Kite Realty Group Trust (KRG) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Kite Realty Group earnings conference call. (OPERATOR INSTRUCTIONS)

I would now like it turn the presentation over to your host for today's conference, Mr. Adam Chavers, Director of Investor Relations. Please proceed

Thank you, operator. By now you should have received a copy of the earnings press release. If you have not received a copy please call Kim Holland at 317-578-5151 and she will fax or e-mail you a copy. March 31, 2008, supplemental financial package was made available yesterday on the Corporate Profile page of the Investor Relations section of the company's website at kitereality.com.. The filing has also been made with the SEC in the company's most recent form 8K.

The company's remarks today will include certain forward-looking statements not historically 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 including access to capital at desirable terms, property management risks, level and volatility of interest rates,, financial stability of tenants, the company's ability to maintain status as a REIT for federal income tax purposes, acquisition, disposition, development and joint venture risks, potential, environmental and other liability and other factors affecting the real estate industry in general.

The company refers you to the documents filed by the company from time to time with the Securities & 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, Tom McGowan and Dan Sink. And now I would like to turn the call over to John.

Thanks Adam, and thanks for joining us today for our first quarter conference call. We're pleased with our operating results for the quarter and compared to the first quarter of 2007 diluted FFO per share increased by nearly 7% and total revenue increased by over 9%. Obviously the market is a lot tougher than it was a year ago, but despite this reality, we continue to believe that forward thinking, strategic, and creative companies like ours have the ability to thrive in these kind of challenging environments. We're very focused on growing our business by leveraging our strengths as a flexible organization to take advantage of those very market disruptions. Our three most recent deals are all off market transactions that demonstrate our conservative approach to development and capital deployment. For example, in February we acquired Rivers Edge Shopping Center in Indianapolis. We believe that this property has been under valued and under managed and represents and excellent opportunity for us to add value.

Two other examples of our creative strategy are the development of Eddy Street Commons and the acquisition of Pan Am Plaza in downtown Indianapolis.. Eddy Street is a great example of a project that should thrive in good times and bad due to its location on the University of Notre Dame's campus and its unique capital structure. Tom will talk more about these two projects in a few minutes. As we all know, one of the most challenging aspects of the current environment is the availability of capital. This is a major focus of ours and we are executing a strategy with a twin goals of reducing debt and increasing available capital for future acquisition and development opportunities.

We're currently analyzing various joint ventures that would include the contribution of several existing operating properties into a joint venture with the ability to expand the portfolio through the acquisition of new deals. We have longstanding and mutually profitable relationships with institutional investors including several major pension funds. We're exploring new opportunities with these partners and others who are interested in working with companies with a proven track record like ours. We're also closely monitoring retailer activity. Although retailers are showing signs of significant slowing in terms of new deals, we're encouraged by our first quarter closing with Wal-Mart as an anchor in our Broadstone Station development in Apex, North Carolina. In addition, we have site approval from another major big box retailer for Park Side Town Commons in Carey, North Carolina and that retailer is also evaluating a third shadow development project in North Carolina.

We understand in this environment some retailers are going to close stores and may ultimately go out of business. For example, we recently experienced a closure of Circuit City in our Sun Land Town Center in El Paso, Texas. The Circuit City closure combined with the transfer of two development properties into the operating portfolio, which are still in the leasing phase, were responsible for 130 to 200 basis points decline in our lease percentage quarter over quarter. However, we are encouraged that we're already negotiating a lease with a replacement tenant for the Circuit City vacancy. These tough situations are not unique to us. Everyone in this industry is facing the question of how to deal with inevitable loss of certain tenants. We're particularly mindful of the effect on our small shop tenants.

We've tightened up our default process in order to quickly identify those tenants in distress and aggressively pursue collection and retenanting efforts. We believe our focus on leasing to strong credit tenants remains one of our core strengths, and we believe it is important that no single tenant constitutes more than 3.4% of our base rent and our top 25 tenants comprise less than 40% of our annualized base rent which is significant when taking into consideration the size of the company. We'll continue to work to capitalize on these unfavorable market conditions by implementing our conservative and flexible strategies strategies that have proven to be the right path through both favorable and difficult market cycles. Now I would like to turn the call over to Tom.

Good morning. As John mentioned, we are in the midst of a challenging economic cycle, but we believe the market pressures are highlighting some of our inherent strengths and are providing significant opportunities for us. In the first quarter we moved the recently acquired Rivers Edge Shopping Center into the redevelopment pipeline. We acquired this property which is approximately 80% leased as a redevelopment opportunity. The anchor tenant is nearing the end of its term, and we're looking forward to revitalizing the center as part of the retenanting process.

Additionally we have moved the first phase of our Eddy Street Commons project at the University of Notre Dame into the current development pipeline. In our last conference call I explained the three internal criteria that we needed to meet before commencing construction. We have now met all three of those criteria. One, the property is fully entitled. Two, we finalized our business deal with the University, and, three, the tiff is now complete. We recently closed on the tiff bonds and secured incentives from the city of South Bend which together total $35 million of net proceeds. Pre-leasing is strong in the retail and office components of the project.

We signed the lease in the first quarter with our anchor tenant, Fowlett Higher Education Group for 20,000 square feet of the planned 90,000 square feet of retail. Fowlett is a strong credit tenant and the top university book store company in America. This college book store will be the perfect anchor for for this project and will complement our various mixed use components. With respect to the office component, we are in lease negotiations with the University of Notre Dame to take the majority of the office space. Since we have met our three internal criteria and pre-leasing remains strong, we anticipate beginning site work by the end of next week. The Eddy Street Commons project is an example both of our creativity and our conservative approach to capital deployment in the development process.

The current development pipeline is approximately 72% pre-leased and 21% occupied. Our risk in this pipeline is largely limited to construction execution and timing of deliveries. We think the realities of this environment demonstrate we have had the right development strategy all along. We've always been willing to delay construction starts in order to make sure we have the right anchor tenants. Our pre-leasing success in our current development pipeline proves that small shops follow strong national anchors like Target and (inaudible) Foods. As we work on pre-leasing the visible shadow pipeline, we're finding that junior box and small shop tenants are hesitant to commit to a site before we have a signed deal with an anchor.

At Park SideTown Commons we have site approval from a premier, big box anchor tenant and we have a signed lease with Frank Theaters in the first quarter. Wal-Mart closed on a 20-acre parcel at Broadstone Station in Apex, North Carolina, in February. LA Fitness signed a lease in the first quarter at South Elgin Commons near Chicago. The bottom line is high quality anchor tenants like ours are being very selective and deliberate about their sites, and we believe in our real estate.

Finally, we acquired Pan Am Plaza in April through a joint venture. The four-acre parcel is the premier undeveloped parcel in downtown Indianapolis and is located in the heart of the central business district. $1billion of new construction is under way within one block of Pan Am Plaza including the Colt's new stadium and the expanded Indianapolis Convention Center. Other properties in the core of the central business district have recently sold for more than $100 per square foot and we acquired Pan Am Plaza in an off market transaction in a per square foot price in the low 20s. This deal is another great example of our creative opportunistic strategy and focus on great real estate. Dan will now summarize our financial results.

Good morning. For the three months ended March 31, 2008, funds from operations operations were $0.31 per diluted share. This is an increase of 6.9% over the $0.29 per diluted share for the first quarter of last year. In the quarter our same property NOI decreased -- increased 50 basis points over the same period in 2007 excluding two boxes previously occupied by Office Max and Circuit City at Sun Land Town Center, the 50 same store propers were leased 95.5% at the end of March 31, 2008, and 2007, and the net operating income increased 1.7% between the quarters then ended. We are currently in negotiations with replacement tenants for the two vacant boxes.

G&A expense for the first quarter was approximately $1.7 million or 5.2% of total revenue. We still anticipate G&A expense for the year to be in the range of 6.5 to $6.7 million. The construction and service fee net margin in the quarter was approximately $525,000 or 13.9% before tax. With the increased activity commencing on the Eddy Street Commons project, as well as other third party and unconsolidated joint venture construction contracts, we still anticipate being within the annual guidance range of 3 to $5 million before tax. Other property rate revenue for the quarter includes net gains on land sales of $4.1 million before income tax expense of $1.2 million or a net impact to FFO of $2.9 million. A portion of the land sale gain was derived from the sale of our land to Wal Mart anchor in Apex, North Carolina. Our financial metrics continued to be in line with our expectations. Our fixed charge coverage ratio was approximately 2.7 times. Our floating rate debt was 30% of our total debt, and approximately 14% of that total debt was in floating rate property specific construction loans. Our AFFO payout ratio for the quarter was 78%. At the end of the first quarter we had approximately $40 million of availability in our line of credit before utilizing the accordion feature plus $19 million of cash and cash equivalents.

In this constrained credit environment we are fortunate to have established strong longstanding relationships with local, regional, and national banks and other institutional investors. Our recent experience has demonstrated that this is giving us a competitive advantage during the current credit crunch. As John mentioned we're continuing to look for ways to strengthen our balance sheet by reducing our leverage and increasing our liquidity. We're evaluating the potential sale of several assets into a joint venture in which we would own a minority interest that generate market fees and promotes. We are also constantly monitoring the equity markets for low cost capital alternatives. We were successful in the quarter on refinancing $83 million of debt to 2009 and beyond. Our 2008 debt maturities are limited to two construction loans for approximately $18 million that mature in December. In addition, we have built in extension options for approximately $75 million of debt scheduled to expire in 2009. Lastly we are reaffirming guidance in the range of $1.28 to $1.33 for the full year, 2008. This guidance does not include any material acquisitions or dispositions that may occur during the year. Thanks for participating in today's call and operator please open up the line for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Steven Rodriguez of Lehman Brothers. ]

Good morning, guys.

Good morning.

I was wondering if we can talk about this joint venture, possible size and is there going to be a regional focus of it?

In terms of the geography, this is John is talking, in terms of geography, that we're doing here is we're looking at the opportunity to expand into markets that we've been looking at for quite some time. Also to come into markets and get more strength in markets that we're currently in, so there is no restriction to the geography of what we've been discussing, but again it we're not -- we're early in the process and we're moving through it, so that would also be the same answer for size. We're looking at contribution of three or four assets and we would also be looking at the idea of the investor investing probably another 100, $150 million of new equity, so that should give you a general idea.

Overall it seems pretty early, then? Yeah.

We're in discussions and we're usually very conservative about that, so we're in discussions. We have good conversations going. Probably we're moving towards the idea of one particular investor, but we're talking to multiple people.

Regarding your guidance, you guys have a pretty substantial amount, $200 million of variable rate debt. What kind of LIBOR assumptions did you underwrite in your guidance earlier on in the year.

Steven, this is Dan. When we under wrote guidance we used a forward curve which we typically do at the time that we produced the guidance. So we'll-- we'll-- I think consistent with other of our peers that's what we utilized at that point in time.

Okay. Great. Thanks.

Thank you.

Your next question comes from the line of [Tom Baldwin] of Goldman Sachs.

Good morning, guys, how are you doing?

Good. How are you doing, Tom?

Pretty good. Just wanted to get some additional color on Bridgewater Marketplace. What's happening there? Why the pre-leasing levels still low at 17.3%, and what kind of progress do you think you'll be able to make over the course of the year to get the occupancy there up?

Hey, Tom, Tom McGowan. In terms of Bridgewater, it is located at a great spot, great intersection with tremendous amount of traffic and a high growth area. Our struggle has been we have been unable to secure an anchor, and in a center like that really needs an anchor, so obviously not a lot of square feet, but it is a position that we need to address and we're comfortable with the fact that this year we'll make significant progress, but the specific answer is we need the end cap anchor.

Tom, it is John. The only thing I add to that, and we mention this had before. This project was one of several projects we did with Walgreens as the anchor to the small shops, and I think we said this before, that's not something we will continue to do. In environments like this you need a bigger draw than that, so as Tom said the whole center is only 26,000 feet, and we really just need an end cap that we're working with a couple of different end cap users, and once we do that it should be fine and the bottom line is it is a great market and a good neighborhood. It is just a small neighborhood shopping center. It is not material, although it is something that we really are focused on executing.

Okay. Thanks a lot, guys. More broadly, one of the things I do each quarter prior to your call is compare pre-leasing levels in your development pipeline from the prior quarter to the current quarter looking for progress. This quarter I noticed that the pre-leasing levels really haven't changed much from the close of 4Q '07 so the close of 1Q '08. If you can just comment on the velocity of leasing and your broader outlook for progress on leaseup of your current development pipeline.

Tom, if you take -- this is Tom McGowan. If you take a look at our pre-lease or committed number, right now we're at 71.5%. In the previous quarter we were at 76%. The big difference there is the fact that we brought Eddy Street Commons over to the development pipeline in a fairly early stage of the development, so that obviously had an impact on it. But we do feel like the leasing inside the pipeline is going well, and at 71% we see a nice progression of that, especially when EddY Street commences that we'll see that number move up considerably.

And the only thing I would add to that, Tom, if you look at it deal by deal, a couple of these deals aren't even open, and you have Cobblestone Plaza that's just under construction at 75% leased, and we haven't-- we're not finished with the construction or close to being finished, so we're actually doing pretty well when you look at it that way, and it kind of breaks down to a couple of individual projects, for example, Beacon Hill in Northwest Indiana where it is one small shop building that we built which was an expansion, so I really feel like we're doing pretty well there. Considering the fact that these projects are just opening, and some of the small shops aren't even completed construction, it is very difficult to lease small shops until they're actually up and the concrete floors are poured and people can come in and look around. Frankly, I think we're doing pretty well there.

Okay. And then my next question just relates to the Circuit City closure. Were you able to extract any kind of term fees there?

Yeah, Tom, this is Dan. We were able to get $525,000 dollars of lease term fees going through other property related revenue, but the net impact to FFO of that termination this quarter was about $290,000 because we had to write off straight line rent and the market rent adjustment was a negative for that particular tenant. The net FFO impact of the Circuit City vacancy in this quarter was about $290,000.

What do you think the timeframe for getting those two vacant boxes leased up is, if you had to handicap it?

Well, as far as the Circuit City boxes we mentioned, we're in late stage lease negotiations with a national credit big box tenant, junior box tenant, and it is hard to predict exactly when, but let's just say we're well down the road in exchanging the lease documents. Then as far as the former Office Max space, we're in the letter of intent stage, so all I can say is we're happy that we're actively engaged in two deals on the two boxes.

I mean, obviously we think -- to be quite frank it is a strong center. The sales are strong in the center. K-Mart sales were up almost 9% in the year. Ross' sales were up almost 12%. The shops are averaging around $300 a foot. It is kind of an opportunity for us, but in the sense that in a slow market people will want to be in this property.

Okay. Thanks a lot, John. One final question before I see the line. Have you guys considered I guess structuring this joint venture that you're currently working on, such that it has a takeout -- a takeout vehicle aspect to it?

Yeah. Obviously we're as I said early in the stages, but the idea of the JV is to go out and find new opportunities, so we would certainly be thinking about the fact that we could try to do that within the framework, but again I mean it is going to depend on the makeup of the deal that is we're looking to add to it, the deals we're looking to buy, the IRRs, so it is possibility, but I wouldn't tell you that it is done.

Okay. Thanks, guys. Appreciate all the color.

Your next question comes from the line of [Jeff Donnelly] of Wachovia Securities

Good morning, guys.

Good morning.

John, I am just curious, to step back, do you have a sense for how the institutional JV market has changed maybe in the past six to twelve months for folks in your position? Specifically, have you seen any shift in return threshold fees or participations?

Again, macro-- the encouraging part, Jeff, is that there definitely seems to be interest that has-- continues to be there for opportunities. I think that probably that interest is more aligned with companies like ours that can create value than it would be just to go in and buy something that has got no opportunity to create value.

The nice thing about us is that we can kind of bring both of those things to the table, and that's the idea in the JV is that we can acquire assets that we think are just really high quality that would just have the basic rent growth and then some potential turnover in below market rents and we could acquire things like Rivers Edge where there is a real redevelopment opportunity. The biggest thing is there is still a lot of capital out there, and that capital is really queueing up as you know, Jeff. There just aren't a lot of places to put it right now. People are hesitant, so as they hesitate, the capital builds. I think that we're going to see that we'll be able to take advantage of that.

Do you have a sense at this point-- I know it is early on but what kind of returns they're looking for, the core, core plus, to use that vernacular? Is there a range you're looking around?

No. We're going to be careful of that right now. I think people are realistic. Let's just say that. I think people are realistic on returns. It is going to depend on whether there is a value creation component to it, but obviously we still believe that acquiring high quality Class A retail in decent markets is going to be in the sixes going in, and as to where exactly that is in the sixes, I am not sure. I think that if you can get something like that with a little leverage where interest rates are, you can obviously generate decent high single-digit returns on just cash and then you can generate higher returns on a terminal event.

If I can switch over to leasing, if you were in that residential housing business, looked at a map, I think Kite had a lot of exposure to markets, Indianapolis, Naples and even Raleigh Durham, areas where you see a lot of press attention on sub-prime exposure and falling home prices and job offers and all those sorts of things. I guess I'm curious about those. Whether or not you guys are actually seeing that in your leasing activity? Either among the big national retailers, do you think they're shifting away more than you might see in other areas or maybe just decreased mom and pop activity or just not much impact at all?

I will give you a little bit of color on that, and Tom, too, but basically when we look at how -- when we look at our occupancy and looked at the drop in the occupancy, and we carved that up pretty good for you hopefully in the press release and there is a percentage of the drop in the occupancy that does come from small shops, and that when you look at it, the interesting thing of studying is it was pretty well spread out throughout the portfolio, almost right in line with where our base rents were coming from on a percentage basis, so from my personal perspective, obviously there is pressure in certain markets, but the small shops in our portfolio seem to be holding up generally well, and it seems to be spread across.

Part of that small shop drop for us is being much more aggressive about kicking tenants out. I think we're making a point of being aggressive in this market because we don't want it to build upon itself, so my personal belief is obviously Florida, Naples, has been an area that people have focused on, but we have not seen a greater degree of loss of occupancy in Naples than we have for say in Indianapolis or Dallas, so that's kind of my view, Tom.

Jeff, I think part of your question tied back to new deals as well, and I think the way we look at it junior boxes, big boxes, et cetera, is when they come into markets similar to the one that you mentioned, the bottom line is we're being more selective in the process and the time it takes for them to deliberate and try to determine the best place to be is an extended period of time from what we may have seen two years ago, so the retailers are out there. There's people doing deals as you know. the bottom line is it takes us a little bit longer. We have to work a little bit harder, help on research, et cetera, but the activity is still there.

I guess as a follow-up to that, I am curious what you guys are aiming to accomplish at ICSC, it's ten days away. How should we be thinking about where it manifests itself, how should we be thinking about your percentage leased in the development pipeline kind of in all of its forms and maybe the overall size of your development pipeline as we look out to Q2, Q3, should we expect to see sort of jumps in those areas, maybe get work done at ICSC.

As far as ICSC goes, we're taking ICSC extremely seriously. We have I think over 300 meetings scheduled for ICSC, but everybody throws those numbers out, Jeff. Everybody is there to have meetings, so I don't know that's a huge win, but the bottom line is we're looking to do deals. We have a 90-day initiative right now in the company to aggressively get stuff done, and that means not just talk about deals or not just have LOIs, that means execute leases, so I think that we're in an environment where it is critical to execute deals when they're in front of you, to get deals done because obviously this isn't going to turn around over night.

The economy has got lots of various issues, and so we get into this kind of hesitation mode, and when people as I said, they're hesitating, you have to push the deal forward, so ICSC is extremely important this year. In the past years it is kind of hasn't been like that, the market has been good, and just kind of another month. I think this is a critical ICSC, and as far as how it represents our pipeline going forward, it is all about execution. It is all about leasing. We have the product. We have excellent properties, and now we have to execute, so my perspective is that it has never been more important.

I think people forget it is a room full of optimists. Last question, and I will turn the floor back over. Dan, I think as a last quarter Naperville marketplace, I think in the last quarter's release I think was around 45, 50% occupied, and I think 80 to 85% leased. That may have changed subsequently, but you guys have a $14 million loan maturing in the property I think at year end. How are you handling that, and do you think there might be issues in rolling that over?

I don't think there is going to be any issues particularly. We're in deep discussions that. Again I think in the conversation it it is benefiting us to have these long-standing relationships, and we have done businesses with these bank for a number of years. I think if we look at that particular property, I think it is nothing material on a renewal basis other than potentially there may be a small debt paydown to renew the loan, but I don't think there is any issues of the fact that we're going to have to find $14 million to replace the whole loan. Depending on debt service coverage where we're negotiating with a bank from that standpoint.

Great. Thanks, guys.

Thank you.

Your next question comes from the line of [Michael Billerman] of Citi

Hi. This is [Ambeca] for Michael You briefly talked about the project on the visible shadow pipeline. Given that you've spent about 40% of the total estimated cost, how would you characterize your pre-leasing for those projects relative to the capital that's invested?

Ambeca, this is Tom. We talked about on the development pipeline being about a little over 71%. Excuse me, the ties back to the visible shadow pipeline, we're just over 50%, and that includes the key anchor tenants. From a tracking standpoint we feel pretty good about where we are as these projects then move to the development pipeline.

Okay. In the current development, redevelopment pipeline, there is a wide gap between the occupied and the leased/committed. Can you talk about the timing of when those leases start to kick in and we should expect to see the NOI of those projects ramp?

You really have to look at it Ambeca, from a property perspective, each one individually, and John mentioned Cobblestone. That's a project that is really just starting to get out of the ground, but projects like Bayport where we have the final box under construction with Best Buy and others are moving along very quickly. Then you will see trailing from a project like Eddy Street Commons, but for the most part the projects that are under way are moving quickly, but we do have with the inclusion of Eddy at 70 million, that one is going to obviously take some time.

Ambeca, it's John. We always look at the kind of the projected opening dates, and we look at that every quarter and are still comfortable with that in the supplemental, so you can track it that way, but remember that the opening date is the first tenant paying rent. So if you think about it on a full year basis, these deals aren't really going to start generating significant NOI until late, late this year and into next year which is what we've always said, so obviously that's gotten pushed back over time, but I would say Q4 into the next quarter of '09 they begin to start paying rent.

And then just some accounting questions. How does it work on the capitalization of these assets? When do you decide to move it into the operating portfolio and not capitalize interest on these projects?

The capitalize interest is really on a pro rate a basis, Ambeca, so we go with as a tenant occupied, the tenant occupied column, we pro rate a move that asset to the out of CIP into fixed assets and correspondingly take that same percentage of interest and taxes, et cetera, and run it through the P&L.

Okay. So, for example, for a project like Beacon Hill, when would you say-- I know it is not a significantly large project, but when would you say, okay, well, at this point it looks like it is difficult-- going to be difficult to lease up the remaining part of the project, we're going to move it into the operating portfolio?

Right. We typically from that perspective do one year from the first tenant opens or basically construction completion or 85% occupied, so when one year commences, and I know some of these because they're phased, makes it difficult to follow, but from an accounting record perspective one year from the date the first tenant pays and then or 85% and then we transfer it to operations and then all of the costs related to that asset are running through the P&L.

Okay. The fact that Gateway has two phases, that's the reason why it wasn't necessarily moved into the operating portfolio this quarter?

That's correct. That's correct.

Great. Thank you.

Sure.

Your next question comes from the line of [Nathan Isby] of Stifel Nicolaus.

Hi. Good morning.

Good morning.

Dan, what was your bad debt expense this quarter.

Bad debt expense this quarter was about $180,000.

Has that track to do Q1 last year?

Q1 last year was about $200,000. We're about even where we were last year.

Okay. And you generated 42% rent spread on the new leases, obviously not a huge amounted of leasing, but if you give me color what was going on there.

On the new leases what we do with the 42% on that, Nate; we're comparing the leases signed to our portfolio average, so we're giving color on how the new leases we have in the development portfolio compare to our averages both anchors and shop from that perspective.

That's not a same space.

That's first generation, stuff, Nate, and we're showing if you look at the last page of our supplemental and look at the anchor leases and the shop leases, we kind of try to give a comparison how we're doing on the new leases compared to our overall averages for shops and anchors.

Gotcha. One last question. Can you give a little mor more detail on this downtown Indy land you bought, obviously not your typical Kite project and how you got it and what you plan to do there?

Nate, this is Tom. Pan Am was an incredible opportunity for us. In an urban atmosphere, it is so tough to assemble multiple pieces in particular on a full city block, so this is a situation that you had a single owner that owned that entire parcel, and due to a relationship we were able to secure a first right opportunity on the property in terms of working with another party, so that was really the way we secured the in-line approach to getting the property.

It is a piece that we can take a little bit of time on in terms of making sure we're able to secure the highest and best use for the property, and the nice thing about it is the real estate will continue to improve as all of this construction goes around it, so we're really looking at our options right now. We're looking at probably three or four different concepts, and are really waiting at this point to see the best way to move forward.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Phillip Martin] of Kantor Fitzgerald.

Good morning, everybody.

Good morning, Phillip.

Dan, my first question is for you. With respect to the 2000 debt maturities, what kind of discussions, I mean, certainly it is not unthinkable to be thinking about 2009 at this point given your pipeline, your growth trajectory, et cetera, what kind of discussions are you having with respect to 2000 debt maturities or 2009 debt maturities and how are those discussions proceeding?

We are very much in discussions each one of the project that is have debt maturities in '09. I think one of the things we tried to do with the 2008 debt maturities is build in some extension options, so what we did on some of these loans, Philip, was extend it for 12 months with a 12-month extension option based on underwriting criteria to give us an opportunity to hedge that particular piece of debt and when the hedge rolls after one year, we can see how the market is, whether we want to extent the construction loan for another year or potentially look at some type of permanent financing? I think our whole objective when we did the 2008 debt maturities was to keep flexibility and leave ourselves an opportunity to extend the construction loan because the majority of these banks with the projects we have in place, they're not fighting us to keep these on the balance sheet because obviously these are quality projects where you have shadow anchor Target as well as various box tenants and high quality national shops, so I think when you go through that scenario, we're in discussion with the banks, and we right now feel comfortable we can continue to do the same thing we did in 2008, whether it be extend the loan or exercise on the options we have in place.

Philip, I want to add to that. I think it is somewhat misunderstood as to the strategy there. We had other option available to us. As we sat down and talked about it exactly what Dan said there, we were in an environment in the fourth quarter of last year and the first quarter of this year where the majority of the activity was that doing this was the most logical step to take because vis-a-vis the swap process, the majority of a lot of that debt was sub-five, and having gone longer term would have really affected that rate and also would have affected proceeds. When we looked at the curve and we thought about where things were going to be and the environment, it was a much smarter play to give us that flexibility over that 12 to 24 months with the idea the chances were higher that the long-term debt markets would be back into par in 12 to 24 months. I think it was a very smart move we talked a lot about.

That's helpful. I guess, too, again the discussions have been going well. You have good relationships with your bank relationships from what you said on your last call, and just talking to you over the last couple of months, but also these assets are good assets, so at this point it is more positive than negative given the environment we're in. Is that a fair characterization?

Yes. We would agree with that.

Then in terms of the Circuit City and office maximum leases, can you talk a little bit about with where you think rents will be there when these are released in terms of cost to get that space ready for a new tenant or where you think you'll shake out versus previous rents, et cetera?

In terms of-- each space is different. The Circuit City space is actually on the end cap of the shopping center, and we're going to -- it was a 33,000 square foot space, so-- and by the way the reason that Circuit City left the space is that they don't -- they're moving into 20,000 square foot spaces and we couldn't accommodate that, so they moved just down the road into a 20, 21,000 square foot space, and Circuit City was paying about $11 a foot.

The idea we have here is that we are going to take that box and the national guy that we're negotiating with who has far greater credit than Circuit City is taking a smaller space as well and we're going to carve up part of it into shops which will face the street on the end cap, and we think those are great shops, so all in we see we'll be somewhere slightly above where the rent was before basically. And then on the Office Max space that had vacated last year, that was only a $10 a square foot space, and the LOI we're in negotiations with, we still haven't hit upon that rent, and we haven't agreed upon the rent. We believe it is certainly likely to be above that, but it is a very good shopping center and a very strong unique market with the Juarez border very close by and the activity that happens in El Paso, the sales that we have, it's a good center. If we're going to get box vacancy, that's a pretty decent place to get it, and as far as the cost, it is going to be a typical kind of turnkey deal, maybe 35, $40 a foot range.

Okay. Okay. And lastly, I just saw the one liners last night on [Heitman's] 13 G filing. Anything to read into that?

No, I don't think that-- again, as you know, institutional shareholders don't make a practice of calling us up and telling us why they're doing things.

No.

But in fact the data we get is always fairly delayed, but I think what-- first of all originally heightened, I think it was Heitman and one other investor were slightly above our cap, our cap on ownership, and I think part of the -- I think they were above nine, and I think our cap is 7.8%, so they had to work that position down anyway to be below that, so I think I would look at that as probably the primary driver.

Okay.

You can always call them.

Okay. All right. Perfect. Thank you.

Thanks.

Your next question comes from the line of [David Fick] of Stifel Nicolaus.

Good morning. Your institutional JV with Prudential is now over a-year-old, is that correct?

It is about right, David.

And can you just give us the status of that, any fundings that they have made, any projects that you're working on?

The first project that they're in is the project in Raleigh, North Carolina, Park Side, and as you know, that project we took down the land and there is a -- a loan in place of which they are our partnership is in that loan, and as a matter of fact we're actually meeting with them next week to discuss new projects, so they are in -- they're currently in the first phase of the Park Side deal. We have another deal that we're talking to them about right now, and we also have some deals in the visible pipeline that we're also going to discuss with them. As I said last quarter, our intention is to move more of those deals into joint ventures, joint ventures pleural, but the first primary JV on those deals would be PRU, so I can give you a better feeling for it later as we're going to meet with them next week, but they're obviously very active in the business, and are very aware of the stresses in the business, and I think we feel still reasonably good about the partnership.

Has anything -- the whole world is different obviously in the last 12 months. Have you had to modify terms in any way or they're still as interested and as active with that capital as they were a year ago?

We haven't had to modify anything in the deal in any way, but again as we were very clear, they look at each deal on an individual basis and that's the way we'll continue to present deals to them, and I think-- obvious-- no question they're going to look at deals tougher and they're going to look at deals longer just like we are, so I would say that they're kind of reacting with the environment.

Great. Thank you.

You bet.

Your next question comes from the line of [David Harris] of Lehman Brothers.

Good morning. I think this is a question for John or Tom. What are you looking for today when you're underwriting developments in terms of a spread over the mid-sixes cap rate as I think you referenced earlier in the conversation?

In term of the spread, we've continued, David, to think that we can get 200 basis point range over that. Most of the deals in the various stages continue to be between 8 and 9% returns on costs, and just to clarify that a little bit, the returns that people talk about-- there doesn't seem to be a lot of parity on how it is discussed. Our returns on cost are fully loaded development costs with initial stabilized renteds without rental increases, et cetera, no GAAP, and also we don't make any assumptions on sales of out parcels, so that's why I think those numbers are so different, David, that people throw different numbers around, but the bottom line is they continue for us to be in that range, so that means we're going to continue to be 200 to 250 over where we see the exit, and that gives us significant cushion as that may decline, so that we can continue to monitor that.

That kind of leads me to the second question related to that. Help me put that into context using your experience, John, and Tom, too. Where were those spreads a year or two ago arguably at the peak of the market and what do you think is kind of the norm over the duration of your career, the 150 maybe?

It is a great question. I think the spread a year ago probably could approach the higher 200s, 275 and sometimes if you hit it right even 300 basis points, but I think in both of us can chirp in on this a little bit-- you have to look at product types. I think community shopping center retail which to me has the mostly liquidity at this in terms of the buying market has tended to have, for whatever reason, higher spreads. So we've consistently been in that 150 to 250 basis points spread and 150 would be the low end of I think what we have seen, I don't know, Tom, you think --

David, we talk about this a lot, and both having been in the business 20 years we talk about the old days where you had the 10 caps and things were real simple to calculate, and what we always talk about internally is it is not about the cap, it is not about the return, but it is what you talked about which is the ultimate spread, and we do feel like the 200, 250 is going to continue on because as some of these market forces occur, we do hope, and I think we're starting to see land prices come down, you're starting to see municipalities hopefully become more and more realistic, so I think we're in a pretty reasonable range right now.

That value spread, David, is really higher now even with cap rates creeping up than it was 15 years ago like Tom is talking about when cap rates were nine and north of nine. Pretty hard to get a return on costs at 11 to 12, so I think it is one of these things where there has been somewhat of a systemic change in that. The business is still extremely cyclical, but the expected institutional yields when they look at global returns has definitely come down, and I want to kind of highlight again that community shopping centers that we own and develop, even though we do some of these larger projects, the bread and butter is between 20 and $50 million. That creates a tremendous amounted of liquidity when you're looking to sell it because obviously a lot more players can play in that field than can play in a field of trying to buy a single asset that costs $500 million. So it is an interesting kind of situation, I think, occurring there.

As you guys look out from this point in time, are you more nervous about your returns being threatened by slow leaseup and rents falling short of your pro formas or by movements up in cap rates?

That's -- well, I think the impact can be on mathematically, the impact on cap rate is probably more of a hit than the impact on some sort of percentage drop in rent because it is not going to be as great, but when I look at the reality of the situation, we're feeling more, and we're seeing more the timelines stretching out and the rents being pressured that than dramatic cap rate changes, at least today, David, and the fact that the market has shown -- the market is basically saying that it is not willing to meet the bid and the ask spread, and I think many people are talking about that, it shows you that the seller still controls the situation.

If it was controlled by the buyer, I think that bid and ask spread would be met, so bottom line is we continue to be concerned about the timelines associated with decision making. The market has been attacked by fear, so that slows down decision making which also puts pressure on real estate managers to come in with better rents, and then of course the landlords have to make decisions, so that's my view on it is that is more of a realistic problem than a massive backup in cap rates, a massive backup. Obviously we believe we've seen the 25 to 50 basis points that everybody talks about in Class A. I think we have seen that.

David, just one more thing, and, John talked about the 90-day initiative we have. The bottom line is it ties back to time duration. We can battle that one. We can't battle market forces as it ties back to cap rates, but on time duration we can get on planes. We can get research putting together information, we can hump harder than the next guy to try to shorten that period. That's really what our team it focused on.

One final question and it's somewhat related to those questions of cap rates and returns, in respect to the JV you referenced in your opening remarks, and I appreciate it is sort of early days, but you must have a feel for this question. What do you think investors are looking for by way of levered returns?

Well, again, as I said, I think we would Class A retail if you assume that an investor is going to buy an asset on a cash basis kind of in that mid-sixes range, and he is going to lever the property realistic numbers and kind of 50 to 65 basis points, that's a kind of higher single-digit IRR that could lead to a double-digit IRR with rent growth, so again when you look at what's going on in the world, David, and you look at the disruptions in the capital markets and the disruptions in the commodity markets and the problems that we have trying to identify where everything is going on a price basis, those are good returns with realistic kind of numbers and they're also on a risk adjusted basis safe on a relative basis because --

Just to get a number, I am assuming it is sort of 10 or 11% type number is kind of what you're alluding to some.

I think so. When you're looking at more of an IRR situation.

Yeah.

I am saying you're looking in it is single digits, the higher single-digits a levered cash basis, but when you're looking at IRRs, yeah, you can get there, but it is not easy, and I think the institutional investors are aware that they're going to have to build to that 10 to 11% return, and they're going to start at a lower number.

And that number would have been a couple hundred basis points lower if we had this conversation eighteen months ago because you're in the JV market, too, obviously.

Yeah. Obviously when things got really heavy you heard the same numbers we heard about guys taking mid-single digit deals on an IRR basis, and those deals didn't make sense frankly and didn't happen a lot in community shopping centers. That was happening more in other products because the cap rates were being driven down into the fours and fives, and I don't think that we ever saw in community shopping centers realistic cap rates sub-six. There were deals done at 590 and 580 and 550 even but rare, so, yes, you're right, the math was correct that you put out there.

Okay. Great. Thanks, guys.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Rich Moore] of RBC Capital Markets.

Hi. Good morning, guys.

Good morning, Rich.

Do you think the economy affects out parcel sales in any way?

John, Rich. It is a good question. I think it is interesting if you look at the history of our company since we've been public, I think it has been about 15 quarters, and I think we've sold out parcels in each of those quarters, and I think one of our big concerns when we looked at numbers in the beginning of the year was how would the economy affect transactions, and out parcels was one of those thoughts. But again getting back to my liquidity discussion, there is a great deal of liquidity in smaller numbers, and these out parcels parcels trade obviously a million dollars, $2 million, $3 million, that creates liquidity that goes well beyond when you're looking at trying to sell shopping centers, so I think the bottom line is you know, the 1031 market we all know slowed down a little bit, but because of debt, but again think about what people are thinking about today.

Where are taxes going? Where are capital gains taxes going? That's a factor in the 1031 market obviously because that's what's driving it. That may create more volume. Anyway, that's a long way of saying we're concerned about it. We think about it. But we're still doing transactions.

Okay. And, John, the tenants that might end up on those out parcels, do you think they're still active? I mean, they're not the tenants that are pulling back, I guess?

I think they're tenants being stressed obviously because you've got national restaurants. Have you sit-down restaurants, you've got fast food restaurants, you have banks, regional banks, national banks, but again we're actively doing deals. Some of the restaurants, probably the fast, casual guys, may have felt some impact when we think about the ground leases that is we're doing, but then again, it is interesting. Some of new deals we're doing we're seeing new restaurant concepts come up.

We're seeing the national guys Brinker and guys like that create new concepts. So I think the market is a little bit better on the restaurant side than people think, and I think a lot of people shorted a lot of these casual restaurants and Dartan is doing pretty well when you look at the numbers, so, Rich, I think-- we're definitely still doing deals as you can see, but the volume will obviously be impacted like every other retailer that we deal with.

Okay. On that same vane, you guys were higher in the first quarter than you typically are in a quarter. Is there any reason to believe that maybe you got some done that are going to steal from other quarters? In other words, should we expect-- I know it is hard to say-- but a level on an annual basis that's similar to last year and maybe just heavier weighted towards the first quarter or could we be higher for the year maybe this year?

Rich, this is Dan. I think when you look at the first quarter numbers, the FFO impact was about $2.9 million after tax, and of that it is only two parcels of land, one being Wal-Mart and Apex and one being an out lot. In the first quarter we only sold one out lot to generate that type of return, but a larger portion of that was the Wal-Mart sale, which when you look at this environment and you're able to secure that Wal-Mart deal on a 20-acre parcel in our development pipeline, from an earnings perspective that helped but from an overall development perspective it was even better.

Okay. So for the year, Dan, what should we think about for land sales?

I think consistently I think we'll be in the potentially sevenish range. I think that's typically what we've done.

Okay.

Seven land sales in a year.

You feel good about that still?

Yeah. We have a group of investors that we worked with historically who contact us, and that's going right now, and interesting again I think some of these guys are gravitating to smaller deals because they want to stay active and there is lower -- the leverage is available obviously at lower levels, so it is kind of like-- almost on an absolute cash basis what can I continue to I invest in, and these deals are easier for them to get done from a capital out lay standpoint, so it seems to still be going, but we're going to watch it.

One thing to look at in that regard, I think when we walk through the net operating page of our supplemental and we detail out what the EBITDA is, as John mentioned we've been consistently having other property related revenue for 15 quarters, so when we look at our fixed charge coverage and we quote numbers such as 2.7 times, you know, that's because we view that as part of the business no different than our construction line of business. We have out lot sales, we have lease terminations, it is part of being a developer, and that's why those things factor into what we view as the overall return from an EBITDA perspective.

Very good. Thank you, guys.

Sure.

Your next question is a follow-up from the line of Tom Baldwin of Goldman Sachs.

Hey, guys. In terms of the evolution of the credit crisis, it seems like much of the pain in terms of writedowns is shifting from the investment banks to the regional banks, and looking at your debt summary, looks like you've relied on this class of lender quite a bit historically. I am just curious if you have seen an increased hesitancy on the part of the regional banks to originate new loans or any decline in appetite to continue to lending to owners of commercial real estate.

Yeah, Tom, this is Dan. We do monitor that and do watch the banks and watch like everyone else the issues that all of the banks are having with various writedowns. I think one thing when you look at these banks, they're looking for opportunities to deal with very transparent companies that they can easily get to their numbers and feel comfortable that you got the liquidity to both complete projects, pay back loans, et cetera, so I think when you look at a public company who has an audited financial statement versus a private company who is generating a type of financial statement from a tax basis perspective, then it is very difficult for the lenders to get their arms around, that's why when you look at that we have a definitely competitive advantage because we have transparent earnings, transparent financial statements, and these banks are wanting to do deals. They're stepping up in their quality of people. I think that helps us in that regard, but we're definitely watching how these banks are transpiring and how their business is going, so I don't think we have any concerns in the group we're looking at right now, but we are watching it.

The other thing to think about there, Tom, is when you start trailing the credit quality and start looking at how the credit crisis has mushroomed, the reason probably that you're seeing that is the investment banks, obviously operated at a much higher leverage ratio than some of the regional banks, and also the regional banks you're referring to, it comes down to their exposure to residential real estate. When you look at the situation that happened at National City and how quickly that occurred, it was really residentially driven, and that is something that is very easy to track for you, and the guys that we're working with at this point don't have massive exposure in the residential mortgage market.

So I think we feel pretty good about that, and I think commentary-wise the U.S. banks are in pretty good shape and they've been very transparent, although it took them awhile, they've been transparent on that recently, certainly more so than the European banks, so I think right now as we look at it we're fortunate as Dan said that we have this 25-year history of being an active borrower with both money center banks and regional banks and banks you've never heard of that are a billion or $2 billion of assets, so I think we're feeling pretty good about that.

Okay. So you're not -- there is no plan to alter your mix of lenders in any way after seeing how the credit crisis has played out and affected different parties in the lender environment?

Well, I mean, I think as Dan said, we're monitoring that very closely, and we're looking to expand-- look, capital is capital. The bottom line is where we get that capital, we wanted to get it from as many places as possible. That is something that we've always done.

So the idea of expanding that base of borrowers is definitely one of those goal that is we talked about, and I think we've done a very good job of expanding that base of borrowers, and again because of the size of stuff that we do, that pulls in much greater number of lenders that we can go to because we're not every single deal is in the 100 or $200 million. So, yeah, the answer is we're definitely looking to expand that base, but we're not doing it out of weakness, we're doing it out of strength.

Okay. Got it. And then my follow-up just relates again to the joint venture you spoke about earlier on the call. Can you elaborate a little bit on the profile of the three or four assets that you spoke about possibly contributing to the joint venture if it is formed in terms of the geography, the growth profile of those assets as well as those would-be assets you acquired versus developed?

I think it is across the board. I mean, fortunately we have a very high quality portfolio, so it is not as though we're looking to pick and choose, the geography will be mixed. The type of product, we're still discussing that. There are different investors that are interested in different things. And the growth profiles aren't -- are obviously something we're going to look at too, but from our perspective this JV is not all about just what we contribute to it.

That's a portion of it, and it is a portion that's important to us for alternative capital, but probably the most important thing is that it creates a platform for us to continue to grow in a challenged environment. So we're-- again we're fortunate that we have this long history of relationships with various pension funds and capital sources that know that we're a good partner, and so that's kind of what we're focused on is what we can do with it going forward, and it creates, in our track record of finding acquisitions that other people didn't find. People are aware of that, so it is more about that, Tom, probably than anything else.

Okay. Thanks. My final question just relates again to leasing. Obviously the leasing environment right now is very difficult. I am just curious if you guys are doing anything to incentivise tenant to say enter your retail space in the form of concessions and if so can you elaborate on any initiative of that nature and talk about the impact it might have on leasing spreads?

No. Our view on this right now is as both Tom and I have said is that we're in attack mode and we're out there going after deals every possible way we can go after deals. We've been through this kind of cycle before, and if you sit around and wait, you'll get eaten alive, so I can't tell you that we're out there throwing specific concessions around.

We don't really have to offer that because tenants are pursuing aggressive deals as they possibly can pursue. So it is more how do we get creative on these deals to get deals done, but we were very candid and with everyone, that there is significant pressure for the retailers to get the best possible deal they can get and they're going to use this environment to do that. But by the flip side, we know what we can do and what we can't do, and that's what we're all about is getting these deals done from the next 90 days like we talked about.

Great. Thanks, guys, and look forward to seeing you as ICSC.

Thanks, Tom.

Ladies and gentlemen, this concludes the Q&A session. I will now turn the call back over to management for closing remarks.

Well, thank you all for your interest in the company, and we look forward to talking to you on the next quarterly call.

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