Kite Realty Group Trust (KRG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2010 Kite Realty Group Trust earnings conference call.

My name is Jonathan and I'll be your Operator for today. At this time all participants are in listen only mode.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes. I'd now like to hand the call off to Mr. Adam Chavers, Vice President of Investor Relations. Please proceed, sir.

Thank you, Operator.

If you have not received a copy of our earnings Press Release please call Kim Holland at 317-578-5151 and she will fax or e-mail you a copy.

Our September 30, 2010 supplemental financial package was made available yesterday on the company's website at kiterealty.com.

The filing has also been made with the SEC in the company's most recent Form 8-K.

The companies 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 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 SEC 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'll turn the call over to John Kite.

Thanks, Adam. Good afternoon and thank you for joining us.

In an effort to streamline the earnings call process for everyone involved, I'll be reading our remarks today, Tom and Dan are available to take questions as usual. On the operational side of the business, we reported FFO of $0.11 per share which was in line with our budget as well as consensus estimates.

We experienced a quarter-over-quarter increase of 100 basis points in our overall portfolio leasing percentage and 120 basis points for our retail portfolio.

We continue to see strong demand for our vacant space as we anticipate another strong fourth quarter to close out the year.

The third quarter leasing spreads represent another quarter of positive cash rent spreads on an aggregate basis for new leases and renewals. We generated a 1.9% aggregate cash rent spread for the third quarter and a 4.4% aggregate cash rent spread for the nine months of 2010.

In order to provide more comparable data in our supplemental, we have separated the retail only component of the operating expense and Real Estate tax recovery ratio on the bottom of Page 12 of the supplemental. The combined recovery ratio includes a number of gross and base year office leases which affects the comparable results. The recovery ratio for our retail portfolio was approximately 77% for the quarter.

We also added a debt to EBITDA ratio calculation at the bottom of Page 10. Our debt to EBITDA at the end of the third quarter was 10.3 times. As discussed on previous calls, we anticipate reducing this metric to eight to 8.5 over the next 12 months. A portion of the reduction will come from EBITDA growth and the foundation for this growth has been put in place as a result of our strong leasing efforts in 2010.

We have approximately 320,000 square feet of executed junior anchors that are in various stages of tenant construction. These represent 11 anchor tenants recently signed that comprise nearly $4.5 million of annual EBITDA. We anticipate the majority of the 4.5 million will be recognized in the third and fourth quarter of 2011.

In addition, three junior anchors commenced paying rent near the end of the third quarter. Accordingly, after annualizing our third quarter results, a recurring $600,000 positive adjustment should be made in order to correctly account for this activity in forward-looking NAV calculations.

Also in the third quarter, we recorded 180 basis point increase in our small shop leasing percentage. This marks the second consecutive quarter that we achieved an increase. Small shop leasing has been a focal point of the Company and generates increased earnings with minimal capital investment.

We believe this activity demonstrates a positive net absorption trend for small shop space at our centers. We'll monitor this trend going forward and look forward to continued progress in small shop leasing as our lease junior anchors take occupancy and drive traffic to our centers. The majority of this leasing activity will benefit our same-store metrics.

We are starting to see improvement as our same-store performance for the quarter was down half a percent but 100 basis points better than the second quarter.

The year-to-date same-store is negative 1.6% which is in the guidance range we provided at the beginning of the year.

On the development and redevelopment projects, the two in place projects, the two in place development projects, Eddie Street Commons at Notre Dame and Cobblestone Plaza ended the quarter at approximately 96% and 78% leased or committed respectively.

We anticipate moving Eddie Street to the operating property portfolio by the end of the year. This is a project that was developed during the economic crisis and we were able to exceed our financial expectations while producing an outstanding project for the Company and the community.

The project is being praised for its scale, density levels and ability to successfully bridge the representative goals of the University in the surrounding community. This successful model may provide us additional University based opportunities in the future.

At Cobblestone, Whole Foods is starting construction this month. We anticipate acceleration in the small shop leasing as shop tenants get assurance of the Whole Foods opening date.

Both of these developments demonstrate our ability to execute on complicated projects during difficult times while significantly increasing our EBITDA.

A number of our redevelopment projects also made great strides during the quarter. In Coral Springs, Florida, Toys R Us/Babies R Us opened in October of 2010, after expansion of one of our vacant Circuit City locations. The project is 100% leased and will move to the operating portfolio in the fourth quarter.

The significant transformation of Rivers Edge shopping center in Indianapolis is already over 95% pre-leased and under construction. The anchor tenants are scheduled to take occupancy in the Fall of 2011.

At Baldwin Plaza in Jacksonville, Florida, Academy Sports opened their 65,000 square foot store in September and we are negotiating another lease for 47,000 square feet to occupy the remainder of the former Wal-Mart space.

The future development pipeline continues to lease up and we'll continue to provide updates as we approach construction commencement on these projects. Based on the current leasing environment, we're anticipating starting at least two of these projects in 2011 and we continue to under write the development and redevelopment projects to generate incremental returns in excess of 10%.

Turning to the Balance Sheet, Dan and his team continue to work hard to improve the Balance Sheet. We exercised the one year extension of our $200 million line of credit to a new maturity date of February 20, 2012.

We exercised this extension option to provide flexibility, as we have already begun to have very positive meetings with our line of credit banks on a new three to four year agreement.

Our unsecured term loan matures in July of 2011 and we are analyzing options to pay off or extend this piece of debt. We are evaluating alternatives to replace the term loan with a more permanent long term piece of capital and the remaining property level loans that mature in 2011 are currently in various stages of negotiation, as we are moving quickly to take advantage of current rates.

Based on our experience with property level debt over the last couple years, we expect to successfully address all of our 2011 maturities.

We will continue to update you on our progress as the refinancings occur.

In terms of 2010 guidance, we trimmed the top end of our range by $0.02 so our range is now $0.42-$0.45. This is consistent with the second quarter call as we guided to the low end of the range.

Again, thank you for participating today and Operator, we would like to open the line for questions.

(Operator Instructions) Our first question gentlemen comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed, sir.

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

Just looking at your leasing in the quarter and your occupancy in the anchor portfolios, it looks like you don't really have a whole lot of vacancy left for anchorage in your anchor space, so given the success that you've had in leasing those spaces of some of the new relationships you've created I was just wondering if we might see more properties moved into redevelopment where you sort of combine shop tenant space like you're doing at Rivers Edge.

Yes, I mean, I think we're looking every quarter, we kind of sit down and think about that and particularly at this time of year going to the end of the year, we're going to be, we're looking at the total portfolio as it relates to our plans for it in 2011.

In terms of vacant boxes that we have in the operating portfolio, I believe we have two left, so yes, I think to the extent that we can find opportunities to do things like we're doing at Rivers Edge and at Coral Springs, et cetera.

We'll do that because the incremental return is pretty high, but Todd, it's going to depend on the dynamics of each of those particular centers, but right now we do think there's some other opportunities out there.

We would kind of like to get done what's in front of us and that's why as you can tell we're moving a couple of these projects over shortly. So I think you're starting to see us get back into this cadence that we had a few years ago where we were completing projects and starting projects, moving projects into the operating portfolio and starting new projects, so it feels like we're kind of going back to that flow which is real good. So that gives us the opportunity to look at existing assets and see if we can increase NOI so we definitely will be looking to do that in '11.

And then on the shop tenant space, how would you characterize the demand right now? Where does it mostly seem to be coming from and is it national tenants or are you seeing type of return from some of the local mom and pop store owners?

I think it's a little bit of everything, if you look at that's what we highlighted that a couple quarters ago, if you recall that we were not happy with where the percentage was and only a couple quarters ago was 75%. Now we're close to 78%, so you can see we've attacked it. And I think its been in each of those categories, certainly there's more willingness for small shop retailers on the local level to come back in and take some risk.

The franchise area has grown and I think a lot of the franchiseors stood by their franchisees during the down time, so and then we're doing national deals with Radio Shack and GMC, and guys like that, Tom I don't know if you want to add to it?

Yes, the only thing I would add is that we're also forcing it on the renewal side, because needless to say that's the best use of our capital is to keep tenants in place so we're kind of pairing those two strategies together to get that percentage up.

And I would add there, too, is obviously as we're bringing these boxes into play, these anchor tenants that these are strong anchor tenants that we have backfilled spaces with, so that's attracting more interest in our shopping centers, so it's probably a combination of all of that.

And how are rents holding up for the shop tenants that you're signing leases with now, both the national and regional retailers and the mom and pops that are starting to emerge a little bit?

Yes, I mean, I think that's kind of how we were pointing out that the rent spreads are holding on pretty decent and so generally, when you look at our average base rent in the small shop space is around $20.99, $21 is our average base rent in small shops and as I've said before, every day that's kind of getting a little bit better in our ability to get that rent or better.

There is certainly deals that we have done which is why when you see our rent spreads, there are going to be certain deals that affect it plus and minus, but generally speaking, we're at kind of a rent right now where we're able to achieve that and better and there will be an occasional deal that we would do below $20. But again, it depends on what the guys expiring at, so Tom, you got anything you want to add?

I would just also add that on the box side we've been very happy how those have maintained their levels as well because we've had a productive year through September and we've been encouraged the way those numbers have come in on the box side as well.

Okay, and then just lastly switching gears to the development, I don't think you mentioned specifically Del Ray or Parkside, but you noted the two projects might get started soon, but regarding those two projects, they both have construction loans that expire in 2011 and I know the market for construction financing is improved somewhat but I was just wondering if there are any implications for these loans in particular as they mature if they have extension options or if there's any contingencies to financing at this point?

Well I'll talk about it and then let Dan fill in the gap, but one thing to remember on the Del Ray loan, I mean that's a pretty small loan, that's, $9 million what's it come to? About $4.5 million or $5 million so that's a pretty small loan against the size of that future project so that was originally kind of a smaller land loan and so that's obviously not going to be a problem at all, and then Parkside is a joint venture, I'll let Dan fill in the gap on that.

And Parkside, of the loans we have maturing in 2011, there's nine properties, average of about $12 million per loan and Parkside, of the eight consolidated loans, we have four that are right now going through the appraisal process for refinancing and Parkside is one of those. So we've got our development plan, we've underwritten our projected NOI upon a completed development, so we're going through that Parkside loan appraisal right now so it does.

That's one that is in the JV with Prudential. It does expire at the beginning of '11. It's with the relationship bank so we anticipate renewing that. It's based on how the appraisal comes out in that process.

Okay, thank you.

Thanks.

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

Hi, good afternoon.

Just maybe if we could talk a little bit about some of the external opportunities you're seeing.

I guess you've moved through a lot of the leasing and its obviously been paying off and I'm just wondering now whether there's sort of more time for Management to look at broken development projects or maybe new development projects particularly as we're hearing that a lot of the mid size box type tenants struggling to find good locations for assets.

Yes, Quentin, I think we obviously have been focused on blocking and tackling and execution and inside the Company.

A lot of the results that we've seen in leasing, we would agree those have been positive, but obviously the nice thing is the revenue and the EBITDA is out in the future for that leasing, so we do have some time now that we're thinking through what our objectives are in 2011.

We still have plenty to do internally in terms of finishing out of leasing in the small shop portfolio and we obviously have plenty to do in the development leasing so there's still a strong focus there.

In terms of looking at opportunities, we are definitely seeing things and I think when you look at what's going on in the private Real Estate market there's still a tremendous void there as it relates to refinancing capital. So we are seeing things and we're looking at opportunities.

We're also looking at some acquisition opportunities where we could add value to those acquisitions through lease up or redevelopment. So yes, we do have, we've always been looking at that, but we certainly have probably an even greater focus on it now because it's our belief that the timeline or the time available to us to have an advantage on the private market in terms of capital availability won't last forever. So we got to go out there and really dig and try to find stuff so we are definitely looking at that.

The only thing I'd add is just as we look at redevelopment and we look at future development and maybe potential opportunities, the good news is we have the infrastructure in place from our leasing team from the development group etc.

That we've got the experience to take on those opportunities if they present themselves, so we'll continue to keep a measured approach in terms of looking at new opportunities.

And obviously, you're at a disadvantage on the pricing of capital from your common equity.

If you sort of had a reasonable size transaction or development that came in that was external, what do you sort of think your best source of capital would be?

Well, I mean, if you're talking about us looking at a new development opportunity, first of all, we're really not talking about new ground up development opportunities right now.

We have enough in terms of what we currently have that we own, so we would be talking about coming into a deal that has some sort of existing income already that would be, that we could add to.

That's the perfect kind of opportunity for us. If it was large and there was a large capital requirement, then it's going to depend on the size, Quentin. We have had a lot of conversations in the last six months with very interested joint venture capital.

As I've told you the last quarter, that type of transaction doesn't seem to make sense for us unless we literally have the project in front of us that we're trying to match that project with the capital, so we could easily pursue some of those partners if we wanted to.

Again it's going to depend on the situation and that's why I was saying it may be more straightforward, you may see us do what looks like a more straightforward acquisition of an income producing asset that we think we can add value to before you would see us jump into a major ground up new development, I can tell you that.

Okay, thank you.

Okay, thank you.

(Operator Instructions) Your next question comes from the line of Mr. Rich Moore with RBC Capital Markets.

Hello guys, good afternoon.

Hello Rich.

Thank you for the extra disclosure on the reimbursements, et cetera. That's very good stuff.

John? Which two projects out of the development pipeline do you think you'll start next year?

You know, I think what we're said all along, Rich, is that the Del Ray beach project is one that we think is approaching kind of the Litmus test where we want it to be and then we had also mentioned that South Elgin in Chicago was far along.

Those are two of the frankly three or four that we could have chose from that are getting close to that point, but again, I don't want to, we're not 100% sure yet on those, but generally those are likely two. And then we'd kind of go from there. There's progress being made quite a bit of progress being made in Holly Springs, progress being made in Parkside, so the good thing about this, Rich, is we are, because we've waited and we've been selective in deciding how to make the deals with the tenants, we're getting to the point where we can kind of make those choices instead of have those choices be made for us.

Right. That sounds good, and now would you likely start those later in the year you think, John? So we're not quite there yet?

No, I mean we're not starting something in 2010, so--

No, no I'm sorry. 2011.

Yes, I would say it would be great if we could start something in the first half and something in the second half.

I think that's fair Rich. I think we have a nice opportunity on one of them in the First Quarter and I think somewhere in the third or Fourth Quarter, the second one could follow on, but make it clear that we are working very hard on all of these and we're simply talking about trying to get these starts in place in 2011 but there's going to be the same amount of intensity on each and every one of these projects throughout the balance of 2011.

Okay, yes, good, thank you, and then just sort of in general, there seems to be this debate about whether development as a rule can start back up. I think you obviously have some specific projects you've been working on for a while, but what do you think the retailer pulse is like as far as new developments go? Is that changing from where it was, say six months ago?

I think this is a fairly simple supply and demand equation, Rich.

We're going to three years of little to none of new development activity. And just for example, you look at a market like Del Ray Beach which is in Palm Beach County. We've talked about this project enough times but there's a market where there's almost 30 million square feet of retail and there is zero under construction and if you look across all our Markets that we're in, that repeats itself time and time again.

Literally zero under construction so I don't know whether it has anything to do whether retailers like development or don't like development.

I'm sure if they prefer it they would backfill boxes for [infiteitm] but those boxes are gone. You heard us say and we have two. Down from 11 or 12 at one time, so our business is not complicated. It is supply and demand.

That equation is moving in our favor, continues to move in our favor and will for several years because when you just cannot ramp up the development engine. You look at the whole country.

I mean even if you want to do it anecdotally, when is the last time you saw a large shopping center under construction? So I think that's what it's all about and that's why we're getting more activity and the retailers obviously have figured out how to run their businesses very effectively and their margins have improved and what does that mean?

That means they are going to be looking to grow the top line because they've controlled the operating expenses as much as they can, so I think these are a good set of dynamics for guys like us that have an inventory ready to go and have the skill set and that's what we're trying to show you with what we're able to do at Notre Dame, two years ago there was nothing there and it's 96% leased now so these are the trends that we're seeing that are making us feel more encouraged as we move forward.

But Rich, one thing John said that was very important is that we have the inventory and it's not only inventory of land but it's inventory of fully entitled property that will allow us to move rapidly once these opportunities come about so it puts us in a much better position.

Right, good, yes, thank you, Tom.

That's good color and then on the opposite side of things, are you guys worried about any tenants in particular that you think that two empty boxes goes higher because we have some weak tenants that you might lose?

No, I think Rich, we're always monitoring our top list. We always point out if you look at our top 25 tenants, it's a very strong roster.

Our exposure to any one tenant is not more than 3% at the top which I think is public, so every day that kind of goes by away from the fall of 2008 is a good day, and that means that we're further removed from all of that panic and we don't see anything on the horizon. But I think you've got to realize we will go back to the natural ebb and flow of tenants that make it and tenants that don't which is why it is so important that we select great Real Estate.

And we do believe we have great Real Estate, Rich, and I think that when you look at our metrics and the improvements that we've made and how rapidly they've come relative to the peer group, I think it talks about our Real Estate as much as it does talk about us. So sure, there will be some guys that go out but we don't have any fear of that and in particular, one of the good things is we have very little on the book exposure, on the bookstore exposure.

We have no Borders, we have no Barnes & Noble. We have a couple Books a Million, but those categories obviously are hurting bad. We've got two Blockbusters, that's not a big deal, but I think people shouldn't be shocked as these guys do.

They will come and go but the bottom line is it feels like we're through the worst of that Rich.

Okay, great. Thanks John, and the last thing is an equity, use answer a common equity issuance a possibility for taking out that term loan?

You know, as I was saying in the remarks, we obviously know that we need to take out that term loan. It's not up until July of 11.

Certainly, it would not be our preference today at these prices to issue common equity just to replace debt.

I mean that's not as you know, we have talked about if we were going to issue common equity we would prefer to do it in an aggressive manner, not in a defensive manner so no that is not our primary objective in terms of replacing that at all.

Okay, very good. Thank you guys.

Thanks.

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

Thanks, good afternoon guys.

Hello.

Just following up on Rich's question quickly with possibilities for taking out the term loan. You'd mentioned before that preferred equity was a potential. Is that something you're still looking at?

Yes, preferred is something that Dan and I continue to monitor.

We view that frankly as more attractive than common today at our cost of capital in terms of our common but yes, so that's a possibility. There are other possibilities too though. Dan, do you want to?

I think when you look at it there's really two things.

First the term loan is with three relationship banks that we've worked with for a long time so it's not placed with someone who we can't pick up the phone and talk to.

I think that's number one. So there's always a possibility of going back and refinancing and extending that, but I think from a Company perspective we would like to replace it with more long term capital and we definitely are monitoring the preferred market to see some of the prices that some of the unrated borrowers have been able to secure in that market have been attractive.

Sure, that makes sense thanks, and then a question on Eddie Street. Everything I've heard locally in the South Bend area it sounds like that project is a home run. Can you remind me if there's any potential for additional retail phases at that location?

Well the way the project is set up is there is an opportunity to extend future phases down to the South towards State Road 23.

We've been as you said extremely successful with the project across-the-board through the office apartment complex component, retail, hotel, etc. So all those pieces came together very nicely. So we are in a position that we have the opportunity to expand, it but we are not in a position that we have to. We'll do it based upon a measured approach tied specifically to demand, so that time frame has yet to be determined at this point but the opportunity is out there.

Okay, and when you mentioned the potential for future University projects during your lead in this afternoon, was that part of what you were referring to or elsewhere?

No.

What we are referring to there is this project because of its uniqueness and because of the kind of high profile nature of Notre Dame, has lead us to people have quite a few people have contacted us about would we be interested trying to pursue a similar project at another University, so that was beyond an expansion of the existing project.

And again, that's not, we're not saying that's kind of a little niche that maybe we've developed and we're going to see if we can, if there's an opportunity, these are a unique set of circumstances here but there probably are a handful of other opportunities for us along those lines.

Okay, that's helpful, thanks.

And just one final question, a clarification, your remarks leading into this Conference Call. Did you say something along the lines of about $600,000 in annual EBITDA would be what was the occupancy taken in the third quarter?

Yes, from an NAV perspective what we're trying to do is we had some mid quarter rent commencements and what the mid quarter rent commencements were just basically saying if there's another $150,000 of tenants that took possession and started paying rent in this quarter, that were going to receive in future quarters, but this quarter, there are $150,000 short so if you take that and annualize it that's where you get the $600,000.

Right got you. Just wanted to make sure I had the number right. Thank you.

Yes. Thanks.

Your next question comes from the line of are RJ Milligan with Raymond James. Please proceed.

Good afternoon guys.

Hi, RJ.

John, I was just wondering, I know we touched on it last quarter's call and you spoke briefly on it, but just in terms of dispositions as you look in some of your non-core Markets and non-core assets, can you just comment on where you've seen pricing go and if you think there's, the comments we've heard is there's a better market for those types of assets and where you are on looking to make those positions.

Yes, for us, RJ, we don't have a tremendous amount of assets that we don't view as core, so I know there's been a lot of conversation around that, but you're not going to see us set up a section in our supplemental of core properties and then all of the other rest of the properties because we just don't, we're very confident in the properties that we have, obviously we're smaller so we have a real good handle on that.

I will say yes, we do have a handful that it's even tough to say that they aren't core as so much to say that from a geography perspective, there's definitely a handful that we could recycle.

There's probably one, two, or three that we could recycle that are in geographies that we like, but we think that property has seen its best days. But I'm talking about a pretty limited number of properties, so I don't know that I'm the best guy to say what are non-core cap rates, but clearly, cap rates have come down enough that the secondary geography locations you could certainly trade things attractively versus where you were.

I just don't, we're not in the market enough on that to say what the basis point change is, but I can tell you of the majority of our assets certainly when we see the trades occurring in the market, you would look at the majority of our assets, the high majority is going to be that high six, low seven cap type asset.

So that would leave me to believe if we had an asset that we didn't view was core to us, certainly in the eights somewhere would be no problem, so clearly, there's such a huge demand for the high quality assets that we're pretty confident that we feel like there's real good value and upside in our portfolio.

Great. Thanks, John.

Sure.

Your next question comes from the line of Nathan Isby with Stifel Nicolaus. Please proceed, sir.

Hi, good afternoon.

Hi, Nate.

Tom, just looking at Del Ray Beach can you just give us a sense of small shop leasing progress this quarter and how close you are to that Litmus test to getting started?

I think we've said all along that we have our anchor tenants in place which is obviously important in a project like this and there's opportunities for developers like us to go ahead and start this project, but we've been very disciplined based upon the fact that we do not want to start until the small shop leasing is somewhere close to 70% or above. So we're at a point right now that we've continued to make progress, but until we really have those executed leases in place, we're going to hold to our original perspective that we need to be at 70%. So that's one of the things that John talked about, that we have an opportunity to potentially start this project this year, but we are going to hold firm on that requirement, but based upon the trends we see, we think that's going to occur some time in 2011.

Okay, all right, and then John, looking at it in terms of your Balance Sheet position, I'm not asking how you're going to get there but if you were to look at a year where would you like to be in terms of a leverage level in a year from now?

Well, I think Nate, we've been pretty clear that we actually do have a schedule of this delevering process and so I'd like to be right now we're slightly above 10 and a year from now I'd like to be around eight.

Is that possible?

It's possible.

It could be more like 8.5 at that point but there's a significant amount of this work that's already been done because of the leasing so the external things that we need to do to go from 10 to eight are pretty limited.

We're talking about some things that we can do in terms of some minor acquisitions that would help or minor or major depending on timing. But obviously, acquisitions could accelerate that delivering, but we feel pretty confident that you really got to, that's the trick with a Company like ours is you got to look at debt to EBITDA on a forward basis and everybody wants to look at it on a current basis and we understand, that but as we look at it on a forward basis, we feel pretty confident we can drop it two turns in the next 12-15 months.

And again, we can accelerate that if we do something on the acquisition front and we're looking at those opportunities.

Okay, thanks.

Sure.

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

Good afternoon guys.

Hi, Jeff.

John? I mean, I'm curious because you made this comment earlier but most of the retail REITs are saying that anchors want unit growth, yet there isn't much space left to be had. So, it seems like there's something of a disconnect between obviously what one side is saying and what the other side is saying.

I'm curious how you see that playing out.

Do you think in the next two or three years, we'll see rents for anchor boxes and in fill markets- I don't want to say spike- but begin to rise up to compensate for that or do you think maybe a better way to play it is that retailers lower their standards, if you will to go into more secondary Markets so it's not so much a rent story as it is just a leasing story, because it doesn't really seem like many people are trying to make a call on that one way or another.

I don't know. I guess my view is as I was trying to say if you believe it's a simple business and that it's driven by supply and demand, rents are going to grow, because it takes time for the developments to happen, so to the extent that there are existing opportunities that there have been a disconnection between what the retailer's willing to pay and the landlord wants, I would put my money on the landlord when I look out into the future.

Obviously, when you're looking in the rear view mirror, its been the retailer whose had that advantage but those things, they play out over time and so yes, I would tend to believe that people are probably under-estimating the potential of rent growth.

That said, there's no doubt in my mind that we will repeat cycles. And then so they will probably be surprisingly probably more development than there should be and so at some point that will tip the scale in the other direction. But it takes several years to get to that point because as Tom was mentioning, not everybody, not all pieces of land that everybody drives by in these Markets that people think that are these greenfield Markets, a lot of them can't be zoned or have environmental issues or whatever, so generally speaking I'm going to fall on the side that I think rents will grow. I don't think, I can't tell exactly when, Jeff, but at some tipping point they probably grow faster than people are imagining.

I'm curious, I know you aren't going to pursue it necessarily today but how far away do you think I guess anchor rents are from people sticking a shovel in the ground and pursuing construction because certainly land prices have got to be lower and I know it might not be being offered today but financing is cheaper, construction costs are down, it sort of seems like a lot of things have moved in favor and if people are pointing to a situation where there's tenant demand for good quality locations but they aren't available that eventually, development could make sense again and I'm wondering how far away we are from that point.

Yes, I mean, I don't think you're that far away because look, we're talking about ourselves. We're getting very close to starting a couple developments and the barrier has been that we haven't had enough tenants at the right rents to be comfortable to start.

If you look at, we did, we got eight deals we recently did at an average of over $11 a foot on the anchor so if you think about it that way, anchor, you saw some of these anchor deals being done in the single digits during the crisis, and you're already up from the single digits to double digits, so I don't think you're that far away.

I think there's a lot more to it than just what the rent is and what the land cost is. I think the risk tolerance has hugely been changed and the number of people that can execute large scale development is probably a third of what it used to be because so many players are just literally gone and will take them a long time to get back into the market.

So you got a lot of dynamics working to kind of put a cap on how much will happen, which again, this will probably help us on the rent side. These discussions we have with the retailers, look, they are still tough. They still, you know, we're in certain situations with our deals, a guy is not willing to pay the rent. We'll replace him with another guy.

I don't know what else, that's just kind of how we feel about it right now.

The only thing I'd add to that Jeff is the fact that municipalities, counties, et cetera, play a significant role in terms of your ability to be successful on ground up developments and if you look at a project like Eddie Street Commons where we picked up $35 million TIF, that's a prime example of how you can make projects strive. But I think through the slowdown I think communities, counties, et cetera, realize that they need to start enhancing their tax base and they will begin taking a different look and a different approach as developers come to the table and that's why we feel with the inventory that we have in place that gives us a leg up.

And I don't want to leave Dan out. I was hoping you might be able to--

Oh, come on.

I just want to get a little more color on the guidance that you gave for 2010. Specifically as it relates maybe to Q4.

Are you willing to share with us maybe the occupancy that you're sort of underwriting for Q4 or more specifically minimum rents that you're anticipating for Q4 because it seems like it would be a pretty big move at the top end of the guidance and where you finish Q3?

Jeff, I think when you look again we provided and brought down the range consistent with our second quarter call on the top end and I think when you look at the variables that we provided at the beginning of the year which is $0.01 to $0.03 on land sales and other type lease term fees et cetera.

And $0.01 to $0.03 on construction and service revenue, I think right now if you combine those $0.06 we're right in the middle at about $0.03 of the $0.06, so if you look at what we anticipated, a lot of the core portfolio that we had projected to be coming into operations have done so and I think when you look out in the fourth quarter and you just say how do we get to the top end of the guidance, I think that again would be more transactional oriented to get to the $0.45.

I think that's why in previous call, we guided to the lower end of our guidance which I think is consistent with where the street estimates are today.

And I think just adding to that, Jeff, you got to leave a little bit of room when some of these transactions, some of this transactional income is outside of your control so there are some things that could happen at the end of the year, closing wise that may or may not and also lease term fees are somewhat sometimes outside of our control, so I think it's really more as Dan said more about that and trying to give just a little cushion for that.

And one other thing we do have, it's not a significant amount as others, we do have some percentage of rent that comes in in the fourth quarter that can range half a penny to a penny so there's some variance in there for that percentage rent coming through.

Okay, great. Thank you.

Thanks a lot.

(Operator Instructions) Gentlemen, there are no further questions in queue and with that I'd like to hand the call off to Mr. John Kite for closing remarks.

Well again thank you all for joining us today and we look forward to talking to you next quarter. Thank you.

Ladies and Gentlemen, thank you for participation in today's call. The presentation has ended. You may now disconnect. Have a good day.