Kite Realty Group Trust (KRG) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Second Quarter 2013 Kite Realty Group Trust Earnings Conference Call. My name is Philip, and I will your operator for today. At this time all participants are in a 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 your host for today Mr. Adam Basch, Investor Relations. Please proceed, sir.

Thank you, Philip. The company’s remarks today will include certain forward-looking statements that are not historical facts and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. The company refers you to the documents filed by the company from time to time with the SEC, which discusses these and other factors that could adversely affect the company’s results. On the call with me today from the company are Chief Executive Officer, John Kite; Chief Operating Officer, Tom McGowan; and Chief Financial Officer, Dan Sink. And now I’d like to turn the call over to John Kite.

Thanks, Adam. Good afternoon and welcome to our second quarter earnings call. We continue to execute on the primary areas of our business plan, consistently improving operating portfolio performance, pushing forward the completion of our development and redevelopment projects, acquiring high quality shopping centers and continuing to de-lever and improve the balance sheet. These areas of emphasis have driven our company’s actions during the second quarter and will continue to be a focus throughout the remainder of the year. The operating portfolio performed well again this quarter as we generated $0.10 of FFO per share which met consensus estimates. Our same property NOI growth was 4.4%, our ninth consecutive quarter of same property NOI growth. Additionally our aggregate cash rent spreads increased 19.7% consisting of 28% for new and 5% from renewal leases, our 15th consecutive quarter of positive leasing spreads. Retail lease percentage increased to 95.4% from 94.5% in the prior quarter and shop lease percentage increased to 84.5% from 83.3% in the prior quarter. The spread between leased and occupied percentage is 380 basis points. This will begin to decrease as the number of our anchor tenants signed in last few quarters begin to take possession. Some of these tenants include The Fresh Market, for Shops at Eagle Creek and Naples and The Fresh Market at Lithia Crossing in Tampa, LA Business at Stoney Creek Commons in Indianapolis, Total Wine at International Speedway Square in Daytona Beach and the recently signed Sprouts Farmers Market at Sunland Towne Centre in El Paso. We’re looking forward to these tenants opening for business as they will drive additional traffic as well as increase NOI by another 1.9 million on an annualized basis. We continue to drive our development and redevelopment assets towards stabilization. During the quarter Rangeline Crossing became operational at…

(Operator Instructions). Your first question comes from the line of Quentin Velleley from Citigroup. Please proceed. Quentin Velleley – Citigroup: Hi guys.

Hey Quentin. Quentin Velleley – Citigroup: John you have been posting some pretty strong portfolio metrics, the balance sheet has been improving and you have made a lot of progress with developments. However shares have underperformed some of your shopping center peers year-to-date? Can you maybe just talk through what you think people are missing in terms of some of the things you have been able achieve recently and some of the things that are likely to occur in the next year or so.

Sure. Well I think Quentin it’s kind of, as I said in the closing remarks I think maybe people have missed the transformation we have made over the last couple of years in the portfolio. They have been kind of focused maybe on some areas of the balance sheet that we are obviously focused on improving. But I think we think they are kind of missing the result of what we have been doing in the last couple of years. I mean if you look at, we think our metrics from a same-store NOI perspective from a percentage lease perspective are pretty much as good as you see in the space. And I try to point out that really 80% of our rents are coming from 30 properties that are extremely strong and large. And I think maybe not understanding that, part of the reason that we have higher leverage is the fact that we have such a strong large development pipeline that’s in the final stages and without that leverage it would be difficult to have that pipeline. So it’s kind of a test point too but when you look at the embedded growth that we have, from that over the next two years it’s all going to become very clear soon. So I think that’s part of it and remember during this expansion of the development pipeline we have actually improved the balance sheet and improved our liquidity significantly in the last two years. Although we are not finished I mean we are clearly - when you look at how we present our debt-to-EBITDA which is slightly different than others but it’s clear how we do it in our supplemental we are kind of that mid-eight range on our way to being eight or slightly lower by the…

Dan, you want to cover that.

Yeah, I think from a pricing level Quentin we are range for CMBS debt at 65% of the LTVs are in the mid fours for seven and ten year debt and we are also looking at light company debt on some stabilized high quality assets and those ranges are in the mid fours to upper fours. So I think there is definitely the ability to utilize those markets and we are definitely out looking to see what’s the best way to structure that, to not only increase the size of the term loans but pick several assets to either go on bank balance sheet like company debt or CMBS utilize those stabilized assets to pay-off some floating rate debt. So between now and year-end we are going to make a lot of progress in that regard because these development are as you can see in the supplemental quickly progressing towards stabilization. Quentin Velleley – Citigroup: Right. Thanks guys.

Thanks a lot Quentin.

Your next question comes from the line of Todd Thomas, KeyBanc Capital Markets. Please proceed. Todd Thomas – KeyBanc Capital Markets: Hi good afternoon. I am on with Jordan Sadler as well. Hi, just first question on acquisition, I was just curious to get your view on whether or not you’ve seen any evidence of sellers either pulling property from the market or chat around cap rate movement with the increase in interest rates we have sort of heard a mix of comments so far this quarter, would just be curious to hear what you are seeing in some of markets that you are targeting?

Sure we are not seeing any cap rate backup. If anything it’s getting more competitive. Maybe that’s based on the number of assets in the marketplace that’s hard to see but we are looking at stuff all the time Todd and I think clearly assets that are unleveraged, which is what most people are trying to find are just scarce. So I think you have to quantify whether you are buying an asset that has debt on it or not. So if you are buying an asset that doesn’t have debt on it or one that can be prepaid those are real premiums to that. So that people are probably missing that component. But certainly in our markets we haven’t seen any backup at all in the cap rates, in terms of closing and in terms of assets being put under contract and obviously there has been a bit of a backup in rates but there’s just not enough of that to matter to what the type of quality that we are buying. So when you are buying a quality asset there is definitely more guys chasing it than there was before. And there is definitely more people looking in markets such as the markets that we are in which is I think another thing people miss when you think about how people kind of judge shopping center companies. When you look at – the point I was trying to make on how well located our assets are within their respective sub markets that’s really the most important thing you got to look at because I’d much rather own the greatest real estate in Nashville than very average real estate in LA, whether that be LA, Boston, Miami you name that gateway market, there’s lot of places there I wouldn’t want to be. So either [owning] [ph] or walking around. So I think it is something people are missing and that’s what driving these values. Todd Thomas – KeyBanc Capital Markets: Okay that’s helpful. And then thanks giving us an update on the yield for the four key projects in the quarter but just following up on those projects I had a question on how the interest expense is being treated for the financing that’s in place at those projects. I noticed that there is a pretty big decrease in capitalized interest in the quarter. I just didn’t know if we should think about that ratio essentially in terms of the percent of NOI that is online being similar for what is being capitalized versus what’s expensed, or maybe you can help us understand that a little bit.

Yeah, Todd the big thing on that is what we do as the – pro rata as the lease percentage as the tenants become occupied, not lease percentage but as they occupy we are just matching the rent and the expense. So when the tenant begins paying rent we begin expensing the interest. So it is more of a pro rata, so you are right, as the kind of the percentages come in, now [inaudible] that some of them might be gap where the tenant might have, there might be some range between a 30 days period where they have a free rent before they begin paying cash rent. But I mean being pretty much you can look at it and say it is a pro rata from capitalize interest, interest expense as the tenants occupy it. Todd Thomas – KeyBanc Capital Markets: Okay, so on page 24, the in-construction pipeline I guess the column the percentage of owned GLA occupied, that would more or less represent how much of the loan is being capitalized, the interest is being capitalized.

Yeah, the occupied would be the amount of loan being expensed. Todd Thomas – KeyBanc Capital Markets: That’s right, that’s right, okay, perfect. And then John, you made some comments about Broadstone earlier in the prepared remarks, I think I may have missed that a little bit, I just wondering if you talk about what happened there and why that property was moved to land held for development?

Sure, yeah, Broadstone is in the Apex a suburb of Raleigh and we have a kind of a mixed use site because we have opened a super Wal-Mart that open and operating have approximately 30 acres adjacent to it, that is what we are pursuing developing in and then we have an additional 15 acres which, a part we sold to an apartment developer and the apartment just opened. And basically what [inaudible] we have been pursuing, frankly pursuing a particular anchor particular for a while. There was – we were just kind of laying the site around that particular anchor has kind of delayed their timing. And the way we usually look at the developments in terms of how we, how we are looking whether we are capitalizing or not is whether we can prudently know that it is going to start within a reasonable time frame. And this is kind of delay we were not able to really set a clear path on the timing. So it is prudent for us to take that and move it into hand held for development and cease capitalization of the interest expenses. And it doesn’t mean we are not working on it. It just means we are not certain of the timing. So still one of the property, great assets and now we are just working on other kind of site plans and maybe this guy comes back, maybe this anchor or maybe we he loses out and we do a deal with somebody else. But that’s it, that’s simple. Todd Thomas – KeyBanc Capital Markets: Okay, great thank you.

Thank you.

Your next question comes from the line of from Carol Kemple of Hilliard Lyons, please proceed. Carol Kemple – Hilliard Lyons: Good afternoon.

Hey, Carol. Carol Kemple – Hilliard Lyons: Hey, earlier on in the call you mentioned your new leasing spread which sounded really nice. Can you kind of talk about why tenants moved out and what types moved in?

Sure, I mean, Carol, we – in total we did during the quarter in terms of our comparable spreads, there were 30 deals. So a combination obviously of new deals under developments, existing deals et cetera. But in terms our cash spreads, it’s a combination we have, we had an anchor tenant that came in, that was a large spread we had a lot of mom and pop deals. So you know on the renewals side we had several small shop renewals, by ‘13, the mix of national mom and pops. So pretty, pretty much spread across the board. Carol Kemple – Hilliard Lyons: So would you say your list of tenants that you are worried about is decreasing or increasing from December?

Well, I mean that is really decreasing. If you look at our accounts receivables you know, our over 90 is extremely low relative to our total receivables. The best has been in [forever] remember honestly. I think this kind of shows you what is going on, we are in a market I probably underscored when I said the word extremely supply constrained that’s an understatement. We are in a market that is extremely favorable to us, we are going to take advantage of that we are going to continue to push this. That’s why you are seeing our NOI grow, that’s why you are seeing our cash rent spread and that’s why you are seeing our occupancy at 95%. So it is a great question because frankly it is a business. The business is in a very great place relative to supply and demand. By the way all this is happening in light of a moderate retail inventory growth, not a super strong growth, moderate. So to the extent that grows which it will this is only going to get better, and it takes quite a long time to begin development deliveries for the entire sector. So yes, we are in good spot, a real good spot. Carol Kemple – Hilliard Lyons: Okay. And how has the dividends, the board conversation been surrounding the dividends lately?

The conversation around the dividends and in fact we have a board meeting next week, and we will talk about it. But generally we are in a place where we are we still very comfortable with our coverage on our current dividend. We are still in a process of building out developments and redevelopments, so cash flow and capital is very pristine. So we want to be cautious overall. So, quarter, every quarter as it goes by we are growing cash flow. So we are certainly, starting to be in that position where these things will be talked about more than they were. It is what it is but we got very good coverage we like where we are but ultimately increasing cash flow should lead to increasing dividends because it is part of our total returns and I mentioned earlier that this year we are going to deliver 8 to 9% earnings growth and plan a 4% dividend so anything that we grow there is substantial. We are already delivering double digit growth. But we are talking about it, that’s for sure. Carol Kemple – Hilliard Lyons: Good, thank you.

Thank you.

Your next question comes from the line of Tammy Fique from Wells Fargo Securities, please proceed. Tammi Fique – Wells Fargo Securities, LLC: Hi, I just want to follow up on Kedron Village, it sounds like the outcome wasn’t exactly what you wanted and kind of – an asset you developed, it’s a pretty significant contributor to the rent, and seems to have some upside in occupancy, can you just walk us through the conversation that you had with the special servicer or maybe why they weren’t willing to negotiate with you on the lease?

Sure, first of all, Tammy, we did not develop that, we acquired it, just to be clear. Yeah, no we didn’t want this to be the outcome. We were frankly surprised that the vendor kind of at the last second took a position that was there was no ability for us to work with them unfortunately. Frankly it’s the first time in the history of the company which is a very long time when this has happened. So we took it very seriously, and it wasn’t something that we did lightly. However the asset unfortunately due to the timing of when we acquired it was heavily over leveraged, from debt to EBITDA perspective I think it was about 15 times lever, debt-to-EBITDA that that’s why we mentioned we reduced our corporate leverage just by this one asset going bad. So it was just a situation where the unfortunately the debt was too high, it was kind of a loan that even if we were to want to inject equity to reduce the debt we couldn’t due to the CMBS nature and the above market, a little bit above market interest and also frankly we felt strongly that the rents due to the timing when we acquired it were significantly above market and we were certainly concerned of a material roll down in the next couple of years. That is what led us to our decision, not sure what led them to their decision, but it is just one of those things. Tammi Fique – Wells Fargo Securities, LLC: Okay, and then just to make sure that I understand the debt extinguishment gain related to this is not included in FFO guidance but the reversal of the interest accrual is included in FFO guidance?

Yeah, but Dan you want to go ahead.

Yeah, Tammi that’s correct, because the reason for that is when the loan went in default in October of 2012 we began accruing default interest of about $300,000 a quarter. So beginning in that year we had going through interest expense for the Q1, Q4, Q1 of ‘13 and Q2 of ‘13, $300,000. So what we’re doing is reversing the interest from the line that it came from. Tammi Fique – Wells Fargo Securities, LLC: Okay. And then just turning over to NOI growth, obviously been very strong year-to-date. But you I don’t think you provided NOI growth guidance update for this year and the second half of [inaudible] slow down. You have an update on NOI guidance that we should anticipate or are you seeing anything that would cause it to slow in the second half?

No, I mean we are – Tammi this is first of all first half of the year so obviously we have a sense of it. But we still have two quarters to go. We’re still are at the – I believe 3% to 4% guidance certainly we believe we’re going to be at the top end of it. So we aren’t anticipating significant slowdown there. We hope that we see that but I think we’re being that we believe that we’ll be at the top end. I think we’re being prudent and we’ll see how it goes and little bit wiry when we look at it we brought the low end of the guidance up but we didn’t change the guidance. But we still have two quarters to go. So I think it’s a reasonable number. Tammi Fique – Wells Fargo Securities, LLC: Okay. And then just lastly you talked little bit about the acquisition market in general. But are you actively betting on anything today?

Wait a second? Tammi Fique – Wells Fargo Securities, LLC: Wait a second.

Actually we are working on stuff, and that was my comment around cap rates were live comments. I know for the fact that deals that we have pursued have traded below where we thought they would. So we are in the market and we’re looking at stuff. And we’re definitely eager to add high quality assets. But it’s very competitive. So to the extent we can find unique assets we’re trying to. But there is no question that power centers in the market that we operate in are trading in the sixes, it just kind of depends where the six is. And grocery anchor can be there or lower depending on where it is. So it hasn’t changed a heck of a lot it has been talked about way more than it’s actually occurred. Tammi Fique – Wells Fargo Securities, LLC: Okay to the extent you win some of these deals. How should we expect you to finance that?

I think – we’re going to continue to do what we’ve been doing in terms of first of all we’re generating some cash from some sales that we’ve been doing. We’re looking at trying to find assets that we could get in appropriate situation that we might match with equity. But that’s not the driver. So it really kind of depends on where the flow is going to come from at that point. So it’s always hard to time that. But bottom line is that we kind of feel like based on our access to capital right now despite the hiccups of the markets here and there, these things play out for long enough period of times that we will be able to figure it out pretty well. We’re not—we’re certainly not looking to decrease our leverage. Tammi Fique – Wells Fargo Securities, LLC: Okay, great. Thank you very much.

Okay. Thank you.

And ladies and gentlemen this will conclude the question-and-answer portion of today’s conference. I would now like to turn the call over to John Kite for closing remarks.

Okay, again. Thank you everyone for joining us today. And just like to say that we’re very much looking forward to speaking to you next quarter and looking forward to the results will deliver then. Thank you very much.

Well, ladies and gentlemen that concludes today’s conference. Thank you for your participation. And you may now disconnect. Have a great day.