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Kite Realty Group Trust (NYSE:KRG)

Q3 2009 Earnings Call

November 6, 2009 1:00 pm ET

Executives

Adam Chavers – Director of IR

John Kite – Chairman and CEO

Tom McGowan – President and COO

Dan Sink – EVP and CFO

Analysts

Todd Thomas – Keybanc Capital Markets

Quentin Velleley - Citigroup

Nathan Isbee – Stifel Nicolaus

Paul Adornato – BMO Capital Markets

Rich Moore – RBC Capital Markets

Operator

Welcome to the third quarter 2009 Kite Realty Group Trust earnings conference call. (Operator instructions) I would now like to turn the call over to Adam Chavers, Director of Investor Relations. Please proceed, sir.

Adam Chavers

Thank you. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call Kim Holland at 317-578-5151 and she will fax or e-mail you a copy. Our September 30, 2009 supplemental financial package was made available yesterday on the Corporate Profile page in the Investor Relations section of the company's website. The filing has also been made with the SEC in the company's most recent Form 8-K.

The company's remarks today will include certain forward-looking statements that are not historical facts and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the company to differ materially from historical results or from any results expressed or implied by such forward-looking statements, including without limitation, national and local economics, business, real estate and other market conditions; the competitive environment in which the company operates; financing risks, property management risks; the level and volatility of interest rates; financial stability of tenants; the company's ability to maintain its status as a REIT for federal income tax purposes; acquisition, disposition, development and joint venture risks; potential environmental and other liabilities; and other factors affecting the real estate industry in general.

The company refers you to the documents filed by the company from time to time with the Securities and Exchange Commission which discusses these and other factors that could adversely affect the company's results. On the call today from the company are John Kite, Tom McGowan and Dan Sink.

Now, I would like to turn the call over to John Kite. John?

John Kite

Thanks, Adam. Good afternoon and thank you for joining us today. FFO for the quarter was $0.04 per share which is inclusive of an $0.08 non-cash impairment charge taken on Galleria Plaza located in Dallas, Texas which is subject to an underlying ground lease. Excluding the non-cash impairment FFO of $0.12 per share met our expectations and consensus estimates.

The impairment was deemed necessary when it became clear that our efforts to renegotiate the ground rent to a level that reflects current market conditions would be unsuccessful. We plan to turn our leasehold interest and control of the improvements over to the ground lessor which will save us several hundred thousand in ground rents and non-recoverable expenses next year.

We ended the quarter with $102 million cash and availability under our credit line. We recently paid off our final 2009 debt maturity and as a reminder we have refinanced and extended over $230 million of debt in the last 12 months. Our 2010 debt maturities are manageable at approximately $90 million and almost half of this amount was attributed to our construction loans at Cobblestone Plaza in Pembroke Pines, Florida and South Elgin Commons in Chicago. Dan and the capital markets team have been engaged in refinancing all of these maturities over the last several months.

Over the past two years our focus has been to put the company in a position to weather what has been an unprecedented financial storm. Going forward we will maintain our focus on liquidity and strengthening our balance sheet. As we emphasized on the last call our entire company is devoted to a successful and ongoing leasing effort. Our percent leased is slightly up quarter-over-quarter and velocity remains strong as evidenced by the fact we are negotiating leases and LOI’s on four of our five vacant boxes representing approximately 240,000 square feet.

Although the environment is still challenging, retailers are actively pursuing Class A real estate in order to upgrade their locations and position themselves for a recovery on the horizon.

I would like to take a moment to highlight how our leasing efforts over the last five years have impacted our list of top-ten tenants. In our first financial supplement five years ago our top ten tenants showed commercial tenants in spots one and two including Circuit City, Ultimate Electronics as well as Kmart and totaled nearly 1/3 of our scheduled base rent. Today our top four tenants are public supermarkets accounting for only 3.3% of base rents, followed by PetSmart, Lowes Home Improvement and Dicks Sporting Goods.

There are only two commercial tenants in the top ten, both related to the state of Indiana, and the entire top-ten list totals less than ¼ of our annualized base rents. This is a striking change from five years ago and our leasing efforts today are influenced by a constant emphasis on diversification and tenant quality.

From a development perspective our focus remains to complete to fully lease our two ongoing projects; Cobblestone Plaza and Eddy Street Commons at Notre Dame. Both projects are in the early stages of opening and will begin generating meaningful NOI in 2010.

Regarding the six properties in our shadow pipeline, vertical construction will not begin until we reach appropriate levels of pre-leasing. We will maintain this conservative stance but it is noteworthy that we are seeing improved tenant interest in these projects as 2009 comes to an end.

In closing, we believe we have made the tough decisions and taken the proper actions to survive the market crisis of late 2008 and 2009. At the same time we have and will continue to focus on positioning the company to take advantage of the opportunities that will present themselves over the next 2-3 years.

Tom?

Tom McGowan

Thank you. As we discussed in detail on the last call leasing productivity remains a critical component for our company. We have solid results to report again this quarter.

We executed 14 new leases for approximately 77,000 square feet with negative cash rent spreads of 2.8% due to ongoing market pressures. In addition, we signed 11 renewals comprised of 53,000 square feet which produced positive cash rent spreads of 0.5%. Included in the total leasing activity were four deals over 10,000 square feet. The combined cash spread of these transactions was positive 2.6%.

The most significant transaction was a new 45,000 square foot lease signed with Dicks Sporting Goods as a replacement tenant for Circuit City at International Speedway Square in Daytona, Florida. This deal requires us to expand the old Circuit City space by 13,000 square feet of new GOA and highlights the opportunity for well capitalized landlords to execute on deals at appropriate return levels.

Due to the timing of a select number of lease negotiations, our overall production for the third quarter was down slightly compared to the second quarter. However, we are currently negotiating 25 new and renewal leases for approximately 200,000 square feet that we are targeting for signature before year-end. We believe the fourth quarter will allow us to increase our lease percentage for a third consecutive quarter.

Turning to same store NOI we generated a 2.1% decline for the quarter ended September 30 compared to the same period in 2008. The majority of the reduction continued to be attributable to the Circuit City and Linen N Things bankruptcies. The vacant boxes relating to these tenants account for substantially all of the minimum rent variance year-over-year. It is important to note that the quarter-to-quarter sequential improvement in same store relates to a reduction in tax rates at a few of our Indiana properties.

Year-to-date same store is down 2.7% and we anticipate finishing the year near the midpoint of our guidance range of negative 2% to negative 4%. We are working aggressively to complete our current development pipeline. We have two projects underway with a combined total cost of $82 million. $68 million or 83% of the total projected costs for these two developments have been incurred as of the end of the quarter leaving only $14 million of spend.

The first project, Cobblestone Plaza, in Pembroke Pines, Florida saw initial tenant openings in May of this year and more recently Party City opened. In addition we are in the final lease negotiations with a replacement anchor that will significantly enhance our final lease up efforts at this development.

Eddy Street Commons at Notre Dame continues to lease up in an initial group of tenants opens in time for the football season and the school year. The office and retail components are each approximately 72% leased including deals under negotiation. The positive response to the design, scope and mixed use development has been very well received. Tremendous effort is being expended to fully stabilize this asset.

Our re-development pipeline consists of five properties totaling approximately 495,000 square feet. Our preliminary project costs are estimated to be $11.5 million. We are making meaningful progress on these projects and are currently in negotiation with new anchor tenants for three of the five projects. Each of the anchors will enhance the projects and will provide additional clarity on the scope and cost of each redevelopment.

Dan will now summarize our other operating results.

Dan Sink

Good afternoon. FFO was $0.04 per diluted share for the quarter. Excluding the non-cash impairment FFO for the quarter met our expectations of $0.12 per diluted share. This compares to $0.32 per share in Q3 of 2008. This year-over-year decrease in FFO per share primarily relates to 28.8 million share equity issuance, reduced construction activity and reduced land sales.

The non-cash impairment charge was associated with our Galleria Plaza property in Dallas, Texas. This asset is a 44,000 square foot center with a 32,000 square foot anchor box that is currently vacant. The negative cash flow for this center is approximately $700,000 including an annual ground lease payment of $594,000 and non-recoverable real estate taxes. The current ground lease rate was set about eight years ago when the market rents for the box space were near $30 per square foot. We attempted to negotiate with the ground lessor to establish a new ground rent that was reflective of the current market rental rates.

However, after discussions with multiple potential box tenants regarding rent and required capital and unsuccessful attempts to reach agreement with the ground lessor, we determined the most prudent decision was to discontinue our financial support of this property. As of September 30 we have impaired the asset to a value of zero. Additionally, our intent is to turn the operations of the property over to the ground lessor in the fourth quarter.

There are three items regarding this impairment I want to emphasize. Number one, there is no mortgage on the property. Two, the impairment has no effect on our liquidity Finally, the ground lease obligation is not guaranteed by the REIT. In addition, we consolidated Center Associates into our financial statement as the risk of loss and control shifted to KRG. This required us to write the assets and liabilities to fair value which resulted in a gain of $1.6 million and our 60% share was approximately $980,000. We excluded this non-cash gain from FFO.

Turning to a few specific items in the income statement that I would like to cover, our fixed charge coverage was 2.2 times as calculated on Page 12 of our supplemental. Construction and service fee margin before tax for the three and nine months ended September 30th was approximately $302,000 and $1.6 million respectively and was in line with our expectations. We continue to evaluate our construction and service fee expenses as related revenue declines and have been successful in maintaining a solid 13% margin before tax.

Our NOI to revenue continued its upward trend to 69.5% even as other property related revenue declined over the last several quarters. The overall bad debt expense for the quarter was approximately $370,000 and was consistent with our expectations. Our G&A expense decreased $159,000 from the prior quarter reflecting our focus on cost control and the timing of public company costs. We anticipate being near the bottom end of our previously provided annual guidance range of $5.7-6.1 million and finally other property related revenue includes approximately $600,000 from the sale of land at our Beacon Hill property.

As of today we have refinanced, extended or retired our 2009 debt maturities and are diligently working on our 2010 maturities with our lenders. We have listed each loan with a 2010 maturity date on page 17 of our supplemental. Our objective is to refinance, extend or retire all five loans near the end of 2009 and we will update you on our progress. As a reminder we have no maturing CMBS loans in 2010.

At the end of the quarter we had approximately $102 million of cash and available credit. We will continue to focus on increasing our liquidity and generating cash by selling raw land parcels, out lots and selected operating assets. These focus areas will not only produce additional liquidity but will also bring our debt to EBITDA ratio to a more conservative level.

Consistent with our internal practice we monitor and evaluate our assets for impairment at least on a quarterly basis. After our most recent review none of our properties or land which we intend to develop other than Galleria Plaza required impairment charges as of September 30th. Excluding the impairment charge of $0.08 per share we are reaffirming our guidance in annual earnings and FFO for the year to a range of $0.57 to $0.61 per diluted common share.

We thank you for participating in today’s conference call. Operator please open the line to questions.

Question and Answer Session

Operator

(Operator instructions) The first question comes from the line of Todd Thomas – Keybanc Capital Markets.

Todd Thomas – Keybanc Capital Markets

Can you provide some detail around the five floating rate loans you are currently negotiating that mature in 2010? What do the lenders want in consideration for extending or fixing these loans?

Dan Sink

I think as we progress through these we are right now in the appraisal phase on a couple of the loans but I can kind of go through. Ridge Plaza which we talked about putting a 7-year loan on right now the lenders are looking at LIBOR plus 325 and a fixed rate of 6.5-6.75% is what we are looking at to swap out that lease for a 7-year period. I think in general if you look at Ridge Plaza and South Elgin they are looking at 70-75% LTV and a majority of that is with in-place NOI so we are having a lot of discussions. We have a couple of letters of intent and we are moving down and progressing well on finalizing particularly Cobblestone in the next several weeks. We should have some more clarity on those.

I think as we have talked about in the past, our objective is to negotiate these out, stagger the maturities. In 2013, 2014 and 2015 we have very little debt maturing. We want to push these particular five loans out into those years so that we stagger the maturities and end up with a more balanced maturity schedule.

Todd Thomas – Keybanc Capital Markets

River’s Edge or Ridge Plaza?

Dan Sink

Ridge Plaza we anticipate placing debt on that on a 7-year loan, taking the proceeds from that loan and paying off Tarpon Springs. So I think when you look at that I am just giving you some color. Really at this point if we are successful completing the Ridge Plaza financing we will use those proceeds to pay off Tarpon Springs which will again take us down to four expiring loans versus the five.

Todd Thomas – Keybanc Capital Markets

Are you expecting to have to pay down any of the loans separately I guess with equity?

Dan Sink

I think we are anticipating that as we put together our capital plan. Even back when we raised equity in May we anticipated paying down anywhere from 10-25% of the loans as additional equity to entice the banks to move the maturity dates out. I think if you look at South Elgin we right now have a term sheet that requires about a 14% equity requirement which would get the extension out to 2013. The rate on that particular loan right now is all in rate of 5.25. It has a LIBOR plus 325 with basically a 2% floor. We are anticipating in our objective to keep it around 10% but we are anticipating on our capital plan to be between 10-25%.

Todd Thomas – Keybanc Capital Markets

Moving over to your shadow development pipeline. Can you update us on your plans to reduce the cost of scope overall? Are any leases signed at all with any of the tenants that are noted on the margin of that page?

John Kite

There are leases signed, in particular we have mentioned many times at the Delray Beach project we have a lease signed with Publix supermarkets and Frank Theaters. All the other ones mentioned we have letters of intent and in the case of the hardware store we have a lease signed with a hardware store.

The bottom line is there is activity on each deal and as I mentioned in the prepared remarks activity is actually picking up which I think is an indication the tenants have been very focused, as you can see by the square footage that we and many other people have been leasing over the last few quarters. The tenant’s focus has been to backfill existing vacancy in centers because obviously they can open their stores quicker. I think that has probably not fully run its course but is maybe towards the end of that game. That is probably why we are seeing tenants show renewed interest in development deals that would open say in 2011 or 2012.

As far as reducing the cost, again the costs you see reflected now is our projected cost after we had assumed we would have anchor sales. Any other cost reduction in there would be through cheaper construction costs and Tom can elaborate on that if he wants.

Tom McGowan

One point, each and every one of these projects are fully entitled. We are going to continue to look at each and every site plan to make sure they are as efficient as possible. There is going to be an ongoing process of making sure we get the right tenancy and we get the right site plan put together and keep the costs as low as possible.

Todd Thomas – Keybanc Capital Markets

At Cobblestone Plaza you mentioned you are in negotiations with a new anchor tenant there to replace Whole Foods. What do the rents look like and are there any expected change on the yield for the project?

Tom McGowan

It is a little premature to say what the rent is going to be because we haven’t completed the leases we are negotiating. Suffice it to say the per square foot rents are generally in the same range and then we are still figuring out the scope and size of the deal. It won’t be a material difference.

John Kite

I guess the great part of the story ties back to the fact that once we get the anchor tenant executed it is going to allow us to get the balance of the shops leased, get the center stabilized in a much quicker fashion. Just getting the anchor executed as soon as that occurs it will take us to around 75% leased and we are going to be able to move quickly beyond that. Again, we have to get it done so we still have some negotiating to do to get it done.

Operator

The next question comes from the line of Quentin Velleley – Citigroup.

Quentin Velleley - Citigroup

You spoke earlier about your desire to continue to de-lever the company. You also spoke about some of the acquisition opportunities that you might be seeing out there. I am just wondering how you think about the balance between de-levering the company and some of the acquisition opportunities you might be seeing. Also considering you have got some of the potential funding for the shadow pipeline as well.

John Kite

As far as the first question relative to balancing, de-levering and opportunity, that is obviously something we are thinking about a lot and trying to get a game plan together on how we can do that. As we sit today we feel like we are in a very good position as it relates to our liquidity level and our ability to move through the next few years. In terms of what we see in acquisitions and how that impacts that a lot of it is going to depend on where cap rates settle out. Some of that depends on where our stock price is. There is a process involved in getting to that point.

Also how much of the timing of remaining developments and when they come on line. There are probably two or three major factors but the bottom line is we think it is early as it relates to opportunities. I think the process of seeing good deals that may trade at higher cap rates probably has some time to play out because the debt market is such that people are hanging on at this point and obviously with LIBOR at less than one you can hang on longer. As that changes I think that will create opportunities in itself.

Bottom line, there is no magic answer to that question. A lot of it will depend on the things that we do in the blocking and tackling, how that impacts our stock price and where cap rates go.

Quentin Velleley - Citigroup

Are you getting any interest from potential joint venture partners? I am just wondering whether [inaudible] source of capital given at the moment yours is relatively…

John Kite

I think as it relates to joint venture partners I think a lot of institutional capital is beginning to see the IRR’s people were talking about six months ago probably aren’t realistic so they are adjusting what their expectations are. I think their other investments are probably doing a little bit better than they were six months ago so there seems to be a greater desire for institutional capital to be in real estate. I think as you have seen recently there have been some deals occur that the IRRs would be lucky to be double digit IRRs. That probably tells you that there is an adjustment.

We are in various levels, we always are in conversation with capital and it comes down to what is the most cost effective capital whether it be in partnering or whether it be on our own and that is part of the process of analyzing where things go. There is no question that is something we would like to continue to pursue and have access to so that we can diversify our capital.

Quentin Velleley - Citigroup

When you spoke about the land sales and the out lot sales can you give us some understand of what level of sales you are hoping for in the next 12 months?

John Kite

I think in terms of the out lot sales we continue to have 2-4 out lot sales a year. That has obviously reduced from where it was but part of that was by our own design to have less of our FFO be transactional income. If you just look at this quarter as it relates to transactional income it was half of what historically per quarter transactional income has been. Less than half. I think what we are trying to do there is increase the quality of our earnings over time. You will see us continue to move in that direction first of all.

Because we have multiple, multiple out parcels and because some users require to purchase those out parcels we are always going to have some level of that activity. As it relates to larger land parcel sales we believe we will have some in 2010. We know we have a particular transaction that a tenant who is under a ground lease has a right to acquire that parcel from us.

Again, as part of this idea of lowering our total cost of our projects we are very engaged in looking to sell land to certain anchor tenants. Some of our deals just kind of set up that way where we have, for example, Super Wal-Mart in Apex in Raleigh just opened and is doing very well. Then we have a development parcel adjacent to it. That may end up being a large land sale so another large box. Those things are possible as well.

Operator

The next question comes from the line of Nathan Isbee – Stifel Nicolaus.

Nathan Isbee – Stifel Nicolaus

Getting back to the land sales can you talk a little bit about what your pricing expectations are and the fact you haven’t taken write downs in that area is it safe to say comfortably you will be made whole?

John Kite

In terms of pricing expectations on land sale, looking at selling residual parcels and/or anchor tenant parcels is probably something totally different than trying to value land on its own because we are talking about selling land that is conjunction with a development so I think those are two different things.

As it relates to that issue about our comfort with land, as Dan pointed out, quarterly we go through an intensive process as it relates to impairments across the board. As we pointed out, of the six deals we have in the shadow pipeline we have development activity in each one of those deals. So we are obviously looking to the discounted cash flow of those future developments versus just the raw land value.

If we were to determine there wasn’t a go-forward project then we would look to the raw land value. At this point that is not the case or we haven’t determined to be the case on those deals. In terms of pricing expectations, we are pretty comfortable our overall land basis and all of our development deals and our land held for development from the original purchase price is less than $6 per foot so we are not tremendously worried about that but then again, it is difficult to say what land is worth in a vacuum much like it was difficult six months ago for people to figure out how to mark banks. So that is kind of the situation.

Nathan Isbee – Stifel Nicolaus

This anchor replacement at Cobblestone is that another grocer or is that a different type of retailer?

John Kite

We are a little early to say what it is but it is pretty similar to what we had before. That is what we are working on.

Tom McGowan

It is going to be somebody who is going to drive occupancy. That is one thing we can tell you for sure.

Dan Sink

I hope the leasing guys are listening. That is the second time Tom said that.

Nathan Isbee – Stifel Nicolaus

You addressed one of the five junior box anchors. What is going on with the other four? Any other progress there?

John Kite

As it relates to the other four, we are actually making very, very good progress. We are at Coral Springs, Cedar Hill, Market Street and all of those are quality negotiations that are ongoing. We are not going to give a specific timeframe of when we see those leases getting executed but we are totally engaged in discussions, letters of intent and actually in certain situations starting lease documents. We feel very good about the fact we are four out of five. We would feel better if we are five for five but we do have one that we still need to get some work done on.

If you take a look at what we talked about moving forward in the fourth quarter and knowing there is about 200,000 square feet of space out there being negotiated and then knowing some of these can continue to move forward we hope to make some nice strides in the fourth quarter and the first quarter of next year.

Operator

The next question comes from the line of Paul Adornato – BMO Capital Markets.

Paul Adornato – BMO Capital Markets

Back to the land, I was wondering if you could walk us through how you evaluate the land held for development for impairment. What is the threshold and your timeframe for making that determination?

Dan Sink

The timeframe it is a matter of going through the numbers and I think the timeframe is each time we review the land held for development as well as any other asset if we don’t feel we can recover the balance sheet amount on a discounted cash flow basis with a sale into that period at a cap rate that is obviously looked at in each market and analyzed and determined to be on a conservative basis. For us right now what we are doing is we are looking at the rents that we are discussing with tenants in our portfolio. We are imputing those rents on the developments. We have laid out the developments. We know what the square footage is going to be in most cases and we are still pursuing development.

As John mentioned we aren’t in the process of starting the developments until we have the appropriate leasing specifically in the small shops as well financing in place. I think the impairment calculation and impairment discussions are a monthly process here and we continue to refine the development performance and the discounted cash flows related thereto as we go through that process.

Paul Adornato – BMO Capital Markets

Looking at the leasing environment we are hearing a lot of the other retail REITs talking about tenants looking to trade up in this environment. Even though it is a zero sum game or arguably much worse than that, what leases are being signed are trade ups and right sizing of retail space. Is that a similar dynamic you are seeing in your properties and markets?

John Kite

Like I was saying you have a situation where there has been a great deal of square footage put back on the market that wasn’t available and when that happens you are going to see quality retailers assess their positions in that local market. Obviously if they can upgrade they are going to do that. Even if they have a remaining term. Even if they have to write off the costs associated with that. I think it is just part of the situation where people are going to look to do that.

I will also say as it relates to the anchors and the boxes what I said earlier, you have a situation where I think six months ago people were talking about there is thousands and thousands and thousands of dark boxes. Ultimately only a small percentage of those were really high quality and those are the ones that are getting filled. I think we have really strong properties. If you look at our anchor situation we are like 97% leased in our anchors. So it is a process of survival of the fittest and it is a process of the best real estate wins. I think yes those are all true but that will run its course. I think you will start to see next year those opportunities won’t be as many and that’s when I think you will see these anchors want to do deals in new developments which again, that means they are not going to open those stores for a few more years. So that kind of seems to make sense with the cycle we are in.

Tom McGowan

The second part of that question you asked about will some of these right size. Yes, of course some will right size. We have been through that process already and worked through it efficiently and come up with plans to almost make it an advantage versus a disadvantage for the tenant.

Operator

The next question comes from the line of Rich Moore – RBC Capital Markets

Rich Moore – RBC Capital Markets

I am curious, I am imagining you can’t get any of the shadow open in 2010 but should we think about 2011? Is that realistic to opening any of these projects?

John Kite

It is possible. Again it is going to depend on the timing of when we are comfortable from a pre-leasing perspective. If we are talking 2011 you are talking very minimal NOI because you would be opening very late in the year and frankly a lot happens then with dark periods with retailers. So even if you are going to try and open it in November or December you may get to a situation where they don’t want the store until February. I think that is not really likely but I also don’t think that is the major issue. The major issue for us is getting the right tenancy and making sure we are not taking too much risk in the shops.

That is really the primary difference today versus three years ago is three years ago you saw people take a fair amount of risk with their shops. That is just not something we are willing to do today.

Tom McGowan

The only thing I would add to that and this is on a positive note. There are anchors executing inside this pipeline. John talked about the fact we have true, defined, executed anchor deals within that pipeline. We have anchors from a slot perspective who are willing to look at 2011 but the bottom line is as John said whether they want it slotted or not and we are not ready we are not going to do that. There is opportunity but we are going to be conservative in terms of describing whether that is a possibility or not.

Rich Moore – RBC Capital Markets

Would you worry you could lose some of these guys that you have letters of intent or signed leases with? I guess that is a possibility.

John Kite

That is always a possibility. We haven’t to date. In fact, you have to realize as all of this was unfolding I don’t think retailers were extremely eager to take new positions like that. So they kind of worked hand in hand.

Tom McGowan

The only other advantage that plays to our side of the table without using names is you have people out there that were doing 120 stores a year and now may be doing 20 and by the time we are ready hopefully that number starts to be 30-50. So our timing could potentially correspond in line with the growth of some of these people that we are working with.

Rich Moore – RBC Capital Markets

On the Galleria, help me understand how that exactly works. Are you able to hand this back to the ground lessor kind of like a mortgage? Like you would do with a mortgage of a bank and he just takes it and that is the end of it or is there some sort of liability that you have with having to bring it to a certain condition or what have you?

John Kite

No the bottom line is the ground lease is fairly simple and as Dan said this is a ground lease with the entity so depending on the timing of when it happens there may be some remaining monies or whatever but the bottom line is yes simply we give it back to them. They take ownership of the building and we are relieved of the obligations of the lease. It is just that simple.

By the way, this is a situation we have been working on for a long time to try and rectify and we wish we could have rectified but unfortunately the land lease or the lessor just wasn’t willing to negotiate the rent we needed to make the deal work to tie into current market rents. So it got to the point where it was functionally not possible for us to keep going. Obviously it is cash flow positive for us by giving it back.

Tom McGowan

All in all we are very fortunate we have the ability to do what we are doing.

Rich Moore – RBC Capital Markets

So now it is just his shopping center?

John Kite

Yes.

Rich Moore – RBC Capital Markets

On Eddy Street the 72% leased any update on that? That is the update I’m sure but any thoughts about where that is going?

Tom McGowan

I am glad you brought it up. That 72% is basically a combination of office and retail combined. We are basically through the primary components of the office space. We have one level of three levels that are still available. From a retail standpoint I think the biggest advantage for us is the fact this project is up. It is something completely different to South Bend. Completely different to the University of Notre Dame. If you get a chance to see it, it is an incredible project. What we are hoping is now it is up and running and football season is upon us we can really start picking up some momentum. We have already picked up about 5% within the last couple of weeks. We are just going to keep driving this. I think we can get this stabilized in a relatively short period of time. We have a couple of big pieces, a couple of big components which need to get done. Having it open is the key at this point.

Rich Moore – RBC Capital Markets

So the retail leasing is roughly what percent?

Tom McGowan

Really we are at exactly the same spot. 70% at retail and 70% at office. It worked out that way. We are going to see that retail percentage grow here fairly dramatically in a reasonable period of time.

Rich Moore – RBC Capital Markets

On the hotel, is that starting?

John Kite

The limited service hotel has started. As we pointed out it is a 50/50 deal. So this is an unconsolidated deal. I think it opens in the spring.

Tom McGowan

It will open in the fall of next year. Very simple, out of the box 119 room limited service hotel. We are in very good shape.

Operator

At this time we have no further questions in the queue. I would like to turn the call back over to Mr. John Kite for any closing remarks.

John Kite

Thank you. We appreciate everyone’s time today. We look forward to seeing you soon.

Operator

Thank you for your participation in today’s conference. This now concludes the presentation. You may now disconnect. Have a great day.

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Source: Kite Realty Group Trust Q3 2009 Earnings Call Transcript
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