Kimco Realty Corp (KIM) 2004 Q3 法說會逐字稿

Good morning, and welcome to the Kimco Realty Corporation third quarter earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. Realty Corporation third quarter earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

At this time, it is my pleasure to introduce Scott Onufrey. Scott, the floor is yours.

Thank you, Lynn.

Thank you for joining us for Kimco's third quarter earnings 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 state the Company's and Management's hopes, intentions, beliefs, expectations, or 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 filing.

During this presentation, Management may make reference to certain non-GAAP financial measures we believe help investors better understand Kimco's operating results. Examples include, but are not limited to, funds from operations and net operating income. Reconciliations for these non-GAAP financial measures are available on our website.

Presenting this morning are Mike Pappagallo, our Chief Financial Officer; Dave Henry, our Chief Investment Officer; and Milton Cooper, our Chairman and Chief Executive Officer. Mike Flynn, our President, and several other key executives are also available for your questions at the conclusion of our prepared remarks.

I'll now turn the call over to Mike Pappagallo.

Thanks, Scott. Good morning, all.

We finished up another strong quarter by posting FFO per share of 89 cents, an 8.5% increase over last year and a penny above first call consensus estimates. On the year-to-date basis, we are up 11.3%, and at this juncture in the year, I feel our full-year 2004 FFO per share will come in at $3.55. That is also a penny higher than the current analysts' estimates and will result in a full-year growth in FFO per share of just under 10%.

Our Board has approved an increase in the quarterly dividend of 4 cents to 61 cents per share, representing a 7% increase to the current level. This increase is consistent with our overall range of FFO growth expectation which stands at between 6.2% to just under 8%. That range of FFO percentage increase is calculated off the current year's $3.55 level I just mentioned. The 2005 guidance is modified slightly upward since our last earnings release, primarily as a result of completing our annual budget process.

No doubt, we were pleased with the results of this quarter, as well as our balance sheet position and progress in the various business and investment activities. I would also point out that the GAAP net income did, in fact, decline year-over-year due to a substantial gain recorded last year on the sale of a mall in Leominster, Massachusetts. Conversely, the GAAP-defined income from continuing operations, which includes our merchant development gain, increased by 16% quarter-over-quarter.

I probably sound like a broken record, but growth again reflects a combination of factors with earnings generated from internal growth in the core portfolio, increasing contributions from the co-investment programs, including management fees, new business investment, and realization of value from previously acquired positions in real estate and financial assets.

Net operating income from our parent shopping center portfolio that we own for our own account grew by 4.9% to $91.9 million. The composition of assets underlying this portfolio is roughly comparable as many of the assets acquired starting in the fourth quarter of last year, particularly Mid Atlantic, have already been transferred to the various co-investment programs. Or said another way, most of the contributed NOI from acquired properties have been offset by lost NOI from transfer properties resulting in the internal growth rate representing 4.5% of the total 4.9% increase.

With respect to the third-party programs, a total of 6 properties have transferred across GE Venture, LaSalle, the Kimco Income Fund, and others. The total FFO contributions of all managed portfolios, including fees and our proportionate minority stake, rose to $21.4 million in the current quarter from 18.2 million in last year's third quarter. On a year-to-date basis, the FFO contribution was about $61.6 million with a little less than half coming from the Kimco Income REIT. To put this in perspective, 3 years ago the total contribution from these activities was $28 million, with about two-thirds coming from the Kimco Income REIT.

The operating results from both the parent real estate portfolio and from the investor program reflect the fact that we continue to experience earnings growth from the ownership, operation, and management of our bread-and-butter shopping center asset type, but that our investment approach continues to shift to more of that of primarily a manager with a stake, mostly in response to the current pricing environment in both real estate and capital markets. But whether as a full owner or as a manager with a minority interest, we are still capturing our share of opportunity.

The announcement of the Price Legacy transaction is a case in point. Kimco's teamed up with DRA Advisors to execute an agreement to acquire Price Legacy's shopping center portfolio. That company is in the process of finalizing its proxy materials to its shareholders to solicit a vote on the proposal. And we hope to complete the transaction in a couple of months, although timing is not completely within our control.

On the merchant development side, due to the timing of sales, gains were lower this quarter compared to prior year levels, although we have assets positioned for fourth-quarter sales that will bring the full-year income from merchant building sales to about $10.5 million, net of tax, which is similar to the full-year 2003 level. This quarter's results also reflect ongoing contributions from the business activities and investments that fall outside pure ownership and management of retail real estate. You could almost characterize it as the "finance company" wing of the business.

In the third quarter, we captured earnings from the realization from certain bond investments secured by real estate that were acquired at a substantial discount to market and have been recovered at par. This item offset slight reductions in income from mortgage financings and from other real estate investment as prior-year amounts included excess interest earned from the financing of the Ames liquidation and residual profit from the Montgomery Ward deal.

Balance sheet metrics remain as strong as ever. Cash balances were unusually high at the end of the quarter at $134 million, in part reflecting the proceeds received from the bond offering completed in August. This money was raised in anticipation of replacing a note that matured in October. This was done to capture an advantageous spread which settled at a 95 basis point spread over the 10-year treasury or 4.82%. Notwithstanding this action, overall debt levels remained the same as the June quarter end, primarily the results of the elimination of mortgages that encumbered certain of the assets transferred to the co-investment program.

One other point of note, we opened up a separate financing facility denominated in Canadian dollars. The facility has a 3-year term and its value is set at $150 million CAD. This facility will be used to finance new business investment in Canada and will function as a natural hedge against those Canadian dollar-denominated investment stakes. As this is a structure that is supported by the general credit of the Company, we will treat this simply as another component of the debt stack and manage overall debt levels accordingly. We are pursuing a similar facility to be denominated in pesos to support our Mexican business opportunities.

And now Dave Henry will give you a recap of our investment activity.

Good morning.

I am happy to report that Kimco had another strong quarter in terms of new business activity. Looking at our U.S. joint venture activity, Kimco and DRA Advisors are proceeding with the previously announced purchase of Price Legacy Corporation. The portfolio itself contains 33 shopping centers comprising approximately 7.6 million square feet. The properties are generally high quality and located primarily in Florida, California, Arizona, and New York.

Also with DRA Advisors, Kimco acquired during the quarter a 140,000 square foot shopping center in Pompano, Florida. The Pompano property represents the third shopping center acquired with DRA Advisors in 2004. We also manage a fourth property for this pension fund advisor.

In our GE Real Estate venture, 2 former mid-Atlantic properties totaling $36 million were transferred into the GE venture during the quarter. The GE venture is also expected to purchase this week a 237,000 square foot property in Laredo, Texas for $23.6 million. Overall, the venture has purchased 41 properties at a total cost $639 million, of which 6 properties have now been sold. The portfolio itself continues to perform very well with occupancy at 95%.

In our join venture with LaSalle Investment Management, 3 former mid-Atlantic properties were transferred into the venture during the quarter totaling 55 million. The venture now contains 5 properties acquired at a total cost of $83 million. In our Kim South joint venture with Lazard on the former Conover Property Trust portfolio, 2 additional properties were sold during the quarter totaling $18.5 million. To date, the Kim South venture has sold 25 properties, totaling 2.3 million square feet at an aggregate price of $183 million.

Since our last conference call, there has also been acquisitions and disposition activity in our parent portfolio. We acquired for redevelopment a 168,000 square foot shopping center in Tampa, Florida, and a 50% interest in a 170,000 square foot former Kmart shopping center which has be re-tenanted by Lowes in Valdosta, Georgia.

In addition, last week we purchased the portfolio of 11 properties for $84.5 million in the New York City area which are primarily net leased to Duane Reade, a local New York City drugstore chain. The properties are located in Brooklyn, Queens, Long Island, Westchester, and New Jersey and represent excellent long-term releasing and redeveloping opportunities in very dense population centers.

Our preferred equity business was also busy during the quarter. Since our last conference call, we closed on 7 new preferred equity investments totaling 37 million. The program now contains investments in 50 properties with an aggregate commitment of approximately $142 million.

Our merchant building business, KDI, was active as well during the quarter. KDI completed the sale of 1 shopping center and sold portions of 2 other projects at an aggregate price of 34.4 million. In addition, KDI closed on 3 new projects and invested $22.3 million in its current pipeline of 24 development properties.

In Kimco Select, our opportunistic investment business, we purchased an interest in an existing mortgage on a 250,000 square foot shopping center in Edwardsville, Pennsylvania.

Looking outside the U.S., in Canada, we closed on a 12.7 million CAD preferred equity investment with Sandalwood Management in connection with the acquisition of a portfolio of 6 large shopping centers totaling 1.2 million square feet in various cities in Quebec Province. The portfolio was purchased from the large Canadian pension fund for $61 million CAD, and the acquisition brings our equity interest in Canadian shopping centers to more than 9 million square feet with a current portfolio occupancy of 99%.

Also in Canada, we closed on a 170,000 square foot third phase development project in our Sudbury shopping center with RioCan REIT and Trinity Development. In addition, Kimco and Trinity agreed to purchase RioCan's interest in the recently completed 116,000 square foot Grand Park property in Toronto.

Looking south of the border in Mexico, we are particularly pleased with our current momentum and level of activity. After more than 2 1/2 years of negotiating with various regional operating partners, forming tenant relationships, acquiring development sites, and working through a host of complicated currency, tax, and legal issues, we have begun to build an excellent portfolio of existing properties and first-class development projects. During the quarter, we closed on 3 more development projects, a 162,000 square foot Wal-Mart-anchored project in Huehuetoca, a 125,000 square foot H-E-B-anchored project in San Luis, and a large 522,000 square foot project anchored by H-E-B, Home Depot, and M & M Cinemas in Reynosa, Mexico.

Overall, we have now approved a total of 13 investments in Mexico, comprising 3 existing properties and 10 development properties totaling 3.7 million square feet. 7 of these 13 investments have now closed, and we expect GE Real Estate to be a 50% equity partner in most of these projects. GE is fully invested with us in all 3 of the stabilized properties, and they have received internal approvals on several of the development properties. We also are pleased with our local Mexican operating partners which include G. Accion, Precept Planning Groupo (ph), and Promocal (ph).

Now I'd like to introduce Milton for his comments.

Thanks, Dave.

Within a few weeks, Kimco will have been a public company for 13 years, and I couldn't help smiling when Mike Pappagallo mentioned our cash position at the end of October for the quarter. My mind went back to our IPO and the fact that the total gross proceeds of the offering was less than our cash on hand as of this past September 30th. And our dividend of 61 cents is over 3 times the then initial quarterly dividend as adjusted for stock splits.

I am also rather nostalgic and miss all of the questions about our Kmart exposure. You will note from page 18 of our supplemental schedule, that Kmart's percentage of our rents has slipped to number 4 from number 3 as of last quarter. Oh my, just when their credit is getting higher, our exposure to them is getting lower.

On a serious note, the Kimco team has focused its energy and emphasis on re-leasing the substantial vacancies arising out of the bankruptcy of Kmart and others. The re-leasing of these vacant boxes is now by and large behind us. Our occupancy percentage has increased to a point where the team will expend greater emphasis on culling the portfolio for properties that should be sold and finding properties that should be redeveloped and expanded. The result should be healthy increases in FFO from the same property portfolio.

At the same time, all corners of our different businesses have positive momentum and a substantial pipeline of activities. Our challenge is to continue the building of a world-class organization sparked by business leaders who are aligned with the interests of the Kimco shareholders. There are clouds on the retail horizon, but I feel our strategy has prepared us for it. And I feel very confident that our organization will deliver the goods for our customers, our partners, our associates, and our shareholders.

Just one favor before we take your questions. We have many retail relationships and we regard many retailers as good customers and partners. And it would be inappropriate for us to comment on any activity with specific retailers.

And with that, we are delighted to answer your questions.

Lynn will now open the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Alexander Goldfarb. If you would please state your affiliation.

Sure. Good morning. Lehman Brothers. First, Milton, I understand your comment at the end about clients, but care to comment on The Wall Street Journal's article yesterday that cited you guys being approached by First Boston with regards to Toys 'R' Us?

No. I really -- it would be inappropriate.

Okay. Okay. Moving to the Canadian dollar, it's up about 10% quarter-over-quarter, and it's already up about 7% for the fourth quarter. How much benefit did you guys receive in the RioCan from the appreciating Canadian dollar?

In looking at our equity pickup, as it's called, for the quarter, it probably increased about $200,000 due to exchange.

Okay. And what are you budgeting for next year? Was any of the adjustment in guidance related to changes in the exchange rates?

No. We make the assumption that the currency level exchange rates will remain constant.

Okay. So it was just 200,000 in the quarter?

Yes.

Okay. As far as exchange rates go, when you're investing now in Canada, I -- how are you mitigating any potential de-value of the Canadian dollar relative to where your investments are now?

Well, as a general practice, what we have done historically is entered into forward exchange contracts to hedge the net investment risk in our Canadian portfolio. And generally, those have termed out between 2 and 3 years. The purpose of obtaining a Canadian dollar-denominated facility is somewhat more of a natural hedge, but it has the same effect that -- that you've got a counterbalance through the borrowings to hedge your net investment risk.

Okay. Okay. And moving on to the DRA JV acquisition, I think it was originally intended to close October 1st. What was the holdup?

No. I don't think that's the case. Based on the sheer timing of the preliminary SEC review of the proxy materials, which is a normal process, and the requisite timing needed to complete the proxy and give sufficient time for the shareholders, I think it was always the intention of the parties to attempt to close at or around the end of the year.

Okay, okay, end of year. Okay. And just 2 final questions. The Frank's liquidation. When do you expect that to complete?

We would expect the inventory portion of the liquidation to occur around the end of the year, and the real estate disposition would move into the middle of '05.

Okay. And then you'd be fully paid back?

Yes. And we're very comfortable in terms of our exposure, that we will recover all amounts that are currently outstanding, both in terms of the initial financing, as well as the debtor and possession financing that we closed on last month.

Okay. And what were the additional commitment fees or any additional fees for running that process?

We -- 2 points --

We had 2 points on the DIP facility which is amortized over the term of the facility. The facility, which is 1 year. The facility had both a direct payment component, as well as providing letters of credit support with respect to the final vendor payment. So the initial amount was about $27.5 million, and that commitment literally reduces every day, because as the letters of credit are utilized and as the vendor payments are made.

Okay. You said 200 basis points?

2%. You can see on the financing.

Okay. Thank you.

Thank you. Our next question is coming from Jeff Donnelly. If you would please state your affiliation.

Yeah. Jeff Donnelly. Wachovia Securities. And good morning guys. Milton, I won't ask you about specific retailers, but --

But! There's a 'but'!

-- but as it pertains to these, I guess I'll call them big box workouts, such as Service Merchandise, Wards, or even Mervyn's, do you feel this is an expanding industry that you expect Kimco to maintain or gain market share in? Or is -- perhaps activity is more constant versus prior years because visibility is higher, and maybe it's becoming more difficult to maintain your market share and profitability there?

Well, we will continue. There will be, in all likelihood, increased competition. Success always breeds, really, competition, and we expect that it will be there. We expect to be able to execute, and we think we have a wonderful team in place with Ray and his team. And we'll be on top of it.

Is it possible for you to characterize maybe what sort of inning, to use a baseball analogy, we're in within that industry? Is this is a cyclical period we're going through, maybe, where real estate is transitioning from retailers to real estate owners? Are we early on in your minds or sort of late stages, I guess, in terms of how good the getting is?

It's hard to predict. When I commented about clouds, what I was thinking about is the problems that the consumer might have with a triple whammy with -- between gas prices, oil prices, what might happen with mortgages that are adjustable if interest rates go. And if that happens, there might be more distress. No one can be sure of that, Jeff. And all that we can do is having one aspect of our total strategy, the team in place to be fast on our footwork, to take advantage of the opportunities, and to work at it. What will come, no one knows.

And is -- last few questions I guess, for Dave and Mike. The earnings contribution from areas other than your core real estate portfolio grew at a pretty sizeable rate this quarter, while NOI from the core was up about 5% on an aggregate basis. Collectively, I think the other joint ventures and other business areas probably grew about 30% to 40% quarter-over-quarter. Can you just re-educate us on where you see the balance between those businesses going over the next 12 to 18 months? Clearly, I know you want to grow it. But I'm curious what kind of pace we might be able to expect over the next 1 to 2 years.

Jeff, I think if the current environment continues -- when I say current environment, meaning relatively aggressive pricing on a cap rate side, and not withstanding some views about where interest rates might go, relatively low interest rates. I think you'll see us continuing to invest more through joint ventures and managing other people's money, and also to be more opportunistic and creative. To echo Milton's point, there are clouds. If they are further distressed in certain pockets of retail, you will see us move -- continue to move aggressively in what I call the distressed business, or really, structured transactions.

Which means that from the standpoint of the core portfolio, most of the growth will be more of an internal nature and not due to acquisitions on the parent balance sheet. Which means that we're probably looking -- or expecting somewhere of a 4 to 4.5% growth rate next year on the core portfolio. We're very happy about that because, for us, it's the result of much more active management, more redevelopments coming onstream, and hopefully, some bump-ups in the occupancy as well. But I don't expect us to be putting a significant amount of properties -- acquired properties in the core.

So as a result of all that, I think proportionately, when you look at the earnings contribution over the 12 to 18 months, there will be increasing levels of contribution from the cull investment programs and from the other activities of the business relative to the core. But I think you need to put it into perspective that still the lion's share of our fundamental base earnings model is still the parent portfolio.

And 3 years from now, depending on where the markets and the interest rate environment is, you could see us conceivably buying more things for the parent account. We're trying to be as reactive -- when I say reactive, meaning having the team in place to be able to capture opportunities, no matter what economic environment and no matter where they may come from, whether it's the U.S., Canada, Mexico, etc. So, we continue to be very fluid.

I guess related to that, or maybe perhaps driving that, can you folks talk about what the trend has been in the spreads between unleveraged development and acquisitions? And then your experience -- I guess, your experience there? And maybe at what point do you feel, perhaps straight-up acquisitions might again make more sense than development? Or conversely you might be inclined to take on more risk in the development side?

Well, in the development side, we would not want to take on more risk. The development business has always been a business where there is a series of crises, and unless our margins are adequate, we won't do it. If you notice, we have maintained the same development profile, and we have also monitored our developments very carefully, watching the overhead, and when you realize the overwhelming large proportion of our developments that are joint ventures. That every development requires -- is a series of problems, and we really feel that you have to have local partners, etc. So we will watch it, and we will not be aggressive in development.

Insofar as whether there will be projects that will come back to the core, our job is to take the shareholders' capital and invest it as a spread. Right now, the passion to own income-producing real estate is such that we can't take our shareholders' capital and get an adequate spread. We had a picnic when we went public. If the times change, and there are adequate spreads for our shareholders, we will go back to that. It has the advantage of simplicity. It has many advantages. I don't see that happening for a long time.

Sticking with you, Milton, and sticking with the question on investment spreads, you know, I guess, what have you observed maybe in the spreads or unleveraged spreads between investment in the U.S. and Canada and Mexico? Are there more lucrative spreads available, perhaps in other countries that you guys are weighing?

Dave?

Well, in looking at 2 parts, I think Canada continues to have a slight premium in terms of yield compared with the U.S. But the huge arbitrage that we enjoyed 2 to 3 years ago between cap rates in Canada and the U.S. have gone away. Canada has been discovered, so to speak, and yields have come screaming down. But that said, there -- we still believe there is a slight premium in terms of yield in Canada.

Mexico, we continue to think there is a window of opportunity in Mexico where investing today is going to be an enormous value over time as rent growth continues to pick up due from everything from -- from escalations in the leases to CPI to percentage rents, all of which aren't going on in the U.S. today. Those factors are driving returns in Mexico. And Mexico is where the U.S. was many years ago in terms of good population growth, and a little bit of inflation does wonderful things for real estate values. So yes, we do believe there is opportunities in other countries that are a little better than the U.S. And we continue to look at other international opportunities as time goes on.

Thanks, gentlemen.

Thank you. Our next question is coming from Suzanne Sorkin (ph). If you would please state your affiliation.

Hi. It's Suzanne Sorkin, Morgan Stanley. We just had 2 quick questions. We were just looking at your pretax development margins, and it looks like they were around a little below 8 in the third quarter compared to 7% in the second. But that seems like it's down from the mid-teens, historically. Can you just provide some color on that?

There are probably 2 things that influence the margins. First, in more recent -- more recent quarters, many of these developments -- the majority of these development sales are being sold, but there are earn-out provisions, so not all of the gain is recognized up front. It will be recognized when the last phase of the center is completed. So I figure you're going to have a little bit more of a staggered gain recognition.

But notwithstanding that, some of the more recent development gains, that there is a sharing that goes on with the development partner, to Milton's point, most everything we do now is with the development partners. So they're getting their take, so to speak, and our gain, generally, as a percentage of the total cost, has been less than it historically was, say, a few years ago when we did most of them for our own accounts. So those are probably the 2 primary drivers.

But I won't be coy in saying that early on, some of the first 2 or 3 development sales that we did back in 2001 where, I think, were unusually lucrative in terms of the return. I think, really, from the standpoint at that time where we were building to and where cap rates were coming in, I think now you have more normalized percentage change. And when you add in the partners' split of the profits, I think your overall numbers are going to be less than they were, say, 2 years ago. But in -- It's an overall perspective. We are still very -- we're very comfortable with what we are developing to and the relative risk reward that goes with these merchant building transactions.

Great. And our second question is just, going back, I know you mentioned the parent portfolio, the NOI grew at 4.9%. Is that a same-store number?

4.5 was. 4.9 was the aggregate -- the aggregate change quarter-over-quarter.

Great. Thank you.

Thank you. Our next question comes from Chris Capalongo (ph). If you would please state your affiliation.

Yes, Deutsche Bank. Just a couple of quick questions. First, could you just revisit the -- your investment guidance for '05? I know you started -- touched on it, talked about it in some broad ways. But I'm wondering, you said 0 for the parent portfolio, X for the co-investment program. And then if you could also just talk about where, whether domestic, Canada, Mexico, and the volumes there?

Chris, I'm a little unclear in terms of what you're asking.

Just really, total volumes. You know, how much investment activity in '05 do you see yourselves doing?

Okay. That's what you were asking.

In terms of volume considerations, probably in the core, as you know, where we're making more attempts at disposing of marginal properties. But I think in the core what we're going to wind up seeing is probably a 100 to 150 net increase in the acquisition activity. Price Legacy we've already mentioned. Which, again, will probably be a late fourth quarter item which will have some effect -- will certainly have effect for all of 2005 if the timing goes as planned.

In terms of other co-investment programs with any and all partners, we have estimated about 600 to $650 million worth of new business in that area and recognize that we're going to have, you know, a relatively small equity ownership in that final tally. Our rough number has been between 15 and 20%. And then between Canada and Mexico and preferred equity, kind of those arenas, we're figuring probably about $200 million worth of new business generation. And lastly, for the opportunistic business, the retail services business, which include everything from buying designation rights to new mortgage financing and distressed bond purchases, we're probably expecting between 150 and $200 million there.

So that -- those are kind of rough, broad guidelines in terms of the new business generation that we're expecting for next year, and what we've built the business plan on. And as I suggested earlier, that the NOI, or same-store growth in the core portfolio will be somewhere in the 4 to 4.5% level.

Just a couple of detail questions. Interest dividends and other investment income, what's -- what's in that line again, if you could refresh my memory?

Okay. As a general rule, that will be any -- any income on stock or bond investments that we have, as well as capturing any up side on the disposition of position. And in this quarter, the bulk of the increase was due to something I mentioned earlier, that we did -- we had an acquired bond position that was secured by real estate. We had purchased Kmart-backed paper. And most of those properties underlying that were disposed of, and we recovered our investment at par. So that was the jump, quarter-over-quarter on that particular line item.

Okay. And with your co-investment programs, or the JVs in general, do you receive a promoted interest in any of those arrangements, and will you receive any promote income in '05?

The answer to the first question is yes. Almost all of our joint venture relationships call for a promote. The calculations vary, but they almost all have a promote structure built into them. I think there is a bit of a promote in 2005 in connection with one of our ventures.

A small amount, basically?

Yes.

Okay. Well, thank you very much.

Thank you. Once again, if anyone does have a question, please press star, 1 on your touch tone telephone at this time. Our next question is coming from David Rongo (ph). If you would please state your affiliation.

Yes. RBC Capital Markets. Good morning. Getting back to Milton's comments on shifting gears at this point in time, and now that you've got the parent portfolio up to a decent occupancy level here, selling some assets, I wondered if you'd given any thought to what kind of dollar volume you might do in dispositions in 2005?

Well, I -- I think our rough cut is probably going to be about $100 million.

Okay. And then just one more income statement question here. Other income/expense net -- I wondered if you could talk about what's in that line item and then just kind of give some guidance going forward?

For the most part, the change in other in -- well, it includes a variety of items. Everything from franchise -- on a normalized basis, franchise, taxes, equity pick-ups from corporate -- other corporate like Blue Ridge and things of that nature. The big jump year-over-year was the receipt of Kmart stock that we received in settlement of our rejection claim liability from years past on all the rejected leases. That's really the driver more than anything in the year-over-year analysis.

I always hesitate to provide kind of a run rate, because that account caption is legitimately a catch-all for other specific transaction oriented. The only constants in there, as I say, are franchise tax expenses at the REIT level, and maybe some other equity pick-ups from non-real estate investments. And generally, if nothing happens, the number is relatively small. It generally would be a 1 to $1.5 million charge or expense on a year-over-year basis. But many things happen. Things happen all the time. That's why it's very difficult to predict. Last year's number had a $1 million condemnation award to us for a site in the midwest. So it will be a catch-all and very difficult to predict.

Okay. And then just a follow-up to my previous question. When you talk about your targets for domestic investment, do you speak of that number net of dispositions, or --

Yes. Yes. The number I gave you was net.

Okay. Great. Thank you.

Thank you. Our next question is coming from Michael Billerman (ph). If you would please state your affiliation.

Hi. It's actually David Carlisle (ph) here with Michael, and we're from Smith Barney. The question I have for you is, could you tell us how much you have under contract in the acquisitions pipeline right now?

It's minimal. I'm guessing somewhere around 30 to $40 million, that is actually under contract.

Okay. And then, I was wondering if you could also provide us with a little bit more color with how the Price Legacy deal came about and your relationship with DRA?

Tom?

This is Tom Caputo. We have worked with DRA, both on the buy side from them, as well as teaming up with them on 3 individual investments around the country. A couple of them were mentioned earlier in the call. And so it was that relationship, which is a building relationship that brought about the possibility of acquiring Price Legacy.

Okay. Great. Thanks. That's all I've got.

Thank you. Our next question is from David Fick. If you would please state your affiliation.

Yes, good morning. I'm with Legg Mason, and I'm also here with Nate Isby (ph). You have guided to about 17 to $18 million of 2004 development profits out of KDI. And obviously, this is lumpy, but it seems like your expectations are somewhat scaled down. And you can -- I was just wondering if you could walk through what has changed in terms of this year and then into 2005, what you expect?

Well, I guess maybe when you suggest, David, that it was scaled down, I'm just having trouble responding to that. I'm not sure what you mean by scaled down. I think pretax -- your point, this year, when you look at it on a pretax basis, it's 16 to $17 million of development income. And, which I think was roughly what was last year's number as well, and as I do recall -- I had kind of suggested that early on this year that the development profits were going to be roughly similar. So I don't think there is any scaling down of expectation. I think it's --

It's not huge, but it -- I mean, your specific guidance was 17 to $18 million.

Yeah. So I think 17 is not an unreasonable number when you apply the taxes.

Okay. Last question. What is assumed in your occupancy guidance for '05?

I don't -- I think that at this point, the range is between 0.5% to 1% increase. And I say I think, meaning that from an underwriting or budgeting perspective, we have assumed 0.5%, but I think the mindset here is that if we go do everything that we are capable of doing, we potentially could get it up another point.

Great. Thanks.

Thank you. Our next question is from Rich Moore. If you would please state your affiliation.

Good morning. This is actually Chris Chapman here with Rich, and we're at Key Bank McDonald. I was just curious if you guys could give me a G&A run rate?

During the quarter -- let's see, during the quarter, our G&A was roughly $11 million, which would imply $44 million for the year. I think in looking at 2005, we probably should increase that by about 5%. And I think that the reason why we would show an increase is we continue -- as we continue to diversify the business, particularly outside the core, we recognize that we need to put the right people in place from a portfolio management and asset management perspective. So that's the best I can give you right now in where I think we will be in '05.

Alright. I also noticed this quarter the provision for income taxes virtually went away. I was wondering what the story was there?

The -- unfortunately, the presentation of income taxes is in 2 places on the operating statement. One area it's on the gain on development sales line where the income is netted, net of tax, and this separate, stand alone provision benefit line is really for everything else that is subject to taxes.

And the short answer is that in this quarter, other than the development activities, the other -- all of the other activities in the CRS, that the pretax income was offset by the interest charges and the overhead that's allocable to the TRS. So you basically were flat or a little less than that for everything else other than the KDI merchant building sales.

Okay.

And sometimes that reflects the fact that many of these opportunistic deals that we do, it's assumed, many times, that everything goes through the TRS, but that's not always the case. For example, if Ray, in his deal structures can get a first mortgage -- even though it may be an opportunistic play, or financing a distressed retailer, if it's a first mortgage loan, that's a good asset for REIT purposes, and we'll generally record that in the REIT, not in the TRS. So it really comes down to the timing of transaction for the quarter, for the TRS outside of the merchant development gain.

Okay. Thank you very much.

As a reminder, if there are any final questions or comments, please press star, 1 on your touch-tone phone at this time. There appear to be no questions or comments at this time.

Thank you, Lynn, and thank you all for joining us. We look forward to speaking with you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.