Kite Realty Group Trust (KRG) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen welcome to the first-quarter 2015 Kite Realty Group Trust earnings conference call. My name is Lisa and I'll be your operator for today. At this time all participants are in listen only mode.

(Operator Instructions)

I would now like to turn the conference over to Ms. Maggie Kofkoff, Manager of Investor Relations. Please proceed.

Thanks, Lisa. And good morning everyone. Welcome to Kite Realty Group's first-quarter 2015 earnings call. Some of today's comments may contain forward-looking statements that are based on assumptions and are subject to inherit risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the Company's results, please see our SEC filings including our most recent 10K.

Today's remarks may also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website for reconciliation of these non-GAAP performance measures.

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

Thanks, Maggie, and good morning everyone. Welcome to our first quarter earnings call. We appreciate you spending time with us today as we're excited to share the results of another strong quarter.

We continue to be optimistic about 2015, which is why we increased the midpoint of our full-year guidance for FFO as adjusted from $1.95 to $1.97 per diluted common share. I'll walk through the details of our revised guidance and underlying assumptions shortly.

Our first-quarter performance was a result of our strategic focus, which remains anchored on operational excellence and consistently executing on our stated initiatives. We continue to deliver on our corporate objectives, both from an operational and balance sheet standpoint. We generated FFO per share as adjusted of $0.50 for the quarter, exceeding expectations. We increased our AFFO per share 13% year over year to $0.44 per share. We reported strong same-store NOI growth of 4.4%, outpacing our peers and marking the ninth consecutive quarter in excess of 4%. We hit our leasing goals for the quarter with a portfolio generating a positive 7.1% cash renewal spread. And we continue to target the high end of our stated objectives of 5% to 8% for renewals.

Operationally, we've had an extremely efficient quarter, reporting our highest ever retail recovery ratio at 91.3%, which remains comfortably above our high 80%s target. We further strengthen our balance sheet by lowering our net debt-to-adjusted-EBITDA to 6.2 times from 6.5 times last quarter. As a testament to the quality of our portfolio, we grew our ABR 13% to $15.20 compared to this time last year. We carefully pruned our portfolio by closing on the final tranche of a select group of 15 non-strategic assets, which successfully upgraded our high-quality portfolio and refined our geographic focus by exiting four states. And lastly, we started prudently redeploying a portion of those proceeds in our recent acquisition of Colleyville Downs, a Whole Foods-anchored center in the MSA of Dallas, Texas, while executing on our disposition strategy of substantially upgrading the portfolio.

Before turning to the balance sheet, I'd like to highlight a few of our operational achievements during the quarter. We've made a focused effort to update and improve our internal systems, and we're seeing dividends as we increase efficiencies and enhance expense controls. For example, last year in the fourth quarter, we set a new record for the Company by achieving a retail recovery ratio of 89.6%. In the first quarter of 2015, we further raised the bar by increasing our retail recovery ratio to 91.3%. A portion of this improvement relates to focusing on the acquired portfolios' CAM and tax recoveries, and recognizing another $0.005 to $0.01 per share of recovery revenue.

We remain focused on keeping our retail recovery ratio in the high 80%s and have developed a plan, given our updated system and enhanced expertise of our team, to monitor and achieve that goal consistently in the future. As part of these cost and operating efficiency initiatives, we achieved savings both on our insurance cost and real estate taxes. From an insurance perspective, our seamless transition of the expanded portfolio, and our extremely low loss history in both property level and general liability insurance, resulted in a 20% reduction in premiums during our first quarter annual renewal.

With respect to the real estate taxes, our in-house tax team has implemented top-tier property tax management software, which efficiently manages the appeal process. We've already identified over $2 million in tax savings in less than a year. Lastly, we've optimized our waste collection process by implementing a direct-to-tenant billing approach, which creates operational efficiencies and alleviates pressures on CAM in many cases.

With respect to energy savings, as we execute on our sustainability initiatives we've started converting select properties' lighting to energy-efficient alternatives. We've structured this program so that the landlord does not incur any additional cost, yet we're able to reduce energy and maintenance cost for our properties while still delivering high-quality lighting to our tenants and customers at reduced rates. We plan to continue rolling out the program over time, which will result in incremental savings.

We've also continue to focus on sharing our operational expertise with our customers and tenants. Having started as a small family-owned business over 50 years ago, it's our Company's culture to grow and support local business throughout the states we operate. Our regional approach helps us identify top candidates annually to participate in our recently developed tenant mentorship program. This initiative was formed with a third-party consulting firm, and focuses across our clients' business platforms including their business plans, marketing strategies, financial efficiencies, and internal controls and systems. In two recent case studies, both in the restaurant industry, after participating in our mentorship program our client saw material growth in revenues, improved cost efficiencies, and enhanced ability to monitor their business segment returns.

On the leasing side of the business, activity has accelerated in 2015. In the first quarter our team executed 77 leases for nearly 400,000 square feet. On a comparable basis we executed 52 leases with a blended cash rent spread of 9%. Select anchor and junior anchor new and renewal leases executed in the quarter include examples of like: T.J. Maxx and Stein Mart at our Portofino asset in Houston; Ross and Market Street Village in Dallas; and Hobby Lobby at Cedar Hill Plaza, also in Dallas. All segments of our portfolio continue to hit our target leasing objectives from a renewal spread perspective. And notably, the Och-Ziff and Inland assets outperformed our legacy portfolio by over 300 basis points in leasing spreads during the quarter.

Same-store NOI grew another 4.4% for the quarter, and represents a more meaningful portion of our overall portfolio, with assets contributing to our same-store pool growing from 43% to now nearly 55%. This strong performance was made up of approximately 230 basis points from contractual rent growth, enhanced CAM recoveries, and other ancillary revenue. The remaining balance is from continued gains in economic occupancy. Our outlook for the remainder of the year continues to be positive.

Turning to development. We moved the first phase of Parkside Town Commons to our operating portfolio in the first quarter. The asset is fully operational and over 90% leased from an economic standpoint when including the NAV-accretive ground leases, with Harris Teeter, Bank of America, and Chick-fil-A. Our three remaining development projects include the second phases of Parkside and Holly Springs in Raleigh, and Tamiami in Naples, Florida. Development progress continues at Holly Springs Phase II, as we recently completed the building pads and vertical construction is underway.

In aggregate, the three projects are approximately 80% pre-leased or committed as of the first quarter. We anticipate committing construction at Tamiami within the next several weeks, as we recently signed Marshalls and Ulta to join Stein Mart. Parkside II, which is anchored by Golf Galaxy and Field & Stream, will have Frank Theaters and several additional small shop openings in the second quarter. In addition, Phase II of Holly Springs remains on track, with Bed Bath & Beyond and DSW to open in the third quarter of this year, and construction to commence on Carmike Cinemas in the second quarter.

We've added some new cash NOI disclosure in our supplemental on page 27 to provide some clarity around the incremental cash NOI from the development and redevelopment pipeline. We plan on providing additional disclosure in our supplemental beginning next quarter to update the investor community on the progress of our $100 million RRR objective, which we define as repositioning, repurposing, and redevelopment projects. We are in the late stages of lease negotiations at multiple properties as well as finalizing project plans at several assets, including a planned $10 million redevelopment at Cool Springs in Nashville; approximately $15 million redevelopment at City Center in White Plains, New York; a $7.5 million redevelopment at Burnt Store, and a $2.7 million repositioning Phase I of Portofino. We anticipate incremental returns of between 8% to 10%.

In December we closed on the first tranche of the $318 million sale we announced last fall, and in mid-March we closed on the final tranche, which resulted in a $167 million of gross proceeds and net proceeds of just over $100 million. While we'll always be reviewing our portfolio for potential sale opportunities, this completes the majority of the pruning we had earmarked for the near term. As discussed previously, we plan to use the net proceeds from both tranches to first reduce the net debt and then prudently redeploy back into high quality assets. We've already made strides on both of these objectives in the first quarter.

While the acquisition market remains competitive, we intend to further enhance the quality of our portfolio even if it means acquiring less today for long-term benefit going forward. Consistent with our focus on quality, the opportunities we are analyzing are concentrated in and around the core of our regional offices. They are top-tier assets in high-growth markets, and on average tend to have going in mid-5% cap rates with upside potential.

We are currently working on several transactions, and in April we seized a unique opportunity in the MSA of Dallas, Texas, to acquire Colleyville Downs in an off-market transaction. The Whole Foods-anchored shopping center is well-positioned in a densely populated desirable market with an estimated population of 80,000 people and average household income of $127,000, both within a 3 mile radius. Many of the existing leases predate the new Whole Foods and further support our ability to create additional value through lease-up and below-market rent opportunities while substantially increasing the quality of the tenancy.

On to the balance sheet: we continue to execute on our strategy of maintaining a flexible balance sheet. Consistent with our simple approach to corporate structure, earlier this year we purchased the remaining interest from our partner at one of our top assets, City Center in White Plains, New York. Since we previously owned the majority of the asset and controlled the Center, it is not part of our updated acquisition guidance assumption. But the buyout provides us complete autonomy over further enhancements to the Center, which we plan to commence on in the next 12 months.

As we discussed in our last call, we continue to drive down our leverage and target approximately a 6 times net debt-to-EBITDA metric. This quarter we continued to de-lever and maintain our investment-grade balance sheet by reducing our net debt-to-adjusted-EBITDA down from 6.5 times, to 6.2 times. We also intend to reduce our floating rate debt exposure to approximately 15% over the next two quarters by refinancing with unsecured fixed-rate products.

2015 is off to a strong start as evidenced by our first-quarter results and we continue to expect another highly productive year. We're updating our FFO guidance for 2015 from a midpoint of $1.95 to a new midpoint of $1.97. Our updated FFO guidance range of $1.93 to $2.00 includes a few revised assumptions. Increasing expected same-store NOI growth from 2.5% to 3.5%, to 3.0% to 3.5%, raising our acquisition assumptions to $80 million to $125 million.

From our last call, we'd remind investors that the guidance range is also inclusive of opportunistic capital markets activity. We're monitoring a number of unsecured products which would help us execute on our strategic plan to further enhance the flexibility of our balance sheet. Also, our $102 million 8.25% preferred note is callable at the end of 2015.

In summary, we're very pleased with our first-quarter results. The team continues to execute on our strategic initiatives and deliver strong results that are in line or exceed our targets. Given our long history of enhancing assets, the operational excellence we continue to report, combined with our redevelopment expertise, provides a long-term competitive advantage for NAV and cash flow growth. We feel excited about the prospects that 2015 has to offer.

We look forward to attending ICSC in Vegas in a few weeks. Our leasing team has a record-setting list of meetings with national retailers, as we are set to engage and continue to deliver best in class operating results. As a reminder, we are hosting a property tour and reception in Las Vegas the Saturday before the conference on May 16. Given our regional efforts and footprint in the Vegas market, we're excited to show our investors some of our assets in person. We hope to see a lot of you there, and if there's any questions about this or need any further information, please contact Maggie.

Thank you for the time; and that concludes our prepared remarks. Operator, we are open for questions.

(Operator Instructions)

Todd Thomas, KeyBanc Capital Markets.

Hey John there's been some M&A in the space with Blackstone acquiring Excel. I was just curious what you think of the current environment did you take a look at Excel it seems like a portfolio that would've fit in well with Kites portfolio today.

First part of it I think it's the environment is very interesting and there's obviously a lot of private capital looking for very few available assets so I think that is probably what kind of spurred that transaction. And I think based on the deal that they did, it's a very attractive deal and it's very, very hard to assimilate that number of strong assets.

In terms of we knew the company well and we're very familiar with it but we did not look at the opportunity specifically. As it wasn't really presented that way but we certainly knew of it and we think it was a great transaction.

Okay.

And then you talked about some acquisitions that you're looking at with I guess yield in the mid-5% range with some upside. What kind of upside are you targeting? What sort of stabilize yields for these opportunities?

You know I think each one is different, Todd so it depends on a specific situation. But generally, if we can buy something in that mid- 5% range that we think has either the wrong tenancy or below-market, we'd like to get it to more like 6.5% on a stabilized basis. That's the goal.

Some where that range and I think in the one that we specifically mentioned Colleyville, that is what we believe can happen there. Based on the fact that there are significant amount of below-market rents due to the fact that the property was redeveloped whole foods came in and there was some existing leases that are now rolling over and were talking about significant square footage. So each deal will be different but if we can go in at that range, and do what we do, then we should be able to get it up to kind of that 6.4% 6.5% range.

Okay.

And then your commentary on the expense recovery ratio it was interesting. What's the difference in the legacy Kite portfolio and say the inland diversified portfolio for that metric. Were you operating at different levels there?

Dan you want to?

Todd I think one of the main things that we did is we were driving through and looking at the year end recovery and true ups. We really had an opportunity to go through each lease that we inherited from the merger transaction and in then doing that, we saw there some opportunity in the neighborhood of $0.005 to $0.01 to really exercise on the language that's in the least and be able to collect more whether it was a fixed cam that wasn't properly being allocated or collected.

So there's more just really diving in and making sure we were collecting the maximum allowed per the lease which we had done.

Okay. Do you have like a long-term target for the portfolios reimbursement ratio?

And I guess Dan what are you thinking about for the full year on that? What's kind of baked into guidance I guess for the recovery ratio for the full year.

If you look at the full year I think as we mentioned in the prepared remarks our goal is to stay in the high 80s, so I think when you look throughout the year that's our objective is to continue to drive that high 80s recovery ratio in the retail portfolio.

Okay. Great. Thanks.

Craig Schmidt, Bank of America Merrill Lynch.

Yes I wonder as you go forward, is it likely that you're going to find more redevelopment opportunities coming from the inland western side of portfolio?

Craig you know I think as we mentioned we've got this plan in place that we believe we can start around $100 million of redevelopment over the next two years and as I pointed out in the call, we've got that ball already rolling, and it's really a balance Craig between the portfolio we acquired from Inland also the portfolio we acquired from OXIF and then some of our assets. It's not -- it's pretty well balanced so that's good.

I'm actually -- I prefer that we have balance across the portfolio versus just one so that means we'll have more opportunities in the future because were really only getting into having operated the inland portfolio for less than a full year more will come of that, but we have already begun it so it feels like we can continue to have a reasonable pace when we set these kind of 24 month timelines.

Okay and then just in terms of the transaction market. As we move through 2015, do you think you'll still see cap rate compression on the strip centers or could they hold or even rise at some point?

Well I mean I think I can tell you where we see it today. And what we hear in the market and how intensely competitive it is and again, I personally go back to supply and demand which again it sometimes exceeds that factor, the fact that there's always new capital pursuing institutional quality real estate, really regardless of where treasury yields are. That's kind of a byproduct of other things.

In terms of when we're looking to buy something particularly if it's on the market, you're really talking about a great number of institutional players pursuing assets that we would deem high-quality. So my perspective is cap rates are going to be in this area for a while I know people are focused on rates and what that impact is, but as I've said before, the great majority of the people we compete against in an institutional Class A asset, are cash buyers.

So leveraged doesn't come into play. If it does come into play is typically after-the-fact. So I believe that we're in a pretty darn competitive environment. The fact that we haven't added any new shopping center supply as an industry for the past seven years is a big, big factor.

So I mean long story short, it's competitive, it looks like it will remain competitive, so that's why we're so diligent to try to find things that have some uniqueness to them that if we do pay a cap rate like in the mid-5 we mentioned that we can add value to it and I think redevelopment skills are needed to do that if you don't have those skills, you're kind of locking in that yielded and that is the best you are going to do. So I think that's why were comfortable there and excited about that. But it surely feels right now that this is where cap rates are.

Okay, thanks.

(Operator Instructions)

Christy McElroy Citigroup

I'm wondering if you could disclose the purchase price and the cap rate for Colleyville Downs and what was the cap rate on the partner share at City Center.

Will start with Colleyville. In terms of the price I can only give you a general here because we kind of had an agreement with the seller for nondisclosure. But it, it's generally cap rate kind of where I mentioned that we were seeing deals and - -

So five-ish?

Yes kind of mid-five range with the upside we think we can get that certainly over six. And then from a price perspective per foot kind of in that $200 a foot range to not be too specific, but so we saw good -- we really felt good about the purchase on a per foot basis and a upside basis.

And then one City Center?

Go ahead Dan we looked about a little differently.

Yes City Center it's tough to give a specific cap rate analysis on that, Christy. Obviously the partner was being paid days a preferred dividend, roughly 4% and we were also as part of the transaction gain complete control of advertising, kiosks, the parking garage, those kind of things.

So I mean there's a lot of ancillary items that go in versus just looking at specific cap rate, but the transaction overall was very beneficial for the company as we look to enhance the asset.

And then the key was again it's a clean slate actually implement the full redevelopment which was very important.

All right. Okay.

Do you have any additional plans, I don't think there's anything in guidance but in terms of dispositions this year beyond the tranches you've already completed?

I think, Christy, like we said on the call we're still analyzing assets and we do it very frequently. So I think anything else from here is most likely going to be almost matched to an acquisition. I don't see us doing something.

We're in a very good capital position right now. So we would be looking to recycle if we did that and that, that opportunity could exist. But we really want to make sure that we have something to invest back into that has good growth in it. So that's our focus right now.

Okay. And then sorry if I missed the specifics on this, I know that you in terms of the potential bond issuance you're exploring you are out there sort of right now exploring all different opportunities, but in terms of expected size, timing, pricing has anything changed in terms of those expectations that may have influenced guidance at all?

Well. No. We haven't changed anything as it relates to that so we've still assume that we will do something. I think the only changes that the bond market is pretty volatile and has been and so we've been very selective. We haven't wanted to enter the bond market at the wrong time which can be pretty painful.

If you do that so since we had a lot of alternatives available to us as we said before, we're looking at everything. And you know how that goes that can turnaround fairly quickly, kind of a supply and demand thing as well.

From a standpoint of where the market is, how much supply is out there the less of that the better. And then maybe the pricing is a little more favorable. So we still assume we will do something it's just we're analyzing two or three different alternatives not just a bond issuance.

Okay. Thank you so much.

Alex Goldfarb, Sandler O'Neill.

Just a few questions here. First I guess we'll start with the modeling one.

Dan other property income was up in the first quarter and the NCA game was in April so sort of curious what drove that and then what we should expect for the second quarter.

Other property related revenue the majority of that if you look on the NOI page of our supplemental was the lease term fee that we have about $1.4 million. And I think if you look out for the rest of the year, typically Alex we will have anywhere from $1 million to $1.2 million in the other property related revenue on a quarterly basis so I think that gives you a pretty good run rate of what we're looking for in that line item from an annual basis.

Okay any extra pickup in the second quarter from the game? From parking or anything?

No. I mean the parking we will -- parking we typically get on an annual basis roughly $500,000 to $600,000 and it's spread out as you mention we obviously have the parking garage at University of Notre Dame that's during the football season both that and our parking garage here downtown we get some activity on, so whether it's Pacers or Colts but it's typically if you looking at NAV or run end run rates you know I would use roughly $500,000 to $600,000 a year.

Okay.

And then as you guys do your re-tenanting and trying to mark to market the proactively leasing. What is the drag to same-store NOI from that?

I think it really depends what were doing per quarter Alex, and it really is it's more of a longer-term process and this is something we were trying to kind of make sure people understood is that the drag really becomes when we begin to essentially pull down leasing in an asset that we are preparing to move to redevelopment.

So there's a time where assets are still in the operating portfolio, and we haven't moved them into redevelopment. An example of which would be White Plains I think. Where we are intentionally pulling down occupancy.

So we have too many of those going on to get into specific each one of them, but that's what creates potential lumpiness and same-store NOI one of the things that I want to make sure people understand is the fact that we have been producing very strong same-store over the last basically two years, is because three years ago, we implemented a program, a very intense internal operating program that changed the way we do business in terms of how we lease, how we operate, how we manage, how he grind. Those are all things that take time.

So this is kind of we're seeing the fruits of that today and we're going to do the exact same thing in the OXIF portfolio and the exact same thing in the Inland portfolio. So over the next few years we will begin to implement that and then begin to over the next couple of years see the same type of results. We just need time with the assets. So that's very important that people get that and we're really happy about everything we've done to position ourselves to grow these assets.

Okay so from another angle the 4 4 that you printed in the first quarter versus your full-year guidance, that 4 4 is going to come down because straight lines like the economic occupancies sort of slows down or because you're planning on doing more repositioning where you're going to take the hit on NOI from detenanting to retenanting for this year.

You hit it, it's both. So it's a process where you've got both of those things going on simultaneously, but again we anticipate if it comes down then it comes back up, hopefully later in the year.

So that's the process that you'll see happen as we start to begin to, as we call it here the Kite way on these assets. We haven't been running all these assets long enough to implement all this.

So that's what you'll see happen, and again, when we look at how we treat small shops this just a prime example. I mean we still have a lot of upside in small shops and we have upside in the rollover when you look at our expirations particularly in 2016.

We are significantly below our rents in both shops and anchors and almost even the ones that have options to renew are going to renew at up about 8%. So I think this is all putting it into the blender and having us do what we do and it comes out better on the other end. I mean that's what we do.

Okay. Thank you.

Carol Kemple, Hilliard Lyons.

Your G&A number was a little up from the fourth quarter was there anything one time in that or is that a good run rate quarterly?

Yes, I mean on a quarterly basis if you look at our annual guidance the first quarter typically has some additional cost whether it's the proxy to annual report the way that our executive compensation as a result of the subjective versus the formulated approach that we've got, so some of that goes through the first quarter versus the full year but if you look at full-year guidance we were roughly $16 million to $18 million and right now are projected to be at the high end of that.

And one thing to look at if you look at as well we go through it and as we calculate our AFFO Carol, we also, there is some significant non-cash compensation expenses that also part of that I think from a restricted share or OPP program that is part of that number. So as you walk through and look at AFFO calculations and cash flow that's an important component

And then in your retail portfolio you were 94.9% leased why we was your commenced actually paying rent rate.

The lease versus occupied is about 170 basis point difference in the portfolio.

And then at this point do you have any retailers on your watch list that you're concerned about for the remainder of the year.

Yes I think we talked about it a lot Carol hasn't changed much, from my perspective I think it's where watching the obvious office supplies situation. Tom is anything beyond that?

You know that's the big one and we spent quite a bit of time at their office both Office Depot, Office Max, and Staples to make sure we're positioned properly when that potential merger occurs, but we feel like that's a situation we're very comfortable with. So that's a big one we have our eye on.

I think RadioShack obviously we talked a lot about that last quarter that's already really taken hold and about half of the RadioShack's have converted to the Sprint stores and then we've already released of the remaining we released a couple of them at significant spreads so that's gone well.

It has gone real well.

Okay. Thanks.

(Operator Instructions)

Chris Lucas, Capital One Securities.

Just a quick detail question, Dan. There was adjustment on the AFFO there was a $486,000 reduction entitled other non-cash adjustments, is that a collection of items or was that a singular item?

It was a singular item related to the lease termination income. So what happens on that Chris is we receive, it was a ground lease that we received a lease termination on and what happens when you get a cash payment as well as a, on a ground lease you get the building back, so you've got to value the building as it's coming back on your books because previously we did not own the structure.

So we worked through that analysis in detail with our accounting group and that is why that's deemed a non-cash item.

Okay.

John you had mentioned a little bit about some of your balance sheet options in front of you. I guess thinking about the preferred redemption, it's a little early, but I guess the question I would have is how are you thinking about that as it relates to if you decided to move forward what sort of capital would you use and would you think about pre-funding that given the turbulence in the capital markets at this point?

To the second part of that I don't think right now we would think about pre-funding it based on the fact that we're pretty comfortable. That we'll be in a good position regardless of what happens here in the short term. Because it's at 8.25 so we're in pretty, pretty good shape, and generally the, you know doing something early is priced and you end up paying for.

So I would say in terms of how we would do it again that's going to have a lot to do with where we are here at the end of the year in the capital markets. But we have a lot of alternatives because again, at 8.25 we can look to a lot of places whether that be cash, whether that be some sort of asset sales slash portion of it in debt refinancing, there's just so many different things we could look at.

Who knows where will be then but the call is at our option so we will be able to be ready for it. We will plan for it and I think we feel very comfortable Chris that whatever we do it will be accretive.

Okay and then just you also talked a little bit about the competitive environment as it related to asset acquisitions. And I guess maybe if you could give us some color on is that a function of just more capital or is there just a dearth of supply relative to say a year ago?

I mean my personal opinion is that the supply, the lack of supply is a big driver here. Now obviously, real estate has a lot of capital flowing towards real estate, but frankly, there's been volatility in that capital in the last several months. But the lack of good supply hasn't changed, that's a constant.

There just isn't enough new development in the United States in high-quality properties. These are large centers that are well located, well tenanted so when they do become available, there is, there can be a feeding frenzy based on the fact that you just don't get that many opportunities to get good real estate. And I would say that the common denominator is we are looking at very good real estate so again that shrinks the bucket even more.

Also I think institutional investors worldwide, when you're looking at the kind of the global economy that we're in right now which is no matter anybody says we're in a very low growth period of time. And yes people are going to seek alternatives that, that could change if interest rates globally not just in the United States, but globally were to significantly rise.

But you know when you look at where interest rates are relative to cap rates there's still significant spread there, so that's why I personally keep saying we're far away from that despite the volatility and the reality on the ground Chris when we're looking at assets and especially when we don't have the luxury of buying off market, when we have to look at something that's marketed. These things go, the final round might be four different bids. And you're talking about six, seven people in looking to buy the same asset that all could write a check.

So it's very competitive. I can't overstate that.

Great. Thank you, guys.

Collin Mings, Raymond James.

Congrats on the quarter. Just a couple of questions.

First I just -- thinking about just the momentum and leasing up some smaller shelf space can you talk a little bit more about what you're seeing maybe if there's any regional variances what are you seeing here in Florida and then just any sort of variances as far as pricing power.

Just starting off with the leasing situation is it's been pretty firm it's been pretty strong. I think in terms of when we look at our results for the quarter.

You know we did a significant, the deals were pretty balanced between what we would call national and regional tenants and local tenants. So there's been good balance there. There's definitely certain segments of the market that have, that are really on fire like fast casual in the dining segment for example.

Regionally, we see the same, we see opportunities. Obviously Florida in your specific question to Florida, Florida's our biggest market it's our biggest opportunity. We have a huge focus in Florida we have basically one large regional office in Orlando and then a couple of satellite offices as well.

So we have a lot of people on the ground in Florida. Because we understand it's a great opportunity for us. The market in Florida is definitely strengthened. I think that the state has done a wonderful job of diversifying and growing.

So I mean I think we feel very good about it Tom you want to add anything to that?

Well I mean we're going to constantly concentrate on the Florida for the simple fact that we have close to 280,000 square feet of vacant space in that market. Which makes up about 40% of our small shop vacancies.

So that is where we've applied the resources that's where we're focused. I think the positive is we have a new team and they're coming into their own and from a production standpoint, we're really looking forward to seeing advancements as we move through the next couple quarters, but we have the assets, we've got the quality, we've got the team in place, now it's time to execute and drive that number up.

Okay that's helpful.

And then I guess following up on an earlier question just as it relates to your comments about potential disposition activities from here. Any particular themes as you think about continuing to recycle some capital, I think in the past you've mentioned wanting to recycle out just handful of single tenant assets just anymore things that you can add as far as what you would look to exit?

I don't think you would be as macro is what we had just done where that was very geography-based and segment we looked at it, that from the perspective of those markets. Today it's going to be more about the individual assets and their growth profile.

We are very focused on growing cash flow. That's what drives this business. So if we feel like we're in a position where we can't grow cash flow, or cash flow is at risk in a particular asset, then that's the kind of property that we would look to dispose of and trade into or look to buy an asset to replace it that has a better profile.

And also the quality, I mean we are wanting to make it very clear that a lot of the results that we are driving and that people are seeing, are because of the quality of our assets as well as our people. I think we've really turned the business around in that, in that regard and we're going to continue to do that.

Okay.

And then just going back to the questions as far as the cap rate compression in the deal environment. Just as you think about secondary markets and the Excel deal, I mean how much do you think cap rates have moved year-over-year since the beginning of the year even. How would you quantify that?

Sure I think it's moved down in every segment. So I think this is the typical thing what happens. Is that whatever you want to define as the gateway cities, they compress and then it goes from there.

And I can tell you that in every high-quality property that we have to looked at and pursued, whether that'd be in Dallas, whether that be in Orlando, whether that be in any of the markets we're in, in the East Coast, and New Jersey, and in Texas, and Oklahoma City, all of the assets we've look at, that we deem as the kind of quality we want to buy, those don't trade with a 6 in front of them anymore you have to get them there.

They're all trading kind of in that mid-5 depending on what it is mid to high 5. And that's just the reality of the market and it doesn't surprise me one bit based on guys like us can come in and grow the NOI and reposition the assets with our national relationships and they come out the other end worth more. So it's where it is, in my personal opinion it has so much to do with the supply and demand characteristics of institutional quality real estate that far exceeds what's going on with any other thing that you would look at.

Okay so when you say that, that you've seen cap rates probably compress or move just as much in these secondary markets as an kind of top-tier gateway city markets?

Yes I think on a percentage basis right so if we're buying something that we think is high-quality asset in a market that we like, like Dallas for example, if that asset was trading in one of the deemed great gateway markets, you're going to knock another 50 basis points off it at least. So that's why you see pricing where it is and there's real opportunity there.

Okay and then one last one and I'll turn it over. Just on the acquisition front any discussions or opportunities that you see to acquire some non-owned anchor space across the portfolio.

You know were always talking to our customers, our tenants about opportunities like that and those aren't as plentiful as you might think but there are opportunities for example where with some of the larger box guys like Target for example where we're going in and working with them in conjunction with them to monetize excess real estate for example where we can create out parcels together and where we can try to do things together.

So yes, I think it's just another example of how rare it is to get great real estate. That's why you see these guys monetizing those assets because people are desperate to get high quality real estate.

Okay. Great. See you guys in a couple of weeks.

Tammi Fique, Wells Fargo Securities.

I'm just curious last quarter your, you know you were fairly confident in surpassing the $80 million you had in acquisition guidance and obviously you increased the guidance there to $125 million. I guess is there still some ability or desire to do more than that this year or are cap rates at this point somewhat prohibitive.

I mean I think there is a desire to do more Tammi assuming that we can kind of continue to execute acquisitions like the deal we did in Dallas. So we are definitely working on a couple other transactions and we'd like to do more than that and of course that's why we raised it to $125 million because we obviously think a couple of them will happen.

But we are being selective and we want to find things that we think we can grow because of the competitive nature. We're not afraid to buy high quality real estate at a fair value, but we really would like to be able to grow it. So that's what kind of makes it tough to just throw a specific number out because everything we're doing is very specific.

Okay and then I guess what following up on that, what's your appetite for maybe larger portfolio acquisitions today and then how scalable do you think your current platform is?

Well to the second question I think the platforms very scalable. I think the great thing about what we've done in the last year and a half because this goes back to OXIF before the Inland acquisition. Is it really made us dig in and understand the platform and really dig in and understand really literally what do we need per property what do we need per tenant? What do we need to do in asset management? What do we need to do in leasing? What do we need to do an accounting, finance, et cetera?

Where we feel very comfortable that we can judge our capacity and also know what we would need to add to it. And just remember that we did add a lot of people when we did the deal and the two deals, but we were able to very quickly integrate that. So I feel very comfortable with scale, the other part is trickier.

From a portfolio perspective how much of that portfolio is strong. I mean there's a couple portfolio that people have talked about that are floating around that we passed on based on the fact that we weren't willing to take on several weak properties to get a handful of good properties.

So we're always going to make sure that the real estate drives it. So we're looking at everything. If we get the opportunity, if we get presented the opportunity some of these things sometimes you don't get presented them and you can't do anything about it, but as long as we get the opportunity, we will look at that.

Okay, great. Thanks.

And I'm sorry if I missed, but what was sort of better relative to your internal expectations that they gave you comfort in increasing the annual NOI growth guidance at this point, was it the cost efficiencies and insurance tax savings that you talked about or lower kind of fall out maybe could just give some color around that thank you.

I think it was everything I think when you go back and look at the composition of that 4.4%, over half of that was just through contractual rent and cam and things that we were able to drive just from our leases.

And in the other half of it was through the compression of economic occupancy, having tenants actually begin to pay rent so based on the fact that, that was a good blend and we can look out into the future and mind you that we've been pretty clear that, that number will move around, but we were comfortable that at the end of the year that we feel pretty good about going into the end of the year and where we'll be.

Okay and then just last one you talked a little bit about Florida but I guess I am just sort of curious where you think Florida is in the recovery compared with maybe some of your other markets?

As we mentioned I think Florida has recovered very well. I think that the state has done a nice job of diversifying the economy away from solely tourism that it was once before. And now you've got these very interesting markets.

Florida's kind of like three states North Florida, Central Florida, and South Florida all very different the all have their own very special, unique opportunities we're represented in all three of those kind of mini states if you will and if you look at the growth Florida's growth and both Florida and Texas growing at a better pace than most other states. We feel good.

Look we've got work to do, we've got a lot of properties there we have opportunity to increase our shop occupancy there but we have great asset so this is like we're pretty fired up about the opportunity there.

Okay. Great. Thank you.

Nathan Isbee, Stifel.

Just looking at your anchor lease expirations for next year, there's about 26 or 27 of them which significantly below the average of the rest of your portfolio can just comment about how many of those are true expirations without options and what type of visibility you have in terms of releasing them are replacing them and at what type of rents.

Yes. I think first of all, when you look at over the next two years Nate, this year included since we've still got a big chunk of this year. We've got 35 I believe leases coming up in the next, in the next two years. The great majority of them have options.

So over 70% of them have options. But those options have bumps I think the average around 8% on the ones that have options. So you're talking about maybe of that, maybe less than 20% of them do not have options.

So that's a good opportunity that's probably like six leases. That's a very good opportunity for us but when you look at it I would say that you would look to the fact that the majority have options, but the good thing is even those options have about an average of an 8% increase.

And the 30% that don't what type of spreads can we expect?

I think it's deal by deal right? So if you look at the overall average, you're looking at rents that are pretty far below our total average right so if you're looking at something that's expiring at $9 on an anchor lease, there's going to be good opportunity there, I mean that's I think it's probably 40% below our average.

So I think, but again is case-by-case Nate it will also depend on do we want to put capital in, do we not want to put capital in? These are things that will drive the ultimate spread, but I feel pretty comfortable that over the next two years both in shops and anchors, that we have good opportunity there.

All right. Thank you.

There are no additional questions. At this time I would like to turn the presentation back over to Mr. John Kite for closing remarks.

Well I want to take the opportunity to thank everyone for joining us today. We're very excited about the opportunity to continue to drive the results and we look forward to talking to you next quarter, and hopefully some of you ICSC in Las Vegas in a few weeks. Thank you.

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