Good day, ladies and gentlemen, and welcome to the Q4, 2017 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to the turn conference over to your host, Ashley Underwood, Investor Relations. Ma'am, the floor is yours.

Thank you, and good morning, everyone. Welcome to Kite Realty Group's fourth quarter earnings call. Much of today's comments contain forward-looking statements that are based on assumptions and future events 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; Chief Financial Officer, Dan Sink. And now I'd like to turn the call over to John.

Thanks, Ashley. Good morning, everyone. 2017 was another productive year for our team as we've been diligently executing on our long-term strategic goals and plans. As we laid out in our press release, we generated solid results in the fourth quarter that were in line with our guidance ranges. Our strong leasing effort drove our small shop lease percentage past our 90% goal to 90.5% lease at year end. An increase of 160 basis points over the prior year and 80 basis points over the end of the third quarter. Now that we hit that 90% goal, we are focused on driving the shops even higher while still generating strong leasing spreads. The experiential qualities and services provided with these tenants will serve as solid foundation for our portfolio over the long term. We continue to be very selective as we lease additional available small shop space to ensure the prospective tenants add incremental value to the shopping experience. In addition to working on our small shop lease space, we are focused on re-leasing our current vacant junior anchor spaces. We are calling this initiative our 2018 box search. We currently have three boxes under lease negotiations and another four with active letters of intent being negotiated. Over the next 12 to 18 months, our team is going to be laser focused on leasing up to remaining spaces and getting new quality, exciting tenants open and operating. We had great conversations with tenants at ICSC in New York and we've been actively conduction portfolio review meeting with select, highly productive competitive retailers. These meetings are focused on our tenants' future growth plans and generating interests to secure locations in our high quality portfolio. We are treating our 2018 box search as a challenge and we'll succeed. I want to highlight…

[Operator Instructions] Our first question comes from Todd Thomas from KeyBanc. Your line is now open.

Hi, thanks. Good morning. First question just for the anchor box leasing initiative. Are those seven anchors that you mentioned, the vacancies there that you are dealing with, is that the totality of what you have from a junior anchor standpoint? And do you have any rental income in the model in 2018 attributable to leasing up of any of those spaces?

Well, first of all the question as it relates to -- I guess what you are saying is that the only activity we have on those available boxes and the answer to that would be no. What we were saying of those available boxes that have most of which has come back to us in the last year, and particularly heavily in the third and fourth quarter, we are already actively engaged in lease negotiations and LOI negotiations on basically have -- what we have to do. But that said, I mean we are trying to be conservative as it relates to -- if we are just discussing deals with people we are not including that there. We are actually saying we got leases that are going back and forth and we got LOI that we are also negotiating. So that means for us that's generally pretty high penetration. As it relates to other stuff, I mean I was trying to make the point, Todd, that if you look at the activity that we've had and the strength of our portfolio particularly highlighted by what we've done in the small shop space, we just happened to be in a situation where in the last couple of quarters unusual amount of boxes have come back to us. And we got to fill them. That's our job. That's what we are doing and we'll do. So overall we feel pretty good about where we are with that.

Okay.

And as far as the 2018 numbers, we basically one of those leases that we've recently signed that we said it was negotiation is basically signed. That one has an opportunity to be in 2018. But beyond that it's more likely did that all what happen to 2019.

Okay, got it. Okay so you got back -- there are about 14 junior anchors that you are working on in total though it sounds like that is that right?

Yes. That's correct as we sit here today.

Okay and then generally what's been the --

Let me -- Todd, I am sorry to interrupt you, as it related to that 14, I mean that's a lot at one time frankly, but when you look at it against the backdrop of us having about 350 spaces that are defined as anchors for us because that's about 10,000 feet. On a relative basis that's not a lot, that's not a huge issue. It's just the issue so much of it came at a concentrated period of time.

Sure, understood. And what's been sort of the timeline or lead time to get a tenant in and paying rent from lease signing? Is that changing at all?

Well, I think we've talked about this before. It's longer than people think it is, right. And so the bottom line is to get to actually sign a lease and get a tenant open from that lease signing within 12 months is possible, but a great challenge. And generally for us it probably averages 15 months because of the entitle -- you still have to permit these things, you have to design and drop. So there is a lot of time evolved and just the lease negotiation itself can take three months. So generally speaking 12 months would be quick from time of lease signing to opening. Tom, you want to add anything to that?

No. The only thing I would say, Todd, is we are doing everything we can particularly in permitting to do concurrent building permit, site permit processes so a lot of time you have a situation where municipality or county will not allow you to open up a second permit once it's underway, once the single one is underway. So we are trying to pool these which save a lot of time. So we are trying to do everything we can from the actual lease negotiation to the production of drawings, to the permit to tighten up that space that John is talking about.

Okay. And then just lastly, switching over to the dispositions, the $60 million of dispositions that are in guidance, is there any risk to those deals not closing just given the increase in 10 years yield or any of them contingent on financing in anyway? And then have you seen evidence that the increase in borrowing cost is had an impact on private market pricing at all?

Well, I mean, look, that the deals aren't closed so I always feel like there is risk until it is closes. So I mean we are telling you that we expect it to happen -- we believe that it will happen. But they are not closed till they are closed so there is always risk which is why we do what we do relative to guidance but I think that we feel good they will close. As it relates to the impact on financing, I mean again I mean that people are making are obviously very, very hyped about the fact that the 10 years is gone from 235 to 270 to whatever it is right the second but generally speaking that's not going to impact the deals that we are talking about.

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

Okay, thank you. I guess my question focuses on some of the densification projects you are pursuing. I wonder if you are getting reverse inquires from apartment developers? Or you just are targeting certain assets that you think suit well? And then finally, what you look for in an apartment company to partner with?

Craig, for the first part of the question, it's both. We have gotten specific reverse inquiries on some of our assets and we've also from the very beginning kind of laid out a plan on certain of our deal that we knew there was a multifamily component. For example, at Parkside, when we were laying that out, we knew that we had a multifamily component and we executed on that deal for I think is 250-300 unit range. But then in terms of our existing operating assets, that's on a ground up development where it's pretty easy for us to where it's logical. But we are seeing more of now is that we have assets that are very well located and has become -- as it become harder for multifamily developers find good opportunities from a greenfield perspective, they are very interested as it relates to properties that are already up and operating. So as we said in the press release when we announced what we are doing it at Eddy Street, we have four, five situations where there is definitively opportunity for us to have multifamily. So it's really a combination of both and as in terms of what we are looking for, we generally look for experienced operators who have access to capital and we are generally sometimes we are participating in these deals, sometimes we are just selling. So it's just really depends on the deal. Tom, you want to add to that.

Yes. The one thing I would is we talk a lot about multifamily but I think office is also something that we'll begin to look at in unique situations especially where you have a piece of property on a corridor that creates good visibility. So we are looking at several of those opportunities as well. But densification is the huge priority of ours. We've been very successful in Nordstrom as far as what we accomplished with the first phase of 266 apartments now we are moving into over 400 apartments in the second phase. So this is something we are focused. We get hooked with the right people and really try to find the best opportunities for the asset.

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

Hey, good morning, guys. So you talked a lot about the boxes that you are working on. But just maybe in terms of getting a better sense for fallout this year. I know that you talked about the $2.1 million for Toys in terms of the last range from the one, the one lease rejection and then the reduced rent on the other. But are you building in -- what sort of other buffer are you building in for potential fallout from Toys specifically? Presumably that doesn't flow through the bad debt forecast given the Toys has posted -- post addition.

No. I mean I think Christi basically the bad debt forecast which is reasonably substantial at $3.2 million, obviously that is an addition to what we were saying is going to happen in Toys. So we feel like as we know it today, as we sit here today that's appropriate. And it's slightly above what was a pretty severe year in 2017. So I'd tell you that we -- that's the $3.2 million plus the $2.1 million, I mean you are talking about $5.3 million combined. We feel like that's reasonable as we sit here. And hopefully we won't use all that. And we'll be in a better place as we get towards the end of the year. But right now that seems to be a prudent kind of thing to lay out.

And as you look to reach -- the retail lease expiration, there is 18 anchor boxes that are expiring. And of those retail anchor boxes we have four that we know we are not going to be renewing and that would be couple Office Depot, OfficeMaxs and those are already big dent to our forecast. That's not 40,000 square feet and then we've also got one the land tradition Toys R Us is also one of those four that won't be renewing and anther one is like 10,000 square foot tenants that's out there at the end of the year. So we've already factored in the tenants that we know are not going to be renewing, that's budget in and of itself.

Over and above the reserves.

Got it, okay. And then just following upon Todd's question on disposition. I know you are only -- right now you are only forecasting dispositions in Q1 but maybe if you give us a sense of sort of your approach to how are you thinking about any other dispositions this year? And then you mentioned sort of last year your dispositions were at 6.8% but now you are talking about low on the Q1 stuff. Maybe you could talk about the differences in what you are selling or is just has the market moved that much?

Sure. In terms of the first part of the question, this is similar to what I've said I think over the last couple of quarters which is we try to be pretty strategic about what we are doing and particularly how much we are really going out and saying we are going to sell in a programmatic way. One of my personal concerns around over doing that is that we are -- look, we got to get fair value for assets wherever that fair value might be. And we very clearly said we were going to be selling some assets this year, obviously we are kind of front loading the ones that we've already been working on. It doesn't mean that we wouldn't sell more assets down the road, Christie but as I think I've said before, we are not going to be selling assets if we don't believe we are getting fair value. I think it's a bit of -- when you put out a huge amount that you need to sell and you kind of everyone is tracking that it might push in a peculiar situation. So I am clearly saying that we are going to be opportunistic there. If there is a good opportunity for us to accelerate our overall business plan, we would and we are getting fair value, we would do some more. But if we felt like we are not getting fair value we would not. So that's how I feel about that. As it relate to cap rates and what we are selling this year versus what we sold over the last five quarters. These assets all have individual stories. And frankly the assets we sold last year weren't as -- they weren’t in market that we would view as tertiary and secondary. That said, obviously cap rates move around and last year there were some of the assets that we sold were smaller properties. These two are bigger properties. And so some of those smaller properties are little more liquid generally but I think it is just not comparable in terms of the asset sizes and particularly their locations. But the buyers from what we have, they love these deals, deals where they can get a little more yield but when you look at the how it fits into our portfolio in terms of the things that we are focused on in terms of growth and density et cetera, that's the difference.

It's Michael Bilerman here. Yes, I guess you spent much time and I know running the business and leasing the boxes, selling assets is important. But I am curious if you can spend some time just talking strategically how where the company is and you think about and I recognize all -- lot of retail leases have seen their share prices fall. Yours fallen as well and pretty significantly. I think back to the summer of 2016 and all news about potential transaction with the WPG. So clearly you had over time some thoughts about strategically moving the company in different positions. I guess what are you doing now with the stocks that's halved n value over last year and halved in your size and I just don't know how you sort of waiting sorted it or is there other things that you can do to emulate value.

Well, Michael, I think look, frankly, we are obviously we are a bit surprised by reaction how far the value, how much value disconnection there is particularly today. And you are correct in saying that when you look at this evolution of where we've gone over the last couple of years. This is not where we want to be. I think there are many, many things that are going into this right now. And there is obviously -- as it relates to a journalist looking at this space and people that would be putting money to work, there is a fear of elevated interest rates and where that's going. There is a massive fear in my personal opinion unwarranted in the retail space. So, look, from a strategic perspective you are right we have to be focused. And I mean incredibly focused on fighting through the operating goals that we have. And that's one thing that I think you know we will do. And we will execute. But that may not be enough and as it relates to the NAV discount, it's tremendous. And it's frustrated. There are things within that we control that we laid out, that we will do. And then the outside forces will either recognize that or not. And I think people will begin to see over time that this is a point in time where we are faced with opportunities to back tone by the way. Look, the great majority of these boxes that have become available were tenants that were no longer relevant. And it's good to close them out. But we got to go through this process. But as it relates to the strategic side, we got to be very clear that we have some objectives to meet and once meet those objectives, if the stock is not reacting, we have to do things that would make it react. And we are very, very thoughtful around that. So I mean there is part to this that I can comment on, there is part that I can't because you can't understand or know why the market does what it does. But when you look at where we are trading and apply cap rate basis right now, its well, well beyond logic.

Thank you. Our next question comes from Jeff Donnelly with Wells Fargo. Your line is now open.

Good morning, John. Maybe following on that. I think the investment community has a difficult time differentiating an A center from B center, if you will, even within the same market. Where is mall have maybe in the nearly imperfect metric of sales productivity, there isn't available metric for grocery and kind of power centers. I think in universe where there is tens of thousands of these centers in the United States, so just hard really to kind of understand that difference, you are seeing pricing begin to separate more. I guess I am curious what metrics do you think we and the investment community should be using to kind of better understand those quality gaps between assets and between companies. So sort of help narrow the NAV discount. I am just trying to think about how you sort of illuminate maybe NAV discounts for people?

I think that's -- you are right, Jeff. It's tough. Because you don't just throw out sales number or the things that I see people doing are generally, they look at demographics particularly weighted towards population and incomes. They look at ABR which is -- we all focus on that they can become a little dangerous. I mean look at some of the street retail stuff that's occurred from large ABR. So I think that's hard part. We got -- it's kind why I mentioned we got to do a much better of job of getting people out there and seeing our properties, which you can't see on a piece of paper. I mean and even going through our website and looking at the quality of the asset. Over time, I mean look, over the last five years we averaged almost 4% same store NOI growth. We grew our cash flow over the last five years in a huge way. We grew our liquidity from less than a $100 million to $400 million. Like so we are doing things that people could see and track that you wouldn't be able to do without owning quality real estate. But frankly to actually pick one thing is very difficult to do even on demographics. I mean you can have 100,000 people with a 100,000 of income but you could be the third best shopping center at that intersection. Open air shopping centers is very, very local market, right. And it's just hard to do. So, look, I think we wouldn't be able to do what we do over time without owning quality real estate. But I think the onus frankly is on all of us, the whole community to get out and see these things. And as you know, you and I talked about this often that the fact that the narrative is that literally these places are ghost towns but when you taken upon yourselves to well look at them, they aren't ghost towns, they are busy. They are vibrant. They are happening. So I think this will be a great year to track that because we will execute and we will lease up space and over time people will realize you couldn't do that if you didn't own good quality real estate.

And maybe another metric you can consider is because not many of your peers I think you really provided to is traffic. I mean coming into datacenters is something to think about but --

And, Jeff, I got to tell you from our perspective. We are going to invest and really look at how we can do a better job not only for investment community but for ourselves and our customers to really figure out where our customers coming from, I mean shoppers, where they are coming from, how long they are staying there, what they are buying. The metric data analytic side of our business has been ignored and we are not going to ignore that. So, look, I'll take a cue from Amazon and say, we are going to invest and it's going to pay off over the long term.

And just a question on I guess asset pricing. You spoke about ICSC data, using that to segment your portfolio. There is definitely been something of an 80 power centers, sentiment out there, what you believe is driving that widening cap rate trend in the sector? I mean is debt market? Is it equity market? Is it or I mean private equity market? Is it concern around rent sustainability or occupancy levels or CapEx replacing tenant? I am just curious how giving a sort GAAP out so much in the last 24 months or so?

Well, look, I think part of it Jeff is just there is lot that's happened in the last 24 months as it relates to these bankruptcies and the thing about underperforming retailers as they tend to hang on for a really long time. And then when they finally rollover, its huge news. And I for whatever reasons we live in a world today where the media loves to bash physical real estate. And so you combined that with okay there is a lot happened in the last couple -- in the last five, six quarters. People are fearful that there are not enough retailers to back fill these spaces. There is CapEx cost associated with it. So look in the fourth quarter we opened what 43 stores, we closed 30 stores. That is our business. That is always been our business but for whatever reasons people are very fixated now today. So I think there is a huge fear trade right now and they believe that the bigger, power type, power centers that have multiple, multiple big boxes are more exposed. And maybe they are but that's why when you look at -- we are very focused on what we own. And when you look at what we owned that's the minority of what we own. The majority of what we own has a grocery component, has service, has restaurants, and has entertainment. And I am just -- we just got to make sure that the investment community knows that is working. It takes time and Jeff I think people just have really underestimated how long it takes when a retailer controls the bankruptcy process and struggles that take time. And then they decide when those stores are going to back to you. Then you can begin the process of filling them. That's the problem. I mean and it's take time. But it will happen and we will execute.

And just maybe one last question. I apologize if you had already mentioned this but you attended ICSC in New York. What was your kind of takeaway in terms of your meetings, in terms of the pace maybe for store closings or rent lease given maybe not duster yourself for them just curious industry wide versus what it was in 2017? You are going to feel similar pace, improving pace; I mean how do you underwrite that?

I mean, look, ICSC New York we mentioned it but it was already a while ago, it was in December. And I think we came out of that feeling invigorated from a perspective of lots of people looking to do deals. Lots of open to buy, lots of successful physical retailers. But clouded by the old guard slowing dying off, okay. So the reality of how we came out of that. We came out of that with a plan which is what we always do. And now that plan is rolling. I mean yesterday day we were at ULTA and our portfolio review as an example. So I think we feel like that there are definitely retailers who want to take advantage of the fact that some of these good locations are going to become available. That doesn't mean there won't be more pain associated with that rollover process. And that's what you are going to see in 2018 in my personal opinion is a transition year. And it's year when you are balancing along that bottom of the turnover of this retailers, you feel it but when you look out to 2019 and 2020 and beyond and we look at the inventory levels, Jeff, and when look at the demand and we look at the fact that after eight years of 2% growth in the GDP, you are going to see and hopefully an improvement to that. Median income in the country hasn't grown for like 25 years. It's going to grow if this continues. And yes that one negative side of it, from the market perspective is rate move with that. But NOI growth moves lock stock right and so we can grow above that. So I just feel like this is a year where people are really not thinking about the long term, they are just thinking about the short term right now.

But if you just look at New York, year-over-year without question it's a tremendously better and the categories that were out there, entertainment is just moving along very strong with lot of different options. Fitness is out there, we of course always have our value players, the TJ ROSS that are doing extremely well. But I think one of the bright spots for us for sure was grocery. We are seeing sprout starting to attack Florida and lot of different activity with whole foot. So we are seeing a little more diversity in terms of our options and our ability to fill space at different square footage allotment which helps us a lot.

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

Good morning. Looking out to 2018, how much do you expect the real estate taxes grow?

Hey, Carroll, this is Dan. And look at 2018, it's -- there is not anything significant we do a pretty good job of staying on top of those. And obviously when you look at from our run rate the fourth quarter to the extent we disclose our couple of assets, you have some additional properties coming online. So I mean I think when you look at where we are at, what we've done relative to the appeal process when it's been an option to appeal, we felt like we can reduce the taxes, we do so. So I think it's pretty steady when you look at the fourth quarter going forward.

Okay. And just given where your share prices right now, how have conversations changed? Do they have about doing a buyback at this point?

Carroll, I think as it relates to that, we've been again we've been pretty transparent about how we feel about that as it relates to as we get closer and today we are getting closer and closer to being where we wanted to be on a long run basis as it relates to our balance sheet particularly leverage. And I think we are doing some things in the business right now that we feel like within the next year, we are going to be there. So as long as we feel comfortable that we are on track with that, and we wouldn't be looking at increasing our leverage in order to do something. It is clearly something that we are talking about. Its board level conversation. And when the time - if this continues and we get to that execution point that we mentioned. It's an obvious thing for us to really consider in a serious way. But we've seen people in the past throw that out there and not be committed to it. If we are going to announce that we want to be committed to that. And so that's evolving. So I'd stay tuned.

Thank you. Our next question comes from Daniel Santos with Sandler O'Neill. Your line is now open.

Hi, good morning. Just one question for me on CapEx. As you guys have re-tenanting any boxes, should we expect CapEx t remain elevated and then sort of more generally speaking given the increase of debt expense of the elevated CapEx, would you say it's more expensive so just the business generally or is this sort of an anomaly?

No. I think as it relates to CapEx on boxes if you look at the fourth quarter, our CapEx was up but it was very specific to two deals. And that again when you are our size, a couple deals can move the needle. But when you look at over the last two years, it's been pretty level. So we would think that would stay pretty level. We are going to have -- we have more of them available than we did two years ago. So just on an absolute basis we are underwriting in our capital plan to have more spend there. But the returns that we get out of that are very appropriate. So we are good with it. And can you repeat the second part of your question?

And then just so generally speaking if you guys are spending on spending more CapEx and bad debt expense, would you just say more expensive to run that your sort of quarterly run rate or is this sort of a moment in time.

I think we view it as a moment in time in the sense that we are trying to be -- this is the very beginning of the year. So we are trying to be conservative as it relates to how the year is going to evolve but from a CapEx perspective we have a very, very detailed CapEx plan that gets updated literally everyday. And it is -- we covered everything that we need to cover for 2018 and 2019 in that plan. And again it is one of the benefits of having free cash flow that we have. It's one of the benefits of having $400 million of liquidity and $80 million of debt maturing over the next two years. So we are in a very good place as it relates to that. And I think we feel like the business cost, the run rate cost is the same it has been for a while.

And I think what's important there too Daniel is we have a five year model that we run and look at the accumulation of cash flow, the spend relative to CapEx and corporate debt. When we sit down as a group, as a management team and look at spend and we sit down with the Board and walk through our five year plans. That's always incorporated. We also include like five year plan relative to parking lots were up on those particular shopping centers. So all that's going to incorporated when we look at our models.

Thank you. Our next question comes from Collin Mings with Raymond James. Your line is now open.

Hey, couple of questions for me. First, just king of going back to the focus on leverage. Can you put that in context how you're thinking about incremental redevelopment spending at this point, and then if you can just maybe put that in context of free cash flow you expect this year?

I mean as it relates to the incremental redevelopment spend, I mean you can track it and so, it is pretty clear what we are going to spend. And you can see that we still have spent going on today and we relatively to the capital plan we allotted for that. And in terms of free cash flow we continue to generate free cash flow, we are going to obviously we got little more spend budgeted in 2018 and 2019 relative to the boxes that we will be backfilling but we still are generating significant free cash flow in that -- it's going to range over the next two years most likely between $30 million and $40 million. And of course that's after spend.

Okay, so basically $30 million and $40 million of free cash flow after planned CapEx but before redevelopment, is that right?

Correct.

Okay, that's helpful. And then just going back to the -- I apologize, if I missed this but just as far as the timeline for re-leasing the office space.

We didn't give timeline on re-leasing. We were just -- we just made the comment we had a large tenant, 80,000 square feet which was $1.4 million I think. So it's a real number and we could have taken a renewal at below and what we felt like was below market, below value and we did not, that's part of our business. And we are actively engaged in conversations on the space. It's one of the few large contiguous blocks in a downtown Class A building which we believe is one of the best located by far. So we are confident we will do it. We are not ready to give a timeline, but we are actively engaged in conversations.

Okay, all right and then just one last one from me, John. You and the management team think about options and that kind of balancing act between getting leverage where you want it as well as kind of still having the FFO growth or FFO number, I mean, at what point does is it just get make more sense to just get more aggressive again going back to one of the earlier questions of how you think about additional dispositions beyond the $60 million that you've outlined and maybe just getting more aggressive in kind of resetting the slate in terms of kind of FFO run rate that you guys can build off of in context of having leverage where you want it going forward?

That's good question. And we of course appreciate the balance that we have as it relates to the desire to not only -- we are not only looking to grow our net asset value. We are looking to grow our earnings. And we realized that 2018 is taking a step back on portion of that, not an asset value portion but earnings portion this year. Again, look, I think for better or worse we treat a 100% of the equity in this business as that we always have as our equity. And we are very, very diligent around making sure that we don't get taking advantage of in-values. So that's our caution around doing a lot at once. But as I clearly said, it doesn't mean that we wouldn't take advantage of an opportunity to do a smart deal and accelerate that process. So it is a tough balance to be candid. And we are going to have seen how this evolves over this year. And we are in the second month of it. So we are going to see how it evolves. But we want to make sure that the community, investment community understands that we value this equity. We value their investment and we are trying to protect it as well as grow it. And we are going to do the best we can as it relate that balance. So I think that's what I can say about that right now.

Thank you. Our next question comes from Chris Lucas with Capital One Securities. Your line is now open.

Good morning, guys. Just a couple of points of clarification for me if you could. Is the office asset included in your same store NOI guidance number? I just want to make sure I understand whether $1.4 million is in or out.

It is not in the same store guidance and it has not been in same store pool since we started providing same store guidance. We laid out footnote to describe the assets that are out. In footnote one of central page you will see that 30 South Meridian is listed.

Okay. And then thanks Dan. And then as it relates to the guidance, maybe so I just understand a little bit better, can you sort of give me if you can the sort of contributors to sort of deposits on the negative as it relates to the guidance. In other words, I know you got better contractual rent commencement that will add but you also have tenant fallout which is the bad debt non renewals and probably some strategic leasing, I am just trying to understand sort of how the components run together to get you to the 1% to 1.5%.

Chris, when you look at the fourth quarter when we are guiding and just basically sending economic occupancy was kind of decelerating into the fourth quarter and 1.5% is right in the middle of our guidance range for the year. And then you look out to next year, I think that the top end being 1.5% when you consider disruption relative to Toys R Us and then when you look out after the first and second quarter once you get into the third and fourth quarter, obviously your comparative year-over-year boxes that we had that were filed for bankruptcy are going to be out of both quarter. So I think you are going to see the first couple quarters at a slightly lower level and as we come out of that with some additional leasing and then year-over-year comps aren't as difficult against. You will see that number grow up. And then as John mentioned as we get this box leased with this box search initiative, as we grow into 2019 we hope that economic occupancy percentage will continue to give us a lift in addition to the rent bump that build into the leases.

Okay. And then my last question. I know you guys just bumped dividend 5% in November. But I also noticed in your 1099 that you had approximately 24% of the dividend was return on capital. I don't know if there is specific issue in 2017 taxable income that drove that sort of return of capital component but just curious as you guys think forward on your dividend policy, whether you are thinking about trying to -- what drives that? Is it trying to get to toward more conservative pay out policy so that you are meeting sort of more towards your taxable moment or is it something that is going to be driven more by the cash flow, underlying cash flow growth or FFO per share growth?

I think historically, Chris, first of all it is all the above. When you are looking at where you are in your dividend. I'd say most importantly for us is then to continue to return capital to shareholders within reason of our business plan. And over the last few years and if you look back over the last five years, we've increased our dividend fairly significantly through free cash flow. And as we looked at the business plan for 2017, taking into consideration everything we knew available to us at that time, it was appropriate to continue to raise the dividend by 5%. And particularly when you are in a position where you are well covered, we feel like we are well covered there. And when the value, we talked about it little earlier in Michael's question, when you have a significant disconnect between the value of your assets and your public price. One of the things that we do control is the cash flow coming out of the business and returning it to shareholders. So over a longer period of time people will look at the total return not a stock price in a vacuum. But that's also part of the analysis but overall we want to be in a comfortable place that we feel that we can effectively operate our business, pay that dividend, hopefully grow that dividend and while we are growing cash flow. So it's kind of mixture of all that. But again you had taken on a quarter-by-quarter basis as you analyze that.

Our next question from Linda Tsai with Barclays. Your line is now open.

Hi, good morning. In light of some of the anchor movement, do you have view for your anchor occupancy at your end?

Yes. I think when you look at yearend we have -- our lease percentage is projected to be 94.5 to 95.5. And we are going to have a spread, that the spread between economies occupied and leased is going to be a little greater as we work through some of these boxes and get them released. That's probably going to -- right now it is about couple of hundred basis points as we look out the year end and we projected that to be about 280 basis points. So there is going to be definitely some activity from the leasing that will filter into 2019.

Okay. And then your renewal spread was 5% in 4Q and 7% over the trailing four quarters. What's your view on renewal rate in 2018?

As it relates specifically to the spread, the difference between Q4 and Q3 much of that is driven by the anchor renewals, that the non option -- I am sorry the option anchor renewals that are at a fixed kind of lower spread than we would get in quarter would last. For example, I think in the fourth quarter we had 16 anchors renew and in the third quarter we had 9 anchors renew. Actually if you look back at 2016, the fourth quarter spread was about 5%. So this is not an unusual or kind of run rate issue. But again I mean its quarter-by-quarter. But if you look at it over the long term we generally have been producing pretty good renewal spread and in particular when you look at GAAP renewal spreads versus our cash spreads because we are extremely focused on, in the small shop side of our business getting significant rent bumps annually. So looking out in the future, I don't think it feels tremendously different that has in the last year, but it's very subject to a particular quarter and particular anchor. As a matter of fact, I mean, even in the fourth quarter excluding one anchor renewal would have move to 6% from 5%. So it's sensitive number in that regard.

Thanks. And then just the final one. Any general color on how CIs are trending and what discussions are like with them these days?

CIs as I think we mentioned little earlier, CIs are generally been stable and we don't see a tremendous change there. We don't -- that doesn't ebb and flow like it does maybe in multifamily based on incentives. Our business is pretty steady as it relates to the cost to put these tenants in. As it relates what we are willing to give and what they want. Certain tenants cost more than others and generally we are all about what our return on that cost is. And we have significant hurdles, internal hurdles as it relates to those returns. And I think you know Linda, I mean we go to great -- this isn't just us saying, oh, well, it cost 40 bucks and you need to get x return on that 40. This is much deeper than that. This is us looking at NPVs and IRRs, credit quality, yields on that credit quality. We have a pretty intense system around it. So it is wise if we done well there. We don't think that's going to change just because we happened to have a few more boxes this year than we did last year to fill.

I am showing no further questions. I'd now like to hand the call back to Mr. John Kite for any further remarks.

I just want to say thank you to everyone for all their time and thank you for your interest in the company. And I also want to say we are going to execute on the goals that we laid out and we look forward to talking to you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.