grocery company.

Woodlands West Village is a Target-anchored development in the Houston market located just outside the Woodlands in a very high income area, where Regency's other five centers have enjoyed much success.

Red Bank Village is located in a dense infill location in Cincinnati and will have Wal-Mart on a ground lease.

And finally Tanasbourne Market Center in Hillsboro, Oregon is a wonderful location in suburban Portland across the street from the streets of Tanasbourne, a highly successful lifestyle center. The market center will be anchored by Whole Foods.

We are committed to green development under the LEED certification program. LEED, which is Leadership in Energy and Environmental Design, is a green building rating system that is nationally accepted benchmark for the design, construction and operation of high-performance green buildings. We've formed a LEED committee that will identify all the LEED design issues that we either believe about to be implemented as a company or foresee cities requiring us to implement. We will identify the cost/benefit of each design and we have already began hiring LEED certified architects and engineers. We will begin articulating the benefits to our customers so that we can use this not only to improve the environment and meet emerging standards, but also to get ahead of the curve and use it to our advantage from a leasing perspective.

Two of our developments, Shops of Santa Barbara and Alameda Bridgeside should easily certify as they meet many of the design requirements, including wind power for Whole Foods.

With the addition of these new projects, we had 48 projects under construction at quarter end, with estimated net cost of completion of approximately $950 million. The projects are performing very well. The leasing is progressing nicely as demand remains strong. The projects are 54% leased and 75% leased and committed, compared to only 51% funded.

In just a few cases, there were some minor leasing delays causing $30 million of stabilizations that were slated to occur in 2006 to now occur in early 2007. Returns are holding up very well at 9.57% before JV partner participation and 9.4% after participation, virtually unchanged from last quarter.

At this average return and current cap rates in the 6% range, profit margin would exceed 50% for these in-process projects, creating over 450 million in value or over $6 per share. The cost increases we've seen in past quarters remain in check with notable easing of labor pressure as a result of the housing slowdown. Total net costs increases quarter-to-quarter were only $214,000.

In general, the housing slowdown has not impacted Regency. Most of our developments are significantly pre-leased or are under contract, because the population densities that exist today already support the developments. In some cases, it is possible that lease-up could take just a few months longer. All in all, I'm extremely proud of the third quarter performance of the investment group, and look to complete the year on an even stronger note. Hap?

Thank you Brian. As you've heard from Brian, Mary Lou, and Bruce, Regency had another successful quarter. The operating portfolio continues to perform at a remarkably high level year in and year out. The built in value coming out of the development pipeline is extraordinary. The capital recycling strategy is producing over $700 million from property sales that will be redeployed into our development program and into profitable fee generating joint venture acquisitions. And by year-end with the closing of the open-end fund, we will have another vehicle that will enhance Regency's recurring fee income while providing a take-out for our larger format developments. The fund will purchase our stabilized community center developments at fair market value. Regency will earn fees from property management, leasing and asset management that are comparable to our other institutional partnerships. In essence, the fund allows us to fully realize the development value while maintaining a 20% ownership of these high quality centers and growing recurring third-party revenues in an infinite life vehicle.

To date, commitments are already in place for 80% of the $400 million of third party equity that is targeted to be raised. Total capacity of the fund will be $1.2 billion at approximately 60% leverage. $900 million of properties are Regency developments that are either in process or in the pipeline.

I am especially gratified that Regency's commitment to being forward thinking is evidenced in the distinctive way we do business and is paying real dividends to our shareholders. Think for a moment about how Regency focuses on owning high quality grocery-anchored and community shopping centers, which are tenanted by best in class anchored specialty retailers and are located in research-selected markets with attractive demographics. And how -- and how the quality of these centers together with state-of-the-art operating systems like our premier customer initiative are generating reliable growth in net operating income and once again year in and year out.

As you know, Regency's NOI growth has consistently been among the top of the shopping center sector. Consider again how Regency's development program is not only servicing the growth needs of America's best neighborhood and community center retailers and building modern state-of-the-art shopping centers, but is also creating extraordinary value.

You are also familiar with Regency's longstanding commitment to proactive capital recycling, notwithstanding the dilutive impact of dispositions and to co-investment partnerships. Rigorous utilization of these strategies has enabled Regency to not just accumulate assets for the sake of accumulation, but to both expand and enhance the quality of the operating portfolio. This is translated into greater and more reliable growth and NOI and exponential increases in recurring and profitable third-party revenues.

The infinite life open-end fund and the implementation of LEED design and new developments are two more recent and noteworthy examples of Regency's zeal to make the right decisions that will benefit the company long-term. Fortunately, Regency is blessed with an exceptional management team that can brilliantly execute these strategies. As a result, I am extremely optimistic about Regency's future prospects. The company is well positioned to achieve our increased FFO per share guidance, which should translate into growth in excess of the 6% that we originally targeted for 2006.

I'll remind you that this will be on top of the nearly 13.5% growth in 2005 when we earned almost $14 million in transaction fees, and I am confident about reaching next year's growth rate objective of 8%.

I also want to conclude by taking a moment with you to look out beyond 2007. As I consider the financial impact from our current path for NOI growth, development and joint-ventures, I believe that Regency is poised to meaningfully enhance our future sustainable FFO per share growth rate above the current target of 8%. I do want to state that in my view compounding per share earnings on a sustainable basis at 8% is no minor accomplishment. At the same time what I am saying is that if as expected 400-$500 million in annual development starts come on line beginning in 2008 at projected returns in the 9.5% range combined with 3% same-property NOI growth and the strong momentum for third-party revenues with attractive margins from Regency's growing co-investment partnerships an enhanced sustainable per share growth rate that could reach 10% is definitely doable. We appreciate your time and we will now answer any questions you may have and Lisa wants to remind --

Two questions per call and you can always get back in queue afterwards.

[OPERATOR INSTRUCTIONS]. Our first question will come from Christine McElroy with Banc of America Securities.

Good morning, I'm here with Ross Nussbaum as well. Of the development assets that you have earmarked for contribution to the open-end fund, how much of that is in your in-process pipeline versus your Shadow pipeline? And do the expected contribution cap rates on those big box community centers differ at all from the cap rates you've been seeing on your merchant pipeline?

I was, Christy and Ross, the majority are already under development today. And we expect cap rates to -- we may be assuming some incremental increase, or minor increase in cap rates going forward, but it's going to be a fair market value.

As you recall last quarter, we did tell you that the -- basically the criteria is that if it's greater than 250,000 square feet, even including tenant-owned GLA, so can you go through our development in process and basically tick off each one that meets that size.

Okay. And then can you talk about the increase in your JV acquisitions' pace and guidance in the context of the market for acquisitions. Are there more opportunities out there? Has the pricing environment changed at all?

Brian?

The -- I think the opportunities are better for us right now. We're seeing more, and as we talked about in the past, the leveraged buyers are pretty much out of the market. Cap rates have certainly flattened. They may have even ticked up a slight bit. In the past they have been just B and C centers, and A properties were continuing to -- the cap rates are continuing to go down, but we've seen a change in that this quarter, and cap rates for A properties have also flattened out.

Thank you.

Still a very competitive environment out there.

Okay. Thanks.

And next we'll go to Jon Litt with Citigroup.

Hi, this is Ambika Goel with Jon. Given that you didn't disclose drivers of '07 guidance, would it be fair to assume that a similar contribution from your development profits in '06 versus '07?

I think we are projecting, just a general range of 15 to 19% development profits as a percentage of FFO.

Okay. And then the lower recovery rate; was that related to the reclassification of the captive insurance profits from tenant reimbursements to other income?

That's correct. Good pick up.

I am sorry. Next we'll go to Christeen Kim with Deutsche Bank.

Hey guys, how are you?

Good.

Great.

Just a follow-up question, I think you mentioned before in term of the acquisition pace and the environment. Looking at the environment now, are you seeing more or less maybe redevelopment opportunities or in terms of, assets you want to look to purchase or is it more stabilized, has your strategy changed at all?

The strategy hasn't changed. We look at redevelopment opportunities where they make good compelling sense, but we have so much going on in the development program that that's where our focus is when it comes to new construction. So, the acquisitions we are looking at are by and large stabilized core properties.

Great. Thank you.

Just a follow-up note on that, to the extent that there is major redevelopment involved where we're expending significant capital, Regency in effect owns 100% of those in relationships to our institutional partners. Our institutional partnerships are core partners.

Okay. Great. Thanks guys.

[OPERATOR INSTRUCTIONS]. Next from Morgan Stanley, we'll go to Matt Ostrower.

Good morning. I am sorry if you answered this on maybe a previous call, but just from a strategic prospective, the move to sort of selling these developments into a JV context; just going back to some of the way that I perceived you to be looking at this before, the last major change was sort of keeping more of the developments and then ramping up your dispositions using some of the gains potentially to offset some of the dilution from dispositions, can you sort of refresh your thinking on that, does this mean that you may be sort of winding down that disposition process? And what -- I haven't done the math here, but my guess would be, if I really wind down dispositions that might be pretty accretive to next year's FFO?

I think that number one related to dispositions, we will continue to cull the portfolio, but probably as a result of the fact that we've been proactive in culling the portfolio, and I remind you that one time Regency earned 21 Winn Dixie grocery-anchored center and we have three today and would love to get those spaces back. But I think that you will see more in 2007 and beyond, probably a little bit -- a moderating level of dispositions and a lot of that may come in -- in some of our joint ventures.

Secondly, related to the strategy as it relates to the open-end fund, being a take out for larger community centers, we have seen such a significant amount of growth in the -- our community shopping center development program that we thought it made sense to stick on this capital recycling strategy to come up with a partnership vehicle that would be a take out because we like the properties, we want to continue to operate them, we want to continue to be part of the platform; so it enables that and us to do that rather than selling 100% of those. But it is such a large component we had to do something and obviously an open-end fund, an infinite life vehicle is the most ideal vehicle for that, Matt.

And just as a follow-up, Hap. Before, I mean it was my sense that you were not selling everything that you were developing, you were actually keeping a good number of properties. The stuff that you are talking about putting to these funds; can you sort of categorize what types you are talking about there, are these ones that you would have kept on your balance sheet or ones that you just would have --

Well, they are all centers that are with over 250,000 square feet, so these are larger community centers and I might also note they have a somewhat lower growth profile, somewhere in the 1.5% to 2% than the typical grocery-anchored shopping centers. So, we think that the strategy that we are doing makes sense from a capital recycling standpoint. It's an efficient way to -- we still like the assets to operate the assets through the fee income streams that are enhancing our returns, so for a lot of reasons we think this open-end fund makes compelling sense.

Could you clarify, Hap, these are ones where you would have probably sold them outright before if you didn't have this program--?

We have in the past sold some of them outright, yes. And I think the thing to remember though, you know, at $500 million -- when you think about owning 20% of say 50% of those or 60%, the amount of newly developed assets that we are continuing to own is going to, whether through 100% owned or through a joint venture, is probably going to be going up.

Okay. Thank you.

The development level is higher.

And moving on we will go to Scott Crowe with UBS.

Good morning. Could you just detail the fees behind the open-ended fund and how it's structured?

We don't disclose.

I would just say at this point ---

It's comparable.

-- yes, it's comparable and it's really too early, anyway I think upon closing, we may then be able to disclose them but until we close, we're not able to at this time. We're still out in the market.

But just to clarify again, I think Hap did say it. We're talking about asset management fees that would be comparable to what we've been getting in our other partnerships, and the similar fees with respect to property management and lease commissions, and then to the extent there are fees related to construction, management and so forth, we get those as well.

Okay. And just a follow-up, but you're not seeing any -- [or don't] anticipate any changes in, I suppose investor appetite to pay fees or movements in the IRR hurdle for the promote?

There -- fees are always an issue, but from our prospective, unless the structure makes sense, and give Regency the return that we're looking forward, it's not -- to do a joint venture just to do a joint venture, to accumulate assets just to accumulate assets is not something that makes sense. And having the right type of fee structure which we also think given the fact that our partners are buying into this -- to the operating systems that Mary Lou articulates so well and manages so well and the team, to do otherwise is not something that makes sense.

Okay, thank you. My second question, how are you going to balance, I suppose this new fund with the other requirements of your partners, and to what extent is this new fund driven by the fact that the Australian capital that you've enjoyed is, I suppose less competitive these days?

I will let Hap take the second part of that question, but the first one, in terms of balancing it with our other partners. Again, just to reiterate, this -- the open-end fund will be for our larger format centers, greater than 250,000 square feet. Two of our existing partners basically focus only on smaller centers, grocery-anchored shopping centers and beyond that we'll have a pure rotation basis as we've had in the past.

And I think as we noted Macquarie CountryWide bought how many assets in the past quarter?

Four.

Four assets, so there continue to be five, so they continue to be a very active partner.

Thank you.

Thank you, Scott.

And next from Merrill Lynch, we will go to Craig Schmidt.

Good morning.

Good morning.

Given the company's record of being proactive in managing your tenants, I just wondered what your position is with the Blockbuster, and also how many of your stores are franchise-owned versus company operated?

If we -- if you look at Blockbuster, we currently have today 151 locations and we've looked at overall -- that's total video. Blockbuster is 94 locations. I think you can't just look at Blockbuster, you have to look at the whole video category. We have five fewer than we had a year ago. And if you look at market rent, we've got an upside of almost $1 million if in fact we got those spaces back. So, what we're doing is we have proactively met -- and particularly with Blockbuster to go through the portfolio and see where we can start taking locations back, down size them, and we are working towards that. But to be real honest you're in, our centers are pretty good centers with good demos and their sales even though their comps are down are still fairly strong. And as we went through the list with the video people and looked at what they wanted to close, most of them obviously aren't in our centers and we would love to get some more of those spaces back. So, we're going to continue to be very proactive in going after those spaces, because we feel that there is significant upside.

And do you know how many of your 90-some stores are franchised?

I don't know off the top of my head, I really don't.

Okay. But I assume --

I don't know that that matters a whole lot.

I am just noticing that in the couple of states we have seen the franchisees declared Chapter 11 and just closed the stores.

To be real honest in most cases if that happened, it would be good news for us.

Okay. And so I assume--

I hate to say it. Because it's great real estate.

And then on the other hand, your developments would not include a Blockbuster?

Yes, we haven't done Blockbuster deals and I don't know how -- I do know, it has been a couple of years since we actually put TIs into any of those deals, probably two, three years and we haven't done a Blockbuster deal all year. So, we are just not doing deals with them. We are continuing to be concerned about that category.

Okay. Thanks a lot.

Thanks, Craig.

And next we'll go to Michael Mueller with JP Morgan.

Hi, couple of question, first with respect to the development pipeline, the open-end fund, can you give us a sense as to how the mix might change as to what you hold on balance, sheet contribute to the funds or sell through a third party?

I think that —let me just say this, it's 50%, I think it's approximately right, get us in the right zip code of what's in process, a little over 50% or larger community centers.

Okay.

So, you can expect that those centers will be contributed into the fund. And some of those may be sold where there is real, real low growth, and then of the pipeline, two-thirds to three quarters of those are community centers, so you can expect those would be sold into the fund or a large percentage of those would be sold into the fund. And I would say with the fund that probably well over 75 to 80% of what we would call core developments, which means either we would own 100% of it or it would be contributed into the fund or contributed to other one of our partnerships.

Okay. So, bottom-line of the vast majority, it seems like what's in the pipeline is going to make its way into one of your funds?

Yes. Go ahead.

Okay.

There will still will be a significant portion of what we will keep -- in the -- it will be in the hundreds of millions of dollars on a regular basis.

Okay. And second question maybe for Mary Lou, going back to the Cary example, where you talked about Trader Joe's; can you give us a sense as to once you do something like that and you put new anchors in there, what the impact is on the side shop rents? I mean, for example if they go from X dollars to Y dollars, how long does that usually take to happen, where you see the change in terms of the market rents and I guess how much can the rent change be driven by a property specific event, like a re-tenanting versus how much is it impacted by just what's generally going on elsewhere in the market?

It's pretty amazing what can happen when you do something like this. We have got several examples where we put a Publix in the center where there was an A&P and we saw rents go from like $12 up to $15, $16 across the board and we expect -- the time lines it take to do something like that is three to five years as those shops roll over, that we either are able to get it out of renewals and if you look at for the most part we are pretty consistent. This quarter is a little different in terms our renewal percents are equally as high as our new leases and a lot of that has to come from pushing rents when we re-tenant it.

So, I see us, and we haven't laid it out space-by-space, but we will get several dollars per foot higher than we currently get based on just re-tenanting it. So, I anticipate -- the other good number to look at for us is, even looking at what we've done with the First Washington portfolio and looking at NOI growth and rent growth of that, rent growth has been over 14% there where we've re-tenanted and where we haven't, I mean, where we are re-tenanting across the board and NOI growth is almost 4%. So, we've been able to really upgrade the quality of retailers, whether it's anchors or tenants across the board and seeing nice growth.

So the market rents will rise pretty much almost immediately or does that take the 3 to 5 years to go up. Obviously, it's going to be --

Well as the leases roll over, you'll get it immediately. When I say 3 to 5 years, it is just a question of when the leases rollover.

Okay --

So, as the leases, you'll get it right away. As soon as Staples and Trader Joe's opens, and we have leases you're going to start getting that pop immediately.

Yes, the market rents in the center that Mary Lou referenced in Atlanta, this A&P situation, A&P was just doing $8 million in grocery store sales, I think Publix today is doing $36 million in sales, and almost immediately, the rents went from $12 to a market rent of $22; so rather significant increases.

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

Hi, good morning. If I heard Brian correctly, I think I heard him say that the stabilization of development projects is taking a few months longer than previously. I was just wondering if you could elaborate on what's behind that?

There's a couple of things, by and large the delays for -- in the developments are things that are somewhat out of our control. I would say the entitlements are taking much longer, getting in -- just getting it through the city process. You have state agencies, typically the state highway agencies that we rely on them to get the road work done so we can get access to the center. A lot more when we have ground leases and reverse builder suits where the grocers or the major retailers construct their own building; we are often at their mercy and we have seen a few delays that way. In a couple of the projects we've had some leasing delays. I know we have one project where there is one vacancy, but that vacancy represents 8% of the GLA of the project. So, it is sitting there not stabilizing, even though we only have one vacancy. So, that's pretty much what it is. It's typically not leasing related although there are a few that have slowed down.

And then in terms of -- and you guys noted the higher leasing spreads on your PCI tenants. I am just wondering, what are occupancy costs as a percentage of sales for these tenants versus your non-PCI tenants, and then if you can just talk about the recent sales growth that you have seen with the PCI tenants versus the non-PCI tenants?

We don't really look at occupancy costs the way that the malls do because it's so much lower than the malls. So, it's not really been a big issue for us. PCI, I would tell you retail sales in general have been very, very strong and what we do look at is the categories of -- that are in our shopping centers and if you look at over our grocery store sales, it has been over 4%, drug store sales almost 8, and more and more of our centers are occupied by restaurants and they were at almost 8% for the quarter. So, we are seeing nice growth. We do get the national sales and those are mostly our PCI tenants and they have been very, very strong. It's hard to get sales from non-PCI tenants, it always has been. So to give you a fair comparison, it wouldn't be a good number. But I would say in our sector, retail sales in general are extremely healthier and actually healthier than they have been for the past couple years, and a lot of it has to do with the strength of the anchors.

Dennis, as Mary Lou said, most tenants and community [over] shopping centers did not report sales and we get anchor tenant sales, but they are at the end of the year.

Okay. Thank you.

Thank you.

And we'll next go to Ken Avalos with Raymond James.

Hi guys, good morning.

Good morning.

The question was just, I know Brian that you mentioned you haven't seen a slow down in any activity due to the housing -- softening housing market. I guess my question would be from your customer side, the retailer side, have they indicated to you or do you have any sense that they are going to change or pull back on their unit opening plans or reconsider geographies?

We have not heard that from any of the major retailers here. There was the announcement by Wal-Mart that it was going to cut back on its stores. But that really dealt more with stores that would impact existing stores and in real green areas, which we're not building anyway. All of the other retailers we haven't seen any kind of slow down, in fact, if anything, we are seeing a pick up, we have got eight Targets right now in process, we have got 25 in the pipeline, Home Depot we have got three in process, eight in the pipeline; Lowe's, one in process, six in the pipeline, Bed Bath and Beyond, zero with six in the pipeline. So we have not seen any slow down.

Any change in geographies or states you are going to focus on by chance?

Us or the retailers?

The retailers from the customer side?

Not really -- you know about the new entry of Tesco in the United States focused on California right now, but other than that the focus remains pretty much the same from everything we know.

Thanks, I appreciate it.

Thanks Ken.

And next from Deutsche Bank, we will go to Lou Taylor.

Thanks, good morning.

Good morning.

You guys talked about this land availability and pricing, is the slowing single family market helping you get access to more sighted lower prices or has there been any impact at all?

It has not impacted us. In fact, we went ahead and we looked at our existing pipeline to see which projects might be affected by the slowdown and there was very, very little impact if any, and I think Hap alluded to it; most of the projects, certainly the community center projects that we built, have already got the population densities in place, so the retailers are ready to go now. There are very few projects that we might lose -- I think there is only one in our entire pipeline, one or two that might not happen because of the housing slowdown, so as a result we are not seeing a slow down in the pricing -- a let up in the pricing of the land either.

Okay, thank you.

Thanks Lou.

And we do have a follow-up and that will come from Jon Litt with Citigroup.

Hi, this is Ambika with Jon, just could I get some color on your Shadow development pipeline? You noted that for your current development pipeline there is no effect on the housing market given that it's significantly pre-leased, are there any effects on the Shadow development pipeline?

No, it's the same thing. We literally went through -- when I said we went through the pipeline, we went through the current 2006 pipeline as well as the other and I want to tell you that the statistic -- we went through and looked at those where we have land properties with a grocery center lease signed as what we call a roof top contingency which is they will open their store once we hit a certain number of houses built. There is only one of those of the entire $1.9 billion pipeline and that's in northern California, where in the land of $1.37 a square foot and we are going to be selling off a lot of the properties. We will be at a very large negative land basis. I mentioned there is one only project in the entire high or medium probability pipeline that we might loose control just because of the slowdown and that's only 6.9 million. And then we looked at projects, which could be delayed and there is only one that we know of -- it will happen, and we control the land for a long period of time. So there's really only one of those. We have only seen one project where people are saying that the leasing has slowed down because of the slow down in housing and then the only other category would be land we hold for sale, and there's two properties there that maybe delayed a year or two.

Okay, thank you.

Thank you, Ambika.

You're welcome.

And we will go to Jeff Donnelly with Wachovia.

Good morning guys. If -- I apologize if some of this might have been touched on, I've just been bouncing between earnings calls this morning. Hap, could you talk a little bit about just how deep the institutional interest was for the fund that you've been marketing? And do you have an estimate, or can you back into maybe what sort of after fee leverage returns that your investor clients might be underwriting?

As I mentioned, we have commitments where -- the fund will have $500 million of equity. Regency is putting up $100 million of the equity. There's $400 million of third party equity that will be in the fund. We have commitments for $320 million, and we've got some good prospects for the balance. So we feel good about where we are. We expect to have a closing this year, and we'll close the balance next year, and that's what we always anticipated from day one. I will -- having said that, I don't think that core retail is in the sweet spot for a lot of institutional investors today, but I think, given the quality of the offering, the quality of the developments that are being offered, that are already identified and the sponsorship of the company -- I think that the response has been very good. Your question was, what are the after fee returns that are being targeted, and I think what's been offered and been talked about is a average cash on cash return over a five-year period in excess of 6% to the investors and a leveraged return in excess of 9%.

Okay. Thanks. And then just concerning at the development yields of the year-end progress development pipeline, it seems they have firmed up around, give or take 9.5%. Are you guys feeling more confident that that will remain the case going forward and you won't see further declines like we have since '04, '05? And maybe what you guys are doing a little bit differently right now to -- I guess -- you keep those yields where they are. Are you bidding construction contracts differently or you are tying up land differently?

No. I think everyone, in any type of development, was surprised in '04, '05 by the significant increase in the price of raw materials and labor. I mean before this most recent run up, construction pricing has remained flat for 10 years. So, I think it caught everybody off guard. We bid projects before, a lot of times the bids didn't hold. Now, we are way ahead of that and we are seeing an easing as I mentioned in the construction costs and we've seen it for couple of quarters, labor in particular, but also unit prices.

And one just last question, I think the mix of your in-progress development is continued to shift away from --?

Jeff, you are violating our rule here.

Will you let me add it, sneak one in?

You can come back on the queue, Jeff.

Thanks.

Thank you.

And there are no further questions. [OPERATOR INSTRUCTIONS].

Jeff?

Jeff?

We'll return to Jeff Donnelly with Wachovia.

I'll try. Anyways I was just curious -- just your -- your in-progress development continue to shift away from, I guess, historically neighborhood development towards more of a power center, community center mix. When you look at your Shadow pipeline, do you expect that will continue in future years?

What is interesting, of the in-process projects -- I think we have 22 grocery-anchored centers and in the Shadow pipeline which is really '07 and some '08, we've got about 23 grocery anchors. So we are doing as much business with the grocers, it's just that the projects are much bigger. I think there is two reasons for that. One is that the community centers by definition are larger and we are doing more of those, but also we are so busy and we have so many opportunities right now that we are just walking away from the 4, 5, $6 million development starts and it is just not a really efficient or profitable use of our people's time.

You know, to, kind of, say it another way, when we were developing, $300 million of the developments —this will be an oversimplification, which I am accused of being good at, but if 100 million were larger community centers and 200 million were in neighborhood centers, in effect, what we have done is we have grown to $500 million with 100% of the growth being larger community centers. So, in effect, we are now doing 300 million of the 500 million are larger community centers and we are doing about the same amount of grocery anchored.

Okay. Thanks guys.

Thanks Jeff.

There are no further questions. I'd like to turn the call back to Hap Stein for any additional or closing remarks.

Once again, we appreciate you taking the time to continue to follow and learn more about Regency and wish everybody have a great day and great rest of the week. Thank you very much.

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