Kite Realty Group Trust (KRG) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Kite Realty Group Trust earnings conference call. My name is Jonathan and I will be your Operator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions)As a reminder, this conference 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.

Thanks, Jonathan. 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 fourth-quarter supplemental financial package was made available yesterday on 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 these 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 are John Kite, Chief Executive Officer, Tom McGowan, Chief Operating Officer, and Dan Sink, Chief Financial Officer. And I'd now like to turn the call over to John Kite.

Thanks, Adam. Good afternoon and thank you for joining us today. Our FFO for the quarter was $0.11 per share, which was in line with consensus estimates. FFO for the year was $0.43 per share, excluding the one-time write-off of financing fees from the $55 million unsecured term loan payoff. Including this write-off, FFO was $0.42 per share for the year. Our total return to shareholders of 40% for the year, places us in the top 30% of all REITs. And today, I will highlight our plans to continue to drive shareholder value.

A year ago, we discussed a concentrated leasing effort, anticipated progress for select development and re-development projects, an appetite for opportunistic acquisitions, goals for reducing leverage and our plans to achieve a higher quality FFO stream. We made great strides in all of these areas. So I'm very pleased to discuss the results today.

During 2010, we executed 1.1 million square feet of new and renewal leases, which is the highest level of annual production in the Company's history. We also achieved this production with overall positive cash rent spreads of approximately 5%. Our operating retail portfolio ended the year at 92.2% leased, up over 200 basis points from 90.1% at the end of 2009. This was driven not only by anchor leasing but also by gains in small shops. Our small shop leasing percentage increased for the third consecutive quarter, gaining 270 basis points since Q1 2010. We signed 13 new anchor tenant leases, and renewed another 7 anchors during the year for a combined 724,000 square feet. Our leasing team worked hard to sign these leases, but the quality of the real estate we've acquired and developed over the last 20 years played an equally important role. We've selected strong real estate and delivered first class product over the years, and national retailers as well as regional and local users are validating our choices.

Our leasing successes are also driving the progress of our development and re-development projects. In 2010, we completed 1 development project, commenced the final construction phase of another, successfully completed a re-development and fully pre-leased and commenced construction on 2 other projects. Eddy Street Commons at Notre Dame has been moved to the operating portfolio with a recently executed anchor Urban Outfitters. Construction of Whole Foods at Cobblestone Plaza commenced in the fourth quarter and we anticipate the tenant will take possession in the second half of 2011.

Our Coral Springs Plaza re-development was completed and moved to the operating portfolio at 100% leased. South Elgin Commons II is 100% leased as of January and construction commenced during the fourth quarter on Ross and Toys R Us. And the Rivers Edge re-development is 95% leased, and construction commenced during the quarter on several anchors, including Nordstrom Rack, BuyBuy Baby and Container Store. Please note that the square footage of River's Edge on page 30 of the supplemental is understated. The projected GLA for this project is approximately 152,000 square feet which reflects the additional scope of work to account for 3 new tenants.

We are in the early stages of benefiting from our recent leasing and development progress. A substantial number of tenants who executed leases in 2010 have yet to commence paying rent. As we complete landlord work and tenant construction, we will begin to recognize approximately $4.5 million of additional annualized EBITDA, the majority of which we anticipate commencing in Q3 and Q4 of this year. 3 junior anchors and several small shop tenants commenced paying rent during Q4 of 2010. Accordingly, after annualizing our fourth quarter results, a recurring $750,000 positive adjustment should be made to NOI in order to correctly account for this activity in forward-looking NAV calculations.

We're also capitalizing on opportunities for growth via acquisitions. Subsequent to the end of the quarter, we completed the acquisition of a 52,000 square foot Lowe's Foods anchored center in Wilmington, North Carolina for $3.5 million. This was an off market opportunity, which we believe has significant re-development potential relative to the initial purchase price. We also acquired our partners minority interest in the center located in Indianapolis. The purchase price for the remaining 40% was $2.3 million. The combined cap rate for these 2 acquisitions was in excess of 10%. Despite the relatively small deal size, we're confident in our ability to create value and incremental EBITDA on these types of acquisitions.

Our preferred equity offering raised net proceeds of approximately $67.5 million, a portion of which was used to pay off the $55 million unsecured term loan. The remaining proceeds were used to temporarily unencumber International Speedway Square in Daytona, Florida, while we secure long-term financing. The combination of this debt reduction and the leasing driven EBITDA growth has reduced our net debt to EBITDA from 10.3 at the end of Q3 to 9.1 times at the end of Q4. We have made significant progress towards our near-term goal of 8 to 8.5 times and as previously discussed, the ground work has been laid to drive EBITDA growth in the coming quarters as tenants with signed leases take occupancy.

Including January financings, nearly 50% of the 2011 debt maturities have been satisfied. We now have only 6 remaining debt maturities totaling $75 million. The status of these maturities can be found on page 17 of the supplemental. $45 million is concentrated in 2 loans which have extension options. However, our strategy is to secure long-term financing for each of these assets. We have received a term sheet for a 3-year renewal on our line of credit, as well as a 10-year CMBS loan on International Speedway Square. We anticipate closing this loan at an attractive rate and recognizing proceeds in excess of the previous payoff amount. The former loan carried an interest rate of 7%, and initially was paid off with the proceeds from the preferred offering. Accordingly, the anticipated loan proceeds will be used to reduce the line of credit balance. We'll update you in the coming weeks on the status of these negotiations.

Approximately 85% of our FFO in 2010 came from recurring rental revenue, a significant improvement over the 75% on the historical basis. Our plan is to advance this metric even further. Our leasing efforts and our $4.5 million of anticipated EBITDA have paved the way for recurring FFO-- for a recurring FFO component projected to be in excess of 90% for 2011. We're committed to recurring and predictable earnings and are confident that we have the leasing development and asset management personnel, and mostly important, the real estate to make this happen.

Moving on to guidance, we anticipate 2011 FFO to be in the range of $0.40 to $0.45 per share. The guidance primarily incorporates the following assumptions. The full-year $0.03 diluted impact of the preferred equity offering, portfolio lease percentage ranging from 92% to 93.5% at year end 2011, an increase in same property net operating income, ranging from flat to positive 1.5%, interest rates consistent with the current forward yield curve for 1-month LIBOR and the 10-year treasury, transactional FFO and lease term fees ranging from $0.01 to $0.03 on a pre-tax basis, general and administrative expenses ranging from approximately $5.7 million to $6 million, $5 million to $25 million of operating property acquisitions and no material disposition activity.

As we look at the 2011 FFO, FFO per share earnings will be a little uneven. The first 2 quarters of 2011 include interest expense relating to existing interest rate hedges from the line of credit and the recently retired term loan, while the second half of the year excludes the hedges and includes rental income from recently-signed leases. We anticipate the FFO earnings stream to increase gradually from Q1 to Q4 in 2011. And annualized recurring FFO in Q4 of 2011 positions our Company for continued growth in 2012.

On closing, I'd like to say a few things-- I'd like to address a few things that you can expect to hear on our call at this time next year. The $4.5 million of annualized EBITDA that we expect to recognize primarily in the second half of 2011 should be almost fully reflected in the late third and early fourth quarter. This is a substantial increase for our Company that comes with minimal execution risk. We laid a solid foundation through 2010 for this growth, which will not only drive earnings but will also reduce debt to EBITDA and improve our already strong negotiating position with lenders. We also continue to make significant leasing progress on our future developments, which represents imbedded growth in cash flow. And I look forward to updating you on these projects in our next calls. Finally, as evidenced by this quarter's announcements, we are also beginning to see acquisition opportunities that combine accretion, solid real estate and potential growth. And with that, I'd like to open it up for questions.

(Operator Instructions)Your first question is from the line of Todd Thomas with KeyBanc Capital Markets.

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

Hi, Todd.

Hi. If I think about your guidance, you don't have any borders, and you discussed the $4.5 million of the EBITDA that should come online mostly in the second half of the year plus some annualized rent from the 4Q start, so if you look at the $0.11 from this quarter sort of a run rate, what would be some of the negative variances, I guess into the first quarter that would bring it down a little bit before it begins to ramp back up in the second half of the year?

Well, Todd, first thing is you got to make sure you recognize what we mentioned on the preferred and the hedges. And so I think that's probably up with of the biggest components that we have. We have the dilution that we mentioned from the preferred and then we have that against the hedges in the first half of the year. So I would say that's the primary driver but Dan might want to chip in some more.

Yes, there was a couple of things, in the fourth quarter, we had at out parcel sale that was approximately $800,000 and also about $200,000 from the sale of some residential units at Eddy Street Commons. So those 2 items are in the fourth quarter. As well Todd, we also have 1 anchor tenant that pays a percentage rent, which is about $250,000. So those 3 items are primarily in the fourth quarter. And as we look out into this year, we've guided to $0.01 to $0.03 of transactional income, and that may occur throughout the year, but that's the difference between the fourth quarter and the first quarter. And as John mentioned, we only recognized a couple hundred thousand dollars related to the preferred for the partial quarter, and then the first quarter will be a full quarter of the preferred dividend going through the P&L.

Okay. That's helpful. And then a bigger picture question, I was wondering if you could comment on the Company's development strategy longer term, whether you plan to continue feeding the pipeline at this point, or is it more that you're starting these projects that had been in planning, I mean what should we expect to see going forward?

Well, I mean when you look at it, Todd, we-- the good thing we have going is that we've just moved a project from the pipeline into the current development activity in South Elgin. So when we had 6 previous projects in the pipeline, now we have 5, and we finished a project, moved it into the operating portfolio. And so we're getting back to that movement of projects, that cadence of projects that we've had in the past.

And with 5 projects of pretty decent size still in the pipeline, for us right now, we're focused on getting those going, and that's the focus for us. And it gets-- it takes us out, when you think about the time that it takes to move these from the pipeline, and into construction and into completion, we certainly have activity for the next 3 years in these developments. That said, obviously if we thought there was a very good opportunity that was highly pre-leased, we would look at it. But right now, based on the amount of activity we have for the size of our balance sheet, we're very comfortable with just executing what we have, and frankly, there's a significant amount of activity going on, so we're pretty bullish on the prospects of these things getting -- happening over the next 2 years.

So I think that is where our focus is. That doesn't stop us from finding an opportunity to make an acquisition that has a lot of re-development associated with it and using those same skills to create value there. So that's kind of where we're focused right now.

Okay. And then just lastly, I was just wondering if you could discuss sort of your re-development plans for the $3.5 million market that you purchased?

Yes, that's the acquisition we purchased in Wilmington, North Carolina. Obviously, it's not a huge project. We saw it as very good real estate, again off-market opportunity, it is a grocery-anchored center, it will most likely continue to be a grocery-anchored center, although we think there's an opportunity to upgrade the project. So we're in the process of working on that right now, and hope that by the time we talk on the next call, we'd have a lot more detail.

All right. Thank you.

Thank you.

The next question is from Jeffrey Donnelly with Wells Fargo. Go ahead.

Good afternoon, guys.

Jeff.

I had a few questions. John, do you have any co-tenancy rents that kicked in maybe for just maybe a part of Q4 or will kick back in in 2011 as these anchor spaces are refilled?

Yes, I think we had a couple. I know we had 1 co-tenancy in [Hirsch], in Dallas at the Market Street Plaza when we leased to BuyBuy Baby, then I believe I think it was JoAnn's who kicked in on the co-tenancy. And Dan, did we have a second one?

Yes, those-- we had 2 co-tenancies it's about $400,000 in total that we'll get back in additional rent. And those are actually going to occur as John mentioned when the tenants take possession more in the third to fourth quarter when the tenants actually open even though we've signed the leases, we're still working in the process of getting them open.

Okay, so it's really-- those specific rents are tied to the activity you were referring to toward the end of the year?

Correct, correct.

I just want to be clear.And then I know Dan you could help me out with a question on your guidance. Do you know what the sensitivity is of your guidance to changes in the structure of interest rates either the shorter or long end of the curve, have you figured that out?

Yes, I mean we typically just-- when we're running the -- in terms of guidance, we'll just use the forward curve and then we'll lock various -- the pieces of debt we have maturing, we project when we plan on fixing the long-term debt on the projects that John mentioned that we have out, and the end of the fourth quarter, that are -- we're finalizing the bank term loans, they're coming to maturity and we're looking to push those out. So we're underwriting those in our guidance to the -- the term is right around 6% for a longer term debt, 7 to 10 years and we're using the forward curve with the majority of the other items.

And Jeff, we've got pretty good visibility on construction loans as we mentioned in our supplemental. We just finalized a construction loan on River's Edge that was 325 over and drops to 300 over. I think the markets tightening up in that regard, it's probably dropping more to 300 and sub 300. So we're going to be looking at that on the other projects that we hope to migrate from the future pipeline into the in-process developments and we're working with banks on those. So we've really just focused on the forward curve and the current underwriting that we're seeing on the secured loan market.

But you didn't look at it in the context of, for example, like 25 basis points at the long end of the curve is $0.01 a share or something like that?

Yes, I mean we haven't focused on what variance -- that's why we gave ourself a range. I mean we've got $0.05 in there and we've got bad debt provisions at about 1.2% of cash rent, which we hope to do better than that. And we've got -- when we look at it, we try to give ourselves some room, if the interest rate does move away on us a little bit, we've got room in our guidance to cover that.

And then of course, Jeff, that doesn't -- we may well, when we do the -- when we come out of the old swaps and go into the new line of credit, we may swap that new line of credit, which would lower the susceptibility to that. So we're also planning on that, assuming that rates kind of stay relatively where they are.

Okay and just a last question or 2 on development, as I guess for you John, where are you at with Delray moving into active construction, is that still thinking about a 2011 event?

Yes, basically, Jeff, we're in the same place. And obviously Tom and all the entire team is working on it every day. But we're making very, very good progress, kind of week by week, and we still very much hope and anticipate to start this year. But as I said on the last call, we weren't going to start it prematurely, and the leasing on this type of project, it's kind of 1 of these situations where you have to connect the dots, as you get -- as we get more and more guys to sign on, sometimes that's 2 or 3 new guys that are attracted to that tenant. So kind of that's -- I think we're making very good progress and we think we'll still do it this year. I just have-- I'm reticent to give you an exact quarter.

No, that's fair. And the other question was actually on the Wilmington project, I know you were saying it is small, but does that project have excess land associated with it? Or it sounds like you might have like an anchor sort of waiting in the wings on it that might have lead you to get the confidence to buy that.

Yes, I mean it might be a combination of both those things. I mean I think we have a situation where we think we can enhance the asset, vis-a-vis the tenancy and also we think some of it is under-utilized in terms of the parcel. Not-- and again, Jeff, this isn't huge, this is relatively small. But when you look at it on an incremental basis, the numbers are good. And going in, you can obviously tell when we purchased it at the cost per square foot that we did, we got a lot of runway to make improvement here.

But Jeff, the only thing to add would be we're very actively pursuing re-developments, specific concepts, so we would hope that it wouldn't be too long before we could figure this out and come up with a definitive plan.

Great. Thank you, guys.

Your next question is from Nathan Isbee with Stifel Nicolaus.Please proceed.

Hi, good afternoon. John, can you just clarify, of the $4.5 million of annualized EBITDA, can you just break that out, how much of that is operating versus development portfolio?

How much is operating versus development?

Correct.

I don't have that right in front of me, nate. I think I'm going to have to circle back with you on that because we obviously have both in there. And a lot of it comes from the anchor leasing, so it is pretty jumbled. And you also got probably some re-development in there as well. So I think it is each of the categories, and we'll circle back with you, if you'd like to get the exact detail.

Okay. Thanks.

It's all EBITDA. I can tell that you.

Right. No, no, no, I just don't want to be double counting it in the NAV.

Right, right.It only knows that it's EBITDA. We will get back to you on what type it is.

Got you.Okay. And I know you had 1 A&P in the portfolio. What's the status of that?

Yes, that's in Ridge Plaza, New Jersey. That is the only one. As you know, it is a pretty minimal impact in terms of our overall. I think it's-- I don't even think it's 1% of base rents, and I don't have that in front of me, but at any rate, the status of it is, it's still a long-term lease, I think the lease expires in actually I think 2022.

Yes.

And it is a pretty strong store. The last reported sales are over $400 a foot. So at this point we don't know anything. So that probably makes it right about a 1% base rent deal. Bottom line is we don't know anything at this point. They're current. Health ratio is pretty reasonable. Don't see why this would be an issue but obviously we don't know yet. So we're prepared if we need to make a move there, we'll make the move.

Okay. And then Dan, as you look to move some of your floating rate debt to fixed, can you just talk about some of the rates that you've been quoted today and how much they might have moved over the last 3 to 6 months?

Yes, I mean right now we're-- with the CMBS loan we have in the market, the underwriting is -- LTV is 70%, 75%, and it's-- the all-in rate is right around 6. And I think when we first started look at this, it's probably 50 basis points higher, where probably 550 and now it's kind of moved out to about 6 because of the 10-year swap rates being about 3.7% today. So I think that is where -- it's moved out a little bit, but we still obviously, if you can secure 10-year debt at a 6 for a long-term perspective, that's a pretty good rate.

Okay, and then just one final question. There's been a lot of talk about the improvements in south Florida. Mostly on the -- around the Miami/Fort Lauderdale area up to Palm Beach, can you talk a little bit about what you're seeing on the Gulf Coast?

Sure. I mean we're exposed in all of the markets, in several markets. But as it relates to the Gulf Coast, as it has been kind of the last couple of quarters, we haven't seen a significant I would say difference between what we've got there and what we've got in Indiana or what we've got in Texas. I think the pickups we've seen, we have seen pickups, really just in the last couple of quarters in the shops, as we've said, that shop increase that we had in the portfolio was basically across-the-board. So I think I would say that it's gotten better, but it's not what it was a couple of years ago. I think obviously the Gulf -- when you say the Gulf Coast, the Naples area is a little more subject to the residential industry, beyond just housing just the industry itself.

Right.

But all in all, Nate, it's improved. Otherwise, we have enough property there that I don't think our increase in occupancy in the shops could go up that much if we weren't leasing shops there, too. And a lot has to do, as I said before, you know, our product there, is very high quality, it's generally anchored by Publix and Target. So we're also starting to benefit from some of the depth of these unanchored centers that are slowly dying.

It definitely matters which centers you own.

Sorry?

It definitely matters which centers you own.

Right, right. So I'd say Florida, we're pretty-- feeling pretty good about the Florida properties. We're seeing momentum. You're seeing retailers really start to circle back around markets that maybe they don't have enough penetration in. These markets all have good populations, so that's obviously key. So I know I've heard some people say that south Florida has just taken off. I mean it's all relative. There was -- the brakes were put on and now the markets better and people are making deals.

Okay, thanks.

Yes,

The next question is from Rich Moore with RBC Capital Markets. Go ahead, sir.

Hi, good afternoon, guys.

Hello, Rich.

I'm curious about the increases in costs at Rivers Edge in South Elgin from 3Q, the increase in the projected estimated cost.

Right.

And I guess for 2 reason, guys. One, I guess what are they in particular? But 2, how should we think about the other estimated costs you have, because they seem to move a bit quarter to quarter?

Yes, these are very specific kind of situations to each deal, Rich.And remember that when we have these things, before we fully engage, it really is an estimate. So as it relates to Rivers Edge, I tried to point out in the script, we actually transcribed it incorrectly quarter over quarter, so the square footage grew by almost 40,000 square feet, that's why the costs are up about $6 million. We have 3 new tenants coming into the project, which I think we put their names in the supplemental, which is Arhaus Furniture, BGI Fitness, and the other sizable tenant is a sizable restaurant about 8,500 square feet, and all 100%--

Yes you did, John.

Yes, so that is the whole reason for the increased costs. Obviously when you bring in new tenants you're moving other people around. You've got some costs associated with movement, you've got maybe some demo and site work costs, so it's more than just the build out, there's actually costs associated to the shell construction as well. That's the case in Rivers Edge. And frankly, it's a very good thing because the returns are still kind of these 10% incremental returns, and these deals as it is in the others.

And in terms of South Elgin, that was pretty material-- that was a material change in the way we went about the project. Originally I think you'll remember, we were trying or we were hoping that we, in the beginning of that project when things were a lot tougher, say a year and a half ago, we were really just trying to ground lease the remaining pads. And what we ended up doing with the tenant demand that came, with the combo store, we have a toys baby store there, which I believe is 52,000 square feet, 58,000, so it's a big store. And then we have a Ross adjacent to them, so those are actually building leases now. That's why that went up substantially. So in those 2 case, I would say they were very specific.

As it relates to the other projects, I mean yes, I think you should expect that when things move from the development pipeline into current development, we're going to have cost change. I mean it's just -- scope is going to change when we get it to the finish line and we're obviously -- that may traditionally it probably is going to go up, it doesn't mean it couldn't go down, but I think most likely the costs would go up. But whenever that happens, that's usually associated with new tenancy, and so we see it as a positive.

And so usually, John, it is an increase in the size of the center as well, right?

It's an increase to the size of the center. It might be an increase in specific tenants who have CapEx associated with them with the anchor tenants, for example. They may come in with a bigger prototype than what we had originally thought, which that may or may not increase the overall size of the center, but it certainly increases the cost of that box. And then maybe we reduce something else, Rich. So but the bottom line is, yes, I mean it typically is an increase in the cost due to new tenants coming online that we hadn't projected.

And so when you look at the stuff that we have in the pipeline, there's no question that you could assume that might happen. But it isn't -- we're going to be very clear about it, we'll tell you exactly what's going on when it does happen and that we don't believe that it will impair the returns, like for example in both Rivers Edge and South Elgin, the returns got better, so--.

Okay. Okay.

So 1 thing that --

I was going to ask you that, yes, good.

And the one thing to add, Rich, and we're seeing obviously see quite a bit of success at Rivers Edge, we had the ability to pick up a small parcel off to the east and that allowed us to increase the amount of square footage. So we're capitalizing on our success and the project is getting a little larger.

Okay. Good. Thanks, Tom.And then as you guys look at the future development pipeline, obviously you're saying, John, that Delray could indeed go beyond 300,000 square feet if you'd find the right stuff. What about these other projects? Because I look at like for instance Maple Valley and you've spent $11 million out of the expected project costs of $11 million. I'm assuming -- yes, I mean how does that happen or, yes? Yes, the bottom line, Rich, this ties off exactly what John just said, that until we understand a final scope, in terms of whether we are doing ground leases, whether we're doing build to suits, that number will fluctuate. We have a pretty good idea of what that may be based upon the final plan, but I think you'd likely see a rise on that before the future development would move in to the in-process development, so--.

Rich, in particular to Maple Valley, the way that project works, and of course this is in a Seattle suburb, we have a shopping center that's in the re-development pipeline in front of a large parcel, okay. And this amount on the pipeline is relative to what we think happens on the parcel behind. Frankly, for quite some time, we were negotiating either a large land sale or large ground lease. Now, that may end up changing. So that's why obviously spending $10.7 million against $11 million, you're not really doing anything, so our anticipation there is that we were going to ground lease or sell. Now that could change. I mean we're in conversations right now with some other new tenants that would change the dynamics of that deal. So again, these are great questions, because no one should ever think that the word estimated project cost is a final cost.

And I think you'll see more specific color on that in one of the --

In the next couple of quarters.

Okay. All right. Good. That's excellent. Thank you, guys. And then I wanted to ask you on Eddy, the space that's remaining on the retail side, is there anything special about that? I mean is that space that is just typically leasable space, or are you looking for a certain type of tenant that needs to go into what's left over?

No, I mean I will just tell you from an office standpoint, we have 1 space that's available, we're 91% leased, and if we're able to secure that final tenant, we'll be at 100%, and that deal has moved along fairly rapidly. So that one is very, very clear. And then on the retail side, there's 1 tenant fairly large that we've been targeting, and hopefully it is going to be coming around in the near future. It's got one issue that we're working on, but we're down to a point that we know specifically who we plan to put in those spaces.

And Rich, that's why, just to be specific, when we -- when something moves from the development pipeline into the operating and the percentages change, for example on that deal the percentage lease dropped from where it was in the supplemental to the operating platform, that's because we are including leases that were under negotiation on, in the supplemental, and then obviously when it goes into the operating platform, it's just what's leased. So that's the difference there. And I think somebody had a question about that. But that's the difference there. And clearly, if we get those other 2 leases done that Tom just mentioned, which we are kind of in the final lease--

We're very very close.

Lease negotiations on, then it will go back to the 95% plus lease.

Okay, I got you.And then on the line balance, Dan, where is that today? Not so much at the end of the quarter, but where are you right now? Because you said you did some stuff post-quarter end and did that basically go on the line?

Yes, we-- and we put that on the line and the objective is we've got the $3.5 million we acquired at Wilmington, as well as the center acquisition. Now, the important thing there to make sure that we discuss is the permanent loan that we're going to put on International Speedway Square that we anticipate being in excess of $20 million, that's going to pay back the line. So when you look at that under the cash is fungible scenario, in essence, what we've done with the additional proceeds from the perpetual preferred offering is buy out 2 partners for return in excess of 10%. So I think the important --

And buy a new center.

Yes.

You said 2 partners.

But buy those 2 acquisitions for an excess of 10%, which is-- so it makes it accretive to the preferred.

Okay and then so the line balance will return about to the $120 million level, something like that?

It'll come back down. Right now it's at $125-ish million and then once we pay down International Speedway Square, it drops another $20 million to sub-$110 million.

Okay. And the capacity on the credit line is $200 million, is that right?

Yes, our liquidity at the end of the quarter was about $61 million. The capacity, the capacity is $200 million. Obviously, we have to have unencumbered assets to get to the capacity, but when you look at cash plus the availability under the line at the end of the quarter was about $61 million.

And then the other positive there is those 2 acquisitions that would likely be, once they get stabilized, contributed to the line and which would increase the capacity also.

Okay. Okay.I got you.Good. Thank you, guys.

Thank you.

(Operator Instructions)The next question is from the line of Quentin Velleley with Citi. Please proceed.

Thank you, good afternoon. Just wanted to look at the balance sheet for starters and obviously you're starting to get a bit more active and you've got high liquidity and you've done the preferred, but-- and you're getting additional delevering coming through from the NOI growth that you have. Putting all that to the side, or I should say factoring all of that in, is leverage sort of at the right level at the moment? Or would you still like to raise additional capital at some point in the future to delever from the current level?

Well, Quentin, I think at the moment, when you look at the amount of CIP we have relative to -- it is interesting, because let's say we're at 9 times approximately and our goal over the next -- over the near term is to bring that below 9, that obviously is in the face of having that much activity within the development side. So as those projects over the next -- you're going to have to take this out to 2 years, as those projects stabilize and move into the operating portfolio, that CIP comes down, obviously debt to EBITDA will drop with it, then I think we would like to see that number, that debt to EBITDA number, be below that near-term goal for sure. But with the amount of development activity we have, on a forward-looking basis we think we're pretty appropriately levered. So we wouldn't want to be issuing equity today at these stock prices to just delever, but as we said, we're now looking at some acquisition opportunities and if we can utilize those vis-a-vis equity to delever, then I think that could make sense because it wouldn't be dilutive.

So we feel like we've made a lot of progress, we have more progress to make. That progress is already imbedded via the oncoming EBITDA, but once we get down to that kind of 8 to 8.5 level, then we will have to look and see where we are in the development business, see how much of that we're still doing, and we've made it pretty clear that we don't want that -- our goal is to get that at 10% or below, so we still have some work to do there. And once that happens, then we can start thinking about that debt to EBITDA dropping, and hopefully at some point this year, the stock will react to all of these things that we're doing and the improvements we have. And the fact that when you look at our 2012, it's not real hard to figure out that we're going to have pretty decent growth there. So all of those things said, I think we're adequate today and it's going to improve from here.

Okay, that makes sense. And just in terms of the lease-up over this year, the increase in the lease rate, I suspect a lot of that's coming from shop leasing, and you've kind of touched on it across the call, but can you just sort of talk a little bit about what you're seeing in the shop leasing across the operating portfolio? And also in Cobblestone, it looks like you've done some leasing of the shops there as well.

Yes, well, overall, I'll talk about the overall picture and maybe Tom wants to comment on some of the actual deals. But overall, as you know, I think it was, I don't know, a year ago or 3 or 4 quarters ago where we came right out and just said that we didn't think where we needed to be in shop leasing, and at that time we were at 75% leased in the shops. Today we're a little north of 78% leased in the shops. We peaked probably in 2006 at around 85.5%. So we have plenty of room to go. But when you're talking about we can get over 80% by leasing maybe 100,000 square feet, that puts us over 85%. So I think we're making very good progress there. On a macro basis, the challenge with shop leasing is that as we come out of this recession and we're into the recovery mode, you're still going to lose guys. So I think it's pretty impressive that we've gone up by almost 300 basis points this year in the face of us still having tenants go out. Our goal is to obviously have that number over 80% this year, and we believe we'll hit that goal. So on a macro level, it's in good shape. I don't know, Tom, you want to talk about the types of deals we're making?

Yes, I mean one of the questions you asked tied to Cobblestone, and I think you saw quarter over quarter Cobblestone pushed up to 85%, which was a fairly dramatic increase. And I think we're going to continue to see that progress, as Whole Foods comes out of the ground, hopefully in a position to deliver that store in the July range, which generates a lot of activity. And just in our last leasing meeting on Monday, we're seeing a lot of activity which is important, and we think that project is on its way to be a fully stabilized asset in a reasonable period of time, and it's well positioned, great visibility and we're going to keep moving.

Okay. Thank you.

Sure. Thank you.

The next question is from Andrew Dizio with Janney Capital Markets. Go ahead, sir.

Yes, thank you. Good afternoon, guys.

Hi, Andrew.

I just had a question following up on the small shop discussion you just had. Can you talk a little bit about the types of tenants that you're seeing interest from, that you've seen going in and out as far as national versus local?

Yes, I mean I think we've had pretty good success in all kind of national, regional, local. I think on the small shop side, we spend a lot of time looking at the user and we go through an approval process that's pretty severe in terms of how we decide to put capital out. So I would say we've seen recently some of the national kind of I'd say fast casual guys like [Jason Salle] is an example of a real successful tenant, McAlister is another restaurant tenant that's successful. There has been a lot of yogurt type deals being done right now, to be honest with you. We're doing some of those, but we want to make sure that we have a best-in-class guy, because we've been through that before. Those things can be faddish. I think you have to be careful with that.

On the apparel, you're starting to actually see some small shop apparel, boutique deals come back and of course we're very careful with those. All in all, the franchise business has picked up substantially. One thing that I'm not sure gets picked up in the overall kind of gloom about unemployment is that there are a lot of people that have started businesses, and a lot of these people were kind of middle management that were able to get some sort of severance and have bought franchises and have learned to become pretty good operators, so we've seen growth there kind of across-the-board. So again, it's -- in small shops, it's kind of a little bit of everything. I mean you have to -- it's tough to pin it down to 1 category, but I would say it's been quick. I mean it was all but dead 4 months ago, or 4 quarters ago, and now it's pretty active.

Okay, thanks, I appreciate that color. And then just 1 other question. When you look at the remainder of your portfolio, understanding it's pretty young, but from a semi-re-development play, do you have any density plays or anything like that that you're looking at that are potentials down the road?

Yes, I mean we-- as a matter of fact, we have an upcoming, I think in about a week, full asset review, where we go through every property we have. We obviously already have the property budgets done but now we go through the physical, and we have the CapEx budgets done, so now we'll go through the physical, every single property, what's going on at that property, how do we add value to it. We have in terms of asset management, we're very focused on trying to really accelerate ancillary revenue opportunities. So I don't know that we look at it only from a density play quite frankly, because sometimes just having density, I mean you can have great density and have a bad product. So we have -- we look at it more from the standpoint of are we maximizing value at that particular shopping center?

And that's why we bought out the minority interest in the partnership that we mentioned, because we didn't think we were maximizing value. We knew it was going to take capital and we wanted to have full control of the asset in order to do that. Same thing with the acquisition in Wilmington. This is a 92% leased shopping center. I mean we could do nothing, we could sit there and just be 92% leased but we think it is undervalued in terms of what we can add to the NOI. So I think it's more about how do we add to EBITDA on each asset and then we take it from there.

So I would say there's a lot of focus in that regard, if you look at the goals of pre-development and development, there are 16 different assets that are being viewed as potential opportunities through 2011. So that's a big part of what we'll be concentrating on. We've had some nice successes with Fisher Station, now we're seeing Rivers Edge and we know there is inherent value in there that we need to grab.

All right. Thanks a lot, guys.

Thanks.

The next question is from R.J. Milligan with Raymond James. Go ahead, sir.

Good afternoon, guys.

Hi.

I guess most of my questions have been answered, but I was looking --

You can come up with a new one. Come on.

Yes, I'm working on it. On the acquisition environment, are you guys seeing any trends geographically? I know you-- Nate had asked a question about Florida, is Florida heating up at all in terms of pricing? And then I guess the second part of the question is, is there -- we've heard it from a lot of your peers that they're looking at the pricing is too tight on stabilized assets and they're looking at re-development opportunities, where's that spread versus stabilized versus re-development opportunities versus where it was historically?

Well, I mean I think the cap rates are back, in terms of just across the board, I would say class A shopping centers, and you got to think -- you asked, I think you asked it in terms of geography, but I think it is also tenancy and size. There's a lot of things that go into what's a class A asset. But assuming apples-to-apples for a second, I mean the cap rates are probably equivalent to where they were maybe 2 or 3 years ago, but I think the opportunity is in what can you -- either in lease-up, the value creation through lease-up, there's opportunity in inefficient capital, if you're acquiring an asset that has got bad debt on it and then there's opportunities like what we're doing in Wilmington and then our own internal acquisition of our partnership interest, where we know that there's value beyond the existing kind of site plan. So all that said, I'd say that when you look at really strong assets like we have that-- and you asked in specific to Florida, we're seeing -- we just saw power center trade at what was a reported 7 cap but it looked like it was lower than that. When you look at what the actual in-place rent is, we've seen grocery-anchored centers trading in the high 6s. So we've got pretty favorable cap rates, but I think there's still opportunity here when you're looking at value creation. And that's why we think we can really use that skill set, R.J.

And we're not shying away from our existing development, we're executing it. But at the same time, we see some real growth in our own portfolio and in us acquiring assets that they just don't see the value that we see and we can bring to the table this 40 years of construction and development expertise to make something happen. And now, again, the trick for us is to continue to improve our balance sheet, so that our currency is more valuable and that's happening. And as we do that, we'll -- you'll see us do more of that. So I think it's -- I think the cap rates are what you think they are. I think the power center cap rates are very low 7 and I think the grocery-anchored stuff, if it's high quality is somewhere in the 6s.

So do you think the competition is just purely for the stabilized assets and a lot of people -- a lot of the buyers out there aren't looking to re-develop the properties and that's how you get to I guess a higher IRR when you're underwriting it?

I don't know. Honestly, I think each deal is different. I mean we try -- we looked at acquiring a center a couple months ago and thought we had a good line on doing it, and next thing you know there's several more bids and one of the acquirers ends up buying it at a very low cap and so I can't tell you what they think they're going to do. I mean each story is different. But I do think that there are plenty -- there's plenty of capital seeking core returns. I mean obviously you saw what Calpers said about moving into core private real estate, if people keep doing that, that's only going to drive cap rates down. Because guys like that want to buy stuff that they don't have to do anything to. So that just drives the core cap rates down and that's ultimately going to drive other cap rates down, because capital will start seeking a higher return. And this is exactly what happened 3 years ago, 4 years ago. I mean you should expect the same cycle on cap rates. The question is this time, I think there's more runway because the occupancies are lower.

And when do you think supply comes into the picture in a meaningful way?

Supply in terms of new development?

Yes.

I don't think it comes in-- I don't think it adjusts that-- it won't impact cap rates for quite some time. I mean you look at what is going on across the country and we talk to retailers all the time about -- they're still complaining that they can't get enough product because they just don't have enough qualified developers out there to execute large scale developments. So I think we're quite a ways away from having new product impact cap rates. Right now, it's working to our favor. I mean the lack of product is going to drive rents. And we're not that far away from that happening, I mean that always happens quicker. I mean rents go down faster than people think they will and they go up faster than people think they will. And I'd say we're closer to they go up because as more and more of this stuff getting filled up, you're just not going to have opportunities to grow if you're a retailer and you're going to need development for that. So I think that's going to work in our favor.

Okay. Thanks.

Sure. Thanks.

And with no further questions in queue, I'd like to turn the call back to Mr. John Kite for closing remarks.

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