Regency Centers Corp (REG) 2009 Q1 法說會逐字稿

Please stand by, we are about to begin. Good morning. My name is Jennifer, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regency Centers Corporation First Quarter 2009 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 and good morning. On the call this morning are Hap Stein, Chairman and CEO; Mary Lou Fiala, Vice Chairman and Chief Operating Officer; Bruce Johnson, Chief Financial Officer; Brian Smith, President and Chief Investment Officer; Chris Leavitt, Senior Vice President and Treasurer; and Mr. 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 that could cause actual results to differ from those contained in the forward-looking statements.

I'll now turn the call over to Hap.

Thank you, Lisa. Good morning. I have to admit that my future outlook for the capital markets, the economy in general, and Regency in particular has become more optimistic. Some of my cautious optimism ironically is a result that I like many of us on the call have now been acclimated to the shock and awe of the financial panic that has descended upon the world.

My views may also be the result of my hope that what we are experiencing now is the beginning of the end of the crisis. That is not to say that any month now the sun will breakout from the storm clouds and start shining brightly on the economy and the shopping center business. The economy still has a long, long way to go before we are able to enjoy any semblance of a meaningful recovery and the new normal will not look anything like the 2004 to 2007 boom years.

Regency has obviously not been immune to the adverse impacts from the extremely difficult conditions in the capital markets in the economy. For the first time in over 11 years, same property net operating income will be less than the prior year. The high probability development pipeline is dramatically less than what it has been and what it seems like well over 10 years. The increase in cap rates together with slower lease of developments has also caused a major reduction in development profits. The organization, especially the development group, has been significantly right sized to reflect the current environment.

In spite of the challenges that we face and all things considered, there are several key reasons that I feel good about Regency's position for the future, including signing 230,000 square feet of new leases, and 826,000 square feet of renewals in the toughest operating environment that I had ever experienced. This is evidence that retailers still want to operate in well located, quality, necessity-oriented shopping centers, which are anchored by best-in-class retailers, especially grocers and discount department stores like Target and Wal-Mart.

Approximately $600 million of capital from a combination of the recent equity offering and the dividend cut as well as the committed mortgage financing will be available to fund a very significant portion of Regency's financial commitments through 2012. As a result, we expect that our debt to asset level will be reduced to less than 45% by the end of this year.

By maintaining a close relationship with Regency's banking group, Regency should be able to extend the vast majority of the $940 million of bank facilities on reasonable terms well before they expire in 2011 and 2012.

Negotiating favorable terms in the co-investment partnerships, especially distribution and time provisions will continue to work to our benefit and enable us to weather partner issues on a positive basis. Although the 100 person plus reductions in force have been extremely painful, G&A before capitalization has been reduced by $27 million since 2007. Even after the reduction in force, I believe that Regency still has an exceptional, talented, and deep team in all key facets of the business.

And lastly, phasing of developments and putting the brakes on the pace of new developments through evermore stringent underwriting has preserved precious capital.

Now, Bruce, Mary Lou, and Brian will provide color regarding the results for the quarter and future outlook.

Thank you, Hap and good morning. FFO per share for the first quarter of 2009 was $0.78 per share, down 10% from this period in 2008, due primarily to higher G&A and higher interest expense.

Gross G&A for the first quarter of 2009 was $7 million lower than the first quarter of 2008 following the reduction in force and lower incentive compensation accruals. However, these savings were offset by a $2.2 million severance charge associated with the reduction as well as the decline in capitalized overhead given the decreased development activity.

Net interest expense was also nearly $4 million higher primarily resulting from less capitalized interest also related to lower development activity. On April 20th, in conjunction with our equity rates, we released preliminary results and revised FFO per share guidance for the remainder of 2009.

The main drivers behind this revision were -- decline in capitalized interest resulting from significantly lowering our development starts guidance. Secondly, decreased transaction profits. And thirdly, a reduction in same store NOI expectations. These factors combined with the offering resulted in an updated guidance for 2009 of $3.03 to $3.28 per share.

Regency's #1 focus and priority continues to be strengthening and protecting the balance sheet. I mentioned on our recent equity offering of our 10 million shares of common stock, which include the full exercise of the over allotment option by our underwriters. In this very difficult period and uncertain economic and financial environment, we felt it was important to Regency's strategy to provide a source of funds for all of our obligations through 2012. This offering was key in meeting that goal.

The net proceeds of approximately $311 million combined with a recent commitment for $106 million, 10-year mortgage that we rate-locked at 7.75%, represents substantial progress in securing reliable sources of capital. In addition to this equity offering, Regency also reduced the dividends to $1.85 per share saving $200 million through 2012.

And finally, we are in discussions with prospective co-investment partners for them to acquire approximately 75% interest in some of our properties that will provide roughly $150 million of cash for Regency.

The combination of these four sources plus our unfunded line of credit balance will provide almost $1.3 billion, which is more than our obligations for the next 3.5 years. And in fact, it is likely to allow Regency to take advantage of some opportunities in the future.

To give you an update, Macquarie Countrywide has stated that they are actively pursuing improving their liquidity on a basis that makes sense to them and to us. And we feel that good progress has been made. Mary Lou?

Thank you, Bruce and good morning. Same store NOI was down by 2% in the first quarter, primarily due to tenant bankruptcies, move outs, and slower lease up. Occupancy at quarter end was 93.3%.

We leased or renewed 1.1 million square feet through 324 transactions. Our renewal rate was 77% and rent growth was slightly positive at 0.9%. Although these results are well below anything we've experienced over the last 10 years, from my perspective the portfolio is holding up pretty well in this difficult environment.

These times are challenging and our strategy has been to maximize cash flow at all of our proprieties by emphasizing occupancy over short-term rent growth. In order to maintain our flexibility to return rents to higher levels in the future, in those select cases where newer renewal lease needs to be at a lower rent, we are keeping the majority of these leases to a term of less than three years.

Close to 80% of the 251 renewals signed in the first quarter had flat to positive rent growth. The remaining renewals had negative rent growth, but nearly all of these had terms less than three years. This is also a trend with new lease activity. In fact, it's very important to note that all new leases with a term greater than three years had double-digit rent growth.

Mid-term rent release is being granted on a very selective basis. The evaluation process that's been instituted as I talked about last quarter is extremely rigorous.

Rent release was granted to only 22 of our 7200 tenants in the first quarter and that's only three-tenths of 1% of our tenants. All of these tenants were local tenants and the rent release is typically for 90 days and incorporated favorable terms such as recapture rights and termination rights and enhanced guarantees.

So, what we are actually getting is better leases and improving the quality of the lease document with non-monetary clauses. The point that I want to make is that we are conceding some, but we are getting more in return and especially more for the long run.

As we reported earlier, we've lowered our guidance for the remainder of the year. Same store NOI growth is expected to be in the minus 5% to minus 3% range, which equates to $6.5 million reduction in net operating income. We are projecting a high amount of unplanned move-outs, slower leasing activity, and reduced rent growth. But given the quality of our real estate, we expect the portfolio to recover from the short-term pain in the not too distant future.

What I would like to do I think sometimes is best is just give you an example and I want to talk about one of our shopping centers and it's called Powell Street Plaza and that one shopping center accounts for 25% of the $6.5 million projected decline in NOI. Powell Street is an irreplaceable [dead-central] asset in the East Bay area of San Francisco with absolute exceptional demographics and tenant sales.

Circuit City and Shane & Company moved out unexpectedly as a result of these bankruptcies. But within 90 days we had letters of intent from two nationally recognized retailers and they are really strong players. But given the timing to work with these deals, these factors will not be rent-paying for the remainder of the year.

Another thing I think is really important to understand is that we believe that our negative rent growth is going to be short-term in nature and we have 10 LOI for 15 of our vacant spaces in our portfolio of over 15,000 square feet. The LOI rent average is 31% higher than previous rents and they are great retailers such as Stator Brothers, Walgreens, [Dicks] and Whole Foods. However, it is important to reiterate that these transactions are absolutely taking longer and have a direct impact to the bottom line.

We have a number of initiatives aimed to improve our operating income. We have an even greater focus on expenses by renegotiating vendor contracts, so we've seen a lot of success with that. We focus on all aspects of marketing, cold-calling, web-based marketing, broker events, and even a new short form lease that makes it quicker for our brokers to get paid and therefore it makes Regency deals a priority.

And more importantly than probably all of this, we continue to leverage our PCI relationships. We've had 23 meetings in Vegas with our National PCI retailers. This is fewer than the previous years, but the difference this year is that each meeting will be focused on a specific deal at specific properties rather than some of the meetings in the past been kind of a broad State of the Union discussion. The team has already completed portfolio reviews with the majority of these PCI retailers and sent materials in advance for identified transactions so that when we are sitting down at the table with these guys at ICSE, both sides are ready to make deals.

In summary, this is a difficult time. Our real estate is strong, our team is focused and working diligently and we've positioned ourselves to emerge from this recession with the best in class retailers and solid centers that will enable us to grow rents and same store NOI in the future. Brian?

Thank you, Mary Lou and good morning. I'd like to open my remarks by expanding on Hap's and Bruce's comments about the company's G&A. As we said before, we are keenly focused on right sizing the organization. We are striving to maintain what is a delicate balance between the realities of the business environment today and our desire to keep in place an extremely talented team that not only can effectively execute our business plan, but also take advantage of the incredible opportunities that will be available to those companies that are positioned to thrive.

We took steps last year and early in the first quarter of 2009 to meaningfully reduce overhead. We eliminated 141 positions from the plan that existed at the beginning in 2008, which resulted in the savings of $15 million to what was our original staffing plan in 2008 prior to the onset of the recession.

About 80% of the savings came from the investment group and investment support function. While that's a lot, we'll continue to explore additional cost reductions going forward.

Before the capitalization costs related to our development and leasing operations, we expect our G&A to be $15 million lower than 2008, which reflects the savings from the reductions in force already completed. However, because we are capitalizing on much smaller percentage of our development group as compared to 2008, our net G&A for 2009 will be approximately $4 million to $8 million higher than 2008, subject to the range of new development starts, is guidance of $10 million to $15 million. This reduction is a result of our having significantly tightened our requirements as to the kind of developments we think makes sense in the current environment of capital constraints and reduced retailer demand.

For us to move forward on a new development, we have to check several boxes. Returns on rigorous underwriting have been further increased to the 11 to 12% range with one exception being a commitment to a valued anchor that we feel would be wrong not to honor. When evaluating existing land investments, we'll look at the incremental return on costs, which would need to exceed this higher return threshold.

We will be focusing on developing shopping centers with market leading dominant grocers in affluent markets with limited shop space. The development would need to be significantly pre-leased and have strong indications of retailer demand so as to have excellent visibility to 95% lease up and will not take any entitlement risk.

In short, there will be little difference between these types of developments in buying 95% leased operating centers other than completing the construction, leasing a limited amount of space, and the expected returns. In that sense, they are almost what we call acquisition plus opportunities.

While our guidance reflects our cautious approach to development and our belief that there will be very select number of opportunities that can meet these stringent requirements, any project that can clear this bar in the current environment is truly a gem, will enhance intrinsic value and should be pursued.

Probably the best way to illustrate what I am talking about is to give you an example of such a project we are working on that does check all these boxes.

In Los Angeles, there is a very dense -- there is a site in a very dense area, 450,000 people in three miles and well over a million in five miles. To put that into perspective, this is almost six times the average population density in our operating portfolio and represents the kind of densities retailers' dream of. But historically, it has been almost impossible to assemble urban parcels in a manner that allows for traditional retail to be built with acceptable levels of risk in return.

Generally speaking, urban sites are very expensive, so the only way to make them pencil traditionally was to build mixed use projects with multiple stories, charge top of the market rents, and take enormous entitlement and leasing risks. Not surprisingly, that is why we have shied away from these projects in the past.

In this case however, it appears that we can assemble all the property for about $0.11 on the dollar and thereby build prototypical single story retail. We can achieve an 11% return on cost while charging rents that work for retailers even with today's very conservative sales forecast.

In short, the current environment is creating a rare opportunity to develop a low risk urban infill project with most of the traditional development risks stripped out of it at a return 300 basis points higher than previously would have been possible.

There are a few reasons we can do this. A large bank has a loan on the property with a developer who can't perform. It appears that we will be able to buy the property through deed-in-lieu of foreclosure transaction in which the bank will write down the value of the land by 50% plus throw in for free an additional seven adjacent anchors secured by the same note.

In addition, the City is going to give us at no cost properties crucial to the assemblage. All in all, the land concessions are worth about $45 million. Finally, the city has tentatively agreed to further subsidize the project by agreeing to pay for the cost of a theater to go in the property. The demand for the project is keen. All the top retailers want this site and there is far more interest than we can accommodate.

This kind of potential investment represents a once in a generation opportunity. But let me reiterate that our basic mood on developments is that we are extremely cautious and in the short run see limited opportunities to make any sense. When we see ones like this, we are prepared to seize the opportunity. As always, the balance sheet will come first and any such opportunities will need to be funded through property sales, contributions to co-investment partnerships, or by other means.

During the quarter, we did make some modest leasing progress on the in-process portfolio. It is important to remember though that these projects are 85% leased and when you include anchor spaces, or when you include anchor spaces and 75% leased on Regency's company owned portion. So we are starting in a good place.

For the first time in several quarters, our teams in the field are seeing a definite increase in activity. More retailers are showing interest in the spaces and are actively negotiating terms. In the past, given the steep decline in volatility of their sales, junior anchors could not even run sales models, which are necessary to determine the economics of any lease transaction. Now, sales have stabilized to the point that retailers are comfortable running sales forecasts. And again, for the first time in many months, they are willing to present the projects to their real estate committees. One of our largest retail customers recently expressed that it is now considering opening as many as three times the number of stores in 2010 and 2011 than it had previously expected to open. This is all good and welcome news that, knock on wood, will continue and translate into actual lease transactions. Hap?

Thanks Brian, thanks Mary Lou, and thank you Bruce. You've heard from the team what has been accomplished in the first quarter, and some of the strategies that are being employed to position Regency into the future.

Let me review very briefly the key elements of that strategy. First, we are committed to preserving Regency's strong balance sheet and access to reliable external sources of capital, maintaining a large unencumbered pool of assets, which currently approximates $3 billion. Second is to protect and grow net operating income both in the operating portfolio and developments. Third is to cautiously and selectively invest in compelling opportunities like the opportunities that Brian just described what we call gems. And finally to proactively manage G&A cost as the business environment dictates.

By achieving these objectives, Regency will be positioned to cost effectively fund our obligations, take advantage of what should be outstanding future opportunities, enhance our position as the premier national shopping center, owner-operator and developer, grow per share intrinsic value, and generate total shareholder returns that exceed the FTSE Shopping Center Index.

At this time, we do appreciate your time. And we will now answer any questions that you may have.

Thank you. (Operator Instructions). We will take our first question from Jeff Donnelly with Wachovia.

Good morning, guys. Just a question on revisions in your guidance, you took out your revenue growth and NOI growth expectations fairly sharply from the past and I guess I am having a little bit of a difficult time reconciling that decline from the prior quarter because much of your revenue is in place and generally speaking you haven't been granting a lot of rent release and we seem to be over the hump at least for the time being on retailer bankruptcies. I guess I am wondering what specifically you are seeing perhaps in the back half of the year that leads you to be more cautious or is it just that you are baking in more conservativism in light of the lack of visibility?

It's a combination of couple of things. Our new leasing in the first quarter was behind plan and so we think that even though we're starting to see some pick up in the last month that that's one thing that's going to affect the second half of the year.

The second is the fact that we're having high move outs, they've been pretty strong as you know. A lot of that was incorporated into our budget, but we think and we've got our list of -- our watch list of retailers and sit it down and you look at that list and you look at the potential bankruptcies out there, Jeff and this is the majority of it, we think a lot of those things are going to happen. And so, as you know we've always been and I think we're being realistic but conservative. And honestly when you stand back and look at where we are today, what we know is in there, which I think is baked into kind of the middle of our guidance and where we think potentially things could get bad based on some potential bankruptcies, I hope it doesn't get bad, but that's why we took it down because we're not [all-knowing], the fact that there are people out there today that could probably go bankrupt, and probably will. And we put that at the low-end of our guidance and that, we hope we don't get there, but it's a potential.

That's helpful. And maybe this plays into the second question, but looking at your acquisition disposition guidance, cap rates, at the low-end they rose 25 to 50 basis points to about 8.5% to 9%. Is that generally where you see pricing today? I guess better than average assets in your core markets or is that just where you think it's going?

I think that it's, Jeff, pretty conservative. I'd say we save -- see for cap rates with the A properties in top markets would be about 8.25%. If you go to a secondary market or you go to a B property you can probably add 50 basis points. If you get combination of both, maybe 100. But what we've done so far has been better than that. The three sold to-date in the operating and development side have been averaged about 7.6%. We're working on six others that pricing right now looks to be in the 8% range, but I think we're just allowing for the environment to surprise us.

I would also just reiterate the pricing that Brian went over reflects one-off pricing and there is a probably 50 to 100 basis point difference between where pricing is occurring on a one-off basis and where it may be occurring on a portfolio basis.

We will take our next question from Quentin Velleley with Citi.

Good morning, everyone. Just the first question in relation to Macquarie CountryWide. I know they have been looking at potentially getting third-party equity into the joint venture, is that -- could you give us an update on whether that's progressing? And the second point on that I guess is given your liquidity position has improved so much and given the high quality of the first Washington portfolio in particular, does the likelihood of you increasing your ownership stake in MCW, has that increased?

I think with respect to your first question I answered about what I can answer is that we believe they are making good progress with the initiatives that they've announced publicly to the markets in terms of either selling off individual properties in the joint ventures and/or a combination of selling their interest in the joint venture to somebody else that would be satisfactory to us. Our view is that it has to work for us and that's the direction we're going with them in that regard.

With respect to our interest in potentially buying some of that, we'll have to look at that down the road. We are focused today on the first thing focused on protecting the balance sheet, preserving what we currently have and making sure we see the light at the end of the tunnel. That may be an opportunity. We'll have to see if it fits in that arena.

And Quentin, we could be part of that, but the vast majority is going to come from a third-party source when it happens.

Okay, then.

As Bruce said we're cautiously optimistic. It appears like we're making very good progress.

That's good. The second question is, I mean I guess there is more of a hint now of potential acquisitions and so forth from yourselves and competitors and so forth. I guess I just wanted to ask how do you view your longer-term ideal leverage levels relative to making decisions on acquisitions and so forth.

Well, number one -- and Bruce, please provide some adult supervision, at least that's needed here. But we don't just look at our debt-to-cost level or debt-to-market level, especially don't look at the debt-to-market because you may remember that I think our debt-to-market at one time in the not too distant future was well below 30%.

In the past.

In the past. Yes, it is just like I said.

He's optimistic.

And so in addition to debt to assets at cost, we're going to look at our fixed charge coverage ratio and our debt-to-EBITDA. In both of those ratios, we'll be looking on a recurring earnings -- from a recurring earnings standpoint. And we're very comfortable with the current leverage position that we're in right now and we would figure out the best way to cost-effectively finance any new opportunities whether that's on balance sheet or on an off balance sheet basis and that's the reason why -- one of the reasons why we're talking about expanding our co-investment partnership program, but any of that we would not be increasing our leverage other than a short-term basis.

Let me just add to that in addition, Quentin, I think it's important to note that in any acquisition we do that's -- I think to the extent that we're going to use third-party financing for that in a joint venture kind of structure that joint venture financing is typically only available at like a 50% level, so that's kind of the max number we're looking at today. And whether we do less than that, I think it's going to depend upon what the venture itself wants to do.

Okay.

We're certainly not going to increase leverage.

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

Hey, good morning everyone. I'm here with Johann as well. Hap, in your comments you did sound more optimistic and I know you caveat it saying it's certainly early in this process of recovery. I guess specifically in terms of the new leases versus renewals and clearly with the existing assets you guys have been willing to make those concessions on rent, can you talk about the new developments, probably not as much progress in the last few months, but just curious, are you doing shorter-term deals there and what sort of concessions you're making?

Jay, we as I mentioned we made modest progress. You saw 38,000 square feet of net leasing. The number is actually a bit higher than that in terms of the gross leasing. There're several things going on. First of all, we had one project in Oregon where there was an existing tenant that was already signed up and we terminated that lease in order to make room to bring in Trader Joe's, which would not only be a huge boost to the draw of that center but also brought the center to the 100% leased level.

We also had some leasing that was done at Deer Springs, for example, in Las Vegas where this leasing took place in a section of the project we decided to phase. So we took that out of the gross numbers and so forth. But I would say where we're right now, as I mentioned, we are much more optimistic. There is a lot more activity. People are actually negotiating with you, show willingness to enter into new leases. I do think where the risk is, is in the junior anchors because there is a lot of space available on the market. Fortunately for us, only about 19% of our vacancy in the development portfolio is greater than 15,000 square feet, so we don't have much exposure there. I think the juniors recognize that leverage and trying to take advantage of it where they can.

We're not giving much in the way of concessions. TIs in particular are up very, very modestly, but still less than what we have in the budget. And rents, like I said, it's still a function of the strength of the site and where they can do it they will. Well, one thing that we are seeing is improvement in the development portfolio is that the junior anchors, the national retailers are aware that we cannot give the co-tenancies in the lack of opening covenants that they used to try to get and now on new projects going forward, we're not seeing that; that's very positive.

And just --

Before -- Jay, before Mary Lou wants to add a comment as it relates to the operating portfolio, I want to say that we're looking at each development on a case-by-case basis. And where we are giving lower rents today and we think the market is going to -- it's just a temporary dip in the marketplace, we're doing -- we're making short-term leases. And in a few cases, we so to speak have reduced the rent for a longer period of time.

Yeah. And Jay, I just want to comment; you've mentioned the operating portfolio, and really kind of explain our philosophy behind lower rent growth because we've been focused more on occupancy and revenue flow and I though it might be good -- if I look at a month -- just one month, we had six boxes that were over 12,000 square feet. One was at a strong center in California, Barnes & Noble that we did have a 30% rent reduction, but it's only a 12-month lease.

We had another center with a Jo-Ann Fabrics that we kept the rent flat and again 12-month lease. But then we had four other leases that are five years that had anywhere from 8% to 12% increase in rental rate growth. And so our philosophy has been in these good centers and good markets is to keep the anchors, keep the cash flow, and give us 12 months to figure out can we do something with that retailer or do we have -- just buys us time to replace it. And in the meantime we think it protect us from our in-line tenants to not have a big dark box sitting there. So our rent growth hasn't been as strong as certainly history has shown, but that's been our philosophy. So we think overall and again they are short-term leases where we have given it and feel like it's really going to help us go forward.

And just following on the theme of development. I think, Brian, you mentioned looking at incremental return on costs, so on Page 17 of the supplemental where you show the land held for future development or sale. I guess in cases maybe where the land costs -- certainly that land cost might be lower today if you look at those investments, do you still plan to move forward do you think with some where you might see returns of say maybe 6% to 8% but it's below your sort of threshold?

I don't think it will be 6% to 8%. What we did, Jay, is took a look at the land held and we think about 30% of that we can sell and probably come out close to break-even. The other 70% we would see developing. Of that 70% we kind of looked at it and said, what would it take to get the land price -- how much reduction would it take to the land price in order to get those returns overall to about 10.5%, and it looks like about say 24% was the number we came up with.

And then if you look at the incremental return, if you strip out just the land, it's north of 15%. If you subtract out all of the costs to-date that we've incurred including pre-development costs, the incremental returns would be up in the 16% range. And I don't know if they would -- they'll stay there, but the fact is that they are going to be highly accretive on a go-forward basis.

Okay, thanks. That's helpful.

Okay. And the projected -- once again, projected return on cost is a projection even on current -- on total current cost is in the 9.5% range.

Great, thanks.

Thanks Jay.

We will take our next question from Paul Morgan with Morgan Stanley.

Good morning. Just a little bit of focus more on the development pipeline. I mean you had phased a number of the projects that were in some of the housing bust markets. And I am wondering I guess first of all, whether that -- you've basically kind of trimmed down as much of what you got in development right now as much as you can and what's left is basically stuff that you have to complete or is there more potentially? And then, on the leasing specifically, are some of these ones that are only 50-60% leased? I mean how vulnerable might they be to co-tenancy triggers and some of those stores that are at least going dark or kicking out?

I think the phasing is pretty good. We spent a lot more time on it over the last quarter scrubbing those costs. And so, I think what you see right now, we have about $125 million worth of cost pulled out of the development pipeline, the in-process, to move future phases. I don't think you're going to see any more than that and we'll bring that online as the demand picks up. There are some of the large projects that are not leased too well in the growth areas that do have co-tenancy risk. Most of that we've already seen triggered and are in the numbers and the others ones we're negotiating with them right now. We'll handle it same way Mary Lou discussed. Any concession we give them we'll get something in return, but we do have some exposure on those projects, a handful of the large community centers.

Okay. And then going to Mary Lou's comment about the short-term leases that you are doing, I mean are those local tenants primarily and what's the typical kind of rent roll down you are seeing for those short-term renewals or are they nationals as well?

Well, for the most part, they are all local. And when we're doing rent release, out of those 22 that we talked about and I think last quarter we had 34. So we're actually seeing rent relief going down in what we're giving. But for the most part it's all local and we are doing 90-day release and then looking at it again, and if I can kind of reiterate what I said the last time. Our plan was that we look at what kind of sales information they have, we expect income statement, credit application and then their recovery plan, look at rent to sales ratios, and determine what we think that we can do. We are seeing a decline, but it's interesting when you dig into this and look at more specifics in the new leases there were three deals that we did last quarter that were anywhere from 30% to 50% down. Without those -- only those three deals, we would have had 11.5% increase in new leases. So sometimes that big number, especially on a quarter basis, can skew it because there could be a couple of big deals. So overall, it's very healthy. We are seeing high renewals and we're really -- minimal rent reductions, but where you have a couple of these big deals it really [skews] the numbers.

Were those shorter-term deals that you refer to?

Yeah. In every case, all those were under a year.

Okay. Thanks.

Thanks Paul.

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

Yeah, hi. I guess maybe it's a question again for Mary Lou. But when you are thinking about 2010 and I know it's quarters away at this point and it seems even longer, but what sort of assumptions are you operating under with respect to occupancy, do you think occupancy is going to be down on average year-over-year at this point, does it feel like -- do you think -- it seems like rent spreads could still be in negative territory? I'm just wondering what the early read is on '10 at this point.

This is -- it's hard. I'll be honest with you, we're seeing it. If I could look at '10 and say everything was stable and that we didn't have more bankruptcies in second, third and fourth quarter, I'd sit here saying that I think that occupancy is going to stabilize. And as I talked about we have got some '10 deals, 15,000 LOIs and that set should come into play in '10, which is a $4 million increase, so I'm thinking of '10 overall. And if you look at year-end occupancy of '10 versus year-end of '09, I think it's going to be stable to maybe even slightly positive. I think that rent growth in the second half of '10, you're going to see some really positive numbers.

I think the big question that we're trying to get our arms wrapped around and trying to plan '10 is what happens to those retailers who are on our watches and everybody else's and do they declare bankruptcy in third -- second, third and maybe even some of fourth quarter and what does that do to the number. So I wish I could give you -- we're working on that and have quite frankly ask me that question pretty much everyday and we're working on that to try to get a better handle on that. And if I didn't have that caveat out there, I feel like I could sit there and lay out a real good scenario, but we're hoping in this next quarter to do a better job to get our arms wrapped around it and we can give you a better direction.

Sure, sure.

Michael, that as Mary Lou indicated earlier, in our current projections we have incorporated a good amount of what we call a reserve for unplanned move outs, whether it's going to be adequate is once again the -- even as the economy starts stabling out, you could have a continued period of increasing unemployment for the next several quarters, and what impact that's going to have on retailers is just hard to tell. I think that what's encouraging to me is it just appears like -- it doesn't feel like we're anymore going off the edge of cliff right now. It does not mean and that's to a large extent having that not knock on wood level of comfort is encouraging, it doesn't mean that we're not going to have a number of quarters of (inaudible) in the economy and its impact on the shopping center business even when you've got strong anchors and great locations.

I'd tell you the thing that's most encouraging to me is that we had about million square feet in the first quarter and that trend I mean really still like it's continuing. We have a lot of leasing that we're doing. And also, as I stated, the rent reductions are all short-term. So I think it's going to impact us probably through '09 and probably into '10 and then I'm really optimistic.

Okay.

About the rest of it.

Great. And the follow-up. For that watch list that you're talking about, can you give us a sense as to what does that represent in terms of occupancy percentage, is that a percent of total square footage, is it 2%, 3%, how big is that list?

It was -- it's not a huge list. It ended up when I looked at it. It ended up taking occupancy down to about another 1% at the most, over and above what's in our move out reserve, if everything happened, so that's really ugly. And so, obviously we don't think all of that's going to occur. So I think that is kind of the negative news, but that's incorporated in our lower-end of the guidance at the 92%, so we feel our guidance covers really all of that, the minus 5 NOI and the 92%, so --

Okay. So the 92% factors that in or it's 1% below that?

No, no, that's in.

That's in, okay. Okay, great. Thank you.

We will take our next question from Nathan Isbee with Stifel Nicolaus.

Yeah, just circling back to same-store NOI question again. The guidance when originally issued was negative 1 to negative 3.5, you spoke at that time of it being a very conservative look at the portfolio on a lease by lease basis, and I guess it's a two-part question. I mean are you actually even more pessimistic now than you were two-and-a-half months ago about the bankruptcies? And when you talk about the guidance for occupancy, that hasn't changed even as you take your same-store NOI guidance down and you increase --

Well, what we did is we took the high-end of the guidance down from 93.5 to 93 and we think 92% to 93% the same. I think the things that have, are we more conservative, yes. And some of it has to do with the fact that the move outs, although we had a reserve, we are hitting that number. It's definitely, the big issue that's occurred is longer lease-up time. And the fact that in new leases for the first quarter, we had significantly less leases. Now we're seeing some of that is timing and we're really encouraged in the month of April that we had 476,000 square feet of leasing. So I will tell you some of it is timing. It's taking longer to lease up, and move outs are occurring a little bit stronger than we expected. Flip side, we're doing a heck of a lot of leasing, but a lot of our low-end of the guidance absolutely has to do with the fact like I mentioned, these bankruptcies that are out there that we're taking into consideration and you look at them and we think they are going to happen and so -- some of them, not all of them, but some of them. And it is incorporated in both our low-end of NOI and our low-end in terms of occupancy.

Okay. Now when you talk about the 92, 93 of the occupancy at the period end, is that the lowest you'll get during the year or do you expect it to dip below?

The lowest that we honestly today that we expect it to get is 92.3% and we think that would happen late in second quarter, beginning of third quarter and that will be a point in time occupancy, but that's the lowest percent we think we will get this year.

Okay. Thank you.

We will take our next question from Alex Barron with Agency Trading Group.

Hi, good morning. I was wondering as far as the change in occupancy from this quarter to last quarter, how much of that is attributed to small tenants versus larger tenants?

I think for the most part, 60% of it comes from the large tenants and 40% comes from the smaller tenants. So it's a blend, but it's a typical blend of what you see.

Okay. And are you finding basically that as far as the smaller tenants, for everyone you lose it's just kind of you're just basically back-filling another one, is that generally what's happening?

I'm not sure what exactly you mean, it's just taking longer to fill those spaces. But yeah, I mean we're -- and we're doing a lot of things, trying to be a little bit more creative, trying to fill those spaces. We've had a focus because our portfolio is high quality and our anchors are still performing extremely well across the board. So when you have this mom and pop set sail, our guys are out there now going to B centers with A retailers and bringing them into our site as a retailer, so it's taking longer. And we also have been pretty creative in terms of trying to go after more service tenants, the dentists and the chiropractors and spending -- doing marketing to people who are graduating from university starting their own practice. So, it's just taking more work and it's taking more time.

Okay. Now as far as the grocery-anchored centers versus the ones that aren't. What typical if -- or have you measured what the difference is between occupancy of those centers?

I have. If you look at grocery-anchored centers, you end up looking at under 125,000 feet and you look at, our same store NOI in those would be a minus 1.4%, our rent growth would be a positive 1% and our occupancy would be 93.5%. Then you look at the community centers, our same store NOI is minus 2.7%, rent growth is 0.8% and occupancy is 93.1% and then that gives us the total. So we have looked at that because I do think if you look at Regency and you go, okay, it's grocery-anchors, high quality, it's really in more of the community centers and a lot of these big boxes that are taking longer to replace. But again I'll reiterate, if you look at the 15 big spaces that we have available, we got 10 LOIs out there and the fact is that that 31% increase in rents, it's just not going to hit in '09 and it may be into '010 before we start seeing the revenue come in.

I just think it's just important to note that, yes the cup is not full. But the half full portion, when you consider that in the first quarter we signed 1 million square feet of leases, 800,000 square feet of renewals, and 200,000 square feet of new leases and really our activity in April was an acceleration of what we experienced in the first quarter. Obviously even if the economy starts bottoming out, there is still going to be some additional fall out and I think we are incorporating that into our projections.

One thing I mentioned too is that part of what impacted this quarter was the fact that in aggregate there were 19 retail bankruptcies in the first quarter and four of those impacted Regency. It was Ritz Camera, Shane & Company, which is that discount jewelry store, S&K and Everything But Water. That was a million and a half of revenue on an annual basis, but that was $1.5 million of revenue. So, those are the things that we think those kinds of things that may not take that many retailers. The good news about our portfolio is we didn't get impacted by all 19; we only got impacted by four. But, it still hurts.

And we are in line with -- and our reserve in that so far has covered the bad news to date.

Absolutely, yes.

We'll take our next question from David Einhorn with Greenlight Capital.

Yeah. Can you talk a little bit about the temporary rent reductions, who they are being offered to, how temporary they are, what the amounts might be and what the policy is? It sounded like last quarter you were sort of resisting that?

Well, when we look at it, we are resisting it, but it takes -- it's kind of like I said, if you look at it and a couple of these examples, the one that I mentioned was the Barnes and Noble and it's in a really strong center in California. It's negative 30% fixed base, but it's only 12 months. And then the Jo-Ann's, which is a flat, and again it was 12 months. And then the rest of them for the most part, so we've got a few big box retailers, the rest of them are kind a lot of local tenants, not a lot but local tenants that we've done and they're 90 days, they're mid-term leases, they're 90 days that we've given them rent relief to. And again I think the key is that there were 34 in the fourth quarter and only 22 in the first quarter. So, it's just -- our processes -- and our process -- what, go ahead....

I was going to -- I mean one thing I think you are confusing from what Mary Lou is talking about, she used the Barnes and Noble example, that was a lease expiration.

Right, right.

It's not -- that is not a mid-term rent reduction.

That's mainly....

Only 22 mid-term.

Yeah, only 22 mid-term and some of these are rent at the time. The big boxes I gave you were all renegotiations at time of renewal; maybe a little bit of the confusion.

Right. And what's the annualized amount of rent reduction and how -- what is the duration of the reduction and how much has already flown through?

We've indicated it was -- it's like in the case of Barnes, it was a year, some of these rent reductions, the mid-terms are only 90 days.

Yeah, all of that local rents are 90 days, so it's a short-term. It's not --

It's 22, three-tenths of 1% of the 7100 tenants.

Okay.

Thank you.

Thanks.

Thanks.

We'll take our next question from Jim Sullivan with Green Street Advisors.

Thanks. Hap, I wanted to follow-up on the leverage question that was asked earlier. You talked about a number of different ways to measure leverage. One way that you did not mention is debt divided by the market value of your assets. And if we were to use say an 8.75 type cap rate to value your portfolio, your leverage on that measure is somewhere around 50% plus or minus? And on Kinko's call Milton Cooper said that the right leverage level for Kinko's as he looks out a couple of years is in the 25% range.

Right.

Is that a number or is that a target that makes sense for your company? You said specifically you don't intend to increase leverage, but you didn't say that you specifically intend to reduce it?

Jim, I want to reiterate, but I do think that just looking at debt to market cap can be -- is not -- it has certain flaws. As you may remember, I think in 2007 our debt to market cap was well below 30%.

Just to make it clear; I am talking about the debt to the market value of your assets as opposed to --?

But the debt -- if you were to take Green Street's analysis of what our market value of the assets was at the time, I think the number would have been real close to that number. It would certainly be well below -- it would certainly be well below 35%, that's #1. So, in my mind or in our mind there is a couple of other metrics that we think we are going to look at as closely if not more closely than that and that's fixed charge coverage ratio and debt to EBITDA using recurring earnings. And, I did say that we are comfortable with our current debt level at this point in time and we'll analyze future opportunities to potentially reduce that on a cost effective or opportunistic basis in the future.

Are you willing to talk about targets based on the measures that you think are the most appropriate ones?

I would say that once again that we are on the debt to EBITDA is in the fixed range and that our fixed charge coverage ratio on a recurring earnings standpoint is in the [22] range. And I think that's within our range. Could those coverage levels get higher? If there is a way to opportunistically do that on a cost effective basis, we would certainly give strong consideration to doing that.

We'll take a follow-up question from Quentin Velleley with Citi.

I am just here with Michael Bilerman. I just want to sort of follow-up on your comment on the co-investment or the potential of more co-investment. In terms of -- are there likely to be new relationships or existing relationships, I don't know whether you could give sort of any idea of the quantum of capital sort of assets for these kind of relationships and also whether there is a preference to investing into grocery-anchored assets?

I think #1 Quentin, there is -- to your second question, there is a preference to investing in grocery-anchored assets. That's both -- that's also reflected on the mortgage financing side because of the necessity to kind of more stable asset class and I think that we are seeing that on the investment side. And one of the reasons that we are cautiously optimistic about MCW's ability to execute their plan is because of the interest on grocery-anchored shopping centers.

And then lastly I will say that we are in, I think as Bruce has indicated, we are in active discussions with prospective co-investment partners doing a co-investment partnership and I think that the primary interest is on grocery-anchored assets.

Now is that -- you are trying to get partners to buy out the existing joint venture or you are finding partners to buy new grocery-anchored centers?

I think that you are talking about expanding our co-investment partnerships that would be to -- as we stated it as part of our plan that we would like to generate about $100 million to $150 million from the sale of an interest in so to speak existing Regency assets to create a new co-investment partnership and then we also would -- to do that we would also like to feel that that new partner would be a reliable partner on a go-forward basis.

Right.

To either continue to and in theory find new investments either new balance sheet investments that Regency has /developments/takeout of that or secondly to make third-party acquisitions.

I just had a follow-up question just regarding guidance. At the time of the equity offering, one of the key drivers of the reduction had been an increase in net interest expense going from $12 million to $19 million and I was curious how much of that is related to a potential bond offering versus higher cap interest or lower cap interest from the development -- not capping development -- that was just one specific thing on guidance? And then the other two on guidance was I think it's just very clear, your same store NOI is down because your weighted average occupancy for the year is probably down 100 to 150 basis points from your prior guidance, it is taking longer time to lease, higher move-outs. So I just want you to sort of verify that?

And then the last thing on guidance was just on the transaction profit, the $15 million to $20 million effectively with $4 million booked and I think you had anticipated about $12 million Macquarie promote in the third quarter, is that effectively how you get -- 4 plus 12 gets you to 16, so just some questions?

The answer is yes on that, yes on the lower average occupancy and it is lower capitalized interest. Almost 100% of that.

We'll take our next question from Chris Lucas with Robert W. Baird & Company.

Good morning, everyone. Just a quick follow-up question on the watch list, Mary Lou, in just your thought process, how much sort of percentage-wise of that watch list would be Chapter 7 versus Chapter 11 risk?

It is hard to say, but if I looked at it I think that's probably -- potentially three Chapter 7 and the rest of them would be 11.

Okay. And then Bruce, a quick detail question on bad debt expense for the quarter.

And your question is?

How much was it?

It's right about the same of what bad debt expense it's been running, pretty much where we've been for the last year.

And I just want to reiterate related to bad debt expense, watch list etcetera that in our projections we have incorporated what we think is a reasonable estimate for reserve for unplanned move-outs. Whether that reserve -- and we think it's going to be adequate and just we've tried -- Mary Lou and the team have tried to incorporate that into our projections as best they can.

What we didn't want to do is every quarter stand back and have a number. I mean if we took our first quarter and even if we were to look at last year and then we came back and revised it. We don't want to go, "Oops these bankruptcies happened, oops this happened, this happened," and every quarter surprise us with downward guidance. So we literally took the whole year and laid it back and said what could happen and we did what we felt was reasonable and potentially probable.

Is there a number for the first quarter?

What do you mean is there a number?

What was the bad debt expense for the quarter?

In line with what we've --

We'll have to -- Chris, I don't think we know it exactly. I'll be getting back to you.

That's fine, that's fine, okay.

The amount we added to our reserve in the first quarter was $500,000. But the -- your question is how much we pulled off on that.

Correct, okay. That's fine. I'll talk to Lisa offline.

Okay, thanks.

Bye, Chris.

We'll take our next question from Jim Sullivan with Green Street Advisors.

I wanted to follow up on the bankruptcy issue. Mary Lou, can you comment on the bankruptcies that have occurred so far and the pace relative to your expectation?

Yeah. I mean the -- as I said, the four bankruptcies that affected us so far were Ritz Camera, but that's also Wolf Camera and Boaters World, because it's owned by the same entity. Shane & Company, S&K and Everything But Water. The ones that were incorporated into our plan quite frankly, we thought that Ritz was going to happen and we really felt that Shane & Company was; the S&K and Everything But Water, we didn't have that incorporated into our plan. That's what made us kind of go back and go, okay, we need to sit down and really look at this and see what's out there, where do we think our risk is and who do we think, so the question is you got to balance this in terms of sharing the information with respect to our retailers, but which ones do we think are really going to go Chapter 7, how does that impact and which ones are going to go 11? And then which -- then go property by property, space by space and go, take all of them, and which ones do we think are going to be either renegotiated down, downsized or rejected and lay that out. So that's the process that -- it was a big process this quarter going through that.

And as you do look forward, what's your expectation as to what the key trigger will be on putting those on your watch list actually into bankruptcy, is it looming debt maturities at these retailers out of the corporate level or is it your concern that you are going to have trouble perhaps securing inventory financing as it gets towards the middle of the year or is it the expectation of continued deterioration in their operating fundamentals?

Yeah, I mean I'll tell you in every case it starts with deterioration in operating fundamentals. And then when you start looking at some of these guys in their balance sheet, it's really -- they have problems. So you are looking at deteriorating fundamentals, problems on their balance sheet and you sit down and go, okay, do they have a plan and this is where I think it's great to having the people out in the field working with them and I think we will get more color even after I (inaudible) that we can share with some of you at NAREIT is what is their plan to turn their operating fundamentals around and is it a solid one or if they don't have a plan and they have this and that's going to kind of reiterate where we think they are going to end up. So it's a work in progress, but it all starts and everyone at least that's on our list starts with core operating fundamentals.

But I'll also say, Jim I think it's important to know that retailers aren't sitting back and assuming that all of a sudden the operating environment is going to get any better and they are taking significant and meaningful measures to be able to in effect survive and even go cash flow positive in today's low sales levels.

Thank you.

Thank you.

We'll take our next question from [Michael Collum] with Arrowhawk Capital.

Hi, thanks for taking my question. Sort of a little bit of a philosophical question or maybe if you could talk about the rationale that went into sizing the offering at the level that it was sized. It would seem to me that given sort of the availability of capital right now and sort of the window that's open, I might have chosen a more conservative approach in terms of raising many multiples of what you raised in the context of (1) it de-levers you; (2), it provides liquidity; and (3), if the world turns out to be okay, it gives you the flexibility to put capital to work when a lot of the private real estate begins to move its way back to the market and be sort of offensive, if you will, so it kind of helps you defensively and offensively it would be the way I would think about it. How are you -- how did you think about it and why didn't you do more?

There were a lot of considerations there. I think what we wanted to do was to make a -- to basically #1, address a significant -- very significant portion of our capital requirements through 2012, that was the #1 issue that we looked at. Secondly, we didn't totally take our eyes off the ball on two other issues. #2, we felt like we were able to raise capital. If you look at analysts' views of what the implied cap rate was on a minimally diluted or maybe even accretive basis to our per share NAV.

Thirdly, we did look at overall dilution and we felt that we could accomplish what we accomplished, and it was a multi-pronged approach. Remember Michael, we raised I think the reduction in the dividend through the $106 million of committed mortgage financing, through the equity offering, and through where we think we're going to be able to achieve the sale to the co-investment partnership, I think the number is $700 million and it's -- and I think that it puts the balance sheet in good shape, and I think that we're positioned we feel that we still have all of those elements, we still have a close to $3 billion unencumbered pool available to us. We have on balance sheet opportunities available to us, and to the extent they are compelling opportunities we can finance those in a way and they may be done in a way that will further enhance the balance sheet over time.

Right. But I mean I guess that's a little bit mixing issues in terms of liquidity and capital levels, but I mean just in terms of any desire to kind of de-leverage the balance sheet, you could sort of de-lever it to a certain point if the world decides 50% is not the right level and it might be 52% or something like that that gives you the flexibility when maybe some of the distressed sellers come to market, how did you weigh that opportunity in the equation?

Well, what we did was we felt we got our balance sheet in a very comfortable position. And I'll say that in 35 years that I've been in the business, there has never been a position where somebody with a balance sheet of where Regency is today where you weren't in the position to raise capital to take advantage of compelling opportunities. And we feel comfortable that we can play a modest amount of offense today and to the extent that there are compelling opportunities of a larger scale, we'll be in a position to take advantage of those in the future.

We will take our next question from Chris Summers with Greenlight.

Hey guys. I just wanted to talk about some of the lease tenant improvement trends. I noticed in the quarter that on the new leases the tenant improvements ticked up quite a bit. And if I subtract that from the base rent, it looks like rents fell at a ball park of like 22% from the fourth quarter, is that trend kind of continuing and is that the right way to think about this?

Well, let me talk about the TIs again, we had one deal this quarter, which was a grocery deal (inaudible). And without that one deal, it would be $1.47. So it is -- we're really seeing that TIs are going to be right in line with historical levels, maybe a little higher, but not much.

Say $1.70 that's when you divide it into --

So $1.47 without that one deal.

And that is if you annualize it as opposed to -- ?

I'm not understanding what you are asking.

So the tenant improvements in the quarter on new leases was like $18.31?

No, it's $1.47.

Without the one deal.

Right. But on the new leases, what would have -- was that a new lease a renewal lease?

That was a new lease.

Got it.

Okay.

Okay. And then -- all right, thank you.

And we have no further questions at this time. I would like to turn it back over to Hap Stein for any additional comments.

Again, we appreciate your time and interest in Regency and wish that you enjoy the rest of the week and have a great weekend. Thank you very much.

That does conclude today's conference. Thank you for your participation.