Regency Centers Corp (REG) 2006 Q4 法說會逐字稿

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

Good morning, everyone. On the call this morning are Hap Stein, Chairman and CEO; Mary Lou Fiala, President and COO; Bruce Johnson, Chief Financial Officer, Brian Smith, Chief Investment Officer; Chris Leavitt, Senior Vice President and Treasurer; and Jamie Shelton, Vice President of Real Estate Accounting.

Before we start this morning 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 Bruce.

Thank you, Lisa. Good morning and welcome to the kickoff conference call for the shopping center group. As you will hear in more detail from Hap, Mary Lou and Brian, Regency had a truly exceptional quarter and year. FFO per share in the fourth quarter was $1.10, and $3.88 for the year at the high end of our guidance. This represents a 6.6% FFO growth, which follows 13.4% growth in the prior year, and an average over the two years of 10% FFO growth. We did have higher than expected gains on our development sales, and higher percentage rent in the fourth quarter, but these outperformances were offset by debt financing costs and higher G&A. We expensed an $800,000 prepayment penalty for an operating profit that was sold for a non-FFO profit. G&A was higher due to staffing up for our growing development pipeline, higher vacation accruals, and higher incentive compensation. For 2007, we expect that G&A will be approximately $12.5 million to $13 million per quarter.

Our balance sheet is in great shape, with nearly $800 million of gross property sales contributing more than $600 million to the capital recycling model. This cost effectively financed our new investments and our growing development pipeline.

Over the last seven years, we've funded nearly $7 billion in new investments with less than 5% funded by new equity. At year end our unsecured line of credit balance was $121 million, and our debt to asset ratio, including our pro rata share of joint ventures, was approximately 46%. Fixed charge coverage was 2.5 times, again including our share of joint ventures. We also significantly enhanced access to reliable sources of capital with the closing of the open end fund.

Based on our Company's excellent results, future outlook and low payout ratio, the Company increased the dividend by 1% to $2.64 annually. This is the 12th consecutive year of dividend increases. For the first quarter of 2007, we expect FFO per share to be $1.05 to $1.10, and $4.14 to $4.20 for the year.

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

Thank you, Bruce, and good morning. The fourth quarter was a solid capstone to an impressive year in terms of our operating results. For the quarter, the portfolio generated same-store NOI growth of 4.4% and annual growth of 3.8%. Pro rata rent growth was 10.5% for the quarter and 12.6% for the year. 2006 adds another year to our track record of eight years with same-store growth averaging above 3% and rent growth above 10%. We expect these positive trends to continue in 2007 with projected same-store growth of 2.75% to 3.25% and rent growth between 8% and 10%.

At the end of the year our centers were 95.2% leased. Since 2000 Regency's average occupancy has been 95.2%, versus an industry average of 93.3%. More importantly, over this period, Regency's occupancy has never been below 94%, while industry averages have been as low as 91%.

During this time, Regency's same property NOI growth has averaged 2.9% versus an industry average of 1.8%. This incremental outperformance of 1.1% over the last six years is creating real value for our shareholders. During the quarter, another 1.5 million square feet of space was leased or renewed in our operating and development portfolios, bringing the total to the year to over 7 million square feet. We leased 1.8 million additional square feet compared to last year.

Turning to our PCI statistics, rent growth for the year was 15% by our PCI tenants versus 12% for non-PCI. The PCI renewal rate is much higher than non-PCI at 85% and 77%, respectively. Some PCI retailers that I think are hot concepts right now in our portfolio are Chico's, Massage Envy, Citi Financial, and obviously Starbucks and Trader Joe's.

Chico's is a relatively new PCI tenant for Regency. We did three deals with them in 2006, and we have a great relationship in the sales as well as the corporate level.

Citi Financial is a relationship that we're building. We currently have 26 locations in the portfolio and all-in line tenants, and three more deals that we're working on in our pipeline.

I've talked about Massage Envy before, but they're a strong retailer and we're very excited about them. I think it's a great neighborhood use. They're an affordable membership based massage service. Their stores are clean and professional, and a great alternative to higher priced spas. We did five deals with them last year and have another three in the pipeline.

Starbucks, tried and true, is consistently one of our preferred tenants. We currently have 89 stores in the portfolio and another 19 in our pipeline. We signed 11 deals with Starbucks in 2006.

Trader Joe's is one of the most exciting specialty grocers, as you all know. We've completed four deals over the last 18 months, including their first stores entering into the North Carolina and Georgia markets and we have another deal in the pipeline.

But we cannot leave out our significant anchor tenants, because they're performing well. Kroger has announced they will invest approximately $2 billion on capital projects such as new stores and remodels this year. For 2006, their corporate same-store sales are up nearly 5%. In Regency's portfolio they average $428 per square foot in sales.

Publix is a dominant regional player that has rolled out two new concepts tailored for the south Florida market -- Sabre, a Hispanic-focused grocer, and Green Wise, an organic market with high margin goods and private-label. Corporately, their same-store sales increased over 5% last year, and [their] non portfolio these stores produced $520 per square foot.

Safeway continues with their profitable Lifestyle remodel program, that features upscale floors and lighting and an increased focus on fresh and perishable foods. 43% of their portfolio has already been remodeled with the balance expected to be complete over the next couple of years. Corporately, their same-store sales were up 5% last year, and they average over $420 per square foot in the Regency portfolio.

SuperValu's corporate same-store sales have been down just over 1%, but the Company has announced plans to invest $1 billion in their stores and has unveiled a premium Fresh and Healthy concept that is customized, remodeling and new store program designed to enhance customer shopping experience. In Regency's portfolio, their stores average over $425 per square foot.

So in conclusion, retail is very healthy, our significant tenants are performing well, and 2006 was a record year in terms of same-store NOI and rent growth, adding another year of stable growth to our already very strong track record of results.

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

In 2006, Regency's development program exceeded our prior high watermark by starting over $500 million of new projects during the year and a written yield of 9.2% after factoring in participation by our local development partners. This is the first year Regency's development program has broken the $500 million threshold. If we assume that these properties could sell at a conservative 6.5% cap rate, that is over $200 million of value created just this year. These starts bring the total number of in-process developments to 52, totaling over $1.1 billion in ultimate development costs.

The in-process projects are performing well, with a project level return on costs of 9.4% and a 9.1% return net of our local development partners' interests. Demand remains strong for these development projects, which are 76% leased and committed and 43% funded. Of these 52 projects, 25 are anchored by traditional grocers, nine are anchored either by Wal-Mart or Target, and four are anchored by Lowe's or Home Depot.

Key to our development program are the many development partners in the local markets who bring us development opportunities. As you may know, in some of these ventures Regency has the obligation to buyout its partner upon completion. And in other cases we have the right, but not the obligation, to buy our partners' interests. In the past we have elected not to include the cost of the buyout in the project costs, where there was no obligation to exercise such a buyout. Instead the buyout amount was treated as a reduction in value that would be realized upon sale. Given the high probability that we will buyout our partners, Regency has decided that in every development where Regency has the right, but not the obligation to buyout its partners, we will add these buyout costs to the project costs. This new treatment of partnered buyouts negatively affected the returns to Regency on several projects in a meaningful way and was one of the reasons that the returns on the in-process developments were lower than in previous years.

There were four projects that were affected by this change with negative impacts to yields that ranged from 94 to 148 basis points with a simple average of 120 basis points. There are two other reasons for the lower in-process returns.

First, several projects had very low risk profiles in that they were build-to-suits for Walgreens with no entitlement or leasing risk, very limited construction risk and outstanding tenant credit. These developments were done at approximately 8% returns, which still probably represents a 250 basis point spread over exit cap rates, a very desirable risk reward trade-off. We also started development in Corvallis that again represented a lower risk profile than most developments. There was no entitlement risk; the project was over 60% committed at closing, and building costs were capped.

Projects in the Pacific Northwest are extremely hard to come by, so given the low risk we're prepared to develop this project at an 8.33% return on cost.

Finally, we are committed to a development program in the New England market, having recently opened and staffed an office in Boston. As is the case with any new market, in order to gain traction you must prove to the market you are for real, which means quickly getting a good development opportunity that is highly coveted. Our [Shoppes] at Sawgrass is just such a project. It is located inside the I-95 Loop on Route 1, with 115,000 cars per day and strong demographics. However, even at an 8.47% return before partner participation, and an 8.17% after participation, we feel real good about this development in a market that has such very high barriers to entry.

If we were to take out the Sawgrass, Corvallis and Walgreens deal, and treat the developments done with local partners in the same way we have in the past, the returns on the in-process projects would've been 9.42% before participation and 9.27% after our partners' buyout. Stated another way, we continue to see under written pre-partner returns in the range we've discussed for the last few quarters, 9% to 9.5%, which still translates to extremely attractive spreads of approximately 250 to 350 basis points over exit cap rates. These are actually higher spreads that existed ten years ago, and as I discussed, are resulting in huge amounts of value creation.

The pipeline remains robust and highly visible with $1.8 billion in identified high or medium probability projects. Based on the pipeline as we see it today, we expect that we'll start in excess of $500 million of developments in 2007.

Again returns are holding up well. The weighted average return on costs for the pipeline projects net of partner participation is about 9.5%. Based on development costs, about a third of the pipeline consists of neighborhood centers and two-thirds community centers. However, since so many of the Targets and Wal-Marts are supercenters the actual number of projects with grocery stores in them is much higher. If you evaluate the pipeline by the number of projects rather than on development costs, Regency is working on 26 projects anchored by traditional grocers and 25 projects anchored by Target. In terms of numbers of developments, the mixture remains relatively balanced.

When you combine the in-process projects with the pipeline of 2007 and 2008 starts, Regency has a $3 billion development platform, producing strong returns on capital, which should generate profit margins in excess of 40%. These brand-new centers anchored by the leading major retailers will further enhance the quality of Regency's already impressive portfolio. During the fourth quarter, Regency started 25 new developments, totaling $244 million.

As some of you may have heard at our presentation in Houston, each of our investments undergoes a rigorous due diligence and approval process, involving not just investments but also operations and investment services. Therefore, the fourth quarter was a particularly busy three months for the entire Company. Let me highlight a few of this quarter's starts.

On the East Coast, Hibernia Plaza in Jacksonville, Florida is the culmination of a 3.5-year effort to secure this intersection for Publix. This project will be a great fit for the neighborhood and will surely become a high-growth core asset. Canopy Oaks Center in Florida will be anchored by Publix, which is relocating a highly successful store to the project. This center will be located at the entrance to a 6,000 acre master plan development. The project is a 50-50 joint venture with our anchor tenant, Publix.

We're very excited about another development in Florida called the Shoppes and Residences of East San Marco. This will be a mixed-use project located on historic San Marco Square in one of Jacksonville's most desirable neighborhoods, just one mile from downtown. The project is being developed in the 50-50 partnership with The St. Joe Company, one of the largest residential and master planned community developers in the state. The development will consist of ground floor retail anchored by Publix, with 148 condos having views of the St. John's River and the downtown skyline. Once completed, this retail project should thrive. There is virtually no competition due to the extremely high barriers to entry, evidenced by the fact that Publix has tried for many years to secure a store in this high demographic neighborhood.

Miller Creek Commons is a Lowe's food anchored project in Raleigh, North Carolina. This is the first project out of our Raleigh development office and the first deal with Lowe's, who is in the midst of an aggressive expansion program. Lowe's has 105 stores and competes with Harris Teeter in the Raleigh/Charlotte markets for the mid to high-end customer.

And finally in California, Applegate Ranch is located in Atwater, one of the fastest-growing cities in northern California. This project is located on the main highway. It is surrounded by tremendous residential development. The project is another opportunity to solidify our relationships with Home Depot and Target.

In all, the 2006 starts had returns of 9.38% before participation and 9.2% after. Again, if we were to adjust the returns on two JVs to reflect the same treatment for buyouts we've used in the past, the after buyout returns for 2006 would increase to 9.33%. If we also took out the four low-risk strategic starts, the gross development returns would be 9.55% and the after buyout return would be 9.51. As noted earlier, these returns are consistent with what we have been seeing in our development pipeline.

There is a fifth start in the fourth quarter with return less than 9%, but it should be noted that the project level return is 10.01%, and this is a small first phase of a project that will have a much larger second phase, anchored by Target, which should generate much higher net returns.

We acquired one property in the fourth quarter, Shops at Columbia. This center was purchased in our CalSTRS JV and is the ground-floor retail of a newly constructed luxury condominium in Washington D.C.'s affluent West End, near Georgetown and just north of the foggy bottom metro stop. The project is anchored by Trader Joe's, only their second central business district location in the United States, and is Regency's second asset inside the Washington Beltway.

Finally, as our follow-up to last quarter's discussion on sustainable or green buildings, Regency is actively involved in getting our arms around the LEED standards and processes. A permanent task force of professionals in the Company has been put together. Next week the task force is meeting in Denver for a full day's session with the US Green building council's director of LEED. We're interested in partnering with LEED to find a way to certify all our future developments without the cost and bureaucracy currently facing developers and LEED hopes to partner with Regency, given the size of our development program.

Thank you, Brian. Thank you Bruce, and thank you Mary Lou. Your world-class team is performing exceptionally well in each key aspect of Regency's business.

For Regency, the foundation of our strategy is our high quality portfolio that generated 12.5% rental rate growth and a 3.8% increase in same property net operating income. What makes the accomplishments of Mary Lou and the operations team so remarkable is that, as she described, this year's results represent an eight-year track record through different economic cycles of rental rate growth in excess of 10% and NOI growth in excess of 3%.

For the first time ever, Brian and the investment team started in excess of half $1 billion in new developments. In addition they've put together a pipeline of almost $2 billion. Bruce, Lisa and the capital markets and transaction teams have generated almost $600 million for developments and acquisitions from capital recycling and joint venture strategies, in a way that has strengthened the balance sheet and is very shareholder friendly.

And I'm even more excited about how these accomplishments in key leading-edge initiatives have positioned Regency to service our customers and sustain future annual growth in per share value of 8% to 10%.

To begin with, let me remind you how Regency's premier customer initiative efficiently provides for the growth needs of the better side shoppers [to anchors]. This industry-leading program gives us better merchandising, makes important contributions to the portfolio's impressive track record of high levels of occupancy, rental rate growth and net operating income.

The quality of Regency's operating portfolio, which is clearly distinguished by better demographics, better anchors and better anchor sales, is no accident. It results from the implementation of a disciplined research driven investment strategy. The quality of the portfolio is enhanced by the proactive disposition of operating properties, which are called without regard to the dilutive impact on current earnings. The sales decisions are based upon a rigorous system of rating future growth prospects. As a matter of fact, the annual view of each property was recently completed and I am pleased to report that over the last two years, the number of "C" properties has been reduced to less than 3% of our GLA, or just 14 centers out of 400, down from 9%. And I would not be surprised if most of these "C" centers may be graded as B's in other portfolios.

Having over $3 billion of quality shopping centers under development or in the pipeline will have huge and very visible future benefits. It will enable Regency to provide for the growth needs of our anchor and side shop customers, and build modern state-of-the-art shopping centers. As Brian described, we will soon be incorporating the best and most practical green development practices on a Company-wide basis. In addition, the economic benefits from completing $300 million to $500 million a year developments are extraordinary. It means the realization of $100 million to $200 million of value each year for the foreseeable future.

Before I describe in some detail Regency's latest leading-edge endeavor, the open end fund, I want to spend a few minutes to share with you some of our views about the joint venture business. How do we look at it?

Some in the REIT industry describe joint ventures as the fund's management business. From my perspective, this does not adequately explain what we do or how we add value to our partners. I see the traditional advisers as being the fund's managers, who are trying to intelligently but in an indirect way invest capital and manage investments for the multiple investors. What differentiates REITs in general and Regency in particular from the advisers is our active hands-on operational and asset management expertise, our platform and our systems and the fact that we're making meaningful investments on the ground and side-by-side with our partners. We view ourselves as the operating and managing partner of a joint venture or co-investment partnership.

We also believe that in order to be successful in the joint venture business, it is critically important for REITs to make a long-term commitment to the strategy and make the investment in resources for the partnerships to be successful.

Performance is the way that enduring relationships are constructed and maintained, and these enduring relationships translate into long-term reliable sources of capital. At the same time, a handful of partners is ideal as investors cost of capital and appetite for investments in specific sectors change with time.

As you know, not all ventures and venture terms are created equal from the operating partner standpoint. From firsthand experience, I can tell you that managing joint ventures in a manner that is going to enable our partners to achieve their objectives over the long-term requires a substantial investment of management's time and systems, and people. It's hard for me to see how, as a result of this, accumulating assets for asset accumulation sake to joint ventures makes any sense at all for shareholders of REITs. As a result, the fee structure needs to significantly enhance the Company's return on invested capital. Net of the costs of operating the venture and operating the properties. These fees should come from a combination of acquisition, asset, property management and leasing. And all of these being equal, we prefer recurring fees, especially asset management, to transaction fees. As a managing and operating partner, we also like having discretion and gaining control, obviously as long as we invest and operate within the clearly defined parameters of the venture.

This brings me to another key issue, the length of the venture and the investment horizon of our portfolio. Asset light vehicles are obviously ideal. Investment with partners who have shorter investment objectives should be evaluated strictly on that basis. We insist upon distributions in kind and rights of refusal or offer so that we can end up with a significant portion of the portfolio that we've worked so hard to create, in the event that a partnership is terminated.

We also believe that the best use of shareholder capital is the investment in developments. Consequently, developments are only contributed to the joint venture partnerships after we have created and realized the value from those developments. We will leave the decision to the investment community as to what multiple this part of our business deserves. All we at Regency can do is over the long term create attractive returns on capital and sustain growing cash flows from each component of our business.

So with that as background, let's review a few facts to see how Regency has executed our joint venture program. First, it has enabled us to expand our portfolio because 177 of the 405 centers that we operate or 44% of our 54 million square foot portfolio, are owned by Regency's three coinvestment partnerships.

Second, all of these assets are owned in what are essentially infinite life partnerships, especially if we perform. And most of the properties are located in highly desirable, high barrier to entry markets.

Third, in 2006, Regency's share of the NOI from joint ventures was $77 million. While third-party revenues were $31 million. At a margin of 60%, this means that we've added almost 200 basis points to the unleveraged current return on our investment in our partnerships.

Fourth, as Bruce indicated, during the last seven years, joint ventures, together with the disposition of operating assets, have enabled Regency to find nearly $7 billion of new investments with only 5% common equity. While over the same time, substantially improving every key financial ratio.

Fifth, every time we've pursued this, a major portfolio, we've had a commitment on the front end from one of our partners to the proposed transaction.

Sixth, since 2000 we've contributed 29 developments representing over $400 million of value to our joint ventures. These contributions have enabled us to recognize $75 million of profits, while at the same time maintaining an ongoing ownership interest in the management of these high-quality centers.

The bottom line for Regency is that we have substantially expanded our portfolio in a way that has been highly profitable for our shareholders.

In addition, we have exceeded what we promised to our joint venture partners and every relationship is stronger today than when the partnership was started. As a result of this experience we feel that the open end fund takes Regency's joint venture program to the next level. As was announced in December, we closed on the first phase of the fund. The fund will own larger community centers. That means it fits very perfectly with our existing partnerships. It is expected to ultimately hold $1.3 billion of assets and will serve as a reliable and transparent take out for $900 million of already identified community centers in Regency's development pipeline. The fund is an infinite life vehicle and has the potential structure and partners to grow substantially over time, especially as our community center program continues to grow over time. The fee structure, which includes asset management fees and is comparable to other partners, will meaningfully enhance our returns. In general, Regency has total discretion to invest and operate the fund as long as we're investing within the fund's specified guidelines. In addition, having the government of Singapore and Met Life, along with the other investors and the subsequent closing in the spring will add to Regency's stable of great institutional partners.

In summary, the open end fund represents continued and substantial progress for Regency's joint venture program. Together with the impressive and very gratifying performance from the operating portfolio and with our developments, 2006 was indeed a remarkable year for Regency. And most important of all, and most exciting of all, it has positioned the Company exceptionally well for the future.

We appreciate your time, and now will be glad to answer any questions that you may have.

(OPERATOR INSTRUCTIONS). Christy McElroy, Banc of America Securities.

Good morning. I'm here with Ross Nussbaum as well. Brian, when you spoke about the 9.5% expected yields on the development pipeline, were you referring to the entire shadow pipeline or just the '07 starts? And does that include the impact of the partner buyout?

It includes '07 and '08, and it does include the partner buyout.

Why is that higher than the 9.1% expected yield on the current construction in progress?

As I mentioned, you got to do apples-to-apples on the in-process developments. If you look at the third-quarter returns, and compare them to the fourth-quarter returns, you've got to net out the completions in the fourth quarter. And you've got to net out the additions or the starts from the fourth quarter. And when you do that, the returns are only about 6 or 7 basis points different, also after you do the adjustment for the way we treat the JVs.

Remember, we also closed, or really completed, $121 million worth of projects at returns north of 10% prior -- in the fourth quarter. So I don't think the returns really are any different. They're pretty consistent with where they've had been.

Obviously, there are pressures on returns. Even if the returns are in the 9% range, we feel like we're creating substantial value for our shareholders.

This is just following up on your JV discussion. Given the process that you've gone through to get the open end fund off the ground, would you consider using that format again in the future as a means to access additional investment capital? Or is it too early to ask that question?

It's too early to ask that question. Right now, the open end fund, as I said, is a perfect fit for our community center program. And we feel, given the multiple partners that we have that -- Macquarie CountryWide, State of Oregon, and CalSTRS that have primarily focused on [net or great] grocery anchored shopping centers that we're in good shape. That's not to mention that our partners in the fund might also be an additional partner in that sector. But right now, that's -- if we were doing another open end fund, that would be in -- too early.

Thanks, guys.

Jonathan Litt, Citigroup.

This is Ambika Goel with Jon. Your 2007 guidance has been approximately a 20% contribution from development profits, which is ahead of previous guidance of 15% to 19%. Is this just increasing based upon the higher development pipeline, and do you expect it to increase beyond 20% going forward?

We've said that we expect development profits to be in the 15% to 20% range over time, and -- as indicated we think it will be less than 20% in 2000.

So going forward, looking at 2008/2009, you think it will stay in that 15% to 20% range?

Yes, we expect it to stay in the 15% to 20% range in the future.

And then just a few -- I assume the approximate 3.5 million fee from Macquarie in the back half of '07?

Yes.

Thank you.

Christeen Kim, Deutsche Bank.

Good morning. In terms of your same-store NOI growth we've seen a nice acceleration in '06 and you finished the year at 3.8%. What's causing the lower assumption for 2007 in the 2.75% to 3.25% range?

As we give guidance, we expect occupancy to maintain and rent growth to moderate to more historical levels, closer to the 10% range. But the real reason is that we had above average termination fees in '06, which we told you about early on in the year that we would expect it and we're up against those termination fees. So I think to have 2.75% to 3.25% on top of 3.8% is still a very, very strong year.

Great. In terms of some of the mixed-use developments that you guys are getting into, could you talk about where the yields on those projects fall versus your traditional developments? And do you see it as a growing part of your development pipeline?

The returns on the mixed-use projects -- they're not substantially different than the regular developments. And I would not say it's necessarily a growing part of the business, it's just one of those things -- probably like the lifestyle centers, where you have the right opportunity if it's something you want to take advantage of. In the case of San Marco, it's just an incredible opportunity to get involved in a very difficult area to develop in, where the retailer demand is so great and they've been looking for so long and also is a very, very special residential place. So we will do what makes sense, but it's not something that we're focused on.

Typically what we're doing, because we're developing a Publix-anchored center in downtown Fort Myers that we started that is mixed-use, but in effect we're buying the retail land from the residential developer. So even though it's an integrated project both horizontally and vertically, we were able to differentiate that out. We're working on another project in California which will be very similar to that, where we will in effect be selling the residential fees.

In this case the project is so integrated, it didn't make sense to break out the residential portion, and as you can see as a result we have in there a very talented residential partner that also has very deep pockets.

Thank you.

Matt Ostrower, Morgan Stanley.

Just on the G&A side of it, so if I sort of annualize your $13 million it looks like that would amount to a 10% increase year-over-year. I guess two questions about that. One, if you've been sort of in the 20's percent increase the last couple of years, and given that you're trying to ramp up your pipeline pretty dramatically still, if you can sort of help me understand why the growth rate would not be more substantial?

And then second, looking out further into the next -- call it two to five years, can you give any visibility about -- especially given the scarcity of labor etc., what kind of G&A increases you would expect on a longer-term basis?

If you look at it, when we looked at our ramping up of our pipeline and development, that includes leasing, property management, as well as our investment officers, we have a pretty strong plan to ramp up. And that's why you're seeing such an increase in 2007, is to really get that to where we need it to be and to get staffed. However, all of that will be hired at the beginning of the year, so you're going to see some -- you won't have a full-year effect of all those people until you get through '0, probably more the middle of '08. And then we expect to stabilize it and then just grow with the rate of inflation in terms of our G&A. So that's really the cause of it, is the significant growth in our development program. And we see it stabilizing after '08.

I guess just to clarify, I guess I was sort of surprised to see -- given all the work that you're doing on development and expansion there, and given labor pressures, I guess I would have viewed the 10% as a low number, not a high number. So I guess I'm wondering, given that 20% of the last couple years, that you've been higher than that before then, why would you be even higher than that this year? Is it possible you'll increase your guidance for G&A as the year goes by?

Your question is fair. On a historical basis when you look at it that way, I think that's true. We've spent quite a bit of time re-looking at -- as I think many people are aware, keeping good people is one of our key goals. And that means you've got to pay them appropriately. So we've reviewed pay scales for construction people, as an example, spent a lot of time in that area. That's one area that we've spent a lot of time on, and we've looked at that. We believe that we've adequately taken care of those numbers for this year.

Your point is taken, though. There is a possibility that during the year we may -- the labor scarcity that you mentioned may force us to do it. But right now, I think we're comfortable with the number we've put out between 12.5% and 13%. We thought we should give you that number, because again it's more increase over what it was last year.

Obviously it if it changes, we will change our guidance -- but, based on need. But right now as Bruce said, we're pretty comfortable with that number.

Thank you.

Jeffrey Spector, UBS.

Good morning. I had a question for Brian. Can you break out for the '07 development starts the amount you determined is high probability that Regency will buy out the partner?

In terms of buying out our partner now, we're pretty much assuming that we will do it 100% of the time.

So on the 450 -- (multiple speakers)

Let's help you define that though. We make the assumption that on all of the larger format communities as we do 100%. Those would be these centers that we would identify that we typically have sold in the past, but we would identify for the open-end fund. I think that would be closer to an answer, because there will be some that we will 100% sell.

Thank you. And can you talk about your out-parcel strategy? Specifically, the benefits to own versus sell?

Our preference is to land lease or ground lease our out-parcels wherever we can, sometimes, and that's easier to do in high barrier to entry markets like Washington D.C. and California. And lower barrier to entry markets it's a little bit more difficult. So that's our preference, is to ground lease.

Great, thank you.

Joseph Dazio, J.P. Morgan.

Good morning. First on the same-store growth, do you guys have an idea of what that number would be for '06, excluding termination fees?

We would've been a little bit closer -- we would've beat our plan, but we would've been a little bit closer to our plan.

And then looking at the after-tax profit margins on development sales, do you think they will remain in the mid to high 20's as you head into '07, or do you think some of that could pull back a little bit?

You're saying on an after-tax basis? They should hold in the low 20's.

Thank you.

Paul Morgan, FBR.

Is there any -- sort of the greenfield developments, is there any impact of the housing market slowdown on the growth prospects for that kind of part of your development pipeline?

Yes. We went through that in detail last quarter. We looked at every project in the pipeline, and there wasn't that much. There was one or two projects that were experiencing slightly lower growth -- leasing velocity. We had a couple of land banks that we thought would maybe take a year or two longer to get through that. But other than that, most of the developments are ready to go. We had the anchor tenants lined up based on the demographics that are in place now. Particularly the larger community centers, they're regional in nature, they already have everything they need. They don't require any more growth to make them work. So not much of an impact at all.

Relatedly, is it having any impact on land price or greenfield land prices, and how that might filter through in terms of development yields.

We don't do much of what I would call real greenfield stuff, so again most of the projects we do, they are ready to go. If that's the case, we're not seeing much break in the pricing. Where we do have opportunity to do things that are in much more emerging areas, yes. There have been reductions in land prices.

Thanks.

[Brad Kritzer], Merrill Lynch.

With the guidance that you gave for the quarter and for the annual it appears that there might be some loftiness. Is it pretty much fairly due to land sale gains and out-parcel sales?

You just asked for the quarter guidance? It will have -- for this year's transaction profits when you do your modeling, you should assume for the remaining three quarters the remainder of the transaction profits would be split evenly. So I think when you're running your miles, you're going to see that this quarter transaction profits are going to probably be in the high 30s to the low 40% range of our guidance for the year.

Also, you have the deal with the open-end fund to pretty much sell any these developments that are over 250,000 square feet. Is there anything with any of your other partners versus any of your centers of a smaller size?

There's no exclusivity on that regard.

Okay. Thank you.

Dennis Maloney, Goldman Sachs.

Good morning. A quick question on the asset management business. Recognizing that you guys participate in the economics of the funds given your joint venture ownership there, how do your fees stack up to the fees of the traditional real estate advisers? In terms of asset management and so forth?

I think they stack up pretty well. Because what has happened is that some of these institutions are saying, why -- if I'm going to pay a fee, it makes as much sense for me to pay that fee to other operator partner. And so we think that from everything we understand that for the most part our asset management fees stack up very well.

Any sense -- can you put how many basis points incrementally you think the difference might be versus a market fee?

We're not sure there's much difference at all.

We think the fees that are being paid are market fees.

And then I noted the strength in the dividend growth and whatnot. Are you guys bumping up against your known payout at this point?

I think you can tell by what we published from our tax reports in terms of what the bumps of the dividend were. You'll see that basic, we're effectively very -- at 60%, do you expect us to be near our legal limit in that regard, yes.

Great, thank you.

(OPERATOR INSTRUCTIONS). Jim Sullivan, Green Street Advisors.

Good morning. Hap, you threw out a profit margin of 60% for your fee business. What does that represent, and what are your thoughts on how scalable that business is and what the impact might be going forward on the margin?

The most management intensive part of the business is property management. On an incremental basis, I think that the margins -- depending on what market you're in are between 25% and 50%. And the asset management fees are -- the margin is substantially higher than that. Once again the depending on the market, I think it's a very scalable business. But at the same time, you've got to commit the resources to that business in order to do it right. Communication requirements are significant. You've got to operate those properties on a transparent way to the investors to where they're getting the same high level of service at 100% our own center is. And because if you don't do that, there's no way that you can perform. If you don't perform, that fee stream will have a short time frame to it. Because even though these are infinite life vehicles, if there's no performance, it's less than that.

So as it relates particularly to the asset management fee, have you built all of the infrastructure you need particularly for the open end fund, or are there more costs that you're going to incur to get that infrastructure in place?

For the most part the infrastructure is in place. We may have to add some people. We've got Lisa and her team, and then from an asset management standpoint, and Mary Lou and her team from a property management and leasing standpoint, have most of the infrastructure in place.

I wanted to follow up on a question regarding G&A that was asked earlier. Is the reason the G&A isn't ramping up even more, given the ramp up in the development pipeline, because you're capitalizing most or all of those expenses?

We're capitalizing part of those expenses, that is correct.

As far as the ramp up, we're only capitalizing a portion of those -- the majority of them. But there is a portion of those expenses that are expensed, of those costs that are expensed. And we're only capitalizing direct costs.

And given the ramp-up, the absolute dollars, the number --

Jim, we're violating the rule we stated upfront. But you can jump back and ask and get back in the queue.

Will do, thanks. (multiple speakers)

Susan Berliner, Bear Stearns.

Hi, I apologize if I missed this, I jumped on a couple minutes late. Mary Lou, I was wondering if you could just update Blockbuster, any updates on Blockbuster, Movie Gallery or anything on your watchlist?

Yes. Obviously we continue to watch Blockbuster. We had this past year six moveouts of Blockbuster. And if you look at overall in our portfolio, we have eight fewer locations than we had a year ago. And as I stated before, if you look at our average rent per square foot, we have some upside, as we take that space back and you're going see us this year continue to be aggressive trying to take as much space back as possible.

So I think in terms of the real estate component, it's great real estate. Within the centers, we do have upside and we are working closely with them to either downsize them or to move them out of the center. In our Blockbuster centers there's not that many that aren't performing pretty well. So it's not really on Dale's watchlist as much as it is on ours.

Overall their business though -- it's interesting. I think the real estate is still a concern, clearly to us, go back and say pretty much anything that you can download I think over time is going to be obsolete, personal opinion. But their business model seems to be doing pretty well. Since they started that, competing with Netflix, of having -- that you can either get it online, order your movie and either take it back to your local Blockbuster and get another one, or send it back. I think that they have seen some positive -- at least I've read some positive writeups on how they're approaching that. So in the short term, I think they've seem pretty stable. They're doing some things that are right and the long-term remains to be seen. But we'll be aggressive on the Blockbuster real estate like we were on the Winn Dixie real estate.

And with regards to Movie Gallery?

Same thing. We don't have many Movie Galleries. Not nearly as many as the Blockbusters. But I think -- obviously that worries me a little bit more because I think Blockbuster has really stepped out in terms of how they handle their business model, so I think there's probably more risk in the Movie Gallerys. But when I look at how many locations we have, I look at the whole video thing. So -- and some of those are Movie Gallerys.

Thanks so much.

(OPERATOR INSTRUCTIONS). Jim Sullivan, Green Street Advisors.

Welcome back, Jim.

I was just curious, given the ramp-up in development, the absolute dollars involved, the number of projects involved, I'm curious what you've done structurally or organizationally to ensure the oversight. You've had incredible success on the development front, but development is some pretty risky business. What have you done to ensure that going forward you'll have a success in development and not stub your toe anywhere?

Number one, I think one of the key moves we made was to make Brian Smith our Chief Investment Officer. And I'll let him -- and I think also the processes that we have from a investment review standpoint and an underwriting standpoint are extremely rigorous.

A couple things we've done, in Southern California we've promoted one of our most experienced guys to Senior Vice President to help [Mark Kragen] handle everything that's going on there. Of course I'm out in Los Angeles, so I'm even more involved on a day-to-day basis out there as well as the rest of the country. We opened the office in Boston, and we promoted Mac Chandler to managing director just a few weeks ago. We moved Mac out there, I think it was about 2003, knowing that he was one of the most experienced people and that we did have a new program out there and he would be the right guy for that.

So I think -- and the central region, the Southeast, continue to have the same leadership they've had for some time. So I think we're in good shape in terms of that. And then Bruce's group, which is the investment services group, that really is the overseer and provides the checks and balances. He continues to staff those with people at the appropriate skill levels and experience to make sure that we don't stub our toe.

I'll also say the key to any business, especially a business which has as much risk and as much reward as the development business is people. And one of the real challenges in the business today, not only is hiring good investment people, and good investment services underwriting and due diligence people, especially on the construction side. And we have made that a top priority as far as hiring a team that's strong, people with good project management, and extensive project management experience. We've had to substantially increase the amount that we're paying these people, but it is one of the top priorities in our Company today.

Thank you.

It appears there are no further questions at this time. Mr. Stein, I would like to turn the call back over to you for any additional or closing remarks.

To all the investors and analysts on the call, we appreciate you indulging us for the last hour, we appreciate your interest in the Company, and wish that you have a great day.

This concludes today's conference. Thank you for your participation and have a great day.