Regency Centers Corp (REG) 2015 Q3 法說會逐字稿

Greetings and welcome to Regency Centers Corporation Third Quarter 2015 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 would now like to turn the conference over to your host, Mr. Mike Mas, Senior Vice President, Capital Markets.

Good morning and welcome to Regency's third quarter 2015 earnings conference call. Joining me today are 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 begin, 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. We also request that callers observe a two question limit during the Q&A portion of our call in order to give everyone a chance to participate. If you have additional questions, please rejoin the queue. I will now turn the call over to Hap.

Thank you, Mike. Good morning everyone and thank you for joining us. Our results continue to be extremely gratifying. We are achieving Regency's key strategic goals and objectives. First, we're sustaining a long-term same property NOI growth in excess of our goal as evidenced by excellent visibility into a fourth straight year of 4% growth.

Second, our development team continues to source high-quality shopping centers for development and redevelopment allowing us to deliver an average of $200 million of great projects annually. Third, we are strengthening an already conservative balance sheet to disciplined match funding of investments and efficient accessing of multiple sources of capital. At the same time, we're enhancing the intrinsic quality of our portfolio, which is by all relevant measures, one of the best in the sector. Ultimately the combined results of these strategies is consistently compounding core funds from operations and net asset value by 5% to 7% annually. As important, Regency is well positioned to continue to consistently deliver on these key objectives in the future. Lisa?

Thank you, Hap and good morning everyone. We are pleased with our results this quarter with core FFO per share of $0.76 representing a 7% increase over the third quarter of 2014. Year-to-date same property NOI growth excluding termination fees was 4.5% with base rent continuing to be the largest contributing factor as move- outs remain at historically low levels and we experience gains in commenced occupancy.

Through the first three quarters, NOI growth has exceeded our expectations, although it is projected to moderate slightly during the fourth quarter as we face higher comps especially in the other income line item. We have raised our guidance accordingly and we now expect full year same property NOI growth to be in the range to 4.0% to 4.3%. Moving now to capital markets activity, I'd like to spend just a few minutes updating you on the status of our forward equity offering. As a reminder, we completed the offering in January on a forward sale basis. This allowed us to best match the proceeds with the intended use.

As discussed at the time of the offering and on subsequent earnings calls, we identified three uses for the proceeds. First, the acquisition of University Commons in Boca Raton, Florida. Second, repaying $100 million of near-term debt maturities to further enhance our balance sheet. And finally, prefunding a portion of our ongoing development and redevelopment pipelines. We closed on University Commons in September and yesterday we notified the holders of our bonds maturing in the summer of 2017 that we will be redeeming $100 million or 25% of that issuance at the end of November. Given the certainty of timing, we are now planning to fully settle the forward at that time.

As a result of this early repayment, we will incur a make-whole premium of approximately $8 million in the fourth quarter. This will be added back for purposes of calculating core FFO. Driving for a well laddered maturity profile and managing interest rate risks are both key balance sheet objectives and will provide us with more financial agility. Today's capital markets backdrop and elevated maturities in 2017 support the partial redemption as the most cost effective debt repayment alternative at this time. And further, we expect our estimated net debt-to-EBITDA to improve to 5.3 following the settlement. In summary, these capital markets activities combined with the continued strong results of the same property portfolio as well as some straight line [rate] increases driven by the exceptional leasing of our development properties result in an increase to the midpoint of our guidance range for core FFO per share of $0.04 to a new range of $3.00 to $3.03. Brian?

Thank you, Lisa and good morning everyone. 2015 is shaping up to be another successful year by all key measures. On a same property basis, the operating portfolio climbed to 96% leased at quarter-end. The largest growth continues to be in small shops, which rose to 91.5%. Demand for quality space remains high while shop space move-outs as a percent of leased space continues to surpass historic lows. [Despite the trend in move-outs translated] into retention rates that exceed historical averages, which is another measure of portfolio health. Retention rate was very strong at 80% for the operating portfolio year-to-date. Again well above our long-term average.

The momentum from the strong leasing trends gives me confidence in our portfolios ability to achieve additional occupancy gains as we continue to benefit from robust demand from retailers and restaurants [which today] by low levels of new supply. This favorable leasing environment affords us the leverage to execute leases with higher starting rents and embedded rent steps. Rent growth on new leases signed during the quarter was nearly 19% while we continue to attain an average of nearly 2.5% annual growth embedded in the vast majority of our deals. Our consistent occupancy gains and pricing power have produced same property NOI growth in excess of 4% for five consecutive quarters and as Lisa explained, have enabled us to raise our earnings guidance for the current year. These positive trends also give us confidence in our ability to sustain long-term NOI growth of 3% or higher.

Turning now to acquisitions. We continue to be able to find exceptional shopping centers with superior growth prospects. As Lisa mentioned and as many of you are already aware, we closed on our most recent acquisition, University Commons last month. University Commons is a 180,000 square foot center located on a major east-west quarter in an affluent and densely populated market of Boca Raton. It also benefits from a significant day time population from the nearby Florida Atlantic University. The center features a top performing Whole Foods as well as best-in-class tenant line up of national retailers including Nordstrom Rack. With current rents at 25% below market, there's a sizeable opportunity for this property to add to our long-term NOI growth profile.

Focusing now on our ground-up developments. This quarter, we completed our Persimmon Place project in the Bay Area. This 150,000 square foot center took only 20 months from the start of construction to completion and is 99% leased and committed. We've already received overwhelming positive feedback from our lineup of fresh look tenants who have shared that they are performing well beyond their expectations. The exceptional quality and performance of this project demonstrates the acumen of Regency's best-in-class development team and has already led to new development opportunities.

After the close of the quarter, we purchased three acres of land adjacent to our in process CityLine Market in Dallas for a second phase of this already successful Whole Foods anchor project. CityLine Phase II, which is 100% leased even before breaking ground will add an additional 22,000 square feet to the 80,000 square foot center already under construction. We're projecting a return of 8.6% on invested capital for the second phase.

Looking briefly on dispositions. During the quarter, we sold Glen Gate, a Mariano's anchored shopping center in Chicago for $50 million for a cap rate of 5.1%. Consistent with our match funding strategy, Glen Gate was identified as a potential disposition for the funding of acquisitions given it's lower than average growth profile while also enabling us to reduce our exposure to Roundy's. As evidenced by the increased [guidance] range for acquisitions, we do have good visibility into compelling acquisition opportunity in the northeast at a comparable cap rate to the Glen Gate sale.

Lastly, I'd like to touch on Haggen in light of their recent announcement. The six locations represent a minimum amount of base rent in our portfolio and with restocking [host bids] our potential exposure is less than 13 basis points. The good news is we are confident in the desirability of our real estate and our ability to enhance the quality of our anchor tenants. With average base rents in the single-digits, there is potential to unlock substantial growth in redevelopment opportunities. In addition, the leases are guaranteed by Albertson's. Thanks for listening, we'll now turn the call over to the operator for questions.

(Operation Instructions) Christine McElroy, Citibank.

Lisa, to follow up on your comments, in November do you expect to settle the full amount of the equity offering and then did the sale of Glen Gate to help fund the Boca deal impact your decision to via the settlement?

Yes in some sense. As you know that cash is fungible. We did complete our bond offering in the middle of August and when we closed on University Commons in September and the Glen Gate sale did happen, but even with that said, we still intend to fully settle the full amount at the end of November. The Glen Gate proceeds have been earmarked for the increased acquisitions in the guidance that we gave.

Okay. And then Brian, just looking at your acquisition guidance beyond the Boca deal. Sorry if I missed this, is there another deal that you are close to that maybe you have under contract at this point. I noticed that it's now [up to $80 million to $98 million], I didn't know if there was an $18 million deal you are working on?

We do. We have a couple of properties under contract in the Northeast. We are in the process of due diligence right now and we haven't determined yet if they are going to close because of the due diligence, but we do have a couple under contract.

And one is a little more certain than the other, which is the one that we've included in the upper end of the guidance.

Where in the Northeast?

That's on Long Island and the other one is in the Boston area.

Jay Carlington, Green Street Advisors.

Lisa or maybe Brian, I'm just kind of wondering, how difficult is it to forecast the redevelopment contribution at the beginning of the year?

What we do is basically -- at this time now we are looking at all of our potential redevelopments that may begin over the next 12 months. In many cases, you are going to need something else to happen though. We usually have pretty good visibility a year in advance. So, we have a pretty good understanding of what's going to happen. However, there could always be delays. It could be that you are negotiating with an anchor that's already in there right maybe for an expansion, a tear down, rebuild, and there's always some uncertainty to that timing, but roughly we have pretty good visibility into the next 12 months.

This is just the starts and when the anchor decides they want to open and sometimes that changes, we got the permitting but then we also have approvals that are also required by the other anchor tenants and that can take the longest amount of time.

Okay and maybe a quick follow-up to that I guess, how does your year-to-date redevelopment contribution compare to kind of what you were thinking at the beginning of the year?

I think we are pretty much right on target.

And Brian, a big picture question here. Kind of want to get your thoughts on, if you think the markets absorbing the recent wave of bankruptcies that we've seen and the store closures and maybe some of the mergers that are coming down the pipe that may result in other store closures?

I haven't seen much concern about the store closures impacting us. One, we don't have that many big boxes and the kind of assets that we've got, I think of our vacant big boxes, half of them we activity on. The bigger issue in terms of the bankruptcies and the merger and so forth is, what it means for developments going forward. I mean right now, all the activity and development coming from the grocers, largely from the specialty grocers, but they've already got their 2016 pipelines full, they've got their 2017 pipelines full and then you got all the Haggen's on the West Coast where people are wondering what's going to happen there. You still have Dominic's in Chicago, you got the AMPs that are out there, and you still have some Albertson's. So, it's more, can you get a new development going, but I'd say the flip side of that, the good side of that is the grocers are only taking the top deals given those pipelines are full and given the excess inventory out there. So, if you get one, that means they are really, really good projects.

Jay, I want to go back to your first question too because I think something that's really interesting about the contribution of redevelopments. The ones that are already in process, we have really good systems in place to understand what that contribution is going to be. It's those that we haven't started yet that we may or may not start in the current year that we're trying to project and because property is not considered a redevelopment until we put it in the supplemental in our disclosure as a redevelopment and a great example of that is a center that we have in South Florida near the Aventura Mall that we've been allowing tenants leases to expire. So it's not very well occupied because we're getting ready to do a full scale redevelopment there and that's a drag in our same property pool. It is not considered a redevelopment even though I believe [they are accessing like 70% some Brian]. So that's when it's most difficult.

Jim Sullivan, Cowen Group

Just kind of a big picture question Hap, the internal growth here has been exceptionally strong and with cap rates in the acquisition market being as low as they are, I guess when we think about the value creation margin with your both the ground-up developments as well as redevelopments, that is probably as high as you've ever seen it. I'm curious and this sort of follows on what Lisa just said, but the redevelopment opportunities in the portfolio would seem to be very value accretive, and I wonder if you think about those as a source of growth on the one hand as opposed to what I'll call value-add acquisitions. Do you see scope for more growth in either or both of those given how profitable they are or value accretive they are given the margins?

Well, there's no better use of our capital than a redevelopment of the existing portfolio because what we are doing is we are enhancing typically an already good center and making it a great center. We're getting an attractive return on capital and we're going to increase our growth profile on a go-forward basis. So that is priority one. Priority two would be we still believe that a ground-up development in the exceptional cases that Brian indicated still make sense and we can do that at margins while not as good as they were coming out of the downturn or not as good today but they're still very compelling and we're building great shopping centers that are going to be great additions to our portfolio on a long-term basis.

And then thirdly, from a acquisition standpoint, what we're doing there is we're incrementally increasing our growth rate. We don't consider that to be an immediate value creation but we're selling like in the case of Glen Gate a low growth asset in addition to that we're reducing our exposure to Roundy's and reinvesting that capital at roughly comparable cap rates into a shopping center that's going to generate much more growth longer-term.

And I'm curious in terms of as you think about that acquisition market, cap rates of course have come down and stayed low for some time now and there seems to be a significant number of potential buyers out there who want a stable project, well located with long-term leases in place. Just how competitive is the acquisition market for the value added acquisitions something where there is some hair on it or there's some issue that maybe that long-term stable coupon type buyer is not really looking at or looking for maybe as a skill set to redevelop?

I think Brian can add color to this. I think that market is still very competitive, but from an acquisition standpoint, an acquisition with upside potential would be our top priority and one of the properties that we are working on in the Northeast has that or both of them has that.

Basically, you have two and one that we are trying to get on contract. So we got three of those that we are working on, it's competitive. I mean all of the acquisitions are competitive. We are seeing in the grocery market is what we thought were cap rates from the Florida [4.75]. We've had to few that we competed for lately. They are going in the low fours and whereas I thought the IRRs would have been [around 6, we're seeing 6 to 6.25]. We're now not seeing couple of properties do a remiss by a wide margin where pension funds are solving for [5.50 to 5.75 unleveraged IRR]. So it's competitive in the As and it's competitive in the value adds.

Craig Schmidt, Bank of America.

Brian given the six locations from Haggen, would the [re-use] still be a grocer and if they are what are some of the names you like to replace them with?

Well, they would be grocers. For all six properties, we've got interest. In fact, on five of the properties, we have at least three interested parties and there's two interested for all six and some of the names that are out there, the stalking horse names, you got Smart & Final and we've have also got Gelson's and we love Gelson's in particular. They're more compatible I think with our high-end demographics but you got Target's attention in some, you got Sprouts that's interested. There is whole host up in the Pacific Northwest. WinCo is interested. Lazy Acres which is part of Bristol Farms. So pretty much a whole host of good names. The offers that are coming in are also -- it remains to be seen whether we can get control of those leases or whether they'll [move up] somebody else at auction one of the grocers but the offers that we're seeing are just really, really strong. I mean you're talking about $4 rents going to $28.

Wow! And then I noticed Regency's ABR, you got 17% to restaurants. Given the consumer demand for this type of product, would you be willing to raise that exposure?

I think we'd love to have as many great restaurants as we can get. The problem is that we're restricted. In some cases, we're restricted by the grocers who have prepared foods they want to sell, but the biggest issue would be the parking and the city code, how much restaurants you can do.

Rich Moore, RBC Capital Markets.

Last quarter, you mentioned that you were looking at about $650 million of potential development. Is that still the case?

It is. We're working on $650 million in 2015 and 2016. We are getting near to year-end, I think we are going to -- you've seen our guidance so I think we will end up at the very high-end of that guidance and then next year, it's going to be a strong year. More guidance to come but I wouldn't be surprised if we were in the $250 million to $300 million range and so therefore we'd be averaging around that $200 million a year that we talked about. Lumpy but on average we're going to hit it.

Okay, so do you Brian still feel that way? Last quarter, you said you felt that the current environment was the best environment you've ever seen for tenants and we've seen a little bit of, I don't know maybe uncertainty in some of the other reports this quarter, do you still feel like it's the best environment you've ever seen for leasing and for your business?

I do think it's still the best environment just given the fact that there is so little development going on that the retailers are doing well. I mean when I look at our portfolio I see nothing that's showing any reason for concern. I mean the leasing environment is strong. There is no let up in momentum when it comes to the new leasing. Tenants are not moving out. We have had the second highest year of renewals in our [core renewals] and the lowest quarter of move-outs. All those trends continue really, really strong.

The only thing that I would say is that whether it's talking to brokers out in the market, if you go to the regional ICSCs, you go to ULI, I think everybody is and if you talk to our early tenants, they are just cautious. They are taking a long time to open. They are being very, very careful about opening new stores and that's part of why I think it's a really good environment because nobody is getting caught up in the exuberance and they can't really point to anything but it's just that margins I think they worry about a little bit. You hear that foot traffic is down but conversion to sales are up. So I think there's a healthy caution out there, but it's not translating to anything we're seeing in our current metrics or in our pipeline.

Just to reiterate that last point that Brian made is I think this healthy caution on the part of retailers and restaurants and tenants in general is a very healthy trend because they are making, it appears to be very rational decisions and on the last cycle sometimes maybe we should have scratched our head and said, what the tenants doing doesn't make sense or why are they doing that. Now their caution and their -- when they do move forward, it does make sense. So I feel good about that.

The other thing I wanted to ask was a Lidl and ALDI, the two German grocers. Are you running into those guys and kind of what you think of them?

We're putting in ALDI in one of our centers, back filling them and then up in North Carolina Lidl is going across the street from one of our developments. I don't know anything about Lidl. I hear what they are talking about but we heard about that from [Fresh Needs] here on the West coast that didn't pan out. So I just reserve comment on that one. ALDI, I would say by and large, I think they're obviously a good retailer and they drive a lot of traffic but they typically are going to go in demographics that are different from our portfolio.

Michael Mueller, JP Morgan.

A couple of quick ones. On the Boca acquisition, I mean, should we think of that as just stabilized core acquisition or is there something significant that you kind of do with it overtime?

Well yes, I mean we have a saying around here that we would like to invest in properties where bad news becomes good news and this is the ultimate center like that. The bad news here is that the tenants are generating mall like sales. I think they are averaging about $850 a foot across the entire center. It is now the number one Whole Foods in our portfolio. Barnes & Noble, the sales are absolutely at the top of their chain. Same with Bed Bath & Beyond. We get calls from brokers, competitors, heads of real estate [congratulating us]. So the growth you see there, it's about 3% is contractual over the next 10 years but after that, we're going to see a lot of growth in any of these retailers whether its Barnes & Noble or whoever should go out, the rents across the board are about $1.6 million below market. So if you could just bring that up to market, which we'll get to do obviously eventually I mean there is a huge pop in value.

Okay and then you talked about contractual growth. Can you just walk through I know you have been trying to push bumps a little bit harder get more frequent bumps in leases, get higher escalators, can you just kind of walk through how that whole process has been trending in the past couple of years?

Sure. If you look at our -- we have been focusing on this for two or three years. We've been focusing on rent growth forever, but the focus on the mid-term steps is relatively new. So our portfolio on a deal specific basis. So just those leases that contain rent steps averages about 1.6%. If you look at what we averaged for the last three quarters, about 2.3%. So 70 basis points higher. That's pretty significant and then if you translate that into all leases including those that don't have steps but remember we're getting this now from about 90% of our tenants. The growth in the portfolio is about 1.2% and we've been averaging over the last five or six quarters about 2%. So really, really healthy mid-term increases.

And it obviously will take time to have that percentage increase, but I think we're projecting with the next three to five years we ought to be another 30 basis points or 40 basis points in that.

(Operator Instructions) Samir Khanal, Evercore.

As you guys kind of look into next year and I know that you haven't provided any kind of official guidance. Could any kind of this proactive re-tenanting or [re- merchandising] efforts that impact NOI growth like some of the other REITs or sort of start to mention 4Q and next year. Could that impact growth? I'm just trying to get a sense of how should we think about growth for next year?

As we've communicated in the past, we believe that we can generate 3% plus same property NOI on a sustainable basis given the quality of our portfolio along with some of our re-tenanting and redevelopment activities and would hope that, that would get us to the 3.5% range. I'll remind you that this year if we stay north of 4%, which is looking extremely likely at this point, that will be our fourth consecutive year of 4% and as you know, for our product type, that's difficult to achieve and so something that we're really proud of.

When you think about the contribution of redevelopments and Jay was asking this earlier, it is going to vary and it's going to depend on how many properties that we are actually redeveloping at one time and we have given general direction that we would expect that that spend could be $20 million to $50 million and so in any given year, redevelopments could be a positive contribution of 50 basis points roughly to 100 basis points. And so if you think about our contractual rent steps that Brian just talked about plus our rent growth, that gets you to about 2.5% and then the redevelopment activities would [add 50 to 100]. So that's your 3% to 3.5%.

Got it and just curious on your thoughts about Harvard Square asset that one of your peers announced this morning as an acquisition. I know you guys likely looked at it considering your interest in sort of increasing exposure in the Northeast?

I'm not aware of it.

Okay. It was one of your peers announced a acquisition. Just was curious. Okay, thank you.

Chris Lucas, Capital One Securities.

Just wanted to see if there has been any change in the cycle for getting leases completed. In other words, have tenants been accelerating the process or have they been slowing down given where we are in the cycle?

I'd say that it's slowing down. If you look at our down time, it was up this quarter, but largely that's because we're leasing space that has taken a lot longer. I think if you look at stuff that's been vacant two to three years, 49% of our leasing was in that category whereas just the prior quarter it was 34%. So that accounts for some of it, but I think overall it's taking longer because everybody is just battling. It's kind of what happens talking about. They're going to be really careful about not doing a bad deal. We are fighting for all those things that just take a lot of time and we're striving to get not only the economics like fighting for the initial rent growth or the bumps in there but things like termination rights, re-location rights, so we can do renovations and redevelopments, [end of point exclusives], we're fighting those kinds of things.

So a lot of it is in negotiation and then just getting the stuff through the cities is taking an awful lot of time. Having said that, if you look at our developments we're working on right now, I mean (inaudible) than we expected it to. We talked about Persimmon on the call but that thing in 20 months is 99% leased and now we haven't even started CityLine Phase II. We haven't broken ground and its 100% lease and I think the first phase is 98%. So, we're getting things done very rapidly. We're finding robust demand. We're working on a project in Houston we hope to announce in the next two or three months and that one maybe three months away from closing and we have activity on 93% of the space. So, while they are cautious and while there's many things to slow down the process and it is taking longer, it's still pretty robust.

I guess the follow up then Brian would be and you mentioned that Houston and so maybe I'll call that out, but are you seeing the decision making processes being impacted by market or is it very specific to location?

I don't think it's that specific to location. I think the locations we have people are excited about. It's just getting the leases signed is difficult. We have had situations where the retailers will change their hurdles and they will have to go back to their committee and again you get through, it's a good thing because they are being cautious but I think that's more across the board rather than site specific.

Tammi Fique, Wells Fargo.

Brian I was just wondering if you could quantify the move-outs in the quarter relative to your expectations and then maybe as you just start to think about 2016 is there any reason to think that move-outs will normalize or do you expect that they will continue to be at these historical low levels?

Well we haven't been very good at predicting that. It has pleasantly surprised us for probably the last two years. What we do is we do two things in trying to estimate them. We start with the field and go space by space, who is struggling, who do you think is going to be moving out, who has told you they're going to move out and we start there and then what we do here in Jacksonville is we'll make an adjustment and what we do is we look at the trend of move-outs not absolute but as a percentage of occupied space and then stuff happens.

That trend has been on a downward slope since 2010 but it's also been accelerating. So in 2014, it was 1.6% of occupied space. So in 2015, we budgeted 1.7% and year-to-date, it's 1.4%. So I don't see anything right now that would, well it's getting so low you would think that if it just flattened out at this it would be great because our move-outs for this full year are going to be about 1 million square feet less than it were in the 2008 to 2010 time frame. So at some point, they can't keep going low, but I don't see anything that's going to cause that to trend up.

And Tammi, I'll just add, I mean Brian hit it right on. It's just really difficult. We've been talking about this internally because we really have continued to overestimate what we thought move-outs would be. Mike Moss said it great, like chasing a ball downhill. So in 2010 or 2009 was the highest, but even 2010 was a little bit more of a normal year. The number was 2.4% and it fell to 1.6% of occupied space basically of people moving out and so we thought, we were being reasonably conservative if you will by budgeting 1.7%. So thinking that move-outs would stabilize, the quality of our portfolio has significantly improved. The tenants health has significantly improved and all that is contributing to and just continues to improve and we don't know when it will stabilize and obviously at some point it's going to go the other way. And so, we're trying to being as reasonably conservative, but realistic.

Virtue of cycle is a good thing.

And then maybe just one more question following up on Texas. I can see the leased rate is up versus last quarter but I guess I'm just curious what you are hearing from retailers about their sales in that market and if you are seeing any change in future demand there? Thank you.

Sure. So what we're hearing is kind of what I mentioned before. For those in the portfolio, everybody is happy. Nobody is moving out. The renewals are up again, but they know there's going to be a slowdown at some point, but if you look at the new demand, our pipeline is stronger now than it was even a couple of quarters ago and again we measure that as a percentage of vacant space. I'll talk about new leasing. So if you look at this year, it looks like we're going to lease about 71%, 72% of our vacant space. If you compare that to the average of the last five years, the average of the last five years is about 75%. So we continue to do a lot of new leasing, not so much on an absolute basis, but we continue to lease a smaller and smaller amount of vacancies and if you look at our pipeline, it was over the last four quarters about 46% of vacant space and this quarter, it's 54%. So tenants [aren't] moving out. We're continuing to do a lot new leasing and the pipeline behind it remains strong.

Haendel St. Juste, Morgan Stanley.

So, a question for you first on construction labor. I wondering if you are seeing any labor-related bottleneck in your development activities. I asked because a number of the home builders in particular who share your market footprint largely have noted these labor-related bottlenecks. I'm curious if you are seeing anything on that front?

You see those on the smaller projects. I mean overall, we have not experienced the problem. We are aware of where costs are trending and we budget for them, but you are right whereas material costs are pretty benign that labor is increasing. I think what's driving that is the construction spending is the [high expense of 2008] and you are seeing worker shortages growing. The unemployment for September was at a seven-year low and the employment was at a six-year high and the interesting thing is if you look at the actual wage increases year-over-year, it was the highest since 1986 and we are seeing across the country especially in the Mid West the Associated General Contractors reporting significant labor shortages. So that's been translating over this past year [to about 5% increases, 4.5% increases] in total cost but you see that as high as 10% or even higher on small projects where basically the contractors don't want to work on it. If you pay them enough, then they'll work on it but for our large projects, we haven't seen that.

Okay and just a few clarifications. So first of all, it sounds like you're not facing that issue yet, but then I also want to clarify the numbers that were discussing. Those are purely labor cost, doesn't reflect materials or land rate?

Yes, that's correct. That's just labor and then the materials I mean if you look at cement, concrete, that's pretty much like I said [3% to 4%, precast is 2% to 3%] glass is stable. The only material where we have been given notice that you are going to start to see increases would be on steel and this was about three months ago, they said to expect a 10% increase in steel prices, but overall, material prices are pretty benign.

And then Lisa for you, sorry if I missed this, but a clarification on the partial notes redemption. The [$100 million that you are] I guess redeeming next month. Just curious, want to make sure that one, these costs are baked into the current guidance and then also any update on current thinking on the remaining $300 million of notes that will be outstanding pro forma?

First yes, the make all is in our existing guidance. There would have to be some unusual reason why we would not just let the notes go to maturity and then refinance them at that time because I will remind you that we have a forward starting swap in place for $250 million of that issuance. So at a minimum, we certainly expect to refinance at least $250 million.

There are no further questions. At this time, I like to turn the call back over to management for any closing remarks.

We appreciate your time and want you to have a great remainder of the week, great Halloween, and great weekend. Thank you very much.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.