Regency Centers Corp (REG) 2014 Q1 法說會逐字稿

Greetings and welcome to the Regency Centers Corporation first quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I will now turn the conference over to your host, Mr. Mike Mas, Senior Vice President, Capital Markets. Thank you, sir. You may begin.

Good morning and welcome to our 2014 conference call. Joining me today is our Hap Stein, our Chairman and CEO; Brian Smith, our President and COO; Lisa Palmer, our Chief Financial Officer; and Chris Leavitt, Senior Vice President and Treasurer.

Before we start, I would like to address forward-looking statements that may be discussed on the call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in 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 will now turn the call over to Hap.

Thanks, Mike. Good morning, everyone. Thank you for joining us. Regency's talented team continues to perform well, executing our strategy. First, building on the enhanced and intrinsic quality of the portfolio in its better pricing, occupancy and merchandising power to sustain annual average NOI growth of 3%, even as we've achieved 95% leased. Second, profiting from our expertise to deliver annual average starts of $200 million of high quality developments and redevelopments at attractive returns on invested capital. And third, maintaining a strong balance sheet that now compares favorably to other blue chip companies by cost-effectively match-funding investments.

As we shared with you, the positive condition of the portfolio, development program and balance sheet has allowed us to pivot from being a net seller. Any further enhancements to the portfolio and balance sheet will be achieved organically and opportunistically. The progress on sustaining 3% NOI growth at 95% leased is evidenced by this quarter's double-digit rent growth.

The underlying fundamentals not only remain strong but are continuing to gain momentum. Our team is keenly focused on increasing the frequency and amount of rent steps, growing rents, and moving the percent leased beyond 95%. Their efforts in achieving NOI growth in excess of 3% for the third consecutive year and in the future are being aided by the historically low level of new supply, robust tenant demand and health, and particularly the inherent quality of the portfolio.

The development results and prospects continue to exceed our high expectations. Regency's ability to create exceptional centers in our target markets at meaningful margins to the cost of acquiring centers of comparable quality is a driver of significant value. Despite an environment that remains supply constrained and intensely competitive, we continue to win more than our fair share of a limited number of development opportunities that meet our high standards. Our success has allowed us to increase development start guidance for 2014. It is also worth noting that we have nearly $90 million of redevelopments in process and the potential to commence more than $50 million next year.

Now, I want to share thoughts on how he would are addressing the changing retail environment due to technology driven shifts in consumer behavior, demographics and alternative delivery channels, most particularly the rise of millennials, social networking and e-commerce. Due to the strength of the portfolio, particularly its demographics and anchor tenant sales, the recent elimination of virtually all of our weaker centers, the addition of many fabulous new centers, including a meaningful amount now anchored by specialty grocers like Whole Foods and Trader Joes, and the necessity-convenience orientation of the tenant mix; there are many reasons to believe that the portfolio should perform well in the changing environment.

At the same time, given the dramatic changes that are taking place, we are not going to stand still. We need to continually take a fresh look at our shopping centers and operating systems to ensure that we will have a portfolio that not only survives, but more importantly, thrives. Future developments, redevelopments, acquisitions and sales will continue to play a role in keeping our portfolio relevant.

But also key to this is Fresh Look, our three-pronged initiative that includes merchandising to Best in Class retailers and restaurants that are injecting more energy into our centers. And these retail areas and restaurants are also effectively utilizing social media internet strategies to drive sales, adding place-making features using architectural and design elements to make centers more inviting that increases the shopper dwell time, and connecting our retailers and our centers to our surrounding neighborhoods and our communities.

While we are still in the early innings with much to be accomplished, our teams have really embraced this critically important initiative. Brian will offer some examples of how Fresh Look has already positively impacted the portfolio. Lisa?

Thank you. And good morning, everyone. Financial results exceeded our expectations for the first quarter with core FFO of $0.69 per share and FFO of $0.71 per share. Operating percent leased declined by only 20 basis points since the end of the year as a result of lower than normal seasonal move-outs. And it is up 60 basis points when compared to this time last year.

Same property NOI growth, excluding termination fees, was 2.9% for the quarter, driven primarily by higher base rent. This was achieved despite the increase in snow removal costs resulting from that never-ending winter which many of you experienced firsthand. Fortunately this increase in expenses was mostly offset by a resulting increase in tenant recoveries. However, without the resulting increased net expense, it is important to note that same property NOI growth would have been above 3%.

Quickly on G&A, the first quarter was slightly below expectations due to the timing of capitalization related to development starts. We continue to anticipate finishing 2014 within our full year guidance range of $57.5 million to $60.5 million, which we initially introduced to you back in December. This implies a quarterly run rate of approximately $15 million.

Turning to full year guidance, we increased core FFO per share by $0.02 on both ends. This change was primarily attributed to the delayed timing of dispositions. We also increased FFO pre share guidance to a new range of $2.68 to $2.74. It now mirrors the range for core FFO per share as we recognized the gain in the first quarter on the sale of a parcel of land. This gain effectively offsets the other reconciling items between the two measures.

Operating results were generally in line with expectations for the first quarter, causing percent leased and full year NOI growth guidance to remain unchanged.

As Hap said, due to the progress we made converting the development pipeline into starts and the heightened visibility of additional targeted developments and redevelopments, we increased our guidance for 2014 by $40 million. Consequently, we also increased disposition guidance by the same amount. We are highly confident that we will successfully execute match funding of our development spend with dispositions of non-core assets.

As a reminder, our guidance doesn't assume any acquisitions. Should we acquire any additional centers they will be done on a basis accretive to NOI growth and these will be funded with additional sales of lower growth assets with roughly comparable cap rates. As always, equity issuances will be considered as alternative when our equity is favorably priced in relation to our view of NAD.

Lastly, we plan to capitalize on what continues to be a borrower's market as we address our outstanding line balance and April bond maturity. Included in our current projections is a $250 million bond issuance on which we have already hedged our base rate exposure. Brian?

Thank you, Lisa. Good morning, everyone. As Lisa and Hap both said, momentum continues to accelerate through the first quarter of the year. What stands out most this quarter is that rent growth returned to double digits, at nearly 12%. Moreover, the strength is broad based with positive growth in every market and with both anchors and shops contributing in a meaningful manner. This strength reinforces the fact that leasing leverage is in our favor and not only allows us to push starting rents, but also to increase the amount of and frequency of embedded rent steps.

It also reflects our changing perfective on the moveouts. More than ever we welcome them as an opportunity to both upgrade our tenant mix and to drive rents. While we did experience a seasonal decline in occupancy for the first quarter, it was well below historic norms, especially for shop tenants whose moveouts were particularly low for a first quarter. This follows the record low level of shop moveouts for both the fourth quarter and for all of 2013. This trend has also continued into April and exemplifies the improvement in both the quality of the portfolio and the tenant base. Given the limited supply environment and robust demand for space, I'm optimistic about the team's ability to drive the same property portfolio beyond 95% leased.

As Hap indicated, our Fresh Look initiative, which includes aggressive asset management focused specifically on merchandising, design and place-making to shopper experience and connecting our centers to their communities is starting to gain traction throughout the portfolio. Our teams continue to find ways to improve our centers, making them unique and more exciting places to shop, thus enhancing the customer draw and resulting in better sales for our tenants. We have had much success adding Best-in-Class retailers, restaurants and high-end fitness facilities.

For example, we are bringing Mendocino Farms, a highly successful gourmet sandwich and salad restaurant that currently has seven location within the Los Angeles area, to our center in Westlake Village, California. Mendocino Farms is not your typical sandwich shop. The restaurant offers Farm to Table seasonal dishes --

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-- and shares how to purchase ingredients used in their menu items directly from local farmers' markets. With its coveted reputation in southern California and its focus on offering fresh dishes and a unique experience, Mendocino Farms is a transformational tenant that has already helped us attract other outstanding retailers and restaurants to the redevelopment.

And after taking a Fresh Look at a center in Atlanta, the team saw an opportunity to upgrade the tenant mix by terminating an existing lease. They identified an exciting four-unit restaurant chain in the Northeast called Bartaco and convinced the owners to open their first location in Atlanta. Bartaco is a high volume and very socially interactive tapas restaurant that is all about the experience. Not only will this tenant be a valuable upgrade to the center, but it will also provide significant rent growth.

We're also bringing Fresh Look into our ground up developments, showcasing it this quarter with our most recent start, Persimmon Place, a 150,000 square foot center in the Bay area, anchored by Whole Foods, Nordstrom Rack, and HomeGoods. We've taken a keen focus on place-making in our design efforts, so as to promote increased dwell time and make the center more of a gathering spot for locals. For example, Whole Foods will have a tap room inside its store that will serve a wide variety of local and regional craft beers, as well as a large outdoor seating area with a fire pit and an elevated platform for live performances. While we're still putting the final touches on the design, this center is going to have a unique and strong appeal.

As we have in many of our recent in-process developments, we will also be seeking LEED certification at Persimmon for excellence in sustainable design and construction practices. Since 2009, we've completed $300 million of developments and redevelopments that are either certified or pending LEED certification. This is one of the many ways in which we continue to incorporate sustainable practices throughout our operating and development portfolios.

We also executed a lease with Whole Foods at one of our in-process developments, Shops on Main, in suburban Chicago. As a result, we increased the scope of that project, adding a Whole Foods building and an additional 20,000 square foot shop building in response to a substantial increase in demand. This project is already 90% leased, even after the expansion.

During the first quarter, we opened Juanita Tate Marketplace in Los Angeles. The center's grocer, Northgate Gonzalez, described the store as an incredible success, with the highest sales for the first ten days in their chain's history. The center is 98% leased.

Finally, all of the recent development projects continue to demonstrate impressive results. Of the 11 projects started as of 2009 and since completed, seven are 100% leased and collectively the projects are more than 98% leased. This tremendous leasing progress combined with compelling returns reinforces our belief that right-sized and focused development makes a lot of sense. Hap?

Thank you, Brian. Thanks, Lisa. I'm extremely excited about the positive momentum being created from the underlying fundamentals together with the quality of our portfolio, our value-added developments and redevelopments, the strength of our balance sheet, the talent and engagement of our management team, and industry-leading operating systems, like Fresh Look and Greengenuity. We thank you for your time and we now welcome your questions.

Thank you. (Operator Instructions). Our first question is from Christy McElroy of Citi. Please proceed with your question.

Good morning, everyone. Now that you closed on the Fairfield portfolio, can you talk about possible additional investment opportunities with Clayban? I know they own a lot in Fairfield County which is a target market for you for acquisitions.

Well, we are all set up to do a lot more with them in the sense that on their existing properties we have a right of first refusal for the shopping centers that are up there. So if anything happens there there is an opportunity that we can take advantage of that. In addition, we are looking at various ways to add additional value to what we have already done. We have -- we know one of the centers there is an opportunity to eventually put together some space to create a specialty grocer who has been looking in that market for a long time. And we are looking to buy an adjacent property to one of the centers that would allow us to increase the density. And then there is some densification which we can do on the existing centers including buying a pad, turning it into a multi-tenant pad and adding to what we have already got.

And then to the extent they find that completely unrelated development opportunity we have spoken about doing it together. But we don't have anything lined up right now.

And then Lisa, I'm not sure if I heard you correctly. I think you said that you would think about issuing equity if it was viewed favorably to NAV. What is your view of NAV today versus where the stock is?

That is not that fair of a question. The way we would think about it is we have probably 20 plus analysts that cover us. And I would say a consensus cap rate is sub six. So I think that that is probably a fair way to -- that certainly gets us in the ballpark.

So you would think about issuing equity today where your stock is today or you would wait?

If it was in -- with an applied cap rate of sub six, we certainly would be considering it. And everybody is going to have different methods of valuing our developments in process and our third-party fees. But the majority is going to come from NOI.

Thanks, Lisa.

And, once again, depends on use of funds and alternative sources.

Got you.

We haven't issued equity to date.

Thank you. (Operator Instructions). The next question is from [Jake Harlington] from Green Street Advisors. Please proceed with your question.

Great, thank you. Brian, you are one of the most active developers out there. And I wanted to get your thoughts on how you think about what type of grocer you are slotting in some of these new centers? And I ask because there is a ton of dislocation in the food retail market with traditional players and even some of the specialties. What drives your decision there? Is it primarily local demographics? Is it minimum productivity levels? And has that changed over last five years?

It has always been who we think is the dominant grocer in the market, as well as who can we do the best leasing of first site shop tenant. If you look at what we've got this year, we may do seven or eight new developments, we have five Whole Foods, two Trader Joe's and one Publix. So there is a heavy fence this year towards Whole Foods and the specialty grocers. And I think that is a growing trend.

If you look at our portfolio since the beginning of 2009 and you look at the rent that comes from shopping centers anchored by specialty grocers, it's gone from less than 10% to over 20%. However, there are certainly markets where we would default to a non-specialty grocer. You look at Texas, it could be Kroger and HEB. It really kind of depends. But right now more in the way of specialty grocers.

In terms of all the developments or redevelopments that we either have under construction right now or we have signed leases but not yet under construction, or that are in the pretty high probability pursuit category; there is about 29 grocers. And just of breakdown of those would be nine Whole Foods, six Publix, four Krogers and some other smaller specialty grocers, like Fresh Market, Trader Joes and the like.

And maybe just another development question; the East San Marco project -- I don't know if you talked about that one. But where does that one stand and have you said what the size of that one could be?

Well, we control the property we have for some time and the retail has been ready to go. It would be a smaller version Publix with some side shops. And what we are just waiting for is the residential. That was originally planned to be condos and then, of course, that market tanked in late 2008. And so now we are out vetting different residential developers for multi-family residential. We expect that that would start next year.

Okay. And just lastly on the acquisition in Austin. 5.2 cap rate for it looks like a stabilized asset was that an off market purchase or was that a competitive bid process?

That was fairly competitive. I would not call that one an off market bid, no.

Okay.

And the thought process is low five -- as you indicated -- is low five cap rate with significant growth and projected growth in excess of 3.5%. And we are financing a significant portion by the sale of a CVS that has very, very flat rent and cap rate is going to be -- we think is going to be sub five.

Just put that in perspective in that market there was an HEB, Steinmart property that traded about six months before -- or a few months before us in Austin. And that was at a 6.5 IRR and this IRR with the growth cap mentioned is north of seven.

Thank you.

Thank you, Jake.

Our next question is coming from Haendel St. Juste with Morgan Stanley. Please proceed with your question.

Hi, guys. It is actually Albert Lin for Haendel. Following up on the development question, some of your peers have mentioned that overall rents haven't quite gotten up to the level to justify new development. So it seems like it would be even more important to pick your spots. You have a couple in California, a couple in Florida. So just wondering if there are any other locations you were looking at?

We just finished a very large one up in the Pacific Northwest in Seattle. We are active in Northern California, we are active in Southern California, very active in Texas. We are active in the Carolinas and in Florida. And we are active in Chicago.

As you said, you got to pick your spots and have the right corner with the right anchor tenant that is going to, as Brian answered, attract the Best-in-Class sides shop retailers that will make the developments pencil out. As ours -- the last $400 million that have been started have very well.

Okay. And then a question on dispositions. We have heard the assets are getting better pricing than expected. But looks like dispositions were a little lighter this quarter for you guys. Curious on the strategy, if this a function of being a little bit aggressive and looking for the best price, which might be a change in mindset after all the assets that you already sold and you were more pressed to sell in the past?

Let's start with the strategy question. We are pretty much through, as we talked about before, the sale of our lower-quality properties. But we still have a base plan of about $120 million to $125 million that we plan to sell this year and the cap rates there are going to be in the 7% to 7.5% range. We did not do very much first quarter but that is not unusual at all. Last year at this time, we had zero sales and we ended up the year greater than $300 million. We feel confident that we will be within the range that we set forth in our guidance.

The second prong of that strategy is to do the match-funding for acquisitions. And there we will take whatever we are buying, we want to go ahead and do dispositions of lower growth assets Hap alluded to earlier that would narrow the spread between the acquisition cap rates and the disposition cap rates. So right now, with the property I mentioned that is under contract as well as Mira Vista, we have $45 million worth of match-funding to do. And one of the ones that will be a match-funding asset is that CVS in Washington, D.C. at sub 5%.

Okay, thanks.

Thank you.

Thank you. Our next question is coming from Vincent Chao of Deutsche Bank. Please proceed with your question.

Good morning, everyone. Sticking with development, last quarter you had talked about seeing some modest increases in develop -- competition for developments. I'm curious how that has trended over the last quarter? And then the other question is just on land side of things, just curious how big a barrier land availability is becoming for the types of developments that you are trying to accomplish?

Well, in terms of the environment, Hap said it best, we are getting more than our fair share of opportunities. We have a big pipeline for this year. There is no reason to think that we won't continue to average somewhere in the neighborhood of $200 million a year of developments and redevelopments. I do think the environment, at least the competition for land, seems to have picked up. We haven't seen a whole lot more out of the ground. But you are seeing the return of retailers like Target on more site plans.

As we compete for properties, especially if they are mixed use sites, you see a lot of competition for them. And that competition is getting more aggressive in terms of willing to close with a very short due diligence period, perhaps without entitlements and without an anchor tenant. We haven't had to go there and we don't plan to go there. For whatever reason, we are finding the opportunities.

In terms of the availability, where we have been looking, the more urban infill areas, that land has always been hard to find. And I think that is really is one of the benefits and differentiating aspects of our team is the experience and amount of time they have spent looking for those kind of assets and the relationships they developed to get them.

And can you just comment on how land prices in those kinds of markets have trended? Over the past year, say?

The only place where we have seen really significant increases in the land prices would be in those markets that are very hot and could go for any use. And the two that come to mind would be Houston and San Francisco Bay Area, where to be able to do a single story retail development is tough just given the land price. And therefore, instead you see a lot of multifamily. We are incredibly fortunate to have been able to develop the only two single story retail properties in the Bay Area that I know of with our Petaluma that was completed last year and then the Dublin one we just announced this year. Those are the markets where the land prices are really high because of the residential demand.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Ki Bin Kim of SunTrust. Please proceed with your question.

Just a quick one here. If I look at your total base rent, it is about $17.75. Could you provide an update on where you think that portfolio mark-to-market is today? And also how much TI/leasing commission dollars per square foot do you project in your guidance for 2014?

In terms of the rents, it is all going to depend on the mix, whether it is the anchors or whatever. If I look at the expiring rents and compare that to what we signed in the past quarter, it would imply that the anchors we could see about 40% growth. On the top, much more reasonable more like 5%, 6%, 7%. Depending on what the mix is of anchors versus shops will dictate what that growth is. But the trend in rent growth as well as just the trend in the average base rents, both of them continue to be positive. And we think that trend will continue.

And another thing that will have an impact on how much we can harvest is whether the anchor tenant, when their lease expires even though they may be meaningfully below market, whether they have additional term or additional options. And unfortunately, in often case, they do have that.

And then just that second part of that question was your TIs. They seem to bounce around a little bit quarter-to-quarter which is completely understandable. What is embedded in your guidance, your TIs and estimated dollar per square foot prospectus?

I will let Brian comment on the trends on TI. Leasing commissions will be completely dependent on how much leasing we do. And you can estimate that based on our percent leased guidance. From a TIs perspective, we don't provide specific guidance for it. We, obviously, of course, plan for it internally and we plan for it based on trends we are seeing. So I will let Brian talk to that.

Look at the page 21 of our supplemental, in terms of the committed TI's. They were down significantly. The total TI's were down over 30% and the new TI's really drove it being down 50%. Now, while the TI's remain below historical average or near it, the reason really for that big decrease is because we are giving it less often than we used to. I think we gave it 24% of the time versus 57% of the time this quarter.

What was really lying underneath that is that our redevelopments at Hinsdale in the Chicago area, that was one of the Dominick's that left. And they sold that lease to Whole Foods which was a great upgrade for us. In that particular case, Whole Foods wanted to downsize -- didn't want to take the full size of that space. So what they ended up doing is keeping the rent where it was and they put in all of the capital. They put in the capitals to demise the space and do new facades and separate the utilities and mechanical systems. We are getting a brand new Whole Foods space and getting a brand new 12,500 square foot space we can lease and probably rents will be twice as high as what they were. And we are not putting a dollar into it. I think that kind of dragged that number down.

Renewals, same thing. They are low. They were up a little bit this quarter, but that was really due to just one lease. And that was a 24-hour fitness in southern California. It was only $10 a square foot in TI but because it is such a large building, it really drove it up. If you subtracted out that one lease and go to the supplemental page at $0.73 a square foot for renewal, that one lease taken out would reduce it to $0.41. All TI's are in line.

Thank you.

Thank you.

Our next question is coming from Juan Sanabria of Bank of America. Please proceed with your question.

Thank you. Lisa, I think you mentioned earlier you're capitalizing more interest through G&A, at least through the first quarter. Can you talk a little bit about your expectations for capitalized interest for the year? And how you think about allocating that capitalized interest in between G&A and interest expense?

First let me clarify the prepared remarks. I was talking about capitalized development overhead not capitalized interest. And the development overhead, although it would also relate to interest being a little bit early with the start of Persimmon Place in the first quarter, that was what caused us to, from a timing perspective, capitalize more earlier than originally planned.

And in terms of the actual capitalized interest, let's go back to our December guidance presentation. We actually did give guidance on what we expected capitalized interest to be for the year. And that was $7 million to $8.5 million and that is simply netted out of our gross interest expense.

Okay, great. And can you just comment a little bit about the Fresh Look initiative and kind of how we should be thinking of that in terms of dollar spend and returns? And is it essentially just going into the redevelopment spend? Or how should we be think manager that from a dollars perspective and return perspective?

Let me stress the philosophy you are asking about, then we will get to the costs and everything. It is really just a philosophy of what we are doing. And that is, as Hap mentioned, the world is rapidly changing. I read a quote that said, "customers live in an ever-increasing sensory stimulating world that elevates their requirements for uniqueness."

Basically the millennials today are just saying -- we hear this when we sit down with the retailers and we talk to them -- that newness is important. They want exciting and updated brand. They don't just want the same old. And they are inpatient. They want immediate gratification, which includes customer service and just the whole experience they get. They are not anti bricks and mortar. They are comfortable in the real world and the digital world. But to bring them to your centers, you have to make it as fresh and exciting as you can.

With that in mind, there are three prongs to get to improving that experience. One is the merchandising, where we want to attract the best tenants we can for the center, whether that is one of our higher end centers or our bread and butter. Just expand the trade area with them and therefore attract other better retailers and more traffic, which will grow sales and create a virtuous cycle that will lead to higher NOI. We have lots of examples of that. You have in our Westlake development, the Pit Fire Pizza there, and Mendocino farms we talked about. We talked about on the call Bartaco. Part of it is merchandising.

And the second part is place-making it. And we just want to make it a more inviting experience. You know this from the centers you like to go to. You like to kind of just hang out there versus the ones you can't wait to get in and out and get your shopping done.

The third thing is just connecting to the community. And that can be technology, whether it is social media and the like. Or it can be just having the kind of tenants and having the kind of design that allows for things like sponsoring a 5-K race. One of our tenants at Cameron Village is a fitness store and they work these post workout pub crawls with the restaurants and everything. That is kind of the theory.

In terms of the costs, the costs really haven't proven to be an issue yet. If you look at the Bartaco deal that we talked about in Atlanta. The return on cost for doing that deal was over 10%, about 10.5%. If you look at Westlake Village, there is four of these transformational tenants that we brought. And the TI's are $25 to $30 per square foot.

But included in that $25 to $30 per square foot are monies they have to spend to do work that we normally do. For example, we do not deliver restrooms or lighting. The restaurants want to provide their own restrooms and lighting. And that brings the TI's down to more like the $15 a square foot range, which is very, very typical of what we would do. I do think with these kind of tenants, you can expect that TI's will go up somewhat. But we are not going to do it unless we think the overall impact is going to be a raised NOI for the entire center.

And then I would say, in terms of the costs for each individual center, if it is a redevelopment, it going to be part of the redevelopment cost. Where it is not part of a redevelopment, I think it depends on the center. Some centers it might be $100,000 and others could be as low as $10,000. Really going to depend on which properties we are talking about.

Thanks for that color. I appreciate it.

Thank you for the question.

The next question is coming from Jim Sullivan of Cowen. Please proceed with your question.

Good morning. Thank you. Hap, this is really a question for you, I think. The spread between your stabilized development yield and acquisition cap rate is pretty wide. And is suggesting that the margin, in terms of value creation in the development pipeline is maybe as wide as it has ever been for Regency, I don't know. Strikes me that over 30% is a pretty wide margin.

I'm just curious as you think about that, are you tempted to drop the hurdle rate on development? I know that you haven't done so so far. It has been pretty disciplined. How do you think about the potential for doing that, given the demand for quality product in the investor market?

Obviously we can -- developing in an urban in-fill location, the going in return may be justified at a lower rate than if you are developing what I might call a suburban infill or part of a planned unit development. And that spread could be -- as opposed to the more suburban location, like Cinco Ranch, which has been a highly successful Kroger anchor development in the fastest-growing planned unit development in the country. That is going to end up being a 9%. I think we initially underwrote it at 8%.

We could get into the mid sevens and possibly lower on a risk adjusted basis for the right kind of development and the right location where we do think we are creating substantial value, Jim. From risk, location, market, comes into the equation as we look at trying to evaluate what is appropriate as far as developing a shopping center, the returns we need and the margins we would like to have.

If I could amplify on that, we had discussions in the last couple of days about a mixed-use project where we would have a retail at the ground floor of a multi-family. And in that particular case, you are talking urban as you can get, downtown of a major city. And the multi-family developer would deliver the completed shell, have taken all of the risk on the entitlements. Basically it's an acquisition with you just finishing up the small shops, which aren't that great. In that case we view it as being desirable with a lot less risk. And in that case we would go to a lower cap rate.

Interesting. Looking at your tenant list, obviously your combined exposure to Safeway and Albertsons is very significant. And assuming the transaction that has been where the pricing has been agreed to, when it goes through at the end of the year. I would assume given the significant overlap between the two retailers, particularly in the West Coast markets, I'm assuming there would we be the likelihood of significant divestitures or store closings assumed.

You are coming up to the ICSC later this month. Is this a topic of conversation with those specialty grocers who are looking to break in and expand in those markets and might not have any choices? Is there a buzz out there there is going be some significant opportunity space opening up as a result of that merger?

Jim, absolutely. And it is not just because of this. We have all known for a long time that certainly Albertson's and Safeway have had their struggles. And I know probably two years ago we talked to one of the specialty grocery chains about all of our Albertson's holdings in Southern California. And at time, they would be definitely interested in taking a couple and probably interested this taking several more. We know that interest is there. The specialty grocers are having a tough time finding opportunities and this would be a good way to do it.

In terms of the potential closures, following on the theme we have been anticipating; since 2009 we have disposed of or released 28 Albertson's and Safeways across the country. I think we have gotten out ahead of it. Those that we kept are the kind we think we can replace with our better operators, as we did with the five Dominick's in Chicago and the Randalls, you may recall, in our redevelop in Houston, where we got 150% rent growth with Whole Foods and Mariano's taken over in Chicago.

Short term, we don't expect there is going to be much change. Some of the markets where we have no overlap to speak of, when you think about Washington, D.C. and the northern California and Texas. And where we do have stores in those markets, we have got replacements already calling us to be very interested in going.

In southern California and the Northwest where there is overlap, we have been through them space by space and we feel really good about our real estate. Particularly either the Safeways, we think there may be a handful of the stores where, because of overlap, they could close. We certainly don't know. But it is just a handful. And of the ones we think there is some potential risk, which really key is, do you have a right to recapture the space? And looking at both the Safeway and the Albertson's in those situations, there is only one lease where we don't have the right to recapture. We think bad news will turn into good news.

Great. Okay, guys. Thanks.

Thanks, Jim.

The next question from Mike Mueller of JPMorgan. Please proceed with your question.

Hi, When you are looking at this quarter leasing spreads, just wondering were there any significant geographical variances? And how sticky to you think they will be as you move throughout the year?

It's not so much the geographical differences as it is that big leases drive it. So if you look at our rent growth, it was good and that was despite the fact we had two anchor tenants that were new -- one was a new and one was a renewal lease at zero rent growth. And we had one that was a renewal at almost 30% down. So despite those three drags, it was still good rent growth.

On the other hand, we did have a large tenant in Washington, DC as part of a redevelopment. It was an old lease that we are tearing down and we are expanding and there is about 240% rent growth from that one. And we had another one in the Pacific Northwest. We had two leases that really drove it to the positive. And then we had two that held it flat and one that drove it down. And that really summarizes it.

Okay, so nothing really -- if you are saying the Southeast compared to the West Coast or anything like that?

I think as Brian indicated, we had good rent growth throughout in every market in small shop and in anchor tenants.

It really was broad-based. All markets had rent growth. I think 10 had double-digit rent growth. And then the shops rent growth was almost double digits, too, it was 9.8%.

Okay, great. Thank you.

Thank you, Mike.

Thank you. The next question is coming from rich Moore of RBC Capital Markets. Please proceed with your question.

Hi, guys. Good morning. I wanted to make sure I understood from your earlier comments in your prepared remarks. It sounds like the bankruptcy outlook for the year is pretty benign? And with that the outlook for bad debt expense probably pretty benign as well?

Yes, bankruptcies have been hardly anything. This quarter we had the Quiznos and the [Dot]. And Ashley Stewart, and we only had one of them. And that is one of our premier properties in Northern California. We already have two tenants to take that space. The Dots is only six locations. And Quizno's, we have known for some time and have working to re-lease those. Both cases, the Dots and the Quizno's, the vast majority of those are A properties. And we already re-leased the lowest quality of each one of those. So we don't see any issue there at all.

And then on the same thing -- go ahead, sorry?

I was going to average for the actual bad debt expense. Last year was a pretty healthy year for bad debt expense as well. We would expect that to continue. I think we finished the year with less than 50 basis points. And gave guidance that this year should by at least equal or better to that. When you look at our accounts receivable that are outstanding greater than 90 days, we are at 0.5% of revenues, which is the lowest that we have been for as long as I can remember. Even going back to 2007, we were 0.7%, 0.8% and 0.9%.

Great, thanks, Lisa. As you guys think about the other side, the store closing side. You were talking about small shop closings being --small shop moveouts being very light. Do you see the retention, if you want to call it that, the retention ratio of guys whose leases are expiring staying high, where it is? Or getting some deterioration there?

The moveouts, as I said in the prepared remarks, are remarkably low. The best first quarter we ever had for shop moveouts following fourth quarter being the best quarter ever of all quarters and 2013 being the lowest of any year. So we are feeling really good about that. And that is despite some pretty aggressive proactive moveouts that we have been -- that we have got.

If you think about the -- some of the aggressive things we are doing. One is we are not renewing a lot of tenants. If you think about some of the ones we did this year, with the last quarter, we got that Bartaco deal. That was previously leased by a national tenant who wanted to renew. But we had built into their lease a clause that required them to renovate their space, when they didn't do it, we refused to renew them.

We had another situation, we have Lowman's Plaza up in Atlanta where we are doing a complete renovation. We are replacing Lowman's with a specialty grocer. And we are replacing Office Max with a really neat tenant. It's not signed yet so I won't mention who it is. With that in mind, we had tenants that wanted to renew and we said no. We know we can do better. They actually hired an attorney and tried to find a landlord default to force us to keep them and they couldn't do it. We got rid of that.

We have lots of these examples of being aggressive, in terms of asset management and not allowing tenants to renew or terminating them when we see the AR start to increase.

Great. Thank you, guys.

Thank you, Rich.

Thank you. The next question is coming from [Samir Khanal] of ISI Group. Please proceed with your question.

Good morning. I know we talked quite a bit about traditional and specialty grocers, but just want to get your view on something here. How much of a cap rate differential do you think there is between centers with traditional grocers today versus one with a specialty grocer and that all else being equal? And just want to get your thoughts on that?

I don't think it is necessarily whether it is specialty or not. It is how good the grocer is. If you have a Kroger on a lease, you have Publix, you've got HEB, you will have good cap rates. But I will say that, for example, our Shops on Main outside of Chicago, the fact that we are adding a Whole Foods to that center, I think is going to change the cap rate probably 50 basis points across the whole center. The specialty grocers, particularly the Whole Foods have so much cache and does a lot for the properties. A high quality traditional grocer will, as well.

The issue is though, is that typically Trader Joe's and Whole Foods, productivity is so high. So we do have a number of HEB's that are doing comparable sales and Publix and Krogers. And where that is the case, that shows the strength of location. And as Brian indicated, you will get the comparable cap rate.

Great. Thanks.

The next question is coming from Ross Nussbaum of UBS. Please proceed with your question.

Jeremy Metz on with Ross. Can you talk about what kind of growth or maybe value add and redevelopment opportunities you are underwriting right now that gives you comfort buying at these peakish valuations we are seeing?

The redevelopment is separate from the decision to buy some of these acquisitions we are doing. The acquisitions, what we are looking for would be you know the best in-fill markets with dominant grocers, high barriers to entry, excellent demographics that provides superior growth. With everything you've looked at, The Fairfield portfolio or Mira Vista, there is good growth this there and they check all of the boxes on everything else I just mentioned.

The redevelopments are generally within our operating portfolio and there is a couple of things going on. We can take a center that where we may tear down the whole center and go ahead and -- or part of it and rebuild and expand the anchors, like we did in Village Center in Tampa, where we built a brand new expanded Walgreen's and brand new expanded Publix. Or it could be just a renovation of the entire center where you may replace the grocer, as we will do with Whole Foods replacing a Dominicks or Mariano's replacing a Dominick's. Or could be Phase Twos or expansions of GLA of previously developed properties.

One way or another, we are adding value to a center that is already there versus the acquisitions where we are buying the value based on growth.

I would add to that, Jeremy. I think that what you probably have seen over the last year or so for the assets that are being competitively bid -- with Mira Vista being an exception -- assets that are being competitively bid, not only Regency but many of our publicly traded peers aren't necessarily winning those. For those that don't have some type of value add opportunity. Because the pension funds, cost of capital and other private equity is just a lot more aggressive right now.

For those opportunities where there is a value add, I think you are seeing Federal and Equity One and Regency be more often successful on those. And then it may be our relationships that come into play that one might get the edge over the other. The example of -- it was a couple of years ago at this point, but Balboa was a San Diego acquisition. And we had a relationship with CVS and we were able to have a conversation prior to going hard on the contract that gave us the comfort that we were going to be able to complete that redevelopment. Whereas a private equity buyer was not able to that.

I do think that there is some of that happening. And we are looking at acquisitions that way, as well.

But an acquisition that doesn't have a redevelopment opportunity, we are not doing unless the growth is substantial, three plus percent, and unless we are confident that we can do a trade and a roughly comparable cap rate and the asset that we are selling has meaningfully flatter growth profile. That, in our view, is a good trade. The IRR of what we are buying because of the growth is going to be higher than the IRR of what we are selling.

That is what I'm getting at, you are buying a 90 something percent leased asset at a 5% cap, there isn't much embedded -- you've only what is embedded there so there isn't a high growth profile necessarily. As a second question, just wondering on the selling side, have you seen any change in the buyer pool for non-core assets you are selling, more private equity institutional interests, driving tighter pricing as some of the A's become harder to acquire?

Yes, I would say again that the average cap rate out there is -- for A quality properties in the good markets with growth is low to mid fives. I think I have seen on other transcripts there is the property that we looked at and tried to buys as long ago as ten years ago in Reston, Virginia that set a new low in terms of cap rates. My understanding is somewhere in the low 4's with IRR about 6. The inpricing has been tight and it is because we all know there is very, very little product that comes to market and there is huge demand.

The seam market, there has already been interest in that because there is a lot of people who believe the dream that they can create the value to turn the thing around. It is the B pricing where we have seen the most tightening and that is mostly spillover for the lack of product available for the A's. I think cap rates are tightening for the B property, although that is being offset a little bit by the fact there is quite a bit of product available there. So that is sort of holding it in check.

Okay. Thanks.

Thank you. The next question is coming from Tammi Fique of Wells Fargo. Please proceed with your question.

Hi. Most of my questions have been answered. Last quarter you mentioned comfort that lease rates at end of the year would be toward the high end of the guidance range. Are you still comfortable with that today?

I will take it. We did not change our guidance. And as we mentioned earlier in the call, our seasonal moveouts were the lowest that they have been in quite some time. So we are still very comfortable with our guidance. And would expect that we should end the year towards the higher end of the range.

Okay. And then with regard to acquisitions maybe just turning back to that for a minute. You identified a couple of acquisitions that you are looking at today. But maybe beyond that, do you have a pipeline of opportunities? Are there any portfolios or opportunities within your existing JV's to acquire those interests?

We are always looking at everything. But I would say right now the pipeline is fairly thin, as I mentioned, about $100 million that we have identified as having a reasonable chance of seeing them happen. Again, that is going to depend on our ability not only to negotiate a favorable deal for us, but also to be able to match-fund it. There is plenty of other things we are looking at, but most just don't meet our criteria for growth.

And on the partnership side, there is really very little opportunity there. Our partners are generally either at or under allocated to core retail. If anything, they would probably like to add to that.

Okay.

Disposing of properties doesn't necessarily fit their objectives.

Okay. And then maybe just one last one sort of turning back to the decision to sell assets versus issue equity. Is that just really dependent on where the stock is when you got the opportunities? Or is there one you would be more inclined to do versus the other?

We balance what we want to -- what we think about selling with where the stock price might be trading and with the investment opportunity might be. And we look at all those considerations. All I can say is that to date, first part of the year we haven't -- we are basically relying to date totally on our asset sales.

Okay. Thank you.

-- in the mix.

Thank you. (Operator Instructions). Our next question is coming from Chris Lucas of Capital One. Please proceed with your questions.

Good morning, everyone. Thanks for taking my questions. Lisa and Mike, thank you very much for the enhanced presentation and disclosure detail in the supplement, that is very helpful. First question really relates to just the leasing environment. Brian, just thinking about how you have described the activity between the better lease spreads and just the larger development redevelopment pipeline that you guys are envisioning, in terms of the starts for this year. The question I'm wondering about is, is there a tangible change in the retailers perspective? A greater sense of urgency to get deals done now than say 90 days ago? Are you getting that feeling?

I think we felt that for awhile. There is clearly a sense of urgency. I was on the phone this morning with [Mike Nemearas], Chief Economist for ICSC, and he was talking about factors -- there is so many studies out there on moveouts and store closings and everything. What was his take on it? And his view is that while the store closings have edged up, that the new demand for the retailers to open more stores is outpacing it and that that trend is widening. So, there is just a real difficulty in the retailers getting quality stores in the kind of locations they want. And I think you are seeing that in our development pre-leasing. So there is a sense of urgency because they are just not finding the stores.

And then Lisa, a question for you related to real estate expenses. The tax side. Are you seeing pressure now in some of the states that have seen a significant rebound in value like Texas, Florida and California in your portfolio, in terms of the real estate taxes that you are being assessed?

Obviously, as you know, they were much lower last year. So if anything we would see increases but nothing that would materially affect our numbers. Not yet anyway.

Okay. Great. Thank you.

Thank you. Our next question is coming from Tayo Okusanya with Jefferies. Please proceed with your question.

Yes. Good morning. Most of my questions have been answered. I just wanted to add my appreciation, as well, for the improved disclosure. One more question. On the in-process developments, when you say 86% leased and committed, does that mean the rents associated with that are already in our numbers? Or the rents are still yet to come when the centers open up?

It is generally -- they would generally fall in the pre-lease bucket.

Okay.

Part of our disclosure we did actually -- we are now disclosing we called it percent commenced. And that is kind of the proxy, if you will, between -- what is the difference between those that are rent paying versus not rent paying. And a lot of pre-lease will fall -- as a result of our groundup developments as well as redevelopments.

Okay. That's helpful. Thank you very much.

Thank you.

At this time, I would like to turn the floor back over to management for any additional or closing comments.

We appreciate everybody's participation in the call. Apologize for any technical difficulties that occurred. And wish that you have a great rest of the week. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.