Feb 2, 2012
Executives
Hap Stein – Chairman and Chief Executive Officer Brian Smith – President and Chief Operating Officer Bruce Johnson – Chief Financial Officer Lisa Palmer – Senior Vice President, Capital Markets Chris Leavitt – Senior Vice President and Treasurer
Analysts
[Michael Bellarmine] – Citi Craig Schmidt – Bank of America Merrill Lynch Christy McElroy – UBS Jay Habermann - Goldman Sachs Paul Morgan - Morgan Stanley Michael Mueller - JPMorgan Jeff Donnelly - Wells Fargo Chris Lucas - Robert Baird Cedrik Lachance - Green Street Advisors [Tao Akesanya] – Jeffries and Company Todd Lukasic – Morningstar [Gaonton Gar] – Credit Suisse Jim Sullivan – Cowen and Company Wes Golladay – RBC Capital Markets Vincent Chao – Deutsche Bank [Semi Farique] – ISI Philip Martin – Morningstar
Operator
Good day and welcome to the Regency Centers Corporation Fourth Quarter 2011 Earnings Conference Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to your moderator, Senior Vice President of Capital Markets, Ms. Lisa Palmer.
Please go ahead, ma’am.
Lisa Palmer
Thank you, Tom. Good morning, everyone and thank you for joining us.
On the call this morning are Hap Stein, Chairman and CEO; Brian Smith, President and COO; Bruce Johnson, CFO and Chris Leavitt, Senior Vice President and Treasurer. Before we start, I'd like to address forward-looking statements that may be discussed on the call.
Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in these 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 these forward-looking statements. Hap?
Hap Stein
Thank you, Lisa, and good morning. As I stated at Investor Day, Regency’s executive team is committed to regain our standing as a blue chip shopping center company by achieving four critical objectives, which I shared with you then, and I want to very briefly review with you now.
First, generating dependable NOI growth of 3%. Second, reinvigorating a disciplined development program that will add significant value to the portfolio.
Third, further strengthening the balance sheet and assuring access to capital, and fourth, compounding recurring funds from operations and NAV per share by 5%. As I reflect back on 2011, I am gratified by the progress the team has made in positioning 2012 to be a turnaround year for Regency.
I’d like to now highlight those key accomplishments that will be important building blocks for both 2012 and the sustainable achievement of these four objectives in subsequent years. We leased nearly 7 million square feet of space, including 2 million square feet of new leases, and that strong tenant demand is continuing.
We increased occupancy in the operating portfolio to 93.5% and this represents the highest level in three years. We sold on a pro rata basis more than $90 million of operating properties and recycled the capital into $110 million of dominant grocery-anchored shopping centers with much better prospects for future growth in NOI.
We started over $95 million of new development and nearly $25 million of redevelopments or expansions at attractive returns of more than 9%. In addition, we sold or converted to development almost $30 million of land held and we took further steps to improve the balance sheet.
Among these was renewing our $600 million line of credit, closing on a $250 million term loan, and refinancing more than $500 million of mortgages in our co-investment partnerships. In addition to this significant progress, there are several other important reasons and I’m confident that our focus strategy will soon start translating into performance that will manifest into the ultimate measure, total shareholder return in excess of our shopping center peers.
It all starts with our exceptional people. Many of you have had first-hand opportunities to see how good they are through our investor relations group or on property tours.
Regency’s team and our enduring customer relationships are advantages that enable Regency to fully leverage our other essential assets, expertly execute our strategy, and effectively accomplish our critical goals and objectives. It is clear to me our key customers truly recognize the value of Regency’s platform and generally respect and appreciate doing business with our people.
In the mind of our retailers, brokers, our co-investment partners, and other key stakeholders, Regency is a blue chip company. In fact, the vast majority of Regency’s portfolio contains dominant grocery-anchored shopping centers that are located in attractive markets.
Our experience has shown that centers with highly productive grocery anchors attract better side shop retailers, maintain and grow occupancy and produce reliable NOI. Let me take a moment to remind you of the key attributes of the portfolio.
87% is in a top 50 market. Average household income of approximately $100,000, three mile density of over 90,000 people, and grocery sales that we’re proud to publish of $25 million and $500 per square foot.
In 2012, we’ll place even greater focus on selling the small segment of the portfolio, including legacy developments that we determine might be a drag on NOI, and buying centers that will enhance future growth. Regency’s capability to manufacture dominant grocery-anchored shopping centers in attractive markets on a basis that is accretive to NAV, and especially to the price at which we could acquire comparable properties, is an essential Regency advantage.
We have incorporated the valuable lessons learned and are focusing on the construction and repositioning of core shopping centers that we want on long term. And last, Regency has a sound balance sheet and access to multiple sources of capital.
Perhaps that’s the most important lesson from the recent financial crisis that the balance sheet maturities and access to capital are critical. We are committed to maintaining and even enhancing substantial financial flexibility while we are aware we are still operating in an uncertain and fragile environment.
I believe that the accomplishments of 2011, combined with these four attributes and resilient retailer demand for space in our shopping centers, have positioned Regency to make even more meaningful progress this year. Bruce?
Bruce Johnson
Thank you, Hap and good morning on this beautiful day in Jacksonville, Florida. As Hap pointed out, as a result of the proactive steps we’ve taken, our balance sheet is in good shape.
Let me recap the year highlights. We renewed our $600 million line of credit on an extremely favorable basis and we’ve closed on a $250 million unsecured term loan to repay the bonds that matured in January.
This term loan is fully pre-payable without penalty providing us with the flexibility to delever when it makes sense to do so. This means that as of the end of January we had more than $600 million of available capacity between the line and the term loan.
We also secured more than $500 million of mortgage finance in our co-investment partnerships with terms that exceeded tenures and raised, at average, 4.7%. Finally, [Caster’s] committed $100 million of equity to our partnership with them.
As a result of our efforts of the last several years, we have improved our debt profile by reducing the amount of debt outstanding and meaningfully extending the average maturity date with our wholly owned and co-investment portfolios. I’d like to turn now to capital recycling.
In 2011, we disposed of 13 non-core properties. The average cap rate was 7.8% and we acquired five dominant grocery-anchored centers at an average cap rate of just over 6%.
In January we entered the New York market with a strategic acquisition of Lake Grove Commons in partnership with First Washington and [Calper’s]. Lake Grove is an A+ asset located in Long Island.
The center is anchored by Whole Foods with substantial embedded NOI growth from contractual rent increases. This investment represents an opportunity to expand Regency’s presence into the New York market providing traction for potential future acquisitions.
We will continue to recycle capital to enhance future NOI growth prospects. As Hap mentioned, if the right opportunities arise, we would consider expanding the pool of properties that we determine we don’t want to own on a long-term basis.
Obviously, these sales may trigger gains or losses. Looking ahead, our guidance for 2012 is unchanged from what we presented in December.
However, it’s important to point out that we expect to be approximately 93% leased at the end of the first quarter. This is for two reasons.
20 basis points is related to the movement of properties to the same property pool. The remainder is due to projected move outs, which are typically higher in the first quarter of the year, however, I am comfortable that we’ll be close to the 94% lease by year end and that 2012 same property NOI growth, excluding term fees, will be in the range of 1.5% to 3%.
Brian?
Brian Smith
Thanks, Bruce, and good morning. As you heard from Hap, we’re starting to see the fruits of our efforts.
By just about any metric you choose, there was good improvement in the portfolio during 2011. While that improvement hasn’t fully manifested itself, it is setting the table for higher levels of NOI growth.
Let me run through a few of those metrics. After the seasonal dip in the first quarter of 2011, we saw three straight quarters of positive absorption.
Absorption for both the fourth quarter and the full year were the best we’ve ever had. What was more impressive to me was the absorption for operating spaces less than 10,000 square feet was also positive for three consecutive quarters and for the full year.
Never before have we had better quarterly or annual absorption for small shops. Better absorption comes from better move outs and leasing and we did a lot of leasing in 2011, more than any other prior year, again, for both the operating portfolio as a whole and for our small shops.
The level of new leasing was nearly 40% higher than the average of the last five years. We also signed 25% more renewals than the average of that same period.
We not only leased space, we did it with great retailers that enhance the quality of our portfolio. We did a lot of repeat business signing multiple leases with national chains such as Petco, TJ Maxx, Chase, Starbucks, Great Clips, Chipotle, Five Guys and others.
I mentioned move outs were better. They’ve been gradually improving since late 2009, but the improvement was really evident as we ended the year with three straight quarters of lower move outs resulting in the lowest annual level since 2007.
Best of all, the level of small shop move outs was the lowest since 2006, which is really encouraging. As a result of this leasing progress and favorable impact on occupancy from dispositions, the operating portfolio was 93.5% leased.
For the quarter, we had occupancy gains in all size ranges. I draw your attention to one of those ranges—our small shops and spaces less than 10,000 square feet, which ended the year 87% leased.
That is meaningfully higher than a year ago. Developments contributed as well.
Occupancy in those properties increased 630 basis points to over 88% leased contributing nearly $4 million of additional NOI. This increase in development leasing, together with growing our small shop percent lease to 87% represent two very significant accomplishments.
We’ve talked in the past about how our tenants’ health metrics were all heading in the right direction, and by any measure, they are much healthier today. We discussed in the past that retail survivors have learned how to manage costs and inventory to succeed in a tough environment, but for the first time in a while, our tenants are reporting modest sales increases.
We heard about top line improvement across most of the portfolio. As a result, there’s a lot more optimism and confidence out there on the part of the retailers.
Furthermore, many of our grocery anchor customers are also projecting solid 2011 annual sales growth from their stores in our portfolio. There’s another increasing trend we’ve seen in the regions.
It appears that retailers are exercising their stated options more frequently instead of rejecting the option and trying to renegotiate it. If this continues, it would suggest a potential shift in pricing power.
All these things, along with our much lower AR balance and notable decrease in small shop move outs I mentioned earlier, point to a healthier tenant base. Those are all good trends and it is important progress that we’ll soon be paying dividends and same property NOI growth, and there are other metrics as well that also give me reason to be optimistic.
Total NOI growth was positive 1.7% if you include developments on the same property basis. Rent paying occupancy in the operating portfolio increased 60 basis points, over 91%.
As we move closer to 95% occupancy in the next couple years, we should start benefitting from more pricing power. Most important of all, based on what we’ve seen in January, the strong leasing momentum and trend of reduced move outs appear to be continuing.
Let me now turn to development. We started two new developments in the fourth quarter.
After a bruising seven-year entitlement battle, we’re ready to take the land in Sonoma County, California out of inventory and begin our East Washington Place development. It’s a strong lineup of anchors – Target, Sprouts, Dick’s Sporting Goods and TJ Maxx/HomeGoods combo store, and they are helping attract other top-notch retailers like Beverages and More and Alta.
This will be the best located retail center in the city of Petaluma and it’ll be a great addition to the portfolio. We know there will always be tight supply constraints in this market, given the city’s demonstrated no growth attitude.
In northern California real estate circles, this development really is creating a buzz. We’ve received extensive interest from national retailers for the side shop space and the return on the incremental cost is approximately 9.5%.
The second development, Northgate Marketplace, which is located in Medford, Oregon, will be anchored by the perfect grocer for Oregon, Trader Joe’s. Also anchoring the center will be REI, Alta and Petco.
This is the best site in Medford at the intersection of the city’s three most heavily trafficked highways and directly adjacent to the super regional mall. Medford is a proven, very successful market for retailers with several national anchor tenants claiming their Medford stores are among the best in their chains.
In addition to ground up projects, our development expertise gives us the ability to harvest value from our operating properties through expansion and redevelopment. We started two such projects this quarter.
The first was the addition of TJ Maxx at our Golden Hills property in Paso Robles, California, which is also anchored by Lowe’s and Bed, Bath and Beyond, and we have space to accommodate Petco and Five Below at the Target-anchored Lower Nazareth Commons that’s adjacent to Wegmans in Pennsylvania. These expansions enhance existing assets, they drive additional traffic, and they make them more desirable to potential new tenants and provide us with impressive returns of about 11%, all with relatively low levels of risk.
In summary, I know that we’ve still got plenty of work to do, but I am more confident than ever that we’re going to show the results we expect. We’re going to accomplish our goals of improving occupancy and seeing property growth in 2012 and successfully execute our development and redevelopment strategy.
Hap?
Hap Stein
Thanks, Brian and thanks, Bruce. In closing, I have no doubt that Regency is not only on the path to recovery, but more importantly, is on the right road to reestablishing our preeminent standing with you.
Before I turn the call over to questions and answers, I have to take this moment and comment on the announcement a couple weeks ago of Bruce’s plans to retire at the end of the year. To say this is a bittersweet moment is a major understatement.
Bruce’s leadership, his experience, his judgment and financial acumen have been instrumental in successfully building Regency into a leading national shopping center company. He’s part of our heritage and he epitomizes those attributes that make our culture and the people of Regency so really special.
At the same time, Regency is fortunate to have Lisa, another consummate professional and wonderful person in the same mold as Bruce, to succeed him in January 2013. Many of you had the privilege to work with Lisa over the years and already know of her strengths and accomplishments.
As I indicated, Bruce will not be retiring until the end of the year. Until then, we will continue to benefit from his full-throttled effort, leadership and judgment as we build on improving fundamentals in this crucial year.
We thank you for your time and welcome any questions you may have.
Operator
Ladies and gentlemen, the question and answer session will be conducted electronically. (Operator Instructions) We’ll take our first question from Michael Mueller with JP Morgan.
Michael Mueller - JPMorgan
Brian, I think you said it was 87% small shop occupancy at year end. One, what was the sequential improvement, and then where do you think that number can go by year end?
Brian Smith
The sequential improvement was 110 basis points and we’re expecting by the end of the year to have somewhere in the neighborhood of 300,000 square feet of positive absorption, and that’s pretty much all coming from the small shops, so that’s how we’re going to get to approximately 94%.
Hap Stein
I would say that small shop would be between we are today -- We may take a dip in the first quarter, but we ought to be, by the end of the year, between where we are today and 90%.
Michael Mueller - JPMorgan
Okay, great. Second question, I remember from the Investor Day for 2012, the GNA expectation picked up a little bit.
I guess what Bruce’s retirement in ’13 and just thinking about the development pipeline being a little bit bigger by then and maybe you’re capitalizing more. Should we expect to see GNA dip in 2013?
Hap Stein
I think that the rate of growth should reduce and we are actively in an efficient basis to reduce the rate of growth.
Lisa Palmer
Mike, I’d just like to add to make sure that everyone is clear, even though we came in slightly favorable for 2011, our guidance for ’12 remains unchanged, because a large part of what was driving the favorable variance were health insurance claims that we do not expect to recur in 2012, so the guidance for 2012 remains $58.5 million to $62.5 million.
Michael Mueller – JPMorgan
Okay, thank you.
Operator
We’ll take our next question from [Michael Bellarmine] with Citi.
[Michael Bellarmine] – Citi
Good morning. It’s actually [Michael Bellarmine] with Quentin.
I just wanted to follow up a little bit on the occupancy and the leased rates the end of the year in the same store pool in [93-8], that obviously was ahead of where you thought you would be in December of 93 to 93.5, so it sounds like the move outs were a lot less, but I think from Bruce’s comments, there was some talk that you head down about 60 bips in the first quarter as you expect those move outs to occur, and I just wonder if you could just put a little bit of color around -- it was, I guess, about 125,000 – 150,000 square feet. What sort of tenants, have they already moved out, or just what the expectations are and why you think they’re eventually now going to leave.
Brian Smith
We tend to just historically, in the first quarter, have more move outs. That happened in, certainly, the last two years.
It’s pretty much a seasonal thing we see every year. So, we expect that’s going to happen in first quarter.
We’re planning on it, anyway. Our experience so far in January has been less than what we’ve planned for, but that’s an annual thing that happens.
Hap Stein
In addition, as we mentioned, it isn’t all due to seasonal move outs. Some of it is due to including new properties into the pool.
[Michael Bellarmine] – Citi
Right, which I think Bruce said was 20, and then I guess to get down to 93, 20 from the same store and 60 from move outs, but at the end of the year, you were certainly much higher than you thought you would be in December, and if those people didn’t move out in December, and it sounds like they haven’t moved out yet in January. I’m just trying to figure out what’s going on in terms of how conservative you may be in thinking about the guidance.
Brian Smith
We may be. We just don’t know.
Again, historically, for the first quarter we’re going to have negative absorption and then we’re planning in the next three quarters to be very positive from there. The question is does January represent all of the first quarter.
January is the month we expect to be the worst of the three months in January, and like I said, we’re about 100,000 square feet better on the negative net absorption side than what we planned. I just don’t know whether that will maintain that improvement throughout the rest of the quarter or not.
[Michael Bellarmine] – Citi
And then just a question on the acquisition in New York. Hap, I think you mentioned it was with First Washington.
Was that the first capital outlay since buying back the portfolio a couple years ago? Because it sounded like Bill had been pretty quiet in putting new capital out, so I was just wondering if there’s been a change of strategy and getting comfortable with the yields today.
Hap Stein
That was the first that we’ve done together. They have made other investments that, for whatever reason, we decided not to do together.
They’re in the market and would like to deploy more capital.
[Michael Bellarmine] – Citi
And comfortable with the going in yields in the fives, low sixes?
Hap Stein
If you’re going there and you can either get good dependable growth like we’ve got in Lake Grove, or even there’s maybe more upside and your total return is better, I think we’re pretty much on the same page there together as far as what we’re looking for.
[Michael Bellarmine] – Citi
Okay, thank you.
Operator
We’ll take our next question from Craig Schmidt with Bank of America Merrill Lynch.
Craig Schmidt – Bank of America Merrill Lynch
Good morning. I was wondering if there was an expansion potential at Lake Grove Commons.
I’m just looking at the acres and the existing FAR seems kind of low.
Brian Smith
I don’t think so. What you’re got there, Craig, are two very high-volume anchors.
You’ve got the LA Fitness and when we’ve been to that site, it is packed. The health clubs take disproportionate amount of the parking, anyway, so what we don’t want to do is impinge upon that parking and therefore potentially hurt the sales of Whole Foods, Petco or our small shops.
Craig Schmidt – Bank of America Merrill Lynch
Okay, and I just wondered, are you looking at further acquisitions in Long Island? And, what might be your cap rate if you looked out three years given the fixed rent increases?
Hap Stein
We should be over 6% return by then and that is a target market for us.
Craig Schmidt – Bank of America Merrill Lynch
Possibly with Blumenfeld?
Hap Stein
Possibly with Blumenfeld, yes.
Craig Schmidt – Bank of America Merrill Lynch
Okay, thanks a lot.
Operator
We’ll go next to Christy McElroy with UBS.
Christy McElroy – UBS
Hi. Good morning, everyone.
You’ve talked about converting a portion of your land into core development projects over the next few years and you did that in Q4 with East Washington Place. Of the $75 million to $150 million of development starts you’re forecasting in ’12, how much of that is comprised of projects where you expect to use the land already owned?
Do you expect the yields on those to be similar to the East Washington in the sevens?
Brian Smith
Let me just check. In 2012 it looks like we really only have one property that’s going to be coming up of land held and that would be similar in the sense that it would be about a seven, or in the sevens on total cost, and more like about 14% on incremental income.
Christy McElroy – UBS
You’re thinking about those projects more on an incremental basis than on an all-in?
Brian Smith
We’re going to report both, obviously, but the costs are what they are so we’re going to have to report total costs, but they also sunk costs, so the question is how do we get out of those, and if we can deploy the additional capital returns that are that attractive, then that’s what we’re going to do.
Christy McElroy – UBS
Given that you just transferred a pretty substantial amount of development projects into the completed bucket, are those now considered operating properties? I know you mentioned a potential impact on Q1 in transferring properties to the operating pool, but did their inclusion have any impact on the occupancy numbers in Q4?
When should we start seeing these properties impacting same store growth?
Lisa Palmer
Christy, this is Lisa. I’ll answer that.
Yes, as of December 31st all of those development completions are in our percent leased for operating properties, not necessarily same properties. To be considered a same property, the anchor would have had to have been open as of January 1st, 2011.
So, not all of those would be considered same property. We can go offline and specifically give you a list of those that will be added to the same property pool.
Christy McElroy – UBS
So in Q4 ’12, this same store on a wide growth number should include the impact of these properties?
Lisa Palmer
It’s got to be a full calendar year, so again, if the anchor was open January 1, 2011 and it was substantially complete, basically, so more than 90% funded, then that would become a same property pool. Some of those that weren’t open then will have to wait until 2013 before they actually hit same property.
Christy McElroy – UBS
Okay, thank you.
Hap Stein
Thank you, Christy.
Operator
We’ll take our next question from Paul Morgan with Morgan Stanley.
Paul Morgan - Morgan Stanley
Good morning. On the targeted dispositions, can you just give a little bit of color?
Obviously, you’re looking at accelerating it this year versus last year. Is the market for those non-core assets any better?
Is it kind of potential improvements in the same market a factor or are you just going to be more aggressive this year. Is it mostly still one-offs?
Hap Stein
We’re considering all that, where I do think we may have an advantage from a sales standpoint as those assets that are unencumbered, but the key criteria we’re going to look at is is this going to be a drag on future NOI growth, and that’s the criteria that we look at, and/or what’s the visibility from here for NOI going up or going down.
Paul Morgan - Morgan Stanley
What’s the geographic composition of the pool?
Hap Stein
All over the country. And, once again, it depends.
Paul Morgan - Morgan Stanley
On demand?
Hap Stein
It depends on market/demand and it depends on our view of our future outlook for the property.
Paul Morgan - Morgan Stanley
Okay, and then on the development starts, you’ve talked a lot about being more conservative in terms of shop space and the risk that you take on with projects. Is that being reflected in the starts that you’re commencing this year?
Have you scaled back from your original plan in the amount of shop space, and by what percentage?
Hap Stein
The key issue is what’s the individual demand for the specific project. In certain instances, no shop space may make sense, and in certain other instances, 45,000 – 50,000 square feet may make sense, so what Brian and the team are doing is calibrating what’s the visible demand for side shop space and when it’s appropriate, we’re also phasing it.
Brian Smith
It’s exactly right. If you look at what’s been started this year and in the last couple years, as Hap said, some of those had very little.
I think we’ve averaged about 15,000 square feet over what we’ve put in place, but some of them had none and some of them had a lot. Not a lot, but they’ve had more.
If you look at the two we’re announcing this quarter, in Medford, Oregon we’re doing limited amounts, maybe 15,000 square feet, whereas the one in northern California, there’s tremendous demand, so we’re going to build much more there.
Paul Morgan - Morgan Stanley
Great, thanks.
Operator
We’ll take our next question from Jay Habermann with Goldman Sachs.
Jay Habermann - Goldman Sachs
Good morning, everyone. Brian, given the encouraging signs that you’re seeing in terms of occupancy, and I’m just focusing here on the inline space, could you give us some sense of the market on rents, and I guess the question here is if you’re starting to see this pickup in occupancy, are you going to start to focus a bit more, maybe, on pushing rate throughout the year?
Brian Smith
Yeah, we’re certainly focused on it. What we’re dealing with, I think, are a couple of things.
We still are dealing with some high rents. For example, if you look at northern California, we’ve got pricing power in the San Francisco Bay area, but we just did a lease for our Powell Street project at $48 a square foot, but it was coming off of a $51.
So, on one hand, we’ve got markets where we’re seeing increased stability to push rents, but some of those markets we pushed real aggressively before the downturn. But overall, I think we are seeing some positive things.
The property manager’s reporting that across the country there is an increased ability to drive rents. Not all properties, not all markets, but as a general trend, yes.
If you look at our numbers, if we look at all spaces including those that have been vacant for more than a year, the new was negative but it was less than half as negative as the average three quarters, and if you focus on those that are just less than 12 months, we actually had rent growth on new spaces of over 5%. So, in the leverage system, all aspects of the leasing seems to be returning a little bit more.
We are exercising those termination rights and getting rid of the weaker tenants that would be hard to grow rents. We are getting better rent bumps and what we’ve seen so far in January is stronger rent growth.
Jay Habermann - Goldman Sachs
Okay, and maybe back to Paul’s question on the sales candidates versus the core assets, is there a breakout of NOI growth between what you’re potentially selling and what remains the core assets?
Hap Stein
Typically, what we may be selling is we’re saying meaningfully higher growth than what we’re buying than what we’re selling, and let’s leave it at that.
Jay Habermann - Goldman Sachs
Okay, thank you.
Operator
We’ll take our next question from [Tao Akesanya] with Jeffries and Company.
[Tao Akesanya] – Jeffries and Company
Just in regards to your economic outlook. If the economy does end up being a little bit better than you’re anticipating, do you think you’ll probably see more strength in regards to pricing, or more of an ability to generate more occupancy in your small shop space, and conversely, as well.
If the economy got worse, which of those two do you think could give way first?
Hap Stein
Number one, I think that we are seeing, as Brian indicated, a very resilient demand for space and as he indicated, we’re starting to feel more pricing power and I think that feeling is real, obviously to the extent that we get more of the economy behind us, that’s going to improve because there’s less supply that’s been out there, especially a better space, so I think it would take an effective downturn in the economy to swing to reduce the tenant demand for space and pricing power, in effect, swinging back and the momentum going in the other direction.
[Tao Akesanya] – Jeffries and Company
That’s helpful. Thank you.
Operator
We’ll take our next question from Todd Lukasic with Morningstar.
Todd Lukasic – Morningstar
Good morning. Thanks.
Just a quick housekeeping question first on a GAAP basis income statement, the other expense line, $44.9 million. Is that mainly due to write offs of predevelopment costs or is there something else in there?
Brian Smith
It would be a combination of that and our income taxes. Other amounts are related to reserves we’ve put up for environmental costs or insurance reserves on liability claims, those kind of things.
Todd Lukasic – Morningstar
Okay, thanks, and then just with regards to the side shop space, you guys are making some nice progress renting that up, obviously. I’m just wondering what you view as sort of a normalized level of vacancy for that side shop space.
Brian Smith
Probably where we were before the downturn, which is really up in about the 91% range.
Todd Lukasic – Morningstar
Okay, great. Thanks for taking my questions.
Hap Stein
Thank you.
Operator
We’ll go next to [Gaonton Gar] with Credit Suisse.
[Gaonton Gar] – Credit Suisse
Hi, guys. Just another question on the small shop space.
What kind of tenants are you seeing demand from, and going into 2012, are there any specific industries or tenants in your portfolio that you would be concerned about?
Brian Smith
Again, we’ve been focusing for the last few years on mostly the national, the regionals. Very, very little leasing is being done with true mom and pop shops, so I don’t see any reason why that wouldn’t continue, although we are hearing that financing is returning to the small shops but, again, that’s not been something that’s held us back in the past, so I don’t think it’s going to affect us that much going forward.
There’s a couple of categories of small towns that we worry about. I would say that the dry cleaners are certainly one we’ve been seeing some weakness in.
Tanning salons, we’ve been seeing some weakness in, and then we’ve got the ones that are well known to everybody. If there’s any remaining video or the book category, those kind of things.
Hap Stein
We had limited exposure there. We’ve got limited exposure to Best Buy, and in the case of Sears, I think, as Brian says, bad news would be good news.
[Gaonton Gar] – Credit Suisse
Right. Very helpful.
And, you spoke about financing coming back. Are you hearing about any specific initiatives by the SBA which might be helping some of your mom and pop kind of tenants?
Brian Smith
I think I just mentioned that there is more Small Business Association financing out there but we have not been needing that in terms of increasing our occupancy. We’ve been leasing to stronger chains, national, regional and so forth, but it certainly can’t hurt us as some of the smaller players decide to get back in the market because there’s financing available, that can only help us.
[Gaonton Gar] – Credit Suisse
Right. Thank you.
Operator
We’ll go next to Jim Sullivan with Cowen and Company.
Jim Sullivan – Cowen and Company
Good morning. Just a couple of quick questions, guys.
As you move out of the legacy development and some of the transactions where you have some significant sum costs and look at new developments, there has been—and correct me if I’m wrong on this—but there’s been significant growth by some of the smaller footprint grocers in terms of unit growth, and I’m just curious if you’re seeing more of that, or if my impression is wrong, number one, and the 20,000 – 30,000 square foot box rather than the bigger box. And, curious if you’re seeing more of that, number one, and number two, how you underwrite those.
Do you underwrite them any differently or not in terms of projected stabilized yield?
Brian Smith
We are definitely seeing more of them, particularly in some regions. If you look at who’s really expanding, it seems to be all over the map.
You’ve got the Kroger’s and the HEB’s, which are growing very large, putting very large stores into production. On the traditional size, I’d say the one that’s grown the most would be Publix.
But, what you’re seeing, particularly in California, would be almost a grocer war in northern California with all these smaller concepts. You’ve got the fresh market, you’ve got Sprouts, you’ve got Sunflower, Fresh & Easy, just a lot of that going on – Trader Joe’s, of course, and we have not done much with them.
We’ve put some in our existing centers. We are doing a little bit, and in terms of underwriting it, we factor that in with the other risk metrics, the amount of shop space, how much preleasing is done, but we tend to go with the better operators, so we’re not doing any new developments for Fresh & Easy.
We kind of factor the risk in that way. We’d just rather not do it.
Sprouts, we have been comfortable, and, as you saw, the one we put them in is this one we’re doing in Petaluma and they’re not the credit town of the whole deal, so we’re comfortable with that.
Jim Sullivan – Cowen and Company
If we think in terms of incremental dollars into new developments, we don’t have sum costs in the land, where would you like your yields to be, and maybe if you could contrast that with, say, where they were at the height of the development cycle the last time around.
Hap Stein
I think if we can generate on a good infill site returns above 8%, it’s going to be a meaningful accretion to where you’d buy that shopping center on the open market today. So, we’d like to get 9%, but as I said, if we can get returns in the 8.5% range, what we’re focusing on today, which are dominant core shopping centers, especially in infill markets or markets that are tough to develop in, I think we’ll be doing well.
Jim Sullivan – Cowen and Company
Good, thanks.
Operator
We’ll go next to Wes Golladay with RBC Capital Markets.
Wes Golladay – RBC Capital Markets
Good morning, everyone. Now that five years have passed since the market peaked, are you seeing any meaningful headwinds on the renewal front from those leases signed five years ago?
Brian Smith
No, we’re doing significant amounts of renewal leasing. It’s the most I think we’ve ever done.
Obviously, there’s negotiations and the one thing I did mention in the prepared remarks is during the worst times, downturn where people had stated options in their lease instead of just renewing them, it seemed like every renewal was open for renegotiation. Now what we’re seeing a lot more as kind of an increasing trend is that the retailers are willing to just go ahead and sign the stated option and move on because they know, as Hap mentioned, the amount of second generation spaces out there has gotten a lot smaller.
Hap Stein
In general, if you think about it, Wes, if you’ve got a successful business in a good shopping center in a good space in that shopping center, you’re not going to want to relocate that business for a few bucks a foot.
Wes Golladay – RBC Capital Markets
Okay. Sticking with the shop space, I’m trying to figure out when we can start pushing the rents.
Would that be when you get to the 91% occupancy, so about 4% away? Is that what we’re looking at?
Brian Smith
It’s really dependent on the market and the shopping center. We’ve got it and we have significant pricing power in markets like the Pacific Northwest, in the San Francisco Bay area, Houston, Austin, and where we don’t have any would be in Las Vegas, Arizona, Inland Empire and Central Valley, California.
All the other ones, it’s improving quite a bit as we’re seeing fewer move outs, more leasing activity, and our occupancy growing and sales improving and margins improving on the retailers, we are getting better pricing power.
Hap Stein
Unfortunately, we have limited exposure to those markets.
Wes Golladay – RBC Capital Markets
Okay, thank you.
Operator
We’ll take our next question from Jeffrey Donnelly with Wells Fargo.
Jeff Donnelly - Wells Fargo
Good morning, guys. Hap, if I could follow up on the question from Jim, do you think the development yields you earned before, the 8% to 9% yields are achievable if your shop space proportion might be a bit leaner than it was in the past?
I’d expect that shift in the mix of space could potentially clip your yield a little bit from what you might have earned in the past. Is that the case or do you disagree?
Brian Smith
It’s true, but on one hand, there’s not that much development going on. Where it’s going on is typically more in the urban markets where there’s better sales being generated for the retailers, so that’s allowing them to keep their rents higher than you’d expect.
I mentioned the $48 rent in the Bay area. You’re not going to get that in some of the markets that are greener and don’t have -- be able to generate the top line revenue for the retailers.
The other thing that’s happening is construction costs are lower than they were at the peak. The cities are much more willing to work with you on fees because they’re looking for the tax revenue, so you aren’t getting feed out of the game.
And then the land costs have come down in most markets, so while rents may have come down a little bit or you have less shop space, you also have a better top side.
Hap Stein
The bottom line is we’d rather have a shopping center that makes a core shopping center infill market that makes set in stone long term, and if the return is eight or if it’s eight or maybe a little below that, because we’re phasing part of the side shop space, we’d rather have that than a 10% return out in a shopping center that doesn’t make sense doing long term.
Jeff Donnelly - Wells Fargo
Would that argue that the development pipeline as you approach in the next five to ten years is probably more infill than it was in the last five to ten?
Hap Stein
Absolutely.
Jeff Donnelly - Wells Fargo
I guess another question, just maybe building on another earlier question, who is buying BNC Assets out there and how they’re getting financed. Do you guys think lenders are loosening up on underwriting terms there or is that really not changed much?
Brian Smith
I can let Lisa and Bruce talk to the lending and the underwriting, but if you look at what we sold in this past quarter, every one of them except for one was sold to private buyers. What they are looking for and what they like, which was eluded to earlier, is the fact that most of these have no debt on them and therefore they can get very strong leveraged IRRs.
Hap Stein
Financing must be available to stronger local regional and national private buyers.
Bruce Johnson
My friends that are on the private side are still having difficulty arranging financing that they had been used to prior, even before the peak of the market. The underwriting requirements have changed significantly.
You can get financing, but as Hap said, you’ve got to be one of the stronger players in the markets you’re dealing in.
Jeff Donnelly - Wells Fargo
Bruce, is there any chance to—I’m not sure if this exists, but to get assumable data on some of these and actually sell them off on a highly levered fashion, or is that just not permissible in the market today?
Bruce Johnson
That, again, would depend upon the strength of the player involved, I think. Certainly that’s something that we could do and would do, and if you’re a private guy and not a public company, I think if you’ve got the relationships as well, you could do that, but again, all of those things are more difficult today.
Brian Smith
As I look at the lists of the people who bought these private buyers, it’s not like it’s just one person deciding they’d like to own a shopping center. Up in Washington we sold property to Merlone Geier.
They’ve been around forever. They have a large portfolio.
They’re private but they’ve got a lot of endowment money behind them. Cole Capital is one of the ones that bought, so they typically are private but they’re pretty well capitalized.
Jeff Donnelly - Wells Fargo
Last question. We actually just hosted a call last week with one of your competitors who called out Florida for its weakness, particularly in the small shop leasing front.
I think it bottomed lower and it’s turning, but still slowly. Can you guys talk specifically about what you’re seeing in Florida, maybe for your portfolio but more broadly in the market?
Brian Smith
If you had to look at one trend in our portfolio, it would be the recent strength in Florida. The unemployment rate has fallen in Florida.
I think it’s the second fastest improvement in the country and what we saw in the fourth quarter for the first time was real enthusiasm, real excitement. Down in Tampa, which has been a tough market, we had 15 new leases all commence on December 15th so there’s a lot of optimism and there’s a level of activity in Florida that we just haven’t seen in a long, long time.
Jeff Donnelly - Wells Fargo
That’s helpful. I’ll follow up with you guys.
Operator
We’ll take our next question from Vincent Chao with Deutsche Bank.
Vincent Chao – Deutsche Bank
Hi everyone. Just a follow up on the disposition side, the BNC question.
Private buyers are the ones buying the stuff last quarter, but can you just talk broadly about the demand you’re seeing? Is that increasing of late or just holding steady?
Falling?
Hap Stein
It’s holding steady, I’d say. Executing on the sale of non-core properties, the properties that we’re selling, there is demand but it isn’t like the demand for the A centers.
Vincent Chao – Deutsche Bank
Okay, but it hasn’t fallen off at all?
Hap Stein
No, it has not. As a matter of fact, I think the stuff we’re selling is still for the most part is pretty decent.
It’s good stuff and we just think the capital could be better utilized elsewhere as far as improving our growth profile.
Vincent Chao – Deutsche Bank
Okay, and then a cleanup question. I noticed that TI’s this quarter looked like they ticked up a little bit higher than they’ve been trending on a per year basis.
Was there just a couple transactions that skewed that higher?
Brian Smith
There’s some of that. The reality is if you look at the trend in TI’s since 2009 it’s been on a downward trend.
This quarter ticked up a little bit, but I think it’s a one quarter kind of deal and it doesn’t signify anything else. We also were giving TI’s a little bit more often so it’s not -- for example, on the renewals, our per square foot TI amount actually dropped, it’s just that we gave a little bit more often than in the past.
There were several retailers or users that are big high TI demand. We had a lot of medical, whether it’s dentists or hospital urgent care kind of concepts, Petco, which has a big electrical requirement, Office Depot is the same kind of thing, so there was a lot of that.
Vincent Chao – Deutsche Bank
Okay, thank you.
Operator
We’ll take our next question from [Semi Farique] with ISI.
[Semi Farique] – ISI
Hi. Good morning, guys.
Could you talk about the timing and the trajectory of same store NOI growth this year based on your expectations of what the changes and lease percentage and physical occupancy is going to be? Also, just one beyond that, as well.
What are the drivers that you think would get you to the lower end of your 1.5% to 3% same store growth guidance versus the upper end?
Lisa Palmer
I’ll take the first part of the question. I’ll let Brian answer the drivers of the growth of the low end and the high end.
From the trajectory standpoint, clearly it’s going to be on an incline, an upward incline with the first quarter probably being more in the range of 1% to 2%, and then you’d see improvements to that each quarter throughout the year. That would then get us to the 1.5% to 3% rate.
Brian Smith
You have the contractual rent increases in the 1% to 1.5%. That’s going to be pretty well set and it’s going to depend on what’s continuing to happen with move outs and leasing, and if the trends continue, it’ll be as Lisa described.
[Semi Farique] – ISI
Okay, great. And I guess just one more.
DDR announced a program where they’re going to work with Score and the SBA and provide sort of favorable terms to entrepreneurs and potential small business tenants in the Atlanta area right now. Are you working on something similar?
Do you think that’s a need or something as a supplement to help boost some small shop growth and small shop leasing and maybe some of those tougher areas that you’ve had?
Hap Stein
We’ve had conversations with our banks in the past and have offered that up, but when you really get right down to it, most of the demand from tenants, they have financing available, the right tenants, and we just haven’t to date found a program like that that would make sense. Financing, I don’t think is an impediment to us getting 94%, hopefully, by the end of the year, and 95% by the end of next year.
Operator
We’ll take our next question from Cedrik Lachance with Green Street Advisors.
Cedrik Lachance - Green Street Advisors
Thank you. Just going back to the small shop demand, you talked about Florida being an area of strength lately.
Where else do you see outside demand and where else do you see a softening or leveling off of demand?
Hap Stein
I think it’s more noticeable meaningful improvement from where we’ve been would be the way I would describe that as. It’s moving very encouragingly in the right direction.
Brian Smith
Again, that’s been the area of biggest change, which is really what I was trying to address. I don’t think anything’s changed.
We’ve had a great year of leasing throughout the year. It’s just been off the charts and that’s been widespread with the exception of just those few markets that we’ve always talked about and they continue to remain weak.
I think some of the other trends with regard to both the anchors and the small shop leasing would be we are starting to see an increased move toward quality as tenants’ leases expire. We had a situation in Portland where Bed, Bath and Beyond moved less than a mile to come into our shopping center.
We had Beverages and More move out of Westfield power center in San Diego to be where the daily draw of the grocery-anchored center is in one of our centers. I would say also up in the northeast, we saw 125 basis point increase in occupancy and that was despite the move outs of Borders, A&P and Blockbuster, which hit that region particularly hard.
The other thing, I think, going on with them is that these move outs, as low as they were, a lot of them are done on a strategic basis. It’s either to get them out to make room for redevelopment, it’s to expand another user, so I think those are a lot of interesting positive trends that are going on with small shops throughout the country.
Cedrik Lachance - Green Street Advisors
Okay, and just going back to dispositions and thinking about non-core assets, what percentage of your portfolio do you think you would like to sell over the next four to five years in terms of the assets you consider to not have the kind of growth prospects that you would typically expect from your new acquisitions?
Brian Smith
We’ll focus on 10% but I do think the capital recycling will be an ongoing part of our strategy for the foreseeable future.
Cedrik Lachance - Green Street Advisors
Okay, so if you look out four or five years you’d probably sell about 10% of your portfolio during that period?
Brian Smith
Based upon the guidance that we gave on Investor Day, that 10% of the portfolio would be sold in the two- to three-year period rather than -- I think a range of $150 million to $250 million. That would occur over a three-year period.
Cedrik Lachance - Green Street Advisors
Okay, thank you.
Operator
(Operator Instructions) We’ll go next to Chris Lucas with Robert W. Baird.
Chris Lucas - Robert Baird
Good morning, everyone. Brian, just a question, another one, on the small shop space.
It sounds to me like most of the work you’re doing there is through the PCI program or with those type tenants. Is that fair?
Brian Smith
It is, yeah.
Chris Lucas - Robert Baird
Okay, so the question is are you seeing any change in the makeup between corporate stores and franchisee stores?
Brian Smith
I don’t think there’s some dramatic change. The only thing that we’re seeing is you’ve got some franchise concepts where you’ve got a weak program, you’ve got weak local franchisees and we just tend to avoid those, but I don’t think on any macro level there’s much of a change there.
Chris Lucas - Robert Baird
Okay, great. Thanks a lot, guys.
Operator
We have a question from Philip Martin with Morningstar.
Philip Martin – Morningstar
Good morning, everybody. I promise I won’t lead with a small shop question, but with respect to your capital recycling program, what is the average Regency holding period of these assets within your capital recycling program?
How long have you held these assets?
Hap Stein
We’d have to get back to you on that. It varies meaningfully.
Philip Martin – Morningstar
Okay. That would be helpful.
I’m just trying to gauge the average hold time of these assets. Secondly, with respect to small shop space, are you seeing an increase in new concepts or are these existing concepts, as you mentioned, maybe moving around, shifting around more strategically, et cetera, or given the unemployment issues that are out there, are you seeing more new concepts being started up and driving an incrementally higher small shop demand?
Brian Smith
We’re seeing some new concepts. We always see new concepts in the restaurant category – the yogurts, the burgers.
You see things like Petco’s Unleashed, which is an expansion of a concept that they already have. We have heard of some other ones.
There’s a new one out there called The Joint, which is a chiropractic place. Again, I think in all the years I’ve been doing retail, there’s always new concepts coming out and I think that’s continuing to go on, but it’s not the new ones that are driving all the growth.
Philip Martin – Morningstar
Okay, and you’re not seeing a disproportionate of new concepts relative to the past? It’s about the same?
Brian Smith
Yes.
Philip Martin – Morningstar
Okay, thank you very much.
Operator
That is the last question we have today. At this time, I’d like to turn the call back over to Mr.
Stein for any closing remarks.
Hap Stein
We appreciate your time and interest in Regency and hope that you have a great week and a great Super Bowl weekend. Thank you very much.
Operator
Ladies and gentlemen, this does conclude today’s conference. We appreciate your participation.
You may disconnect at this time.