Kite Realty Group Trust (KRG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Kite Realty Group Trust earnings conference call. My name is Keith, and I will be your operator for today.

At this time all participants are in a listen only mode. Later on we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Dan Sink, Chief Financial Officer. Please go ahead, 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 send a copy to you.

Our second-quarter supplemental financial package was made available yesterday on the Company's website at KiteRealty.com. A filing has how also been made with the SEC in the Company's most recently 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 the historical results or from any results expressed or implied by such forward-looking statements.

The Company refers you to the documents filed by the Company from time to time with the 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 Chief Executive Officer John Kite, and Chief Operating Officer Tom McGowan.

I would now like to turn the call over to John Kite.

Okay, thanks, Dan. Good morning everyone, and welcome to our second-quarter earnings call. We are pleased with our second-quarter results, and we look forward to telling you about the progress we continue to make on our 2012 goals and objectives.

First, the operating results for the quarter. FFO as adjusted for the quarter was $0.11 per diluted share. In the second quarter we adjusted FFO for the write-off of $500,000 of deferred financing costs resulting from the modification of our unsecured line of credit and the early payoff of several construction loans, using the proceeds from our $125 million unsecured term loan.

We recorded another quarter of positive NOI growth in the portfolio. Our same-property NOI was up 2.4% over a strong prior year. In addition, our aggregate cash rent spreads of 14.6% for the quarter highlights the quality of our portfolio and our ability to generate positive future rent growth.

We also continue to see consistent growth of revenue from property operations as a result of our development and leasing efforts, as evidenced by the 5.9% increase in the quarter over the prior year.

On the balance sheet our finance team modified our line of credit and extended the maturity to April 2017, inclusive of a one-year extension option. In addition, we closed on a new seven-year $125 million unsecured term loan during the quarter, which we hedged to achieve and all-in rate of just above 4%.

After the execution of the term loan and the line of credit modification, as of June 30 we had no remaining maturities in 2012 and only $19 million of consolidated maturities in 2013. In addition, the weighted average maturity of our debt increased from 4.2 to a more conservative 5.3 years. Our floating rate debt decreased from 42% to 25%, and our unencumbered asset pool increased to approximately $475 million.

During the quarter we also continued to execute on our capital recycling strategy. We sold the recently completed South Elgin Commons, for a low 7% cap rate. The center had three long-term leases with a low growth profile over the next 10 to 15 years, therefore, we sold the assets upon completion and redeployed the proceeds.

The sale generated approximately $9 million of net proceeds after paying off the debt on the property. In addition to South Elgin, we sold two land parcels in Indiana, which generated approximately $1 million of net proceeds. The sales of Marysville and South Elgin for total proceeds of $54 million puts our year-to-date 2012 dispositions at the low-end of our guidance range.

As we briefly discussed on our last call, we are seeing more acquisition opportunities in our core markets. During the quarter we took advantage of one of these opportunities by acquiring a 97% leased 160,000 square foot Publix-anchored center in Stuart, Florida for $22.1 million. The property is located in the Treasure Coast area of South Florida. This acquisition was very attractive as Publix sales significantly exceed their overall store average on a per square-foot basis. We are currently analyzing a potential expansion of the Publix' as well as an overall renovation of the center.

In July we also acquired a neighborhood shopping center in Vero Beach, Florida, for a purchase price of approximately $15 million. The newly named 12th Street Plaza is a 138,000 square foot shopping center anchored by Publix and Stein Mart, and is 99% leased. We were able to purchase this center in an off-market transaction. And Publix sales at this location also significantly exceed their overall store average on a per square foot basis.

Both acquisitions were acquired in the mid-7 cap range, and are the type of value-add opportunities we have been finding in our markets. We have the ability to locate underutilized real estate with strong demographics and above market tenant sales with the opportunity of upgrading the quality of the overall asset. We are tracking several other potential acquisitions with similar characteristics that will continue to grow our NOI and be additive to the overall portfolio.

The redevelopment of Rangeline Crossing, formally known as The Centre in Carmel, Indiana, is another example of our value-add strategy. You may recall that we acquired our partner's interest and gained control of this underperforming asset early last year. We were able to acquire the remaining interest in the asset at an acquisition cap rate in the low-teens, and quickly began plans to dramatically upgrade the center. We are now 88% preleased and will commence construction this month with projected substantial completion in the spring of 2013.

The $15.5 million investment in this project, which is anchored by Earth Fare, a specialty organic grocer with 28 other locations, along with a national drugstore anchor, Panera Bread, Old National Bank, with several other significant tenants.

The upgrades to the existing center are significant, as I said. And we are expecting Rangeline Crossing to have an impact similar to our extremely successful redevelopment of Rivers Edge in Indianapolis.

Now I would like to cover some specifics on several of our in-process development and redevelopment projects that are ongoing as we continue to make significant progress.

At phase one of Holly Springs Towne Center, formally known as New Hill Place in Holly Springs, North Carolina, our momentum has continued with the preleasing percentages increasing to approximately 80%. In addition to anchors Target, Dick's, Michaels, Marshalls and Petco, we have signed a number of quality in-line tenants such as Pier 1, ULTA Salons, and Charming Charlie.

Earlier this week we closed on a $37.5 million construction loan with Bank of America, and we anticipate commencing vertical construction during the third quarter. We expect phase one to be substantially complete in the spring of 2013.

At Delray Marketplace we are approximately 76% preleased and vertical construction is well underway. The tenant interest in this site is accelerating as the buildings begin to take shape. We are targeting an opening of the center in the fourth quarter of 2012.

Four Corner Square, located in Maple Valley, Washington, a Seattle suburb, is now 83.5% preleased. We closed on a $23 million construction loan with US Bank in July, and vertical construction is underway and we anticipate a late 2012 opening.

Oleander Place in Wilmington, North Carolina, is now over 90% preleased, and Whole Foods opened its door in late May. We anticipate delivering this project to the operating portfolio by year-end.

In addition, we continue to make progress on our future developments. Our Parkside Town Commons development project near Raleigh, North Carolina, was a hot topic of conversation at the May ICSC in Las Vegas. We now have nearly 350,000 square feet of retail space at this project in later-stage lease negotiations. We anticipate having more specifics on the project as we approach year-end.

As we assess our progress on each of these developments, we are confident that our projects are best-in-class in terms of the quality of the real estate and the tenant lineups. We have worked very closely with each of our tenants as they scrutinize their target markets and the quality of each development more than ever before. Our perseverance to attract the long-term, high-credit tenants to our Class A real estate will provide significant reliable growth for years to come.

Upon completion of this $200 million in-process development pipeline we will have under $50 million of consolidated CIP, or less than 5% of our total assets. Now that we are over 80% preleased in these projects we have significantly mitigated the risk and anticipate 15% to 20% NOI growth from these projects.

In closing, we are once again using our vertically integrated platform to its fullest extent. The KRG team is locked in and focused as our value-add abilities are in motion.

A number of aspects of the Company are as solid as they have been in several years. Some examples include the quality of our income stream, with only -- with over 95% of our earnings coming from reoccurring property operations. The demographics and best-in-class retailers anchoring the projects in our $200 million in-process development pipeline, which is over 80% leased, as I've mentioned. The operating metrics with positive same-store growth over the last six quarters and positive rent spreads over the last eleven quarters.

The focus on capital recycling with the objective of enhancing and geographically targeting key markets. The conservative maturity profile of our debt, as only 18% of our debt matures over the next 3.5 years, as well as our proven ability to secure construction financing with attractive terms. And, finally, the credit quality and the limited exposure to any one tenant in our entire portfolio.

We look forward to continuing to update you on the progress over the next several quarters, as we execute on these objectives and begin to bring these projects into line.

So with that I would like to open it up to questions. Thank you.

(Operator Instructions). Todd Thomas, KeyBanc Capital Markets.

Just first question. I was just wondering, your same-store NOI came in for the first six months here at 3.9%, and I was just wondering, I think the previous guidance was 1% to 2%. Is that still the forecast for the full year?

Yes, I think we are still leaving the forecast there. We believe that we are likely to be at a higher end of that range, but with two quarters to go obviously we want to make room for that. But I think we are going to leave that in place, and we assume right now that we will be at the higher end of that range.

Okay. And then just moving over to acquisitions. So following Vero Beach and the Cove Center deals, it sounded like there is little more in the pipeline. Can you just talk about what we might expect to see throughout the balance of the year? And then can you also to remind us what you have in guidance for acquisitions?

In terms of what we have for what we are looking at, it is hard to -- we don't like to pin a number on what we think we are going to close, because each of these deals have their own independent issues. But we definitely are probably seeing more than what we thought we would when the year began.

So I don't think we gave specific acquisition guidance at the beginning of the year. We typically give transactional guidance, but we don't give specific acquisition guidance.

So I think we have been successful with these two deals. We are certainly not afraid to do more deals of this type. And if we can continue to uncover these things that -- like if you look at the two deals we did, one of them, Vero, was a completely off-market transaction and the other, Stuart, was an extremely limited-market transaction.

So that kind of stuff, we are going to pursue, and we are seeing better opportunities. So I don't think we can give you any more guidance than that, because I want to be cautious around where it is going to go, but it certainly looks a little bit better now than it did at the start of the year for us.

Okay. And how is the $15 million deal in Vero Beach funded?

This is Dan. We funded -- we assumed about $8 million of debt, and we funded the remainder of it off of a lot of credit. With -- as we talked about on the last call, we have a couple of non-core asset sales that could potentially occur prior to the end of the year, which would match up well with the equity that we needed to fund the Vero project.

A It is John again. Bottom line, as Dan said, we actually have one of these deals under contract that would suffice the equity that we drew. So we don't look at incurring additional leverage on top of where we are for these deals.

Okay. And then just one last question on Del Ray. In terms of the remaining leasing that you still have left to do there, I was just wondering if you think it would be -- if you think the project will be fully stabilized at opening in the fourth quarter?

And I guess I'm wondering what the center's lease rate would be, and what portion of the property will be open and paying rent in the fourth quarter when the project is complete.

As we said, right now it is 76% leased. We have a great deal of leases in negotiation and outstanding. It won't be fully stabilized in the fourth quarter. It is more likely to be the first quarter of 2013 for that. But it is just going to depend on the momentum going into the end of the year. We would like to be, obviously, over 80% before we get to the end of the year, and that is a very legitimate goal. Tom, you want to add anything.

Yes, Todd, I think with deal flow basically where we are right now, 85% is a practical number to shoot for company-wise. And then in the spring I think we are going to make great progress. The deal flow continues, and we feel pretty good where we are headed.

But, you know, the important thing for us is we anticipate that we are going to have both anchors to open by the end of this year. So that is very important in terms of getting the small shop leasing momentum to continue beyond where it is today.

But as I mentioned in the remarks, small shops tend to lease a lot quicker when the buildings are up than when they are under construction. So this is a fairly normal progress for a project of this magnitude.

Okay, thanks.

Nathan Isbee, Stifel Nicolaus.

John, last quarter you had mentioned there was a portfolio acquisition you were looking at. Is that still percolating or have you gone back to the drawing board as it relates to portfolio acquisitions?

No, that particular one I was talking about, we ended up passing on. But based on just where the price went or to -- it was a portfolio that was broken into two separate groups of properties, one in Florida and one in North Carolina. And the pricing went to a point that we didn't think made sense so we ended up passing there.

Again, I think we are seeing more stuff, as I just mentioned. So we are out looking at a couple of things right now. So we will continue to pursue those, but right now the one-offs are a little more attractive for us because they can fly under the radar a bit and we can get the yields that we think makes sense versus the yields that people are chasing -- chasing some of these down to.

Okay, thanks. And then, Tom, how many -- can you remind us how many vacant boxes there are left in the portfolio?

Right now we have two vacant boxes, and one just came up.

In addition to the two?

No, that includes -- so basically we have got two, including the one in El Paso.

Okay. And then just going to Delray, can you give us a little bit of a sense as the leasing has evolved there, your first small shop leases to now where rents are now versus when you first started leasing the center?

I think rents have actually accelerated. When you look where we are now doing deals in the small shops in Delray, which is why -- when you just look at some of the rent growth you see across the industry, But definitely we are seeing small shop rents that can easily be in the 30s in Delray. So I would say they are high-20s to kind of mid-30s, depending on the tenant, depending on the capital.

So I think when we look at our IRRs on these deals they are actually higher than what we had underwritten a year ago, so the rent is actually surprisingly better.

Yes, so from where we started we just continue to get nice increases, which has been a great sign for the center.

So you are in the low-20s -- low-30s today. Where were they when you first started leasing it?

I think when we first started leasing we thought things would be in the mid -- low- to mid-20s and now I would say we are in the high-20s to low-30s. So it is significant, which is why I mention the IRR impact.

Sure, okay. And then --

That is a function of the fact that there just isn't any new product out there, and people just don't have the choices that they had a few years ago. So, you know, supply and demand business, it is pretty simple.

And now it is real.

judging by the press reports down there people do seem to be excited.

Yes.

And then on the two recent acquisitions, could you give us a little more detail on some of the value-add opportunity? And the one undersized Publix is there any concern on your part that they are looking elsewhere to build that new store?

No, the answer to that is we are not concerned about that today based on the fact that we are in negotiations with them already on a new lease. So as far as the value-add side that would be the Stuart, Florida, which as you referenced was the smaller Publix. And that was obviously why we are able to acquire it very attractively.

When you look at these acquisitions together combined it is about $125 a foot. But anyway, the Stuart deal, we are comfortable. We are in negotiations. If we do go ahead and do a new Publix deal that will spur a small redevelopment of the balance of the center. So there is upside there as we rotate tenants and get higher rents.

In terms of the acquisition in Vero Beach it is a little more stabilized in the sense that we got a much longer-term on the Publix. The center basically is almost 100% leased. So we just happen to get a great buy there based on an off-market transaction.

Okay, thanks.

Jeff Donnelly, Wells Fargo.

I will stand on the shoulders of giants, since Nate and Todd asked a lot of my questions. But I am curious, John, coming out of ICSC you seem to have a little bit of renewed interest in maybe some targeted development opportunities. I'm not sure if that is a fair characterization. But are rents close to making sense broadly or just pencil in, I guess, a minority of your markets?

And maybe as a follow-up where would you take your development investment over the next 24 months? I'm just trying to set my expectations on where that might go.

Sure. Well, hard to say over 24 months, but ground-up development today with rents where they are, I think it is still difficult to go out and pursue a ground-up development that is just a brand-new deal based on where rents are. Although it has closed the gap significantly, I would say in the last year.

Honestly, we just looked at a deal that was a very good deal, a brand-new ground-up deal that we weren't a part of that we were considering going into. And it just quite wasn't there. The returns weren't where we would like to see them based on what we are getting in both our current pipeline in terms of incremental returns, and our acquisitions and redevelopments in terms of the returns that we can get.

So I don't -- for us it is not quite there, I mean, for the risk-adjusted return, for the return on its face. Some people would argue that if you can get a 9.5% return on a new development deal that that might work for them. I don't think that works for us today based on where we are getting returns on the balance of the portfolio.

So I think because of that you will continue to see limited -- very limited development in the next three years. But at some point that will change, and I think it will change rapidly when it changes, because rents will just push and, boom, people will get start getting 10% plus returns and guys like us will do deals again. But until that time I think it will be very limited.

Okay, that is helpful. And I don't want to leave Dan out. I was curious, Dan, are you seeing a change in advance rates on mortgage debt from lenders out there? Are you finding that they are getting more aggressive in terms of LTV and coverage ratios or has that been holding pretty firm?

I think it depends on the sponsor and the quality of the project. I think when we are -- these construction loans we have been negotiating I think one of the big items is they want you to be 65% -- 60% to 65% preleased from an economic perspective. So when you're underwriting the project they will be a little more aggressive on the LTVs in the 70%, 75% range when they are underwriting as long as your prelease percentage is in that 60% to 65% range.

So I think -- you know, overall we have had some good success on these properties, which I think speaks to the quality of the real estate. And as they are underwriting these with the tenancies and the -- just the time frames of getting it done, and the anchor tenants and the credit quality, I think it has been really a positive to get all these construction loans completed.

The only thing I would add to that is I think we were talking about this a year ago that we saw that there was a great deal of liquidity in the construction lending market for the right project and the right sponsor, and there is a lack of liquidity beyond that combination. So that also gives us the upper hand as it relates to these development projects, because we're going to see very limited competition.

So even as we go through the lease-up phase we are not dealing with the competition that we used to deal with when we were developing five years ago. So I think that accelerates the back-end of the lease-up phases. So it is all tied together.

Does that apply to stabilized assets as well? Do you think that lenders are still being stingy on proceeds on those as well?

I think it applies -- yes, generally there is a more conservative underwriting, although today you don't hear people talk about debt yields like we heard two years ago in the crisis. So I think they have moved away from -- at least, we see they have definitely moved away from this idea of debt yields, which quite frankly, I never understood why we were worried about what their yield was.

But at any rate now we are more into the typical -- you know, the coverages. And the advance rates have crept up, but again it is based on the quality of the project. And, by the way, when you look at the unsecured term loan that we did that was against -- balancing that against what is available in the mortgage market. And when we are able to do a seven-year unsecured loan at just a tick over 4%, and you see pretty highly rated companies issuing 10-year bonds at 4.5%, I would say we did pretty good there.

That's great. Just one last question; more a housekeeping question. Do you guys have handy what your original investment was in South Elgin, just sort of undepreciated investment.

I don't know that we have the actual undepreciated number handy. We can get it -- we can circle back.

Okay, that is fine.

I tell you what, we made money.

Okay, okay.

That is my litmus test.

Okay, thanks.

Carol Kemple, Hilliard Lyons.

Do you have the spread between the leasing and occupancy in the quarter?

Yes, it is about -- the leased and occupied there is a difference of about 280 basis points. And the majority of that is the leases that we have signed but as yet -- have not yet to take occupancy. I think that is roughly --.

That is like 240 of the 280, so it is more the majority.

Yes, so I think the run rate on that is probably in the neighborhood of 70 to 100 basis points. If you're looking at what is a normal gap for us. But as we sign leases and put them -- as we sign leases that gap is going to occur until we get them in and paying rent. We have three box leases now that are leased but not occupied with DSW and HomeGoods at Cedar Hill Plaza, and Arhaus Furniture at Rivers Edge. So when you look at those two leased but not occupied, that is going to be a nice cash NOI growth when those tenants take occupancy.

Significant same-store growth from those.

So where would you expect that spread to be by year-end?

The three leases that I mentioned will be paying rent, so I would say we probably -- to be in the 70 to 100 basis point range, pending if we get a lease signed at the recent RoomStore vacancy or something like that. There is always lease signings that will occur in the fourth quarter that would create a larger gap, but right now typically it would be 70 to 100 basis points.

Okay. And then it looks like your old property taxes went down in the quarterly year-over-year. Was there something significant there or you all have just been doing a great job in negotiations?

Typically with all of our properties we will appeal the taxes, and I think we had a couple of the successful appeals in the quarter on Indiana properties. And I think if you look at a run rate on that it is probably going to be more similar to the first quarter than the second quarter, because I think $3.3 million to $3.4 million tax number is a pretty good run rate. But that is going to vary as we approach the fourth quarter and some of these development properties come online, the taxes will begin to be expensed, which we will still recover -- you know, have significant recovery on the taxes, but the line item for the expense will go up.

And then your G&A was up year-over-year. Was that he there anything significant in that?

No, I think our G&A guidance was in the range of $6.5 million to $6.8 million. I think right now we are probably tending to the high end of that range, but nothing significant that would -- to report.

Okay, thank you.

Rich Moore, RBC Capital Markets.

Looking at Parkside for just a minute, as I was comparing the two supplementals, the one from last quarter and this quarter, the size, the scope has -- it looks like it has become more defined for Parkside. But could you address, I guess, why -- what you're thinking about Parkside?

Tom and I will both talk about this. But generally, as you know, when we have these things in the future pipeline, the scope of the project and the cost of the project are estimates and they aren't fully refined. So keep that in mind on all of these. But then as it relates to the specifics, I will let Tom give you the specifics.

Just to give you an example, we had 300,000 square feet of apartments in that gross square footage.

Originally.

Originally. Then in addition to that we had about 260,000 square feet of a structured garage. We had multilevel office space. So we have really -- we have reinvented the plan and really brought it up to speed in terms of the retail economy of where it is today.

If you look at just gross retail square footage, which we are at about 572,000, that is basically online with where we started the project, and this is just a reformation of the site plan at this point.

But to add to that, to be specific, so as we went through the process of, as Tom said, the retail landscape, we wanted to refine this and make it more of a retail only project. It began as a large mixed-use project. And we also in this process significantly cut down the number of shops as it relates to the retail.

So we are now in a very, very tight defined scope of what is leasable. And as I mentioned in my prepared remarks, we are -- I don't even know the analogy to use how much steam has been picked up on this project in the last three months.

It is a lot steam.

I think we have probably cut the shops in half. And because we have so much -- we have got some very strong demand in the mid-box size users at what we think are going to be very good returns.

Okay, I got you guys. And is that land then still there, John, if you want to pursue apartments [off the second]?

It is that we are basically selling now rather than being -- again, previously we were going to own in a partnership the apartments, now we are selling to a third party, so we are splitting off the land. Which we think is the smarter risk mitigation move in an environment like we are in today with apartments -- you know, when everybody loves them we are going to be cautious and so we are a seller. So we are able to generate about 300 units. So it is a perfect size parcel.

Okay, is there a time frame on the sale of that? Should we model in some kind of gain at some point, or are you just going to (multiple speakers)?

No, I wouldn't model that in right now, because it is going to be -- we are not going to do that in front of the remaining approval process of the project. So I wouldn't -- we will let you know. As I said, when we get towards the end of this year we are going to have a better feel for the timing.

All right, it sounds good. Then the only other future development really that we haven't talked about is -- the only one left really is Broadstone Station. Is there anything new on that?

Yes, Broadstone, basically, as you know -- I think you may know, Super Walmart is open and operating, and so we have the balance of the land there.

We have -- we believe that we would kind of rather pursue large users than junior box users. So we switched our marketing process on this. That doesn't mean we wouldn't come back and do junior boxes. But we have got interest from a couple really large format users that want to be adjacent to Super Walmart -- that takes a little more time. And we also shifted -- we had some apartment land here that we have solid, so we took that process and shifted that around. So bottom line is we do have activity, but we like to pursue the large user here than multiple users. We're going to see what happens.

Good, I got you, John. Thank you. And then back on the land sales for just a minute, do you think -- you guys have a lot of stuff going on that is in-process. Will we see a pickup, do you think, in land sales and, hence, land sale gain?

You mean in land sales for out-lots or large parcel?

Yes, yes (multiple speakers).

It will happen, but I think we are -- right now we are more in line with pursuing the ground leased income. And one of the reasons is that you see that we have shifted our -- you know, 95% or more of our earnings now come from reoccurring rent. So we want to keep pushing that, and we like that.

It doesn't mean that in the right situation that we wouldn't sell either a parcel directly to a user or sell a ground lease to an investor. But it just seems like at this point we are doing less of that and just generally growing the earnings.

Okay. And then overall, it sounded like your thoughts are that you won't really add to the future development pipeline much in the near term, with the exception possibly of things you buy that are redevelopments and value-added sorts of things?

No, I think what I was trying to say is that we are out looking at stuff. I think people approach us because there is not that many qualified developers left standing in the world. So we are going to look at opportunities, but we are going to be -- what is the word -- we are going to be very diligent on looking at the amount of total development we have relative to our total assets.

And as we said in the prepared remarks with CIP, if you look at the massive disconnection between where we are and what the true value of the business is, a lot of it is just people don't know how to value CIP. So to the extent that CIP gets down to $50 million on a $1.3 billion or so asset base, it is not real complicated, it is not tough.

And so we want to be in that 5% range. And then as the world gets better, and there is more -- the demand really exceeds supply, and numbers -- returns grow, we can get back into that business and maybe it goes from 5% to 10%. But we are never going to be at those levels that we were at in 2008 and 2007 relative to the exposure to it.

So I think we want to be cautious. Now if we see a good deal and it is highly preleased, and we think we can get a 10% plus return very safely, we would pursue that, but those aren't falling off trees right now.

Okay, all right. Good, thanks. And last thing, John, Estero looked like it had dropped quite a bit in the shop space occupancy. Anything special in there?

No, it is a small -- first of all it is a pretty small shopping center. So you lose one or two tenants and it is a big impact to the occupancy. This is a small strip center anchored by Lowe's in the Estero area of Fort Myers. So I'm not exactly sure off of who we lost, but that is just the impact of small numbers.

Okay. All right, thank you, guys.

(Operator Instructions). Quentin Velleley, Citi.

Just going into that comment on valuing CIP, I'm just wondering if you can help us out a little bit in terms of how you're thinking about the potential value creation of the current development pipeline?

of that $200 million odd of project costs, I think your pro rata share is $150 million or so. What kind of develop -- what kind of average development yields on a stabilized basis do you think you're going to get?

And then maybe whether you could talk through what your view of the market cap rates would be and how much value creation sits in this development pipeline now?

Okay, let me start with the percentages. One thing to remember on that current pipeline, we technically own 50% of Delray, but due to the capital structure, we get a preferred return on all of our capital before any other partner distribution would occur. And based on the fact that we have been -- how long we have been in that deal and the accumulated capital return, we will ultimately get very close to 100% of economics -- 95% of the economics or so. So keep that in mind when you're thinking about it.

As it relates to returns, and thinking through your question, I mean, incremental returns that we are getting on the equity going into these assets, the new equity going forward, we look on that on a cost basis and we look at it on an unlevered IRR basis. So on a cost basis, as we have said before on these incremental returns, these are high-9%s to 11% range in terms of incremental equity going into these projects.

Then on an unlevered IRR, depending on your view of exit cap rates, these are solid double-digit IRRs. And again it is all going to depend on the terminal cap rate, but call it between 11%-ish and 13%-ish.

So that is how we look at the dollars that we spend. As you know, Quentin, is what do we think we are going to get on this next dollar that we have to spend? And even the overall total returns on a cost basis on these projects are higher than what we thought they would be. I have seen some of these others out there in the industry that are shockingly low.

We don't have any of these that would be below a 6.5% total return. And some of them, frankly, are up to 9% when you look at the in-process development pipeline.

So it is kind of a long-winded answer. I think from an IRR basis we feel very good about it. We can't get the returns that we are generating in these properties in the acquisition market. Even the ones that we are doing -- you look at the deals we did, we aren't going to generate 14% unlevered IRRs or 13% unlevered IRRs.

And in terms of the cap rate, you know, value creation, because so much of this NOI is weighted in South Florida and Raleigh in terms of our in-process development, project there are obviously trading in the 6s, some of them below that. So you have to look at it on a weighted basis. So on a weighted basis there is just large value creation here.

Okay, and then it sounds like you're looking at more opportunities out there. You have significantly improved the balance sheet. Leverage is still high. I think you said you had some non-core asset sales that are getting close closer. You have got a $50 million ATM in place. Are you closer to using that now or should we be thinking about something else on the capital management side to delever the balance sheet?

Well, we look at all forms of capital, and as to where we stand today where we view -- we view -- as you know, we view there is a disconnection between the stock price and the asset value. So I wouldn't say that those are -- that the equity market is our only option. If we continue to be in the levels that we are today relative to the stock price, then it would also make sense for us to look at assets that we have that would trade at significantly below our implied cap rate and monetize those in order to fund these -- finish out funding what we needed to fund in the development pipeline, for example, and generate large returns.

So I think we are going to look at everything. We are going to look at the market. If the market can more accurately reflect value then that is something we will look at. If it doesn't, we will tap into one property and fund quite a bit just by monetizing it at fair value.

And, again, that is why I mentioned you have got to start looking at the weighted -- you know, where is our NOI coming from in the total portfolio? And we are trading where we are, and we know what the NOI is going to be in 2013 and 2014, we got to look at other things.

That is great, thanks. Just lastly, maybe one for Tom. And I may have missed this, but the RoomStore box, what are the plans for that at this stage?

Well, it was a 31,000 square foot box in El Paso, and at this point we are working with multiple replacement tenants. And so far because of the success of the center interest level has been high, but we are still playing that out. But the hope is to secure a single user, but we will look at all options as we go through the process.

Okay, thank you.

Tammi Fique, Wells Fargo.

I was just curious, I am wondering if you could elaborate on the South Elgin sale, was that a widely marketed deal?

Yes, it was a marketed deal.

And I am kind of curious, with it being a recently completed development, how that fell into your non-core asset group?

As I have tried to say in the remarks, we viewed it as non-core based on the fact that it was essentially just three boxes with flat leases. And so we didn't see much opportunity to grow NOI. And when we originally undertook the project, before the -- during the downturn times we had put this in our TRS as part of our merchant building program.

So we back in -- I think in 2007 and 2008 we had a pretty large merchant building pipeline, which we obviously don't today. So that was also a factor. But, frankly, I think we would have done it anyway, because when you look at the NOI characteristics, you look at the characteristics of the credit that we have there, the fact that we can sell it at a low 7 and recycle that capital into higher returns, it made sense.

Are there any other sort of more recently completed development that could fall into that bucket?

We have -- we are looking at that. We have some other -- as Dan mentioned, to fund -- if we need equity for any of these acquisitions we have some other stuff that we are testing the market on that are more net lease type. So, yes, there are some stuff out there, but in terms of things that are in our current development pipeline that are under construction, I think the majority of those assets we feel will grow. Obviously, we have the one Walgreens in there, so that is something we might look to in the future.

And, so, in the context of the 1% to 2% NOI growth range, what are you targeting when you think about your core portfolio for long-term NOI growth?

Well, we think -- again, as you look back historically at neighborhood and community shopping centers, you look at the nature of the cash flows, the high credit nature of the cash flows, and again depending on how much small shop space you have versus anchor space, those are going to impact your NOI growth characteristics. So to the extent that you have more anchors, in other words to small shops, your NOI probably wouldn't grow as fast as if you had more small shops. Obviously, the more small shops you have, the higher risk it is. So people need to take that into consideration when they look at NOI growth.

But I think we would like to be growing at -- not at 1%, but at 2% or better. And as we bring some of these new projects online, and as I said before, ones that are weighted in South Florida and Raleigh, other higher-growth markets we could do that.

But I think we are going to be conservative today, because you also have to adjust for potential tenant losses and that is part of the business. So we will keep our 1% to 2% guidance, but we are going to be disappointed if it is in the lower end and not the higher end.

Okay, and then with regard to vacancies is there anything else in the near term that you had some foresight into, where a large tenet may be vacating, like the RoomStore did?

No, we don't know of any material tenants that are kind of bankruptcy risk tenants. When I look out at our expirations, it is the normal stuff. And generally the ones that we think are -- could potentially leave we are already pursuing replacements.

And we just have so much more activity today than we did a year ago or two years ago as it relates to tenants actually approaching us saying -- do you have any -- do you have anything available there? Will it become available? Those are questions we didn't use to get.

So it feels pretty good there. And the overall credit profile of retailers has significantly adjusted in the last two years. They have significantly improved their ability to operate at a little bit lower sales volumes, but hold their margins. So it feels pretty good right now.

So do you have a clear pathway to get to the midpoint of that leasing guidance range that I think you gave of 93% to 94%

Yes.

In second quarter you were at 93%. Do you think we can get back to the midpoint of that by year-end?

Yes, I think -- we think we can be certainly at 93.5% by year-end. And again we are always trying to outperform that. When you lose a box, it obviously impacts you. So had we not had the RoomStore bankruptcy we would be higher.

But, again, I am more interested in the fact that our small shop occupancy is growing. The box stuff is just a part of the business. And the real estate outlasts the tenant every time, and you got to make good real estate decisions. So we do, and we feel comfortable with that. And we are very focused on growing the shop occupancy, probably more so than we are the total.

Okay.

That is where we will get NOI.

Okay. Yes, you did see a nice pickup from last quarter to this quarter on the shop occupancy.

Right.

I guess to 80.6%. How much more do you think you can grow that through the end of this year?

Through the end of this year, it is hard to say. But we have a goal of by sometime next year getting back to 85%. So we got work to do. Small shop can pick up quick. It really -- you have to remember it is also about absorption. In other words, you lose tenants in the shops as well. And we are, as I have mentioned to people before, a lot of this is self-inflicted, because we are tough when it comes to people not paying us rent. We don't like to be in that situation. And we won't carry people very long. I am not sure what other people do, but that is what we do. So that is a part of it as well.

Okay, and then just one last question related to your leasing volume. I am just curious, how much of the total leasing volume that you did in the quarter is reflected in the new and renewal leasing spreads that you reported?

Well we did 43 deals in the quarter, so 22 of them were new and 17 -- or, actually, I take that back. We did 39 deals in the quarter. 22 of them were new and 17 were renewals.

Okay, so all of the leasing that you did in the quarter is reflected in the leasing spreads.

Yes -- no, actually sometimes there are some short-term leases that would be noncomparable, and there is a couple of those.

Okay, but not a significant number.

No. We are talking a couple, two or three.

Yes, a very small number.

Okay, great. Thank you very much.

(Operator Instructions). It looks like no one else is queuing up. Mr. Kite, would you like to make some closing remarks?

Yes, again, thank you everyone for joining the call. And as you can tell, we are very excited about the business. We feel very good about where it is. When we look back, as I mentioned, we are really firing on all cylinders right now and look forward to continuing to report that throughout the balance of this year and into next year. Thank you.

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us. You may now disconnect. Have a great weekend.