Regency Centers Corp (REG) 2008 Q4 法說會逐字稿

Ladies and gentlemen, please stand by. The conference is about to begin. Good morning. My name is Cynthia, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Regency Centers Corporation Fourth 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, and good morning everyone. On the call this morning are Hap Stein, Chairman and CEO; Mary Lou Fiala, Vice Chairman and Chief Operating Officer; Bruce Johnson, CFO; Brian Smith, President and Chief Investment Officer; Chris Leavitt, Senior Vice President and Treasurer; and Jamie Shelton, Vice President of Real Estate Accounting.

Before we start, I'd like to address forward-looking statements that may be addressed on the call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes, and results may differ materially from those expressed in these forward-looking statements. Please refer to the documents filed by Regency Centers Corporation with the SEC, specifically the most recent reports on forms 10-K and 10-Q, which identify important risk factors which could cause actual results to differ from those contained in these forward-looking statements.

I'd like to turn the call over to Bruce to discuss the pending accounting resolution regarding the timing of recognition of gains. Bruce.

Thank you, Lisa. The recent distribution-in-kind of properties resulting from the dissolution of two entities in our partnership with Macquarie CountryWide, raised a question under FAS 66 regarding when partial gains from sales of properties to co-investment partnerships should be recognized. Regency's auditor, KPMG, has historically agreed with the Company's application of FAS 66 in accounting for these gains. However, due to the absence of any controlling accounting literature, at KPMG's request, Regency will seek guidance from the Securities and Exchange Commission regarding this question.

Regency historically has recognized gains on the sale of properties to co-investment partnerships at the closing date, excluding that portion attributable to its percentage interest in the partnership. If the partnership subsequently sold the property to a third party, Regency then recognized the gain on the portion of the property attributable to its remaining ownership interest.

The question has arisen whether Regency's rights under certain JV agreements that allowed Regency to call for a liquidation of the entity, and in so doing, receive a distribution-in-kind of the properties owned by the partnerships, are in fact an option to reacquire the properties.

If these rights are deemed to be options, then all partial gains previously recognized by Regency on the sale of properties that are still owned by these partnerships would be deferred until such time the partnership is liquidated or the property is sold to a third party.

To the extent that any such partnership subsequently sold a property during the period in question, the deferred gain would be recognized at the resale date. While you can read the details of the potential adjustments in our press release, the bottom line is that regardless of the accounting treatment, there is absolutely no impact whatsoever on Regency's cash position or the inherent value of the Company's assets and liabilities.

Additionally, the Company is well within compliance on all loan covenants with our bank line and our public debt. Our intent is to disclose the results of our compliance certificates related to this debt shortly on our website. I will now turn the call over to Hap for his introductory comments.

Thanks, Bruce. As everyone is acutely aware, the economy has deteriorated further since our last call. The deepening recession with declining retail sales, and a meaningful reduction in demand for space has made the environment for operating shopping centers much more difficult.

While it seems that the financial markets have avoided collapse, and have thawed a little the flow of capital which is so important to the real estate industry, has been reduced from a flood to a trickle, and the cost is much more expensive.

Since the beginning of last year, I believe cap rates for A-quality shopping centers have moved from approximately 6% to 8%, with a corresponding decrease in values of at least 25%, and by even more for lower quality shopping centers and portfolios.

Regency's operating portfolio, our developments and our capital recycling have obviously not been immune to the decline in asset values and the slowdown in tenant leasing. The cumulative impacts were particularly harsh as evidenced by the $50 million write down of operating properties, developments, land, and pre-closing cost. For the first time in the 15 years that Regency has been a public company, we did not meet earnings expectations. Big disappointment.

At the same time, I am extremely proud of several noteworthy accomplishments. The attainment of these is a testament to inherent strengths of our companies, especially given the tough conditions. The successes include -- achieving nearly 94% occupancy in the operating portfolio, while increasing rents by over 10%; the 2.6% growth in same property NOI represents the tenth consecutive year of growth greater than 2.5%; the expansion of Regency's bank facilities by more than 50% to $941 million.

In December, Moody's and S&P reaffirmed our investment grade ratings at Baa2 and BBB+. These are clear evidence of the strength of Regency's balance sheet and the careful steps that were undertaken to manage sources and uses of precious capital.

The sale of over $400 million of operating properties, developments, and outparcels produced almost $300 million in net proceeds, including $47 million in the fourth quarter. Regency also placed $250 million of mortgages, $102 million of which were funded in the fourth quarter, and $43 million which came at the end of December.

A $20 million promote was earned from the co-investment partnership with Oregon, with a return of almost 14% since the inception almost eight years ago, outperforming the NCREIF Index by more than 120 basis points.

Gross G&A costs were $20 million less than original plan, and over $10 million less than 2007. In spite of being negative, which is no solace, Regency's total shareholder return significantly exceeded NCREIF Shopping Index in 2008.

So let me now turn to the future and share with you my thoughts on how Regency will weather the combined financial and economic storms, which show no signs of letting up any time soon. As a matter of fact, it appears that the economy will continue to weaken, which will further dampen tenant demand and accelerate pressure on rents and store closings.

First and foremost, preserving the balance sheet and funding future capital commitments will remain the top priority. While fully recognizing the uncertainty of the world today, hopefully after Bruce's review, you will share my cautious optimism about our ability to fund these commitments, which in essence, fall into three buckets -- first, balance sheet maturities; second, low maturities in our co-investment partnerships; and third, cost to complete in-process developments.

Regency's necessity-oriented, high-quality portfolio should hold up to the downturn relatively well. Unfortunately, as Mary Lou will describe, in spite of the portfolio's recession-resistant attributes, it will not be immune to the impact of what's returning into a pretty nasty recession.

As you will hear, we are projecting net operating income to decline for the first time in over 10 years. Regarding leasing of developments, I do want to point out there is a silver lining here in that the significant amount of imbedded growth that we will realize over the next several years as leasing is increased from 75% to 95%, and the returns grow to over 8% from the current 5.9%.

As Brian will explain, Regency's development program is being retooled and slowed. Painful cuts are being made to enable Regency to afford the development program during these lean times, while still maintaining adequate muscles for when prospects improve as the recession finally ends.

There is little doubt that retailers will not return to prior growth levels for the foreseeable future, if ever. This means that the new normal will mean fewer opportunities. At the same time, it seems that the number of competitors will be even more dramatically less, land prices will be significantly lower, and Regency should be in an enviable position as one of the few viable developers for retailers and land sellers.

With lower levels of development and leasing activity, there will also be meaningful savings in the operations in corporate support areas. The necessary measures are being taken throughout the Company to make sure that the organization is the right size in the current environment. Keeping our team fully engaged, and not compromising Regency's special culture, remain challenging top priorities.

The bottom line is given that the projected reduction in same property NOI, lower development gains and fees, higher net G&A as a result of lower capitalization of development overhead, and lower capitalization of carry costs due to lower level development starts in phasing, we are expecting FFO per share to be in the range of $3.30 to $3.70.

While the dividend coverage at this level is well below what we'd like to see, today, our intent is to continue to pay the dividend of $2.90. While I feel strongly that cash dividends are integral and important parts in Regency's models, in this environment, the sustainability of the dividend and/or the need for capital should be and will be rigorously monitored.

As many of you saw in our earnings release, Mary Lou has shared with us her desire to retire at the end of 2009 to spend more time with her family. It's with very mixed emotions that I announce her succession plan. Mary Lou has made an extraordinary contribution to building Regency into the great company it is today. As is her style, Mary Lou wants to make certain that we have enough lead time to allow for a smooth transition.

Many of you have asked who will be the next COO. In light of the current operating environment, Mary Lou has agreed to continue as Chief Operating Officer, and now Vice Chairman until the end of 2009, and longer if needed. So we will announce the COO succession when appropriate. Although, effective immediately, Brian Smith will become President.

Mary Lou will clearly be difficult to replace, but we're fortunate to have a skilled executive right in our midst, a Regency veteran. Someone with deep experience in the shopping center business, and an understanding of the unique culture that defines and differentiates Regency.

It was an easy decision for me, with the Board's strong endorsement, to tap Brian as our next President. In addition to his new role, Brian will retain his Chief Investment Officer responsibilities. The Board also elected him as a Director. In addition, Mary Lou will remain on Regency's Board after retirement, ensuring our continued access to her unique retail expertise and ongoing counsel.

I'm also announcing today that Bruce Johnson has been named Executive Vice President of Regency Centers. While this elevated title recognizes the vital contributions as a top executive Bruce has made over the years, his wise and experienced leadership has been particularly valuable as we have navigated the difficulties in the financial markets and economy over the last 12 months or so.

Through the years, Regency has built a great company with an outstanding, deep, and experienced management team that will be able to not only work through the current daunting challenges, but also position the Company for the future. Mary Lou.

Thank you, Hap, and good morning. Let me start by saying I just, as you know, I absolutely love Regency, and I clearly love the team that I've worked with and will continue to work with. And I've enjoyed helping build such a wonderful company. And although I've announced my retirement, I plan on going full force thorough this transition.

I'm truly excited that Brian is my replacement as President. We've always been proud of our depth of management, and his promotion is a true testament, not only to Regency, but more importantly, to Brian. He has strong leadership skills and a clear vision that will enable us to help lead Regency through these challenging times.

So let's begin with this year's results. Occupancy for the quarter went from 94.3% in third quarter to 93.8% in fourth quarter, or 50 basis points decline. But within that, there's some good news. 64,000 in [feet] of that was in Albertsons. So our fourth quarter, we achieved a $2.5 million termination fee, and in the next few weeks, we'll have a grocer signed up to replace the Albertsons with significant upside in rent.

We also lost three Linens 'N Things for 90,000 square feet. And then one, we're in final negotiations with a replacement tenant, and again, there's upside in rent. And the other, two, we have excellent prospects. So this shows the strength of our portfolio, despite what's going on in the market.

In 2008, our rent growth was over 10.5%, and our same store growth was 2.6%, 1.9% if you exclude termination fees. And we leased over 4.7 million square feet of space in the operating portfolio, and another million in our development. So, we should just take a moment and enjoy these remarkable results. But what a difference 90 days makes.

Retailers in general cannot predict their sales trends. They cannot appropriately plan inventory levels and G&A. And their overall goal is, like everybody else, is to protect their balance sheet by reducing costs. First and foremost, G&A, then inventory, and third, real estate.

So what does this mean for Regency? Well grocers who anchor over 80% of our centers have seen sales increases in 2008 of 4%. And three of our largest significant tenants are drug stores whose sales are up over 5%. A necessity-driven retail has held up in past recessions, much better than other different product types. And this should be true for Regency's predominately grocer-anchored, high-quality portfolio, which is expected to continue to solidly perform, evidenced by the fact that Regency's occupancy over the last nine years has averaged 95.2%, which is almost a 400 basis points higher than the average occupancy of shopping centers in the NCREIF database.

With that said, we are not immune to the market conditions. The retailers are struggling. And honestly, the consumer just flat out isn't spending money. And given these circumstances, we expect same store NOI to be a minus 3.5% to a minus 1%, or flat to minus 2.5%, excluding termination fees, and rent growth to be flat to up 5% in 2009. This decline is driven by an expected decrease in average occupancy and lower termination fees.

And we think these assumptions are reasonable, but honestly, in today's environment, life changes everyday, and our plan is to push as hard as we can. Like all landlords, Regency has been receiving requests for rental systems from a great number of tenants. And honestly, our answer is no. But, you know, for anybody who is strong, we're like, no. But those expectations, there's a few people that we've made exceptions for.

But even with that, we have a fair but rigorous process that's implemented consistently throughout our portfolio. We request three years of sales information, income statements, a credit application, their recovery plan, and determine their rent-to-sales ratios. We are currently using a national checklist, and look at these requests state by state and tenant by tenant. And when we go through this process, more than three quarters of our tenants don't even respond.

Any reduced rent is deferred and not forgiven. And lease rights are stripped from the tenant, giving us full control over the space. Out of approximately 9,000 tenants, we've granted rent release to 37 over the past four months. And in 28 of these cases, we were able to extend the term of the lease. These are [requested] in our fourth quarter results as renewals, and the reduced rent is already incorporated into the renewal rent growth calculation.

But there is some good news out there. Some of the in-line tenants are still performing well. As we all know, moderate-priced restaurants such as McDonald's and Subway are doing great. And some other retailers are expanding in our portfolio like Massage Envy and GameStop.

Making deals with tenants as these, as well as relocating the best retailers out of our competitors' properties, or lower-quality B&C properties, and putting them into a Regency Center, and allowing that retailer to upgrade their space, as well as have better results, is a primary focus of the operations team in 2009.

We must maintain occupancy in the operating properties and increase occupancy in our developments by continuing to concentrate on marketing to our PCI retailers, our brokers, and our local tenants in competing centers. The economy is having a negative effect across the country. But with that said, we are seeing strong occupancy and solid rent growth in the Bay Area, the Pacific Northwest, Southern California -- where it's important to note that the vast majority of our operating properties are in the coastal and infill markets -- as well as the mid-Atlantic and the Carolinas.

And even through Florida and the Northeast had a solid OA, we are starting to see some pressure on occupancy in those markets. The Midwest and Georgia have been tougher markets for those where we've already experienced some deterioration in occupancy.

Although we do not expect to be immune from these economic forces that are affecting the retailers, but the quality of our portfolio, our strategy and our team should ensure that we'll make it through these difficult times relatively unscathed. Brian.

Thank you, Mary Lou, and good morning. I read with interest, many of the research reports over the last 12 hours or so, including your flattering comments about Mary Lou, and I could not agree more. It's humbling to think of following in Mary Lou's enormous shoes. No one can replace her, and I'm fortunate she will be here to help me along the way.

In the fourth quarter, we started two new developments totaling $24 million. Let me briefly talk about them because they represent the kinds of opportunities that make sense, even in today's environment where any new development should be, and are being, undertaken cautiously, if at all.

North Gates is a small, Kroger-anchored neighborhood center in Greeley, Colorado with a return in excess of 11%. [Central Slosslin] is a grocery-anchored project in urban Los Angeles with limited shops that we've been working on for more than a decade. Although only considered to start this quarter, the project is nearly 60% pre-leased, and we have a presale agreement in place that provides for an approximate 20% profit margin.

In addition, we began the second phase of our Culpeper development where we will be building a 68,000 square foot Giant of Carlisle Grocery Concept. This additional development adds a full-service grocer to the original project without taking on any entitlement or leasing risk, while achieving better than a 10% return. Giant of Carlisle is one of the grocers doing great right now, having recently reported a 5.4% comp store increase, and should provide a significant boost to foot traffic in the center.

We completed two developments during the quarter totaling $25 million with returns of 11.46 before JV participation, and 9.1% after. For the year, our completions totaled $121 million with a weighted average return on cost of 10.68% before participation to 10.3% after.

Of the project center construction, we are presently 78% funded, but 85% leased and committed. The current return on in-process projects at the end of 2008 was approximately 6%. In other words, if we didn't lease another space, but completed construction on all the Phase I space, our return would be 6%. Our projections are that this will increase to 6.7% by the end of 2009, and climb to about 8% in the next few years.

Going forward, we remain mindful that capital is precious, and all investments will be viewed in the context of the balance sheet. We may decide to pursue a few, select compelling acquisitions and development opportunities. These may involve land already owned, commitments to key customers, or distressed sellers.

Return in profit margin guidelines have been increased and tougher underwriting standards are in place. We have said before, there will be extraordinary opportunities available to companies with strong balance sheets and the expertise to take advantage of them. Already, we are evaluating several distressed situations that we can take advantage of. We were able to structure them so as to greatly reduce risk in ways we have not seen in 20 years.

Let me give you some examples of what we are seeing. In Southern California, we are working on an opportunity to develop a project in a very dense infill market with 460,000 people within three miles. Even in this environment, retailers are all over opportunities to open stores in dense markets like this. As the average spending per consumer drops, the retailer needs more bodies to provide the same purchasing power to sales volume, and these kind of locations provide that.

This opportunity, like others, is a result of a developer's inability to perform, and we're working with the leader on a $10 million reduction to the loan amount. The project is fully entitled with the best-in-class anchor retailers, all of which are signed. Given the desirability of the site, there are backup anchors for every space. There's limited amount to shop space, and it's already 77% leased.

Also in California, we made an offer at a bankruptcy auction to buy a 70,000 square foot building in a terrific location with only 22,000 square feet of occupancy. Our offer was for $1 million for $14 per buildable foot-- or building foot. Being the only bidder, our offer was accepted, although the bankruptcy judge ultimately decided to take it back to auction [again], which we're awaiting. Even without leasing up the vacant 48,000 square feet, this acquisition would have yielded a 25% return on cost.

I use these examples to illustrate that there are great opportunities out there, and more are sure to come given the dearth of competition. When considering the distressed acquisitions and development opportunities, you need a team that's ready to pounce. But to reiterate once more, these opportunities, no matter how good, will not be undertaken at the expense of the balance sheet.

As for future developments, we dramatically reworked and reduced development pipeline this quarter as conditions deteriorated. As a result of this reduction, we wrote off over $15 million of pursuit costs in 2008. The total amount of remaining at-risk dollars that controls the entire pipeline of projects is now only $3.4 million. Other remaining pipeline, more than half the projects involve land that we already own, and will move into production when appropriate. It's important to remember that any development we will do will involve only the top anchors with 100% pre-leasing of those anchors and significant pre-leasing of shop space.

Before I end, let me briefly elaborate on Hap's comments regarding cap rates. With so few transactions out there, it's difficult to gauge value in the current market. The MCW sale to Inland could be used as a comp to clearly such a large portfolio carries a significant discount in today's capital constrained environment. Retail Capital Analytics says the strip center cap rates for the fourth quarter average 7.4%. So that's another data point.

As for more recent comps, I'm aware of only three retail centers having traded in the first quarter. Our own Regency Village Publics Anchor Center closed at 7.41% cap rate. We're right about where Retail Capital Analytics peg the average cap rate. Another public center in Florida closed at a 7.8% cap rate. And just this Tuesday, a community center in Chino, California traded at 6.0%.

In short, there are too few transactions to provide a definitive measure of current cap rates, but I do think some conclusion can be drawn from these examples. First, big is bad, and large portfolios will trade at significant discounts, particularly if distress is involved. Second, one-off sales for quality assets are probably in the 8% with some trading lower -- significantly lower in the case of the Chino project I mentioned -- while others could trade higher. Third, financing is key to any acquisition today, and only the better quality centers can get financing. Bruce.

Thank you, Brian. Although funds from operations of $3.75 per share were significantly less than our objective than last year, these results were accomplished in an unfavorable development and sales environment, and after $50 million of dead deal costs and impairments.

The components of the $50 million were, as Brian indicated, $15 million of dead deal costs as we retooled the development pipeline, and $35 million of impairments, comprised of $19 million of operating properties, $7.5 million on one in-process development and one parcel of land held for future development, $6 million on investments in unconsolidated partnerships, and the remainder on outparcels and a note receivable. I think it's important to note that the impairment calculations were based upon what we believe to be conservative assumptions.

We are expecting FFO per share in 2009 to be in the range of $3.30 to $3.70. Last quarter, we indicated that FFO would be approximately $0.60 higher than this. Since last quarter, we have significantly reduced our expectations for the development program. And as a result, the revised guidance includes lower development gains, $12 million of higher net interest expense, and higher G&A -- $8 million higher than '08 and $14 million higher than last quarter's guidance. Also in this range is further reduced, same-store NOI.

As you've heard from Hap and Brian, our business plan comes full circle back to balance sheet management. We cannot say it enough that strengthening and protecting the balance sheet is our number one focus and priority.

We've updated the detailed scenario analysis available as an Excel file on our website entitled, "Balance Sheet Capacity," and I'll walk you through the major components.

Referring back to Hap's buckets of featured capital commitments, number one was balance sheet loan maturities. During the next three years, balance sheet maturities total $725 million, with only $235 million expiring by the end of 2010. We believe these needs can be funded by placing mortgages on Regency's unencumbered assets, which generate $250 million of NOI and $3 billion of estimated value.

Modest-sized mortgage loans on quality shopping centers, sponsored by highly regarded operators like Regency, seem to be one of the sweet spots for mortgage lenders. We have excellent relationships with lenders as evidenced by our placement of over $250 million of debt at a weighted average interest rate of just under 6.3% in 2008.

And we are currently reviewing applications from two live companies for 10-year mortgage loans on four properties totaling $47 million. The interest rate ranged from 6.75% to 7%, with loan-to-value ratios in the 50% range.

The second bucket is loan maturities in our co-investment partnerships. Regency's share of mortgages maturing during the next three years in our partnerships is $279 million-- excuse me, $297 million. Assuming conservative underwriting, Regency's share of these loan paydowns in order to refinance could be in the $100 million range. Also critical to these loans being extended or refinanced is our majority partners' ability to fund its share.

On this front, good progress is being made by Macquarie CountryWide to bolster their balance sheet. We agreed to dissolve two of our original co-investment entities, which resulted in the portfolio assets being distributed to the partners through a one-for-one selection process.

This distribution and comp process allowed us to select half of the first 12 picks from the portfolio. As a result, we received six quality shopping centers with some favorable mortgages.

It is ironic that this extremely favorable time is causing us some consternation with accounting policies. In addition, we will receive a promote of approximately $11 million to $13 million, which is based on year-end 2008 appraisals. In turn, the distribution allows Macquarie CountryWide the flexibility to generate cash through the sale of properties distributed to them.

Macquarie CountryWide has since closed on the sale of seven properties to Inland. The balance is expected to be closed at the end of the first quarter, with a total value to Macquarie CountryWide of approximately $425 million, and generating almost $200 million in equity capital for them. Macquarie CountryWide has publically announced that it's actively working to raise additional capital through asset and entity transactions.

Finally, the third bucket is cost to complete the in-process developments and committed new investments. Two phasing process that Brian discussed, the net cost to complete the in-process developments have been reduced to $186 million from $241 million since last quarter. As indicated, this additional phasing has resulted in negative impact on net interest expense.

As I mentioned, we believe that $825 million of balance sheet and partnership refinancing commitments can be funded by placing mortgages on Regency's unencumbered assets. You should know that our plan is to stay well ahead and proactively begin this process now. It's also important for you to remember that we have over $600 million of capacity on our line today, which alone could fund all of our commitments over the next two years, and the cost to complete the developments even if we are unable to raise capital from asset sales or contributions through ventures. Hap.

Thanks, Bruce, Brian, and Mary Lou. In summary, in these extraordinary times, the near-term imperatives are clear -- protect the balance sheet; achieve 95% occupancy in our operating and development portfolios; rationalize the development program; operate efficiently and keep the team energized to emerge from these difficult times in strong financial shape. Longer term, be poised to capitalize on compelling future acquisition and development opportunities, which will be available from distressed sellers.

In spite of the daunting challenges, I'm confident that we can achieve these goals and emerge from this tsunami, while not unscathed, in much better shape than others. The reasons are rooted in my faith in Regency's inherent assets; strong balance sheet; a quality recession-resistant operating portfolio; industry-leading operating systems; excellent tenant, lender, and partner relationships; value-creating investment capabilities; and especially, a superb team of dedicated professionals who are now really earning their oats.

At this point in time, we appreciate your time, and will now answer questions that you may have.

Thank you, Mr. Stein. (Operator Instructions). We will take our first question from Michael Bilerman with Citi. Please go ahead.

Good morning, guys. This is Quinton Valieo. I'm here with Michael. Just a first question. In relation to your 2009 guidance for same store NOI, I'm just wondering if you can outline what your expectations are for occupancy, leasing spreads, and any level of rent assistance that you've got factored in.

Yes, let me-- you can go to the guidance page. We have all that broken down in terms of that. With occupancy, we said it'd be 92% to 93.5%. Rent growth would be 0% to 5%. And you can get it all off the guidance page.

So that-- this rent [growth] includes some kind of rent assistance allowance?

Yes, absolutely. It's all incorporated in what we believe will happen in '09.

Okay.

We've built that into our budget.

And Quinton, remember, like as Mary Lou said, there have been approximately 30-- only 30 cases where we have-- 37 where we have, out of 9,000 tenants where we have redone leases. And in a lot of those cases, we're getting lease extensions.

And let me just tell you real quickly, as far as the primary drivers of the NOI and the decline, as you know, we have strong termination fees, and so when I put that in there that we would see flat to minus 2.5% without being up against those termination fees to being a more normalized rate. Secondly, quite frankly, we planned higher move outs. We think that there's going to be more big box move outs and mom and pops. Typically, it's been like 45% big box, 55% in-line, and we've laid that into our budget, too. So we've been-- we feel realistic, but probably very conservative in terms of our approach for looking at 2009.

Just in terms of the development platform, the return expectations come down from the third quarter. I'm just wondering if you can outline some of the [drivers] it's got in terms of what rent's getting and what you're assuming for late (inaudible) costs and incentives, and so forth.

The developer returns-- if you look at the in-process portfolio in the supplemental, you'll see that they were down 71 basis points before JV partner participation, and 68 after. 44 basis points of that total is attributable to phasing we're doing.

We've got 11 projects where we are-- we've decided that we just do not want to build that, a certain amount of that square footage today, and we've pushed that out into the future.

Now, as Hap mentioned, there's going to be some pretty good embedded growth in that. The Phase II returns, the stuff we're not going to build now, but we'll push out later, will have a return, of right now it's pro forma at 12.1%. So obviously, if you take the most profitable parts of the business and the developments and push it out, it's going to impact your Phase I that we're building.

So we've got the cost, but not the-- the land cost and a lot of the site work cost there, but not the--.

So if you take out the phasing, then you're really left with an apples-to-apples comparison from last quarter of about a 24 basis point reduction. And 10 of those basis points were attributable, one project, and that's our big Deer Springs project in Las Vegas where we lowered our rent or NOI estimates by $800,000. And then 4 basis points is our Murrieta project in California where the project has basically been delayed a year.

Okay, thanks.

Thanks, Quinton.

Thank you.

Okay, we'll take our next question from Steve Sakwa from Banc of America. Please go ahead.

Good morning. Thank you. I guess just following up on that, I guess it sounds like most of the delay is due to phasing and two projects. But why wouldn't rents be coming down on the balance of the developments, and why wouldn't that have a bigger impact on the returns on the development side?

First of all, Steve, remember 70-- they're 78% leased right now. Keep that in mine.

Right. As I mentioned, that 24 basis point, apple-to-apple comparison, 10 of that is attributable to other projects that have had leasing shortfalls.

Brian, can you I guess help us quantify or think about what is 10 basis points? Is that sort of a 5% to 10% reduction in asking rents for the balance of the space, or something less or something greater?

Well, I'll break it out for you. If you look at the actual NOI variance, it's about $16.9 million. Of that $16.9 million, $15.2 million of it-- with NOI was pushed out in the phasing. Of the remaining amount, the $1.7 million, you've got, again, half of it, $800,000 came from the Deer Spring project, and then about $500,000 came from two other Southern California, large community projects. So it's really what's happening is we've built too much space on some of the large projects, and we've reduced that.

The other thing that's happened is we've changed scope on a lot of the projects. For example, we've got a project in Southern California where we had an L.A. Fitness, and we decided we did not want to do a lease with them. We ended up selling the parcel to them, let them spend their money. There's obviously a reduction in NOI that goes with that.

So I don't think it's that the rents have been dialed down too much. I think we've done that in the past. It's more of this change of scope and phasing, plus the big projects, particularly in Southern California.

Okay. And then if I can maybe ask a question of Bruce. On the guidance, when you talked about the promote, just to be clear on this unwinding of the Macquarie partnerships, you'll recognize-- I guess you're getting an extra property, or sort of, in kind, but you are going to also recognize kind of the one-time fee?

That is correct.

Okay. And then, just in terms of the fee--.

If I can, Steve, before you ask that question, I just want a little bit of clarification, maybe, on Brian. Because I think what we really are seeing, to the extent there are rent reductions in the development area, it's really on a geographical market basis and not across the board. We're not seeing that across the board. I think Deer Springs would be one that we did have that in which-- in Las Vegas. But it wouldn't be across the board.

Okay. And then I just-- so the $12 million is included in your guidance of $15 million to $28 million.

Correct.

Okay. And then--.

Thanks, Steve. Appreciate it. Moderator?

Mr. Sakwa, were you done?

Yes.

Very good. Thank you.

Unless he wants to get back in the queue again.

And we will take our next question from David Wigginton with Macquarie Capital. Please go ahead.

Morning.

Morning.

Had a quick question regarding the winding down of the joint ventures. What is the expected decline in recurring management fees from the two lost-- or against the dissolution of the two JVs?

I think the best way, David, to look at that is I think Macquarie has disclosed in the past what fees are for these partnerships. The 25 basis point asset management fee and property management fees are 4%. Their June 30 valuations were right around $750 million for the combined two entities.

So if you-- you can double check my numbers. So if you go through the math, it's going to end up on a net basis to Regency in terms of our share of those fees that are paid -- because remember, we own 25% of those ventures -- about $3.5 million.

We have that dialed into the guidance that we provided.

We do.

And then just with respect to the other JVs, do you expect any of those to be wound down in 2009, and what is the relative quality of those assets compared to your existing portfolio?

You know, again, I think as Bruce and/or Hap both mentioned in the call, Macquarie has publically announced that they continue to look at more alternatives in terms of property sales and entity transactions, and that they're making good progress on it. I think that that is a question for them at this point.

In terms of how it would impact us and the properties that we have, the properties we have remaining in our Macquarie venture are extremely high quality. And the ones that we distributed, I would still say are high quality because I think all of Regency's portfolio is high quality. So although it may be below the average in terms of demographics for a Regency portfolio, it's still better than 90% of the shopping centers that are out there.

All right. So when you said below average, are you talking about the ones that were distributed, or the ones that are being--?

The ones that were distributed at below the Regency average.

Regency average.

I didn't say that below average. Still 90% better than what is out there.

Yes, I know. Understood, understood. Okay, thank you.

Thank you, David.

Okay. We'll take our next question from Jay Habermann with Goldman Sachs. Please go ahead.

Hey, good morning. Starting first, I guess just in terms of same store NOI and how you've gained some comfort, I guess, as you looked into 2009, given the deceleration in occupancy quarter over quarter, and as part of that, can you expand a bit just on maybe sort of the small shops base versus, say, the anchor stores? And furthermore, whether you're still seeing the anchor stores, the commitments for some of the major projects that you have in your pipeline?

Well, let me talk a little bit, first, about same store NOI. And we really do have a lot of comfort in what we did. And I think, as you know, we've never been under-- we've averaged over 3% same store growth for the past 19 years. So when we came out with this guidance -- and we've done it very thoughtfully -- the high end of the guidance is really looking at lower termination fees and a couple hundred thousand square feet of greater move outs.

When you get into the low end of the guidance, we literally sat down and looked at retailer by retailer -- and I'm not comfortable saying who they are -- looking at our portfolio, feeling that some of these retailers this year, unfortunately, aren't going to go into 11, they're going to go into 7 because they're not going to be able to get credit and work their way through it. And what would that be? And that represents the low end in our guidance.

So I feel like we have really thought through mom and pop move outs, which is typically, as I said, about 55% of our move outs. 45% of the GLAs have been bigger boxes. And our guidance really reflects that. And in terms of people who are replacing some of these big boxes, as I mentioned, we have a grocery store replacing the Albertsons, we've got several significant tenants. The Dollar Tree is taking on, believe it or not, the (inaudible) are still growing. Tuesday Morning, City Trends, which is a moderate-priced fashion store, and Ross. And those are some of the people that are growing.

But with that I'll say, yes, we've got good interest, yes we're working deals. The deals are harder, but more importantly, they're taking longer, and that's why we changed our down time in this guidance, too. When we talk about it from 8.8 months at the end of this year to 11 months next year, and that's incorporated into it.

So I really feel like we've got it covered from really as much as you're capable of, how bad could it be, and what do we think is really going to happen. And that's why we gave the range that we did.

So thus far, you aren't seeing the anchor stores pull out of their commitments to open in your developments?

Brian, he's going to talk a little more about developments.

The only thing we've had, we haven't had anybody pull out. If they've got a signed contract, they've got a signed contract. What we have had are some requests, or just deferrals, for a year.

The biggest one that hurt us is our Murrieta project. I think I mentioned to you that that was one of the ones that took the biggest hit this quarter. And that was a situation where we actually went under contract-- I'm sorry, under construction with the site work, and Target decided, as it's doing all across the country, they want to push out their openings that were scheduled for 2010 into 2011. So they're still committed, they're still going to go forward, but it's been deferred a year.

And Brian, just one more question for you. On the question of whether or not to invest in these opportunistic transactions, the 25% return you mentioned versus sort of the 8% yield on development, I mean, why not curtail the development further over the next two years?

If we could get those consistently, we would. I mean, the problem is that was such a good deal that the bankruptcy judge said, you know, let's take another cut at this. But every, we aren't -- any development we do is not only subject to the balance sheet, but we're going to compare it any of these other opportunistic opportunities. And if we can get 10.5%, 11%, maybe a 9% current returns without taking a development risk, that's what we will do.

Remember, Jay, that that 8%, too, is on $1 billion of properties that are already in--.

Yes, I mean--.

If they're already 75% leased and 85% funded, that's now new investments.

Just to reiterate, our-- to the extent that capital is available, let me reiterate. The recurrent guidelines, taking aside land already owned, has been increased again this past quarter to 10.25% for grocery-anchored shopping centers, higher for larger centers, and with a 200 basis point margin.

Thanks, Jay.

Okay, thank you.

Okay. We'll take our next question from Craig [Schmidt] with Bank of America. Please go ahead.

Thank you. On the recovery rate, I see you have it dropping from 79.4% to a range of 74% to 76%. What is driving that downward?

Primarily, reduction in occupancy.

But you had a reduction in occupancy in '08, and it actually picked up over '07.

Yes, well-- go ahead.

What happened in 2008, you saw a slight in uptick compared to 2007. It's really the mix of the extent that we recover from our tenants when you look at our fixed expenses versus our operating expanses. We clearly recover a higher percentage of that from those types of expenses fixed over variable expenses.

Okay, so the fact that the occupancy is going down, you're unable to spread some of those charges over every tenant?

And also, Craig, I think it's important to recognize that that large occupancy drop mostly happened in the last two months of the year.

Good point.

So for the average occupancy for the year was still very close to-- it was 94.67%. So the decline in occupancy really--

Really happened in the last quarter.

-- happened in the last two months. So we had 10 months of recovery so that we were at the-- closer to the 95%.

So the positive, really, this year was more the mix of where it came from. And next year it'll be negative, impacted by lower occupancy.

Okay, great. Thanks for that clarification.

Thank you, Craig.

Thanks, Craig.

Okay. We'll take our next question from Jeff Donnelly with Wachovia Securities. Please go ahead.

Good morning, guys. Can you provide any specificity to us about how you're thinking about the length of downtime between leases, as well as tenant incentives like TI dollars and free rent to your 2009 guidance, and at least maybe versus what you experienced in 2008?

I tell you what, a lot of what we did is we really took quarter to quarter, we typically do our budgets, quite honestly, in September. And we went back in and redid our budget in December to make a more real of what happened with November/December as you know. November/December comp store sales for the retailers, in general, are around 2.3%, which wasn't what happened in the year.

Free rent isn't in our vocabulary, so we didn't really have any discussion with that. In terms of downtime, we've been seeing it tick up, and we've graphed it out, literally, quarter by quarter, and we're seeing it going up.

And honestly, it was kind of a working consensus of how long, especially in the last November/December, and even, quite frankly, through January, how long has it really taken us to fill these boxes, what are the boxes that are going to be empty, and the bigger boxes, obviously, are going to take longer. But even the smaller boxes are going to. So it was more of a work in process. What else did you ask? Did I answer your question?

And like months of--

Down time.

-- down time.

Yes, I gave that already. I said that we went from 8.8 months to 11 months in the last question.

And just a follow up -- and maybe this a little more broad brush, Mary Lou -- but can you talk a little bit about how you see retailers approaching their plans to downsize store counts? I mean, I guess I'm curious, do you find that this tends to be, I call it top down strategic view where it's sort of-- their market opportunity, unit level revenues and profit, maybe with some eye toward the economies of scale in that market? Or is it, your experience just not that organized, and it's more of a [function of] lease rollover?

No, I have to tell you, it's changed completely from what it always was. And every single retailer that I talked to, it's all about protecting their balance sheet. Period. And like I said, that they're cutting G&A, they're cutting their inventories.

The big problem that they're having in determining closing stores is they don't know-- the stores that last year made money, and maybe fourth quarter they had 20% negative comps, and this year they think there could be 20% on top of it, but they don't know. So they're literally going through their portfolios and trying to do the best-- it's more balance sheet related, and where they're losing the most money than anything else.

It's not as strategic, in terms of the retailer and where they want to be. Although, I think cannibalization and comps come into it -- but it is the literally what is pulling our balance sheet down, and what do we have to get out of? And that's where they're either trying to downsize the size of their space, obviously renegotiate rents where they can, and close locations. And it's really, all the way the through.

It's CEO driven. You talk to the heads of real estate, it is driven by their CEOs coming back and saying, here's our third largest cost, how are you cutting it?

Thank you, Jeff.

Thanks.

Thanks, Jeff.

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

Good morning, everyone.

Morning.

Just a question on the term fees. Can you let us know what the fees were for '08, and what your expectation is for '09?

Yes, for--.

Just before Mary Lou even answers, just so you know, we did-- we do break them out in our supplemental. We have a line item for termination fees.

Yes, but I think that to answer your question, historically, our term fees have been $0.08 $0.10 a foot. This year, it was unusual because we had two really big ones. One, the Albertsons that I mentioned for $2.5 million, and then we had one at [Powell] Street for $1.2 million.

But this year, it was $0.20 a foot. It was really unusual. So for next year, when we're looking at it, we're taking the low end of our norm at $0.08 a foot. On one hand, intuitively, you'd think next year would be a good year for term fees. And so I think there will be people who want to get out of their leases and will get them. The flip side, the retailers are protecting their balance sheet, and they're trying to hold onto their cash.

So, we projected it at the low end of the norm for those reasons.

And then going back to the guidance question as it relates to-- is there any equity dilution plan in those numbers?

Bruce, is there any equity dilution plan in the numbers?

Not currently.

Okay, thank you.

Thanks, Chris.

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

Good morning. It's Nick Vedder here. Just had a quick question with regards to a subject that you touched on earlier with Craig. With respect to common area maintenance, can you talk about how [CAM] is shared between the various anchor and non-anchor tenants in your shopping centers? And furthermore, how does that CAM burden shift between the landlord and the tenants as vacancy increases?

CAM is shared on a pro rata basis based on the size of the center, obviously the anchor tenants have certain restrictions and caps in their clauses in their leases, but if there's an anchors dart, unless we have the right to, what we call "after anchor" our tenants, and we really look at that. We don't do that that often. They'll continue to pay their pro rata share, and you'll see a downward pressure on recovery rate.

And so an increase in vacancy, then, they would take their pro rata share, whatever that was, and then the landlord would split the bill for the rest?

Yes.

Yes. Absolutely.

Most of it's fixed, so it's going to just drop to the bottom line what you don't recover, effectively.

Okay, thank you.

Thank you.

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

Yes, hi. With respect-- I'm echoing. Can you hear me?

Yes, we can hear you fine.

Oh, you can hear me. Okay. With respect to the development pipeline, how should we-- should we be thinking of the pipeline as really buying whole, going forward? I know you have it looks like $3 million to maybe--. But you have some development gains embedded in your guidance, but not a lot. So what are you thinking there? Are you thinking it's buy and hold-- or develop and hold, or develop and contribute it, not a significant margin. How should we think about that?

I would say that it appears like there's going to be a higher percentage that's going to be develop and hold in our store. I still think that there's a-- that there will be some continued development sales, and there will continue to be some development contributions.

Okay. And then second question is with occupancy heading down in 2009, I know you don't have 2010 guidance out, but how do you think that plays out as you move to 2010? Is occupancy lower year over year, or do you have visibility on tenants to make up what you think you'll lose in '09?

No, we've been working on that and looking at it. On one hand, as we did this downside analysis for our own portfolio -- which is the low end saying, oh my gosh, what if all these things happen, which is our downside that we gave you at 3.5% -- do we think that would continue or not. (Inaudible) on the conservative case, you'd probably see in '10, maybe a negative 1 to flat.

But the good side of it is is we're going to start leasing these spaces. So we've got great centers, and we've got a lot of action; more than you'd expect. So I think that there's going to be some upside in occupancy, especially in the second half of '10. I think the first half of '10 is still going to be tough; second half you're really going to start seeing some results based on what we know about the portfolio and what's actually going on.

Okay. Thank you.

Thanks, Michael.

We will take our next question from R.J. Milligan with Raymond James. Please go ahead.

Good morning. Just a question on the guidance. The $0.21 to $0.39 per share, I'm assuming that's a combination of transaction profits and dead deal costs. Can you break that out for me?

We would assume that a dead deal cost would go back to our normal which is about $4 million a year.

Okay.

Then our debt, again, I'll refer you to page 39 in the supplemental also. We actually break out-- we just have the transaction process net of those costs, and the guidance for the year is $15 million to $28 million. And then separately, that will include the Macquarie promote that we talked about. And then separately, we list out what we expect from a third party seasoned commission as well.

Okay, thank you. And my last question is just if you guys could provide any more color on your approach to the dividend and what you guys are thinking about, going forward, in terms of the possibility of doing a stock dividend.

I just want to reiterate my comment is number one, at the risk of sounding redundant, we feel that the dividend is integral to the REIT model and to Regency's model, and our intent is to continue to pay the dividend at $2.90.

At the same time, if we don't feel that for any reason that's not sustainable -- and I'm not just talking about because of one quarter or two quarters, but for a reason in the future if, for instance, Mary Lou's assumption regarding NOI growth, which she feels are very conservative, tend to be not conservative enough, then that could, in effect, change our outlook in that regard. And at the same time we feel, I've got to say, we feel cautious, but I'm cautiously optimistic about our ability to continue, our ability to tap the mortgage market.

I mean, we're still seeing a lot of activity there. We feel like we are in the sweet spot, so to speak, of the Fannie and Freddie Mac standpoint for shopping centers. And that if mortgage capital will be available to us, as Bruce said, we're going to get on the front end of the curve to do that. To the extent that's not available to us, that could create another set of circumstances.

But before we do that, I think as you'll see in the guidance, we've given from a development start standpoint, zero. We're prepared to stop all development to make sure that we have the right capital to, in effect, preserve the balance sheet. But in effect, nothing is off the table, today, at the same time.

Okay, great. Thanks for the additional color.

Thanks, R.J.

Okay. We'll take our next question from Nathan Isbee with Stifel Nicolaus. Please go ahead.

Good morning. Can you talk a little bit about the small shop leasing in the development portfolio, and specifically, have you seen any uptick in the signed lease fallout before opening?

No. It's pretty consistent with what it's been. Fourth quarter is always slow, but we did a fair amount of leasing. And you know, I just don't see any difference at all right now.

Okay. And do you have--?

It hasn't ticked up, it hasn't turned down.

Okay, great. Thank you.

Thanks, Nick.

Operator We will take our next question from Alex Barron with Agency Trading Group. Please go ahead.

Yes, and thank you, good morning.

Good morning.

Wanted to ask you guys, in terms of how you guys define your occupancy rate, what's included in that number, what's not included when a tenant like the mom and pop is no longer in business, at what point does that kind of affect that number? Can you help me out with that?

Yes. From the time a tenant moves out till the time another tenant moves in, and that's how we look at it.

So is the occupancy rate a physical occupancy rate, or is it more like a financial as long as you have a lease in place, it still counts in the number?

It's financial.

Okay. My second question is you mentioned that on some of these new developments, you were expecting a 6% type of yield. I was wondering, where-- if you had to get debt financing, like permanent debt financing right now for this project, where are those numbers penciling in at rates?

Alex, let me be clear. The 6%, we've started projects that are already underway. The 6% is our current return if we don't lease another square foot and we fully build out the Phase I. And the returns will get up to above 8% with the current phases when we lease those developments up to the--

8.6

Right. Now if we were to start a development today, our return expectations would be at least 200 basis points higher than that.

Thanks, Alex.

The important part of that answer, though, is that there is no debt on those projects to date.

Right. That's why I was kind of wondering where the market-- or if you guys have tried to obtain some-- what kind of pricing you're getting--?

Basically, we only finance basically stabilized projects today. That's what it--

And in effect, we've spend about $800 million already. It's already incorporated into our numbers and the cost to complete is another $180 million. And after that cost to complete, and don't lease another square foot, it's a 6% return. But I'll just reiterate, we are continuing to be able to foot mortgage financing on completed developments and existing operating properties that are A-quality properties.

Thank you very much.

Thank you.

Thanks.

We will take our next question from Anar Ismailov with Gem Realty. Please go ahead.

Good morning. There are a lot of moving pieces. And if I were to focus on just something that is going to move the needle, something that keeps you up at night, what is one thing among the possible things that could happen next year, that you think is the most important-- your biggest concern?

I think the-- if you look at it, the key things that we want to do is to achieve our net operating income objective, and get our occupancy stabilized because that will pay dividends into 2010. And secondly, we've got, although I think we're extremely well positioned with having $3 billion in unencumbered assets, is executing our plan related to mortgage financing.

But among the things that could actually happen, is it like as it relates to local tenants, as it relates to anchors? Is there anything in particular that you're most worried about?

I think as Mary Lou indicated, I think we feel -- and it's not to say that things couldn't get worse -- but I think we've incorporated some reasonably conservative assumptions into the guidance that we've provided.

And I'll reiterate, when we did this, we sat down and looked at what we felt-- there is a 5% rent growth, and what we've consistently been over 10%, number one. Two is we looked at greater move outs both in the side shops and in the anchors. Three, we changed our downtime from 8.8 months to 11 months. And we've also, in the downside of our guidance, looked at a group of retailers that we think have potential of going Chapter 7 during this year, and what does that do space by space to our numbers? And some of those are already incorporated in our plan, some of them are in addition. But all that's incorporated in our range of the guidance.

So like Hap said, things can happen. It's a different world out there. But to the best of our ability and knowledge today, we feel as comfortable as you can be with that guidance.

And let me just also say -- and I think this is correct, Mary Lou -- that January has started in line with expectations.

True.

So our experience in January is in line with the guidance that we provided to you. So it's not as nice as January of '08, or especially of '07, but we haven't fallen off of a cliff either. And I think there were some concerns that the economy might do that and that would have that adverse impact. So that has not happened to date. One month, so far, so good.

One good thing is we're seeing renewal rates hold at the 79% to 80%, which I think is a big deal in this environment.

Thank you.

Thanks.

We will take a follow up from Chris Lucas with Robert W Baird. Please go ahead.

Yes, Bruce real quick. On the $250 million of unencumbered NOI, how much is NOI that is from projects that are developments in progress?

None. None of those-- this is actually the unsecured pool NOI number that is with Wells. That's where that number comes from. None of our developments in process, in a technical sense, once they reach a certain occupancy, they go in, which is the 80%. But if they're not above -- and that's rent paying occupancy. If they're not there, they aren't in that number.

And I really appreciate you pointing that out, and came back on for that call. So, in effect, as we achieve 95% leased, and it's going to take us longer than we expected, and it's going to be more arduous to get there, that unsecured asset pool is going to continue to grow. Good point you made, Chris.

Well, and the other point we indicate, by the way, we've got this much of unsecured NOI available for that, but that really doesn't include all of those projects that are already financed. So in terms of that that's rolling over, you've really got to throw that in the bucket as well, if you want to look at the total capability.

Thank you.

Thanks, Bruce.

Thank you.

You're the only one left, Chris. If you have another question, feel free.

And at this time, there are no further questions. Mr. Stein, I'm going to turn the conference back over to you for closing thoughts.

Just once again, thank you for taking the time to join us on this call. And like we've indicated, we look forward to a very challenging, but gratifying year if we can-- as we execute our plan in 2009. Have a great week. Bye bye.

Ladies and gentlemen, this will conclude today's Regency Centers Corporation Fourth Quarter 2008 Earnings Conference Call. We thank you for your participation, and you may disconnect at this time.