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Kite Realty Group Trust (NYSE:KRG)

Q4 2012 Earnings Call

February 08, 2013 11:00 AM ET

Executives

Adam Basch - IR

John Kite - CEO

Dan Sink - EVP and CFO

Tom McGowan - President and COO

Analysts

Todd Thomas - KeyBanc Capital Markets

Craig Schmidt - Bank of America

Jeff Donnelly - Wells Fargo

Carol Kemple - Hilliard Lyons

Rich Moore - RBC Capital Markets

Josh Patinkin - BMO Capital Markets

Nate Isbee - Stifel Nicolaus

Tammy Feak - Wells Fargo Securities

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 Kite Realty Group Trust Earnings Conference Call. My name is Alison and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions). As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Adam Basch, Investor Relations. Please proceed.

Adam Basch

Thank you, operator. 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.

The company refers you to the documents filed by the company from time-to-time with the SEC, which discusses these and other factors that could adversely affect the company's results On the call with me today from the company are, Chief Executive Officer, John Kite; Chief Operating Officer, Tom McGowan and Chief Financial Officer, Dan Sink.

And now I would like to turn the call over to John Kite.

John Kite

Thanks, Adam. Good afternoon and welcome to our fourth quarter earnings call. 2012 was a year of strong performance with the company. The year marks a transition as we not only advanced and delivered several in process developments; we also significantly increased our acquisition activity in the second half of the year. In addition, we accelerated our internal growth initiatives with focus on redevelopment and leasing up our operating portfolio.

Lease activity is giving comfort that our plan of significantly growing EBITDA and de-levering the balance sheet over the next 12 to 18 months is well underway. FFO for the quarter was $0.10 per deluded per share. The results were impacted by our October equity raise and our timings tied to the redeployment of the capital for new acquisition, as well as the disposition of approximately $20 million of noncore assets in the quarter.

The full year FFO, as adjusted for onetime items recognized earlier in the year was $0.43 per share. We recorded another positive increase in our NOI growth and rent growth during the quarter. Our same property NOI for the quarter was up 3.1%, over a very strong prior year and increased 3.2% for the full year. This was primarily driven by the increased leasing volume throughout the year, with aggregate rent spreads of approximately 15% and a focus on controlling operating expenses.

As demonstrated by the solid core metrics, we ended last year with very positive momentum as we entered 2013. I’d like to highlight our 2012 accomplishments. We increase our retail lease percentage to 94.2% and our small shop percentage to 82.5%, up from 93.3% and 79.5% year-over-year.

We expect continued positive advancements on both metrics in 2013. We accelerated our strategy of selling non-core and limited growth assets in 2012. The dispositions included two commercial properties, four un-anchored strip centers, a single tenant net lease asset and two larger retail centers that did not fit within our long term strategy.

The company share of sales proceeds was approximately $70 million. We executed on our acquisition plan by issuing $60 million of common equity, and subsequently acquiring $75 million of well-located retail properties. These assets are positioned in our core markets, leased to upper tier retailers with strong sales and were acquired at prices well below replacement cost. The acquisition of these properties increased our unencumbered asset pool to approximately $475 million and accelerated our deleveraging process.

On the balance sheet, the weighted average term of our debt increased from 4 to 4.6 years and we decreased the overall cost of our debt by 30 basis points over the last 23 months. We were also successful in securing approximately $80 million of construction financing during the year.

We continue to make significant progress on our $240 million in process development pipeline which is now 81% leased. This positive momentum will allow us to deliver several properties to the operating portfolio in 2013.

Excluding the anticipated 2014 development deliveries at Parkside and Bolton Plaza, we anticipate 75% to 80% of the NOI from the 2013 development deliveries will be in the income statement by the fourth quarter. Stabilization of the 2013 development deliveries, completion of Parkside Town Commons and Bolton Plaza, as well as our recent leashing activity provided additional upside.

Some development highlights for the year are we transitioned Oleander Point Shopping Center in Wilmington, North Carolina to the operating portfolio in the fourth quarter. The property is 100% leased and anchored by Whole Foods. As Delray Marketplace in Delray Beach Florida, we are approximately 81% leased and Publix Supermarket opened a 45,000 square foot store last month. We expect another 125,000 square feet of tenant openings to occur in the first quarter.

Phase I our Holly Springs Towne Center development near Raleigh, Carolina in the 85% leased, with targeted opening in early March and other anchors such Dick's Sporting Goods, Michael's and Petco opening prior to March 31st.

Our Rangeline Crossing redevelopment in Carmel, Indiana is now approximately 95% leased. Earth Fare, a specialty organic grocer plans to open in late June along with another 44,000 square feet of specialty retailers while, Walgreens plans to open in the first quarter of 2014.

Four Corner Square, the redevelopment project located in Maple Valley, Washington, a Seattle suburb is over 86% leased. Grocery Outlet opened in January and Do it Best Hardware is scheduled to open in April, while Walgreens plans are open in the first quarter of 2014.

Phase I of Parkside Town Commons is the most recent addition to the in-process pipeline. We were successful in closing on the sale of land to target and entering into an anchor release with Harris Teeter Supermarket prior to the end of the year. We also acquired our partner’s 60% interest in the Parkside project at a price well below book cost.

We anticipate commencing construction next month on the first phase of the project with a scheduled opening date of March 2014. In addition, we have executed leases with anchor tenants in access of 140,000 square feet in Phase II and anticipate commencing construction in late 2013 or early 2014.

As we look into 2013, our initial FFO guidance is in the range of $0.43 to $0.47 per share. We are projecting another solid year for the portfolio with 2% to 3% same store NOI growth and leasing percentages between 94% and 95.5%. The disposition of our lower tier assets, acquisition of quality operating properties with strong tenancy and the completion of our first class development pipeline will lead to improved operating metrics in the portfolio on an annual basis.

We’ll also be transitioning two operating properties into the redevelopment pipeline. Gainesville Plaza in Gainesville, Florida will begin redevelopment activities in the second half of the year. Our preliminary plans are to demolish portions of the center and implement redevelopment plan with several new junior anchor tenants. We anticipated this redevelopment opportunity when we acquired the center. We will provide additional details as our plans progress.

At King’s Lake Square in Naples Florida redevelopment activities will begin in June. We signed a new 20-year public lease for 45,000 square feet and intend to demolish their existing building and construct a new store as well as redeveloping the balance of the existing center. We anticipate completing the renovation in the second quarter of 2014. These two renovation projects result in a $0.01 reduction of 2013 FFO as we temporarily hold the income offline to enhance the long-term value of the shopping centers.

In closing, the retail environment has strengthened significantly and our ability to secure high quality tenants has improved since the economic downturn. To supply our available superior locations for expanding retailers or retailers interested in relocating is becoming increasingly scarce. This dynamic should allow for continued rent and occupancy gains. We look forward to a successful 2013 and updating you on our progress over the several quarters.

This concludes our prepared remarks and operator; we’d like to open for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We do have your first question for you and that comes from Todd Thomas of KeyBanc Capital Markets. Please proceed.

Todd Thomas - KeyBanc Capital Markets

A couple of questions on guidance. Your assumption for the leased rate at the yearend 94% to 95.5%, your anchor occupancy is about 99%. Are you expecting any anchor move outs or are you expecting that to be steady and the gains to be entirely on the small shop leashing side?

John Kite

Yes, I think we are expecting the anchor expiration has to be pretty stable but we also are assuming that we're migrating some of the development deals into the operating portfolio. So we're taking that into account. So, I think the upside, certainly from a spread perspective continues to be in the small shops.

Todd Thomas - KeyBanc Capital Markets

Okay and then aside from all the guidance assumptions that were outlined in the Press Release, are there any additional non-core asset sales or any capital markets activities embedded in the forecast?

Dan Sink

Hey Todd, this is Dan. Right now we don’t have any specific dispositions embedded in the forecast as our objective would be. If we dispose off of some additional noncore assets we will likely use the proceeds to acquire some additional assets to continue to grow the NOI. I think when you look at capital markets activities, I think we've been pretty clear that if we have the opportunity to go out and acquire some assets, to accelerate the deleveraging process and grow NOI we will take advantage of the opportunity but we have not underwritten that specific item in guidance.

John Kite

So Todd, the only thing I can add to that is, I think you can take from that, that we plan to continue to be a net acquirer.

Todd Thomas - KeyBanc Capital Markets

Okay, and what would the funding for those acquisitions generally look like? Are noncore asset sales still sort of on the table or are you still contemplating pruning the portfolio a little bit?

John Kite

Yes, I think as we've said, in the remarks, we were pretty successful in 2012, slightly exceeding our guidance in terms of dispositions and we in turn acquired assets slightly above that but, I think we'll continue to look at that in '13 and remember we also had potential land sales, potential ground lease sales in some cases. So we have capital that we could cycle from non-income producing or from both from income producing and non-income producing assets, but I think we are taking it as we go relative to the plan. We're going to continue to look at improving the overall quality. So that may include additional dispositions but certainly we would be redeploying any of those proceeds.

Todd Thomas - KeyBanc Capital Markets

Okay and then question on Parkside Town Commons, you consolidated financial interest and sold some land to Target. So the total estimated cost of the project's first phase decreased by $20 million. Can you just walk us through the economics of the transaction and talk what about kind of all-in yield you're expecting now and maybe some context just around the change and the scope of the project overall Phase 1 and Phase 2 would be helpful?

John Kite

We will take that in two parts. I’ll talk a little bit about the overall, and let Tom will give you a little more of the detail of the changes in the project. First of all, overall, this was an excellent opportunity for the company to acquire our partner’s interest at a pretty significant discount and so we were very pleased with how it came together and we look at it from a perspective of, we were way down the road in the project. We had, in our view mitigated much of the lease-up risk. So, the opportunity to get in there and get the 100% of the economics was great.

So, I can tell you that we were very happy with that. Kind of the strategy of the overall plan, like all of our in-process development and redevelopments, our overall yields, all in cost yields on all of our in process is in that high-six low-seven range as we have been saying, incremental returns are 10% in north and as is the case on this project as well. So, this is a real good addition when you think about it that way relative to the NOI flow.

Tom you want to talk about some of the changes in the scope?

Tom McGowan

Yes. From a scope standpoint, we went from $51.9 million to $39 million quarter-over-quarter. That really tied back to the fact that we have pulled out the apartment parcel. that had been in the initial phase. So that was removed and that will be sold in a separate parcel, about 12 acres. We modified some fee structures tied to the prudential transaction and now also had a re-measurement or revalue of the land. So that really makes up that variance between those two figures.

Operator

And your next question from Craig Schmidt of Bank of America. Please proceed.

Craig Schmidt - Bank of America

As we move into ‘13 I wondered if you could describe the leasing climate in Southern Florida right now?

John Kite

I think Southern Florida continues to improve; obviously the macro situation is still relatively attached to the residential market in general as a driver. That seems to continue to firm up. There are actually portions when you say Southern Florida; obviously the concentration of our assets is in Southwest Florida in terms of Southern Florida but we also have, obviously a major development on the East Coast and we have other assets on the East Coast.

So generally it’s improving. I think it’s kind of reflects the overall retail environment where you have very little new products, probably even more so in Florida, than in other markets, not only just because of the lack of supply of new development, but because of the difficulty of getting in a position to develop in Southern Florida. The idea that it’s become easier to develop projects is just not accurate. If anything it’s become more difficult to get through the process. We can talk about that at length but bottom line is that we feel still very good about having product there, because it’s just so hard to get product there. So all-in-all it is improving. Clearly, still there is runway, as the business environment firms up. You only need better things for our retail properties there.

Craig Schmidt - Bank of America

Okay and the remaining 19% at Delray, what is your plan for that leasing? Who’d you see put into that phase?

John Kite

Well, we have talked out this a lot and Delray is a center where we have, it’s somewhat of a hybrid of a grocery, anchored, power, mixed-use, all in a center. So we have done a lot of leasing with national tenants in the last three months and now as we have been mentioning, there is going to be more small shop leasing of local tenants and also regional tenants and we are still pursuing some national tenants. So I think we continue to see a good balance. We also have some great restaurant opportunities there. It’s truly is kind of a mixed-use property with different retailers.

So it’s really accelerating and the bottom line is, in any project like this that’s got this much interest in it, when customers are actually able to access the site and be there every day, I think our leasing just accelerates from there. So we feel very good about where we’re going to be and occupancy as we move through the next couple of quarters. We expect that to be steady, quarter-by-quarter. We have mentioned the fact that we are going to open 125,000 square feet in the first quarter in addition to Publix, taking us about 170,000 square feet.

And then we have a very systematic system of bringing it back through each quarter to get us to the stabilized point; but the theater that’s opening up, that’s an entertainment complex that’s going to be a huge driver of traffic, which should help us tremendously.

Tom McGowan

One more thing to add to that Craig is that this is the kind of property where you have to be very selective in your merchandizing mix. So we’re not going to lease just the lease. We’re going to make sure that the additional leasing from here is very additive to the mix, because that will make the property successful long term, not just short term. So that’s part of the process as well.

Craig Schmidt - Bank of America

Yes, I think when you open up the 125,000; I think it’s going to be a lot easy for people to visualize what they are trying to get into?

John Kite

Right that’s what we think as well.

Operator

And your next question comes from Jeff Donnelly of Wells Fargo. Please proceed.

Jeff Donnelly - Wells Fargo

I am just curious how you’re thinking about it in that your stock has certainly done well since it’s your last issuance for equity. How are you guys thinking about equity, I guess as a source of capital? As you move into 2013, is it sort of back on the table for you as an option?

John Kite

Well, I think it’s quite always Jeff. I think we’re always trying to match our sources and uses. So if we continue to do what we’re doing and continue to lease up the space, continue to deliver these developments, we’re going to have increasing cash flow quarter-over-quarter. So that gives us comfort that we can think this through. As it relates to equity, we’re always thinking, what’s the most effective way to fund the business?

But the good part of that is we don’t have to do anything right now. We’re in a very good place as it relates to our debt maturities. We’re at good place as it relates to the funding of the development pipeline and we’re out scouting acquisitions.

So if we feel that it make sense vis-à-vis, with the offensive capital then that’s a possibility, but as I’ve tried to say for the last year, we’re done with the defensive capital and we’re going to be very offensive as we think about that.

Jeff Donnelly - Wells Fargo

I am sorry if you mentioned this in your remarks or for an earlier question, I dropped off the line for a moment. I think you did say you wanted to be a buyer. Can you talk about where you like to be buying? Is that new markets, is it existing markets, and is more sort of stabilized assets or busted (ph) development; so just kind of curious what we should be setting our expectation to?

John Kite

I think if you look at what we did in the second half of 2012, that’s kind of reflective of what we’re thinking about. We are very comfortable acquiring assets in certain regions, the Southeast part of the United States, the Mid West, Texas; I’d say those are the three major categories we're thinking a lot about that we're very active in. I don't think we're really thinking too much about entering into markets that wouldn't be within those regions.

So, we're pretty focused on that. There's just so much opportunity for us to acquire properties that I think are being overlooked by a lot of people chasing assets in very specific coastal type regions like where you are, although you got to make sure that you're ready to remove snow if you're buying in Boston but bottom line is people are kind of still focused in the North East in California and in some of those markets, Miami and we're finding that we can buy very attractively priced properties that are very high performing in the markets that we've been acquiring in.

And if you see the amount stuffed that we're doing in North and South Carolina, both from a development and an acquisition perspective, that's also been very productive. So, I think what we figured out is we're pretty good at real estate. So that means we can underwrite maybe better than people who are more financially driven. We're going to be real estate guys and we're going to find good real estate at a pretty attractive price, that's what we want to keep doing.

Jeff Donnelly - Wells Fargo

What snow? I look out of my window and I don’t see anything?

John Kite

Yes I know. We'll see, come back to me in a few hours.

Jeff Donnelly - Wells Fargo

Actually I am curious on cap rates. What sort of differences do you see on anchored versus shadow anchored centers out there and have you seen any shifts in cap rates in the last three to six months? I know it’s a short period of time but I'm curious of the rebound in the CMBS is causing a notable shift.

John Kite

Yes, I think Cap rates are, I don't know if they are compressed a lot in the last couple of months. I think they're clearly competitive; it's very competitive to find these opportunities. I think the shadow anchor versus the anchored, we typically, before buying something we definitely are wanting to get the majority of the anchors in the income stream. We would rarely buy, for example if there was a shadow anchored grocery anchor center, that's not something we would do unless there were three or four boxes as part of that center.

And I think the cap rates on unanchored strip centers as an example have compressed quite a bit as evidenced by us selling some unanchored strip centers. And if you’re going to buy a quality power center or a quality grocery anchored center in a good market that is on the market, it’s very difficult to acquire something that’s not got a six or five in front of it. So you have to work hard to acquire something.

But honestly Jeff, we’re also not only wholly driven by that. We’re making a lot of replacement cost. I think too many people are focused on just the cap rates and look; the reality is product this scarce is going to continue to be that way. So, we’re able to buy things at a $200 foot range or less which we have been doing, and it costs $275 to $350 at a foot to build something of equivalent, we’re doing pretty well.

So, we’re going to focus on that and I think people will start to realize that the cap rate, when you think about a relative to just the market and CNBC market, that’s only one small element. The difficulty in getting product, vis-à-vis development cycle is a big part of the cap rate compression as well, just because you can’t find it.

Jeff Donnelly - Wells Fargo

I guess the last question, and maybe pertains to sort of a good segue, pertaining to anchor box rents and development, can you help us understand the anchor retailer mindset as it relates to rents because I think the rhetoric has been that development economics haven’t generally penciled out about into retail because the anchors aren’t stepping up on rents and it make sense because they pull back during the financial crisis and it takes may be time for their expectations to adjust but now that occupancy is up and it’s particularly tight, in anchor boxes, have you seen those bigger box, 20,000, 30,000, 40,000, all the way up to 100,000 square foot anchors adjust their attitude to what that they got to pay if they need to see new centers built?

John Kite

Right now it’s on case by case basis and it’s going to be driven the strength of the real estate and I think it’s obviously better than it was a couple of years ago and I can give you many examples of that. If you look at both, like for example our Parkside development, there is an example where this is a very attractive piece of real estate and we\re doing very well on the rent which is why we are very excited to acquire the balance. And the same thing happens in certain redevelopment projects, like Rivers Edge redevelopment we did in the Indianapolis where you’re doing an infill deal that people just love to be in, they are going to pay the rent.

So that’s a slowly but surely mechanism. You got to realize I think, as the environment is strong right now, as I said really because of this supply and demand equation, as well as a slowly improving economic environment. When we have 2% or less economic growth it’s not being driven by the fact the retailers are, stops flying off the shelves at very high margins. They are making money, they are doing fine, but right now I think we are only in the early stages of rent growth because of that. As that matches low supply, a couple of years in the future then you see real dynamic growth in that. So it’s a process and it’s better than it was but it has got runway, it’s going to get better in our view.

Operator

Your next question comes from Carol Kemple with Hilliard Lyons. Please proceed.

Carol Kemple - Hilliard Lyons

You all had really good leasing spreads at renewal at new properties this quarter. Were specific leases or was it overall or what led to that good increase?

John Kite

Generally it was overall. You look at the probably Carol, we have been having very strong releasing spreads over the last five to six quarters in new leases, up and down but pretty strong overall, but probably the change this quarter is, we saw strong renewal lease spreads, and again that kind of comes back to my theme of supply and demand is moving in our direction from pricing power perspective, but if you look at it, during the year, you look at what we did during the year and you look at what we did during the quarter, it was pretty balanced in the portfolio.

Carol Kemple - Hilliard Lyons

Okay. So what was your spread between lease and occupancy in the quarter?

John Kite

The spread between lease and occupancy, about 350 basis points and roughly 70% of that are new tenants that have not occupied yet. So we signed a couple of new grocery stores, a couple of fresh markets that our leases are signed but they haven't occupied, they'll occupy it as we complete the space. So that's the variance.

Operator

Thank you and your next question comes from Rich Moore of RBC Capital Markets. Please proceed.

Rich Moore - RBC Capital Markets

On the development projects, to follow up on Craig's question, do you see the 81.4% overall leasing growing as fast as it has been? Did we get the low hanging fruit or is there plenty upside I guess for that whole pipeline.

John Kite

I think there is definitely upside because obviously introducing Parkside into the equation; it has brought the overall average down a little bit, because we're in our early stages of that preleasing. I shouldn't say early stages but we, it's a phase 1, its small enough that if we add one more box to phase 1, then that moves up and that moves the whole needle. So generally, these things, as I said in my remarks, these are all going to be delivering into the portfolio this year and based on our assumptions and what we look at the NOI growth being and what's going to be hitting the income statement in the fourth quarter, we're pretty comfortable that the lease up is going to be pretty high.

So we're not worried about that at all. I wouldn't say the low hanging fruit's happened, obviously small shops as we've talked about take a little bit more time and you need to physically be open to finish that out. So if anything we're, we're pretty bullish on how we end the year on that.

Tom McGowan

Just to give you an example you have Holly Springs Towne Center; its 204,000 and change of owned square footage. We're at 85.4 and have not opened the center. So if you look at that before you open and you have seven spaces remaining, I mean, that’s going to give us a nice clip to really improve those numbers.

Rich Moore - RBC Capital Markets

Okay. And this year, you think, Tom is reasonable to expect those to fill up?

Tom McGowan

We absolutely do.

Rich Moore - RBC Capital Markets

Okay. And then on Parkside, what do you need to have happen to have phase 2 come in. You said, I think, John in the later in the years when you bring it into the construction, the in process pipeline, is there anything special that has to be undertaken or is it just time?

John Kite

The timing from the perspective of the overall development and also the way we have designed the phase is part of that as well and we are still in the leasing process and we are still in the process working with the municipalities to phase the project. So it’s a combination of those two things.

I think what we were trying to point out is phase 2 from a leasing perspective, is already way down the road with a 140,000 square foot of signed anchors. So really, I think originally Rich; this was more spread out in terms of phase 1 and phase 2. Now they have come together. They are still going to be phase 1 and phase 2, but the window between the two is much tighter.

Tom McGowan

Yes and we filed these applications with the county and with the actual town. So it's very well under process and that’s why we think we can get through this through the fall.

Rich Moore - RBC Capital Markets

Okay. Good. And then on the land, on the apartment land is that for sale? Are you guys actually marketing it?

John Kite

Yes. That is for sale and we're in late stage negotiations with the buyer.

Rich Moore - RBC Capital Markets

Okay. So do you get a gain from that? Do you think John or is that mark-to-market already with the leasing transaction?

John Kite

Yes. Rich that’s mark-to-market with the whole transaction that just occurred when we re-measured and remarked that land to market.

Rich Moore - RBC Capital Markets

Okay. And then the same story in Ohio what happens to that with Gainesville and King’s Lake? Did those exit the pool or do you keep them in and take the hit on the same story in Ohio for the re-developments?

John Kite

I mean, what we've done on that typically Rich is as we begin the process of redeveloping the centers and because of these two it’s not just replacing an anchor box, it’s actually pretty much scraping the site. So we are starting again. So, I think from that perspective we will more than likely move, we will move them out of the operating portfolio at the time that we start the redevelopment activities.

Tom McGowan

And we have taken that into consideration with the guidance.

Rich Moore - RBC Capital Markets

Okay good and then the last thing on the tenant improvements for the commercial side of things, Dan that seemed to kind of high. Is there anything special in there?

Dan Sink

Yes, I think the biggest thing Rich when you look at this, particularly our office building is really growing commercial asset we have since (inaudible) to 100% leased, and we were fortunate, we have done a lot of positive leasing. We’ve got a new restaurant coming in on the first floor. We got a tentative increase from I think 30,000 square feet to 50,000 square feet. We have had some good momentum there and I think, from an office building structure, once when somebody reups their lease for 10 to 15 years, it requires a decent amount of TDI and so we’ve got some good activity going on in this building and you may see a little bit of that leak over in the first quarter, and then from that point we’re pretty much fully leased in this building for a long stretch.

Operator

And your next question comes from Josh Patinkin of BMO Capital Markets. Please proceed.

Josh Patinkin - BMO Capital Markets

So sort of, looking at the development projects again here, it seems like you guys have about a $150 million that’s either open now or opening up shortly; and then $50 million and a $150 million on top of that. Is that fair to say, that’s the pipeline right now?

Tom McGowan

Yes, I think round numbers, yes.

Josh Patinkin - BMO Capital Markets

Okay, and is there any other land parcels that you would consider a part of maybe the shadow pipeline that are out there and not any supplemental?

Tom McGowan

I think right now Josh we have got pretty much, we have got the land held for development. Those were the assets that we had opportunities on those we would look to pursue development activities, but as far as looking for additional land, we have nothing in the pipeline right now. I think our objectives are to complete what we have, look for good opportunities to enhance the assets in a portfolio like King Lake and Gainesville, and as John mentioned, opportunistically in our markets look for acquisitions. So, I think that’s kind of been our objective the last couple of years, is to make sure that we complete each development ground that we have which, as you look at the supplemental and you look at the anchor tenants on locations of these properties, it’s fortunate that we had the opportunity to complete these. So I think that’s what our objective is.

John Kite

Yes, I think, I will add to that, when you look at 2013 and 2014, those two years we will see significant NOI growth in both years from the in process projects and when you look at the future development projects, that’s kind of a late 2014 and into 2015 impact to our EBITDA and NOI growth. So really we have three years of increasing EBITDA from this existing pipeline of both, in process and future and including the redevelopment of the dam referred to and we do have a couple of parcels of ground that we talked about that something could happen on that we’re already own but we also think those could be sold to users as well.

So, I think having 2.5 to three years of built-in growth is pretty adequate for a company of our size, and then as we move through the cycle, we will continue to look at things and there are lot less guys who do what we do in the world today. So people come to us with opportunities and as the world evolves we’ll look at.

Josh Patinkin - BMO Capital Markets

I get and it seems also that all of these projects actually are wholly owned. Is that the mindset going forward or would you to partner with people?

John Kite

Yes when I think right now the mindset is that we’re adequately capitalized to take advantage of these opportunities and reap 100% of the benefits. So we don’t today see the reason to give a disproportionate amount of the award to another party, when we’re taking disproportionate amount of the workload. That’s kind of how we have looked at this since day one, which is why we haven’t had a tremendous of joint ventures and in fact which is why the one that we did have, we ended up acquiring the interest, because in the end, as I said we’re doing a disproportionate amount of work and the company and its investors should get those rewards.

So I see that continuing, but look, if we saw some large-large opportunity, that we felt it was a great opportunity but didn’t match up our capital structure, we would consider it. But right now we feel very good about getting 100% of the economics.

Josh Patinkin - BMO Capital Markets

Okay and John you mentioned NOI growth coming on shortly, and into 2014 and beyond. Obviously that helps your credit metrics a lot recently. Is there a specific metric that you’re targeting end of the 2013 that you could describe?

John Kite

Yes, probably the one that we’re most focused on is debt-to-EBITDA and we’re very focused on bringing that down. Obviously we’re bringing it down without diluting. So that takes longer when you do that but as I said, I’d over the next 12 to 18 months we see that continuing to come down. Our goal is over that period of time to get it down to a 7.5 times or lower and again a lot of that depends on the timing of the EBITDA flowing through and then also whatever external acquisition activity we have and how that's capitalized.

But we feel very good that we're through the tougher part of that ratio and now we’re in a period where we have low debt maturities and we have EBITDA coming on. So that will gradually get better and I think frankly the margin is starting to see that and understand that but we still are very focused on bringing it down and that's one of our top objectives, much like growing the company is one of our top objectives.

Josh Patinkin - BMO Capital Markets

Very good. You’re stock is up 15%. So the market is seeing that that, I am sure.

Operator

(Operator instructions). Your next question comes from Nate Isbee of Stifel Nicolaus. Please proceed.

Nate Isbee - Stifel Nicolaus

Few questions. Number one as you look at the remaining portfolio, how much would you classify as non-core in your minds as a possible source of capital?

John Kite

Yes, when we look at it right now Nate, you look at the balance of our portfolio, we move through several of these unanchored strips centers that we mentioned or we still have a handful. So in percentages maybe it’s less than 10% but it's not always only just about the obvious kind of smaller property or non-retail property. It also is geographically focused as you know. So we have a few more of those to move through. But generally it’s been in that range. It's got to be less than 10% today.

Nate Isbee - Stifel Nicolaus

Okay. And then on the most recent acquisitions can you talk little bit about the pricing and some of the growth opportunities you’re seeing there and I guess it's just more broadly, can you talk about how you approach buying from another ret who has said that they're going to report a portfolio upgrade, versus buying in the open market?

John Kite

Look, they are so many things that are going into what we view as an opportunistic acquisition, starting with pricing. We are very disciplined in our approach on pricing. So I think the easiest thing you can do is to go acquire an asset that's viewed as a blue chip asset and pay $500 - $600 a square foot for that and justify it with its irreplaceable real estate. I’ve heard that a lot. The problem with that dynamic is when you’re acquiring at those price per foot levels, you’re paying more than it cost to build it and the acceleration of the rent isn’t going to match your cost-of-capital needs.

So when we buy something at $150 a foot to $200 a foot and our rents are in mid to upper 20s in the shops and our dynamic relative to the anchor percentages is good, we think we’re in a much better place to grow NOI, that 2% to 3% plus range than when you’re stretching could buy at the higher levels. So that’s kind of why we like what we’re buying, one of the reasons we like what we're buying for buying.

And then also Nate, we found that the anchor performance in some of these centers is just really-really strong on a national level. I mean several of these assets we’ve acquired have anchors in them achieving sales that are in the top 5% of their portfolio.

So, that makes us think that we have rent room in terms of the NOI growth on the shops because a lot of these, in the cases that are ones that were owned by generally, that are owned by non-rets as an example, they aren’t going to be as focused on increasing rent in the small shops. They’re just happy to have a full shopping center. And also some of the rets that we’ve acquired assets from in the past, when they view an asset as an asset that they’re not that interested in, they’re just not going to have the focus to increase NOI that we would.

And one guy thinking he’s rotating into another market that is more interesting to him for whatever reason, gives us the opportunity to view, we view it as do we think we can do something with it and is it a high performing property in that submarket.

So that’s kind of how we look at it? Do we do a lot of that? It doesn’t happen that often but when it has happened for us it’s been very successful. So, we’re not afraid of it but we’re sticking to our strategy which is that we think we know the real estate very well and we’re going to focus on the real estate and see if we can add value to vis-à-vis the fact that we’ve acquired it below replacement costs.

Nate Isbee - Stifel Nicolaus

So, would you say that an asset in Greensboro that was previously ret-owned is or was under managed from your perspective?

John Kite

I wouldn’t say it was under managed at all. I would say it was managed very professionally. But what I would say is when we went in Greenville and acquired two properties, we went in there with a thought process that we thought Greenville has huge upside from a macro prospective, the market itself.

The market itself is extremely dynamic. When you look at where is our country is going from a manufacturing perspective, this is a market that’s going to benefit from that. When you look at average household incomes of $100,000 and where the cost of living is two-thirds less than it would be on the either coast, to be having more disposable income.

So, I don’t think it’s really about who owns what and what they’ve been doing with it. It’s about what’s your long-term strategy, what you are trying to accomplish. And I think that the investor base hopefully understand that we’re real estate guys and we are not going to buy something just because it pencils below 200 foot. We are going to buy it because we think we can grow the NOI. So that’s really it. We don’t get too caught up in why someone else may think differently.

Nate Isbee - Stifel Nicolaus

And then moving to Delray real quick, were any of the 125,000 square feet of the leases scheduled to open shortly, were any of those originally scheduled to open in 2012 which just got pushback or was the openings moving too slow?

John Kite

As you know, we originally had planned on opening many tenants in November and December. So, as we went through the process and this is the one, this is a project that I referred to that it is a lot of work and rather challenging to deliver projects today, in the environment we live in, where municipalities are very focused on projects, because there is a lot that’s going on, so they can focus on individual projects.

So bottom line is that what happened here is that, it took longer for us to get permits, it took longer to deliver property, to deliver the tenant, but it didn’t affect us in any way financially. So, it’s really kind of that and making sure as I said they we’re doing this in a very-very first class manner.

Nate Isbee - Stifel Nicolaus

And then just on Delray real quick. Is there any signs that residential development is picking up?

John Kite

Yes, there is no question. Just right down the street (inaudible) couple of bridges. They have done tremendous job of adding parcels and adding new homes to the area. So, you simply get on a planned drive and you can just feel the traffic pressure that has been developed, probably within the last six months and if you look at housing starts and you’re start to see impact on construction costs, it's definitely coming and the good news for us is we're out in front of it, we have tremendous ingress, egress points with the extension of Alliance (ph) road and the expansion of Atlantic. So, our timing is very good to get this open.

I think ultimately Nate, Delray will be the beneficiary of kind of what this whole macro idea that we're talking about which is that, with such little new development you’re really starting to see a lot of pent up consumer demand and I don't mean it relative to overall retail sales, but I mean it in the submarkets. When you have a market like this that hasn't seen new product in 10 years, you get a lot of interest in it.

So, I think people often think about how can we need new retail in this country? It's not all about what the retail per capita is, it's also about the age of the retail and the functionality of it. So this will be a great example of that over the next several years, because it's just so hard to deliver these things and so hard to get them done. If anything, projects like this would warrant a forecast because you just can't, it's so hard to get there. And here we are, we're on the finish line, it's going to be a great project.

Operator

Thank you and your next question comes from Tammy Feak of Wells Fargo Security.

Tammy Feak - Wells Fargo Security

Just wondering transactional FFO and termination fee guidance, you gave $0.02 - $0.04 for 2013, and I was just wondering what the contribution was under those items in 2012?

John Kite

In 2012, we had roughly between land and termination fees, it was probably a penny to penny and a half and in addition to that we had some over hedge (ph) which is close to a penny as well. So, I think when you look at the projections for next year and transaction income, as we do these developments and the outparcels become valuable, I think that the important thing is those of us that develop and can’t develop, you really have an opportunity in some cases to ground lease and sell up parcels and in other cases you'll have tenants that want to buy it outright. So, we bake some of that into the guidance for next year as a result of these developments that are ongoing.

Tammy Feak - Wells Fargo Security

Okay, and then with regard to the range line redevelopment, it looks like opening was pushed back a couple of quarters. I was wondering is going on there?

Tom McGowan

Yes. That’s why I back to a comment John made earlier while we worked with the municipality that have very stringent overlays on components tied to it and that basically required all structures be brought up to the right of way. And with our tenancy, especially a great grocery like Earth Fare that was coming into the market, it simply didn’t work to have people parked behind. So we went through a lengthy negotiation with the municipality to end up with a compromise in that period of time that we did that, we will make this project far more sustainable and far more valuable. So we made a conscious effort to get the plan we wanted.

John Kite

Tammy, can I have one thing to add on the supplemental as well. With the say, project opening date, that’s when the first tenant opens. So in some cases we say it takes six to 12 months to stabilize. So we have tried to shows when an occupied tenant comes in and starts delivering income, so that investors and analysts will try to avoid double counting of that. So when the first tenant moves in, that doesn't always indicate that the project’s pushed back. I just wanted to point that out when you look at supplemental..

Tammy Feak - Wells Fargo Security

Thanks. And then with regard to the leasing provided, for the guidance for 2013 for yearend leasing, it’s kind of wide range from 94% to 95.5% and I guess I was just wondering is that a result of when development projects start to come into that reported figure or what’s, why the wide range?

John Kite

Yes. Basically, that’s probably the biggest component if it, is the timing of the deliveries of the development and where they'll be. And then also obviously at the beginning of the year you are looking at taking through what your net absorption will be, what tenants we would lose during the year unforeseen circumstances. So, that’s why typically we are going to be little wider with that at in the beginning of the year as we move through the quarters, but I think probably the biggest component is when you are bringing in these developments.

Tammy Feak - Wells Fargo Security

Okay. And then the recovery ratio I notice was down in Q4 versus prior quarters. Anything specific going on there?

John Kite

Tammy, I think the biggest thing on that is that at the very end of December, some of the operating expenses were a little higher as a result of, we had additional snow over the prior year and I think that’s why you are seeing the recovery ratio drop a little bit, as a result of some of our properties we get better recoveries than others as it relates to that. That’s the primary difference.

Tammy Feak - Wells Fargo Security

Okay. And then just one last question on development cost. I was wondering what you are generally seeing in terms of construction cost?

John Kite

I think if you look at our, I think part of our theme is that construction cost are not as cheap as you would think that would be in the environment we are in. So we generally think these new developments are in that $275 square foot range; $265 to $300 a foot probably all in and we haven’t seen any material change in cost in terms of unit cost. So I wouldn’t say it’s cheap, I wouldn’t say it’s a lot more that it was, it’s pretty stable.

Tom McGowan

Yes, just little bit more on the macro side, when you get into residential materials because of the uptick in residential starts we will start to see pressure and thing like drywall. Steel has stabilized pretty nicely, asphalt products are coming down, but as the residential market continue to improve, we will see lumber drywall, other supplies tick up, but as John said all-in-all we are in a very nice market to be implementing all of this development or re-development. Our timing has been very good.

John Kite

Yes, then probably one more component of it would be the labor cost that, there is a lot of people that got out of the workforce. So you lost skilled labor in construction through the downturn, and as we tick back up, some of those people won’t come back into the workforce likely. So that would put pressure on labor cost. So at the end of the day, I think this all works to benefit us from the perspective of the amount that we’re delivering now under hard contracts and the fact that our existing portfolio only gets stronger as it costs more to build. So in all-in-all these things are working in our favor.

Tammy Feak - Wells Fargo Security

With construction cost being fairly high now, just wondering how you balance, you are thinking of future construction versus acquisition.

John Kite

I am sorry, say that one more time? How we balance?

Tammy Feak - Wells Fargo Security

Yes, how do you balance future construction for future development versus going into the market and acquiring below replacement cost?

John Kite

Sure, and I think that’s why we accelerated our acquisitions in the second half of the year and that we’ll continue to likely accelerated, that if we can acquire below replacement cost, there is a lot more upside there for us. Now obviously it depends on what it is and where you are acquiring versus where you are building but I think as costs move up, rents will have to move with them or you will continue to see just a very low delivery supply, which again, since we are in both businesses; we are in the acquisition side, we are in the development side. So for us this is a good thing because we can ebb and flow and we can think about which one is more profitable for us.

Operator

Thank you. We have no further questions at this time. So I would now like to turn the call over to John Kite for closing remarks.

John Kite

Okay, thank you very much and again we appreciate everyone joining us. To summarize, we feel we had a very good year in 2012 and as we said we feel we have turned a corner in 2012. We are very excited about the upcoming years, and we appreciate you interest in the company. Thank you.

Operator

Ladies and gentlemen, thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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