Regency Centers Corp (REG) 2007 Q2 法說會逐字稿

Good morning. My name is Connie, and I will be your conference facilitator for today's call. This conference is being recorded. At this time I would like to welcome everyone to the Regency Centers Corporation Second Quarter 2007 Earnings Conference Call. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Ms. Lisa Palmer, Senior Vice President, Capital Markets. Please go ahead, ma'am.

Thank you, Connie. Good morning, everyone. With me 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 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 forward-looking statements. Please refer to the documents filed by Regency Centers Corp. 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 the forward-looking statements.

I will now turn the call over to Bruce.

Thanks, Lisa, and good morning.

As you will hear from our team, the fundamentals in all key aspects of Regency's business continues to be remarkably strong in the second quarter. This quarter we've also focused on strengthening the balance sheet. Personally, I have also been focused on strengthening my hip, and I'm pleased to announce that I'm no longer walking with a cane or a limp.

FFO per share was $0.94 for this quarter. Year-to-date it was $2.07, 16% higher than this period last year; quite impressive given that last year we had recognized over $10 million in one-time transaction fees mostly from the First Washington deferred acquisition fee, compared to less than $1 million this year. I'd like to clarify that the last piece of the First Washington deferred acquisition fee is expected to occur in the second half of 2008, which means that nearly 100% of 2007 fees are recurring.

The growth from higher development profits, NOI coming online from new developments, and the growth in same-store NOI has more than offset the negative impact from lower transaction fees, higher G&A, and the loss of NOI from dispositions.

In June, Regency completed the sale of $400 million of 10-year senior unsecured notes. As has been true with our other unsecured offerings, the offering was significantly oversubscribed and the quality of the inventor list continues to be blue chip.

We were also able to maintain tight margins and hit near the low end of the expected spreads. We will be approximately 30 basis points higher today, but, as they say, its better to be lucky than good.

In this volatile and uncertain interest rate environment it makes sense to be especially conservative. We've always been proactive and conservative in our Capital Markets strategy, and I'd like to remind you that last year we locked $400 million of debt due in 2010 and 2011.

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

Thank you, Bruce, and good morning, everyone. Let me quickly review our numbers, because the fact is they're excellent, and they have been at these high levels consistently for quite some time now.

Year-to-date same-store NOI growth was 3.2%. Rent growth was 13.9%, and there were 934 new and renewal lease transactions for a total of 3.5 million square feet leased or renewed.

As a quick aside, termination fees for the first half of the year are virtually equal to the first half of last year, so there's no impact to same-store growth. There's also $600,000 of Captive Insurance reserve reduction and other income that is not included in the same-store calculations.

Rent growth continues to be strong. Based on the releasing spreads we've seen thus far, we've raised our rent growth guidance for the year to 10% to 12% from our previous guidance of 8% to 10%. As you know, rent growth achieved this year benefits next year as well. In fact, I am very, very encouraged by the preliminary numbers for 2008 and our ability to sustain the 3% same-store growth.

To maintain this strong growth we are always looking ahead at the best way to merchandise our centers. We monitor our retailers to capitalize on such opportunities. In 2007, like always, there's a few retail categories that are struggling.

As we are all aware, the first category is one we have been very proactive about during the past few years -- video stores. Industry-wide store rentals are down 13%. Video rental profit margins have been affected by increased competition from discounters online and digital programs. We continue to move video stores out of our portfolio, and today they constitute over about 2% of revenue down from over 3% a year ago. As we've stated before, we feel there is potential rental upside as we continue to get these spaces back which are typically highly desirable locations.

As a direct result of the housing market downturn, we've seen some move-outs in some categories quite frankly we haven't seen before, like the residential real estate offices, and were watching retailers where same-store growth has been impacted such as furniture, home improvements and home decor businesses.

All of this is the natural retail cycle, as you know. Clearly, certain retailers in particular sectors have been impacted more than others. However, it's important to remember that the consumers most directly impacted are less affluent sub-prime borrowers and are not Regency's customers.

Overall, for the second quarter, every retail category except for department stores were positive with total retail sales up almost 4% last quarter. Grocers were up over 5% as traditional grocers continued to more effectively compete against discounters and specialty grocers.

Drug stores are up nearly 7%, and food and restaurants were up almost 6%. Coffee is included in that food and restaurant number, and continues to be a strong growth business in the U.S. We currently, at Regency, have 87 Starbucks in our portfolio with another 16 in process, making Regency Starbuck's largest landlord.

So the main sectors that impact our portfolio continue to be extremely strong. Retail continues to be a changing business which, quite honestly, makes it fun. For example, Hallmark has had tough comp store sales but has turned their comps around with musical cards and Webkinz as more and more consumers are looking for an experience rather than just a product.

Interactive retail is big. Whether its restaurant and food categories, products or stores, retailers that can tap into this web presence and interactivity will have the most success. Interactive retail is about integrating bricks and clicks. Those retailers that can expand their presence and services in the ever-increasing Web audience should garner market share and the consumer dollar.

I want to close by switching gears from Regency's quality real estate to the quality of Regency's management team. Although I admit that I am totally partisan, I truly feel that the talent and depth of our team is second to none in the industry. This strength was evident recently with the announcement of the future retirement of John Euart and the departure of Mac Chandler, two of our managing directors of Investments in the East. Mac Chandler moved back to Southern California to rejoin his family business.

Fortunately for us we had to look no further than our Operating Committee to find the perfect candidate, Jim Thompson. Jim, who has been with Regency over 25 years and has worked in every facet of the business from leasing, development, construction, agreed to moved from Eastern Operations to Eastern Investments. Jim has the critical ingredients to be successful in his new role -- shopping center expertise, excellent leadership and management skills, and a track record as a relationship builder and deal-making abilities.

With Jim's movement into Investments, it made sense to combine Leasing and Operations nationally under John Delatour. I feel that extending the scope of John's responsibilities is a natural, given the superb job that John has done building and leading the Western Operations group. Regency could have no one better than John to fill this new role because, like Jim, he has extensive real estate knowledge and excellent leadership skills.

We think this unification makes sense for our retail customers and our co-investment partners in shopping centers should benefit from the best practices pulled from each region. Brian?

Thank you, Mary Lou.

Regency's investment program, both developments and acquisitions, continues to perform at a remarkable level. We started six projects during the quarter totaling $192 million. Those projects averaged 9.2% in underwritten returns. For the $192 million in starts this quarter, 90% of that amount came from two projects -- Deer Springs in North Las Vegas, and Stonewall in northern Virginia. These two projects are big investments. Deer Springs alone is $124 million and doing extremely well.

Las Vegas is consistently ranked as one of the top retail markets in the country and enjoys tremendous residential and job growth. North Las Vegas is the fastest growing area of Las Vegas with a very low retail vacancy rate. But we like Las Vegas a lot, and we like North Las Vegas even more. In Deer Springs we have what we believe to be the best location in the market at the intersection of Interstate 215, which is the Las Vegas beltway, and North 5th Street, which will be an eight lane, 150-foot wide super arterial connecting North Las Vegas to downtown Las Vegas. We have dominant anchors in Target and Home Depot and are in lease negotiation and have letters of intent for every anchor space with category dominant retailers. The small shop leasing is going just as well. All together we have 442,000 square feet of space committed at least with a letter of intent that's signed.

Stonewall is located in the very affluent suburb of Washington D.C. with an average household income of over $113,000. We're fortunate to have Wegmans as our lead anchor. This will be our second Wegmans-anchored development. In addition, the project will be co-anchored by Bed Bath & Beyond, Staples, Ross, and Michaels. The shop leasing here is going great as well, especially considering how early we are in the process. The development is only 29% funded, yet 75% leased.

The pipeline is in excellent shape in terms of its size, the quality of the projects, the strength of the anchors, and the returns we are projecting. Year-to-date we have started $226 million, which is about 50% of what we did last year and almost half of our 2007 plan. So unlike most years where our starts are heavily back-ended, we are in pretty good shape halfway through the year.

While much work remains to be done, I'm very comfortable that we will meet our development starts guidance for the year of $450 to $550 million. Returns remain very strong. Our 2007 year-to-date starts and those projects we expect to start during the remainder of the year are currently underwritten well north of 9% before partner participation, and slightly under 9% after. That should create value well in excess of $200 million.

Our pipeline at $1.6 billion remains very strong with underwritten returns in the mid 9% range through 2009 at the project level, and right at 9% on an after JV basis. Still, there are real pressures on returns going forward. Competition for development projects continues to increase, and our competitors are willing to develop for much lower returns.

With Regency's shadow pipeline of $1.6 billion and average returns in it still north of 9%, we feel that were insulated against significant overall dilution in returns in the short to intermediate term. This means the spreads remain very healthy at 300 to 350 basis points on a pre-tax basis. Regency's disciplined strategy of investing in top markets with leading retailers has enabled us to build a strong, highly profitable and sustainable development program.

Were applying the same strategy to our acquisition program. During the quarter we announced a partnership with Macquarie to acquire 33 primarily Schnucks-anchored centers from the Desco Group, St. Louis leading grocery-anchored shopping center developer and operator. Desco will retain an approximate 27% interest. The vast majority of the centers are located in the St. Louis metro area. The transaction is valued at approximately $400 million and is expected to close in the third quarter. Overall ownership will be 60% Macquarie, 13% Regency, and 27% Desco.

What we like about this portfolio is the fact that it is anchored by Schnucks, which is without question the dominant grocer in the St. Louis market with an estimated 37% market share and more than 100 stores across the Midwest. They have a very loyal following and generate strong sales, which is part of the reason their portfolio has averaged 97% leased over the last five years.

We're particularly pleased to have Desco staying in as a partner, which we believe greatly reduces the risk of any store closings and fully aligns our economic interests. This investment is consistent with our strategy of owning centers anchored by the number one grocer in above-average demographic neighborhoods.

This acquisition is part of a larger capital recycling plan in our Macquarie partnership. We have taken to market approximately $270 million worth of properties in the venture to sell. Doing so will upgrade the quality of the partnership's portfolio by selling those non-core centers and reinvesting the proceeds into these higher-quality assets.

We also recently acquired a four-property Publix-anchored portfolio in southwest Florida for approximately $80 million at a cap rate of 5.73%. This originally consisted of six properties until Publix exercised the right of first refusal on two of the centers, which in itself speaks for the quality of this portfolio. Fortunately, Publix only had such rights on two of the properties.

This is truly an A-quality portfolio anchored in each case by Publix, which is producing nearly $700 per square foot in sales. These centers are all located in high-growth, affluent areas with incomes 32% higher than the market average.

Just to be clear, as much as we like these properties, we went under contract for this portfolio expecting that wed be able to bring a partner to the table to co-invest. Given the size and the quality of the portfolio, we were comfortable buying the properties outright if we failed to do so, which is what happened. We like the portfolio, and even with the benefit of 1031 exchange, buying properties without a partner at sub 6% cap rates is not something we plan to do in the future, as we know that investing in developments in co-investment partnerships is a better use of our capital. Hap?

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

Let me start by sharing with you my views on our stock buy-backs. Unfortunately, the current leap-year market is obviously not over with Regency. As a result, management and the Board have thoughtfully evaluated the implications of a buy-back for the company.

The starting point for our analysis is our view of intrinsic value. Based upon a ballpark calculation, Regency is trading at a very substantial discount to intrinsic value, even if cap rates increased 25 to 50 basis points; especially considering Regency's proven track record for growing same property NOI by 3% year-in and year-out from our high quality portfolio; considering the embedded value of the $1.2 billion of in-process developments; a development program with a $1.6 billion pipeline and the relationships and market presence to deliver $500 million of developments annually for the foreseeable future; The certainty of funds for recycling in transaction profits from our co-investment partnerships, especially the open-end fund, even at modestly higher cap rates; and the recurring high-margin fees from the Infinite Life partnerships that are projected to grow by 10% annually.

However, just as you wouldn't expect us to sell stock when we are trading at a substantial premium to value unless there is compelling use of funds, we're not going to buy in stock unless the buy-back would result in a compelling return and not have an adverse impact on the company's capability to create substantial value and produce attractive returns on vested capital from developments in co-investment partnerships.

With this in mind, we thoroughly analyzed the impact of a stock buy-back on a leveraged, neutral basis, including the financing of the program by contributing assets to our joint ventures. Even at today's price and before taking into consideration the not-insignificant tax impact of property sales, the implied cap rate is notably below the weighted average returns that we are achieving from developments in co-investment partnerships.

This means for the numbers to be meaningfully accretive with FFO and intrinsic value on a per-share basis, the size of the buy-back would need to be so large that it would have an adverse impact on our ability to continue to grow Regency's development program and joint ventures, which are critical to sustaining growth in FFO and NAV per share over the long term.

Consequently, we've decided not to pursue a stock buy-back at this time. We will continuously monitor buying in stock in relation to other investment opportunities.

In closing, Bruce, Mary Lou and Brian did an excellent job articulating the success and progress that Regency continues to make in each key facet of our business. As they discussed, Regency's accomplishments are being made in an even more challenging, changing and competitive operating and investment environments.

Regency is blessed with strategic core competencies, including a national portfolio, operating systems, relationships with vesting-class retailers, market knowledge, partnerships that in my view, when combined together are second to none in the industry in terms of total quality.

However, the real reason I am as excited as I have ever been about Regency's future growth prospects is the quality team that each and every day, and in each and every phase of our business continues to excel. Watching John Delatour and Jim Thompson expertly step into their new leadership roles has been so rewarding. It's extremely gratifying to be part of a team that is continuing to brilliantly execute the company's proven value added strategy, and magnificently has positioned Regency to meet our future goal for growing FFO per share by 10% and meaningfully increasing intrinsic value.

We appreciate your time and will now answer any questions that you may have. Lisa would like me to ask you to limit your questions to two in succession.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Craig Schmidt from Merrill Lynch.

Thank you. I was wondering if you were concerned a little bit about Schnucks losing market share. It looks like Deerburg's and Wal-Mart has grown market share in that market, while Schnucks has started to lose.

Craig, its Lisa. I'll take that, as I was with Brian and our team when we first sat down with Desco in St. Louis. Schnucks in a private company, so it is difficult to get information on them; however, they had to disclose it to us. So fortunately we were able to see that over the past several years they did lose market share to Wal-Mart three to four years ago, and just like all the other dominant grocers they've been recapturing that over the past several years. So their market share has actually grown over the last three years.

That's not what MarketScope is showing. In any case, are there any other markets that you'd like to make entries into, or even regions of the country as this is your first entry into St. Louis?

We don't have any plans to go into any new markets. As you know, we opened an office in Boston and were trying to digest that right now. We started the Community Center Development Program a little over a year ago in Florida. Those are the markets that were really focused on right now in terms of expansion.

Thank you.

Thanks Craig.

And well take our next question from Matt Ostrower from Morgan Stanley.

Good morning. Can you just talk about-- I know you've done Schnucks, but given what has happened in the debt markets more recently, how would that affect your thinking about evaluating another transaction, say, starting today? So if you saw a large transaction that had similar economics, would you do it again? I guess that implies the question, Hap, about what you think is going to happen to cap rates for the kind of centers you want to buy over the next year or so?

Well, let's start with, obviously, the debt markets are in a tremendous amount of uncertainty and disarray. I think we've been told that the spreads have increased 50 to 60 basis points from when we fixed the debt for the Schnucks-- for the Desco-Schnucks transaction. Obviously, that would have an impact on the way we and our partners would look at any investment today. We have seen to date a 25 to 50 basis point increase, and maybe even more-- in D properties maybe even higher, or C property cap rates. To date A property cap rates have been sticky, but my expectation is that there's a very real possibility that you might even see some very modest increase in A cap rates. As we indicated, we have two portfolios out for sale, and we expect to put them under contract in the third quarter. It will be very interesting to see what happens with that.

Ill just add also, Matt, I think its important that when you look at who our partners are, our co-investment partners, were pretty fortunate in that Macquarie has the ability to actually leverage at the corporate level. So if we were to pursue a transaction with them, we may not necessarily have to tap into the U.S. debt market. Then also, our other partners are large pension funds that, for the right opportunity, certainly would be willing to pursue an acquisition on a debt-free basis.

Just to follow up, to go back to the question about whether you would do something again now, you would need to then see-- even assuming that you're only buying stuff that is sort of A quality, you guys would want to see some kind of better cap rate today than you would have seen over the last year in order to make you interested in doing the deal, just based on what your own expectations of cap rate movements are?

Well, we are underwriting an increase of cap rates when we're buying properties, number one. Secondly, and one of the key things to us, is the growth of the portfolio going forward. But it is important to note that our-- the recurring fees that were getting from these partnerships are adding 150 to 250 basis points to our returns.

I also want to note one other thing, is that-- I inferred this in my comments, but that the projections that we have, one of the key impacts for Regency as far as our business model is the purchase of our developments, especially for the open-end fund; and our projections for cap rates on that are reasonably conservative and are projecting cap rates to go north even in our projections, which work.

Thanks, Hap.

Thank you.

And well go next to Christine McElroy from Banc of America Securities.

Hi, good morning. Between the increase in your JV acquisitions guidance as a result of the Desco acquisition, and then the decrease in your contributions guidance for the year, I think net-net you're still assuming higher overall gross in assets under management than you had three months ago. Why doesn't that result in an increase in your fees and commissions guidance from the $32 to $34 million level? Does it have something to do with timing?

We did increase our acquisitions guidance, but you've got to remember that in the original guidance we had projected that we were going to be a 25% owner. So even though the gross number increased, the actual net ownership increase is pretty minimal.

There also is a timing difference here in terms of when things happen.

Okay. And then with regard to development contributions in C open end fund over the next couple of years, can you talk about the process of how the assets are valued before they're contributed? Is it a third-party appraisal process, and are there any cap rate floors or ceilings?

Basically, yes. To half answer it, yes. There is an appraisal process, and the fund actually will buy the properties on in-place income rather than in underwritten. So we use the appraisal really to identify the cap rate for the property, and then we apply that to in-place income.

And there is a floor under which the fund does not have to buy the property.

Right. And that is clearly to protect our investors. I mean, if cap rates were to fall even further and it came in at 5.5%, as it stands its a must-offer/must-take. We can't force them to take something at 5.5%. And if cap rates are still that low, that gives us comfort because that means there must still be a lot of demand out there for those properties. So if we needed to sell it for capital recycling purposes, if we didn't sell it into our fund, we could sell it to a third party.

Thank you.

Thanks, Christine.

And well go next to Jonathan Litt from Citi.

Hi. This is Ambika with John. Can you comment on your outlook for profit margins for this year on developments and beyond that?

Sure. I think if you look at a couple of things. As I mentioned in the call, the returns in the pipeline are still north of 9%. Even after JV they're about 9%. That's true going through 2009 and it's true of our in-process. So assuming cap rates hold pretty close to where they are right now, you're talking about a 50% profit margin. Now, do I think they'll all come in there? No, but that gives you kind of a feel for where they are.

I know that it was written up about the fact that this past quarter it was only 18%, but if I can just address that for a minute. There are only two sales that reflect in the supplemental as development sales, and that was Spring West in Alameda. You need to strip out Spring West. That did not turn out to be a development. It was supposed to be. We had a joint venture lined up with HEB, and they backed out. So all we wanted to do is sell the land and come out of it whole, and we came out quite well on that. In the costs also were all the dead yield costs from across the country, which are all loaded on to essentially one project. So you need to strip those out too.

So, if you do that, then you end up with, for Alameda, a 21% profit margin, and that's net of closing costs and GAAP costs. That still doesn't reflect a very high margin sale of a gas station that took place last year from that property, and also some deferred tax increment financing proceeds. If you go ahead and you add those back in, then the profit margin on Alameda would be 26%, which is pretty good considering for the last four quarters we have been talking about that project as one that was unfortunately burdened with a lot of cost increases and, therefore, was one of our lower yielding projects and still nets out to about 26%.

So that was an anomaly, and I think going forward you're going to see a profit margin similar to what we've had in the past.

And then, I guess, based upon previous comments of cap rates on even A quality properties increasing, that 50% margin would likely fall, correct?

If cap rates go up, yes, it would fall.

And just to reiterate that Ambika, as was just stated, we are banking into our numbers some modest increase in cap rates.

Right. And then on the--

Sorry. Ambika, I'm sorry. It's the (inaudible). If you can get back in the queue that would be great. Thank you.

And well go next to Paul Morgan from FBR.

Good morning. You mentioned a couple of the factors that were slow, some of which you've been kind of slow for a while. Some other segments of the retail industry that I've heard are slowing maybe in terms of their store growth or just sales, like the restaurant area, and I'm just wondering how much of the moderation might be sort of systemic and related geographically to the housing market? Places like California and Florida have been impacted at least in that segment, and I just want to get your sense of, kind of, traffic in sales generally maybe regionally, rather than just on some of the sectors that have been weak for some time.

You know, it's interesting. When we look across the portfolio, as I mentioned in the comments, some of the move-outs in some of the areas were like real estate offices. It has been pretty spread out through the portfolio, not any geographic difference. I'd say that if we look at our businesses, and I look at rent growths and occupancy when I look across the portfolio, that's my best indication because I don't necessarily get sales on all the individual tenants. So we've got to say, okay, are there differences? The reality is they're very strong throughout the country with the exception, and I believe I mentioned this before, that in the Midwest that were seeing a little bit lower occupancy and single-digit rent growth compared to high single or mid-double digits across the rest of the country. So we are not seeing it impact our centers. Our occupancy continues to be strong.

But I think, as we always do, it's prudent to be cautious and to understand what's going on in the retail trends, and we do sort out move-outs and look at our centers in occupancy to see is there anything there that overall we should be concerned about? We did it with Winn-Dixie when we looked at sales trends. We've done it with the video stores for the past couple of years and very aggressively moved them out. We're just seeing some down trends that were there, but right now nothing significant in our centers and nothing that I could pinpoint to any geographic area.

Then another question on the Schnucks joint venture. How is the-- I missed this, but how is the structure in terms of management and allocation of fees?

The owners are the 60% Macquarie, 27% Desco, and 13% Regency. Desco is actually going to maintain the property management and leasing for two and three-- three and two years-- three and two years, respectively. Then from a fee standpoint, well get an acquisition fee on the portion from Macquarie; clearly, not from Desco as they're the seller of the property. Then the property management fee. Desco is actually going to be retaining the physical property management. Well still do all of the lease ads, administration and accounting here at Regency. So well basically split 50/50 that 4% property management fee with Desco. Then an assess management fee of-- the same that we get on our other Macquarie-- on the First Washington joint venture, which is 20 basis points on total assets will be received from both Desco and Macquarie.

Thanks.

And we'll go next to Michael Gorman from Credit Suisse.

Thank you. Good morning. Lisa, just going back to your comments on Desco, quickly. What happens to Desco's portion of the fee stream after the two or three years? Does that revert to you guys automatically, or is there --

Contractually we are actually the property management and the leasing agent for the property. We are subcontracting to Desco for a period of three and two years. So, we may -- if we haven't established a presence in St. Louis, we may decide to retain them. Or, if we've established our own office there, then we would take the property management and leasing over 100%. I'll let Mary Lou comment on that.

Yes, that was really no different than what we did up in the Mid-Atlantic with the First Washington acquisition, is for a time we had them lease and do property management as we felt that we had built up our team and it was the market that we were very strong in and had a lot of development going on. We felt it was appropriate to take over that. So, I think we just need to go through the next couple of years and we'll make that decision at the end of two and three years.

One other intriguing and attractive part of the investment here is that Desco has a very active development program and we see an opportunity to venture with them on development. Hopefully, we can make that happen. So, I think there may be more of a long-term relationship here with Desco, who is -- not only is Schnucks a first-class operator, but Desco is a first-class developer and operator.

Understood. Thank you. And Mary Lou, if I could go back to your comments about those retailers that have been exposed to the slowdown in the residential market. Can you give us a sense, obviously none of them really show up on your top tenant list, but could you give us a sense for how much exposure your properties have in aggregate including those that square footage that isn't owned by the company?

It is next to nothing. I mean, it's minimal. We pull it up -- if you add it all together, it's under 1%. I mean, it is truly nothing. And when I say it, I think you have to be wise. I give this to give you kind of color on how we look at retailing and how we look at our portfolio. But just because home improvements are some negative comps or are slowing down in positive comps doesn't mean that they're not great companies. It's just the cycle of business that is normal for them to go through with residential slowing down.

So, really, honestly, it's minimal to ours, and again I don't see that having any affect on our portfolio. We look at increasing rents based on what we believe is market. With our strength in our centers, with the demographics and our strong anchors, typically we find that the businesses, even though they may be slowing down in the aggregate, we still end up with positive comps in our centers and are able to continue to get the kind of increase in rents that we historically have gotten.

Great. Thank you.

Thank you.

And well take our next question from [Ken Avals] from Raymond James.

Hey, guys. Just a couple of questions, obviously, to stick within Lisa's limit here. Could you tell us why you think the partner-- you couldn't find a JV partner or what they walked away from on that Publix portfolio? Secondly, just talking about the competition in development space, are there any markets where you feel like you're getting a little concerned as you look out, maybe not this year or next year, but three or four years out-- worried about the supply picture there? Thank you.

Ill address the partnership issue, and then let Brian talk about the markets that we may have some concern about.

When it really got down to it, it was the fact that there was, interestingly enough, existing debt on the property at about 6% and, as a result of the negative leverage, the partners said they couldn't make their numbers work, especially after paying us the fees that we were going do. I think they would have done the same on a non-fee basis, and that wasn't of interest to us. The properties have really a terrific growth profile so we'll be fine there. But the partner did indicate to us if the debt could have been removed on any kind of reasonable basis, they would have gone forward, which is interesting.

What it shows is, is that some of the major institutions, even in spite of the negative leverage, still may be there keeping cap rates where they are because they'll just buy, in effect, at 100% equity basis.

In terms of the markets and which ones were concerned about, we monitor a lot of different data including the Reese data, [Linneman], and a whole bunch of others. If you look at that data, the markets that they are most concerned about in the future are ones we have virtually no exposure to at all. In fact, of all the Reese markets across the country, the only one that they indicated there was some potential of overbuilding would be in Charlotte and that's the only market that we have a single pipeline project in. So I think were in pretty good shape there.

What were more concerned about would be keeping our focus on the high-barrier markets, and as long as it has all the great demographics, as long as we do that, I think were going to be relatively immune from overbuilding. We've been entitling Petaluma now and Santa Barbara for three years, and I can assure you there won't be any overbuilding there.

What has happened, as we've talked about in the past, is Target has pulled back from the smaller markets. As a result, we've adjusted accordingly. So we are now much more focused on just the more infill markets.

Thanks, guys. Nice quarter.

And well go next to Lou Taylor from Deutsche Bank.

Thanks. Good morning. Hap, can you talk a little bit about the contribution from the development pipeline a little further out? I mean, if you're getting pressure on yield from just competition, either higher costs or just other sources, do you think your volume can ramp to offset that kind of compression, or is that development contribution at a plateau a year or two out?

Well, just a couple of things to note, Lou, is, number one, what is in process is $1.2 billion, which is approximately two and half years of completions that are currently underway and in essence fixed returns. In addition to that, as Brian mentioned, there is $1.6 billion of developments that should fill, in effect, the next three years beyond that. So we've got three to five years of developments at returns that are relatively already set.

Then as I also indicated, we have kind of dialed into our projections and our goal of 10% FF0 per share growth and a meaningful growth in intrinsic value per share, what I would call a reasonable increase in cap rates. So we've got three to five years in effect, they're already set.

What is really interesting that (inaudible) a bit more but it gives you a feel, we've been saying on the investment side that there has been compression in cap rates, and it feels that way. But when you look at the numbers, the numbers-- not cap rates, but compression in margins-- when you look at the numbers, the returns are remarkably holding up even as new projects are added to the pipeline.

So it feels a little bit softer. It feels like there's a lot of pressure out there from a construction cost standpoint, from a competition standpoint, but remarkably it's been able to hold up. I think the key point is, and the key takeaway is, in effect the next five years between the pipeline, the shadow pipeline and what's already in process, is already pretty well set for. I really also believe, as you inferred, that in spite of the challenge and competitive nature of the business that our development program and our development team is continuing to get more and more of their fair share. But, yes, if there is a compression in margins, well make up for it with some additional developments.

The only other thing I would add, Lou, would be the way we are today in terms of our business model, we aren't contributing or selling 100% of these new development assets. We're keeping more and more every year on 100%. So effectively, the pool of assets that we have is actually getting larger every year to deal with in this area.

Thank you.

Without belaboring this point, the other thing I'd add is that were now in the fortunate position of being able to be a bit picky. So if you-- our pipeline this year-- or this quarter, we actually dropped 16 projects either completely off the pipeline or lowered the probability to low probability which does not get factored into it. Probably half of those are because we just didn't think the returns measured up compared to some of the other opportunities we've got. Were taking one to the Capital Allocation Committee on Monday that's 10.25%.

Great. Thank you.

Thank you, Lou.

And well take our next question from Jeffrey [Spector] from UBS.

Good morning. I guess as a follow-up, Brian, to the comment that on the 16 projects that you've had to pull, how did that compare-- I guess year-to-date, what have you had to pull and how does that compare to prior years?

You know it's a pretty volatile-- not volatile, but the pipeline is a living, breathing thing. Every day were moving things in and we've moving things out. This quarter was, I'd say, particularly-- a lot of activity going on. We had 16 bids that we added, and we had-- did I say we took 16 off?

Yes.

I'm sorry. We added 16, and we took 14 off. So of the 16 that we added, most of those were projects that we've been working on for quite some time, and they've now progressed far enough that our confidence and our ability to deliver those has gone up.

The ones that we took off was unusually high for two reasons. One, like I said, just given where we are right now, the environment, I think we want to be a little bit more measured in terms of the risk/reward trade-off. So about half of them we dropped because of economic reasons.

The other half was probably a one-time deal where we had to reflect the fact that Target has pulled back in a lot of the smaller markets. So we just went ahead and lowered the probability on all of those.

So I think that's more than what we've seen in the past in terms of the number we've taken off, but I also think that half of those were unlikely to see again.

And then on the JV side, are you all set for now, or are you still seeing institutional demand to set up new funds?

I'd say from our capital recycling perspective, and that's how we use JVs, is that were comfortable with where we are today. Basically, as you know, all of our large format centers have been committed from an exclusive standpoint, and we've got still a good relationship with our other three partners to do some of our transactions with them, specifically Macquarie.

Just to elaborate on that, there's over $1 billion of capacity that's left in the open-end fund. So for the next three years, all of our large Community Center developments can be contributed in there. So, that's a significant amount of capacity. Macquarie country-wide has been very specific in that they want to be a net buyer of shopping centers in the U.S. Oregon and Calpers have continued to buy, and they will be especially-- even more aggressive to the extent that we see any increase in cap rates.

Thanks, guys.

Thank you, Jeffrey.

And well take our next question from Michael Mueller from J.P. Morgan.

Hi. A couple of questions. First, can you remind us how much fee income from First Washington is going to hit next year that you referred to earlier? Second question is the third-party buyer mix for your developments, is that changing at all just given what has been happening in that market?

I'll take the first one. We would expect it will be in June-- in will be in the second quarter of next year. It will be $3.9 million. That's our share. I'll let Hap handle whether the third-party buyer of our developments has changed.

It think that percentage goes between probably 10% and 30% or 40%, depending on the quarter and depending on whether the assets are core. I mean, for instance, the Alameda asset, which we originally developed as a core asset-- thought was going to be a core asset, because of issues related to our view and long-term concerns about the grocer, Nob Hill's ability to compete in that market, we decided to just sell 100% of it.

The question is, has the buyers changed?

Yeah.

Yeah, are the buyers changing?

I don't think so on the A quality properties. Again, those are in big demand by the pension funds, large institutions, and that's-- what we used to do is get a healthy mix of both. We'd get the large institutions, as well as the 1031 buyers. I think today, given the debt markets, were not seeing the individuals buyers quite as much but still strong demand by the big institutions.

A lot of the institutions are licking their chops hoping the interest rates and cap rates continue to go up because they're-- as we indicated on the Publix transaction, on an unleveraged basis, they would have been ready to go. What we ended up doing, as I said, is actually we did it in the 1031.

Thanks.

And we'll go next to [Paula Poskin] from Robert W. Baird.

Good morning.

Good morning.

Just a couple of other questions on the development schedule. A couple of the anchor completion dates have been pushed out a little bit. What's the catalyst for that? Is there a common theme there, and in particular Bear Creek moving off to future activities?

Excuse me. Paula, there's one common theme on all of those delays. Well, actually, there's two. In the center part of the country there has just been a tremendous amount of rainfall, and that has just slowed the construction schedule. Then the other reason, which is pretty common, particularly like in the California market, would just be delays in entitlements. That's generally what's causing it.

Bear Creek.

Oh, Bear Creek, too. Bear Creek, too, is a project that got caught up-- that's in Southern California in Riverside County where it has been in just a terrible entitlement battle, and it's a very small project. It's right across from the grocery concern that we developed. It just got to the point where the amount of profit we were looking to make on that was very, very meager. We had an opportunity to sell it and actually make more by selling it than we thought wed make if we continued to develop it out.

And that sale actually occurred subsequent to quarter end.

Great. Thanks. Secondly, similar to your comments regarding Target and its growth plans, are you hearing any other similar hesitation, or limiting or refocusing of growth from your other tenants, in particular your PCI tenants?

Not on the grocery-- the anchor side. Everybody still seems to be -- you know, Target still is, too. They're still doing an awful lot of stores, it's just that they've filled their pipeline now through I think 2009, and they just don't need to be adding a whole lot of stores. And I think they've seen that the returns in the smaller markets are just not as strong as the other ones. But nobody else has given us that indication.

And as far as the in-line, the PCI tenants, were still seeing very, very aggressive growth. Obviously, the video category, as I mentioned, has slowed down, which makes sense. But overall, were seeing the restaurants grow. Everybody is being very active.

The only thing I would say that changed a bit is the banks. And its not that they're not continuing to grow, but they are being a little bit more rational in their decision-making on out-parcels and ground rents that they'll pay. So were seeing a bit of that, but only on the margin.

Thank you, very much.

Thank you.

Thank you, Paula.

And well go next to Jay Habermann from Goldman Sachs.

Hi. Good morning. How are you?

Good morning.

Good morning.

Just a quick question on development. It looks like the Las Vegas project is a pretty sizeable investment. It looks like a good location though and obviously solid anchors. I'm just curious. Are you looking to sort of increase-- is this a trend to look forward to in terms of larger investments and individuals assets?

This is a pretty big one. In fact, this is the biggest one we've ever done. As a result, it got scrutinized pretty carefully. No, I don't think were -- were certainly not looking to go out and door $100 million plus size centers. This one just happened to be in just a wonderful location, great growth market with tremendous anchor demand, and we structured it such that we didn't have to close until we got everything taken care of. So, if we have something that kind of fits that bill, then we would be glad to do it. But it's not a goal into itself.

About half of our numbers-- about half of our developments are grocery anchored and continue to be grocery anchored. We're doing about the same number I think in the pipeline. Its 15 to 20 are grocery anchored, and then you've got another 15 to 20 that are larger community centers. It's just that the larger community centers, Jay, are just larger in size.

And I guess for Mary Lou, you mentioned obviously the solid leasing thus far and the positive impact potentially for '08. Can you just give us a sense for what's rolling over and obviously the outlook sort of for the leasing spreads?

Well, we haven't done that. But were saying-- as I mentioned, we changed our guidance for this year from 10% to 12%, and we've consistently performed about the 10%. So as far as-- I haven't gone into all the details. Confidence with where we'd be at, I'd still say were probably closer to the 10%. For guidance I always tend to be somewhat conservative. Some of the things for this quarter that is a very strong positive that makes it look even stronger is we had a space in Walnut Creek in a center called Ignatia where we took over the Albertson space, that we were able to take rents from $5.40 up to $26.00, which made the quarter really even stronger than normal. Also, RTIs were higher. But the return on investment is over 68% in that, so it's just a wonderful story.

So you're going to see-- I would say were just seeing strong growth. We keep expecting it to back off, but so far so good and we haven't seen it.

Okay. Thank you.

Thank you, Jay.

And well take a follow-up question from Jonathan Litt from Citi.

Hi. This is Ambika. Can you give an outlook on the tax rate that you're expecting for the remainder of the year? It has been quite low. This is on the development.

Right. I would say that we will continue on our-- what's an average for us year-in and year-out, is in the 20% to 24% range. Obviously, with our guidance we've got significant sales projected for the remainder of the year. So I think you'll see the tax rate rebound, more of what we've been incurring in the past.

Then on the other tenant income, were there any one-time items in that number? It seemed higher than normal.

It was higher. As I think I mentioned, we had other income just from normal income-- property income that came through. Termination fees this quarter were actually a bit higher, but for the year they're the same (unintelligible) the fact that year-over-year same-store growth. Then we had $600,000 that we look at, at the end of every year. June is the end of the year for that. It was Captive gains profits, and that came in. But that again isn't included on our same-store growth.

And Ill remind you-- well, I don't think I expect any of you to go back and read the third quarter 2006 Conference Call transcript, but that's something that we do. So, if you go back and look at that, you'll see that we explain that the Captive Insurance-- the income is included in the same-store numbers, but that's really flat year-over-year, knock on wood, as long as we don't incur any losses, at which time it would actually have a negative drag on our same-store NOI growth.

But the reserve reduction, which was this quarter of $600,000, that is not included in our calculations. So that $600,000 is not part of our same-store calculations.

But it is in Other Income.

It is in Other Income; correct.

But it is recorded as Other Income.

So in quarter, same-store NOI would be what percentage? I know that for the year lease terms are flat. But for the quarter, X lease terms, what would--

I can get back to you with that, Ambika. I don't think we have that calculated here in the room.

I don't have that, no.

Thank you.

Thank you, Ambika.

And we'll go next to Jim Sullivan from Green Street Advisors.

Thanks. We love the strip-center development business because it's our view that 50% profit margins provide a reward that greatly exceeds the risk that you take as a developer. Firstly, do you agree with that? Secondly, how far would that profit margin have to drop before you really started to dial back on the pace of development?

Well, let me just say, were not targeting 50% profit margins. I think the profit margins were targeting are profit margins in excess of 20%, and we've been able to achieve significantly above that. That's, once again, on a pre-tax basis. I think, Jim, it also depends on the risk/reward equation of the development opportunity. There are certain opportunities that you may-- that 35% or 40% may or may not be enough, and there are others where-- were doing a development in Corvallis, Washington -- Oregon. Were pretty much-- well, Oregon State Beaver fans would hate to hear me say that. But we're-- and the margin is going to be greater than that. But we had pretty much all the anchor tenants lined up when we came into it, and there was no entitlement risk, et cetera.

Thank you.

Thank you, Jim.

And at this time, we have no further questions in the queue.

We appreciate everybody taking the time to join us on the call, and we wish everybody enjoy the rest of the week, especially during the rest of the earnings season. Have a great day. Bye.