Regency Centers Corp (REG) 2013 Q1 法說會逐字稿

Good day, and welcome to the Regency Centers Corporation First Quarter 2013 Earnings Conference Call. Today's conference is being recorded, and at this time I would like to turn the conference over to Mr. Mike Mas. Please go ahead, sir.

Good morning, and thank you for joining us. On the call with me this morning are Hap Stein, Brian Smith, Lisa Palmer, 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 forward-looking statements. Please refer to the documents filed by Regency Centers Corporation with the SEC, specifically the most recent reports on forms 10-K and 10-Q, which identify important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements. I'll now turn the call over to Hap Stein.

Thank you, Mike. Good morning everyone, and thank you for joining us on the call today. As you'll hear from Lisa and Brian, we continue to make good progress in all aspects of our business.

Our operating fundamentals remain strong, and our portfolio is realizing the benefits from its inherent high-quality, particularly the infill trade areas that enjoy supply constraints and substantial buying power from average household incomes and population densities that total 200,000, as well as highly productive grocers with sales that averaged $27 million and over $500 per square foot; robust tenant demand from retailers, from restaurants, and from service providers, combined with the limited amount of new supply; the replacement of weaker tenants that were weeded out by either the recession or operations team, and we're replacing them with stronger and better operators; the enhancements to the portfolio, from developments, acquisitions, and sales during the last three years; the significant amount of leasing and net absorption accomplished last year, specifically in our smaller-sized spaces; and the positive impact from distinguishing the appearance and merchandising of our centers through hands-on maintenance and well-conceived redevelopments and renovations.

The result was 5.1% growth in NOI in the first quarter of this year. Our in-process developments were nearly 90% leased at quarter end, which especially satisfying given the construction while on schedule, was only 50% complete. Furthermore, the pipeline of high-quality infill developments is encouraging, and the potential for value-added redevelopments is growing.

Regarding our ongoing portfolio and NOI enhancement efforts, we are seeing an increase in demand for non-institutional-quality centers. Although there are very few A-quality shopping centers in the market, our team is working diligently behind the scenes to source acquisitions. I expect their efforts in our two dozen attractive target markets to produce some gems that will meet our stringent criteria for quality and growth.

Our balance sheet is rock solid, and the markets for raising capital and selling shopping centers are favorable by any historic standard. Since these conditions won't remain in effect forever, we will continue to take advantage of opportunities to cost-effectively fund our developments, redevelopments and acquisitions.

Brian, Lisa, and I recognize that a positive single quarter or even a year does not meet Regency's standard for success. Much still needs to be accomplished, particularly meeting our near-term objective of 95% leased. But we remain confident that the portfolio will soon return to the milestone -- that milestone -- and repeat our 1999 through 2008 track record of consistent annual NOI growth that was never below 2.5%. To sum it up, Regency is well-positioned to sustain growth and shareholder value. Lisa?

Thank you, Hap. Good morning, everyone. As Hap stated, we are pleased with our first-quarter results, which out-paced projections. The continued strength in operating fundamentals, coupled with higher recoveries and percentage rent, lifted net operating income by 5.1%. This level of NOI was the primary driver of the $0.02 beat on the high end of our first-quarter guidance.

With respect to capital markets activity, we issued 1.2 million shares during the quarter through our ATM program. This resulted in net proceeds of just over $62 million, which is pre-funding the $350 million of forecasted new investment activity, which includes the cost to complete our in-process developments and redevelopments, and development starts and acquisitions. This issuance is consistent with our strategy to cost-effectively fund new investment activity. The additional benefit is the further improvement of our healthy balance sheet metrics, bringing us closer to our targets.

Subsequent to quarter end, we entered into an agreement to sell all the assets owned by our closed-end fund, of which Regency owns a 20% interest. We expect that the sale will close in the third quarter, but the timing is contingent on the lender consent process, with six of the nine assets encumbered by secured mortgages. Once closed, the partnership will dissolve.

Lastly, I would like to walk through the revisions to our full-year guidance for 2013. In response to the continued strength in operating fundamentals, we now expect same-property NOI growth, excluding termination fees, to be in the range of 2.5% to 3.2%. It is important to note that approximately two-thirds of the same property NOI growth of the first quarter did come from base rent. The other drivers -- other income, recoveries, and percentage rent -- are expected to normalize over the remainder of the year. Additionally, although the impact of redevelopments added 30 basis points in the first quarter, the expected ramp-up in redevelopments later in the year will take some NOI off line, and will moderate 2013 growth from this point forward. We're really looking forward to realizing the benefits of this activity in future earnings.

Additionally, we increased guidance for dispositions by $15 million at the mid-point. This was somewhat impacted by the agreement to sell the fund's assets, as initial guidance included only a probability that the properties would sell by the end of the year. But as you'll hear from Brian in just a little bit, it was mostly a result of the increased visibility of our development and redevelopment pipeline, as well as the improvement in demand and pricing for shopping centers.

Based on these market conditions, we believe there's an opportunity to dispose of lower growth assets as part of our funding strategy, and remain consistent with our goal to enhance our ability to deliver same-property growth on a long-term basis in excess of 2.5%. Combined, all these factors result in a range of $0.02 to the bottom end and $0.01 to the top end of the ranges for both core FFO and FFO per share. Brian?

Thank you, Lisa. Good morning, everyone. For the last five quarters, our portfolio has performed at a level consistent with Regency's high standards. I believe this is a testament to its inherent quality, robust tenant demand, coupled with a limited amount of new supply and the significant strides that our talented team is making enhancing the quality of the portfolio at the property and tenant levels. We leased nearly 1 million square feet of space this quarter, roughly a quarter of which were new leases. Although volumes were down compared to last year, remember, the 2012 was a record year from leasing. It would be difficult to sustain those levels, especially as we approach 95% leased.

That said, tenant demand and the leasing pipeline remains strong, so there's still room to run. As a matter of fact, leasing velocity has consistently increased every month this year, including April, with the vast majority being small-shop space. While we did experience a seasonal decline in occupancy, it was not historically significant. A good deal of our move-outs were the result of the operations team taking a much more proactive approach to evicting weaker tenants in order to upgrade them in terms of credit and merchandising.

Once more, pricing power is returning in nearly every market. This can be seen in our rent growth, which is positive 5.4% for the first quarter, including almost 15% on new leases. Our team is working hard to push rents, and is now benefiting from the leverage to do so. Matter of fact, over 80% of the new leases showed increases, and the average small shop rent signed during the quarter of $28 per square foot was above pre-recession levels.

Turning now to developments, the $190 million of total in-process developments are already approaching 90% leased, with projected returns on deployed capital approximately 88%. This is in spite of the lower returns and higher costs at Grand Ridge. The return for the superior centers are vastly higher than if acquired, and will represent value creation in excess of $70 million. The pipeline for new development bodes well for our ability to start close to $150 million, both this year and in 2014. In addition, we would expect to annually add another $25 million to $40 million worth of developments and expansions.

Looking ahead to the second quarter, we began construction on the first phase of Shops on Main, located along the main retail quarter of a Chicago suburb. The 148,000-square-foot community center has a solid lineup, with four anchors and letters of interest or viable interest for much of the side-shop and out-parcel space. With this start, we will be putting nearly one-third of our remaining land held for development into production.

On the acquisition front, the number of high-quality shopping centers on the market is down substantially. For those that do come to market, there is intense competition, with multiple offers being made. As a result, our team continues to focus on off-market transactions. We have a modest pipeline of opportunities for our two dozen target markets, where the teams had a good deal of success in prior periods. As of today, we are under contract on $30 million of acquisitions.

At the same time, there is an increasing demand for non-institutional properties, which is narrowing the price gap between higher- and lesser-quality shopping centers. If this holds true, it should certainly help us on the disposition side; and we got a taste of that better pricing after quarter end with the sale of Deer Springs, marking our official exit from the Las Vegas market. We received multiple offers, and ultimately accepted pricing with a 6.75% cap rate. In closing, the positive start to the year gives me confidence that we can accomplish our key objectives for 2013. Hap?

Thanks Brian, and thank you, Lisa. In closing, I feel that the first quarter was a real good way to start the year. I continue to be gratified by the dedicated efforts and creativity that our team brings to the table each and every day to execute our strategy. Much heavy lifting needs to be done, but we are poised to grow net asset value per share and shareholder value. We thank you for your time, and welcome your questions.

Thank you.

(Operator Instructions)

We'll take our first question from Christy McElroy with UBS.

Good morning, everyone. Lisa, if I think about your Q1 FFO of $0.64 and your Q2 guidance of $0.62 to $0.64, what are some of the factors that are built into that range that could cause your FFO to be down sequentially, whether it's timing of move outs or something else? What impact is assumed for captive insurance process on other income? I think that's a Q2 thing, right?

I'll start with actually the run rate. The $0.64, and then the range of $0.62 to $0.64, there isn't that much of a sequential decline. But again, I'll come back to the fact that we were 5.1% same-property growth for this quarter, and we're expecting -- our range for the remainder of the year is 2.5% to 3.2%, so we are expecting some of it to moderate. That would be -- that would have a negative impact. At the same time, we would expect to have lower G&A for the quarter, because as you'll note, year over year, we're about $2 million higher, and that's almost directly related to a lower amount of development, overhead capitalization -- and as Brian mentioned, the Schereville start, as well as some other potential expected starts. We would expect capitalization to normalize. So the north of the run rate to hit the G& A of $60 million to $63 million for the year will occur in the second quarter.

With regards to other income, yes, you're correct. We used to recognize the captive insurance income in one quarter; we're now recognizing that on a monthly basis, so it's going to be more even throughout the year. In 2012, our other income was north of $10 million. The first quarter of this year it was, I think -- I believe it's about $2.2 million. It's -- that's a pretty good run rate. You would expect that to be flat. The difference being first quarter of last year, we were less than $1 million, so we just had an easier comp for the first quarter.

Okay. Brian, with regard to ground-up development starts, can you talk a little bit about the markets that you're targeting, the anchors that are driving some of those starts, and what kind of yield are you looking at? What's changed over the last year or two with regard to your confidence in leasing up small-shop space?

Sure.

And that's on small.

I'm sorry, what?

Leasing-up small-shop space on development.

Okay. Well, we'll with start with the anchors, you talked about the anchors. In terms of what we're working on right now that our at least I'd say in the high-probability category, we have six or seven Whole Foods projects we're working on. Actually, about three of those are redevelopments, so on ground-up it would be about three or four Whole Foods, three Publix. We've got a Mariano's that we hope to start this year in Chicago; Northgate, a Hispanic grocer in urban LA, and possibly a King Sooper and a Fresh Market.

In terms of pipeline, we feel really confident in our ability to hit what's in the guidance. Returns right now look like they will be about 8% for the year. If you looked at that on an incremental basis, because share goes coming out of land held, it would be about 9%.

In terms of what's gives us confidence, we're building in infill markets. We're building in the Washington DC, Miami, coastal California, Seattle -- so large, high-barrier markets where -- there's limited new supply coming on anywhere, but in those particular markets it's very tight, there's strong retailer demand, and we're right-sizing the amount of shop space we build. I think we mentioned on the call that we are approaching 90% on our in-process developments, even though it's only about 50% funded. Really, that's consistent with what we've done since the down-turn; it's just the right-sizing and building in the right areas.

Great, thank you.

Thank you, Christy.

Nate Isbee, Stifel Nicholas.

Good morning. Just two quick questions. You mentioned that the redevelopment in the rest of these areas is negatively impacting the same-store NOI. Can you quantify how much that is impacting, let's say on a normalized basis without the redevelopment, what you're saying your NOI would come in?

Sure. The first quarter would've been 4.8% -- as I mentioned, it was a 30-basis-point impact without redevelopments. For the full-year forecast, we're expecting it basically to have zero impact. So it's going to go from a 30-basis-point positive down to flat.

So there's no negative impact there, where you're taking --?

Not negative. It's just that we're going to lose the positive impact in the 5.1%.

Okay, great. Following up on the development, you talk about renewed opportunities here with the Whole Foods, et cetera. How many of these deals would you say are old deals that you're taking out of storage, versus new opportunities that are arriving at this point?

Nate, I look at our total pipeline for 2013 and 2014, and there's only one, maybe two -- there will be one next year. So they're almost all new opportunities.

Except for on the redevelopment from.

Yes.

Okay, so these are deals that you have newly sourced, not even like you are monitoring them, working on them, without taking the land down prior to the crash?

Well, not entirely. We'll start one here this year in urban LA that I mentioned with the Northgate. That one I started working on 20 years ago before coming to Regency, so it's been something we've been working on a long time. But I would say you're right, the vast majority of these are all newly sourced. But let's say newly -- we've probably been working on all them for at least a minimum of two years, maybe one is new this year.

Okay, thank you.

Thank you, Nate.

Rich Moore, RBC Capital Markets.

Good morning, guys. It seemed like there was a lot of interest from big-box retailers, from grocers, et cetera, to expand and open stores -- wasn't enough good space. Looking again at developments, I mean, are these guys willing to pay the rent now? Is that what's changing, or are you seeing something interesting, I guess, from a more macro development standpoint about what's going on out there?

Rich, as I look at kind of what the reasons are for the lack of development, several things. First of all, the acres had many options, I think is where you were headed. That second-generation space was plentiful and it was far cheaper. The new developments didn't pencil in most areas because the retailers were being really careful about their sales projections. The lack of housing growth obviously prevented people from expanding out in the suburbs; but even if there was housing growth, the retailers weren't opening stores out there. They're opting for the infill, and then of course capital is tough.

I'd say what's been changing lately is separate second-generation space is clearly not an option. The retailers are getting more aggressive on rents, although they're still focused on infill. In the areas where we want to develop, the cities are still very tough in terms of the fees and the other costs. Though housing is improving, again, that's not what's driving the new development so I think more importantly what's happening is the retailers do want deals. They are much more aggressive, both in terms of the number of stores they want to open and the rents they'll pay. But it has to be the right areas. In those -- I think that's what's driving it, mostly. I think in the areas, again, where we want to develop, though, you better have a lot of capital, because as I mentioned, the cities are tough, the approvals are going to take a long time, there's no lay-ups there. You had better be prepared for a long haul on the pre-development expenses.

Okay, so you're saying, Brian, that the -- well, previously they, the key retailers, probably wouldn't pay the rents or didn't want to bump up their rental expectations. Now maybe they are willing to do that, so we can see maybe a beginning of a boom in development again?

No, I think what I was trying to say, Rich, is they are getting more aggressive on the rents, but it's still in areas where they can count on a lot of purchasing power. Again, it remains the infill and more affluent areas; and the ability to get those is not great, because again, the small developer one, doesn't have the capability to pursue all the pre-development costs and the risks that you have to do; and the capital is still tight.

What you're seeing in terms of development out there, we just had a meeting of about three of the leading retailers, anchors who would drive development, and talked to them about what they're seeing across the board. What they were saying is the opportunities for the grocers are often in the mixed-use projects as part of multi-family. One of those leading anchors is doing a lot of self-development, and you're seeing a lot of stand-alone. So where there's opportunities to -- there's just not that many opportunities for them to get new stores, so when they have the right kind of opportunity, they will step up and pay the rents. So I think you will see more development, but until the banks loosen up and the retailers start going in less difficult places to develop, it will still be pretty muted, I think.

Okay, good. I got you, thanks. Then on redevelopment, I wasn't sure I understood exactly. Were you saying there would be an additional $40 million you thought of redevelopment-type activity on top of the basic development starts you think you'll do?

$25 million to $40 million of redevelopments, yes.

So ground-up is what we've been talking about on top of that, redevelopment's $25 million to $40 million.

Just to -- I'll just add from a more technical standpoint, we've modified our guidance on -- I think it's the third page from the end in the supplemental, where we give our starts for the year, to now include redevelopments. We didn't restate the past years, if you will, but so the $125 million to $175 million of new expected starts in 2013 includes redevelopments.

Okay. And what does that look like, I guess, going forward? Do you guys have a lot of redevelopment opportunities? Is that something you see getting bigger, or I guess how do you look at that?

We do have a lot of opportunities. They aren't that big, any individual one. What they are is they are everything from like you're seeing in -- like we did at Heritage in Southern California last year, which is a major renovation of the entire center; to other situations where we're doing a second phase on a development that maybe we started several years ago; to doing just some creative things, like we're doing a carriage gate in Tallahassee where we got control of the Winn-Dixie box that had been sub-leased to TJ Maxx. So we got -- that unleashed a whole new redevelopment that allowed us move out a tax collection agency and move in a Trader Joe's. A lot of that kind of stuff, each one is different. Sometimes it's adding GLA. Sometimes it's just creating value and other of manners.

The $25 million to $40 million is a significant increase from what we've been doing in the past few years.

No, exactly. Yes, exactly. Okay, great. Thank you, guys.

Michael Mueller, JPMorgan.

Hi. A couple questions. On Deer Springs, the cap rate was 6.75% below the 7% to 8% range you have in for guidance. When you're thinking about the -- I guess the Regency Retail Partners sale, other stuff that may be in the queue, does it feel like you could be at the bottom end of that range, in terms of the cap rates?

Mike, we absolutely could.

Possible.

But there is a range for a reason -- as I kick Brian under the table. (laughter)

Okay. Maybe sticking with something on the JV topic, I mean you have a JV unwind, a sale in the process. Is that just kind of a coincidence? Why now? Is there something maybe a little bit bigger picture going on where you're trying to unwind some of this -- shrink that business, and bring more on balance sheet, or is it just pure coincidence?

It really is a pure coincidence. Charter Hall -- they've been attempting to exit the US -- we're into the third year or fourth year of their strategy, and it's just taken that long to do it. I think you'll recall the fund was originally an open-end fund that was put in place to be the take-out for our community center developments. Unfortunately, we know what happened with developments and how much the leasing slowed down, even with what we had in process. So with the partners in that fund, we converted it to a closed-end fund, and have really been working on an exit strategy ever since.

Although it is a coincidence, we do think that reducing the number of partnerships is a good outcome.

Got it.

We love our partners, but I think that reducing the number makes more sense.

Okay. So there could be visibility to seeing a few more announcements like this over the next couple of years?

No. There's -- no.

We wouldn't expect any changes to what we -- to the partnerships.

Hap's referring to these specific two.

These two, which would take us down to four in size.

Okay, thank you. Got it, thanks.

Paul Morgan, Morgan Stanley.

Hi, good morning. Just on the -- you mentioned 13 or 14 grocery-anchored projects. Are those -- is that what constitutes the -- if I'm trying to reconcile that with that $150 million number in '13 and '14, are those -- if you did all of those, would the number be higher? Are there any projects that are not neighborhood-grocery-anchored, but maybe more larger-format power centers?

We wouldn't have what I would call a power center. The one that we started first quarter is a little atypical. Again, that's the Schereville Shops on Main coming out of land held, and that right now does not have a grocer in it. It's got Gordman's department store, TJX's HomeGoods concept, Ross, and DSW Shoes. There is a possibility that a high-end grocer will go there; the question is we're just kind of evaluating whether we want to do it. But to get to the numbers we're talking about, there are a couple of larger projects -- Schereville would be one of them, and we have another one coming in south Florida that will be -- you'll have some community anchor-type center, or community anchors, but it will also have a neighborhood component with a leading grocer.

I mean --

So every one of the developments has a grocer right now planned for it, except for the one that just started; and as I said, we may put one in, in a later phase.

From a size and scope related to new developments, I think that was all included as far as the pipeline for '13 and '14.

All those projects are basically kind of in those numbers when you get to $150 million per year?

Yes.

Okay, great. Then I think you talked about this a little bit, maybe just get a little more clarity. What really drove the boost in same-store NOI sequentially from last quarter to this quarter as you look in the year. What did you see that came in differently or stronger?

Again, approximately two-thirds of it did come from base rent. That's a result of the leasing that we did last year. Our percent rent-paying tenants is up pretty significant -

Wouldn't you have already known that, though?

I'm sorry, Paul?

Wouldn't you have already know that last quarter? I'm trying to see what is the delta, and why you raised guidance?

Oh, I'm sorry. I thought you were asking me to explain how we opened 5.1% to 2.5% to 3.2%. It's just a matter we're four months into the year, we have more clarity, move outs are always the things that our the most uncertain; and we had a lower-than-expected number in the first quarter.

Okay, great.

It's as simple as that.

Samit Parikh, ISI Group.

Lisa, just a question. How does the bond market play into your funding plans for this year, comparatively, to using the ATM? Are you thinking about sort of something similar to what some of your peers did in terms of raising a larger -- raising a $250-million-type bond issuance to pay off, or call a later bond, but since the rates are lower today, it's sort of a neutral on FFO and you raise cash?

You may recall from the last quarter call and also the K, that we did put into place a couple of forward-starting slots to mitigate and to lock in the interest rates of today, so we would have no need to do it early.

That's for '14 and '15.

For '14 and '15 maturities. Unless something changes in terms of other investment opportunities, we wouldn't expect to hit the bond market until April 2014.

Okay, that makes sense. I guess thinking about sort of strategically how you envision the size of the Company going forward, and the kind of continuous de-leveraging that you're doing here by using your ATM, et cetera, are you positioning the Company in a way to make sure you're always flexible for maybe a very large-scale acquisition that may come to the market? Or are you -- do you not envision that for Regency? Are you happy with sort of the asset size of the Company today?

Well, just kind of in general, our view on size is that bigger isn't necessarily better, and bigger isn't necessarily bad. So the key thing is growing intrinsic value per share. I think that our funding strategy to me is basically highly cost-effectively fund our current and potential and visible future investment activity, and I think today we've got two attractive alternatives, and that being sale of low-growth assets, and last quarter we tapped the ATM program.

So there's two levers that we've used in the past, and I think an outgrowth of that cost-effective funding strategy is that it has improved our financial ratios. As a result, the balance sheet has gotten stronger -- and we do want to have a balance sheet that can take advantage of those opportunities when they appear, whether continued growth of our development program or attractive high-growth acquisitions. If there is another financial crisis, we want to be able to not only survive that, but also thrive in a period like that.

Okay, thanks.

(Operator Instructions)

Vincent Chao, Deutsche Bank.

Sorry to kill the same-store NOI question, but I just want to recap here. So the 5.1 %, two-thirds of that is from better ABR, which sounds like it was lower move-outs than expected, and then the other third of the growth was sort of CAM-related and percentage-rent related? But then I guess since the occupancy guidance is the same, are we to assume that you're just taking the move-outs that didn't happen in the first quarter and you're moving them into the balance of the year? Is that -- and are the expectations for the balance of the year different from what they were previously?

First of all, I said two-thirds of it was from ABR, which isn't just necessarily from lower move-outs, it's from the leasing that we completed. So we have a higher percent rent paying. The difference from the last question is that was expected. What was better than we expected was the lower number of move-outs, which caused us to raise our guidance. So that's the only change. Then the other things are some of the things that were in the first quarter only that will normalize during the year which is moderating growth -- it was the timing of percentage rent, and recovery rate, and the lower comp and other income. So as those moderate, that brings us back down to the 2.5% to 3.2%.

It is hard to predict timing on move-outs. It's gotten -- and our team is being much more proactive, as far as -- as Brian mentioned -- as far as evicting weaker tenants; and we're even signing leases, assuming that we are able to move out those tenants.

Okay, that's helpful. Just going to the comps are at a non-institutional have seen some increased demand -- that's something we've heard from a number of folks over the course of the quarter here. Can you just comment, what is the spread you're seeing right now between institutional and non-institutional, from a cap-rate perspective?

I'd say about 175 basis points.

So if you compare that to a year ago, that would be more like 200, 250, something like that?

I think more like about 200.

250, yes.

Okay. Thank you, that's helpful. I think you'd also commented that -- just in terms of the development demand, it's really still in the infill area, and you're seeing some willingness on the retailers' part to pay higher rents for the right locations in infill markets. But we have also heard from others that they're also starting to -- some of the increased demand in the non-institutional seems to be that there's more leasing activity in that area, and maybe some of these guys that are not as willing to pay up are taking more of the non-institutional space, as opposed to paying for developments. Is that consistent with what you're seeing? It seemed like your comments were maybe a little bit different from that?

Well, again, it's going to depend on where. We are working on a property in one of the better markets in the San Francisco Bay Area, and we've got restaurants and shops lining up to pay $60 a square foot, and we have probably 2X the amount of demand as we have supply. In that one, clearly stepping forward and would rather be at that center that we would the other non-institutional ones.

Okay, and just maybe some final clean-up kind of questions. One, did you guys say what the commence rate was this period? I don't know if I missed it or not?

Vincent, this is now number four. If you would like to get back in the queue, we'd love to have you get back in there.

Sure. No problem, thank you.

Thanks, Vince.

Tom Lesnick, Robert Baird.

Honing on percentage rents for a minute. What percentage of your small-shop tenants are currently paying percentage rent, and how many more are close to hitting the break point?

I don't have that number for you. But I would think on the small shops it would be a very small amount. What happens is when you set those, the natural break point, which would just be their rent divided by the percentage factors, so if it's $20 rent and it's 2%, you divide the $20 by the 2% and that becomes your break point. Most retailers cannot hit that for several years. There is an exception, we have an anchor in a redevelopment we did last year that hit it big-time first-year. But typically it's your anchors going to hit it, because they will have much longer-term leases, where small shops have short-terms.

Right. Then I know you previously mentioned the timing and percentage rents was contributing to the NOI guidance for the rest of the year. How should we think about that cadence during the quarter?

Well, we do provide guidance for percentage rents, and we've received almost half of it -- at least on the low end. As you think about the rest of the year, you can assume that we'll get another call -- call it a third to potentially a little bit more in the fourth quarter, with a little bit in between.

All right, and then kind of a big picture question. Looking out three years, which of your markets do you expect to be strongest and weakest, and why?

I would say we've got two dozen very attractive target markets. The coastal markets are performing well, our Texas markets of Houston, Austin, and Dallas are performing well, including Denver. Atlanta is on the way back. Our markets in North Carolina are doing extremely well. Our Florida markets our starting to exercise a comeback. So we feel really good about the canvas under which we're investing and operating.

Thanks, guys that all I've got.

Thanks, Tom.

Tammi Fique, Wells Fargo Securities.

Hi, I just wanted to follow up again on the move-outs. Just kind of curious the same property leased rates fell from the fourth quarter to the first quarter for spaces under 20,000 square feet. I guess is that reflective of move-outs that maybe occurred toward the end of the quarter? Maybe just trying to get some color around that.

I'll go first and Brian can add color. Again, we're talking about guidance and how we performed versus our guidance. We expected more, so they were lower. We still had some, as Brian talked about, but not at all significant on a historical basis. The percent -- the drop in percent leased on the small-shop space, I'll let Brian talk about that, because that had to do with spaces that were more in the 5,000- to 10,000-square-foot range.

Right. In terms of the comment about your historical reference, we generally add occupancy -- always add occupancy in the second, third, and fourth quarters; and we lose occupancy in the first. That loss has averaged typically about 30 basis points. In this quarter, we were about 20 basis points. It was actually better than historical for it. In terms of the loss in the small shops, that was really driven by the larger small shops, if you will -- the ones from 5,000 to 10,000, as opposed to less than 5,000. We had 130-basis-points decrease there, and a lot of that was as a result of chain-wide bankruptcies like Fashion Bug. They average about 7,000 square feet, we lost three of those, some large restaurants and the like. Whereas the small shops less than 5,000 square feet it was just 40 basis points.

Okay, and then sticking with the move-outs, are the trends for the second quarter better than you perhaps would have expected at this point?

I'm sorry, was that for development?

We're only one month in, so it's a little too early to comment on that yet.

Okay, and then turning to the Grand Ridge development, the yield on that project is down about 100 basis points in the last six months. I know you talked briefly about it in your opening remarks, but I think last quarter you talked about the city demanding some upgrades that maybe weren't originally budgeted. Is that what drove the construction cost up another $7 million this quarter, or is there something else going on there?

Well, I can actually -- last -- I was basically telling you things that were happening after the quarter end. Last quarter, I believe we had some cost increases related to changing some ground leases to build-to-suits, which were NOI and return neutral. But in terms of this year, yes we had -- or this quarter -- we had I think $7.3 million of cost increases. Really what was happening there, it was just a perfect storm of several things coming together, much of which were outside of our control.

I put those in three categories -- the first one was unusually severe weather, even by Seattle standards, where it not only rained a lot, but it just didn't stop. So the soils never got a chance to dry out and it just became saturated. Ultimately, that led to the on-site stormwater management pond overflowing, and it flooded the entire site. We had to bring heavy equipment on that could not only pump the water off site, but first has to treat it, so that you're not pumping 30 water off-site. We had to haul off other soils, dry soils, cement-treat the pads, re-do the erosion control -- so a lot of it was that severe weather.

Then secondary cost increases that were outside our control were those city-imposed costs, and there are a couple categories of that. One were the fees. There's the schedule of fees that's published by the city and it just -- they didn't adhere to it. They just went beyond that for traffic medication and for other fees. Then they not only upgraded the design standards on a lot of things that we had designed, like demanding canopies on all sides of buildings, but in landscaping, hard-scaping, but actually added scope. So they added, for example, a tiered plaza area that we didn't even have in our proposed development. The final thing was just the construction cost increases, which we are seeing around the country. They're little more severe up there, because it is such an anti-growth environment that you don't have many subs, so there wasn't very much depth to the bidding.

But at the end of the day, I think the development program is under control. We've done 12 projects since 2009, and if you strip this one out we are actually over $2 million under budget, including East Washington Place, which is also on the West Coast. At the end of the day, Grand Ridge Plaza is still going to have about a 200-basis-point spread over the exit cap rates, and that thing is 96% leased and committed, and we're working on LOIs for another 2%. It should be great project, I don't mean to diminish the importance of the cost, but as I said a lot of those were outside our control.

Okay, great, thank you.

That does conclude today's question-and-answer session. I would like to turn the call over to our host for any closing or additional remarks.

We appreciate your participation in the call, and wish that you have a great rest of the week. Thank you very much.

That does conclude today's call. Thank you for your participation.