Regency Centers Corp (REG) 2007 Q1 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Regency Centers Corporation first quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period.

I would now like to turn the conference over to Miss Lisa Palmer. Senior Vice President - Capital Markets.

Thank you and good morning, everyone. On the call this morning are Hap Stein, Chairman and Chief Executive Officer; Mary Lou Fiala, President and Chief Operating Officer; 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 I'd like to address forward-looking statements that may be addressed on the call. Forward-looking statements involved risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by Regency Centers Corporation with the SEC specifically the most recent reports on Form 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 will now turn the call over to Bruce.

Thank you, Lisa, and good morning.

Regency is off to a strong start in 2007. FFO per share in the first quarter was $1.13 or 33% growth over the period last year. This is $0.03 above the high end of our guidance. It is related to timing of transaction profits. The lion's share of this growth comes from development profits, net of taxes, NOI coming online from new developments and same store NOI growth. This growth was offset by NOI reductions from dispositions, higher interest in preferred charges and G&A expense.

We reported a tax benefit of $1.3 million this quarter. The tax benefit was anticipated and planned due to normal tax deductions in our [TRS]. Normal tax deductions include G&A, depreciation, and dead deal cost. The benefit is related to the fact that our TRS did not realize any significant gains in the first quarter as the Vista gain was recorded in the REIT as a result of contributing it to the fund in a tax-efficient manner.

You may remember this has occurred in the past, most recently in the third quarter of 2006. This will reverse and we will be in our usual tax expense position for the year.

We expect FFO per share to be in the range of $0.91 to $0.96 in the second quarter and $4.14 to $4.20 for the year. Please note that the supplemental guidance indicates $0.91 to $0.95. We will correct this to $0.91 to $0.96 and post an updated supplemental.

You will also note on the guidance page in the supplemental that we will provided clarification on our JV acquisitions, separating third party acquisitions from Regency contributions to our JVs. The Regency contributions were inadvertently not included in last quarter's guidance and, therefore, are not incremental to planned JV acquisitions.

During the quarter we finalized the initial capital raise of Regency retail and partners, the open end fund that we previously discussed with an additional $232 million of capital commitments. This brings a total equity to $564 million including Regency's contribution of $313 million. Regency's ownership in the fund is 20%. The fund will primarily acquire a fair market value, Regency-developed large format community centers upon stabilization.

The fund is expected to have a total capitalization of approximately $1.4 billion when fully invested with approximately 60% leverage. We anticipate that the fund will provide sufficient capital for Regency that finances community shop center development program for the next three years.

The closing of the open end fund was an important and gratifying accomplishment. We feel as the open-end fund takes Regency's Joint Venture program to the next level. It will serve as a reliable and transparent takeout for community centers and Regency's development pipeline with a fee structure that will meaningfully enhance our returns. Fees for management's of leasing (technical difficulty) market and fees for asset management will start at 25 basis points of gross assets with the potential to grow.

As an Infinite Life vehicle, the fund has potential, structure, and partners to grow even beyond the initial equity committees. In addition the investors in the fund particularly the government of Singapore, Ohio Teachers and MetLife are great additions to Regency's institutional partners.

Please note that Regency's current run rate of recurring third party revenues, mostly generated from managing its Infinite Life JVs is tracking at about $32 million per year.

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

Thank you, Bruce, and good morning.

At the close of the first quarter, the portfolio is performing well. Rent growth was strong, the renewal rate is solid and same store NOI was above our expectations at 2.4% and 2% on a pro rata basis. This is on top of 3.8% in the first quarter of 2006, due to higher levels of termination fees.

For 2007 we expect termination fees to be at normalized levels. We are still forecasting same store NOI growth to the within the range of our guidance and north of 2.75%, which represents a five-year average of 3% and a nine-year average of 3.2%. Pro rata rent growth was 12.8% for the quarter and at the end of the quarter, our incentives are 95.1% leased as 1.4 million square feet of space was leased or renewed in our operating to end development portfolios.

I have mentioned in the past that we are proactively managing the video category and you have also heard me say that in most cases we actually like to get these spaces back, as they usually end up paying less than what we concurrently get in market. We have thoughtfully gone to our portfolio looking for locations that we could recover or take back space where there is upside in rent.

In the last 12 months we reduced our exposure to the video category by 22 stores. As a result of this preemptive calling as a percent of Regency's total rent the video category has decreased from nearly 3% at the beginning of 2006 to slightly over 2% today. We continue to proactively maximize value in our operating portfolio.

During the quarter we replaced two grocers the Giant at Rafferton in D.C.. It was (inaudible) purchased it from First Washington. We have terminated their lease. We have received a fee and we released the space to (inaudible) at an incremental NOI gain of over $175,000 this year.

The second was a former Albertson's at [Ignacia] Plaza in Walnut Creek, California. We purchased this lease, terminated Albertson's, and our final negotiations with Sports Basement, a regional upscale sporting goods and apparel store. The projected run on this new Sports Basement lease is in the mid-20s versus $5 per square foot that Albertson's was paying. We believe that in addition to attractive demographics the strength of the anchor is a critical component determining the success of a shopping center.

Regency's strategy has always been to own centers with markets (inaudible) grocers, category leading anchors, and specialty retailers - the best in class. The majority of our grocers have reported their 2006 sales averaging $488 per square foot compared to $470 per square foot in 2005. We continue to see strong sales on a chain by chain basis.

For example, Publix 2006 sales in our portfolio were $530 a foot. Kroger at $450, Safeway was $449 per foot and ATB sales were over $800 a foot.

Specialty and regional grocers also continue to excel, as you'll hear from Brian. Grocers remain an intergral piece of our business and development growth.

Before I turn the call over to Brian, I do want to follow up on a question regarding future growth and G&A rates on last quarter's call. By the end of the year we expect to have the right organizational infrastructure in place to effectively manage 54 million square feet of GLA including our institutional Joint Ventures and to effectively reduced 500 million in development starts annually.

The context for the growth in G&A that Regency has experienced is the doubling of our operating portfolio and the development program. (technical difficulty) for development starts were 250 million and the operating portfolio was 27 million square feet. In addition as you are aware the last several years have been extremely competitive in terms of compensation to attract and retain top talent.

We are on target for G&A to be in the $12.5 million to $13 million range per quarter for the remainder of the year which would represent a reduction to a 10% growth rate down from the 20 to 25% level in prior three years. G&A should grow approximately 10% again next year when the full team of 600+ employees will be in place for that full year. Looking beyond in 2008 I would expect growth in the 5 to 7% range. The growth rate is obviously subject to growth in the portfolio and development and the market for the best professionals. Brian?

Thank you, Mary Lou, and good morning.

Regency's investment program is on track for another successful year. We started two new development projects in the first quarter one in Buckwalter, South Carolina and the other in Hillsboro, Oregon. Buckwalter is located in the Hilton Head area and represents an opportunity to develop a Publix-anchored center in a master plan community of 20 residential developments that will total over 7500 homes with prices ranging from $500,000 to over $2 million. The Center will also be the primary shopping destination for an additional 9500 homes that are planned.

The Hillsboro project is one of the three former Mervyn stores located in the Pacific Northwest that Regency acquired from Kohls at the end of February. It is our intent to remodel and release all three locations.

Leasing interest has been extremely strong on all three properties from anchor retailers. All three of the properties are exceptional infield locations, with strong markets surrounded by successful existing retail. We signed a lease with Best Buy for the Hillsboro project within 30 days of closing on this portfolio. We expect to execute a lease for the balance of the building very soon. The speed of this lease up should give you an indication of just how desirable the location is.

The other two locations are equally attractive to retailers and will be recorded as development starts when leases currently in negotiations are signed.

These starts bring the total number of in process development to 51 with ultimate development costs totaling over $1.1 billion. The in-process projects are performing well. The total cost variance of $3.7 million is very minor, about 3 basis points on the total expected costs. Of this $3.7 million overrun, $2.1 million alone is attributable to higher buyout costs for our Joint Venture partners, an increase attributable to lower cap rates. Projects are 51% funded and 78% leasing committed.

With increases in construction costs reducing to a more normalized level and with leasing remaining solid, the development yields are holding up nicely. The average return on invested capital for the in-process projects is 9.3% on a gross basis down 6 basis points from the prior quarter.

After factoring in joint venture partner participation the net returns to Regency average 9.06% or only 3 basis points lower than in the fourth quarter of 2006. However on a same project basis, there was no difference in net yields quarter to quarter.

The pipeline of identified higher medium probability projects totals approximately $2 billion. This compares with $1.4 billion at the same time last year and $1.8 billion last quarter. Returns on pipeline projects are also holding up well and while things can always change at this stage of the development process we are forecasting 2007 high probability projects to yield 9.5% before partner participation and 9.3% after. Projected returns beyond 2007 continue in this same range.

Given where current cap rates are for completed projects, and also given the extremely competitive nature of the developing business, we are very pleased with these returns which should generate substantial value. We fully expect to hit our development start guidance for the year and in so doing create value from the starts in excess of $250 million.

We continue to have a healthy balance between grocery and good neighborhood centers in promotional retail-anchored community centers. 24 of our in-process projects were 47%, our grocery-anchored neighborhood centers in the development pipeline, 40% of our projects were in the grocery anchored neighborhood centers. These percentages are based on the number of projects.

In terms of the diversity in major retailers we have 13 different grocers anchoring the projects that are in process. The grocers with the highest representation are Publix, Kroger and Whole Foods. Target continues to be our top anchor in the community center business with six stores in process and an additional 21 projects in the pipeline.

On the acquisition side, we purchased one center in the first quarter, Centennial Crossroads. This center which was acquired in our [McQuarrie] joint venture is anchored by Target and Von's and is 100% leased. Centennial Crossroads is located in the heart of rapid housing growth at the intersection of two major freeways. Demographics are strong at over $82,000 average household income in the trade area.

Finally I want to give you an update on our Green initiative. Over the last six months Regency's Green Building Task Force has been working with the U.S. Green Building Council or the USGBC and was recently selected as the USGBC Shopping Center Partner of Choice in establishing shopping center lead certification standards. This selection is a result of Regency's early leadership in the shopping center sector and the size of our development program. According to the USGBC, Regency is the only such partner from the retail sector.

USGBC also selected our shops at Santa Barbara Project as the model for the proposed pilot program for pursuing lead certification for a shopping center. Currently there is no system for combined lead points earned by the individual retailers with those available to the developer for such things as storm, water treatment or other site work. This limits the ability of both retailers and developers to earn lead certifications.

Shops at Santa Barbara will be a vehicle for changing this system and is intended to serve as the basis for a nationwide rollout, which will set the standards for other projects throughout the country. USGBC asked Regency to present this model pilot program with them at the [Billpoint] Conference which took place earlier this week. Regency was the only developer invited by the USGBC to this function which included the Who's Who of major retailers in our industry -- all of whom want to get certified.

Regency has already begun to see immediate benefits of this partnership with the Green Building Council. Entitlements at the Santa Barbara project have been slow in coming. [Tim Hoskin] who is the Director of lead new construction at the USGBC wrote the city a letter explaining the pilot program and the importance of our project to it. The city responded with enthusiasm and is now willing to assign key staff to the team, calling it a wonderful opportunity and pledging full support for the project. Hap.

Thank you, Brian. Thank you, Mary Lou. Thank you, Bruce. Thank you, Lisa.

The foundation of Regency strategy is our high-quality portfolio. With 12.8% rent growth, Mary Lou and Regency's operations team have expertly position the portfolio to maintain average NOI growth in excess of 3% of what will now be nine years.

Brian and the investment team's on track to start another $500 million in developments this year, and they continue to cultivate a nearly $2 billion pipeline of new state-of-the-art centers that will create substantial value for our shareholders. In addition as the U.S. Green Building Council's Partner of Choice, Regency is once again leading the industry with another initiative that will pay important future dividend for our shareholders.

Bruce, Lisa and the capital markets team have put in place a fourth Infinite Life vehicle which will provide permanent transparent funding source for our Community Center Development program. When you add up the growth in that operating income, 2.75 to 3.25%, from Regency's high-quality portfolio the completion of $300 million to $500 million of developments at 9% plus returns and 10% plus increases in high margin recurring revenues from Infinite Life Joint Ventures, I see a compelling recipe for sustaining annual growth in FFO per share by 8 to 10%.

In my view, this formula will also produce sustainable growth and intrinsic value.

In that light, if and when you are undertaking your evaluation of net asset value per share for Regency, I know you won't overlook the quality of Regency's portfolio and the consistency of reliability of our same property NOI growth, or the high margin third party revenues from Infinite Life Joint Ventures that are growing at a double-digit rate. Or the in-process developments that currently total $1.1 billion or the development team's ability to continue to deliver approximately $500 million of developments per year for the foreseeable future as evidenced by the $2 billion shadow pipeline.

It seems to me that the combination of each of these components should result in a pretty compelling net asset value per share.

I want to close with Regency's commitment to having a sustainable business model and being an industry leader. For those of you who know Regency, you know that we often speak of sustainability and industry leading. We endeavor to tenant and anchor our centers with best in class operators. Our trademark operating system is the premier customer initiative. That operating income growth, we describe it as reliable. We strive for Infinite Life Joint Ventures that have leading edge terms. We want developments to deliver significant value for the foreseeable future. And as you can imagine, we are proud that the U.S. Green Building Council selected Regency as their Partner of Choice.

The theme that we chose for our annual report is "Thinking Ahead". Put simply, management is intensely focused on building a great company that meaningfully grows earnings for our fellow shareholders over the long-term and not just for this quarter or for this year.

In that regard I want to share with those of you who may have inadvertently fallen asleep reading the CD&A in Regency's proxy. That incentive compensation for top management is directly tied to meaningful growth and Funds From Operations per share and to Regency generating total shareholder returns in excess of our peers. The Compensation Committee utilizes a measurement period of three years. Our peer group [is] shopping center REITs with equity market capitalization in excess of $1 billion. As you know that includes a number of companies for whom I have a lot of respect.

So in order for Bruce, Mary Lou and me to earn our maximum incentive awards, both the three-year FFO per share growth rates on a rolling and future basis must be 10% and Regency's three-year total shareholder return must place us as No. 1 in our peer group. Brian obtains his maximum award by Regency achieving these three goals and by Regency completing investments that have created another $100 million of value net of G&A and net of debt deal cost.

Regency's Compensation Committee has used this incentive compensation program to reinforce the Company's focus and commitment to put in place and execute the right strategy, and make the right decision each and every day that over an extended period of time will compound growth and FFO per share by 10%, and generate favorable relative shareholder return (inaudible) to an impressive peer group.

We appreciate your time and now we will answer any questions that you may have.

(OPERATOR INSTRUCTIONS).

Christy McElroy with Bank of America.

Can you talk about the upsizing of the total capitalization of the open end fund to 1.4 billion? Was that a function of sourcing additional power-centered development opportunities and so you went out and raised additional capital or was it a function of higher than expected institutional capital demand for this asset type?

I would say it's related more to your second answer that was related. Although as we have indicated upfront we've identified $900 million of our own property that could go into the fund in the next few years. And we actually expect to see more of that in terms of what's in the pipeline today. But it would be related to the fact that we had some institutional investors that wanted to make a larger investment.

Just a follow-up to that question, I mean is there a demand for a fund too?

Well, we would expect if we grow the fund and successfully and performed as we expect to perform that we will grow this fund. We would expect to see this as an important strategic -- since it is an important strategic initiative, we expect that this will be an important part of our fund business in the future.

That's one of the appealing attributes of an open end fund is you can organically grow it over time and investors can increase their investments and we can bring in new investors over time.

My second question (multiple speakers).

Lisa.

Hap is making me the the policeman. That was two questions. If you can get back in queue.

That was my follow-up.

It's two total questions. If you could get back in the queue that would be great.

Okay.

Jonathan Litt with Citigroup.

This is (inaudible) here with Jonathan and Bika.

Had a question for you on your field deals. It looks like they were flashing the pipeline. Are you seeing cost moderate?

Yes I think the costs are in really good shape. We've got as mentioned $3.7 million in net increases and as I mentioned also, most of that actually came from just the increase in paying out our development partners. We had some projects that had cost increases. We had some projects that had cost decreases. But $3.7 million is what 3/10 of 1% on the total in-process developments so we are pretty happy with that.

In the past you have mentioned that there's a possibility of starts going to $500 million to $700 million from the $450 million to $550 million today. Any idea when that might happen?

We have stated that we believe something in the neighbor of $400 to $600 million is a sustainable number over a period of time. We make evaluate increasing that but right now we have got the infrastructure. We are in the process of finalizing putting the infrastructure in place to develop up to about $600 million on a sustainable basis and that's where our focus is right now.

[Ron Shee] with Friedman Billings Ramsey.

Regarding $175 million to $225 million JV contributions in '07 what kind of an SMX are you expecting? How much will be allocated to the open end fund?

Right now, we would expect -- answering the JV question. As you know the open end fund is the only venture that there's really a definite takeout or an obligation in terms of Regency developments. So the (inaudible) and the Oregon JVs have only bought Regency completed developments at the initial closing and McQuarrie will on occasion. So it's a fair assumption that you can assume the lion's share of those are going to the open end fund.

In the first quarter is Vista Village, the only asset sold to the JV to get to the $21 million merchant gained?

Yes that's correct.

The margin seems to be pretty high, maybe like above 50%. Could you comment on the trends of the future margins?

I would think that they would be probably in the 35, 40% range.

Thanks, Ron.

Jeff Donnelly with Wachovia.

Mary Lou, anecdotally, anchors seem to be scaling back their unit growth to refocus on internal operations. Is that consistent with your observations and is there a theme that you can see to the extent that is the case to the projects, partners and markets that could be most impacted there?

I think what we are seeing is that you are seeing nice growth, consistent growth at the grocers. So, yes, you went through a phase for a while that some of the grocers were really looking like Safeway and reinvesting their capital on existing locations and they are still doing that. But you are starting to see normalized growth.

And Brian can speak to this but if you look at our pipeline and look at our -- how many grocery anchors, it's very consistent with historical numbers that the growth of our pipeline as in other retailers.

Target, we were at a Target meeting. They are continuing to grow. Although I did think they are looking at cannibalizations and they are being a little bit more cautious in their growth but still very aggressive plan. Very successful retailer with, as you know, very strong comps. JC Penney's has come out and announced even stronger growth plans set at historical levels and so has Kohls. So I will tell you in general we really see a robust market out there in terms of our anchors and their ability to grow.

It's just a normal market. You know, sometimes, you know right now some of the retailers are being much more aggressive and some are cutting back and vice versa. So we see it very strong as you can tell by our pipeline and what is going on in the strength of our pipeline and what Brian and the team have going on.

One last question about ICFCs. Just increasingly hear from retailers as well as developer owners that that meeting has sort of gradually been losing its effectiveness just because of the brevity of meetings. Is that a venue that can eventually be more productive and is there something that Regency is doing to adapt its approach? I mean to come out with more tangible results?

Well, I think that the way we look at it, No. 1, when you are working on the development side of the house I feel that the meetings are extremely effective. They are making significant progress on the development and in many cases, it's not the first meeting with an anchor or with a retailer. It's a second, third or even more of really moving down the line.

What we find the advantage of it is, a lot of our meetings are one-on-ones with our -- in the op side on the leasing agents. Really working on a specific space and being able to close sales, get things done. Where we have found probably the most significant opportunities is when we get the heads of real estate and all of our people around the table, in our PCI meetings and able to get the decisionmakers all in one room, and actually get things decided and done.

One way or the other it works or doesn't work and oftentimes that just really extends the time. So I think our focus has always been very relationship-driven. Very specific deal-driven to either show up for sale, to move it along or to close it. I think we've done a very good job of that and our focus is good.

I think some people look at ICFC as a relationship. People are running in and out of meetings and it -- just not a lot occurs, but I think we've been very disciplined both on the investment side and the operations side of really getting maximum productivity out of that.

(OPERATOR INSTRUCTIONS).

Christeen Kim with Deutsche Bank.

Just in terms of the growth and the shadow pipeline could you maybe talk about what that's a function of, is that just your increased staffing or are you seeing more opportunities?

I think it is a function of both of those. We have staffed up for it. As you know we had a big increase of staffing last year because we were seeing so many good opportunities that it was just really stretching the capabilities of the team. I've always said in the past, too, that success begets success. The more of these very successful projects we do the more we seem to be attracting. It is not, though, a function of growing the pipeline just for the sake of increasing it. We are only going to do projects that get good returns on capital and value creation.

In fact if you look at our returns, the returns for the pipeline are still about 9.5%. So I think it's a just a combination of doing well. We could grow it more. I mean there are plenty of opportunities we see out there that have great opportunities but slightly lower returns.

We also did add, remember, a New England office which should add to that pipeline. And we have over the last year really enhanced our program in Florida at a neighborhood -- I'm sorry a Community Shopping Center Development program so that should increase the pipeline as well.

Also, just in terms of what you are seeing in terms of the institutional demand you saw for your open end fund. Could you really speak about just the general interest you are seeing from institutions for U.S. shopping center assets?

You know, it is interesting when you meet with investors and you talk about core properties or you talk about the properties, obviously there is a lot of interest. Then you talk about you want to do something on the core side, there's a little bit less interest. You want to do something in core retail, you narrow the market even further and then you even further when you go to open end as opposed to closed-end.

So I don't think from that standpoint we are, Christeen, core retail specially on an open-ended basis is not, so to speak, the sweet spot.

Having said that every time we go and look at making an acquisition, there are a number of competitors out there that are offering prices that continue to amaze us.

Steve Sakwa with Merrill Lynch.

Hap, can you just remind us what your appetite is if any to look overseas? A number of your competitors are looking kind of north and south of the border as well as down in South America. And I was just curious what your thoughts are on those markets?

We continue to look at those markets and will continue to look at those markets. We've looked at several specific opportunities. It is a -- I would say if you have first, second and third tier from a priority standpoint, it is not as important as our current development program, current investment program in the States at continuing to grow our net operating income as we have had. But it's -- I would say it's something that we are going to look at and continue to look at.

The key thing is, Steve, can we find an opportunity or opportunities to where, in a meaningful way, we can leverage our Development and Asset management capabilities. If we can do then we are going to make money for our shareholders and it will be worth the management time and the capital, most importantly the management time it will take to do that.

If we can't do that, we are just not going to go overseas to go overseas. Because I don't know that the -- there are some retailers obviously Wal-Mart, HEB, that are customers of ours that are also customers south of the border some. Wal-Mart, north of the border. But I don't think you have the same customer imperative like you do in the Industrial sector.

Just maybe as a follow-up, as you think about going into these markets, would it be with a Joint Venture partner or would it be through an acquisition first to get existing assets? Would it be strictly for development? I mean, how do you think about I guess setting up the infrastructure?

The answer is, yes, we are considering all of those alternatives.

Thanks, Steve.

(OPERATOR INSTRUCTIONS) Jeff Donnelly with Wachovia.

You mentioned your New England office. Increasingly, I have seen you active around the Boston area. How are you finding penetrating this market and should we be seeing you more on the acquisition side here or on the development side?

We started our march into Boston if you will through acquisitions. We bought a couple of properties up there and then we hired a development team and they have been in place now for, I guess, about six months. It is tough, but we expected it to be tough. That's one of the reasons we like that market. It is high barrier, difficult to penetrate just as it was in Washington, D.C. and California; but my understanding is they are turning up a lot of really interesting prospects and we hope to be able to deliver things soon.

We have one, we have completed two developments and in southern New Hampshire, and we have one underway in the Boston market. It is going to be a fabulous little shopping center that we are developing. You want to describe it?

Yes. That one is in Saugus so it's -- pretty close in right on Route 1 and that will be anchored by Trader Joe's.

And if I could ask another one on Green construction. Aside from the social and political benefits, are there economic opportunities that you can see today by introducing either more green stance on new construction or even existing projects?

There are. Right now, 14 states and 19 local municipalities offer economic incentives for construction of projects to lease standards. So those incentives will certainly help us financially. They take the form of fee waivers or discounts, tax incentives, density bonuses, and grants and, of course, expedited permitting.

One of the things we are looking at right now is working with a company that installs these photovoltaic solar panels for the purpose of generating on-site electricity. They install those at their cost, they then sell the electricity to us and/or our retailers below local utility rates. So that benefits our tenants, which gives us a leasing advantage and ultimately can allow them to even pay more rent. And they also pay us rent on the space that they utilize for their equipment.

So even without solar electricity we should be able to lower the utility cost for our tenants and, again, lower their operating costs and give us a leasing advantage. I think just on a go forward basis, I believe any developer who builds a center without sensitivity to the sustainable practices will simply not be welcomed by other cities, particularly in our highest barrier markets. If that happens our shareholders would see a much smaller pipeline of projects and of course with it far less value creation and contribution to FFO.

I also think there are a number of potential tenants out there who all things being equal or close to equal are going to make their leasing decisions based on whether one center is green and the other one is not. So I think there are some real tangible benefits and that is part of what we continue to study in this task group.

Thomas Baldwin with Goldman Sachs.

Just on the video stores front, I'm curious as to the extent to which that process can be taken even further. How many stores you think you could continue to get back and sort of (technical difficulty) there is involved in that process?

We've looked at it and we think over time we are going to get the majority of the space. We did an analysis of the remaining video stores and if you look at it the rents that we currently have in market rents there's probably another $1 million of upside over time, getting that space back. So I think kind of the pace that you see us now at 20 some a year is an ongoing pace and we will probably be able to continue to work through those as leases come up and we can get our space back. But there is significant upside but over time.

Christy McElroy with Bank of America.

I'm back. Given Prologis's recent acquisition of the remaining interest in McQuarrie Prologis trust set that kind of begs a question with the future for McQuarrie Countrywide. Has McQuarrie expressed any interest to sell its stake back to you? Can you go through some of the buy sell agreements that are in place in that JV?

And do you have a sense from McQuarrie's continued appetite for investment in the U.S.?

No. 1, they just -- the acquisition that Brian mentioned is in Joint Venture plus the acquisition in Las Vegas is joint venture with McQuarrie Countrywide. Secondly, we are actively looking at a number of investment opportunities with them. Thirdly, I think they just announced a major acquisition in Europe. So they are a net buyer in the U.S. and are looking to continue to expand their presents.

You know, you are more than welcome to call them up to get any further insights. But from what we see we have got a partner that wants to continue to aggressively grow our joint venture in spite of the fact it will also be culling off and selling some centers that we have got targeted for sale. But they will be a net buyer.

(OPERATOR INSTRUCTIONS). It appears we have no further questions. I would like to turn the conference over to Hap Stein for any additional or closing remarks.

Thank you. We appreciate your interest in time in Regency and wish you all to have a great rest of the week and a great weekend and look forward to seeing you soon. Bye bye.

Once again, ladies and gentlemen, we thank you for your participation.