May 7, 2008
Executives
Lisa Palmer - Senior Vice President, Capital Markets Bruce M. Johnson - Chief Financial Officer, Managing Director, Director Mary Lou Fiala - President, Chief Operating Officer, Director Brian M.
Smith - Chief Investment Officer, Managing Director Martin E. Stein Jr.
- Chairman of the Board, Chief Executive Officer
Analysts
Christy McElroy - Banc of America Securities Christeen Kim - Deutsche Bank Jay Habermann - Goldman Sachs Paul Morgan - Friedman, Billings, Ramsey Ambika Goel - Citigroup Craig Schmidt - Merrill Lynch Jeffrey J. Donnelly - Wachovia Securities Michael W.
Mueller - JPMorgan Jim Sullivan - Green Street Advisors Christopher R. Lucas - Robert W.
Baird
Operator
Good morning. My name is Cynthia and I will be your conference facilitator today.
At this time, I would like welcome everyone to the Regency Centers Corporation first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Lisa Palmer, Senior Vice President, Capital Markets.
Please go ahead, Madam.
Lisa Palmer
Thank you, Cynthia. Good morning, everyone.
On the call this morning are Martin Stein, Chairman and CEO; Mary Lou Fiala, President and COO; Bruce Johnson, Chief Financial Officer; Brian Smith, Chief Investment Officer; Chris Levitts, Senior Vice President and Treasurer; and Jamie Shelton, Vice President of Real Estate Accounting. Before we start, I would like to address forward-looking statements that may be addressed on this call.
Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes, and results may differ materially from those expressed in these forward-looking statements.
Please refer to the documents filed by Regency Centers Corporation with the SEC, specifically the most recent report on our Form 10-K and our 10-Q, which identify important risk factors which could cause actual results to differ from those contained in the forward-looking statements. I will now turn the call over to Bruce.
Bruce M. Johnson
Thank you, Lisa and good morning to you all. Regency posted strong results in the first quarter, which will provide positive momentum in the increasingly more challenging environment.
As you will hear from the rest of the team, Regency is proactively taking measures across all areas of our business to address these challenges. Our top three priorities remain maintaining 95% occupancy in the operating portfolio, achieving 95% occupancy in the in-process developments, and preserving a strong balance sheet with ample funding capacity.
We carefully track funding sources in relation to funding requirements. Significant progress has been made ensuring that Regency has a substantial amount of capital to fund the development program and other compelling opportunities which may arise.
In March, we closed an additional three-year bank facility in the amount of $341.5 million. With this, the company now has credit facilities that total over $941 million.
Loan maturities through the end of 2009 that are directly on Regency's balance sheet total only $78 million. Regency's commitment to a strong balance sheet and more than sufficient funding capacity allows us to continue to capitalize on attractive investment opportunities.
It is important to remember that our co-investment partnerships have relatively low leverage. In fact, debt to current estimated values is only 52%.
Even if cap rates were to rise to 7.5%, loans to value ratio would only be 57%. Although the CMVS market is not a viable option today, insurance companies are still making loans on quality projects with relatively low loan-to-value ratios.
We have turned to the insurance companies to place $286 million of mortgages during the last 12 months. More recently, in April we locked a $62.5 million nine-year interest only mortgage with a coupon of 6%.
Contributions to partnerships and sales of developments and operating property dispositions remain critical elements of Regency's capital recycling. I am comforted that all but two developments represent less than $20 million in proceeds, which are slated for sale this year, are over 95% leased.
It is also important to remember that most of the development sales planned for the year are contributions to our open-end fund, thus minimizing transaction risk. We do expect to close the mid-Atlantic portfolio this quarter.
As a result of numerous reverse inquiries, we are cautiously optimistic that we will be successful in achieving our objective for operating property dispositions. FFO per share in the first quarter was $0.87 compared to $1.13 for this period last year.
The FFO in -- the change in FFO per share is primarily related to transaction profits of $2.5 million in the first quarter of 2008 compared with profits of $24.1 million in the first quarter of 2007. We expect FFO per share in the second quarter to be in the range of $0.88 to $0.92 and feel all of the elements are in place to meet full-year guidance of $4.54 to $4.66 per share.
As a reminder, this guidance includes promote income of $21 million to $23 million from one of Regency's co-investment partnerships that is expected to be earned at the end of the year. Before I turn the call over to Mary Lou to discuss the operating portfolio results, I would like to point out a few additions we’ve made to the supplemental.
We’ve expanded the summary of unconsolidated debt page to include scheduled maturities by year. We have also added additional disclosure on termination fees, capitalized direct development compensation costs, and a footnote has been added in the in-process development page providing additional information regarding phasing of developments.
As Brian will discuss, in an effort to minimize our leasing risk in new developments, we phase construction until leasing has occurred. This has always been an integral part of our development strategy -- nothing new in how we operate, just improved disclosure.
We hope that you find this enhanced transparency helpful. Thank you and Mary Lou.
Mary Lou Fiala
Thank you, Bruce. Good morning.
Regency's operating portfolio results were strong in the first quarter with same-store growth of 3.1% and rent growth of 12.6%. Occupancy remained solid at 94.9%, as 1.7 million square feet of space was leased or renewed in our operating and development portfolio.
As I said on the last call, our top priority is to maintain occupancy at 95%. As evidenced by an 88% renewal rate for the quarter we are proactively working with our retailers on renewals to help achieve this goal.
Impressively, [inaudible] rate growth on these renewals was 10% and in line with the previous three quarters. Although we clearly are pleased with this quarter’s results, the economy has softened and we are seeing modest stress in our portfolio.
Consumer confidence continues to deteriorate. The majority of consumers believe that their wealth is less than it was even a year ago.
Their home values have dropped and the value of their 401K or stock portfolio are diminished. Negative economic outlooks and political uncertainty dominate the evening news and create fear.
These economic lows are made all too real each week as consumers fill their gas tanks or grocery shop where the price of grains, eggs, and poultry are up over 20%. The result is a jittery consumer that is waiting on the sidelines to spend their money.
This decreased demand is impacting some of our retailers and as a result, we expect small shop attrition will impact occupancy and same-store growth. Additionally, downtime in the portfolio has increased to 8.2 months and we expect termination fees to be half of what they were last year.
It’s the combination of these factors that will cause same-store growth to moderate with full year expected growth of 2.4% to 2.8%. Although retail sales were up over 1.5% in the first quarter, consumers are becoming more price sensitive.
As a result, sales and margins will suffer, leading to an increase in the number of consolidations, bankruptcies, and store closings. As I’ve said in the past, this trend impacts certain categories more than others, as consumers tighten their discretionary spending.
They are eating at home more frequently and when they do dine out, they are choose fast casual and value-oriented dining. They are shopping discounters rather than department stores.
As a result, grocers continue to see solid comp store sales increases, 5% in the most recent quarter, while department store comps were down over 4%. Remember, in the Regency portfolio, 90% of our GLA is leased to tenants in retail categories that have seen flat to positive sales in past recessions.
We are operating in an environment that market forces will have a moderate impact on our business. Regency's predominantly grocery anchored necessity driven portfolio is built to withstand these economic pressures.
We have proactively culled the bottom of our portfolio over the past decade, coupled with a development program that continuously adds new state-of-the-art centers, creating a quality portfolio with dominant anchors in strong markets. The majority of our grocers have reported their 2007 sales, which on average are up over 3% over 2006, to an average of $24.7 million, or $476 per square foot.
In addition, the average age of our portfolio is 12 years versus 14 years just two years ago. Real estate, as you all know, is a corner business.
The best property and the best location is the key to success. Analyzing our operating portfolio on a regional basis, our top performing markets are, as expected, the Northeast, Northern California, the Pacific Northwest, and Texas.
And while the Florida and Southern California economies have softened, the quality of our properties in these markets should help sustain performance, as evidenced by our 96% occupancy and first quarter rent growth near or above double-digits in both of these markets. This week we’ll be hosting our annual customer appreciation event with over 100 attendees.
Retailers, as well as brokerage and development companies will be attending. Our long-lasting established relationships are key to sustaining our operating performance goals.
We have already booked over 300 meetings for ICSC in Las Vegas and expect this year’s meetings to be pretty similar to last year’s, a tribute to the expertise of our team and the quality of our portfolio, both in operations and in development. The work that Regency has done in the past through highly disciplined investments and proactive culling of our portfolio to ensure that our centers are in good areas with strong demographics and top tier anchors is paying off.
The solid results of the first quarter have built momentum that should carry us through the year. We are positioned to continue to perform in our operating properties to maintain occupancy at 95% and to maximize opportunities in development.
Brian will now review our development results and future prospects.
Brian M. Smith
Thanks, Mary Lou. This was a good quarter for the development teams on all fronts -- pipeline activity, new starts, leasing, construction costs, and in-process returns.
As for starts, we added two new developments totaling $29 million with expected returns in excess of 9%. One of these starts is the second phase of Suncoast Crossing.
This project is a good example of strong projects beating soft markets -- in this case, Florida. The combined center is now extremely well-anchored by two of the best retailers in the country in Target and Kohl’s.
The $1.1 billion in-process portfolio also performed well as a whole. Forty-eight projects are in development with same-store construction costs down $3 million on a quarter-to-quarter basis.
The Pacific region projects in particular are enjoying very pleasant surprises when it comes to construction costs. Four projects were stabilized during the quarter and moved off our in-process list.
These four completions had an average return on costs of 11.3%. Returns on the in-process projects are eight basis points lower than last quarter on an after JV basis.
However, on an apples-to-apples basis, where we add back the completed projects and remove new starts, the returns are actually two basis points better than last quarter. In the first quarter, we leased 232,000 square feet in our developments.
This is 30% more space than we leased in the first quarter of 2007 for the same size portfolio, and in doing so we also beat our own leasing plan by about 10%. By all accounts, this is a solid showing in any kind of market.
We expect these projects to continue to perform and believe we can end the year with them 85% leased. As Mary Lou pointed out, there gains were accomplished under circumstances that have certainly become more challenging.
With the exception of the grocers, many retailers are slowing new store growth and some are trying to push store openings into 2009. Decisions are taking longer and sometimes are unpredictable.
The retailers are cautious and require more research before approving projects. So we are very pleased with the results and confident of the long-term performance but recognize that some of the developments may take longer to achieve 95% stabilization in this environment than we had hoped for.
Looking ahead, these market conditions play well to our strengths. We are seeing an increasing number of attractive opportunities in this environment and are well-positioned to capitalize on them.
Retailers aren’t closing up shop. While more cautious and deliberate, the top retailers need stores.
When they approve new locations, they count on them to be built. In this environment, these retailers are worried about the ability of developers to finance and deliver their stores.
Some retailers are going so far as to interview their developers to make sure they can perform. The fact is many private developers are having a difficult time financing good projects and as they run out of options, they increasingly turn to Regency as a potential development partner.
This is creating excellent new opportunities for Regency, allowing us to pick and choose projects we want to pursue. Construction costs are benign at worse and significantly under budget in many markets.
Entitlement difficulties are easing as many cities begin to welcome retail developers and the tax revenue their projects generate. And finally, sanity again prevails in purchasing land.
Terms have improved dramatically and land prices are beginning to soften. Simply put, at the inflection points of any cycle, there are also greater opportunities, but the environment is different and there are greater risks to accompany the increased opportunities.
Our go-forward strategy then must address both. We must reduce risks we face while taking advantage of the opportunities.
Ways we will do this include: first, we will continue to phase some projects as appropriate. As Bruce said, phasing of developments has always been an integral part of our development strategy.
In today’s market, there is certainly heightened sensitivity. Nine of the 48 in-process projects have experienced weaker demand with the downturn in housing.
We’ve decided to delay the construction of 556,000 square feet of space associated with these projects until additional leasing has occurred. This 556,000 square feet represents only 7% of the building area for the in-process portfolio.
About 60% of this space is anchor space, the rest being shops. Without question or exception, these projects enjoy the dominant locations of their respective markets and for that reason will prosper long-term.
When demand increases and we are able to lease additional space, we will complete the construction. Second, there will be even more focus on stronger demographics.
The projects we will build are those with proven strong tenant demand with an emphasis on in-fill markets with consumer purchasing power that is based on population densities and income, not home equity. This means concentrating on new projects with even denser populations and higher incomes.
This focus is working, with results that are already evident. Overall, our three mile population for the entire pipeline is almost 62,000 people compared to about 49,000 people a year ago, or a 27% increase in density.
On projects in initial due diligence that have not yet hit the pipeline, the average three mile population is almost 142,000 people with an average household income of $82,000. We will also reduce risk by further limiting the amount of shop space we will build.
Again, the changes are already visible. Eighteen months ago, our ratio of shop space to total building area was 28% to 30%.
Today our in-process project shop space represents 23% of total area while in the pipeline, the number is only 20%. And for the projects in initial due diligence, the ratio is down to 14%.
Finally, through the relationships that come with development teams in our local offices, we will take advantage of opportunities presented by other developers’ financial limitations. The inability of our competitors to get their projects off the ground is creating more JV possibilities, which increases our ability to be selective as to which ones we choose.
Specifically, 21 such opportunities have come our way. Not only will these -- I’m sorry, not all of these will prove worthy of our investment but several will.
So far we have passed on three but four have moved into the active pipeline and the other 14 are currently going through pre-development evaluation. Several look very promising.
This improved selectivity also allows us to accommodate those anchors who want to open in later years while still moving forward on well-conceived developments with strong anchor demand. In short, we will continue to take advantage of opportunities in these turbulent times, available only to those with the expertise and financial strength to capitalize on them.
We will continue to maintain a pipeline of quality projects that the leading retailers still clamor for, and we will do so in a manner that addresses the risks inherent in the market. In closing, I am pleased with our most recent results and excited about the kinds of opportunities we are seeing, which we will exploit.
Despite the increased uncertainty, the in-process projects performed well in the first quarter and there is strong demand for projects in our pipeline. This doesn’t just happen.
In any market, weak or strong, great real estate sponsored by formidable companies with highly experienced talent is still a winning formula. In fact, the components of this formula are more important than ever.
While the macro picture is certainly important, the fundamentals supporting each individual project are even more germane. Well-anchored developments in the right locations do thrive even in downturns.
It’s all about purchasing power based on densities and incomes. Dominantly located projects in high barrier markets with in-fill demographics and favorable supply/demand forces continue to attract the very best anchors.
There is no question the demand for projects with such characteristics remains strong even today. Today’s environment is not a surprise.
We saw warning signs a few quarters ago and began taking steps necessary to prepare for this downturn. That process continues and I believe we are better positioned now than at any time in the past.
We are building less shop space, the demographics of the pipeline are greatly improved, the weaker retailers have dropped out, the opportunities we are seeing are rich, the competition is faltering, land and construction costs are moving in the right direction, and returns on new opportunities are improving. Markets like this benefit the strong and the experienced and it is for all these reasons that I am more excited than ever about the future.
We’ll take advantage of this slowdown to position ourselves for the inevitable rebound while taking care of what we’ve already started.
Martin E. Stein Jr.
Thank you, Brian and thank you, Mary Lou, thank you, Bruce, and thank you, Lisa. As you heard from the team, Regency made significant progress in the first quarter.
Notable accomplishments include bolstering an already strong balance sheet and reliable access to capital to the closing of a term loan an additional line of credit that brings the company’s total back facilities to over $940 million. Regency now has access to over $2.2 billion of committed capacity from our banks, our balance sheet, from our co-investment partnerships.
High quality operating portfolio produced consistent growth in net operating income yet again of over 3%, and double-digit [rent growth], generating momentum that will sustain results in the more challenging environment ahead. The development program continues to build financial value.
Progress was made on the $1.1 billion of in-process developments, which are expected to generate close to a 9% development return and almost $300 million of future value, assuming a 6.6% cap rate. We appear to be well-positioned to start $400 million to $500 million of well-conceived new developments with proven tenant demand.
At the same time, as good as recent results look in the rearview mirror, the road ahead promises to include some pretty nasty bumps from both the economy and capital markets. In the more discretionary retail categories, tenant demand for space continues to temper.
In my view, it very well could be at least two years before retail sales recover to a level that would translate into a return to robust demand for new store locations. There have been some improvements in the capital markets, like the tightening of spreads on corporate debentures.
And while the worst of the financial crisis is probably behind us, the capital markets are not totally out of the woods and are still a long way from a sense of normalcy. We are fully cognizant of how these factors might adversely impact the fundamentals of the operating portfolio, the development program, and the balance sheet, and Regency will certainly not be immune to softer tenant demand and higher cost of capital, higher cap rates.
While our hindsight and prognostication skills are far from perfect, we do try to incorporate these sobering conditions into our projections, which we share with you through guidance and the color that we are giving you on the call. You should know that even as I assess the upcoming rigorous test, I continue to be energized and excited by Regency's distinctive assets and a talented and experienced team that is taking proactive measures.
These assets and measures that will not only enable us to weather the storm will also position Regency to grow per share funds from operations and intrinsic value. As Mary Lou explained, Regency's high quality portfolio should continue to deliver growth in net operating income.
Regency's shopping centers are primarily anchored by best-in-class operators who again appear to be generating strong sales in another downturn. The vast majority of the portfolio is located in relatively dense areas with above average household income and a few centers in green areas.
There are $520 million of developments with over $150 million of embedded gains, which have already stabilized and are available for sale or contribution to our partnerships. Despite taking longer to lease and less generous margins, the $1 billion of in-process developments will still create hundreds of millions of dollars of value.
Included are $200 million of developments which are expected to be completed by the end of 2008 and over $500 million of projects which are expected to stabilize by 2010, $120 million of which is already over 85% leased. As Brian articulated, the quality of the $1.5 billion pipeline has been enhanced by an even higher level of scrutiny from both Regency and from our anchor tenants, and will be delivering significant value well into the future.
The pool of opportunities to select from has grown from local developers who are capital challenged and from retailers who are looking to developers to execute. As Bruce described, the balance sheet is in great shape.
We are carefully make sure that we have capital sources to fund compelling developments and other killer opportunities which may arise. We now welcome your questions.
Operator
(Operator Instructions) We will take our first question from Christy McElroy from Banc of America.
Christy McElroy - Banc of America Securities
Mary Lou, you talked about small shop attrition a little bit. Can you provide some more color on what tenants you are worried about and have you seen incrementally more distress among some of the local and regional tenants?
Mary Lou Fiala
We are seeing about the same kind of move-outs that we historically have in terms of square footage, but what we are seeing is a lot of them are coming more from the mom and pops, under capitalized retailers. We looked at it by market, we’ve looked at it by sector and it really is -- there’s no trend that I can sit here and say it’s this category versus another category.
But that’s really -- it’s the mom and pop or the franchisee that is in a business that just can’t afford to make it, that they may have been decent operators in very strong economic times but just can’t sustain it or just give up. And the reason why we are tempering our growth is because of the fact that even though we don’t have greater move-outs, it’s taking us longer to find retailers to fill that space.
So it’s the mom and pops, it’s across the board, and it’s the small franchisee who just doesn’t have the capital to stay in business, or it is too much work and they are giving up.
Christy McElroy - Banc of America Securities
And then with the grocery stores having held up fairly well in this environment, is there a distinction that you are seeing in the performance of some of the higher end, higher priced grocers, like Whole Foods? Are they seeing an impact on sales growth from consumers trying to stretch their dollars further?
Mary Lou Fiala
Not yet. I mean, we see the high-end grocers continuing to perform at high-single-digits and then the traditional grocers performing more in the mid-single-digits.
So it’s -- you know, it’s a strong category. I think it’s a combination of the prices going up in food inflation, as well as the fact that people staying home and not going out to eat and entertaining as much.
So it’s really been the nesting that happens during a recession, as well as the cost of goods.
Christy McElroy - Banc of America Securities
Thank you.
Operator
We’ll take our next question from Christeen Kim with Deutsche Bank.
Christeen Kim - Deutsche Bank
Thanks. Mary Lou, just a follow-up on the longer down time -- you mentioned 8.2 months.
What is that up from?
Mary Lou Fiala
You know, it’s only up from eight months last year but 12 to 18 months ago, we had that thing down to about 7 months, so over the past year-and-a-half, it’s significantly gone up. So we are seeing it trend up a little bit every quarter but it has definitely gone up.
It is just taking longer to replace those tenants.
Christeen Kim - Deutsche Bank
Brian, you also mentioned that you guys did about 30% more development leasing than Q107, despite a more difficult operating environment. Could you provide a little bit more color?
Is it just the nature of the projects in the pipeline right now?
Brian M. Smith
I think it is. I think we are probably working twice as hard to get the same amount done but the projects are strong and in almost every situation, we do have the dominant locations.
For example, Deer Springs in Las Vegas, Las Vegas is a market where residential growth has slowed. We’re north Las Vegas, right on the beltway with a major expressway that leads to downtown, with the best anchors and so that’s -- when people make decisions to go somewhere, they are going to be selective and we just are fortunate that some of these projects are the ones that went out in that kind of competition.
Christeen Kim - Deutsche Bank
Great. Thanks, guys.
Operator
We’ll take our next question from Jay Habermann with Goldman Sachs.
Jay Habermann - Goldman Sachs
Good morning. Here with Tom as well.
You mentioned the $500 million plus or so of assets that are stabilized but not yet sold or contributed and I’m just wondering -- I mean, given the cautious views on the capital markets, et cetera, are you going to consider resizing the absolute size of the development portfolio over the next couple of years, I mean, given your sort of cautious views over that timeframe? And also what gives you confidence about those margins and I guess the $150 million of gains, again given sort of the wide bid/ask spread between buyers and sellers?
Martin E. Stein Jr.
Well, in regard to the margins, I think as we’ve indicated in the past, we’re using relatively conservative cap rate assumptions in the mid to upper sixes. We know what returns are and we are using cap rates in the 6.5% to 6.7% range as far as the margins we are estimating there.
We obviously, as Bruce indicated, are very carefully making sure that we have capital sources out into the future for new developments and any other investment opportunities that are there. Capital is extremely precious today and we want to make sure that the capital is available to fund our growth.
And as far as right-sizing the development pipeline, I think you mentioned related to capital as one reason to do it, and another reason to do it may be even related to risk. And I think as Brian has indicated, the quality of the pipeline has never been better and the underwriting has really never been more conservative.
I think he indicated that we have taken our side shop space percentage down from 30% to 14%. We are dealing with best-in-class operators and I think as he said and I said, not only are we being more conservative but our anchor tenants are being more conservative, so you have kind of a double self-selection process.
So I still think -- let me say this; I think that the pipeline is even more -- as attractive as the in-process developments are, the pipeline is even more compelling. And returns seem to be, on the face of it, going up a little bit.
We’ll see on that.
Jay Habermann - Goldman Sachs
It’s Tom here with Jay. I was hoping you could elaborate a little bit on the $21 million to $23 million promote you expect to book at the end of the year.
If you could just go over the logistics of how exactly that promote will be recognized, whether that is going to be from the sales of some assets currently in your co-investment partnerships. And also, what the potential for slippage on that promote is into 1Q09 if market conditions don’t materially improve over the back half of the year.
Lisa Palmer
No properties need to be sold for us to be able to recognize that promote. We simply will have to value each property individually and then as long as the returns are over an IRR threshold, we receive the promote.
So there will be no slippage either into the first quarter of ’09.
Martin E. Stein Jr.
And I think as Lisa indicated, we’ve used reasonably conservative -- in our view, conservative cap rate assumptions. And another important thing that she mentioned was the fact that the properties will be individually valued.
And in this market, we are still seeing individual properties, cap rates on individual properties being a lot stickier as far as going up than cap rates on larger transactions, which is where you have a lot of investors for investments in size staying on the sidelines.
Lisa Palmer
And with our co-investment partnerships, really in three of the four major ones, we basically just have a cycle of when the promote is recognized and in this one, this happens to be the seven-year timeframe of when it is going to be valued and a promote recognized
Jay Habermann - Goldman Sachs
Thank you.
Operator
We’ll take our next question from Paul Morgan with Friedman, Billings, Ramsey.
Paul Morgan - Friedman, Billings, Ramsey
Good morning. On the comments about cutting the shop space percentage from 28% to 30% to 14% for the shadow pipeline, what kind of impact does that have on your yields?
Brian M. Smith
Well, it is going to have some -- there is going to some trade-off. I think it is going to give us a little bit of return for less risk.
Right now we are expecting in 2008 that our pipeline returns will be just a shade under 9%, although I did mention that all the increased opportunities we are seeing is allowing us to be more selective and enhance our returns. In 2009, we are looking for that return to go up to about 9.35% and in 2010, about 9.9%.
That’s before partner participation but after partner participation, still 9.6% in 2010. As Hap indicated, it remains to be seen if all that materializes.
There will always be cost pressures and things that could bring down the return but the trend is really favorable.
Paul Morgan - Friedman, Billings, Ramsey
It’s going up despite the fact that there is going to be some offsetting drag from the lower shop space allocation?
Brian M. Smith
Right. We’ve got cost working in our favor in a lot of those -- it is helping some.
Paul Morgan - Friedman, Billings, Ramsey
Okay, my other question is on, Hap, you provided some color in recent quarters on cap rates and I just wanted to get a sense from you what you’ve seen so far this year in terms of cap rates and maybe -- obviously with not a lot of transaction activity maybe how far apart you think the, how wide the bid/ask spread is at this point and what might happen and how far cap rates need to move to kind of clear the market at this -- right now.
Martin E. Stein Jr.
Well, there’s not a lot of transactions that are happening out there, number one. Number two, there still appears to be, especially for A properties in better markets, enough demand on an individual property basis, as I said, and I think those cap rates -- Brian, 6.5%, 6% to 6.75% depending on the market for A properties, 6% to 6.75% today.
So there’s been -- individual cap rates have been pretty sticky. I think where you seeing -- where investors truly are staying on the sideline is on larger transactions and for core properties, large transactions, there just doesn’t seem to be very much capital [all up there], but as far as individual property transactions, cap rates have been for A properties pretty sticky.
I’d say B properties, depending on the market, et cetera, 7.25% to 7.75% and your guess is as good as mine as far as C properties.
Paul Morgan - Friedman, Billings, Ramsey
Are sellers just kind of taking off the market properties that aren’t getting the bids or is it just they are not even -- there is not really much even going on in the market at all?
Martin E. Stein Jr.
I think there is -- just to finalize that thought on the question, transactions for better properties, A quality properties are happening on an individual, one-off basis typically. You are seeing some of that occur for B properties.
As Bruce said, we expect to close, and more to come on the next call, on this mid-Atlantic portfolio that we’ve had on the market and it really does appear like that portfolio is going clear in the second quarter of this year.
Operator
We’ll take our next question from Ambika Goel with Citigroup.
Ambika Goel - Citigroup
On your development profits that are embedded within your guidance, it appears based upon reported 1Q and then guidance for 2Q FFO that gains are going to be back-end loaded. Given that you have about $500 million of stabilized developments that you can sell and an open-end fund that can buy those assets, what is the reason for making those development sales back-end loaded?
And are there any contingencies that we should be concerned about that that guidance may not be attainable?
Martin E. Stein Jr.
Two of the properties are contributions to the open-end fund in which the anchor, we have signed leases from the anchor. The anchor, just because of the timing of the construction of the space, just hasn’t moved in.
And I think it is more related to factors like that than anything else. I mean, Lisa, I don’t know if you’ve got any other color to give.
Lisa Palmer
Basically it’s -- we need them to be rent-paying and the rent is scheduled to commence in the third quarter.
Martin E. Stein Jr.
And they also aren’t as large as -- to meet the open-end fund requirements in terms of size. In certain cases, we have a -- in another case we have a partner buy-out that we can’t commence -- we can’t do until August of this year, so they are reasons like that, Ambika, that whether it’s tenant move-in date where they are going to be rent-paying and occupied, or partnered by our factories like that.
We’re not looking for drama.
Ambika Goel - Citigroup
Okay, so just to clarify this -- correct me if I’m wrong but there’s about $200 million of development sales that will have to occur in the back-half of ’08 and you are saying about half of those projects are going to be -- are related to anchors that haven’t opened yet, but leases are signed?
Lisa Palmer
No, I mean, I think that that’s an overstatement. Because they are the community shopping centers that we are selling to the fund, they tend to be larger, so each individual transaction will have larger gains than a typical grocery-anchored shopping center that we sell.
Like last year when we did Vista Village in the first quarter, the gain on that was close to $20 million. So they are individual transactions that are larger and as Hap explained, there’s really only two of those projects that we just talked about, the one with the buyout and the one where the -- and it’s not -- it’s just a smaller, junior anchor that is not rent-paying yet.
So there is not risk I think is what you are alluding to in terms of that they may not move in and may not begin paying rent. There’s just -- they are larger transactions so there is fewer of them but again the risk is pretty minimal.
Ambika Goel - Citigroup
And then just one short follow-up -- on that $500 million of assets that are stabilized, what is the expected NOI development yield on those projects? Because I guess you are suggesting that there would be higher than 9%, given that there are these larger projects.
So I just wanted to see -- just to back into the profits, what is the development yield of those projects that are stabilized?
Lisa Palmer
I’m sorry, you are talking about the 520 that are already stabilized?
Ambika Goel - Citigroup
Yes.
Martin E. Stein Jr.
I would say it’s in the above 9%.
Brian M. Smith
Yeah, above 9%.
Ambika Goel - Citigroup
Okay. Thank you.
Brian M. Smith
We just want to confirm the number.
Operator
We’ll take our next question from Craig Schmidt with Merrill Lynch.
Craig Schmidt - Merrill Lynch
Thank you. This question again focuses on your sort of expecting the tougher environment taking the same-store NOI from 3.1 down to a range of 2.4 to 2.8 and likewise doing for the rental regrowth.
That’s about a drop of 20%. I’m wondering what you think the drop will be for the community shopping center industry as a whole.
I guess what I am getting at is what degree of protection the PCI program is going to be giving you here.
Mary Lou Fiala
I think that if you look at some of the studies that have been done, they are saying occupancy could go down to on average another couple of percentage points. And I think that that’s very real.
And I to think ours will not go down nearly as much as you’ve seen in the industry. We saw that in the early 2000s when some of our peers went below 90% and we were very well maintained between 94% and 95%.
So I think it is going to obviously depend on the quality of the portfolio and the quality of the retailers. I think we will have a modest decline and actually we are looking at the end of the year average occupancy being about the same.
It’s just during the year we’re going to have some downtime that it is just going to take us a little bit longer to get there than historical numbers. So I think we over time, we could moderate a little bit from where we are but not significantly and depending on the PCI program and the quality of your portfolio, I think you could drop as much as another couple of percent.
Martin E. Stein Jr.
I think another factor in addition to PCI and the quality of the anchors and the quality of the locations is the fact that we’ve got 21 offices, which really does allow us to be close to our properties and be extremely hands-on.
Craig Schmidt - Merrill Lynch
Great. And then I guess as a follow-up, the slight tick-up in the yield for the two new developments, is that because of the greater scrutiny or just sort of randomness?
Brian M. Smith
I think it’s random. I don’t think it has anything to do -- one of them is a third phase to a project, so you are dealing with mostly shop space.
So you are going to get higher rents and higher returns on that anyway.
Craig Schmidt - Merrill Lynch
Okay. Thanks a lot.
Operator
We’ll take our next question from Jeffrey Donnelly with Wachovia.
Jeffrey J. Donnelly - Wachovia Securities
Good morning, folks. I do want to clarify -- when you talk about reducing your exposure to shop tenants through your development pipeline, is that because you are exclusively shifting your development mix towards more of a power center product, I guess I’d call it, or are you developing some properties that are more in-fill but just not to their fullest potential, maybe leaving some space behind for a future date?
Brian M. Smith
We are doing a lot more in-fill and we are not shifting our focus exclusively to those kind of projects, community center projects. In fact, if you look at 2008, we have by number about a third of our projects are grocery anchored and about two-thirds would be community centers.
In 2009, the grocery anchored centers goes up to 58% and community to about 42%. So the mix is not changing.
In fact, we have 29 grocers in the in-process portfolio right now and our pipeline is right now looking at 29. So there is really no shift.
Jeffrey J. Donnelly - Wachovia Securities
So to be clear, it’s sort of a grocery-anchored center that just happens to have less shop space, but not so much undeveloped?
Brian M. Smith
That’s right.
Jeffrey J. Donnelly - Wachovia Securities
And then I guess for my follow-up, I guess my concern is that maybe in that pursuit of shoring up the visibility of your development yields, do you reduce your future growth prospects by forsaking yourself some of that shop space? I mean, can you talk about how you weigh that decision?
Because I would think that you are developing into a product type that has maybe more exposure to a smaller handful of tenants and probably has higher cap rates vis-à-vis the more traditional stuff you had been billing.
Martin E. Stein Jr.
One thing as it relates to community center portfolio, one of the reasons that the open-end fund makes sense for us as we contribute those larger projects that happen to have a lower growth profile, typically have that lower growth pile into the open-end fund. And we will continue to evaluate any development that we complete and find out whether it is suitable for Regency to own 100%, for one of our partnerships, or if it makes sense for a third-party sale.
An interesting component of the pipeline is buying boxes and we bought three Merman’s boxes and we will ultimately sell all three of those boxes, which we very successfully released and redeveloped. And that also has an impact on the amount of shop space that is being picked.
I mean, some of it is yes, we are being a lot more cautious but some of it has to do with the nature of what’s being developed.
Jeffrey J. Donnelly - Wachovia Securities
Great, thanks.
Operator
We’ll take our next question from Michael Mueller with JPMorgan.
Michael W. Mueller - JPMorgan
In terms of the development contributions to the open end fund, what’s the exact cap rate floor for the fund? And is it turning out to be any sort of an issue today?
Lisa Palmer
It’s basically -- it’s a ladder on a total dollar value, basically, so the first $225 million in the floor, they basically have to average 6.5% and then after that, it steps up to 6.6 and then it steps up to 6.7 and that’s the -- that is the ultimate floor. You know, the first four or five assets that we’ve contributed have actually been below that 6.5% so the next one we put in, we’ll probably have to make up that difference a little bit and in that case, it would make a difference.
But beyond that, I think with where cap rates have gone and with the dollars that we save on transaction costs and the tax savings, it does not become an issue. We feel that we are getting full value.
Martin E. Stein Jr.
And we’ve incorporated those factors into our projections.
Michael W. Mueller - JPMorgan
Okay. Thanks.
Operator
We’ll take our next question from Jim Sullivan with Green Street Advisors.
Jim Sullivan - Green Street Advisors
Thanks. Brian, the leasing progress you made in the development pipeline seems to have been very concentrated in markets that are less severely impacted by the housing situation.
And when I look at housing bubble markets, particularly Southern California and Florida, it looks like the vast majority of your developments did not achieve any leasing progress during the quarter. Are you seeing substantial differences in tenant demand in the housing bubble markets versus those less severely affected?
Brian M. Smith
Yeah, California, I’ll speak to that one because that’s where the bulk of the big projects are. You living there, Jim, know that it depends where you are.
The projects that we built more in the growth rates out in the Coachella Valley or the desert or the Inland Empire are the ones that are taking longer. They are definitely experiencing more of a slowdown as the housing stopped.
Those that are more in the urban core, certainly Northern California, anywhere near the coast, are doing just fine. But yeah, we’ve certainly seen the slowdown in both Florida and -- North Las Vegas is another one, of course, though, that has -- I think is one of your bubble markets and that one we’ve seen very strong demand.
In fact, that’s where the bulk of the leasing took place.
Jim Sullivan - Green Street Advisors
And despite the longer lease-up and some of the softness in tenant demand, you are still reasonably confident about hitting your pro formas with respect to yield?
Brian M. Smith
I do. We adjust those every quarter and we take a look at it space by space and there have certainly been some projects that we’ve had to lower the rents and there’s been other projects that have outperformed.
So I think we are in good shape, at least right now based on what we know for the returns and the income. The only issue is some of them are taking longer to reach stabilization than we would have expected.
Jim Sullivan - Green Street Advisors
Thank you.
Operator
We’ll take our next question from Chris Lucas with Robert W. Baird.
Christopher R. Lucas - Robert W. Baird
Good morning, everyone. Brian, could you just give a little more color on the construction costs in terms of what you’ve seen over the past year and what you are seeing in sort of your future expenditures?
Brian M. Smith
Sure. Basically they are as I said, benign.
I mean, we’re expecting cost increases going forward of about 5%. And some of the individual materials are down.
The ones that obviously remained high would be the petroleum based products, like asphalt and PVC pipe and the like. The labor component, especially in the formerly hot markets, as Jim says, the bubble markets, are way down.
So on a lot of our Pacific region projects, particularly California, we are seeing construction bids come in of 15% below what we had budgeted for those projects, which is accounting for those cost decreases. But if you strip out the real high growth markets where we are seeing big cost decreases, you are only looking at about on average 5% going forward.
Martin E. Stein Jr.
And that’s cost increase in relation to budget.
Christopher R. Lucas - Robert W. Baird
Okay. Thank you.
And then just a quick follow-up, again on the issue of the shadow pipeline and the lower shop space allocation, am I to understand that what the future will look like in terms of the projects, the allocation will be to larger spaces. But are you building out the complete FAR on the parcels that you have, or are you setting aside potentially some of that FAR for future phases of a particular project, but leaving your initial shop space allocation at a lower level?
Brian M. Smith
The key thing is we build to the size of the market, not the size of the site. So just because we have 20 acres does not mean we are going to max out to 200,000 square feet.
So in some cases, it so happens that we wish we had more space and we can only build what the land allows, in which case we’ve maxed it out. In other cases, there probably will be extra space that we will be able to take advantage of in later years.
Christopher R. Lucas - Robert W. Baird
Okay, great. Thanks a lot, guys.
Operator
At this time, there are no further questions. Mr.
Stein, I will turn the conference back over to you for closing comments.
Martin E. Stein Jr.
Once again, we appreciate your time. We appreciate your interest in Regency and hope that everybody has a great rest of the week and weekend ahead of them.
Thank you very much.
Operator
Ladies and gentlemen, this will conclude today’s conference call. We do thank you for your participation and you may disconnect at this time.