Regency Centers Corp (REG) 2013 Q2 法說會逐字稿

Good day and welcome to the Regency Centers Corporation second-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Mas, please go ahead, sir.

Thank you. Good afternoon and thank you for joining us. On today's call, you'll hear from our Chairman and CEO, Hap Stein; our President and COO, Brian Smith; our Chief Financial Officer, Lisa Palmer; and Senior Vice President and Treasurer, Chris Leavitt.

Before we start, I'd 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. Hap?

Thanks, Mike. Good afternoon everyone. And thank you for joining us on the call.

Through the second quarter, Regency's team continued to take advantage of robust tenant demand and favorable conditions in the capital and sales markets, to execute on all aspects of our strategy and make meaningful progress towards our key objectives. Starting with our high-quality portfolio, the 5% NOI growth achieved in the first half of the year should result in annual growth in excess of 3.5%.

With respect to our development program, our roster of high-quality, in-process developments are approaching 90% leased and creating substantial value on our $240 million investments. I continue to be excited about the prospects of our pipeline for new developments. I'm also encouraged by the growing pipeline for value-added redevelopments, expansions, and renovations. The team has currently identified future projects that represent over $100 million of opportunities.

And just as critical, we are cost-effectively strengthening what is already a rock solid balance sheet, while funding our new investments through our ATM and property sales. We are gratified by these advances, but in order to carry this positive momentum through the rest of the year and beyond, our Management team will continue to focus on the key drivers for growing net asset value for our shareholders. Intense leasing and asset-management, together with the addition of high-quality shopping centers and the disposition of those that have been prioritized for sale, which will be critical to sustaining long-term growth in NOI of 2.5% or more, creating value and great shopping centers through developments and redevelopments. Astutely and opportunistically, preserving and enhancing an already strong balance sheet and a capital market environment. And as we experienced during the last 60 days can quickly become volatile and more expensive, and utilizing Regency special culture to maintain the teams high level of engagement and focus. Lisa?

Thank you, Hap. Good morning to some of you. Good afternoon to most of you. Core FFO per share for the second quarter was $0.67, this is $0.03 ahead of the high end of guidance, primarily as a result of higher net operating income. Year-to-date same property NOI growth excluding termination fees was 5.1%, with the majority of this outperformance coming from base rental income. The balance of our growth was due to the timing of prior recoveries, percentage rent, and other income.

With respect to capital markets activity, during the quarter, we raised just over $36 million through our ATM, at a weighted average share price of nearly $55. As Hap stated, this, together with dispositions, is consistent with our strategy to cost-effectively fund investments while improving our already healthy balance sheet metrics towards our long-term targets. And to that end, we raised guidance for dispositions, the high end of guidance for dispositions, by $50 million, due to the heightened visibility of selling two additional centers.

Hap also mentioned the recent fluctuations in the capital markets. I think it's worth reminding everyone that more than 50% of the $500 million of unsecured debt maturing in 2014 and 2015 has been locked at 2.1% and 2.5%, respectively. This represents 10-year treasury rates plus swap spreads. We continue to monitor future commitments in order to maintain significant uncommitted capacity on our $800 million line, which as of today, has an outstanding balance of only $5 million.

Looking ahead, I'd like to walk through the revisions to our full-year guidance for 2013. As a result of the second-quarter outperformance, we now expect same property NOI growth, excluding termination fees, to be in the range of 3.5% to 4%. The impact of base rental income is expected to moderate as we face higher comps from the strong occupancy gains we experienced over the second half of 2012. This results in an increase of $0.04 at the midpoint of the range for core FFO per share. Brian?

Thank you, Lisa and good afternoon. Our focused leasing efforts, the success of our redevelopment and ground-up developments, and our portfolio enhancing strategies produce yet another quarter of strong results. The operating portfolio made a full recovery from its seasonal first-quarter occupancy dip and closed the second quarter at 94.6% leased. The biggest improvement came at spaces less than 10,000 square feet, which gained 90 basis points quarter over quarter, and now stands at 88.5% leased.

Also, we are experiencing broader leasing demand, perspective retailers and restaurants are being less picky about the spaces they will lease, and are now more focused simply on securing a space. Increasingly, national tenants are seeking to lock in early renewals at today's rents and negotiating leverage is clearly improving for landlords. For example, it's now typical to get firm outside rent commencement dates, something that was common before the downturn, but not since. This is drastically improving our down time, which is 45% shorter today than at the end of the first quarter 2011. In fact, the average downtime is now a mere three months for spaces vacant for less than a year.

The shift in pricing power also affords us the leverage to drive rents as evidenced by rent growth of 15% on new leases. As a matter of fact, this is the ninth consecutive quarter of positive rent growth. Just as notable, these consistent occupancy gains and strong rent growth figures have led us to NOI growth in excess of 3% for the sixth quarter in a row.

Looking forward, we should continue to deliver same property NOI growth on a long-term basis in excess of 2.5% supported by embedded growth from a meaningful amount of contractual rent increases, continued interest from retailers and restaurants looking to expand, particularly into better shopping centers, the leverage gained as we achieve and even surpass our objective of 95% rent paying occupancy, and the addition of new retail supply remaining at a rate that is significantly below historic levels.

I'm also pleased to announce that our value-added redevelopment program continues to produce exceptional results. By removing underperforming operators and replacing them with proven, high-quality retailers, not only have we been able to generate high rents, more traffic, and better merchandising, we've also substantially upgraded the growth potential of our income stream. For example, at Greenway Town Center, a new redevelopment start this quarter in Portland, Oregon, we terminated the lease with an underperforming regional grocery store and replaced it with Whole Foods at nearly two times the rent. This game changing new anchor along with planned upgrades at the center's facade, parking lot, landscaping, and other common area features will create substantial value.

Speaking of Whole Foods, their operating success and plans for expansion are no secret to anyone. With very strong average store sales, healthy margins, and a top notch shopping experience, Whole Foods is an ideal anchor for shopping centers in our target demographic to attract the best-in-class secondary anchors, shop retailers and restaurants. To that end, we are excited to be working closely with Whole Foods on a dozen exceptional development and redevelopment opportunities within our pipeline.

Moving to ground-up developments, we started two projects during the second quarter and announced a third just last week. The first, Shops on Main, was covered in detail on our prior call. Construction is progressing nicely and the project is converting $15 million of land into what will be a quality shopping center that's expected to generate 12% incremental return on newly invested capital. The second, Juanita Tate Marketplace, is located in a high barrier infill market near downtown Los Angeles with approximately 450,000 people living within a three-mile radius. It will be anchored by a leading Hispanic grocer called Northgate Market and CVS. We are projecting a return of 9.2% on invested capital.

After the close of the quarter, we purchased 23 acres of land in Miami, Florida, on which we will develop a 320,000 square-foot center that will be anchored by Target, Publix, Ross, and TJ Maxx. Before even breaking ground, the center is nearly 90% leased and committed with interest for every space. Land is scarce in Miami and infill development is the only kind of development. This center is no exception. This is a dense trade area with more than 180,000 people living within three miles. It also benefits from a daytime population of 250,000, due in part to its location near the second-largest university in Florida. Perhaps more importantly, this will be Regency's first ground-up development in Miami. This gives us a foothold from which we should be able to expand our development presence in this highly desirable market.

Turning to acquisitions, the environment remains very competitive for a limited supply of A-quality product on the market. And the recent increase in interest rates has not moved cap rates for institutional quality centers in primary markets. Most buyers use low leverage and are challenged to find satisfactory places to deploy their huge amounts of capital. This makes our recent purchase of Preston Oaks even more rewarding. Preston Oaks is located in the prestigious Preston Hollow neighborhood of Dallas, Texas, with average household income in excess of $140,000. The center is anchored by H-E-B Central Market, and in its first year generated sales of nearly $900 per square foot. And also features national retailers including Gap, Pier 1 Imports, and White House Black Market. With a growth profile of 3% annually, this is a great addition to our portfolio. We look forward to adding more centers like Preston Oaks that meet Regency's strategic NOI growth and total return guidelines.

Because the buyers of these properties, especially secondary markets, are more opportunistic and rely more heavily on leverage, there could be a backup in cap rates for B centers. However, we haven't seen it yet. To that end, we sold five properties this quarter for a combined net proceeds of a nearly $90 million at weighted average cap rate of 6.7%. As Lisa discussed, we raised guidance to a new range of $250 million to $300 million due to recent leasing progress on two centers that had been targeted for sale.

In closing, with what we've accomplished over the past four quarters, we've raised the bar. Regency's formula for growing NAV is the right one, the team is highly engaged and motivated to help build on our positive momentum during the second half of the year. Hap?

Thanks, Brian. Thanks, Lisa. To wrap it up, I continue to be gratified by the dedicated effort that our team brings to the table each and every day to execute our strategy. I really like how Regency is poised to continue to grow shareholder value. We thank you for your time and we welcome your questions.

(Operator Instructions)

Christy McElroy from UBS.

Lisa, just wanted to ask a couple of questions on expenses. It seemed like your same-store operating expenses in Q2 saw a pretty big jump. Just wondering what the biggest contributors were to that rise and sort of what you are expecting for the balance of the year? And then on recoveries, you talked about timing of recoveries contributing to the quarter. I'm wondering if you could expand on that a bit.

Sure. I will let Brian add some color, if he'd like. The were some late snowstorms. I think we had a couple April snowstorms in a few regions of the country. That contributed to the higher expenses. The spike sequentially, and also year over year.

In terms of the operating expenses, they're really only about 2% higher on a controllable expenses. What we had was snow, as Lisa was talking about, last year, that was late in the year. And what we usually do is time our building improvements, painting, parking lot resurfacing, things like that, we do that when there's no snow. Usually those have been later in the year. Last year, because of the weather, they happened earlier. That will all level out for the end of the year. And then the other expenses, the was some property taxes that were higher, but the controlled expenses were only 2%.

With regards to timing, we finished our reconciliations earlier this year. So we completed all of our prior year recs in the second -- by the end of the second quarter. Last year, that was in the third quarter and it's contributing to current year income, approximately $0.02. However, we will see that reverse, because we are going to be up against a higher comp in the third quarter.

Okay. Just -- what was physical occupancy at the end of Q2?

You mean physical or you mean rent (multiple speakers).

For commenced occupancy as composed to the leased rate. What was the commenced occupancy rate? Of the portfolio? 92.9%?

92.9%, yes.

Thank you.

Jeffrey Donnelly with Wells Fargo.

I'm not sure if you agree with the approach. But if I look at the sequential change in the dollar rents you are signing on new and renewal leases, they haven't really moved a great deal over the past year. Does that imply that market rents maybe snapped back after 2009, but ultimately kind of flat flattened back out in the last year?

Well, Jeff, I'm not sure I do agree with that. I know at least on our shop space rents, those rents increased for I think it was eight straight quarters before this quarter taking a dip down. That's all shop space excluding ground lease. Sometimes ground lease has thrown a little bit of noise. But they are now at levels that -- last quarter they were the highest they'd ever been. This quarter, they backed down a little bit, I think they fell about 11%. But they are still I think where they were about second quarter 2008.

Now, the anchors, that definitely distorts things. Because, we had a 34% drop in the average rents signed this quarter with anchors. That's because 12 of them were at single-digit rents. And all but two of those are renewals with fixed increases from leases signed long ago. For example, we had a CVS at $1.85. And so I think the average anchors signed this quarter was $10.26. But we signed three or four anchor leases either in the quarter or subsequent to it that averaged about $20 a foot. So I think the average rents, especially on the anchors, distorts the picture a bit.

That obviously is not a same space reported number.

Understood. Just to clarify. I wasn't necessarily looking at spreads, per se. Just 12 months ago you guys were doing leases -- new leases at $22.50 a foot, and today they are around $23.50. They haven't moved tremendously. Maybe as a follow-up, it looked like TI dollars on small shop tenants has been rising across almost all the REIT out there. Is that a function of maybe companies cutting deeper into tougher to lease space as they mature in the cycle? Or just really just kind of a coincidence about the tenant mix?

Jeff, you look at the supplemental, for sure, it shows three quarters in a row of increasing rents. But the reality is, if you go back to the four quarters ago, that was the lowest amount of TI that we had given. It was the bottom, literally, of any amount that we have on record for how much we've given. So yes, it's been three quarters increasing, but coming off a very low base. In fact, except for this quarter, the last 10 quarters have all been below historic average. So this is the first quarter where it's ticked up just a little bit above the long-term average. And the other thing I would say about those TIs, is we are giving it significantly less often than we have in the past. I think there's like 42% or something like that this quarter.

There was one transaction that was a bit of an anomaly, a very difficult to lease space that's in California.

Space that's only suitable for a day care center. So it's part of our redevelopment. We combined a couple spaces to bring in another day care operator, and that had very high TIs. We did a PetSmart lease. The PetSmart lease always requires a lot of TIs for their electrical and plumbing. Then, we had a corner bakery that we took a lot. So we have fewer leases, we had a few that were higher, so it kind of distorts it. But overall like I said --

Close to historical averages.

We're close to historical averages.

That's helpful. Thanks.

Nathan Isbee with Stifel.

As you look at the 5% same-store growth they generated in the second quarter, can you perhaps break it down a little bit between the occupancy? What exactly was driving that growth occupancy? It was up, but it wouldn't signify a 5% plus same-store growth combined with the 5% lease spreads.

Nate, as I mentioned on the call, there is a significant amount that is related to timing. The timing of percentage rent and the timing of prior year recoveries, and also timing of other income. If you -- we do expect those to, literally, reverse. Not just normalize, but reverse for the second half of the year, and if you were to level that, we would be closer to the high 3% range.

The good portion of that comes from contractual.

Yes. A good portion of that, call it 3.8% is from base rental income and we've been through that math with you. You get 1.25% to 1.5% from contractual rent steps. Then occupancy is driving really the rest of that with our rent growth has been kind of low-single digits. So it's not contributing as much.

Okay. So when you look at the guidance increase for the full year, would you say most of that is driven by the outperformance in the first half? Or would you say that you've allowed for any, what I would call, for fundamental acceleration in the second half?

It is driven by the outperformance in the first half. Basically, with a range of 3.5% to 4% from where we are today, growth in the second half would be 2% to 3%. And I again, would point you to the same formula. If we are getting 1.25% to 1.5% on contractual rent steps, the rest is going to be coming from occupancy with a limited contribution from rent growth. (multiple speakers) And the range is we are sitting at 94.6% leased and our range for the year is down 30 bps to up 40 bps. And that's also contributing to the range of the same property NOI growth.

Did I ask my follow-up, yet?

Mike's the cop. Go ahead.

Alright. I will just jump in. Brian, following up on that, when you talk about tenants being less picky and being willing to trade down, in terms of space, at what point would you say that's going to start translating to higher leasing leverage in terms of your rent growth?

Well, I think our rent growth is already showing the leverage that we're looking for. We had 90% of our markets generating positive rent growth and I think we've shown you before that, in terms of the number of leases, it's about 75% are positive and two years ago it was 25%. So we just got still, some markets, more than anything. I would say, still Sacramento, Central Valley in Arizona are the ones that are causing the drag. So I think until those markets start improving a lot more than they have, we are still going to see a little bit of the drag.

In terms of the spaces, I think we did -- if you look at our rent growth for spaces less than 12 months vacant compared to the old method of doing it, there is a pretty big difference. I think what you see there is about 10 properties that had negative rent growth. And they averaged being down for 40 months, in some cases as long as 80 months. The fact is we're starting to see those spaces turning over and leasing, that haven't leased in years. So I don't know when that specifically translates into a higher number, but it's obviously moving in the right traction.

That actually contributes a little bit to the point that Jeff was getting to. So we believe some much more difficult to lease space, a little bit less desirable, so obviously those rents are going to be lower than our average rents in the portfolio.

Great. Thanks.

Omotayo Okusanya, Jefferies.

Congrats on a great quarter, guys. That was really good to see. First question, the potential merger between Kroger and Harris Teeter, I know it's kind of early in the process, but do you expect that to involve any consolidation and if that could potentially have any impact to your portfolio?

I think the impact is going to be -- none of us really knows what's going to happen. But if you take Kroger at their word that they're going to let Harris Teeter operate where they'd been operating, I think it's a win for everybody. Harris Teeter has a great brand in the Carolinas, in particular. The problem is, they have fairly low margins. I think if Kroger allows them to keep their brand, keep operating as Harris Teeter where they have a loyal following in the Carolinas, and then they bring their purchasing power and more savvy systems, operating systems, I think it's going to be really good for our centers, it's going to be good for Harris Teeter and for Kroger.

Up in DC, I think it's less clear what's going to happen. But I think that's where they view their engine, the growth engine being. And I'd only be speculating if I said what I thought was going to happen there. They would go in the market being number four, Shoppers Food Warehouse is number three. You can see that there might be a potential for something to happen there. If that were the case, I think that also benefits our portfolio.

I would add that Kroger has a pretty good track record of assimilating acquired companies.

In our conversations with them, they are very excited about the Harris Teeter brand and their ability, as Brian indicated, to improve efficiencies without adversely impacting the brand. So I think it's a win-win. Also in the Carolinas, we have one store where there's significant amount of overlap. That store is a Kroger store that is bigger sized than the Harris Teeter across the street, plus has a gas pad which is important to Kroger. We feel pretty good about what the impact is going to be to us. Both in general, and on a specific basis.

Okay. That's helpful. Then, just one quick follow-up call. Lisa, in this quarter, did we kind of see the same trend of just -- move outs you were expecting basically not happening? Was that also part of the occupancy gain this quarter?

Yes. I think Brian would love to share, actually, how we do prefer moveouts. I'm going to let Brian add to that.

If you look at our moveouts, they are about average for a typical quarter. But if you break it down a little bit more, I think you see some very positive underlying strength. 170,000 square feet of those moveouts were for anchor tenants who are temporarily -- had temporarily moved out while we do redevelopments or they've moved out entirely while we bring in a new one. For example, in Texas, we terminated the Randles lease on our Woodway center. We'll be bringing in Whole Foods. That's showing up as a moveout. So if you strip those out, we only have 230,000 square feet of moveouts, which is by far the lowest amount of moveouts we've ever registered in the quarter. And if you focus just on the small shops, it was the second-lowest amount of moveouts we've ever had for shop tenants. Overall, that average number doesn't tell the whole picture. I think the whole picture is really positive.

I answered on the last question, that is what is driving the outperformance for the first half of the year, which is then causing the raise for the second half.

Yes. Thank you.

Cedrik Lachance with Green Street Advisors.

I just wanted to go back to the same-store discussion. Sorry to beat that one. Just want to tile the numbers. So you talked about 1.25%, 1.5% coming from rent steps. I guess from what I understand, from your comments about 150 basis points from timing on recoveries? And then --

Recoveries, percentage rent, and other income, all of them together.

About 120.

(multiple speakers).

I'm sorry?

So it leaves us with about 200 basis points, which is primarily from occupancy. What's the increase in occupancy that's taken place? Not in the leased occupancy report, but in the command store rent paying occupancy? What's the increase that's taken place there over the last year?

Bear with us one second, Cedrik. Okay. We are about 130 basis points of effective rent paying occupancy growth.

Okay. And so did that contribute to the whole 200 basis points? Or is there a little more that came from, say, redevelopment as well?

Redevelopment was just a small contribution for the first half of the year. Same property NOI growth without redevelopments was 5%. Most of it is -- the contribution to same property growth from occupancy change really does depend on the mix and on the average rents. But call it 130 basis points if you take kind of -- if you take a midpoint of $25 kind of average rent, that does contribute the full 200 basis points.

Okay. Then, just in regards to the rent negotiating process, right now, where are you able to push most of it? On the base rent, is it on your ability to reduce tenant inducements and CapEx? Or is it on the amount of reimbursements that you can charge your tenants?

Cedrik, really, it's all those. We are obviously pushing rents, as you can see from our new rent growth numbers. Where we still -- remember, we are renewing or releasing 2008 spaces, now. So where we do have renewals that were above market, what we are seeing is we are getting lower growth, rent growth, but we are getting much better steps going forward. We are also getting -- able to negotiate percentage rent better than we used to from the anchors at artificial growth break points lower than would normally be the case. oncessions, for the most part, are just not even an issue. The only place where the tenants, right now, are really pushing back would be on control of the space, the anchors want to make sure that they protect their sales through exclusives and things like that. But other than that, pretty much the negotiations have turned totally in our favor.

The prior-year recovery is an indication of higher reimbursements that we are achieving from the tenants.

Michael Mueller with JPMorgan.

Looking, I guess, at the guidance for Q3, FFO, it looks like it's expected to be, I think it's $61 million to $63 million. Can you reconcile the $67 million and what causes the drop in Q3?

Again, I'd start with the fact that we completed our reconciliations in the second quarter and that's about $0.02. And then the rest is really timing of dispositions.

Okay. Okay. That was it. Thanks.

Quentin Velleley, Citi.

Can you just state broadly on the development pipeline, if you include the Miami project you're getting close to $300 million. Your starts are up to $125 million to $200 million this year. How should we think about the level of development you are comfortable with, and where ultimately could the pipeline move to?

Sure. With Fontainebleau, we are at $128 million of starts for developments, redevelopments, which is where the low end of the range is. We feel really good that this year we've got -- we will get up somewhere near the high end. We've got $49 million worth of high-probability ground-up developments, which we rate in part high probability because we are confident they're going to happen. We control the land. We have anchor tenant leases signed. But you never know. Something, I suppose, could happen.

And we've got another $13 million of high probability redevelopments. So that's about $190 million. Then we have another development that we think we are going to get, which that's not as certain. So that would take us up to and slightly above $200 million high-end of the guidance range. I think going forward, you can expect that we would do somewhere in the neighborhood of $100 million to $200 million of ground-up development, depending on the size of the projects, if we have a bunch of Grand Ridge Plazas or Fontainbleaus, that number is going to be large. Redevelopments and expansions, renovations, I would think that would be in the $50 million to $100 million range. I would think somewhere in $150 million to $300 million range.

A good portion of that being redevelopments and expansions.

Okay. Thanks. Just going back to Jeff's question on the new leases in the second quarter. The TI CapEx was up to about $10. It sounded like there was one lease that drove that increase. Can you give us a sense of what TIs would have been on the new leases if you excluded that one lease?

There are actually about four leases that stand out, Quentin. I mentioned the day care center. That was I think about $78 a foot. It was a big number. Then we had PetSmart lease, as I mentioned. That use, whether it's Petco, any of the pet supply guys, because they have fish tanks, they have a lot of electrical in there. They are going to have big TIs. Then we have a corner bakery and what was the other one? I think it was a salon, wasn't it? A salon. So we could probably get back to you as to what the number could be. I don't have it.

I mean, my guess it would be very much in line with historical averages.

Because we are only slightly above historical averages with this quarter. I think it would probably take you right down to it, slightly below.

Okay. That's great. Thank you.

(Operator Instructions)

Vincent Chau, Deutsche Bank.

Just a question on the leasing activity sort of broadening out and seeing better activity across the board there. Can you just share what the percentage of leases this quarter had roll ups and how that compares to recent quarters?

You mean increased rents?

Yes. Yes.

Percentage was like 75%, right?

Yes, in terms of positive rent growth, it was about 75%.

And how is that compared to sort of recent trends?

On the long-term trend, compared to starting two years ago, it's much better. It was about 25% of our leases had positive rent growth. Now, it's about 75%. Quarter to quarter may bounce around a little bit.

Okay.

But, I think it's slightly lower than it was last quarter, but long-term trend, we are seeing more and more and more leases with positive rent growth.

And again attributing some of that to some of that space that has been vacant for quite a long time.

Actually, the 73% is wrong. It was 60% last quarter, 48% the quarter before. So over the last three quarters for the spaces vacant less than 12 months, it's been getting stronger.

Okay, thanks. Then, just a question going back to the commentary about the cap rate environment and you haven't seen it yet in the B assets in terms of cap rates going up. But it reasonably could go up? Does that cause you to want to pull forward any other dispositions? I know you raised the guidance for some visibility on some deals. But any desire to pull forward some deals?

We will continue to be opportunistic and continue to look at our portfolio. We've made significant progress on those assets that we prioritize for sale and we are about to start that process right now. And I think as Brian indicated there were two assets where we had meaningful leasing progress. One of which we replaced the anchor, and we pulled those forward. So that's the kind of decisions that we will make. The team had already targeted these for sale for a while. But we wanted to wait until we had resolved an anchor issue and we did in the past quarter. It looks like we are either under contract or about to go under contract on two centers that we targeted for sale.

Okay. Thanks, guys.

Rich Moore, RBC Capital Markets.

You guys are kind of leading the pack in terms of number of new developments you are doing. Usually, what we hear is from the others, from our competitors, and the public world, is that the rents just don't make sense at this point. Why do you -- what are you guys seeing, I guess, that is leading to -- looks like a pretty good acceleration in development?

I think -- we had about $150 million of ground-up starts last year, Rich. So it's not meaningfully more. I just don't agree with that. I think what we've seen is, and we continue to see, is the place where it does pencil is in the better demographic areas where there's much more purchasing power, combination of average household income and population density. That's where the retailers can generate the sales and therefore they're willing to pay the kind of rents that we need.

So in terms of why I think we are getting more than our share, some of it is market demand. But like I said, it really is in those better areas. Some of it's financial strength, because in those areas, you've got to -- you got to have some real staying power. If you look at the Juanita Tate development, that thing has been -- we've been working on entitlements for 19 years. And Dublin, which is coming down the pipe for next year, you're facing lawsuits. Lots of money. I think one of the things is that we kept good people during the downturn, because it takes years to get these projects through the pipeline, to find them, to entitle them. Some of it is just success breeds success. It gives you credibility with sellers, particularly joint venture partners when they can see how much you've done. We're working on mentioned 12 Whole Foods developments, or redevelopments. Yesterday, we were talking to a landowner in a great area who wants to do a development with Whole Foods, and he knows that we've done probably more than anybody.

And then I think a lot of it is skill set. Avon is a property that we are going to close on later this year and start in Chicago. I think that one, if you had asked me a year ago, I wouldn't have put any money on that we would actually persevere in getting our entitlements. But the team did an unbelievable job on that one.

I think finally, it's relationships. We've got a property that we are going to be starting next year in an area that is a true work, live, play environment. Again, a Whole Foods development. That one, the relationship is with the owners of that company and in Regency, they go way back. One of them is Hap's fraternity brother. So I think the combination of those things really is what's helping us succeed.

I will say, even though we are seeing a pickup in the amount of new developments occurring, it's still well below historic averages. So there is a limited amount of opportunity there. Our focus is extremely sharpened. We, so to speak, have learned our lessons. We are developing those centers that make sense for the long-term with great anchors in great locations, primarily infill or planned unit developments when it's suburban.

And secondly, I think -- and we've been talking about kind of $100 million to $200 million, or in the $150 million range. The pickup that we are seeing is more on the development, redevelopment side. Hopefully, I think we've taken that from say $10 million to $15 million of renovations a year, to hopefully we'll be in the $25 million to $50 million, and maybe even more than that on a go-forward basis on an annual start basis.

Okay great, thank you. Great answer. Then on the acquisition side of things, is there any interest in your partners, your coinvestment partners in selling their shares? Or in you approaching them to buy their shares?

The opportunities there from our standpoint are pretty limited. From what we understand for the most part our partners -- other than the fund, which is under contract for sale, I think the opportunity is there from Oregon and CalSTRS and First Washington CalPERS are pretty limited.

Okay. Great.

Thanks, Rich.

Ki Bin Kim, SunTrust.

Could you talk a little bit about if you've seen -- you guys have mentioned the strong retail demand and it's reflected in occupancy. Has that translated into your secondary assets or markets at all?

Yes. One of the things that we are seeing this quarter, we mentioned a little bit on the call, is just how broad the demand is getting. Some of our weaker markets, like Michigan, some of our best leasing activity this quarter happened up there. We did about 12 -- I think we signed about 8,000 square foot of leases in Fenton, our project in Fenton, and 4,000 I think have been signed since then. Our State Street project up there, the in-line spaces 100% leased.

In the housing dependent markets, we've got for the first time about six properties that have hit 100% leased, that struggled here during the downturn. So I think we are seeing it in weaker spaces within the center. I will give you another example. We have a BJs up in Massachusetts and they went out. We found a replacement tenant to take about two-thirds of the space, leaving about 30,000 square feet of back. We actually got somebody to take that back space. So there's lots of examples of improvement in housing dependent markets, weaker markets, Arizona is seeing a lot more activity. The rents are still soft, but you are seeing much more activity than we ever did before.

Let me just remind you we have three centers in Arizona now. We sold one. And down to two in Michigan. So it's a very limited amount of our space and even becoming more so.

But it's still your occupancy growth that you've been reporting. Is that still predominately your better markets, better assets? Or has that -- from a financial standpoint shifted? (multiple speakers).

That's the majority of our spaces. So yes. (multiple speakers).

It is across the board. As Brian mentioned, we are seeing it in all markets.

Okay. The second question. I understand that class A, B plus assets haven't changed much in terms of cap rates. Given your significant development and redevelopment pipeline, have you guys, internally, changed the way you view IRRs? I guess more specifically, exit cap rates and have those changed to reflect, in some way, the change in treasury?

We're still -- from a development standpoint -- depending on where the development is located, where the market is, etcetera, we are looking for returns in the 7.5% to 8.5% range. And from an acquisition standpoint, we are looking for total returns -- and that's growth plus going in return in excess of 8%. And at least having growth that's going to be in excess of 2.5%, so that the properties we are buying is going to be accretive to our long-term NOI growth rate.

In both of those scenarios that Hap described would have IRRs at or slightly above our weighted average cost of capital.

The takeaway developments.

Yes, developments would be much above, acquisitions at or slightly above.

Okay. Thanks.

Jonathan Pong, Robert W Baird.

Just a quick question on the dispositions. I see Anthem Marketplace, you guys got a pretty good price on that, $59. Is there some upside that you might be leaving on the table there? What's the disposition thesis, I guess, on that asset?

I saw the press release that the buyer thinks there's upside. We wouldn't have sold if we thought there was. We had an anchor tenant, the grocer, who's sales were weak. They were not trending right. We thought that was -- represents some significant risk for us. That particular property is, I think, at the outer reach of the market, if you will. And frankly, I think it's not really that well positioned compared to some properties in the market. So beauty is in the eye of the beholder, for us it represented risk and no upside.

We hope the buyer does well, like we always have. But we have no regrets about the sale. As indicated on the two properties that we are now bringing to market, we waited until we were able to do a substantial amount of leasing before we sold. We are always making those evaluations. Look, we sold a lot of property and hope every one of our buyers does extremely well with their investments.

Got it. And then following up on Juanita Tate. I think you guys mentioned it earlier. Can you talk a little bit about how that development plays out in terms of the sweet spot of what you guys like to develop and own? I think the household income number there is much lower than what you guys typically do. Is this just sort of a vestige of what you guys have been working on for the last 19 years, like you mentioned? Or is this something we could see more of in the future?

The key thing there, when you look at the purchasing power there, what we shoot for is in excess of $200,000. That's average household income plus population density. There are I think 450,000 people, Brian, and even though the household income is typically below our $100,000 average, the purchasing power there is substantial. We've got a great grocer who's going to do very, very good. It does happen to be a presale because that's part of the deal. But we would be happy to own that asset long-term, it's got a Starbucks Coffee in there. The lineup of side shop retailers is excellent.

Yes. You've got CVS, they're paying the Starbucks, Little Caesars, Chase Bank, yogurt, dental. It is lower income, but I'll tell you what, not only does it have the population Hap talked about, but if you look at Hispanic grocer's in the area, there's not been a center built there in 15 years because of the obvious high barriers. They all do about $800 a square-foot, and not one of them, that you could point to, has good real estate fundamentals. Usually, they are not on the Main Street. They don't have good access, they don't have good visibility. They've got really bad physical property.

The other thing is, those Hispanic areas, we have not changed our strategy. I don't think you can ignore the demographics. It's not only a fast-growing part of the population, but they spend so much more on groceries. The average Hispanic household spends 46% more on groceries than the general population per week. And they visit the grocery store three times as often. So I think that is more where their priority is to spend money. And with the anchors we've got, they are attracting the best retailers. That's also true of Fontainbleau.

Getting back to a prior question, because I indicated 19 years, I think it was Rich's question. I mean, having the team, the capabilities and the persistence and dedication, this is a key part of our business. And if and when we do it right, we create substantial value. It takes a lot of hard work.

Thank you.

That does conclude our question and answer session. I'd like to turn the call back over to our speakers for any closing remarks.

Prior to turning it back out over to Hap, I'd like to close the loop on the TI question, excluding the two anomalies. So if you exclude the day care center that Brian talked about as well as the PetSmart, the TI for new deals would be $5.31.

I think $6.75 is about where it usually averages.

Thank you. We appreciate your participation in the call. Everyone have a great day. It's a busy day. We thank you for your attention.

That does conclude today's call. We appreciate your participation.