Kite Realty Group Trust (KRG) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 Kite Realty Group Trust earnings conference call. My name is Lacey and I will be your operator for today's call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to our host, Mr. Adam Chavers, Investor Relations Manager. Please proceed, sir.

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 Holland at 317-577-5600. She will fax or e-mail you a copy.

Our September 30, 2007 supplemental financial package was made available yesterday on the corporate profile page in the investor relations section of the Company's website at www.kiterealty.com. The filing has also been made with the SEC and the Company's most recent Form 8-K.

The Company's remarks today will include certain forward-looking statements that are not historical facts and 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 results of the Company to differ materially from the 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 all 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 from 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. And now I would like to turn the call over to the President and CEO, John Kite.

Thanks, Adam, and thank you all for joining us this morning for our third-quarter conference call. We're pleased with our operating and financial results in the third quarter and perhaps more importantly, remain optimistic about the future. Continuing uncertainty in the capital markets and the overall economy is obviously causing concern throughout the real estate industry. However, we remain convinced that KRG is well positioned to weather the current market forces based on the strength of our real estate assets, our experienced team, and our flexible capital structure.

As many of you know, one of the keys to the longevity and success of our Company has been our disciplined capital strategy, particularly when it comes to the deployment of capital into development projects. Recently I stepped back and refreshed our five-year plan given the current market turmoil. As we look forward to the future, we are comforted by the composition of our balanced portfolio. Over the next two years, we have limited rollover in the operating portfolio, but we have significant embedded growth in our development pipelines.

Although our current development pipeline is nearly 80% preleased, it is only 30% occupied, which will provide substantial NOI growth as tenants move in. In addition, most of our projects are commanding significantly higher rent than our portfolio average.

In the somewhat longer term, if you turn to Page 22 of our supplemental, you will note that 1.6 million square feet or 30% of our base rents will expire between 2010 and 2012, years in which the economy will likely be expanding. The properties in our operating portfolios are well located in high income, stable areas with existing demographics and well positioned assets translate into opportunities for internal growth.

We continue to believe that many of our acquired operating properties have leases at below-market rents and we will reset these leases aggressively when the opportunities arise.

In this economic environment, it is important to understand that we are not speculators. Real estate development inherently contains risk, but we only take calculated risks. We do not begin construction in the anticipation that the residential rooftops to support the property will materialize, nor do we begin construction hoping that tenants will come. Instead we are taking a very disciplined approach. On a percentage lease basis, our investment in the development pipeline is extremely conservative.

Key to the success of our business is our flexible capital structure, including the Prudential joint venture. We currently have one project in the Prudential joint venture, but look to add several projects in the near future. In the third quarter, we partially funded development with recycled proceeds from vacant land sales and will continue to evaluate opportunities under appropriate circumstances to recycle noncore assets over the next several quarters.

The uncertainty in the economy has had one notable silver lining. We have found that private developers who control or have the inside opportunity to obtain quality real estate are having trouble bringing their projects to completion. We are now in a much smaller group of companies that can be trusted by sellers, lenders, and anchor tenants.

This has two benefits for us. First, it may give us opportunities to take over or joint venture on entitled development projects. Second, it gives our projects a competitive advantage in respect to securing tenant commitments.

In closing, I want to be clear that while our underwriting process for new projects has always been rigorous, the balanced composition of our portfolio that I discussed earlier gives us the ability to be even more selective going forward. We are confident that our conservative approach will serve us well over the next few years.

Now I'd like turn the call over to Tom to discuss our development pipeline in greater detail.

Thanks, John. Our team is continuing to make significant progress on our development and redevelopment pipelines. Two of our target anchored Florida developments opened in the third quarter. Bayport Commons is a 286,000 square foot center near Tampa and Tarpon Springs Plaza is a 276,000 square foot center in Naples. Both projects are nearly 90% leased and we are confident that the balance of the small shops will lease in the short term.

You will notice a few changes on page 28 of the supplemental, which details projects in the current development and redevelopment pipelines. In regards to Beacon Hill Shopping Center in Crownpoint, Indiana, the pipeline now includes only the second phase of small shops currently in development. The remainder of the center has been moved to the operating portfolio. For Naperville marketplace near Chicago, the supplemental now reflects the GLA actually being developed, although additional land is available for expansion.

More importantly, the percentage occupied for Tarpon Springs Plaza, Bayport Commons, and Gateway Shopping Center increased 48% quarter-over-quarter. At the end of the third quarter, the development pipeline and the redevelopment pipeline consisted of 11 projects with a total project cost of $186 million. We have made meaningful progress on the projects in our current development pipeline. The projects are just under 80% funded. All of the anchor leases are signs and nearly 80% of the owned GLA is preleased.

As John mentioned, this pipeline is a great example of our conservative approach to development. We have lived through a number of economic cycles over the past 20 years. Our development strategy is reflective of the difficult lessons we have learned about mitigating risk and the tactical deployment of capital.

A redevelopment of Glendale Town Center continues to proceed as scheduled. We are on track to deliver the target shell at the end of the year in the first tenant recently opened in our nearly completed small shop building. We are now beginning work on the two buildings to the north of Macy's. The initial building will be delivered in June 2008 to coincide with the opening of Target. We continue to receive great interest in the project and are currently negotiating an LOI with a quality user to take substantial amount of space in the first building.

We currently have over one million square feet of owned GLA in our development and redevelopment pipelines. In addition, page 29 of the supplemental provides details about the projects currently in our visible shadow pipeline. We added two new projects to this group in the third quarter.

The first is an addition of Spring Mill Medical in Carmel, Indiana. The existing building includes over 63,000 square feet of medical office and surgery center space. It has proven to be a successful project for both KRG and our partner, a practice group from Indiana University Medical Center. We signed a letter of intent and are currently negotiating a lease with a high caliber tenant for the majority of the 41,000 square foot expansion area.

Our second new project is 133,000 square foot junior box development, shadow anchored by Target in South Elgin, Illinois. We have a signed lease with Dick's Sporting Goods and are negotiating a lease for one additional box. We anticipate selling both Spring Mill Medical and South Elgin Commons upon completion.

With the addition of these two projects, our visible shadow pipeline now consists of six projects with a total estimated cost of $320 million, including our partner's share. Beyond the visible shadow pipeline, I am pleased to report that Eddy Street Commons, located adjacent to the University of Notre Dame, is continuing to gain momentum.

As I've mentioned the past, the critical contingency for this project moving forward was negotiating a TIF with the city of South Bend. We have reached an agreement with the city on the final TIF structure and have commenced the local and state approval process. In the meantime, we are working to finalize an acceptable deal structure with the University of Notre Dame. Eddy Street Commons is another great example of our conservative development approach. Although we have completed the entitlement process, and are working on preleasing commitments, we have a minimal amount of capital invested in the project.

Dan will now summarize our third-quarter financial results.

Thanks and good morning. For three months ended December 30, 2007, funds from operations were $0.32 per diluted share. This is an increase of 6.7% over the $0.30 per diluted share for the third quarter of last year. On a year-to-date basis, FFO was $0.92 per diluted share or a 9.5% increase over the prior year.

In the quarter, our same property NOI, which includes 49 properties increased 1.5% over the same period in 2006, which is at the midpoint of our previously provided guidance of 1% to 2%. Construction and service revenue in the third quarter decreased approximately $2.6 million compared to the second quarter; however, the margin for the third quarter was 15.9% compared to 6.9% in the second quarter. The second quarter included higher volume, lower margin third-party contracts.

On a year-to-date basis, construction and service revenue totaled $23.6 million with the margin of 11.8% before tax and that is in line with our budgeted expectations. G&A expense for the third quarter was approximately $1.7 million or 5% of total revenue, which continues to compare favorably with our peers. We are on track to achieve our G&A budget of $6.3 million to $6.5 million for the full year.

You may recall that last quarter we wrote off to minimum rent approximately $875,000 of FAS 141 deferred revenue to income at our Silver Glen property. Excluding this item, minimum rent went up in the third quarter by $365,000 primarily as a result of development property tenants opening for business.

The other income line in our financials increased approximately $430,000 quarter-over-quarter. This increase was attributable to a $450,000 payment received from a lender in consideration for agreeing to terminate a loan commitment. The recovery ratio decreased from 70.7% in the second quarter to 65% in the third quarter. Excluding onetime items that existed in both quarters, our run rate for this line item is approximately 68% to 69%.

Summarizing some of the more significant financial metrics as of September 30, our fixed charge coverage ratio was approximately 2.8 times; our floating-rate debt was 31% of our total debt. But please keep in mind that approximately 61% of the total debt was in floating-rate property specific construction loans.

The FFO payout ratio for the quarter was 64% and the AFFO payout ratio was approximately 88%. The AFFO payout ratio this quarter is a little higher due to the cost of retenanting a space for the Indiana Supreme Court in our 30 South Meridian property. We are updating our FFO per-share guidance for 2007 to be in the range of $1.25 to $1.27. With respect to 2008 guidance, we are well along in the budgeting process and anticipate providing 2008 FFO guidance on or before our fourth-quarter earnings conference call.

Turning to funding matters, as a Company our size we are fortunate to have multiple sources of capital to fund our operations. As John mentioned, in the third quarter, we successfully recycled approximately $9 million of vacant land holdings to help fund our development projects and we will look for additional opportunities to recycle noncore assets over the next several quarters.

We have our Prudential joint venture that we anticipate utilizing to fund several of our future development projects and in addition, we have been very proficient at securing project specific construction loans at attractive rates.

Tom mentioned the addition of Spring Mill Medical Phase 2 to our visible pipeline. The completion of this project will allow us to extract the full value from this noncore holding upon completion. We have been consistent with the message on this asset that the 41,000 square foot expansion area was a critical component to complete prior to recycling the entire Spring Mill Medical property.

In the third quarter, we hedged $60 million of our consolidated floating-rate debt and $42 million of our unconsolidated debt to fixed rates. We are analyzing our floating-rate construction loans to potentially extend our terms and match the maturities with cash flow hedges. This program allows us to protect the balance sheet while taking advantage of the accretive swap spreads over our construction debt rates.

We are also staggering these maturities to minimize our refinancing risk and maximize our flexibility. The strength of our long-term banking relationships will offset the volatility of the permanent debt markets.

We want to thank you for participating in today's conference call. Operator, we would like to open up the line for questions.

(OPERATOR INSTRUCTIONS) Jonathan Litt, Citi.

Hi, this is Ambika Goel with John. Can you comment on the expectations for lease up of the recently developed assets that were contributed to the operating portfolio this quarter?

Sure. Are you talking about the two that we just contributed?

Yes.

I think the one was -- and Tom and I can both talk about it -- but you had, which was it? Go ahead, Tom.

Actually the first one was Cornelius and the second one was Beacon Hill. To start off with Beacon Hill, it came over at 70% and at this point we have letter of intents being past to take up to 85%. That is why we made the decision to move it to the operating portfolio maybe a little bit earlier than typical.

On Cornelius, it is a small shop building and we've had a little bit of trouble getting it leased up at the pace that we had originally anticipated, but now that the structure is in place, we're confident that that will move within the next several quarters.

Okay, and then can you comment on the yields of the shadow development pipeline? Just general numbers and how if it all the housing market is impacting the shadow pipeline, where you don't give the preleasing percentage?

This ties back to the visible shadow pipeline, the six properties that total in excess of 300 million. It's a little early to give specific return on cost, but we do feel the ranges will be between 8.5% and 9%. We are at a point right now that by the end of the year we hope to have all six entitled and then at that point, we will have further clarity.

But they seem to be in line where we've able to develop in the past. Obviously from a residential standpoint we have had some impact as it ties back to Delray Marketplace, but the key there is to secure the two primary anchors and then we think we can move through that. The balance of those properties we really don't see the impact of the housing slowdown.

It is John. If you look at it and you look at it kind of property by property, you actually have -- we have -- particularly adjusted for dollars, you have two of the larger projects in the Raleigh, Cary, Durham area, which is as you probably know one of the hottest residential markets in the country. And then you have another sizable project in Seattle, which is an extremely strong market. You've got Chicago and Northern Indianapolis. Then as Tom said, as we have been clear about, the project we have in Delray Beach.

But to be a little more specific in Delray Beach, it is not a situation where we have a piece of ground that is out the middle of nowhere. There's a 140,000 people in a five-mile radius. So we are not terribly concerned about the potential residential impact to those specific projects. I think we're looking at it from the standpoint of the global kind of slow squeeze that's occurring. So that is what we are referring to when we are talking about being conservative.

So just stepping back, can you talk just anecdotally of what you're hearing from anchors and other tenants about leasing off projects that are in 2010, 2009/2010? Are you seeing lower rents or are you just -- is it harder to get the leases done? What about the housing downturn is affecting your potential shadow pipeline project?

I think two parts to the question. First part, anecdotally regarding conversations that we have with tenants, in the last two months we have spoken to you about this, I think. We have been very actively engaged in not only the lease up of our projects, but in kind of meetings with the retailers to get their pulse. And really it continues to be a case-by-case basis.

First and foremost, there really is no impact to tenant openings in 2008, because all those projects are well under construction. So any concerns about next year relative to, i.e., the residential situation, probably are overplayed. Most of conversations we're having with them are about 2009 and 2010 and that is fairly far out there in the consensus is that the residential market certainly should be moving in the right direction by 2010, obviously. So we do not see a huge impact at this point.

There is conservative approaches by everyone. People do not like to make mistakes in periods of disruption. So that really is our advantage because we have very high-quality real estate with good demographics. We have a long track record of execution. So I think really what happens in this situation is we come out stronger. We're going to be very conservative and we made that clear on what we do going forward, but being that we have such a large embedded growth vehicle in the development business and being that our operating platform will start to generate significant internal growth in 2010, we feel great about where we are.

Okay, great. Thank you.

Nathan Isbee, Stifel Nicolaus.

Just following up on the visible shadow pipeline, can you give us -- maybe walk through some of the larger projects, give us a best case estimate as to when you could start construction on those?

Sure, Nate. This is Tom. To run through the list to be specific, Parkside Town Commons, we're at a point that actually this month we will determine if we received final entitlements. That would put us in a position to be able to start that project either in the first or second quarter, so we are tracking very well on Parkside.

Delray Marketplace, the second one, is in a position that it has received entitlements. As I mentioned before, the anchor leasing component of that will be critical to allowing us to move forward. But once again, we feel that there is a potential development start prior to the midpoint of the year.

On Maple Valley, which is a project southeast of Seattle, that's a project that we're hoping to receive final entitlements by the end of the year as well. Peakway in 55; that is a project in Apex, North Carolina. We've already received final entitlements and once we receive one additional box, we should be in good shape to start that project.

To end the list, the two that we recently added, South Elgin Commons in Illinois, that is a project along with Spring Mill that can start as well in the first or second quarter. So the bottom line is all six of these projects are positioned to move forward in the near term.

Okay, thanks. John, maybe you can address this. You talked about the noncore sales. Can you give us a sense of what you might be looking to sell in 2008, or how much?

I can't get specific exactly with what we're thinking there, but generally speaking I think Dan hit it pretty hard on terms of Spring Mill. That is obviously something that we're looking to recycle. And I want to point out that we have stuck with that pretty true and as far back as last year, there were a lot of questions as why we were holding that asset. And I think when we get this expansion done, it will become pretty clear why we held the asset.

I think other than that, Nate, we're going to always be looking at what opportunities come to us. A lot of times opportunities come to us on our vacant land holdings. We just -- the majority of what we sold particularly in this past quarter was non-income producing land. So that is a great way for us to recycle and use the capital for the development business.

And then probably some of them build-to-suit stuff that we've done in the past, the Walgreen's -- those would be the typical deals, but the beauty of it is there's multiple options for us there.

Okay, so the Spring Mill is probably the only office.

Yes. As we discussed before, we've got our headquarters developing and then we have got the net leases to the state. Other than that, that is it.

Okay, great. Dan, just one quick question. Am I understanding you correctly that we should expect the construction margins to trend down come the fourth quarter and looking forward a little bit?

I think when we provided the guidance, I think last quarter I thought we would be about $30 million with 9% to 11% margins. I think when you look at that out into the next year, we do have a lot of our construction group working specifically on the projects and the visible shadow pipeline that Tom was talking about. So I will button that up for a '08 as we look into that and as we finalize our budgeting process.

Okay, thank you very much.

Jeff Donnelly, Wachovia.

I guess a question for John and Tom. Some of your competitors have had I guess what you'd call a significant churn in their shadow development pipeline. [A good] quantity falling out only to be quickly replaced. The fact kind of prompts the question is the attrition rate of shadow projects or this development project increasing do you think in the last few months?

And I guess the bigger question on our side is the [prudence] of attribution value to that segment. I am just curious what your sense is on attrition. Do you expect that is going to persist?

Again, I think that's one of those things, Jeff. It is John, by the way. I don't think for us the attrition rate has increased significantly, because as I have pointed out in my comments, we have a very rigorous process that we go through to even make it into the pipelines. So I think a lot of people tend to just throw a lot of things out there particularly when they don't report them that makes it look real large.

The bottom line is the development process by its own very nature has attrition, because it is a very difficult process to get through with entitlements and returns, etc. So for us specifically, what we are seeing is we are being rigorous and we were tightening the ship because we see a process occurring that we want to be careful with. Now that said, we also have enough of a pipeline that we have plenty to do.

So I would tell you that, no, I don't see it s being significantly different, but I think people's antennas are way up so they are talking about it a lot.

Jeff, this is Tom. The only thing to add is we are very, very careful about moving projects into the visible shadow pipeline and I think you'll hear us as part of the discussion that Notre Dame was not moved to that point because we still had a couple critical points that needed to be resolved. So we feel like we really use the shadow pipeline as the area to sift through these projects before they get to the visible and then ultimately to the development pipeline. So it is a very regimented process.

Is it that you look -- to be included in visible shadow -- is it that you look to have either anchor commitments and/or financing commitments or --? Is there a rule of thumb?

I would say the rule of thumb is two things. It ties back to lease up and obviously having anchor components in place is huge. But the other is knowing that we can start the project from an entitlement perspective. That is probably the number one trigger, knowing that once it gets to that point, you have the ability to be successful.

Then, John, just in your comments you mentioned stepping up -- stepping into entitled developments out there, to maybe finish those projects to the extent I guess developers are having issues. Anecdotally we have heard that in several cases folks with near-term debt maturities have no ability to refinance, repay, or extend in the middle of construction. Are there any specific projects that you're targeting or are you attempting more of a shotgun approach just to kind of market yourself broadly to the retail development world?

No, we have specific projects in the shadow pipeline that we're working on right now. Two that I can think of that we're fairly advanced on that were brought to us by private developers. As a matter-of-fact, we had a group in town yesterday that we were meeting with on a project, and it looked very interesting, and are looking at another one this afternoon. So that is definitely happening. But it is one of those situations where that kind of ebbs and flows and right now there is obviously a little bit of over panic going on.

I also think that there is a process where the private developers start to think about their recourse. In the past, in this environment that we had that got way out kind of a little frothy in terms of capital, you end up with private developers who take on a great deal of personal exposure and don't even think about it. When you get into markets like this, they start thinking about it. And that gives us a great opportunity to step in and recapitalize a deal and take the risk a little bit off of their shoulder. But if the deal is well advanced and has an anchor tenant, that's a good opportunity for us. So I think it is kind of a combination of those things.

I know there hasn't bee a plethora of these, but is there a flavor to how those deals work? Do you usually become the senior equity investor or what's the role that you can take?

There is not any one specific way to do it. But typically we have to get what we need, which is first and foremost, we want to make sure it is a project that we would do regardless. Then secondly, it comes down to the specific deal, how far along it is, how much tenant -- how much leasing has actually occurred or is occurring. Then typically it is some sort of -- for us it would typically be some sort of joint venture format.

Now there's deals that we've looked at where we could be sort of a mezzanine provider of capital and kind of get into the deal that way. We're not big into that. Typically it would be a straightforward sort of joint venture that we've done in the past where we would take over the development process.

Okay, just one last question concerning Glendale. Maybe it is my perception but it feels like there is a lot of call it upscale or lifestyle retail redevelopment and development going on in Indy and the surrounding area I guess completed or in the works. How is pre-leasing going on the shops (inaudible) at Glendale? Are you seeing a lot of supply or am I just perceiving that?

We're going to develop Glendale into what it should be, and that's going to be a couple great anchors being Macy's and Target, and draw off the theater, etc., so we're really not looking to be a lifestyle center. We're trying to be a high-quality shopping center to tie back to the tenancy of what we've created. From a small shop standpoint, we've just turned over the first building and leasing is going well. We try to be a little bit selective on the west shops, but as we start construction to the north of Macy's, we are seeing great demand. So I think the draw is really going to come, Jeff, from the quality of our anchors at that location.

Thank you.

Ken Avelos, Raymond James.

For the first time in quarters I am not going to ask about housing. And you put me at the end.

Operator, we might have lost Ken.

Can you hear me?

Yes, we hear you.

I was just saying for the first time in quarters I'm not going to ask about housing and you put me at the end anyway.

Paul covered that on CNBC this morning.

I know, right? Just a couple of bookkeeping questions, actually. First I guess for Tom and John, I forget, I know you've told us this before but does the total estimated project cost on page 28, that includes land, does it not?

That is whole development costs including our partner's interest.

Okay, thanks. And then the rest is just really just income statement stuff for Dan. Can you run through what was in the other property revenue line for us?

Sure, I tried to detail that a little bit at the bottom of page 12, where we have got -- that line item for September 30 [includes] gains on land sales of $2.8 million. (multiple speakers) Lease termination fee is at $203,000.

Thank you. Then I did have a question just on the timing sort of trying to get back to an NOI run rate basically, Dan. When did you put the developments into service and what was the expense sort of drag there? What would your NOI be plus if I could just look at it ex the drag there from those developments?

I think on the developments, the hard part about that is as a tenant occupies whether it's at the end of the quarter or at the beginning of quarter it's not really when it is placed in service. What happens from the development pipeline is those properties as those tenants move in, it goes through our income statement.

So giving you a specific drag, I don't think I have that data right in front me because I don't have the specific dates each one of those tenants occupied. But as I mentioned, the minimum rent from those tenants moving in increased by over $350,000 because of the tenant lease up and the occupying by those tenants in the current development pipeline.

Okay, maybe you could give us -- would you disclose sort of what the Q4 yield on those developments would be? Based on sort of just current occupancy right now?

As far as trying to get a run rate for the fourth quarter, Ken?

Yes, that' what I'm working on.

I think if you look at in general as we look through in the occupied, the percent occupied of those properties increased quarter-over-quarter and as we look at delivering those stabilized to the operating portfolio, I think we have been pretty consistent on saying that the return on cost on those properties ranges anywhere from 8% to 9%. So I think that is primarily the reason we've got the percent occupied in there so that can be tracked and kind of back in to the NOI attributable to those current development pipelines.

Great. Nice job on the preleasing front. I appreciate all the commentary.

Steven Rodriguez, Lehman Brothers.

Sorry about the big loss on Sunday. But I wanted to talk about your leasing spreads for the quarter, 23%, which is pretty strong relative to your other quarters. Is that more representative of a possible spread than your '08 rolls or is it more of a much lower -- like your first and second quarter spreads?

Again, this is John, you have got to remember that with the limited amount of rollover we have, that is probably a small group of tenants, maybe six deals or something like that. And a couple, probably three of those deals were in Florida, where we obviously have stronger spreads. So it is going to be difficult for us to comment yet on what we think is out there in the future in that roll. But clearly when they get an open window to reset rents, it is going to be strong. We will continue to track that quarter over quarter and see how it goes, but that is a pretty healthy number obviously.

Of the 112 that you signed in the quarter, what percentage of that was new? Or is that all new -- like new verses renewal?

Of the 112, about 50,000 feet were new leases.

About half, okay. Regarding your land sale gains, I believe you mentioned earlier in the year that you were going to try to get $65 million in proceeds by year end. I know timing has a lot to do with that, but are you still on track for that?

Mentioned -- repeat your question, please. We mentioned we were going to have --?

You mentioned you're going to have $65 million in land sale proceeds so a maybe $10 million with a 15% gross margin. $10 million in gains at 15% gross margin. Are you a guys on line for that?

I think as you look at that line item and we discuss -- we don't give specific guidance really on land sales. I think we kind of combine land sales, merchant building, lease termination fees, and other types of noncore income. I think when you look at where we proceed and what we are looking like for the fourth quarter, we do anticipate having a couple of outlaw sales as well as a merchant building sale in the fourth quarter.

But as far as specific number, we typically do not guide on specifics as it relates to noncore income because we have a bucket event that we feel as developers that we will get in any given year, whether it is outlaw sales, whether it is vacant land sales, merchant building sales, lease termination fees when we're upgrading our properties -- I apologize, but I don't remember providing a specific number as far as relates to that.

Okay, I thought I had that in my notes. Thanks.

Philip Martin, Cantor Fitzgerald.

Coming from Chicago, I can't feel that bad about Indianapolis losing the other day, but --

There is a lot more football to play, my friend.

We just want to get our two linebackers and our left tackle back and then we'll play them again in January.

We want to get our whole team back. First of all, good morning. If you could talk a little bit about what you think or would like the incremental additions to your visible shadow pipeline or what you think is achievable incrementally here over the next couple of quarters or even the next four quarters as to what the incremental additions to the visible shadow pipeline could be? Based on your shadow that is out there and where you're at in the process and certainly maybe some of these incremental additions you're seeing from the smaller private guys as well?

Philip, it's John. Obviously just the fact that we added two new projects to the visible shadow pipeline this quarter and both of those projects were -- are obviously new projects to you, although one of them is an expansion, you see that we have an active shadow pipeline out there that's active. So clearly the biggest impact in the near-term to that would potentially be Notre Dame and Tom has made that pretty clear all the way through.

You know, beyond that, as you know, we have land holdings that are out there that we're working on and we have a couple other potential expansions. We have some new projects in the market that we are already in. So it is a healthy pipeline, but I think the point we were trying to make is we have the luxury of being selective. We are -- we never feel pressure to add to any of these pipelines, because we know we have enough out there that we are very comfortable that there is plenty of development for us over the next three to four years.

So we're not going to throw out a number, but the shadow pipeline is greater than the visible pipeline in terms of dollars and that is why we will continue to post new deals.

Okay, that's fine. I think the land in the portfolio, can you quantify that? The land in the portfolio that is not yet represented in your visible or current pipeline?

That is land on our balance sheet.

Okay, I guess what is the portion --? I know there is a portion there where there is a higher likelihood that it will be sold via land sales.

Yes, it is about -- I think at the end of the quarter it was $23 million round numbers. And when we look at the land held for development on the balance sheet, it is a combination of properties. There is one -- we have been fairly specific that we own some land in Naples. There is a pretty good tract of land that we own in Naples that's a potential development for us. There are some out parcels that we have held for quite a while in there and there's a couple other pieces of ancillary development land adjacent to some of the shopping centers we have.

So it is a combination of things and I think it continues to be a potential good harvesting area for us for capital, just like we did this past quarter. That was a great opportunity for us to sell non-income producing land and invest it right back into the development business. It was great.

Is there -- that $23 million, could you talk about what kind of square footage could be developed on the land? Again, excluding the land that would be likely land sale candidates, but the land that you keep developed for longer-term projects, is there a potential square footage that could be developed on that land is roughly what?

Again, it depends on what we do with each specific deal. We have that land at a very good price basis, so it is more acreage than you would imagine. There is easily 300,000, 400,000 square feet that we could develop there, probably more like 400,000, 450,000. But I don't envision us developing every one of the parcels, so there will definitely be a couple more projects coming out of that raw land, but in our shadow pipeline, we have several pieces of land that we control that are not part of the acreage of the land that we own on our balance sheet.

So we actually have two different sources of land that we have for future development, one being the land we own on the balance sheet and the other being the hundreds of acres that we control.

Okay, and you touched on my last question here. And that is your cost basis in this land, can you give us an idea of where that is relative to market?

I can just tell you it is below market.

Philip, this is Dan. I think when we run our NAV we conservatively say the value is 1.5 times what we have on our books. I mean when we talk to people about that regarding -- if you're looking at it from an NAV perspective.

Okay, great. Thank you very much.

Jay Habermann, Goldman Sachs.

This is Tom here, by the way. Just a quick question. I know that Pru is part of your growth strategy going forward, but we haven't seen you announce any new projects with them in quite some time. While I know you guys are eager to grow the pipeline, is there any hesitancy on their part to undertake new development given the less than ideal macro backdrop we're seeing these days?

Tom, no. This is John. I think quite to the contrary, as you know, Prudential is an extremely active real estate investor across all spectrums and I think we are in a situation where in fact recently a lot of us were at their partner conference in South Florida about six weeks ago. And I think a couple hundred people there and clearly the theme is that they are continuing to raise capital.

One thing I think this is a good opportunity to point out is people are very concerned right now that there is kind of a vacuum occurring and there is no capital going into real estate. That is just completely not correct. As a matter of fact, everything that we are seeing, people we are talking to, a recent kind of polling of the top 50 pension funds shows it pretty clear that over the next three years they are going to increase their investments in alternative investments. That is real estate and hedge funds and private equity. And real estate will probably go from a 4.5% allocation to a little bit over 6% allocation. Just in those top 50 pension funds, that is $300 billion of equity in three years.

Guys like Prudential are getting that money and they want to deploy it into the higher yielding assets, not lower yielding assets. So to the extent that we are out there and we are a partner, that puts us in a great spot. Now you're right, we have not added anything to the JV recently, although we made it pretty clear that we will be adding to the joint venture and we are -- one of the beauties of the situation is we will -- we might do some smaller projects in the joint venture if we think that is appropriate.

So I would definitely expect to see us continue to do more with Pru and we expect them to continue to want to do more with us.

Okay, thanks for that update. Then my next question is on last quarter's call, you mentioned that you had not yet seen a backup in cap rates for Class A real estate. Does that still holds true or would you concede that there has been a modest maybe 25 basis point backup in cap rates even for higher quality real estate?

Again, if you want to talk about spot current cap rates, and I'm a believer that is not something that I would look at as a long-term trend because, as I just mentioned, there is a lot going on. There's a lot of capital shifting around. Yes, I think if you look at globally -- or I shouldn't say globally -- if you look at domestic U.S. domestic real estate, there seems to be some sort of movement towards that, towards of a slight backup. But we have not seen enough sales out there for us to say, boy, we see a trend and Class A cap rates are moving up 25 basis points. I know some of our peers have made a categorical statement that Class A cap rates are going up 25 bps.

Frankly we looked at a grocery anchored center in Atlanta last month, well located, Publix anchored center that traded at a 5.9. That is one deal. I am not going to tell you that I think cap rates are below 6 because one deal occurs, but I also don't think I'm going to tell you that cap rates are 6.25 because one or two deals occur.

So no question if we continue down this road there could be a little bit of movement, but there is -- I definitely don't personally see these major cap rate movements that some people have talked about. I think it's incremental and it is also incremental to the IRR.

Got it. Thanks a lot. And one final question. Are you guys making any defensive moves in terms of your shadow pipeline? Perhaps in the way of securing grocery anchors as opposed to your pure retail anchors at some of those projects further on down the line?

Well I think in terms of the overall composition of our portfolio has always had a good percentage of our rents coming from grocery-anchored centers, about 25% range. Actually when you expand it and you look at our portfolio in the sense of shopping centers that we own or are developing that have a grocery store as a component of the shopping center, it is about one-third of our base rents.

We are big believer in that and as you know, you've heard us say in the past even two years ago when everybody was suggesting the death of the smaller grocery, that was just categorically wrong. And I think we like grocery, but we like it as a component of the shopping center probably a little bit more than just a straightforward deal. But again, that depends on a grocery store itself.

So we are aggressively looking at deals where we could have the premier grocery in a market. We absolutely want to do that deal, Tom. Then when we can add a grocer to a power center, we absolutely want to do that. That just gets back to providing more to the customer. That's what we've got to do.

Great. Thanks a lot. I look forward to seeing you at NAREIT.

(OPERATOR INSTRUCTIONS) A follow-up from Ken Avalos, Raymond James.

Hey, John or Tom, in terms of finding opportunities from capital constrained developers, are you seeing any more or less opportunity in any of your particular markets, i.e., I'm just asking if you're going to get more in Florida, basically?

This is Tom. I think without question we're starting to see names pop-up in Florida. George McManus has been talking to a lot of capital contacts and we have been picking up a pretty good flow I would say in the state of Florida probably more so than any other location.

I would just add to that though, I know where you are going with that question. I think that obviously you can look and say that Florida has been impacted more from the residential fallout, but again, I think it's more about the capital markets than it is about Florida specifically. When you look at the rent growth that we are getting in Florida, the rent growth we are getting in Naples for example is really substantial. The occupancy we have in Naples is near 100%.

I don't think it is as much to do with the fallout as it is to do with just some of the guys had got over extended in terms of recourse. And I think we are seeing that and quite frankly, the meeting we had yesterday was a potential project in the Pacific Northwest, so it is not specific to a market. Florida just happens to have 17 million people in it and there is a lot of action, a lot of deals. That is a good thing.

Sure, we like Florida, obviously, particularly if you are getting in fill locations. So I appreciate your commentary. Take care.

Rich Moore, RBC Capital Markets.

John, on the Prudential venture, would any of the existing pipeline beyond Parkside, would that be something that might go in there or is all the stuff that you might add to Pru, is that new?

In terms of the visible pipeline stuff, yes, we have the option, Rich, of adding some deals there if we choose to. So there is a potential that we might do that. If you remember, you have got to look at the fact that we for example we do have a local partner in the Delray deal, but that doesn't mean that we couldn't recapitalize the whole deal.

So we're looking at everything that we're doing in regards of the comments made earlier about how diligent we want to be with our capital. We have been to this movie before and regardless of what happens in next month or the next week or the next three months, we know that we are in an environment where we want to protect our capital, so we're going to be very, very thoughtful around that process.

Okay, I was looking at the visible shadow pipeline and you guys need $200 million but really $160 million of that comes from the two big projects and that could all be Pru if you wanted it to be.

It could be and one of them already is.

One of them already is, correct. Good, thank you. Then the worry warts out there are all concerned that no one is going to live in a house anymore and certainly if they do live in a house they're not going to fix it up. So everyone is concerned about Lowe's and Home Depot and you guys of course have three Lowe's I think it is. Have you heard anything from Lowe's? Are you concerned about Lowe's? Any color on what is going on with Lowe's?

All the things are anecdotal, Rich, but yes, we've talked a lot to Lowe's. I personally just had a conversation with them two weeks ago or three or four weeks ago and we spoke about it. The quick reaction is clearly you are going to see some of these retailers report same-store sales that will be not at the levels that they were, but the levels that they were artificially inflated. When you saw those numbers getting up into the high -- getting up into almost double digits, that was just part of the overall process of speculation, right -- particularly in the home improvement side, where you had investors buying homes and fixing them up and all that?

They are not worried about the business normalizing. They are absolutely expanding and in particular to Lowe's, they have a long way to go before they even get anywhere close to the number of stores that Home Depot has. So they have the advantage there. As far as Home Depot goes, they are in a restructuring process and they are doing a good job with it. But Lowe's absolutely 2008, they are doing 130 stores in '08 or no 150 and I think they did 155 in '07, Rich, so.

But they are actually increasing their square footage in '08, so I think they are in pretty good shape. And I think all the retailers in general are concerned about the impact, but this process just has to occur and absorb, and that will happen.

I think you're right, John. Thank you. And then on Tarpon Springs, it looked like is was up about $1 million. It's a little high -- so maybe I read that wrong, but that is what I thought I saw last evening. Anything special going on there?

It's really just tied back to the final permitting phases. When you go through Collier County, it is so difficult and each one of these boxes goes through its own unique process from a permitting standpoint so that it was just simple construction creep tied to the final permitting perspective.

Okay, good. Thank you. So that is kind of done you think -- that's not (multiple speakers)?

That is behind us 100%, but that is what caused that creep.

Okay, then a couple quickies on the income statement. The higher CapEx, is that all the Supreme Court or close to that I assume is the Supreme Court?

That is correct. We broke out on the page in the supplemental, we broke out commercial and retail to try to give some visibility on that, on the 71,000 square feet that we're leasing to the Supreme Court. I think if you look at as far as tenant improvements, commercial and leasing commissioned commercial, that is almost all 100%, related to the Supreme Court.

If you look at the capital improvements in general, roughly $280,000, a portion of that is -- it's spread around between about six properties, whether it is being roof replacement or parking garage replacements here at one of the commercial properties here. It is nothing major, just general property maintenance work.

But as you know, Rich, our run rate there still runs well below our peer group and if you look at CapEx when you think about rent growth, when you net that, more of a cash flow rent growth, we're doing pretty well there.

Okay, good. Thank you, John. Remind me, Dan, would you, there was a tax item last year and I can't seem to pin down exactly what it was but as far as going forward I thought you might have more taxes this year. I had more in my model, but you did not. Where do taxes go, do you think?

The taxes, one of the things last year that we had in the third quarter was we had a merchant building sale, which increased the tax number. Any time we had those merchant building sales, the tax numbers will increase. As we have mentioned, we are tracking a merchant building sale for the fourth quarter, so those taxes will go up in correlation with the income.

Good, I got you. Then on Cornelius Gateway, that I guess is not the merchant building. For some reason I thought that might be one of the merchant building possibilities, but it sounds like that's something you're going to keep.

Well, we're looking at that. I think we will -- as soon as it is to the area that is leased up, we will market it for sale. Right now we want to get to it to a leasing percentage. As Tom mentioned, we have got -- when we moved it over we were roughly 14% to 15% leased but we have a significant number of leases being negotiated. There is the timing item on that as far as that is concerned. I think with the leases we're negotiating currently, we will go over 50%.

It is like 21,000 square feet, Rich, so a couple leases make a big difference on that thing.

Right, exactly. Then the very last thing, Dan, is straight line rent has been bouncing around. Is this -- it seemed -- I think it doubled from 2Q '07 to 3Q '07. It is not huge or anything, it is just is bouncing around. Where -- I guess I'm not sure why it bounces so much, but where do you think it is going from here?

I think the key thing on that when you look at it is remember in the last quarter, if you look quarter-over-quarter we had the write off of the straight line rent related to the Dominics at Silver Glen property. So that -- when you take that into effect, what is hard as a developer with the accounting rules when the tenant takes possession you're required to recognize straight line rent, so that varies. As we do these development pipeline project it's really hard to give you, say, this is going to be our pinpointed straight line rent because it is based on when the tenant takes possession. And between the time the tenant takes possession and the time that they start paying rent, we're required to record straight line rent.

Do I think on a run rate basis, we're going to be at the level we're at this quarter? No, I think it will be less than that but it is going to be greater than where we were the prior three quarters because we have a lot of development properties coming on line.

Okay, I think I could get a number in there, then. Very good. Thank you guys very much.

A follow-up from Jay Habermann, Goldman Sachs.

It is Tom here again. I know the call is dragging out a bit but I just a quick final follow-up. The $450,000 loan cancellation fee you received during the quarter, was there anything in particular that prompted the lender to pay the fee rather than originate that loan? Or could you just comment on that?

I think when you look at the markets at the time, it was really during the July/August time frame and I think when the lender came to us, it was in the best interest of both parties just to terminate the agreement.

Okay, that makes sense. Thanks a lot for that color, guys.

At this time there are no questions in queue. I would now like to turn the call back over to John Kite for closing remarks.

Well we want to take the opportunity to thank everyone for joining us this morning and we look forward to seeing a lot of you at NAREIT next week. Thanks a lot.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.