Regency Centers Corp (REG) 2007 Q3 法說會逐字稿

Good morning, my name is Matt Pfeffer and I will be your conference facilitator today. This conference is being recorded. At this time I'd like to welcome everyone to the Regent Center -- excuse me, Regency Center Corporation third quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Lisa Palmer, Senior Vice President, Capital Markets, please go ahead ma'am.

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

Before we start, I'd like to address forward-looking statements that may be addressed in 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, which could cause actual results to differ from those contained in the forward-looking statements.

I will now turn the call over to Bruce.

Thank you Lisa, and good morning.

I hope everyone enjoyed Halloween, one of America's favorite past times. As you will hear from me and the rest of the team, Regency continues to perform at a consistently high level. Results for the third quarter continue the momentum and have positioned us to meet our plan for the year.

FFO per share this quarter was $0.97. Year to date, it was $3.04, compared to $2.77 this period last year, an increase of nearly 10%. Major components of this year over year growth are $0.10 from the growth in same store NOI, $0.12 from NOI coming online from new developments, and $0.20 from higher development profits.

These gains were minimally offset by $0.09 from lost NOI from disposition, and $0.07 from higher G&A. With respect to G&A, we remain on target for year over year G&A growth to be less than 10%, down from the 20% to 25% levels of the prior three years.

At $49 million to $50 million, G&A as a percent of total revenues, excluding fee income from assets under management, is 5.25%. However, we have a significant development program, and if you exclude development related G&A that has expensed as well as transaction profits, Regency's G&A as a percentage of total revenues under management would be approximately 3.3%.

For the year, we tied our range of FFO per share guidance, expecting 2007 FFO to be in the range of $4.15 to $4.19, with a fourth quarter range of $1.11 to $1.15. For 2008, we expect FFO per share to be in the range of $4.52 to $4.72.

This guidance includes a potential promote from one of Regency's co-investment partnerships that may be earned at the end of the year. The promote is contingent upon returns from ventures, from the venture exceeding the NCREIF index. The amount of the promote will depend upon the valuation of the portfolio.

Next quarter one would provide more detailed guidance for 2008, or clearly will begin for the range for transaction profits and fee income, which will include the promote.

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

Thank you Bruce, and good morning everyone.

Before I review our results, let me begin by saying that thankfully, our employees in and around San Diego are safe, and that we had not any property damages from the fires. I'm pleased with the persistently strong fundamentals of Regency's quality operating portfolio.

Year to date same store net operating income growth was 2.9% and occupancy remains above 95%. We've executed nearly 1400 new and renewal lease transactions for a total of 5.3 million square feet. We continue to feel very, very, good about achieving same store growth at the 3% range.

Rent growth remained strong, and is driven largely by the coastal markets; 28% in the San Francisco Bay area, 21% in the remainder of California, there is 15% in the northeast, and 13% in the southeast. The rest of the country was high single digits.

Year to date rent growth was 13.8% and we've increased our rent guidance growth to 12% to 14%. For the most part, the environment in which we operate remains reasonably healthy. Overall, our retail sales are positive, up 4.2% over this year a year ago.

Sectors performing well this quarter are discounters at 5%, grocers, drug stores, as well as food and restaurants where all had comp store sales above 6%. Combined, these sectors represent 64% of Regency's portfolio rent. However, we do continue to see declines in categories, more directly impacted by a slowdown in consumer spending, such as furniture and home furnishing, which we're nearly down to 1%.

Fortunately, Regency does not have much exposure to these categories. In fact, if you look at the retail categories most prevalent in our portfolio, very few are at risk of declining sales, and history is a good indicator of future performance.

During the recession of the early '90s, those categories typically found in neighborhood and community centers such as grocery stores, restaurants, drug stores, and discount department stores realize continued sales growth. The categories that experience negative growth were conventional department stores, home related goods, shoes, and jewelry stores.

In Regency's portfolio, these at risk retailers represent only 10% of our annual pro rata base rent. With incomes of nearly 86,000 and densities of 81,000 people within a three miles of our centers, we are even more buffered than probably the average REIT.

During the real estate recession of 2001 and 2002, Regency's same store growth remained above 3%. Clearly though, another at-risk category is the video rental business. We've been managing this business over many years, as we've talked and have proactively decreased our exposure.

In 2005, the video category was 2.7% of our total base rent, and today, it's 2.1%. We released 13 video spaces since the first quarter of 2006, with an upside in rents of 290,000, and average downtime of only six months.

This has reinforced our often stated view that most video stores are located in some of the best locations within our shopping centers. We continue to be very proactive in this sector to take back space and to minimize our risk.

Possibly releasing space and redeveloping our existing centers is a key component of value creation, and often involves taking space back. For example, at Pima Crossing in Phoenix, Arizona, we moved out a local antique store and released to a PGA golf superstore, a national tenant with huge traffic draw, and we had a 9% increase in base rent.

At Brafferton Center in the D.C. area, we received a termination fee from the Giant grocery store, and released the space to a sports club. Giant was paying $4.86 a foot, the sports club's now paying $8 a foot. And we were able to negotiate Giant -- Giant remaining as the credit on the lease.

I mentioned Ygnacio Plaza in San Francisco last quarter. We terminated the Albertson's lease that was paying $5.40 a foot, and released the space to an upscale sports and outdoor store at $26 per foot.

Granada Village in Los Angeles was anchored by Ralphs grocery store. Ralphs opened a new store across the street. Because of the location and the quality of this center, we were able to negotiate a significant termination fee from Ralphs, and have already signed a ground lease with Coles to replace the box.

These are just a few examples of the 15 centers we're currently redeveloping, and how our team is able to remerchandise centers while increasing revenues.

I'll now turn the call over to Brian for an update on Regency's investment program. Brian.

Thank you, Mary Lou.

During the quarter, we added $22 million of new development projects. Two of the projects were former Mervyn stores that we purchased earlier in the year. These two projects, like a third one reported earlier this year, were purchased empty and are now 100% leased, with returns on capital that average 11.3%. On a risk adjusted basis, these returns are even more impressive, given that there is no construction involved, and no entitlement or site work risk.

The new projects bring our year to date starts to $246 million. We are still very confident that the total starts for 2007 will fall within the guidance we have provided, of $450 million to $550 million.

I'd like to spend a little bit of time discussing the current housing slow down and the credit crunch, and how paradoxically, they have served to improve the quality of the pipeline, and with a few exceptions, have not significantly effected the in process leasing.

There is no question that many of the anchor retailers have become more cautious over the last six to eight months. On the community center side, Target and Wal-Mart remain active, but are more deliberate about site selection. They still consider growth areas, but are more circumspect and rigorous in their housing absorption analysis. They are avoiding secondary markets in emerging communities unless the economics are exceptional, and even then, they may not proceed with the opportunities.

Having said that, all the large retailers will still react quickly, decisively, and aggressively, to projects in strong, high barrier markets that are well located and have the required population densities in place. Big bucks retailers will still pay top dollar for infill sites, in proven markets, and are very creative and flexible when it comes to store planning, for these sites.

The softness in the housing sector has had an interesting impact on our development pipeline. In terms of the numbers, our pipeline today totals approximately $1.7 billion, which is virtually identical with where it was a year ago, and a $123 million higher than it was at this time last quarter.

The returns remain very healthy, averaging in the mid 9% range before JV participation and right at 9% after the JV cost. Based on those numbers, it would appear that not much has changed with the pipeline, but the numbers don't tell the whole story.

About six months ago, we became aware of Target backing away from secondary markets and refocusing on the primary markets. As a result, several pipeline projects were turned down by Target. In many cases, Regency proactively elected to drop other predevelopment projects, either because we believe the developments were dependent upon questionable future residential growth or because the anchors, the [amount of] side shops, or the economics no longer seemed appropriate given the changing environment.

As a result of both anchors changing the criteria, as well as our own reevaluation of opportunities, 22 projects, totaling over $700 million were dropped from the pipeline over the last two quarters. During the same time, Regency added 32 projects to the pipeline totaling $650 million.

In other words, we churned the pipeline to the tune of almost $1.4 billion with a swing of 54 projects. So all the numbers indicate virtually no change to the size of the pipeline. There has been much activity which greatly affects the character of it. We believe the quality and reliability of the pipeline are actually much improved as a result.

In short, Regency's pipeline today is simply not dependent upon residential growth. The current pipeline consists of projects with in place demographics and market locations that are immediately attractive to major retailers.

For example, the average three mile population for the pipeline is 99,000 people. Perhaps a more meaningful metric, the population weighted by project cost is 68,000 people within three miles. These are very strong densities, and reflect the infill nature of the pipeline that needs no housing growth.

And while some retailers have pulled back as discussed previously, the grocers are doing extremely well. The realignment of our pipeline reflects this dynamic. Today, 27 of our 48 in process developments are grocery anchored, while 39 pipeline projects contain grocers.

With the pipeline now reflecting better anchors, better markets, and stronger demographics, I believe, the pipeline is more secure than ever. One reason for the improvement in quality is that the credit crunch and the slower response times from retailers have created unusually good opportunities.

Let me just mention two. Despite the size of our Southern California Development Program, we have never done a ground up development for Safeway. We recently were approached by a developer, wanting to joint venture with us, a project that will be anchored by bonds. The project is fully entitled, the bonds lease is signed, the construction drawings are complete, and we're guaranteed a minimum project return.

Secondly, with the retailers having pulled back from some markets, those markets that they remain committed to have taken on a greater sense of importance and urgency. In many cases, these anchors have become concerned about smaller developers, being able to finance developments the retailers need, and as a result, we've seen major retailers direct us to an unusually large number of projects on their behalf. These specific market assignments give us a much higher degree of confidence in the anchor's commitments to the projects.

As far as the housing downturns affect on the in process projects, there has been limited impact. Our stabilized NOI for the in process projects is right on plan with only three or four of the 48 projects experiencing slower leasing due to the housing slowdown.

Overall, the in process returns are in very good shape. Returns on the in process projects are 9.19% before JV participation, and 9.03% after. Compared with the numbers last quarter, this represents a deterioration of 8 basis points at the project level, and only 2 basis points after JV.

However, this comparison does not account for the movement of projects into and out of the in process category. On an apples to apples basis, whereby we take out the third quarter start and leave in the third quarter completions, returns are within 9 basis points of those reported last quarter.

Forty-five of the forty-eight projects are right on plan with the other three alone accounting for 9 basis points of variance to last quarter. Our San Marco project in Jacksonville that we are developing in partnership with St. Joe's, is a mixed use development that contemplated retail under condominiums.

With the current weakness in the condo market, we are in the process of evaluating alternative use to this and have moved this project, which totals $86 million at completion, from the in process category to land held for future development. This is exceptional property and we remain very excited about it.

In summary, while the current environment has created new challenges, the impacts on the business to date have been minor, and there may, in fact, be silver linings. The actions taken by the investment team to date, have resulted in a pipeline that is resilient to the negative housing forces, and the credit crunch has opened doors to some exciting new opportunities.

Speaking of our development teams, we currently have 220 employees devoted to our development programs, or directly support the due diligence, entitlement, anchor lease negotiations, land acquisition, construction and financial analysis of our program.

As we said on past calls, we capitalize about 80% of their direct cost, excuse me -- we're $9.7 million per quarter, which represents less than 8% of projected annual development starts of $500 million. With the certainty of the $1.7 billion pipeline and Regency's excellent relationship with leading anchors, and strong presence in key markets, we are extremely confident in our ability to average new development starts in the $400 to $600 million range for the foreseeable future.

I'd like to close with an update on the green building task force that was formed last year to study how Regency might best incorporate environmental sustainability into its business strategy and operations. Based on the extensive research and due diligence of this group, Regency has adopted lead certification goals for our new developments, as well as baseline sustainability measures and initiatives that will be implemented into our existing properties and corporate operations.

We're committed to lead certify 20% of our 2008 development starts, 40% of the 2009 development starts, and 60% of our 2010 starts. In addition, beginning next year, Regency will incorporate lead certification into the redevelopment of existing properties.

We are the only developer that was selected to form a partnership with the United States green building council to create a method that would enable lead certification for shopping center developments. The Shops at Santa Barbara, the Whole Foods anchored shopping center that Regency currently has under development in California is the pilot for this program.

Regency is once again taking the leadership position in the shopping center industry.

Hap.

Thank you Brian, thank you Mary Lou, Bruce, and Lisa. Regency's green building and sustainability initiative is another poignant example of why Regency's commitment to innovation, together with integrating quality into all aspects of our company will enable us to continue to be the premier operating and developed company in the shopping center industry.

At Regency, we really do strive to be on the leading edge. Whether it's our research based investment focus, market driven development program, premier customer initiative, co-investment partnership platform, or the latest -- or this latest initiative to incorporate practical environmentally sustainable designs to our centers.

Developing and operating in an environmentally responsible way is not only the right thing to do, but it will better position Regency with retail anchors, and getting development opportunities, immunities in obtaining entitlements, and with institutional lenders in making investments in our partnerships.

What our green task force accomplished, in addition to their normal duties, really is extraordinary. And I really do love being part of a team that is dedicated to making Regency a great company.

Let me now turn for a second to the credit markets, and their impact on pricing. With the assistance of a turmoil in the credit markets, a much anticipated increase in cap rates that we've all been talking about, has come to pass.

We believe a cap rate for A centers have moved up approximately 25 basis points; B centers, 50 basis points, and by 75 to 100 basis points for C centers. Pricing is obviously further dependent on market, growth prospects, and especially the rating and terms that can be obtained either loan assumptions or from a new mortgage lender.

Although some institutional investors are sitting on the sidelines, there is still plenty of capital targeting real estate for investment. The institutions and brokers with whom we talk, indicate a strong preference for global, then value added, and finally core properties that are A quality. Especially in infill coastal markets like California.

While the number of potential buyers for the B and C properties has been measurably reduced by the availability in terms of debt, there's still enough with access to capital to buy B properties in portfolios like the two portfolios that we mentioned last quarter if we are selling the portfolio countrywide.

Matter of fact, the southeast portfolio closed yesterday just after we released our results at a cap rate of 6.8%, it's pretty darn close to what we had planned.

Mid-Atlantic portfolio is about to go back under contract, and is slated to close next year at a cap rate slightly above 7%. As for other plan dispositions, we had one buyer back out due to the -- their inability to attain adequate financing, and we chose not to take several other properties to market this year in order to let the dust set on the credit markets.

Consequently, during the closing of the southeast portfolio, dispositions for the year will be between $83 million and $85 million. With the deferred sales, net dispositions in 2008 should be in the $200 million range.

The impact of the timing and pricing of these operating property sales on Regency's balance sheet is minimal. As you know, the primary component of Regency's capital recycling strategy is the open end fund being the guaranteed take out vehicle for our community center developments.

And the fund has well over $1 billion remaining capacity, and we've used conservative assumptions for cap rates in our projections.

The direct impact of the credit markets on the pricing and timing of sales, slowing of anchor openings and anchor decisions, and the bankruptcy of Movie Gallery are all examples of an operating environment that is becoming more challenging.

In this business environment where it feels like things have at least moved from great to good, and where one can clearly see storm clouds, one has to be cautious.

At the same time as Mary Lou, Bruce, and Brian explained, we believe that there are silver linings for Regency in those storm clouds and more than plenty of reasons for optimism. Regency's high quality portfolio should again deliver 3% same property NOI growth this year and next year, which will make nine years of average NOI growth above 3%.

To me that is reliability and that is quality. Regency's $1.7 billion pipeline and the team's market presence and excellent anchor relationships provide a great deal of assurance about delivering $400 million to $600 million of high quality new developments that will create $100 million to $200 million of value each and every year for the foreseeable future.

Regency's co-investment partnerships not only are dependable takeout vehicles for our developments, but also afford us an extremely cost effective way to expand the portfolio through high margin fee income.

If you think about it, each of these exceptional competencies that's creating a meaningful amount of value in their own right, and the combination is a pretty -- a real impressive value creating machine.

The bottom-line is that good judgment in today's environment calls for a good dose of caution. Even in these more challenging times, Regency's deep, experienced, and talented team continues to brilliantly execute our plan, and to develop and implement innovative strategic initiatives.

After just completing this year's strategic review and watching Regency's incredible team in action each and every day, I want to share with you my confidence that over the next three years, Regency will significantly grow in intrinsic value and compound FFO per share by 10%.

We appreciate your time and we'll be glad now to answer any questions that you may have.

Thank you, sir. [OPERATOR INSTRUCTIONS]. We'll first go to Christine McElroy with Banc of America Securities.

Hi, good morning.

Good Morning Christine.

Bruce, excluding the potential promote next year, would you say that your forecasted growth range would be more in line with your stated target of 8% to 10%?

We'll give you more guidance again on that. I think you'll understand that when we break out our guidance for our -- primarily in our -- fee income side, because we -- and there are -- when we give guidance next quarter.

Okay. And then Mary Lou, you talked about raising your rent growth assumptions to 12% to 14%, I think that was 8% to 10% earlier this year.

Yet your same store NOI growth forecast hasn't changed much. Is there an offset there, or is it just timing related?

Well, what's happened is as you noticed our [occupancy] went from 95.2% to 95.1%, and that's it will be around as there's some slower lease up in some of our redevelopments, although there's some great stories which I shared with you. And so some of that offsets the increase in the rent growth and that's why we ended up at that 3%.

Thank you.

We'll, go next to Paul Morgan with FBR.

Good morning. It was interesting, the data points about the churn within the development portfolio. So I just want to get a little bit of a sense of -- what was it about the -- those projects before that made you not look at them until the anchors pulled back from the Greenfield sites. Is the yield materially different or the geography is not what you are looking for, or what -- what made those pop up when you decided to pull back from something else, rather than always be there.

I think it's just that things were so good before, it almost didn't matter as long as you had your anchor tenant and the anchor tenants were interested in those markets, then everything else followed and the yields were good.

When the -- when Target in particular started to pull back on the secondary markets, in some cases, we didn't have a choice; they decided not to go forward and that caused a lot of the reduction in the pipeline.

But when they started doing that, we -- you have to assume that it's going to continue. So what we did is we took a look at the other markets that we considered to be rather secondary, and we looked at some of the projects that we had that were in okay areas, but we didn't really like the kind of anchors who were going to be our lead tenants, and we just went ahead and just dropped those instead, and recommitted and refocused on more grocery anchored centers and more -- and doing the community centers in just better demographic areas, better market areas where we know that they'll react quickly, and will take those projects.

So the geographic dispersion of the markets really didn't change?

Well, it changed in that we did get out a lot of the markets that we knew they wouldn't be interested in. Some of those are in the Midwest It's kind of all over the place. The only place we haven't seen any pullback whatsoever would be in the real high barrier coastal markets, where they continue to need sites, want sites, and are real aggressive for them.

Okay, thanks mate. My other question is about Hap's comments on cap rates. Could you make some more characterizations about -- on a geographic basis?

Is there a meaningful differential between, say the coastal markets or the Sun Belt markets or the Midwest? And then is this based on what you see in the market sense, sort of July-August or -- and that's what you're characterizing up first is, prior to the real peak or the crunch?

Now, the answer to the second question -- and the answer to your first two questions is yes, it depends on geography, obviously, coastal markets, the cap rates there. Some of those REIT properties are still sub 6, they're not as much sub 6 as they were.

And more towards the middle of the country, you get the -- you may have a 20 to 50 basis points spread in cap rates even for comparable quality assets, and I would say that that increase in cap rates would be what's occurred during the last three to six months.

Thanks.

And we'll go next to Jonathan Litt with Citi.

Hi, this is Ambika with Jon, just more on the churn of the development pipeline.

Do you think that a lot projects were taken off that might have been more difficult and you replace them with stronger projects that you -- that Regency believes, and could we expect the development pipeline to continue to grow from here?

We're going to grow not for the sake of size, but if there's really good opportunities out there above and what the -- beyond we see now, yes. What I would say is that we are seeing those kind of opportunities. I alluded to that a little bit in the comments.

But more and more, we're clearly seeing the small developers having a tough time and that's leading to two things, that's leading to those developers bring this opportunities, so they don't lose them, they can at least participate in some way.

And the retailers very much more are directing projects to us and telling us they wants to be their developer, and here's where we want you to get some sites. So I think what we're going to see is maybe not necessarily a significant increase in the amount of the pipeline, but I think we can be more selective now as we have better opportunities available to us and we'll pick and choose the ones that we like.

And then should we expect significant churn of the development pipelines going forward?

I don't think so. I think that was a two-quarter phenomenon, particularly two quarters ago when we saw the bulk of the drop, and then this last quarter, we should -- we spent more time building it up. But I think I really like where we are right now, and I would think it would not churn a lot.

And then can you give some color on how Regency was able to maintain the development yields given that you're starting a lot of new projects?

I think what's happening now is that certainty close is becoming much more important to the sellers, and whereas in the past, I think any developer -- a lot of developers would tell the seller anything they wanted to hear. Now, they're more concerned not with that, but rather with the certainty of closing, we're telling them what the real story is, and so what we're getting is -- are the returns at -- the properties at the prices we need.

And again, I think with so much of our development focused in the higher barrier markets, there's been no decrease in what the anchors will pay.

So that's probably the biggest reason why we've been able to maintain it. And there's also been an easing on the construction pricing. The costs are well in line now compared to where they were in the past.

Great, thank you.

Thank you, Ambika.

We'll go next to Michael Mueller with J.P. Morgan.

Hi. When you look out over the next year or so at the development gains, how much should that -- can you split it into two buckets, one bucket coming from sales to affiliated entities versus just the third party?

I think the key point to make, Michael, in that regard is between contributions to our partnerships between sales to third parties, and if you add kind of transaction related fees, and then promote it, we think we've got a very flexible combination of revenue sources that are going to enable us to continue to sustain our FFO per share growth for the foreseeable future at a very attractive rate.

Okay. And switching gears, going back to the churning of the pipeline again. The projects that you mentioned that were dropped, were they primarily '09 deals, beyond that or there's some '08 in there?

They would mostly be -- there were some '08, but mostly '09 deals.

Okay. Great, thank you.

And we'll go next to Matt Ostrower with Morgan Stanley.

Good morning, just to reiterate on '08 guidance and to this quarter as well. Your development gains that are going to be sort of embedded in that, I know you'll give that specifically next quarter, but are you sort of saying you'll get there with purely fund contributions as opposed to developments that are sold to third parties and could you also as part of that, just explain why gains would've gone down so much this quarter was that given a fund presence there, was that a problem with the timing, or is it something else. It was -- was that a lack of third party buyers?

Yes, Matt -- to answer your last question, it really is a time in issue for us, we expect to be right on where we expect it to be at the end of the year.

With respect to -- let's see -- your question's dealing with 2008. I'm not sure I'm going to answer but would you ask it again.

You -- just that -- so your guidance depends on gains being generated just from properties contributed to funds as opposed to properties sold to third parties.

I think that's going to be again as Hap says, we have a great amount of flexibility in what we can do there, and there could be some third party sales, there may not be, but then you'll -- you'll probably get more clarity as we go in May of (inaudible) 2008.

Okay, great thanks.

Thank you, Matt.

We'll go next to [Kevin] Avalos with Raymond James.

Okay. Thanks. Hey, Brian, I thought I heard you mention that retailers have changed their parameters for housing absorption. Could you -- I know you can't give out the specifics, but could you give us a sense on maybe the severity or the timing that -- on average, you see retailers forecasting for housing recession.

And then if so, my second question would be -- doesn't that inherently place risk on recharging that or reinvigorating that $400 million to $600 million pipeline every year?

Well, I don't think they've changed their requirements for the housing. I think what they're getting concerned about is will that housing be there. So what they're doing is -- that's part of what lead them to focus on the more mature markets, and pull out of the high -- not pull out, but do fewer opportunities in the emerging markets if you will.

So as I said, if you look at our pipeline right now in terms of the densities, we're in areas that do not require any future residential growth. I mentioned the $99,000 -- 99,000 people in three miles, it's just -- it's a very, very dense market for us to be developing in.

So I don't know exactly what their parameters are, I just know that they are not comfortable counting on it.

Fair enough. And so implicitly, if you've got fewer projects in secondary, tertiary markets, more focused on infill higher, higher quality markets.

Right.

And more developers chasing those returns down or do you feel pretty comfortable still booking 9 plus-ish type returns?

Those returns have been amazingly resilient over the last few years despite the pressure and despite -- a lot of our competitors are doing -- we've been able to maintain pretty much the same number for the last few years.

I think there's always going to be pressure on it, but I'm -- on the other hand, I think what's -- the wind's behind our back when it comes to the fact that the retailers are looking to companies like ours, the bigger companies, and that's going to lead a lot of the opportunities that were going to go to the smaller developers to come our way.

Thanks a lot.

Thanks Kev.

We'll go next to Lou Taylor with Deutsche Bank.

Hi, thanks, good morning. Bruce, can you talk a little bit about development spreads given the cap rate movements and your yield movements, what do you expect spreads to average over the next 8-12 months or so?

Well, just based upon what Hap -- the information that Hap gave you, as an example, if you just use 6-1/2 kind of as an average, and then if it was 9, as Brian indicated that would be the kind of spread level you're talking about today.

Great, thank you.

And even if that's further compressed little bit, it's still

Even going --

-- real attractive.

Great, thank you.

Thank you.

Thank you, Lou.

We'll go to Jay Habermann with Goldman Sachs.

Good morning guys, its Tom Baldwin here with Jay. Just a quick question, you mentioned that three or four of your in process developments are experiencing slow downs in leasing as a result of what's transpired in the housing market, just curious if you can comment on which markets these sites are in.

We find those specific ones -- quite -- the Midwest is really where we're seeing that. Ohio -- we also had -- let me see. Yes, mostly I'd say that in the upper Midwest is where we had some of the troubles with that.

California, we've not experienced it, the Mid-Atlantic we've not experienced it. That's pretty much where they're coming from.

And so is it safe to say that in terms of the churn in your pipeline, you guys have kind of positioned yourself away from those markets?

Yes, I'd say, if you look at the bulk of where our development activity and our pipeline activity is, it's -- almost half of it is in the pacific region, which means mostly California, excuse me, and also Las Vegas and everything, and then the other regions are spreading the remaining 50%.

Okay, and then in terms of the logistics of the churn, you dropped what sounds like an awful lot of pre-development sites; were those sites that you controlled?

And when you -- when that churn takes place, how do you gain control of the new site. I just can't understand how exactly that works.

Well, we did have control over the ones that we dropped, and with that, we had the -- we did have the cost that we had to walk away from, which were not that significant, but -- and then in terms of getting the new ones under control, it's just what we always do.

We were assisted by the fact, as I mentioned that the retailers just said, "Look, here's where we need to be, we need to go get this site for us." And we're also assisted by the fact that the -- this -- the local developers needed a joint venture partner and came to us.

But there's also plenty of those that we go out, and we have a big team, as I mentioned, that sits out there all the time looking for the best opportunities, and then it comes down to a land seller deciding who do they want to allow to put this property under contract, and when they -- when that land seller looks at our size, looks at our credibility, looks at our history, performance, we often get the jump ball.

And just one final question on that. If you ever estimate a cost associated with the repositioning of your development pipeline, could you ballpark that or is it really tough to say?

You -- are you asking me in terms of what we had to write off?

Yes.

A write-off, I believe, this quarter were about -- a little over $1 million.

Okay, great, thanks a lot guys.

Thanks Tom.

We're going next to Nathan Isbee with Stifel Nicolaus.

Hi, good morning. Give me your comments about the coastal markets versus the Midwest. Can you just talk a little bit about the St. Louis acquisition, what type of demographics you have there versus the rest of your portfolio, and why you found it fit to make a significant investment in the Midwest?

Brian, I can take that.

Overall, the demographics are pretty strong, just slightly lower than overall for Regency. What we liked about that, several things. One is that Schnucks is the dominant grocer, and that as you know they are partners with us on this deal.

Great.

So they are committed to make it work both from a retailer point of view as well as from a real estate point of view. But we just -- it's a good solid, solid portfolio if you get a chance to see it.

And I was recently there.

Okay, well, I'd be interested to hear (inaudible) but the demos are very consistent with what we have across the portfolio.

Okay, thanks.

The Regency's return on invested capital given our ownership position is very attractive.

We'll go back to Paul Morgan with FBR.

Hi, Mary Lou, I just thought that maybe we could get your comment given that Tesco is opening a lot of stores coming down the end of the year and up their markets.

What do you think the impact will be? What do you see as the risk, Fresh & Easy is to the traditional grocers?

Yes, to be honest, just kind of wait and see. I'm not sure I can give you a lot of insight on this. I'm anxious, it's November 8th, that's when they open their first food stores, and we'll be able to go in there and understand, and look at the merchandise and understand where they're going to steal the business from.

Obviously, it's going to take some from traditional grocers. I think it'll take some from the high-end grocers. I doubt it'll take as much from the moderate priced -- the low-end grocers.

But I honestly am anxious to go see it. We're going to go out there in November. I want to go see it, and then we'll obviously report on it next quarter and give you at least my point of view.

They've done a ton of research in really understanding their consumers. What the consumer eats, how they live, and I think that's what's going to be the most interesting, is going to the different stores and see how it fits into that consumer, and what impact it has.

So give me a little more time. In another month I'll know.

Okay.

I was with Jim Ukrops yesterday. He -- Ukrop's Chain in Richmond is an exceptional chain. His kind of take on it was that Tesco has done so well because of their urban locations, and if then -- that the U.S. for the most part, even if more urban areas is a little bit more suburban.

And it will be interesting to see how they're able to compete, but I think they are terrific operators though.

I think they're good. I think they'll figure it out.

And then, sorry if I missed this. But did you talk about your exposure to the Movie Gallery closings?

Well, we did a little bit. What has happened is we have six centers -- we've 33 Movie Gallery centers, we have six of them that was slated to close. The net effect to us would be almost 400,000.

However, we worked with our team and looked at every one of those locations and based on our ability to be able to get some of those back and release them we feel that it's truly a minimal effect.

It was much better quite honestly than I anticipated. And I'm really proud of our team and what they've done. So, not fun to go through this with the video categories but still I -- it's very good and very proactive of trying to get space back, reduce space, and minimize our risk. So they're small for us.

Thanks.

Welcome.

I'll go back to Jonathan Litt with Citi.

Hi, this is Ambika. Just going back to guidance, I know that you can't give us the specific drivers, but if we can get out the low-end to the high-end, should we think about the low-end assumes no promote versus the high-end assumes that you received the promote?

I think that's probably -- we're number one, more to come, but that's probably a pretty safe assumption, is that the low-end would assume that there wouldn't be a promote there and we would still expect it to be 8% FFO growth and --

On the low end.

On the low end.

8% on the low end.

On the low end.

Right.

Potentially higher, and then the number that we're expecting that would assume the promote is involved would be 12.5%.

Okay, and then could you refresh me on this piece from First Washington? At this point are you managing the part of the portfolio that you were going to -- I think it was the Mid-Atlantic region, and then in addition, is the one time deferred acquisition fee still expected in June of '08?

Yes, the acquisition fee is still expected in June of '08, and we are managing and running the whole portfolio, and have been this year.

Okay, great, thanks.

You're welcome, Ambika.

Thank you, Ambika.

And we'll go back to Matt Ostrower with Morgan Stanley.

Yes just two questions. One the transaction fee that you booked this quarter, is that from First Washington?

No Matt, that was the acquisition fee on the Desco portfolio --

Oh.

And if you looked at our acquisitions for the year, we came in just -- the plan that we gave in the beginning, we came in slightly above it. It just happened that -- most of that happened in one quarter.

Okay, and so you're still expecting another First Washington fee next year?

Correct.

Correct.

Okay, great, and then the second question on the balance sheet. It looks like leverage has sort of picked up a little bit as the year has gone by. I assume part of that's because you sold a little bit less than you planned to.

Can you just talk about your funding strategy in a period where you sort of feel like this is not a very receptive market to selling the assets that you like to sell?

Yes, Matt, this is Bruce. I think that's a good question, because I think that it's something that obviously we focus on. As things change, we want to make sure, we have the flexibility in the balance sheet, and that's why we've taken a conservative view on how we structure our balance sheet from day one.

We have a pretty reliable take up from the standpoint of the open end fund, which we believe can very sufficiently handle our cash needs for our future development going forward.

Okay, so the fund by itself is enough. You don't need to delever with the other dispositions.

Well, obviously as we indicated we're planning on $200 million approximately next year. That obviously will help some. But a lot of -- a good, significant portion of it is our development sales.

Thanks.

(OPERATOR INSTRUCTIONS), we're going next to Craig Schmidt with Merrill Lynch.

Good morning. I appreciated Brian's comments about the coming back to the secondary market. What I'm wondering is, more recently, Target has trimmed their sales forecast two months in a row and they've also pulled down their earnings guidance.

What would it take for them to escalate the trimming back process, meaning they are not pulling back on the secondary markets but set to pull back on more major markets, if their business got a little weaker?

Mary Lou, I don't know if you -- you can comment on that. I don't know exactly what caused them to pull back even further.

I think they've done a pretty good job of recognizing where they've been weak, and they are having some slowdowns in scaling back, but I think they feel that they've addressed it now by saying we're only going to go to those markets where we know we have proven stores, where our stores do real well, and I don't know, Mary Lou, if you have anything to add on that.

Well, the only thing I have to say Craig, and I think this is the one thing that I don't really have a point of view in terms of when do they actually stop pulling back on stores. But they are going to continue to grow because it's a very profitable retailer, unless it's markets that cannibalize existing stores and gross profits and that's where you are going to have to see that.

I would be surprised besides some of these tertiary markets that the economy is pretty tough, that they do it. I think with retail sales, I do have a comment. And I think you just need to think about it this way. And what's the real problem and what's the temporary problem.

But it's just one person's opinion, so you can take it or leave it. I think the real problems with the department stores, as well as the discount stores is obviously the home business.

And that's going to continue to be tough until this housing market stabilizes and sinks off, and I think that's more long term. It obviously decreases some traffic in the store and it's going to minimize comps.

Secondly, I think when you have -- you all know that the last couple of months have been unseasonably warm, and so you've got warm weather goods, and then people just didn't go in to buy them, which has affected the whole ready-to-wear category. And therefore, you've really lost traffic.

Tonight you've got ready-to-wear as home. I think that ready-to-wear component, as it gets cold in holiday season, you'll see that pick back up.

Prices will be better, they're going to have a lot of stock, they're going to take -- it might affect their margins, but it's not going to affect their sales. And sales are moderate, but not nearly the level that they have been.

And then the last component, especially for the discount stores, has been a toy scare with all the lead and other toys recalled. And I think a lot of consumers are going to make decisions this holiday season, not to go buy toys.

So, and again I think that that's going to affect holiday sales, but isn't a long terms issue. So I don't think it's as much. But there's a huge economic issue in what's -- the sky falling and what's happening.

When you break it in, one component is economic, the other two are weather or kind of issue related, and those will be turned around.

And Craig I'll add -- this is an interesting item that I heard from one of our investors actually, who went to a presentation from Target CFO. If they react specifically on consumer spending, it's a cycle, but if they react today, then three -- it's the new -- the stores they're talking about doing now, aren't going to open for another two years at the earliest, and by then sales will have recovered.

So consumer slows -- the spending slow down doesn't impact their new stores as much as Mary Lou said the housing slowdown would. And that's why it's -- tertiary markets, where they're being much more cautious.

It makes (inaudible).

Yes, I hear you. I guess my concern is -- especially seeing the consumer confidence at this low, that it will -- starting to look like it could be a housing recession, leading into something larger, and given that the company makes 80% of its profits from softline, I'm just not sure that you don't need to get more conservative on all fronts, not just the secondary markets.

But I appreciate the input in how you react so far to their trade change and store strategy.

Thanks, Craig.

Thanks Craig, good question.

(OPERATOR INSTRUCTIONS) With no other questions, I would like to turn the call back to Mr. Stein for any additional or closing comments.

Once again we appreciate the time that you've taken, we appreciate your questions, and we appreciate your interest in Regency and we wish you all have a great November.

That does conclude today's call. Again, thank you for your participation. Have a good day.