Regency Centers Corp (REG) 2011 Q1 法說會逐字稿

Good morning, my name is Kathryn and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regency Centers Corporation first quarter 2011 earnings conference call. As a reminder, this call is being recorded and 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 like to turn the conference over to Lisa Palmer, Senior Vice President, Capital Markets. Please go ahead, ma'am.

Thank you, Kathryn. Good morning everyone. Thank you for joining us this morning. On the call 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 would 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 statement, Bruce.

Thank you, Lisa, and good morning. Recurring funds from operations for the first quarter was $0.59 per share. This was in line with expectation and within guidance that we provided on last call. Total funds from operations was $0.56 per share.

As indicated in our press release we are still evaluating the accounting for the Rabbi trust in our Non-Qualified Deferred Compensation Plan. Regency has had a Non-Qualified Deferred Compensation Plan since 1996. Our Plan allows participants to diversify their vested stock awards into mutual funds similar to a 401(k). Based upon what we now know we should have changed our accounting at the point we modified our plan to allow diversification. Our earnings reflect the accounting by marking the investments and liabilities to market beginning at the point in time participants defer their shares into the plan.

To illustrate, if the stock price increases we incur additional deferred compensation expense. And a reversal occurs if the stock price decreases. Late yesterday afternoon a question was raised if we should have begun marking the Regency stock awards to market at the original grant date rather than at the end of the vesting period. We are still quantifying the additional impact of this issue, and we expect to recognize further non cash adjustments to net income. While the net income is subject to change, based upon the completion of our review, we do not anticipate any change to FFO or recurring FFO. We plan to file our 10-Q as soon as we finalized our review.

Since year end we have accomplished a series of transactions to enhance the balance sheet and to access capital. In March we settled the forward equity offering issuing 8 million shares and receiving approximately $220 million in proceeds after issuance costs. We used the proceeds to repay the balance on the line of credit facility.

We currently have more than $44 million of available cash including our pro-rata share of co-investment partnerships and 0 outstanding on the $600 million line of credit which was extended until February of next year. Subsequent to quarter end we paid down and refinanced nearly $431 million of debt maturing during 2011 in the co-investment partnership with GRI. We placed mortgages totaling $340 million on 20 assets with ten and 12-year terms and a weighted average coupon of 4.9%.

During the quarter CalSTRS committed an additional $100 million of equity and extended the investment period through the end of 2013. When Regency's 20% and leverage at 40% are added, the total available capacity for new acquisition is just over $220 million.

Yesterday we redeemed our interest in the partnership with Desco and Charter Hall. We received 100% ownership of four properties and Desco and Charter Hall will maintain co-ownership of the remaining 28 properties. We selected the properties on a one for one rotating basis and as a result we believe that we received four great centers. Regency will continue to earn asset management fees to 2011 for transition services and additionally, we received a $5 million termination fee.

Looking ahead for the year, we expect recurring FFO per share to be in the range of $2.30 to $2.45, unchanged from last quarter. Total funds from Operations now expected to be in the range of $2.30 to $2.40 per share. We raised the low end for the Desco fee and lowered the high end for the current quarter impairment charge. For the second quarter we expect recurring FFO, and total FFO, to be in the range of $0.56 to $0.61 and $0.61 to $0.66 per share respectively. Brian?

Thank you, Bruce. Good morning, everyone. Although as we expected, occupancy took a step back this quarter, the underlying positive momentum of 2010 is still intact. A decline in occupancy was anticipated and was better than our plan. 80% of the drop was due to a handful of large tenant move outs including two that were already dark, and 13% was the result of the Blockbuster move outs. Shop occupancy, under 5,000 square feet, was approximately 84% down 50 basis points from the prior quarter and that includes the Blockbuster impact. Finally, move outs are typically much higher in the first quarter, and 2011 was no exception.

Renewal leasing at 874,000 square feet was very good. New leasing on the other hand was relatively light at least in terms of executed leases. However, this should not be interpreted as a reduction in demand. In fact leasing activity remains very strong.

In the month of April we signed almost as many leases as in the entire first quarter. As of late April the leasing teams across the country were working on an additional 1.6 million square feet of new leases either in contract or letter of intent negotiations. This level of demand is very exciting. It is consistent in almost all of our markets and, as I'll discuss in a moment, is benefiting properties throughout the quality spectrum. Retailers in almost every category are active with increased appetites for growth.

One example where this increased demand was evident was at our Kroger anchored center in the Atlanta area where we had not done a single lease in four years, in the last four months of this year alone we signed three leases with another in final lease negotiation and one letter of intent. Additionally, it is now common to receive multiple offers on vacant spaces especially in centers that are over 95% leased which is the majority of the centers in our portfolio.

As we reported, it has been our policy over the last two years that whenever we grant rent concessions we will get in return, a right to terminate the tenant's lease on short notice. This allows us to keep spaces occupied and rent paying while we look for stronger replacement tenants. The increased leasing activity we're seeing finally allowed us to exercise those termination rights in several instances this is quarter. For example, in suburban Washington, D.C., we exercised such a termination right and immediately turned over the space, as is, to a new tenant at 50% higher rent. We do continue to expect fewer move outs relative to the prior two years. Existing tenants are feeling more confident and believe the economy is strengthening.

Our property managers report for the first time that improving conditions are finally being felt by small shops at the local level. Survivors have honed their skills and are capitalizing on the current market environment and many retailers are opening with sales volumes well ahead of projections. This improvement in tenant health is not just anecdotal but can also be seen in certain operating metrics. Accounts receivable balances outstanding for more than 90 days have declined to .7% of revenues nearly a 50% reduction from a year ago. Mid term rent concussions are at pre-recession levels and the number of tenant defaults declined for the fourth consecutive quarter.

It's important to reiterate that the first quarter leasing and move out results were expected and better than planned. And taking into account the impact from additional Blockbuster move outs it's likely second quarter occupancy will be flat to slightly negative, however, looking ahead to year end, if we convert 80% of the 1.6 million square foot pipeline of identified leases and letters of intent into executed leases, and there are no surprises in terms of move outs, we will end the year at 93% leased. And there is still plenty of time remaining in the year to add to this pipeline of leasing activity.

It is worth noting that there is significant retailer interest in our vacant Blockbuster spaces. To date we executed leases on 16 former Blockbuster spaces achieving 17% rent growth with less than three months down time and minimal tenant improvement dollars. While we're actively leasing all the Blockbuster locations, the latest information we have is that at the end of the day Dish will continue to operate about eight to ten of the remaining 23 stores.

Notable progress was also made in leasing at the in process developments. First quarter absorption was positive 112,000 square feet and occupancy increased to 190 basis points to 83%. Excluding termination fees same property NOI growth was positive .6%. When you include NOI growth from the developments, total NOI increased approximately $2 million for the quarter. If you simply annualize that number that is $8 million of additional NOI for 2011. And although pressure on rents remains if you exclude spaces that have been vacant for more than 12 months, rent growth was negative by only %1. Rent growth at centers that are more than 95% leased was essentially flat.

Additionally there was a significant amount of leasing in our toughest spaces. Almost 60% of which was for spaces that had been vacant for longer than 12 months, that's nearly double the first quarter of last year. For the fourth straight quarter we saw lower total tenant improvement dollars. In fact, we gave tenant improvement dollars on less than 3% of the renewal leases and tenant improvements are well in line with pre-recession levels.

As I touched on before, I'm encouraged by the progress being made in our developments. During the quarter we began two new developments, Kent Place and Shops at Stonewall phase two. Both enjoy leading anchors and trade areas with average household incomes approaching or exceeding $100,000, and have projected returns near or above 9%. These returns are being achieved with very little leasing risk. The two projects combined have only 13,000 square feet of shop space. Kent Place is located in the affluent Cherry Creek area of Denver and is anchored by King Soopers. The side shop space is oversubscribed at healthy rents. Shops at Stonewall phase two is a Dicks Sporting Goods, build to suit at our dominant Wegman's anchored center in suburban Washington, D.C. whose added draw will greatly benefit the existing tenants.

Our most recent development starts are already 82% leased and well on their way to 95%. They're currently projected to produce an average return on invested capital of 9.4%. And I'm encouraged by the depth and quality of the shadow pipeline for future developments and redevelopment's which now totals near $300 million.

Additionally we're moving forward on our capital recycling plan. During the first quarter we sold one property out of our GRI partnership. We also have two properties under contract and another 13 that have either been on market for about a month and a half or will be taken to market to the near-term. We're experiencing better than expected pricing and activity on a number of these properties where we have received offers.

In terms of acquisitions we're under contract or close to it on three outstanding shopping centers with locations and anchors that provide sustainable competitive advantages which will translate into excellent prospects for future NOI growth. We're currently evaluating about a dozen others, many of which like the two already under contract, are off market.

We're already seeing the benefits of our recycling capital strategy. Over last year we sold $119 million of lower quality properties and recycled the proceeds into $113 million of extremely high quality centers. The improvement as measured by key indicators is dramatic. The three-mile household income of the acquired properties is nearly $150,000. And the average gross for sales are more than $714 per square feet. Both metrics represent an improvement of two times the average of those disposed. This is the kind of up grade in real estate and tenancy that we will continue to pursue as we execute our strategy.

So, the underlying trends that I mentioned, healthier retailer interest and vacancies, and continued improvement in tenants if it persists, these combined with the successful implementation of our development and capital recycling strategies should translate into gains in the remaining quarters of 2011. Hap?

Thank you, Brian and thank you, Bruce. We continue to make steady progress toward achieving our key strategic objectives. Our top priority remains returning the sustainable NOI growth rate and occupancy to their historic levels of 3% and 95% respectively. Notwithstanding this quarter's expected reduction in occupancy largely due to anticipated move outs and encouraged that retailers, including in line tenants, are still expanding and are attracted to Regency Centers because great real estate attracts great tenants.

When Brian and I discuss future prospects with our market leasing team and all of our 17 offices across the country, they're universally enthusiastic about the strong level of leasing activity. This is evidenced by the extremely robust leasing in April in the large significant numbers of leases and NOI's currently in negotiation. I concur with Brian's belief that the pipeline is there to pick up 100 basis points of occupancy and accomplish our near-term objective of being 93% leased by the end of the year.

Our capital recycling initiative is moving in the right direction. We have contracted about two centers with superior anchors in real estate and have excellent prospects for NOI growth. While the tremendous amount of capital chasing core assets has driven down cap rates, silver lining is that more sellers are now motivated to bring high-quality assets to market. And the amount of capital is making its way down to some of the lower quality assets we're currently marketing improving the sales prices of those assets.

Prospects for new developments and redevelopments where we are manufacturing centers located on great real estate with dominant anchors and limited side shop space that attractive risk adjusted returns and margins, are particularly encouraging. I'm also pleased with the quality and depth of the shadow pipeline for future developments and redevelopments. I expect these developments to enjoy the same level of performance as our more recent starts have demonstrated.

The balance sheet is in solid shape. We have access to multiple sources of capital. We closed on a major refinancing and our GRI partnership and finalized CalSTRS additional equity commitment which, once invested, will more than double the size of that partnership. And the dissolution of the Desco portfolio was on favorable terms with Regency receiving a [nice] termination fee and four terrific assets.

Based upon my 35 years of experience I've learned one thing that's certain about the real estate business, is that there is never certainty. Obviously there is a real potential that external factors like rising gas prices might halt economic growth and slow tenant demand and that rising inflation could end the attractive pricing in the capital markets. At the same time, it feels like the improved operating fundamentals are continuing to gain momentum in longer-term traction.

Most important of all I believe that Regency is well positioned regardless of the external risk to benefit on a relative basis from one of the best portfolios in the country by any measure that will further prosper from lack of new supply coupled with strong demand for space fueled by retailer's increased need for external growth. Second, an ongoing commitment to recycling that will further enhance the quality of the portfolio. Third, a solid balance sheet and access to multiple sources of capital that we continue to improve. And fourth, a unique combination of in house capabilities, excellent tenant relationships and presence in key markets throughout the country to create value and high quality shopping centers through development and redevelopment. As I consider these opportunities to grow shareholder value, from the portfolio, from development, from capital recycling and from the balance sheet, I have no doubt that Regency is moving in the right direction and is well positioned to achieve our goals. We thank you for your participation and welcome your questions. Katherine?

Yes, sir. (Operator instructions). We'll hear first from Michael Mueller with JPMorgan.

Going to the development pipeline for a minute, you are talking about the shadow pipeline building and when we listen to other calls, we're just not hearing a lot about new development and people are talking about new development being just close to nonexistent. So, when you are looking at your shadow pipeline, can you just talk about number one, how visible it is in thinking about, as we move up to 2012, and then talk a little bit about what the portfolio is comprised of? Is it larger centers? Is it smaller centers? Are they all grocery anchored? Etcetera. Just a little more color on the pipeline.

Sure, Michael. In 2011, there is a lot of visibility. We think it's likely we could exceed or be near the high end of our guidance. Those are all properties that are identified with anchors. It's possible that one could be delayed, but right now they're all looking very good. All of them or 93% would be grocery anchored. And the returns are all in the mid nines just like the most recent starts. The thing that I think is interesting about it is that when you look at the returns, we're getting those kind of returns without much shop space risk. The average amount of shop space in all the properties I think it's about six that we'd start this year, is a little over 8,000 square feet and almost half of the projects actually have no leasing risk whatsoever.

These are all anchored by your dominant grocers, really good demographics and the same is true in 2012. 2012 we're actually in the high and medium probability category, we're talking about essentially doubling what may happen this year. Again, the returns for new projects are in the 9.5% range. We do probably anticipate moving 2 properties or 2 of those developments would come from land held. So those are termed to be a little lower but on an incremental basis still up in that neighborhood.

Okay.

Just to add a little bit, some of those that we're talking about are redevelopments. Some are in land owned and some are in expansions like the project in the D.C. market that we started this quarter, expansions of existing projects that we have.

Okay. So of that bucket, that $300 million bucket, how much of it is new real ground up development versus a second phase or redevelopment?

Well, for 2011, I would say development would be the bulk of it. Redevelopment's is going to be about maybe $20 million. And then, if we get to the high end of our range of course that is closer to $75 million for ground up.

Okay. Okay. Great, thank you.

Thank you, we'll continue on to Quentin Velleley with Citigroup.

Hi, good morning. Just wanted to ask quickly about the 1.6 million square feet of demand that you are hoping to lease maybe 80% of this year. It sounded like from your prepared remarks that demand is improving. Should we think about leasing spreads on this space being similar to what you've achieved in the first quarter or do you see some kind of improvement in rental rates over the rest of the year?

Let me talk about first the new leasing pipeline. As I mention that is 1.6 million square feet. Almost half of that would be leases that are actually signed letters of intent working on lease documents. And then the rest of it would be the letters of intent that are right in the middle of negotiation. When I mention the 80%, the 80% is what it would take for us to get to our plan. I don't know if it will be 80%, I don't know if it will be less than that, but the point is right now we got about a 25% buffer to what we need. They all won't happen.

But like I said we also have a few months left to build that pipeline. So we're just very excited that this isn't just wishful thinking. These are real deals being worked on. In terms of rent growth, one of the things that we can get into is what happened this quarter versus what do we see going forward. And what really happened this quarter paradoxically was an indication of the improving markets that are out there. What I mean by that is we did a significant amount of new leasing in the spaces that are very difficult to lease.

Last year, 65% in the first quarter of our new leasing was done in spaces that have been vacant less than a year. And that is the easiest space to lease. If you look at this quarter almost 60% was done in spaces that have been vacant more than a year. If you look at the really difficult space to lease that has been vacant over two years, the amount that we did this quarter versus first quarter last year was about triple in terms of percentage basis. So, at some point we are going to work our way through that space, and it will become less of a factor and you will see rent growth improve.

Okay.

Said another way, we've maintained our guidance there and it's going to essentially be flat or close to flat on spaces that have been down just 12 months and on renewals and for the spaces that have been vacant for longer than 12 months it's going to be as Brian just described.

Okay. That is good. And then just maybe want to talk about the demand for assets and it's being improved by a weaker US dollar demand coming in from several wealth funds, you have extended your joint venture with CalSTRS. Can you just talk about some of the opportunity for Regency to take advantage of some of the capital that is looking to move into better quality assets?

Like I mentioned, the two silver linings of the amount of capital that is out there are on the one hand, we are seeing better assets and we are getting better pricing than I guess than we feared on the assets and more certainty of being able to sell the assets that we want to sell. So, in effect, I think there is an excellent chance of good prospects to buy some terrific assets like the shopping centers, that hopefully will announce next quarter, that are located in great real estate, the anchors are producing strong sales. And as a result, we feel there is excellent prospects for 2% plus growth. And we think that we can exceed kind of our benchmark of 7% IRR's on those and then on the other hand we should be able to sell centers where we fear there is a potential erosion in value and NOI.

OK. Thank you.

Thank you, Quentin.

And now we'll hear from Nathan Isbee with Stifle Nicklaus.

Good morning, just two quick questions. First of all, in terms of the distribution in kind, could you just talk about your basically focusing on St. Louis as you picked the four assets that you want to keep?

The bottom line, Nate, is pretty much all the portfolio was all of the better assets in the portfolio were located in St. Louis. So if we wanted to get really good assets and we feel like we've got four really good assets, they were going to be in St. Louis. That's where Schnucks is based. That's where the back yard is and that is where they have dominant market share.

Okay. Thanks, and then, Bruce, the same store NOI of 0.6%, can you break that out if you exclude the bad debt adjustments.

Bad debts, if you excluded that—and the reason we excluded this quarter versus how we handled since the middle of 2009 was we're back at what I consider a more normal operating environment where we're pre recession levels for bad debt expense. If you take that out we would be in negative .1% same store growth.

Okay. Thanks.

Thank you, we'll continue on to Craig Schmidt with Bank of America Merrill Lynch.

We've heard on previous calls some comments about the leasing environment in Florida. They sort of portrayed it as improving but not quite as strong other regions. I wonder if you could weigh in what you are finding in the leasing environment in Florida?

Craig, I think that is accurate. When we go through our meetings with the teams, Florida has always been a market where we've held our own. The occupancy has been about the same as the rest of the portfolio but you always hear about that it's a grind. This quarter they're talking about much more activity. You know, I think it's still, when you rank it among all of our other markets around the country, it's certainly not the top, but there has been a definite pickup in activity.

Do you think the delta that will improve it increase it to the rest of the other regions? Is that a housing issue or is it an unemployment issue?

Probably a little bit of both, Craig. But, I think the important thing to note is that it appears like it's headed in the right direction. Momentum is good. In some, you know, not all real estate corners in in Florida are the same and fortunately we have some really well located shopping centers in areas of better demographics so we're doing okay. But on a relative basis I think, as you said, it may pick up in activity and it may not be as strong in the pressure on rents may be a little bit more there.

Okay. Thank you. Go ahead.

This is Bruce, I want to actually correct a misstatement I made regarding Nate's question on same store when you exclude bad debt. That should have been a negative 1% not negative .1%.

Thank you, Bruce.

Thanks, Craig.

Thanks.

Thank you, gentlemen. We'll now hear from Rich Moore with RBC Capital Markets Corp.

Yes, hi, good morning, guys. Bruce, G&A was higher in the quarter fairly substantially. Is there a particular reason for that and what do you think we'll use going forward.

Yes, on a sequential basis, the biggest reason for that was our reconciliation to our accrual for our healthcare expense and what we actually experienced in terms of claims.

Okay. Going forward, do we drop that?

Well, I think that we're comfortable I think with -- if I'm not mistaken, Lisa, we gave guidance on that and we're comfortable that our guidance will be within the range that we've given you and you want to use the mid point, I'm comfortable with that.

But in fact what happened is it was less in the fourth quarter because we had favorable experience when we reconciled in the fourth quarter, but I think the best thing to do is base it best upon our projection which may not include the favorable experience we had in 2010.

Good, I got you. Thank you, and then on the impairments. What were those, exactly?

The impairment's related to a joint venture that we have in a project here in town that is a land investment. That when we looked at the accounting and looked at what our joint venture partners also had done with that, and the fact that we were refinancing the project, it triggered us re-looking at in terms of joint venture accounting. That is what that is related to. Our project with St. Joe.

I will say we do feel good about the long-term prospects of the project.

Okay. Great, thank you, guys.

Thanks, Rich.

Thank you. And, Christy McElroy with UBS Investment Bank.

Hi, good morning, guys. Brian, I think you mentioned that you saw a 17% rent spreads on some of the former Blockbuster spaces. How much in TI's were associated with the leases and what kind of marked market would you expect for the remaining stores including those you expect to get back this year.

Christy the TI's are pretty minimal. The building improvements in some cases were incurred because sometimes we release the space as is, maybe 6,000 square feet, and other times we'd have to subdivide it into two so you had to incur those costs, but in terms of TI's it's pretty minor. I believe the number going forward for the remainder of them we estimate to be about minus 4% or 5% rent growth and I would say the same thing with the TI's.

With regard to some of the lower quality secondary tertiary market assets that are out there on the market, who are the logical buyers and how are they financing purchases?

We have a range right now from -- a couple that we've received offers on from wealthy individual buyers. They haven't raised financing as an issue and they have a good track record of buying through the down turn so I don't think financing is an issue there and then we have groups like Kohl that are buying them. So I think it's a mix of sort of quasi-institutions and individual owners.

Local developers with a major private equity players and sometimes it might be a supermarket chain.

Is there enough demand out there to absorb all the product that is coming to market?

I think there is. I mean if you just look at what has been going on with cap rates over the last quarter or even the last year, obviously the core, the sector, the space that we play in fell pretty dramatically and the B's and C's in the secondary markets did not drop at all. But if you look at what has been going on lately, we're seeing a lot of movements in the C's and the C secondary as well as the B, both primary and secondary so I think the surpluses, the excess of capital that's out there is spilling over into these other areas.

Thanks.

Thanks, Christy.

We'll continue on with David Wigginton with DISCERN.

Thanks, good morning, guys. Brian, circling back to the occupancy increase that you anticipate for the rest of the year. Can you just talk about what you envision driving that, you have LOI's and a pipeline that you are looking at is that going to be predominantly driven by anchor, or small shops and from the sound of it sounds like it's going to be pretty back-end loaded?

I would say it's going to be back-end loaded because it's going to take time to work the leases through the system. But what's driving it is, yes, we'll fill up some of the larger spaces that went dark but the reality is most of our occupancy is small shops, or most of our leasing is small shops and I think is that going to continue. The trend is just up. You know, three years ago, I did say to people around here that it just didn't feel as good as the numbers indicated. And today I would tell you just the opposite. That it feels a whole lot better than what our numbers are showing so I think what we're seeing is a real positive environment out there where the tenants are healthier.

The retailers are just more confident. They're looking for growth. We have not seen activity this strong, nobody can remember frankly ever. And what is happening, too, is there is a sense of urgency as the retailers realize with the lack of supplies being delivered out there, that they are going to have a tough time with external growth and they have to start getting some stores. So I mentioned the example in Atlanta where we hadn't had any activity for four years and now we have five leases. We have the same situation in southern California at our Vista Center where we haven't had any looks in two years and now we've got three shop deals.

In India we had a situation where two years ago Starbucks turned us down and now they're just pounding on us to get their store open quickly, same with Party City out there. So it's just an improved environment where the retailers are feeling much more confident and they just got to get some stores for external growth.

David, the other factor that going to have to occur, and we feel there is a reasonable chance it will, is we're going to have to see moderate reduction in move outs closer to more normal levels, we feel like that is very possible. But that is the other key factor.

Hap, are through yet or how close are you to that more moderate level?

We're moving in that direction. It feels like we're moving in that direction, but we've got, in effect, 8 more months to prove it out, but I will say that the move outs are occurring at a lower pace than for the first 4 months of the year than we had projected.

Okay. Then just going back to the leasing for the quarter, were the negative spreads, were they concentrated I guess in any particular market or region, and was it a result of, I presume small shop leases, but were there any negative spreads on any of the anchor leases that is you signed in the quarter?

The rent growth, certainly there were some markets that are weak. Arizona was I think pushing 40%. And the other weak markets, upper mid-west and north Florida, we did have a couple instances of larger tenants that drove it down. We had a Petco that was about a minus 45% in the upper mid west and a property that we're getting rid of. But mostly the issue with the rent growth again comes back to the facts that we're leasing a substantial amount more of our lower quality space.

I mean, just to reiterate, too, I think important contacts that Brian mentioned, number one, leases on spaces that had been down for less than a year were essentially flat. And then leases or rental rates in the centers which make up 60% of our portfolio where we have more than 95% occupancy were also essentially flat.

Okay. Then just with respect to Arizona, Brian, you said negative 40%, I presume that is a space that has been vacant for greater than a year and is probably a box?

Yes, I think that is fair, yes.

Okay. Thank you.

Thanks, David.

Thank you. We'll now hear from Jim Sullivan with Cowen and Company.

Good morning, I've two questions. First of all for Brian, in your prepared comments you talked about the very low level of leasing costs per foot per year which I think is the lowest it has been for some time. I wonder to what extent that you attribute that to the mix of new and renewal leases or whether you think this is a level that you can sustain.

Jim, I think it's a few things. One, I do thing that it's reflective of the improving leasing environment. We're not seeing the kind of requests for TI's that you saw at the depth of the recession. But I think it's also a lot of it has to do with the kind of leasing we're doing in some of the inferior markets or weaker properties where if we're going to give somebody those kind of low rents we're saying fine, but you are going to put your own money into it.

So in other words it's kind of a decision on your part in terms of what you are willing to pursue and what you are willing to put into the asset?

That's right. If you look at our renewal leasing as I mentioned we're giving to tenant less than 3% of the time. That is an indication that things are improving. That is back to pre-recession levels. Then when it comes to the other space, it's really an economic judgment. In some cases we're doing short term leases and we have a fair amount of that going on right now. Either because we've got redevelopments coming or because we've got a better anchor tenant to replace somebody so we'll go ahead and put them in short-term and we're not going to give them TI's in that kind of a situation.

Do you have a percentage on the short-term leases you are doing?

I may have to get back to you on that one.

That is fine. Question for Bruce on the bad debt. Bruce, could you just remind us what the guidance number was, what you were assuming I guess in terms of bad debt? I think in the past you've talked about it at various times as a percentage of total revenues and I know in the prepared comments, I think Brian maybe, cited the improving 10 are in the collectible. If you could just talk about how you get the number you have for this quarter and whether that is consistent with what you have the guidance previously provided?

Well, let me go back to '09 if I can, I'll start there. I think that is a place to start. In '09 we went to 1.5% and then we saw better experience we dropped that down to 1 to 75 basis points and I think we've talked at our investor day call, I think that was kind of the range we're still talking about, 75 basis points. And our experience this time was 70 basis points which is effectively one half of what it was a year ago.

So for run rate purposes of 70 BPS is probably a good number to use.

I think 70 BPS, 75 BPS, anywhere in that range is fine, yes.

Ok, good.

Jim, this is Brian, if you are still there. I want to get back to you on the short-term leases. About 20% of the leases this quarter were less than, less or equal to 12 months. That is about double the percentage of last quarter and the reason for that really has to do with our redevelopment activity. We've got several examples where we had a redevelopment coming and we went ahead and just put somebody in there short-term. In some cases six months just to collect some rent while we wait for it. And we've got some examples in there also where we have a good grosser coming in to replace like an antique store and we went ahead and let the antique store stay in there. So really it has to do with place holders and the redevelopment activity.

Thanks for that. I appreciate you following up.

Now we will go to Laura Clark with Green Street Advisors, Inc.

Hi, good morning. How deep is the pool of JV capital the market today, and would you like to expand this segment of your business with new partners?

I think there is a lot of capital out there, but we're going to be very selective and we like our line-up of existing partners. You know, from Oregon, CalSTRS, GRI/First Washington, Calipers and U.S.A.A. so those four partners I think that's an adequate amount of capital while we'd very much like to you know, expand the footprint in the sector. We've got enough joint venture capital committed to provide us access and to allow us to profitably grow our footprint.

Hap, how have the fees changed today versus where they were three or four years ago?

You know, it's interesting. All of our partnerships, all of our older partnerships or legacy partnerships, and that would be CalSTRS and Oregon, the fee structure is the same as it has been for many, many years. And the -- I say U.S.A.A. and the Calipers/First Washington, GRI, our partnership is about where it has been. In those cases what you really do have is U.S.A.A. and First Washington are advisors, so the total fees being paid by the ultimate investors is probably about the same it has been for the last three or four years, and we've not seen any pressure on fees recently.

Okay. Thanks so much.

Thank you.

Thank you very much. And we will continue on with Vincent Chao with Deutsche Bank.

Good morning, everyone. Apologize if I missed this but can you tell us what the small shop tenancy or vacancy is today or occupancy rate is today? I think it was 85% last quarter.

It's about 84% right now.

We lost 50 basis points during the quarter for small shops under 5,000 square feet.

50 basis points, quarter on quarter?

That includes Blockbuster.

Okay. And what size is that inclusive of?

That was 5,000 square feet and below defined shop space.

Got you, okay. And then just a question. With the construction pipeline, it sounds like shadow pipeline building, just wondering if you started to see rising construction costs creep in at all in terms of impacting yields and that kind of thing?

We've built it into our models but yes, we are allowing for higher construction costs. Materials certainly but not labor. The labor is still very, very favorable. And largely offsets that. Where we're seeing the most right now and we'll see whether this continues or not would be in petroleum prices which effects so much. Certainly parking lots, PVC pipe and all that.

But that is all baked into your assumptions, in the pipeline, that you've shown here?

It is. And in fact, we've got one of the projects that we would hope to start, this would be next year, but because of the uncertainty out there I think we have a $3.5 million contingency built in which would be more than adequate.

The last question on the construction side of things, are you seeing any improvement in the construction financing market?

Construction financing?

That doesn't impact us at all because we're financing off our balance sheet which we think is a real competitive advantage especially in dealing with developers. I think developers are still struggling somewhat to get financing. I'm willing to sign on loans although I will say that my instinct is the tenor of the construction loan business, it's probably getting a little bit better.

I would agree with that. I think the one common denominator that is still here that was here 12 months ago is the fact that construction lenders are still requiring a pretty good amount of equity which is slowing down the private developers.

Just what you hear from our field, when we start talking about our pipeline, one of the reasons we're seeing the opportunities that we are is because the developers can't get any financing or are unwilling to accept the terms of that financing. So what you've got are projects they've been working on, entitlements for the last three years and now they're all ready to go and they can't go anywhere with them so we are seeing those kind of opportunities to a pretty good degree.

As a follow up to an earlier question, I think it's correct to say that the opportunity set of development opportunities that make sense today is much smaller. We just think we're well positioned to get more than our fair share plus we have, you know, internal redevelopments, land that we already own, but we're seeing, as Brian mentioned, a good source from developers that either can't get financing or would prefer to finance with an entity that understands the development business and can provide the capital.

Okay. Thank you.

Thank you very much. We'll continue on with Sri Nagarajan, FBR Capital Markets.

Sri Nagarajan, FBR. Good morning and thanks for taking my question. A couple of the questions on the Desco transaction here. Number one on the second quarter of guidance obviously the deference between the recurring and nonrecurring items I'm assuming that is more or less the $5 million termination fee that you received at closing?

Yes, we consider that to be a nonrecurring FFO. We did not include it in recurring.

So what I'm saying is that the 5 percent difference between recurring and nonrecurring is primarily this termination fee, that's it.

That's correct.

And could you give us an idea of the magnitude of fees that is you are earning through the 2012 from the Desco that is going to drop off in 2012?

Should be about a million dollars or so.

Slightly less.

Slightly less than a million dollars.

Okay. All right. Thank you.

Thank you.

Thank you, Sri. We'll continue on with Tayo Okusanya.

Yes, good morning. Most of my questions have been answered but I have two quick ones. In regards to Desco and the fee that is earned from the disclosure in the press releases, that means the fee is going to end at the end of 2011, is that the way that works?

Yes.

That is helpful. Then second of all just to get an update on the overall outlook for grocers and their appetite to neglect to take in additional anchored space on a going forward basis.

It's a mixed bag on that. What we're seeing is that there is strong demand from those grocers who are not necessarily competing on price, in other words, if they're competing with Wal-Mart we're not seeing a whole lot of activity there. Where we are seeing a tremendous amount of activity, particularly out on the west coast, would be with those grocers who are offering a different experience, either they are the organic or the high-end. Your Whole Foods, your Sprouts, and out here on the east coast Publix, so, real strong demand for the higher-end grocers and specialty grocers and a little bit more of a mixed bag on the others.

Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, there are no additional questions in the queue, I would like to turn the conference back over to Mr. Hap Stein for any additional or closing remarks.

We appreciate your interest in the company and your participation in this call. And thank you and everybody have a great day and a great weekend.

Thank you, once again, ladies and gentlemen, this does conclude today's presentation. Thank you for your participation.