Kite Realty Group Trust Q2 2008 Earnings Call Transcript

Sep.20.08 | About: Kite Realty (KRG)

Kite Realty Group Trust (NYSE:KRG)

Q2 2008 Earnings Call

August 8, 2008 10:00 am ET

Executives

Adam Chavers – Director of Investor Relations

John A. Kite – Chief Executive Officer, President and Trustee

Thomas K. McGowan – Chief Operating Officer

Daniel R. Sink – Chief Financial Officer

Analysts

Sloan Bohlen – Goldman Sachs

Michael Bilerman - Citigroup

David Fick - Stifel Nicolaus & Company, Inc.

Philip Martin - Cantor Fitzgerald & Co.

Jeffrey Donnelly – Wachovia Capital Markets LLC

Richard Moore – RBC Capital Markets

Operator

Welcome to the second quarter 2008 Kite Realty Trust earnings conference call. (Operator Instructions) I will now turn the call over to Adam Chavers, Director of Investor Relations. Please proceed.

Adam Chavers

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 email you a copy. Our June 30, 2008 supplemental financial package was made available yesterday on the corporate profile page in the investor relations section of the company’s website at kiterealty.com. Filing has also been made available with the FCC 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, natural and local economic, business and 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; acquisitions; dispositions; development and joint venture risks; potential environmental and other liability; 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.

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

John A. Kite

We thank you all for joining us for our second quarter conference call. Since our last call, we’ve made progress on important strategic financing and leasing initiatives, which are designed to increase liquidity, execute on our development pipeline, and strengthen our operating portfolio.

We are pursuing a capital strategy with the twin goals of managing debt and increasing available capital for future opportunities. While we’re continuing to evaluate potential joint ventures and funds for institutional investors, we recently took steps to increase our liquidity by agreeing to a $60 million, three year unsecured term loan arranged by KeyBanc Capital Markets.

Our initial draw of $30 million has allowed us to pay down a portion of our unsecured credit facility. We remain focused on our balance sheet and debt maturity. As in 2007, we are aggressively engaged in refinancing our upcoming debt maturities. Utilizing our long standing relationships with local and national lenders, we’re confident that we will be successful.

We’re carefully monitoring retail activity and its potential impact on our operating portfolio. But while some tenant defaults and foreclosures may be inevitable, we’re focused on turning those challenges into opportunities by backfilling with high quality tenants. For example, we mentioned on the last call that Circuit City closed its location at Sunland Towne Center in El Paso, Texas. We’ve already signed a lease with Bed Bath & Beyond for the majority of the space and we’ll convert the remaining 7,000 square feet into attractive, end cap small shop space.

We’re also in negotiations with a national retailer for the other junior box vacancies at this center. While these kinds of tenant closures may present challenges in the short term, we believe these challenges will ultimately leave us with a stronger tenant base and more valuable assets.

Despite the volatility that we’ve experienced as a result of these recent junior box vacancies, our same property lease percentage held strong at approximately 94%.

And our same property NOI slightly increased. Excluding the junior box vacancies, our same property NOI would have increased 90 basis points for the quarter and 130 basis points for the first half of the year. Again, we believe that these short term blips in our metrics will be more than offset by the rise in tenant quality in leasing momentum that we are achieving over the longer term.

In this kind of environment, it’s particularly important to focus on recruiting and maintaining a diverse roster of quality tenants. During the second quarter we executed 21 leases and renewals at attractive rates. For previously occupied space, the leases represented a 22% cash increase over the previous rent. For the first generation space, our average rental rate was approximately 79% above the portfolio average.

Our leasing team is focused and highly motivated to continue this positive momentum. We are currently negotiating nearly 50 additional leases in dozens of LOI’s. I mentioned our diverse roster of quality tenants. Diversity and quality are core components of our leasing strategy. Our focus on leasing to strong credit tenants remains one of our strengths. We believe that it’s important that no single tenant constitutes more than 3.4% of our base rent, and that our top 25 tenants comprise less than 40% of our annualized base rent.

The quality and draw of our anchored tenants greatly contributes to our ability to lease and backfill vacated space. As we said in the past, we remain committed to managing the risk in our development business. We continue to maintain high levels of pre-leasing in our current development pipeline. And all of our anchored tenants are in place. The presence of retailers like Target, Publix, Ross, Whole Foods and Kohls just to name a few, is critical as we work to fill the remaining small shop, junior box and restaurant spaces.

While the economic environment remains difficult, we are very encouraged by our leasing and financing initiatives in the second quarter. And we believe that our strategies put us on the right path for long term success.

Now I’d like to turn it over to Tom.

Thomas K. McGowan

In the second quarter we continued to make progress on the projects in our development and redevelopment pipelines. The seven projects in our current development pipeline are 78% pre-leased, but only 20% occupied which represents future [NLI] growth. The majority of our risk in the pipeline continues to be limited to construction execution and the timing of deliveries.

We had a couple of changes to the development pipeline starting in the second quarter. First, we moved phase one of South Elgin Commons into the current development pipeline. Phase one will consist of a 45,000 square foot LA Fitness, which is estimated to have a total project cost of $9.2 million. We delivered their pad in June and anticipate that the project will open in the second quarter of 2009.

South Elgin Commons is shadow anchored by Super Target, and we expect to move the remainder of the project into the current development pipeline and commence construction only after additional junior box leases are signed.

We moved our 54th and College project out of the current development pipeline and into the operating portfolio during the second quarter. The Fresh Market has opened and commenced paying rent. This was a successful, low risk project for us and a great match between tenant and location.

Finally, we moved Bolton Plaza into the redevelopment pipeline. As anticipated, Wal-Mart moved out of the center at the natural expiration of its lease and relocated into a larger format store. We’re currently pursuing a redevelopment plan. Bolton Plaza will be another example of our strategy of repositioning an asset and improving its value.

We’re pleased that our complex redevelopment strategy for Glendale Town Center has proven to be successful. Target opened in late July and overall, the project is 88% preleased. Construction recently concluded on the building to the north of Macy’s, and major tenants including Famous Footwear and the Indiana University Medical Group have opened for business. Our redevelopment strategy has captured the true value of this asset by leveraging its infill location and demographics.

Another development property with a great deal of activity is Eddy Street Commons at the University of Notre Dame. Since the last call, we closed our deal with the University and held a groundbreaking ceremony in early June. Site work is well under way, and we’re scheduled to open the first phase of the project, which is 61% preleased, in the fall of 2009. Residential sales will begin later this month, and we have an executed letter of intent to construct several housing units for the University. Eddy Street is a high quality project that has generated significant excitement.

With respect to the visible shadow pipeline, we continue to make meaningful progress on Parkside Town Commons near Raleigh, North Carolina and Four Corners Square near Seattle, Washington. We recently signed a lease with Publix at Delray Beach Marketplace in Delray Beach, Florida, which will join Frank Theaters as the two anchors occupying approximately 120,000 square feet.

In summary, although retailer activity has slowed on an industry wide basis, we are very pleased with our leasing in the current development pipeline and encouraged by the leasing progress we’ve made in the visible shadow pipeline.

I’ll now turn the call over for Dan to summarize our financial results.

Daniel R. Sink

For the three months ended June 30, funds from operations were $0.31 per diluted share and $0.62 per diluted share for the six months ended June 30. Our other property related revenue for the quarter includes net gains on land sales of $2.2 million and lease termination fees of approximately $300,000.

A portion of the lease term fee relates to the Barnes and Noble space at Plaza at Cedar Hill. The lease was set to expire in late 2008, and we negotiated an early termination. We are currently finalizing an LOI with a high end, regional grocer for the space.

The construction and service fee net margin in the quarter was approximately $1.3 million, or 18% before tax. For the six months the net margin was $1.8 million, or approximately 17% before tax.

G&A expense for the second quarter was approximately $1.3 million or 3.6% of total revenue. G&A declined in the second quarter from lower legal, professional compensation and other expenses. We anticipate G&A expense for the year to be at the lower end of our previously provided guidance of $6.5 to $6.7 million.

Our financial metrics continue to be in line with our expectations. Our fixed charge coverage ratio was approximately 2.6 times. Our floating rate debt was 32% of our total debt, and approximately 15% of the total debt was in floating rate properties, specific construction loans, and our AFFO payout ratio for the quarter was 79%.

As John mentioned, we had entered into an unsecured term loan agreement arranged by KeyBanc Capital Markets. This loan is priced at LIBOR plus 265 basis points and matures in July of 2011. $30 million of the loan has been funded, and we received commitments on an additional $25 million which should fund prior to August 31. We are in negotiations with a lender for the remaining $5 million. We are evaluating the timing and terms of an interest free hedge to fix the interest rate for the term of this loan.

As of the end of June, we had approximately $43 million of cash and cash and credit line availability. After funding the term loan and the planned transfer of targeted development projects into property level joint ventures, we anticipate having between $75 and $100 million cash and credit line availability. We are also evaluating the sale of an unencumbered operating retail asset and a commercial asset that would generate approximately $25 to $30 million of additional equitaty, as well as reduce leverage.

We wanted to take this opportunity to provide some additional color on the loan maturities of the next 12 months. Today we have approximately $190 million of 2009 consolidated debt maturities, the majority of which are in construction loans. We have extension options on $75 million. We are negotiating construction loan extensions and our money terms for $57 million, and there are fourth quarter maturities of $49 million that will be addressed throughout 2009.

Finally, we are in the process of converting the final $9 million to a construction loan.

We have revised our earnings and FFO guidance for the full year of 2008 to a range of $1.25 to $1.30 per diluted share. This change reflects the higher interest rate on the new term loan, inclusive of the anticipated interest rate hedge and the potential disruption in the timing of transaction related income due to the current market conditions.

We will open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sloan Bohlen – Goldman Sachs.

Sloan Bohlen – Goldman Sachs

Just a question about your JV fund. I know you guys had narrated with us about, you know, potentially looking at foreign capital. You know, what do you think that institutional investors are looking for still on a return side? Do you think they’re waiting for movement in cap rates? Or even if it concerns more with the slowing consumer?

Thomas K. McGowan

We have been talking to a lot of institutional investors as you said. I recently made a trip to the Middle East and met with a lot of interesting funds, sovereign wealth, and private funds. So there is in my view a lot of capital that’s queuing up, and I think that capital is obviously trying to determine at what point the right entry is. I’m not sure it’s focused on the consumer as much as it is where they see the marketing settling out. I think you’ve got a situation where again there continues to be very low volume of transactions, to really get a sense of where cap rates are.

But the transactions that are occurring are still occurring in the sixes, so from an IRR perspective, I mean, people are going to have to get comfortable with where they end up there. But definitely, I think you know my view on the situation, is most people seem to be thinking that an entry point in 2009 is going to be a very attractive entry point.

Sloan Bohlen – Goldman Sachs

And then with regard to paying down the line beyond, I guess, kind of the $60 million that you’re raising right now. You know, does that mean, you know, further asset sales out into ’09? Or how does the JV fund play into that? Or, I don’t know, could you give us a sense of, you know, further debt repayment down the line?

Thomas K. McGowan

Well right now, as far as the JV ideas that we have both joint ventures and/or funds that we’re considering, that doesn’t really play into what we’re looking at other than, as Dan said – and I’ll let Dan comment on this too – other than the fact that we have additional liquidity beyond that. So Dan do you want to follow up with that?

Daniel R. Sink

I think one thing we’re focusing on as far as the couple development projects that I mentioned is moving those assets into a joint venture, property specific joint venture where we would take, you know, somewhere between 10 and 20%. And the primary objective there is to, you know, they’re unencumbered development projects to get a portion of the capital back, where we will then utilize to pay down the line.

I think why that’s critical for us, it’s a very tax efficient way for us to continue to have liquidity without, you know, creating any – we can retain the majority of the money, under the REIT structure we need to watch the return of capital provisions, etc. So I think that’s the most efficient way for us to get that done, to retain liquidity as well as reduce the future funding obligations on some of those development projects.

And I think when you look at asset sales, you know, we have talked about the medical office asset that we are considering selling, as well as we have an operating retail asset that’s unencumbered that we could sell. And also, you know, it’s unencumbered that would help (NYSE:A) to reduce debt and (NYSE:B) give us some additional liquidity.

Sloan Bohlen – Goldman Sachs

On the Bed Bath & Beyond lease, when does that commence?

Thomas K. McGowan

We are in the process now of working construction on the space. I think we’re looking at it in the first half of ’09.

Sloan Bohlen – Goldman Sachs

Could you give us a sense of the rent on that relative to where Circuit City was?

Thomas K. McGowan

Yes. Between the Bed Bath rent and the shop rent that we’re going to be receiving, we’re going to be receiving on the 7,000 feet, we’re about even. It wasn’t a lot of increase.

Daniel R. Sink

Slightly above I think.

Operator

Your next question comes from Michael Bilerman – Citigroup.

Michael Bilerman – Citigroup

On the joint venture that’s primarily on the visible shadow pipeline, trying to take the risk off of trying to fund the extra $200 million for those projects?

Thomas K. McGowan

Well I think joint venture’s getting thrown around in a ubiquitous way. I think the bottom line is we’re analyzing various capital alternatives in the term of joint ventures, and we already have one obviously joint venture arrangement with Prudential which we still have obvious capacity in for the visible shadow pipeline projects. We also have other institutional investors who are approaching us not only for programmatic but property level joint ventures in the development pipeline.

And then what Dan was talking about was the idea of what many people have done obviously, is the contribution of existing assets into a joint venture to go forward with additional deals. The thing about that, Michael, is that particular avenue; we want to be very careful because basically it’s fungible. You know, you’re raising capital and we just want to make sure we understand what the cost of that capital is. And that, you know, we’re putting in the assets that we want to put in. So that takes time.

And beyond that at another level for future opportunities, you know, we think that kind of the storm hasn’t shaken out yet and we think that in 2009 you’ll see more things come available. And we’re talking about making sure that we have adequate capital to take advantage of that as well. So that’s where the idea of a potential either new partnership or fund or, you know, an arrangement like that would come into play. And that’s what I was referring to when I was talking about the capital that’s queuing up.

So you’ve really got multiple things going on. But the good thing is, we’re still getting a lot of inquiries into our deals to see if we would be willing to partner with people.

Michael Bilerman – Citigroup

And then just going over, Dan, you talked about having $75 million in liquidity post doing the term loan. What’s the excess you have? You have $30 million available now plus another $60 million. What takes you from $90 down to $75 million?

Daniel R. Sink

Well the acquisition of the Holly Springs parcel would be the primary factor that would bring that down. And I think when I’m going through to get to $75 to $90 and we’re currently at $42, we’ve got the funds coming in. We’re also factoring in from additional developments then that we have finishing up. Some of the redevelopment projects, etc. So I think when you look at where we’re at today at $42, we get the term loan in place, you know we’ve got in our capital funding we’ve got several options to keep the liquidity at that level. That’s our objective is to stay in the $75 to $100 million range.

Thomas K. McGowan

To follow up on that, Michael, as Dan said the $20 million in the new project, you know, that project is already slated to be a joint venture project and we’re well down the road in discussions on a joint venture there. So that’s how you get the number back up into that $100 million range that Dan was talking about. So we fully intend on doing that and it’s likely that that would ultimately be a merchant build type development as well.

Michael Bilerman – Citigroup

And the $25 to $30 million you referenced? That is from the sale of [Spring Hill] Medical and one operating property?

Thomas K. McGowan

That’s correct.

Michael Bilerman – Citigroup

And then on Spring Hill, you know, you did reduce the guidance, partially reflecting the higher cost of the term loan. Can you talk a little bit about what the expectations were for, you know, a merchant build profit? I thought it was about $0.04. Have you just removed that from guidance at this point?

Daniel R. Sink

No. From a guidance perspective, the one thing we wanted to do in this environment is - Spring [Mill] Medical currently has a secured loan in place. And we went through and analyzed the different, you know, options that we had as we looked at the year from a guidance perspective, to make sure that we were conservative in our guidance. I mean, we’re still moving forward on Spring Mill, but I think it’s important that it’s the timing of it more than whether we’re going to sell it or not.

I think we think it’s a prudent capital decision to sell the medical office uses and to use that capital, redeploy into retail projects. So I think it’s more of a timing perspective. You know when we originally did guidance in January of 2008, I think the cap rates and those kinds of things, you know, were perceived to be lower than they are today. And we’re out marketing the asset. We just want to be conservative in how that’s going to come back in.

Thomas K. McGowan

The bottom line, Michael, is we don’t want to be in a position to get squeezed at the end of the year on that deal. And so we want, you know, to be very cautious as to the timing so that we’re not pushed into making a deal to make it happen in a year. That doesn’t make sense for us. We want to maximize the profit to a great asset. We’ve got a lot of interest in it but we don’t want anyone thinking we have to do it this year.

Michael Bilerman – Citigroup

So you’ve effectively removed it? At least part of it?

Thomas K. McGowan

Effectively from a timing standpoint, yes.

Michael Bilerman – Citigroup

And then on out lot and land sales, you’ve gotten about $5 million year-to-date. What’s embedded in guidance for the rest of the year?

John A. Kite

We’ve, you know, and you go on back historically from the date when we went public in 2004, we’ve consistently sold out lots and we, you know, we anticipate, you know, that market has still been there and we anticipate still proceeding forward on a couple of additional out lots throughout the year. We also have a couple of land parcels that we’ve held that we’re also looking to potentially sell and reduce our land held for development, you know, as we proceed forward to put that land into more productive use. So those are a couple things that we’re looking at now.

Michael Bilerman – Citigroup

And how much do you actually, I mean, you’ve gotten $5 million to date. Is another, you know, $3 or $4 million in the back half of the year?

Daniel R. Sink

I think, again, I think, you know, that we have the bucket of capital. We have the Spring Mill Medical. There’s some land sales that we could have flexibility on whether it happens this year or next year. So I think that’s going to depend on, you know, how Spring Mill Medical comes out and what the options are and how we proceed forward on some of the land held for development.

I think if you look at this quarter versus next, I would potentially say, you know, the $5 million we had this quarter, for the first half, you know, we would look to potentially duplicate that in the second half. And that’s why we came at the range of $1.25 to $1.30.

Michael Bilerman – Citigroup

Between all the different pockets though, another $5 million between selling Spring Mill and other land and [end] parcels?

Daniel R. Sink

Yes. I mean, we’re looking at that. Its fungible, Michael.

Michael Bilerman – Citigroup

That’s what I’m saying, as a bucket.

Daniel R. Sink

Yes. We’re looking at it as a bucket. We need to put some water in that bucket.

Michael Bilerman – Citigroup

On Park Side the cost went up to $148 million from $134 million but the estimated GLA stayed the same?

Thomas K. McGowan

The reason that went up $14 million, on the south portion of that parcel what we ended up doing is, instead of doing a ground lease with a large box we’re going to develop about 80,000 square feet of built to suit junior box and small shop space. So when you look at the total GLA that was already in that number. We just changed the capital structure in terms of the way we’re moving forward with the deal.

Michael Bilerman – Citigroup

How much of that GLA will you own now?

Thomas K. McGowan

Of that new space of that GLA, we will own 100% of that new 80,000 square feet.

Michael Bilerman – Citigroup

And of the total of the one five? How much is owned?

Thomas K. McGowan

I believe it’s about 700 to 800,000 square feet.

Michael Bilerman – Citigroup

Your yield expectations haven’t changed?

Thomas K. McGowan

Michael that did not affect the yield. It was just a recalibration of the site plan. And, you know, the project’s still in the visible shadow pipeline so that plan basically stays fluid until it moves to the development pipeline.

Daniel R. Sink

And remember that we reflect some costs in site work and improvements for a non-owned anchor. And we’ll get reimbursed for that. So the cost doesn’t always match up with the square footage.

Michael Bilerman – Citigroup

And you already have some preleasing on these projects, right?

Thomas K. McGowan

Yes we do. And as soon as we get to a point where we’re comfortable with that level, we’ll be in a position to push forward. I would say on Park Side this is an opportunity to potentially start this year, but it may fall into the first or second quarter of 2009.

Operator

Your next question comes from David Fick - Stifel Nicolaus & Company, Inc.

David Fick - Stifel Nicolaus & Company, Inc.

Just a clarification on the last question. You have no preleasing at this point on Holly Springs, right?

Thomas K. McGowan

In terms of Holly Springs we do not have any executed leases. That is correct.

David Fick - Stifel Nicolaus & Company, Inc.

You’re generally building now to about an 8% stable ideal?

Thomas K. McGowan

We are typically developing somewhere between an 8% to 8.5% yield and obviously those range up and down.

Daniel R. Sink

But when you say stabilized yield, David, that 8% to 8.5% is an initial return on costs that’s opening a stabilization. That is not a return on investment. We have to be clear that, you know, we do not proforma out parcel sales into those yields like I think it is done in some other places. So that’s just a cash return on costs.

David Fick - Stifel Nicolaus & Company, Inc.

Can you just walk us through that type of yield profile works in development JV? It would seem to me that anybody that is either doing a JV or investing in a fund for development, is going to want a substantially higher ROE than for stable assets. And given that you’ve got an 8% yield in current, you know, long term mortgage rate now or high six, low seven, how do you get to a high teens ROE for your outside investor while keeping enough upside for the risk adjusted return to make sense for the REIT? Especially given the leasing risks?

Thomas K. McGowan

Sure. Well, first of all, for example on the Holly Springs project which, you know, we’re talking about, the yields that we’re talking about there on a return on cost basis is closer to nine. It’s just under nine. Right at this point it’s kind of 8.75, 8.80 range. And the idea for that deal is also to be a merchant build deal. So the timeline of the horizon of the IRR is not very long.

So, you know, we’re looking at, if you do that deal the right way and you hold the yield, and you can maintain cap rates, you know, between six-and-a-half and seven, even if you run it at seven or seven-and-a-quarter, if you hold the asset and you get the rents you can get into the teens based on that timeline.

If you hold the asset, obviously, for ten years you’re going to bring down that IRR. So, you know, it requires the market to be there for the merchant build obviously, but based on that particular deal coming on line in late ’10, you know, we think that’s a very legitimate kind of return threshold. And then you would obviously look to sell the asset probably in ’11. So you really have a short time horizon there, David.

David Fick - Stifel Nicolaus & Company, Inc.

Can you really get the out parcel realization done quickly enough to turn it around for a sale within a year of grand opening?

Thomas K. McGowan

Yes. Again it all comes obviously down to execution. But in the case of this deal, I mean, we’re already negotiating – I should say we’re already sending out proposals and have requested proposals for, you know, six or seven of the out lots already. And remember we’re not talking about high end restaurants here. We’re talking about, you know, kind of that sit down casual that’s picking up business off the high end. You know, there’s been a trade down there. So the Lone Star’s of the world, the Charlie’s of the world, Applebee’s, you know, they’ve had their struggles but now they’re getting a pick up from the trade down.

So I think it’s very possible. It all comes down to demand and in that particular case, you know, we have a very high level of comfort with, you know, the anchor that we think is the best anchor in the country. So, you know, you can look at it a lot of different ways, but there is enough room in the spread here that the IRR’s are still strong.

David Fick - Stifel Nicolaus & Company, Inc.

Would you be Pari pasu with your outside investors and would you have to guarantee things like development cost?

John A. Kite

The particular deal we’re looking at right now the investor that’s interested, one of the institutional investors, would not be Pari pasu. It would probably be more of an 80-20 transaction. We would be getting fees also. You know, unlikely that we would be required to guarantee costs in that particular case. But we’re still talking in discussions and haven’t closed on that yet.

David Fick - Stifel Nicolaus & Company, Inc.

And Delray, you’ve got the Publix deal signed, congratulations, when do you start? When do you deliver?

Thomas K. McGowan

David, Tom again. As it ties back to Delray you’re correct. We have fully executed anchor leases with the two primary groups, Publix and Frank Theaters which is obviously the key to our ability to push forward. It is our intent and expectation to start that project this year and then we would push forward likely with openings in 2010.

David Fick - Stifel Nicolaus & Company, Inc.

Jacksonville redevelopment, you’ve got the Wal-Mart to deal with there. I know that’s part of the plan. Any idea on timing or what might happen with it?

John A. Kite

From a timing standpoint, we’re looking at several options. Both seem to be very viable at this standpoint, so, you know, from a timing standpoint it would hopefully be in a position we’d be able to push this project forward sometime next year. It’s going to really tie back to our negotiations with the various tenants that we’re working with at this point.

David Fick - Stifel Nicolaus & Company, Inc.

I missed the first five minutes. You may have addressed it. Your tenant reimbursements were down. What was that about?

Daniel R. Sink

The biggest thing on the tenant reimbursements quarter over quarter relate to snow removal. Snow removal was roughly $400,000 in the first quarter, and then in addition to that you’ve got the taxes, tax reimbursement, a successful reassessment at Market Street Village in Texas, which I’ve tried to note on page 12 of the supplemental. We basically had a repeal of taxes of $345,000, of which $308,000 was reimbursed to tenants. So those two items would drive down the reimbursement.

David Fick - Stifel Nicolaus & Company, Inc.

Given that, you know, you’re doing a certain amount of speculative development for strategic reasons here for, you know, as sort of culmination to certain things you were already working on, would you do any more projects like a Holly Springs deal without signed anchors?

John A. Kite

As you know, David, in the development business every deal is unique. In general, the market that we’re in, we’re obviously not very interested in taking down land unless we have a strategy that is going to be executed quickly. So I guess the answer to that is, the market’s changed dramatically, our focus is on not projects like Holly Springs, other than that – you know, Holly Springs is going to be a project we’re going to be very focused on and while we bring in anything new from there, it’s going to be smaller projects.

So we’re actually focused more on the kind of cookie cutter deals that are straight forward. The larger complex deals we’re not focused on. So I think the answer is, that is probably the last of the large deals that we’ll look at for a while. But as the market begins to unwind, and you see things really kind of hit the wall next year which is what, you know, we kind of think will happen, then we might be able to step in and take advantage of broken deals.

Not deals that are our, you know, ground up deals but deals that are broken that we can really take advantage of the prices. And that was the one other thing about the Holly transaction is the pricing was sub $200,000 an acre, so it gave us confidence on the land. So – but the answer is no, we’re not actively seeking large transactions like that right now.

David Fick - Stifel Nicolaus & Company, Inc.

So you’re implying that a Democratic administration will be good to create more opportunity sets for you?

John A. Kite

Can you say that again for me, please?

David Fick - Stifel Nicolaus & Company, Inc.

You’re implying that a Democratic administration would create more stress and more stress is good for your future opportunities.

John A. Kite

Well, we’re thinking about putting out a commercial that we can put alongside Paris’s commercial, but I think the bottom line is yes, we’re going to go through a process next year of realization in commercial real estate financing. And, you know, I hate to use words like this but I think that there’ll be some capitulation towards the end of the year as a lot of these interest only loans begin to have no home. And we want to have capital to take advantage of it. That’s where we’ll focus on our business strategy.

Operator

Your next question comes from Philip Martin - Cantor Fitzgerald & Co.

Philip Martin - Cantor Fitzgerald & Co.

First of all, Tom, on the development pipeline, 78% preleased, 20% occupied, can you give us some more on the timing of, you know, that 70% prelease in terms of occupancy takeover?

Kind of how that runs out?

Thomas K. McGowan

Sure. From an occupancy standpoint, if you take a look at our development pipeline, we have

Bayport, Beacon, Spring Mill and Gateway Shopping Center projects that are very, very close to stabilization and in a position that are on queue to move to the operating portfolio. Then if you take a look at projects that will come in in the queue like you talked about, Cobblestone will be one that will start to occur in the first quarter, second quarter, third quarter and we’ll have very significant lease up because of the preleasing and the quality of the real estate.

So if you look at it, that is the one project from a queue standpoint that will be coming on a little bit later than the balance. And as you can see from our redevelopment projects, you know, those are moving along fairly well. Rivers Edge and Bolton are ones that will likely not occur or start until 2009.

Philip Martin - Cantor Fitzgerald & Co.

And then in terms, now given the economic environment, how’s the viability of your shadow pipeline? I mean, where is that sitting? How comfortable and confident are you today in that shadow pipeline? And again, I know the market could be totally different in a year. But as it sits today, how confident are you on the viability of that shadow pipeline?

John A. Kite

To kind of start off on it, in general we’ve focused a lot of our leasing efforts in the visible shadow pipeline because the current pipeline is highly leased. So we’re aggressively going after it. When you look at as Tom said, property by property, you know we’re really beginning to make progress now and a lot of that has to do with, you know, where the tenant openings are going to occur. Because now we’re obviously talking about delivering these visible shadow pipelines and projects in kind of the ’10 range.

So for a retailer who’s looking at what’s happening in the world, you know, he’s very concerned about 2009 obviously but that retailer obviously also has to continue to do business and take advantage of the market share. But really we’re set up pretty well, Philip, in the visible pipeline in terms of what retailers want to talk about. They much more would rather talk to us about ‘010 deals than they would about ’09 deals and we’re fortunate there because our ’09 openings are already 80% leased.

Philip Martin - Cantor Fitzgerald & Co.

And then Dan, just a – I know you’ve talked a lot about this. I just want to make sure I’ve got it correct here. But from kind of a sources and uses in the [beeline] you’re going to be roughly at about $70, $75 million then there’s some asset sales in there that will add to cash of about $20.

Daniel R. Sink

Right now we’re saying asset sales that we’re projecting and again these are [eyes] that we’re projecting out, we don’t have signed contracts or anything. But we feel as we’ve marketed them that we can generate an additional liquidity of $25 to $30 million.

Philip Martin - Cantor Fitzgerald & Co.

And that is over what time frame? Through ’09 or is it year end?

Daniel R. Sink

I would say between year end and the first quarter. You know, between now and the first half of ’09, not through the end of ’09.

Thomas K. McGowan

Obviously as Dan said the objective is to continue to do things from a capital standpoint to give us that range, you know, to give us that $75 to $100 million of liquidity. So that’s why we’ll continue to seek out these other capital alternatives, the joint ventures, the funds, the things that we’ve talked about.

Philip Martin - Cantor Fitzgerald & Co.

And then in terms of available secured debt capacity that you have right now, what could you take that to at this point?

Thomas K. McGowan

I think, let me make sure I’m answering your question. On the secured debt side I think that we, you know, that’s something we’re looking at, we’re going to be in conversations with as these construction loans mature. As I mentioned we’re talking to both the commercial banks and we’re going to be having conversation with the insurance companies on taking some of those construction loans and moving them to more along of a mini-perm end or a secured loan.

So when you look at those two perspectives that’s going to be our objective because as we’ve talked about, as we’ve done in the past, you know, we typically will take down projects off the line of credit. We’ll then convert it to a construction loan, complete the project and move it to secured financing. I think as you know the CMBS market is, there’s not a lot of bids being down out there but there’s insurance companies and banks that are willing to keep quality assets on their balance sheet at this point.

So that’s a lot of the, those are a lot of our objectives as it relates to the construction loans and the secured [inaudible].

Philip Martin - Cantor Fitzgerald & Co.

Now in terms of uses, I mean, you certainly have your debt maturities and I guess looking through ’09, debt maturities throughout ’09 are right in that $240 million total, you know, based on your supplemental. You’ve got development needs through ’09. I know you’ve got it laid out there but where are your development? What kind of cash do you need for the development, redevelopment and shadow pipelines through ’09?

Daniel R. Sink

I think if you look at, you know, the completing of the current development pipeline, you know, we’ve got basically $160 million in it, without the redevelopment projects, the total estimated cost which we funded about 66% of that.

Philip Martin - Cantor Fitzgerald & Co.

So just go off of those numbers and assume that that’s?

Daniel R. Sink

Exactly. That’s going to be a good guide because we have, you know, our objective is to, you know, get these projects going and complete them in the current pipeline. And the spend is about $60 million left on those projects. And the spend on the visible shadow pipeline, as we move

Delray and some of those other projects into the current pipeline, we’ll have some more visibility on exactly, you know, the construction loans and the equity in this type of item. So I think a good metric to go from is the current pipeline, the visible shadow pipeline and we also acquired Holly Springs. But as John and I talked about our objective there is for us not to fund 100% of that, you know, but more along the lines of 10 to 20%.

Operator

Your next question comes from Jeffrey Donnelly – Wachovia Capital Markets LLC.

Jeffrey Donnelly – Wachovia Capital Markets LLC.

John, maybe this is a bit of an open-ended question but I think on your last call you had talked about having something of a 90 day plan, I think, headed into the ICSE spring convention with a series of objectives? How have you progressed there? And, I guess, what points remain at the top of your list?

John A. Kite

Well I think first of all that we have a meeting on that next week to summarize the progress we made. And we’ve made good progress as evidenced by the amount of leasing we did in July. You know, I think in July alone we did 100,000 square feet, somewhere in that range. So, you know, we’re doing well, Jeff. I mean, we’re probably, you know, in one of those situations where as I said a lot of it has to do with the delivery timelines of what we’re leasing. So you’ve got the combination of what we’re doing between the operating portfolio and the development portfolio.

I think that the market continues to definitely be slower. People are much more cautious and conservative in their deal making. So, you know, what I wish could get done in 90 days maybe takes longer than 90 days. But the bottom line is, you’ve got to keep the pressure on and the pressure is clearly on here to execute that. And also as we kind of talked about, you know, it’s not just we really want people to understand that they can do well financially by getting these deals done, so we’ve created a compensation structure for that as well.

So things are moving forward. I think you can see that by the leasing activity we had in the quarter, you know, by the anchor deals we did with Publix and Bed Bath & Beyond and LA. People are making deals. No question. It’s just that, you know, on the margin you’ve got to have the right real estate. And I think one of the advantages that we have, when you look at our portfolios, you know our portfolio pretty well, it’s all very high quality real estate. You know, if you have secondary, older assets, it’s going to be a tougher grind.

Thomas K. McGowan

Hey Jeff, just one more thing to follow up on the 90 day initiative, and one of the keys, of course, was the visible shadow pipeline. And I had mentioned earlier that we’re going to be in a position to be able to start Delray this year. So that was one of the key points that we wanted to push forward as a company, as well as making progress on Park Side and in addition to that, making sure we’re in a position to start Maple Valley as well. So on those key three initiatives, we had a pretty nice push.

Jeffrey Donnelly – Wachovia Capital Markets LLC.

Actually, Tom, on Eddy Street, you know, it looks like you’re exposure there was cut because it seemed like you’re laying off on the apartment component, I guess, to another party. Is that actually put in place or are you guys technically on the hook for those units of that component of the project, either under your TIF or arrangements with the University?

Thomas K. McGowan

Yes, just for a clarification we took our total project cost on Eddy Street from $70 million to $35 million and that was done simply as a clarification of exactly how the deal structure was done with our partner on the apartments. So our exposure truly is laid off on the apartments, and that will be funded by that group.

John A. Kite

Then we will be the beneficiary of the heir rights component of that transaction.

Jeffrey Donnelly – Wachovia Capital Markets LLC.

Dan on the construction loan maturities, just to clarify I think you mentioned you had $75 million in loans with extensions. Are you able to identify which projects those are attributable to and maybe some of the details, such as how long the extension options are for? And any hurdles you might have, for instance, around leasing in order to, you know, achieve those extensions? Or is it just a function of cost along those lines?

Daniel R. Sink

I think that the biggest driver of the extension options is the debt coverage ratios. And I think when you go through and you look at the various construction loans, you know, we’ve got a couple that we’ve got extension options for a year and we’re going back to try to get another 12 months. And so we’re constantly in negotiations with the bank.

And I think one of our objectives right now, Jeff, is to go in and not just try to push for a year with extension options for another 12 months, but try to do a three year mini-perm or do something of that nature just to push out the maturities and term it out for a bit. So I think that’s our objective as we go into this, you know, as far as, you know, the specific loans. I mean, some of the larger projects that we’re looking at like a [inaudible] are included in those, in that $75 million.

Thomas K. McGowan

And those loans, Jeff, I mean as the year evolves here the ones that he mentioned are in the 90% leased range. So we’re going to be also analyzing the permanent market versus kind of the mini-perm market. And at the end of the day, we’re going to take advantage of the best rate opportunity that we have over a life term.

So, you know, if we can get a five year permanent loan versus a three or four year mini-perm, and what the stock market is versus the kind of long term interest rate market is we’re also going to be looking at that, too. A combination of really looking at what capital is out there and how we marry it out.

Jeffrey Donnelly – Wachovia Capital Markets LLC.

For the construction loans that you’re in negotiations on with $57 million of those with extensions, is there a chance here where if you didn’t have that extension or maybe you don’t comply with terms of the extension that you’d have to come out of pocket to pay down those loans? Or you might have difficulty pulling out proceeds and if you had to recast some of those construction loans?

Daniel R. Sink

We feel pretty confident in our negotiations. I hate to use the word “never” because this market is crazy right now, but a majority of these lenders are lenders we’ve worked with for, you know, 20 years and we have good relationships, and these projects are projects that aren’t spec. They’re projects that have good anchors, are well leased, and they’re the type of project banks want to keep on their books if they aren’t over levered and where they’ve got a good sponsor behind them.

With the banks moving towards quality and looking for what kind of assets to hold and what type of assets to move forward and push off their balance sheet, I think we’re going to be from the quality side we’re going to benefit from that. Can I sit here and say that I have comfort that that’s not going to happen right now? Am I confident? Yes, but I don’t think I ever want to say the word “never” right now.

Thomas K. McGowan

The nice thing about that, Jeff, is that’s why we’re generating liquidity. I mean, the bottom line is in a market like this that you have to expect the unexpected. So we’re going to have the proper amount of liquidity available to us to deal with whatever happens. That’s our objective right now. And that’s what we’ve been working on. So as Dan said, these are great projects, well anchored, well located, good relationships but, you know, if something crazy happens we’ll be prepared to deal with that.

Operator

Your next question comes from Richard Moore – RBC Capital Markets.

Richard Moore – RBC Capital Markets

On this whole liquidity thing, am I kind of understanding that you think the work obviously that Dan is doing and the potential joint ventures should be sufficient? Or do you think you can ramp up maybe some more dispositions of core assets that don’t have the kind of growth that you’d like to have? Or is it sufficient just what you guys have outlined so far?

John A. Kite

I think Rich we’re, you know, the nice thing about what we’re doing right now is we’re looking at the whole picture, you know, and frankly capital’s fungible. And you know, we want to make sure that we have it for multiple buckets as Dan likes to say. So we think that the plan we have in front of us is adequate. But you know like the question that Jeff just posed is a good question, because maybe you spend capital in places you didn’t think you were going to, so you have to prepare for that.

So the process we’re going through is to make sure that we have enough capital available to us to have that $75 to $100 million cushion that Dan was referring to. So that’s why you look at the alternatives and the asset sales that we’re talking about, I mean, are things that we have been talking about for a while that make sense. I mean you’re talking about a merchant build medical office building and we’re looking at a couple maybe non-strategic retail assets that don’t have a lot of growth in our view.

So that makes sense to us and at the end of the day we do think the plan that Dan outlined is adequate.

Richard Moore – RBC Capital Markets

How much small shop space is there on Delray?

Thomas K. McGowan

Delray has about 140,000 square feet of small shop space. But some of that will be broken into larger components, maybe the 10 to 15,000 square foot pieces. So, you know, we’ve gotten fairly comfortable with that percent of space based upon where we are, number one, and then number two, the drivers of the two primary anchors being Publix and the Theater because you obviously have the service components to follow one, you have the restaurants and the others that follow the second. So it’s a percentage that we’ve determined to be manageable based on its location.

John A. Kite

As well as some of the restaurant deals that we will be doing will be actually end cap restaurant deals that will be contained in that square footage. So it’s actually a mixture as Tom said of all those things. And we are already well on the way in our preleasing efforts as well.

Richard Moore – RBC Capital Markets

You were saying about 60% I think. Right? Somewhere in that range?

Thomas K. McGowan

Well one way to look at is in terms of where we are leasing, we have about 120,000 square feet of anchor leases in place. If you take a look then at where we are with the restaurants, like John talked about in the small shops, we’re starting to approach about 50% in terms of where we are from a commitment perspective. And with the thought and goal of the company to commence this project this year, and knowing that it’s not going to deliver until probably likely the second quarter of 2010, that gives us adequate time to get that percentage up to a point of where it needs to be.

John A. Kite

Well one thing we do, Rich, on our Florida deals, particularly, is when we’re in the leasing process and, you know, you come into the summer months and the off-season months, we’re careful to leave ourselves room to commence more leasing kind of in the season. Because you have a better option, you have a better just kind of feeling in the market of what people can pay in rent. So that’s something that people sometimes forget is the season actually plays into it in Florida.

Richard Moore – RBC Capital Markets

As you guys look at that, and look at Florida in particular, are some of these tenants dropping out as time goes by? I mean obviously that’s the big concern with community center attendance has been. New developments in Florida is a tougher area as geographies go. So are you seeing some of these fall out as well?

John A. Kite

We looked real hard at Florida and we compare Florida to our total portfolio. We look at it small shops. We look at the anchors. We look at the rent. We look at the turn over. And we continue again anecdotal is one thing, but data is another. And the data is basically showing us that the impact we’re having in Florida is really not materially different than the impact in the other markets that we’re in. Now obviously, again, something I just said a second ago is playing into this.

Not only is Florida going through just a total re-sizing of its residential market, you know, you’re in the summer months. And we’ve been talking about that a lot with the tenants. I mean, we’re in months that are difficult for tenants regardless of the environment. So it’s kind of a double whammy. As far as tenants dropping out, you know, relative to Delray it all has to do with who our marketing is to.

The tenants that have dropped out are the lifestyle tenants. And that’s not something that’s just specific to Delray Beach or specific to Florida or specific to the southeast. That’s the whole country. I mean, the lifestyle, the smaller lifestyle shopping centers they’re continuing to try to do those with those high end tenants. It’s just very, very difficult to get any acceleration. So we’re very aware of that and we have really moved the marketing pitch on this particular deal to more reflect who we think are doing deals right now.

Richard Moore – RBC Capital Markets

And then staying on the tenants for a second. It seems like TIs were up for retail. I mean do you think maybe put more TIs in? Maybe offer concessions in this kind of environment?

John A. Kite

I think in the particular quarter and for the six months we haven’t had a significant increase. But as we’re re-tenanting such as the Bed Bath space at Sunland, because we’re dividing that box up in the Bed Bath and 7,000 feet of small shops, you know that’s going to be more than a – many people would put that in a redevelopment, but we left it in because we’re just re-tenanting the box. So I mean we’re doing a lot of work on the façade and the various parts of the structure and breaking the box up. So that’s going to cost a little bit more.

But overall, I think when you look at from concessions and those type of things, I think if you’ve got the right real estate I think it’s more of a timing issue and it’s taking a lot of time to get the leases signed.

Richard Moore – RBC Capital Markets

And then on Bay Port and Gateway, both of those were up, you know, Bay Port obviously just a tiny bit. But is that a construction cost thing or what’s going on there?

Thomas K. McGowan

On Bay Port it went up about 300,000 square feet. You had just mentioned about TI. We did get a little bit of creep on TI as it ties back specifically to the small shops at Bay Port. And you know that’s a situation that we have a great anchor in Super Target and we’re doing well there. In terms of the three boxes being leased and trying to close that out, if we find a good small shop user and feel they’re of quality we could put a little more TI there.

As it ties back to Gateway, Gateway went up $3.7 million. The reason Gateway went up that figure was we added a Rite Aid build to suit on what was previously going to be a ground lease out lot, so we did not have any cost tied to that in terms of the total project. So those are the two specific reasons on those. And I think I had mentioned previously why the Park Side number went up, that really tied back to the fact that we were not doing a ground lease there and were doing build to suits tied back to about 80,000 square feet of space.

Richard Moore – RBC Capital Markets

And then Dan, last thing, on accounts payable those jumped? Any thing in particular or is that sort of a timing thing?

Daniel R. Sink

That’s a timing thing. And one thing on accounts payable that makes it a little, probably a little heavier on ours than others is we also have construction payables from a third party perspective. And when you’re being a construction manager or a general contractor, you know, those payables if you hold those over month end or a quarter end, it’s going to be a large timing difference. More than anything else that’s what it would be.

Operator

And there are no more questions at this time.

John A. Kite

Well again thank you for joining us for the call and we look forward to talking with everybody next quarter. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!