Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host for today's conference, Ms. Ashley Underwood, Investor Relations. Ma'am, you may begin.

Thank you, and good morning. Welcome to Kite Realty Group's third quarter earnings call. Much 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 contain 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; Chief Financial Officer, Dan Sink. And now I'd like to turn the call over to John.

Thanks, Ashley, and good morning, everyone. Thanks for joining us. First, I'd like to go over some highlights of excellent quarter. We generated FFO, as defined by NAREIT, of $0.49 per share. We grew same-property NOI by 3.6% for the quarter or 3.9% excluding the impact of our 3-R initiative. ABR for the retail portfolio continues decline as we reached $16.32 at the end of the third quarter, representing an almost 5% increase over the year at 4.5% increase. We reached small shop occupancy of 89.7%, which is an increase of 100 basis points from the same period in the prior year and 50 basis points over last quarter. We commenced construction on the development of Phase II of Eddy Street Commons, which is an exciting successful mixed-use development located at the University of Notre Dame. Before I go into further details on the results, I'd like to address the effects of the hurricanes that we experienced in Texas and Florida about 1 month ago. We were fortunate not to sustain any material structural damage to our centers. The majority of the damage was largely landscaping, debris cleanup and minor building repairs. Through our captive insurance subsidiary, we were able to limit our total exposure from the Florida hurricanes to $100,000 insurance deductible payment, and we currently don't anticipate any material claims from Texas. Also, during the third quarter, importantly, we announced our Kite Cares outreach program, under which we made donations to local and national charities to assist with the relief efforts to help our community needs during these very tough times, and we'll continue working to help those who were less fortunate than we were. Back to operations. Our leasing team continues to focus on tenants that provide consumer services, food offerings or otherwise operate experiential businesses, and…

[Operator Instructions] And our first question comes from the line of Todd Thomas of KeyBanc. And your line is open.

Hi, thanks. Good morning. So the deceleration in same-store NOI growth that you're anticipating in the fourth quarter, is that expected to persist in the 2018? And then, how much of that, if you can quantify, is related to some disruption or I guess, deleasing for some of the 3-R projects that you're commencing?

Well, first part of the question, Todd, I mean, as you know, we're not going to give 2018 guidance, so not going to talk a lot about 2018. We clearly -- when we laid out guidance in the beginning of the year and as we went through the year, we were well aware where we thought the NOI would be. And as you can see, we're essentially right on top of our estimates and most likely will be at the top end of that guidance. As it relates to the deceleration in the quarter, as we try to point out, when you have economic occupancy pick up 70 basis points, that's going to create positive compression and create NOI growth, and that's why we do in terms of the 3-R program, and that's why, frankly, you lose the NOI in the front end, you gain it on the back end and at our size, that's going to create some lumpiness. And I think that's really the story and then on top of that, obviously, we've had significant givebacks and properties for us over the last couple of quarters, and that's impacting us, but as we pointed out, we backfill the last phase. We're negotiating LOIs. And one thing I want people to understand, we don't just go out and put tenants in spaces because we're panicking about metrics, okay? We're constantly looking at NAV, constantly looking at how to improve values. So it takes time. And look, I understand that the narrative is negative and people think there's a lot of things happening, but reality as you look at our tenant openings, you look at our rent spreads, which are pretty darn high, we feel good about that. So I would just say that it is being impacted by both the bankruptcy that you're aware of and then probably more importantly, the lumpiness of our 3-Rs.

Okay. That's helpful. And then, you have a lot of direct exposure to some shadow-anchored Walmarts in the portfolio. And I was just wondering, what you're seeing there as they turn more stores into click and collect for grocery and other services? Is there any commitment or consideration from Kite for that sort of a transformation of space at all, whether leased or owned or anything like that?

Yes, I mean, first of all, as it relates to Walmart, we have 15 Walmarts, I think, [sick of re-leases], so 9 of them would be shadows. But they're -- in our mind, they're an outstanding retailer that's doing great things, that's putting -- is the only retailer that I can really say, in my opinion, is putting pressure on Amazon, and I think it's great. Yes, we have been involved with both of them and Target and others, HEB, Kroger, et cetera, on creating areas, either inside or outside the store that would allow for pickup, and so that's going to continue to grow. And it's an excellent thing. And particularly as it relates to Walmart, we've seen them completely change the company in the last few years. Now they're just on a cutting edge today. So I think it's great, I think it's going to continue to help us, but it's not just Walmart. I mean, it's really anybody of that magnitude is aggressively going after that. And I think you've seen what Target is also doing, and the beauty of that is Target realized that they, I don't want to speak for Target, but I think they realized over the last few years they kind of ignored store, pursuing online sales where you lose money. And real retailer don't like to lose money, so they figured out let's invest back in the store, and they're doing that and we're seeing great things from them.

Is there any commitment or any sort of consideration from Kite for any of those changes? And then, any thoughts on the adoption of that service, any early reads or feedback from them as they begin to ramp up some of those initiatives?

Yes. I mean, at this point, the cost to Kite has been pretty minimal. We've done some small projects, nothing at this point has been real material. Particularly, in the non-known deals, I mean, essentially, even if it's a ground lease, we would still have some TAM ownership of the land and parking lot that we might get involved in. But generally, it's not been huge, but I think that's going to continue to change and grow. The HEB stores, we're doing some work with them and again, not huge dollars there, but we help them create a pickup area outside the store. And it's already been making pretty strong results. So yes, our view is, it's been important. Tom, I don't know if you want to add to that?

Yes, I mean, we've also been talking to Target about the size of the parking fields. There was a time when Walmart, Target, et cetera, also they needed massive parking fields. So we've been working with them trying to find ways to add value collectively with those out Marshalls. And the other thing Target is doing very effectively, I spoke to their broker and real estate rep, is their smaller store concepts really add tremendous amount of opportunity for us in that 15,000 to 20,000 square foot range. So we're keeping a close eye on those as well.

Okay. Thank you.

Thank you.

Thank you. And our next question is from the line of Alexander Goldfarb of Sandler O'Neill. And your line is open.

Good morning. Good morning, out there.

Good morning.

Hey. So two questions. The first question, John, you've really been focused on improving your credit rating, growing cash flow, but at the same time, just the disconnect between the public market and the private market continues. So do you think -- how do you weigh the trade-offs between contemplating becoming a net seller, harvesting more versus retaining assets to grow cash flow and improve the credit profile?

That's a good question. I mean, obviously, we always have to look at the assets that we own, and we have to think of them as though we're buying them, right. We have to kind of view them as is this an asset that we would want to go out and buy and add value to it just because we own it. We don't stop looking at that. So I would say, you're always kind of balancing the present value of the current cash flow and where you think that cash is going to grow against your cost of capital and what you need capital for. So I think you heard me say in the comments that we would potentially -- this year, we clearly have been a net seller. Last year, we were a net seller. And we had said in the prepared remarks that we're looking at whether or not we want to continue to do that. So it's a little early to talk about what we're doing going into '18. But clearly, we are well aware of the disconnect and the fact that the value of our assets significantly exceeds our current stock price. So we're engaged in that, Alex, and I think we'll continue to be. But also, you're also looking at the assets in terms of do we still think they've growth in them and do we still think they're located in the market that we want to be in. So there is a lot that goes into it, isn't just a math equation. But I would say that, obviously math, a big part of that is relates to the present value of that cash flow.

Okay. And just, as a follow-up to that, via the JV partner buyout for your Vegas asset, is that -- can you disclose the cap rate or talk about is that a preset amount or that's a market negotiated cap rate?

Yes, it really is a preset amount that was negotiated. That was something we assumed when we acquired Inland Diversified. That was an Inland Diversified partnership. So it was just a preset amount, Alex. There was no cap rate associated with it.

Okay. And then just the second question is, when we look at your same-store NOI over the past like 3 years, it's been basically 3% -- plus and this year, obviously, trending well. But…

3%-plus-plus over the last 3 years. So there's a second plus on there.

Okay, but earnings growth has been muted. Would you say that's more disposition impacted? Or is there other leakage in the portfolio that's causing the NOI growth to not slow the FFO growth?

Good question. No. I'd say most of it is, you got to look at the deleveraging that's occurred over that 2-period time, and when you go back to the beginning of that time line, we were probably 9x debt-to-EBITDA. So there's been significant deleveraging going through there. There has been asset sales that have accelerated that. So I think that and then the fact that we've always -- we've been having this lumpiness of the 3-R program, reducing our NOI and then building it back up. And then you got to look at the capital markets activities over that period of time that raised where we went from variable rate to fix rate. So we did the private placement, we did the bond deal, and as I said, the deleasing intentional bringing down of NOI from the 3-R program, which we can't. You see the results of it, but it creates this lumpiness. So great question. But no, I don't think there's any leakage there and, in fact, when you look at our recovery ratios and you look at our cost to operate the business, I mean, find somebody anywhere that's more effective in our script [ph] center space than we are at operating this business.

Okay. Thanks, John.

Thank you.

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

Hey, John. Hey, Dan. This is Justin on for Craig. I want to talk about small shop occupancy. I see here that at 89.7%, we've nearly reached what I think was a year-end '18 goal of 90%. So you've almost done it a year early. I know you're not quite there, but as we take a step back and look at how we got here, are there things that you've done from a leasing standpoint to reach this level, I guess, first of all, what got us here? And then, would those same things be done the same way to get us beyond that point?

Well, I can tell you that what got us here is the fact that we have been extremely focused on small shop leasing in our organization for the past 5 years. I remember us talking about that a few years ago that you hear a lot about the big-box deals and everybody highlights the big-box deals. And you didn't hear a lot about small shops and we started talking about it. So we had a internal agenda that was very, very focused on that, and we also knew that we would have the opportunity to have annually increasing rents in that small shop portfolio. So really, like all of our business, it is a business that you have to make happen, it doesn't just happen, you make it happen. I think our team has done a phenomenal job of doing that as it relates to the small shop. Now there's a macro element that I keep talking about that no one seems to care about anymore in today's world of this. I'm going to create some delivery this day and next day and all that stuff. But reality is, we own great real estate, and it's limited. There just isn't inventory coming online over the last 8 years, it's been the lowest I've seen in my career and all of us here have never seen it this low as it relates to the inventory balance of high-quality open-air real estate. So we're benefiting from that. That creates compression, that creates NOI growth, that creates -- that's why our ABR is 16-plus today and it was 13 3 years ago. We continue to grow and improve. So yes, I think going forward, as I said before, we really -- we're very focused on hitting that goal, but that goal is going to go up from 90%, will go to 92%, most likely. So just let everybody know that. So, I think, we'll keep doing the same thing and we'll keep focusing on the quality of the real estate and incrementally growing the quality. And as we're talking about on the last question, this is creating a lot of positive cash flow that we are able to reinvest. And businesses are run off of positive cash flow, they're not run off lock the stock prices and ridiculous multiples. They run off cash flow.

The only thing I'd add is, I think we've also had success and the fact that we're really recast who we are attacking, who we're going after. And in the past, we had a host of tenants in categories that we would pursue time and time again. But as the markets have changed, we really put in a position where we can concentrate more on food, more on fitness, entertainment, services.

And we don't have any further questions, and I'd like to turn it back it over to Mr. John Kite for closing remarks.

Okay, well, thank you. I hope you enjoyed that closing classical music, and we look forward to seeing you soon. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everybody, have a great day.