Good day, ladies and gentlemen and welcome to the Kite Realty Group Trust Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, today’s program maybe recorded. I would now like to introduce your host for today’s program, Ashley Underwood, Investor Relations. Please go ahead.

Thank you and good morning. Welcome to Kite Realty Group’s fourth quarter 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, Ashley. Good morning, everybody. The fourth quarter rounds out another successful quarter and year for the company. I wanted to take time to recognize the team’s hard work and achievements, which have positioned the company to capitalize on our future opportunities. Some of the objectives and milestones we achieved during 2016 were: FFO as adjusted for the year of $2.06 per share, which was at the midpoint of our guidance range. We achieved same property NOI growth of 2.9% for the year or 3.7%, excluding our 3R properties. Our same property NOI growth for the fourth quarter was a solid 3.6% or 4.5%, excluding the 3R initiative. We began construction on 14 3R projects during 2016, completing 4 of them and generating an annualized 11.3% return as we continue to strengthen our current portfolio. We executed 390 new and renewal leases for over 2 million square feet and increased our ABR to $15.78. As a point of comparison, our ABR is now almost 20% higher than it was just 3 years ago, which is an indication of just how dramatically we have improved the company’s portfolio over that time period. Back to 2016. We grew our small shop lease percentage by 130 basis points to 88.9%. This increase was led by our Florida properties which grew 240 basis points. We executed on a $300 million inaugural public bond offering with an attractive 4% coupon. We now have only $90 million of debt maturing through 2020 with approximately $430 million in liquidity. And most recently, we increased our quarterly cash dividend another 5.2%, for an overall increase of 26% since 2013. For the fourth quarter, we ended the year on a solid note with FFO as adjusted of $0.50 per share. Our retail recovery ratio increased 190 basis points over…

[Operator Instructions] Our first question comes from the line of Alexander Goldfarb from Sandler O’Neill. Your question please.

Hey, good morning out there.

Good morning.

Hey John. The fun topic of can you talk a little bit about your credit reserves for 2017 versus your historic trends and how do you view tenant health and if your guidance assumes or contemplates any store closings?

Alright, sure. I will talk a little bit about the second part of the question, how we view health and then Dan will probably get into the details about the reserves, but – which I think are our reserves are what we traditionally do. But look, I think we are trying to make the point Alex that we feel like we are in a pretty good position right now. We have opened quite a few tenants in the last couple of quarters, a very diverse group of tenants. When you look at our top 25 tenants and you look at our concentrations, it really hasn’t changed much in terms of any watch tenants, so to speak. And the other thing I would like to talk about is the fact that look, we have over 360, I think 365 boxes, spaces that are anchor spaces, about 10,000 feet. And out of that 365, we basically have four vacant. So it’s – we are in a position of strength I think right now. Obviously, when you start the year, you want to be conservative. So I think we are being reasonably conservative with a fairly volatile world and trying to position ourselves to grow from here. But Dan, if you want to get into the...?

John, on the reserve perspective, we typically do 1% of cash man rent. And like in 2016, our total bad debt was less than that by say, 20 basis points. When you look at anchors that we have projected, I mean we spent – we go through a very, very, very detailed budget process. Anchor tenant by tenant, space by space, when you go through that Alex, we had – a couple of tenants that we have that are going to be renewing, probably office supply guys, one in the first quarter and one in the fourth quarter. And then a couple other 10,000 to 12,000 square foot tenants will also be closing again to their term. But I think when you look at our projected retail lease percentage we are overall going to be pretty steady in that regard. We are obviously going to lose some tenants, pick up some during the year, but we definitely have factored in those tenants that we don’t think are going to renew.

Alright. So Dan, you said for 2015, it was 20 basis points lower or you meant for 2016, it was 20 basis points lower?

I meant for 2016, sorry, about that…

No worries, a bunch of stuff going on. And then the next question is, on the same-store NOI guidance for ‘17, obviously in ‘16, you guys were able to put in a pretty healthy number, but what is the impact from the redevelopment on the 2,000 same-store NOI guidance?

I think when look at it, it’s been pretty consistent. I mean we have had roughly 70 basis points to 80 basis points, you can see the spread. That’s going to start closing like for instance, this quarter when we delivered four reposition assets. Then we are going to have, as you can see on the supplemental page, we have the deliveries setup and the development team and construction team, those projects are going very well that the timing, on-time, on-budget. So we feel like we can get those markers laid out. So the drag that we have had in the past, I don’t have specifics per quarter, but you are going to see that come down as we start delivering some of these reposition assets. But right now, those are affecting our same-store guidance that we are providing.

But even if it’s coming – even if drag is coming down though Dan, your same-store growth is slowing down, so what’s causing the slowdown then?

I mean look, we have got some anchors and we talked about that are going to be affected by that. So I think when you start out as John mentioned, you start out at the beginning of the year. There are some headwinds relative to some retailers. We will not be sure that we factor that into our guidance we are providing.

Yes. Alex, I think we are just leaving – we are leaving ourselves room, it’s the beginning of the year. So I think we are leaving ourselves room, not to mention, we didn’t put it – we didn’t mention it in our press release, but we are still impacted by Sports Authority, I think in the fourth quarter that was 75 basis points. So with that and assuming that there might be other fallout, it’s a good place to start.

Perfect. Thanks a lot John and Dan.

Thank you.

Thank you. Our next session comes from the line of Christy McElroy from Citi. Your question please.

Hi, good morning guys. Just kind of follow-up on the same-store NOI guidance, what are your expectations for expense trends in 2017 just given the declines that you saw in ‘16 just embedded within that 2% to 3% guidance range?

I think – Christy, this is Dan. I think when you look at that, we continue to have some additional – we will have some additional pickups. This year, our insurance continues, our premiums continue to come down as we have been performing well at the properties, we have our reserves relative to the various events at the properties, we haven’t had any issues, so we have been able to drive down insurance premiums. We have been continuing to work on the direct bill from a trash perspective and those kind of things, when you get them out of the CAM pool, I think we are then down about half the portfolio. So I think you will see that as a net pick up. We continue to look at fixed CAM as we have renewals for shop tenants, but that will be a net pick up. So I can’t say that we are going to continue like this quarter, we had net recoveries of a plus $500,000, but I think as you see, we will still continue to get some additional lift from our – the efficiencies we are seeing from the expense side.

Christy, I will just add to that. On the positive side, on the rent side, I mean our rent bonds were almost 1.5% this quarter, just under 1.5%, that’s up probably 25 basis points from what it has been historically. We are also starting to see good push from the specialty leasing side that was almost 1%, like 80 bps. So those two items are kind of a real positive as we look into the future, because obviously those rent bumps are contractual and that has a lot to do with the work that we have done in the last say 3 years relative to forcing in those rent bumps on an annual basis on the small shop side, which we, I would say, get 95% of the time.

Okay. And then just to clarify on the $45 million to $55 million of dispositions guidance in first half of ‘17. Are those the same properties that you reiterated only targeted probably 2016? Can you maybe provide some more color on why you decided to delay those sales with it based on what you were seeing in the market in terms of demand? And what gives you the confidence that you can compete those deals in the first half?

Sure. Well, first of all, yes, the disposition we did in the very end of the year, which was, I think, like second week of December, was approximately $15 million, a small center in Florida that was one of the original centers that we have talked about selling. As it relates to the $45 million to $55 million, if we are at the low end of that, that’s the exact same portfolio that we were thinking we were going to sell. If we are at the high end of that, there is probably another property in there on top of what we originally were looking at selling. So yes, generally, it’s the same properties. And generally, it’s the same kind of mixture of properties, which are the smaller ones that we are looking to dispose of. In terms of why, I think look, at the end of the year, everybody was kind of trying to take advantage of volatility and we weren’t – as I mentioned earlier on the call, we are in a really, really good position as it relates to our balance sheet with $90 million of debt maturing between now and the end of 2020. So, we don’t have to do anything, we have no capital market needs at all. So as it relates to this, this is something we want to do to improve the portfolio and continue to prudently de-lever. So, I – we just felt like the – some people were trying to take advantage of that and we said no. And I think our -- I think we will be rewarded for it in the first half of this year. I think we can already see there is more interest than there was in November and December right now. So, we feel good about that decision. And I think that’s what gives us confidence based on the conversations that we are having with the buyers and again if – we will not sell something in a distressed way, because we don’t have to. And we have done a heck of a lot of work to be in that position, so that’s kind of why, Christy.

Got it. Thank you so much.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Jeff Donnelly from Wells Fargo. Your question please.

Good morning, guys.

Good morning.

Just we have been hearing from brokers and some of your competitors that there has really been a discernible increase in cap rates on, I guess, what I’d call commodity powers on our product in the last 3 to 6 months and the net spreads have been widening versus say grocery anchored. What are you seeing in the marketplace? And does that lead you to think there is more opportunity for you guys in the acquisition side in another area or just love your perspective?

Sure. Well, I think as I was just saying, I think the end of the year was a very difficult time to try to kind of figure out where cap rates were. I think there was just a lot of indecision and there was just a lot of volatility. And frankly, the end of the year is always tough, because you also have – most of the institutional buyers have already put all their money out the door. So usually, the first half of the year is better. That said it’s all dependent. Look, no question that there has been some fluctuation and movement in certain cap rates on certain properties, but as a – I think you really got to look at what you are selling. And when I think about the meat of our portfolio, the core strength in our portfolio, I don’t think that’s moved a lot. I would say, maybe the bottom end of the portfolio has moved. So that idea that there has been cap rate movement of 25 or 50 or whatever, sure, I think on some of the lower end quality that has happened. It might create opportunities as you said in the second half question, where depending on where our cost of capital is, which right now is not where it should be. But if it was in a better place, it would create opportunities to find some unique situations where we could buy something add value, create significant NAV appreciation that way, but I think it’s a bit early, Jeff. I still think there is lot of people wondering where we are going, what’s going to happen and look, it’s normal. When you are into the first two weeks of a new administration after 8 years, there is going to be lots of questions.

And I know, I guess I will call them B malls are outside your focus today, but you had some experience with those redevelopments such as the Glendale in your own backyard. The pricing that we have seen on some B mall transactions in the country have been at some pretty remarkable cap rates. Did that ever, I guess, in sort of select circumstances is it will lead you to want to look at some of those as redevelopment projects, maybe not into a mall, but into some other form of retail or do you just think based on your experience that it’s just not a worthwhile effort?

Look, I think it’s a very challenging thing to do because of the type. It really depends on the situation. If you have anchors that are still in place, it is very challenging just because of the difficulty of the REAs, the reciprocal easement agreements that exist between the landlord and those anchors. Generally, the language in those anchor leases requires a certain number of department stores. It’s difficult. Now if you are finding something that’s already been gutted, so to speak and it happens to be good real estate, yes, that could be interesting. I think it’s few and far between and that’s not going to be our focus. But if something was to come along – and again, our cost of capital was right and it was in that scenario where it was just great real estate that was barely hanging on, then that would be fine, because we have obviously done that before and been very successful at it, but tough circumstances to get there, Jeff.

Yes. And actually, just maybe switch gears on the leasing side, I guess, can you talk a little bit about where you are seeing the strongest demand by sort of anchor box side as I am just curious, is that depth of demand maybe greatest at sort of 20,000 to 40,000 square feet or sort of 40,000 to 60,000? I am just curious where you see that. And I know every space is different and certainly, every market is different. But are there any kind of rules of thumb you can give people as to where rents are on those types of boxes as the size grows?

Well, let me – we will touch on it a couple of different ways and I will have Tom kick in on it as well, but my perspective is the box sizes, the nice thing about the office supply business is those boxes are generally in the 20,000 to 30,000 square foot range if they haven’t been right-sized down to 12,000 to 15,000. So the good thing about 20,000 to 30,000 is that’s a very leasable box, not only in its current form at 20,000 to 30,000, but also very easy to divide into two or even three spaces. It gets more challenging, obviously, as you go up in space. And one of the things I mentioned on the call before is as you get north of 40,000 square feet, 50,000, 60,000, obviously, it gets a little harder. Although I did mention on the call that our 50,000 foot box that we are working on right now, we have a lease that we are negotiating for that entire box. So, it’s all very situational. But as it relates to sizes, that’s the nice thing about our portfolio, is most of our boxes are, I would say, in that 15,000 to 35,000 foot range. That probably covers the majority of our boxes. And that’s a very nice box size relating to potential tenants. And maybe Tom can talk about those type of tenants and those type of rents.

Yes. If you think about it in terms of the type of tenants, you got the TJ concepts, you got Ross, you got PetSmart, ULTA, all of those boxes are being very productive. And then as you rise up in terms of the square footage, you got the Academy Sports, you got a new player like Skechers. And then we have been spending a lot of time on entertainment as it ties back to specialty theaters, there is a host of those out there. So when you get higher, you have to – you really have to look a little deeper and find the right uses.

I think, Jeff, when you get a chance to go back and read this transcript because I know I was reading the deals that we opened in the quarter, but when you open 50 new tenants in the quarter and the diversity of what we opened in the quarter with entertainment, restaurants, some apparel, some value and the quality of the tenants that we opened in the quarter, I think it shows you that our space, the type of center that we own, is extremely attractive in today’s market. And this idea that the narrative, which is so frustrating that the narrative on where retail is, when you paint the entire space with one brush, our part of this space is as active as I have seen it in a very long time. And it doesn’t change. I mean we are in a great supply demand metric. There has been no supply. We own good quality. Everybody wants to talk about over retail. That is such an oversimplification. We are definitely not over retailed in our high quality open-air centers, we aren’t. We are under, if anything, probably.

And I would say the diversity of our tenant base continues to expand, which is an additional edge in terms of any strains we may see. So that’s been a huge help for us as well.

And I can tell you are a big fan of the narrative that’s out there?

Big fan. It reminds me of the narrative in October, turned out to be wrong, but.

Right. Actually just one last question, I know this is kind of specific, but in one of your repurposing projects is the Corner in ND [ph] and I just – I think it’s mostly mixed use between residential and retail, it’s a fairly tight site, I guess I am just curious how that lays out, I mean is that going to be residential over retail or is there just going to be all on grade?

Yes. It is fairly tight site. So yes, I mean the plans that we have been discussing are – is residential over retail. And it’s one of those situations where when you change a use like that in a very dense area like that, it takes time. So we are obviously working on that, spending a lot of time and still working on how we are going to reposition it. But the real state is outstanding, it’s kind of a good example of the resiliency and flexibility of retail real estate, which is another thing I think doesn’t get talked about enough when you hear so much about the other sectors of real estate, multifamily, industrial, self-storage. I think from my view, retail real estate is probably the only one that has the kind of flexibility because generally, the real estate is so well located, positioned. And it’s also something you can from a zoning perspective almost anything is a down zone, right. So we are able to have extreme flexibility on our properties, which is why in the case of the Corner that you brought up, Courthouse Shadows in Naples, these are projects where maybe the retail component of it isn’t the highest and best use, but there two or three other things that we can do. And I just hope that you can do that in those other segments, suburban office, apartments, industrial, whatever. So good question and something that we ought to talk about more is we own the best real estate and that makes it the most flexible.

I mean what a great example that you were able to get your first level of retail. You are able to get 300 multifamily units on top, able to get public incentives for interior garage space. So it’s a great model for us.

That’s great. Thank you, guys.

Thanks.

Thank you. Our next question comes from the line of Todd Thomas from KeyBanc Capital. Your question please.

Hi thanks. Good morning. Just on Parkside Town Commons and the move out of the Field & Stream, which you talked about, what’s the timing to get that replacement tenant in occupancy and paying rent? And then in terms of the merchandising of the center, just curious, if you can share what kind of retailer or retail category that replacement tenant is in?

Well Todd, I don’t think we are in a position to get into specific timing or a specific of who it is since we don’t have an executed lease and we are still in the negotiation phase. But I can tell you that we are, obviously we said it, we are negotiating a lease with someone and we hope that we get to the finish line here soon. What the good thing is, in this particular case, we also have other people interested. So it’s one of these situations where we want to – we are very focused on our primary target. But the good thing is, there is other people and we hope to get it done soon. And it would be in our belief, very additive to the merchandising mix, which we think is very important in a center of this magnitude that you are always focused on that merchandising mix. But it’s too early to get into timing and impact. And suffice to say that we have been conservative in how we have looked at it for the year in the guidance that we laid out.

Okay. And then in ‘16, pretty solid leasing results about 10% rent spreads achieved over the four quarters, what are you expecting in terms of leasing spreads in 2017?

I think we will continue to – our goal is to continue to do what we have been doing which is, we generally focused on trying to get our renewal spread that we are – our non-option renewal spreads in that 10% range. This quarter, they were around 8%, very impacted by anchor leasing. As a matter of fact, interestingly, this quarter about 75% of all of our renewable deals both option and non-option were anchors, that’s kind of unusually high. Last quarter, it was about two-thirds. So when you are at 75% of your deal as you are renewing our anchors and you are still able to generate 6% spread or 5.5% spread on that total, that’s pretty darn good. So I feel that we will continue the way it is. And look, anything can happen which is why, to the earlier question, when you sit here at the beginning of the year, you got to be thinking about things that you are not anticipating happening. So – but as it relates to, as I said, where we are right now with the amount of demand and frankly, the – probably the most I have seen is in terms of just the breath of the different retailers that are beginning to look at our spaces. And everything from the local player to the entertainment concept, to J. Crew Mercantile, as I said, we did a deal with them that we just opened, just killing it. I mean so there is just a lot of interesting things going on.

And you just mentioned, local retailers, I mean are you seeing a little bit of a pick up in interest and demand from local retailers relative to prior years?

Yes. I think we definitely are, it’s early this year. But when you look at what happened in November and December and January, I think we definitely have seen a pickup of people looking to – it reflects the environment or feeling we are bullish in the overall economy despite the anemic fourth quarter GDP that kind of closed out several years of that. I think people are thinking there is a better opportunity to grow going forward. So that’s going to create more business formation, which would lead us to believe that we would have more opportunities.

Okay. And just lastly for Dan, in that other property income line where you are expecting $1 million to $3 million of out parcel sales gains or some condo sales, what’s the range for that line look like overall for the full year?

Well, I think when you look at kind of the lease commission or lease term fees and other items go in there Todd. So this year, we generated about $1.4 million of lease term fees. I think for next year as we look out, that’s hard to budget, but we will probably be slightly less than that when we look at ‘17. When you look at gains on land sales that’s $1 million to $3 million, is what we have got recorded in guidance. So I think those are the two primary factors. You got overage rent, which is in the other property related in the face of our financial statement, but when you go to the NOI page in our supplemental, we break that out. And I think again, that was like $1.5 million this year. I think we will be maybe slightly less than that depending on how sales coming from tenants if everything is pretty static. So those are the three primary metrics, looking at that line. So year-over-year, not a big variable, maybe down slightly because of the, any street residential sales, we won’t have any of that in 2017, although we are working on Phase 2. We might have some other types of other income.

Okay, got it. Thank you.

Thank you.

Thank you. Our next question comes from the line of Carol Kemple from Hilliard Lyons. Your question please.

Good morning.

Good morning Carol.

Hey, can you talk a little bit about the Phase 2 at Notre Dame, what kind of tenant demand that you have and when you expect to start that project?

Yes. In terms of Eddy Street Phase 2, we are really focused on zoning right now. So we are working on zoning, we are working on our tax, insurance, financing, the public incentive components. So right now, we are starting to get into the depth of the design. Really, it’s key to get those primary components put together. But this was the project that we will be in a position to start in 2017. So we are moving along extremely well in that regard. And this is a two city block project that has a potential to add about 400 units. So it’s going to be a well-devised plan in terms of the way we take the land down just like we did at Eddy Street Phase 1.

Okay. And have you all had conversations with any other universities or even some of the student housing providers about doing a project similar to this with retail and multifamily or student housing?

Yes, we have. We have – with a handful of different universities and discussed the concept. Eddy Street gets a lot of attention based upon the fact that it’s been a very successful model and a lot of universities come to the University of Notre Dame to see it. So, we always have our eyes open for that opportunity and we will continue to look at that.

Okay, thank you.

Sure.

Thank you. Our next question comes from the line of Linda Tsai from Barclays. Your question please.

Hi. Realizing that it’s always location-dependent and given what’s happening in retail, is there a shortlist of 2, 3, 4, 5 nationally known retailers that you are generally quite happy to welcome to your centers?

I think there is a long list, not a short list. Yes, I think as I said, when I think we are in an interesting time right now, because we are seeing a lot of interest from such a wide degree of retailers. And I mean, I think it really depends on if we are talking about the big box side, if we are talking about the, what we would call maybe the medium box side, like in ULTA, or beauty brands, that type of thing, or the small shop side, I mean, the small shop side has gained quite a bit of momentum as you can see from our – the fact that we are hovering around 90% leased in the shops. But there is no doubt that even the traditional value retailers are very aggressively looking to find opportunities like TJ and Ross. I mean, these guys are doing extremely well. Even on the Dick’s Sporting Goods is definitely looking at deals. PetSmart and Petco are both still expanding. I mean, you kind of go down the list, I would say that the health and beauty side has definitely gained significant momentum. And what L.A. Fitness has been doing very successfully for the last, I don’t know, 6 or 7 years, is now really growing into a lot of specialty guys. We mentioned 02 Fitness in Raleigh that is a high end facility that attracts the right demographic. So, it’s a little more niche than someone like in L.A. but they are an awesome retailer. It’s much more of a regional retailer. And then you got the guys in every other element again really looking around and it was interesting that we opened a J.Crew Mercantile deal this quarter and it’s doing extremely well. And so we are – I just think we are just seeing such a wide variety. It’s really the variety that’s changed, I think the most, which really gives us a real good feeling because the amount of space that is being produced is almost nil.

The only one I would add is really tying back to specialty theaters, entertainment concepts or so many opportunities in that space and that was great part of that component for us is it’s a huge traffic generator, it does tremendous things not only for the inline but also for the restaurants. So, we are aggressively pursuing those and we can make capital investments to upgrade, we will continue to do that as well.

Yes. I just would add to it and the reason I kind of mentioned that about the stores that we opened and what kind of users they were, we just aren’t in our space and particularly, in our – in what we own, we just don’t have much concern around the dramatic headlines about the department stores and the depth of all that. It just doesn’t really impact us. And the fact of the matter is, of our 50 deals we opened, two of them were had anything to do with apparel. And if one of them is killing it, which is I mentioned was the J.Crew Mercantile. So I don’t know it feels much better than what you would read.

Thanks. That’s really helpful.

Thank you.

Thank you. Our next question comes from the line of Chris Lucas from Capital One Securities. Your question please.

Hey, good morning everyone. John, just you mentioned early in the call that you had a couple of office tenants that or office supply tenants that were not renewing, one in the first quarter and one in the fourth quarter. Just curious if you could talk a little bit about maybe what prospects you have for backfilling those spaces? And whether or not you are looking at a single tenant or whether you are looking at devising the space?

Sure. Yes, we definitely have a couple of deals that we think are not, are going to close this year, two of the office supply players. And in terms of the backfill deals, I mean, it’s interesting, we have got a couple of situations where we have got one of them would be one user, another one is dividing into two users. So, it’s a little early to get specific on that. But when you look at what we have done with these historically, either we have leased it to one tenant, which often has been a specialty grocer or we have subdivided it into two. And generally, when we have done that, we have been doing subdivision with one of a guy like ULTA, for example, who then will drive in a very strong tenant adjacent to them. So again, as I said and I was pointing out, it has a lot to do with the size. The size is kind of like the perfect dimension, because it enables us to split it or not and then the rents that we have generally had in these spaces have been reasonable. So we haven’t been way outsized on rent and have either been at par or sometimes better.

Is that the same outcome you are sort of expecting with the backfilling of the TSA boxes that you are working on?

Well, I think the TSA boxes are a little more complicated because they are twice the size, right? So they are 42,000 square foot, one of them is 42,000 and one of them is a little over 40,000. So in fact, I mentioned that we have been really working on a deal where we were going to significantly expand one of them, which was very unusual and became very difficult to execute on. But the 40,000 is a bit of a tougher scenario, because if you are going to split it, you basically need two boxes. And if you want to split it into several small shops, that becomes very expensive and very difficult to do logistically. So, it’s more challenging, which is probably why we still have the two, although we had one go away very quickly. So I think we will be able to execute, but it’s just – that’s why it’s taking longer and it’s why we are conservative in assuming that we are going to keep those vacant all year.

But on the office supply, we are chipping away as these. We have already got two renewed. We are working on 5 new store of the future. So we are aggressively pursuing these decreasing the amount of risk that we have with them and it’s something that gets a lot of attention, but we will have a couple and we will figure out ways to get those filmed. As John said, they are the right square footage for us.

And then one last question for me, maybe for Dan, I don’t know, maybe for John, I am not sure, but you mentioned that the bad debt for this year, we are in about 80 basis points and you sort of bumped up your expectation as a part of – as it relates to budget for or guidance for this year to 1%. Is the bump related to sort of one, sort of a small tenant concern or is it a bigger box concern or is it just a general concern that you have about in being more conservative about what you are seeing related to bad debt this year over last year?

Chris, from my perspective, I think it’s just us kind of trying to be prudent in the beginning of the year coming off the end of the year and the volatility that exist kind of in the macro world. It’s not specific, it’s more macro. That said look we have got a lot going on and we have got a couple of these box deals that we just mentioned. And so I think it’s the prudent thing to do, because it could very easily be 1%, but it’s not a specific to a retailer.

Great. Thank you for taking my questions.

Sure. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Collin Mings from Raymond James. Your question please.

Hey, guys. Good morning.

Good morning.

Good morning.

Just going back to your comments in response to Jeff’s question earlier on cap rates. Can you touch on, if you are seeing maybe any trends regionally across your market, does it relate to some of the upward pressure? I know you kind of talked in kind of differentiating across quality of property, but just curious if you are seeing it regionally?

Not as it relates to the regions that we are operating in, Collin. I mean, when you look at our six regions, I think it’s pretty similar across the board. It becomes extremely micro as it relates to the specific assets. I mean, there is significant examples that I have of things trading at cap rates lower than you would imagine, in markets that the narrative would tell you are weaker markets. That said, I mean there is other assets where you think, boy, that’s a well known kind of market in a primary top 10 market and traded a little wider than you thought it would because from whatever particular reason. I just think now is a tough time to try to say that this is where cap rates are settling in. It is too early in a very significant change over the last 3 months it’s just far too early to see where that’s going to go. My personal belief is going to be reasonably stable. And I think as people begin to look and see what we are doing and the fact that there is absolutely no new supply and there is very limited supply of high-quality product that institutional investors will look to buy those assets. And I think that depending on where things settle out with where rates go, that’s only one element. You got to look at the massive amount of capital that is just what’s accumulating in real estate and not being deployed, I mean, multiple billions. So I think you add all that together, you look at how we are performing. Operationally, when you look at a company like us, I think it’s a good example for people to think, well, how will my real estate perform? Well, if we can grow our NOI on a comp basis over the last 3 years at close to 4% in a less than 2% GDP that tells you something.

Okay, fair enough. And then just switching gears, just as it relates to the 3R pipeline, just an update as far as construction costs and how do you see that playing out into 2017? And then just more broadly, as you think about rolling in additional 3R projects, maybe just an update on if you think that combination of maybe some slowing rent growth in some markets as well as some upward pressure on construction costs, there could be some moderation in 3R yields going forward?

Yes. Just to start off on construction cost, if you look at the numbers in 2016, overall construction cost went up about 3.9%. Looking forward, there is likely going to be some pressure on the labor side as a lot of infrastructure projects are going to press forward. But for the most part, if you are looking at the actual commodities, asphalt, steel, etcetera, you are going to see a fairly stable market. So that’s not a great concern to us. In terms of the pipeline as a whole, I think we are executing as best we ever have with the 10 projects that are under construction or certain all those will be delivered on time, hopefully with the double-digit returns that we have talked about. I think that’s proven by the fact that before we delivered, we are also delivered on time with 11% returns. And then as you look at the opportunities, we have got 10 very strong opportunities. And when we look at it, we see three or four that are very close to being able to move over to the under construction pipeline. So, we feel like we have a very robust process of identifying opportunities and then moving them into the under construction pipeline and most importantly, being able to deliver.

Yes. The only thing I would add, Collin, is once you get through the 10 that are in the pipeline and these are all very real and very significantly advanced opportunities. And in fact, example of which we just signed a lease yesterday with Kroger for a ground lease for 120,000 square foot store in one of those pipeline deals. So, these are real deals, these are deals that will happen. And once you go beyond that, it’s really going to be dependent on where we are from a demand perspective, where we are from a return perspective. And we will ebb and flow is that in that regard. And if we feel like that there is better opportunities elsewhere in our capital structure to deploy that money, that free cash flow. I mean, it all comes back to free cash flow and it always kind of amazes me how little I hear about that in our space, but we generate free cash flow, significant amount of it and we are deploying it in an extremely accretive way. And will that, maybe sometimes create some short-term volatility in a particular metric? Maybe. But is it going to create a lot of long-term value? Yes, absolutely. And I think we are pretty good at that. And I think as Tom just said, we are delivering these things right on the dime. That’s hard to do and everybody thinks they can do it, but once they get into it, they find it’s a little harder than they thought. So, I feel very good about what we have done and I feel even better about how much more cash flow we are going to generate over the next couple of years. So that’s what this business is all about. That’s why we have raised the dividend almost 30% in the last 3 years. That’s why our cash flow has grown a tremendous amount in the last 4 years and our ABR is growing. So all-in-all, it’s a real positive thing.

Alright. Appreciate the color, guys.

Thank you. And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to John Kite for any further remarks.

Well, we certainly appreciate everyone taking the time today. We look forward to talking to you all soon. Thank you.