Kite Realty Group Trust (KRG) 2012 Q4 法說會逐字稿

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

As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Adam Basch, Investor Relations. Please proceed.

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 effect 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.

Thanks, Adam. Good morning and welcome to our fourth-quarter earnings call.

2012 was a year of strong performance for the Company. The year marks a transition as we not only advanced and delivered several in-process developments, we also significantly increased our acquisition activity in the second half of the year.

In addition we accelerated our internal growth initiatives with a focus on redevelopment and leasing up our operating portfolio. These activities give me comfort that our plan of significantly growing EBITDA and delevering the balance sheet over the next 12 to 18 months is well underway.

FFO for the quarter was $0.10 per diluted share. The results were impacted by our October equity raise and our timing tied to the redeployment of the capital for new acquisitions as well as the disposition of approximately $20 million of non-core assets in the quarter. The full-year FFO as adjusted for one-time items recognized earlier in the year was $0.43 per share.

We recorded another positive increase in our NOI of growth and rent growth during the quarter. Our same property NOI for the quarter was up 3.1% over a very strong prior year and increased 3.2% for the full year. This was primarily driven by the increased leasing volume throughout the year with aggregate rent spreads of approximately 15% and a focus on controlling operating expenses.

As demonstrated by these solid core metrics, we ended last year with a very positive momentum as we enter 2013. I would like to highlight our 2012 accomplishments.

We increased our resell lease percentage to 94.2% and our small shop percentage to 82.5% up from 93.3% and 79.5% year over year. We expect continued positive advancements on both metrics in 2013. We accelerated our growth -- we accelerated our strategy of selling non-core and limited growth assets in 2012. The dispositions included two commercial properties, four unanchored strip centers, a single tenant net lease asset and two larger retail centers that did not fit within our long-term strategy. The Company share of sales proceeds was approximately $70 million.

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

On the balance sheet, the weighted average turn of our debt increased from 4 to 4.6 years and we decreased the overall cost of our debt by 30 basis points over the last 12 months. We were also successful in securing approximately $80 million of construction financing during the year.

We continued to make significant progress on our $240 million in-process development pipeline which is now 81% leased. This positive momentum will allow us to deliver several properties to the operating portfolio in 2013. Excluding the anticipated 2014 development deliveries at Parkside and Bolton Plaza, we anticipate 75% to 80% of the NOI from the 2013 development deliveries will be in the income statement by the fourth quarter.

Stabilization of the 2013 development deliveries, completion of Parkside Town Commons and Bolton Plaza as well as our recently leasing activity provides additional upside.

Some development highlights for the year are we transitioned Oleander Place Shopping Center in Wilmington, North Carolina, to the operating portfolio in the fourth quarter. The property is 100% leased and anchored by Whole Foods.

At Delray Marketplace in Delray Beach, Florida, we are approximately 81% leased and Publix Supermarket opened a 45,000 square foot store last month. We expect another 125,000 square feet of tenant openings to occur in the first quarter.

Phase 1 of our Holly Springs Towne Center development near Raleigh, North Carolina, is 85% leased with Target opening in early March and other anchors such as Dick's Sporting Goods, Michael's and Petco opening prior to March 31.

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

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

Phase 1 of Parkside Town Commons is the most recent addition to the in-process pipeline. We were successful in closing on the sale of land to Target and entering into an anchor lease with Harris Teeter Supermarket prior to the end of the year. We also acquired our partner's 60% interest in the Parkside project at a price well below book cost. We anticipate commencing construction next month on the first phase of the project with a scheduled opening date of March 2014.

In addition, we have executed leases with anchor tenants in excess of 140,000 square feet in Phase 2 and anticipate commencing construction in late 2013 or early 2014.

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

We will also be transitioning two operating properties into the redevelopment pipeline. Gainesville Plaza in Gainesville, Florida, will begin redevelopment activities in the second half of the year. Our preliminary plans are to demolish portions of the center and implement a redevelopment plan with several new junior anchor tenants.

We anticipated this redevelopment opportunity when we acquired the center. We will provide additional details as our plans progress.

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

In closing, the retail environment has strengthened significantly and our ability to see it secure high-quality tenants has improved since the economic downturn. The supply of available superior locations for expanding retailers, or retailers interested in relocating, is becoming increasingly scarce. This dynamic should allow for continued rent and occupancy gains.

We look forward to a successful 2013 and updating you on our progress over the next several quarters.

This concludes our prepared remarks and, operator, we would like to open for questions.

(Operator Instructions).

Operator, we are not hearing the questions.

Todd Thomas, KeyBanc Capital Markets.

Good morning. I am on with Jordan Sadler as well. Just questions on, a couple of questions on guidance. Your assumption for the lease rate at year-end 94% to 95.5%, your anchor occupancy is about 99%. Are you expecting any anchor move outs or are you expecting that to be steady and the gains to be entirely on the small shop leasing side?

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

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

This is Dan. We don't -- right now we don't have any specific dispositions embedded in the forecast because our objective would be, if we dispose of some additional non-core assets, we will likely use the proceeds to acquire some additional assets to continue to grow the NOI. I think when you look at capital markets activities I think we have been pretty clear that if we have the opportunity to go out and acquire some assets to accelerate the de-leveraging process and grow NOI, we will take advantage of that opportunity. But we have not underwritten that specific item in the guidance.

One thing I would add to that is, I think you can take from that that we plan to continue to be a net acquirer.

And what will the funding for those acquisitions generally look like? I mean, are non-core asset sales still sort of on the table or are you still contemplating pruning the portfolio a little bit?

Yes, I think as we said in the remarks we did -- we were pretty successful in 2012 slightly seeding our guidance in terms of dispositions and we, in turn, acquired assets slightly above that. But I think we will continue to look at that in 2013 and remember we also have potential land sales, potential ground lease sales in some cases.

So we have capital that we can cycle from non-income-producing or from both income-producing and non-income-producing assets. But I think we are taking it as we go, relative to the plan. We are going to continue to look at improving the overall quality, so that may include additional dispositions, but certainly we would be redeploying any of those proceeds.

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

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

So I can tell you that we are very happy with that. The kind of the strategy of the overall plan like all of our in-process development and redevelopments, our overall yield, all-in cost yield on all of our portfolios in process is in that high 6, low 7 range as we have been saying and our incremental returns are 10% and north and that is the case on this project as well. So, this is a real good addition when you think about it that way, relative to the NOI flow.

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

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

That's helpful. Thank you.

Craig Schmidt, Bank of America.

As we move into 2013, I wondered if you could describe the leasing climate in southern Florida right now.

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

So, generally, it is improving. I think it kind of reflects the overall retail environment where you have very little new product, probably even more so in Florida than in other markets, not only just because of the lack of supply and new development, but because of the difficulty of getting in a position to develop in southern Florida. The idea that it becomes easier to develop projects is just not accurate. If anything, it's become more difficult to get through the process.

We can talk about that at length, but bottom line is we feel very good about having product there because it is just so hard to get product there. So, all in all, it is improving. Clearly still there is runway as the business environment firms up. It only means better things for our retail properties there.

And on the remaining 19% at Delray, what is your plan for that leasing? Who do you see putting into that space?

We talked about this a lot and Delray is a center where we have -- it's somewhat of a hybrid of grocery-anchored power mixed-use [almost] center. So we have done a lot of leasing with national tenants in the last three months and now as we have been mentioning there's going to be more small shop leasing local tenants and also regional tenants and we are still pursuing some national tenants. So I think we continue to see a good balance.

We also have some great restaurants opportunities there. I mean, this truly is kind of a mixed-use property with different retailers. So it is really accelerating and the bottom line is in any project like this that has got this much -- has this much interest in it, when customers are actually able to access the site and be there every day, I think our leasing just accelerates from there.

So, we feel very good about where we are going to be in occupancy as we move through the next couple of quarters.

Yes, we expect that to be steady quarter by quarter. We've mentioned the fact that we are going to open 125,000 square feet in the first quarter in addition to Publix taking us about 170,000 square feet and then we have a very systematic system of bringing it back through each quarter to get us to the stabilized point. But the theater that is opening up, this entertainment complex, is going to be a huge driver of traffic which will help us tremendously.

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

Yes I think when you open up the 125,000 I think it will be a lot easier for people to visualize what they are trying to get into.

Right. That is what we think as well.

Thank you.

Jeff Donnelly, Wells Fargo.

Good morning. I was just curious how you are thinking about it in that your stock has certainly done well since your last issuance for equity. How are you thinking about equity as a source of capital? As you move into 2013 is it back on the table for you as an option?

I think it is like always. I think we are always -- we are always trying to match our sources and uses. So if we continue to do what we are doing and continue to lease up the space, continued to deliver these developments, we are going to have increasing cash flow quarter over quarter. So that gives us comfort that we can think this through.

As it relates to equity, we are always thinking what is the most effective way to fund the business. But the good stuff, the good part of that is we don't have to do anything right now. We are in a very good place as it relates to our debt maturities. We are in a good place as it relates to the funding of the development pipeline and we are out scouting opportunistic acquisitions.

So if the time -- if we feel that it makes sense vis a vis with the offensive capital, then that is a possibility. But as I have tried to say for the last year, we are done with the defensive capital. We are going to be very offensive as we think about that.

I'm sorry if you mentioned this in your remarks for an earlier question, I dropped off the line for a moment. I think you did say you wanted to be a buyer. Can you talk about where you would like to be buying? Is that new markets? Is it existing markets, and it's more -- there's stabilized assets or busted developments? I'm just kind of curious what we should be setting our expectations for.

Yes, I think if you look at what we did in the second half of 2012 it is kind of reflective of what we are thinking about. We are very comfortable acquiring assets in certain regions. The Southeast part of the United States, the Midwest, Texas -- I would say those are the three major categories we are thinking a lot about that we are very active in.

I don't think we are really thinking too much about entering into markets that wouldn't be within those regions. So we are pretty focused on that.

There's just so much opportunity for us to acquire properties that I think are being overlooked by a lot of people chasing assets in very specific coastal type regions like where you are, although you have got to make sure that you are ready to remove snow if you are buying in Boston.

But bottom line is people are still focused in the Northeast and California and some of those markets, Miami. And we are finding that we can buy very attractively priced properties that are very high-performing in the markets that we have been acquiring in. So and if you see the amount of stuff that we are doing in North and South Carolina, both from a development and an acquisition perspective, that has also been very productive.

So I think what we do figured out is we are pretty good at real estate. So that means we can underwrite it, maybe better than people who are more financially driven. We are going to be real estate guys and we are going to find good real estate at a pretty attractive price, and that is what we want to keep doing.

Actually, I am curious about that on cap rates, what sort of differences do you see on anchored versus shadow anchored centers out there? And have you seen any shifts in cap rates in the last three to six months? I know it is a short period of time, but I'm curious if the rebound in CMBS is causing a noticeable shift.

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

And I think the cap rates on unanchored strip centers as an example have compressed quite a bit as evidenced by us selling some unanchored strip centers. And if you are going to buy a quality power center or a quality grocery anchored center in a good market that is on the market, it is very difficult to acquire something that has not got a 6 or a 5 in front of it. So you have got to work hard to acquire something.

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

And I think people will start to realize that the cap rate, when you think about it relative to just the market and CMBS market, that is only one small element. The difficulty in getting product, vis a vis development cycle, is a big part of the cap rate compression as well, just because you can't find it.

I guess the last question and maybe pertains -- sort of a good segue is pertains to anchor box rents and development. Can you help us understand the anchor retailer mindset as it relates to rents? Because I think the rhetoric has been development economics have not generally penciled out in retail because the anchors are not stepping up on rents and it makes sense because they pulled back during the financial crisis and it takes maybe time for their expectations to adjust.

But now that occupancy is up and it is particularly tight in anchor boxes have you seen those bigger box 20,000, 30,000, 40,000 all the way up to 100,000 square-foot anchors adjust their attitudes to what they have got to pay if they need to see new centers built?

I think because right now it is on a case-by-case basis and it is going to be driven by the strength of the real estate. And I think it is obviously better than it was a couple of years ago. I can give you many examples of that.

If you look at both, like, for example, our Parkside development. There's an example where this is a very attractive piece of real estate and we are doing very well on the rents which is why we are very excited to acquire the balance. And the same thing happened in certain redevelopment projects like Rivers Edge redevelopment we did in Indianapolis where you are doing an in-fill that people just would love to be in. They are going to pay the rent. So but that is a slowly but surely mechanism.

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

So it is a process and it is better than it was, but we have got runways. It is going to get better, in our view.

That's great. Thank you.

Carol Kemple, Hilliard Lyons.

Good morning. You all have really good leasing spreads at renewals and new properties this quarter. Were those specific leases or was it overall or what was it, that could increase?

Generally it was overall. You look at the -- probably, Carol, we have been having very strong re-leasing spreads over the last five, six quarters in new leases. I mean, that is (technical difficulty) up and down but pretty strong overall. The [property] that changed this quarter is we saw strong renewal lease spreads and again that kind of comes back to my theme of supply and demand is moving in our direction from a pricing power perspective. But if you look at it during the year, you look at what we did during the year, you look at what we did during the quarter it was pretty balanced in the portfolio.

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

The spread between lease and occupancy is about 350 basis points and roughly 70% of that are new tenants that have not occupied yet. So we signed a couple new grocery stores a couple Fresh Markets that our leases are signed, but they have not occupied. They will occupy it as we complete this space. So that is the variance.

Thank you.

Rich Moore, RBC Capital Markets.

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

Yes, I think that there's -- I think there's definitely upside because obviously introducing Parkside into the equation has brought the overall average down a little bit because we are in the early stages of that pre-leasing. I shouldn't say early stages, but we -- it's a Phase 1, it is small enough that if we add one more box to Phase 1 then that moves up and that moves the whole needle.

So generally these things, as I said in my remarks, almost all these -- these are all going to be delivering into the portfolio this year and based on the -- based on our assumptions and what we look at the NOI growth being, and what is going to be hidden in the income statement in the fourth quarter, we are pretty comfortable that the lease-up is going to be pretty hot.

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

Yes, just to give you an example we have Holly Springs Towne Center. It is 204,000 and change of owned square footage. We are at 85.4 and have not opened the center. So if you look at that before you open and you have seven spaces remaining, I mean, that is going to give us a nice clip to really improve those numbers.

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

We absolutely do.

All right, good, thanks. On Parkside what you need to have happen to have Phase 2 come in? You said I think, John, later in the year is when you bring it into the construction, the in-process pipeline. Is there anything special that has to happen or is it (technical difficulty) time?

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

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

Yes and we have -- we filed, excuse me, we filed these applications with the county and with the actual town. So it is very well under process and that is why we think we can get this through the fall.

And on the land, on the apartment land is that for sale? Or are you guys actually marketing that?

Yes, that is for sale and we are in late stage negotiations with a buyer.

Okay. So do you get a gain from that do you think, John, or is that marked to market already with the recent trends (multiple speakers).

Yes. Yes, that's marked to market with a whole transaction that just occurred when we remeasured and remarked that land to market.

All right. Good. Thanks. And then, the same-store NOI. What happens to that with Gainesville and King's Lake? Do those exit the pool or do you keep them in and take the hit on same-store NOI for the redevelopments?

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

And we have taken that into consideration with the guidance.

All right. Good. And last thing on the tenant improvements for the commercial side of things, Dan, that seemed kind of high. Is there anything special in there?

Yes. I think the biggest thing when you look at this particularly, our office building is really the only commercial asset we have since Eddy Street is 100% leased. And we had a -- we were fortunate, we have done a lot of positive leasing. We have got a new restaurant coming in on the first floor. We have got a tenant that increased from, I think, 30,000 square feet to 50,000 square feet.

So, I mean we have had some good momentum there and I think from an office building structure and once when somebody re-ups their lease for 10 to 15 years, it requires a decent amount of TI. So we have got some good activity going on in this building. And you may see a little bit of that leak over in the first quarter and then from that point we are pretty much fully leased in this building for a long stretch.

Very good. Thank you.

Josh Paquin, BMO Capital Markets.

Good morning. Looking at the development projects again here, it seems like you guys have about 150 million that is either open now or opening up shortly. And then 50 million and 150 million on top of that. Is that fair to say? It's the pipeline right now.

I think round numbers, yes.

And is there any other land parcel that you would consider a part of maybe the shadow pipeline that are out there and not in supplementals?

I think right now we have got pretty much we have got the land held for development. Those were the assets that if we had opportunities on those we would look to pursue development activities but as far as looking for additional land, we have nothing in the pipeline right now. I think our objectives are to complete what we have, look for good opportunities to enhance the assets in the portfolio like King's Lake and Gainesville. And as John mentioned opportunistically on our markets look for acquisition.

So I think that has kind of been our objective the last couple of years is to make sure that we complete these development now that we have which, as you look at the supplemental and you look at the anchor tenants and locations of these properties, I mean it is fortunate that we have had the opportunity to complete these. So I think that is where our objective is.

I think and an answer to that when you look at 2013 and 2014, those two years, we will see significant NOI growth in both years from the in-process projects. When you look at the future development projects, that's kind of a late 2014 and into 2015 impact to our EBITDA and NOI growth.

So really we have three years of increasing EBITDA from this existing pipeline of both in-process and future and including the redevelopment that Dan referred to. And we do have a couple of parcels of ground that we talked about that something could happen on that we already own. But we also think those could be sold to users as well. So I think having 3 years of 2 1/2 to 3 years of built-in growth is pretty adequate for a company of our size. And then as we move through the cycle, we will continue to look at things and there are a lot less guys who do what we do in the world today.

So people come to us with opportunities and as the world evolves, we will look at them.

Very good. It seems also that all of these projects actually are wholly owned. Is that the mindset going forward or would you look at partnering with people?

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

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

And, John, you mentioned NOI growth coming on shortly and into 2014 and beyond. Obviously that has helped your credit metrics a lot recently. Is there a specific metrics that you are targeting into 2013 that you can describe?

Yes. Probably the one that we are most focused on is debt to EBITDA and we are very focused on bringing that down. I mean obviously we are bringing it down without diluting so that takes longer when you do that. But as I said I'd say over the next 12 to 18 months we see that continuing to come down. Our goal is over that period of time to get it down to 7.5 or lower. 7.5 times or lower.

And again, a lot of that depends on the timing of the EBITDA flowing through and then also whatever external acquisition activity we have and how that is capitalized. But we feel very good that we are through the tougher part of that ratio and now we are in a period where we have low debt maturities. And we have EBITDA coming on.

So that will gradually get better and I think, frankly, I think the market is starting to see that and understand that. But we still are very focused on bringing it down. And that is one of our top objectives, much like growing the Company is one of our top objectives.

Very good. Yes, stock is up 15% so the market is seeing that I am sure.

Well, it's got room to go.

All right, thanks.

(Operator Instructions). Nathan Isbee, Stifel Nicolaus.

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

Yes, I think when we look at it right now and you look at the balance of our portfolio, we moved through several of these un-anchored strip centers that we mentioned but we still have a handful. So in percentages, maybe it is less than 10%. But it is not always only just about the obvious kind of smaller property or non-retail property. It also is geographically focused, as you know. So we have a few more of those to move through.

But generally it is in that range. It has got to be less than 10% today.

And on the most recent acquisitions, can you talk all bit about the pricing and some of the growth opportunities you see in there? And I guess, just more broadly, can you talk about how you approach buying from another REITs who has said they are going through a portfolio upgrade versus buying on the open market?

Sure. There are so many things that go into what we view as an opportunistic acquisition. Starting with pricing, we are very disciplined in our approach on pricing. So I think the easiest thing you can do is to go acquire an asset that is viewed as a blue-chip asset and pay $500, $600 a square foot for that and justify it with this irreplaceable real estate. You know, I have heard that a lot.

The problem with that dynamic is when you are acquiring at those price per foot levels you are paying more than it costs to build it, and the acceleration of the rent isn't going to match your cost of capital needs. So when we buy something at $150 a foot to $200 a foot and our rents are in the mid- to upper 20s in the shops and our dynamic relative to the anchor percentages is good, we think we are in a much better place to grow NOI. That 2% to 3% plus range than when you are stretching to buy at the higher levels.

So that is why we like what we are buying. In terms of -- I mean, one of the reasons we like what we are buying. And then also we found that the anchor performance in some of these centers is just really, really strong on a national level. Several of these assets we acquired have anchors in them achieving national -- sales that are in the top 5% of their portfolio. So that makes us think that we have room in terms of the NOI growth on the shops. Because a lot of these, in the cases of the ones that were owned like, that are owned by non-REITs, as an example, they are not going be as focused on increasing rents in small shops. They are just happy to have a whole shopping center.

And also some of the REITs that we have acquired assets from in the past, when they view an asset as an asset that they are not that interested in, they are just not going to have the focus to increase NOI that we would. And one guy thinking he is rotating into another market that is more interesting to him, for whatever reason, gives us the opportunity to view it as, do we think we can do something with it and is it a high-performing property in that submarket? So that is kind of how we look at it.

I mean, do we do a lot of that? It doesn't happen that often, but when it has happened for us it has been very successful. So we are not afraid of it, but our strategy is very -- we are sticking to our strategy which is that we think we know the real estate very well and we are going to focus on the real estate and see if we can add value to get it vis a vis the fact that we have acquired it below replacement costs.

So would you say that the asset in Greensboro that was previously REIT owned is or was undermanaged from your perspective?

I wouldn't say it was undermanaged at all. I would say it was managed very professionally. But what I would say is when we went into Greenville and acquired two properties, we went in there with the thought process that we thought Greenville had huge upside from a macro perspective, the market itself. The market itself is extremely dynamic.

When you look at where our country is going from a manufacturing perspective, this is a market that is going to benefit from that. When you look at average household incomes of $100,000 and we're at the cost of living is two thirds less than it would be on either coast. To me that means more disposable income.

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

And moving to Delray real quick. Were any of the 125,000 square feet of the leases scheduled to open, surely, were any of those originally scheduled to open in 2012 that just got pushed back? Or was the openings moving --?

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

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

Just on Delray real quick. Is there any sign that residential development is picking up?

Yes. There's no question. Just right down the street a project the call the Bridges. They have been doing a tremendous job of adding parcels and adding new homes to the area. So you simply get on an Atlantic drive and you can just feel the traffic pressure that has been developed probably within the last six months. And if you look at how things starts and you are starting to see impact on construction costs it is definitely coming. And the good news for us is we are out in front of it. We have tremendous ingress egress points with the extension of the [Lyons Row] and the expansion of Atlantic. So our timing is very good to get this open.

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

So, I think people often think about so how can we need new retail in this country. It is not all about what the retail per capita is, it is also about the age of the retail and the functionality of it. So this will be a great example of that over the next several years because it is just so hard to deliver these things and so hard to get them done.

I mean, if anything, projects like this would warrant a forecast because you just can't -- it is so hard to get there and here we are and we are on the finish line and it is going to be a great project.

I have to believe that new rooftops will definitely be a positive for it.

And they are coming.

Great. Thank you.

Tammi Fique, Wells Fargo Securities.

Good morning. Just wondering transactional FFO and termination fee guidance you gave $0.02 to $0.04 for 2013. I was just wondering what the contribution was from those items in 2012.

Yes. In 2012, we had roughly between land and termination fees, it was probably $0.01 to $0.015 and in addition to that we had some overage rent which is close to $0.01 as well.

So I think when you look at the projections for next year and transaction income as we do these developments and the out parcels become valuable, I think that the important thing is those of us that development can develop. You really have an opportunity in some cases to ground lease and sell out parcels and in other cases they will have tenants they will want to buy them outright. So we have baked some of that into the guidance for next year as a result of these developments that are ongoing.

And with regard to the Rangeline redevelopment, it looks like your opening was pushed back a couple of quarters and I was wondering specifically what is going on there.

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

Yes. Can I add one thing to that? On the supplemental as well, when we would say project opening day, that is when the first tenant opens. So in some cases we say it takes six to 12 months to stabilize. So we have tried to show when an occupied tenant comes in and starts delivering income so that investors and analysts we try to avoid double counting on that.

So when the first tenant moves in, that doesn't always indicate that the project is pushed back. But I just want to point that out as you look at the supplemental.

Thanks. And with regard to the leasing provided for the guidance for 2013 the year-end leasing, it is kind of a wide range from 94% to 95.5%. And I guess I was just wondering is that a result of when development projects start to come into that reported figure or was (multiple speakers) --?

Yes. Basically that is probably the biggest component of it is the timing of the deliveries of the developments and where they will be. And then also, obviously at the beginning of the year you are looking at thinking through what your net absorption will be. What tenants we would lose during the year for overseen circumstances. So that is why, typically, we are going to be a little wider with that in the beginning of the year as we move through the quarters. But I think probably the biggest component is when you are bringing in these developments.

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

No I think the biggest thing on that is the very end of December NOI, some of the operating expenses were a little higher as a result of we had additional snow over the prior year and I think that is why you are seeing the recovery ratio drop a little bit. As a result of some of our properties, we get better recoveries than others as it relates to that so that is the primary difference.

And then, one last question on development costs. Was wondering what you are generally seeing in terms of construction costs?

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

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

Yes and probably one more component of it would be the labor costs, that there is a lot of people that got out of the workforce so you lost skilled labor and construction through the downturn. And as we tick back up, some of those people won't come back into the workforce likely. So that would probably put pressure on labor cost.

So at the end of the day, I think this all works to benefit us from the perspective of the amount that we are delivering now under hard contracts, and the fact that our existing portfolio only get stronger as it costs more to build. So all in all, these things are working in our favor.

But with construction costs being fairly high now, just wondering how you balance your thinking of future construction versus acquisitions.

I'm sorry, say that one more time. How we balance.

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

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

Great. Thank you very much.

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

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

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