Kite Realty Group Trust (KRG) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Kite Realty Group Trust earnings conference call. (Operator Instructions). I would now like to turn the call over to Mr. Adam Chavers, Director of Investor Relations. Please proceed, sir.

Thank you, Louisa. 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. Our September 30th, 2009 supplemental financial package was made available yesterday on the Corporate Profile page in the Investor Relations section of the Company's website. The filing has also been made with the SEC in the Company's most recent Form 8-K. The Company's remarks today will include certain forward-looking statements that are not historical facts 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, acquisitions, dispositions, development and joint venture risks, potential environmental and other liability, and other factors affecting the real estate industry in general. The Company refers you to the documents filed by the Company from time to time with the Securities and Exchange Commission which discusses these and other factors which 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 Kite.

Thanks, Adam. Good afternoon, and thank you for joining us today. FFO for the quarter was $0.04 per share, which is inclusive of an $0.08 non-cash impairment charge taken on Galleria Plaza, located in Dallas, Texas, which is subject to an underlying ground lease. Excluding the non-cash impairment, FFO of $0.12 per share met our expectations and consensus estimates. The impairment was deemed necessary when it became clear that our efforts to renegotiate the ground rent to a level that reflects current market conditions would be unsuccessful. We plan to turn our leasehold interest and control of the improvements over to the ground lessor, which will save us several hundred thousand dollars in ground rent and non-recoverable expenses next year. We ended the quarter with 102 million of cash and availability under our credit line. We recently paid off our final 2009 debt maturity, and as a reminder, we have refinanced and extended over 230 million of debt in the last 12 months.

Our 2010 debt maturities are manageable at approximately $90 million, and almost half of this amount is attributed to our construction loans at Cobblestone Plaza in Pembroke Pines, Florida and South Elgin Commons in Chicago. Dan and the capital markets team have been engaged in refinancing all of these maturities over the last several months. Over the past two years, our focus has been to put the Company in a position to weather what has been an unprecedented financial storm. Going forward, we will maintain our focus on liquidity and strengthening our balance sheet. As we emphasized on the last call, our entire Company is devoted to a successful and ongoing leasing effort. Our percent lease is slightly up quarter-over-quarter, and velocity remains strong, as evidence by the fact that we are negotiating leases and LOIs on four of our five vacant boxes, representing approximately 240,000 square feet. Although the environment is still challenging, retailers are actively pursuing Class A real estate in order to upgrade their locations and to position themselves for a recovery on the horizon.

I would like to take a moment to highlight how our leasing efforts over the last five years have impacted our list of top ten tenants. In our first financial supplement five years ago, our top ten tenants showed commercial tenants in spots one and two, including Circuit City, Ultimate Electronics, as well as K-mart, and totaled nearly a third of our scheduled base rent. Today, our top four tenants are public supermarkets, accounting for only 3.3% of base rents, followed by Petsmart, Lowe's Home Improvement, and Dick's Sporting Goods. There are only two commercial tenants in the top ten, both related to the State of Indiana, and the entire top ten list totals less than a quarter of our annualized base rent. This is a striking change from five years ago, and our leasing efforts today are influenced by a constant emphasis on diversification and tenant quality.

From a development perspective, our focus remains to complete and fully lease our two ongoing projects, Cobblestone Plaza and Eddy Street Commons at Notre Dame. Both projects are in the early stages of opening and will begin generating meaningful NOI in 2010. Regarding the six properties in our Shadow pipeline, vertical construction will not begin until we reach appropriate levels of preleasing. We will maintain this conservative stance; but it is noteworthy that we are seeing improved tenant interest in in these projects as 2009 comes to an end.

In closing, we believe we have made the tough decisions and taken the proper actions to survive the market crisis of late 2008 and 2009. At the same time, we have and we will continue to focus on positioning the Company to take advantage of the opportunities that will present themselves over the next two to three years. Tom?

Thank you. As we discussed in detail on the last call, leasing productivity remains a critical component for our Company, and we have solid results to report again this quarter. We executed 14 new leases for approximately 77,000 square feet, with negative cash rent spreads of 2.8%, due to ongoing market pressures. In addition, we signed 11 renewals, comprised of 53,000 square feet, which produced positive cash rents spread of .5%. Included in the total leasing activity were four deals over 10,000 square feet. The combined cash spread of these transactions was positive 2.6%.

The most significant transaction was a new 45,000 square foot lease signed with Dick's Sporting Goods as a replacement tenant for Circuit City at International Speedway Square in Daytona, Florida. This deal requires us to expand the old Circuit City space by 13,000 feet of new GLA, and highlights the opportunity for well capitalized landlords to execute on deals at appropriate return levels. Due to the timing of a select number of lease negotiations, our overall production for the third quarter was down slightly compared to the second quarter. However, we are currently negotiating 25 new and renewal leases for approximately 200,000 square feet that we're targeting for signature before year end. We believe the fourth quarter will allow us to increase our retail lease percentage for a third consecutive quarter. Turning to same-store NOI we generated a 2.1% decline for the quarter ended September 30th, compared to the same period in 2008. The majority of the reduction continues to be attributable to the Circuit City and Linens 'n Things bankruptcies. The vacant boxes relating to these tenants account for substantially all of the minimum rent variance year-over-year.

It is important to note that the quarter to quarter sequential improvement in same-store relates to the reduction in tax rates at a few of our Indiana properties. Year-to-date, same-store is down 2.7%, and we anticipate finishing the year near the mid-point of our guidance range of negative 2 to negative 4%. We are working aggressively to complete our current development pipeline. We have two projects underway with a combined total cost of $82 million. 68 million or 83% of the total projected costs for these two developments have been incurred as of the end of quarter, leaving only 14 million to spend. The first project, Cobblestone Plaza in Pembroke Pines, Florida, saw initial tenant openings in May of this year, and more recently, Party City opened.

In addition, we are in the final lease negotiations with a replacement anchor that will significantly enhance our final lease up efforts at this development. Eddy Street Commons at Notre Dame continues to lease up, and an initial group of tenants opened in time for the football season and school year. The office and retail components are each approximately 72% leased, including deals under negotiation. The positive response to the design, scope, and mixed use development has been very well received. Tremendous effort is being extended to fully stabilize this asset. Our redevelopment pipeline consists of five properties, totaling approximately 495,000 square feet. Our preliminary project costs are estimated to be $11.5 million. We are making meaningful progress on these projects, and are currently in negotiations with new anchor tenants for three of the five projects. Each of the anchors will enhance the projects and will provide additional clarity on the scope and cost of each redevelopment. Dan will now summarize our other operating results.

Good afternoon. FFO was $0.04 per diluted share for the quarter. Excluding the non-cash impairment, FFO for the quarter met our expectations of $0.12 per diluted share. This compares to $0.32 per share in Q3 of 2008. This year-over-year decrease in FFO per share primarily relates to 28.8 million share equity issuance, reduced construction activity and reduced land sales. The non-cash impairment charge was associated with our Galleria Plaza property in Dallas, Texas. This asset is a 44,000 square foot center, with a 32,000 square foot anchor box that is currently vacant. The negative cash flow for this center is approximately $700,000, including annual ground lease payments of $594,000, and nonrecoverable real estate taxes.

The current ground lease rate was set about eight years ago when the market rents for the box space were near $30 per square foot. We attempted to negotiate to the ground lessor to establish a new ground rent that was reflective of the current market rental rates. However, after discussions with multiple potential box tenants regarding rent and required capital, and unsuccessful attempts to reach agreement the the ground lessor, we determined the most prudent decision was to discontinue our financial support of this property. As of September 30, we have impaired the asset to a value of 0. Additionally, our intent is to turn the operations of the property over to the ground lessor in the fourth quarter. There are three items regarding this impairment that I want to emphasize. Number one, there's no mortgage on the property. Number two, the impairment has no effect on our liquidity. And finally, the ground lease obligation is not guarantees by the REIT. In addition, we consolidated Center Associates into our financial statements, as the risk of loss and entity control shifted to KRG. This required us to write the assets and liabilities to fair value, which resulted in a gain of 1.6 million, and our 60% share was approximately 980,000. We excluded this non-cash gain from FFO.

Turning to some specific items in the income statement I would like to cover, our fixed charge coverage was 2.2 times as calculated on page 12 of our supplemental. Construction and service fee margin before tax for the three and nine months ended September 30th was approximately 302,000 and 1.6 million, respectively, and is in line with our expectations. We continue to evaluate our construction and service fee expenses as related revenue declines, and have been successful in maintaining a solid 13% margin before tax. Our NOI to revenue continued its upward trend to 69.5%, even as other property-related revenue declined over the last several quarters. The overall bad debt expense for the quarter was approximately $370,000, and was consistent with our expectations. Our G&A expense decreased $159,000 from the prior quarter, reflecting our continual focus on cost control and the timing of public company costs. We anticipate being near the bottom end of our previously provided annual guidance range of 5.7 to 6.1 million. And finally, other property related revenue includes approximately $600,000 from the sale of land at our Beacon Hill property.

As of today, we have refinanced, extended or retired our 2009 debt maturities and are diligently working on our 2010 maturities with our lenders. We have listed each loan with a 2010 maturity date on page 17 on our supplemental. Our objective is to refinance, extend or retire all five loans near the end of 2009, and we will update you on our progress. As a reminder, we have no maturing CMBS loans in 2010. At the end of the quarter, we had approximately 102 million in cash and available credit. We'll continue to focus on increasing our liquidity and generating cash by selling raw land parcels, out lots and selected operating assets. These focus areas will not only produce additional liquidity, but will also bring our debt to EBITDA ratio to a more conservative level. Consistent with our internal practice, we monitor and evaluate our assets for impairment at least on a quarterly basis. After our most recent review, none of our properties or land which we intend to develop other than Galleria Plaza required impairment charges as of September 30th.

Excluding the impairment charge of $0.08 per share, we are reaffirming our annual guidance and -- annual earnings and FFO guidance for the year to a range of $0.57 to $0.61s per diluted common share. We thank you for participating in today's conference call, and Operator, please open the lines for our questions.

(Operator Instructions). Your first question comes from Todd Thomas with Keybanc Capital Markets. Please proceed.

Hi. Good afternoon. I'm on with Jordan Sadler as well. Can you provide some detail around the five floating rate loans that you're currently negotiating that mature in 2010? What do the lenders want in consideration for extending or fixing these loans?

Sure. I think -- this is Dan -- the as we progress through these, we're right now on the appraisal phase on a couple of the loans, but I can kind of go through. Ridge Plaza, which we talked about putting a seven year loan on, right now the lenders are looking at LIBOR plus 325, and a fixed rate of 6.5 to 6.75% is what we're looking at to swap out that rate for the seven year period. I think in general, if you look at Ridge Plaza and South Elgin, they're looking at 70 to 75% LTV, and it is just -- the majority of that is in with in place NOI, so we're having a lot of discussions. We've got a couple of letters of intent and we we are moving down -- progressing well -- on finalizing, particularly Estero and Cobblestone. In the next several weeks, we should have some more clarity on those. But I think as we've talked about in the past, our objective is to negotiate these outs, stagger the maturities -- in 2013, '14 or '15, we have got very little debt maturing. We want to push these -- particularly these five loans out into those years so that we stagger the maturities and end up with a more balanced maturity schedule.

Okay. You mean Rivers Edge, or --

Oh, I'm sorry -- Ridge Plaza -- on Ridge Plaza, we are anticipating placing debt on that on a seven year loan, taking the proceeds from that loan and paying off Tarpon Springs. So I think when you look at that, I am just kind of giving you some color on how we are going to -- so really at this point, if we are successful completing the Ridge Plaza financing, we will use those proceeds to pay off Tarpon Springs, which would then take us down to four expiring loans versus the five.

Okay, I see. Are you expecting to have to pay down any of the loans separately, I guess, with equity? Or --

I think we are anticipating that as we put together our capital plan. Even back when we raised equity in May, we anticipated paying down anywhere between 10 to 25% of the loans as additional equity to entice the banks to move the maturity days out. I think if you look at South Elgin, we right now have a term sheet that requires about a 14% equity requirement which would get the extension out through 2013. The rate on that particular loan is-- right now is an all-in rate of 5.25. It has a LIBOR plus 235 with basically a 2% floor. So I think we are anticipating that our objective is to keep it around 10%, but we are anticipating that on our capital plan to be between 10 and 25%.

Okay. And then moving over to your Shadow development pipeline, can you just update us on your plans to reduce the cost and scope overall? And also, are any leases of the leases signed at all with any of the tenants that are noted on the -- I guess the margin of that page?

Yes, there are leases signed; and in particular, we have mentioned many time that is the Delray Beach project -- we have a lease signed with Publix Supermarkets and Frank's Theaters. And then in the other -- all of the other ones that are mentioned there, we have letters of intent. And in the case, I think, of the hardware store, we have a lease signed with a hardware store. So the bottom line is there's activity on each deal, and as I mentioned in the prepared remarks, activity is actually picking up, which is I think an indication that the tenants have been very focused -- as you can see by the amount of square footage that we and other people have been leasing over the last few quarters, the tenants' focus has been to backfill existing vacancy in centers, which gives -- obviously, they can open their stores quicker. And I think that's probably not fully run its course, but is maybe towards the end of that game. So that is probably why we are seeing tenants show renewed interest in development deals that would open, say, in '11 or '12. And as far as reducing the cost; again, we are continuing -- the cost that you see reflected now is our projected cost after we had assumed that we would have anchor sales. So any other cost reduction in there would be through cheaper construction costs, and Tom can elaborate on that if he wants.

Yes, and this one point is, each and every one of these projects are fully entitled. We are going to continue to look at each and every site plan to make sure they are as efficient as possible. So there's going to be an ongoing process of making sure we get the right tenancy and that we get the right site plans put together to keep the costs as low as possible.

Okay. And then lastly, just at Cobblestone Plaza, you mentioned that you are in negotiations with a new anchor tenant there to replace Whole Foods. What do the rents look like, and any is there any expected change on the yield for the project?

It's a little premature to say what the rent is going to be, because we haven't completed the lease that we are negotiating. But suffice to say that the per square foot rents are generally in the same range, and then we are still figuring out the scope and size of the deal. But it won't be a material difference.

I guess the great part of the story is that it ties back to the fact that once we get the anchor tenant executed, it is going to allow us to get the balance of the shops leased, get the center stabilize in a much quicker fashion. And just getting the anchor executed, as soon as that occurs, will take us to around 75% and then we're going to be able to move quickly beyond that.

But again, we have to get it done, and so we have still got some negotiating to do to get it done.

Okay. All right. Great. Thanks.

Thanks.

Your next question comes from the line of Quentin Velleley with Citigroup. Please proceed.

Good afternoon, everyone. John, you spoke earlier about your desire to continue to delever the Company, and you you also spoke about some of the acquisition opportunities that you might be seeing out there. I am just wondering how you think about the balance between delevering the Company and some of the acquisition opportunities that is you might be seeing, and also considering you have got some of the potential funding for the Shadow pipeline as well?

Well, as far as the first question relative to balancing, delevering, and opportunities, I mean, that's obviously something that we are thinking about a lot and trying to get a game plan together on how we can do that. I mean, as we sit today, we feel like we are in a very good position as it relates to our liquidity level and our ability to move through the next few years. In terms of the -- what we see in acquisitions and how that impacts that, a lot is going to depend on where cap rates settle out. Some of that depend on where our stock price is. So there's a process involved, I mean, in getting to that point. Also, how much of the timing of remaining developments may come online. So Quinton, there's probably two or three major factors, but the bottom line it is we think it's early as it relates to opportunities, and there will be -- I think the process of seeing good deals that may trade at little bit higher cap rates probably has some time to play out, because the debt market is such that people are hanging on at this point. And obviously, with LIBOR at than one, you can hang on longer. As that changes, I think that will create some opportunities in itself. So the bottom line is, there is no magic answer to that question. A lot will depend on the things that we do and the blocking and tackling, how that impacts our stock price and where cap rates go.

Are you getting any interest from potential joint venture partners? I am just wondering whether JV partners might be a good source of capital, given at the moment yours is relatively --

Yes, I think as it relates to joint venture, there's no question that -- I think a lot of institutional capital is beginning to see that the IRRs maybe that people were talking about six months ago probably aren't realistic, so they're probably adjusting what their expectation are. I think their other investments are probably doing a little bit better than they were six months ago. So there seems to be a greater desire for institutional capital to be in real estate, and I think as you have seen recently, there has been some deals occur that the IRRs would be lucky to be double digit IRRs. So that probably tells you that there's an adjustment. We are in various levels, but we always are in conversations with capital, and it comes down to what's the most cost effective capital, whether it be partnering or whether it be our own. And that's, again, part of the process of analyzing where things go. But there's no question that that's something that we would like to continue to pursue and have access to so that we can diversify our capital.

And you spoke about the land sales and potential out lot sales. Can you give us some kind of understanding what level of sales you're hoping for over the next 12 months?

Well, I think in terms of out lot sales, we continue to have two, three, four out lot sales a year. That is obviously reduced from where it was, but part of that is by our own design to have less of our FFO be transactional income. And even if you just look at this quarter as it relates to transactional income, it was less than -- it was half of what historically per quarter transactional income has been. So less than half. And I think that what we are trying to do there is to increase the quality of our earnings over time. So you will see us continue to move in that direction, first of all. But because we have multiple, multiple out parcels and because some users are required to purchase those out parcels, we are always going to have some level of that activity. And as it relates to larger land parcel sales, we believe that we will have some in 2010. We know that we have a particular transaction that a tenant that is under a ground lease has a right to acquire that parcel from us. So -- and then again, as part of this idea of lowering the total cost of our projects, we are very engaged in looking to sell land to certain anchor tenants. And some of our deals just kind of set up that way, Quinton, where we have, for example, a Super Wal-Mart in [Apex] in Raleigh just opened and is doing very well, and we have a development parcel adjacent to it. That may be end up being just a large land sale to another large box. So those things are possible as well.

Okay, got it. Thank you.

Thanks a lot.

Your next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please proceed.

Hi, Good afternoon.

Hey, Nate.

Just getting back to the land sales, can you just talk a little bit about what your pricing expectations are, and the fact that you haven't taken write downs in that area, is safe to say you are comfortable you will be made whole?

Well, Nate, in terms of pricing expectations on land sales, I mean, those are -- looking at selling residual parcels, and/or anchor tenant parcels is probably something totally different than trying to value land as a -- on its own because, we are talking about selling land that is in conjunction with a development. So I think those are two different things. As it relates to that issue about our comfort with land, as Dan pointed out, quarterly we go through an intensive process as it relates to impairment across the Board. And as we pointed out, of the six deals that we have in the Shadow pipeline, we have development activity in each one of those deals. So we are obviously looking to the discounted cash flow of those future developments, versus just the raw land value. If we were to look -- if we were to determine that there wasn't a go forward project, then you would look to the raw land value; and at this point, that that's not the case, or we haven't determined that to be the case on those deals. So in terms of pricing expectations, we are pretty comfortable that our overall land basis, and all of our development deals and our land held for development, is -- from the original purchase price is less than $6 per foot. So we are not tremendously worried about that. But then again, it is difficult to say what land is worth in a vacuum, much like it was difficult six months ago for people to figure out how to mark banks. so that's kind of the situation.

Okay. And this anchor replacement at Cobblestone, is that another grocer or is that a different type of retailer?

Well, again, we are a little early to say what it is, but it is pretty similar to what we had before. That's what we are working on.

And Nate, it is going be somebody that's going to drive -- that's going drive occupancy. That's one thing we can tell you for sure. It is going to drive occupancy, and it is --

I hope the leasing guys are listening, because that's the second time Tom has said that, so.

Okay. And then you addressed one of the five vacant junior box anchors. What's going on with the other four? Any other progress there?

Yes, as it relates to the other four, we are making very, very good progress. We are at (inaudible) in Corral Spring, Cedar Hill, and Market Street, and all of those are quality negotiations that are ongoing. And we are not going to give a specific time frame of when we see those leases getting executed, but we are heavily engaged in discussions, letters of intent and actually, in certain situations, starting lease documents. So we feel good about very good about the fact that we have four out of five. We would feel better if it were five to five, but we do have one that we still need to get some work done on. So if you take a look at what we talked about moving forward with the fourth quarter, and knowing that there's about 200,000 square feet of space out there that is being negotiated, and then knowing that some of these could continue to move forward, we hope to make some nice strides in the fourth quarter and the first quarter of next year.

Okay. Great. Thanks.

Thank, Nate.

(Operator Instructions). And your next question comes from the line of Paul Adornato with BMO Capital Markets.

Hi. Good afternoon.

Hi, Paul.

Back to the land, this time I was wondering if you can walk us through how you evaluate these land held for development for impairment? What is the threshold and your time frame for making that determination?

Yes, Paul. This is Dan. I think -- I mean, the time frame, it is a matter of going through the numbers, and I think the time frame is each time that we review the land held for development, as well as any other asset, if we don't feel like we can recover the balance sheet amount on a discounted cash flow basis for the sale at the end of that period at a cap rate that is obviously looked at in each market and analyzed and determined whether -- to be on a conservative basis.

So I mean, for us, right now what we are doing is we're looking at the rents that we are discussing with tenants in our portfolio, we are imputing those rents on the developments as we have -- we have laid out the developments, we know what the square footage is going be in most case, and we are still pursuing the developments. We -- as John mentioned, we don't -- we aren't in the process of starting the developments until we have the appropriate leasing, specifically in the small shops, as well as financing in place. But I think the impairment calculation and impairment discussions are a monthly process here, and we continue to refine the development proformas and discounted cash flows related there, too, as we go through that process.

Okay, that's helpful. And then also, just looking at the leasing environment, we are hearing a lot of the other retail REITs talk about tenants looking to trade up in this environment; and even though it is a zero sum game, or arguably much worse than that, that what leases are being signed are trade ups and right sizing of retailer space. Is that a similar dynamic that you are seeing in your properties and in your markets? Yes, Paul.

Like I was saying, I mean, you got a situation where there's been a great deal of square footage put back on the market that wasn't available. And whenever that happens, you're going to see quality retailers assess their positions in that local market; and obviously if they can upgrade, they're going to do that, even if they have remaining term, even if they have got to write off costs associated with that. So I think it is just a part of the situation where people are going look to do that. I will say as it relates to anchors and the boxes what I said earlier. I mean, you have got a situation where I think six months ago people were talking about, "Oh, there's thousands and thousands and thousands of dark boxes." Well, ultimately, only a small percentage of those were really high quality, and those are the ones that are getting filled. And so I think we have really strong properties. When you look at the anchor situation, we are like 97% leased in our anchors. So it's a process of survival of the fittest and it's a process of the best real estate wins. So I think, yes, those things are all true, and that will run its course. So I think you will start to see next year those opportunities won't be as many, and that's when you will see these anchors want to do deals in new developments -- which again, that means they're not going to open those stores for a few more years, so that kind of seems to make sense with the cycle we are in.

Okay.

The second part of that question, you asked about "Will some of these rightsize?" And yes, some will right size, and we have been through that process already and have worked worked through it efficiently and come up with plans to almost make it an advantage versus a disadvantage for the center.

Yes. Okay. Great. Thank you.

Yes, thanks.

Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Yes. Hello, guys. Good afternoon.

Hey, Rich.

I am curious, I am imagining you can't get any of the Shadow open in 2010, John, but should we think about 2011? Is that realistic to open any of these projects, do you think?

I mean, it is possible. But again, it is going to depend on the timing of when we're comfortable from a preleasing perspective. So if we are talking 2011, Rich, you're talking very minimal NOI, because it would be opening very late in the year. And then frankly, it depends - a lot happens then with close -- I'm sorry, with dark periods, with retailers. So even if you are going try to open in November, December, you may get to a situation where they don't want the store until February. So I think that is not really likely, but I also don't think that's the major issue. The major issue for us is getting the right tenancy and making sure we are not taking too much risk in the shops. That's really the primary difference today versus three years ago, is three years ago you saw people take a fair amount of risks with their shops, and that's just not something we are willing to do today.

Well, the only thing I would add to that, Rich -- and this is just a little bit on a positive note -- is that there are anchors executed inside this pipeline, John talked about the fact that we have true defined executed anchors deals within that pipeline. We have anchors that from a slot perspective are willing to look at a '11; but the bottom line is, as John said, whether they want slotted or not, we're not ready -- we're not going to be there. So there's opportunities, but we are going be conservative in terms of describing whether that's a possibility or not.

Right. Right, I got you, Tom. And then would you worry that you could lose some of these guys, that you have letters of intent or sign leases with? I guess that's a possibility, huh?

That's always a possibility, Rich. But we haven't to date; and in fact, you've got to realize that as all this was unfolding, I don't think retailers were extremely eager to take new positions like that. So they kind of worked hand in hand.

And the only other advantage that plays to our side of the table -- without using names -- is you have people out there that were doing 120 stores a year, and now may be doing 20. And then by the time we're ready, hopefully that number starts to get to be 30, 40, 50. So our timing could potentially correspond just in line with the growth of some of these people that we are working with.

Right, I think that sounds reasonable. Okay, good. Thank you. And then on the Galleria, help me understand how that exactly works? Are you just able to hand this back to the ground lessor, kind of like a mortgage, like you do with a mortgage at a bank, and he just takes it and that's the end of it? Or is there some sort of liability that you guys have with having to bring it to a certain condition or what have you?

No, the bottom line is the ground lease is fairly simple; and as Dan said, this is a ground lease with the entity. So yes, we will -- depending on the timing of when it happens, there may be some remaining moneys or whatever. But the bottom line is yes, it is simply we give it back to them, they take ownership of the building and we are relieved of the obligations of the lease. It is just that simple.

As Rich, as we said -- and by the way, this is a situation that we have been working on for a long time to try to rectify, and we wish we could have. But unfortunately, the land lease or the lessor just wasn't willing to negotiate the rent that we needed to make the deal work to tie into current market rents. So it got to the point where it was functionally not possible for us to keep going. And obviously, it is cash flow positive for us by giving it back.

Okay.

All in all, we are very fortunate that we have the ability to do what we are doing.

Right. And so now it's just his shopping center?

Yes.

Okay. Got you. Okay, now on Eddy Street, the 72% leased, is that -- any update on that or or any -- that is the update, I'm sure -- but is there any thoughts about where that's going?

Yes, I am glad you brought it up, Rich. I mean, that 72% is basically a combination of office and retail combined, and we are basically considered the primary components of the office space. We have one level of three levels that are still available. From a retail standpoint, I think the biggest advantage for us is the fact that this project is up. I mean, it's something completely different to South Bend, something completely different to the University of Notre Dame. And if you get a chance to see it, I mean, it is an incredible project. So what we're hoping is now that it is up and running and football season is upon us, that we can really start picking up some momentum. I think we have already picked up about 5% within the last couple of weeks, and we are just going to keep driving this, and I think we can, we can get this stabilized in a relatively short period of time. But we have a couple of big pieces, a couple of big components, that need to get done.

Okay. And then --

Having it open is the key at this point.

Okay. So the retail leasing is roughly what percent?

Really we are at exactly the same spot. We're at 70 at retail and 70 at office. So it worked out that way, but we are going to see that retail percentage grow here fairly dramatically within a reasonable period of time.

Okay. And then -- thank you. And then on the -- the last thing is on the hotel. Is that starting?

Yes, the limited service hotel has started, Rich. As we pointed out, it is a 50/50 deal. this is an unconsolidated deal. So yes, and I think it opens in spring.

It will open in the fall of next year for football. It's a very simple out of the box 119 room limited service hotel. So we are in very good shape.

Okay. Very good. Thank you, guys.

Thank, Rich.

At this time, we have no further questions in the queue. I would like to turn the call back to Mr. John Kite for any closing remarks. Sir?

Thank you, and we appreciate everyone's time today and look forward to seeing you soon.

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