Kite Realty Group Trust (KRG) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter 12013 Kite Realty Group trust earnings conference call. My name is Patrick and I'll 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, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Adam Basch, Investor Relations. Please proceed, sir.

Thank you operator. The Company's remarks today will include certain forward-looking statements that are not historical fact. They 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, and 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 this call with me today from the Company are Chief Executive Officer, John Kite; Chief Operating Officer, Tom McGowan; and Chief Financial Officer, Dan Sink.

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

Thanks, Adam, and good afternoon and welcome to our first-quarter earnings call. The retail environment continues to be strong, as credit tenants are looking for quality real estate and dependable sponsors to grow their top line revenues. Our team is capitalizing on the current favorable market conditions with strong leasing momentum, acquiring, developing and redeveloping high-quality assets, and opportunistically raising money in the capital markets.

We started 2013 with three primary goals -- first, continue to focus on the strong operating performance of our portfolio; second, stabilize the majority of the in-process development pipeline by the end of the year; and third, continue to strengthen our balance sheet by acquiring quality real estate with equity in order to accelerate our deleveraging process. The continued strong performance of our operating portfolio was demonstrated by the following -- FFO for the quarter was $0.14 per diluted share; our total portfolio rent and recoveries grew approximately 15% year-over-year; we recorded another solid increase in our NOI growth; that same property NOI increased 5.2% over a strong prior year; our aggregate rent spreads increased 16% for new and renewal leases; and we increased our total resale lease percentage to 94.5%, and our small shop percentage to 83.3%, up from 94.2% and 82.5% respectively, in the prior quarter.

Second, we are focused on stabilizing the in-process development pipeline by year-end, as well as beginning the construction on Phase II of Parkside Town Commons and finalizing the anchor tenant leasing in Holly Springs Phase II. During the quarter, at Delray Marketplace in Delray Beach, Florida, we had approximately 160,000 square feet of tenants open, including Publix, Frank Theaters, Charming Charlie, Joseph Banks, Chico's, White House Black Market, and many others. Our leasing results have been very good as we are approximately 85% leased, and have recently received additional commitments from three national retailers.

225,000 square feet opened at Phase I of our Holly Springs Towne Center development near Raleigh, North Carolina, Including anchors Target, Dick's Sporting Goods, Michaels, Petco, as well as Charming Charlie, Pier 1, Starbucks and Children's Place. The center is also 85% leased, with sufficient tenant interest to fully stabilize the asset later this year.

At Four Corner Square, a redevelopment project located in Maple Valley, Washington, a Seattle suburb, we opened Grocery Outlet and Do It Best Hardware. The center is currently 87% leased, as we quickly move towards stabilization. We plan to open the Walgreens store in the first quarter of 2014. Our Rangeline Crossing redevelopment in Carmel, Indiana is now approximately 95% leased. Earth Fare, a specialty organic grocer, plans to open in the second quarter, along with the majority of the in-line tenants including Panera Bread, Old National Bank and Verizon, while Walgreens plans to open in the first quarter of next year.

As we approach the stabilization of these four key projects, with a total project cost of $195 million, and an approximate aggregate 6.5% yield on cost, we anticipate their NOI contribution to be approximately 50% of the stabilized total by the end of June, up from 20% at the end of March, and 65% at the end of September, and 75% by the end of December. In addition, Phase I of Parkside Town Commons is now 60% pre-leased and the site work for the entire project is well underway for an anticipated opening in March of 2014. We also have executed leases with anchor tenants in excess of 150,000 square feet in Phase II of Parkside, including two concepts owned by Dick's Sporting Goods, Golf Galaxy and Field & Stream, as well as Petco and Frank Theaters. The Field & Stream at Parkside will be a flagship location of this new outdoor sporting concept. We will continue to aggressively use the remainder of Phase II, and we anticipate commencing construction in late 2013 or early 2014. At Holly Springs Phase II, we have two of the four anchor tenants committed, and we plan to make additional progress on the final plans during 2013. We anticipate starting this project in mid 2014.

During the quarter, the tenant openings at various development projects brought our CIP balance down by $50 million, or 25% from year-end. As we look back at the level of our CIP balance several years ago, and the quality of the projects we have on our balance sheet, I'm very proud of our team for executing on our plan to complete these high-quality large projects. The approximate one million square feet from these projects is now starting to come into the portfolio, and will provide solid cash flow growth for many years to come. Finally, we are making significant progress on our deleveraging strategy, as we acquired over $125 million of unencumbered retail assets since December of last year. We have funded the majority of these acquisitions with successful equity raises in October of 2012 and April of 2013, for a total of $145 million, with minimal impact to earnings. These all-equity acquisitions will help us reduce our debt to EBITDA between 1 to 1.5 turns, as well as provide additional cash flow to fund our operations including redevelopment cost and tenant improvements.

We are also deleveraging organically, as we stabilize our large development assets. We had a number of tenants open in the first quarter, and this activity will continue throughout the rest of this year and next. These events will enable us to achieve debt to EBITDA of around 7.5 times in 2014. We've also improved our net debt to enterprise value from 63% at the end of 2011 to 52% at the end of the first quarter.

From a long-term perspective, we are beginning to investigate some new opportunities, resulting from foreclosure meetings with national tenants. Our leasing team has an impressive schedule with many of the top retailers in our industry at the upcoming ICSC in Las Vegas. Subsequent to the end of the quarter, we were able to deploy 90% of the recent equity offering in two prime assets in Nashville and Indianapolis, both of which were acquired in off-market transactions. Anchor tenant sales at these centers are very strong, and we see the upside at both locations. We'll continue to look for additional opportunities in the national market, as the growth in demographics are very appealing from a real estate perspective.

Turning to guidance. We are increasing our 2013 FFO guidance from a range of $0.43 to $0.47 to a range of $0.44 to $0.48. A couple of items to note in the first quarter results. G&A expense was approximately $300,000 higher in Q1 than we project for each of the next three quarters.

We are currently discussing a restructuring of debt on our Kedron Village property. Until an agreement is in place, we must continue to accrue $350,000 of default interest each quarter, although we don't expect to pay that accrued amount. We incurred $180,000 of transaction costs that were specifically excluded from our original guidance, and we anticipate that our retail recovery ratio will be closer to 82% to 83% on a run rate basis versus the 79% reported this quarter. In addition, we've increased our same-property NOI guidance from 2% to 3% to 3% to 4%. This increase results from an increase in our minimum cash rent. We also don't anticipate significant FFO coming from land sales in the remainder of 2013. Our guidance has provided us an annual number and three quarters remain in 2013. We exceeded the upper end of our transactional guidance of $0.02 to $0.04 in the first quarter by $0.01. Therefore, we felt it was prudent this early in the year to increase the midpoint of guidance by $0.01 to account for the transactional gains in the quarter.

In closing, we are off to a great start to the year, with significant tenant openings in our developments, sourcing high-quality acquisitions, maintaining strong metrics in our operating portfolio, and accelerating our deleveraging plan. The NOI growth we anticipated is now beginning to flow through the income statement.

This concludes our remarks. Operator, you may open the lines for questions, please.

(Operator Instructions)

Todd Thomas with KeyBanc Capital Markets.

You put up a very impressive same-store print on top of last year's big number. I was wondering maybe you could shed some light on where the upside was, relative to your forecast for the quarter?

Todd, I think we kind of covered a little bit -- basically it's additional rent. Kind of the point I want to make in terms of pointing out that our rent and recoveries were up 15% year-over-year. So, there was some specifics that Dan might want to add to, in terms of the actual tenant openings. But, the bottom line is, we obviously had an increase in rent coming in a little bit quicker than we thought we would. Dan?

A couple specifics, at the Plaza at Cedar Hill, we had to anchor tenants that moved in. That's DSW and HomeGoods. We had some additional tenants moving in and start paying cash rent at Cobblestone. In addition to that, we had various small shop tenants with 5,500 to 6,000 square feet and those year-over-year comparisons make a difference, 1% of same-store is about $140,000 or so. So, those were some items that make that up. As John mentioned, it's primarily cash rent year-over-year comparisons.

Okay. Then, just digging in on the two acquisitions that were completed in April. They are largely stabilized from an occupancy standpoint. I was just wondering if there are any value creation opportunities at either site, maybe build out some paths or maybe some adjacent land nearby for expansion or any near-term lease role where there might be some upside.

I think all of the above. Taking them individually, the property we bought in Nashville, just an excellent property, locationally. It's a power center that's been owned by kind of an institutional fund and has had different property managers, different leasing agents, different owners. So, the opportunity here, again, this is why we try to find acquisitions like this that are off market. Is that we can come in and consolidate all three of those functions and immediately begin to look to improve the property.

The sales here are strong. This is in the Franklin sub-market in Nashville, which is one of the two best sub-markets in Nashville. So, we absolutely think we can improve it. If there is a process, it's going to take time. But we absolutely think we can improve it. Not only the tenant base, but potentially add GLA and we are really looking forward to it. Again, when you acquire it at $170 a foot, you've got opportunities to do that.

In terms of the Indianapolis acquisition, I almost -- the real estate is obviously different, but very similar in strength. This is at the core of Indianapolis, the 82nd and Allisonville corridor in Castleton. And again, this was previously owned by an insurance company. Ted has done a good job of filling the center, but we think there's a lot of opportunity here, we think a lot of upside here. Again, we acquired this at less than $150 a foot. Also, off market, so, we look at the pieces of real estate involved here, and look at what we are capable of doing, these are two great acquisitions for us.

Okay. And then just lastly, moving over to Delray. It sounds like momentum, leasing momentum for the remaining 15% is fairly steady here, with a lot of the anchors open now. You mentioned three additional leases that you're negotiating. I was just wondering if those three deals come to fruition, what that would take the pre-leased, or the leased rate, to at the center? Also, just wondering, if there's been any feedback on how business has been just in the first few months or so from Publix and the theater, any of the other key anchors or apparel retailers, or if it's still a little too early to tell?

Yes, the feedback has been excellent. The property is off to a great start. It's extremely busy. There was a lot of pent-up demand in the market for an asset of this quality. So, we are very excited by the anecdotal feedback. It's obviously early from a sales perspective, but anecdotally, it's excellent. A lot of traffic, very busy. So, that part's good. In terms of the lease-up, again, I think we will just continue to maintain that we believe it will be stabilized by year-end. Approximately 90% and Tom, want add anything to that?

Yes, I think one key point is you can see as it is reported right now, we are about 65% occupied, and by the end of the summer, in August, we will be at 78%. So, you are showing a lot of great growth on the occupancy side, and if you take a look at the 200,000 square feet of executed leases right now, we have activity of around 39,000 square feet of leases being negotiated, as well as LOIs being negotiated. You can see we can hit that hurdle that John talked about in fairly short order, if things go well.

Okay.

One other thing, Todd, I just want to make sure, based on your note that you understood what we were doing with guidance, and that we were trying to keep this very simple. Just to be clear, since it's this early in the year, we held all else equal, and all we did with guidance is raise by $0.01, because we exceeded our transactional guidance by $0.01.

So, I just want to make sure that's clear, based on the note and so there's no confusion that we did not get into the other aspects of the variabilities. There's a lot of variabilities when you are in the first quarter. So, I think we feel very good about that. We feel it's conservative and this early in the year, you really need to hold all else equal and just go with that one metric.

All right. Thank you.

Craig Schmidt with Bank of America.

What line item in the P&L does the three land parcels that were sold show up in?

Right, this is Dan. It goes to other property-related revenue. If you go to page 12 of the supplemental, we break that out specifically, and on the first footnote, it indicates that it includes $4.2 million of land sales.

Great. Thank you. I'm curious how you screen potential properties. It was interesting to see that you surfaced something in Nashville. I'm just curious, what is the screening process you first apply to potential acquisitions?

Okay. Yes, Craig, basically what we've been doing, is we feel like that we're concentrating in three geographic regions. So, that's the Midwest, the Southeast and Texas. So, what we do, in terms of looking at opportunities, we are thinking regionally. In the Southeast region, we've been extremely active, of course in Florida and North Carolina, recently South Carolina.

So, we start to begin to study other markets, demographically, and growth, both from a pure demographic standpoint and a retailer penetration standpoint. That's how we ended up, I'd say for the last two or three years, we've been looking at deals in Nashville, and just didn't come across one that we liked. And, again, we really tried to do as much as we can off market. So, this opportunity came to us via a relationship. We had already been well-versed in Nashville. So, once the opportunity came to us, we struck pretty quickly. We are just really happy to get an off deal market done. You got to move quickly.

That's it. The bottom line is we love the Nashville market. It's extremely vibrant. You've got downtown Nashville, obviously is on fire with Vanderbilt and the medical community and the convention center. Everything really spurs from there. There's a lot of similarities, by the way, to the Indianapolis market and the Nashville market, so that makes us comfortable. Really, that's it. Then, the other two acquisitions we did recently, obviously Orlando, we already know that market well and Indianapolis, we better know that well. That's how we do it.

Okay. Thank you.

RJ Milligan with Raymond James and Associates.

John, curious what else is out there in terms of acquisitions? What are you seeing in the market? Are there any other markets that you are looking at, that's not currently in your portfolio? How do you think about acquisitions versus -- yields on acquisitions versus yields on redevelopment or development, going forward.

Sure. Yes. We are actively engaged in looking at other opportunities. I think we were one of the early players in these type of acquisitions, which are deemed as not primary markets like a Nashville or an Indianapolis or an Orlando. It's starting to, obviously, gain traction. So, we have to be mindful of that, which is why we try to do everything we can to find unique opportunities.

We are seeing more. I would say we continue to be active in those geographic regions that we discussed. We are looking at stuff, also, and other markets within the Carolinas, for example. So, the Carolinas are very strong. We are looking at other stuff in Nashville. So, we are seeing things, no question.

In terms of how we balance that against redevelopment returns, you've got to look at risk-adjusted returns in terms of how you really look at things. Redevelopment is not risk-free. While we are able to get double-digit returns in redevelopment, it takes a lot of effort, takes a lot of work. It's very concentrated. So, we balance that against what we can find in terms of an acquisition that we see upside in.

So, none of these acquisitions that we are acquiring -- I mean, it would be very rare for us to say we are going to buy something at a 7, and it's never going to exceed that. So, I think we balance it that way. We want to find good real estate and we are wanting to -- remember that everything we do starts with the real estate, and everything else follows.

But, we have to love the real estate and in every deal we've done, that's the case. So, I think we've got a pretty good balance going right now. I see good upside there, and we can bring our development skills into the game, when we acquire these centers that have frankly been a bit underutilized.

Okay. Thanks. So, for the portfolio, including the acquisitions you did, can you quantify what you think the redevelopment opportunity is left in the portfolio?

I don't know that we put a specific number on it like that, RJ. Every year we go through a process, a couple of times a year, where we like to sit down and analyze that. So, I don't know if that we have a specific number, per se. As our portfolio grows, that's another factor as we are acquiring these assets. Some of these may become redevelopment projects, because we may end up getting into the demolition phase, etcetera. So, I think it's kind of a bigger picture than that.

RJ, just to add to that, in our guidance that we gave, we are going to be looking to redevelop Gainesville Plaza in Florida, where WalMart's lease expires in May. That's an opportunity. We talked last year about the projects we are working on that will be 2014 over 2013 growth with the two Fresh Markets, one in Tampa and one in Naples, as well the two All Day Fitnesses under construction, one in Noblesville, Indiana and another in Jacksonville, Florida. So, there's a lot of things in the works. Those are some retenanting, some redevelopment, we're definitely looking for the opportunities that we can find a portfolio.

We are not short on opportunities. I think it's funny, RJ, because if you think about it, it goes back to what I said a minute ago about, it starts with the real estate. You can't even be in a position to redevelop a project unless you own excellent real estate. So, over time, that's the beauty of these assets. As they get older and things change, the real estate is still the same, and we step in and maximize it. Every time we do a redevelopment deal, that's what's happening.

Okay. Thanks, guys. Nice quarter.

Carol Kemple with Hilliard Lyons.

In your operating portfolio, the retail occupancy was 94.5%, what percent was actually leased and paying rent?

There's about a 280 basis point spread between leased and occupied.

Okay. And then with parking revenue, why was it down in the quarter? Was there a lot of snow removal costs or what led to the decline?

I think the biggest decline, if you look at it and compare year-over-year, we had a Super Bowl here last year, which we had some additional parking revenue related to that event. So, everything else, I think, remained pretty static. If the Pacers can continue to play well in the playoffs, it will be a little better as well.

So this year was a good first quarter run rate?

Yes.

Then, the property operating expenses, the recoverable ones, they increased at a faster pace than minimum rent increase? What led to that?

A couple things. Last year was a very, very mild winter compared to this year. It was mild again, but we still had roughly $300,000 of snow removal costs year-over-year. We also had some insurance-related cost because we brought down our windstorm coverage in Florida from 5% of value to 3% value just to reduce the risk of the balance sheet. I think, lastly, we had some real estate tax assessments, and those bounce around a little bit. So, I think those are the three primary items.

Should we look at this year or last year or maybe an average of the to for a good run rate going forward?

As John mentioned on the call, I would look at an 82% to 83% retail recovery ratio run rate would be a good one to utilize.

Okay. Thanks.

Tammi Fique with Wells Fargo Securities.

Just wondering, you have the higher base rent that drove same-store growth NOI higher above the 5% level, first quarter, and then you have higher recovery ratios coming in the second or fourth quarter of this year. What's going to cause all NOI growth to decelerate in the coming quarters to get to that 3% to 4% NOI growth level? If you know.

I think two things on that. First, again, it's the first quarter and we want to make sure everything goes as planned. As you look out with the economy and some other things and changes that occurred, we want to make sure that we don't have the issues of tenants, etcetera. We don't see that coming, but that's always something in the back of our mind when we are providing guidance.

Secondly, when you look at that year-over-year comparison, at times, when you have an anchor tenant that may move into the fourth quarter of 2012 and as you come to the end of the year, you're comparing year-over-year, that anchor tenant is in both quarters, which decelerates it a little bit. Those would be two primary items.

Okay. And then, with regard to acquisition costs for the deals you completed so far in the second quarter, what are you expecting within guidance?

In guidance, we do not utilize that in our guidance numbers. I think when you look at it, Tammy, I think in the next quarter, will have a little bit coming through with the Indianapolis acquisition we just had and --

If you're looking at the quarterly number for this, probably $150,000 is reasonable and then it is just a matter of what additional activities we have throughout the year.

Okay. And then, with the acquisitions, did you disclose cap rates for those?

No. But, we disclosed what we paid per foot, and I think we generally said it was around the 7 cap, on average.

Okay. And then, are you seeing specific additional opportunities within the national market today, and do you think there's some critical mass that needs to be reached in order to operate efficiently in the market? Or is it self-sustaining because of the long-term leases in the power centers?

First off, yes. We are currently studying additional opportunities right now in Nashville. So, we definitely, over the long-term, want to become a bigger player there. Not really for the second part of your question, though. We want to be a bigger player because we love the market.

In terms of efficiencies, this is one of the things we talked about quite a bit. When you're in our business, managing power centers and grocery anchor centers, it's not that highly intensive relative to the management. So, there's not necessarily the need to own a certain number of properties from an efficiency perspective. We have a system that we utilize across the country in managing these assets, that system is very efficient. So, I think we have found that it's actually a higher return on cost for us or a higher return on investment to manage from here than to set up local management.

It doesn't increase the NOI at all, you having X number of properties the way we increased the NOI is by actively working it to bring in revenue for or lower the operating expenses. Not too concerned about the second part of that and, obviously we own some great assets in markets where we own one or two of them in a market. But, definitely want to increase our presence there.

Okay. Just lastly, just trying to get some understanding around the transactional and termination fees. For the year, you said it would be $0.02 to $0.04. John, you said in your remarks that you exceeded it by $0.01 in the quarter. I'm just curious, does that include the land sale gains?

Yes, it does. That is the land sale gains. By the way, land sale was the sale of ground lease at a 5 cap, which is why we did it. We look at it from a perspective of capital, not FFO. We generate a lot of capital out of that deal.

But, yes, that does include that. The point we were making was, when we sat down and put that guidance forward, we didn't know which quarter a transaction would occur. This particular transaction was a possibility, but it accelerated very quickly. So, we obviously hit the top end. We received the top end of the guidance in first quarter, which is unusual, which is why we are being conservative around our mid-point raise, it's just too early for us to really do more than that, despite the fact that there are things out there that could help us exceed it.

Okay. I guess, what is your new guidance, then, for that? It was $0.02 to $0.04 before and you are already at $0.05. Where are you with termination and transactional fees for the remainder of the year?

We just -- all we did is, again, this is kind of the problem of giving too much granular detail in guidance. The bottom line is, we are raising our overall guidance and we're not raising our same-store NOI guidance, but we are not getting into the various elements of all the rest of the subsets of it. So, we are just saying we exceeded our transactional projection and we don't believe that we will generate very material transactional income from outlet sales for the remainder of the year. So, we're just saying, essentially, we've got an entire year's worth of transactional income in one quarter.

I think, Tammy, when you look -- and your question on lease term fees, it's difficult. Right now, we don't have a lot of visibility into a significant lease term fee. So, that's why, again, it's the first quarter and we will update people as the year goes on.

Okay. Great. Thank you.

Nathan Isbee with Stifel.

Talking about granular detail. Dan, wasn't there a second day of Daytona last year?

There was a second day of Daytona last year. We got a little additional parking.

You are on it, man, you are on it.

That was really granular, because I think you're talking $20,000.

John, if you could just circle back on the Nashville acquisition, could you talk about how you approached this property, given the fact that it is a non-owned grocer anchor and there is some additional competition in the area?

Sure. First of all, we typically don't acquire centers that have a non-owned grocery anchor unless they have several other anchors, and that's the case here, with Dick's Sporting Goods, Marshall's, JoAnn, and Staples. Panera, some other good small shop guys. So, there's a comfort level that the center itself is somewhat insulated from what may happen with Kroger.

Obviously, Kroger drives daily traffic, so, that's a part of the shopping center. But, we studied that pretty significantly. We got comfortable that the balance of the center was very strong, vis-a-vis the sales of the tenants. This is, again, part of being a player that has national relationships, we were able to determine what's going on there, and what kind of upside we saw.

That is how we get comfortable with that part of it, Nate, and secondly, we love the real estate. It's excellent, excellent real estate. In terms of the Kroger itself, it's kind of a whole other animal. Yes, there's other competition in the area. We obviously don't own the Kroger. So, we will be very focused on what's going on with that, and we will try to be in position to be a player with that if the opportunity exists.

Okay. In your underwriting, are you expecting the Kroger to be open in three years? Or not?

Again, in our underwriting, there's no NOI coming from it. Those no co-tenancy associated with it. The tenants are operating independently of it and physically, it's in a location in the shopping center that -- it's not like in between two other boxes. So, it's on an endcap in the center. So, we view no risk to the NOI based on them. So, again, if for some reason of Kroger wasn't there or it was a different tenant or the building was dark, what I'm trying to say is, if the opportunity arises for something to happen with that box, we are the natural player to be there to do something with it.

Sure. Thanks. On Delray, you have, I guess, the two biggest categories represented right now are restaurants and apparel. If you look at the last 15% are you looking to bring other uses into the center? Or are you looking to bring in more apparel?

I think we are looking for a mix, like we said all along. We mentioned that we are negotiating with three national players that happen to be apparel oriented. But, we were also talking to a lot of unique locals. So, I think that's been the success of the property so far, that we have a mixture, a good mixture of the standard fare. Then, we have some unique players. So, I think we like to fill it out in the same way. We'd like to create the environment that the people want to go there not only on the weekends, but daily. So, a little of both.

I also think we can become more selective. We are heading to a point of being 90% leased or committed, it gives our leasing have an opportunity to really step back and think and create leasing pressure, as we really complete the balance of the projects. As we get to that 90% point, we feel very, very good in terms of our leasing leverage.

Have any restaurants beyond the Maxes and the Cedar opened yet?

Yes. We do have a restaurant, a Terra Fiamma, there's a Tango, and we'll have another one opening fairly soon. So, that's that activity continues to improve and that's going to help us traffic-wise. And already you are hearing very, very encouraging things in terms of the number of cars, the number of trips coming to this property. We're already looking into and contemplating how this lease up will affect us and what we need to do to react.

Okay. Then, John, final, in your prepared remarks, I think you said you are looking at additional opportunities based on conversations with retailers. And I correct in assuming you're talking about new development there?

I think were talking about a couple of things. Basically, what we are saying is that the retailers are approaching us because they are reaching utilization. They can't -- they're having a tough time getting new opportunities. So, they're starting to approach us from a geographic perspective.

Do you have anything in XYZ market? So, I mean, that is kind of what we are talking about, is that there is activity there. So, it's possible that we could find opportunities that we think makes sense, and I'm trying to be clear this is over time, this is not like tomorrow. It's starting to give us some visibility to where things will be in the next few years.

I think it's really clear that as we've been hearing and the TRZs have been talking about for at least two years, that the pendulum is swinging so much -- it's starting to swing pretty quickly, relative to the retailer landlord pressure points. So, I think they're starting to try to come to guys like us, because there's very few of us left to say what you have? What's out there? What else do we not know about?

Now, that doesn't change our opinion that we want to be cautious around it and we want to be -- we are keeping our balance sheet, we're improving our balance sheet and we are not going to change that. We are going to keep improving it. It does give you an idea what it means relative to supply and demand. I think that's why we are seeing -- that's why our same-store NOI is growing.

That's why our comp operational revenue is growing and our occupancy is growing. It's just that simple. Ultimately, there will be additional development, but you it is going to continue to be very limited.

Right. Are you looking at any specific projects that you don't own the land yet?

No. People have brought things to us that we don't own the land, and have said, would you be interested in this? But, we are looking at a couple unique situations where we have been asked to come into an already existing development. So, it's things like that. But, nothing where we are out looking for a large parcel of land. That is a no.

As John mentioned, the great part about this is there's been very few people developing to the extent that we have. These retailers understand that we have the machine, we have the ability to deliver. So, when they do have an opportunity, that is the reason we've been getting some calls and just gives us an opportunity to take a calm look at the opportunity and make good decisions.

Is it safe to assume, and perhaps you can just give us some color on some ironclad rules that you've instituted, in terms of risk management on the development side?

Ironclad? Yes. As you know, Nate, first and foremost, we are going to continue to drive our leverage down. So, were not going to be doing anything that we think would materially impair that. So, I think what we are saying, as we said for quite a while now, that we'd like our CIP to fluctuate between 5% and 10% of our total assets and occasionally even one quarter or another, exceed that. But, that's our goal, is to be in that range.

For right now, with 2013 and 2014, quite frankly, the first half of 2015, our existing developments are going to accomplish that. So, it would be on the margin, where we would be doing things. To say ironclad, we still have to be opportunistic because we create value, and that's how we make money. If we did nothing, we would never make money.

So, I think adjusted against what your opportunities are, but we are extremely mindful of our balance sheet. We work very hard, as we said, to get the leverage down, and it's not yet where we want to be, but it's very quickly getting there. Then, so, I think internally everyone knows that. But, we certainly are going to always look at opportunities and we are going to be very cautious around non-income producing assets.

And the preleasing as well, I would assume?

Yes. Gosh, if there's anybody that knows that, its us. If you look at our development pipeline, we are 85% leased in our development pipeline versus the competition, who, very few people have that. Certainly on a size-adjusted basis, we have leased more space and development than anyone. So, I think we understand that very well.

I think that's also seen in our future development pipeline, as John mentioned, where Parkside is, from the second phase perspective. We are making huge, huge advances terms of where we are there, and before we move, it's going to be even better.

Okay. Great. Thank you so much.

Jeff Donnelly with Wells Fargo.

I think we are going to push you over on hour, so you're have to keep going granular.

Let's go, baby.

I'm curious. The projects that you are buying, you think that NOI growth at those centers is going to exceed the growth of some of your existing portfolio?

I think we look at that every time, Jeff. We try to buy things that we think are going to at least be in the range of our NOI growth. Now, quite frankly, our NOI growth has accelerated quite a bit as we talked about. A lot of that is, again, we are doing a good job of generating lease and recovery revenues, but we're also doing a good job in the small shops category of getting our leases to have annual bumps in them. I do think that's what we add to the equation, that we aggressively price our real estate.

One thing you've got a think about, if you look at our total portfolio, sales per foot is obviously a much bigger deal in the mall space, but we care about it a lot. We think that our overall health ratio for our tenants is below 10%. So, that means we can aggressively go after more rent. We're doing that. So, I do think that these acquisitions enable that opportunity. I do think the to that we just did in Castleton, I'm sorry, in Indianapolis and in Nashville, are pretty big box oriented. Although the Nashville has definitely had a good amount of small shop space.

But, we can increase NOI on the asset by doing a pad deal. That's where we'll sit down with the development team, the leasing team, the asset-management team, and we examine those assets to find out, what are we missing? Tom and I spend a lot of time talking about -- we're going to get revenue out of every square inch of that property. So, that's something we are very focused on. That's probably the next level of our company, actually, is the real focus on that.

So, that's a long way of saying, yes, I do think we can do that. I do think we are doing an excellent job in same-store NOI. It puts pressure on us to continue to do it, but that's why Dan said, relative to guidance, it's early in the year. Things will move around on a company our size. We are confident that the asset quality that we've added is part of why our same-store NOI is where it is today versus four years ago.

I guess related to the acquisition side, how do you think about -- I know you might not necessarily be a seller, but how do you think about exit cap rate when you're running those acquisitions? Do you use traditional spread your entry cap rate, or how do you think about differently?

We think about it relative to IRRs. When we buy real estate, we're both a cash yield buyer and an IRRs guy, because we're real estate people. And at the end of the day, no matter what the cost of capital is, we're going to care about what the IRR is. So, I think that we do talk about that a lot.

It's tough, Jeff. Because, a lot of it is about timing. I mean, if we were really an IRR player like a Blackstone or someone like that nature, the faster you reposition and sell, the higher your IRR is. In fact, that exceeds whatever your cap rate compression would be. Time is a bigger player there.

We do look at it and I think that before acquiring these in that seven cap range, based on the NOI growth, based on what I just said, us figuring out where there's NOI that doesn't even exist today that we can create, yes, you can get double-digit IRRs with conservative leverage, with exits that are maybe 25 BPs below where you sold. You don't have to go much further than that to get double-digit IRRs.

I'm curious. In negotiations with retailers, have you seen them maybe relent more on deal terms like free rent options or just other aspects that maybe are a little less visible to us? I don't know if there's a difference in your view between big box space and shop space in the last few quarters?

Yes. I think that's the thing you never see, right? What you see is the rent and the length of the lease. And there's so much more to it than that.

Frankly, we fight so hard in every category, but probably the biggest change is that we are able to -- quite honestly, you have to have a good enough real estate to say no. And that's what we talk about all the time. If you have good enough real estate, you are in a position to say no. You don't, you aren't. We've been very focused on the fact that we have high-quality real estate. It puts us in a position to be more balanced.

At the end of the day, the retailer is the customer, so we want to take care of them, you have to have a balanced negotiation. I think that the devil is in the details, and we have gotten much better there. I think it's definitely moving in landlords' favor relative to some of the things that were happening in 2009 and 2010 with kickouts and co-tenancy and all those things. So, yes, it has improved. It's still always a challenge.

I think one of the big areas that we spend a lot of time on is exclusives. We own a shopping center that we have got to have a lot of things going on. You have to be really cautious around exclusives, as an example. We are, and we pushed back very hard on that. Again, we could go all day on that, but there's a lot of opportunity for us to improve the lease itself.

Last question -- with ICSC coming up, are there two or three specific things on your hit list that you want to get addressed while you are out there, whether leasing a particular space, are you trolling for deals? I'm assuming you're not working on your tan.

Tom and I will both comment on that. From my perspective, from a macro perspective, first of all, my goals are that we go out there and get deals done. We have, I think you know this, we have a pretty intense process that we go through before we go to Vegas, where every one of our leasing agents has to go through every meeting, in order to even be approved to go to Vegas. So, we have a vetting process that we do internally. I will let Tom really get into detail. It's not just going out there and seeing Las Vegas. We are going out there to get deals done. Tom do you want to --?

From a Vegas perspective, we look at it as a four-pronged approach. One is, we have the operating portfolio. We've got to focus on that portfolio. So many other things going on inside the Company, but we've got to get that back to the operating portfolio to concentrate there.

Second, we have this active process of development, redevelopment, we've got to get them stabilized, similar to what Dan talked about, and get that done as quickly as possible. The third being acquisitions. Not only do we have acquisitions that just recently occurred that we need to move quickly and focus on that in Vegas, but we are also looking at opportunities on the horizon. It's an opportunity for us to really assess those opportunities and make determinations to whether or not tenants have a strength position on those properties or not.

Then, fourth and finally, the new opportunity. You had brought it up as a category on new opportunity. We will continue to look at new opportunities. Once again, it allows us to hash that out and make a determination. Is this best suited for our time and resources. So, we spend a lot of time talking about it, and it gets fully vetted.

The pressure is on for our guys. If they are not in a position to prove to the team, Bud Mall, the head of the leasing that they have a strong enough book, they won't be out there. So, it's a lot of pressure. It's a big investment. We take it very seriously.

Just last question, and I'll yield the floor, and I don't want to leave Dan out, but guidance for this year, I guess, you could argue looks conservative. You are running ahead of your NOI growth. You are already ahead on transactions. Recovery activities are picking up as well. I guess, why the more conservative posture? Was there something down the road that you're concerned about?

No. Nothing that we're concerned about. I just think that it never benefits you at the beginning of the year to over promise and under deliver. I think we've done this now for 10 years and things come up you don't anticipate. There's nothing out there that we would anticipate, but I think as we look at the Business, we had the equity offerings, we've got the money deployed. We've got these assets that are coming into the portfolio.

We've got a lot of moving parts, a number of development properties that are coming to the portfolio from a timing perspective, getting those open. As I mentioned, we have the two All Day Fitnesses, the two Fresh Markets, some other activity on the anchor side. So, I think there is a lot of positive momentum looking forward. We just want to make sure that we are cognizant of that it is the first quarter of the year and there are three quarters left.

Even when we laid out our original guidance, Jeff, and I'm pretty sure we communicated this. Because of that, as Dan mentioned, the deliveries, the development deliveries, and that's kind of why we laid out the percentage of what NOI was flowing through the P&L. I mean, right now, we are only getting 20% of the development NOI. We think by the end of the year, that's 75% of the development NOI, and were talking about going from 20% to 75% on a $200 million, at a 6.5% or so yield. One quarter or another can be material to that.

It clearly is back-end loaded in the end of the year. So, it's much, much more logical, as I said in the very beginning on the call, we had one thing occur in this quarter very different, and then you can say the same-store, obviously, also went up. So, we had two things occur. But the best thing we could do was hold all else equal and say, let's raise it by $0.01, because that's the one thing that happened, we exceeded the top end by $0.01, so we raised the midpoint by $0.01.

The same-store NOI growth, that obviously is accelerating. At the same time, as Dan mentioned, we are accruing a fairly large quarterly number here for this default interest that may are may not come into play. So, just too early to go to the next step.

Thanks, guys.

There are no remaining audio questions at this time. I would now like to turn the call back over to Mr. John Kite for closing remarks.

Again, thank you everyone for joining us this afternoon. As we said, we are off to a great start to the year and we look forward to seeing you soon.

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