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Kite Realty Group Trust (NYSE:KRG)

Q3 2012 Earnings Call

November 02, 2012, 01:00 pm ET

Executives

Adam Basch - Financial Analyst, Investor Relations

John Kite - Chairman & CEO

Tom McGowan - President & COO

Dan Sink - EVP & CFO

Analysts

Todd Thomas - KeyBanc Capital Markets

R.J. Milligan - Raymond James & Associates

Nathan Isbee - Stifel Nicolaus

Carol Kemple - Hilliard Lyons

Rich Moore - RBC Capital Markets

Quentin Velleley - Citi

Josh Patinkin - BMO Capital Markets

Tammy Feak - Wells Fargo Securities

Operator

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

I would now like to turn the conference 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 third quarter earnings call. Thank you all for attending today, especially in light of the difficulty being on the call with the effects of the storm. We appreciate you coming on with us today.

We posted another solid quarter as we continue to execute on our operating, portfolio and balance sheet objectives. The operating results for the quarter continued their positive trends. FFO for the quarter was $0.11 per diluted share, meeting our expectation as well as consensus estimates. The year-to-date FFO as adjusted for the charges recognized earlier in 2012 was $0.33.

We recorded another quarter of positive NOI growth and rent growth in the portfolio. Our same property NOI for the quarter was up 1.9% over a strong prior year and increased 2.8% with bad debt expense added back. In addition, our aggregate cash rent spreads increased 4.1% for the quarter.

Our portfolio retail leasing percentage increased 40 basis points over the prior quarter to 93.4% as our small shop percentage increased to 81.8%. This small shop percentage is our highest level since the second quarter of 2008 and represents a 120 basis point increase over the prior quarter. The small shop tenants that drove this increase include high quality national tenants like Charming Charlie at International Speedway Square, Kirkland’s at Boulevard Crossing and several prominent quick service restaurants including Five Guys and Buffalo Wild Wings throughout the portfolio.

We continue to look into opportunities to enhance our operating assets in our current retail portfolio. For example ,we're in final stages of lease negotiations to execute a new 20 year lease with Publix in one of our shopping centers in Florida, which will trigger redevelopment of the center. This renovation is anticipated to be complete by the end of 2013.

In addition, we are in late stage lease negotiations with a high quality specialty grocer at two of our existing centers, to backfill an empty anchor space in one center and to enhance the overall tenant line up of another. These expansions and retaining the opportunities have long-term value to our centers and provides strong cash returns on incremental capital spend.

During the quarter, we also continued to execute on our capital recycling strategy. We're pursuing the sale of several un-anchored centers and limited growth assets. We sold two operating properties in the quarter including Coral Springs Plaza, a single tenant Toys “R” Us in Ft. Lauderdale for proceeds of approximately $9.5 million. In addition, we moved one retail operating property and two commercial properties to the discontinued operating section in the income statement, as these three properties were considered to be held-for-sale as of September 30th.

The sale of the two commercial properties closed on October 31st, and we anticipate closing on the sale of Preston Commons and associated residual land in Frisco, Texas in the fourth quarter. The three properties will generate approximately $8.5 million of net proceeds after paying off the property level debt. We anticipate redeploying the proceeds into our retail assets.

After the sale of the two office assets, we reduced the percentage of NOI coming from non-retail properties to 5%. The two remaining commercial assets are the 30 South Meridian Corporate Headquarters building and associated parking garage as well as the mixed use office component of Eddy Street Commons.

To-date, we have generated total proceeds from dispositions and consolidated properties of approximately $75 million. After adjusting the Marysville asset for the JV partner’s 50% share our share of the total proceeds would be approximately $60 million.

As we discussed on the last call, as well as during our recent equity offering, we are seeing more acquisition opportunities in our target markets. During the quarter, we acquired a center in Vero Beach, Florida for $15 million in an off market transaction. The newly named 12 Street Plaza is a 97% leased 138,000 square foot neighborhood shopping center anchored by Publix and Stein Mart. Publix sales of this location significantly exceed their overall store average on a per square foot basis.

We are making good progress on our due diligence and anticipate closing in early December on a 194,000 square foot community shopping center in Greenville, South Carolina. The property is anchored by Bed Bath and Beyond, Old Navy, Party City, Shoe Carnival and several other national tenants. Property was built in 2000 and is currently 95% leased.

The center’s in place rents are slightly below market and is located in the primary trade area of Greenville. Greenville is a vibrant market with strong demographics and home to the North American headquarters for GE Engineering, Hubbell Lighting and Michelin. As well as having a large corporate presence of BMW, Fleur and Lockheed Martin.

We are also tracking several assets in our targeted markets including a late stage negotiation on a grocery anchored center and we are soon to execute. As we are focused on deploying the proceeds from the offering and cash from our recent non-asset sales into retail assets with good strong value and upside potential.

On the development and redevelopment side of the business, I would like to provide a brief update on several of our in process projects. The Delray Marketplace development is approximately 77% pre-leased and vertical construction will be substantially complete by year end. Several tenants will take possession or open in the fourth quarter of this year with the remainder scheduled to open in the first half of 2013. We are very excited to get this project open and operating and anticipate the asset will be a strong addition to our portfolio upon completion.

The Holly Springs Towne Center development near Raleigh, Carolina is experiencing solid leasing momentum with pre-leasing increasing to approximately 85%. Vertical construction is well underway and we expect Phase I to be substantially complete in the spring of 2013.

At Rangeline Crossing in Carmel, Indiana we have added Walgreens to the expending tenant roster. The redevelopment project is now almost 91% pre-leased and is under construction. We plan to close on a construction loan for the project before the end of 2012 and we will have the majority of the tenants including Earth Fare, a specialty organic grocer open by July of 2013.

Four Corner Square redevelopment project in located in Maple Valley, Washington, a Seattle suburb is over 85% pre-leased. We closed on a $23 million construction loan with U.S. Bank in July and vertical construction is well underway and we anticipate an early 2013 opening.

Oleander place in Wilmington, North Carolina anchored by Whole Foods is now a 100% leased. We anticipate delivering the redevelopment project to the operating portfolio in the fourth quarter. In addition, our Parkside Town Commons development project near Raleigh, North Carolina continues to have strong leasing momentum with several national retailers in late stage lease negotiations. We plan to begin the site work in early 2013 and expected opening in mid 2014.

Moving to the balance sheet, we continue to focus on four very important objectives. First to improve our flexibility with an increased number of unencumbered assets; to reduce debt to EBITDA while maintaining value for our shareholders; and to term out and stagger debt maturities as well as reduce CIP as a percentage of total assets.

The completion of our $200 million in-process development pipeline will reduce our consolidated CIP to $150 million or less than 5% of our total assets. Now that this pipeline is almost 84% preleased and has construction funding committed, we've significantly mitigated our risks and anticipate 15% to 20% NOI growth from these projects.

We've also minimized the risks on our near term debt maturity schedule as 2013 maturities are only $30 million. As we complete our construction projects, we anticipate terming out the debt as these projects were underwritten for the permanent financing market. We are also analyzing terming out a proportion of our credit lines for five years to place it into the 2018 maturity slot where we currently have only approximately $7 million of debt coming due.

In closing, we have a number of exciting projects well underway and nearing completion. The developments and redevelopments are taking shape with solid NOI growth on horizon, and we are ahead of plan with our asset recycling objectives as we prune the portfolio of assets that don't fit into our long term growth strategy.

Finally, our acquisition pipeline is providing new growth opportunities in our targeted markets, as we are pursuing grocery and community centers with strong anchor sales and sub markets with solid demographics at purchase prices below replacement costs. With that we would like to thank you again for participating and look forward to talking to you over the next several quarters and we would open the call for any questions operator.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will comes from the line of Todd Thomas with KeyBanc Capital Markets.

Todd Thomas - KeyBanc Capital Markets

In terms of the non-core asset sales it sounds like there might be more to do on that front, what should we be thinking about heading into 2013, I mean how many properties does this pool consist of and what kind of gross proceeds could this represent and then also I'm just curious who the buyers of some of these assets are.

John Kite

We are taking two questions, basically we have three or four other assets that we are marketing that we think we could do something with or we could sell. Some of it depends on the asset that we are selling some small unanchored centers that are going to be more private owners who are potentially using 1031 transactions or leverage and then we've obviously sold a couple of larger projects to couple of publicly traded company, a large non-traded REIT as well. So I think it’s a combination, there's a lot of activity in the market and really its pretty good depth in each of these asset classes, that's what's making it a little bit more attractive right now.

Todd Thomas - KeyBanc Capital Markets

For the three to four properties on the market any sense for what type of value you would assign to that.

John Kite

You know, again it depends on a couple of smaller ones or bigger. You know, say somewhere between 20 million and 30 million?

Todd Thomas - KeyBanc Capital Markets

Okay, and then I think you mentioned, that there was going to be a land sale along side, the Preston comments [at this] position, are you expecting to record again an FFO at all in the fourth quarter on that.

John Kite

As far as in the fourth quarter on that the land that we are selling there is, for the most part breakeven. So there is nothing to record from an FFO on that land sale. It will reduce our land held for development by the proceeds that we get from that asset.

Todd Thomas - KeyBanc Capital Markets

Just moving over to Delray market place, just wondering how much visibility you have, with regard to remaining GOA last [two week] last 20% or so, just pulling. On past calls it sounded like leasing was coming in a little bit a head of that expectation rents were trending a bit higher. Is that positively impacting where the overall yield on the development project will stabilize.

John Kite

As we talked about quite a bit, the majority of the remaining leasing is small shop leasing. So to answer your question, yeah the rents are obviously higher in the small shop leasing and it continues to be on track to exceed what we thought it would a bit in terms of rents. In terms of the overall returns, where we are taking you guys in the past, but these development projects are a returning close to 7% all in probably a bit below that and then around north of 10% on incremental returns. So both of those metrics continue on this project and quite frankly the pipeline.

Dan Sink

And Todd I think with the fact that the projects come in to completion that’s going to give us a nice surge as it relates to the balance of the leasing. It’s really coming together and from a visual standpoint these local tenants etcetera can now really put their teeth in and make some decisions.

Todd Thomas - KeyBanc Capital Markets

Okay. And then just a follow up on that lastly. You mentioned that some of the property will commence rent before year end. What portion of it will actually will commence rent before year end and how will the rest of it kind of trend into the first half of ‘13?

John Kite

Yeah Todd before the end of the year, we are focused on getting both anchor tenants. We are not sure whether if they are definitely going to take possession and be [fixturing]. So from an income statement perspective we will be recognizing minimum rent. As far as their opening and timing of their opening and some of those items, we are in constant contact with those tenants, but they some of them don’t have a specific date whether it’s the middle end of December beginning of January that they are going to be paying cash rent. But we will start recognizing straight line rent from those tenants as they take possession and fixture their stores.

Todd Thomas - KeyBanc Capital Markets

Yeah, so there will be a lot of activity on the turnover front as we head into November and then through December, so we have a fairly significant tracking system as we go further.

Operator

Your next question will come from the line of RJ Milligan with Raymond James and Associates.

R.J. Milligan - Raymond James & Associates

Hey guys first question a follow up on Todd’s questions, do you guys plan on marketing either the remaining two office properties the Eddy Street or the headquarters?

John Kite

We look at everything RJ, so it’s something that we are going to be thinking about in 2013, they are very different in their nature. The building in Indianapolis obviously we are here it’s our office building, so there are something that revolve around that in terms of whether we would sell it or not. The office building and their name is kind of part of the overall development, and it’s full or close to full. I think if we look at both of them, but I think we have got at down to the point now where we are talking 95% of our income comes from retail assets and obviously as we deliver these other projects it’s going to get even higher. So we will have the non-retail down to a couple percentage points within a year. So it’s going to come, I won't use the word deminimus but it’s obviously not a material impact either way.

R.J. Milligan - Raymond James & Associates

Okay, and would you say that the non-course assets sales over the past, say two quarters are more driven by the strategy of really focusing on your core portfolio or is it more driven by pricing is attractive now this is a great time to sell?

John Kite

I think you look at everything right, but you start with what do you wants your portfolio to be comprised of, that's what you start, and you start with what is the asset quality within it. In order to execute, you need a liquid market and we have a liquid market. So I think it’s a combination of those two things, but clearly the strategic idea of eliminating smaller non-anchored centers is a primary kind of the business objective because the anchored centers have provided more growth for us and have more stability. And then the geographic things that we have done and are doing in terms of tightening our geography and making it more clear to the market, where we are pursuing and want to be. So I think if all those combined RJ, but clearly there is liquidity, it’s hard to find returns and even the assets that we deem non-core or things that we don't want other people do want. So I've told you something right there.

R.J. Milligan - Raymond James & Associates

Question for Dan, guidance maintained, it seems like there's a pretty big range even not on a penny’s basis but still a pretty big range for the fourth quarter and I was just wondering what would drive you to hit the low end versus the top end there?

Dan Sink

I think with the recent equity offering and the redeployment of those proceeds when it happens during the quarter is somewhat drives that answer and we've got, when you look at typically RJ we give ourselves some room. I mean, we normally give a range and it has been our practice for several years. We guide towards the middle. So I think that's the important thing to look at. I mean, is there opportunities with the transaction type items that we could reach the high end? Yes, but I think we are seeing them for the most part for guiding towards the middle and if you look at redeployment of the equity offering and those proceeds that's what would have an effect on the fourth quarter number as well as the year.

John Kite

I think and particularly as it relates to the top end because sometimes we can't predict that someone may come to us and say I want to buy this and I want to buy it by year end if it’s an outright as an example. So that happens and that's what we drive that but again as Dan said, we are really comfortable with the midpoint of guidance.

Operator

Your next question will comes from the line of Nathan Isbee with Stifel Nicolaus.

Nathan Isbee - Stifel Nicolaus

Just looking back at your most recent acquisitions, clearly, they have healthy yields relative to some of the other markets for people are acquiring, can you talk about the rents, in place rents on those properties and where you think they are relative to the market as those leases mature?

Tom McGowan

Sure, I mean I would say that when you look at, like if you look at the two that we did in Florida, you have kind of shop rents in Vero Beach in the high teens, you know, mid to high teens which we think is below market and the anchor rents are below 10 which we also think is below market. So that one, if you look at the deal we did in Stuart, Florida, shop rents are higher but the anchor rates are actually lower and I think we as you know we acquired that one with a very below market anchor rent.

So the shop rents there are probably in the kind of low 20 range which we think is probably closer to market. And then the assets that were in due diligence on South Carolina, the shop rent or I'm sorry the box rents are kind of between $9 and $11 which single digits is below market and I think that nearly probably have $10 to $12 box market there. So we have some opportunity and then the shop rent, there's just not a lot of shops there but they are kind of in the high teens.

So we think we have opportunity. So I don't know how much of the pricing is driven on, obviously the NOI is what we are buying and so from a price per square foot its probably driving some of the discount that we are getting but on a cap rate basis that's an absolute metric and we are getting these, majority of these are off market and I think we are negotiating a good deal.

Nathan Isbee - Stifel Nicolaus

Okay and then in terms of the Indiana State Office Building you are looking to sell, can you just talk about appetite from investors for office space in Indianapolis today and like what type of cap rates they are willing to pay?

Tom McGowan

Sure, but to be clear Nate, we actually sold the two. So those are closed.

Nathan Isbee - Stifel Nicolaus

Okay,

Tom McGowan

So those are done. That’s not really cap rate transaction because they were both leases with the State of Indiana and the original lease document had a count of purchase right in the document which they exercised and it was profitable for us. And if we were to look at selling other office, the other office assets we have, I would say that depending on the property cap rates are probably around high 7s to low 8 range depending on the property.

Nathan Isbee - Stifel Nicolaus

Okay, thanks and then just moving to Delray real quick, the remaining small shop space, you see there is growing interest. Would you say that’s coming mostly from food users or perhaps other types of retailers as well?

John Kite

I think it's coming from everybody. If you look at what we did this quarter in terms of our leasing, I think its representative of everything we’ve done. I mean this is macro but in the quarter, we did 46 deals, 41 of them were small shops and of those, I’m sorry 30 were small shops.

But if you look at the balance of it, it was national deals, it was regional deals, and then it was Mom and Pop deals. So of the 30 deals that we did, it was a good balance. So we feel like that’s continuing. In terms of Delray itself, we've done a lot of national leasing there. So I think Tom mentioned this in an earlier question but we're now to the point where we are finishing the project and you will have much more kind of regional local leasing done when you can actually walk the project and go into the spaces and see where you are going to be. So overall, I think we have had a really good balance of national, regional franchisee and Mom and Pop in our portfolio, surprisingly high on the Mom and Pop side actually, but at this particular project it’s been much more national leasing oriented and now it’s becoming local and regional.

Tom McGowan

I would also add with a lot of great new concepts, concepts that you may not be familiar in the local market that have good strength. So that will add a little bit of pop into the center which we are excited about.

Nathan Isbee - Stifel Nicolaus

I can’t wait to see it. When you talk about the balance in terms of national, regional versus Mom and Pop would you say that’s changed materially over the last few quarters?

John Kite

I think the Mom and Pop side has increased for us in the last couple of quarters. We look as I have said told you before we kind of we differentiate a national tenant and a national franchisee typically the franchisee is of a national like a Subway or Great Clips, Sport Clips, Massage Envy guys like that, these are national franchises but they are typically operated by Mom and Pop operator.

Nathan Isbee - Stifel Nicolaus

Sure.

John Kite

But they have a platform behind them. So obviously those and the national small shop tenants like Charming Charlie BW3 and Starbucks and those guys they have been active for couple of years now, but the Mom and Pop in terms of our portfolio seems to have picked up that could be in for a lot of reasons, but we are happy to see that.

Nathan Isbee - Stifel Nicolaus

And how do you underwrite those [hubs] today looking ahead to that next downturn trying to give you some sort of assurance that they are viable and have some staying power in the downturn?

Tom McGowan

Well we do as I think you know we do a pretty intense underwriting process when we are kind of sending at least through our approval process for, every lease we signed goes to a pretty rigorous process and obviously the more capital we are spending, the more intense that process is. So we are looking at and we have an internal credit rating system that kind of gives us an idea of what IRR we need to achieve on any capital that we are spending tenants specific then also we look at it from the net present value perspective. So I would say the way we are doing it today is that we are putting less money, less CapEx into lower credits than we did five years ago, I don't think there is any question about that.

And we are also verifying funds and we go through a lot of rigor in terms of our credit committee and what it brings back out of it and what it request of our leasing group. We would like to see funds verified for their portion of the work, their money goes in first. I guess, I would say, we treat it like we are a bank and we are lending money that’s kind of bottom line.

Operator

Your next question will come from the line of Carol Kemple with Hilliard Lyons.

Carol Kemple - Hilliard Lyons

What was the spread between occupancy and lease rate in the quarter?

Dan Sink

Its 280 basis points with the majority of that being tenants that have not yet opened and are paying already.

Carol Kemple - Hilliard Lyons

And then, decline in renewal spreads, was that just a couple of leases or was that basically overall?

John Kite

No, Carol. That was quite frankly just a few leases. I think if you look at the total, we had the majority of them were positive I think we did on the renewal side we did 19 deals and I would say of the 19, five or six of them were negative, so its the law of small numbers that we have working against us in any one quarter. And frankly, we probably benefit from that and like we did last quarter.

So last quarter we had large spread increases on a handful of deals and it drove the number. But when you do 19 renewals and five or six some are negative, you know that's probably not that unusual. And by the way remember that, we in our spreads, we include everything in terms of how long spaces have been empty, so we are not excluding spaces that have been vacant for more than a year and I think that throws off some comparisons because some people do that.

Carol Kemple - Hilliard Lyons

And then on the income statement, I noticed the income from unconsolidated and it’s increased substantially from the second quarter, was there anything new there?

Dan Sink

I don't think there's anything new specifically to speak of on income from unconsolidated, it would have been, that would have been related to that, Carol I can like look into that and see if there's anything specific, but I can't think there's anything that's going to be affecting the run rates or anything of that nature.

Carol Kemple - Hilliard Lyons

Would you say the third quarter amounts are good run rate on a quarterly basis?

Dan Sink

I think that's probably a good run rate.

Operator

Your next question will come from the line of Rich Moore with RBC Capital Markets.

Rich Moore - RBC Capital Markets

First thing for you, is on Parkside and maybe on some of these other projects that are in the future development pipeline, as you guys have it listed in the supplemental, it seems like they are actually kind of going at this point, I mean should we anticipate that they move into the main development pipeline here shortly?

John Kite

Yeah, Rich, I mean I think as you know we've talked quite a bit about the progress there, so we try to give you good kind of color and I think I mentioned in my comments about Parkside that we are in very late stage lease negotiations on several anchor tenants. We are pretty close to closing on the land sale with the major anchor tenant. So we think that Parkside will be under construction next year and from there the next largest project is Holly Springs Phase II and it’s a similar situation where we are kind of in late LOI stage negotiation on probably a couple of box tenants and we have one lease already signed.

So if that also goes our way we could start it late next year on Phase II, but Phase II for Holly is very much our decision, it has to be the right deal for us. Its great real estate, Phase I is doing extremely well, its only getting better by the day, so we are going to get the right deals. And then the others, you got some smaller redevelopments and the deal in Apex, which is the ground adjacent to Wal-Mart. So long answer to a short question, but yeah we are close, all those things are, you know, everything feels pretty good in terms of moving forward.

Tom McGowan

Yeah, in terms of the wheels being in motion from an entitlement perspective, from an engineering perspective, all those things that you have to do to be prepared for first quarter event are all underway.

Rich Moore - RBC Capital Markets

And then on Parkside I assume it would be bulk phases or bulk pieces that you show in the supplemental would be underway simultaneously. Is that right?

John Kite

Well, we've kind of talked about that also being a phase project, but based on the activity, the way the leasing is coming together, it will be probably likely will be phased but pretty close together unlike Holly which would have been a significant separation between the two phases. Here, you are talking within a year, when one phase starts, another one starts most likely based on the leasing progress as of today.

Rich Moore - RBC Capital Markets

Okay, good, I got you John. Thank you and then on Maple Valley, are you guys planning the idea to finish it and then sell it I assume?

John Kite

Well, I think the idea on Maple Valley is yes, first and foremost get it finished, which again it’d be finished next year. We kind of indicated that overtime that we would ultimately be out of the Pacific Northwest. So yeah, the idea that we would ultimately do that but that’s of course subject to getting the right valuation and the right timing, but over the long run, the idea is not to be in the Pacific Northwest.

Rich Moore - RBC Capital Markets

On Greenville on that some of you are looking at, where is that exactly. Is that kind of the southwest side down by the mall, is that where you are looking?

John Kite

Well, we are trying not to be totally specific as to where it is because we're not closed, but the bottom line is that it's in a very strong sub-market kind of 385, 85 intersection corridor. And there is probably, it's one of the three top primary markets in the Greenville, very, very strong demographics. We're very excited about it and the market itself.

Rich Moore - RBC Capital Markets

Last thing I have for you guys on the bad debt side of things, I guess what are you seeing there is the current low level of bad debt, kind of continue to think or what are you seeing there?

Dan Sink

Yeah, Rich I think as John talked about on a previous question, the underwriting that we are doing on the Mom and Pops tenants the amount of time we are spending with their wherewithal to pay the rent and to do their fixturing, I think overall there is - as we look at the portfolio we are having a major tenant risk out there. Of course we are always to going to have some come in and some go out, but when we look at I think we feel good about our processes and I think as we do our 2013 guidance we are not going to be considering that to be a major risk for next year.

John Kite

Yeah, I think our reserves have continued to be accurate and conservative and during the huge downturn in ‘09 I think a lot of people obviously experienced losses in excess of 1% probably of their revenue the typical reserve. Today I would say that we are below that and frankly it’s just the situation where there is less bankruptcy today that we see than there was in ’06. So it’s in an interesting phenomenon of - I guess we have less players but stronger players.

Operator

(Operator Instructions) Your next question will come from the line of Quentin Velleley with Citi.

Quentin Velleley - Citi

Just in terms of the development top line, I think as a proportion gross assets you are about little bit above the 15% at the moment and it will drop to 5% as you spoke earlier you might add a few more projects in there. How should we think about the development pipeline as a proportion of gross assets going forward? It seems like 5% will be too low for you guys but may be 15% sort of pushing at. Is there some kind of target that you want to have in process going forward?

John Kite

As we said right now, the focus is to finish these out which is going to obviously bring the percentage down to a lower level, but I think overtime throughout the different cycles, if we are between 5% and 10% that's a good place to be and obviously, you want to be at the lower end in a weaker cycle and if the higher end in a better cycle.

The fact is the development is so few and far between right now, we are going to be in the lower of this right now, but we obviously think as things improve we can move and make things happen. So I’d say, we are comfortable in that 5% to 10% range as long as our balance sheet is strong and we still have work to do to improve the balance sheet, one process is doing that and as we bring our debt-to-EBITDA down over the next 18 months like we are going to in a significant way then that will able us to be more aggressive where we need to be.

Quentin Velleley - Citi

Plus the equity raise and you’ve got the Greenvale asset that you are likely to close in December. How much of that capital have got set aside for acquisitions at the moment?

John Kite

The equity raised was approximately $60 million and the Greenville asset is around $30 million. We have some other asset sale capital that we have. So we are in a comfortable position to continue to look for some opportunities. So we have runway, I mentioned in the remarks that we are closed on another deal which was a small grocery anchored center in that $8 million to $10 million range let's say. So I think we are going to do what we said in terms of the $60 million we think we will deploy at least $50 million of it and straight into acquisitions maybe more, and that will gives us a little more powder as we go into next year and through the asset sales and the capital generated there we’ll be doing some recycling as well.

Quentin Velleley - Citi

And then just lastly in your opening remarks you spoke about potentially a couple of high productivity growth is coming into some boxes, can you maybe just talk a little more about that and also just broadly about your leasing priorities for 2013, what we should be thinking about.

Dan Sink

Well, clearly for 2013 we continue our push to increase our small shop leasing. I mentioned that we have achieved a level of occupancy in the shop close to 82% which is as good as we've been for few years, but still not where we want it to be. So we still maintain the goal of being at least 85% lease in the shops. Frankly 85% leased in the shops means that we lease 65,000 square feet or something like that of shops, its not a huge amount but with tenant losses in other places its all about positive absorption. So we are moving in that direction.

As it relates to the question about specialty grocers, we are very active on that front and we are very active with our national tenant relationships and again every kind of quarter that goes by there's less and less available inventory so we are very focused on making sure that we are close to the tenants to know when they want to make a move which is what happened in these two deals that we are negotiating right now with a national specialty grocer. We kind of knew where they wanted to be and we happen to have two holes that could be plugged.

So we are going to focus on that. But as far as ’13 goes, we very much want to push the NOI up through lease up in the small shops and then also any time we have a chance on the box side through kind of non-option renewals, we want to be in a position to push rents there as well.

Operator

Your next question will come from the line of Josh Patinkin with BMO Capital Markets.

Josh Patinkin - BMO Capital Markets

Looking at South Florida, you guys have a lot of assets in the Naples area in South Florida in general and I'm just trying to get a feel we've heard a lot about Florida housing recovery. Have you seen any of that in your tenants’ performance there in terms of consumer spending, you get that information?

Tom McGowan

Yeah, I mean we get data and we get anecdotal. On the anecdotal side there's no question that the mood is better. I think the risk taking environment is better. That might have something to do with the Mom and Pop activity you know and again that's been across the board in our portfolio but all-in-all I always said that I don't think our properties in Florida were hugely impacted by the residential downturn.

I think they were more impacted just by the overall consumer confidence that we dealt with for a couple of years but the actual, if the actual data that we look at in terms of housing stock and number of houses and foreclosure, all of that stuff, doesn't seem to have drawn, it doesn't seem to be a straight correlation to our increased occupancy, but clearly the attitude is better and I think that's the correlation. And then our centers have, because of the quality of our assets, the fact that typically, in whatever submarket we are in, we're going to be the best or one of the best shopping centers at that intersection. So that means the weaker properties have gotten weaker and the stronger have got stronger and that’s we're in the stronger category. So that’s helped us a lot.

Josh Patinkin - BMO Capital Markets

Okay, in those assets, are there any structural vacancy, stuff that will always be vacant or how vacant is it relative to the rest of the portfolio?

John Kite

The Florida occupancy is generally in line with our total occupancy and so, structural vacancy, that’s hard to say. I mean each shopping center has its particular weaker space but that’s kind of [wise] when I look at the leasing that we're doing in spaces that had been vacant for more than one year and again, we include that in our numbers.

We've done pretty well there and we have not taken big hits on spaces that have been made vacant for more than one year. So to me that’s a sign that A, we're doing a good job of not rolling over and B, that these are good spaces and that’s why we've been waiting to get the right rents on them.

So if you see our occupancies slightly below in terms of the small shops to maybe some of the peers, it may have something to do with how we approach the deals. We're not just going to roll over and take any rent because we see the market improving and we see supply shrinking. So we rather wait a couple of months then roll over.

But structurally, I think strip centers in general have less of that that maybe some of the other bigger retailers just because our design is simple and straight forward and there is very little in the way of space that I would say would be structurally vacant.

Josh Patinkin - BMO Capital Markets

Okay, and then finally, how would you say the cash rents spreads compared to Indianapolis, Naples to Indianapolis?

John Kite

Again generally, we don’t see huge differences in any one quarter. For us, it kind of comes down to what happens to be again since the portfolio is small relative to others, it comes down to what deals are happening in that particular quarter, but we haven’t seen significant differences. I think where we have seen significant difference is probably in the past would be in the on [acreage] strip centers where we have a less kind of power and draw, those are little more volatile in terms of rents up and down. But in the anchorage centers in Indi versus Naples versus Chicago versus Dallas pretty generally not huge changes.

Operator

Your next question will come from the line of Tammy Feak with Wells Fargo Securities.

Tammy Feak - Wells Fargo Securities

I was just wondering how much of the 2013 lease expirations have been addressed at this point?

John Kite

The percentage?

Tammy Feak - Wells Fargo Securities

Yes.

John Kite

Typically in the year I don’t have this right in front of me but we have probably addressed probably 40% to 50% of it already and then we get into the year and we typically get that up to 75% to 80%. So we are not looking at 2013 based on the percentage you got, on the shop side 3% of our AVRs are rolling over. So that’s not a huge amount and on the anchor side it’s less than 1%. So we are in pretty good shape there.

Tammy Feak - Wells Fargo Securities

Okay. And then in 2013 are you expecting to a net buyer or seller?

John Kite

Assuming everything stays as it is right now and the environment stays the same we are in the growing mode. So we are going to continue to [prove] what we think needs to proven but on the flip of that we are seeing more opportunities to acquire than we do to sell. So probably if I had to say right now, more on the net buyer side.

Tammy Feak - Wells Fargo Securities

Okay and then my last question relates to NOI growth for 2012, the prior guidance range I think you said in your release that you expected to be above that for this year so, above 2?

John Kite

Right.

Tammy Feak - Wells Fargo Securities

And year-to-date you have growth of 3.2%.

John Kite

Right.

Tammy Feak - Wells Fargo Securities

Should we anticipate a negative in the fourth quarter?

John Kite

No, I think we are probably going to end the year somewhere close to 3%.

Operator

And there are no further questions in the queue. I would now like to turn the call back over to John Kite for closing remarks.

John Kite

Again we want to thank everybody for finding the way to make time and to be on the call today. We really appreciated it and look forward to talking to you next quarter. Thank you.

Operator

Thank you all for your participation in today’s conference. This does conclude the presentation. You may now disconnect. Have a wonder day.

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