Good day, ladies and gentlemen and welcome to the Q3 2016 Kite Realty Group Trust Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Maggie Daniels, Director of Investor Relations and Strategy. Ma’am, you may begin.

Thank you and good afternoon everyone. Welcome to Kite Realty Group’s third quarter 2016 earnings call. Some of today’s comments contain forward-looking statements that are based on assumptions and are subject to inherent 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 10-K. Today’s remarks also include certain non-GAAP financial measures. Please refer to yesterday’s earnings press release available on our website for a reconciliation of these non-GAAP performance measures to our GAAP financial 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 would like to turn the call over to John.

Thanks, Maggie and good morning, everyone. The third quarter marks another successful period for the company and the team’s efforts are paying dividends towards our stated objectives. First, I would like to highlight the balance sheet as we completed several transactions, which allowed us to finish the quarter in the strongest financial position in the company’s history. We replaced our $500 million revolver with a new 5-year bank facility. At the same time, we issued a new $200 million 5-year term loan and used those proceeds to redeem half of our existing $400 million term loan maturing in 2020. Both of these bank transactions were executed with more favorable terms and covenants. Next, we completed our non-rural public bond offering by issuing a $300 million of 10-year senior notes at a 4% coupon. Based on the pricing dynamics and peer secondaries at the time, this was as an incredibly well executed transaction to introduce us to the public fixed income market. The bond proceeds along with the draw on our new bank facility were used to pay off existing debt obligations, including the remaining $200 million legacy term loan maturing in 2020, approximately $70 million of CMBS scheduled to mature during the quarter, and the $76 million outstanding balance on the Parkside construction loan. All of these actions bolstered our financial flexibility as we pushed out our weighted average debt maturity from 5 years last quarter to just under 7 years this quarter, while keeping our overall interest rate around 4%. Our floating rate debt is now only 5% of total debt. Lastly, we plan to pay off approximately $35 million in future CMBS maturities during the fourth quarter, which will result in a near $90 million of debt obligations coming due through the end of 2020. On Page 15…

Thank you. [Operator Instructions] And our first question comes from the line of R.J. Milligan with Baird. Your line is now open.

Hi, good afternoon guys. John, some of your peers, earlier this week, on some conference calls have expressed concern that we might be nearing the end of the cycle, but some of your commentary implies that momentum is picking up, I am just curious where you think we are in terms of this up cycle for retail?

Well, I mean I think all I can do is say how we are operating and executing here. And if you look at the leasing that we did this quarter, you look at the spreads that we had, we feel pretty good about where we are and about demand for our particular properties. We have done a lot of work to improve those. So that can be a part of it, just all the work we have been doing over the last couple of years to update and upgrade. But also I think, if you look at the spreads that we are generating, we continue to generate double-digit option – non-option renewal spread. So I think we are feeling pretty good about both the anchor side and the shop side. And I think again, R.J., you have got to get back to the basics that we are in the supply environment means very low and when you own good shopping centers and there is limited supply, we should be able to continue to do what we are doing.

Okay. Thanks for that John. And seeing that – given the sell off here that we have seen in the stocks, we are seeing quite a few of these strip REITs trading at significant discounts relative to NAV, does that change your interest in public to public M&A?

Well, I think I made the point that we are really just focused on blocking and tackling and driving our 3R program and leasing up and generating positive cash flow growth per share. So yes, I mean the market is the market. The current conditions are what they are. We in fact and I am sure it’s not be a surprise to you that we think it’s a dramatic overreaction, but we have seen it before. So I think we will just see where that goes and there is a ton of capital out there. So I think we will just keep doing what we are doing.

Alright. Thanks guys.

Thank you.

And our next question comes from the line of Collin Mings with Raymond James. Your line is now open.

Hey, good afternoon. Just as it relates to prepared remarks on the bond offering, can you take us through how that impacts, if at all the 3-year goal as you have outlined earlier this year as far as FFO growth?

Hi Collin, this is Dan. I think from an FFO perspective, when we put out the 3-year plan, it didn’t contemplate significant capital markets activities. And as we have alluded to, we saw the opportunity to really execute on a – under the $300 million bond deal with a 4% coupon and do it quickly and make sure we – the execution risk was down and we are really happy with how it turned out. So when you look at that and you look at the impact on – just the difference in the rates between the bond deal as well as what we paid off. We paid off a term loan that did mature until 2020. So when you look at the term loan Parkside as well as line of credit would be paid down short-term and then we have an objective to pay of Colonial Square in the next week, you are looking at about 170 basis point spread on the rates on that $300 million. So that’s going to impact that about $0.05 on an annual basis.

The only thing I would add to that Collin, is look I think, as we look out to the end of 2018, which was our original 3R goal, we still feel pretty good about everything that we put out there. As Dan just mentioned, that probably impacted the FFO per share, but give us the opportunity to be at the lower end of our original guidance for that. And again, a lot is going to happen between now and then in terms of upside opportunities that we will see in the upside that we will get out of our free cash flow, paying for our redevelopment pipeline. And when we laid out those original goals, we were pretty conservative on that. So I still feel like we are certainly within striking distance on those goals.

Okay, that’s helpful. And then, just as we approach 2017 here, recognizing you aren’t providing guidance yet, but just maybe directionally, you can tell us how to think about potential disposition activity relative to still what you expect to complete here before year end in 2016, recognizing you have got a lot of free cash flows are being generated that will be able to pay for redevelopment activity, but just as you think about the leverage targets and pure point about the strong bid out there for one-off acquisitions, how should we think about the additional asset sales into next year?

Well, I think if you look where we have been over the last couple of years, we have been a net seller over the last couple of years. When you look at the current market conditions that probably is a little bit smarter of a move based on where the market is. So we haven’t – we aren’t giving 2017 guidance yet, but as we look out from where we are today and if the market continues to look as it does, when you see this pretty big disconnection between private prices and public prices, then it probably makes more sense to be a net seller than a net buyer. But again, you have got to see where the market goes.

Okay, that’s fair. And then just one last question for me John, as you have talked upon this on prior calls, but just maybe update us on, you guys had exposure to the office supply sector, your latest discussions there as it relates to some of those boxes? Thanks.

Sure. We – as you know, we 18 Office Depot, Max Boxes, we have talked about quite a bit that we talk to them all the time. We have a very sophisticated kind of look at how we go about figuring out which of those stores we think is going to be in their offer in terms of the stores in the future that they want to build, this time we can talk about a little bit. And then just, as I said before, I am sure we will get a few of those back. But frankly, we want some of those back from a merchandising mix and rent perspective. Tom, you want to add to that?

We have taken a lot of time to make sure we have got out to Boca Raton and meet with the Office Depot. We really met with their entire team, head of real estate, real estate managers all the way down the line. So we want to do that early because there is a lot going on inside that company. So if you take a look at where we are on our total inventory, we have already addressed three under renewals and those are ongoing right now or chipping away an additional one. Then in addition to that, John has in store in the future, we are lucky to identify with Office Depot aided these opportunities, which really put us in a position to provide capital and allow them to get their new store format that they are focused on. So I will say, we have a strategy for each and every one of our properties and are very much on top of it.

Alright. Thanks guys.

Thank you.

And our next question comes from the line of Vineet Khanna with Capital One. Your line is now open.

Yes. Hi. Thanks for taking my questions. I am just going off on the office supply, can you provide any color sort of on what the lease expiration schedule looks like for the Office Depot, OfficeMax locations?

You mean, specifically?

Yes. I mean just do you have any coming up...?

Yes, sure. I can give you a little color. ‘17 would really work through it. ‘18, we have six coming up and then ‘19, two, with the balance of the rest. So like I said, we are on top of these type of strategies for each one and we are picking through these on a very balanced approach working closely with them.

Okay, great. And then just shifting gears, so for the $50 million to $60 million in dispositions for this year, was that sort of always contemplated to be sort of in the latter half of the year, was there a shift sort of in the marketplace over the course of the year and maybe you can talk about sort of the transaction market, generally.

That was always contemplated to be in the fourth quarter or latter half of the year, I should say. And then to your second question, I mean, the market there remains a strong bid for the type of real estate that we own. The private market is active and liquid. So, we are very comfortable and confident that assets that we want to sell can be sold. So, it’s actually pretty favorable.

Okay, great. And then just lastly for me, on the same-store or same property NOI both, does that include sort of the 3R initiatives that have been removed from the operating portfolio? And sort of based on that, maybe you can remind us how you think about which 3R projects are sort of kept in the operating portfolio as opposed to taking out?

Yes. I mean, if you look in our supplemental, we do designate the properties that have been taken out, which were generally the properties that we have significant de-leasing efforts going and I believe there is 9 of them that we highlight out of the total 24. So, you can see that it’s we have a pretty thorough way of analyzing what comes out based on the significance of the work that we are doing and the significance of the disruption. And it’s basically, when we are more intentionally significantly de-leasing, that’s when that generally happens, but you can find it in our stuff.

Okay, great. Thank you.

Thank you.

And our next comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is now open.

Hi, thanks. Just a quick follow-up, I guess, on the 3R program. So that 75 basis point disruption, in the quarter, how should we think about that drag heading into ‘17 assuming you keep a pretty constant pipeline of projects?

I mean, I think as long as the pipeline stays in this general range of size, Todd, then it’s going to be a similar impact. That’s been possible to say exactly, because each project is different. And the significance of the drag is different. But I think it’s a reasonable estimate in that range. And I think historically we have said it kind of fluctuates between 50 and 100 basis points is what we have historically said.

Okay. And then just regarding the dispositions, the $50 million to $60 million, can you just remind us where we should think about for the average cap rate on those asset sales? And then based on your comments it might be a smarter decision to sell versus buy with the pace of dispositions be somewhat higher in the year ahead if conditions remain?

Well, first question is where we actually have three assets on the market that are kind of different types of assets and so you are talking about low 6 cap to kind of slightly above 7 cap type cap rates. And then to the – what was your second question, I am sorry?

Disposition.

Yes, the pace of dispositions. Yes, I think again as I said on the remarks assuming that the conditions kind of remain as they do today, which again you are seeing a significant difference between public prices and private prices. So, as long as private prices remain as healthy as they are and there is liquidity in the market, if you are asking if we would be a net buyer or a net seller, we would be a net seller in that scenario.

Okay, alright, great. Thank you.

Thanks.

And our next question comes from the line of Christy McElroy with Citi. Your line is now open.

Hi, good afternoon guys. John, just a follow-up on the disposition question and sort of glaring it in with leverage and so to follow-up, what sort of the timing for that mid-6s level you mentioned in terms of debt to EBITDA, is that when the $50 million to $60 million is complete and what’s sort of the timing for that? And then just in thinking longer term about the 6.2x goal that you mentioned, I think for year end ‘18, how much of that is sort of debt pay down with disposition versus just EBITDA growth?

Yes. Well, Christy, I think just the $50 million to $60 million is probably around 30 basis points. So, that kind of gives you to slightly above say, 6.5x, 6.6ish. Then you have got the NOI that is actually in our stuff. So, it’s out there that you see coming in from our redevelopment, development activity, which is approximately $12 million. So, that’s probably another 30 basis points-ish. So, we don’t get all the way down to 6x just from those two things happening. Then that’s why I am saying it’s not next year that we would get down to 6. Be more likely 2018, if we just did it organically as though we are projecting right now which is the NOI coming in that I mentioned, the sales that I mentioned and then the next leg of that is the other 12 assets that we have in the future redevelopment pipeline at 10% returns is going to generate pretty significant NOI. So, that’s probably the next leg down to get into low 6 range. And I think Christy, when we give guidance for ‘17, we will definitely give more color around that.

And so you have got three assets on the market today, how much of that is the $50 million to $60 million and when do you expect to complete the $50 million to $60 million?

That is $50 million.

That is the $50 million. Okay.

Yes, yes. And then we anticipate that they will be done probably at this point, if couple of them still at year end maybe one goes into the first quarter of ‘18.

Got it. Okay, great. And then….

First quarter of ‘17, I am already projecting that.

I got it. On Parkside Town Commons, the stabilization was pushed back to mid ‘17 from mid ‘16 can you talk about what’s happening there that drove the line?

Sure. I mean, I think on Parkside Town Commons, we have talked about we have a couple different things going on. One is that we have got the shop lease up that we are doing. We still have several tenants in the opening stages that are opening later than we anticipated. So, that’s a big part of it, because a lot of that is in shops. The other is on the box side. We still have a couple of box deals to do. And I think we have mentioned before that we had a freestanding Field & Stream box there that we are getting back. So, we have gotten back that we anticipate leasing in the first quarter, I would say, of next year or signing a lease. And so based on the timeline to fill that back out, that kind of takes that out into ‘18 when they would open. So bottom line is we had a couple of things that pushed it back in terms of being stabilized, not in terms of being open, but being stabilized. Go ahead, sorry, Tom.

The only thing I was going to add to what John talked about is we are under construction with Stein Mart. And Stein Mart should open towards the end of the first quarter, which will be great. And then we have 22,000 square feet of small shops, still a lot that we are working very hard on. So, this stabilization period makes sense to extend it out as we address some of those items John talked about.

Okay, thank you.

Thank you.

And our next question comes from the line of Daniel Santos with Sandler O’Neill. Your line is now open.

Hey, good afternoon.

Good afternoon.

Just two quick questions for me. Just in general, could you guys talk a little bit about how when thinking about filling space, how do you balance getting the right tenants versus sort of taking a deal with a tenant who may not drive as much complementary traffic? What takes away the risk of having vacant space?

Well, I mean, I think that’s the art of the business. We refer to merchandising mix a lot. And that’s really what we mean by merchandising mix is that we are very focused on creating the environment that the consumer wants. And that environment is both physical in the way that the property presents itself and its more tangible in the retailers that you have as your property. So, we have often talked about our lease, the way we go about leasing and what our lease percentages are reflect our intensity around having that right mix. So, bottom line is in today’s world, you have got to put forward a product that is enticing to the consumer. And that’s what our business is all about. I mean, we can make easy decisions regarding that, but frankly, it takes time and we are very focused on.

And just one last question, when we are thinking about the 3R program, how would you describe the sort of flexibility of starting or stopping program, given changes in the retail environment?

I think it’s significantly more flexible than ground-up. When we lay out our strategy in terms of what we are going to start during the year and what is potentially coming behind it, that’s a big part of what we are thinking about, just making sure that we can do these projects in sections. And if the market was to back up significantly or if there was some significant disruption, it would be much easier for us to pull back on the redevelopment pipeline. And that’s really part of how we plan it. Tom, you want to?

Yes. I would say on the under construction pipeline, that that one, we have really made a commitment to the project and we have permanent tenancy and everything really lined up to create a very low risk file for the company. So as it relates to the opportunities, we are really in a position that we spend very little capital, basically mining these projects to get them ready. So from a risk standpoint, we keep that at a minimal level because we simply won’t move them over to the under construction layout. So we’re 100% confident. So that cadence really allows us to be very disciplined in terms of when we actually start spending our capital dollars.

That’s helpful. Thanks.

Thanks.

[Operator Instructions] And our next question comes from the line of Craig Schmidt with Bank of America. Your line is now open.

Thank you. The small shop occupancy had a real good lift during the quarter, I am just wondering when you look at the small shop leasing environment, how do you feel about being able to continue to push this occupancy in the small shops going into 2017?

Craig, I think we feel pretty good. I mean when you look at the activity we had in the quarter, we did a lot of deals. And as I try to mention, we also are focusing very heavily on the renewal side, not just the new shop leasing because the greater retention rate we have, the more ability we have to drive the gains in occupancy. So we had a really good balance this quarter and not only doing new deals, but in our renewals. And when you look at, as I have said, when you look at our non-option renewals still generating, I mean I think this quarter was almost 11%, 10.5% in our non-option renewals. Cash rent growth with almost no, well obviously, no capital costs associated with that. So I think there is a good balance right now. And I think the things that we have done over the last couple of years internally to position ourselves to be very focused on that, is paying off. So I feel – I mean we still are aware of where the overall macro environment is and continuing weak kind of GDP growth is not great. But because of the lack of supply and the high quality nature of our assets, we are doing pretty well.

Thank you.

Thank you.

And I am not showing any further questions at this time, I would now like to turn the call back over to Mr. John Kite for any closing remarks.

Great. Thank you, operator. And we appreciate everyone dialing in and look forward to seeing you soon. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, you may now disconnect. Everyone, have a great day.