Kimco Realty Corp (KIM) 2003 Q1 法說會逐字稿

Good morning and welcome, ladies and gentleman, to Kimco Realty first quarter 2003 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I will turn the conference over to Mr. Scott Onufrey. Please go ahead, sir.

Thank you and thank you all for joining us for Kimco's first quarter conference call. First I would like to read into the record the safe harbor statement. The statements made during the course of this conference call a state the company's and management's hopes, beliefs, projections of the future which are forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained from time to time in the company's SEC filings. During this presentation, management may make reference to certain non-GAAP financial measures we believe help investor relations understands Kimco's operating results. Example includes funds from operating and net operating New Jersey income.

Presenting this morning are Michael Pappagallo our CFO, David Henry, our chief investment officer and Milton Cooper, our Chairman and CEO. Mike Flynn, our president and several other management personnel are available for your questions and some remarks. I will turn the call over to Michael Pappagallo.

Good morning. In preparing for this call I was struggling to come up with a theme or attention grabber. I concluded that the past few months have been devoid of excitement or major headlines, just the way I like it. This has been a quarter characterized by a executing our strategy with improvement in portfolio performance and investment act activity and along awaited improvement in stock price.

First the basics. Net income per common share remember share rose by almost 19% to 63 cents and FFO grew to 78 cents per common share. FFO level exceeded first call consensus by a penny. The higher growth rate in the net income figure reflects gains on property sales from the parent operating portfolio as well as a gain on mortgage settlements related to two former K-Mart locations. These items as well as the customary depreciation and preferred stock dividend adjustment were the only items applied to reconciled net income and FFO.

The most significant factor in the quarterly earnings improvement was higher operating income for the parent shopping center portfolio. NOI grew by 9% year over year or about $7.4 million. Revenue growth was even higher but recognized that some of that top line jump relates to higher snow removal costs this year and the resulting reimbursement income from tenants. In breaking down the $7.4m rise in NOI, about $5.4m was due to the impact of acquisitions over the past 12 months but the balance reflecting internal growth, translates to about 2%.

The K-Mart store closings that first began impacting the rent flows in the first quarter of 2002 influenced the internal growth rate. NOI was reduced by over $2.5 million from the comparable period last year for the impact of the 2002 closed locations that are still in the portfolio today. Separating this impact, the remainder of the core portfolio grew at 5% rate. This was evidenced by the overall increase in same site occupancy of 1.2% from March 2002 and a jump of 1.5% on same site locations excluding the K-Mart.

Occupancy continues to rise from its low point last June. We are still optimistic we can reach 90% occupancy in the parent by the end of the year. While occupancy stands at 89% now, there will be some temporary impact from the last round of K-Mart closings this quarter, but certainly not of a material nature.

In addition to the strong performance of the U.S. portfolio and the ongoing repositioning of the vacant K-Mart boxes, solid contributions were realized from all other corners of the company. Our investment partnerships continued to have a meaningful impact on earnings. The aggregate FFO contribution from the Kimco income rate, G.E. joint venture and the Canadian program with RioCan increased to $13.5 million from $7.7 million, a jump of 75%. These three ventures combined have now vestured in over $4.2 billion of real estate, across 116 properties and 23 million square feet. We also continue to invest selectively with other partners to acquire properties on a one-off basis as opportunities arise. Many of these relationships, management services income becomes an important part of the return on investment equation.

Management and fee-income did show a decline from the corresponding period, but last year's amounts included a $1.1 million break up fee associated with the associated liquidation fee. We are adjusting the management fees down to reflect our [pro-rad] ownership with the offsetting increase benefiting the equity of earnings line. This reclassification affected comparability by about $700,000.

Other business unit activities outside the shopping center portfolio also helped the earnings increase. Year-over-year increases in mortgage financing income reflect both investments made during 2002 and the past quarter, whereas earnings from increased levels of preferred equity deals and the Kimco South operations replaced declining contributions from the remaining assets from Montgomery Ward transaction. These new business areas also counter balanced lower levels of marketable security gains and income earned from our participation in the retailer inventory liquidation from a failed retailer last year.

On the merchant building side, we sold a variety of pads and out parcels last quarter, whereas last year's quarter included bigger ticket property sales. Larger properties are scheduled for sale later in the year. We feel there are no issues in executing the Kimco developer sales program. For those of you who analyze income statement components, you'll note that the development gains appear on the last line of the income statement which was done to satisfy SEC classification requirements.

Unfortunately, going forward you will see some development sales located here and others in the discontinued operations line, all to comply with FAS 144 standards issued last year along with certain interpretations from the accounting firms. I leave it to others to conclude whether these standards succeed in enlightening the investor with useful information about earnings.

Financial flexibility remains on solid footing. We are nearing completion of the renewal of the unsecured credit facility, which we expect to up size to $400 million in the pricing grid to the existing facility. Debt service and fix charged coverage remain at 4 and 3.4 times respectively. Our debt level grew somewhat during the quarter as we accessed our credit line to close on $80 million worth of properties, certain of which are earmarked for one of our joint venture promise. Also, Kimco developers make greater use of non-recourse construction financing to fund the pipeline and minimize use of parent funds. With rates where they are, we are considering refinancing opportunities to certain pre-payable debt as well as our preferred stock series. We expect to reload the shelf as is customary every few years to reestablish capacity for future capital needs.

As noted earlier net income levels included gains recognized in connection with the successful resolution of non-recourse mortgage obligations on former K-Mart locations. With this settlement the company dealt with all seven mortgage loans impacted by K-Mart lease rejections during 2002. One other mortgage loan will be affected by the latest round of K-Mart closings. We are in active discussions with the servicer on alternative solutions.

In summary, a solid quarter consistent with the business plan. We are comfortable with the range of earnings guidance and tightened it up a bit. I'll now turn it over to Dave to update you on investment activities.

Thanks, Mike. Good morning. I'm happy to report that we had another strong quarter in terms of acquisitions and new business activities. In Canada, our RioCan joint venture closed on an additional shopping center in Vancouver, 228,000 square feet, at a cost of $4.7m Canadian. Our portfolio with RioCan now totals just under 7.5 million square feet with a total of $1.01 billion Canadian. We have five development projects located in five different provinces. Portfolio occupancy is 98% and the Canadian retail leasing market in general remains very strong. Our partner, RioCan, continues to do a superb job of logic managing, leasing and underwriting our joint activities.

In Mexico we are building a effected second phase of an HEB anchored shopping center in Monterrey. It will contain an additional 125,000 square feet of space bringing it to 255,000 square feet total. In the U.S., during the quarter, we closed on two additional properties for the Kimco income Rete (ph), our joint venture with the [NY Commerce] and several investor relations. The venture now contains 70 shopping center, totaling 14.6 million square feet with occupancy of 98.6%.

In the Kimco retail operation portfolio, our U.S. joint venture with G.E. real estate we added two more properties during the quarter bringing the portfolio to 17 shopping centers, totaling 2.2 million square feet with occupancy of 95.1%. We have six other properties totaling $173 million targeted for the venture, which are either currently under contract or recently acquired by Kimco.

In our parent portfolio, Kimco also acquired three other shopping center centers and three single tenant buildings which represent development opportunities or not otherwise fit the investment parameters for ceer (ph) or crop. These properties comprise $21 million of investment. In addition, Kimco continues to provide leasing, property management, redevelopment and disposition services for our joint venture with Lasard (ph), on the former Conover property trust portfolio. During the quarter, Kimco sold two properties from the portfolio for approximately $11 million.

Our preferred equity program was also active during the quarter with $13.1 million funded in connection with five transactions comprising seven properties. In addition, three other transactions totaling $9.7 million have been approved and are expected to close during the second quarter.

During the quarter, Kimco's merchant building business, Kimco developers started three new development properties an invested an additional $31 million in the pipeline of 18 development shopping center projects.

Now I would like to introduce Milton Cooper for his thoughts.

Thanks, Dave. I will be very brief chatting about K-Mart and then the business strategy. One week from today K-mart will emerge from bankruptcy. Eddie Lambert, ESL and Marty Whitman and the third avian(ph) funds have invested hundreds of millions of dollars in the equity and seem enthused about what they may accomplish. They certainly spearheaded the emergence in break neck speed.

Now, as to our properties. As you know, in the first round of K-Mart closings, 31 stores were involved and I previously reported on our progress on all but two. Now as to the second round. There have now been seven leases that will be rejected as part of the second round. Six are in our core of Kimco classic and one is in the Kimco income rete. Of the six locations in our core, one location is subject to non-recourse mortgage, the amount of which substantially exceeds our basis and a second location is subject to ground lease and that location generated about $82,000 a year in cash flow.

In these two locations, there will be a reduction of cash flow result of the rejections of 219,000 per annum. On the remaining four locations, one is under contract of sale to Walmart. A second location is, a contract of sale is being negotiated with Home Depot. And on the remaining two locations, leases are being negotiated with the user. Other than the interim loss of rent, until the leases and sales are effective, there should be no loss of income on the remaining four.

On the key location, which is in Amarillo, there was 103,000 K-Mart at a high rent. We have agreed upon a lease with coals for 82,500 square feet and another user for the remaining 20,000 feet. The result will be at the effective net rents will be about 200,000 less than the K-Mart rent. And Kimco's share of that reduction should be less than $100,000 per annum. As Michael Pappagallo mentioned, our guidance estimates have not changed by virtue of the second round of closings.

Now our strategy. As to the business with K-Mart, at our last conference call we discussed the formation of a joint venture agreement with K-Mart to dispose of leasehold and seed properties. The bankruptcy court limiting the marking of release holds to mid-April from an expected timetable of late November. In addition, objections were raised to the joint venture by certain constituencies. K-Mart and Kimco jointly decided to withdraw the initial joint venture agreement and advise the Court that a new joint venture agreement would be agreed to and executed post emergence. And that agreement is presently being completed. So we are working with K-Mart on a disposition of properties owned by K-Mart in addition to the stores that K-Mart closed during the bankruptcy proceeding.

Now, while K-Mart exposure has been dramatically reduced to approximately 3% of total rents, it still is a large component. We will be monitoring our portfolio for that exposure and at the same time working with K-Mart and the new management to help create value out of the real estate holdings.

Now the strategy. In our last conference call we talked about our concerns about deflation and our concerns have been escalated because of SARS and the continuing weakness in the economy. If there is deflation, interest rates should decline and cap rates for strong income streams should continue to decline. But there will be further casualties among weaker retailers. This environment will require our team to be responsive and opportunistic on distressed situations and the environment will require great selectivity and judgment in acquisitions. What these times mandate is discipline and keeping the balance sheet strong with total debt a decreasing portion of our capital structure.

The strategy that we have been following is consistent with the economic climate we are in. It all will be in execution, execution, blocking and tackling, watching expenses, generating profits from all of the buckets and all of these activities should result in a growing safe per share income stream.

Our pessimism is for the cycle. It is not for our business and it is not for our team. With that we are all delighted to answer your questions.

The question and answer session will begin at this time. If you are using a speakerphone, pick up the hand set before pressing any number s. Should you have a question, press star followed by one on your push button telephone. If you wish to withdraw your question, please press star followed by a two. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from Jay Leupp with RBC Capital Markets.

This is David Ronco. Could you expand your strategy comments to include your plans for capital allocation and given your view that cap rates may continue to fall, your thoughts on asset sales and then the last part of my question is how large you think the Canadian joint venture could get given your activity to date.

With respect to asset sales, it is our view that those assets where the credit and income stream will be unquestioned -- I'm not talking about Walmart, Home Depot and et cetera, those, I think will increase. What we have to watch and have sales on are those properties that we have concern with the retailer [constituency]. You will see a bifurcated approach. One, that is strong, we will maintain. Others we will move them to mitigate any issues. In so far as Canada, Dave?

We remain very bullish about the general market in Canada, retail occupancies are strong. Retail tenants that we have are doing well. Our partner is an excellent partner up there. The only mitigating factor is prices have escalated quite a bit in Canada. Similar to the U.S. We are now seeing cap rates almost comparable to U.S. cap rates, but we suspect that the acquisition volume will slow down quite a bit for existing properties.

At the same time, we expect to do a few more development properties. I think we have now five with RioCan and their joint venture Trinity development. We suspect the growth of our Canadian portfolio will moderate somewhat because of high prices there. We still remain -- still feel bullish about the Canadian economy and the retail market in particular.

Thank you. The next question comes from David Shulman with Lehman Brothers.

Good morning, everybody. The follow-up on the prior question, the current annual report showed a border less North America. Are you doing more in Mexico for the balance of the year?

Yes, we anticipate doing more deals in Mexico. Deals, as I said for a long time, are difficult and complicated and time-consuming in Mexico. It's not an easy country to consummate transactions. We are evaluating several new proposals, together with our potential partner in Mexico, G.E. real estate. We expect to do several more this year

Okay, thank you. This is for Mike. Could you give us some color on the drop, the other joint venture JV contribution that fell, it was 2 million in the first quarter and 5 million in Q4?

There are a couple of primarily drivers, David. We disposed of a few other properties in that other joint venture, a few properties in Tempe, Arizona, that we disposed of during the fourth quarter. We also actually acquired the minority shares of another property. That was part of our consolidated portfolio. Also there were mentioned some of the properties in Arizona, there were lease termination fees in the revenue line last quarter that were not repeated this quarter. Which were shared with our partners Really, the sum of those three things that caused the reduction in the revenue line in the other joint venture bucket.

Okay. Now, one last question, if I may, for Milt. Is A-hold a potential casualty in this deflation area world you are talking about?

I don't think so, but you never know. When you say A-hold.

And the subsidiary --.

Our concern would be the giant foods, stop and shop.

Yes.

There, two of the businesses are very good businesses. So I would -- I would guess that they won't be casualties, but financing them and cap rates on them will be affected. I imagine that those two business businesses are strong enough that they will not be a casualty -- see, that's my hunch. They will be a casualty as a new growth vehicle. They will not be aggressive in their expansion. That's my best guess, David.

Okay, thank you.

Our next question comes from Matt Ostrower with Morgan Stanley. State your question.

Most of my questions have been answered. On K-Mart, I did cut off for a moment when you talked about your relationship with K-Mart. Forgive me if this is a repeat. Could you comment in general, are we learning anything about the demand for space and particularly the nature of the demand for space as it relates to releasing of K-Mart stores? Not just yours, but the overall K-Mart closure portfolio? Is Walmart going to use any of these stores, as you know, to open neighborhood markets? Are there any points that you are taking away from the releasing activity that happened so far?

Walmart was a user of some of K-Marts. To the best of my knowledge, none of them were designated for neighborhood groceries, which are a smaller store. While, Matt, we know that Walmart was the buyer and we don't know which of their operations they are going to use it for, our best information is that none of them were for neighborhood centers

Home Depot, as I understand it is using some of the smaller K-Mart stores to open a new format for themselves; is that correct?

Yes.

Is that something you are seeing other retail retailers do? Are they using it as an opportunity to get closer to their customers, more than Home Depot?

More than Home Depot. Others were fairly aggressive. Lowes was a user, Coals was a user. The usual list of suspects were the buyers.

In terms of, I know this is speculative, but if we look at closures so far, there's a first and second rounds. The numbers of stores you think will end up ultimately being, you know, released -- I know that's a sketchy word to use, but significantly released, in the first round it was X%. Second rounds will be X%. I'm talk talking about the overall K-Mart portfolio here. Is the second rounds going to be a better leasing percentage than the first? Seeing anything there?

In our case we have seven rejections. As I mentioned, all of them will be released. From our point of view those with non-recourse debt, one with non- non-recourse debt will be released at a much lower rent. We will not benefit from that. There will be activity, in the case of Amarillo, as I mentioned, it's a rent that is lower, effective rent that that's lower. There will be a greater proportion of releasing. The rent levels depend on how high the K-Mart rent would be in the market. But the activity is higher.

Do you have a sense for the overall closure list, the first round, second round, what amount would be effectively obsolete in those two rounds?

I don't on the rounds. It would be a guess. Because I -- the specific knowledge is just not there.

I may have missed this last point, but I think you will have a relationship with K-Mart going forward. Did you give any guidance about what kind of revenues you thought you would be able to recognize from that relationship in the next year or two?

No, I think as attribute to the management, the fees are modest, low percentage. What it does, it gives us really insight into possible buying opportunities, but it will not be substantial.

Okay, thanks so much.

Our next question comes from Craig Schmidt with Merrill Lynch. Go ahead speaker.

Given your pessimism with the cycle, we have a bankruptcy occurrence in '03 and you guys are hopefully looking to increase occupancy to 90%. At what point do we start to feel the pain, I guess, from the collapse of further retailers?

I think that, in other words, when we issued our guidance, we took into account the climate. And so I think I think we feel comfortable we can hit our 90% despite the climate. How severe it will be and whether -- I'm not sure, Craig. I have a feeling there will be more bankruptcies based upon the reality of the consumer is finally slowing down. You know what deflation does for retailers. I'm not sure of the ultimate effect. I am analyzing our portfolio, we're okay. But generally, I'm not sure.

I'm guessing it would be first quarter '04 we would sense the real failings if that was the case.

I think the substantial amount would be in the first quarter of '04. I'm looking at Ray to see what he thinks of the bankruptcies, where they would come. He said it would be principally after the Christmas season. Okay.

What retailers are represented in the designation rights within the category of other real estate investments?

That situation, Craig, it's two investments. The first K-Mart Kimco arrangement and we were alluding to the recent ones, but there was one initiated earlier last year that we were negotiating on behalf behalf of K-Mart. That is winding down. There are residual amounts remaining on Montgomery Ward transaction. Eight of ten are under contract. It is not fully fleshed out. In the balance sheet those represent the primary two investments at issue.

Okay, thanks a lot.

Thank you. The next question comes from Mike Mueller with JP Morgan.

A couple questions. Could you give us some color on the cap rates for acquisitions in the quarter. And, It looks like 40% of Q1 transactions were for the parent company, not joint ventures. I know you touched on RioCan, going forward should we more expect more transactions for the core portfolio and not in joint ventures?

The transactions for the parent were ones that were allocated through the joint venture, through the joint venture process and the due diligence says that there's a time lag. We in effect hold them for the joint venture. There were some purchases that were opportunistic that arose out of seeing some K-Mart properties that we felt comfortable with the others. You're right, we bought a couple of those. There will not be a pattern. It was an exception. And again, there will be the need to close on these properties prior to the joint venture partner completing them.

Okay.

You might want to comment on the cap rates.

The cap rates we purchased in the first quarter were at 9%. We subsequently purchased a few other properties. Clearly, the direction is down on cap rates, down into the eights.

Okay, thanks. I thank you.

The next question comes from Jeff Donnelly with Wachovia Securities.

Hi, guys. Milton, I had a question about the preferred equity of mezzanine loan business you guys were in -- it has been a year since you launched to date. You have 13 positions, 30 odd million. At what point do you ask is it sensible for you to be in this niche? Given the limited scale of that your organization has achieved there an the liquidity of those businesses?

It takes some time to ramp it up. We like those. We have 12 deals funded now. We have another three that should fund in the second quarter, which brings our positions to 15. The vision is, you eventually have a nice basket or portfolio of 50 to 100 of these things with equity positions in real estate that otherwise we would otherwise love to own. We do not have a large sales force originating these business. We have two primary representatives out there. We like the business, the promise of it. It lets us participate with owners that do not wish to sell properties but want to take capital out and are willing to give us an equity position. We think there are great synergies with the preferred equity team and we like it a lot.

How do you accelerate the placement there? Do you look at joint ventures with existing parties in the industry?

There are a number of ways we are going about the business. We have relationships with people that we bought properties with that we are also doing preferred equity deals with. It's a way to broaden our arrangements. We also deal with intermediaries, mortgage brokers and others that bring us these transactions. As you know, we are competing with a host of mezz-funds out there today. It's an aggressive time for mezzanine type lenders. It's a competitive market. But we like our position in the market. We think we bring, besides capital, bring leasing expertise to the table. We have other things to offer. We think it's synergistic to other businesses. We feel good about the long-term prognosis and its ability to contribute real income.

On the leasing front, could you maybe drill down a little bit and tell us, you know, characterize what specific brand exposure you have to, within the all holds name? Is it buy low in Brunos.

Exclusively giant foods.

Milton, beyond that, have you heard about Albertson's or the California grocers reviewing or rationalizing their California portfolios?

I have not. I heard rumors, but I know nothing specific.

Like me. A last question, for Mike, I apologize, I came in a few minutes late. The NOI margins declined from the same quarter the prior year by about 110 basis points. I wonder if you can tell me or just review again what was the reason behind the sizable bump in operating and G&A expenses in the quarter?

It 's generally a phenomenon that as you have the higher expenses you are going to have more leakage because you're certainly not at full occupancy. Because this quarter we had a substantial amount more of snow removal costs and the like, that certainly impacts occupancy. Excuse me, in margins to a certain degree. I think as you go through the rest of the year, you know, we are around in the 72% range in terms of a margin calculation. And I, you know, I don't see anything that would change that at all, all that significantly as we go through the balance of the year. What you will most like likely see as we get to the second and clearly the third quarter, relatively speaking the expense load will drop because you don't have things like snow removal costs, fixing potholes and so on. You might have slight up tick in the margins later in the year, but certainly nothing material one way or the other.

One last one. What again was the reason behind the decline in other investment income, about $8 million year-over-year?

Interest dividends and other investment income?

Yes. I'm looking at it in the aggregate, but specifically that line is where the majority of it is.

Mostly marketable security gains more than anything else. There was that inventory liquidation that we were talking about as well. In the preceding period.

Right.

It was primarily those two factors. One of them hit the interest dividends line. The other one hit the so-called other income net line. Some of The sum of those two items you have comparability.

Okay. Thank you.

Our next question comes from Kevin Lampo with Edward Jones.

One last question. I'm curious what you are seeing on the credit side beyond the top tenants like K-Mart and Ames, or down into the mom and pops and medium sized businesses. Have you seen any deterioration in the past quarter or so?

The problem is that the mom and pop businesses have been holding very strong and the issues seem to be -- you know, Kevin, the conventional which is wisdom was that the SEC looked at their access to capital, their income statement. The private guys are hanging in, making it happen. We have not seen deterioration in the mom and pop.

Okay, thanks, guys, nice quarter.

Thank you. Our next question comes from Keith Mills with UBS Warburg.

It's actually Ian Weissman. Excuse me if this question has been asked, but I had to jump off. If you had to look at your joint venture activity with G.E Capital. It was over a year since you made you last major acquisition, I think the Rouse (ph) assets, 12 assets in the portfolio. Can you comment on the current pace of acquisitions with that joint venture? Are you above your target? Below your target? What are your expectations going forward?

We are pleased with the momentum. You're correct about the significant sized portfolio. The rouse transaction was the last one we did. Although we look at large portfolios, where we made the most progress is the one off transactions. As I mentioned our pipeline is probably larger than it ever has been in terms of the single transactions. We have six more that we hope to fund in the second quarter.

So we've got some good momentum. As I mentioned we are up to 17 properties. And building some good momentum. So I think, you know, 350, 400 million by the end of the second quarter would be a nice target for us. But if we continue with that pace, we will meet our targets for this year.

So far with the Rouse calling for 12 of the 17, has the reason been you haven't found portfolios out there to buy or is it that -- it seems like you would be below, in the year and a half since you started this joint venture, you are sort of running at a slower pace in convictions and with RioCan or with Kia. Is there a reason or you haven't found opportunities?

We count the Rouse portfolio as about eight transactions. There have been about nine others that we've done subsequent to Rouse. So the actual velocity of the deals is, we are very satisfied with. And we have a very good working relationship with the internal G.E. people that work on these with us. I think the method of attacking these acquisitions has gotten smoother as time goes on. We are feeling with good about the G.E. capital venture and our ability to meet the acquisition targets of both G.E. and ourselves. As you know, they have a voracious appetite for earning assets.

Thank you. Good quarter.

Thank you. Our next question comes from Ross Nussbaum with Salomon Smith Barney. State your question.

Hi. Good morning, everyone. Question for Milton. (Loss of audio)

Hello? Hello?

Thank you. Our next question comes from James Crow (ph) with Client Spears (ph).

Good morning, everyone. A couple questions. First quick one, the $6 million gain on the extinguishment of debt, can you give me a little color on that in terms of where that came from? Is that going to be recurring? What do you expect quarter-to-quarter?

No, that will not be recurring. That was really a transaction whereby we had agreed with the lender that, to satisfy pay off the debt at a discounted price to the principal. So that was what created the again, the entertainment and the outstanding principal add to go the gain. We had similar transactions in the fourth quarter of last year after we settled a couple of other mortgages. Now we basically come to fruition with the lenders on all the problematic -- as I mentioned in my comments, there is one other mortgage that [effected] by the latest rounds of the K-Mart closing and we are talking to the servicer about what might be some alternatives.

My second question is off of page 14. I am looking at the releasing spreads. New leases signed year to date. Forgetting about the K-Marts. You are at about $8. And there are two different relevant comparisons. I wonder if you can tell me which is more relevant. I think the average rent to lease portfolio, $8.41 in the portfolio and the expirations during the quarter or year-to-date were $10.43. What, I guess for purposes of kind of calculating a releasing spread, was that space that expired? Was that representative of the new space that was resigned or what, you know, what is the best...

The best way to look at it, you're telling dealing with one quarter and broad brush numbers and space that may not relate to each other. It's time realignment to leased space. The best way to look at it, if you look at the vacates with an average of 1043 and compare that to the new leases signed which again is generally different spaces, but the new leases sign ed of $7.49 is weighted down by the fact that it was signed a few large releases. The way I look at it, breaking it down there were eight leases for 390,000 square feet that had an average rents of 590. Then 86 leases for 200 -- 600,000 square feet that had an average of about 1,090. So you pull those two together and you look at the smaller leases signed against the smaller vacates and you see that there is a positive leasing spread.

What weights down the leases signed averages in any one quarter might be big boxes, which obviously are leased that much lower per square foot rate. What it points to in relation to the average rent to lease per square foot of 841, it tells us, points to us that there is still some up side in the portfolio relative to the new leases signed. But when those things hit are depend and the on a lot of circumstances and when things are coming off lease, early termination and in a given period if we sign a big vacancy or lease a big vacancy at low rates, it will bring down the average. It's something we will do all day long because it absorbs costs and gets tenants in the space

What have been the trends on the tenant improvements and CAPEX and what not associated with that leasing activity the last couple quarters?

Looking at averages, as a general matter we will fend all tolled from a capital budget, $30 to $40 million, which will encompass everything from tenant improvements and allowances to major expansions and redevelopments. Probably also, you know, anywhere in the neighborhood of $8 to $12 million annually on leasing, capitalized leasing commissions. That's kind of the full boat of expenditures that we have experienced in our portfolio. You probably are looking at a little bit of an up tick in 2003 as we are putting some money into certain of the K-Mart locations. Out of all of the vacancies, the original vacancies in the K-Mart portfolio, there are only four locations where we are putting in a reasonable amount of money because we are breaking up the box and really expanding and redeveloping the location. Many of the other locations aren't [inaudible] deal.

Is there a per square foot number that is a good one to use on a going forward basis?

It's very hard for me to generalize in that because our portfolio is so large and there are so many things which might influence, say, influence a particular calculation. I can't say on the building -- on the building improvement side, the maintenance CAPEX, if that's what you want to call it, we expense quite a bit of costs that others might capitalize. So if you even take a building improvements or normalized CAPEX of 25 to 30 cents per square foot, you know, probably half of that is already expensed in our operating accounts. And the other half is capitalized. That's probably the best number that I can give you from a historical perspective in terms of our non-recurring capital expenditures.

Great. Thanks so much, guys.

Thank you. As a reminder, should anyone have further questions, please press star followed by the one at this time. If there are no further questions I will turn the conference back to Mr. Scott Onufrey for further comments

We thank you all for joining us and we look forward to speaking to you again next quarter.

Ladies and gentlemen this concludes our conference for today. Thank you and have a nice day. All parties may now disconnect.