Kite Realty Group Trust (KRG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to Kite Realty Group Trust's Second Quarter 2011 Earnings Conference Call. My name is Crystal and I will be your operator for today.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host for today Mr. Dan Sink, CFO. 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 email you a copy. Our second quarter supplemental financial package was made available yesterday on the Company's website at www.kiterealty.com. The following 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 SEC, which discusses these and other factors that could adversely affect the Company's results.

On the call with me today from the Company are John Kite, Chief Executive Officer and Tom McGowan, Chief Operating Officer. I would now like to turn the call over to John Kite.

Okay. Good morning. Welcome to our second quarter earnings call. I would like to start today by discussing several positive trends, as our core portfolio is leasing up and performing at a high level.

FFO for the quarter was $0.12 per share which was a $0.01 ahead of consensus estimates. Same store NOI is positive for the second quarter in a row, and reached 3% this quarter, which is the highest level since 2006. We expect this positive same store momentum to continue, as tenant improvements are completed and tenants begin to take occupancy. The retail portfolio is 93% leased while our occupancy is approximately 330 basis points less. The vast majority of this disparity is derived from recently signed leases that have yet to open for business. We expect the gap to be at a more historical level of 50 to 80 basis points by the end of the year.

We recently issued an 8-K for an Investor Presentation that illustrated our forward cash NOI growth from our in-process development and re-development projects, signed leases not yet paying rent in the operating portfolio, and the recent acquisition of Lithia Crossing in Tampa, Florida. This additional cash NOI contribution is anticipated to be approximately $11 million, or about 17% NOI growth. The vast majority of this rental income will commence by the fourth quarter of this year.

These sources of cash NOI are very important in accurately determining our forward net asset value and leverage metrics. The embedded growth is not only accretive to earnings by also to our NAV. We have added additional disclosure to page 9 of the supplemental to annualize the straight-line rent associated with new operating property tenants accruing straight line rent, as well as mid-quarter rent commencements. We want to make sure that the investment community includes this rent in the NAV calculations, as multiple tenants begin to take possession of their spaces.

This quarter we realigned our in-process projects to include re-developments on page 29 of the supplemental. As evidenced by this new presentation, we have quality projects that are highly leased and on an accelerated delivery schedule. The projects are Cobblestone Plaza, our Whole Foods-anchored center in the Fort Lauderdale area. It is now 89% leased or committed, and we plan on transitioning this property to the operating portfolio prior to the end of the year. South Elgin Commons II in Chicago, Illinois is 100% leased with Ross and Toys R Us/Babies R Us, and we will transition this to the operating portfolio at the end of Q3 2011.

Delray Marketplace in Delray Beach, Florida is now included as an in-process development. This project is approximately 62% pre-leased and is in the early stages of site preparation prior to vertical construction which we plan to commence upon the finalizing of construction financing. Our leasing group has done an excellent job securing high quality small shop tenants along with our two anchors Publix and Frank Theatres. The small shop tenants include Max's Grille, Charming Charlie, Chico's, Apricot Lane, Bobby Chan, White House Black Market and Jos. A. Bank, obviously all very high quality users. We anticipate the Delray tenants will begin to open in the fall of 2012.

At Oleander Point in Wilmington, North Carolina which we acquired in February, we commenced construction on the Whole Foods on July 25 with an anticipated turnover in November of 2011. At Rivers Edge in Indianapolis, Nordstrom Rack, buybuy BABY, and The Container Store will open in the fourth quarter of 2011. The Centre is 98.6% leased.

These projects will be a great addition to our portfolio over the next several quarters. We're also seeing positive momentum for near term vertical construction on the projects at Four Corners Square in Maple Valley, Washington, a suburb of Seattle as well as New Hill Place in Holly Springs, North Carolina, a suburb of Raleigh. Four Corners Square is gaining traction, with an anchor-signed LOI, as well as two additional national tenants and two out lot users. We are optimistic that we can commence construction in the fourth quarter of 2011 or early 2012.

Holly Springs picked up four national junior anchor leases representing approximately 100,000 square feet in the quarter and we have leasing momentum on an additional 45,000 square feet of national large scale shop concepts. We anticipate starting construction in the first half of 2012.

Turning to asset management -- we have recently made significant enhancements in our technology, which will ultimately increase productivity, accelerate the leasing process from lease execution to cash rent, and increase tenant retention while conserving capital and driving growth. We're also refining our process that will better coordinate inter-company communication with existing tenants, and provide our prospective customers the ability to access vacant spaces in our portfolio and obtain all relevant information via secured website. We believe these technology enhancements will improve our tenant retention as well as reduce the amount of time it takes to realize cash rents.

On the acquisition side of the business, in June we purchased another strong asset in Tampa, Florida in an off-market transaction. Lithia Crossing is located in a heavily traveled area with household incomes of approximately $100,000 and population in a three mile radius of 60,000 people. We acquired the property at an in-place eight cap rate with the anchor tenant paying below market rents. We were attracted to the current tenant mix of the property but we feel it can be enhanced, given the location and the quality of the real estate.

On the balance sheet, we made significant strides in recent months, as we closed on a renewal of the unsecured line of credit in June. We were pleased with the interest from our bank group, as we were oversubscribed by $65 million and our relationship banks clearly continue to support the Company with their balance sheets. The term of the line is three years with an additional one year renewal option.

Subsequent to the end of the quarter we closed on an $82 million of secured loans on six properties at a fixed rate of 5.44% for a term of ten years. We were very pleased with the closing of the loans, given the recent turmoil in CMBS markets. After the completion of these loans and the subsequent pay-off of Glendale Town Commons, our 2011 maturities have been reduced to $20 million outstanding on the Gateway in Marysville project. This project has a one year extension option and we are also analyzing the market value for this property as well as our other Pacific Northwest real estate assets.

We paid down the line of credit by $17 million with the remaining proceeds. Now our debt maturities from 2011 through 2015, excluding the line, average only approximately $50 million a year.

Now that we have successfully reduced our debt maturities to a very manageable level, we will continue to focus our efforts on reducing leverage. As the NOI growth from the items that I discussed previously is fully recognized in our income statement, we anticipate that our debt to EBITDA ratio will decrease by approximately 80 to 100 basis points.

We're continuing to look for opportunities to de-lever and grow NOI via acquisitions and the build-out of our four developments. We also see some opportunities to recycle capital from non-core and non-strategic assets. For example, we're planning to sell our interest in the limited service hotel at Eddy Street Commons in the fourth quarter of 2011. We're also under contract to sell various parcels of residual land.

We continue to evaluate our core markets for real estate opportunities that will thrive in the long-term. The acquisition market for assets is very competitive, and we will continue to be disciplined and only deploy capital on quality assets that have a positive NAV impact on a long-term basis.

In summary we had a very strong quarter which, with the result of a strategic focus that we initiated during the downturn to focus our efforts on leasing and asset management and we're confident that these positive results will continue.

Operator, we would like to open the line for questions.

(Operator Instructions). Today's first question comes from the line of Quentin Velleley with Citi. Please proceed.

Hi. Good morning.

Morning.

Morning.

Just in terms of Delray Marketplace and Holly Springs, can you sort of give us some kind of idea of what your yield expectations are going to be on total project costs for those two?

Yes. Quentin, they're pretty similar. On Delray, as we've said before, I think the overall total return is somewhere between 6.5% and 7% on total cost. And the incremental return on new capital is north of 10% and that's about the same for Holly Springs. Holly Springs might be slightly below that. You know, maybe it's -- doesn't quite reach 7%, maybe it's in the 6.5% range, something like that. And then the incremental is about the same, about -- a little north of around 10%, 9.75%, 10%.

So both of the projects are similar in the regard that, you know, in today's market we feel very good about the incremental returns. We just can't get those kind of returns on capital anywhere else, and with the amount of equity we already have invested in both of those projects, the financeability of them is, we believe, pretty straightforward.

And then if you look at Whole Foods where you have had some success in Wilmington and also at Cobblestone -- and given their store rollout plans, are there sort of some other opportunities out there whether it's, you know, a re-anchoring opportunity with an acquisition or new development just given the high store rollout plans that Whole Foods have?

Yes. I think we're very excited about opportunities in our relationship with Whole Foods. As you know, they've publicly announced that they would like to get to 1000 stores and -- so that's almost triple -- I guess that's about triple from where they are right now. So guys like us that have inventory that can be put forward pretty quickly I think it gives us an advantage with tenants like Whole Foods and also just the fact that we have established ourselves with them and have performed in a very, very difficult market. I mean if you look at Cobblestone, obviously, you know, we held onto that deal and got it done during the downturn and I think they're appreciative of that.

Quentin, this is Tom.

One other point is, as part of the Whole Foods rollout, they're really looking at different size stores as well -- which gives us more flexibility in terms of finding locations for them. And if you look at the deals we have now we have one at 36,000, one at 30,000. So that footprint has a lot of different options for us to look at, which is good.

And would you be more comfortable -- or would you be comfortable I guess going into sort of more of an urban environment where they want these smaller stores to be?

Sure. I mean we always -- you have to be cautious around, you know, just chasing a tenant, but the bottom line is that we have enough going on that we're always talking to them about opportunities. And when we particularly can find something that could be an interesting re-development that we could bring them to the table. That's right up the -- our alley and I think it's right up their alley.

I think what Tom is saying, though, is that not only are they looking at these urban opportunities, but they are also with the smaller concepts, they are going to go into markets like a Wilmington that they probably wouldn't have gone into previously. So that's where you will see probably on the margin you will see more growth in those markets than you would say having them put three more stores in Manhattan. So I think we see some opportunity there, too.

Right. And then just lastly the shop leasing momentum has been pretty solid. Is that continuing into this quarter?

Yes. We feel pretty good about it. I mean I think we -- when we look at our -- as you know, we have a very, very intense focus around our weekly leasing meeting and we sit down, you know, every Monday morning early for three or four hours. So we're pretty in tune with what the market is telling us. And there's -- you know, in our portfolio we see pretty good demand for shop space and more often than we have -- I mean I would say today much more so than the last few years obviously. We're talking about multiple tenants that are interested in one space. So that is what creates cash rent spreads and same store NOI growth. And that's where we're seeing it and so I think it should tell the market, you know, we believe as we have been saying for quite some time, you know, we don't just have strong development capabilities. We have a very good operating portfolio and we're starting to see that.

Tom, you want to chip anything else in there?

Yes. On the Monday morning meetings like John said, where the rubber meets the road, is how many deals are presented, how many are approved and I can tell you the last two weeks have been very, very productive. So as we start to complete the third quarter we like the direction we're headed.

That's great. And thank you for the additional disclosure, too.

Great. Thanks.

Thanks, guys.

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

Good morning. Just a follow-up on Quentin's question. Where is the demand for the small shop coming from? Is that more national retailers or is that -- have you seen a resurgence in sort of the mom and pop demand?

I think it's each category. I mean the way we look at is you've got the national retailers who have company-owned stores, you've got the franchise operations which are national in scope but, you know, local in -- typically local in the franchisee and then you have the independent, you know, mom and pop, so to speak, retailers and we're --from my point of view we're seeing demand in all three categories.

There's a lot of speculation as to why that is, whether it's, you know, on the franchisee side. You've obviously seen some recent push by the larger franchisors to provide credit enhancement to get financing.

But the bottom line is I think it's demand in all three areas. You just see people a little more comfortable expanding from more than one location. That's part of it, too. So from my perspective all three.

Yes, I agree. I think a great example of what John is talking about is the way we're leasing up Delray. And John mentioned a lot of great national tenants but we also, as part of those 20 new deals we have executed, have great local tenants and you have the Orange Leaf franchise group. So it is -- it's been a very nice mix, and I think we've done a good job attacking all three segments.

Okay. Thank you. And the -- Dan, I don't know if you could just provide us with some color as to how the progress for the Delray construction loan is going.

Sure. We -- we're out right now. We have got -- we sent the package out on those six or seven banks. We've got a couple strong term sheets that we have received back so we're working through that process.

We've got pretty good interest. We've already had an appraisal done on the property and the appraisal came back strong to where we're comfortable with how the appraiser viewed the -- some of the rents and the percentage rents, et cetera that we have on the property. So right now we're going through term sheets and just trying to move forward to finalize the deal.

So we're pretty far along. We were hoping to have all the term sheets back end of this week beginning of next week and then we'll start vetting it with the banks.

Okay. Thanks, guys.

Thanks.

Our next question comes from the line of Todd Thomas with KeyBanc. Please proceed.

Hi. Good morning I'm on with Jordan Sadler as well.

Morning.

Morning. John, last quarter and then a little bit again this quarter in your prepared remarks you mentioned sort of a new program or focus on tenant retention and I think you've mentioned trying to get renewals up into the mid 80% range. I'm not sure if it's a little too early or not, but can you just give us an update on sort of what you are seeing and tell us where your expectation for tenant retention is this year?

Sure. And I think to kind of take it from a macro level for a second -- as we have been successful and continue to be successful in leasing up the core portfolio, I think that we are aware that in order to continue to accelerate and continue to have positive growth we need positive absorption. So we want to be mindful of that and not lose focus on retaining the existing tenants because that can hurt your absorption if you lose focus on your existing tenants.

So the things -- the initiatives that we've got going on, you know, that Tom has talked about in the past from a technology perspective is very, very focused on that. So I think that we are seeing progress. It's early in our rollout of some of these things that we are doing that is going to help us communicate with the tenants vis-a-vis our -- a couple software packages that we have initiated. But we are seeing positive -- already very positive results you know anecdotally tenants that have for example a couple years left on the lease and vis-a-vis our ability to communicate very directly between asset management and leasing and senior management, we're tracking these conversations and seeing opportunities that pop up to renew a tenant early for example. I think that's going to be a big deal for us.

And we just -- again, anecdotally we just renewed a 5000, 6000 square foot tenant whose lease was coming up in a couple years for, you know, a very, very small amount of capital and an increasing rent. So I think it's early but I do think it's going to be impactful. You know we have historically, as I've said, been in that kind of high 70% range in terms of retention and we want to be in the 80%s. We want to go from 78% to say 85% and in order to do that these are the kind of things we have to do. We have to be on that hard. And again, I think as long as the things maintain or we have people very interested in spaces, you know, it also gives us pricing leverage when people are coming up for renewal. So, so far it looks good.

And, Todd, the other thing we're really pressing beyond what John is talking about on the technology side is making sure our tenants are healthy and making sure we truly understand the customer and understand the health ratios to the fullest extent possible. And John is really pushing on making sure we're getting the sales data so we understand exactly how they're performing, and we can react in the event a tenant does have a problem, because it's so important to make sure these guys are healthy, keeping expenses down, et cetera. Then as we perform well in the field and operate the properties efficiently, we should be in good shape to retain them.

Okay. And then any sense on 2012 leasing at this time? You know, in terms of where spreads may come in, the expiring rents are a little bit above the portfolio average. I was just wondering if you can give us a sense for how some of those conversations are starting to trend.

Yes. I mean if you look at 2012, I mean, from a shop perspective, the expiring rents are below our average. So again, we're pretty focused on the shop side from the perspective of that's where we know there's a lot of work. We feel pretty good about that. I mean the expiring rents are below $20 for the shops, I believe, and our average is still around $21. As it relates to the anchor leases, we're already well under way in those negotiations with everybody in 2011 and 2012 and frankly at this point it looks pretty typical. I mean it looks like most people are interested in renewing.

There is a couple of deals that we intentionally want to move out. So, you know, all in all, Todd, right now the trend is kind of continuing that. As long as we continue to pick high quality real estate, you're going to ebb and flow. But in times that -- what people have to keep remembering is despite the fact that one day on a macro level the market looks great, the next day it looks terrible, vice versa, down in our trenches, you know, every single day with retailers, they day by day have less opportunity for space because there is no new construction. So this again gives us that ability with a high quality portfolio to increase rents.

However, it doesn't happen by default. I mean you don't do that just by waiting for the phone to ring and that's what I was saying in the closing remarks. We have aggressively attacked the vacancy in our portfolio. We didn't wait. We attacked it, and now we're starting to see the benefit so I think we can still -- that's what I'm trying to say. We can maintain that growth in the near term as we look out. Obviously, the macro environment affects us but right now it looks like it will continue.

Okay. And then just two more quick ones. Any thoughts or -- or leads or updates with regard to the vacancy at your office building at 30 South?

Tom, do you want to -- ?

Yes. It ties back to the vacancy here. We've been very aggressive. We've got a new team, outside brokerage group, working on it, and we're following three or four leads. But the great thing about this building, if you look at it historically we've always performed extremely well due to the proximity of downtown, the connectivity to the many amenities. So we feel like we're going to make good and steady progress on that.

Okay. And then just lastly at Delray and also with the leases that you've signed at Holly Springs -- do any of those tenants have any kick-out or lease cancellation rights prior to space being delivered?

No, they do not. They just have typical co-tenancy type components.

Okay. Great. Thank you.

Our next question comes from the line of Carol Kemple with Hilliard Lyons. Please proceed.

Good morning.

Morning, Carol.

What led to the decline in parking-related revenue in the quarter?

One thing on parking-related revenue is we have -- it's kind of seasonal in nature, Carol, because the parking garage we have in downtown Indianapolis derives a lot of income from Colts and Pacers games so you know the seasons right now we're in a lull quarter where those two things aren't happening. In addition to that the Eddy Street parking garage at Notre Dame also is highly driven by seasonality of the sporting events. So I think when you look at it on an annualized basis and the trailing 12 months will give you a better indication versus the small loss we had in the current quarter.

Okay. And then it looks like your construction costs were higher than the fee revenue from that. Is that a trend you all expect going forward?

No. I think in that particular line item I think if you look at the net loss generated by that it's roughly $40,000, I think, each quarter. So I think the margin is about the same, but I think that's a number that as we continue throughout the next couple quarters and into next year that should continue to be driven down.

Driven down as to a positive number or just a lower negative?

I would say a lower negative if not break-even.

Okay. Thank you.

Thank you.

Our next question comes from the line of Rich Moore with RBC. Please proceed.

Yes. Hi good morning, guys.

Morning.

The $5.5 million of EBITDA that you mentioned in your presentation, John, that you expect to get over the course of the year as leases that you have signed commence -- how much of that would you say percentage-wise happened or has happened already and how much of that is still to come for 3Q, 4Q?

Yes. Rich I think a good thing for you to do is if you pull the 8-K at the Investor Presentation that we had that we mentioned, there's actually a summary -- it's actually on page 34 and what we've kind of -- we've kind of moved it from that EBITDA rolling discussion to more of a forward NOI discussion. And we break that out, Rich, and we actually break out and what we do is we exclude -- we took the NOI from Q1 2011 and deducted that in terms of the annualization. So if you look at -- and that's how you end up -- that number from those four kind of in place development projects was around $7 million and that was net of what we had already occurred in Q1 and then there is a different section, which is executed leases, which is what I'm thinking you're thinking. Executed leases over 5,000 square feet, much of which was actually at Eddy Street and that's also on the page and that's about $3.2 million of NOI. So really I think if you look at that, it would give you a good walk forward, Rich.

Okay. Good. Thank you, John. That sounds great.

Then as you guys look -- you know, you sounded like you were fairly positive about what retailers are saying despite what's going on in the economy with the negative overtones that we're seeing. And when I think about development, I always think that if there's any place they can pull back that would be the spot. So first of all I am guessing you would confirm that they're not thinking of pulling back -- but then secondly would they be thinking of starting new things? I mean you guys are developers at heart. Is there something new down the road or are you more -- I guess more confident that new developments may begin to crop up here over the next year?

Well, I mean first of all, you know, I don't think retailers react to the daily CNBC action. I think they're thinking a little longer-term than whether today or tomorrow or yesterday was some panic.

I mean obviously we're very aware of the macro environment like everyone else and we realize that it's -- there's some instability on a day-to-day basis, but when you look at it on a long-term basis as we talked about, thinking back to when this started in 2007, you know, you're headed towards almost five years of little or no new supply growth. So we don't necessarily have to have massive job prints for us to continue to lease space. And I think the retailers realize that sure, they're subjected to those -- to those whims of the consumer, but, again, we are seeing demand because there's just not a lot of places for these guys to look any more.

And by the way we didn't mention this -- I mean we don't have any Borders, we don't have any Barnes, so our space is leased up. So what we're now doing is leasing the shops and as I said, we're seeing more than one guy interested in these spaces. So that's a long way of saying we don't see that being a material issue in the long run.

As it relates to new development starts, you know we have been extremely diligent on the pre-leasing front and that's why we now have made it very clear what's going on there. And that's how we're getting to where we need to get.

In terms of us going out looking for new development deals I think it's going to be things that we think we can create value. And I think it's going to be things that don't have a lot of leasing risk. So that's what I see happening for us.

As it relates to the macro market the good part for guys like us with our capabilities is there aren't a lot of people left that have these capabilities that can execute major projects and have capital. So that helps us as well.

So all in all, I mean, I think it lines up very well for our skill set. And when you say we're developers at heart, you know we're value creators at heart. And I think when you look at our operating portfolio performance, stack it up against anybody in our space this quarter and see how we did. I think we did pretty well. So we're more than developers. You know, we're value creators and we see opportunity.

Hey Rich, this is Tom.

I'm only going to touch on one point that John talked about, and that is tied back to the potential of tenant rollback on our current development pipeline. And I think one thing you need to think about is that retailers have made substantial corrections in terms of store counts and cleaned out non-performing stores. So in order to make their list of potential projects that's a very small number of projects. So you go through a tremendous amount of scrutiny.

So that's one thing to keep in mind is that some of these people we're dealing with maybe are doing one fourth or one fifth of the store counts they did in the prime. So to make that level already takes a tremendous amount of work. So we feel like that real estate is going to serve to hold onto those commitments.

Good points, guys. Thank you.

And then I have, Dan, one question. Thank you for the extra couple lines on page 9. Could you explain them exactly so we know exactly what those are?

Yes. What I was trying to do there on page 9 is -- and I appreciate the question because that -- this will help give us a little more color. The straight-line rent accrual -- what happens, as everybody calculates NAV they back off straight-line rent and typically straight-line rent relates to rent bumps that are amortized over the term and equalize the rent over the term of the lease. These are straight-line rent respective to operating tenants only in which the tenants have taken possession of their space and under GAAP accounting rules we're required to start straight-line rent.

So when you look at that, Rich, all I'm saying is from over a period of time these leases will begin start paying cash rent, but I'm just trying to give a little more color when you're calculating NAV, give you an annualized number that should be included for these tenants that have not yet started paying cash rent.

Yes. Rich, it's trying to separate out the difference between that type of straight-line rent, and straight-line rent when we're just straight-lining rental increases over the period. So I think what we're trying to say is this is actually rent that's going to commence and we want to make sure people have it in their models.

Okay. I got you.

Rich, one final thing is in addition I wanted to make sure that is for operating property tenants. So I think the question from -- from your side is going to be are you going to be double counting something in CIP and we have backed out anything related to CIP type projects.

Okay, very good. And then that second line, Dan, the mid-quarter rent commencement?

Yes what we are trying to do there as well is just give some clarity on the operating properties, about $205,000, of which we've got let's say a tenant starts paying cash rent in -- you know, middle of the quarter we're just trying to give an annualized number net of terminated tenants. So, again, in September -- the September quarter end those leases will be fully baked into the income statement.

Okay. Got you. Very good. All right. Thank you, guys.

Thanks, Rich.

Our next question comes from the line of Mark Lutenski with BMO Capital. Please proceed.

Hi. Good morning. I was wondering if you could delve a bit deeper into the Lithia Crossing acquisition. Obviously an off-market deal but was it a distressed seller?

Yes. It was a situation that we were tracking for quite some time and we had a relationship with some of the partners that were involved in it. And so that's why it evolved over a fairly long period of time and it ended up being, I would say, a situation where the options for them ran out, and since we had tracked it for awhile we were kind of hanging out by the rim and we got the opportunity. Frankly, you know, again that's kind of why I made the comment that we're, you know, more than developers, you know, and I said that we're value creators. We're going to create a lot of value here and this is -- if you want to look at it on our website, you can tell it's a very high quality property, pretty new property. But it was very under managed, and the tenant relationships were poor, the anchor lease was -- is at a very -- it was at a below market rent.

So we see a lot of opportunity and these are the kind of deals we want to find. They're hard to find. You've got to work them very hard, but that's part of what we do. It's part of what we get paid to do. So we're going to continue to try to find stuff like that.

Okay that was very helpful. And then a quick question on the lease termination income in the quarter. Was that weighted towards any single lease or was that spread out over a number of leases?

Yes, Mark. This is Dan.

As far as the lease termination fee that -- that -- and we tried to talk about that a little bit in the first quarter call. That lease termination fee related to Lowes Foods at Oleander when we -- basically, when you sign the agreement for the lease termination, you have got to prorate that from the time the agreement is signed to the time the tenant moves out. So that's just -- it crossed over the quarter and we just allocated that pro rata between those two periods from the time they signed it to the time they moved out. So $500,000-some of that related to that particular tenant.

Okay. Thank you.

Yes.

Thanks.

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

Hi, good morning.

Morning.

Hi, Nate.

Just going back to the famous page number 9 here for a second. The -- you disclose this acreage of undeveloped vacant land in the operating portfolio. Can you give just a little more color on that land holdings and maybe give us just a sense of your ability to monetize that?

Yes. I mean that -- and the one thing we wanted to do there, Nate, is just to give people clarity. There is several out lots that we don't have leased as well as several residual pieces of ground, like -- to give an example in Naperville, Illinois there is a box -- there's a site for an additional box next to T.J. Maxx and the other national tenant we have there and we've valued that based on the net book value, and how we calculate it. We just put the acreage down there.

So we wanted to give a little clarity that we do have not only in the land held for development and the CIP. There is some additional residual land that's in the land account in the fixed asset area of our balance sheet.

And that 38 acres, as far as monetizing, I think we would push to do additional boxes and/or ground lease those sites. And I think we just put it down there, so if you value that at X amount per acre it's an additional item for NAV purposes.

Okay. What are you carrying it on your balance sheet at?

Boy, the 38 acres. What am I carrying it at. I don't know if I have that data right offhand.

Okay.

Of what exactly we carry it at. You know, we estimate an NAV on what we could sell it at. I don't have the exact net book value of what we're carrying it at. But I can find that for you and get back to you on that.

All right. Thanks. And then just you had laid out in your presentation the expected stabilization of the four in-process developments. Can you give us an expected stabilization date for Delray?

Yes. Yes. I think it's going to be a lot sooner than what you were thinking, Nate.

And as a matter of fact I have already sent a note to invite you to the grand opening so we'll be there. It will definitely be before four years from now. No, honestly, as we said, we're going to deliver -- we look like we're going to start delivering in the fall of 2012. Today we're 62% leased. We think we'll be, you know, another -- we'll probably be over 70% leased by the end of the third quarter so we have a lot going on. I would say that will stabilize probably in -- sometime in 2013 based on what's going on.

Obviously, you know, the end is always the challenge when you get down to the end, but being that we're at the 93% level in our portfolio right now I mean obviously we would be disappointed if we weren't there in 2013. And based on the momentum -- I mean, one of the things when you -- and I forgot to mention this earlier if you look at our in-process development page in the supplemental, just read the name of the tenants across the board. I mean tenants like Whole Foods and Joe Bank and all these guys in the various projects, very high quality names.

I think we have a real thing going on in Delray with momentum right now. Again, just because there's no options for people down there in this market. So we're feeling pretty good about that. Tom, you want to add --?

I think John is being conservative, as he should, I mean, fall of 2013, giving yourself one year upon completion is very attainable and the fact that we're just starting site work, haven't gone vertical, which we'll do in December should give us a nice push on some of the local shop, not only the national but the local side. So we're very pleased with where we're headed.

Okay. Thank you.

You're welcome.

Thanks.

(Operator Instructions). And our next question comes from the line of Andy DiZio with Janney Capital. Please proceed.

Thanks. Good morning, guys.

Morning, Andy.

Morning.

Just one question for you, I guess for Dan.

Going back to the presentation or the 8-K that you had out there from five weeks ago and you had quoted -- you had the expected CMBS loans in there at about 5.25%, and then they closed at about 5.44. I was just wondering if that was a rounding difference or if you saw spreads move during that time?

That's a big rounding.

Well.

I wish I would have rounded wrong, but that was -- what happened there, Andy, is that when we went to finalize the loan with all the disruption in CMBS market, we had locked rate on the Treasury but the credit spread is available for movement based on the market volatility. And I think it was one of those times in history where the banks were -- as they were quoting, you know, these credit spreads and I think it's getting difficult for them to move forward on some of these deals. And there's been a lot of in the Wall Street Journal the struggling deals that have occurred, and I think we're happy that we got it closed.

But what happened there is the credit spread originally was -- got us to an all-in rate of 5.25% and then before closing the bank just came to us and said, "Hey, look, this is -- these are historic times in the CMBS market and these kind of things don't happen very often. Can you help us out on this end?" And we talked to them and it ended up being that we adjusted the rate roughly 19, 20 basis points as a result of the credit spread.

Okay. Thanks. With that closing a couple days ago it's good to get the real-time indicator.

We're really happy. I think right now it's tough to get credit spreads quoted even. I think that banks are -- it's a tough time to -- you know, in that regard.

Okay. Thanks for the extra color.

Thanks.

And our next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed.

Good morning guys. Actually, a good chunk of my questions on shop leasing have been answered.

John, I was curious if you have seen a change in the appetite from pad and big box users as it relates to owning versus leasing their sites? Historically like a Home Depot or a restaurant might have a preference to own that pad. But if rents are a little cheaper, maybe their cost of capital is a little cheaper. Has there been any change there in how they're thinking about their own real estate?

You know, I think on the big box side we haven't seen it at this point. I mean the large format users, Target, Wal-Mart, Kohl's, those guys, Costco, they still tend to want to own. And I would say, you know, we haven't seen a material change in that. Although, again, a lot of that is site-dependent. You know, we have situations where the real estate is strong enough that we will -- that we have ground leases for example with some of those guys.

On the pad side, there may have been -- I think there was a little shift towards owning, and now it's probably maybe a little bit back to where it was. I think during the downturn there might have been a little more shift to owning and they were probably trying to take advantage of pricing. But right now I mean we're negotiating multiple ground leases right now with pad users, and in certain situations it might make more sense to sell and we would sell. So I haven't seen a tremendous difference there at this point, Jeff.

Okay. That does it for me. Thanks.

Thanks.

Ladies and gentlemen, that concludes our question-and-answer session. I would like to hand it back to John Kite for closing remarks.

Okay. Well, thank you everybody for joining us and we look forward to talking to you on our next call. Thank you.

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