Kite Realty Group Trust (KRG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2010 Kite Realty Group Trust earnings conference call. My name is, Janietta and I will be your operator for today. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Adam Chavers, Vice President of Investor Relations. Please proceed.

Thank you, operator. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call Kim Holland at 317-578-5151 and she will fax or email you a copy. Our March 31, 2010 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. The Company refers you to the documents filed by the Company from time to time with the Securities & Exchange Commission, which discusses these and other factors that could adversely affect the Company's results. On the call today, from the Company, are John Kite, Chief Executive Officer; Tom McGowan, Chief Operating Officer; and Dan Sink, Chief Financial Officer. And now, I'd like to turn the call over to John Kite.

Thanks, Adam. Over the last several quarters, our business plan has remained consistent and simple. We have remained focused on leasing our portfolio, managing our debt maturities and generating recurring rent for a more predictable FFO stream. While we still have work to do, I'd like to recap our progress on these fronts. I continually stress the importance of an effective leasing strategy for our Company. Leasing will be a focus of our earnings calls and investor meetings, just as it is in our offices every day. 2009 was one of the best leasing years in our history, with 700,000 square feet of total production.

We followed that with 350,000 square feet in the first quarter of 2010. But since the majority of this activity was renewals, our lease percentage did not change significantly. As we meet with tenants to analyze their growth plans, it's become clear to us that they are focused on restarting their engines for new stores. The available existing inventory and quality locations continues to shrink and entitled ground, owned by capable developers, is limited. This scenario benefits us, given that our centers are well located and of high quality and our land holdings are development ready.

In addition, cap rates for quality assets are approaching the levels prior to the economic meltdown. There has been much discussion of quality shopping centers trading at cap rates below 7%, which is a positive reflection on our current portfolio. Recent returns we are underwriting, on incremental capital spend for redevelopment and development projects, compares favorably to the current acquisition market. We believe the combination of these incremental returns, along with operating property lease-up in an improving tenant environment, creates a compelling long-term growth story for KRG.

We will continue to apply a conservative and cautious plan for spending development capital, while not losing sight of our goal to maintain CIP at equal to or less than 10% of our assets. As I said, we'll be cautious with new development but as the demand continues to increase, I'm comfortable with our future developments, which include two large anchor tenants that are open and operating, multiple executed LOI's with anchor and junior anchor tenants, and a number of shop leases under negotiation.

Turning to the balance sheet. In February, we satisfied our remaining 2010 debt maturities. This marked $170 million of maturities Dan and his team were able to extend, refinance or retire since early 2009. The planning for 2011 maturities began months ago. And while it's early to give specifics, I'd like to provide a few thoughts. We have a one year extension option to 2012 on our line of credit. And we continue to closely monitor the activity on line renewals and extensions. And feel the extra time is to our advantage, as the financing markets continue to heal.

Our Daytona, Florida power center, where Dick's Sporting Goods recently replaced Circuit City, is 98% leased, has a strong debt coverage ratio and is the only significant CMBS maturity in 2011. Lastly, a major portion of the remaining 2011 maturities occurred late in the year and were extended in 2008 after the industry underwriting standards were already tightened. As I mentioned on the last call, approximately 90% of our FFO guidance is anticipated to come from recurring rental revenue, compared to 75% to 80% on a historical basis. Outlot sales and construction and service fee profits are a part of our business but are among the variable FFO contributors that we expect to play a smaller role in 2010 and beyond.

Our leasing efforts will fill the void. Approximately $2.1 million of rent and recoveries are anticipated to commence by the end of the year from executed junior anchor tenants that have not yet taken occupancy. Another $500,000 is expected to commence in mid-2011. Additionally, there are two junior anchor leases currently in negotiation that are estimated to represent another $1 million in annualized recurring rent. These tangible results will be impactful to the quality and size of our FFO stream and the growth of the Company. Now, I'd like to turn it over to Tom.

Thanks, John. We're off to a solid start this year on a couple of fronts. In the first quarter, we executed 23 deals totaling approximately 345,000 square feet, including 12 new leases representing 53,000 square feet, and 11 renewals for 292,000 square feet. Despite a still challenging environment, we achieved positive rent spreads on our new leases of 5.4%. The renewal spreads were marginally negative at 30 basis points.

The renewal spreads were driven, in part, by two smaller transactions totaling 4,300 square feet. Macy's exercised a critical renewal option through 2016 at Glendale Town Center. The early renewal highlighted the overall success of the significant redevelopment of the Center. Excluding the Macy's renewal, our first quarter overall leasing volume more than doubled year-over-year. The results are indicative of the tremendous focus our Company is placing on our leasing efforts in order to capitalize on an improving leasing environment.

As retailers begin to consistently report improving results, we're seeing renewed interest from tenants to pursue both ground up developments and vacancies at existing centers. Last quarter, we talked about the multiple benefits that Whole Foods would bring to our Cobblestone Plaza development in the southeast of Florida. We recently executed a lease amendment with Whole Foods, which established the rent commencement date in the fall of 2010. Our construction team is finalizing plans to mobilize in October to turn their store over in the spring of next year. This should provide clear visibility for small shop retailers as they evaluate our center and the strength of our sites.

We previously discussed that our Delray marketplace development may break ground this year or early next year. We set a conservative pre-leasing expectation for this project and are focused on continuing to make strides towards that goal at the ICSC Conference later this month. Our five redevelopment projects are in various stages of progress. As tenant interest in new store openings accelerates, we are exploring opportunities to expand the anticipated scope of work at certain properties. The returns generated from incremental capital spend and expanding NOI for these assets will play an important role in FFO growth for the Company. Last quarter, we announced new redevelopment leases with Academy Sports At Bolton Plaza and Toys"R"Us/Babies "R"Us at Coral Springs Plaza. Both projects are under construction, with rent commencement dates anticipated for late 2010.

Turning to operating metrics. Same store NOI declined 2.9% for the quarter. While this percentage is below our full year guidance range, it is within our expectations for the quarter. As we've discussed in previous calls, we have signed approximately 70,000 square feet of junior anchor space, that is scheduled to commence rent in the latter part of 2010. So, we remain comfortable with our full year same store guidance range of 0% to negative 2%. Including redevelopment properties, which do not contribute to same store, we ended the quarter with five vacant junior anchor spaces.

Subsequent to quarter end, we executed a 34,500 square foot lease for Toys"R"Us/Babies "R"Us combination store at Cedar Hill Plaza in Dallas, Texas. Of the four remaining boxes, we're in lease negotiations on two. We will remain diligent in our active lease negotiations, moving as quickly as we can but we will not sacrifice tenant quality or critical deal terms for the sake of simply executing a lease. These are strong pieces of real estate and we have the opportunity to create long-term value with each lease deal.

Given the size of our portfolio, however, I think it's important to note two things. First, every 25,000 square feet lease in our operating portfolio represents 50 basis points of occupancy. And second, only 140,000 square feet of NOI in a quarter generates approximately 100 basis points of same store growth. Therefore, we recognize the potential sizable impact to these metrics from junior anchor leasing. We announced, in our earnings release last night, that we have approximately 200,000 square feet of potential new and renewal leasing activity. As a result of this progress, we remain comfortable with our guidance range of 90% to 92% leased by year end. Dan will now summarize our other operating results.

Good afternoon. Overall, our first quarter results were in line with our budgeted expectations. FFO was $0.10 per diluted share for the quarter, compared to $0.20 per share for the prior year. Dilution related to the re-equitization of our balance sheet in May of last year and caused the majority of the $0.10 year-over-year decrease. As we anticipated, the contributions to FFO, from transactions and construction and services, were down year-over-year by approximately $1.2 million. In the quarter, our FFO stream from recurring rental revenue was over 90%.

Highlighting some specific items on the income statement, our fixed charge coverage is approximately two times. This metric will continue to improve as the NOI from our leasing efforts begins to flow through our income statement. Construction service fee margin before tax for the quarter was approximately $121,000 and in line with our expectations. Our recovery ratios continued to improve by approximately 130 basis points, quarter-over-quarter, as we continue to focus on cost control, with examples such as 15% reduction in our portfolio insurance costs and continued success on real estate tax appeals.

Our property related revenue includes approximately $500,000 from the sale of on outlot at Market Street Village in Hurst, Texas, which generated approximately $1.3 million of net cash flow. We experienced a couple of nonrecurring items that negatively impacted the quarter by approximately $400,000 and should be considered when establishing run rate assumptions for the rest of the year. Straight line rent was less than budgeted due to write-offs relating to terminated tenants and additional reserves. Net parking income was impacted by the initial tax assessment of the Eddy Street parking garage and the related affects adjusting accruals. And finally, partially nonrecoverable snow removal costs is a seasonal item.

On the balance sheet, we are focused on reducing our debt to EBITDA over the next 12 to 18 months by executing in the following areas. Stabilizing the Eddy Street and Cobblestone assets, as we currently have $78 million in costs outstanding on those two projects, that are currently only 41% occupied but 74% leased, with several tenants taking occupancy late in the first quarter. Achieving rent commencement on previously announced executed junior box leases, as well as LOI's that we are currently negotiating. Stabilizing redevelopment assets at Rivers Edge, Coral Springs and Bolton plaza. Utilizing the capital markets to acquire opportunistic assets with all equity and assessing the potential of the perpetual preferred market. Continued leasing and financing progress on our development assets. And finally, selected opportunistic land and outlot sales.

Now that all of our 2010 debt maturities have been addressed, we are focused on 2011 maturities. I want to re-emphasize several items that we mentioned on our February conference call. Our line of credit has a current balance of $87 million. It is held with relationship lenders and includes a one year extension. We hedged the interest rate on the line at an all-in rate of 6.2% through February 2011. Therefore, upon maturity and potential adjustment to market rates, we don't anticipate having a significant negative impact to earnings or fixed charge coverage. Our $55 million term loan is also with relationship lenders and our objective is to extend the current facility at market rates or refinancing.

And finally, we have seven property level loans maturing in 2011. On average, these loans have a 1.2 times fixed charge coverage and are with relationship banks. We continue to perform a regular in-depth analysis of our assets for potential impairment and potential delays in the development process. We are fortunate that our development assets are fully entitled and have executed anchor leases and/or LOI's. We will continue to monitor these assets on a regular basis. We are reaffirming our full year 2010 earnings guidance of $0.42 to $0.47. The first quarter results were in line with our expectations and we are looking forward to benefiting from our leasing momentum in the latter part of the year. Thanks for participating in today's conference call. Operator, please open up the line for questions.

(Operator Instructions)

And your first 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. First, on the leasing, you continue to make solid progress with the junior anchors but the shop tenant occupancy declined a little bit further sequentially. When do you think occupancy may stabilize for the smaller tenant spaces in your portfolio? And then, also, can you discuss your strategy surrounding leasing those spaces?

Sure. We're actively engaged in the small shop leasing, just as we are obviously on the box side. The small shop category has been impacted by the economy, obviously, and the available capital has been an issue. But that said, I will tell that right now we're negotiating probably 70,000 to 75,000 square feet of small shop leases. Now, that's LOI that's in negotiation. So there is a process there but we have a great deal of activity. If we can execute on what we're negotiating, we should fairly quickly get back to where we were. But I would tell you, that obviously takes some time. The other good thing there, Todd, is that, obviously, we're monitoring the capital side. And I think, in a sense, we are our own regulator there. And we are not just doing any deal, as Tom said. So, we're going to be pretty selective on the capital side. So, that will take some time. But the good thing is, clearly, we see more activity today in small shops than we did three months ago.

And then, the only thing I would add is just the simple fact that the leasing department looks at it as an opportunity. We're at a low market this point and now, we simply need to build that and it will make a tremendous difference in our portfolio.

Sure. On the 70,000 to 75,000 square feet that you're negotiating, how do the rents sort of stack up against your your retail shops, on average, right now?

I think you're going to see what you have seen so far. Is that we're seeing slight positive spreads. But again it's going to depend on how much capital we're putting into these deals, which you won't outwardly see. So there's going to be times where you'll see a negative spread on rent because we determined, from a credit perspective, that we were at the limit with that particular tenant with capital. So, generally speaking, it's probably flattish to down slightly but I wouldn't say materially.

Okay. And then, you mentioned some opportunistic acquisitions. But actually, was interested on the disposition side. Can you talk about any plans that are -- that might be in place or are you marketing any deals right now to exit some non-core markets? And what type of cap rates do you think you might see on some of those assets?

Well, we're definitely monitoring the activity and obviously, we've seen a pretty significant cap rate compression in the last quarter really. So, we are monitoring it. We're thinking about it in the sense of recycling. I can't tell you specific assets that we have -- that we would sell you, that we're going to sell this quarter or anything like that. But definitely, as it relates to when we look at our geography and it relates to making sure that we can upgrade our assets, we will probably do that. But I think that will take time. It will evolve over the rest of the year. But as it relates to where we see cap rates, again, depending on the asset, depending on the existing market rents and the rents in the center; clearly, the type of quality assets we have, we can go lower than what we thought. So, that's why we're looking at it and we'll see where that shakes out.

So, do you think that you might have some asset sales during 2010?

I don't know, Todd. I think if we did, it would be -- we would be doing it in the form of recycling into something else. So, we wouldn't see much in the way of any dilution. We would likely -- again, we might look at an exchange. We might look at a reverse exchange. There are things we're looking at but clearly, we're not looking to sell assets to just sit on it. We're thinking about it in the sense of recycling.

Okay. And then, at Eddy Street Commons, are you seeing increased traffic right now? Is there any push to sort of get that leased up before the fall there or the school year? I know you made some progress during the quarter but what's the sense that you're getting over the next couple of months?

Well, without question, we're obviously trying to push for fall. There's a tremendous amount of traffic. It's infused to that center through the football season and just general activities on campus as a whole. We're looking at it really in two different categories. The makeup of the small shop leasing, which we're concentrating very closely on the merchandising mix. And being selective because we obviously want the longevity of the center to outweigh any and all decisions. So, that's one thing that we're focused on. The second, is we do have some office space, 0.6 of the office space was really leased, going into the original development, to the University of Notre Dame, which was obviously encouraging. And at this point, we're working on several other deals that will help push that vacancy or push up the overall occupancy of the center. So, we have a two-prong approach. We're making good progress. And without question, there is a very strong push towards fall.

All right that's helpful. Thanks.

Your next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Hi. Good afternoon. You mentioned a rent commencement date for Whole Foods. I was wondering if you could review the economics of that lease, if possible?

Paul, what was mentioned when we were given the remarks, it's actually 2011, not 2010. It's the fall of 2011. And I think we talked about this before, as it relates to the economics, the rent was slightly above the rent we had before, but the square footage was smaller. And I think the rent is in the $19 range.

Okay. And in general, how competitive is it to land the top tenants in your markets these days, both in terms of anchors and junior anchors?

Well, I think it is competitive but there's been a real separation of shopping center owners that have capital and shopping center owners that do not. So, there's an advantage to those of us that are able to invest capital into the tenants, as well the center. So, we've seen a significant shift there but again, there's always -- you're always going to compete. The real estate, as we've always said, is the most important factor, in our opinion, that a retailer decision they make. So, it's still competitive but I would definitely say there's an advantage to those of us that have capital.

Okay. Thank you.

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

Good afternoon, guys. Just in terms of the day levering, I think you went through a number of the mechanisms for which you'll do, including only NOI outside and developing the boxes and the redevelopment and potentially, some land and outlot sales. But I think you also mentioned, potentially, doing all equity funded deals. So, I assume going to the public markets, raising equity to buy stabilized retail assets. What are you seeing, on that avenue, in terms of potential acquisitions? Maybe, what the timing might be and the size? Is this something that's sort of further out into the future?

Well, Quintin, as we said, this is a process that's fluid. So, we're looking at lots of situations right now. And our focus generally tends to be, we're still more interested in the opportunities that we see value creation, as opposed to just going out and buying an asset for a low six cap. So, when you're a market buyer at those very low cap rates, obviously, you can do lots of deals. Our perspective is we're going to try to look a little harder. Try to find some things that are unique and again, where we have market intelligence and we can make something happen. So, it's certainly not something we're talking about over night. We're thinking about -- when we think about the delevering, you're really are talking about the next 12 to 24 months. It's a process. But, as you know, when we run through all of the things that we're doing on the leasing side and we run through the redevelopments and you look at the potential EBITDA growth, that's significant in its ability to delever. But the acquisitions would also add to that and we would do it in the right situation. But again, we're hoping that we can find opportunities that have something in them that we see that's not obvious.

And it seems like it's going to be potentially some ground up development as well. Would that be new projects that you would go into? And I assume that if you do go down that avenue, you'd look at equity funding those?

Well, I think in the development side, we're focused on what we have ongoing, which we've been clear about. And we're focused on our land holdings that we haven't begun vertical construction.

To the extent that those ramped up quicker than what we anticipate, then, obviously, joint venture partnerships would be important to us in the larger developments. So, that we're not relevering there because there's a lag on spend and NOI, as you know. But we're not saying that we're actively out pursuing parcels of land. That's not at all what we're saying. We're saying, we have enough that we already currently own and that are currently under construction to create EBITDA growth that we think is pretty significant.

And just on that, you briefly mentioned Delray Marketplace. It sounds like that things are improving there, so you're getting closer to potentially starting something. Can you just remind us what the lease-up or pre-lease assumptions are to get that project going?

Well, on the positive side, which is obviously a key to a development like this, is we have the two anchors in place. The grocery store with Publix and then a very strong theater concept. So, from a small shop perspective, one of the keys that we're focusing on is making sure we get to a level that we're 100% comfortable, prior to starting any form of construction. And we've talked, Quintin, really about a range from 65% to 70%, wherever we feel that comfortable level, at that point, then we would proceed with the project. But we've made nice progress over the last several months. And that's why we're comfortable, at least, discussing the possibility of a start at the end of this year or possibly the first quarter of next.

Okay. Perfect. Thank you.

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

Hello, guys. With the improvement in retailer sentiment, could you give us maybe some thoughts on -- are you thinking possibly the other five projects, John, in the shadow pipeline, you might have some visibility as to when those could start, as well, in addition to Delray?

Yes, Rich. As we've talked about before there, each one of these has their own separate characteristics. And I think we mentioned on the last call that the South Elgin Commons in Chicago, which is a smaller project, we have made significant progress recently. And are in kind of in negotiations on an LOI there right now, that would enable us to get going on that. And based on the fact that it's pad ready and there's a parking lot in already, that could move fairly quickly. And we think the final permitting process there wouldn't be too complicated.

The projects, obviously, Raleigh is the big market and we've had a great deal of activity there. It helps us that Raleigh is kind of a -- it's a market that has held up pretty well through the meltdown over the last two years. And I think retailers are seeing that. And it's a kind of a strategic market for some guys. So, we're making good progress there, too. But the problem here, Rich, is it's hard to give timelines when we're really being very, very conservative on the pre-leasing and going as far as really pre-leasing shops. And historically, we did less of that and would build shops as we were building the center.

Now, we're going to be cautious. Obviously, as you said, the sentiment is improving. But I think we're in the early stages of that improvement and there's going to be starts and stops as it relates to how retailers view things. So, we're going to be cautious. We're not going to get in ahead of ourselves. But the good thing is, as we pointed out, if we wanted to accelerate because of the demand, these projects are ready to do that.

And Rich, I think as it ties back to the Delray discussion, I think you'll see us use that same perspective on each and every one of the projects that John mentioned. So, there's obviously the potential for quarters coming in the future, that we'll talk about each one in a little more specific.

Okay. Good. I got you guys. Thank you. And so, you're capitalizing interest, I assume, on each of these, is that right?

Yes, that's correct, Rich.

Okay and there's no chance that you'd have to undue that because all of these are things that, presumably, would go forward at some point?

Well, Rich, one thing we try to do on the script each quarter is, again, make sure we are addressing that and letting the analysts and investors know that we are analyzing all of our assets on a monthly/quarterly basis, to ensure that capitalization and/or impairments are not applicable. Now, when you look at it at the end of the year, we did a thorough review of that and we placed on hold a project that we had in Naples, Florida, at 951 and 41. And I think as some of you've seen, our interest expense in the quarter increased. And that's as a result of parking that asset. And it was roughly $200,000 of interest on a quarterly basis that we will incur in 2010.

So, I think, again, we hit that hard at the end of the year, which we filed our K March 15. So, between now and -- March 15 and today, there hasn't been a whole lot of -- we went through the analysis again at the end of the quarter with the auditors and internally. And it's something we're going to review consistently. And we have enough activity on the projects right now but we'll continue to monitor that and report accordingly.

The only thing I'd add, Rich, is, it's a fluid process and very driven by where we see the activity with the tenants. And as Dan pointed out, we've got a lot of -- we have leases executed, LOI's executed. So, if that changes for some particular reason, that's why you're always looking at it. So, it's not a simple --.

Right, sure. I got you, John. Thank you. And then, so is the amount of capitalized interest per project, roughly, the pro rata of what you spent versus the, say, $2 million a quarter of capitalized interest that you have total?

But the $2 million a quarter, Rich, also includes Cobblestone and Eddy Street, which -- that capitalized interest is pro rata, as we deliver spaces. So, for instance, those projects were built in phases. So, as those phases are occupied, we will begin expensing the interest, as well as moving the assets of the project from CIP to fixed assets. As the projects begin to open up, that's when the capitalization ceases. So, I think -- on your question on a -- from a future development perspective, I think that's -- your assumption is correct. I think if you take it on a pretty much pro rata basis because we do kind of a weighted average interest calculation and allocate it across the projects.

Okay. And so, then, when do Cobblestone and Eddy come out of CIP, so to speak, or fully operational?

I think when you look at those two, I think as we -- the the Eddy Street project, again, it's started and it's being built in phases. So, I think it completely comes out and transfers to operations, our objective would be, closer to the end of the year. I think when you look at Cobblestone, again, with substantial construction still going to be commencing on the Whole Foods pad, that's going to, again, be phased out and moved over in pieces.

Rich, just remember, as we're trying to explain this, as that process is occurring, obviously, there's rental revenue that's coming in as well. So, I know you're probably thinking about an impact to the P&L. And there's rental revenue that absorbs that as you roll off that interest cost.

Exactly, yes, you're right, John. I'm just trying to figure out, that $2 million of quarterly capitalized interest, what kind of impact did we have if we don't do all of these things? But, yes, you guys have made it pretty clear. So, then on the -- switching, for a second, to leasing on the bankruptcy front. Is there any concern there, on your guys' part? Because as you point out, any lost junior anchor type box can be pretty significant.

No, Rich, frankly the bankruptcy front, at this point, has been much better than I think what most people had imagined. When you look at our top tenant list, we're pretty comfortable that we have a very high quality group of tenants in the top ten and the top 25. As you know, we're always monitoring that. But the best thing is that we've really reduced our exposure, on a percentage basis, as it relates to any one tenant. So honestly, Rich, I don't have an impending thing that we're thinking is a big concern. But we've made it clear that tenants, boxes, small shop tenants, whatever, that's just part of the business. They do go out and it's always our job to fill them when they go out. And I think you can see from the fact that we had seven boxes vacant not long ago and we're down to four. And of the four, we're negotiating leases two of them. That, clearly, we have good real estate that tenants are interested in.

Okay. Great. Thanks, guys.

Your next question comes from the line of David Fick with Stifel Nicolaus. Please proceed.

Good afternoon, gentlemen. Did you have to do anything with Macy's in terms of accommodation to achieve that lease renewal?

Dave, we did not have to do anything as it tied back to the lease renewal, fortunately, due to the redevelopment that occurred. They're happy and well-positioned with what happened with the projects. So, no, it was a very smooth process.

They just exercised their option, David.

It was pure execution, okay.

Pure exercise on an option.

Good for you. You must be doing the right things there. The next question is land sales, I'm just wondering, given sort of resurgent positive view on the part of retailers, are you seeing an increase in demand for pads? And what might we see from an upside perspective in the pad inventory that you have today?

Well, we definitely are seeing more interest on the pad side. Again, I think to the extent we have ground leases there, Dave, we still favor ground leases. But there are definitely some deals where the tenant is going to really push for a sale, a purchase. So, I think our guidance we gave was a $0.01 to $0.03, I believe, on the fee side and the land sales side. That's still reasonable. And we'll just kind of take it as it comes. In the right situation, we will sell. There's a couple of deals we have right now, banks in particular, that are looking. So, we'll see how it evolves.

And I know it is tough to talk about individual tenants but what are you hearing from Target? They really pulled back their horns about 18 months ago and kind of very conservative and you've been a preferred developer with them. Is there any kind of change in their mode in terms of expected openings, from your perspective?

Dave, we have been in a position of talking to multiple real estate managers inside of Target. And by no means, do I want to speak for Target. But as it relates to our perspective, we do feel that they are now active in terms of trying too fill pipelines. With some increases in same store numbers, I think they are beginning to look at new opportunities. And it's been described to us that that is becoming a fairly difficult task because of the lull that we went through the last 1.5 year and to two years. So, we're in very close contact with them, making sure that we're able to capitalize on some of those opportunities moving forward.

Dave, I don't know if you caught my comment on the lack of entitled land in the hand of capable developers. That's what that meant. I think what we're saying is, historically, when we saw the boom four years ago, when everybody was building and every single site plan at ICSC had a target on it, I don't see that happening. They're very cautious around who they're going to work with because, obviously, they got into situations where the developer couldn't deliver and you have half built projects. So, while the pace of the store openings won't be what it was, I think the ability for guys in our position to get a higher percentage of those is pretty good. So that's encouraging for us.

And what about for your existing deals that -- where you had some issues and they were put on hiatus?

As it relates to Target, specifically?

Yes.

We're still working with them on the two that we've mentioned in the past. I think it's a big -- the situation there is, again, everyone is more cautious, so the pre-leasing and the co-tenancy, in terms of having a lot of the players in at opening, is a bigger deal to them. So, that delays the process. That's why it takes time. But they're, from my perspective, still interested in both.

We'll be meeting with them out at ICSC and going through some technical issues as it ties back to site plans. So, we're fully engaged.

And the roof top development isn't an issue on either of those locations?

Well, I think the roof top development clearly slowed it down. It slowed down everybody. But as we were saying, you can be selective only for so long, as it relates to -- if you're going to grow your format, at some point, you go back to doing deals on sites that aren't immediate. Because you have less and less opportunities for the large in-fill sites and they're extremely expensive. Obviously, if you're going to do you a project big enough to accommodate a Target or Wal-Mart, you're talking about a pretty large parcel. So, to find that in an in-fill area, when you do find it is very, very expensive. So I think -- look, we're not trying to say, Dave, that the has world changed over night. We're just saying that we see progress here and we see their options becoming more and more limited, which means that we're closer to turning that page.

Thanks.

Your next question comes from the line of Andrew Dizio with Janney Capital Markets. Please proceed.

Thanks, good afternoon, guys. You talked about the development pipeline. Can you talk a little bit about redevelopment and maybe if you think you have additional -- or what additional opportunities you have behind the five projects listed in the supplement?

Go ahead, Tom.

John and I keep starting at the same time. From a redevelopment standpoint, we do have five very solid projects. As we mentioned, two of them are under construction, as we speak. And one of the keys to this redevelopment initiative is, of course, to find and pull out as much value as possible anywhere inside our portfolio. And Dan Meador, Head of Asset Management and his team are constantly looking for opportunities for us to do that. So, it is absolutely a focus. And as the amount of tenants grows, in terms of their reference to doing new deals, this will open up more opportunities for us. But, yes, a very important initiative for us.

Can I assume or think about it this way that, you're going forward, you said you have a bigger focus on kind of limiting CIP as a percentage of your assets. And so, with a quicker turn on a redevelopment project, it could become a bigger part of your business?

As you know, our asset -- we have a newer asset base. So, culling our assets for deals that are falling apart and need to be redeveloped, that's not us. But we are looking for opportunities to find situations within the portfolio where we can add incrementally to them. But clearly, when you see what we're doing on the existing assets, we really like the returns. So, we're going to try to do that. You can't make something out of something that's not there. So, the assets that are performing and are fully maximizing the parcels, there's not a lot you can do there, other than some minor improvements. But if it doesn't generate additional rent, that's what we're always looking at. We're always looking at; Can we generate additional NOI? So, yes, it will become a bigger part of what we do overall. And, yes, it is a much more attractive equation on a risk adjusted return basis. But we have a limited stable of that due to the quality and newness of the portfolio.

The only thing I'd add to that is, these redevelopments that we're talking about on the redevelopment list, inside the supplemental, are relatively large in size. But we will also focus on very small incremental increases in NOI. That if we can find an outparcel, if we can generate ancillary income through the properties, we're going to be looking everything from the smallest increase to a large full scale redevelopment.

Great. Thanks.

(Operator Instructions)

And your next question comes from the line of Jeffrey Donnelly with Wells Fargo. Please proceed.

Hi, guys. Just to clarify, I think you alluded to this, John, in your remarks and I think in your response to David. You are saying you think ground up development is, let's call it, creeping into the discussion with retailers again?

Absolutely. It's more than creeping in. Jeff, what -- when you look at global numbers, it always is difficult to figure out submarkets. So, when you look at numbers that tell you how much square footage is vacant in the US and how many vacant boxes there are, it's difficult to understand how many of those are what we would call high quality, tier one possibilities for the retailers. So, as we continue to do deals -- just look at our little situation as an example. When you go from seven vacant boxes, to four, to two, you start to realize that there's just not that many opportunities for these guys to go and be in high quality real estate.

So, as that occurs and the world continues to slightly improve and gradually improve, which is kind where we see it. When you're a retailer and you start thinking about EBITDA growth in 2012 and 2013, that's when you realize new store development is kind of a must. And again, backing up on the comments, since not a lot of the land that you see out there is ready to go, in terms of entitlement, in terms of capable developers being ready to build, it shrinks that universe a little bit. So, it's not as though we're saying we're where we were. What we're saying is that we are absolutely having conversations with retailers and will have conversations with retailers, coming up at ICSC, about new development.

I know, certainly, in retail, that all space is not created equal or better put, all sites are not created equal. But does that change your take on the ability to acquire either half built or half leased developments? Is that a deep opportunity for you or another? Or do you think just much of the product out that's, I'll call it, partially completed developments are just not worth the effort?

Again, case by case, but we haven't been overwhelmed with opportunities of half built shopping centers. Anything that we've seen so far, in the last 1.5 year, has been half built for a reason. So, I don't see it as a major deep opportunity but again, we're early in the process. As we all know, there's a lot of debt coming due in the next three years. So, I'm sure there's things out there, that we're not familiar with, that are hanging on, that might be interesting. And again, you've got to be cautious around; Where do you want to spend your capital? Just because it looks good on paper, everybody -- I've never seen a bad pro forma. So, we can -- we have to be cautious around jumping in just because it looks distressed, is what I'm trying to say.

That's fair. I'm curious, then, if there are sites where it's certainly, I'll call it justified for retailers, maybe to explore that. To flip it around, have you found there are metros where the demand for new openings, I don't mean just development but just taking space has simply just fallen off the radar screen and they've kind of red lined for the time being?

Well, certainly there has been -- there are parts of the country that -- when things kickback up and restart, as it appears that that they're beginning to do, you're clearly going to want to start in the areas where the retailer feels he can get the quickest incremental sales growth. So, sure. Does that mean that there are parts of the country where they're probably not on the top three list? Yes. I don't think we operate in any territories that we would say, "Boy, it's red lined." We don't currently have that. But obviously, there are certain parts of the country that they believe will generate higher sales. But again, it's all on a cost adjusted basis and they're thinking about profits, not just top line sales. So, what might look like a small market to someone, a retailer is going to say, "I can make a lot of money in the four wall." So, it's a long way of saying, yes, there probably is, Jeff. But I'm probably not the guy to tell you what's been red lined. I don't want to hurt anybody but it's not anything we're doing.

And just one last question. Then, how do you think about market rents? If hypothetically, at the peak, you guys have largely developed a lot of your own stuff. You were probably pretty close to market rents. And let's just say, your mark-to-market today is down, if you had to, down 10% to 15%, let's make up a number, from where things are today versus where they were signed. Do you think in one year's time, two year's time, that's going to narrow substantially? If you think development is going to come back, you're going to see a quick close in the gap?

That's a supply and demand question. I do think that it's going to come back quicker than what people think. Just like things have happened faster -- they typically happen faster than people generally think they are. But if you look at the makeup of our rents, our average rent is under $13. Our average small shop rent is just under $21. And our average box rented is under $10. So, we're operating in an area that we think, we don't have a lot to give up. Sure, do we have an occasional shop rent rolling over in the high $20's, low $30'S? That happens occasionally but it's not enough against the entire portfolio that we're worried significantly.

And we do think in the right situation -- we have an example, Jeff, of one of our redevelopment deals, that the difference between the rents that we're talking right now with the tenants, we're negotiating with, versus what we were talking about a year ago or nine months ago, are very substantial. So, it's case by case, supply and demand. But assuming we continue along the path that we are, which is kind of a gradual improvement, that gets gradually better along with it.

Thanks, guys.

At this time, there are to further questions. I would like to turn the call back over to John Kite for any closing remarks.

I just wanted to thank everyone for spending their time with us today and look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.