Regency Centers Corp (REG) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Regency Centers Corporation 2010 fourth quarter earnings call. Just as a reminder, today's call is being recorded.

And at this time, I would like to hand the call over to Ms. Lisa Palmer. Please go ahead.

Thank you, Nicole. Good morning, everyone. Thank you for joining us. On the call this morning are Hap Stein, Chairman and CEO; Brian Smith, President and COO; Bruce Johnson, CFO; and Chris Leavitt, Senior Vice President and Treasurer.

Before we start, I'd like to address forward-looking statements that may be discussed 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 report on Form 10-K, which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

Hap?

Thank you, Lisa, and good morning.

As I reflect on the progress that was made in 2010, and then back over the prior few years, which are obviously extremely challenging, I'm gratified that Regency's superb team has taken significant steps to better position Regency for the future, regardless of the economic or capital markets landscape. As a result of our intensified focus and recovery-intended demand, operating fundamentals improved significantly over the past 12 months. We also strengthened the balance sheet, reinvigorated our development program, and heightened the energy and focus of the team. Every key measure is headed in the right direction.

Same-property NOI growth was positive 1.2%. In total, including developments, we increased NOI by 2.4% or approximately $10 million. As of year-end, the operating portfolio was 93% leased; 92% with developments. While these results fall short of our goals of 95% occupancy and 3% total NOI growth, we experienced a vast improvement in leasing activity. Our four newly opened developments and redevelopments have been extremely successful. We acquired three outstanding centers in high barrier and affluent infill areas, two in the North Shore area of Chicago and one in south Charlotte. We also sold seven centers that no longer fit our criteria.

We further strengthened the balance sheet, accessing the public debt and secured mortgage markets at extremely favorable pricing. We ended the year with approximately $22 million in cash, less than $10 million outstanding on our $600 million line of credit, and over $200 million due to the Company this quarter from the forward equity settlement. We also improved the financial structure of our co-investment partnerships by refinancing our locking rate on nearly $600 million in mortgages. When you include future pay downs resulting from these refinancings, the amount of joint venture debt will then reduce by nearly $500 million. In addition to these accomplishments, recurring FFO for the year substantially exceeded expectations.

Although we are proud of what we achieved, we also recognize that in 2010 and for this three-year period, returns for Regency shareholders have been roughly averaged relative to our shopping center peers. This is not good enough. We won't be satisfied until we have sustained growth over an extended period of time in per share recurring FFO and NAV of 5% or more, and produced superior returns for our shareholders.

The path to success is clear. Going forward, we will build on Regency's underlying strengths and execute our sharpened strategy at an even higher level. The team's top priority remains restoring occupancy to 95% and total NOI growth, including in-process developments, to 3%. And thus harvesting the imbedded NOI growth in our portfolio. We will accomplish this by sticking with our cycle-tested investment strategy of owning infill shopping centers in target markets, with substantial purchasing power and dominant anchors, and by excelling at the basics of leasing and property management.

Due to what appears to be an improved market for the sale of lower quality assets and the availability of more higher quality centers, we should be able to accelerate capital recycling. As a result, a larger number of properties that no longer meet our standards have been targeted for sale. The funds from these sales will be recycled into shopping centers like the three that we purchased this year that meet our rigorous investment criteria. In spite of the short-term dilution and impairments that may be triggered, it has been our experience, that in time, reliable future NOI growth and returns on capital and value from outstanding shopping centers will justify the decision to target for-sale properties with problematic attributes.

We will leverage Regency's unique combination of in-house expertise, presence in key markets, and close relationships with leading anchors and local partners to revitalize the development and redevelopment program to $150 million to $200 million in starts. The team's value-added capabilities will enable Regency to manufacture new shopping centers with dominant anchors that have a -- centers that have demonstrated demand for side shop space, and these centers would be much more difficult and expensive to buy on a third-party basis. These skills will also be utilized to reinforce the redevelopment, the competitive advantage, for our existing centers. Developments and redevelopments, when executed at profitable risk-adjusted returns, make a meaningful contribution to earnings and NAB while adding quality shopping centers to the portfolio. When it makes sense to do so, we will continue to further strengthen our balance sheet and maintain access to reliable sources of capital.

Brian and Bruce's comments will amplify on my view that Regency is well positioned to build upon the accomplishments of 2010 and achieve our long-term goals. Brian?

Thank you, Hap, and good morning.

Due to the depth of the recession that produced circumstances as difficult as this industry has ever faced, we began 2010 uncertain of the direction of the economy. While there was evidence of recovery on the horizon, there was also the looming threat of a double dip. And we were acutely aware of the amount of work that had to be done to bring the portfolio back to historical levels when, up until 2009, we had ten consecutive years of same-property NOI growth in excess of 2.5%.

Throughout the year, economic conditions steadily improved. Today, the environment in which we operate is much better and appears to be gaining momentum. Retailers are far more optimistic and are aggressively leasing space. This quarter there were significant improvements in most markets. It is not uncommon now to receive multiple offers from national retailers on vacant spaces. There have also been noticeable improvements and signs of life in the markets most severely impacted by the housing bust. For example, during the fourth quarter, the leasing in Florida and California's Inland Empire was the strongest in years. Furthermore, in Florida, same-store NOI growth was positive for the year, and occupancy was in-line with the rest of the portfolio.

The health of our tenants has also improved markedly. 2010 was a year of removing the dead wood, leaving us mostly with a stable of retailers that are clearly survivors. Sales are up, and rent relief requests are now at pre-recession levels, as a result of increased customer spending and the fallout of many weaker players. Fortunately, this strengthening environment also translated into improved operating results across all metrics, which will be more fully amplified in the years ahead. Leasing activity climbed to levels not achieved in the last five years, as retailers return to the table with an appetite for aggressive expansion. To give you an idea of the significance, the 1.7 million square feet of new operating space signed during the year was the most we've ever done, and was 40% higher than the average of the previous five years. 2010 was the only year in which new leasing in the operating portfolio exceeded 400,000 square feet in all four quarters. New leasing in the fourth quarter was the best quarter on record, and December was the strongest final month in five years.

The higher leasing activity and lower level of move outs combined to produce the only fourth quarter in the last five years with positive absorption in the operating portfolio. One of the most significant items in all of this is the fact that the improvement is attributable to the strength in small shop leasing. More than 95% of the leases signed in the quarter were less than 10,000 square feet, and the net absorption of these small shops was positive for the first time since the second quarter of 2006, or 18 quarters ago. Although still below the peak, I'm encouraged that rents have been moving in the right direction. The average rental rate of all leases signed in the quarter was 13% higher than the third quarter's average rate. Notable advancements were made in the development portfolio as well. Leasing gains translated to a $9 million year-over-year increase in development NOI.

And finally, while the NOI growth rate moderated slightly, for the first time in two years, quarter-over-quarter same-property base rent turned positive, which is a good indicator of future growth prospects. As Hap stated, our newest developments and redevelopments are all doing great, with average returns for the four projects in excess of 9.5%. At [seminal] shops, public sales continue to outperform the high level generated as the previous location. Additionally, we executed a ground lease with a national bank that will commence paying rent six to nine months before it even opens. Being able to negotiate terms like that is a clear sign of a center's strength. Village at Lee Airpark is 97% leased. Giant opened a month ahead of schedule and is generating very strong sales.

We continue to make progress creating value by converting land held to in-process developments or sales. The Whole Foods anchored market at Colonnade in Raleigh is surpassing underwriting expectations with an incremental return of nearly 12%, and is receiving excellent demand for side shop space. Additionally, during the quarter, we sold 20 acres of land to Walmart. This quarter we started one new development, a Toys R Us, Babies R Us combo store build-a-suit, which represents the second phase of our Indio development and also puts land inventory into production. The return on this new development is expected to be 10.6%.

The success of these projects further solidifies our belief that our development and redevelopment programs, when properly managed and sized, will make important contributions to the portfolio, NAV and shareholder value. As is indicated in the guidance for development starts, and based what I am seeing from the pipeline, I expect that during 2011, we will make meaningful progress towards the $150 million to $200 million of development and redevelopment starts that Hap discussed.

We acquired an exceptional property in the fourth quarter in the North Shore area of Chicago called Willow Festival. This was an off-market transaction totaling $64 million at a 6.5% cap rate with good growth. The property enjoys tremendous demographics, including an average household income of $180,000. This income exceeds the Chicago metro average household income by almost 120%, which is the largest spread of any property in our portfolio. The center is anchored by Whole Foods, Lowe's, REI, Best Buy, HomeGoods, DSW, and TJ Maxx.

Building on the progress of 2010 won't be without challenges, especially sustaining the rent levels for those leases signed at the peak. However, for the reasons I stated previously, a profitable and newly-tooled development and redevelopment program, a proven operating strategy of owning premier shopping centers in premium locations, a welcomed improvement in overall retailer sentiment, and slow but steadily improving economic conditions, I share Hap's belief that we will successfully execute our strategy. If retail demand remains robust and move-outs continue to moderate, I would expect that we will finish 2011 near the high end of our guidance, both the 93.5% lease in the operating portfolio, with total NOI growth including developments of nearly $12.5 million or 3%.

Bruce?

Thank you, Brian, and welcome to those on the call. It's currently 48 degrees in Jacksonville, Florida.

Recurring funds from operations was $2.39 for the year. As Brian discussed, this is due to the notable leasing volumes and positive impact that improved fundamentals and bad debt expense had on net operating income. During the quarter, the Company recorded $43 million of impairments, most of which are related to over 30 operating properties that were recently targeted for sale. As a result, funds from operations was $1.81 per share. As Hap stated, we believe that it makes sense to sell shopping centers with less than desirable attributes for future NOI growth, regardless of the short-term dilution and impairments that may be triggered from the decision to target an asset for sale.

The balance sheet is in good shape. As a result of the capital markets transactions in 2010, and the repayment of our January 2011 debt, we extended the average maturity date of consolidated debt by more than two years to 2017. Also in December, we exercised a one-year extension option on our $600 million credit facility. The maturity date is now February 2012. As stated on the prior call, we anticipate settling the forward equity offering in March. We will issue 8 million shares and receive approximately $220 million in proceeds after issuance costs. It is worth noting that for the year, approximately 1.5 million shares are already included in the calculation of diluted weighted average shares, due to the requirement under GAAP that we apply the treasury stock method to account for the forward equity offering until settlement. Therefore, upon settlement, weighted average shares will increase by the incremental amount.

Looking to 2011, we are expecting recurring FFO per share to be in the range of $2.30 to $2.45; unchanged from the guidance we provided in December. Total funds from operations for 2011 are expected to be in the range of $2.28 to $2.48 per share, also unchanged from guidance provided in December. Beyond 2011, as Hap indicated in his comments, and we included in our December investor presentation, we expect to generate growth in recurring FFO and NAV per share of 5% or more. The primary drivers of this growth will come from same-property NOI, a continued lease up of in-process and recently completed developments, and our expanding pipeline of future developments.

Hap?

Thank you, Bruce, and thank you, Brian. As you've heard from each of us, we've emerged from what has certainly been a challenging and interesting cycle. Believing that the lessons learned in the past few years, and the accomplishments of 2010, have strengthened Regency Centers and sown the seeds for sustaining growth and shareholder value in building an exceptional Company.

Thank you for your participation and now I welcome any questions that you may have.

Thank you.

(Operator Instructions)

And we'll start with our first question from Quentin Velleley from Citi.

Good morning, guys. I'm here with Michael Bilerman as well. Just wanted to focus, firstly, on the new leasing that you did in the quarter, and I know that you include leases on vacant space that are vacant for more than 12 months, so if you were to take those out, what would the leasing spreads have gone to? And then, just relating to the leasing, if you look at the TIs which were down a lot on last quarter, and the terms gone out as well, so is it fair to say on an effective basis that you're actually achieving better leasing spread?

Hi Quentin, this is Brian. To answer your first question, if you take out the spaces vacant longer than 12 months, for the quarter the rent growth rate goes from minus 3.5% to minus 2.5%, and for the full year, it goes from minus 1.8% to minus 0.4%, and I think that's a pretty fair assessment of what you're talking about in terms of net rents with the TIs. I know you see the total TIs; when you look out on a deal-specific basis, addressing only those leases that have TIs in them, what we're seeing is that the TIs given for new leases has fallen, really, for about five quarters, and for the last three quarters we've seen a drop in the per square foot for the renewals as well. The only thing that has changed is the number -- the percent of renewal tenants who are getting TIs has increased, but the amount that they are getting is very modest. It's just about $5 a square foot.

Okay. And then, just secondly, I wanted to follow-up on the Charter Hall assets in the Desco joint venture, which Charter Hall announced they were selling to Desco on an 8.5% cap rate. I know you had purchased your interest at 6.5%, so I was just wondering whether you could sort of talk about how the discussions and negotiations went there, and why it wasn't attractive to you guys at an 8.5% cap rate.

Quentin, we felt that what made the most sense for us was to do a distribution in kind, given the objectives of our partner Desco, who's obviously the Schnucks family. And it just seemed to us, based upon what they wanted to accomplish with the transaction, that doing a distribution in kind, which, as we've indicated, would be done on a very favorable basis, is the direction we want to go in. So, we'll end up with several to better assets in the portfolio as a result of that. And we're very pleased with that outcome, as soon as it gets closed.

Okay, thank you.

And we'll move on to our next question from Rich Moore from RBC Capital Markets.

Yes, hi. Good morning, guys. And by the way, we only use only one digit in our temperature here in Cleveland.

The 30 assets you guys are planning to sell. I'm assuming it's 30; you said it might be more than 30. Is that the $100 million to $200 million of dispositions that you had given us guidance on for the year? In your guidance you guys --

This is Bruce. I think the press release indicated we would do that over a period of three years effectively, so some of the assets would occur in that guidance number that we've given between $100 million and $200 million. That is correct, on a pro-rata basis.

I think the important thing to note, Rich, is that the -- our guidance is $100 million to $200 million, as you said, whereas the impairments relate to properties that have a value north of $300 million. It goes slightly beyond what would be the 2011 plan.

Okay, and then, do you have a target that is larger than the $300 million, you think, for ultimate dispositions from the portfolio?

I mean, I think -- again, if you think about it, the way we talk, every year we go through -- it's continuous. The retail environment is dynamic and circumstances change, and you have to remember, something can trigger a decision to sell or to hold. At this time, we did a very thorough evaluation, and they're the properties we identified for sale. Could that change in the future? It could. But with all the other properties we have, our current intent is to hold all of them.

Okay, good. I got you. Thank you.

We'll go through the process next year and decide what the acquisition environment looks like, what the disposition environment looks like, and what the assets look like.

Okay, very good, thank you. And then, on the January 15 bonds, Bruce, I assume those went on the line of credit, is that right? The remaining portion that you had.

That is correct.

And then, you used the stock issuance in March to clear up the line.

That is correct as well.

Okay, very good. Thank you, guys.

Thank you, Rich.

And our next question comes from Jeffrey Donnelly from Wells Fargo.

Good morning, guys. Bruce, I think most of us on this call could probably send you 48 inches of snow. Actually, a first question on shop space leasing. I might have missed it, but can you share with us what your small shop occupancy is for small- to mid-sized tenants in fourth quarter? I'm not sure if you have it available, but are you able to break out what your rent spreads were for spaces that were maybe vacant on a shorter-term basis versus a longer-term basis?

Well, the first one I can answer for you; it's about 85% for the space that's less than 10,000 square feet.

That's been pretty stable over the last number of quarters. It's gone up a little bit.

Jeff, is your second question about downtime?

Yes, by downtime, I'm just curious on the rent spreads for spaces that maybe have been down six to 12 months or longer, versus shorter.

Yes, if those that were less than 10 months, we break it out; we're about 11% to 12% negative. And if it is over 10 months, it's almost 25% negative.

Okay. And then, just a follow-up is concerning Blockbusters and Borders. I know, beyond your own exposure, I'm just curious, do you think that's going to present a material overhang in your markets, as you look around? And are you hearing that there's good demand for those spaces from retailers?

It's not going to be an overhang for us. We've got very good activity going on right now, and we've got leases signed for spaces that we have not yet gotten back from Blockbuster. In fact, some of them Blockbuster won't -- doesn't want to give them back to us. So, we've had 11 properties close of our original 63 from last year; eight of those we've already released; two of them, we've leased half the space. And though -- if we lease a space -- a Blockbuster space where we cut it in half, that would not show up in our rent growth because it's not exactly same-space. If you still just look at the comparison of rent, it is already 27% higher, so that likely won't continue, as some of them will be more difficult, but we have a lot of demand for that space.

Thanks.

Thanks, Jeff.

And we'll take a question from Christy McElroy from UBS.

Hi, good morning, guys. Just wanted to follow-up on Rich's question regarding the 30 assets targeted for sale. Can you give us a little bit more color on what are some of the common problematic attributes, whether geographical or otherwise, that make them unattractive to you as long-term investments? Are any of these assets that you had developed in the last several years, and what kind of cap rates do you think you can see on the sale?

A number of them were purchased in portfolio. I think we've given an indication from the standpoint of what kind of cap rates we're expecting in the guidance we've given, is somewhere in the 8% to 9% range. And it's a combination of concern about the anchor tenant that's there; it's just overall concern with the direction of NOIs. And in the past, we've been and will continue to be, pretty rigorous about being willing to sell properties. And we will continue to do so, and it's our view that there is, hopefully, knock on wood, a market to sell these assets today and, at the same time, we also feel pretty good. One of the silver linings of what's happening with the low cap rate environment is we're seeing a decent pipeline as far as very attractive assets, often on an off-market basis, to reinvest that capital. So, it's kind of an opportunity to reinvest capital from centers where there's some question about future NOI, whether it's because of what the anchor might do, whether it's because of what's happening with side shop space, or into centers where we feel real good about the future of NOI growth prospects.

So, none of the assets are in your development pipeline currently?

I'm not going to say none, but -- none is all encompassing. Lisa and Bruce are shaking their heads, so there's none that come to mind.

Okay, and then just secondly, regarding the Whole Foods Chicago deal at a 6.5% cap, is there any potential upside in the lease roll over the next couple years? And then, given the move in treasuries that we've seen in the last three months, do you think that that asset still would've traded at a 6.5% cap today? Have there been any noticeable trends in cap rates adjusting to the slightly higher financing cost?

Well, I think, the latter part of the question, I think that had we not gotten this on an off-market basis, what we've seen is assets of this quality have been trading across the country sub 6%. Whether this would have been sub 6% or not, I don't know, but I still think that where we got it at 6.6% is a very good rate. What was the first part of the question?

Future growth prospect.

Oh, you know, the good thing about this asset, one of the things we really liked about it -- it's not that there are a lot of vacancies for us to release to create upside that way. There is a lot of contractual growth; I think it's like 2.3% per year. But the thing that's nice is this was developed and leased during the downturn, so you have, at worst, market rents that reflect this environment.

Thanks you.

Thanks, Christy.

Thanks, guys.

And our next question comes to us from Paul Morgan from Morgan Stanley.

Hi, good morning. You've got a 200 base point spread between the cap rates you assumed for your acquisitions and dispositions, and I'm wondering just kind of what you're seeing in the market. I mean, you just mentioned that maybe the Whole Foods, if it had been on market, would have been sub 6%. First there, in terms of the 6% to 7%, is that assuming you can do mostly off-market deals? And then, just related to expanding breadth of where the demand is, do you think that 8% to 9%, you could beat that? Or, is that being conservative based on what you are seeing now?

I think the 6% to 7%, for an average, is a good estimate, and we think the 8% to 9% is a good estimate. And until we're -- we just finalized the list, and I think based upon what we're seeing, if we can average in those areas, that's as good an estimate as we can make at this point in time. I will say a lot of these valuations were determined -- were assisted with broker estimations of value.

I would add, too, that the sub 6% would be for the highest quality properties in the bigger markets. I would say overall cap rates are probably in the 6% to 6.25% range with lower quality, smaller markets being higher than that and, as I mentioned, the better quality markets and better centers below that.

Oh good, that's helpful. And then, on the occupancy guidance, you commented that this is your first positive quarter of small shop absorption in several years, and your full-year occupancy guidance is sort of bracketed around where you are now. I mean, is there something that's holding you back from assuming that the positive absorption in the shops would continue? Is it some kind of issues with -- you mentioned you were confident about Blockbuster, but are there other things where you could get negative 50 basis points given -- if the trends that you've seen in the fourth quarter continue?

There are things that I'd say that are pulling us two different directions on that. While things are going well with Blockbuster, we haven't seen the full shake-out of what's going to happen there. It's very difficult; it's a very fluid environment in dealing with Blockbuster, depending on their sales, their advertising program, and what their investors are doing, so that is one thing that makes us a little bit more cautious on that side. On the other hand, we are seeing significant improvements on the move outs, which could benefit us. Just for example, we've had a lot of examples so far where tenants that told us in early 2010 they'd be moving out, have gotten current with their AR, things have improved, and they've renewed their leases. So, I think it's just difficult to say; there are forces pushing in two different directions.

I think what Brian said in his summary remarks, though, if the positive trends that we're seeing in leasing activity continue, and move outs continue to moderate -- and included in that you are going to have this downtime related to Blockbuster in spite of the strong demand, I think he, and I think he's speaking for Bruce, Lisa and I, would be hopeful that we'd be at the higher end of the range from an occupancy and NOI growth standpoint.

Great, thanks.

And we'll take a question from Samit Parikh from ISI Group.

Hi, good morning, guys. You know, you said that you're going to sort of look at $150 million to $200 million of redevelopments and developments for this year now. I just wanted to ask you where that incremental, that new demand is coming from, from where you were forecasting before? Is this more build-a-suit deals like you're doing with Babies R Us or Toy R Us? Or, are you actually seeing interest from smaller tenants that want new space?

I'll let Brian speak to the -- where the pipeline -- the makeup of the pipeline. But what we said -- what he said, or what we're articulating is, is our three-year objective is to get to $150 million to $200 million in starts. And the guidance that we've given is $25 million to $75 million, which we think we're -- we've got the momentum to make that happen, and that would be a major step forward from where we've been -- where we were in '09 and 2010.

But there is absolutely demand, particularly in the more infill markets for new retail space. I mean, there's just no supply. And the anchor tenant demand is pretty strong in those areas. So, if you look at what is in our pipeline for 2011, it is very modest in terms of the amount of shop space that we'll put in there. All of them, of course, are anchored, and we won't go forward without all of the anchors being signed. But I think in four of the six that may come to market this year, there's between zero to less than 15,000 square feet of shop space, so I think they're right-sized for this environment.

Some may be land-held that we've -- a couple of them may be land-held that we've already got, and we have a handful of redevelopments that are involved in that. So, a combination of some, I think real exciting -- knock on wood, we've got some heavy lifting to do to get them across the goal line, but some fabulous infill developments, some real exciting redevelopments, and converting some land-held into new developments.

Okay, and then, on the acquisitions, you said in general you're looking at 6% to 7% cap for that , but maybe the better stuff at 6.25%, 6.5%. How does that translate -- what does that translate into your unwritten tenured unlevered IRRs when you are looking at

We're in the 7% to 8% range.

Okay, so you're not -- so these are slow-growth assets then.

What we are targeting is 2% growth.

Okay.

You know, our view, once again, is to buy assets that have reliable 2% growth in NOI, or plus. And so, we expect that what we're going to buy is going to at least have an average of that. And if you get a higher going in return, you might accept something a little bit less than that.

And that would include rental roll downs that you might have from high market rents today.

Thank you.

And our next question comes from Craig Schmidt from Banc of America Merrill Lynch.

Hi, good morning. I guess, this has been touched on, but a question on guidance. I know that you pointed out that about every key metric is headed in the right direction, but if I look at the mid-point for same-store NOI and rent spreads, it's actually lower than 2010. I guess, specifically, the rent spreads, what is it that's giving you concern that that may fall even greater?

You know, Craig, that's always the one that we have the widest spread on just because we're not sure which spaces are going to come up for releasing, but to the extent we continue to see more leasing as we have been for the last two quarters in the spaces that are vacant longer than 10 months, that's one reason that would hold us back. I think it's just really hard to predict. The other thing that's happening is we're seeing a lot of the releasing of the Blockbuster spaces I mentioned that are being split in half. And it's not just Blockbuster; we have a center in Virginia where we released a space, I think it's this quarter. And there's actually -- by cutting it in two, we got 53% rent growth on the two spaces, but that won't count .

In terms of the same-property guidance, I think -- remember how much we had in term fees in 2010, so the comp for 2011, if you exclude term fees and same-property NOI growth, I believe the guidance mid-point would be closer to 1.5%.

That's correct.

Okay. And a lot of people are talking about the fact that as the consumer comes back and retailers get a little more aggressive, the shopping centers are going to be benefiting from lack of supply. When will that start to move rents in a more positive direction? Is that something that's still a year off, or are you starting to see that earlier?

We're starting to see a positive trend in rents, but I think as Brian always says, it's a question we get to -- our portfolio back to 95%. I think the overall shopping centers, depending on which metric or who you use for that, but I think it's in the upper 80s, low 90s. As that increases, which it should do in the next year or two, we'd expect to see some more pricing power. And I think it is over 50% of our portfolio, or about 50% of our portfolio, is 95% leased, and there is some amount of pricing power in those shopping centers.

Thanks.

Laura Clark with Green Street Advisors has our next question.

Good morning. In regards to your three-year objective of $150 million to $200 million of development starts, what kind of market rent growth do you need to see to get to that goal?

Laura, I don't think you need to see it at all. What we are finding out there right now is the rents support -- in other words, if you look at the projects we are going to start in 2011 we would expect to be in the mid 9% range on those, as it is. Where you're going to have to see rent growth would be in the markets in the green areas where we don't want to be developing right now anyway. In the urban areas the sales are there that justify the rents that they can pay.

Okay. And going back to your comments on TIs. TIs have moved on over the past several of quarters. Can you tell us how free rent has changed over the past year?

I don't think it has changed much at all over the past year. It is something people always ask about. We certainly are seeing our competitors giving it. What we give, when we give it, is really not so much free rent, unless isolated examples in very tough markets, perhaps maybe in Arizona or something. But, by and large, what we are doing is we're giving fixed rent commencement rates so if the tenant can get open earlier than that, then they would benefit from some free rent. But, really, we're also doing that because there is so much risk now in terms of getting permits because of the problems of cities cutting staff. We've got an example in Houston where a small tenant put in his plans and it has been five months and they haven't gotten any response yet. That used to happen in an month, easy.

Great, thanks so much.

Michael Mueller from JPMorgan will give us our next question.

On the new investment, particularly the acquisition side, a couple things. Can you talk a little bit about the pipeline you are seeing today compared to maybe six months ago? And then, secondly, when we look at your acquisition and disposition guidance for 2011, they look like they are washing each other out from a dollar standpoint. But if you were going to come in ahead in one of those meaningfully -- would you suspect, at this point, it's probably going to be on the acquisition side or on the asset sale side?

First on the pipeline, and what we are seeing, I think as Hap indicated, it's a lot of stronger than what existed two or three quarters ago. I think the move down in cap rates has helped that a lot. We used to have a fairly limited pipeline of deals that interested us. Now I would say we have a very large pipeline that interests us. In terms of the acquisition, disposition guidelines, that's exactly what we are trying to do, is match them. Based on the activity we have seen so far on the acquisition side, I think it will be hard work on both sides. I wouldn't know how to handicap which one will be better.

First of all, from a disposition standpoint, we're going to put the $100 million to $200 million of assets on the market based upon what we know right now. And to the extent that we accelerate our acquisition -- we exceed our acquisition objectives then we would look to fund that with additional dispositions. But we are early in the year right now, and as Brian indicated, and as we reiterated on the call, it is our intent to match those two things.

Got it, thank you.

And we have a question from Tayo Okusanya from Jefferies & Co.

Yes, good morning. Just a quick question. If you could address what you are seeing on the grocers side of the business.

The grocers side of the business, this goes back to the question, they are finding it difficult to grow. So what you are seeing is the grocers would like to be doing some more consolidation. There is a lot of stores that were built over the last several years in anticipation of housing growth that didn't materialize, and those resulted in a lot of under-performing stores. I think what you are going to do is you're going to see some store closures of those under-performing stores. I think -- I read something in the fourth quarter, there were a lot of grocers -- I think there were 50% more store closures of all retail than in the prior quarter and the top five was grocery. But the other thing I would say, if you look at that closely, there were 46 chains that were represented in that, which would really indicate there's a lot of private brands, a lot of independents that are just not faring well as more and more competitors get into the food retailing business.

And that has reinforced our strategy of dominant anchors and/or infill locations with very strong sales.

Very helpful, thank you.

And we'll take a question from RJ Milligan from Raymond James.

Good morning. For the small shops, can you talk about the mix of the new leases? How much are new openings versus tenants relocating? And how has that changed over the past year?

We do have a fair amount of relocations. I don't have the exact breakdown. But just in terms of discussions with our field people, it's a lot of new leases, a lot of new concepts, a lot of regional players expanding into new regions, and then just a lot of expansion of chains who have been sitting on the sidelines for the last couple of years.

Has that mix changed quite a bit since the first quarter of 2010?

I'd say yes, you are seeing more of the expansion in the new concepts rather than just the relocations.

Great, thanks.

Jay Habermann with Goldman Sachs has the next question.

Thanks, good morning. Maybe just for Brian, are you seeing any impact thus far from higher food costs or oil pricing? Is that affecting the decisions of supermarkets or other retailers at this point in any way in the leasing discussions for 2011?

Jay, I think about it a lot but we have not seen it or heard it yet.

So no impact thus far?

Not yet.

In terms of some guidance in terms of provisions for bad debt and term fees, can you give us a sense of what you are planning for 2011?

I will let Bruce answer the bad debt expense. But I will just go back to the guidance we gave on investor day which gives you a feel for the term fees, at least. Our same-property NOI growth is negative 1% to 1.5%.But when you exclude term fees, off the top of my head, I said the mid point was 1.5%, but we actually did give guidance there and the guidance was flat to positive 2.5%.So that gives you an indication of where we expect term fees to be. We expect them to be down this year versus last year. I will let Bruce address the bad debts.

I think the best thing for you to do is look at what our experience was in 2010, and look at the total reserve increases, compare that to total gross revenues. You come up with a number that's probably somewhat in excess, or right around, 70 basis points. We are thinking we will be somewhere in that ballpark again for next year.

Thank you.

We will take a question from Eric Rothman from Urdang Securities.

Good morning. Could you provide a little bit more detail on the provision for income tax expense, in this case a benefit of $2.451 million?

That is actually related to the impairments that we took. It was a positive benefit on that side which we don't normally see.

If it is a one-time benefit related to a one-time impairment, why is it included in recurring FFO?

It's not. We take out that entire line.

I guess I had missed that.

Not a problem. It is a question I wanted to make sure was correct, as well.

We have a follow-up question from Samit Parikh from ISI Group.

Just one more. Going back to developments ramping up to $150 million to $200 million, do you think that is still achievable in the next two years if, let's say, 200 empty Borders hits the market and there are grocery store closures, et cetera?

We do. Again, you are not seeing the grocery store closures in the markets we want to be in. Again, they are coming from independents, they're coming from a lot of stores that opened up in high growth areas where housing was expected, didn't materialize, so I think you will continue to have trouble developing in those areas, but I think in the more infill areas that are protected you will not have that issue.

And we had in the past and would in the future buy centers where the worse thing that can happen is the supermarket would stay.

What about if we see 100 to 200 Borders closing across the board? Anything there that you think might affect --?

That could be an opportunity there. Look, the opportunity set is certainly going to be smaller than it was at the peak. Significantly smaller. Our strategy is going to be more focused, more sharpened, as we said. But we think that the competition, the unique combination, as we've said, of Regency's in-house capabilities, not a lot of companies have that in our sector. Number one. Number two, we own 500 acres of land that will be a source of development. And we have an existing portfolio where there will be a decent amount of redevelopments from that. And in addition to our tenant relationships.

Thanks.

A we have a follow-up question from Quentin Velleley from Citigroup.

Good morning, it's Michael BilermanI just wanted to come back to the impairments for a second. Obviously you are just being impacted by more of a conservative stance in how you view things and what GAAP requires you to do when you move an asset from operating book to an effectively held for sale and being marketed, having to mark that asset to the effective market but the rest of your portfolio, which likely has some strong gains, is sitting there at book. When you think about that $43 million, what is that based on in terms of what it was carried at gross book for? Where has that been marked down to in terms of yields?

I don't think we have that number available. We can certainly get that. I have not done that full take off on that group of assets.

I think, Michael, you can go back to my earlier answer when I said that the impairments primarily related to -- the properties we have targeted for sale, the value on those, and I believe the midpoint is right around 8.5% cap rate, it's right around our guidance, the value of those at that cap rate is over $300 million. So the $43 million, call it $330 million, that gets to where the book value was.

On a portfolio base of your share, call it $5.4 billion, taking the $4 billion of book and then your share of joint ventures at $1.4 billion, it probably represents the true bottom tier of assets. If every company in the REIT world would take their bottom 10% of assets and mark those to market, probably would have a fair number of impairments, I would gather. And looking at your country wide portfolio purchase, which you did a little while ago at almost a 10% cap, I would assume the embedded gain just on that recent acquisition supersedes that of a small impairment? Is that a fair comment?

I would agree with that.

Unfortunately, accounting does not allow us to reduce our basis on those properties. Even those that are marketing for sale. So we will take a full impairment on some of those even though the actual --

We don't get the advantage of a blended book basis on those.

You are correct.

Thank you.

We have a question from Chris Lucas from Robert W. Baird.

Good morning, everyone. Just a follow-up question to the impairment train of thought here. Bruce or Lisa, were any of the 30 assets that were impaired this quarter previously impaired?

Yes, we have had that continuous. As cap rates change and so forth. Of those that were impaired, I think there were seven that had previously been impaired. Again, every quarter we continue to scrub the numbers and look through it and make sure we are complying with what GAAP is requiring.

Can you remind us what your Borders and A&P exposure is at this point? And given that, in both cases, it is unclear as to what the ultimate results will be, but what your plans, how you are thinking about whatever exposure you might have to those two credits?

Fortunately, we don't have very much exposure at all to Borders. We have one location that represents about $300,000 in pro rata rent. It is a fairly high rent, so it is a good location, we could release that. We might take a hit on the rent. As far as A&P, we have three locations. One of them is already dark and it has been dark for a while. It was assigned to Farmer Jack some time ago. The other two are really good performing stores. They are both located in Baltimore, the rents are low, about $10 average rent. Both of them are pushing $500 a square foot in sales. One of them we know -- we already have three grocers who have approached us who would like to take the rent from $7 to $19 and expand it. The other one is also, as I mentioned, doing well. And there is interest to take, perhaps, not the entire space but we could release it to a couple of people. That is really the limit of our exposure. Total A&P per rata rent is less than $1 million.

Thank you very much.

We have a follow-up question from Jeffrey Donnelly from Wells Fargo.

Just a question about the strip center pricing we were talking about before. The gap between the core asset prices, they were 6% to 7% cap rates, and non core assets at 8% to 9% just seems historically wide. Do you see that gap narrowing in 2011? I'm really curious about what do you think is the source of the weakness of non core assets? Is it simply just anchor credit of bleak leasing outlook in those markets, or is it more financing driven?

I think a lot of it is financing driven.

It is primarily financing driven.

Is it just that financing is not available or the terms are tough?

I think it is more available than it was 12 months ago but I think it is still very problematic. If you have an anchor tenant with eight years left on the lease, you will have a difficult time getting anything other than a three-year to five-year term on that loan. And then it has to have the credit components that the lender wants. Negotiating mortgage debt today is still highly credit oriented and they spend a lot of time just in that area.

The other thing is the buyers are looking at this as distressed, and they're looking for superior returns. It really does depend also on the occupancy. For example, if you look at the properties we sold this quarter, they are all over the book. At [Cascasita], it was 7.9% but that's based on 88% occupancy. Buyers are looking at that as pushing 10% once they get to 95% leased. On the other hand, if you look at Village Commons, that was 6.8%. We knew about one occupancy coming up, that immediately took it to 7.3%. And, again, that was 77% leased, so that's why you see the lower cap rate on it. And finally, Stearns was 97%, somewhere right around 95% leased. That one, because you don't have that upside, went for 9.1% cap.

That's helpful, thank you.

We have no more questions at this time.

We thank you for your time and participation. And everybody, have a good rest of the week and happy Super Bowl weekend.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.