Regency Centers Corp (REG) 2011 Q4 法說會逐字稿

Good day and welcome to the Regency Centers Corporation fourth quarter 2011 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to your moderator, Senior Vice President of Capital Markets, Ms. Lisa Palmer. Please go ahead, ma'am.

Thank you, Tom. Good morning, everyone, and 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 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 which could cause actual results to differ from those contained in these forward-looking statements. Hap?

Thank you, Lisa, and good morning. As I stated at Investor Day, Regency's executive team is committed to regain our standing as a blue chip shopping center company by achieving four critical objectives, which I shared with you then and I want to very briefly review with you now. First, generate dependable NOI growth of 3%; second, reinvigorating a disciplined development program that will add significant value to the portfolio; third, further strengthening the balance sheet and assuring access to capital; and fourth, compounding recurring funds from operations and NAV per share by 5%.

As I reflect back on 2011, I am gratified by the progress the team has made in positioning 2012 to be a turnaround year for Regency. I would like to now highlight those key accomplishments that will be important building blocks for both 2012 and the sustainable achievement of these four objectives in subsequent years. We leased nearly 7 million square feet of space, including 2 million square feet of new leases and that strong tenant demand is continuing. We increased occupancy in the operating portfolio to 93.5%, and this represents the highest level in three years.

We sold on a pro rata basis more than $90 million of operating properties, and recycled the capital into $110 million of dominant grocery-anchored shopping centers, with much better prospects for future growth in NOI. We started over $95 million of new development, and nearly $25 million of redevelopments or expansions at attractive returns of more than 9%. In addition, we sold or converted to development almost $30 million of land held. And we took further steps to improve the balance sheet. Among these was renewing our $600 million line of credit, closing on a $250 million term loan, and refinancing more than $500 million of mortgages in our co-investment partnerships.

In addition to this significant progress, there are several other important reasons that I am confident that our focused strategy will soon start translating into performance that will manifest into the ultimate measure, total shareholder return in excess of our shopping center peers. It all starts with our exceptional people. Many of you have had a firsthand opportunity to see how good they are, through our Investor Relations group or on property tours. Regency's team and our enduring customer relationships are advantages that enable Regency to fully leverage our other essential assets, expertly execute our strategy, and effectively accomplish our critical goals and objectives. It is clear to me that our key customers truly recognize the value of Regency's platform, and generally respect and appreciate doing business with our people.

In the mind of our retailers, the brokers, our co-investment partners, and other key stakeholders, Regency is a blue chip company. Second, the vast majority of Regency's portfolio contains dominant grocery anchored shopping centers that are located in attractive markets. Our experience has shown that centers with highly productive grocery anchors attract better side-shop retailers, maintain and grow occupancy, and produce reliable NOI.

Let me take a moment to remind you of the key attributes of the portfolio. 87% is in a Top 50 market; average household income of approximately $100,000; three-mile density of over 90,000 people; and grocery sales that we are proud to publish of $25 million, and $500 per square foot.

In 2012, we will place even greater focus on selling the small segment of the portfolio, including legacy developments that we determine might be a drag on NOI, and buying centers that will enhance future growth. Regency's capability to manufacture dominant grocery-anchored shopping centers in attractive markets on a basis that is accretive to NAV and especially to the price at which we could acquire comparable properties is an essential Regency advantage. We have incorporated the valuable lessons learned, and are focusing on the construction and repositioning of core shopping centers that we want to own long term. And last, Regency has a sound balance sheet and access to multiple sources of capital.

Perhaps that is the most important lesson from the recent financial crisis, that the balance sheet maturities and access to capital are critical. We are committed to maintaining and even enhancing substantial financial flexibility. While we are aware we are still operating in an uncertain and fragile environment, I believe that the accomplishments in 2011, combined with these four attributes and resilient retailer demand for space in our shopping centers, have positioned Regency to make even more meaningful progress this year. Bruce?

Thank you, Hap, and good morning on this beautiful day in Jacksonville, Florida. As Hap pointed out, as a result of the proactive steps we have taken, our balance sheet is in good shape. Let me recap the year highlights.

We renewed our $600 million line of credit on an extremely favorable basis, and we closed on a $250 million unsecured term loan to repay the bonds that matured in January. This term loan is fully pre-payable without penalty, providing us with the flexibility to delever when it makes sense to do so. This means that as of the end of January, we had more than $600 million of available capacity between the line and the term loan. We also secured more than $500 million of mortgage financing in our co-investment partnerships with terms that exceeded ten years, and rates that average 4.7%. Finally CalSTRS has committed $100 million of equity to our partnership with them.

As a result of our efforts over the last several years, we have improved our debt profile by reducing the amount of debt outstanding, and meaningfully extending the average maturity date in both our wholly owned and co-investment portfolios.

I would like to turn now to capital recycling. In 2011, we disposed of 13 noncore properties. The average cap rate was 7.8%, and we acquired five dominant grocery-anchored centers at an average cap rate of just over 6%.

In January we entered the New York market with a strategic acquisition of Lake Grove Commons in partnership with First Washington and CalPERS. Lake Grove is an A+ asset located in Long Island. The center is anchored by Whole Foods with substantial embedded NOI growth from contractual rent increases. This investment represents an opportunity to expand Regency's presence into the New York market, providing traction for potential future acquisitions. We will continue to recycle capital, to enhance future NOI growth prospects. And as Hap mentioned if the right opportunities arise, we would consider expanding the pool of properties that we determine we don't want to own on a long-term basis. Obviously these sales may trigger gains or losses.

Looking ahead, our guidance for 2012 is unchanged from what we presented in December. However, it is important to point out that we expect to be approximately 93% leased at the end of the first quarter. This is for two reasons. 20 basis points is related to the movement of properties to the same property pool, the remainder is due to projected move-outs, which are typically higher in the first quarter of the year. However, I am comfortable that we will be close to the 94% leased by year end, and that 2012 same property NOI growth excluding term fees will be in the range of 1.5% to 3%.

Brian?

Thanks, Bruce, and good morning. As you heard from Hap, we are starting to see the fruits of our efforts. By just about any metric you choose there was good improvement in the portfolio during 2011. And while that improvement hasn't fully manifested itself, it is setting the table for higher levels of NOI growth. Let me run through a few of those metrics.

After the seasonal dip in the first quarter of 2011, we saw three straight quarters of positive absorption. Absorption for both the fourth quarter and the full year were the best we have ever had. What was more impressive to me was the absorption for operating spaces less than 10,000 square feet was also positive for three consecutive quarters and for the full year. Never before have we had better quarterly or annual absorption for small shops.

Better absorption comes from better move-outs and leasing. And we did a lot of leasing in 2011, more than any other prior year, again for both the operating portfolio as a whole and for our small shops. The level of new leasing was nearly 40% higher than the average of the last five years. We also signed 25% more renewals than the average of that same period. We not only leased space, we did it with great retailers that enhanced the quality of our portfolio. We did a lot of repeat business signing multiple leases with national chains, such as Petco, T.J. Maxx, Chase, Starbucks, Great Clips, Chipotle, Five Guys, and others.

I mentioned move-outs were better. They have been gradually improving since late 2009, but the improvement was really evident as we ended the year with three straight quarters of lower move-outs, resulting in the lowest annual level since 2007. Best of all, the level of small shop move-outs was the lowest since 2006 which is really encouraging. As a result of this leasing progress and the favorable impact on occupancy from dispositions, the operating portfolio was 93.5% leased.

For the quarter, we had occupancy gains in all size ranges. I draw your attention to one of those ranges, our small shops and spaces less than 10,000 square feet, which ended the year 87% leased. That is meaningfully higher than a year ago. Developments contributed as well. Occupancy in those properties increased 630 basis points to over 88% leased contributing nearly $4 million of additional NOI. This increase in development leasing, together with growing our small shop percent leased to 87%, represent two very significant accomplishments.

We have talked in the past about how our tenants' health metrics were all heading in the right direction, and by any measure they are much healthier today. We discussed in the past that retail survivors have learned how to manage costs and inventory to succeed in the tough environment, but for the first time in a while our tenants are reporting modest sales increases. We heard about top line improvement across most of the portfolio. As a result, there is a lot more optimism and confidence out there on the part of the retailers. Furthermore, many of our grocery anchor customers are also projecting solid 2011 annual sales growth from their stores in our portfolio.

There is another increasing trend we are seeing in the regions. It appears that retailers are exercising their stated options more frequently instead of rejecting the option and trying to renegotiate it. If this continues it would suggest a potential shift in pricing power. All these things along with our much lower AR balance, and notable decrease in small shop move-outs I mentioned earlier, point to a healthier tenant base.

Now those are all good trends, and it is important progress that we will soon be paying dividends in same-property NOI growth, and there are other metrics as well that also give me reason to be optimistic. Total NOI growth was positive 1.7% if you include developments on a same-property basis. Rent-paying occupancy in the operating portfolio increased 60 basis points over 91%. As we move closer to 95% occupancy in the next couple of years, we should start benefiting from more pricing power. And most important of all, based on what we have seen in January, the strong leasing momentum and trend of reduced move-outs appear to be continuing.

Let me now turn to development. We started two new developments in the fourth quarter, after a bruising seven-year entitlement battle, we are ready to take the land in Sonoma County, California, out of inventory, and begin our East Washington Place development. It is a strong-up line of anchors, Target, Sprouts, Dick's Sporting Goods, and T.J. Maxx/HomeGoods combo store, and they are helping attract other top-notch retailers like Beverages & more! and ULTA.

This will be the best-located retail center in the city of Petaluma, and it will be a great addition to the portfolio. We know there will always be tight supply constraints in this market given the city's demonstrated no-growth attitude. In northern California real estate circles this development really is creating a buzz. We have received extensive interest from national retailers for the side-shop space, and the return on the incremental cost is approximately 9.5%.

The second development, Northgate Marketplace, which is located in Medford, Oregon, will be anchored by the perfect grocer for Oregon, Trader Joe's. Also anchoring the center will be REI, ULTA, and Petco. This is the best site in Medford at the intersection of the city's three most heavily trafficked highways, and directly adjacent to the super-regional mall. Medford is a proven, very successful market for retailers with several national anchor tenants claiming their Medford stores are among the best in their chains.

In addition to ground-up projects, our development expertise gives us the ability to harvest value from our operating properties through expansion and redevelopment. We started two such projects this quarter; the first was the addition of T.J. Maxx at our Golden Hills property in Paso Robles, California, which is also anchored by Lowe's and Bed Bath & Beyond. And we had space to accommodate Petco and Five Below at the Target-anchored Lower Nazareth Commons that is adjacent to Wegmans in Pennsylvania. These expansions enhance existing assets, they drive additional traffic, and they make them more desirable to potential new tenants, and provide us with impressive returns of about 11%, all with relatively low levels of risk.

In summary, I know that we have still got plenty of work to do, but I am more confident than ever that we are going to show the results we expect. We are going to accomplish our goals of improving occupancy and same-property growth in 2012, and successfully execute our development and redevelopment strategy. Hap?

Thanks, Brian, and thanks, Bruce. In closing, I have no doubt that Regency is not only on the path to recovery, but more importantly is on the right road to reestablishing our pre-eminent standing with you.

Before I turn the call over to questions and answers, I have to take this moment and comment on the announcement a couple of weeks ago of Bruce's plans to retire at the end of the year. To say this is a bittersweet moment here is a major understatement. Bruce's leadership, his experience, his judgment and financial acumen have been instrumental in successfully building Regency into a leading national shopping center company. He is part of our heritage, and he epitomizes those attributes that make our culture and the people of Regency so really special.

At the same time, Regency's fortunate to have Lisa, another consummate professional and wonderful person, in the same mold as Bruce to succeed him in January of 2013. Many of you had the privilege to work with Lisa over the years, and already know of her strengths and accomplishments. As I indicated, Bruce will not be retiring until the end of the year; until then we will continue to benefit from his full-throttled effort, leadership, and judgment, as we build on our improving fundamentals in this crucial year. We thank you for your time and welcome any questions you may have.

Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator Instructions) We will take our first question from Michael Mueller with JPMorgan.

Brian, I think you said it was 87% small-shop occupancy at year end. One, what was the sequential improvement and then where do you think that number can go by year end?

Well, the sequential improvement was 110 basis points, and we are expecting by the end of the year to have somewhere in the neighborhood of 300,000 square feet of positive absorption, and that is pretty much all coming from the small shops, so that is how we are going to get to approximately 94%.

I would say small shop would be between where we are to date -- we may take a dip in the first quarter but we ought to be by the end of the year between where we are today and 90%.

Okay. Okay. Great. And second question. I remember from the Investor Day for 2012 the G&A expectation picked up a little bit. I guess with Bruce's retirement in 2013, and just thinking about the development pipeline being a little bit bigger by then and maybe you are capitalizing more, should we expect to see G&A dip in 2013?

I think that the rate of growth should reduce, and we are actively working to, in an efficient basis to reduce the rate of growth.

And, Mike, I would just like to add, to make sure that everyone is clear, even though we came in slightly favorable for 2011, our guidance for 2012 remains unchanged, because a large part of that -- what was driving the favorable variance were health insurance claims that we do not expect to recur in 2012. So the guidance for 2012 remains $58.5 million to $62.5 million.

Okay. Okay. Thank you.

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

Good morning. It is actually Michael Bilerman with Quentin. I just wanted to follow-up a little bit on the occupancy and the leased rates at the end of the year in the same-store pool at 93.8. That obviously was ahead of where you thought you would be in December of 93 to 93.5. So it sounds like the move-outs were a lot less, but I think from Bruce's comments there was some talk that you would head down about -- it sounds about 60 bips in the first quarter, as you expect those move-outs to occur. And I am just wondering if you can just put a little bit of color around what --- it was about I guess, around 125,000, 150,000 square feet. What sort of tenants were that? Have they already moved out? Or just what the expectations are and why you think they are eventually now going to leave?

We tend to just historically in the first quarter have more move-outs. That happened in certainly the last two years, but it is pretty much a seasonal thing we see every year. So we expect that is going to happen in first quarter. We are planning on it anyway. Our experience so far in January is it has been less than what we have planned for, but that is just --- it's an annual thing that happens.

In addition, as we mentioned, it isn't all due to seasonal move-outs; some of it is due to including new properties into the pool.

Right, which I think Bruce said was 20, and then to get down to 93, 20 from the same-store and 60 from move-outs, but certainly at the end of the year, you were certainly much higher than where you thought you would be in December, and if those people didn't move out in December, and it sounds like they haven't moved out yet in January, I am just trying to figure out what is going on in terms of how conservative you may be in thinking about the guidance?

We may be. We just don't know. Again, historically the first quarter we are going to take --- we are going to have negative absorption and we are planning on the next three quarters to be very positive from there. The question is does January represent all of the first quarter? January is the month that we expect to be the worst of the three months in January, and like I said we are about 100,000 square feet better on the negative net absorption side than what we planned. I just don't know whether that will maintain that improvement throughout the rest of the quarter or not.

And then just a question on the acquisition in New York. Hap, I think you mentioned it was with First Washington which I think was the first --- was that the first capital outlay since buying back the portfolio a couple of years ago? Because it sounded like that Bill had been pretty quiet in putting new capital out. So I was just wondering if there has been a change of strategy and getting comfortable with the yields today.

That was the first that we have done together. They have made other investments that for whatever reason, we decided not to do together. And they have been, they are in the market, and would like to deploy more capital.

And comfortable with the level, the sort of going in yields in the 5s, low-6s?

If you are going there and you can either get good dependable growth like we have got in Lake Grove, or even --- or there is maybe more upside, and your total return is better. I think we are pretty much on the same page there together as far as what we are looking for.

Okay. Thank you.

And we'll take our next question from Craig Schmidt with Bank of America Merrill Lynch.

Good morning. I was wondering if there is an expansion potential at Lake Grove Commons. I am just looking at the acres and the existing FAR seems kind of low?

I don't think so. What you have got there, Craig, are two very high volume anchors. You have got the LA Fitness, and when we have been to that site, it is packed. The health clubs take a disproportionate amount of the parking anyway, so what we don't want to do is impinge upon that parking, and therefore potentially hurt the sales of Whole Foods, Petco, or our small shops.

Okay and I just wondered are you looking at further acquisitions in Long Island, and what might be your cap rate if you looked out three years given the fixed rent increases?

We should be over 6% return by then, and we are -- and that is a target market for us.

Possibly with Blumenfelds?

Possibly with Blumenfelds. Yes.

Okay. Thanks a lot.

We will go next to Christy McElroy with UBS.

Good morning, everyone. You have talked about converting a portion of your land into core development projects over the next few years. And you did that in Q4 with East Washington Place. Of the $75 million to $150 million of development starts you are forecasting in 2012, how much of that is comprised of projects where you expect to use the land already owned? And do you expect the yields on those to be similar to the East Washington, in the 7s?

Let me just check, in 2012 it looks like we really only have one property that is going to be coming out of land held, and that would be -- it would be similar in the sense it would be about a 7, or in the 7s on total cost, and more like about 14% on incremental income.

So you are thinking about those projects more on an incremental basis than on an all-in?

We are going to report both obviously. But the costs are what they are. So we are going to have to report total costs. But they also sunk costs. So the question is how do we get out of those, and if we can deploy the additional capital at returns that are that attractive, then that is what we are going to do.

Okay, and then given that you just transferred a pretty substantial amount of development projects into the completed bucket, are those now considered operating properties? And I know you mentioned a potential impact on Q1 in transferring properties to the operating pool, but did their inclusion have any impact on the occupancy numbers in Q4, and when should we start seeing these properties impacting same-store growth?

Christy, this is Lisa; I will answer that. Yes, as of December 31, all of those development completions are in our percent leased for operating properties. Not necessarily same property. To be considered a same property, they basically, the anchor would have had to have been open as of January 1, 2011, so not all of those would be considered same property. We can go off line, and specifically give you a list of those that will be added to the same property pool.

So in Q4 2012, the same-store NOI growth numbers should include the impact of these properties?

It has got to be a full calendar year. So again, if the anchor was open January 1, 2011, and it was substantially complete, basically, so more than 90% funded then that would become a same property pool. Some of -- those that weren't open then will have to wait until 2013 before they actually hit same property.

Okay. Thank you.

Thank you, Christy.

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

Good morning. On the targeted dispositions, I mean you just gave a little bit of color; obviously you are looking at accelerating it this year versus last year. Are there -- is the market for those non-core assets any better? Is it kind of potential improvements in the CMBS market a factor? Or are you just going to be more aggressive this year, and is it mostly still one-offs? Or could you --?

We are considering all of that. Where I do think that we may have an advantage from a sales standpoint is those assets that are unencumbered. But the key criteria that we are going to look at is is this going to be a drag on future NOI growth, and that is the criteria that we look at, and/or what is the visibility from here going -- for NOI going up or going down.

What is the geographic composition of the pool?

It is all over, yes, all over the country.

Okay.

And once again, it depends.

And on -- demand?

It depends on market/demand and it depends on our view of our future outlook for the property.

All right. Okay, and then on the development starts, you have talked a lot about being more conservative in terms of shop space, and kind of the risks that you take on with projects. Is that being reflected in the starts that you are commencing this year? I mean, have you scaled back from your original plan the amount of shop space, and kind of by what percentage?

The key issue is what is the individual demand for the specific project. In certain instances no shop space may make sense, in certain other instances 45,000, 50,000 square feet may make sense. So what Brian and the team are doing is calibrating what is the visible demand for side-shop space, and when it is appropriate, we are also phasing it. Brian, you want --?

It's exactly right. If you look at what has been started this year and in the last couple years, as Hap said, some of us had very little. I think we have averaged about 15,000 square feet over what we have put in place. But some of them had none, and some of them had a lot, not a lot, but they have had more. If you look at the two that we are announcing this quarter, in Medford, Oregon, we are doing a limited amount, maybe 15,000 square feet, whereas the one in northern California, there is just tremendous demand. So we are going to build much more there.

Okay. Great. Thanks.

Thank you, Paul.

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

Brian, given the encouraging signs that you are seeing in terms of occupancy, and I am just focusing here on the inline space, I guess could you give us some sense of the mark-to-market on rents, and I guess the question here is, if you are starting to see this pickup on occupancy, are you going to start to focus a bit more maybe on pushing rate throughout the year?

Well, yes, we are certainly focused on it. What we are dealing with I think are a couple things. We are still arguing with some high rents, for example, if you look at northern California, we have got pricing power in the San Francisco Bay Area, but we just did a lease at our Powell Street project at $48 a square foot, but it was coming off of a $51. So on one hand we have got markets where we are seeing increased stability to push rents, but some of those markets we pushed real aggressively before the downturn.

But overall I think we are seeing some positive things. The property managers are reporting that across the country there is an increased ability to drive rents, not all properties, not all markets, but as a general trend, yes. If you look at our numbers, if we look at all spaces, including those that have been vacant for more than a year, the new was negative, but it was less than half as negative as the average three quarters, and if you focus on those that are just less than 12 months, we actually had rent growth on new spaces of over 5%. So in the leverage just in all aspects of the leasing seems to be returning a little bit more. We are exercising those termination rights and getting rid of the weaker tenants that would be hard to grow rents. We are getting better rent bumps, and what we have seen so far in January is stronger rent growth.

Okay. And maybe back to Paul's question on sort of the sales candidates versus the core assets, is there a breakout of NOI growth between what you are potentially selling and what remains kind of the core assets?

Typically what we may be selling is we are seeing meaningfully higher growth in what we are buying than what we are selling. And let's leave it at that.

Okay. Thank you.

We will take our next question from Tayo Okusanya with Jefferies & Company.

Yes, just in regards to your economic outlook, if the economy does end up being a little bit better than you were anticipating, do you think you would probably see more strength in regards to pricing, or more of an ability to generate more occupancy in your small shop space, and conversely as well if the economy got worse, which of those two do you actually think could give way fast?

I think number one, I think that we are seeing, as Brian indicated, very resilient demand for space, and as he indicated, we are starting to feel more pricing power, and I think that feeling is real, obviously to the extent that we get more of the economy behind us that is going to improve. I think it would take a -- because there is less supply that has been out there, especially of better space, so I think it would take a, in effect, a downturn in the economy to swing to reduce the tenant demand for space. And pricing power in effect swinging back and the momentum going the other direction.

Okay. That is helpful. Thank you.

We will take our next question from Todd Lukasik with Morningstar.

Good morning, thanks. Just a quick housekeeping question first on a GAAP basis, income statement, the other expense line, $4.9 million. Is that mainly due to write-off of predevelopment costs? Or is there something else in there?

It would be a combination of that and our income taxes. Other amounts are related to reserves we put up for environmental costs or insurance reserves on liability claims, those kind of things.

Okay. Thanks and just with regards to the side-shop space, you guys are making some nice progress renting that up, obviously. I am just wondering what you view as sort of a normalized level of vacancy for that side-shop space?

Probably where we were before the downturn which is really up in about the 91% range.

Okay. Great. Thanks for taking my questions.

Thank you.

We will go next to [Gauton Garb] with Credit Suisse.

Hi guys, just another question on the small shop space. What kind of tenants are you seeing demand from? And going into 2012, are there any specific industries or tenants in your portfolio that you would be concerned about?

Well, it is again, we have been focusing for the last few years on mostly the national, the regionals, very, very little leasing is being done with true mom-and-pop shops. So I don't see any reason why that wouldn't continue. Although I do -- we are hearing that financing is returning to the small shops, but again, that has not been something that has held us back in the past, so I don't think it is going to affect us that much going forward.

We worry about --- there's a couple of categories of small tenants that we worry about. I would say the dry cleaners are certainly one we have been seeing some weakness in. Tanning salons we have been seeing some weakness in. And then we have got the ones that are well-known to everybody. If there are any remaining video or the book category, those kind of things.

We got limited exposure there, we got limited exposure to Best Buy, and in the case of Sears, I think as Brian says, bad news would be good news.

Right. Very helpful. You spoke about financing coming back, are you hearing about any specific initiatives by the SBA which might be helping some of your mom-and-pop kind of tenants?

Well, I think I just mentioned that there is more Small Business Association financing out there, but we just have not been needing that in terms of increasing our occupancy. We have been leasing to stronger chains, national, regional, and so forth. But it certainly can't hurt us as some of the smaller players decide to get back in the market because there is financing available, that can only help us.

Right. Well, thank you. Thank you.

We will go next to Jim Sullivan with Cowen and Company.

Good morning, just a couple of quick questions, guys, in terms of as you move out of the legacy development and some of the transactions where you have some significant sunk costs. And look at new developments. There has been, and correct me if I am wrong on this, but there has been significant growth by some of the smaller footprint grocers, in terms of unit growth, and I am just curious if you are seeing more of that, or if my impression is wrong, number one. And the 20,000 to 30,000 square foot box rather than the bigger box, and curious if you are seeing more of that, number one, and number two, how you underwrite those? Do you underwrite them any differently or not in terms of projected stabilized yield?

We are definitely seeing more of them particularly in some regions. If you look at who is really expanding, it seems to be -- well, it is kind of all over the map. You have got the Krogers and the H-E-Bs which are growing very large, putting very large stores into production. On the traditional size, I would say the one that has grown the most would be Publix. But what you are seeing, particularly in California, would be almost a grocer war in northern California with all of these smaller concepts. You have got The Fresh Market, you have got Sprouts, you have got Sunflower, Fresh & Easy, just a lot of that going on, and Trader Joe's of course.

And we have not done much with them. We put some in our existing centers. We are doing a little bit. And in terms of underwriting it, we factor that in with the other risk metrics. The amount of shop space, how much preleasing is done. But we tend to go with the better operator, so we are not doing any new developments for Fresh & Easy. We kind of factor the risk in that way. We would just rather not do it. And Sprouts, we have been comfortable, and as you saw the one we put them in is this one we are doing in Petaluma, and they are not the credit tenant of the whole deal, so we are comfortable with that.

If we think in terms about incremental dollars into new developments, where you don't have sunk costs in the land, where would you like your yields to be? And maybe if you could contrast that with say where they were at the height of the development cycle the last time around?

I think if we can generate on a good infill sight returns above 8%. That is going to be a meaningful accretion to where you would buy that shopping center in the open market today, and so we would like to get 9%, but if, as I said, if we can get returns in the 8.5% range, for what we are focusing on today, which are dominant core shopping centers, especially in infill markets or markets that are tough to develop in, I think we will be doing well.

Okay, good. Thanks.

We will go next to Wes Golladay with RBC Capital Markets.

Good morning, everyone. Now that five years have passed since the market peaked are you seeing any meaningful headwinds on the renewal from those leases signed five years ago?

I mean, no. We are doing significant amounts of renewal leasing. That is the most I think we have ever done. Obviously there's negotiations, and the one thing I did mention in the prepared remarks, is during the worst times the downturn, where people had stated options in their lease, instead of just renewing them, it seemed like every renewal was open for renegotiation. Now what we are seeing a lot more, as kind of an increasing trend, is that the retailers are willing to just go ahead and sign the stated option and move on. Because they know, as Hap mentioned, the amount of second-generation space that is out there, has gotten a lot smaller.

In general if you think about it, Wes, if you have got a successful business in a good shopping center, and a good space in that shopping center, you are not going to want to relocate that business for a few bucks a foot.

Okay. Sticking with the shop space, I am trying to I guess trying to figure out when we can start pushing the rents? Would that be when you get to the 91% occupancy, so about 4% away, is that where we are looking at?

It is really dependent upon the market, and the shopping center. We have got it, and we have significant pricing power in markets like the Pacific Northwest, in the San Francisco Bay Area, Houston, Austin, and where we don't have any would be in Las Vegas, Arizona, Inland Empire and Central Valley, California. All of the other ones, it is improving quite a bit. As we are seeing fewer move-outs, more leasing activity, and our occupancy growing, and sales improving, and margins improving on the retailers, we are getting better pricing power.

And fortunately we have limited exposure to those markets.

Thank you.

We will take our next question from Jeffrey Donnelly with Wells Fargo.

Good morning, guys. Hap, if I could follow up on the question from Jim. Do you think the development yields you earned before, the 8% to 9% yields are achievable if your shop space proportion might be a bit leaner than it was in the past? Because I would expect that shift and the mix of space could potentially clip your yield a little bit from what you might have earned in the past, is that the case or do you disagree?

Go ahead, Brian.

Well, it is true, but on one hand there is not that much development going on. Where it is going on is typically more in the urban markets where there's better sales being generated for the retailers, so that is allowing them to keep their rents higher than you would expect. I mentioned the $48 rent in the Bay Area, you are not going to get that in some of the markets that are greener and don't have -- be able to generate the top line revenue for the retailers.

The other thing that is happening is construction costs are lower than they were at the peak. The cities are much more willing to work with you on fees, because they are looking for the tax revenue. So you aren't getting feed out of the game, and then the land costs have come down in most markets. So while rents may have come down a little bit, or you have less shop space, you also have better cost side.

Bottom line is we would rather have a shopping center that makes -- a core shopping center -- an infill market that makes sense to own long term, and if the return is 8, or it's 8 because, or maybe even a little below that because we are phasing part of the side-shop space, we would rather have that, than say a 10% return out in a shopping center that doesn't make sense to own long term.

I was going to say would that argue that the development pipeline as you approach the next -- call it five to ten years is probably more infill than it was in the last five to ten?

Absolutely.

And just, I guess another question just maybe building on another earlier question, talk about who is buying B and C assets out there? And I guess how they are getting finance? And do you guys think lenders are loosening up on underwriting terms there? Or has that really not changed much?

I can let Lisa and Bruce talk to the lending and the underwriting, but if you look at what we sold in this past quarter, every one of them except for one was sold to private buyers. What they are looking for, and what they like which was alluded to earlier, is the fact that most of these have no debt on them and therefore they can get very strong leveraged IRRs.

The financing must be available to stronger local, regional, and national private buyers.

Yes, but Jeff, to your question, my friends that are on the private side are still having a difficulty arranging financing that they had been used to prior, even before the peak of the market. The underwriting requirements have changed significantly. You can get financing, but as Hap said, you have got to be one of the stronger players in the markets you are dealing in.

Bruce, is there any chance to --- I'm not sure this exists --- but to get assumable debt on some of these, and actually sell them off on a highly levered fashion? Or is that just not permissible in the market today?

That again would depend upon the strength of the player involved, I think. Certainly that is something that we could do and would do, and if you are a private guy and not a public company, I think if you have got the relationships as well, you can do that. But again, all of those things are more difficult today.

As I look at the list of the people who bought these private buyers, it is not like it is just one person deciding they would like to own the shopping center. I mean up in Washington we sold a property, Merlone Geier, they have been around forever; they have a large portfolio, they are private, but they have got a lot of endowment money behind them. And Cole Capital was one of the ones that bought, so they typically are private but pretty well capitalized.

And just a last question. We actually just hosted a call I think last week of one of your competitors who called out Florida for its weakness, particularly in the small shop leasing front. I think it sort of bottomed lower, and it is turning, but still slowly. Can you guys talk specifically about what you are seeing in Florida, maybe for your portfolio but more broadly in the market?

If you had to look at one trend in our portfolio, it would be the recent strength in Florida. The unemployment rate has fallen in Florida faster -- I think it is the second fastest improvement in the country. And what we saw in the fourth quarter for the first time was real enthusiasm, real excitement. Down in Tampa, which has been a tough market, we had 15 new leases all commence on December 15th. So there is a lot of optimism and there is a level of activity in Florida that we just haven't seen in a long, long time.

That is helpful. I will follow up with you guys.

We will take our next question from Vincent Chao with Deutsche Bank.

Hey everyone. Just to follow up on the disposition side, the B&C question, private buyers are the ones buying this stuff last quarter. But can you just talk broadly about the demand you are seeing? Is that increasing of late or just kind of holding steady? Falling?

It is holding steady, I would say. We've been able -- executing on the sale of non-core properties, the properties that we are selling, there is demand, but it isn't like the demand for the A centers.

Okay. But it hasn't fallen off at all?

No, it has not. As a matter of fact, I think the stuff we are selling is still, for the most part, it's pretty decent, it's good stuff, and we just think the capital can be better utilized elsewhere as far as improving our growth profile.

Okay. And then just sort of a cleanup question. Just noticed that the TIs this quarter look like they ticked up a little bit higher than they have been trending on a per-year basis, was there just a couple of transactions that skewed that higher?

There's some of that. I mean the reality is if you look at the trend in TIs over the -- since 2009, it has been on a downward trend. This quarter ticked up a little bit, but I think it is a one quarter kind of deal, and it doesn't signify anything else. We also were giving TIs a little bit more often. So it's not that the -- for example on the renewals, our per square foot TI amount actually dropped, it is just that we gave a little bit more often than in the past. And there were several retailers or users that are big high TI demanders. We had a lot of medical, whether it is dentists or hospital, urgent care kind of concepts; Petco, which has a big electrical requirement; Office Depot, same kind of thing. There was a lot of that.

Okay. Thank you.

We will take our next question from Samit Parikh with ISI.

Hi, good morning, guys. Could you just talk about the timing of and the trajectory of same-store NOI growth this year, based on your expectations of what the changes in lease percentage and physical occupancy is going to be? And also just one beyond that as well, what are the drivers that you think would get you to the lower end of your 1.5% to 3% same-store growth guidance versus the upper end?

I will take the first part of the question. I will let Brian answer the drivers of the growth on the low end and the high end. But from the trajectory standpoint, clearly it is going to be on an incline, an upward incline with the first quarter probably being more in the range of 1% to 2%, and then you would see improvements to that each quarter throughout the year. That would then get us to the 1.5% to 3% range.

You have got the contractual rent increases in the 1% to 1.5%. That is going to be pretty well set. And it is going to depend on what is continuing to happen with move-outs and leasing. And if the trends continue it will be as Lisa described.

Okay. Great. And I guess just one more. DDR announced sort of a program where they are going to work with SCORE and the SBA and provide favorable terms to entrepreneurs and potential small business tenants in the Atlanta area right now. Are you working on something similar? Do you think that is a need? Or something as a supplement to help boost some small-shop growth and small-shop leasing in maybe some of those tougher areas that you have had?

We have had conversations with our banks in the past, and have offered that up. But when you really get right down to it, most of the demand from tenants, they have financing available. So the right tenants, and we just haven't to date found a program like that that would make sense. And financing, I don't think is an impediment to us getting from -- to getting to 94% hopefully by the end of the year, and then 95% by the end of next year.

Okay. Thanks.

Thank you.

We will take our next question from Cedrik Lachance with Green Street Advisors.

Thank you. Just going back to the small shop demand, you talked about Florida being an area of strength lately, where else do you see outside demand, and where else do you see rather a --- either a softening or levelling off of demand?

(inaudible) more meaningful --- noticeable, meaningful improvement from where we have been, would be the way I would describe that. It is moving very encouragingly in the right direction.

Yes, again, there is really -- that has been the area with the biggest change which is really what I was trying to address. I don't think anything has changed. We have had a great year of leasing throughout the year. It has just been off the charts. And that has been widespread with the exception of just those few markets that we have always talked about, and they continue to remain weak.

I think some of the other trends with regard to both the anchors and the small shop leasing would be. We are starting to see an increased move towards quality as tenants leases expire. We had a situation in Portland where Bed Bath & Beyond moved less than a mile to come into our shopping center. We had a Beverages & more! move out of Westfield Power Center in San Diego to be where the daily draw of the grocery anchored center is in one of our centers.

So I would say also up in the Northeast, we saw 125 basis point increase in occupancy, and that was despite the move-outs of Borders, A&P, and Blockbuster which hit that region particularly hard. And the other thing I think going on with them is that these move-outs as low as they were, a lot of them are done on a strategic basis it is either to get them out to make room for redevelopment. It is to expand another user. So I think those are a lot of interesting positive trends that are going on with the small shops throughout the country.

Okay. And just going back to dispositions and thinking about non-core assets, what percentage of your portfolio do you think you would like to sell over the next four to five years, in terms of the assets you consider to not have the kind of growth prospects that you would typically expect from your new acquisitions?

We will focus on 10%, but I do think the capital recycling will be an ongoing part of our port -- of our strategy for the foreseeable future.

All right. Okay. So if you look out four or five years, you would probably sell about 10% of your portfolio during that period?

That 10% could be sold under, I think the -- based upon the guidance that we gave on Investor Day, that 10% of the portfolio would be sold in a two to three-year period, rather than in the -- I think a range of $150 million to $250 million, and that would occur over -- say a three-year period.

Okay. Thank you.

(Operator Instructions) We will go next to Chris Lucas with Robert W. Baird.

Good morning, everyone. Brian, just a question, another one, on the small shop space. It sounds to me like most of the work you are doing there is through the PCI program or with those type tenants. Is that fair?

It is, yes.

So the question is what is the makeup of the -- or are you seeing any change in the makeup between sort of corporate stores and franchisee stores?

No, I don't think there is some dramatic change. The only thing that we are seeing is you have got some franchise concepts where you have got a weak program, you have got weak local franchisees, and we just tend to avoid those, but I don't think on any macro level there is much of a change there.

Okay. Great. Thanks a lot, guys.

Thank you.

And we have a question from Philip Martin with Morningstar.

Good morning, everybody. I promise I won't lead with a small shop question. But with respect to your capital recycling program, what is the average Regency holding period of these assets within your capital recycling program? How long have you held these assets?

We have to get back to you on that. It varies meaningfully.

Okay. That would be helpful. I am just trying to gauge the average hold time of these assets. Secondly, with respect to small shop space, are you seeing an increase in new concepts, or are these existing concepts as you mentioned, maybe moving around, shifting around more strategically, et cetera. Or given the unemployment issues that are out there, are you seeing more new concepts being started up and driving an incrementally higher small shop demand?

We are seeing some new concepts. We always see new concepts in the restaurant category. The yogurts, the burgers. You see things like Petco's Unleashed, which is kind of an expansion of a concept that they already have. We have heard some other ones. There is a new one out there called The Joint, which is a chiropractic place. So again, I think in all of the years I have been doing retail there's always new concepts coming out, and I think that is continuing to go on. But it is not the new ones that are driving all the growth.

Okay. And you are not seeing a disproportionate of new concepts relative to the past? It's about the same?

Yes.

Okay. Okay. Thank you very much.

And that is the last question we have today. At this time I would like to turn the call back over to Mr. Stein for any closing remarks.

We appreciate your time and interest in Regency, and hope that you have a great week, and a great Super Bowl weekend. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time.