Good day ladies and gentlemen and welcome to the Q2 2016 Kite Realty Group Trust 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. [Operator Instructions]. I would now like to introduce your host for today's conference, Ms. Maggie Daniels, Director of Investor Relations. You may begin.

Thank you Vicki and good morning everyone. Welcome to Kite Realty Group's second 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 includes 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. And now I would like to turn the call over to John.

Thanks Maggie and good morning everyone. During the second quarter, we continued to execute on our core objectives and progressed closer towards our three-year roadmap of goals. The details of our results can be found in the press release and supplemental. But before diving into the specifics, I would like to discuss the transaction cost incurred during the period. In the second quarter, we expensed $2.8 million in costs relating to a potential transaction that we ultimately elected not pursue. Consistent with our long-standing corporate policy, we do not comment on market rumors or potential transactions. Because of this, we will not be answering questions about this specific transaction. I will however use this opportunity to reiterate statements that I have made in the past regarding our underwriting process and how we approach transactions. We have several objectives that we analyze internally and with our Board to evaluate potential opportunities, including pro forma portfolio metrics, risk mitigation and capital allocation, to name a few. These objectives include some primary goals such as first, enhance our portfolio's asset composition and net asset value, second, maintain or improve our balance sheet metrics and third, grow our free cash flow per share. We don't intend on executing on any transaction that would jeopardize or run counter to these strategic objectives. In the past, I have been asked if our team is interested in growing for the sake of growing. I can't think of a more tangible example to refute this concern than what has happened in the second quarter. Although we did not move forward with this particular transaction, I would like taking a step back and look at the execution and success of our two most recent transactions, the $300 million nine property portfolio acquisition in 2013 and the $2 billion Inland…

[Operator Instructions]. Our first question comes from the line of Christy McElroy with Citi. Your line is now open.

Hi. Good morning everyone.

Good morning.

John, you have made no secret of the fact you do want to grow the company over time. When you look at the market's reaction to just rumors of those efforts to try to grow, what impacted that how you think about the company strategically? So what signal do you think that the market was giving? How do you think about the idea of growing the company versus potentially selling into a larger entity to maximize shareholder value?

Well, Christy, look I think when we look back at it and look at what was out there and what we read and what the rumors in the market were, I don't think we were surprised at all by the reaction. I think it's difficult for investors when they don't know exactly what's going on. So assumptions are made and after what we read we understand the reaction. I think certainly when you look at it, it's why we discussed the transactions that we have done in the past and the success of those transactions as it relates to the strength of the company, the balance sheet and growing our free cash flow per share so that we can reinvest into the business. So I think it's certainly understandable due to what people thought was potentially happening. So I don't really think it changes much other than to say we are focused on doing smart deals that create shareholder value, whether that be through internal redevelopment or whether that be through transactions like Inland or the Och-Ziff transaction. But we are not going to do deals that don't meet those characteristics and I think it's why you saw what happened in the quarter and that's the point we were trying to make is that we are looking to do smart deals not just any deal.

And so does it put you off in terms of thinking about your growth strategy? Does it out you off to potentially doing another bigger deal as opposed to one-off acquisitions and redevelopment? And how does the increase in your stock price this year impact your view of your cost of capital today?

Well, to the first question, look our job is to create value the most efficient way we can within this organization. And so it doesn't put us off, it just reaffirms how we think, which is that we are trying to find opportunities that makes sense from a value perspective and makes sense from our ability to add more value to them. So size isn't really what we are thinking about, it's can we get assets at a discount that we can make better. And that's what we did in those last two transactions and that's what we would have attempted to do in this transaction that didn't come to fruition because of those things, right, because we want to achieve and we want to manage risk. So I think to that extent, again I understand how things went, but the reality is, as we look at the landscape we love the properties that we own, we want to continue to own properties like this and we want to add value to them. In terms of the stock price, we look at it. It's obviously a part of our capital allocation thought process. So it does matter and it matter to in terms of how we look at the value. But it's what we focus on every minute of the day as the stock is more closer towards what we feel is a fair value. It's certainly helpful in how we look at the world but it doesn't mean that you run out and try to do something just because of a particular stock price. I think we always looking at the longer term and we are looking at the assets. And do these assets make sense, do they improve the quality of our base and can we growth them, that's more what we looking at.

Thank you.

Thank you.

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

Hi. Good morning guys. First question for me, just as it relates to the improved stock price. How are you planning on approaching the ATMs just to help fund the redevelopment pipeline and potentially accelerate some of your plans to help lower the leverage?

Well, as you know, as we said we continue to want to fund our pipeline through our free cash flow and right now that's matching up pretty nicely because our annual spend does not exceed our free cash flow. So we wouldn't look at accelerating a project just because the stock might be in a particular place. These projects, they have to meet the timelines that makes sense in terms of where we are to manage the risk for every project. So it really isn't about the capital size as much as it is the risk side. We don't want to overextend in this area. We have seen what that can do. So we will do this in a measured way and we would much prefer to fund stuff with free cash flow than any outside capital. So we are always aware of it and we are probably more focused on our balance sheet strength and we are accelerating our redevelopments. And as I made clear, we want to continue to delever the company. So that's what we are focused on.

Okay. And then just as far as in the guidance, you trimmed disposition guidance a bit. Can you maybe touch on what drove that? And just your updated thoughts as far as the timing of asset sales?

Well, I think just as we get through the middle part of the year and have the timelines for the things to happen, I think what we are really doing is probably saying that $25 million of the potential dispositions won't happen this year. It may happen next year. But we still think we will meet the revised guidance of dispositions and we want to execute at the right price. So we are going to push ourselves into executing just to meet a range.

Okay. And then just last question for me, just going back to Christy's question. Just is there anything else, John, in the pipeline that you are actively engaged in that you think could result in a similar type of transaction charges if it doesn't materialize?

Well, I mean, look I think it's our job to always be reviewing what's happening in the market and to be reviewing opportunities. So we never stop reviewing opportunities. This was obviously significant and so just to say there's something of that significance right this second, no. But we are going to continue to review opportunities and we are going to continue to say, if there's something we can find that we can add value to at the right price at the right capital structure, we will look at it. And I think it's clear that we will also look at things and walk away from them if they don't meet those characteristics. So I hope that's what the takeaway is, is that we are very focused on doing things that create value in the right way. We are not just focused on doing something to do it.

I appreciate the color, John.

Thank you.

[Operator Instructions] And our next question comes from the line of Todd Thomas, Keybanc Capital Markets. Your line is now open.

Hi. Good morning. This is Drew Smith. I am on for Todd today.

Good morning.

Good morning. Just on the topic of guidance, I am just curious what was baked into the low end that gave you the confidence to lift the range by $0.02. And then additionally just a little bit about the Sports Authority boxes, maybe if you could give us some color in terms of the timing and cost for retenanting those, that would be great. Thanks.

Sure. I think when you look at bringing up the low end of guidance, obviously the first two quarters we were at $0.52 and as we look at throughout the rest of the year with our bad debt reserves which originally had budgeted as well as the interest expense, some of the clarity we get around potential closures and the acceleration of openings that we have in our 3R pipeline, I think that gave us comfort, great comfort to bring up the bottom end. So the Sports Authority and that particular, those two closings, obviously affected some of the same-store NOI range as well as the lease up or percentage leased range, but overall as we looked at the year, we felt comfortable about bringing in the range, especially with how we performed in the first two quarters. As it relates to the Sports Authority releasing, look we are only talking about two locations and this is what we do and we do it well. We are looking at multiple opportunities at both locations and really focused on the merchandising mix as it relates to the balance of the shopping center. So that's why we mentioned in the remarks that over the next year to year-and-a-half, anticipate that we would execute on those two boxes because we want to take the appropriate time and not just rush into any deal, although we are actively talking on both to make the right deal. Tom, do you want to add to that?

Yes. I think the positive for us is we have two large shopping centers here and they both have very strong tenancy in terms of the other anchors inside the center. So that allows us to track the type of tenancy that we want. And without question, it's traditionally a little further along we are actually into the end of the road negotiations with a tenant which is very encouraging since we just got this back in June. In Colonial, we are really focused on entertainment uses and I have worked on a long list of opportunities. So in terms of being in this process for a very short period time, we have a great deal of confidence of getting through this.

That's helpful. Thank you guys.

Thanks.

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

Yes. Hi. Good morning. Thanks for taking my question. As you mentioned in your prepared remarks, you have undertaken two significant transactions in the last year. You have made a lot of progress on improving the balance sheet. So at this juncture, why consider another significant transaction? And why do think Kite is prepared from an organizational and balance sheet perspective to really digest another significant transaction?

Well, I guess we aren't doing another significant transaction right now. But to your question, we are prepared because we have executed exactly how we laid out the plan when we did those two transactions. And unlike others when we closed on those transactions, we had no hiccups. In fact we excelled and the company became stronger because of both of those transactions. So the point that we were making is that we have done deals that have improved the portfolio and improved the balance sheet. When you look at the balance sheet today from where it was, it's significantly stronger and more flexible than it was prior to those two transactions. And I mentioned that we grew our free cash flow per share, mind you, 7.5 times in that period of time. So that's why a company like ours would look at a transaction and it's why we would pursue something like that because it makes a lot of sense. However, if we are looking at a transaction as we have this past quarter and we get to the point where we deem that those things would be in jeopardy in any way, then we won't do that transaction which is why this is what occurred. So I think we are very capable of doing these things. And as I mentioned, our operating efficiency is the best in the business. So that's why we are able to do these things. So I think we feel very comfortable with our capabilities, but we are most focused on managing risk that is around these deals to make sure those are right deals.

Great. And so now I guess shifting to the portfolio. So you are within striking distance of your 90% mall shop goal. So do you think that goal can move higher? And if so, where maybe do you think it could go? And then maybe if can just talk about shop demand in general?

Well, goals will always move higher. But we need to hit this one first. And we are 88.3%. We want to be at 90%. We are very focused on it. There is a lot of upside there for us in terms of NOI, cash flow and earnings growth. Very profitable business in the small shop side of our business. So that's our focus, is to hit back and try to maintain it. I guess I would say maintaining that ratio would be something we would want to do. But yes, we think we can continue to excel here. We think our portfolio is capable of reaching that. But by the same token, we don't just put tenants in spaces to try to achieve that goal. We turn down tons of deals every month based on us not being comfortable with a particular tenant. So it's really more about high quality leasing than just leasing.

And then I would say, the second half of the equation ties back to, we spend a lot of time on that tenant retention. From an asset management standpoint, we have spent hours and hours trying to figure out the best ways to retain our tenants. And we have been very successful with that, but those two go hand-in-hand in terms of reaching that goal, not only have the lease but you have to retain. So we are more focused on both accounts.

Okay. And then just one last quick one for me. How much is left to sell at Eddy Street Commons? And when do you think that their revenue will subside?

On the first phase, we are down to very few units remaining, only a handful. So when you look at that, there is a profit sharing portion to this basically arrangement we have with the builder. So we have a couple of units to sell and we will look at adding potentially some additional profits that we will be able to book as it relates to that. Just to point out that we call the Eddy Street residential sales but it has been a fee income since 2010. So I think it's very important to point it out. It's almost like a seven-year lease that's been in place that keeps providing additional cash flow every year. So it is winding down, but it has been a great source of earnings and cash flow for the period of time since 2010.

All right. Great. Well, thanks for taking my question.

Thanks.

[Operator Instructions]. And our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Your line is now open.

Good morning out there.

Good morning.

Hi. So just, John, if you look back over Kite, originally you guys were developers and then as of late you have been on the acquisition side with the two large portfolios you mentioned and obviously you spend quite a bit of time looking at the deal during the quarter. As you think about growth for the company, do you feel like the driver of growth really on the external side is more from acquisitions or do you think that development will once again play a role? You mentioned that you are down to one development. So I am just curious from your experiences over time, if you think that acquisitions are better risk reward for growth or if it's development or maybe it's neither, maybe just more internal focus and more redevelopment is really where the growth will come from?

Well, I think, Alex, these things are situational. So everything we look at, we look at on its own merit. So as I mentioned in the call, I think right now our focus is on redevelopment in the portfolio that we have and that we are adding value to and we funding in a very efficient way and the returns are high. That said, it doesn't mean that when you are focused on that you don't look at anything else. You are always looking at what you can do that's going to create the most value per dollar. So I think it's hard to say that we are going to limit anything. I think what we are going to do is we are going to continue to do what we have been doing, which is growing free cash flow, improving the balance sheet and being in a place where we are very flexible to adjust and adapt to the macro environment. We are in an environment that is pretty shaky when you look at what's going on in the world. So we have got to be ready to adapt and pivot to that. And that's what you think about when you look at anything. When we spend $1, we are going to think about all those things as it relates to that $1. So it doesn't mean that we would exclude any particular thing, but it means that we are going to be reviewing it with that lens of caution around the macro.

So, John, in other words, if I hear what you say, it doesn't sound like we should at all expect ground up development as part of Kite. It doesn't sound like that will be a growing part of the business. It sounds like more will be redevelopment and then the acquisitions as they come up. Is that fair to say?

I think it's fair to say that large-scale ground-up development right now, in our view does not pencil very well. So yes, I think it's fair to say that where we were in 2004, as we look at the landscape it's very different than we look at the landscape in 2016. So I think that it doesn't mean that we wouldn't do ground-up development in the right scenario, but not to the scale and not to the exposure to our balance sheet that we once had. I think exposure that we have to nonincome producing assets right now is the exposure that's the maximum exposure as we look to that.

Okay.

If anything change, Alex, based on the macro, we are not going to dig our hand in the sand. We are going to pivot based on what's happening. And as my personal view is that a little bit of caution right now is probably a good thing.

Okay. And then as far as, I mean I realize that you won't discuss the deal, but certainly in speaking about what was reported, it was the mix of assets. So some of the assets people liked and others didn't seem to be appropriate for a combination. In your view, do you think retail is as neatly as a company has a sector and that's only where it is? Or do you think that retail is more fluid and as you are seeing demand from tenant that their ideas are more fluid and such that maybe traditional views of how retail properties lay up may not be the way it lays up going forward?

Well, I think, in my view, this is a supply and demand business and supply remains extremely low. However demand is, what I would call, moderate. So I think retailers are looking at the landscape and are certainly willing to look across spectrums as it relates to where they want to be, but they are always going to be focused on the dirt, the real estate. So when you go back and talk about our company over time, we have been very good at understanding dirt, understanding real estate. We will continue to focus on that. We want to own assets that are in locations that will be able to transition. So that's our view of the market is that it is very low supply, so that puts retailers in a position that they will look at various products. But look, when you look at our portfolio, we own 121 properties, I think 119 of those are open air shopping centers. So that's the business we like. We like being in a business where we have good tenant relationships. So we will continue to focus on having great tenant relationships and great real estate. And I think everything else will go from there.

Awesome. Listen, thank you, John.

Thank you very much.

And I am showing no further questions at this time. I would now like to turn the call back over to Mr. John Kite, CEO, for closing remarks.

Well, thank you everyone. We appreciate your time and look forward to talking to you next quarter.

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