Regency Centers Corp (REG) 2011 Q2 法說會逐字稿

Good morning. My name is Holly and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regency Centers Corporation second 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 now like to turn the conference over to Miss Lisa Palmer, Senior Vice President Capital Market. Please go ahead, ma'am.

Thank you, Holly. Good morning, everyone. On the call this morning are Hap Stein, Chairman and CEO, Brian Smith, President and Chief Operating Officer, Bruce Johnson, Chief Financial Officer 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 reports on forms 10-K and 10-Q which identify important risk factors that could cause actual results to differ from those contained in these forward-looking statements. I would now turn the call over to Bruce.

Thank you, Lisa, and good morning. As we reported, recurring FFO for the second quarter was $0.56 per share. Total FFO was $0.61 per share. As Brian will discuss later, tenant health continues to improve. Rent relief requests and defaults, tenant defaults, are approaching pre-recession levels. That being said, our provision for doubtful accounts was higher than what was recorded in the first quarter and also higher than the second quarter of 2010.

The majority of that increase was due to expense reconciliations being billed in the second quarter this year versus the first quarter last year. This year we reserved a higher amount relating to the reconciliations as we experienced abnormally high expenses in 2010, much of it related to snow removal costs in the northeast and the mid-Atlantic. During the quarter we renewed our property insurance policies early in an attempt to get in front of expected increases resulting from the recent catastrophes including the Japan earthquake.

Although we mitigated some of the impact, we still expensed higher than expected premium increases of 12%, or approximately $2 million over the prior policy period. As a result of a high reconciliation billings and the recently completed renewal of our insurance we have lowered guidance for the expense recovery rate to the range of 76% to 78%. Primarily because of a slightly higher than expected provision for doubtful accounts and the reduction in recovery rate related to insurance increases we reduced the high end of our guidance for same property NOI growth by 50 basis points to 1%.

Our liquidity position is in great shape with almost full availability of our $600 million line of credit. We held our annual bank meeting last Thursday to discuss the re-cast of the line, which is set to expire in February 2012. We had an extremely positive response. We have seen commitments in excess of our requested level prior to the meeting.

Expect the new facility to carry a four year term with a one year extension option and market leading pricing. Closing is anticipated in late August or early September. We further improved our debt maturity profile particularly in our co-investment partnerships. During the quarter we closed $340 million in secured financings with a weighted average term of 11 years and an interest rate of 4.87%.

We also infused with our partners nearly $120 million dollars in equity which is part of our plan to de-lever the GRI partnership. This eliminated all 2011 maturing debt in our partnerships which has allowed us to focus on 2012 maturities and take advantage of still historically low rates. We have just over $200 million in consolidated unsecured debt maturing at the end of 2011 and the beginning of 2012.

Looking ahead for the year we have tightened guidance range of recurring FFO per share to $2.33 to $2.43. For the third quarter we expect recurring FFO to be in the range of $0.57 to $0.62 per share. Brian?

Thanks Bruce and good morning. Things aren't perfect but the positive underlying trends we experienced last quarter continued. With spaces greater than 5,000 square feet nearly 96% leased small shop leasing is the key to restoring occupancy to historic levels. This category led the way during the second quarter with occupancy in spaces less than 5,000 square feet increasing 50 basis points to 84.3%.

Overall operating occupancy increased by ten basis point to 92.1%. This is despite a 30 basis point negative impact from 19 Blockbuster move outs and a 10 basis point impact from development completions. We signed over 500,000 square feet of new leases, significantly more than in pre-recession times. Notably 90% of these new leases were with retailers less than 5,000 square feet and they represented over 60% of the GLA (inaudible).

Renewals totalled 1.2 million square feet which is also far more than any quarter in recent memory. The renewal rate was 78% versus 64% last quarter and 68% since 2006. Move outs improved in the second quarter even with more than a hundred thousand square feet of Blockbuster move outs. 21 Blockbuster assignments to Dish have been approved by the bankruptcy court compared to a store count of 52 at the end of 2010 for a loss of 31.

This will cause an 80 basis point decline in same property NOI growth for the year which is more than we originally anticipated. Rent growth, while still not nearly as good as we would like, was almost flat. Excluding spaces vacant for more than 12 months, rent growth was positive 2.8% with both new and renewal leasing registering positive spreads.

In the process we spent only $1.82 per square foot in tenant improvement dollars. In accounts receivable greater than 90 days, an indicator of existing tenant health, are down nearly 40% compared to last summer, a result of actively culling weak tenants from the portfolio. Beyond this quarter's results there are more reasons to be optimistic about the future.

Our current leasing pipeline remains robust with nearly 1.5 million square feet of leases, or LOIs, under negotiation. A sizeable cushion of almost two times the amount of new leasing we hope to execute in the remainder of the year. We are getting tremendous amount of new activity from retailers looking to take advantage of opportunities to secure spaces in strong markets at favorable rates. This includes a good share of local tenants relative to last year.

We've not experienced any slowdown in tenant interest even in light of the recent increases in unemployment and reduction in GDP gross. And finally, retail construction remains at or near all time lows in virtually every part of the country. This is serving to benefits landlords while the supply, or rather the demand side of the business improves.

While these are all good reasons to be encouraged we are operating in an environment that continues to be choppy. Move outs, while better, remain at levels above long-term norms. On the demand side, retailer bankruptcies and consolidations continue to have an impact on the supply of competitive space.

While the leasing activity is significant it is taking longer than expected to translate into rent paying occupancy. New leases are taking much longer to execute due to under staffing by the retailers and more difficult and drawn out lease negotiations as both sides work hard to protect their interests. Once signed it then takes longer to get tenants open.

Local governments have experienced significant staffing cutbacks causing permitting times to increase dramatically which in turn delays rent commencement. On balance, conditions in the operating portfolio are better now than they were last summer and much better than two years ago. And the trend is improving, but we remain cautious as the recovery is clearly still a slow and fragile one.

Leasing in the development portfolio has been encouraging as well. On an apples-to-apples basis our percent leased at 86% increased 400 basis points compared to the fourth quarter of 2010. And based on the recent activity and momentum we believe we could finish the year above 88% leased. Also, our six most recent developments, and two months recent re-developments, are averaging 9.7% return on costs which is about 60 basis points better than underwritten.

In today's environment this translates into profit margins in excess of 60%. This list of centers includes Seminole Shoppes which is anchored by a highly successful 54,000 square foot Publix. Our team was able to take this project from raw land to fully built and 95% leased with a 9.9% return on costs in less than two years. This is the type of success we expect from our development program.

We started one new development this quarter located in Greeley, Colorado. It is a T.J.Maxx build-to-suit and it's a final phase of a much larger operating property. Our return on the project should be approximately 10% which we are very happy with considering the limited risk profile of this investment. Given the depth of the high probability pipeline there is a good chance that we will end the year at the high-end of our guidance for development starts.

It is also important to note that significant progress is being made on reducing our land inventory. Sales contracts, letters of intent and land in high probability developments now total $45 million. Once closed we will have effectively converted 30% of our owned land into cash or attractive new developments. Furthermore, we continue to upgrade Regency's portfolio of high quality real estate through our capital recycling program.

Today's cap rate environment is coaxing a lot of once in a generation properties to market and those are the properties that Regency is aggressively targeting for acquisition. In the second quarter we acquired Ocala Corners a Regency development center with excellent future NOI growth prospects. Ocala Corners is the main grocery anchored center serving Florida State University in Tallahassee Florida. It is anchored by one of the best performing public stores in the chain.

The center was acquired from Charter Hill through a right of first refusal at a very attractive 7.9% cap rate. Since the end of the quarter we also closed on Calvin and Commons, a Whole Foods anchor property located in the up town neighborhood of Minneapolis, Minnesota. Calvin and Commons is true infilled real estate with more than 170,000 people within three miles. Whole food sales are in the $850 per square foot range and have grown by over 40% since 2007.

While shop tenant sales average approximately $450 per square foot. The tenancy is extremely stable as 94% of the tenants have been in the center since it was developed back in 1999. In addition to this quarter's closed transaction transactions, we are under contract on four new acquisitions with similar attributes to those on which we recently closed.

Real estate in high barrier markets where there is long-term pricing power, or any bad news encountered results in good news. Of course this type of quality does not come without a price. The best retail real estate on the market today is traded below 6%. Prices are high but they are commensurate with the quality of the assets.

Though as our disposition program accelerates, I am confident we will be able to reinvest the proceeds into quality infill shopping centers with substantially more reliable prospects for future NOI growth. I am truly excited about these infill opportunities and believe that their unique attributes will enhance Regency's portfolio and help drive our fundamental results for years to come. Especially in comparison with the assets being sold.

This quarter we disposed of a non-core asset located in Alexandria, Virginia for $3 million, a 4.9% cap rate. Additionally we have eight properties under contract for disposition and more being prepared for market in the near future. Leases are being signed that will improve the market ability of the properties, and ensure that Regency receives maximum value for these assets. To conclude, during the second quarter the foundation was laid for more concrete improvement in key metrics.

There is no doubt that the trend is pointing up but there's no straight line to where we're headed. We continue to see bumps along the road but we're encouraged by the momentum. Hap?

Thank you, Brian and thank you, Bruce. As I reflect on this quarter's results I want to share two sentiments with you. First, while for the most part and in most areas, we are where we said we would be at this time, Regency's team feels we have a long way to go before we're satisfied. At the same time you need to know that we are encouraged by the underlying trends which should lead to real progress in each key aspect of our business.

Growing occupancy in NOI, enhancing the quality of future NOI through capital recycling, manufacturing quality centers at attractive returns through development and continuing to strengthen the balance sheet. Let me describe what real gratifying progress by the end of the year would look like to my colleagues and me.

First and foremost the tenant demand, coupled with the intense focus of the leasing team and the high quality of the portfolio, helped us convert more than 50% of the 1.5 million square foot leasing pipeline that Brian described, into signed leases so that the operating and development portfolios finished the year at 93% and 88% leased respectively. And NOI growth for the total portfolio, that is operating properties plus development on a comparable property basis net of termination fees, reached 2%.

Second, that we recycled over $150 million of capital out of lower quality assets with potential erosion in value into irreplaceable infill shopping centers, along the lines of those two described by Brian, with market leading anchors that will generate reliable future NOI growth. Third, that our re-energized development program started $75 million to $90 million dollars of new developments and re-developments that will enhance the overall quality of Regency's portfolio while achieving attractive risk-adjusted returns.

And fourth, that the team further strengthened Regency's balance sheet and access to multiple sources of capital while renewing the $600 million bank line of credit for four years, maintaining substantial unused capacity on that line, closing on over $400 million of mortgages in the co-investment partnerships and meaningfully expanding several of those co-investment partnerships. While a lot of wood still needs to be chop and there is no way to overlook the headwinds on the extremely sluggish and fragile recovery, I am confident of our dedicated team's ability to achieve these objectives.

I am also hopeful that the deficit reduction agreement will remove some of the uncertainty in our economy and set the stage for our government to start addressing some of our country's long-term issues. As long as there is some level of growth, even if it is anemic and uneven, I feel that the steps we are taking at Regency will begin to bear fruit by year end, produce results that will represent a meaningful advancement toward a standard that we have set for the Company, and most important of all, better position Regency for the future. Especially for achieving 95% occupancy and 3% NOI growth. We recognize that Regency's vision of building a great company is an ongoing journey.

We welcome the challenge and look forward to seeing the results of our efforts in the coming quarters. Before I end my comments I want to note how pleased and excited I am that David O'Connor has joined Regency's Board of Directors. I have long admired Dave as one of the most astute minds in the REIT industry and for those that know him he's also a wonderful individual. Regency is very, very fortunate to have the benefits of his perspective and insights.

We thank you for your participation and welcome any questions you may have.

Thank you. (Operator Instructions). At this time our first question comes from Craig Schmidt with Bank of America Merrill Lynch.

Good morning. I was wondering what are you looking forward to in terms of things that might mitigate what appeared to be the smaller shops starting to come back? What I'm guessing obviously, is the continuation of trying to fill up the Blockbusters. But is there anything else in the third and fourth quarter that might mitigate what otherwise would be forward progress?

I would say the overall economy. If you have a back (inaudible) in the economy which eventually translated into a slow down in tenant demand that would obviously have an impact and the timing of, I'm looking at Brian right now, but the real thing is, we've got a 1.5 million square foot pipeline that's real. But as Brian mentioned, it's taking longer to convert leasing activity into LOIs and LOIs into executed leases, executed leases into rent paying tenants.

Right.

Yes, Craig, I think that's the biggest issue. We've got so much momentum when it comes to the leasing. We are signing so much. We are just not seeing that improvement right now simply because, as mentioned on the call, the leases are taking longer to get signed, the retailers don't have the staffing, then the negotiations seem to go on and on. A lot of that's due to us.

You know we're taking a harder line on some of the provisions that could hurt you down the road. And then the real tough part is once you turn it over, for example in Atlanta, once a tenant applies for permits it's a good three to four weeks before they'll even touch the plan. So it's just taking a long time to get those plans reviewed and then you get the build-out and the subsequent delay in getting rent paying.

If back-to-school were to be good, reasonably good, do you think you would see some of that process through the leasing accelerate from the retailer's point of view?

Yes. Again, it's not the pipeline of leasing and the volume of leasing getting done. It's just getting them open. We are seeing a sense of urgency in some parts. At our Indio project, for example, where we had Starbucks, they wouldn't each talk to us three years ago and now it's like, we've got to get open, we've got to get open. So I do think as sales ratchet, and sales have been good, if they continue like that I think the retailers are going to clearly have a sense ever urgency to get open before the end of the year.

Okay. Thank you.

Thank you. I'm sorry. Our next question comes from Quentin Velleley with Citi.

Hi. Good morning. Just going back to the comment that it's taking longer for leases and tenants to get opened and the process is a lot longer. If we sort of, I'm just trying to workout how much NOI is sort of sitting there so if you look at the lease rate versus the actual opened and occupied rate, what is that spread between the two numbers and how should that sort of close out over the next 12-months?

I'll let Brian answer from a bigger picture but, Quentin, we also do give some guidance in the supplemental on the guidance page, Page 37, where we show NOI from leases signed but aren't yet rent paying and for that quarter that number was $1.7 million. And that's just the quarter number.

Right. I mean the breakdown, Quentin, it's 190 basis points from the percent leased to the effective rent paying occupancy. 40 basis points of that would be tenants that are not paying, or not paying everything they should be, and 150 basis points would be those that, basically the pre-leasing. 60 basis points of that 150 have not yet taken occupancy and the other 90 are in occupancy doing their build-out waiting to pay rent.

It's Michael Bilerman speaking. It happened Brian, both of you made comments about not being where you want to be and, Hap, you said you have a long, the Company has a long way to be satisfied and, Brian, in the press release you talked about while we're not where we want to be. And I'm just trying to tease out how much of that is you guys as a Company have always had, you've always had very high expectations for yourselves.

You want to be a premiere company, premiere developer, premiere owner and so you set your targets, I'm not saying they're not realistic targets, but you demand a lot from yourselves. And so I'm just trying to reconcile some of your views versus the, what should be viewed as reasonably good results, right. Lease spreads are going up, your occupancy is going up. I don't want to undermine the fact of what's happening, of what's actually happening on the ground and with your portfolio relative to, I guess your ambition of where you want to be and maybe you can sort of tease that out a little bit for us.

Well, like I just said I think that from an operating portfolio standpoint if we could be, and I think it's achievable, but it's, as we talked about there's risk on the timing of converting leasing activity into signed leases, but if we could be at 93% leased by the end of the year, I think that would be a step in the right direction towards getting to 95%. And that's probably going to take another couple years beyond that to get to 95% leased.

I think that if we can be, we will have taken our developments from 82% today, we don't like being at, excuse me at the beginning of the year, we don't like being at 86% today but 88% by the end of the year is doable. And that's progress on the way to 95%. The development pipeline is pretty strong. We've got, the team has got a lot of work to do to get us to the upper end of guidance. Things can get pushed out, et cetera, but there's some real attractive properties there.

We think we can get there and then also executing on the capital recycling side and I think progress is being made. So I think that when you look at the environment in which we're operating today with the slow economy, et cetera, and the amount of time it's taking to make transactions happen, things take longer than they have in the past. But we do feel, and we are encouraged by the progress. it's just not getting there as soon as you would like to see. I don't know any other way to say it. I don't know, Brian, if you ...

Yes, Michael, actually I appreciate that. I think we are driven and we're just not satisfied, not patting ourselves on the back for anything we may have done to date. We all have the goal in mind. We know where we've been, we know where we need to be, we know where we can be and we know where we are going to be. And until we get there we are going to be hard on ourselves.

Okay. Thank you.

Thank you.

Thank you. Next we'll hear from Christy McElroy with UBS.

Hey. Good morning everyone. Just actually staying on that same topic. With the bulk of that sort of 93% to 95% occupancy upside over the next several years being in small shop leasing, if we assume sort of a gradual increase over time how should we think about the average rents on that space relative to the portfolio average given that not all occupancy is created equal?

So basically where do you think the rent growth is going ?

Sure. Well, basically how, in terms of the occupancy upside that you've had so far has created a certain amount of rent growth. Given that the average rents on that incremental space on the small shop leasing will probably be higher than the portfolio average, what's the incremental contribution to rent growth from that leasing?

Well, I think it's not going to be, the small shop leasing has been, I don't know if we've got the contribution to rent growth on that, do we? No. I think basically our rent growth is going to be, at least through the end of the year, essentially where it's at today. I think our renewal leasing is going to be somewhere around flat to slightly positive and I think our new leasing is going to continue to be maybe flat to minus 10%.

As we start to fill up those spaces, logically we're going to get better and better ability to drive rents. We're seeing that in our 95% leased centers. If you look for example in the Bay Area in the anchor space this quarter we signed some in the $30 range and we signed a couple junior anchors in the mid 20s. So I think what will happen is you will see this year continuing to be relatively flat and then as we start to get that occupancy up closer to 88%, 89% on the less than 5,000 square feet we'll start to be able to drive the rents.

I think, Christy, I would just add if you really roughly do the math, if you assume somewhere around $24 of revenues coming from those small shop tenants, on a hundred basis points of occupancy in our small shops, that gets you to almost $7 million. So a hundred basis point increase in occupancy in small shops should translate to close to 2% same property NOI growth on an annual basis.

And then on top of that, is as we said, we're generating about 1% to 1% plus in contractual rent increases on top of that. So 3% NOI growth in the not too distant future plus is achievable.

Okay. That's helpful. And then just with regard to the increase in occupancy for your development leasing. Was that purely a function of sort of greater demand for that space or have you become, in terms of your strategy with regards to that leasing, have you become a little softer on rent requirements just to get this space leased up for the good of the center? And with regard to leasing up that sort of the pre-2009 projects, to what extent are you doing shorter-term maybe one to two year leases in hopes to occupy the center in the near term but maybe benefit in a couple years as demand recovers more substantially?

We haven't changed our strategy on that. In fact, if anything I think we're out-performing our strategy. If I think back to some of our tougher projects like at Indio, at Indio we had underwritten very low rents to get some of the spaces leased and, in fact free rent for a period of time, and that hasn't happened. We've come in with rents better than that so we're not letting good tenants get away on the development properties just because the rents are lower. We are, though, doing as you said, in some cases, more so last year than this year, we would go ahead and do a three year lease and offer a low starting rent and then build it up pretty rapidly like maybe 30% a year even.

But I would say what's really going on there is some anchor leasing is driving that, but I think things are just slowly improving. I think the best example again is in Indio where we had a retailer, Party City, open up a temporary store, their Halloween concept, took a chance, things were so good they decided to convert it to a full long-term lease with Party City and Starbucks which wouldn't look at it three years ago now is eager to open. So I think it's just, things are improving, people are willing to take chances, because of the lack of supply out there they don't have as many opportunities, and it's just kind of slow and steady.

Great. Thank you.

Thank you, Christine.

Thank you so much. Our next question comes from Rich Moore with RBC Capital Markets.

Yes. Hi. Good morning, guys. Lay, Bruce, on the Rabbi trust issue that you had last quarter where does that stand? Is that resolved or what's going on there?

Yes. We have basically converted that so that you won't see any more negative numbers with respect to that.

Okay. Good. Thank you. And.

Yes.

I'm sorry. Were you done?

That's it.

Okay. Good. Thanks. And then also, guys, I was curious, on the last call it seemed that you were, you had identified more assets both for sale and for purchase and you mentioned some of that in your opening remarks, Brian, I think that you had found some things. But it seemed at the time that you had many more assets, I think it was 13, that you were going to sell, and then maybe a dozen that you were reviewing in the pipeline. Have either of those dispositions or acquisitions slowed in your view and maybe what are you thinking in terms of both as you look at the next couple quarters.

Our thinking hasn't changed, Rich. Of the 13 that we were talking about taking to market we have taken the majority of those to market and the seven I think we talked about last quarter that were on the market we have contracts and I think in almost every case the buyers are hard with their deposits on six of them. So while the numbers to date don't add up, if you take a look at what we've got for sale either closed or under contract we're at about the $58 million range.

And then as you said we've got many more of the original 13 plus some additional ones that we're going to be taking to market. So we still hope to get up in the $140 million, $150 million range by the end of the year. And the acquisitions, there are lots of opportunities. With what we've already got under contract and closed we're already at the $140 million range.

Okay. But you even have more you're taking a look at, I take it, that pipeline is still deep on the acquisition front?

It is. There's still some talk about, there's, the good news associated with the lower cap rates is we are just seeing some just fabulous properties. I mean the kind you just have to own and to the extent we can recycle out of our ones with NOI risk we would just love to get those.

Okay. Good. Thank you. And the last thing I had was the other income line was higher. Is there anything special in there?

Yes. We did have, I think the vast majority of that were settlements. For example there was a large tenant out in Northern California that we were in a lawsuit with and so it really, what those represent, those settlements, are rents owed as well as acceleration of rents.

Okay. So that comes down I take it for the next several quarters?

Yes.

Okay. Alright. Good. Thank you, guys.

Thanks, Rich.

Thank you. Our next question comes from Vincent Chao with Deutsche Bank.

Good morning everyone. Just a follow-up question just in terms of leasing volume which has been pretty solid. I was just curious as to how the trends in the fallout rates have been, have they improved or are they kind of staying stable at this point.

That's the one area that we need to break and we expect to improve. We've been saying for some time given the, all the different health ratios, health metrics of the retailers we expect it to improve. It is improving slowly. Unfortunately, we had the Blockbuster we talked about. If you subtract the Blockbuster from our move outs in the second quarter it would be vastly improved.

On an annualized basis it would be a pretty low number. But really it's slow and steady progress there, also. If you look at the first quarter move outs this year in compared to the first quarter move outs last year, it's better. If you look at the second quarter this year versus second quarter last year, it's better. So we do have an improving trend line and by the end of the year we expect that we will probably be about 250,000 square feet better in terms of move outs than we were a year ago.

And that's one of the keys to getting to 95% over the next few years.

Okay. And then just a follow-up. I thought I heard you say the pipeline of deals that you're sort of looking at right now is about 1.4 million square feet, is that correct?

1.5.

1.5. Okay. And did you say that represented only about two times what you expect to do in the second half here?

Yes. I mean to get to the numbers that we want to be at we've got assumptions as to how much new leasing we are going to do and how much we're going to experience in move outs. And so when it comes to what we still, we want to do about 1.8 million square feet in new leases. We've already done over a million, so we've got about 800,000 square feet to go and we're actively working on about 1.5 million square feet of identified tenants either in lease negotiation or LOI. So that's the two times.

It just seems like that's a pretty dramatic slow down in terms of the quarterly volume from what you've been doing so just so that's more what you hope to do to hit plan or do you really think that's going to slow down that much?

Right. Well, the issue there is it certainly could be more but when you look at, especially your LOI but also with your lease negotiations, things can happen. I mean we just had a situation where you're working on a lease, it's approved by all the real estate people, it's a national tenant, it goes to their committee and it gets turned down. That stuff can happen. So what we look at it as is it's a cushion.

If we've got two leases or two square feet for every one we need we feel pretty confidant we will get to our numbers but hopefully our numbers are conservative and hopefully we'll do better than that. But the big thing that's preventing us from really ratcheting that number up is just that a lot of that 1.5 million square feet could slip into 2011. They may happen but they may go past the end of the calendar year.

Okay. And just one last one. It just seems like obviously the macro environment has gotten a bit softer here and no one has really mentioned anything in terms of how it's impacting the leasing actively or they're not seeing it yet. I am just wondering what your thoughts are there. Is the discussion at all changing even within the last few weeks.

We haven't seen any impact yet. I mean just there's, I think retailers are pretty cautious for the most part even those that are expanding but we have just not seen, the leasing activity is still extremely robust, but at the same time we all read the paper.

Right. Right.

That's the reason why we're overlaying a good dose of caution on top of the encouraging signs that we're seeing.

Okay. Thank you.

Thank you. Our next question comes from Tayo Okusanya with Jefferies & Company .

Hi this is Albert Lynn with Tayo on the line as well. Just a quick question. Aside from the leasing process taking a little bit longer is there anything else that he is driving your same store NOI guidance down?

Well, I mentioned on the call we lowered our recovery rate on the call and also --

And also really the increase (multiple speakers).

The provision for bad debt effectively ads another 15 basis points to where we thought we would end up being. As you recall I think I had given guidance we would be at 70 basis points for the year. That was my expectation and I think that will be our run rate kind ever going forward. That's kind of what we're expecting but we had a little bit of a blip which will cause an average over the year probably closer to mid 85 basis points.

And for those of you that maybe dialed in a little late because that was pretty early in the call, the increase in the provisions for doubtful accounts is really related to our recovery reconciliations that we completed in the second quarter of this year. And past years we typically had that done in the first quarter so on a year-to-date basis you will see that our bad debt expense is actually less than it was in 2010 yet our revenues are pretty significantly higher. So on a run rate basis from 2011 to 2010 we've actually improved that.

And termination fees will be down from last year.

Okay. Thank you. And then also with your development pipeline already at 86% leased how much of an impact do you think you'll generate as those projects come online and you lease the remaining of that space out?

From an NOI standpoint I think there's probably another --

Well, we've got $6.2 million of additional upside in the development portfolio. Of that $2.6 million of it is already pre-leased and $1.4 million of that pre-leasing is coming on in 2011, $1.2 million in 2012 and then there will be additional lease up beyond that.

Okay. Great. Thank you.

Thanks.

Thank you. Our next question comes from [Sunit Parekh].

Hi. Good morning guys. Just one quick question. Given the sort of relatively low return environment with high quality acquisitions right now are you guys seriously considering repurchasing the preferred stock?

We look at all financing options and uses of capital and that's one of them. I do want to point out that while 7.4% preferred, which are our highest rates preferred, is above where we could issue preferred today and it seems high. Preferred stock is preferred and there is no maturity on it and there was not too long ago when ten year interest rates on corporate bonds were well above that. So it's something that we look at and we considered, and will consider.

And the issuance costs for doing a new deal basically makes up the difference between what we can issue today and redeeming. So there's not a whole lot of savings to replace the existing preferred with new preferred.

It's something that we're continuing to evaluate in the context of, it is permanent capital.

Okay. Great. And just, sorry, one more question. Last question. Could you just give sort of a comment on the financing environment for sort of small businesses and what you're seeing from your tenants you're talking about leases taking longer to sign. How much risk do you think there is in those leases potentially ultimately not being signed if banks sort of de-risk here and just aren't as willing to lend to new business creation or small business.

We see the trend going the other way. The banks seem to be loosening the credit to, they want to make small business loans.

Yes. We saw a pretty sizeable, a very sizeable increase this quarter in the requests for business assignments, which you only get when you have financing available as well as lender verification calls where people are looking to take out financing. They are calling us to verify term, rent, stuff like that. And while we are seeing a lot of that, the fact of the matter is, over the last two years we've had to deal with the fact there wasn't much small shop financing available so all of our leasing efforts have really been focused on those that are well capitalized either individuals or franchisees, national regional chains. While we are seeing a lot more of the financing we're really not counting on it.

And I think it's also just to pick up on the Brian made, I think at least half of our small shop leasing is national tenants. I mean JPMorgan, Starbucks, Panera Bread. These are well capitalized companies. But I think the lending environment for local tenants has gotten better.

Okay. Thanks.

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