Kite Realty Group Trust (KRG) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Kite Realty Group Trust earnings conference call. My name is Shakwana and I will be your coordinator for today. All this point, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host, Mr. Adam Chavers, Director of Investor Relations. Please proceed sir.

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

Our December 31st, supplement financial package was made available yesterday on the corporate profile page in the Investor Relations section of the Company's website at kiterealty.com. The filing has been made with the SEC and the Company's most recent Form 8-K. The Company's remarks today will include certain forward-looking statements that are not historical fact 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. The Company refers you to the documents filed by the Company from time to time with the Securities and Exchange Commission, which discusses these and other factors that could adversely affect the Company's results.

On the call today from the Company are John Kite, Tom McGowan and Dan Sink. And now I would like to turn the call over to John Kite.

Thanks, Adam, and thank you, everyone, for joining us today. A year ago on this call in the height of the financial market crisis, we discussed our thoughts on capital preservation, debt maturities, and moderation of development spending. Today I would like to spend a moment on each of these topics to assess where we stand as compared to last year. Also, I want to briefly discuss our leasing progress and the quality and the resiliency of our operating portfolio, and give a few words on 2010 guidance.

We ended the year 2008 with $90 million in cash and availability on our credit line, and over $108 million in 2009 debt maturities. As of February 2010, we have approximately $80 million of cash and availability on our credit line, and zero debt maturities for 2010. This is a testament to our success in the property debt markets, our conservative capital spending program and most importantly, the support of our shareholders via our two equity offerings in October of 2008 and May of 2009. We will continue to focus on improving our balance sheet and preserving our liquidity throughout 2010.

In regards to our operating portfolio, we remain laser focused on leasing. Often we say good real estate wins and while this remains true, in today's environment, we take absolutely nothing for granted. No deal is too small and every deal is important. We will continue to fight the battle at every level, every day.

While we saw a slight drop in our overall leasing percentage sequentially and year-over-year, our leasing department signed about 700,000 square feet of deals in 2009. This represents approximately 11% of our own portfolio. Tenants are still attempting to drive tough deals. However, the supply and the demand balance that was tilted heavily in the favor of tenants is moderating, which gives us encouragement as we look through 2011. During this two-year period of 2010 and '11, we will see nearly 17% of our annual base rent expiring, a concentration we were fortunate enough to avoid in '08 and '09. Additionally, the average expiring rents during this period are $6 a square foot for anchors and $18.50 for small shop tenants, both comfortably below our current portfolio averages. While much of our leasing is directly correlated to the strength of our Class A portfolio and the draw of our Best In Class anchor tenants, projects don't lease themselves -- our people do. Bud Hall and his leasing team know that this Company is all about leasing and will continue to be.

In regards to the development and the redevelopment pipeline, we made important progress throughout the year and we are encouraged by what we see, particularly with improving demand. This year, we moved Phase I of South Elgin Commons in Chicago to the operating portfolio. We resigned Whole Foods at our Cobblestone Project in Pembroke Pines, Florida, located between Fort Lauderdale and Miami. And we made solid progress on our Eddy Street Commons project at Notre Dame. In our redevelopment pipeline, we signed two strong junior anchors and are in LOI discussions on two additional anchors. We are pleased with the demand that we see at these projects and are expecting double digit returns on new invested capital. The shadow development pipeline consists of five consolidated and one unconsolidated project. We continue to uphold a conservative approach to new development and maintain our stance that vertical construction is tied to strong pre-leasing. However, we have seen a recent improvement in tenant demand and I would like to point out that our shadow pipeline includes two large anchor tenants that are open and operating, multiple executed letters of intent with anchor and junior anchor tenants and a number of shop leases under negotiation.

Looking at the next few years, we have several immediate goals. First, we'll continue to pour blood, sweat and tears into leasing. Second, we will continue to focus on our balance sheet and pursue delevering. We have a goal of reducing our debt to EBITDA to the mid single digits and we will continue to maintain a strong fixed charge coverage. Third, we will grow occupancy and NOI and perhaps most importantly, we will begin generating returns from our development pipeline and redevelopment pipeline. While doing this, we will reduce our percentage of CIP, construction in progress, to total assets to below 10% from approximately 16% today. We have learned from these turbulent times the CIP should not exceed 10% of our asset base. Finally, we'll continue to preserve liquidity, while pursuing alternative sources of capital to look for new growth opportunities.

Dan will discuss guidance in greater detail later, but I would like to highlight our 2010 earnings guidance. It is $0.42 to $0.47 a share. It's important to note that over 90% of our earnings in 2010 will come from recurring rental revenue, compared to 75% to 80% on a historical basis. In closing, while we remain cautious and fully prepared to deal with an unpredictable real estate market, we are encouraged by the recent improvement and general retail demand and are equipped to seek out opportunity with the stability of our balance sheet, and the predictability of our cash flow.

Now I would like to turn it over to Tom.

Thank you. I will provide more detail today on our leasing productivity for the quarter and also provide an update on our two current developments, our redevelopment projects and our shadow pipeline.

As John mentioned, we had another solid quarter of leasing production. We executed 14 new leases for 178,000 square feet at positive cash rent spreads of 5.7%. We also recorded 13 renewals for 122,000 square feet at 2.3% positive cash spreads. We continue to successfully renew 75% of our current tenant base. We placed tremendous focus on this issue, due to the minimal capital outlay associated with renewals. We had 300,000 square feet of leasing production for the quarter, and approximately 700,000 square feet for 2009, which made this one of the most productive years in our history.

There are two primary reasons why our lease percentage for our retail operating portfolio declined from 90.8% in the third quarter to 90.1% in the fourth quarter, despite our significant leasing production. First, a significant portion of the new leasing square footage occurred at Cobblestone Plaza and within our redevelopment pipeline. Second, a junior anchor at Cedar Hill Plaza in Dallas vacated as expected during the quarter. At 25,000 square feet, this tenant represents 50 basis points of lease percentage on our five million square feet of retail operating portfolio. We executed two anchor leases in our redevelopment pipeline during the fourth quarter, totaling approximately 115,000 square feet. We signed a lease to back fill the vacant Circuit City box in Coral Springs with the Toys 'R' Us, Babies 'R' Us combination store for 47,000 square feet. The work is out for bid and is anticipated to start in March of this year, with rent commencement prior to the end of the year. Academy Sports executed a 66,500 square foot lease at Bolton Plaza in Jacksonville to occupy approximately half of the vacant WalMart box. We also anticipate Academy Sports to open prior to the end of 2010.

As previously announced, we signed a 35,000 square foot lease with Whole Foods to anchor our Cobblestone Plaza development in Southeast Florida. This was an important milestone for this project for a couple of reasons. First, Whole Foods decisions signifies the strength of our site. Second, as a primary -- as a premier grocery anchor, they will help to boost our small shop leasing production and achieve higher rents. And finally, the lease allowed us to complete a recent three-year loan extension.

The Eddy Street Commons development is progressing well. The lease percentage increased only slightly quarter to quarter, simply because we have been diligent about achieving our rent expectations and desired tenant mix. We're active -- we're in active negotiations or discussions with six tenants for approximately 20,000 square feet of new lease deals. The first phase of the apartment project is approximately 90% leased at above performer rents. As a reminder, our economic interests in the apartments is an air rights lease that benefits from the annual increases in gross revenue. In addition, we are well underway on the construction of a 119-room limited service hotel directly facing campus with our hotel joint venture partner. Our modest per room basis has positioned the hotel project to be successful upon its opening in August of 2010.

I would like to spend a few minutes discussing a couple of the projects in our shadow pipeline. We're making steady progress with leasing and hope to commence construction on Delray Marketplace in Florida late this year, or possibly early next year. With two anchor tenants fully executed, we are concentrating on leasing the small shops to an acceptable level prior to obtaining construction financing and moving forward with vertical construction. In addition, New Hill Place in Holly Springs, North Carolina, also continues to gain momentum from a leasing standpoint. We're focused on commencing the first phase of this development once our primary anchor and junior box leases are fully secured.

Ground up development projects are still challenging. However, we are seeing measured improvement in the leasing environment in this area. Real estate managers are now able to assess viable ground up development projects with an open mind, as they have now substantially completed their analysis of vacant junior box opportunities. Same store NOI declined 3% for the quarter and 2.7% for the year. Both results were in line with expectations and our guidance range at the beginning of the year was negative 2% to negative 4%. The majority of the reduction continues to be attributable to the Circuit City and Linens 'n Things bankruptcies. Of the three vacant Circuit City boxes, we have executed leases on two, and are negotiating a final LOI on the third location. Additionally, the single Linens 'n Things vacancies is under lease negotiation with a national tenant. This positive leasing momentum should allow for gradual improvement in the same-store NOI as these tenants take occupancy.

At this point, I will turn the call over to Dan as he summarizes our operating results.

Good afternoon. FFO was $0.12 per diluted share for the quarter, and in line with consensus estimates compared to $0.24 per share for the prior year. The dilution related to the re-equitization of our balance sheet of May 2009, which caused the majority of the $0.12 year-over-year decrease. FFO for the year was $0.48 per share, compared to $1.17 per share in 2008. Excluding the impact of a third quarter non-cash impairment charge, FFO was $0.57 per share for the year, and met the low end of our guidance range.

Turning to some specifics on the income statement, our fixed charge coverage is approximate -- was approximately 2.4 times as calculated from page 12 of our supplemental. This improved from last quarter as we utilized a portion of our available cash to retire debt. Construction and service fee margin before tax for the three and the 12 months ended December 31st was approximately $622,000, and $2.3 million respectively and ended the year at the midpoint of our annual guidance range. Our G&A expense was relatively flat year-over-year and we ended the year at approximately $5.7 million, which is at the low end of our annual guidance range of $5.7 million to $6.1 million. And other property related revenue includes approximately $800,000 from the sale of an out lot at our Gateway property in Marysville, Washington. Our partner's share of this gain which is included in non-controlling interest, was $160,000. This line item also includes percentage rent of approximately $300,000.

On the balance sheet, as of last Friday, we have extended or refinanced all the remaining 2010 debt maturities totaling $57 million. The loans were extended into 2013 at rates ranging from LIBOR plus 325 to 400 basis points. Only one loan contained a LIBOR floor at 2%. The average pay down was 14% for the extension on the five loan maturities which is at the low end of our 10% to 25% range we discussed in previous quarters. The recent extensions were underwritten to a 70% to 75% loan-to-value which resulted in a 1.3 times debt coverage based on an 8% debt constant.

Now that our 2010 debt maturities have been financed, we are actively addressing the 2011 maturities. Our line of credit with a current balance of $78 million is with Relationship Lenders and includes a one-year extension. The interest rate on the line was hedged at an all-in rate of 6.2% through February of 2011. Thus upon maturity and potential adjustment to market rates, we don't anticipate having a significant negative impact to earnings or fixed charge coverage. The term loan of $55 million is also with Relationship Lenders, and our objective is to extend the current facility at market rates or replace the loan with long-term debt. Finally, we have seven property level loans maturing. On average, these loans have a 1.2 times fixed charge coverage and are with Relationship Banks. Most importantly, five of the seven loans were underwritten and extended based on the new, more stringent 2008 underwriting standards. These two corporate facilities and seven operating property loans comprise 85% of our 2011 maturities. Based on our prior successes, we are confident in our ability to refinance or extend the 2011 maturities.

As we have discussed on previous calls, we continue to perform a regular in-depth analysis of our development and joint venture assets for potential impairment and potential delays in the development process. In the fourth quarter, we decided to delay the development at 951 & 41 in Naples, Florida and reclassified approximately $4 million from CIP to land held for development. The site is fully entitled.

We have provided our 2010 earnings guidance of $0.42 to $0.47 in yesterday's press release. Several of the key assumptions include total portfolio lease percentage ranging from 90% to 92% at December 31, 2010, same property net operating income is estimated to be flat to negative 2%. Transactional FFO ranging from $0.01 to $0.03 and construction and service fee net margin ranging from $0.01 to $0.03 before tax. As John mentions, the guidance we are providing assumes that over 90% of our earnings are being generated from recurring rental revenue from our real estate operations, which is 10% to 15% more than previous years. The low end of the range on the lease percentage takes into account the development assets potentially transitioning to the operating portfolio during the year at less than portfolio averages.

Thanks for participating in today's conference call. Operator, please open up the line for questions.

Yes, sir. (Operator Instructions) Your first question comes from the line of RJ Milligan with Raymond James. Please proceed.

Good afternoon, guys.

Hi, RJ.

Are you seeing interest from potential JV partners and if so, is the acquisition market warming up at all? Would there be anything to go out there and buy?

RJ, it's John. I think, yes, we're -- we are seeing interest. I think that's -- you probably heard that in other places -- in terms of we're in discussions with a few different groups relative to looking at some go forward opportunities.

In terms of what's out there, we are every day looking at what we see, both marketed deals and deals that are not on the market. And I think they continue to be more competitive than what everyone had imagined. So we're -- we are still seeing, it but I would say that, we think there's opportunity and in particular, we think there's opportunity on value-added opportunities where we can use our skill set to turn things around, to buy something and create value.

So we're encouraged. It's going to be tough. It's not going to be as easy as everyone thought. I think our size will help in that we are smaller, so we're maybe able to be able to look at things on an individual basis more so than others, but, that's what we see right now.

And do you think that environment is going to continue? Do you think it will start to warm up as we go through 2010?

It's tough to say. Obviously a lot has to do with what happens with the debt maturities that people are facing over the next two, three, years. But at this point, it appears that the banks and/or insurance companies, whoever you want to say -- even CMBS lenders are working with borrowers to restructure deals and seem to be opposed to foreclosing on deals. I think that's the difference between today and the late '80s, early '90s is the foreclosure process was much more rapid. I do think, though, that over time that that will begin to happen and, again, the fact that we have such strong relationships with midlevel banks who have a lot of these loans --banks that we have 25-year relationships with, we're hoping that we can work with them -- come in and recapitalize some of these deals as -- if we were able to put that together.

Thanks, John. And Tom, a question for you. Do you -- for the two projects in the development pipeline, how -- have the IRR expectations changed over the past couple of months?

I would say on a combined basis, if you really look at Cobblestone Plaza and Eddy Street Commons combined, they have stayed relatively steady as it ties back to the return parameters and from an IRR perspective.

RJ, we talked about this on the call last time. Those two projects, we still believe will be in the 8% range, and we think that the -- just to hit it head on, we think that the shadow pipeline is probably more in the 7% to 8% range. So as Tom said, it -- the fact that we've got good things happening in certain places and going backwards in other places but all in all, that's where we are at and it seems to be relatively steady. We also haven't -- as it relates to the current developments -- we are still in the lease up phase. And the rents that we receive are obviously going to impact that. We may have some up side there.

Okay. Great. Thanks, guys.

Thanks.

Sure.

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

Good morning. Good afternoon, guys, actually. Just going back to the net debt to EBITDA, John, I think you mentioned that you are hoping to get that down into the mid-single digits and in my numbers, it's above nine at the moment. So it's obviously going to be a big move.

Right.

I'm just wondering if you can talk through the various levers you are going to use to get that ratio down, whether it's potentially some land sales, increasing NOI off your development pipeline and also an equity raise and how that works and what the time frame is to get that ratio down.

Sure. Quentin, well, first of all, the thing we would like to do -- of the ones you mentioned -- obviously land sales are the most productive relation -- relative to how quickly it can bring it down, but then obviously it's going to take longer to get that done. No question that the NOI -- we're focused on growing the NOI through our existing leasing program, and I think you heard on my prepared remarks, we're very focused on leasing.

And I look at it from the standpoint, I think we have multiple ways to grow NOI, and the first couple ways to grow NOI are what we have already done, which is backfilling vacant boxes, number one. We just got done doing four back fill deals of vacant boxes, which are going to be fairly incremental NOI and then, two is leasing small shops. I think one thing that you will see is that our average small shop occupancy is around 77%. When we look at what it was 2004 through the mid second half -- through the first half of '08, it averaged 86%. Right there is significant upside for us, and we are in the process of working through that. And then of the seven boxes that we still have, five of them, as Tom pointed out, we have lease negotiations on. Those -- that's an immediate NOI -- not immediate -- but that's NOI that we see.

In addition to that, we are thinking about potential joint ventures, and how that might be able to help us delever. And obviously in the right situations, it's perhaps some selling of net leased assets, even though we have been extremely conservative with our land sale guidance, that's there too. So I think we're very focused on all of those things and that's why I said over the next couple of years. It's not going to be tomorrow but we will get there.

And it sounds like raising equity is last on the list of things that you might do?

Right. Yes. That's why I didn't say it.

In terms of -- I'm just wondering, if you look at the current development pipeline, obviously there's a lot of NOI upside in there. Can you give us what the current NOI yield is on the capital you have spent versus what it will be when it's stabilized?

We -- we obviously -- we look at that and we don't -- it's not something -- it moved so much because we are in this -- in the process of leasing. But obviously, as I said in the current developments, which are the Notre Dame and Cobblestone, if we think we are going to be in the 8% range and we are 74% leased, I think on both of those projects, you can look at it from the perspective of -- you are whatever that is, five-ish percent current. So we would never do a deal to assume that we are going to get that current yield but that's probably in the range of where it's at.

Sure. And then the last question is just on -- in guidance, transaction income of $0.01 to $0.03, and that's some out lot sales. Is there anything else? Anything else in particular in that guidance.

Yes, Quentin this is Dan. In the guidance, we've got at the midpoint of that, it gives you a couple of pennies of income related to the out lot sales. There's really nothing else imbedded in that transactions, we don't have any build to suits that are planned or anything of that nature. It's land and outlet sales.

Thank you.

Thanks.

The next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Hi, good afternoon. I'm on with Jordan Sadler as well.

Hi, Todd.

Quick question on Cobblestone, can you walk through what changed with that project exactly, with the new Whole Foods lease and also just the scope of the project in general? I guess I'm a little confused how the stabilized yield will remain consistent.

Well, I think, first of all to answer the second part of your question, we described the range of yields between the two projects, maintaining a steady 8% return on cost. So you have to look at those two combined as we had discussed.

To answer the first part of your question, what really changed? And I think it really ties back to where we were originally with the Whole Foods transaction, versus where we ended up with that deal. The deal is about 25,000 square feet smaller than the original transaction. You had some increases in allowance figures just based upon the change environment. There were some issues that tied back to the modification of the positioning of the building on the site. So there was a myriad of issues that pushed those costs up, but as we said before, you combined it with Eddy Street along with Cobblestone and we still very comfortable in that 8% return range.

Todd, it's John, the thing I would add to that -- the last time we were on the call, although we were obviously negotiating with Whole Foods, we didn't know that we had Whole Foods, so a portion of how we were underwriting this deal was to assume that we weren't going to have them as an anchor, which affected the rents that we assumed that we would get on the small shops. With them back in the mix, we feel that we have good opportunity to raise the rents on the small shops from what we had been signing prior to us being able to say we had Whole Foods. That's something you have to take into consideration.

Secondly, we assume -- we're hopeful that after Whole Foods opens, since we lost square footage by redesigning their building and we might be able to go back in the future and find an out parcel on the site to generate additional revenue there as well. As Tom said, there's a lot of moving parts. We look at it this way, Whole Foods found three leases in the first quarter of this year, two in Canada, and ours. I think that tells you we have pretty good real estate.

And it was good for to us pick up 33% in occupancy level. So it was very important for us.

That's helpful. That makes sense. I saw that the costs went up about $5 million on that project, so I guess that's balanced out with higher rents from the small shop tenants.

Moving over in terms of guidance, I was wondering if you could give us a sense for where -- internally or so far for 2010 -- you are projecting leasing spreads to come in.

I think you saw that we said -- we thought we would maintain occupancy, and, flat to 2% down, and if you follow -- in terms of same store -- and if you follow the progression of leasing spreads throughout this year, obviously they picked up in the fourth quarter. We don't -- we're not assuming that they are going to be dramatically changed from what we have done in the third and the fourth quarter.

Okay and looking ahead to 2011, as was mentioned in the prepared remarks, with the expiring base rents being well below the average base rents for your portfolio overall, and, yes, it seems it's more heavily weighted from the anchors that are expiring, I would imagine you started to talk to some of these tenants or, if you haven't already, but --

Sure.

Is there any upside there from the leases being below market or is it really a function of the markets themselves or something else specific?

Well, I think the reason I wanted to point that out is obviously we still --as I mentioned, we are still in the daily fight to maintain rent. And, we have -- we were fortunate that the rollovers that we have are below our average. Upside, that's going to depend a lot -- if the supply and the demand ratio tilts faster than what it has tilted. What I mean to say is that today versus at the beginning of the year, it's clearly night and day in terms of our ability to negotiate.

We have one of our redevelopment projects as an example, where we have four very high quality anchor tenants that are vying for maybe two to three spaces. That we did not have a year ago. So I think there's a possibility that in 2011 there's upside but the point that I'm making is that we have six or seven different ways to grow -- to grow revenue to grow NOI and that's one of them.

It's Jordan Sadler here with Todd as well. I just have one on the guidance, coming back to it. The plans to delever, what is embedded? What would be the impact overall of getting down to your target leverage at this point?

Jordan, this is Dan. I think -- and one thing that we have not factored in is no material dispositions or acquisitions. I think when you look at the delevering and the transactions that would occur, I think we look at that on a couple scenarios, one if we -- as John talked about, if we enter into a joint venture relationship, one of the things we will be looking at is, if we seat assets or if we transfer some of those assets in order to delever. Those types of transactions would be -- we don't have any visibility that I could give you a number, a direct number today. That's a method we are looking at of deleveraging.

A think another form of looking at what we can do, we don't have any equity as John planned in the guidance. We don't anticipate issuing any additional common equity. I think one thing if you look at our balance sheet, we continue to watch the preferred markets to see if that's an opportunity for us, whether the -- whether it's preferred debt or equity and how that would unfold and translate into our balance sheet. And I think an important component there is if you look out in '11, and we have the $55 million term note, we are looking for ways to recapitalize that and that could be potentially trading that for a preferred piece of paper that would be five-year non-call without any covenants tied to it.

So those are a couple of scenarios we are looking at. It's hard for me to give you a fixed number because the joint venture discussions and some of the things that we are looking at are still in the discussion stages.

Also, Jordan, it's John -- the delevering we did in October and May was defensive delevering, and delevering as part of the process of surviving in order to thrive in the future. The thrive portion of that is more what we are talking about now. We are talking about delevering in order to put the Company in a position to take advantage of opportunities, which is why we are not talking about common equity. That's why we are talking about these other forms.

Obviously you can be opportunistic with common equity, but it's the most expensive way to do it at this point, when we are trading at what we see as a percent severe discount to NAV. So right now, I think Dan and I are more focused on how do we do things opportunistically. How do we have the capital for that -- and that's really what we are talking about and we are making good progress there.

So we shouldn't necessarily assume just because you entered into a joint venture, reduce exposure some of assets, you may be delevering but it may not necessarily be dilutive?

Yes, our goal is for it not to be dilutive. We have already done that. That's why I mentioned we were appreciative of our shareholders' support. They supported us through that process. Now we need to turn around and perform and make that equity that we raised productive. And we are way more focused on that.

Okay. Thank you.

Thanks.

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

Hi, good afternoon.

Hello.

Going back to Cobblestone, a small shop benefits aside, what was the rent -- old rent per square foot for Whole Foods versus the new?

Actually the new rent is slightly more. It's slightly above $19 a foot.

Okay. And if you could just get a little more specific on Delray, where do you stand right now on the small shop preleasing? What type of progress did you make this quarter? And where do you need to get to?

Well, we made good quarter -- we made good progress in the quarter but we have not reached our ultimate goal and really what we have talked about is trying to get to a number closer to 65% of total small shops leased. So that's the fine line that we are working off of right now, is slowly pushing that up. But we did -- we made significant improvement in that regard.

Nate, I think the bottom line with Delray, we have two very strong anchors there. It is heavier in small shops on a percentage basis than our typical deal. So that's why as Tom just said, we have a higher level -- a higher threshold level of comfort on pre-leasing that we need to be at 60% to 70%, let's say. But the most important part there is that -- and I think this is the general theme -- retailers are definitely back looking at these types of deals that are unique, and this is a unique deal.

So, I think we've still got a lot of work to do, but we've made a lot of progress. We think we will announce some more deals this year, and if we do what we think we are going to do, we will be in a position to get third-party financing, and move forward. And that's what we are focused on there.

No, that's definitely a positive. This is the first time that you have really talked about a specific target date.

Right.

To start.

Right. That is correct.

Okay. Thank you very much.

Thanks.

Your next question comes from the line of Andrew DiZio with Janney Montgomery Scott. Please proceed.

Yes, thank you, good afternoon. Given that a good portion of your current and shadow pipeline, is between Florida and the Raleigh area. Can you talk a little bit about differences you are seeing between those two geographic areas in terms of tenant interest?

Yes, Tom and I will both talk about it. First of all, Raleigh, if you think about our -- we have six projects in the shadow pipeline. Three of them are in the Raleigh market, and you can read any publication anywhere to see that Raleigh has probably held up better than any city in the country in the residential market. So I think one of the primary differences is that Raleigh has continued to see a great deal of influx of population into the market. It's obviously a bigger, spread out market than a Delray Beach, for example. Delray Beach is a very tight market with very little land available. Raleigh is a bigger market with more land available but it has a stronger residential backdrop.

So, when we look at what we are doing in that pipeline with three of them in Raleigh, one of them in Delray Beach, one in Seattle and one in Chicago, these are all very good pieces of real estate in very good markets. We are not talking about markets in the middle of nowhere. So we are encouraged with that. Florida, it's -- it has certainly held up better than most people thought it would, but it went through a major upheaval, and you've got to regroup from that. But it's not -- it's definitely improved.

Yes, Florida will take sometime and Dan mentioned, a decision we made as it relates to 951 and 41, which we think was a prudent decision. But that growth will come back. That piece of property that we still feel very strong about will be developed and we're going to make the right decision and move forward with that project in due time.

Okay. Thanks. And then along the same lines, you talked about the potential to obtain construction financing further down. Can you talk a little bit about lender requirements, as far as pre-leasing and what terms would potentially be out there?

Pre-leasing, frankly, that's our requirement. Our requirement is going to be more stringent than the lenders' requirement because the lender is going to be more focused on what our debt coverage ratio is going to be and that's going -- obviously will be influenced by NOI but it will be influenced by the amount of equity we put into the project.

I think as Dan pointed out, we -- all of the loans that we have recently refinanced, they have been more the 120, 125 coverage we have been using debt constants of 8%. And LTVs are the last thing you look at. Once you figure out those other cash flow metrics, the LTV is what it is but I think they have generally been in the 70% to 75% range. So that's what we think. But really, frankly, we're going to be the ones that are going to be very tough on when it is to start this. Just because a lender is willing to lend the money doesn't make it a good project.

Okay. So I guess from that standpoint, it's fair to say that the decision -- there's not an issue with lender participation at this point?

We don't think so, but, again, we haven't -- I can let Dan expand on it. We're communicating with people, but we're not putting a -- we haven't put a package in front of anyone and said will you finance this today?

That's correct. We are waiting to get some of the LOIs completed, signed and then go out to our bank group and work through the construction loan. Again, it's not a construction loan where we are going to be asking for a huge number. I think it would probably be two to three banks could go together and get it done. Potentially just two at roughly $40 million to $50 million construction loan. So I think, again, the size of the loans that we have on our portfolio benefit us when it comes to going out and trying to discuss this type of project with our relationship lenders.

Also, we're interested in -- this is John again. We are interested in a couple of these larger projects becoming joint venture projects, so, our goal is to get them into a position where we can either add them to an existing joint venture or bring in a new joint venture partner so as to mitigate the impact to our balance sheet.

Okay. Great. Thanks for the details.

Thanks.

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

Hello, guys. Good afternoon.

Hi, Rich.

On these loans you just got done, are any of these recourse? I assume some of the construction aspects would be recourse, but any of these ones where you had paydowns, are they recourse as well?

Yes, in certain situations, Rich, a lot of the -- especially the line banks are wanting 25% to 50% recourse. So there is some recourse tied to financing these with regional and national banks. When you look at, that what we try to do is once we get over a certain hurdle that we put in there, we typically try to get that recourse reduced. Like if it starts out at 50, get it reduced to 25 and in most cases there's recourse related to those loans.

And Rich, it's John. In some of those situations, that's been our decision to choose that piece of debt, versus another piece of debt that would have been non-recourse which obviously probably would have been not only more equity but higher rates and fixed in and wouldn't have given us the flexibility. Because we were really looking also here for flexibility to lease up the -- a lot of these were transition properties that were not fully leased. So what we really want to do here is lease them up and go out to the permanent market, as Dan said in his remarks. The seven to ten year market which of course would be non-recourse.

Yes, got it.

So over the next few years you will see us start to do that well before we hit the maturities in '13. That's our goal.

Right. Got it. Good. Thank you, John. And also, Dan, on the operating expenses, the recoverable operating expenses were quite a bit higher.

The last time you had something like that was March of 2009. So it doesn't seem to really be seasonal. Is there anything special going on -- especially in the recoverable operating expenses.

No, nothing special and I think one thing, Rich, we try to strip out on the NOI page, we try to break out the parking, because we've got a parking garage now operating at Eddy Street that -- because that project is in its infancy, the parking garage is open but there's not a lot of revenue coming in. So that's one item that's creating and if you look at just the financial statement page and not look at the NOI page, where we push the parking revenue and expense into one net number in the section of the NOI page.

I think that's probably the biggest thing other than, this quarter compared to last quarter we had roughly $365,000 of snow removal costs. There's bad debts, quarter-over-quarter is up probably $100,000 or so. But I think when you wrap it all together, I think when we look at it from a percentage perspective, it's -- on the NOI page, there's not significant differences.

Okay. All right. Very good. Thank you. And then the last thing I had for you guys, you had a -- much like Cobblestone but on a smaller scale -- it seemed that two of your redevelopment projects went up in bidding cost but there was really no change in size.

Right. Those are good things, Rich.

It was Bolton and Coral?

Right. Those are good things. And basically, when we put the redevelopment projects in there, those are fluid. So we haven't fully defined what tenancy is going to be and in both of those cases, we're adding tenants, which is adding NOI more so than what we thought we had before, particularly as it relates to the Rivers Edge project and the Bolton Plaza project.

Yes. So, Rich, if you look at it in total, we increased costs $4.2 million. $0.5 million of that was tied back to Coral Springs, which was very close to the initial estimate because we had a fairly good idea of the tenancy of what we would ultimately attract. The other increased tied back to Bolton Plaza at about $3.7 million, and that just ties back to John's comment. We simply didn't know or understand the specific scope of the tenant that would be moving in. So, the bottom line is we've got two strong leases coming into that space that will buoy both of projects.

Right, the Bolton Plaza one, Academy Sports is a very strong tenant and therefore we put money back into the space. Some of deals we were talking to before there were really more as-is deals that would have been lower rents.

Just low allowance.

And we were only going to just paint the building. This became a full scale renovation.

I got it, John. Very good.

Yes.

Very good, thank you, guys.

Thanks.

(Operator Instructions) You have a follow-up question from the line of Quentin Velleley with Citi. Please proceed.

It's actually Michael Bilerman with Quentin Velleley.

Hi, Michael.

John, you mentioned this severe discount to NAV, I was wondering if you can talk maybe a little bit about the future of FFO for you in terms of -- there is a lot of moving parts to this, obviously, one being the leverage situation and how you deal with that. But clearly there's a lot of potential upside within the core portfolio as you bring on the developments, but then obviously as you refinance, a lot of your debt and I think Dan talked about it preferred. I guess what it all boils down, if you are -- let's say a $0.44 number today, if you were to look out in two to three years, what are you playing for? Are we talking about an FFO number that you think could get upwards of $0.60?

Yes, Michael. I think that's what -- obviously I can't tell you exactly what that number is going to be when I look out over two or three years. But I think it's substantial and I think that we are looking at it -- as I said, we have broken this down into seven groups that we think we can grow FFO through and just to walk you through. The first group is back filling boxes. We just did four back fills and when you look at the rents and recoveries associated with that, that's over $2 million in those four back fills. We're negotiating five more back fill deals, okay? Again, just looking at what we're seeing out there, maybe that's another couple million dollars of rent and recovery.

The small shop leasing alone -- it's pretty easy to figure that one out. We are at -- we are in the mid-70s in terms of occupancy and historically we have been in the mid-80s. You look at that, that's probably $0.04 just right there getting back to where we were, and that's being conservative at -- say leasing space at $19 instead of $21. Redevelopment, pretty simple. We are looking at double digit returns in the redevelopment pipeline on new equity, on new capital invested. It's expanding as Tom said, and we feel very good about where we are there. That's the fourth item. The fifth item is the current development pipeline. We have been pretty clear that we are at least at 8%, probably a little north of there combined. Everyone knows what the numbers are there. So maybe there's a couple of pennies there.

The sixth thing is the shadow pipeline. Obviously, there's a lot to play out there, but as Tom and I both said, we are seeing material pick up in interest. It's going to take time, but, we obviously believe we will have a positive spread. And then the seventh thing is creating a new -- basically joining with a new capital partner to pursue these opportunities that are going to play out over the next couple of years. So when I look at that bucket, and I add that bucket all together, the number that you mentioned is very possible. It obviously takes a couple of years to get into that, but, I think the current spread that we can have, and the current growth we can have, just on the existing leasing is because of where our price is -- is pretty damn substantial. So.

And you think that encompasses -- if you set aside leveraging for a second, but just refinancing your debt at potentially higher costs, I would assume would have a pretty dilutive effect.

No, I think -- Michael, Dan pointed out that as it relates to a lot of this debt that we have, we have swapped a lot of this debt in the mid-sixes. We do not foresee a material hit to us. Now we're not feeling the benefit today that others are. Because when you look at our swaps, generally -- Dan can jump in here -- generally our swaps are between six and six and a half, and current interest rates on those would be two. So we are feeling the pain today but I think we will be rewarded for that later.

Michael, as you look at this, we are really trying to -- our group is really looking hard, looking for opportunistic debt, where if you look at -- the one we just put on Ridge Plaza, it was [656] for a seven-year loan. I think when you look at that scenario and you compare that to what we are getting today, that's a fairly -- that's a great rate to have on a loan for that seven year period and I think that swapped out for the full period. And I think those are the things that we are looking for, the types of loans we are looking for to move this debt out.

I think when you look at the specific mortgage loans where some of these are LIBOR plus 3.25% and those items, I think as you -- we're going to just try to opportunistically look to extend those out to the longer periods. I think with the relationship banks, we don't have to do this all at once. We can continue to look for the best capital to place that debt. And I think one thing we have done is give ourselves flexibility in how we've pushed these things out three years. We have hedged some of them to keep the fixed rate, the variable rate as low as possible and the fixed rate high. So, it gives you opportunities to move the hedges and put long-term debt on them as the opportunities arise.

The other thing, Michael, I would chip in there and I think it's why you heard both Dan and me really try to hit home on this idea that our FFO, our cash flow for 2010 is much more predictable, much cleaner than it has been historically. And when you think about our multiple, obviously, is at a pretty significant discount which typically would mean, the confidence in the cash flow is low. So when you look at the fact that we mentioned that 90% of our FFO will come from reoccurring rent, and that we have basically 6% of our represent rolling in 2010, simply that means of 90%, 94% is pretty solid, but for any concerns that we would have with tenants, which is obviously mitigating.

So I think we are trying to focus in on the fact that despite the fact that we did issue a lot of equity, that the earnings power that we have is going to be able to grow, but more importantly -- equally important -- to that is that it should be very predictable. That's where we are headed.

Well, how much confidence, when you think about all the sudden growth drivers that you have laid out, how much confidence do you have that in two to three years time we can see a -- let's call it north of 60 FFO number which would put the multiple at a lower figure.

Right, well, obviously, there's -- the big -- the unknown factor is where we go in this industry, in this business. It's tenuous because we are in the early stages of a recovery. And whenever you are in the early stages of a recovery it's going to be like the difference between today and yesterday. Yesterday everything was great and today people are worried. So I think that that's a big factor.

But as we move through that purely -- I think our business, Michael, is supply and demand. And the supply got out of whack. The demand fell off the table and it takes a couple of years to reverse that trend. So I'm just saying over the next few years, we believe that that trend will start to move in our favor. We have the right leasing team in place. We talk more about leasing than I think everybody because we realize we don't exist without it, and so we are very focused on it and we have to execute. It is not a lay-up. We have to execute, but I think we have the positions and the people in place to execute.

We have addressed our debt maturities, all the way through this great recession, and now we're in a pretty good place to focus out on the next three years, not just the next three months. And that's why I tried to lay out those seven different forms.

Right. You mentioned a severe discount to NAV, what items are not being appreciated by the market with your stock at $4. How much value do you see in the portfolio above and beyond $4?

Well, first of all, it's not even $4 right now, but --

I rounded up.

We appreciate that. I think, Michael, again, there's a discount to the -- I think there was a discount to our cash flow and I think that people -- I think that the general sense was the cash flow wasn't as predictable or high quality as the peers which is why I just laid out to you that we believe that that's not incorrect.

And I tell you that you have to look at the makeup of the cash flow and when you look at the quality of our properties, look, we're 90%, 91% leased. Let's say the market is 92% or 93%. There's upside right there. Our same storm NOI performed right in line with the peer group but our occupancy is a little lower. What does that tell you? It tells that you we turned down some deals. We weren't willing to enter into deals that didn't make sense. We will benefit from that later.

Clearly the development overhang is there which is why I said we have to get this below 10% of our asset base. It's at 16%, 17% today. It was at 25%, 30%. We have already worked it down and we will continue to work it down.

Now, while there's upside in that business, it's also a concern with the debt. And, one of the things Dan and I are very focused on is to continue to find opportunities to bring in partners to absorb some of that, so that we can grow off of our smaller base. It's not as hard for us to grow off of a smaller base. So I think there's been a big discount there, but other than that, I think we just have to execute.

We issued a lot of equity, Michael, and, we are sitting here today with $80 million of liquidity and no maturities. Could we be sitting here with $50 million of liquidity and have 10 million less shares? We could. But quite frankly, at the time that we issued the equity we thought -- we did what we thought was prudent, and I think it was prudent. But now we have to use it and make that equity not a drag, but a -- help us be a grower.

When you talk about severe, are we talking about a 10% discount, 20% discount, a 30% discount? Just a range of magnitude of where you think you pegged value for the portfolio?

Well, obviously that's in the eye of the beholder.

You mentioned severe.

Well, severe -- you got -- how many REITs are even trading at a discount right now. I look at it from the perspective that you see a lot of people trading at a premium. We're -- per your research, maybe we are trading at an implied cap rate of nine something and I think, we would never sell our current assets at a nine.

UCS is trading sub 8%.. You see high-quality assets continuing to trade at a sub 8%, 7.5%, 7.25%. Sure, there might be deals at 8%, 8.25% too. So it's hard for me to say exactly what that is, Michael but it's enough that we have to get out there and prove it's there.

And just a final clarification for me, just on the CIP, the $176.7 million on page 7 when you reconcile that to page 29, the 52.6 million and I recognize it's not all your share, but the 52.6 million -- the 51.6 million that's embedded in the current development pipeline and then you have 86.4 million which is in the shadow pipeline so call it about 138 million, how much of the balance, $38 million, $39 million is -- is that part of the redevelopment? What else is in that number?

It's -- there's a -- Michael, this is Dan. Within that number, there's a Phase II -- really two pieces. A Phase II of Holly and a Phase II of Apex are included in the difference in the number, and we disclose that at the bottom of the FFO page where we walk through different scenarios. So there's a -- roughly a $37 million number that's down there, which is made up primarily of those two components, as well as some properties that are transitioning to the operating portfolio where they were transferred prior to the year of lease up, where we typically will do 85% or a year before we stop capitalizing and just migrate the whole thing into fixed assets -- land and building. So that's difference in the two components.

Is there anything in the consolidated assets that is purely no income, where you are not recognizing an income that came our of CIP that went into a core that wouldn't be adjusted for if you were applying a cap rate to current NOI?

The only thing that I can say -- looking from an NAV perspective, the only thing I can say is there are some in scenarios which we need to detail out a little bit --is if -- we try to give the occupancy numbers within the current pipeline so you can back into the NOI that's being contributed from those assets, I think that's current development pipeline. hen you look at other items, for instance, LA Fitness that got transferred from South Elgin, a portion of that, they had a free rent for a portion of their opening. So there might not be a full quarter where you annualize that if you back out all the straight line rent.

So there's some situations where when we do the big box tenants, they may take possession and get opened quicker than rent commencement date. So we will be straight lining that rent and NAV may be understated in the period of time when they were in the straight line rent phase.

Okay. Thank you.

All right, thanks, Michael.

At this time, there are no further audio questions. I would now like to turn the call over to Mr. John Kite for closing remarks.

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

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