Regency Centers Corp (REG) 2008 Q1 法說會逐字稿

Good morning. My name is Cynthia, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regency Centers Corporation first quarter 2008 earnings conference all. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (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, Cynthia. Good morning, everyone. On the call this morning are Hap Stein, Chairman and CEO; Mary Lou Fiala, President and COO; Bruce Johnson, Chief Financial Officer; Brian Smith, Chief Investment Officer, Chris Leavitt, Senior Vice President and Treasurer; and [Jamie Shelton], Vice President of Real Estate Accounting.

Before we start, I'd like to address forward-looking statements that may be addressed on this 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 report on form 10K -- on our forms 10K and our 10Q, 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 to you all. Regency posted strong results in the first quarter which will provide positive momentum in the increasingly more challenging environment. As you'll hear from the rest of the team, Regency is proactively taking measures across all areas of our business to address these challenges. Our top three priorities remain maintain 95% occupancy in the operating portfolio, achieving 95% occupancy in the in-process developments, and preserving a strong balance sheet with ample funding capacity.

We carefully track funding sources in relation to funding requirements. Significant progress has been made ensuring that Regency has substantial allotted capital to fund the development program and other compelling opportunities which may arise. In March, we closed an additional three-year bank facility in the amount of $341.5 million. With this the company now has credit facilities that total over $941 million. Loan maturities through the end of the 2009 that are directly on Regency's balance sheet total only $78 million. Regency's commitment to a strong balance sheet and more than sufficient funding capacity allows us to continue to capitalize on attractive investment opportunities.

It is important to remember that our co-investment partnerships have relatively low leverage. In fact, debt-to-current estimated values is only 52%. Even if cap rates were to rise to 7.5%, loan-to-value ratio would only be 57%. Although the CMBS market is not a viable option today, insurance companies are still making loans on quality projects with relatively low loan-to-value ratios. We have turned to the insurance companies to place $286 million of mortgages during the first -- during the last 12 months. More recently, in April, we locked a $62.5 million, 9-year, interest-only mortgage with a coupon of 6%.

Contributions to partnerships and sales of developments and operating property dispositions remain critical elements of Regency's capital recycling. I am comforted that all but two developments represent less than $20 million in proceeds, which are slated for sale this year, are over 95% leased. It is also important to remember that most of the development sales planned for the year are contributions to our open-end fund, thus minimizing transaction risk. We do expect to close the Mid-Atlantic portfolio this quarter. As a result of numerous reverse inquiries, are cautiously optimistic that we will be successful in achieving our objective for operating property dispositions.

FFO per share in the first quarter was $0.87 compared to $1.13 for this period last year. The FFO in -- the change in FFO per share is primarily related to transaction profits of $2.5 million in the first quarter of 2008, compared with profits of $24.1 million in the first quarter of 2007. We expect FFO per share in the second quarter to be in the range of $0.88 to $0.92, and feel all the elements are in place to meet full-year guidance of $4.54 to $4.66 per share.

As a reminder, this guidance includes promote income of $21 -- $21 to $23 million from one of Regency's co-investment partnerships that is expected to be earned at the end of the year.

Before I turn the call over the Mary Lou to discuss the operating portfolio results, I'd like to point out a few additions we've made to the supplemental. We've expanded the summary of unconsolidated debt page to include scheduled maturities by year. We have also added additional disclosure on termination fee, capitalized direct development compensation costs, and a footnote has been added in the in-process development page, providing additional information regarding phasing of developments.

As Brian will discuss, in an effort to minimize our leasing risk in new developments, we phase construction until leasing has concurred -- occurred. This has always been an integral part of our development strategy, nothing new in how we operate, just improved disclosure. We hope that you find this enhanced transparency helpful.

Thank you, and Mary Lou.

Thank you, Bruce. Good morning. Regency's operating portfolio results were strong in the first quarter with same-store growth of 3.1% and rent growth of 12.6%. Occupancy remains solid at 94.9%, as 1.7 million square feet of space was leased or renewed in our operating and development portfolio.

As I said on the last call, our top priority is to maintain occupancy at 95%, as evidenced by an 88% renewal rate for the quarter. We are proactively working with our retailers on renewals to help achieve this goal. Impressively, rental rate growth in these renewals was 10% and inline with the previous three quarters. Although we clearly are pleased with this quarter's results, the economy has softened and we are seeing modest stress in our portfolio.

Consumer confidence continues to deteriorate. The majority of consumers believe that their wealth is less than it was even a year ago, their home values have dropped, and the value of their 401k or stock portfolio are diminished. Negative economic outlooks and political uncertainty dominate the evening news and create fear. These economic lows are made all too real each week as consumers fill their gas tank or grocery shop where the price of grains, egg, and poultry are up over 20%. The result is a jittery consumer that is waiting on the sideline to spend their money.

This decreased demand is impacting some of our retailers. And as a result, we expect small-shop attrition will impact occupancy in same-store growth. Additionally, down time in the portfolio has increased to 8.2 months, and we expect termination fees to be half of what they were last year. It's the combination of these factors that will cause same-store growth to moderate with full-year expected growth of 2.4 to 2.8%.

Although retail sales were up over 1.5% in the first quarter, consumers are becoming more price-sensitive. As a result, sales and margins will suffer, leading to an increase in a number of consolidations, bankruptcy, and store closings. As I've said in the past, this trend impacts certain categories more than others as consumers tighten their discretionary spending. They're eating at home more frequently and when they do dine out, they're choosing fast-casual and value-oriented dining. They're shopping discounters rather than department stores. As a result, grocers continue to see solid comp store sales increases 5% in the most recent quarter, while department store comps were down over 4%.

Remember, in the Regency portfolio, 90% of our GLA is leased to tenants in retail categories that have seen flat to positive sales in past recessions. We're operating in an environment that market forces will have a moderate impact on our business. Regency's predominantly grocery anchors and necessity-driven portfolio is built to withstand these economic pressures.

We have proactively called the bottom of our portfolio over the past decade coupled with the development program that continuously adds new state-of-the-art centers, creating a quality portfolio with dominant anchors in strong markets. The majority of our grocers have reported their 2007 sales, which, on average, are up over 3% over 2006, to an average of $24.7 million or $476 per square foot. In addition, the average age of our portfolio is 12 years versus 14 years just two years ago.

Real estate, as you all know, is a [corner] business. The best property in the best location is the key to success. Analyzing our operating portfolio on a regional basis, our top-performing markets are, as expected, the northeast, northern California, the Pacific Northwest, and Texas. And while the Florida and southern California economies have softened, the quality of our properties in these markets should help to stay in performance, as evidenced by our 96% occupancy and first quarter rent growth near or above double digits in both of these markets.

This week we'll be hosting our annual customer appreciation event with over 100 attendees. Retailers as well as brokerage and development companies will be attending. Our long-lasting established relationships are key to sustaining our operating performance goals.

We've already booked over 300 meetings for ICSC in Las Vegas and expect this year's meetings to be pretty similar to last years, a tribute to the expertise of our team and the quality of our portfolio both in operations and in development. The work that Regency has done in the past through highly disciplined investments and proactive calling of our portfolio to ensure that our centers are in good areas. The strong demographics and top-tier anchors is paying off. The solid results of the first quarter had built momentum that should carry us through the year. We are positioned to continue to perform in our operating property to maintain occupancy at 95% and to maximize opportunities and development.

Brian will now review our development results and future prospects.

Thanks, Mary Lou. This was a good quarter for the development teams on all fronts, pipeline activity, new starts, leasing, construction costs, and in-process returns.

As for starts, we added two new developments totally $29 million with expected returns in excess of 9%. One of these starts is the second phase of Sun Coast Crossing. This project's a good example of strong projects beating soft markets, in this case, Florida. The combined center is now extremely well anchored by two of the best retailers in the country in Target and Kohl's.

The $1.1 billion in-process portfolio also performed well as a whole. 48 projects are in development with same-store construction costs down $3 million on a quarter-to-quarter basis. The Pacific region projects, in particular, are enjoying very pleasant surprises when it comes to construction costs. Four projects were stabilized during the quarter and moved off our in-process list. These four completions had an average return on cost of 11.3%. Returns on the in-process projects are 8 basis points lower than last quarter on an after-JV basis. However, on an apples-to-apples basis where we add back the completed projects and remove new starts, returns are actually 2 basis points better than last quarter.

In the first quarter, we leased 232,000 square feet in our developments. This is 30% more space than we leased in the first quarter of 2007, for the same size portfolio. And in doing so, we also beat our own leasing plan by about 10%. By all accounts, this is a solid showing in any kind of market. We expect these projects to continue to perform and believe we can end the year with them 85% leased.

As Mary Lou pointed out, these gains were accomplished under circumstances that have certainly become more challenging. With the exception of the grocers, many retailers are slowing new-store growth and some are trying to push store openings into 2009. Decisions are taking longer and sometimes are unpredictable. The retailers are cautious and require more research before approving projects. Though, we are very pleased with the results and confident of the long-term performance, but recognize that some of the developments may take longer to achieve 95% stabilization in this environment than we had hoped for.

Looking ahead, these market conditions play well to our strengths. We are seeing an increasing number of attractive opportunities in this environment and are well positioned to capitalize on them. Retailers aren't closing up shop. While more cautious and deliberate, the top retailers need stores. When they approve new locations, they count on them to be built. In this environment, these retailers are worried about the ability of developers to finance and deliver their stores. Some retailers are going so far as to interview their developers to make sure they can perform. The fact is, many private developers are having a difficult time financing big projects, and as they run out of options, they increasingly turn to Regency as a potential development partners. This is creating excellent new opportunities for Regency, allowing us to pick and choose projects we want to pursue.

Construction costs are benign at worst and significantly under budget in many markets. Entitlement difficulties are easing, as many cities begin to welcome retail developers and the tax revenue their projects generate. And finally, sanity again prevails in purchasing land. Terms have improved dramatically and land prices are beginning to soften.

Simply put, at the inflection points of any cycle, there are also greater opportunities, but the environment is different and there are greater risks to accompany the increased opportunities. Our go-forward strategy then must stress both. We must reduce risks we face while taking advantage of the opportunities. Ways we will do this include, first, we'll continue to phase some projects as appropriate. As Bruce said, phasing a development has always been an integral part of our development strategy.

In today's market there is certainly heightened sensitivity. Nine of the 48 in-process projects have experienced weaker demand with the downturn in housing. We decided to delay the construction of 556,000 square feet of space associated with these projects, until additional leasing has occurred. Those 556,000 square feet represents only 7% of the building area for the in-process portfolio. About 60% of this space is anchors, anchor space, the rest being shops. Without question or exception, these projects enjoy the dominant locations in their respective markets and for that reason will prosper long term. When demand increases, we're -- and we're able to lease additional space, we'll complete the construction.

Second, there will be even more focus on stronger demographics. The projects we will build are those with proven strong tenant demand with an emphasis on in-fill markets with consumer purchasing power that is based on population densities and income, not home equity. This means concentrating on new projects with even denser populations and higher incomes. This focus is working with results that are already evident. Overall, our three-mile population for the entire pipeline is almost 62,000 people compared to about 49,000 people a year ago, or a 27% increase in density.

On projects in initial due diligence that have not yet hit the pipeline, the average three-mile population is almost 142,000 people, with an average household income of $82,000. We will also reduce risk by further eliminating the amount of shop space we will build. Again, the changes are already visible. 18 months ago, our ratio of shop space to total building area was 28 to 30%. Today, our in-process project shop space represents 23% of total area, while in the pipeline the number's only 20%. And for the projects in initial due diligence, the ratio is down to 14%.

Finally, through the relationships that come with development teams in our local offices, we will take advantage of opportunities presented by other developers' financial limitations. The inability of our competitors to get their projects off the ground is creating more JV possibilities which increases our ability to be selective as to which ones we choose. Specifically 21 such opportunities have come our way. Not only will these provide -- I'm sorry. Not all of these will prove worthy of our investment, but several will. So far we have passed on three, but four have moved into the active pipeline and the other 14 are currently going through pre-development evaluation. Several look very promising. This improved selectivity also allows us to accommodate those anchors who want to open in later years, while still moving forward on well-conceived developments with strong anchor demand.

In short, we will continue to take advantage of opportunities in these turbulent times, available only to those with the expertise and financial strength to capitalize on them. We will continue to maintain a pipeline of quality projects that the leading retailers still clamor for, and we will do so in a manner that addresses the risks inherent in the market.

In closing, I am pleased with our most recent results and excited about the kinds of opportunities we are seeing, which we will exploit. Despite the increased uncertainty, the in-process projects performed well in the first quarter and there's strong demand for projects in our pipeline. This doesn't just happen. In any market, weak or strong, great real estate sponsored by formidable companies with highly experienced talent is still a winning formula. In fact, components of this formula are more important than ever. While the macro-picture is certainly important, the fundamentals supporting each individual project are even more germane. Well anchored developments in the right locations do thrive even in downturns. It's all about purchasing power based on densities and incomes, dominantly located projects in high-barrier markets with in-fill demographics and favorable supply-demand forces, continue to attract the very best anchors. There is no question, the demand for projects with such characteristics remain strong even today.

Today's environment is not a surprise. We saw warning signs a few quarters ago and began taking the steps necessary to prepare for this downturn. That process continues, and I believe we are better positioned now than in any time in the past. We're building less shop space, the demographics of the pipeline are greatly improved, the weaker retailers have dropped out, the opportunities we are seeing are rich, competition is faltering, land and construction costs are moving in the right direction, and returns on new opportunities are improving. Markets like this benefit the strong and the experienced, and it's for all these reasons that I am more excited than ever about the future. We'll take advantage of the slowdown to position ourselves for the inevitable rebound while taking care of what we've already started. Hap.

Thank you, Brian. Thank you, Mary Lou. Thank you, Bruce. Thank you, Lisa. As you heard from the team, Regency made significant progress in the first quarter. Notable accomplishments include bolstering an already strong balance sheet and reliable access to capital due to closing of a term loan and an additional line of credit that brings the company's total bank facilities to over $940 million. Regency now has access to over $2.2 billion dollars of committed capacity from our banks, our balance sheet, from our co-investment partnerships.

High-quality portfolio -- operating portfolio produced consistent growth in net operating income, yet again of over 3% and over -- and double digit rent growth, generating momentum that will sustain result in a more challenging environment ahead.

The development program continues to build financial value. Progress was made on the $1.1 billion dollars of in-process developments which are expected to generate close to a 9% development return and almost $300 million of future value, assuming a 6.6% cap rate. We appear to be well positioned to start $4 to $500 million of well-conceived new developments with proven tenant demand.

At the same time, as good as recent results look in the rearview mirror, the road ahead promises to include pretty nasty bumps from both the economy and capital markets. In the more discretionary retail categories, tenant demand for space continues to temper. In my view, it very well could be at least two years before retail sales recover to a level that would translate into a return to robust demand for new store locations.

There have been some improvements in the capital markets, like the tightening of spreads on corporate debentures. And while the worst of the financial crisis is probably behind us, the capital markets are not totally out of the woods and are still a long way from a sense of normalcy. We are fully cognizant of how these factors might adversely impact the fundamentals of the operating portfolio, the development program and the balance sheet. Regency will certainly not be immune to softer tenant demand and higher cost of capital, higher cap rates. While our hindsight and prognostication skills are far from perfect, we do try to incorporate these sobering conditions into our projections which we share with you through guidance and the color that we're giving to you on the call.

You should know that even as I assess the upcoming rigorous test, I continue to be energized and excited by Regency's distinctive assets and a talented and experienced team that's taking proactive measures. These assets and measures that will not only enable us to weather the storm but will also position Regency to grow per-share funds from operations and intrinsic value.

As Mary Lou explained, Regency's high-quality portfolio should continue to deliver growth and net operating income. Regency's shopping centers are primarily anchored by best-in-class operators who again appear to be generating strong sales in another downturn. The vast majority of the portfolio is located in relative dense areas with above-average household income and a few centers in green areas. There are $520 million of developments. There were $150 million of embedded gains which have already stabilized and are available for sale or contribution to our partnerships.

In spite of taking longer to lease and less generous margins, the $1 billion dollars of in-process developments will still create hundreds of millions of dollars of value. Included are $200 million of developments, which are expected to be completed by the end of 2008, and over $500 million in projects which are expected to stabilize by 2010, $120 million of which is already over 85% leased.

As Brian articulated, the quality of the $1.5 billion pipeline has been enhanced by an even higher level of scrutiny from both Regency and from our anchor tenants and will be delivering significant value well into the future. The pool of opportunities to select from has grown from local developers who are capital-challenged and from retailers who are looking to developers who can execute.

As Bruce described, the balance sheet is in great shape and we are carefully making sure that we have capital sources to fund compelling developments and other [stellar] opportunities which may arise.

We now welcome your questions.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Due to time limitations, we ask that you limit yourself to one question and one follow-up question. If you have additional questions, you may press star one to place yourself back in the question queue.

We will take our first question from Christy McElroy from Banc of America. Please go ahead.

Hey. Good morning. Mary Lou, you talked about small chop -- small-shop attrition a little bit. Can you provide some more color on what tenants you're worried about? And have you seen incrementally more distress among some of the local and regional tenants?

Yes. What -- we're seeing about the same kind of move outs that we historically have in terms of square footage. But what we are seeing is a lot of them are coming more from the mom-and-pops under -- under-capitalized retailers. We've looked at it by market. We've looked at it by sector, and it really is there's no trend that I can sit here and say it's this category versus another category. But that's really -- it's the mom-and-pop or the franchisee that's in a business that just can't afford to make it, that they may have been decent operators in very strong economic times, but just can't sustain it or just give up.

And the reason why we're tempering our growth is because of the fact that even though we don't have greater move outs, it's taking us longer to find retailers to fill that space. So it's the -- it's the mom-and-pops, it's across the board, and it's the small franchisee who just doesn't have the capital to stay in business or it's too much work and they're giving up.

And then with the grocery stores having held up fairly well in this environment, is there a distinction that you're seeing in the performance of some of the higher-end, higher-priced grocers, like whole foods? Are they seeing an impact on sales growth from consumers trying to stretch their dollars further?

Not yet. I mean, we've -- we see the high-end grocers continuing to perform at high single digits and then the traditional grocers performing more in the mid-single digits. So it's a strong category. I think it's a combination of the prices going up in food inflation, as well as the fact that people staying home and not going out to eat and entertaining as much. So it's really been the nesting that happens during a recession, as well as the cost of goods.

Thank you.

You're welcome.

Thank you, Christy.

We'll take our next question from Christeen Kim with Deutsche Bank. Please go ahead.

Thanks. Mary Lou, just a follow-up on the longer downtime. You mentioned 8.2 months. What is that up from?

It's only up from 8 months last year. But 12 to 18 months ago, we had that thing down to about 7 months. So over the past year and a half, it's significantly gone up. So we're seeing it trend up a little bit every quarter. But it's definitely gone up. It's just taking longer to replace those tenants.

Great. And, Brian, you also mentioned that you guys did about 30% more development leasing than Q1 '07, despite a more difficult operating environment. Could you provide a little bit more color? Is it just the nature of the projects in the pipeline right now?

I think it is. I think we're probably working twice as hard to get the same amount done. But the projects are strong and in almost every situation we do have dominant locations. And I mean, for example, Deer Springs in Las Vegas. Las Vegas is a market where residential growth has slowed. But we're in north Las Vegas right on the beltway, the major expressway that leads to downtown, with the best anchors. And so that's -- when people make decisions to go somewhere, they're going to -- they're going to be selective and we just are fortunate some of these projects are the ones that went out in that kind of competition.

Great. Thanks, guys.

Thanks, Christine.

Thank you.

We will take our next question from Jay Habermann with Goldman Sachs. Please go ahead.

Hey. Good morning. Here with Tom as well. Hap, you mentioned the $500-plus million or so of assets that are stabilized but not yet sold or contributed. And I'm just wondering, I mean, given the sort of cautious views on the capital markets, et cetera, are you going to consider re-sizing the absolute size of the development portfolio over the next couple of years, I mean, given your sort of cautious views over that time frame? And also, what sort of gives you confidence about those margins and I guess the $150 million of gains, again, given sort of the wide bid-ask spread between buyers and sellers?

Well, in regard to the margins, I -- as we've indicated in the past, we're using relatively conservative cap rate assumptions in the mid- to upper 6s. We know what the returns are and we're using cap rates in the 6.5 to 6.7% range as far as the margins that we're estimating there.

We obviously, as Bruce indicated, are very carefully making sure that we have capital sources out into the future for new developments and any other investment opportunities that are there. So capital is extremely precious today and we want to make sure that the capital is available to fund our growth.

And as far as right-sizing the development pipeline, I think you mentioned, related to capital is one reason to do it, and another reason to do it may be related to risk. And I think as Brian has indicated, the quality of the pipeline has never been better and it -- and the underwriting has really never been more conservative. I think he indicated that we have taken our side-shop space percentage down from 30 to 14%. We're dealing with best-in-class operators. And I think as he said and I said, not only are we being more conservative, but our anchor tenants are being more conservative so you have kind of a double self-selection process.

So I still think -- let me say this. I think that the pipeline is even more -- as attractive as the in-process developments are, the pipeline is even more compelling. And returns are, seem to be, on the face of it, going up a little bit. We'll see on that.

Hey, guys. It's Tom here with Jay. I was hoping you could elaborate a little bit on the $21 to $23 million promote you expect to book at the end of the year. If you could just go over the logistics of how exactly that promote will be recognized, whether that's going to be from the sale of some assets currently in your co-investment partnerships. And also what the potential for slippage on that promote is into 1Q '09, if market conditions don't materially improve over the back half of the year.

It's -- this is Lisa. No properties need to be sold for us to recognize that promote. We simply will have to value each property individually. And then as long as the returns are over [IR] threshold, we receive the promote. So there's -- there will be no slippage either into the first quarter of '09.

And I think as Lisa indicated, we've used reasonably conservative, in our view, conservative cap rate assumptions. And another important thing that she mentioned was the fact that the properties will be individually valued. And in this market, we're still seeing individual properties -- cap rates on individual properties being a lot stickier as far as going up, than cap rates on larger transactions which are where you have a lot of investors for investments in size staying on the sideline.

And with our co-investment partnerships, really in three of the four major ones, we basically just have a cycle of when the promote is recognized. And in this one, this happens to be the 7-year time frame of when it's going to be valued and a promote recognized.

Okay. Thank you.

Thanks, Jay. Thanks, Tom.

We will take our next question from Paul Morgan with FBR. Please go ahead.

Good morning. On the comments about cutting the shop space percentage from 28 to 30% to 14% for the shadow pipeline, how -- what kind of impact does that have on your yields?

Well, it's going to have some -- there's going to be some tradeoff. I think you're going to give up a little bit of return for less risk. Right now we're expecting in 2008, that our pipeline returns will be just a shade under 9%. Although, I did not mention that all the increased opportunities we're seeing is allowing us to be more selective and enhance our returns. In 2009, we're looking for that return to go up to about 9.35, and 2010 about 9.9. That's before partner participation. But after partici -- partner participation is still 9.6 in 2010.

As Hap indicated, it remains to be seen if all that materializes. They'll always be cost pressures and things that could bring down the return, but the trend is really favorable.

So it's going up despite the fact that there's going to be some offsetting drag from the lower shop-space allocation?

Right. We've got cost working in our favor and a lot of those is helping some.

Okay. My other question is on -- Hap, you've provided some color in recent quarters on cap rates. And I just wanted to get a sense for me what you've seen kind of so far this year in terms of cap rates and maybe, obviously, with not a lot of transaction activity, maybe how far apart you think the -- how wide the bid-ask spread is at this point and what might happen and how far cap rates need to move to kind of clear the market at this -- right now?

Well, there's not a lot of transactions that are happening out there, number one. Number two, there still appears to be, especially for A properties and better markets, enough demand on an individual property basis, as I said -- and I think those cap rates, Brian, I think 6 to 6.5%, 6 to 6.75, depending on the market, for A properties, 6 to 6.75% today. So there's been individual cap rates have been pretty sticky.

I think where you're seeing -- where investors truly are staying on the sideline is on larger transactions. And for core properties, large transactions, there just doesn't seem to be very much capital in the -- capital at all out there. But as far as individual property transaction cap rates have been for A properties pretty sticky, I'd say B properties, depending on the market, et cetera, 7.25 to 7.75%. And your guess is as good as mine as far as C properties.

Are sellers just kind of taking their -- taking off the market properties that aren't getting the bids or is it just they're not even -- it's not really much even going on in the market at all?

I think there's -- just to finalize that thought on the question is, is transactions for better properties, A-quality properties are happening on an individual one-off basis typically. You're seeing some of that occur for B properties. As Bruce said, we expect to close, and more to come on our next call on this Mid-Atlantic portfolio that we've had on the market, and it really does appear like that portfolio is going to clear in the second quarter of this year.

Thanks, Paul.

We will take our next question from Ambika Goel with Citi.

Hi, this is Ambika with Michael. On your -- on your development profits that are embedded within your guidance, it appears, based upon reported 1Q and then guidance for 2Q FFO, that gains are going to be back-end loaded. Given that you have about $500 million of stabilized developments that you can sell and open-end fund that can buy those assets, what's the reason for making those development sales back-end loaded? And are there any contingencies that we should be concerned about that guidance may not be attainable?

Two of the properties are contributions to the open-end fund in which the anchor -- we have signed leases from the anchor. The anchor, just because of the timing of construction of the space, just hasn't moved in. And I think it's more related to factors like that than anything else. I mean, Lisa, I don't know if you've got any other color to give.

Yes. Basically it -- we need them to be rent-paying.

Right.

And the rent is scheduled to commence in the third quarter.

And they also aren't as large as would meet the open-end fund requirements in terms of size.

Okay. So --

Not all -- and in certain cases we have a -- in another case we have a partner buyout that we can't commence -- we can't do until --

-- August.

-- until August of this year. So the reasons like that, Ambika, that whether it's tenant move-in date, where they're going to be rent-paying and occupied or partner buyout or factors like that.

Okay.

We're not looking -- we're not looking for drama.

Okay. So just to clarify this. So correct me if I'm wrong. But there's about $ 200 million of developments that will -- development sales that will have to occur in the back half of '08, and you're saying about half of those projects are going to be -- are related to anchors that haven't opened yet, but leases are signed?

No, I mean, I think that that's an overstatement.

Yes.

I mean, there's a -- because they are the community shopping centers that we're selling to the fund, they tend to be larger. So each individual transaction will have larger gains than a typical grocery anchor shopping center that we sell. Like last year when we did Vista Village in the first quarter, the gain on that was close to $20 million. So they're individual transactions that are larger. And as Hap explained, he -- there's really only two of those projects that we just talked about, the one was the buyout and one where the -- that -- and it's not -- it's just a smaller, junior anchor that is not rent paying yet. So there's not risk, I think is what you're alluding to, in terms of that they may not move in and may not begin paying rent. There's just -- they're larger transactions, so there's fewer of them. But, again, the risk is pretty minimal.

And then just one short follow-up. On that $500 million of assets that are stabilized, what's, I guess the expected NOI development yield on those projects, because you're -- I guess you're suggesting that there would be higher than 9%, given that they are these larger projects. So I just wanted to see, just to back in to the profits, what is the development yield of those projects that are stabilized?

I'm sorry. You're talking about the 520 that are --

Yes.

-- already stabilized?

Yes.

I'll say it's in the above 9%.

Yes, above 9%, Ambika.

Okay. Thank you.

Thank you.

We just want to confirm the number.

Thanks, Ambika.

We will take our next question from Craig Schmidt with Merrill Lynch. Please go ahead.

Thank you. This question, again, focuses on you sort of expecting the tougher environment taking the same-store NOI from 3.1 down to a range of 2.4 to 2.8, and likewise doing for the rental re-growth. That's about a drop of about 20%. I'm wondering what you think the drop will be for the community shopping center -- shopping center industry as a whole. And I guess what I'm getting at is, what degree of protection the PCI program is going to be giving you here?

Well, I think that if you look at some of the studies that have been done, they're saying occupancy could go down to, on average, another couple percentage points. And I think that that's very real. And I do think ours will not go down nearly as much as you've seen in the industry. We saw that in the early 2000s when some of our peers went below 90% and we were very well maintained between 94 and 95%. So I think it's going to, obviously, depend on the quality of the portfolio and the quality of the retailer. So I think we will have a modest decline.

And, actually, Craig, we're looking at the end of the year our average occupancy being about the same. It's just during the year we're going to have some down time that it's just going to take us a little bit longer to get there than historical numbers. So I think we, over time, we could moderate a little bit from where we are, but not significantly. And depending on the PCI program and the quality of your portfolio, I think you could drop as much as another couple percent.

I think another factor in addition to PCI and the quality of the anchors and the quality of the locations is the fact that we've got 21 offices which really does allow us to be close to our properties and be extremely hands-on.

Great. And I guess as a follow-up, the slight tick up in the yield for the two new developments, is that because of the greater scrutiny or just sort of randomness.

I think it's random. I think that one of them's a third phase to a project, so you're dealing with mostly shop space, so you're going to get higher rents and higher returns on that anyway.

Okay. Thanks a lot.

Thank you, Craig.

Thanks, Craig.

We will take our next question from Jeff Donnelly with Wachovia. Please go ahead.

Good morning, folks.

Morning.

I do want to clarify, when you talk about reducing your exposure to shop tenants through your development pipeline, is that because you're exclusively shifting your development mix towards more of a power center product, I guess I'd call it? Or are you developing some properties that are more in-fill, but just not to their fullest potential, maybe leaving some space behind for a future date?

We're doing a lot more in-fill and we are not shifting our focus exclusively to those kind of projects, community center projects. In fact, if you look at 2008, we have, by number, about a third of our projects are grocery-anchored and about two-thirds would be community centers. In 2009, the grocery anchor centers goes up to 58% and community to about 42%. So the mix is not changing. In fact, we have 29 grocers in the in-process portfolio right now and our pipeline's right now looking at 29. So there's really no shift.

So to be clear, it's sort of a grocery-anchored center that just happens to have less shop space but no so much --

That's right.

-- undeveloped? And then I guess for my follow-up, I guess my concern is that maybe in that pursuit of shoring up, I think it's called the visibility of your development yields, do you reduce your future growth prospects by forsaking yourself some of that shop space? I mean, can you talk about how you weigh that decision, because I would think that you're developing into a product type that has maybe more exposure to a smaller handful of tenants and probably had higher cap rates vis--vis, the more traditional stuff you had been building.

Well, one thing as it relates to the community center portfolio, one of the reasons that the open-end fund makes sense for us is we contribute those larger projects that happen to have a lower growth profile, typically you'll have that lower growth profile into the open-end fund. And we'll continue to evaluate any development that we complete, find out whether it's suitable for Regency to own 100% for one of our partnerships or whether it makes sense [from] a third-party sale.

An interesting component of the pipeline is buying boxes. And we bought three (inaudible) boxes and we will ultimately sell all three of those boxes, which we very successfully re-leased and redeveloped. And that also has an impact on the amount of shop space that's being -- I mean, some of it, yes, we are being a lot more cautious. But some of it has to do with the nature of what's being developed.

Thanks, Jeff.

Great. Thanks.

We will take our next question from Michael Mueller with JP Morgan. Please go ahead.

Yes. Hi. In terms of the development contributions to the open-end fund, what's the exact cap rate floor for the fund and is it turning out to be any sort of an issue today?

The -- it's basically it's a ladder on a total dollar value basically. So the first $225 million, the floor has -- they basically have to average 6.5%, and then after that it steps up to 6.6%, and then it steps up to 6.7%, and that's the -- that is the ultimate floor.

We've -- the first four or five assets that we've contributed have actually been below that 6.5%, so the next one we put in will probably have to make up that difference a little bit, and in that case it would make a difference. But beyond that, I think with where cap rates have gone and with the dollars that we save on transaction costs and the tax savings, it really -- it does not become an issue. We feel that we're getting full value.

And we've incorporated those factors into our projections.

Okay. Thanks.

Thank you, Michael.

We will take our next question from Jim Sullivan with Green Street Advisors. Please go ahead.

Thanks. Brian, the leasing progress you made in the development pipeline seems to have been very concentrated in markets that are less severely impacted by the housing situation. And when I look at housing bubble markets, particularly southern California and Florida, it looks like the vast majority of your developments did not achieve any leasing progress during the quarter. Are you seeing substantial differences in tenant demand in the housing bubble markets versus those less severely affected?

Yes. California, I'll speak to that one because that's where the bulk of the big projects are. You living there, Jim, know, it depends where you are. The projects that we built more in the growth areas out in the Coachella Valley or the dessert, (inaudible) Empire are the ones that are taking longer. They're definitely experiencing more of a slowdown as the housing stopped. Those that are more in the urban core, certainly northern California, anywhere near the coast, are doing just fine. But, yes, we've certainly seen a slowdown in both Florida and -- north Las Vegas is another one, of course, though that has, I think it's one of your bubble markets. And that one we've seen very strong demand. In fact, that's where the bulk of the leasing took place.

And despite the longer lease up and some of the softness in tenant demand, you're still reasonably confident about hitting your pro formas with respect to yield?

I do. We adjust those every quarter and we take a look at it space-by-space. And there's certainly been some projects that we've had to lower the rents and there's been other projects that have out-performed. So I think we're in good shape, at least right now, based on what we know for the returns and the income. The only issue is some of them are taking longer to reach the stabilization than we would have expected.

Thank you.

Thank you, Jim.

We'll take our next question from Chris Lucas with Robert W. Baird. Please go ahead.

Good morning, everyone.

Morning.

Hi, Chris.

Could you, Brian, could you just give a little more color on the construction costs in terms of what you've seen over the past year and what you're seeing in sort of your future expenditures?

Sure. Basically they're, as I said the 9. I mean, there -- we're expecting cost increases going forward of about 5%. And some of the individual materials are down. The ones that obviously remain high would be the petroleum-based products like asphalt and PVC pipe and the like. The labor component, especially in the formerly hot markets, or as Jim says, the bubble markets, are way down. So in a lot of our Pacific region projects, particularly California, we're seeing construction bids come in about 15% below what we had budged for those projects, which is accounting for those cost decreases.

But if you strip out the real high-growth markets where we're seeing big cost decreases, you're only looking at about, on average, 5% going forward.

Okay. And then --

Most of that's cost decrease in relation to budget.

Okay. Thank you. And then just a quick follow-up. Again on the issue of the shadow pipeline and the lower shop space allocation, am I to understand that what the future will look like in terms of the projects, the allocation will be to the larger spaces. But are you building out the complete FAR on the parcels you have or are you setting aside, potentially, some of that FAR for future phases of a particular project, but that's leaving your initial sort of shop space allocation at a lower level?

The key thing is we build to the size of the market, not the size of the site. So just because we have, say 20 acres, does not mean we're going to max out to 200,000 square feet. So in some cases it so happens that we wish we had more space and we can only build what the land will allow, in which case we've maxed it out. In other cases, there probably will be extra space that we'll be able to take advantage of in later years.

Okay. Great. Thanks a lot, guys.

Thanks, Chris.

Thanks, Chris.

At this time there are no further questions. Mr. Stein, I will turn the conference back over to you for closing comments.

Once again, we appreciate your time. We appreciate your interest in Regency, and hope that everybody has a great rest of the week and weekend ahead of them. Thank you very much.

Ladies and gentlemen, this will conclude today's conference call. We do thank you for your participation, and you may disconnect at this time.