Regency Centers Corp (REG) 2012 Q3 法說會逐字稿

Good day, and welcome to the Regency Centers Corporation third quarter 2012 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, Capital Markets, Lisa Palmer. You may begin.

Thank you, Anna. Good morning, everyone. Thank you for joining us.

On the call this morning are Hap Stein, Brian Smith, Bruce Johnson and Chris Leavitt. 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 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.

Hap?

Thank you, Lisa. Good morning, everyone, and thank you for joining us on the call today.

Let me start by saying that while our properties in the Northeast experienced relatively minor damage from Sandy, we know the losses to many have been great. Our thoughts and prayers are with those who were caught in the storm's path.

Turning now to Regency's results, I continue to be encouraged by the impressive progress the team has made so far this year in all aspects of the Business. At the risk of stealing the thunder from Bruce and Brian, let me provide a quick recap.

Fundamentals in the operating portfolio and demand from retailers remain strong, as evidenced by our results this quarter. We enhanced the portfolio's NOI growth, strategic and risk profiles through the sale of lower quality assets, using the proceeds to reduce leverage, as well as acquire dominant A-quality shopping centers with superior growth prospects. The large amount of sales so far this year has substantially reduced the remaining asset centers that we have prioritized for sale. This means that in the future, we expect dispositions will be more modest in scale.

Our seven in-process developments continue to perform extremely well, featuring significant leasing progress and attractive returns. I feel that our ability to create value through development and re-development of dominant centers is an important core competency. And while progress continues to be made fortifying our solid balance sheet and access to capital, we will continue to take advantage of cost effective opportunities for enhancement.

In summary, I'm extremely proud of our team's accomplishments and gratified by our results. But in no way do I underestimate the challenges and risks presented by today's fragile economy and financial markets. You should know that despite the uncertainties we face, I feel that Regency Centers is well-positioned to sustain growth and shareholder value through the following strategic assets. Number one, our portfolio of dominant in-fill shopping centers that will produce reliable growth and net operating income. Number two, the strength of our balance sheet and cost effective access to capital. Number three, disciplined value-add development capabilities, and last, but definitely not least, our engaged and talented team.

Bruce?

Thank you, Hap and good morning, everyone.

As Hap stated, our third quarter results were very good. Core FFO was $0.62 per share, $0.03 above the high end of our guidance range. Year-to-date, same property NOI has grown 4% and continues to exceed projections. Roughly 80% of NOI growth came from increased base rent. In response to these positive results, as well as our forecast for the final three months of the year, we are raising guidance for 2012. Core FFO is being raised by $0.05 at the midpoint to a new range of $2.40 to $2.52 and same-property NOI growth, excluding termination fees, is now 3.6% to 4.1%.

Before sharing our initial 2013 guidance with you, I would like to remind you that we expect a significant -- to be a significant net seller this year, enabling us to reduce our total debt by approximately $170 million. Assuming a 6% spread between the cost of interest and the cap rate on dispositions, the estimated full year impact to 2013 is roughly $0.11 of dilution. To that end, 2013 core FFO guidance is $2.45 to $2.53. In the future, we don't expect to be a net seller. Therefore, we would expect growth in 2014 and beyond to be in the 5% range.

Turning to capital markets, we are committed to maintaining an already sound balance sheet and opportunistically strengthening it even further. Let me recap the transactions we completed during the third quarter, all of which were in line with that goal. In August, we raised $75 million of Series 7 Preferred Stock at an annual dividend rate of 6%. We used those proceeds to redeem all outstanding shares of our Series 5 issuance, providing a permanent dividend savings of approximately $525,000 every year. In September, we expanded our revolving credit facility to a capacity of $800 million and extended its maturity date by one year to September 2017 including the extension option.

In addition to our revolving credit facility, we also retained the right to draw the remaining $100 million on our term loan, which expires in mid-January 2013. Together these bank facilities provide $900 million of capacity. We are monitoring our net commitments as it relates to these facilities to ensure significant capacity remains to provide Regency with sleep at night security. And finally, during the quarter, we sold nearly $22 million of stock through our ATM program at an average price of $49.70.

Now, Brian will provide more color behind our operating results and development successes.

Thank you, Bruce, and good morning.

This quarter, we saw a continuation of the improved fundamentals that we discussed in prior quarters. We leased 1.5 million square feet of space in the operating portfolio, nearly one-third of which was new leases. Net absorption was positive and we ended the quarter at 94.3% leased and 87.4% leased for spaces under 10,000 square feet. Likewise, the pipeline of leasing activity remains strong and above our historical average, indicating solid interest in our vacant spaces. This robust leasing performance has been the primary source of our same-property NOI growth this year with base rent contributing roughly 80% of the increase. The growth in NOI was broad based across the portfolio.

Looking forward, as we approach and exceed 95% leased, more NOI growth will have to come from rent growth than from occupancy gains. This quarter, we continued to see evidence of pricing power beginning to gain traction, as rent growth was positive 13.7% for the quarter and positive 6.1% year-to-date. Much of the rent growth this quarter was due to a handful of leases for large boxes; even without these, rent growth was over 4% for the quarter and 3% year-to-date, with 80% of our leases showing positive rent growth.

Turning to our developments, our $240 million of in-process projects are performing extremely well, registering an average incremental return of more than 9% that are nearly 80% leased, creating $75 million of value at today's implied cap rate. The interest in these projects has been remarkable. For example, take Grand Ridge Plaza in metro Seattle. Today, the project is 79% leased with additional leasing activity that, if signed, would take it to 95% leased, well ahead of the estimated June 2013 completion date.

I also want to briefly comment on our capital recycling progress. In addition to the portfolio sale, we sold three operating properties during the third quarter. First State Plaza, a ShopRite-anchored center in Stanton, Delaware, and Brentwood Commons and Baker Hill Center, both Dominick's-anchored centers outside of Chicago. As with the portfolio sale, these properties were deemed inconsistent with our investment strategy and expectations for NOI growth.

We acquired one truly outstanding shopping center this quarter, Balboa Mesa, located in San Diego, California. Anchored by Vons, CVS and Kohl's, Balboa Mesa is exceptional in-fill real estate located at one of the busiest retail intersections in San Diego. With embedded contractual rent growth and very compelling immediate re-development opportunity, not only will the stabilized return be around 6%, but we also expect to see very good growth from that point forward.

In summary, the third quarter was very much a continuation of the progress that was made during the first half of the year. All aspects of our plan are coming together nicely and producing desirable results.

Hap?

Thank you, Brian.

As you know, Bruce will be retiring as Regency's Chief Financial Officer at the end of the year and this will be his last participation on a Regency earnings call. So before we turn the call over to questions, I would like to take a moment to say a few words about Bruce. He is Regency's consummate Chief Financial Officer. He has been an extraordinary leader by word and deed, he's been my wise partner and a wonderful friend. He's played a vital role in Regency's success and especially epitomized our culture and everything that is good and great about Regency.

As many of you who are on this call know from investor dinners, Bruce has a great sense of humor, to say the least. He's always unpredictable and keeps things light. More importantly, he's Mr. Perspective; he knows what is important in work and in life. Bruce, to say that we will miss you is an unbelievable understatement. However, we are comforted that your legacy will continue to guide us and that you are only a phone call away. We thank you, and know that you will enjoy and fare well in your retirement.

And Bruce, your 34 years, at a minimum, entitles you to the last word today.

Thank you, Hap. I'm humbled by your comments. However, when you offer the last word in this group, you need to take advantage of it.

This December marks 34 wonderful years that I have worked with my good friend and partner, Hap. He has been a wise leader and an incredible role model, with a personality that everyone loves. Our relationship has been very special and I can't imagine a better 34 years.

Brian and I started working together following the Pacific Retail Trust merger in 1999, but it wasn't until they moved to Jacksonville five years ago that I have really gotten to know him. Like Hap, he has also been a good friend and partner. His vast knowledge of and experience with shopping centers, his work ethic and his inspirational leadership set him apart in our industry. And 16 years ago, I hired Lisa Palmer, and we are fortunate with that decision. During her many roles at Regency, she has continued to perform like a star, most recently, as you know, in Investor Relations and Capital Markets. I admit to feeling like a proud father as she assumes my role.

As many of you know, Regency has a great culture with an upbeat and fun family atmosphere. And in my view, it also has the best associates in the Business. They are smart, professional and important to sustaining our culture. It goes without saying that I will miss the daily interaction with the Regency family. For the last 19 years, I have been privileged to know and work with a very talented and sharp group of investors, analysts and investment bankers.

Many of you were on the call this morning. A lot of you were young when I first met you; some very, very young. I have enjoyed watching you grow, develop and progress in your roles as you have assumed more responsibility, moved to other firms and maybe back again, gained the respect of the industry. And yes, I even enjoyed your asking Regency and other REITs those difficult analyst investor questions. I will also miss the interplay with you.

In 2013 and beyond, I look forward to watching Hap, Brian and Lisa take Regency to the next level. Hap alluded to my propensity to ask table questions. I won't have a question this morning, but as I turn the call over for your questions, I will leave you with a favorite three-letter acronym, QTR, or as Lisa prefers, QT. For those who know what that means, it's something to think about.

And with that, we'll take questions. Thank you.

(Operator Instructions)

We'll now take our first question from Samit Parikh.

Good morning, everyone. I wanted to just circle back to, Bruce, your comment on the 5% long-term earnings growth, 2015 and beyond. Can you quickly just go through the drivers on that? I know part of it is being net acquirers, but one thing I'm wondering is your funding plans on both developments, re-developments, the size of that every year. What you are thinking long-term and the funding plans in terms of how to fund the acquisitions going forward?

Thanks for your question. I'm going actually turn that over to Lisa because that will all be on Lisa's watch. (laughter).

I think he enjoyed doing that. Yes, as you think about our business model, we've communicated in the past and we'll continue to be committed to development. We would like to average approximately $150 million in new starts every year and in terms of funding that, as you know, we've been an active capital recycler. We would also like to continue to do that also in the, call it, $150 million range for acquisitions and dispositions.

To the extent that -- and also, as you know, we did implement an ATM; we filed it in August. To the extent that we're able to access the equity market at an attractive price to match fund our developments, we will do that. If that's not available to us, then our disposition proceeds would fund our development commitments first, and acquisitions would follow only to the extent that we have the available capital. So if you think about the 5% growth, if you average 2.5% same property growth, leverage that and then get the incremental growth from the developments that are coming on line because we're developing them on a very accretive basis, that will get you into the 5% range.

How do you think about G&A growth on top of all that annually, as you're expanding the asset base?

I think that we plan to monitor G&A very closely, and we would expect that G&A shouldn't increase more than 3% a year.

Okay, thank you.

So in effect, we'd be growing our earnings, our top line, our bottom line, at higher rates than our G&A has grown.

And we'll now take our next question from Michael Bilerman with Citi.

Good morning, and Bruce, certainly wish you all the best. It's been great having you, and 34 years, it's amazing that -- of what you've brought to the organization. You are certainly welcome to be on this side asking questions with me if you ever want to get back on a Regency call.

(laughter). Only because Mike John has done that to you for years now.

I had a quick question about guidance, both as we look into the fourth quarter and also into next year. Can you help to walk through, if you did $0.62 in the third quarter, you're looking at $0.55 to $0.59 in the fourth. I guess I was surprised by that drop-off.

I recognize you sold the assets in, I think it was late July, so there's a little bit of drag from that. But typically, your percentage rents will come up a little bit, your rents are doing well, your occupancy is high, your recovery rate is within the average. So I guess the decline is a lot more than I would have thought sequentially, and so maybe you can just walk through how you get from today down to the midpoint.

Then as we move into next year, especially with no sales, I'm not sure how you get to the low end, or what's driving that sort of low end of guidance. It would seem that you should be able to be in excess, and Lisa, I know you want to [peak] in your first year as a CFO, but maybe you can help us reconcile those things.

Sure. The first part, from the third quarter to the fourth quarter, we talked on the call about being a net seller and reducing leverage by -- in the prepared remarks, rather, for about $170 million. But if you look at our guidance for the remainder of the year, you'll see that we're still expecting some acquisitions to come through, so the amount that we're a net seller at this point in time is actually much greater than that. So that has more of a drag on the earnings and that we're expecting the acquisitions to happen later in the fourth quarter.

So that will get you to the difference in third quarter to fourth quarter, and that also helps for the run rate for next year. To the extent that we're able to execute on those acquisitions, that NOI will come on line. In addition to that, 3% NOI growth is about $12 million a year, and so that will also -- we're going to begin to see leases commence rent paying and we're going to see that growth take hold in 2013.

So in terms of, we're sitting here in the first week of November, how much -- you have $145 million at the higher end, $150 million of additional sales baked into the fourth quarter and upwards of $150 million of acquisitions. When does that $150 million get sold for it to be such a -- we're talking about a $0.07 sequential -- a $0.05 sequential drag 3Q to 4Q. Just seems like a pretty big drop.

Yes, you just take the -- if you just assume that it happens in the middle of the quarter, which would be in the middle of this month, now that we're already in November.

Right, so do you have $150 million that are ready to be closed in a week?

We have -- actually we have about $120 million that are expected and are on the market. Whether they actually close, I cannot predict that.

So it would seem that the guidance is conservative then, at least into the fourth quarter.

If it happens, then it would not be conservative. We would be within the range.

Okay, thank you.

Unfortunately, I am not able to predict at this time if it all will happen so we have to give a range of expectations. And that's, therefore, why we have a low end and a high end. To the extent that we don't execute on the dispositions, then we would be towards the higher end of the range. If we do, we would be more towards the middle to potentially the lower end.

Okay, that's helpful.

Thank you, Mike.

And we'll now take our next question from Joseph Dazio with JPMorgan.

Hey, guys. Wonder if you could talk specifically about what drove the $0.03 upside to the top end of the range in the third quarter?

It's basically all -- 80% of it was NOI, even in the same property growth. Same property growth was above our guidance for the quarter, and also above our expectations.

Was that a function of the rents being up fairly notably in some of the new leases that hit in the quarter, or was there something else that caused that?

No, I mean, when you think about rent spreads, the impact of those don't happen immediately. You may want to check how other companies do it, I think there's a mixed bag. We report rent spreads at execution of the lease, not necessarily at rent commencement. I think -- I do believe that's what the majority of our peers do, but there's some that may report it at rent commencement. But the primary driver of the upside was better leasing than expected and fewer move-outs.

Okay, thank you.

Thank you.

(Operator Instructions)

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

Thanks. Just to stay on the theme of NOI, can you give me a sense of what is the gap between leased space and occupied space this quarter, versus what it was last quarter?

Cedrik, leased space and rent paying?

Yes.

It's 200 basis points, and that's 50 basis points better than it was last quarter.

Okay, sorry, so you were 250 last quarter, and now you're 200 this quarter?

That's right.

Okay. Just a completely different track here, next question. In regards to land values, as you think about development, as you go out there and try to acquire land, what do you think has happened to land values over the past year?

It depends on the market. In California, coastal California, I don't think land values had really fallen that much at all. And other markets, if you're in secondary markets, tertiary markets, I think they clearly have fallen. In the places where we're looking, we still see land values fairly high.

Okay, and if you were to compare it versus the past 12 months, have land values changed or they've just been stable for an extended period of time?

I think they've been pretty stable. What's happening is you are seeing some cost increases on the construction costs, both materials and labor, probably about 10% in the last 18 months or so, and then what you're also seeing on developments is yields compressing. There aren't that many good opportunities out there, and those that are ready to go, I think we're seeing some pretty intense competition.

Okay, thank you.

Thank you, Cedrik.

And we'll take our next question from Rich Moore with RBC Capital Markets.

Hello, good morning, guys. First thing I would like to, Bruce, add my congratulations and my first question is actually for you. If I wanted a good bottle of red wine, what would you recommend?

I would never suggest a good bottle of red wine without you buying Wine Away at the same time, Rich.

(laughter). I had a feeling you'd say that. Okay, I don't know, Lisa, if you're going to give me two more questions on top of that, or just one, so I'll ask this one first. On the small shop leasing front, you guys are obviously making some pretty good progress. Is that coming, you think, more from actual leasing or is it the sale of assets that have more small shop vacancy? And then going forward, do you think you will be selling some small shop vacancy, as well?

This year -- or this quarter, our gain in occupancy was from the capital recycling, but we're 200 basis points up quarter-to-quarter in the small shop -- I'm sorry, year-to-year, and last quarter, if you had measured, I think we were 280 basis points higher. So it's coming from real leasing.

As you know, the first three quarters of this year is the best leasing we've ever done, and last year was a record at the time, as well. So it's real strong demand, the tenant sales are very good, their optimism is back. The lack of new supply is certainly helping us, so it's genuine demand, Rich.

Okay, and then -- (multiple speakers).

Follow up on that, we studied what have been the ingredients of successful shopping centers, and the amount of side shop space through up and down markets has not been an issue for the better shopping centers, the A-centers that have performed better. So we want to own shopping centers where we're not afraid of the shop space, and we think we can merchandise it and where we think we're going to have merchandising and pricing power on a go-forward basis.

Okay, so going forward, Hap and Brian, I would assume that you are saying that you think the small shop leasing will actually continue to be steady.

Yes.

The second question I have is on the grocery store business. You guys got any thoughts -- maybe broader thoughts on what you're seeing with grocers and how you view the grocery business right now?

I think that the grocery business is extremely competitive. The traditional supermarkets that aren't dominant in their market are not doing well, and they're losing share, obviously, to Wal-Mart, to Costco, to the higher end supermarkets, et cetera. So our focus is three-fold. Number one, it's the dominant, traditional supermarket that's got a dominant share like a Publix in Florida, even Safeway in California, so we look at that; Kroger in a lot of markets.

Then secondly, the upper end supermarkets or grocery stores, especially supermarkets like Whole Foods, like Trader Joe's. In both cases, they're generating very productive and generating significant amount of sales. And then thirdly, the locations, and most important of all, the locations that as Brian says, if something bad happens, we are going get the space back and be able to re-lease it to a better operator.

So overall, you feel pretty good about your grocery exposure at this point.

Yes, but it's something that we watch very rigorously and monitor all the time. It's a changing landscape but we feel, in general, very good about our real estate and/or our operators.

Okay, great. Thank you, guys.

And we'll now take our next question from Paula Poskon with Robert W. Baird.

Thanks, good morning, everyone. Apologies if I missed this in your earlier comments. Could you explain why the 2013 projected development completions, the amount, was revised downward a little bit?

I don't know the exact project that may have fallen out, but I'm happy, Paula, to get back to you on that.

Okay, thanks, and then --

The only thing I can think of is we pulled something forward, if 2012 came up, because our developments are performing well in line with expectations. In fact, they're also exceeding expectations, so I'll get back to you on that.

That very well could have happened.

Thanks very much. Then just to follow up on the first question about G&A, maybe just to ask it a little bit differently, how scalable do you think the existing platform is? How much could you grow the asset base without a substantial investment at the corporate level?

We could meaningfully grow the asset base without a meaningful growth in G&A.

I'm sorry, let me just come back to you. I have the guidance page in front of me, and that's exactly what happened. We actually increased completions for 2012, so we brought one forward.

Thank you.

As Lisa said, our developments are performing extremely well.

Okay, and can you just quantify what meaningful means? Could you double the portfolio, or 50%, or --?

Well, I think that it's a very scalable business, and I think we could easily grow it by 20%, 25% with de minimis increases in G&A. We're not looking, although if we can grow smartly and in a way that's going to grow NAV, it's something we would like to do. But as far as growth for growth's sake, is not an important objective here, but I would say that we feel that we have the capacity to grow very efficiently. Especially -- if you can look at our footprint, and the fact that we have 17 offices throughout the country, we're well postured throughout the country to build on that platform if the right opportunities, both on the investment side and on the finance side, present themselves.

Thank you very much.

Thank you.

We'll take our next question from Jim Sullivan with Cowen.

Thanks and good morning. First, wanted to make a comment to Bruce. Bruce, we've worked together for a long time, you've always been an absolutely great guy to work with. I think you're a class act and we're certainly going to miss harassing you every 90 days or so, so make sure you keep in touch.

Thank you.

And I have a couple of questions, I guess, for Brian and Lisa. First of all, Brian, when you talked about the leasing business in the quarter, you cited a couple of transactions that were a little unusual but helped to drive that rent spread. I'm just curious, and I think when you commented about that, you talked about large boxes and I'm just curious whether -- where we are in terms of coming off the bottom.

Back a year or two ago, there was obviously a lot of large box vacancies you had to fill, and a lot of that has been done. And there's been some commentary that some of the weakness in development starts was the result of the large box availability that was out there. I'm just curious if you feel pretty confident that, given the increases in occupancy rates across your portfolio and the industry as a whole that we are going to see, perhaps a -- I don't want to say material, but maybe a meaningful increase in development starts as you look out over the next year, and what the implications are for yields on development?

I missed the last part, Jim. The outlook for what?

The outlook for the yields on development. Obviously, they -- you've had a number of the big boxes we've been hearing at ICSC conferences and otherwise, have been reluctant to step up and pay the kind of rents that you guys need in order to get acceptable yields on development. And that was especially the case given that there was a lot of vacancy to be had in the first case.

Now that that vacancy has pretty much been eliminated or is back down to more historical levels, are the tenants feeling confident enough about their business to step up to the kind of rents you need to get acceptable yields and ramp up your development?

Well, let me start with our portfolio. We only have 10 boxes left, and it totals about 300,000 square feet. So when you look at ours and you look at it in the bigger picture, I think what you are seeing here is a microcosm of what's happening across the country, is that the top space is gone, and what we have left is going to -- we're going to have to -- it's going take a little longer to get through that.

Because of that, you are seeing the boxes looking for external growth, because they haven't been able to get the same kind of growth as they had from taking second generation space. I think a good example of that is Dick's. Dick's has always been one of those operators that took second-generation space, and we're doing several deals with them in first-generation space. The issue is where will they do and what will they pay, and they really go hand-in-hand. The only place they are going to pay the rents that can support new development are where they can generate the sales, and that's more in the urban areas.

So I think that's really the governor right now, that's keeping development down, is they're just -- not only are developers having trouble with financing the equity requirements, but new development requires,, to your point, the kind of rents and those rents can only be generated, not in the secondary and tertiary markets. So I don't think you are going to see a big explosion of development at all, at least not in the next 12 to 18 months.

To what extent also, kind of a follow-up on the same question, the ability to do greenfield developments in new housing communities. To what extent as we have begun to see a ramp in single family permitting, does that lead you to maybe be a little more confident as well that on that side of the development opportunity spectrum, you will have more opportunities over the next year or two?

I think what you'll see in emerging residential markets is we'll only probably do it the way we're doing it at Grand Ridge and Cinco Ranch, where those are master planned communities with high barriers to entry, extremely high at Grand Ridge. They've already got enough homes to support the retail, which, I think, is a different approach than happened at the peak of the market when people started tying up the retail land and building on the anticipation of those homes coming.

Jim, the question I didn't answer that you asked earlier was the outlook on returns. And I would say for the kind of places we're looking to build, I would say the norm is probably in the 8.5% range, which is still probably about a 60% profit margin given exit cap rates.

Okay, very good. Thank you.

(multiple speakers). -- areas, obviously were lower than that.

Thanks, Hap.

Thank you, Jim.

And we'll take our next question from Tammi Fique with Wells Fargo Securities.

Hi, good morning. I just wanted to come back to the rental rate growth guidance given. Obviously, there was a big swing, in part due to the big increase in the third quarter, 13.7%, but has something changed in the last 90 days to give you and your team more confidence in pushing rents? Have you reached an inflection point in occupancy?

We have in some markets. I think in 60% of our markets, we're now 95% leased or more. I think things are turning the right way for us. With that 95% occupancy in those markets, we're gaining more pricing power; supply, demand tightens. We've now got six quarters in a row of positive rent growth, and as Hap mentioned, 80% of our markets and 80% of our leases had positive rent growth.

This quarter was unusually strong. It's unusual that we would find that many anchor leases with the kind of growth that we had. Those were all really in anticipation of re-developments, but even without those, we were positive. As I said, low- to mid- 4% range and our shop space was positive.

So I don't think there's a massive change, I think it continues to be an improvement in the fundamentals. And going forward, I think you would expect to see rent growth in the next 12 months, probably in the mid-single digit range.

I think we're kind of halfway there. Mid-single digit rent growth on our way to 10% rent growth, hopefully, maybe not next year, but hopefully, the following year, 2014.

Okay, and then last quarter, you talked about strategic move-outs. Does that continue to be a part of your strategy?

It's definitely part of the strategy, and we're exercising it far more often than we have in the past. As occupancy tightens up, and as the demand continues to be strong, wherever we've got those place holders, as we call them, that we put in there -- when we gave them rent concessions, we are moving them out when we have a tenant that we view as a significant upgrade in quality and/or quality.

Lots of examples of that this quarter. Quiznos has been a struggling chain, and we got rid of several of them in the portfolio this quarter. For example at Hollymead, we replaced them with a better operator and the sales are five times higher. We did it in many other locations where we not only got better operators, but we got nice double-digit rent growth.

Okay. Just flipping over to dispositions, of the $120 million that seem to be on the cusp for sale or being marketed, what -- are those being sold individually or is that a portfolio?

Those are being sold individually.

Okay, and then your recovery rate has been ticking up each quarter, and now it sits above the guidance range for the year. What should we expect going forward?

Remember, I think we've told you all in the past that as occupancy increases, we basically see a like increase in recovery rates. And also a credit to our team, we've done some things that have allowed us to increase our recovery rates and hopefully, our tenants are not listening. So I think you would see, from a same property recovery rate, we're close to 78%, and we would expect to maintain that.

So you will be above the guidance range that's in your supplement?

Again, if you look at -- there's been an improvement each quarter, and the range is 76% to 78% -- I'm talking same property only.

Okay.

And we would expect to continue to see that strong recovery rate.

Okay, great. Thank you.

Within the range.

Thank you.

We'll now take our next question from Vincent Chao with Deutsche Bank.

Hi, everyone. Just a follow-up on the disposition question, just sounds like you're selling -- the rest of who you're selling this year is the individual assets. Just wondering what you're seeing as far as the sweet spot for demand for sort of non-core assets in terms of geography, as well as the size of the assets and that kind of thing.

Did you say for non-core assets?

Right.

You know, really, what people want is the [assets] is they're looking for returns. So what they're hoping to do is to be able to buy them at say, 7% on existing income, 8% on existing income, then if they can get that up to 9% through re-leasing, then they're real happy. I think the pricing is typically -- it depends on the quality, but anywhere from at the higher end of the B spectrum, maybe 7%, and at the lower end, maybe 8%. Then in terms of markets, you know, we're -- I don't really see that much of a difference. We don't have anything in places like Arkansas and stuff like that, so I think there's pretty much -- people are looking for opportunities in any markets.

Okay, and then in terms of the total size of the deal value, is it like a $50 million is the sweet spot? A little bit less than that?

I'd say it's less than that, although when you look at who we have been selling to, we've been selling to private buyers, private REITs, pension fund advisers, investment advisors and other retailers. We've got two properties we've sold now to grocers, so it all depends. Obviously, the pension funds would probably look to put out more money; the private buyers would be looking at more in the probably $20 million, $25 million range.

One of the key things is what's financeable, and I would say that the so-called commodity product of what's available for financing from a CMBS standpoint has expanded meaningfully, maybe not dramatically.

Okay, that's very helpful. Just one last question on the quarter. I know we have talked about it a lot, and most of the upside sounds like it's coming from better operating performance, but just wanted to confirm. Were there any expense items in the quarter that might not be recurring going forward? True-ups, that kind of thing?

No, nothing out of the ordinary.

Okay, thank you.

Thank you.

(Operator Instructions)

We'll now move to Steve Sakwa with ISI Group.

Thanks, good morning. Bruce, congratulations, and I'm sure you'll enjoy the QTR as you move into the next phase of your life.

Thank you.

I guess I had a question, you guys talked a lot about the leasing spread, so I will turn my attention, maybe, more to the just the acquisitions and really, the institutional partner market. You guys have a lot of different institutional ventures, and we've seen other companies be able to take advantage of those as built-in acquisition opportunities. I'm just wondering what kind of discussions you might be having with the existing partners as to their exit plans, and if you thought some of those might materialize sooner rather than later.

I'll take that. When you think about our partners, we really have a few really major partners. We've got GRI, which is First Washington, and CalPERS, we have CalSTRS; the State of Oregon. They're our really -- they're our most significant partners, and every single one of them has the same objective of holding real estate long-term as we do. They may be in a recycling mode, for example, Oregon, again, similar to the Regency strategy. The other two, we'd like to grow rather than be a source of acquisitions for Regency.

We do have the fund properties, and we had talked earlier about potentially selling those, even this year. It has been decided that we're going to hold those for at least, call it the medium term, so there are no opportunities at this time for us to grow through acquiring properties from any of our partnerships. If anything, we may incrementally grow those that have the demand. If you will recall from a couple quarters ago, CalSTRS recently committed an additional $100 million of equity to us, which is a vote of confidence in our partnership.

Well, I guess that kind of leads to maybe the second question. What is their appetite, Lisa, and have their return hurdles changed, or what kind of product and what kind of returns are they asking you to look for? What's in their wheelhouse today?

Exactly what Regency would be looking for, and as we've had conversations in the past, we are -- we have a rotation basis, if you will, for acquisition opportunities. And we are obligated to show our acquisition opportunities to CalSTRS and to the State of Oregon, and then Regency would be the third in that rotation. And to the extent that, for example, we bought Lake Grove earlier this year, to the extent that maybe it's a larger asset or a new market, we may look to one of our other partners to co-invest with us, but that's at our option. And we did do that with GRI for that asset.

But to the extent of what they're looking for, their objectives are aligned with ours. So our acquisitions team is out there in the market, and they have the same mandate, and it's blind to who will be the actual acquirer of that.

Having consistency of that purpose, we think makes it a lot easier on our acquisition team and our management and leasing teams.

Lisa, if I can just ask you to be a little more specific, financially, range of cap rates or IRR hurdles would be what for those kind of institutional partners?

Steve, if you can call them and ask them and get them to give you a number, we'd love it. They're actually -- they're never that specific, right. Real estate is going to depend on each and every asset, but if you think about what we've talked about, we're looking at -- look at our -- the asset we just bought in Southern California in San Diego. It was going in approximately at 5%, but with the potential re-development -- well, the actual re-development, we're going to be able to grow that, stabilize yield close to 6% in incremental return on capital north of 8%. That gets you to, call it, an IRR un-levered in the 7% range, and I think that that would meet a hurdle today.

Okay, thank you.

We'll now take a follow-up from Michael Bilerman.

Brian, just on the leasing in the quarter, just page 23 of the sup, can you just peel back the onion a little bit on the 220,000 square feet of new leases? I think you talked about how big box and clearly, just by the term of 16 years, can you just give a little bit more color on that 33% rent growth? It doesn't seem like PIs were anything big at all to get those leases, and sort of what it represented?

Sure. Well, with regard to the rent growth, that was all -- we've got about five re-developments coming up, Michael, and there's seven anchor tenants that are part of those re-developments. It's just taken those from very old -- for example, down in south Florida, we have a Publix-anchored center and a Walgreens, and those are just very, very old leases, and we're writing new leases and actually giving them new spaces and just taking them up to market. There was like about 170,000 square feet of those, and the weighted average rent growth was about 180%.

I'll just add color that despite that rent growth, even if you -- when you strip those out, rent growth was still positive 4% for the quarter, 3% for the year, and over 80% of our leases had positive rent growth.

Right, and we can see that in the renewals you've been marching up. Was there anything particular in the renewals for those to be up 5%, or that's continuing the same trend? And your TIs are down also, only at $0.18.

That's right. There's nothing unusual there.

Just one quick question just on bad debt. It's still extraordinarily, the provision for debt, doubtful accounts. It was up over last year, it's still year-to-date lower than where you were. Is there anything in this quarter's number that we should be mindful of, or was it really just 3Q '11 being awfully low?

Yes, it was more of '11 being low. There's nothing unusual. Generally speaking, our tenants are much healthier. There aren't any surprises.

Okay, thank you.

Thank you, Michael.

(Operator Instructions)

We'll take another follow-up from Samit Parikh

Hi, just following up on the question about the recovery rate. Back in 2006, 2005, just asking a different way, your NOI margins were still materially higher than they are today. I understand that as occupancy increases, you should see that coming back. Do you think that your margins as you increase closer to 95% plus occupancy, can go back to where there were five years ago, and is that part of your long-term NOI growth model?

We're not seeing any significant changes in terms of actually recovering operating expenses. To the point about margins, and we've talked about this internally, ground leases, actually, are in the expenses line item, so it actually negatively impacts your recovery rate. And we recently have acquired a couple of properties that are on ground leases, and that unfortunately, is a permanent change for as long as we own those properties. So maybe we can do a better job of disclosing that to help you get to more sustainable recovery rate, and it's something we'll talk about internally. Because there's no significant change in terms of actual margin on operating expenses. If anything, from -- if we were to get back to 95%, I would say we've improved that.

Okay, that's helpful. Thanks.

Thanks, Samit.

And it appears there are no further questions. I would like to turn the conference back over to Mr. Hap Stein for any additional or closing remarks.

We thank you for participating on the call. Have a great weekend, and we thank you, Bruce.

And that does conclude today's conference. We thank you for your participation.