BEHIND THE NEWS: Kite's quest to fix Glendale reverberates on Wall Street

March 27, 2006

N o r t h - s i d e r s aren't alone in eagerly awaiting Glendale Mall's redevelopment plan. Wall Street is watching what happens next, too.

Glendale is the largest of the 40 retail properties Indianapolis-based Kite Realty Group Trust operates. The North Keystone Avenue shopping mall collects annual rent of $2.5 million, representing more than 4 percent of the company's total.

So what Kite will do with the ailing, 724,000-square-foot property was topic No. 1 last month when company executives held a conference call with analysts.

Repeated questions from persistent analysts yielded few facts, though company officials did say redevelopment might occur in 2007 and cost $18 million to $20 million.

If the plan comes together, they say the property would retain its retail focus. While retail brokers say the site is best-suited for big-box retailers, like Target or a large-format bookstore, company officials aren't showing their cards.

"We are pursuing a specific plan on Glendale. We have increased our momentum as it relates to pursuing the development opportunity that we have in front of us," Chief Operating Officer Tom McGowan said during the call.

At the same time, he said, "There are a tremendous amount of obstacles that we'll need to overcome to be successful."

All of which creates uncertainty for investors in publicly traded Kite. Glendale's occupancy has fallen to 81 percent-the lowest of the company's properties-and may slide further if it takes space out of service to clear the way for redevelopment.

Analysts say that uncertainty is a big reason the real estate investment trust has provided unusually wide guidance for 2006 financial results. It says funds from operations-a key measure of REIT performance-may range from $1.13 a share to $1.20 a share.

"The sooner the redevelopment takes place," the more 2006 results will suffer because of space going off line, David Fick, an analyst with Stifel Nicolaus in Baltimore, said in a report. "This is a good example of 'short-term pain for longerterm gain/value creation.'"

Redevelopment would mark Kite's second run at trying to revive the property. Six years ago, the company spent more than $40 million to buy and revitalize Glendale, adding a Lowe's home improvement store, a Kerasotes movie theater and an Indianapolis-Marion County Public Library branch.

But performance has been disappointing, fueling the departure of a string of marquee retailers, including Old Navy, Stein Mart and Casual Corner. Retail revenue fell $470,000, or 16 percent, over the past year.

Veteran retail broker Mark Perlstein said Glendale's destination retailers, such as Lowe's and the movie theater, have fared well. But traditional mall shops have struggled, in part because Kite was never able to find a strong retail anchor for the south end to complement L.S. Ayres on the north.

"[Glendale] is somewhat of a tweener location," said Perlstein, a partner with the Linder Co., noting competition to the north from both The Fashion Mall at Keystone at the Crossing and from Castleton Square Mall.

Still, he said, "the land itself is A-plus real estate," surrounded by neighborhoods with high incomes and high population density. He said it would make sense to open retailers to the street, moving away from the enclosed mall format. But the catch is that would require extensive demolition that would be both costly and difficult to negotiate because of existing leases.

Kite acknowledged those challenges in a filing with the Securities and Exchange Commission this month.

"If we decide to redevelop the property, we may have to obtain the consent of various tenants in order to do so and various tenants may have the right to withdraw from Glendale Mall if the redevelopment project is not completed on time," the filing said.

"In addition, we will bear the risks of construction delays and cost overruns that may increase project costs and make a project uneconomical."

Adams poised to pay $90,000

Former Conseco Inc. Chief Accounting Officer James Adams has agreed to pay $90,000 to settle a Securities and Exchange Commission lawsuit accusing him of securities fraud.

Full terms of the settlement have not yet been filed in court. But the $90,000 payment was disclosed March 13 in a filing in Adams' personal bankruptcy case. He plans to come up with the money through a mortgage on his home, the filing said.

The SEC two years ago sued Adams and former Conseco Chief Financial Officer Rollin Dick, charging they masked the company's burgeoning financial problems in 1999 by overstating profit by $367 million.

IBJ reported in January that Dick also has agreed to settle, but the SEC has yet to file papers revealing terms of his deal. In a March 14 filing, commission staff in Chicago said both Adams and Dick had signed their settlements, which had been forwarded to Washington, D.C., for approval.
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