Kite Realty Group Trust (KRG) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kite Realty Group Trust second-quarter 2007 conference call. My name is Tanya and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a Q&A session towards the end of today's conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Adam Chavers, Investor Relations Manager. Please proceed.

Thank you, operator. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call [Kim Hollins] at 317-578-5151 and she will fax or e-mail you a copy.

Our June 30, 2007 supplemental package was made available yesterday on the Corporate Profile page in the Investor Relations section of the Company's website at kiterealty.com. The filing has also been made with the (technical difficulty) in the Company's most recent Form 8-K.

The Company's remarks today will include certain forward-looking statements that are not historical facts that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual result of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements, including, without limitation, national and local economics; business, real estate, and other market conditions; the competitive environment in which the Company operates; financing risks; property management risks; the level and volatility of interest rates; financial stability of tenants; the Company's ability to maintain its status as a REIT for federal income tax purposes; acquisitions, dispositions, development, and joint venture risks; potential environmental and other liability; and other factors affecting the real estate industry in general.

The Company refers you to the documents filed by the Company from time to time with the Securities and Exchange Commission which discusses these and other factors that could adversely affect the Company's results.

On the call today for the Company are John Kite, President and CEO; Tom McGowan, Chief Operating Officer; Dan Sink, Chief Financial Officer; and George McManus, Senior Vice President of Finance and Capital Markets. Now I would like to turn the call over to the President and CEO of Kite Realty Group, John Kite.

Thanks, Adam. Good morning and thank you for joining us today. We're pleased to report that in the second quarter, we continued to execute on our strategic plan and once again showed strong operating results.

In the second quarter, FFO per share increased by nearly 11% year-over-year and total revenue increased nearly 16%. The second quarter was the third consecutive quarter of double-digit year-over-year FFO growth.

Next week will mark our third anniversary as a public company. In that short period of time, we've worked hard to capitalize on our business plan and, importantly, our growth strategy. Our success is evidenced by our rising cash flow (technical difficulty) a 23% increase in our property net operating income year-over-year.

Therefore, I am pleased to be able to announce a 5.1% dividend increase to $0.82 per share on an annualized basis.

We continue to strengthen our position as a growth company, supported by our development pipeline, which is approaching $500 million. We view real estate as a long-term investment and remain focused on constantly and incrementally building value. Our management team has significant experience in the industry and has successfully navigated the Company through good times and bad. We've structured the Company with the financial flexibility and necessary liquidity to withstand pressures on the market, interest rates, or the real estate industry as a whole.

Despite current capital market pressures and disruptions, we are confident the Company is well positioned to continue to build on our substantial achievements over the last three years. We have a flexible capital plan, a strong and diversified tenant mix, high-quality real estate, and a robust Class A development pipeline.

Over the next few years, we expect that our development platform will continue to serve as a substantial source of growth, and we remain confident, given the current market conditions, development continues to be the best use of our capital.

We have several options in place to finance this growth, including our unsecured $200 million line of credit, our strategic partnership with Prudential, and recycling non-core and lower growth assets.

One of our strengths is the quality of our tenant base. We continue to focus on recruiting top retailers like Target, Lowe's, Staples, and Bed, Bath & Beyond, with strong credit profiles. At the same time, we've been focused on diversifying our tenant mix in order to mitigate our exposure in any particular tenant.

Our diversification strategies have been very successful. No single tenant represents more than 3.7% of our annualized base rent, and our top 25 tenants represent only 40% of our annualized base rent.

Overall, our portfolio is also well positioned in areas with average household incomes of approximately $80,000 in a five-mile radius. This strong demographic profile compares very favorably to our peers and the national average. Our geographic focus in the Southeast, particularly in high-growth, high-income markets such as Raleigh/Cary, North Carolina, and Naples, Florida, will generate above-average same-store growth over the long term.

In addition, a significant portion of our Indiana portfolio is located in the northern suburbs of Indianapolis, with average household incomes of $105,000.

Now I would like to turn the call over to Tom to provide an update on our development and redevelopment activities.

Good morning. As John mentioned, our development pipeline will be an important part of our story over the next several years. I am pleased to report that the ten projects in the current development pipeline remain on track. In the second quarter, we completed Estero Town Commons near Naples, Florida, and moved it to our operating portfolio. The addition of Estero to our operating portfolio further diversifies our geographic footprint, while continuing our strategy of expanding our overall presence in the Southeast.

Work is nearly completed at Tarpon Springs Plaza in Naples, Florida. The Target anchor store opened in July and we anticipate delivering the remaining tenant spaces in the third and fourth quarters of this year. The constructed square footage is 100% leased and we're planning to build additional small shops to meet the substantial tenant demand.

Our success on this project demonstrates the value of our in-house, vertically integrated platform. We were able to utilize our in-house construction expertise to facilitate tenant buildout and minimize permitting delays.

Similar to Tarpon Springs, we have experienced strong demand for the properties in our development pipeline. Our Bayport Commons project, located near Tampa, Florida, is currently 87% preleased or committed, including a lease currently being negotiated with a national electronics retailer to occupy our final junior box.

In Naperville, Illinois, we are negotiating a lease with a 27,000 square foot national pet supply retailer on one of the final two junior boxes. Our Beacon Hill project in Crown Point, Indiana is now 88% preleased or committed.

Based upon our leasing success at that property, we are now building approximately 20,000 square feet of additional small shops.

Our redevelopment of Glendale Mall into Glendale Town Center also illustrates the value of our in-house platform. As we have discussed on previous calls, construction is underway to transform this 50-year-old enclosed mall into an open-air center anchored by Target and Macy's. As you can imagine, this project has involved significant engineering and construction complexities. All of our anchors have remained open throughout the demolition and redevelopment activities. We're pleased that this project is proceeding as planned, and are confident that Target will open on schedule next summer. Our in-house construction team will commence the vertical construction for the Target building shell this month.

One project that has received a great deal of press and national interest is Eddy Street Commons. The proposed $215 million project will be an exciting mixed-use development located at the front door of the University of Notre Dame. We've received final zoning approval and are negotiating joint venture agreements with experienced residential, hotel, and multi-family partners. Retailers have also demonstrated strong interest in the site. Provided that we secure the remainder of the governmental approvals and the economic incentives, we will add the project to the visible shadow pipeline.

In addition to Eddy Street, we're currently analyzing several other projects for potential inclusion in the visible shadow pipeline. All four projects in our visible shadow pipeline are now fully zoned, and our predevelopment teams are working hard to secure final site plan approvals. We feel all four projects have the potential to commence construction either in the fourth quarter of 2007 or the first quarter of 2008.

In particular, our mixed-use development in Cary, North Carolina, which is located on the southern edge of the Research Triangle Park, is gaining significant momentum. We're in the final stages of securing entitlements on a modified site plan, which will include approximately 1.5 million square feet. The project costs have now increased to $134 million due to the acquisition of an adjacent parcel, the increase in gross square footage, and clarification in regards to our mixed-use components.

Dan will now summarize our second-quarter financial results.

Good morning. I would like to refer you to our earnings press release issued last night and our quarterly financial supplement package on our website for full detail on our financial and operating results for the second quarter.

For the three months ended June 30, funds from operations were $0.31 per diluted share. This is an increase of 10.7% over the $0.28 per diluted share for the second quarter of last year. In the quarter, our same property NOI, which includes 47 properties, increased 1.9% over the same period in 2006, which is at the high end of our guidance of 1 to 2%.

Our recovery ratios also continue to strengthen, with 120 basis point increase over the prior quarter. We anticipate that this metric will continue to improve as our retail portfolio grows and we gain efficiencies.

During the quarter, we executed 14 small shop lease renewals at our consolidated properties at a cash spread of 5.2%. We also executed 19 new leases, or approximately 53,000 square feet.

Construction and service fee revenue in the second quarter increased approximately $4 million over the first quarter. The major sources for the increase were construction services on the Target stores at Bayport Commons and the Glendale redevelopment.

On a year-to-date basis, construction of fee revenue totaled approximately $16 million, and our margin on this business is approximately 9%, which is in line with our expectations.

G&A expense for the second quarter was approximately $1.6 million, which is 4.4% of total revenue, or 6.8% of rental revenue, which continues to compare favorably with our peers. We are on track to achieve our G&A target of $6.3 million to $6.5 million for the full year.

Summarizing some of our more significant financial metrics as of June 30, our fixed charge coverage ratio, which is defined as [EBITDA] divided by interest expense was abruptly 2.6 times. Our floating-rate debt was 33%; however, keep in mind that 18% of that floating-rate debt was in property-specific construction loans. The FFO payout ratio was 62%, and the AFFO payout ratio was 79%.

We are reaffirming our guidance of $1.24 to $1.30 for full year 2007.

As opportunities arise, we are fixing our floating-rate debt. In December 2006, we entered into a $20 million forward rate lock on our Tarpon Springs property at an initial rate of 5.45%. We anticipate utilizing this favorable rate as the project stabilizes in the fourth quarter of 2007.

Last week, a $50 million hedge expired on our line of credit, and we subsequently entered into a new $50 million hedge at the rate of 6.32%. Our $200 million line of credit at rate of LIBOR plus 115 to 135 will help us maintain flexibility and availability at very favorable borrowing costs.

In addition, our $1.25 billion joint venture with Prudential will provide us with the flexibility to develop a number of projects, irrespective of the volatility of the debt and capital markets.

I will now turn the call back over to John for some closing remarks.

Thanks, Dan. As I reflect our first three years as a public company, I am very proud of our team's efforts and accomplishments. We have clearly come a long way, but this is just the beginning. As we look forward to the future, we are confident that the Company is well positioned to take advantage of opportunities for growth and weather market pressures.

Again, thank you for participating in today's call. Operator, we would like to open the line for questions, please.

(OPERATOR INSTRUCTIONS) Ken Avalos, Raymond James.

Nice job. I mean, it looks like you're executing pretty well -- just clicking along.

Thanks.

So question is really a pretty original one these days. John, maybe you could address cap rates, your view on sort of where cap rates are going, your markets and others. Then more so, also talk about replacement costs. You are in the market every day, building, buying and potentially selling. How does that all play into the equation? What is your macro element there?

Sure, Ken. It's John. In terms of the cap rates -- and I think there has been a lot of talk about this obviously, what we currently see in the market as current day is that in Class A retail shopping centers, the cap rates are holding firm. I think a lot of that has to do with kind of a supply-and-demand equation more so than it would with, say, long-term interest rate movement.

And what I mean by that is, as you know, it takes us quite some time to deliver a Class A brand-new high-end retail center. So to the extent that centers are sold, the replacement of those centers is not immediate. I think, again purely from a supply-and-demand standpoint, capital is looking for safety, and there is quite a bit of safety in Class A retail, when you look at where the cash flows come from.

So currently, we see that as the main metric and the driving force in cap rates staying the low sixes and even below in very high-quality markets.

Now, that said, obviously the disruption in the capital markets is people are fearing that that is going to have an impact on cap rates. But we view those disruptions as typically not long-term disruptions; and cap rates tend to move in long-term movement. So particularly the equity involved, cash investors are out there. So the bottom line as we have not see movement. Doesn't mean it won't, but we have not.

In terms of replacement costs, the replacement costs have stabilized in terms of construction costs, but the new centers that we are building are typically in that $275-a-square-foot range in high-quality markets. So clearly, when you look at kind of what people have factored into increasing cap rates vis-a-vis multiples, there is a real disruption there in what people are pricing stocks at versus what replacement costs are, let alone value.

Thanks. You said $275?

Yes, approximately. Again, it depends on the deal. That can range from probably $250 to $325, depending on the deal.

Wow. Maybe you could spend a minute talking about transactions between you, Paul, Al and the stock sale. You committed cash to that, right? Just give us a little detail behind that, if you could.

Sure, Ken. And we did have several questions -- and maybe not a real clear understanding. But basically Al, my father, and I acquired 800,000 shares from my brother, Paul, at $20.77. That was really a situation where Paul is not involved in the business, obviously, as you know, and has other things going on and other demands for capital. And that made sense for him and it was a great opportunity for Al and I to acquire a large block of stock that we would otherwise not be able to acquire. We thought it was a very attractive number, based on the size, the amount of shares involved.

So what I think the misperception is that it was some kind of transfer. It was not a transfer. We paid for it in cash. So that is a huge investment. You can do the math. That is an investment in the Company that we would do today. That was a great opportunity.

Thanks. That's helpful. Listen, I hate to beat on this, but when you talk about that $275 number, can you sort of reconcile that to a center where you do not own the anchor? Where does that number tie back to, sort of?

It is hard to reconcile it because we're talking about averages. But the bottom line is if you look at deals in Naples, for example, like I think Tarpon Springs was probably around $240 a foot or $235. That is off the top of my head. You've got to realize that land is a component of that number, because I'm talking about total cost.

And when we look at that, it depends on the deal what percentage would be what. But we're looking at total cost, which includes, as you said -- it's hard to reconcile it to square footages on our pipeline because we do have non-owned anchors in there, so that number jumps around a little bit. But I was just kind of giving you a general sense. I don't know if Dan or Tom wants to jump in on that either.

Ken, this is Tom. If you take a look at our development pipeline and you look the top three projects, which John really referenced, they do range from that $250 to $300. You always have to remember, as John mentioned, that those are total project costs, fully loaded. So he was correct in terms of that specific market.

Obviously, in other markets, those numbers will drop closer down to a $200 number, and maybe at times below that. But that is a consistent area that we have been operating within.

Okay, that is really helpful. Thanks a lot.

Jay Habermann, Goldman Sachs.

I am here with [Tom Baldwin] as well. Just one question for me and then Tom has some as well. I am just curious if you're seeing any slowdown on the part of retailers. Obviously just given the recent market uncertainties and changes in the debt markets, is it taking longer for them to commit to developments? Just getting a sense, again, on the retail side.

It's John. Actually, we've been going out and seeing a lot of retailers recently. Myself, Tom, Greg Poetz, our head of leasing, our whole leasing team. We have been doing a lot of traveling to get out and meet the customer, which is a critical part of the business.

And it is interesting because I think selectively, anecdotally you hear stories about certain tenants being more selective in their decision-making. But then again, when you get out there and you meet with them, there is a lot of interest in talking about new opportunities, which is always one of the great things about our platform, is we bring a lot of new opportunities whenever we meet with them. We're not just talking about static properties.

So I would tell you that in general the environment is strong. When you're in kind of a disrupted capital markets like we are today, everybody is sensitive to what is going on and wanting to be careful. That is just human nature. When you pick up the paper every day and they tell you the sky's falling, you want to be careful. Reality is sales are growing and earnings are growing in general. You saw some of the retail reports this morning. The discount retailers doing strong, the JC Penney's of the world.

And that plays well into the high-quality nature of our (technical difficulty) and the fact that it's new and that we're in these good markets. So I think what it has a lot to do with is the marginal site, the peripheral site or kind of the second or third option site that have some struggles, because we're not in a go-go capital market. But the flip side is I think we feel very good about our retail base.

Okay. And then Tom had some questions as well.

Just on the Eddy Street Commons at Notre Dame, you mentioned that there is still quite a bit that needs to be done in terms of incentive financing, as well as some further government approvals. Do you have a sense for what the likelihood of pushing forward with all of that is and what the timeframe might be on that?

Yes. This is Tom McGowan. In terms of what we have accomplished to date, it is obviously significant getting the overall project approved. It was a very dense project in a residential area across from the University, so we were successful with that.

But one of the keys to the project, as we mentioned in the script, is that we do in fact have to have the public incentive component of this project to move forward. We do feel that ultimately we're going to be successful in working that process out. It is complicated. There's quite a few things going on in the state of Indiana right now in terms of tax assessments. So we're having to work particularly hard to be successful. But we are confident and continue to move forward on this project based upon that line of thought.

Okay, thanks. Then in terms of retail, Lowe's is your biggest tenant by percent of total portfolio base, right? How have those guys been, given the decline in the housing market?

That is a good question. Lowe's is -- and you remember that we have a couple of ground leases in there with Lowe's, as opposed to just building operating leases. I actually think we only have one building lease in the ground leases. So there is some defense to that, so to speak.

But the bottom line is Lowe's is another one of tenants that we talk to that, again, is -- absolutely has an expansion program. They have a long way to go between them and Home Depot in total stores. So they really have an (technical difficulty) in being the smaller player. That said, obviously, they are concerned about the market and they're concerned about the housing market, the growth in it, the impact to what everybody's talking about in subprime. But as we see it in the stores that we talk about, in the new deals that we have, they are very interested because of the growth markets we're in and the incomes we're in.

So again, playing it to us specifically, we see a future opportunity with them. And in terms of their sales per square foot, they continue to do well.

Thanks. And then one follow-up on Eddy Street. In terms of your joint venture partners there, how far along are you in terms of signing them on? And is that contingent upon whether or not you can get those necessary approvals?

This is Tom. As it ties back to the joint ventures, we have moved very, very far down the road in terms of those negotiations. We're really at a point of working on documents. Each and every one of those players will play a critical role in the project. For example, there are two hotels in the project. There is multifamily components, office components, etc. So we wanted to make sure we brought in a great team.

Ultimately, though, the joint venture agreements, tied back to your question, will be subject to the final completion of the incentives.

Okay, thanks very much (multiple speakers).

This is John. The only thing I wanted to add to that is, again, that kind of shows the flexibility that we have. Because in terms of looking at these joint venture partners, we're looking at operating partners on kind of the residential side and the hotel side, people that we have dealt with in the past and actually done deals with.

So again, I think we really have an advantage when we do a mixed-use project, that we come to the table with direct development experience in these categories. So in other words, we're going to take our time in making the right decision there.

All right. And actually, I do have one more quick follow-up. Your same-store NOI growth this quarter was tracking obviously on the high end. I'm just curious, does that include some of the lease term income from Eli Lilly when you terminated that?

We typically, Tom, have a practice of not including lease term fees such as Dominick's, and those items are not in there. Eli Lilly is included as part of the other income because of how we negotiated the deal, because they are still a tenant in two of the three floors that they were in. And we negotiated lease terminations, so we think it is more comparable to include that piece only on that particular deal. But our typical framework on that would not to include lease termination fees.

Okay. But it is safe to assume the impact on the NOI figure this quarter was small -- or how do I think about that?

Say that again.

In terms of the actual -- the 1.9% growth in same-store in NOI, was the termination income from Eli Lilly -- did that boost it somewhat or was it a small impact there?

Well, I think it is going to be a small impact. Because remember in the prior quarter, they were occupying the ninth floor, and in this quarter they are not. So you've got a balance between the lease termination fee and the rent. Actually, it is more comparable than it would be not to have it in there.

Okay, that's great. Thank you.

Jon Litt, Citigroup.

This is (inaudible) with John. Can you comment on the higher FAS 141 in the quarter?

Sure. The higher FAS 141 was as a result of the lease termination with the Dominick's in Silver Glen. And when we acquired that center, the rent was $10.20, and in doing the market research, we marked it up to $12. So at the time that the lease was terminated, the deferred revenue is then written off to the income statement. And that amount for that particular tenant, when you net out the straight line rent receivable, etc., was about $850,000.

So that is just this quarter, or is it continuing?

No, that is just this quarter. When you look at that, like in the first quarter we had a negative adjustment for straight line rent and FAS 141 when we terminated the 55 tenants at Glendale. And that impact in the first quarter was $153,000 negative.

So we are recognizing -- we got hurt on that in the first quarter and now we're picking up the $153,000 in this quarter. I think from an accounting perspective, it just depends on whether you have a positive or negative rent adjustment under FAS 141.

Right. And I guess net-net, were both of those items included in guidance?

I think when you look at guidance, there is a number of opportunities that we will look at in different types of land sales, merchant building sales, etc. So was it in particular (technical difficulty) for guidance? No. But I think as a management team, we have certain items that we put in guidance that we feel comfortable that we can get, whether it is land sales, lease terminations, FAS 141. So there's different opportunities to get there, and each and every year it may come in in a different geography on the income statement.

Okay. Then on the project delays in the quarter, it was just one or two quarters, but is that related to Target at all or is it just an overall project delay? Can you give some more color on that?

This is Tom. (Technical difficulty) both those delays tied back to our Florida projects. And as a Company, if we can keep a delay under one quarter or two quarters in the state of Florida, we feel like we're doing very well. They really just tied back to specific entitlements in terms of being able to pull permitting out of the respective counties.

And then you seeing any impact from Target reducing expansion plans in smaller markets?

We are not. It is really based upon specifically where you're attempting to attract Target. We understand, due to the fact that we spend a fair amount of time with them, specifically what they're looking for as a company. We know that they're looking for growth areas. We know that they're looking for areas that you do not have to wait two or three years to ultimately get a population base.

So as we look at infill locations and highly populated areas, we do not see any falloff. But, as John had mentioned earlier, if you're looking at fringe properties, that is going to be a significant challenge.

It's John. On thing I'd add to that is I think our Target opening in Tarpon Springs in Naples is a great example of that. I would not call that urban, and that particular store, people were getting in line to get into the store two days before it opened. They kept coming back, hearing that it was opening. And it opened extremely strong.

So there is a great deal of demand for Target, even in markets where there are several Targets represented. It is just one of those situations where they are that type of retailer that bring a lot of action and a lot of excitement. So, as Tom said, clearly every retailer would like to open a store and get immediate results, but they have still got to grow the business, and that means they're going have do both types of deals over time.

Okay. And then the disruption in the capital markets, do think you could see yourself using the Prudential JV more than previously anticipated?

Yes, I think it is just an outstanding opportunity for us to feel very comfortable that we can continue to bring in as much development as we can handle. As you know, that has been growing, and the capital side of that we're not concerned about it. So clearly, the Prudential flexibility that we have and the sense that we can pretty much present them any deal we want to present them makes us feel very comfortable in our capital structure.

And Prudential, as you know, is a very long-term player in real estate. And I think they realize -- they want to take advantage of this disruption. So to the extent we can bring them more, I think they're ready to take it.

So have you been bringing Prudential more deals than previously?

I think (technical difficulty) we're just looking at everything we have in the pipeline and we're studying what we have. As we've said before, to the extent that the deals are larger, not only size-wise but in terms of their complexity and development, and they are going to take longer to develop, that obviously would lead us to believe that putting in Pru would make sense, because we protect ourselves against any dilution there.

But right now, we're just taking it one deal at a time. We do not have anything to announce on another deal going into the JV. But based on the size of our pipeline approaching $500 million, the system of those deals will go in there.

Okay, great. Thank you.

Philip Martin, Cantor Fitzgerald.

First of all, what sort of opportunities, John, are you seeing for tight -- given the environment -- if we're going to see an environment of tighter commercial real estate lending standards? Are there some potential opportunities on the development side where maybe there's a developer out there who did not necessarily have the ability to get good financing or certainly is having more difficulty in this environment, and is that creating an opportunity for them?

Yes, we think it will create opportunities. We are not -- we are talking to people right now who are bringing us opportunities for potential joint ventures. Frankly, the market -- the pendulum swings, and the pendulum swung pretty far out there in terms of liquidity -- not necessarily liquidity, but in terms of lending practices. So you had several undercapitalized development companies with large projects.

And a rising tide floats all boats, and those deals were working. Now that is much, much tougher for people to do. So considering that we have done lots of joint ventures historically, we are a great place for someone to go with an opportunity. And we are looking at deals like that right now in all the markets that we operate in.

So we hope that that disruption creates that opportunity. We think it will; but again, it depends on how long this takes hold. But I think people that were out there doing deals and personally guaranteeing debt and levering it up, I think they're going to think twice about that right now. And maybe they would come to us and say, boy, I would like to take a little chip off the table and be a little more conservative.

This is Tom. One other thing to add is the other area that we're seeing the opportunities are people that have great projects and just simply do not have the internal infrastructure. So the fact that we have the construction development, predevelopment components, along with leasing, that has been a good source of potential opportunities for us as well.

Are the opportunities in new markets that you're not in already? Are you pretty comfortable that the majority of your growth over the next 12 months is going to be in the core markets you're in right now?

As we said before, there are definitely opportunities in other markets, in particular in markets that we view as having high growth and high income, and markets with various barriers to entry. One thing to remember on barriers to entry is that people tend to believe that barriers to entry is just identifiable as available land. It is actually available land that is entitleable, or that you can actually build on. I think people sometimes view markets that are more open as open, but yet they really are not in the sense that you cannot entitle the property.

So we do think there is opportunity there, and I think it is very likely, as I said before, that we will look to go into some new markets, in particular, probably our TRS in the merchant building program that we have done in the past, to kind of explore them. And as part of our shadow pipeline that we talk about, there are some projects like that that we are exploring.

Okay. That's helpful. In terms of -- just jumping around here a little bit -- in terms of same-store sales growth, 1.9% here, when does that --? I know that this has been in the kind of 1 to 2% range because of the newness of the portfolio, etc. When does that start to ramp up and, let's say, get closer to 3? Where is that inflection point?

I think when you look at the lease expiration tables and you look at leases in 2010 and '11, where we have significant rollover, I think that is going to be the time where the most opportunities will present themselves. But I think as we look at the portfolio and the fact that we are developers and we are always looking for ways to generate income with land parcels, storage areas, all those other type of things.

So I think right now we're sitting down and going through a pretty extensive look at the portfolio. When we look at 2008 as for as now that our portfolio is of size, we can really look at expense efficiencies, look at ancillary income and really try to drive it in that direction.

Because as fare as the low-hanging fruit from lease renewals and getting the spread off lease renewals, we do not have that because our portfolio is brand-new. So the average age is seven years. We will have that in 2010 and "11, but right now we need to just use our expertise as developers and go find some additional revenue and expense recoveries at the properties.

Okay. And on that same line, in terms of the upper end of your guidance, what type of land sale (technical difficulty) have you made through the end of the year to achieve the upper end of your guidance?

I think primarily on the upper end of the guidance, if you look at that -- the $1.24 to $1.30, the assumption there really is there's a couple transactional items we have in the fourth quarter that we mentioned on the last call, particularly the sale of the merchant building asset in Pasco, Washington and selling that prior to the end of the year. As well as we have two development pieces of ground in Apex, North Carolina, which those are -- one of the two of those is projected for the end of the year. So I think that is primarily what is giving us the range that we have today.

I think it is always important, whenever we're talking about transactions and such, that we realize that we typically are talking about when, not if. So when we're putting these things in our guidance and we are assuming them throughout the year, particularly a company our size, that is what is always going to have that -- that is going to require a wide range, because those things, you cannot determine whether it is going to be the fourth quarter or the first quarter of the following year. You just have to go on what we think is going to happen at this point in time.

And I think that will continue, and we will continue to have contribution from those type of events because we are a developer and we are creating value. So we are always looking for other ways to create revenue, and so we're going to continue to have a good percentage of that come from that.

Okay, that is a good point, an important one. The last question I have here is in terms of the renewals, the rent growth on renewals, what was that in the quarter? Did I miss it?

Yes, we had 14 small shop lease renewals that were a 5.2% rent increase. The one thing there, that also includes options, which you do not have any control over the bump. So it was 5.2% for 14 new leases.

14 new at 5.2. Okay, thank you for the color.

Rich Moore, RPC Capital Markets.

Dan, could you go back over the FAS thing again? Because that's obviously -- that is a couple cents, so that is a pretty big component of the quarter. I guess I do not exactly understand why a single lease would generate this.

Yes, when you go through on an acquisition of a property, you either have leases that are above market or below market based off [resups] that you do in analyzing it, talking with the local brokers, etc. So at the time that you go through and you go -- say, the boxed leases, you pick a $12 number and the shop leases, you may pick $18 or $19.

So at the time that you allocate that specific FAS 141 to that lease, it amortizes into min rent over the term of the lease. However, if the lease is terminated, you have got to recognize the full term of the lease payment in the period that it is terminated.

So I think you get the positives and negative from this. We have got $150,000 negative in Q1. We have recognized the other -- in Q2 of '06, we had a positive impact from the termination of the Winn-Dixie lease in Florida. So these are the type of things where you go through and you analyze it the best you can, with as much market research as you have.

I think if you look at how we have done these things in the past, we have been pretty on point. On the Winn-Dixie store, it was marked up from $7.69 up to a number that was far less than we got on the re-lease, which was $14. If you go back and you look at the Dominick's store, which was marked to $12, it also encompassed some tenant improvement assumptions. Well, when we re-leased the space to Caputo's, Caputo's did not get any TI, so we leased it at the same $10.20 rate that we had with Dominick's.

So I think when you go through it all, overall, when I look at the books, you want to make sure that we're making conservative assumptions on market rents, and I think we have done that to this point.

Okay, that's good. Yes, I certainly see the strategic value of doing these things. But you're saying every time you identify a tenant that you want to buy them out of their lease, that is the same thing essentially as acquiring a property, but you --

No, I'm sorry, Rich. We acquired -- post-IPO, we acquired this property. And when you make the acquisition of property, you have to go back and do the accounting as if you acquired it vacant. So then you mark the leases up, based on what you think you could fill them up at that time, going through absorption rates -- or down -- up or down, depending on the market. You've got to go through absorption rates, timing, tenant improvements.

So the FAS 141 creates a significant amount of accounting work for anybody that is acquiring assets. It is not -- that is just under the GAAP rules.

Rich, it is John. Remember that that was only about 3.5 years ago. So you're talking about a timeline that is pretty compressed. And then there was a significant amount of term on Dominick's. So this all -- that is what you're looking at the size you're looking at.

The other thing that we do obviously is there is the accounting side of this and then there is the business side of this. The business side, this was a great move for us to replace Dominick's, who frankly is struggling and was struggling in that particular spot, with a retailer that we just had done another deal with who is doing very well and has a great kind of local penetration. So there are two sides to the equation.

But I think one of the big things when you're looking at the impact of it is the fact that this is very recent since we acquired the property.

Right. That is very helpful, John. I agree with you. I think that is a great point. Dan, then as you look at 3Q, does it just go back to sort of the 1Q level, we just take out the $850,000? Is that the idea?

The 153 from Glendale was still impacting. So you have the 153 from Glendale as well, as we had roughly $275,000 of additional minimum rent from new tenants and development properties. So I think net-net, if you pull out the 850 and then we've got some additional growth in this quarter, that would probably get you close to the min rent line item.

The other thing I would add to that, Rich, that Dan said a little bit earlier in the question is that we look at the entire year. We do not really -- as you know, we're not breaking down this guidance into quarters. We know you have to, and we understand that. But we're looking at the entire year when we make projections.

And due to the fact that we have $200 million in construction in progress, a $500 million development pipeline, we have activity in bringing in new revenue, as Dan said, in terms of ancillary income, we have activity in creating outlots where there were not outlots. When we went public, we probably had, round numbers, 25 outlots in our portfolio. Now we probably have 65, in the sense of -- and we look at that as capital, as you know.

So we really try to put it in the basket and say, these are the multiple sources of revenue that we have available to us, and we want to project it on a complete basis, not on a part-by-part basis. So that's why we end up with these things. Frankly, I think, as we've said before, we will continue to have 20% to 25% of our makeup of our FFO in these type of items that are value creation. So I think it is something that it is just going to vary quarter-to-quarter where it is coming from and which basket.

I got you. That is very helpful, John. Thank you. On the lease term income, that wasn't all from Lily. I think it is $900,000. How was that broken out?

The lease term income is -- $650,000 of it was Dominick's. Lily was roughly $270,000. Then we had a couple small tenants.

Okay, good. Thank you. And then the last thing I had was the development pipeline. I'm trying to understand a little bit. There are five projects in there that have had a portion of them open for some time, mostly last year. At what point do you say, okay, this is essentially done and we'll just finished leasing it or whatever as we go, and it is actually not a development but it is part of the operating portfolio?

Rich, it is John. I think you're talking about projects where tenants were delivered in '06.

Yes, I'm just looking at (multiple speakers) '06.

Exactly. I think what you've got to do is you have to break it down and look at each project. But in general, what happens is -- I think Bridgewater is an excellent example of this -- what happens is these projects -- ultimately, very few of the projects come in in one particular piece. And ultimately, they are phased, the larger projects, like a Bridgewater. The complexity of trying to put that on one piece of paper and then kind of keep it the same way every quarter makes it difficult.

So I think, again, Bridgewater being a prime example, when we open up a space, that is when we will show you on the development pipeline that the projected opening happened. But yet, we may not have even started construction on the balance. So it becomes a little bit difficult tracking-wise for you to say, well, gee, it has been open for X number of years -- or X number of months, I should say. So we are more focused on the total delivery of the project and the stabilization of the project for when we move it, and Estero being the flip side of that.

A very simple, straightforward deal where we had a ground lease with Lowe's. We did the site work and we built two small shop buildings and had outparcels. That is a much more straightforward deal, so it essentially opened at 100%, whereas these others are happening in phases. So that is kind of -- we're looking at it more from the stabilization of the total project versus the first tenant opening.

When you look at Bridgewater, for example, John, you have $11.3 million of estimated costs. You've spent $11 million. So it sounds like you've done most of the construction, yet it is 17% leased. Does that mean they will be moving in shortly and next quarter it will probably be 100%, or close, or something like that?

This is Tom. One of the keys to small shops that we've learned and continue to learn is the fact that we need to get those shops up in place before we are able to get significant leasing done. So that is a project that will continue to mature from a leasing standpoint.

But one of the great things about our pipeline that I think you mentioned is a lot of our projects are very far along and are at a position of being very close to being moved to the operating portfolio. We talked about Tarpon Springs earlier and Bayport. We are at a position that those boxes are now leased and we're going to be able to get to 100% stabilization.

So it is a mature development pipeline, and that is our entire process of now being in a position to push that visible shadow pipeline up into this and get these properties out into the operating portfolio.

And the other point there is remember that to the extent -- whatever the percentage lease is, it is generating rent. So we are generating revenue. And, as I said before, it just depends on where that phase is. In the case of Bridgewater, we hadn't factored in the fact that we're building new small shops now. And that is the same case in Bayport, as Tom mentioned earlier.

But it is important that people realize that just because it is on the pipeline does not mean it is not generating revenue. It is generating revenue.

Okay, I got you. And it could take another couple quarters to get these done, is that the idea?

Yes, depending on the extent of how much we're adding, yes.

All right. Very good. Thank you.

Steven Rodriguez, Lehman Brothers.

Sorry to -- just a follow-up on Bridgewater. Since you opened it in Q3 '06, it is fair to assume that it is going into your operating portfolio next quarter, since it is a year, even if you do not have it fully leased out?

This is Dan. That is typically the case when -- and again, as John mentioned, some of these dates will include the completion of such as a Walgreens that we developed and sold quicker than another property. So I think to pin down on Bridgewater, I do not have the exact details.

Okay. So the balance of the construction, even though it says Q3 '06, it could've been a month ago.

Exactly, we have got some of that going on. I think the best example in this scenario that Tom used in the script was Beacon Hill, where in Beacon Hill Phase I is 88% leased. So now that we've completed that phasing, we're building 20,000 feet of shops on a different lot. So it is -- Phase I and Phase II are still in the development pipeline. We are generating significant revenue because the stuff, the property that we constructed is 88% leased. So I think is hard to do that, because we do not want to have 12 phases to each project, three of them in operations and one in development, which makes it difficult.

That makes sense. Have you recalculated the total preleasing, after accounting for the 88% and 87% in Bayport and Beacon? (multiple speakers) 68.9 inclusive?

Have you done that calculation? Right now, I think -- at the end of the quarter we are at 69%. So I think when you start taking those couple large boxes and putting them in there -- it is going to be a good number.

Bayport alone, I think, goes from 58 to 80.

So that is a big jump.

Just to be specific, Bayport goes from 58 to 87, and then Beacon Hill goes from 66.1 all the way up to 88%. So you can see these are fairly significant jumps and it will have a major impact to that percentage.

Okay, just a few more questions on line items. Construction revenue line, it definitely jumped. Are you still confirming your year-end guidance of $35 million to $40 million?

In the last quarter call, we talked about the probability that we would be at the lower end of that $35 million to $40 million guidance. I think as I look at the year for this quarter and we look out, with $16 million completed to date, there are some variables that will come into play, such as how much and how quickly we start a couple of the projects to get the revenue and the margin that we are anticipating.

So do I think -- I think it is going to be in the neighborhood of $30 million to $35 million, in that neighborhood. I do not know that we're going to get up to the $35 million to $40 million number, Steven. But a lot of that is -- on construction revenue, when you're a general contractor, the revenue, once you start a project, starts flowing in pretty quickly, because you're basically handling the subcontractors' billings, doing the paperwork, getting lien waivers, etc., and sending it out. It is going to vary, but I feel we're going to be in that range of the $30 million to $35 million.

Okay. And one last question on land sale gains. Did you disclose the amount of land sale gains you had in [2Q] regarding Target and some of the other parcels?

Target -- the other parcels are included in the supplemental, on the bottom of page 12, that kind of goes through that we had land sale gains of $1.2 million, $1 million net of minority interest.

There it is -- my apologies. Okay.

And the Target sale, as we disclosed on last call, we went through that calculation. There was no gain or loss on that, in particular, because the Target proceeds plus the TIF proceeds went together as part of the adjustment to the basis of the asset.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Paul Adornato, BMO Capital Markets.

I just have one additional question, and that is could you talk about which properties you believe might be most exposed to the single-family housing slowdown, either existing properties or properties under development?

It's John. If you look at it geographically and you look at from the standpoint of the anecdotal evidence that we see, obviously, Florida is a market that has been impacted. Then frankly, we have read reports about even Indianapolis being impacted. However, that is anecdotal.

From what we see in empirical evidence, we have not felt that. I think in terms of going forward, it is still difficult to see the impact overall. You have a situation, for example, where in our Cary, North Carolina Cary/Raleigh region, where we're very active right now, the market is growing substantially and the value of the homes is increasing.

So to be quite frank, we have not felt any impact. Naples has also been mentioned. And we like to talk about Naples because it has been mentioned as heavily impacted by the overall housing disruption, but our portfolio in Naples is approaching 100% leased. And whenever we get opportunities to remove tenants, we actually remove them.

An example I have is that we have a center that we just had a turnover in tenant because the tenant was struggling. We increased rent -- this is real-time, this is not last quarter -- we increased the rent from $21 to $30, and that is supposedly in a tough market.

So I think the bottom line is we have not felt the impact, but we are obviously observing it, and it is what is creating the ultimate disruption in capital markets. It'll probably continue for awhile. But our opinion of it is it is not at all flowing over into the commercial sector.

Are there any tenants or sectors that you're keeping an eye on for potential credit problems?

Well, we always look at the tenants and that is why we talked about our strength of our tenant list and the fact that, for a small company, we really have a great lineup and very little exposure to any one tenant. Again, if you look at it anecdotally, you'll hear people talking about the housing market affecting the home improvement chains and the soft good chains.

But again, from what we see relative to our conversations with these tenants, they are talking to us about expansion and wanting to di deals in late '08 and '09. So again, I do not have one tenant to throw out there that concerns us.

Okay, thank you.

Ladies and gentlemen, this now concludes the Q&A portion of this call. I would like to turn it over to management for closing remarks.

Thank you, operator. Again, thank you all for tuning into the call today. We look forward talking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This now concludes the presentation. You may disconnect. Have a great day.