Good day ladies and gentlemen and welcome to the Kite Realty Group Trust Q1 2016 Earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Maggie Daniels, Director of Investor Relations and Strategy. You may begin.

Thank you and good morning everyone. Welcome to Kite Realty Group’s first quarter 2016 earnings call. Some of today’s comments may 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 may 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 our Chief Financial Officer, Dan Sink. Now I’d like to turn the call over to John.

Thanks Maggie. Good morning everyone. We started out 2016 accomplishing results above our internal estimates for the quarter. The details of our results can be found in the press release and the supplemental, as I plan to use this call to highlight key milestones and update our investors on our three-year core road map. As a reminder, core includes our unique company culture, our expectation and deliverance of operational excellence, our diligent path to achieve and maintain a resilient and flexible balance sheet, and lastly executing on these objectives and strategic initiatives that grow shareholder value over the long term. To start, our lean corporate culture and intense passion showed no signs of slowing in the first quarter. We continue to benefit from industry-leading operating efficiency metrics which we define as a combined look at NOI margin and G&A to revenues. This quarter was no exception as we improved our NOI margin and our recovery ratio from the prior period while keeping a modest G&A platform. Our tenant relationships remained strong throughout the quarter as our asset management and leasing teams conducted nearly 1,200 tenant interactions on an average tenant base of approximately 2,000. As a result of our regional platform and our commitment to our clients, our retention ratio on desired renewals was over 90% in the first quarter. Moving on to operational excellence and execution, we continue to report consistently strong same store results, with this quarter marking the 14th consecutive quarter of same store NOI growth in excess of 3% for an average of 4.3% increases, which is about 100 basis points above our peer average. This quarter, same store NOI grew another 3.4% excluding redevelopments. Sixty percent of this growth came from rent and occupancy increases while the remaining 40% was attributable to expense management. The…

[Operator instructions] Our first question comes from Collin Mings with Raymond James. Your line is open.

Hey, good morning. I guess first question, just update and touch on the three Sports Authorities in the portfolio, and then what has been factored into guidance as it relates to that.

Well from a macro perspective, I’ll just give you a little bit. First of all, it’s only three, as you mentioned, and the average rent on those three is below $13. So from a macro perspective in terms of the quality of the stores, the location, we feel very good about that. In terms of the details, Dan, you want to--?

Yes, as far as the Sports Authority on guidance, when we originally did the budget, we typically keep a general forecast for bad debt provision for a year and then factor in some potential loss rents of a half million dollars or so. So when we looked at re-forecasting with the three Sports Authorities that we have, I think we took--you know, as we looked at guidance for the rest of the year, we factored in a conservative position that they potentially would move out, and that’s why we’ve re-run the numbers and even though we had a solid first quarter results, we left guidance in check and reaffirmed it under that scenario.

Okay. Then Dan, more of a modeling question, can you maybe just walk us through your expectations on that other property line item for the remainder of the year, just as it relates to Eddy Street Commons and then just other asset or land sales?

Yes, I think as you look at the guidance page in the supplemental, we’ve put some additional details in there, and we basically--we provided guidance on the sales of undepreciable assets of $1 million to $3 million. If you look at this quarter and the NOI page in our supplemental, we detail out that we sold about $1.2 million of Eddy Street residential sales - that was before tax. After tax, it was about $800,000, and we had an outparcel sale at Parkside Town Commons for another $500,000. So adding those together, it’s about $1.3 million. When you look at the rest of the year relating to that type of activity, the sales of Eddy Street, we’re anticipating some additional sales but it’s not going to be to the volume of the first quarter. I’d say right now we’re budgeting about half of what was in the first quarter, and I think that will probably--for the most part, we have a couple other small land parcels, but all in all that’s what we projected within our guidance range.

Okay. One more and I’ll turn it over. Just as far as on asset sales, can you just maybe update us, John, kind of where you stand as far as on the $50 million to $75 million this year? Anything under contract, or any more color on that?

Currently no, we don’t have anything under contract. I mean, I think when we initially laid out the $50 million to $75 million, we anticipated it would be in the later half of the year, and we still do anticipate that. We have a couple assets that we think that we would like to sell, so we have an idea around that and we’ve done work around that. I think we still feel pretty comfortable that within the year, that we will meet that $50 million to $75 million, but can’t give you a window right now as to exactly when.

All right, thanks guys. I’ll turn it over.

Thank you. Our next question comes from Craig Schmidt with Bank of America. Your line is open.

Great. I wanted to thank you for the additional disclosure on the 3-Rs, but I’m wondering what determines which projects move from opportunities to in-process? I mean, they seem like they have the same kind of yields. I just wondered what helps you pick which projects to start working on first.

Well I think, Craig, really it’s the projects that are the closest to commencing construction. So I think the difference between the larger 3-R page and the page that’s smaller is the five that we have are actually under construction. So once we commence construction, then we’re obviously going to give more color around the exact projected cost and the exact projected returns. I really think it’s--we think all of these are going to happen, so it’s really more along the line of when are we in a position to begin construction, when do we have the leasing in place. Each one of them has different magnitudes, and as you can see, we actually only have two of those five that are under construction that are pulled out of the same store pool, based on the size and the disruption to the income stream. So it really is a case-by-case basis on how we treat those, and we’re trying to be as clear as possible on that.

Then Craig, as it relates to the balance of the year, we feel very good about continuing to move those projects over to the in-process development, both in the third and fourth quarter as we look through this list. We’re really making tremendous progress and our strike rate has been surprisingly good at this point.

In terms of getting approval from the governing bodies, are they any less problematic or more problematic?

No, I think my personal view on this is that it’s always difficult, and it really doesn’t matter where you are, in what part of the country you’re in, the process is challenging. I mean, it probably should be challenging to make sure that we’re doing everything we can to have these projects be high quality and fit within what the community desires; but no, I wouldn’t say anything has gotten easier. If anything, it continues to get more difficult, which ultimately is probably a good thing as it relates to guys like us, that are very experienced in this field, have been doing it for many, many years. But it is definitely not easy.

Okay.

I was just going to say, Craig, we are pounding every day on each and every one of these, but our progress has continued to move very smoothly.

Okay. Then just one other. What are you seeing the transaction market maybe in 2016 that might be different from 2015, if anything?

My personal view is 2016 is similar in the assets that we desire to own. It is still very competitive. As I said, I think on the last call, there is a lot of conversation around the CMBS market being disrupted and how that might affect transaction activity, cap rates, et cetera. Really in the end of the day, as I mentioned, most of the deals that we own and want to own, generally when they trade, they trade all cash and then any kind of financing would be done after the fact. So I think the market remains competitive. Obviously in the beginning of the year, there was less transaction activity than there was in the beginning of 2015, but I wouldn’t read too much into that. I really believe that the market is still very competitive. Anything that we’ve seen transact continues to be at the cap rates that we’ve seen over the last couple years, really.

Thank you, okay.

Thank you. Our next question comes from Christy McElroy from Citi. Your line is open.

Hi, good morning everyone. Just a follow-up on Craig’s question on the redevelopment stuff. In thinking about the first five of the 23, maybe you can give us an update on your thinking about how big you would expect that pipeline to get in terms of the number of projects that you’d be working on at any given time.

Sure. I think that’s an important part of it, is that we want to manage that process and you don’t want to get overextended with too many deals going at any one time. But a lot of this is driven by the tenants, the demand of the tenants and the timeline associated with permitting that we were just talking about. So I would say--it’s kind of why we’ve said, Christy, that this $150 million range of activity is something that we think we can handle, and it generally happens--it doesn’t happen in a 12-month period, so as of right now when you see us in that kind of $35 million, $40 million range and you think about that quarterly, that’s very close to where we think we were going to be. So I feel good about where this is, but I think the concern you’ve got to have is even if it’s a smaller project, it always is more complicated than you think it’s going to be. So sometimes a $10 million project can be as difficult as a $100 million project, so we are very focused on that and very focused on our ability to execute. So we’re in the right spot right now and we’ll just continue to kind of churn these out, as Tom just said.

Okay, and then with shop occupancy up 180 basis points year-over-year, you talked about an ultimate goal of 90%. What does the 95 to 96% year-end 2016 target imply for small shop?

I think in terms of small shops, we’re pretty close to what we had anticipated. I don’t have that exact number in front of me, Christy, but it probably--we probably have another 50 basis points range in there. Again, the hard part of that is we always assume we’re going to lose tenants too, so that could push up higher if the tenant losses are below what we anticipate because in the small shop area, there’s generally more turnover obviously. But we’re pretty close - you know, we’re not there, but we’re close.

Okay. Then just one last one on expenses, same store expenses down 5% this quarter. Any anomalies in there, any one-time impacts? Maybe you can talk a little bit about what was going on with that trend and what you’re expecting for the balance of the year.

No, I think really - and Dan can get a little more granular here - but I really think it’s what we focused on is our management program around some items that we want to have tenants do directly, which helps us quite a bit, and then there was--you know, we definitely saved money on the insurance side. I wouldn’t call that an anomaly, but that can change. Dan, you want to--?

Yes, I think as you look through the numbers as well, and particularly--I know there’s some states had rough winters, we had a pretty mild winter in Indiana, so I think when you look at some of those expenses being down year-over-year, that’s just one item as well. John talked about expense management, but snow removal was also down a couple hundred thousand dollars. I think when you look at it, the insurance will be something that we can repeat the remainder of this year, and I think it’s always our objective to continue to recover as much as possible from tenants. I think as John went through on his script, the expense management, being able to direct bill trash and those type of items, we’re really digging in and trying to maximize recoveries and drive that number, the recovery ratio each and every quarter.

Great, thank you.

Thank you, and our next question comes from Todd Thomas with Keybanc Capital. Your line is open.

Hi, good morning. John, you mentioned the greater than 90% retention rate in the quarter, and I think your retention rate has been in that range for quite some time. As you think about managing to occupancy versus rate, is a 90% retention rate too high, and is there any consideration to being a little more aggressive with some of the small shop space perhaps near term in the current environment?

No, I think--look, our goal is--you might recall that I said desired retention, so there are some tenants that we obviously don’t want to renew based on various factors, so I think our desired retention rate is higher than our overall retention rate by a little bit. But this is a big part of our business because it’s the most cash productive part in the sense that when we renew, we generally have zero or very little in the way of TI, so it’s a big focus and obviously when you get much more--when your leasing expands like this, you become more focused on that than you do new leasing. So I think it has a lot to do with the relationships that we have driven, it has a lot to do with our asset management program that Tom’s talked about in the past in terms of our tenant touch program. It has to do with our better ability to monitor our tenants in terms of our software. Look, as we mature and as this business grows and matures, you have to be very, very focused on your operating efficiencies, and you can’t lose sight of that because that’s where we generate free cash flow. So that’s a big part of why we care about that, Todd.

Okay. Then I don’t think you talked about acquisitions at all. I know there’s nothing baked in the guidance for any new investments during the year, but how are you thinking about acquisitions, and do you plan to be opportunistic throughout the year?

Well, I talked about this a little last quarter - in today’s environment, the one-off acquisitions are difficult based on values and cost of capital. We tend--we obviously haven’t stopped looking. We have a very active review process. We have to know what’s out there, we have to be involved. It’s just that we haven’t been at a point so far this year where we’ve seen those two things line up, our cost of capital versus what we might be able to buy and grow. I do think that we’re always going to be, as you said, opportunistic, so if something presents itself that we feel is a tremendous value, then that’s where we pique our interest. But if we’re looking at buying something and it’s we’re basically a retail buyer at a very low cap rate and there’s not a lot of growth opportunity, that’s probably not what we want to do right now. But look, these things change, they ebb and flow, and you never know when things present themselves, so we’re always looking.

Okay. Dan, the capitalized interest in the quarter was about $1.4 million. How much of that is expected to burn off later in the year, or how much of it is attributable to the three in-process developments - Holly Springs, Parkside, and Tamiami? How much of that will burn off actually as they transition fully into the operating portfolio?

So as you can see in the occupancy and we start transitioning these, they will definitely burn off, and I think you’ll see us capitalizing--there will be some imputed interest capitalized on the 3-Rs that we have and that in-process that we have, on say like a City Center, a Northdale, and some of those projects, but it’s not nearly to the extent as when we potentially deliver Tamiami and Holly Springs 2. So I don’t have the exact number in front of me, Tom, but you’re right - as those projects deliver and they pro rata go to fixed assets and the rent starts, we will bring down capitalized interest and expense it in the P&L. So with the heavy construction that we had on those three projects particularly, you will see that number definitely come down over the rest of the year.

Is the capitalized interest burn-off based on the percent of GLA that’s occupied, or is it based on the percent of GLA that’s pre-leased or committed? How does that work, actually?

It’s based on the GLA--the percent leased occupied. So in essence, when a tenant commences and occupies their space and starts paying rent, we will then expense the interest to coincide with the collection of rent, so it’s the matching of those two, revenue and expense.

Got it. All right, great. Thank you.

Thank you. Our next question comes from Vineet Khanna with Capital One. Your line is open.

Good morning, guys. Thanks for taking my questions. Just regarding Sports Authority, can you talk about the treatment of the Sports Authority rent in the first quarter, and then how you’re sort of thinking about the range of outcomes there?

Sure, Vineet, this is Dan. So in the first quarter, we reserved all of the February rent for the three stores. We reserved 100% of the straight-line rent receivable for the three stores, and then we--you know, since they filed March 2, we analyzed the March rent and based on the legal proceedings that we are attracting, we’re expecting payment on that [indecipherable] period. So that’s how we analyze the first quarter. Now when you look at the remainder of the year, it really is--you know, as John talked about in the script, we’ve looked at it on guidance and in same store potentially worst-case scenario that we would get the three stores back, or in some cases, the best case scenario depending on the rent and whether we can push rents or we’d want to--you know, if another tenant is going to come in and acquire the store in the liquidation process. So I think that’s the way we’ve looked at it. We’ve kind of run the numbers from a P&L perspective on the most conservative basis, that we would receive the stores back. So I think under--you know, when you look at that, walk through it, that’s how we’ve accounted for it in the first quarter, and then going on throughout the year, the impacts will be a lot more clear as the liquidation process occurs.

Sure, and then just more specifically, would there be any impact to your plans at Portofino if that specific Sports Authority there were to close, or you were to get it back?

No, we obviously--that’s an important property for us and we’re obviously monitoring what happens there; but no, our plans are continuing on in terms of the redevelopment and what we’re doing. We always assumed that that would be a space that we would be able to utilize in the redevelopment.

Yeah, and we have aggressively pursued trying to recapture that space since May of last year.

Okay. Just lastly from me, can you provide any color on those two leases that sort of impacted spreads in the first quarter?

Sure. Basically, one was a short-term deal that was a hardware store, basically an Ace Hardware store in Florida. It was a short-term deal to match up with a Publix expiration, because we intend on--it’s a very, very strong store for them, and we intend on adding that property at some point into our redevelopment pipeline, so we wanted the two to match up, so that was why we were willing to do a deal below value there--or not below value, but the deal that we were willing to do short term. Then the other one was actually a former dark box in Naples that we had for a few years dark, that we did a PetSmart deal in, which was actually a very strong deal. So there were two very specific circumstances around that.

Sure, thanks for the time.

Thank you. Again, if you have a question at this time, please press star and then the number one key on your touchtone telephone. Our next question comes from Jim Lykins at DA Davidson. Your line is open.

Good morning everyone. First a leasing question. You talked about the impact of the two anchor leases, but excluding those, can you give us a sense for what you have baked in the guidance for leasing spreads and how we might want to think about that for the rest of 2016?

I think the way we look at that is if you look at our same store NOI guidance, we’ve kind of talked about that. Leasing spreads are going to probably generally be around where they are right now, excluding the two that we’ve talked about; and frankly, and I’ve mentioned this many times, our real focus is on the renewal side, which we continue to want to generate renewals between 8 and 10%. When I mean focus, is that that’s the side of the business where we have the least amount of capital going, so the capital doesn’t affect the rents very much on the renewal side. But I think it’s going to stay generally the same because we’re in a pretty good dynamic as it relates to supply and demand, and we haven’t talked about that yet on the call but the supply-demand characteristic definitely remains strong, and I don’t see that changing much because the supply in new retail is at a trickle relative to history.

Okay, that’s all good to hear. Regarding the ongoing projects for the 3-Rs, the 9 to 11% returns you’re getting, have you guys identified the low-hanging fruit or should we think about that 9 to 11% as kind of a run rate going forward as you cycle through the portfolio?

The 9 to 11%, or let’s just call it 10%, is the goal that we always have when we’re spending capital on development, whether that be ground-up, which is hard to do, or redevelopment. So again, it depends on the complexity of the deal, the amount of capital that we’re spending, but we always want to try to reach those goals. Some of these are going to be slightly below, some of these are going to be above, but that’s a good run rate for you to assume. Really when it comes to redevelopment, there is no low-hanging fruit. Everything is complicated and everything is a battle, but we feel like we’re pretty good at it.

Okay, great. Thanks John.

Thank you. Our next question comes from Carol Kemple with Hilliard Lyons. Your line is open.

Good morning. Besides Sports Authority, do you have any other retailers you’re really worried about at this time, or anybody you’re seeing closings from?

I think not of that magnitude in the market, where you’re seeing a lot of closings. There are definitely other people on the radar that you continue to monitor. I think we have an HH Gregg or two that we think about, and we have a couple of the other guys, but I don’t think anything of this magnitude. We have one K-Mart that we’d love to get back that was not on their closing list. But look, I think Carol, the reality is this is nothing new. This is the retail business. There will always be closings. That’s something we’ve always dealt with, and it just so happens in today’s supply-demand market that we’re in, these closings generally work out to be opportunities. That’s one of the best things about low supply, is that it actually creates an opportunity where, as in the past before the downturn, these could be very problematic. Today, we don’t look at it that way.

Okay. Then on Page 25 and 26 of the supplement, there are several of the 3-R projects that you all have taken out of the operating portfolio. Can you quantify the square footage associated with those?

I don’t have that square footage in front of me right now. We can get that for you, but as I mentioned, Carol, it’s really case-by-case depending on the disruption to the particular asset and how much of the NOI we’re taking offline, which is why it’s, quite frankly, not that many of the 25 or so that we have.

Okay, thank you.

Thank you. I’m showing no further questions. I would now like to turn the call back to John Kite for any further remarks.

Okay, well thank you everyone today for your time, and we look forward to talking to you in the future.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect.