Regency Centers Corp (REG) 2008 Q3 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 third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (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. On the call this morning are Hap Stein, Mary Lou Fiala, Bruce Johnson, Brian Smith, Chris Leavitt, and Jamie Shelton. 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 documented filed by Regency Centers Corporation with the SEC, specifically the most recent report on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in these forward-looking statements. I will now turn the call over to Hap.

Thank you, Lisa, and good morning. Regency is currently operating in an environment that combines a crisis, an unprecedented crisis in the capital markets and a recession. Although the fact that the atmosphere is difficult is no surprise. I for one have been taken aback by how severely and rapidly the financial markets have frozen. Historically, we have been very accurate with our guidance, and notwithstanding the current tough and uncertain realities, especially as they relate to the transaction side of our business, it is personally very disappointing to me that we will be well below our prior estimates of earnings for the year. Before Bruce, Brian, Mary Lou and I describe how this milieu is impacting our business, the staffs at Regency is undertaking to preserve our balance sheet and strategies to prosper in the future in the short and term-long implications to the balance sheet and earnings. I do want to comment on a few key results and Regency's attributes, which I really believe are relevant to our future.

The signing of 600,000 square feet of new leases, 300,000 square feet in the operating portfolio and 300,000 in developments and almost 900,000 square feet of renewals in the third quarter at 13% higher rents are indicative of the fact that retail demand for better shopping centers still has a pretty steady heartbeat and that Regency's quality operating portfolio and developments are demonstrating resilient health in the face of the worsening economic conditions. Mary Lou and the operations team are still confident that same-store NOI growth for the year will be 2.4% to 2.7% for Regency's ownership share. The contribution of four completed developments with a gross value of $158 million to the open-end fund in the Oregon partnership that occurred very close to the end of the third quarter demonstrates the strength of Regency's relationships with our partners and the attractiveness of quality shopping centers to institutional investors, even in today's markets.

While I knew it was important at the time, I didn't fully appreciate Regency's move last spring to expand our bank facilities by $343 million to $940 million would turn out to be. With only $70 million outstanding on the line of credit portion of the facility, Regency has over $645 million of funding capacity still available. The line of credit doesn't expire until 2011 and there's a one-year extension option for $600 million of the line. Regency has only $235 million of debt on the balance sheet that matures during the next two years. As Bruce will explain in further detail, we have more than adequate committed sources of capital, including line capacity, to complete the in-process developments, pay off corporate debt maturities and refinance maturing mortgages by infusing equity to meet more stringent underwriting requirements that are in place today. In addition, with over 87% of assets unsecured, Regency has over $3 billion of unencumbered assets that are available for mortgage financing.

Let's now turn to Regency's strategies for working our way through these severe challenges, preserving a strong balance sheet and turning the turmoil into a time of opportunity to create substantial future value. First and foremost, all committed sources and uses of capital are being rigorously monitored. New development is being slowed and will be halted if necessary to make sure that we have more than adequate capital to meet our funding obligations and maintain dry powder to take advantage of future opportunities, which are already becoming more attractive. Second, as mentioned earlier, there's significant capacity that can be accessed for mortgage financing from the $3 billion of unencumbered assets. Mortgages are an alternate source to refinance the balance (inaudible) debt that expires during the next three years.

Regency has developed excellent relationships with a handful of mortgage lenders and these lenders seem keenly interested in making loans to select borrowers, especially in modest loan amounts on quality shopping centers. Third, established a co-investment partnership funding source for grocery anchored and community center developments after 2009 is a top priority. Financing the development program at a cost effective basis is critical to providing capacity for future developments and acquisitions. Fourth, the guidelines for returns on total invested capital for developments have been raised to 10% with a 200 basis point margin. This represents 150 basis point increase since the beginning of the year and 100 basis points in the last quarter and it is based on cap rates settling into the 8% range. The return, return thresholds will be increased again to the extent that cap rates and/or cost of capital turn out to be higher.

Special consideration will obviously be given to land that is already owned, developments with a lower risk profile and prior form commitments to anchor tenants. Having said that, we are not being bashful to renegotiate with land owners to increase returns to an acceptable level, or we will not proceed even if the consequences involve walking away from pre-closing costs and expensing development G&A. As important as returns, new development opportunities are also being scrutinized to insure that there are significant preleasing and excellent visibility to achieve 95% lease up. The appeal of a development to co-investment partners and institutional buyers is also a critical consideration. If the current turmoil in the capital markets will cause a significant number of distressed sales, this should provide Regency with what could be compelling acquisition opportunities. I should have said should be.

We will seek opportunities to generate returns and access of Regency's cost of capital after incorporating the impacts from the downturn and are being bought at cap rates above the long-term average for the property. A key initiative is to make sure there's dry powder for these opportunities and leveraging our institutional relationships to effectively finance them. Sixth, as announced MCW, Macquarie CountryWide, is committed to bolstering their balance sheet through capital, and that's their announcement, capital management initiatives, which may include property sales or entity level transactions. We are working closely with them and this will happen on a basis that makes sense to Regency. Seven, the leasing team is totally focused on returning the occupancy of the operating portfolio to 95%, while continuing to increase rents. Achieving 95% occupancy in the developments also remains a critical objective.

Finally, G&A costs have been carefully scrutinized and the size of the organization is in the process of being right sized to fit the current environment and a level of development starts in the $250 million to $350 million range. In the longer term, assuming that Regency's high quality portfolio can withstand the recession and assets with flat same property NOI the next year or so and that the capital markets begin to slowly thaw and we have some success executing a modest portion of our capital plan and we are able to progress on retailing our development program, then our very preliminary view would be that FFO per share would be in the same range for 2009 and 2010 as we are expecting in 2008, and Bruce will give you more information about that. And then, from there, we should and expect to be in a position to generate respectable growth in 2011, even if with transaction profits at less than 10% of FFO. Bruce will discuss the implications of these actions on 2008 earnings as he details our revised range of FFO per share guidance and more information and details on our capital market strategy. Bruce?

Thank you, Hap, and good morning. In this day of recognition, I salute our veterans. Regency's FFO per share in the third quarter was $1.21, nearly 25% higher than this period a year ago. We exceeded consensus and our own guidance largely because of lower accrued incentive compensation and earlier than anticipated development profits. While the third quarter exceeded guidance, we've reduced our expected range of FFO per share guidance for 2008 to $3.90 to $4.35 per share. The main driver of downward revision and the wide range is transaction profits. The previous guidance included expected transaction profits of $63 million to $78 million. The new guidance range assumes transaction profits between $26 million and $60 million. Components of the transaction profits that have been impacted are -- promote income; development gains; and debt deal costs.

The promote from Oregon partnership is expected to be approximately $15 million to $17 million, due primarily to higher cap rates, which are expected to be in the range of 7.25% to 7.75%. This compares to our prior estimate of $21 million to $23 million that was based on an average cap rate of 6.75%. It is interesting to note that a year ago the properties were valued at a 6.25% cap rate, which would have resulted in a $30 million payment. More troubling is the real risk that promote could be totally eliminated if we don't beat the NCREIF index. Although as of June 30th, our portfolio had a 17% return and was meaningfully outpacing NCREIF's 14% return, we are concerned that many of the participants in NCREIF will not be as closely reflecting current market as we are with current appraisals. This possibility of not receiving promote contributes $0.21 of downside in our FFO per share guidance. Without this, the low end of our guidance would be $4.11.

With respect to development gains, $115 million of developments are in the market for sale. As you will hear from Brian, nearly $17 million is under contract. We are actively negotiating LOIs on two more centers and reviewing offers on three others. Depending on how many actually close in this uncertain market and the resulting cap rates, the fourth quarter gains from these developments could range from $6 million to $21 million. And finally, the estimate for writing off debt yield cost has been increased to $7 million to $10 million from $4 million. This is the result of tougher underwriting requirements, as Hap indicated, and scrubbing our pre-closing costs. You will note that a debt deal cost line item has been added to the statement of operations. In prior supplementals, debt deal costs were treated as an offset to development gains. As Hap said, G&A costs have been carefully scrutinized. Gross G&A for the year is projected to be $6 million less than 2007.

However, capitalized overhead is projected to be $9 million less than last year, due in large part to the reduction in development starts. As a result, G&A is expected to increase by approximately $3 million on a net basis for the year. I do want to note that net G&A in 2009 is expected to be $6.2 million less than in 2008. These are unprecedented times in the capital markets. We cannot say enough that strengthening and protecting the balance sheet is our number one focus and priority. Given our conservative stewardship, the balance sheet is in excellent shape. There is currently only $70 million outstanding at Regency line of credit leaving nearly $645 million of available capacity. I calculated a downside analysis of our balance sheet capacity that assumes no property sales, no cash flow, and no refinancing of maturing debt.

Given our ample credit facility, we could operate through 2010 and still have over $170 million of available capacity in the line of credit at the end of that year. This analysis is available on our website, along with our supplemental as an Excel file titled Balance Sheet Capacity. The scenario assumes refinancing our funding of $210 million of maturing bonds and $25 million of mortgage loan maturities, $240 million of net costs to complete the in-process developments, and $30 million of new fourth quarter starts and provide $34 million of equity into our co-investment partnerships to refinance maturing mortgage debt. In addition to the capital available under our line of credit, as Hap mentioned, over 87% of Regency's total real estate assets are unsecured. Valued to add an 8% cap rate, this provides over $3.1 billion of value that when leveraged at 55% loan to value would provide over $1.7 billion of potential loan proceeds. It is important to note that secured financing is still available.

Our experience is that low leveraged grocery anchored centers are a sweet spot for mortgage lenders. As evidence of this, we are close to a commitment on a 7-year, 50% LTV, $43 million mortgage on a three property portfolio at a coupon rate of 6.85% that we brought to market in early October. We continue to have a high level of interest from our life Company relationships for loans of this type. Finally, the dividend is secure and sustainable at its current level. Given what we are probably projecting, currently projecting for FFO, the dividend pay out ratio is in the range of 67% to 74% of FFO and 74% to 83% of AFFO. Brian?

Thank you, Bruce. Good morning. Before I discuss our thoughts on development in this environment, let me quickly review the performance of our in-process developments and discuss the remaining 2008 development sales. Leasing continues to be soft, but it's certainly not dead. In the third quarter we leased 341,000 square feet of development space. That's about 45% more than the average development leasing done in the first two quarters of this year. Stabilized returns on the $1.1 billion of in-process developments on a quarterly apples to apples basis are up 5 basis points. If we assume we can't lease another square foot of space, the current return on invested capital is approximately 6%. Although leasing the in-process portfolio in the middle of this downturn is a challenge, there is reason for optimism.

The best retailers are signing leases but only in projects where they can expect to generate strong sales. Our best weapon in leasing space then is to provide the perspective lessees or to prove to the lessees that our superior locations generate high foot traffic created by strong anchor sales volumes. Let me give you three recent examples of where this is in fact happening. About five weeks ago KOHL's opened 47 stores across the country, two of those were stores we developed for them in south Florida. One of the stores opened as the number one highest volume store of the 47 nationwide and it continues to enjoy that same position today. The second store we developed for them is in the top 15 of those 47 stores that were recently opened. Similarly at our shops at Stonewall project in northern Virginia, Wegmans recently had one of the best openings in its history, with overflow crowds too large for its parking field. In fact, we got word this morning Staples said their store there is on fire. That's their quote.

I think these projects on good examples of how, even in difficult economic times, thoughtfully conceived projects and superior locations with top tier anchors can result in robust sales and there's nothing that attracts retailers like strong demonstrated sales. On the disposition front, we have got eight development properties on the market at an estimated total price of $115 million. If all sold, could generate as much as $21 million in gains. Of these eight properties, two are currently under contract with a third nearing contract execution. All three of these are single tenant buildings, so there's very little due diligence challenge or risk for the buyers and therefore these sales have the highest probability of closing. The gains associated with these three sales would be approximately $6 million.

In addition, we are actively negotiating letters of intent with interested buyers on two other centers, which represent nearly $9 million in gains. And are reviewing offers on three other centers, whose gains would total $6.5 million. As Bruce said, these are unprecedented times. Going forward, caution is the order of the day and we are being highly selective in the opportunities we pursue. All investments are viewed in the context of the balance sheet and will not proceed if capacity as an issue. The projects we do pursue will be those that retailers want, that consumers want, and that our co-investment partners ultimately want to own. In short, projects are being evaluated based on the ability to quickly and profitability recycle capital. As for specific directions to our team, we will continue to focus on the most desirable markets, with the strongest demographics, anchored by the top retailers, no real change there.

We will not be pursuing mixed use projects nor will we buy land to hold except for extraordinary opportunities. We will be doing a higher percentage of grocery anchored centers, catering to nondiscretionary shopping. We will further reduce the amount of shop space we build, it is already down but it is going lower. In early 2007, shop space in our in-process projects amounted to 33% of GLA. Today, our in-process projects average 19%, our 2008 starts will average 16%, and our 2009 starts look to average just 13%. We have significantly raised return requirements. As Hap indicated, we expect new developments to be underwritten at returns 200 basis points higher than the expected cap rate for the proposed development and that exist cap rate will reflect all risks and market conditions unique to that project.

Return thresholds will be increased again to the extent cap rates and/or the cost of capital increase. We will give special consideration to projects where the land is already owned, developments with lower risk profile and where we have prior firm commitments to anchor tenant customers. Given the increased return requirements, our development pipeline is being retooled. Returns will rise to acceptable levels or we will drop the pursuit. A meaningful portion of the pipeline consists of projects where Regency already owns the land and we expect eventually to move those holdings into production. Where proposed projects fail to make the cut, there will be write-offs of pursuit costs. The total amount of at-risk dollars that controls the entire pipeline of projects is $11 million. For projects that don't currently meet our new hurdles, the at-risk dollars total about $6.6 million.

We fully expect that we will be able to restructure many of these projects and dramatically reduce the amount of potential write-offs. While the amount of development is being significantly curtailed until the capital environment improves, we will continue to pursue these investments under the right terms, as we are, in my opinion, entering a period of immense opportunity. In today's environment development is significantly less risky than it was a year ago. Today land prices are down, construction costs are soft and with the complete lack of competition, we are pretty much able to negotiate whatever terms we need. For the first time in about 15 years we can negotiate to tie up properties for as long as necessary and put off closing until we have all entitlements and significant leasing in place. This is in marked contrast to market peaks when developers had virtually no negotiating power with landowners and were forced into taking increasing amounts of risk.

Today cities are willing to work closely with us on reasonable terms, retailers are bringing us many exclusive opportunities. In short, we are entering the sweet spot of development that comes around very rarely and in those periods developers can create extraordinary value. The only weak ingredient in this model today is retailer sales, with the projects being pursued will not be delivered for several years when that demand is back. These opportunities, no matter how good, will not be undertaken at the expense of the balance sheet. The bottom-line is that Regency's development program is being retooled and slowed. The volume of development starts and at least the amount of Regency's investment will be reduced as a result of higher return guidelines, tougher underwriting standards, the need for transparent takeout commitments or real financial partners, and limits on capital commitments.

Projected starts for this year have been reduced to $180 million. The remaining $30 million is scheduled to come in at 10%. The amount of development that is started next year very well could be less or more based on how successful we are in executing our financing plans. I do want to point out that most developments that would be started in 2009 would not be stabilized until the period of 2011 to 2013. Furthermore, it is important to remember that any development we do will involve considerable preleasing. Of the remaining 2008 starts, we are currently 84% preleased and the projects we hope to start in 2009 I expect will be approximately 80% preleased as well. The day's closing without this kind of leasing are long gone. I will close by saying Regency is extremely well positioned for profitable growth when the economy returns to normal.

In addition to traditional investment opportunities, we are very likely to see banks, mezzanine lenders and hedge funds taking back huge amounts of unfinished developments. They will need a team with a strong, they will need to team with a strong Company with development and operating capabilities to see their way out of these projects. As I have said before, anchor tenants will turn to the handful of companies that have performed for them during difficult times. Not only do the best retailers still need to expand, they need reliable development partners, of which there are few today. The development business is not one that easily can be started and stopped and restarted again, as development takes years to hatch and future returns will become more attractive as land owners find religion and land prices drop. Hopefully by 2011, development starts can be returned to the $300 million to $400 million level with margins about 200 basis points, thereby creating significant value. Mary Lou?

Thank you, Brian, and good morning, everyone. Regency is a necessity driven, largely grocery anchored operating portfolio, is holding up remarkedly well in the face of an increasingly challenging environment. Occupancy for our pro-rata share of the portfolio was 94.3%. Rental rate growth was in double digits, at 13.8% for the quarter and 11.6% year-to-date. 1.2 million square feet of new leases and renewals were signed during the quarter and NOI growth for the quarter for Regency's wholly owned portfolio and shared partnership was 2.3% and 2.5% year-to-date. The total portfolio posted 2.6% NOI growth year-to-date. Occupancy has dropped from 94.6% last quarter to 94.3% in the third quarter, a decline of 30 basis points. There has been a slight uptick in move-outs in the operating portfolio this quarter, which year-to-date are 110,000 square feet higher than last year, largely attributable to two lenders and banks. The portfolio is performing solidly on a regional basis.

Strong markets for us continue to be California, where average same-store growth is over 4%, occupancy is 98% and rent growth is over 20%. The northeast is another very solid market with same-store growth of 2.5%, occupancy nearly 95%, and double digit rent growth. Texas is also strong with NOI growth of almost 3%, 94% occupancy and again, double digit rent growth. And honestly, I am pleasantly surprised to see how well the Florida portfolio is performing. Despite the tough economy, NOI is positive and the portfolio is 94% plus leased and rent growth is over 8%. Our tough area, honestly, is the Midwest and it continues to be the most difficult market with flat NOI and low rental rate growth. To quote Hap, our portfolio looks pretty darn good. We are still leasing over 3.5 million square feet of space and due to strong anchors and better demographics, the sales at our centers are good and the retailers are healthy.

As the consumer turns to value and necessity retailers, several retail categories continue to see sales increases. Grocers are up almost 6%, drugstores over 3%, and discounters over 4%. If you were to view these results in the back end, you could assume that this year's not much different than any other, but given the credit crunch retailers are not able to access the capital needed to expand and grow their business. Down time for vacancies is increasing in both new developments and the operating portfolio and therefore, putting downward pressure on rents. As a result we are forecasting year end occupancy to be between 93.8% and 94% on a pro-rata basis. For the most part with the exception of exposure to Fine Linens & Things and two Circuit City stores, impact from bankruptcies have been minimal. Even though in the short run these move-outs hurt our numbers, they're still good news.

In Santa Barbara we are replacing the Circuit City with Whole Foods at significantly higher rent. And across the country, as we look at these spaces, we are proactively working with retailers like Fresh Market, Marshall's, Nordstrom Rack, Best Buy to fill these larger spaces. It may take a little longer and we may have some short-term pain, but these are strong retailers in strong centers. In addition to major retailer bankruptcy, other (inaudible) that over the next few months Regency will experience an increase of move-outs in local tenants as well. But excluding grocers, we do not have any significant tenant that is other 1.5% of our revenue. Our geographic and tenant diversity will continue to minimize the impact of retailer failures in the future. The leasing teams are totally focused on returning the operating portfolio back to 95%, while continuing to increase rents. Our preference for better operators is even greater during a recession. Existing tenants are being proactively approached for early renewals.

The leasing team is spending even more time cold calling retailers and competing centers about upgrading their space in Regency's better performing centers. These same programs are being applied to achieving 95% occupancy for development. For the remainder of the year we have narrowed our same-store guidance to a range of 2.4% to 2.7%. It is important to note that in October we received a termination fee of $2.5 million that does add 70 basis points to our full year same-store growth. The same-store growth rate, excluding termination fees, is expected to be about 1.7% to 2%. We have raised our rent growth guidance to 9% to 11%, given our performance year-to-date, even though we are expecting moderated rent growth in fourth quarter and continuing into '09. While I have confidence in the guidance given for the remainder of this year, we believe that next year is even going to be more of a challenge.

And at this time my best guess is that in the face of the recession, we may have flat same-store NOI. And in my mind, if this environment our portfolio maintains occupancy of 93% to 94% and sustains the same level of NOI or perhaps even see some growth, it is a testament to our high quality, necessity driven portfolio that's truly built to withstand the strong headwinds coming our way and that in the next two years we can get back to our 95% occupancy and our normal 2% to 3% same-store growth. Hap?

Thank you, Mary Lou. Thank you, Brian, and thank you, Bruce. I do want to close with what I believe are two important messages. First, I feel extremely fortunate to be working with an experienced cycle-tested deep leadership team, which is totally dedicated to meeting the unprecedented challenges which we are now facing. The tough decisions are being made, like renegotiating land contracts, walking from projects that have been worked on for months and times many years, and especially reducing head count. These steps are being taken to preserve the balance sheet, while at the same time we enhanced Regency's franchise as the premier operator and developer, intensely manage our portfolio, and position Regency to take advantage of compelling opportunities to create significant value in the future from developments and acquisitions.

I also think it is fitting to end the call by finding perspective regarding survival versus thriving. If you would indulge me for a minute and let me read from an exert from a OpEd column in the September 28th New York Times by one of my favorite writer, Tom Friedman, many of you may have read it, but I do want to read it again. And I quote, when I need reminding of the real foundations of the American dream, I talk to my Indian American friends who have come here to start new companies. Friends like KR Sridhar, the founder of Loom Energy. He mailed me a pep talk in the midst of this financial crises, a note about the different between surviving and thriving. Infants and the elderly who are disabled, obsess about survival, said Sridhar. As a nation if we just focus on survival, the demise of our leadership is imminent. We are thrivers. Thrivers are constantly looking for new opportunities to seize and lead and be number one. That is what America is all about. End quote.

Finding the path to thrive has never been tougher. The mountain that we are climbing is very steep, got some land mines on it and the fog is really thick. At the same time, we can't overlook the fact that we start this climb with some amazing resources, a strong balance sheet, a quality recession resistant operating portfolio, excellent tenant relationships and value creating development capabilities, a reputation as the best in class operator that owns and develops high quality assets, that even today are attractive to institutional investors, and especially the world class team that I work with. After a long and arduous journey, that almost certainly involve one slow step at a time, some tedious backtracking and new paths to get around the unexpected surprises that are still in front of us, we will get to the top of the mountain. And the reason that our journey will be a gratifying success is that thriving is what Regency is all about and what we are committed to doing. So we appreciate your time and will now answer any questions that you may have.

(OPERATOR INSTRUCTIONS) We will take our first question from Michael Bilerman with Citigroup. Please go ahead.

Hi, it's Quinton Valieo. I'm here with Michael. Just in terms of your current development pipeline you spoke about return hurdles and so forth increasing on that and the potential for some write-downs, if you are going to make some merchant gains in the future, could you just maybe speak about what you are expecting in terms of net development margins on those existing projects?

Well, if we do a 200 basis point spread that equates to about a 29% profit margin.

Okay.

If we build at a 10 and sell at an 8 or contribute an 8 that would be 29% profit margin.

That's really on the future stuff.

Yes.

How about the stuff that's already, the $400 million that's delivered and the stuff that is scheduled to deliver over the next year.

Yes, the -- depending on the cap rate, the stuff that we would expect to deliver next year would be in the neighborhood of 7.5%, you are probably at 20% and if you are at 8% you are getting down around 15.

Okay. And just for my other question, you mentioned Macquarie CountryWide, which is obviously has some difficulties at the moment, if Macquarie CountryWide becomes a forced seller of assets, would you be a potential acquirer of these assets or is it more likely that you would inject equity into the joint venture?

That is the possibility of us being acquirer of some of their positions, a possibility and it is also a possibility there may be other investors that may be buying their position.

Is this something that they're actively or that you are actively speaking about at the moment.

I think they have announced that they are actively involved in considering both entity transactions as it may relate to the partnership and the possible sale of assets. As I said, we are working with them closely and expect that something can be accomplished on a basis that's going to make sense to Regency.

Okay. Thank you, guys.

Thank you, Quinton.

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

Hi, good morning, guys. Bruce, you talked about appetite among lenders for doing deals on grocery and good centers, can you give some color on the appetite and pricing for doing deals on larger community or power centers. And when you complete and stabilize one of these centers, are you typically putting on permanent debt before contributing it to the open-end fund?

I will answer the last question first. That's really -- we are trying to do that simultaneously to the extent we can although, you note that we contribute the assets to Oregon in the process of doing that mortgage financing that I referred to in my comments. Larger centers are more difficult to finance today in general. The sweet spot would be $10 million to $15 million per center from a loan perspective. To the extent you get above that, you start to get a little push back from lenders that want to do that, you just narrow the amount of lenders that would do that. Current spreads today are probably for our types of property are probably in the 350 to 400 basis point range, but I would say that between now and the end of the year, you will see less activity just because we are at the end of the year and I think there are a number of lenders that are saying -- are waiting to see if there's more clarity even on their side of the capital markets.

And I would also add, Christy, on the larger community center side, Bruce is absolutely correct in terms of the larger dollar amount it gets a little tougher and you may have fewer players, but still the most important thing is the quality of the tenants and the credit quality of the tenants that are in the shopping center. If you have got a community center, for example a Target on a lease, you would be able to get a loan on that as easily as you would with Publix on a lease.

Okay. That's helpful. And then Hap, you talked about opportunities out there that are becoming more attractive. Can you provide just some additional color on what types of opportunities you are seeing in the transaction markets today, if any, and how much distress or what kind of pricing you guys really need to see out there before committing capital more aggressively?

Well, we indicated that we feel that longer term in general and better assets may price better than this, but in general cap rates are moving to 8%. So we would need to see, in effect, it would have to be accretive to that. And I think on, there may be some distressed sales that we are aware of, where you might see some opportunities in that regard. But we can't speak to any of those right now because they haven't, they haven't occurred and -- but we believe there is a, there's good prospects, Christy, that may evolve in the months ahead.

Did you say they are moving to 8% or they have moved to 8%?

We are saying that we expect them to move to the 8% range, is with obviously, cap rates being lower for more infill properties and coastal markets and cap rates maybe being higher for what you might call more commodity type, from a commodity type product.

Okay.

I think that, if I may, I would just add that it is so difficult right now to really know where cap rates are because there's so few transactions that are occurring.

Sure.

I think that that's the most important thing and because of the capital markets. Once the capital markets start to clear up a little and saw that there will be a clearer picture as to where cap rates are going to go.

You might just share the full range of appraisals on the Oregon.

Yes. We are still in the process of getting all the appraisals that determines our promote for the Oregon partnership and cap rates, if I need to be honest, have come in on these appraisals for 6.25 up to 8.25. So, definitely varies and clearly the appraisal market, as some people know, some times lags the actual market.

Okay. Thank you.

Thanks, Christy.

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

Hi, this is Jahan here with Jay as well this morning. Just turning to the balance sheet and your available capital at this point, you have mentioned in the past that you would be open to providing seller financing to get deals done in these entity opportunity just arise, does arrive, what are your thoughts on this today and have they changed at all from capital preservation standpoint?

No, I think we are still in the same position with respect to providing seller financing> We will do it on a sparing basis where we look at who we are dealing with and the type of property that we are selling and the likelihood of full repayment. Our general rules are 35% equity, in other words, we wouldn't do more than 65%. There could be some variances in that and we are trying to do basically targeting market rate deals, basically, using 400 basis points over whatever the treasury is. It is market. Our view on that is that still is important on our capital recycling plan when you wouldn't get any money if you didn't sell the asset without the seller financing. We are going to generate 35% of the proceeds in terms of capital recycling from our perspective. Again, that money would be used on a sparing basis.

Okay, thanks. Then turning back to merchant build for a second and your outlook for 2009 and 2010, I guess how should we be thinking about gains as a percentage of your earnings going forward and would you consider at this point removing gains, or merchant build gains from your guidance altogether with anything recorded being incremental to base-line earnings.

We are going to have more definitive guidance on our, our call at the end of the year, our year-end call. And we will try to provide as much guidance as we can as far as transaction gains. We do believe that even under some conservative, more conservative assumptions that a certain amount of gains can be generated but in effect more to come on that and I think as I said, I think the guidance that we provided for -- that Bruce has given for 2008 is probably a pretty good range or starting point for guidance for 2009 and would -- my kind of inclination right now is it ought to be somewhere in that range.

Okay. Then just to follow-up the lower end of that range then being sort of the, the baseline or the conservative just looking at what sort of, what to expect in terms of the lower end versus the higher end of that range?

I just think, like I said, the range for right now we haven't given guidance but as I indicated, we are looking somewhere in that, somewhere in that range of 390 to 435 and we've had a pretty good preliminary look at the numbers, but would like to have another, in effect, 90 days there to be a little bit more clarity in the capital markets before we provide any additional guidance.

Thank you.

We will take our next question from Lou Taylor with Deutsche bank. Please go ahead.

Thanks. Good morning, everybody. Let's see, Hap or Bruce or Brian, can you talk just a little bit about the deals that you have got on the market for sale, are any of them going to third parties or what percent is going to third parties and maybe just give us a sense or buyer profile and their source of equity?

They're all private buyers. We have got two of them are all cash buyers and the remaining ones are, of the ones we expect to close would be seller finance.

Remember a lot of these are single tenant occupied buildings. I think there are two multi-tenant buildings, I mean, what you would call typical shopping center.

The three under contract are all single tenant. The ones we are negotiating LOIs, one is a single tenant building, the other is a grocery anchor center and then the ones that we are evaluating offers right now are grocery anchor.

Okay. By private buyers I mean institutional, are they families, are they local?

Families, local people, not institutions.

Not institutions, okay. And then second question just pertains to just development leasing, how much is really actively in negotiation today for the vacant space that maybe takes occupancy in maybe second quarter or later next year, or is that environment really just pretty quite right now.

Like I said, we did 341,000 square feet of development leasing this quarter, which is 45% more than the average of the prior two quarters. Now, whether that indicates an uptick or not, I don't know. I think it feels pretty consistent with where it has been for the first two quarters, the projects that are the best located that were not built in the markets depending on future growth continue to lease well and those that were built in markets that did require a little bit more housing are the ones that are slow. One of the projects we are going to be doing in the fourth quarter would address one of those. For example in Culpepper Virginia, we have a project where the housing market's slow, we have got a Target anchored center and what we are going to be doing there is one of our starts is to just build [knot holed] grocery store, no shop space and just create some additional foot traffic that will hopefully help the sales at that center and therefore the leasing.

Yes, I guess, where I was going with that is how much has the leasing environment changed in the last 30 to 45 days as opposed to what happened in Q3?

I don't --

Yes, it's Mary Lou, I will answer it. It really hasn't changed that significantly in the last couple of quarters. I mean, the thing that has changed is the time it takes to lease up a space and it has changed. As I mentioned even in the operating portfolio and looking at some of these move-outs that we have on Circuit City and the bankruptcy from Linens & Thing, we have got great deals going on, and with a lot of good retailers out of the spaces we have, I think there's two right now that we don't have anything going on. It is just taking, whether it is a development or it's an operating portfolio, it is taking us longer time to lease up, but we are still seeing strong activity and I think Brian said it very well, the most of our developments are leasing up at a reasonable pace, slower than it has been but reasonable pace. We just have some out there that were dependent on housing growth that is very slow and very difficult, but not a significant change in the last 30 to 45 days.

There's still -- really the bottom-line is to date there's still a pretty resilient heartbeat out there, it is not as strong as it was obviously a year ago, and I -- and there's a chance that things may slow further. I mean we are -- I think that our projections are now we have moved out to 40 months from putting a space in the ground and a couple of years ago it was -- our average was like 24 months. We rigorously go over the portfolio every quarter and I think we are being pretty conservative in our assumptions, but could things slow further, the answer is absolutely that's possible.

The thing that's out there and that really has changed is the fact that the inability for people to get credit and where we are seeing the challenge isn't the fact that we have our PCI retailers, who quite frankly many of the sectors are having nice mid-digit increases, comp increases over the previous year, but where you are dependent on a franchisee to open a location, they have the franchisee, franchisee today just can't go to the bank and get the credit. So it may take $350,000 to $500,000 to open a location, but they need that and they can't get it. And that's the primary reason why we are seeing a slow up both in developments and operations.

Great. Thank you.

Thanks, Lou.

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

Good morning, guys. Bruce and Hap, I know you are reluctant to give 2009 and beyond guidance at this time, but I am curious, if you annualized your Q4 '08 FFO, excluding transaction profits, you are at about $3.40 a share and that seems to leave a pretty wide gap to the $3.90 to $4.35, I think, Hap, you said in your comments. I know you don't want to be specific, but can you at least in very broad strokes give us some rough sense of how you feel that $0.50 to $0.70 share differential?

My answer would be that clearly there's going to be some transaction-related business in that. That would be the component of our plan. In addition you are going see reductions in G&A that occur that we have -- that I referenced in my comments.

You will see some growth in what somebody might call non-transaction FFO.

The G&A reductions, Bruce, just to be clear beyond what the run rate in Q4.

Yes.

Yes.

Okay. And then your second question -- .

$6.2 million difference.

Okay. Second question, then I guess for Brian and Mary Lou, in your development pipeline you have been managing down your small shop space, obviously, for some time, does that tell us that in your core portfolio we should expect greater retention and releasing issues among small shop tenants than in big box? And I guess within just the small shop side, do you think your mix between PCI and mom and pop tenants is going to shift around at the margin.

First of all our renewal rate on our core portfolio's over 80% and even if we look at next year, in 2009 we have already early renewed about 15% of those side shop tenants and our rental rate growth in the renewals has been extremely strong, year-to-date over 12%. So the answer to your question is yes, renewal is a focus, maintaining occupancy is key, and that is true whether it is in a in-process development and it is true in terms of our operating portfolio. As far as our -- is it going to shift on the margin? Yes, it will shift on the margin.

What we are doing today is because of the fact that our franchisees are not able to get credit and we can't grow as quickly as they would like or we would like in our portfolio, we are focusing on real strong regional players in a market that are in a center that quite frankly don't have the characteristics that we have, both in terms of our anchor sales, demographics and in many case density, and we are going out there and our guys are out there cold calling these people and moving them in and showing how much stronger they will perform in a Regency center. We are seeing some nice success with that, but it will only be on the margin and as soon as this credit crunch breaks loose, we are real happy with where we are with our PCI retailers, but that is what making it change. But it still we have not lost sight at all in terms of really keeping the tenant quality high.

Let me get back to Jeff's question. I think that part of the -- we do expect some growth in non-transaction related FFO to occur as developments lease up and some of that leasing has already occurred, we are just not getting the income from that right now as those leases come into place from G&A savings. So I think that if you take aside transaction income aside, we are expecting some pretty meaningful growth in what I would call non-transaction related FFO.

That's great.

That doesn't include much growth in same-store.

Okay. Thank you. Thank you, guys.

Thank you.

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

Hi, can you hear me?

Yes.

Okay. Let me see. Bruce, can you clarify your comments on G&A. If we are looking at the G&A that is actually hitting the P&L it is not capitalized, how much lower is what you are talking about it could be in '09 versus '08?

Net basis $3 million.

$3 million, okay. And then if we were --

I'm sorry. '09 over '08 is $6.2 million net.

And that is expensed?

Correct. That would be the amount that we would show that would be expense difference.

Yes, exactly. If we are looking at, I guess, the margins Brian laid out for maybe 15% or 20% on the development gains next year lower than what it has been running. It seems like volumes would have to be a little higher. Can you just talk about -- I know you don't have the crystal ball right now, but when you look at what could be contributed or sold next year, does it look like it is going to be a mix of stuff going to the takeout fund as well as third parties or is it more heavily skewed one way or the other.

There will be a component that is effectively going to make two properties that will meet the open-end fund and the rest will be effectively third party basis.

(multiple speakers)

Or naturally beyond to the fund itself, if that gets expanded.

Plus, we have gone as far as to give you that exact number for the fund contributions on that balance sheet capacity slide of what we expect in terms of the cash coming in.

Okay. Thank you.

Those are identified and as I indicated one of the key initiatives that we have -- .

A fly over for veterans day, sorry.

One of the initiatives that we have is to have a joint venture, co-investment partnership in place as it may relate to grocery anchored shopping centers.

Okay. Thank you.

We will take our next question from Nate Isbee with Stifel Nicolaus. Please go ahead.

Hi, good morning. You'd spoken before about the higher development yields you are going to be demanding on the future projects. And can you just address the, the current lend inventory, much of which was bought above current market value and your ability to get to those higher yields using that land?

Well, of the things that would keep the returns from immediately getting up to the level we are talking about, one of those reasons is the land held. Overall we have got about, of the projects we think will go forward, we have about $350 million worth of ultimate development costs and the return on that would be probably in the low 9s as opposed to over 10. We have got some projects that are mid-10s to almost 12%, but overall they look pretty darn viable in the low 9s.

So talking about that 200 basis point spread, doesn't make sense to build those to a nine or low 9s?

No, but -- .

Wait a second -- to the -- it does make sense to build those, because in effect we are, we are converting the, the land into an earning asset.

Okay. I guess in a perfect world you never would have bought it, but now that you have it. (multiple speakers) You could, by the way, monetize that. Okay. Thank you.

Thanks, Nate.

We will take our next question from [Avi Learner] with Robert Baird. Please go ahead.

Hi, good morning, everyone. My first question, I was wondering related to your joint ventures, are you seeing any interest either from new partners or expanding or extending relationships from existing partner?

I would say that there is a good chance that it will be an expansion of --from an existing partner. Or partners.

That's in negotiation or are you pretty close?

More to come.

Okay.

On that regard. As I indicated, this is something that is important for us and now is not exactly the best time to be having discussions right now with folks and we are going to do this on a proactive but thoughtful and diligent basis.

Right.

This is not, this initiative is not a new initiative. Actually it is something we have been working, talking about for over six months. So it is --

Right.

Is been on our list to do for some time.

Okay. And then, secondly, with regard to this project eligible for the open-end fund, are you taking any steps either promotions or TIs to generate more leasing velocity in those projects?

No. We are really not. I think we're in pretty good shape in the projects that will be contributed into the fund and we haven't really seen a trick up in that at all. So, no.

Okay. Thank you.

We will take our next question from Michael Bilerman with Citigroup. Please go ahead.

Yes, the note receivable balance went up about $35 million. Was that a note relative to the developments that were sold in the quarter or is that something else?

Yes, that was related to the properties that we contributed to the Oregon fund.

And in fact, the, in Bruce's comments he noted the $43 million mortgage that at 6.85 coupon, that we are very close to getting commitment for, that is to repay a $35 million note for Oregon.

And you don't adjust anything on your gain calculation when you provide seller financing?

No. Longer than market. As long as it is market rate financing.

And then just coming back just to make sure I understand 4Q relative to what has happened this year into next year. The G&A specifically, I think you talked about being -- just trying to back into it, it is about $16 million in the fourth quarter? If it was -- if total G&A was up $3 million for the year.

That would be close enough to drill, I think.

And then you're saying, when you look at totality for next year you are going to be 3 million less or 6 million less, sorry, 6 million.

- think on as less.

And is there anything else in the fourth quarter that would be effecting that $0.85. In Mary Lou's comments I heard something about lease term fees. I don't know if that was already received or to-be received or anything on out parcel gains, just -- .

It was received.

In October.

In October.

Right.

So it is in the fourth quarter, but it was -- we have already received it in October. You didn't, obviously, see it in third quarter numbers. And that was $2 million. It was $2.6 million.

$2.6 million Is there an expectation at the low end of this guidance for additional lease turn fees or any out parcel gains.

No, not from our perspective at this point.

Thanks, Michael, we have to move on to the -- .

I just want to make sure I clarify what's in the numbers. I thought that was important. Okay.

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

Thank you. Can you help me understand a little bit better which assets under development are merchant building assets? As I look at the dispositions during the quarter it is more confusing than it has been as to what you consider to be merchant building and what you don't, especially with respect to assets on ones you have taken depreciation.

I am not sure that we understand the question. I think historically we have always said that everything we have built we are willing to hold long-term and clearly some of these single tenant properties that are currently on the market and expected to be sold were identified at the beginning as likely candidates to be sold at completion, although we would be comfortable holding them. There's really no merchant build program that's just -- .

You specifically, Jim, referring to the three assets, four assets that were contributed to partnerships.

Yes, looks like where there were gains over, over gross, book value, those were merchant building and where there was a loss in one case it was not considered merchant building. I am just trying to understand that.

Loss in the quarter. When you refer to a loss,.

Yes, Independent Square.

I think Independence was really tied in with a portfolio sale that we did with Waterford, which was -- what's driving that loss, but I think it was a very slight amount, wasn't it.

It was an operating property.

Yes, again that's the confusion as to what's an operating property versus a merchant build property for purposes of your accounting.

I see. I understand your issues. Which schedule are you referring to, Jim.

He is looking at the supplemental.

This call has gotten long, I will take it off0-line with you, but I think that would be helpful to have some clarity.

We will look at that, Jim. I think I understand your point now. I think that's a fair comment.

And then, secondly, Brian, I have heard comments on the call with respect to the development pipeline, about further reducing the amount of shop space, which would seem to be the right thing to do, but hurt your overall yield because of the differential in rents. And then I have also heard comments with respect to extending the lease up period, which would seem to increase your carrying costs, yet when I look at the development yields that you are showing, I believe they're down 3 basis points this quarter versus last quarter. How can you reduce the shop space and extend the lease up and not negatively impact your yields on what is, what is underway, by more than say 3 basis points?

Well, first of all most of that, Jim, we did in prior quarters. We are at 40 months this quarter, but we are pretty close to that last quarter. It might have been just a couple of months difference. So we have already taken those impacts, which would -- which already lowered the returns down to where they are right now.

Just to be clear, the reduction in shop space is on the pipeline. The increase in lease up time is on what's in process.

Okay. And --

Which is already what is underway, Jim.

I got it. Then finally the lease termination fee, can you provide a little bit more detail on that, that's a pretty big number.

Yes, we had a shopping center in Houston, Texas that was an Albertsons, I'm sorry, Austin I always say, Austin, Texas that was an Albertsons. We are working on -- so we accepted their lease termination fee, third party. It was one of those leases that somebody, a third party had owned it. Very happy to get the $2.6 million. We are already working on another anchor that is a strong anchor that would go into that space. So it really is a win-win, like I said, and we are seeing this a lot and I think it just helps everybody to understand, some of these vacancy that have come open and available, we really feel are a huge opportunity to upgrade the quality of the retailer in our centers. This is an example of one of them. In the short-term it is painful. In the long-term it is real good news. We have a good of good news I think that you are going to be seeing over the next year and especially the year after.

Thank you.

Thanks.

We will go back to Michael Bilerman with Citigroup. Please go ahead.

Welcome back, Michael.

Thank you. And I get another two. On the stabilized developments.

You can get back in the queue again for another two.

We will just take it off-line. The $400 million, your current yield on that right now is what?

On what, Michael?

The $400 million of -- the stabilized developments that are sort of held to sale or to hold,.

What is the current yield on that? It is --

Effectively, is there more upside to go as you think about leasing up or is it really the leasing from the -- .

Yes, I think the range is 9 to 9.5, somewhere in that.

In inventory.

I am pretty sure that it is, that the $400 million plus it is north of 9%.

Already, that's already running.

Already and they're already 95% lease.

My good, my best guess would be that it is slightly north of 9.5%.

Right. So trust, take my number but trust what Lisa says, because it is north of 9%.

And you're really thinking then on the $1.1 billion of the sort of construction in progress of which you have already spent which is obviously a very low yield today, under 2% as you are just in the lease up process, that that is where even if you don't sell these assets next year, as you start to lease up and get more income you will get that FFO accretion.

We refer to that as new development NOI and it doesn't show up in same store.

But if you take the amount that they are leased today and the cost to complete, exclusive of any future phase that we are not committed to today, the current in place return it real close to 6%. And I also want to note something else, getting back to Nate's question about land. To the extent we have got about $175 million, $200 million of land on the books, to the extent that we are able to convert that land to 9% returns, that's $18 million a year in FFO, not gains, but constant FFO that is out there. Now obviously to the extent those assets could be sold, there's a portion of that, but that's a -- even though, yes, could we buy those assets as lower value today, yes. But I think for the most part we feel real good about the future potential of those land assets that we own.

And then my last question just on the downside analysis, Bruce, that you prepared, which is very helpful, that assumes zero development starts in 2009 and 2010.

That is correct. What we showed you is effecting the guidance for 2008.

Where you are today.

The $30 million is the only new component that is in that analysis.

Okay, thank you.

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

We appreciate your time and you can be assured that we are focused to move Regency forward in these challenging times but feel that we are going to be well positioned, as I indicated, not only to survive, but also to thrive. And everybody have a great day. Thank you.

Ladies and gentlemen, this will conclude the Regency Centers Corporation third quarter 2008 earnings conference call. We thank you for your participation and you may disconnect at this time.