Regency Centers Corp (REG) 2008 Q2 法說會逐字稿

Good morning. My name is Paula Kines, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regency Centers Corporation second 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 Mr. Jamie Shelton, Vice President of Real Estate Accounting. Please go ahead, sir.

Thank you, Paula, and good morning. On the call this morning are Hap Stein, Chairman and CEO; Bruce Johnson, CFO; Brian Smith, Chief Investment Officer; Lisa Palmer, Senior Vice President Capital Markets; and Chris Leavitt, Senior Vice President and Treasurer. Unfortunately, Mary Lou has come down with a stomach virus or food poisoning and despite her best efforts was unable to join us this morning.

Before we start, I'd like to address forward-looking statements that may be addressed on the call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by Regency Centers 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 Hap.

Thanks, Jamie. Good morning. Fortunately, although Mary Lou (inaudible) right now, we expect her to be back on her feet. Lisa Palmer will be covering the operations portions of the call.

As we complete the first half of what we expected to be a very challenging year, the team and I would like to spend this time looking forward for the rest of 2008, into the future. In addition to providing color behind the numbers, I've asked the team to share Regency's strategies to meet the goals we set, given today's very challenging environment. Economic weakness, turmoil in the capital markets are being expressed in moderated tenant demand, deal constraints to capital availability, even rise in cap rates.

Bruce will begin with a description of the steps that are being taken to execute Regency's capital recycling strategy. In the period the balance sheet remains strong, reliable access, both internal and external sources of capital.

Lisa, who as I mentioned, will be filling in for Mary Lou, will then highlight the resilience to the operating portfolio, both the expanding contracting retailers and their impact on Regency's portfolio, discuss the measures which are being implemented to maintain 95% occupancy.

Finally, Brian will elaborate on in-process developments, including the steps being taken to achieve 95% rent paying occupancy and the increased scrutiny that is being given to new development opportunities to make sure that precious capital is carefully and intelligently deployed. Bruce?

Thank you, Hap, and good morning to Mary Lou, and everyone else on the call. When the capital markets are in turmoil and availability is severely constrained, capital it king. The need for a strong balance sheet and access to reliable sources of capital is more critical than ever. As a result, key ratios, buying balances, future sources and uses of funds and the development inventory are being closely monitored to ensure that we maintain our strong balance sheet and access to capital.

Thanks to conservative stewardship, the balance sheet is in great shape. There is currently $573 million of availability under our recently upsized bank lines. In addition, assuming an average cap rate of 7%, there is $660 million of estimated total value from developments, with approximately $180 million of estimated gains. These developments are currently 96% leased, and together with committed capacity from our core investment partnerships, provide a significant amount of visibility in meeting both Regency's future recycling and transaction profit objectives.

You will note that we have modified guidance for contributions to co-investment partners. The revised guidance reflects a plan to contribute 5 centers at a gross value of $170 million. We will contribute 2 properties to the open-end fund by year-end. Silver Spring Square and Phase 4 of Vista Village, and the other 3 centers are targeted for contribution to another co-investment partnership.

The change to the plan was the decision to delay the contribution of 1 larger community center to the open-end fund. Although this center was 95% leased last quarter and crossed the 95% rent paying trigger last month, we have 270 days from that trigger to complete the contribution. We plan to use the allotted time to allow us to maximize value with additional leasing, which we expect to happen in early 2009.

With this delayed contribution of a larger center, in order to meet our capital recycling needs we've added 2 smaller grocery anchored centers from our completed development inventory to our plan.

Mortgage financing is integral to the growth of the co-investment partnerships. With the CMBS market in disarray and banks suffering through their well publicized problems, insurance companies remain the one reliable source for longer term financing. Insurance lenders are focusing their limited capacity on making low leverage mortgage loans, 50 to 60% on value, on high quality assets to select borrowers. These conservative guidelines fit Regency's co-investment partnerships very well and we have been working closely with a handful of companies with whom we want to grow our relationships.

In fact, last month we received commitments and locked rate for almost $110 million of new and refinanced mortgages and average all-in coupon rate of 6.3%.

Progress was also made with the disposition of operating profits. During the quarter a 7-property Mid-Atlantic portfolio of B- and C centers was closed. The purchase price of $108 million represented a 7.75% cap rate.

A Randall's anchored center in Texas was also sold by the Oregon partnership at a 6.5% cap rate for $13.8 million. We do feel that selling B and C centers will be more challenging in the months ahead. Bank financing and high leverage levels in the 75% range that buyers have typically required to purchase non-investment grade properties appears to be drying up. This may mean that on a select basis, Regency may provide (inaudible) as long as we have a meaningful investment by the bar. It's hard to move targeted properties from the operating portfolio.

Finally, I want to remind investors that it's less than $85 million of consolidated debt maturing through September 2010. Lisa?

Thank you, Bruce. Good morning, everyone. Before I share with you the story behind the numbers, our view of the future and color on some of the key markets where our properties are located, it is worth noting how remarkably well Regency's portfolio is holding up in the face of the weakening economy and moderating of retailer demand for space.

While NOI growth for Regency's 100% owned portfolio and share of partnerships was 2.2% for the quarter and 2.6% year-to-date, the total portfolio has 3.4% NOI growth in the quarter and 2.9% year-to-date.

Occupancy for the whole portfolio remained above 95%. Rental rate growth was 9.2% for the quarter and 1.3 million square feet of new leases and renewals were signed. We are especially gratified that our portfolio has remained approximately 95% leased. We believe that this is a testament not only to the quality of our real estate, but also to the proactive measures we have in place to navigate the current retail environment.

Today, even more of a premium is being placed on the quality of the tenants. Powell Street Plaza in the Bay area is an example where we proactively replaced a struggling tenant. We terminated a 15,000 square foot national furniture store and negotiated a $600,000 termination fee. A new lease was executed in July, with a new tenant at a 9% higher rent, with no loss in rent during the transition period.

The other component of Regency's strategy to maintain occupancy is to renew a high percentage of our existing tenants. Year-to-date we've renewed 82%, which is impressive and higher than our historical averages. This includes proactively approaching anchors to renew early, as was the case with Target at Pleasant Hill and Randall's at Weslayan Plaza. Pleasant Hill is located in the Bay area, with high surrounding incomes. Target's lease was set to expire in November of 2009, with no remaining term or options. We signed a renewal at significantly higher rent and longer term. Renewing them really solidified their presence early in our center.

Rate growth remained solid and we expect to end the year within our guidance range of 8% to 10%, and this growth is being achieved with only a modest increase in tenant improvements.

Maintaining 95% occupancy is the main challenge that we face in the operating portfolio. While tenant move outs have not increased above historic annual average of about 3.5% of GLA, moderating tenant demand is increasing downtime. This period which a year ago averaged approximately eight months, is now up nearly a month.

However, it is important to keep in mind that while demand is moderated, retailers still want to keep their good locations in quality shopping centers and both anchors and PCI tenants are still expanding into the best locations. For example, as we all know, even though Starbucks announced the closure of 600 stores, of which Regency only has 6, and even though we're their largest landlord, they're still slated to open 7 new stores in our portfolio.

Not all retailers are impacted equally by the decline of discretionary spending. In fact, some continue to grow. Luxury goods, department stores and apparel stores all saw negative year-over-year sales growth in the first half of 2008, but grocery, drugs and discount stores saw positive growth. And as we've said, even during these tougher times, these historically 90% of the categories in Regency centers have had flat to positive comps in recessions. But even more importantly this year over 50% of the retail categories in our Centers are still enjoying 3%-plus comp store sales growth.

Before I turn it over to Brian, I'd like to give you a little regional flavor. Florida and California are two states where the housing slowdown and potential fallout on shopping centers have garnered a lot of attention. Our business remains a corner business. Although a few of our Florida Centers are certainly experiencing a slowdown, occupancy for our operating properties in Florida remains above 95%. Rental rate growth has been about 8% and same property NOI is positive and forecasted to exceed 2% for the year.

Regency has minimal exposure in California to the markets that are being hurt by the housing prices. Our California properties are enjoying strong same-store growth of over 3%, 97% occupancy and rank growth across the state that averages double digits.

Texas is another positive story. Occupancy is improving and thanks to the proactive early renewal and expansion of several anchors, same-store growth is in excess of 2% and rental rate growth above 10%.

On the other hand, as we've discussed in the past, the region was what still appears the least promising future prospects remains the Midwest. Same property NOI growth is essentially flat in that region. However, it is of note that the Midwest only represents 8.5% of Regency's total net operating income.

The important thing is that we planned for these challenges. There is downtime and pressure on rents, moderating tenant demands and decline in consumer spending, but the persistence of our team, the inherent quality and cycle resistant nature of the portfolio, and retailers' strong desire to operating in the best locations gives us confidence that we can achieve same property growth on Regency's share of the operating portfolio of 2.4% or higher. Brian?

Thanks, Lisa. Well, as you've heard from the others here today and on past calls, we're operating in a very different and challenging environment. To deal with these times, the Investment group is focused on first carrying out our role in preserving the company's strong balance sheet. We do this by working hard to stabilize the in-process projects to maximize their value.

Second, using this recycled capital to selectively pursue investment opportunities where we can create high quality shopping centers and generate attractive returns.

In terms of the in-process projects, we're fortunate to have a large diversified portfolio of projects underway. As I said last quarter, of the 48 projects that are in-process, there are 9 that have experienced weaker demand with the downturn in housing. Five of these are straightforward neighborhood centers whose grocery sales are good and we expect these projects to be solid long-term holds. These developments are 85% leased.

The other 4 are larger community centers that because of their size and amount of small shop space, will take longer to lease, which is one reason why we are phasing these larger projects. Assuming no phasing and full build-out, these centers are nearly 70% leased.

These larger projects are ones we believe in strongly and want to own long-term. Each enjoys the dominant location within its respective market and each has generated strong anchor demand. But the reduction in housing activity has slowed shop leasing. Let me give you one example. Deer Springs in the North Las Vegas submarket is very well anchored by Target, Home Depot, Babies and Toys R Us, PetSmart, Staples and others. Without question it enjoys the premier location in that submarket and when the housing growth returns it will be extremely successful.

We've reduced guidance for 2008 stabilizations. Projects driving the reduced completions guidance for the year are Anthem Highland in Las Vegas and shops of Highland Village in Dallas. Anthem is 90% leased and Highland Village is 82%, but given the tougher leasing environment, we don't expect them to reach 95% leasing threshold by year-end.

Although it's taking longer to stabilize some projects, quarterly returns on the $1.1 billion of in-process developments on an apples to apples basis, are down only 10 basis points. Our Deer Springs project in the North Las Vegas submarket accounts for 6 of those 10 basis points, while Red Bank in Cincinnati represents 2 basis points. The other 46 centers combined account for the remaining 2 basis points.

So while the environment is tough, we are making progress and on a portfolio basis we're holding our own. Returns have held up and there has been leasing progress. Still, we have much to do and have taken the following steps to ensure the success of these projects in today's world. Where demand for shop space is soft, we will phase the construction of the space. We've underwritten lower rents where we believe the market is new or where we believe it's necessary to attract the right high traffic generating retailer. We are creating additional leasing incentives and have allowed more time in our models to lease up the space.

Finally, we focused an even greater amount of our efforts on the leasing of the in-process projects by reallocating our more seasoned and top talent folks on the more challenging projects.

Now the silver lining. We continue to see an environment that increasingly favors strong developers with solid retail relationships and the ability to fund projects off their balance sheets. These opportunities are getting better, even in the face of the current slowdown, as the competition disintegrates.

Some have questioned whether the risks outweigh the rewards in today's environment and I'd like to interject my thoughts on this. First of all, this is a cyclical business. Projects we are working on now will not be open for years to come, at which point the current economic woes will hopefully be a distant memory.

Second, there are always good development opportunities, but they take more work to find and the risks surrounding those opportunities must be weighed carefully. Most of the anchor retailers are still expanding, including many of the grocers such as Publix and Kroger, but also Target, Lowe's, Kohl's, off price soft good retailers, off supply stores and others.

As reported quarters ago, these retailers would just assume push all 2008 openings into later years, but they're actively looking to fill 2010 and 2011 opening slots. We are very mindful of the risks and the environment in which we find ourselves. We will not build for the sake of building and we will only start new projects if they make compelling sense.

So far this year we have moved almost $300 million of high probability 2008 starts into either a lower probability category or we've pushed them into 2009 or beyond, when retailers want to open. I will address specific 2008 starts in a moment, but first I'd like to address how we're tackling the risks we're facing.

First of all, we have raised our return guidelines for new development commitments to 9%, with some projects already penciling higher. The higher returns will likely not start showing up until 2010, given the long lead times required to bring a project to the point where it's ready to start.

We've also tightened our underwriting with longer lease-up times and more conservative rents being modeled. As has been discussed previously, we are planning fewer side shop spaces and are focusing on more infill demographics, those areas with higher purchasing power. This is where the top retailers want to be. We're also requiring more pre-leasing before we close on the land.

We're planning to start $300 to $425 million of new developments in 2008. This is about $100 million lower than our guidance last quarter and it's appropriate, given the comments I just made. We currently expect to start 12 new projects this year and I do believe they are compelling. Four of them are bread and butter grocery anchored neighborhood centers; 3 of the starts will be second or third phases of existing successful projects with limited or in one case no shop space to lease.

One of the projects we discussed last quarter is a rare opportunity to buy property on the San Francisco peninsula in a great infill location in East Palo Alto that enjoys extraordinary demographics. We purchased a vacant Home Depot Expo building, so this investment contains no entitlement, development or construction risk. Within weeks of closing on the purchase, we executed 2 anchor leases, bringing the building to 100% leased. This investment should generate double digit millions in profits.

That leaves 4 community centers. One is a Target Lowe's anchor project that we've been working on for years and got fully entitled, but the project was stopped through a legal challenge. That litigation is now behind us and we're ready to go.

In Northern California we'll build a center anchored by Target, Toys R Us, Babies R Us and Nordstrom Rack on the last parcel of retail land that we know of in the Bay area situated on an interchange with an interstate freeway.

Another is in the metro Miami area in a very densely populated and under-retailed area. Over 90% of this center is leased or in active negotiations. The final project is located at the entrance to the best mall in the area, with a half mile of frontage on the city's main highway. Retailer demand there is incredible.

In short, these are, in my mind, compelling opportunities worthy of our capital investment. If necessary, we'll delay any of these projects if circumstances dictate or we may add to them. Just this quarter we were approached either by anchor retailers or by financially strapped local developers with at least 12 very intriguing development opportunities. Turmoil creates opportunities and Regency is seeing a lot of opportunity in this turmoil.

Make no mistake about it though, margins particularly on the in-process projects have been affected by downward pressure on rents, retailers, particularly the junior anchors exercising leverage they believe they have and being very deliberative in their decision making. Shop retailers in many cases are out of the market and cap rates are expected to rise.

But in spite of these pressures, we still expect net margins to be approximately 20% after fully allocating G&A costs. Looking out into the 2010 and 2011 pipeline, we should see somewhat expanding development returns, thanks to lower land prices and carrying costs. Given the lack of competition and the resulting plethora of quality development opportunities, our teams and local partners are finding we have the luxury of sorting the wheat from the chaff and picking only the best of the available opportunity. Hap?

Thank you, Brian, Lisa and Bruce. Regency did have a solid quarter. The growth and the value of the operating portfolio continues to be remarkably resilient. In-process developments, in spite of the longer lease-up times, should create significant value, even after factoring in higher cap rates and lower margins.

There seems to be a number of extremely attractive new development opportunities that are coming our way and would appear to be higher returns and higher margins. Most important of all, between the large inventory of developments that are completed and leased, the available capital from the co-investment partnerships and the bank facilities, there is a tremendous amount of visibility and not only realized development gains, but also to maintain a pristine balance sheet.

As good as these recent results look in the rearview mirror, the road ahead promises to include some pretty steep bumps from both the economy and from the capital markets and Regency will certainly not be immune to the effects of longer lease-up times on occupancies in the operating portfolio and developments, lower development margins from higher cap rates and cautious lenders and co-investment partners.

You've heard from the team, proactive steps are being taken to try to prepare for worsening conditions in each part of the business. The bank facilities were substantially expanded earlier this year and the co-investment partnerships have been in place as reliable takeout vehicles for our developments.

The capital markets team is working closely with a handful of permanent lenders to ensure the flow of mortgage loans we're calling investment partnerships. Regency's tried and true investment focus has enabled us to build a high quality portfolio that should weather the storm and the downturn relatively well. And we've been pruning weaker assets for years.

Leasing-up the development pipeline is receiving a huge amount of attention and achieving and maintaining 95% occupancy in the operating portfolio and new developments is the top priority for both operations and investments. Although the number of opportunities from local developers and retailers look extremely interesting, new developments will be scrutinized to make sure that they are truly compelling investments for Regency.

G&A expenses and the number of employees are being fully and carefully monitored, while keeping the team engaged, focused and motivated. Although this current downturn feels like it might get pretty nasty, Regency's management team and I have been through cycles before.

As a matter of fact, many of the legacy shopping centers in Florida and California were purchased on what now looks like unbelievably favorable basis after the last severe real estate downturn that was caused by the S&L meltdown and the recession of 1990 and 1991. We believe that if we continue to execute using sound cautious judgment and conditions don't deteriorate much further, we can achieve FFO per share growth within the guidance range which we provided for this year.

In addition, I think more importantly we should be well positioned for the future to meaningfully grow FFO and intrinsic value on a per share basis through our strong balance sheet and access to capital, high quality assets, operating and development expertise and tenant and partnership relationships.

We also realize that it is not too far from the realm of possibility for conditions in the economy and financial markets to deteriorate beyond even what our current conservative expectations are and we are taking the necessary actions to make sure that if the unforeseen does happen, Regency will be able to withstand some pretty severe additional body blows until the cycle does finally turn in the right direction again.

We appreciate your time and would now be glad to answer your questions.

(OPERATOR INSTRUCTIONS) Michael Bilerman with Citi.

Ambika Goel is here with me as well. Brian, it was very helpful in sort of laying out your thoughts on development. Can you give just a little bit more granular detail? You talked about lowering the amount of starts for this year and you talked about the projects that now comprise the 300 to 400. Can you talk a little bit about the projects that you sort of delayed and then anything else as you sort of went through that process when you looked at your potential '09 and 2010 starts, that you decided to pass on or just delay indefinitely? Just give a little bit more color about those steps that you're taking.

I think in some cases where we have the flexibility to just push them off, where we have long option periods and everything, then if the retailers are saying that they would prefer to wait and can accommodate that easily and we push them out. Some of the projects that we have just dropped would be those where the junior anchors may have tried to just exercise a little bit more leverage on us and that would have had an impact on the returns, we decided it wasn't worth going forward with those.

But for the most part, the pipeline remains about the same. It's about $1.65 billion, which is about $150 million less than it was last year at this time. And that's because they like the opportunities, they like the locations, it's just I think everybody feels if we could just push them off a little bit we'd like to do that.

And you talked a little bit about yields coming down, lower rents, additional incentives, more time to lease-up. You said in effect 10 basis points on the active pipeline, but 80% of that was 2 projects. So I guess I'm surprised. You hear all this caution, but then the actuality of it rolling through your yield you can't really see. So I'm trying to piece it together. Is it more so on the future pipeline or you expect the yield, as you move through this and as you start to see where rents come out, will come down?

I think on our active in-process pipeline we've already reflected the hit. I mean, we rolled several of the projects down in prior quarters. This quarter, Deer Springs took a much bigger hit, because we lowered rents across the board. We lowered it on anchor shop space and on ground leases. So that was a big hit. But most of them, the numbers have already been reflected. We pushed back our lease-up period from I think it was about 31 months the beginning of the year, to 39 months currently. So, it's not a big surprise to us.

Now, I think going forward we're being much more cautious in our underwriting. As I said, we've got fewer shop space. We've already reflected the lower rents, and that's why I think you'll continue to see a dip or rents slightly sub-9 in 2008 starts. 2009 should be somewhere about the same and 2010 we're already seeing right now, return to the 9.5-10% range.

We're able to exercise a little bit more leverage with the land owners.

Jay Habermann from Goldman Sachs.

Here with Johan as well. Obviously given your sort of more cautious comments, I just wanted to zero in on the transaction based income you have baked into your fourth quarter. You're expecting a number around $1.70 based on full-year guidance. Can you just give us a little bit more comfort obviously on the assets that will be sold or you're anticipating will be sold and just sort of your comfort level there?

I'll speak to the co-investment partnerships and have Brian or someone else speak to the third party sale. In Bruce's comments he spoke about that we have $170 million planned for contribution to our co-investment partnerships. You can use average margins on those to figure out how much of the transaction profits are going to be coming from those 5 properties that we're selling.

Two of them are going to be going to the fund and we specifically named them. Silver Spring Square and Vista Village 4. Silver Spring is a Target Wegmans anchored center that meets all of the criteria of must offer, must take and Bruce referred to the 95% trigger date. Well the trigger date on Silver Spring was in the first quarter of this year, so that absolutely positively will be contributed to the partnership for year-end. The one thing that's going to be on the value. It's subject to appraisal. We do believe early indications that the appraisal is going to more than support what the price is going to be for that property.

The second, Vista Village 4 is really just a small property, which is a phase 4 of an existing property that's already in the fund. So the comfort level on those 2 is extremely strong.

Then the other 3 are 3 grocery anchors completed developments from our completed development inventory that we've talked about in past quarters. We have already or are in the process of working with one of our other partners to buy those, and I would say the comfort level on those is north of 90%.

I'm not sure we can say much more than what we've said, other than the fact that you'll note that the guidance remained exactly what it was last quarter, and we've just recently again been through all of those transactions that we expect to occur in the next two quarter periods and feel exactly as our guidance is indicating.

We understand that it's important for us to be as transparent and have these transaction processes visible as possible, which is why we're really trying to give you as much detail as we can on it.

And all those centers are over 95% leased, including those being sold to third parties and we feel the cap rates we're using are probably average 7%-plus.

Okay. That's helpful. And just second question--.

Jay, just one other comment there. And then I did give us some background which is the purpose of talking about the development inventory that's available, because that is really our transparency and comfort should come from with transaction profits.

Just to reiterate that, Bruce, I gave a number of $650 million worth of properties that are 96% leased and have an estimated value of 7% cap rate of $180 million.

Okay. And then just a second question. You mentioned the opportunities where some cash strapped developers have approached you. Can you give us a sense of what types of returns you might be able to extract there and even the dollar amount of those opportunities? How does that pipeline compare to I guess your existing development inventory?

I don't have the exact number of them, but there's many. We've probably got a couple of dozen of them that we're working on right now. Returns, you know, are about what our returns are that we've talked about right now, slightly sub-9. In many cases the returns are better, but we've got a partner now that wants to stay in, so the net returns are averaging about where they are. We also, where we can, can sort of leverage with the seller and try to boost those returns. So, I'd say in the short-term over the next six or 12 months we're probably looking, again, right around 9, maybe a little bit less than 9, but for some of these opportunities that are further out, we're getting much better returns.

And some of those are already baked into the pipeline, some are in lower probability right now as they work their way through.

Okay. Send my best to Mary Lou for a speedy recovery. Thanks.

Jeff Donnelly from Wachovia.

I echo the concerns for Mary Lou as well. A question about occupancy and how you see it pacing out to the end of the year. It looks like you're going to have some net absorption through year-end and I was curious if you could talk a little bit more about that and does your guidance anticipate I guess any cushion for more retailer losses between now and then?

I will try to be my best Mary Lou. Our occupancy has remained unchanged, guidance that is, and we do expect to increase it by year-end. If you recall, what we keep reiterating is that the move outs are not higher than historic averages. It's just taking longer to lease-up. And the occupancy guidance that we give of 94.9 and 95.1 is at year-end, the point in time. So what is going to happen is our average occupancy throughout the year is going to be lower than last year. It's the main driver behind why same-store NOI growth is going to be lower than it's been in the past year. So you know, if we execute our plan, then we'd expect to be within the range for both occupancy and same-store NOI growth. And as Hap said, we believe we have conservative but realistic expectations for our operations going forward.

But obviously things could deteriorate beyond--.

They could deteriorate beyond what we expect.

Great. And then I guess my second question--this might have two parts to it, but I'm curious what's happening with the overall scale of the shadow pipeline, and just in Brian's comments he mentioned that I think you raised your yield requirement to 9%. Can you just remind us what it was previously on developments?

We were at about 8.5 to 8.75 in the past and now we want it to be a minimum of 9%. Really what we're trying to do is maintain about a 200 basis point spread over exit cap rates.

20% margins is what we're shooting for on a net-net basis, and I think a quarter or two ago we raised the guideline to 8.75 from 8.5, which is where it was at the beginning of the year. And the other part of the question was the scale of the pipeline. As Brian said, the pipeline is, Jeff, about the same as it's been. But from our perspective in evaluating opportunities the cup is now so to speak, half empty and the underwriting requirements are tougher, so it's going to be tougher to take that $1.6 billion of developments for them to get through to become a start.

Paul Morgan with FBR Investments.

On the cap rates for the Cincinnati acquisition at 6.4%, I guess I was a little surprised at how low that is, and maybe you could just talk about that? And then given the market there, what kind of cap rate do you think that would have gone for if it were in DC or California or something, and what does that say about where cap rates are generally?

The deal was basically contracted actually for today. In December, we were the second highest bidder. We were not the highest bidder at the time. It's taken us into the quarter to end up closing it. I think that's one important fact. So it just kind of reflects cap rates four or five months ago and Brian will describe the project.

It's a pretty great project. I mean, it's right at the best mall in that area, but also there's some upside in that. There was a Linens & Things we had planned to go out and it has and we knew there was upside in that. And then there's also an expansive parking field that allows for some potential new development expansion of NOI through that. So we think the returns will be significantly better than 6.3.

And I'd also asked about what you think--how much the market location would have mattered? I guess since it was contracted for earlier, what's the difference between then in December and where you think it would have traded now?

Probably about 50 basis points. And I think in California it would still be in probably the low 6es, depending where in California. I mean, the one thing that's happened with the cap rates is we used to be able to make kind of blanket generic statements as to what they were, on any property it was this. Now it has really become a function of two things; the quality of the asset, the A assets in the--well, the second thing would be which markets they're in. The A assets in the very best California and coastal markets are still trading in the low 6es. We've gone after a couple of projects and been incredibly surprised at how low the cap rates are.

But, you move off of those major markets and they start rising pretty quickly. And the B and C properties are well into the 7s, mid-7s, sometimes the high 7s, simply because the financing is so difficult for them. And then you've got the lack of interest only debt, which is reducing the cash yields and pushing those returns up even more.

It's also important to remember, as Brian indicated, this is the best location in Cincinnati. There is a good amount of embedded growth and there's some significant upside potential beyond that.

And I was going to add that it's really difficult to look at the cap rates in isolation, because you always have to include the growth profile.

Christine McElroy from Banc of America Securities.

Lisa, just following up on Jeff's question, since you've got your Mary Lou hat on today, on leasing, I think I ask this question every quarter, but just looking for an update on kind of what you're seeing on the small shop side? Are you incrementally more nervous today about bankruptcies and store closings there?

Well first of all, I'd say I didn't dye my hair blonde for the call. No, again, we're certainly monitoring, really (inaudible) for all tenants and specifically moms and pops, and looking at AR balances very closely. We've seen only a very modest up-tick in bad debt expense. So going forward, we're not seeing it yet. We are not necessarily expecting to. But again, to Hap's point, things could deteriorate further, but at this time we still believe that we're going to be in terms of historical trends, in terms of move outs of small shop space.

Christy, we've talked about move outs before and now those are similar, but we also look at early move outs, which is a better indication in terms of, from my perspective, in terms of what's going on with those types of tenants. And that also has not changed.

And in terms of the bankruptcies, of the smaller shops we've had no impact and then of the bigger boxes that have been out, Brian alluded to Linens & Things. We had 3 of our Linens & Things actually closing. We didn't have any Mervyns and I think that's really it of the bankruptcies.

And then it seems like the grocers, I know they're kind of [need to be] retailers have held up fairly well until now. Do you see the potential for any softness there, given rising input costs and continued pressure on the consumer?

First of all, I think the industry has been very rationalized, and I think where that would be expressed would be in demand for new stores as it relates to development. But it isn't like they're growing at fast paces in any way. But I think that for the most part the grocers we have, have dominant shares in the market and even though I think the margins right now are being strained a little bit, their gross sales are doing pretty well and I think they're being able to withstand the trade down, you know, even as consumers trade down.

So you're still seeing the demand there on the development side?

We're still seeing a modest amount of demand. But demand has moderated significantly from where it was three to five years ago and so it's tepid to moderate, and I think we would anticipate it continuing in that fashion.

Michael Mueller with JPMorgan.

Just the two questions are, first, can you comment or give us a little more detail on concessions? I think you talked about them picking up moderately and are they more skewed towards shops or anchor tenants? And then second question, can you comment on the open end fund the appetite to take on more grocery anchored centers as opposed to a larger format on community centers?

Sure, Mike. I think the comment on the call was that we've had a modest increase in tenant improvements. We haven't really had any rent concessions. And we actually disclose our TIs on page 24 in our supplemental. And you can just see, for example, second quarter of 2008, just slightly higher than the first quarter and for the year, I mean, when I say modest, I mean a modest increase in TI for the quarter. It's nothing significant.

What we're hearing today from the tenants is larger requests for TIs that we're fending off to some extent. We're seeing much more of that, which is exactly what you'd expect.

I think that we've got more in the development.

It's interesting, it depends on the projects. We've got some development projects we're actually outperforming our pro forma for rental rates and in others, mostly I'd say we're right on the rental rates. Where we've made some concessions would be in the very large projects that have a lot of space to lease. And we have areas where we need more activity, then we will, for the right retailer, go ahead and cut a more aggressive deal than we had originally underwritten.

An example of that would be like a BestBuy or Indio project or up in Northern California in the Atwater project. Out front there's a lot of space. We needed a good kind of anchor to generate activity there and there was a real demand in the community for Joann's Fabrics, so we went ahead and lowered rent there. That's more on a isolated basis, looking at each project and what it needs.

And to the second question with the co-investment partnerships, I mean, they're certainly cautious as we all are in today's environment. But they are still willing to acquire quality real estate and fortunately, when you look at sort of the return thresholds of the two most active partnerships we have, they're complimentary. One is very current cap rates, current yield focused and not so much on the actual growth, whereas another one of our partners is less focused on the current cap rate, as long as we get the total returns and have the embedded growth in the property. But again, they're cautious, but the appetite is there.

So they would be open to it, but when they're outside of the must offer, must take, they're being very cautious.

Jim Sullivan with Green Street Advisors.

It's [Steve Vetter] here. Just following up on the question about lease concession. It looks like the re-leasing spreads on the new leases that were signed over the past quarter were a lot smaller and narrower than they had been in the past. It also looks like the term that was signed was fairly large at about seven years. Can you talk about the new leases that are being signed and your efforts to maintain occupancy, if you're giving more concessions? You've talked about a little bit more TI. And what is your ability to gain that or get that space back if the market does turn?

Again, let me just reiterate that we really haven't been giving great concessions and our TI has only modestly increased. Again, if you look at our build rates, (inaudible) on the margin. And in terms of the quarter, the rent growth for new leases, I think that was driven by one larger transaction more than other. If that's true, I'll follow up later. I'll have Jamie comment on it.

But what we've also said is that we do expect rent growth to be in the 8% to 10% range for the year. That remains unchanged. And it has been slightly higher on renewals year-to-date and that is because it's just a little tougher to get new tenants into the spaces. So because they're more deliberate in their decision making, we're not achieving as high rent growth. We're more focused on the quality of the tenant than the rent growth in those spaces.

And just to follow up on Lisa's comment there, in some of the markets where we may have been holding out to sustain higher rental rate growth that we historically had, we're going in and leasing some of those spaces to quality tenants at a lower growth rate, so that they can become rent paying and contribute to our operating portfolio NOI over the next 24 months.

Are those tenants getting signed to longer lease durations than they had in the past or is it still similar in that sense?

It's pretty similar in nature. With some of those tenants it may be a little shorter, but not significantly that it would change the nature of how we've always negotiated lease terms.

Probably may have been skewed by some larger spaces that were either renewed or new leases signed.

And in some cases, especially in some of our newly completed developments that we may be leasing first--this wouldn't fall into rent growth, but where we're leasing first generation space, we are building in greater rent steps in anticipation of the economy turning, and tenants are willing to do that to get into the space, starting at a slightly lower rent, but actually building in higher rent steps two or three years out.

Michael Gorman with Credit Suisse.

Just a question going back to some of the [cull] investment programs. Can you talk a little bit about plans for more asset sales out of the Macquarie joint venture? Are there any more being marketed or planned for the rest of the year to maybe help reduce some of the leverage there?

I'm most comfortable to say they haven't had their call yet, I don't think, for the fiscal year. I think it's probably best just--kind of do that jointly. But I mean, certainly we have said in the past that they had been focused on selling--we have the same goal--we have a joint goal of recycling capital and selling the lower growth, higher risk (inaudible). That will always continue throughout our partnership and we'll look at that together.

In terms of selling beyond that, they have said in the past that they were focused on paying down some debt, but I will defer until they report their results, I think later in the summer.

Okay, and I guess this may fall under the same category, but can you talk--?

Real quick, I'm sorry, Mike. Our guidance includes our plans with Macquarie in terms of our operating property disposition. So that is one way for you to look at it.

Got you. And then just in terms of the earnings power, can you talk a little bit about--there's a pretty wide spread between what Regency itself is doing and what Macquarie is doing. Can you just talk about, is it a function of the properties in the portfolio, is it a function of their leverage or maybe that 40% of the portfolio that isn't related to your side of things? What's dragging down their earnings growth?

They've got significant investments in hedging. It's different. It's totally different. I mean, payout ratios are different, etc., etc., and I just don't think that--.

And again, just really quickly, I would defer to their earnings release later this month. Again, in terms of our results, if you look at our percent leased and our same property NOI and our rent growth, which show both our 100% owned plus our share, and then we also show the whole portfolio. And it happens to be that this quarter 100%--the numbers are slightly better, which would lead you to believe that the numbers in our co-investment partnerships are better, which would lead you to believe that Macquarie is our largest partner in the co-investment partnerships, with 150-plus properties. You would expect that their operating statistics are going to be very strong.

Right. The fundamentals of what they earn in the partnership are performing very, very well and it's just a different vehicle, different structure, etc. And as Lisa said, it's just not appropriate for us to comment beyond that.

Chris Lucas from Robert W Baird.

Just as a follow-up on that point, what are the contributing factors to the better performance on the same-store basis of the co-investment partnerships relative to your pro rata share?

They're typically one year--you may have termination fees playing into that, but one year one portfolio will perform better and then you're up against higher numbers or lower numbers and they have redevelopments in there. But all in all, the portfolios over a period of time perform pretty competently.

Okay, and then just a quick question on G&A, Bruce, what were the contributing factors to this 7% sequential decline in G&A?

You know, I think just less expense with respect to recruiting was part of that. Some of our travel. Some of our non-payroll related. If you look going forward I think you'd see, just so we don't get people using a run rate of whatever we're showing today, that basically I think it's going to be another $14 million for the next two quarters in net G&A.

I will say, there's a lot of scrutiny throughout the organization to controlling and reducing G&A costs, but we want to do it without impacting the effectiveness of the organization, especially as it relates to leasing our vacant space.

Follow-up from Michael Gorman.

I just had a quick technical question. Looking at the results for the quarter and the development profits, I was wondering what I'm missing, since the first quarter if I recall it was a zero and then the second quarter why does the Q2 number not match the year-to-date?

I'd have to follow-up on that.

There are no further questions in the queue at this time. I'd like to turn the conference back over to Mr. Hap Stein for any additional or closing comments.

We thank you for your comments and we all wish that Mary Lou gets well and as I said, we expect her to be back on her feet within the next couple of days. Everybody have a great day. Thanks. Bye-bye.

That does conclude today's conference. We'd like to thank you all for your participation.