Kite Realty Group Trust (KRG) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in 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 call over to 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 317-578-5151 and she will fax or email you a copy.

On December 31 -- our December 31, 2007 Supplemental Financial Package was made available yesterday from 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 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 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, acquisition, disposition, development and joint venture risks, potential environmental and other liabilities, 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 from the Company are John Kite, President and CEO; Tom McGowan, Chief Operating Officer; Dan Sink, Chief Financial Officer; and George McMannis, Senior Vice President of Finance and Capital Markets.

Now I would like to turn the call over to the President and CEO, John Kite.

Thanks, Adam, and thank you for joining us this morning for our fourth quarter and year end conference call.

We finished the year strong with year-over-year FFO growth of 8.6% on a per-share basis. Our financial metrics including portfolio leasing percentage, G&A to revenue, earnings per share and fixed charge coverage compared very favorably to our peer group and were consistent with our expectations.

While we're pleased with our 2007 results, we are focused on 2008 and beyond. As I've told you many times before, when it comes to committing capital, we see ourselves as risk managers.

This isn't a new policy initiative in reaction to the economy. This is simply how we have always done business. Our focus on risk management is clear when you look at our disciplined development approach. Every project we take on is put through a systematic process and must meet a series of hurdles before we will commit capital.

As you know we break out the pipeline into three components -- the first being the current development and redevelopment pipeline, which is made up of 11 projects. All of the projects are fully entitled and under construction. These projects are 80% leased or committed including all of the anchor tenants. It is important to note that only 27% of the owned square footage is currently occupied which means that the leased but unoccupied space will be a source of growth toward the end of this year and into 2009. The pipeline is approximately 80% funded with the balance of the necessary funding available under in-place construction loans.

As you can see, the vast majority of the risk in the current development pipeline has been mitigated. We are now positioned to realize the majority of the growth in this pipeline as we stabilize the assets in 2008 and 2009.

Next, we have the visible shadow pipeline that consists of six projects. We own the land at five of the six projects and have acquired all of the land at market and below market values. The majority of the projects are fully entitled and we are in the final stages of completing anchor leasings. These are all well located land parcels that are generating strong tenant interest and we remain confident that we will realize -- that we will finalize anchor leasing and entitlements and commence construction on the majority of the projects throughout 2008.

Finally, we have the shadow pipeline. The projects in this pipeline are subject to strict evaluations before significant resources are committed.

In the fourth quarter, we tightened the parameters of our review process and cut the size of the shadow pipeline by five projects which resulted in an after-tax write-off of approximately $270,000. We elected to proactively drop these projects in the predevelopment stage because the economics and risk profile no longer had merit in the current environment. Of the remaining five projects in the shadow pipeline, all of which are in our core markets, we own the land for three and control the land for the other two. We will continue to actively monitor the viability of these projects before additional capital is committed.

As I've recently said in regards to capital we were confident that we would aggressively manage our current and future debt maturities. We have already refinanced in excess of 80% of the debt originally scheduled to mature throughout 2008, and the remaining '08 maturities will not expire until the end of next year. We have access to the capital necessary to carry out our strategic plan for 2008 and into 2009 via our current credit facility, construction loans, the Prudential joint venture and capital recycling.

Recycling noncore assets to pay down debt or to redeploy in the core opportunities with upside potential is an important part of the strategy. For example, just last week we completed a like kind exchange in which we sold a single tenant operating property and used the proceeds to help acquire Rivers Edge Shopping Center on the north side of Indianapolis.

Rivers Edge was acquired from a private owner in an offmarket transaction. It's 80% leased and positioned within the strongest retail quarter in Indianapolis and presents an excellent opportunity to add value through redevelopment.

In the current backdrop of economic concern and potential recession, we see our operating portfolio as a real source of strength. Our operating portfolio is well located with respect to income and population demographics. An average of 125,000 people live with in a five-mile radius of our shopping centers and with average household incomes of nearly $80,000 this target group of shoppers enjoys substantial purchasing power.

In addition, our operating portfolio has a low average age of approximately seven years. Accordingly, only 4% of our annualized base rents rolled this year and only 6% will roll in '09. The combination of these factors make our operating portfolio even more attractive in these uncertain economic times, and help to insulate us against a potential recession.

Approximately 60% of our annualized base rent is generated by anchor tenants and ground lease tenants which we view as particularly stable because of the longer terms and the strength of their credit. In addition, we have seen strong rent growth in the last two quarters. Although this growth is calculated on a small base of leases, it gives you some visibility of the impact that we expect to see in 2010 through 2012 when the leases at our younger properties will begin to roll. Obviously this lines up nicely to a timeline of a potentially recovering economy.

As I have said before, we have excellent opportunities for growth in the current pipeline in late '08 and '09 and through the visible shadow pipeline in late '09 into '010. The development pipelines and the increasing rollover in our operating portfolio will be a source of much of our growth over the next five years. Now I would like to turn the call over to Tom to further discuss the development details.

As John mentioned, our development process focuses on the systematic deployment of capital and risk management. Three projects met our necessary hurdle to advance through various stages of the process in the fourth quarter. Tarpon Springs, the second phase of Spring Mill Medical and Eddy Street Commons.

Tarpon Springs is 100% leased and has transitioned to the operating portfolio. Spring Mill Medical, Phase II, moved from the visible shadow pipeline to the current development pipeline because the site is now fully entitled and the project is 100% leased. We are on track to deliver the 41,000 square foot expansion in December 2008.

The first portion of Eddy Street Commons at the University of Notre Dame, our $200 million mixed-use development, recently moved from the shadow pipeline to the visible shadow pipeline. We've moved the first component of the project -- the retail, office and multifamily buildings -- because we satisfied three important previously announced benchmarks.

First the 25-acre parcel has to be fully entitled with a plan unit development designation. This task has been accomplished. Second, we needed to secure significant public incentives. I'm pleased to announce that we've received the final approvals from the city of South Bend and the necessary oversight approvals from the state of Indiana to proceed with the [TIF]. The specific details of the TIF will be announced once the bonds have been sold which we anticipate will occur in the next 30 days.

Third, we have completed negotiations with the University of Notre Dame on the final deal structure. By limiting the outflow of capital until these benchmarks were accomplished, we have effectively managed our risk on this project.

Another example of our disciplined approach is Delray Marketplace in Delray Beach, Florida. While all entitlements are complete we have chosen to delay commencement of construction until we have both anchor leases fully executed. Frank Theatres recently signed a 55,000 square foot lease for a 14-screen theater and entertainment center.

We are also in late stage lease negotiations with a high-quality grocery operator with a significant presence in Florida. We remain enthusiastic about the long-term prospects of this project. In addition to our external growth strategy, we continue to enhance internal growth initiatives by focusing on improving efficiencies in our operating platform and have already identified $800,000 in operating expense savings.

We remain focused on maximizing ancillary income sources and anticipate these opportunities will become more impactful over time. We are also continuing to evaluate the portfolio for redevelopment opportunities such as Bolton Plaza in Florida and Four Corner Square in the state of Washington.

At this point I will turn it over to Dan to summarize our financial results.

Good morning. For the three months ended in December 31, 2007, funds from operations were $0.34 per diluted share. This is an increase of 6.3% over the $0.32 per diluted share for the fourth quarter of last year.

For the year, FFO was $1.26 per diluted share or an 8.6% increase over the prior year.

In the quarter our same property NOI, which includes 49 properties, increased 1.4% for the same period in 2006 and for the year same store grew 1.5%, which is the midpoint of our previously provided guidance of 1 to 2%.

For the year, excluding proceeds for the fourth quarter sale of a single tenant build-to-suit in Washington, construction and service fee revenue totaled $31.2 million with a margin of approximately $3.2 million before tax; and that is in line with our budgeted expectations. G&A expense for the fourth quarter was approximately $1.5 million or 4.6% of total revenue. For the year, G&A expense was approximately $6.3 million or -- which was at the low end of our expectations and continues to compare favorably to our peers.

In total for the quarter, we received approximately $800,000 from the settlement of [Ultima] Electronic bankruptcy. Approximately $280,000 was a recovery of a previously written off receivable and the remaining $520,000 was in other property-related revenue. In addition to the recovery from the Ultima Electronics other property-related revenue includes land sales of approximately $1.47 million and overage rent of approximately $943,000.

Cost to construction and services includes a write-off of approximately $444,000, a predevelopment cost related to the termination of our shadow pipeline projects. The net effect to FFO after-tax is approximately $270,000.

Summarizing some of the more significant financial metrics for December 31, our fixed charge coverage ratio was approximately 2.9 times. Our floating rate debt was 26% of our total debt and approximately 14% of the total debt was in floating rate property-specific construction loans. The FFO payout ratio was 60.1% and the AFFO payout ratio was higher this quarter as a result of the Indiana Supreme Court took possession of their space in our 30 South property and the majority of tenant improvement lease commissions were incurred in the fourth quarter.

Now I want to take this opportunity to walk through our availability of capital to complete our 2008 plan, as well as our objectives to reduce leverage while continuing to maintain a healthy fixed charge coverage ratio.

At the end of the fourth quarter, we had approximately $50 million of availability on our line of credit before utilizing the [accordion] feature or negotiating additional opportunities with our lending group. We have approximately $1 billion of debt and equity capital available in the Prudential joint venture; and we have the option to present several projects in our shadow pipeline to Prudential to further expand the relationship.

We also intend to analyze noncore low-growth assets for recycling opportunities to pay down debt or redeploy into higher growth assets. Good prospects for this strategy are the single tenant projects with limited rent growth opportunity, noncore medical office and commercial buildings, and our continued focus on recycling land holdings.

In addition we are in early discussions with potential joint venture capital partners to seek market-driven opportunities with private developers or assets with a value-added component. This fund relationship would allow us to sell assets into the fund while maintaining an ownership percentages -- percentage and management responsibility.

Also in the fourth quarter, we sold a single tenant build-to-suit asset asset for a net gain of $1 million after-tax and our partners' 20% minority interest at a 6.2% cap rate. And we sold a single tenant operating property for a net gain of $2 million at a 6.19% cap rate.

Lastly we are reaffirming guidance in the range of $1.28 to $1.33 for the full year 2008.

Thank you for participating on today's conference call. And, Operator, we would like to open up the line for questions.

(OPERATOR INSTRUCTIONS) Jonathan Litt with Citigroup.

This is [Ambika] with John. Could you give some more color on the projects that were dropped from the shadow pipeline? Just exactly what criteria did they not fit? And how has pipe changed their criteria that they are requiring for their new development project?

Basically the shadow pipeline project that we said we dropped, the criteria is essentially the timelines that we see. The length of time that we think it's going to take for lease up, the demand for tenants, the cost structure associated with that. So really there's a multitude of things we are looking at there.

But the bottom line is, we've always said that we have a very active shadow pipeline and obviously we had 10 projects in that pipeline and we cut it in half. And also there, we are looking at a market-driven approach too. There are a couple -- there's one particular project in the pipeline that was in a new market that would have been a merchant building. Would have been in a merchant building with TRS.

So that at this point in time would -- it didn't seem to make too much sense, so I think it was really a combination of us wanting to be conservative; the returns we're seeing and the activity that we have going on in the current pipeline and the visible pipeline. We obviously have enough going on there, but also some of these projects can be a distraction.

So we tightened it up. We still have five projects there that represent rate opportunities and I think going forward they will -- it will be a real good thing for us.

And is this specifically related to specific tenants? Or is it just generally looking at the market and saying, let's pull back on this development and this project?

The answer to the question is when we see compression in rents and unstable conditions in specific markets, as John said, we have a very strong list of pipelines and we have the ability to pull back when we need to. And this was simply a situation it did not meet the risk parameters. We saw some compressions inside the rents and at that point it was an easy decision for us, based upon the key parameters that we have established.

My last question is, who are you seeing right now as the biggest kind of retailers that are expanding at this point? We've heard that Target, JCPenney, various big box retailers have been reducing their store management plan. So I just wanted to see where you are seeing the demand from at this point?

I think, clearly, that the larger box guys you are talking about -- Target, Wal-Mart, Kohls -- obviously they have, they are taking a more conservative look. But they're also still opening a lot of stores and I think when you look at it on an impact basis, particularly when we are talking about our pipelines. I mean, again, remembering that our current shadow pipeline, I should -- I'm sorry our current development pipeline and our visible shadow pipeline, those projects are going to be delivering as you know into '09 and '010. So you really move beyond some of this.

But in general, the junior box guys are still actively looking for new opportunities. Even the guys that have had disruption in their space -- the Best Buys and the Circuit Citys, the Bed & Bath, Linens 'N Things, Michaels, PetSmart -- all those guys are essentially staying on plan. I mean Circuit City has obviously had restructuring. But in general the junior box guys will continue to look for opportunities and may even see this as a -- in certain cases, as an opportunity to get into deals that they otherwise couldn't have.

So I think in general it's really more about the larger users and, again, for a company like us that has 16 projects between the current construction pipeline and the visible pipeline, we have enough going on there that as we move through this period of time over the next two years it shouldn't be a massive impact. But, clearly, there are -- there's caution so that's why we are using caution as well.

[Thomas Baldwin] with Goldman Sachs.

Just following up, can you clarify how long it takes today to take a development from conception to completion versus how long it might have taken previously?

I would say the process as a whole takes approximately the same amount of time. The issue that ties back to that process is how difficult to municipality or county may make the entitlement process as a whole. There are certain areas of the country that are pushing very hard on very restricted entitlements that may tie back the mixed-use components, etc. I'd say the actual timeframe and the sequence is the same. It's just become a bit more challenging as you go through that process to make sure they end up with a plan and a return that ultimately works for the company.

So extended lease up periods don't really factor into that because we have been hearing from some of your competitors that the time to take a development from inception to stabilization has really lengthened and that was the result of longer lease up periods. Are you seeing any of that on your end?

I think that the bottom line there is these projects have always had that two- to three-year process from when we take down the grounds to stabilization and really as Tom said, it is more about the entitlement process. The leasing process, that's why we spend so much time explaining that that's why we have the visible shadow pipeline. That is our holding -- that's kind of our holding area for the three leasing requirements that we have.

I think our preleasing requirements have always been maybe a little more stringent than some others. So we are doing the leasing there and that has always taken some time. And that's why the current pipeline is 80% leased.

So we don't view it as a huge differential between now and what it was a year ago. Perhaps on the small shop space you might see a little bit of a lag there that the bottom line is the anchors are the anchors. And the time it takes to lease the anchors is essentially the same. Either you have them or you don't.

Thanks a lot, guys, and I know you've spoken about this in the past but institutional demand -- and I'm referring specifically to your joint venture -- is that still as strong as it was say early 2007, given, I think, the widespread perception that cap rates may back up over the course of 2008?

I mean when you are referring to our joint venture you are referring to our current point joint venture with Prudential and that's really a development joint venture or it is oriented toward development. And that's not really a factor relative to that, because that's kind of a higher returning JV with the idea that we are going to get development returns.

In terms of us looking at new joint ventures which would be more orientated towards us seeding it with some assets and then using that to go out and acquire things that have predevelopment opportunities or have retenanting opportunities, there's still strong demand there.

I think what you've got to realize, what everybody has got to realize is that all this cap rate talk at this point is essentially conjecture. Clearly, there has been movement because of the capital disruption, but interest rates have moved down significantly over the last six months to nine months.

So there's a disparity there between what originally started off this talk about rising cap rates was rising interest rates. While all those projections that the 10-year would be at six are not quite correct right now. So I think that disruption allows for that talk but the bottom line is, we have good interest in our conversations about creating a joint venture to do something like that.

So there's still a lot of liquidity; it's just a debt issue. The equity -- quite frankly, the equity is greater today than it was six, nine months ago in terms of the total capital that's out on the sidelines. It's just the debt disruption.

[Steven Rodrigez]. Lehman Brothers.

I was wondering if you can talk a little more in detail about potential size of joint venture set up with these commercial and health care assets? Without getting too specific, obviously.

No. We are not going to get into too great a detail right now on that. As Dan mentioned, we are in early discussions. I think we are going to continue to have these discussions and see where it goes but let's just say that it would be very meaningful for us. And our objective is to have a meaningful pool of capital that we can go out and utilize and deploy.

So I think it's early to get into size, but we kind of want to approach this cautiously in that we are in early discussions. But it is very important to us to execute on this eventually.

And, Dan, regarding your guidance, what kind of LIBOR assumptions did you make for '08?

When we presented the '08 guidance we utilized the one-month forward curve for LIBOR. And I think as you look at that, we put that together end of December early January. And I think as you work through and you're looking at the forward curve as compared to when we finalized our guidance, I think the interest rates and economic environment those kinds of things are items that you can't get your arts around completely because there's a lot of variables.

That's primarily why we give a range. And I think that's where we sit today from a guided standpoint.

My last question regarding Circuit City. The lease term fee. Have you guys provided or disclosed when that possibly will be? What quarter?

Yes. The Circuit City lease term will be in Q1 of '08.

(OPERATOR INSTRUCTIONS) Paul Puryear. Raymond James.

Could you update us on your tenant watch list? Who do you have on the list? Any anchor tenants that [bother] you here?

I think if you look at the -- at our kind of our top list of tenants, I think the one that we are pay the most attention to and obviously with the recent lease term is Circuit City. That's the one that we spend the most time discussing that -- the thing that we are reasonably confident about there is when we terminated the one lease that we had with them -- which was their old format store -- the new, the remaining leases that we have with them are the newer formats.

So we feel reasonably good about that and frankly the rents are reasonable. So in that particular case we feel pretty good.

Beyond that, we've got a pretty strong list of tenants and as you know, no tenant exceeds 3% except for Lowes. And even in despite the current residential debacle, Lowes still remains strong and is talking to us about new deals.

So in general, that would be the one that would -- that has any material impact that we were watching.

So are you getting in the any indication from the small shops at this point? How are the leasing trends there ?

Small shops are generally the same. I think a good cursor there or the good thing to look at is when you see what our rent growth was on a cash basis in the last two quarters, the majority of that comes from small shops and our rent growth has been firm and strong.

Again it's property by property with us. You know the Naples property that we have, we still have tremendous demand from small shops. We have good leasing spreads. The Indianapolis portfolio is strong. So in general, it's pretty good.

Perhaps we will see some of that as we -- as this plays out over the next few quarters. But we are at 95% occupancy and one of the things we refer back to is we have been through several cycles and this is the highest occupancy we have been at, going into any kind of tough cycle. So I feel pretty good about that.

Philip Martin. Cantor Fitzgerald.

First of all, Dan, could you give us some sense of discussions you are having with your banking relationships? More specifically with respect to refinancings and how they are now looking at the whole underwriting process, underlying evaluations. Are they coming back wanting to -- well, how are they approaching valuation in this market versus let's say a year ago?

I think, Philip, we have been very fortunate as John talked about that we were able to refinance 82% of our debt that we had maturing in '08 and if you go, we've listed a separate page in the Supplemental that references back to the subsequent refinancings after December 31 of '07. And you know, I think it's on page 17.

I think when you look through that list I think we've been very fortunate. George McMannis and his group have been working hard on these and I think the key thing to look at when you look at how we were able to get these done so quickly is I think it's a flight to both relationships and a flight to quality of assets. And when you've got both of those things and we've built up -- we've been working with these banks for a long time. We've always done what we said we were going to do and you know that pays off at times like this when you need to get refinancing, get construction loans.

So, we feel very positive about those relationships and don't have any concerns about that going in the future.

Now that being said, I think if the economy stays as it is today, you might see some of the spreads on the construction loans widen a bit. But we still think there's opportunities for us to get that capital.

And you are still dealing with many of the same people at -- within each one of these banking relationships that we've heard or at least anecdotally heard, many of the banks get rid of a lot of people that were underwriting both residential and commercial real estate. But the relationships you have are still with many of the same people you've had for years?

Yes. For the most part. Actually we've had actually had some growth in relationships because there's been some turnover in some of the larger banks and some of the people that we've had strong relationships with have branched off into new ventures with new banks.

So it's actually with the relationships we've had and how long we've been around. The number grows versus shrinks. So we've seen that from a very positive standpoint.

One of the things we've always done for the past 20 years in our -- and you've got to realize maybe we have an advantage here in that we were a private company doing business for a long time, depending on commercial banking relationships. And because of that we've always made it a priority to have relationships at the top of the bank. And I have done that with George and Dan over the past 15, 20 years. We've always made sure that we didn't focus on one relationship manager but that we knew the president of the bank, the chief lending officer, the chief credit officer.

So, these are deep relationships and frankly when you look at the schedule Dan is referring to, you'll also see that they are unique relationships. We weren't just totally dependent on the large money center banks. We have relationships with regional banks. We have relationships with local banks.

So we feel that that's probably one of our greatest strengths is having had to be a user of capital when we weren't a public company. Those are deep, long relationships.

Secondly, on the shadow pipeline, five properties were taken off here and we talked about leasing compression and that made some sense certainly in this environment. And but, from a catalyst standpoint to get those project sort of back in the pipeline, is it really tied just to leasing getting a bit -- my guess is that a lot of the retailers are probably taking a step back here, reevaluating plans etc. and that's probably slowing the leasing volume which leads to leasing -- or rental rates compressions potentially. Is that a fair characterization?

Sorry. We will both comment here. First of all, it's not just leasing.

It's several things.

Yes. And Tom mentioned compression and rents and obviously when you look at that you've got to take that into consideration. But it's also in the environment we are in today it's the complexity of the deals. And some of the projects that we dropped were complex, mixed-use projects that, frankly, could we have continued on? Absolutely. There's no question we could continue on and each one of them have various levels of leasing interest so don't want to overfocus on that.

I mean, it's more a fact that we have so much going on that we are fortunate, as Tom mentioned, that we have a very viable and active pipeline in the current pipeline and the visible pipeline. It was really more a decision on our part to refocus our efforts there and to execute there which is, I think, why we are 80% leased in the current pipeline.

So I don't want anyone to think that to overplay this, it really was just a matter of turning inward as Tom said and focusing on execution. And having so much going on I think that was a great decision.

And look how small the after-tax amount was. It shows you how conservative we are on deploying capital there.

The other part of your question really tied back to the ability to replenish the shadow pipeline. And we have absolutely no concern of that. We have a very vibrant list of properties and what we need to focus on is securing A sites in the best real estate possible.

Once you accomplish that then the retailers will come. It's the issue of having sites that may not attract the type of rent growth that we need. So we are very well positioned in terms of our future growth.

So the shadow pipeline throughout the year, we can expect to see a couple more projects enter that shadow?

Absolutely. We will continue to pursue opportunities and we are just going to pursue in a very conservative approach based upon these very stringent parameters.

David Fick. Stifel Nicolaus.

I'm also here with [Nate Isby]. He's got a couple of questions.

My question is given that you've done a lot of leasing in your pipeline recently, just for the record, sort of current pipeline, where do you stand in terms of anticipated yields?

From a yield standpoint we feel very comfortable that we are going to maintain our current band between that 8, 9% overall return on cost parameter that we've talked about many times. And as John mentioned we have 16 to 17 properties between the two pipelines and as you look at those as a whole that's a very comfortable range for us.

Isn't fair to say that half of your profit has just evaporated in cap rate shifts?

Half of -- what's your -- ?

If cap rates have moved up 100 bips, you've just lost half your spread. That's a pretty tight current target for a development pipeline. It seems to me on a (multiple speakers) your yield is pretty low.

I guess you are assuming cap rates are what? 7?

Yes. For, yes, I think that that's probably reasonable maybe a Florida Publix-anchored center is still closer to 6, but clearly up from the low 5s earlier last year.

Well, I mean, I guess, David, we would obviously agree to differ there. We don't cap rates right now at 7. If you look at any transactions of high-quality real estate which we believe we obviously have, when you look at our portfolio you look at how new it is. We just go through it deal by deal. I think -- and the demographics associated with it.

We still believe that our quality product's in the low 6s. So and that obviously who knows what it is right now based on the fact that the capital disruption exists? But so if you think (multiple speakers)

(multiple speakers) 200 basis points enough? Shouldn't you be, as the market has moved, changing your targets? Increasing your hurdles and perhaps going back on your development pipeline?

No. I think 200 basis points is a great spread. You also have to look at the margin percentage which is anywhere from 20 to 40% margin, depending on what, where that cap rate is. And if you compare our pipeline and the risks associated with our pipeline to other product types, who are much more dependent on speculative leasing who have traditionally depended on and executed at that 100 to 150 basis points spread even in the best of times, I think we compare very favorably to that.

So we have pulled back on the pipeline and so, to answer the second part of your question, absolutely, we pulled back. That's why we eliminated those five projects. And the other thing to notice that we did is acquire the Center in the last quarter which was an excellent acquisition for us, using equity from a net lease project that's got great upside in it and obviously has less risk associated with that.

So, when you look at the risk return risk-adjusted return I think we need to do both of these things but that is particularly why we are looking at the pipeline very closely and we still think that it is in a great place. But we are going to continue to monitor that and if cap rates ultimately come out in the 7s, as you suggest, then you've got to look at that even tighter.

It would seem to me that you are having to make commitments today for things that are going to be delivered three, four years out and certainly, within the next two years, your current construction pipeline. It would just seem that four, five years ago we were talking about building to double digits and that it would seem reasonable to be pushing your hurdles out dramatically given where things stand today. I think Nate has a couple of questions.

Let me follow up on that, though, before Nate asks. That, also David when you make a comment like that you assume everything is static, and everything is not static. And we aren't really making new commitments by buying land. That's why we terminated those five deals.

The land that we have in our balance sheet now and the land that we have in our pipelines are very attractive values relative to the spreads. If it truly does turn down as dramatic as some people wish that it will, ultimately this is a cycle. And land values will react to that turndown. And as that happens spreads will go up. I should say returns will go up.

But the value spread is what we are focused in on as you know. And if that value spread can stay within that 200 basis point range, we have a great deal of comfort there. But if it really does turn down as people think it might, ultimately it will react; and land owners and developers will react to that.

So we are not terribly worried about that future commitment but that is why we declined to purchase sites in this last quarter and we dropped those sites.

Okay. You got something, Nate?

Dan, what does your '08 guidance assume for construction fee income?

Construction fee income? It's a range -- we didn't give a revenue projection. Construction service fee profit before tax was $3 million to $5 million.

Thanks. Of the $70 million cost for the (inaudible) Phase I. How much of that is in the retail and office portion that will be absorbed by Kite?

From a retail perspective, just using round numbers, it's about $25 million. And then if you look at the other two components they would then combine to be somewhere around $50 million.

So we've got a good comfortable range between the three from a risk perspective.

Rich Moore. RBC Capital Markets.

Dan, real quick on the refinancing or the refinancings that you did, they are all variable rate, and I realize the construction loans are going to be variable rate. But I was looking like Indiana State Motor Pool's variable rate used to be fixed.

Is there some reason that you are doing variable rate on these?

I think the primary reason, Rich, is we want to keep some flexibility. I think if you look through these new debt maturities that we have in '09 and '11, we've really tried to stagger this. And what we have been doing in doing the floating rate debt is with, we've used the opportunity to use hedging and swap out the rate on a forward basis for a year, 18 months, two years.

So it really helps with the flexibility and gives us an opportunity to use the floating rate while the rates are low with the opportunity to fix to protect the balance sheet. We are just doing it from a flexibility standpoint.

So some of this could be hedged. Is that what you're saying?

Absolutely.

And then on that same topic, Dan. The other comprehensive income was down. Is that -- has that got to do with hedging or what is that?

Yes. That completely has to do with hedging. Because with where our hedges are, where we finalize [with] the hedges, the interest rates have gone down which affects the OCI.

Got you, thanks. When you guys think about your outparcel inventory, stuff that you might consider for selling soon, in the next year, how big is that?

Well in terms of the number of them, Rich, I think we typically average -- we have around 60 or so that are either available or have ground leases in place. And historically I think we've probably sold seven or eight of them a year in general.

But, remember, we kind of keep that average, based on the fact that the development pipelines generally have anywhere from five to ten out lots at each of our new developments. So it's always going to be there. It remains fairly consistent. So I would expect that to continue.

Thanks John. Then on the Supreme Court build out, when does that end again so that we can readjust our CapEx spending?

The Supreme Court took possession of their space in December so their -- really the majority of the TI and commissions have already taken place in Q3 and Q4. The only thing that would be leaking over would be punchless type items were small items that have been completed prior to the end of year.

Then you had two projects that kind of increased in value and going back to David's question for a second -- or increase in cost, I mean. Do the return parameters at Delray and at Bayport do those change as the costs go up or is that just sort of like cost overrun, if you will?

Well if you tie it back specific to Bayport, we just had two small factors that really increased the cost about $13 a square foot. One just tied back to the final design parameters as established by Hillsboro County. That's a fluid process as you go through the final approval set of drawings and then the second one ties back to a component that we don't know at the beginning of the project which is, really, how will the final TI packages play out as part of the lease negotiation?

So those are the two components of the cost increase in Bayport.

As the ties back at Delray Marketplace that project is in the visible shadow pipeline for a reason. We have not finalized costs. It's an ever-changing figure as it ties back to total cost. And as we get closer along to the ultimate start date of the project, we have a better handle on that and then we will move to the development pipeline. So that's an ever-changing process until it moves to the next step.

Rich, that's why we -- in general when you've got 17 projects in various stages it's a very, very comparable range for us to say between eight and nine. Obviously deals may exceed that. Deals may be slightly below but that's why we give you that and that really hasn't changed at all.

And so -- and typically it's going to depend on geography as well. Obviously the Florida projects cost more money, but in some cases they may be worth more. So in general, that's a very comparable range and we are still very comfortable with that kind of 200 basis point spread in each direction and more importantly kind of that 20 to 40% margin.

Then the last thing for me is, did you guys talk at all about the cap rates on [Puyaluk]? I don't have any idea how to say that what exactly in Rivers Edge?

That was close. (multiple speakers) The single tenant property that was sold in Washington that we used in like kind of exchange was at a 6.2 cap and the Rivers Edge that we acquired was at north of a 7. Like 7.25.

But the reason that that cap rate on Rivers Edge we acquired was where it was is the anchor tenant expires in less than two years. And the owner was not a sophisticated retail owner, so that's why we got that there. But both of the single tenant deals were 6.1, 6.2 and those are flat rents. So that ought to give you an indication where cap rates are. I mean, you've got two flat rent deals trading at 6. So that's our [live] information.

(OPERATOR INSTRUCTIONS) Steven Rodrigez. Lehman Brothers.

I had a follow-up on the refinancing. I realized five out of the eight deals or so are at the same rates. I was wondering are these just one-year renewals or are they actually just complete one-year new contracts?

They're one-year renewals.

So they had an option embedded in the old deal?

They did not have an option embedded. We just -- we renewed them and worked through the banks to get an extension.

But you remember that the philosophy here is to renew these, to buy the time that we think is appropriate for the markets to stabilize and as Dan said we are also using it as a great opportunity to take advantage of that steep yield curve with the hedges.

So it really makes sense for us to do that. And if you look at the maturities we also have done a pretty good job of staggering those throughout '09. So I think we are in a really good position relative to stabilization of the credit market.

Another question on the redevelopment that you mentioned in your guidance on two assets that you are putting into planned redevelopment. Can you talk about the timing of those two assets? At what point during the year you're going to take them off-line?

From the timing standpoint, one of them that was mentioned is Bolton Plaza. And Bolton Plaza we are in that process right now of going through the specifics of the plan. But our hope would be to try to commence that sometime in the third or fourth quarter of this year.

The second project that was mentioned is Maple Valley, and that was really part of the Four Corner Square project. That's a project that may even have an opportunity to commence a little bit early, possibly towards the end of the second quarter.

So these are both very active projects and we are pushing towards start dates as quickly as possible.

My last question is what you've just mentioned regarding the acquisition. How the tenant, the anchor tenant is expiring in less than two years. Is -- what are your thoughts? Are you guys planning on renegotiating with them or -- what's the upside there is kind of my question.

Well the bottom-line upside is first and foremost the real estate is outstanding. This is located in between, in northern Indianapolis in between the Fashion Mall and Castle and [Squares], two of Simon's properties in the market. Fashion Mall being the highest producing shopping center the state and Castle and Square probably not far behind. So first and foremost we love the real estate and as I said, the owner was not potentially an active retail owner.

But the anchor is the opportunity. The anchor is at slow market rent. So that's where we have a great opportunity to come in and actually redevelop the whole center by retenanting and repositioning.

So that was our opportunity and it gave us good current income for the next two years to establish that plan. So just an outstanding potential deal for us.

(OPERATOR INSTRUCTIONS). At this time, there are no additional questions in the queue. I would now like to turn the call back over to Mr. John Kite for the final remarks.

Again, thank you for joining us today and we look forward to joining you next quarter. Thank you.

Thank you for joining in today's conference. This concludes the presentation. You may now disconnect and have a great weekend.