Kite Realty Group Trust (KRG) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth-quarter 2013 Kite Group Trust earnings conference call. My name is Denise and I'll be your operator for today. At this time, all participants are in 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 your host for today, Mr. Dan Sink. 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 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.

As you know, we announced this morning that we have signed a definitive merger agreement with Inland Diversified Real Estate Trust. We had a call earlier today to discuss that transaction. This call is our regularly scheduled quarterly earnings call and we will be talking about our fourth-quarter results of operations and related matters. In light of filings that we will be making with the Securities and Exchange Commission relating to the merger transaction, we are limited in this call with respect to the discussions about the merger transaction and we request that you refrain from asking questions about the merger transaction on this call. We appreciate in advance your adherence to this request.

On the call with me today from the Company are Chief Executive Officer, John Kite and Chief Operating Officer, Tom McGowan. I'll turn the call over to John now.

All right, Dan. Thank you and good afternoon. It's good to be back again here. So welcome to our fourth-quarter earnings call. We appreciate you spending time with us today as we are excited not only about the announcement we made this morning, but the performance of our business during the last quarter and for the full year. We continue to execute on our strategic plan through focused balance sheet and operational management. We were able to make significant strides in 2013 as we increased our FFO as adjusted from $0.43 per share to $0.48 per share, almost a 12% increase, while decreasing our debt to EBITDA over a full turn from 8.6 to 7.4 times at year-end and continuing our objective to maximize balance sheet flexibility. We also posted another quarter of strong, same property NOI at 4.9% and exceeded our original expectations for the full year at 4.9% as well.

For the fourth quarter, we generated FFO of $0.11 per share after adjusting for the nine property portfolio acquisition and $0.48 for the full year. Our total retail lease percentage and small shop percentage ended the year at 95.3% and 85.5% respectively after integrating the recently acquired properties. Excluding these new properties, our overall retail lease percentage was the same as the prior quarter and our small shop average was up 20 basis points.

Our aggregate cash rent spreads increased 15.6%, which is our 17th consecutive quarter with positive leasing spreads. These spreads were comprised of 25.6% for new leases and 2.7% for renewal leases. As I have previously mentioned, our same property NOI growth was 4.9% over a solid prior-year fourth quarter marking our 11th consecutive quarter of same property NOI growth. For the full year 2013, our same property NOI exceeded our original expectations as we ended the year at 4.9%. As we look into 2014, we feel we will continue to see strong NOI growth in current portfolio at 3% to 4% as our anchor tenants occupy and we continue to focus on operations.

Onto our investment activity, we acquired the nine property portfolio in late November for $304 million with assets in states which we already have a presence -- Texas, Florida, Georgia and also two properties in Alabama. The assets in Houston generated approximately 38% of the total annualized base rent we acquired in this transaction. After our first few months of analyzing and integrating the new portfolio, we are excited about the growth and long-term value creation opportunities within. We are spending a significant amount of time reviewing the tenant mix and looking for redevelopment and repositioning opportunities.

During the quarter, we completed the first phase of our development projects in Holly Springs, North Carolina, which is now included as part of our operating portfolio. Holly Springs Towne Center is almost 91% leased and is anchored by Target, Dick's Sporting Goods, Marshalls, Petco and Michael's. We are currently negotiating leases with several additional regional and national retailers to bring the lease percentage up to our portfolio average. Also, during the quarter, we completed our 90% leased redevelopment project in Maple Valley, Washington, a Seattle suburb. We transitioned into the operating portfolio this quarter.

Four Corner Square is anchored by Johnson Hardware Do-It Center, Grocery Outlet and Walgreens. The Walgreens is scheduled to open in the second quarter of this year. We also continue to make progress on our 380,000 square-foot Parkside Town Commons development in Raleigh, North Carolina. The first phase of the project is to open later this quarter or early next quarter. The second phase is already 60% preleased and site work is well underway with anchor [pad] deliveries scheduled this quarter and several openings beginning to occur prior to year-end.

On the balance sheet side, we were able to reduce our debt to EBITDA a full turn with the acquisition of the nine property portfolio and increased the size and quality of our unencumbered asset pool. Our adjusted debt to EBITDA is now approximately 7.4 times before giving effect to the merger transaction and the finalization of our developments and redevelopments.

Turning to guidance, we are establishing our initial 2014 FFO guidance to be within a range of $0.48 to $0.52 per diluted common share. To be clear, this guidance is on a standalone basis exclusive of the proposed merger transaction. We are anticipating a stable portfolio from a leasing perspective with incremental growth in our small shop percentages and another solid year of same-store NOI growth of 3% to 4%. Our guidance excludes any acquisitions or acquisition costs in 2014.

The dispositions we are forecasting include four or five assets at a price range between $40 million and $50 million and an expected blended cap rate of approximately 6.5%. Two of the assets are the Seattle Walgreens that we sold in the first quarter for $8.6 million and our Ridge Plaza property in New Jersey that is under contract to sell in the first half of 2014. These two sales are projected to sell in the low to mid-6 cap range.

In closing, we will continue to focus our efforts on expanding the portfolio with quality assets while maintaining a conservative, flexible balance sheet. We will look forward to seeing all of you at the conferences coming up soon in February and March. Operator, this concludes our prepared remarks and we are ready for questions.

(Operator Instructions). Todd Thomas, KeyBanc Capital Markets.

Hi, good afternoon. Jordan Sadler is with me as well. First question, regarding the $300 million acquisition of the nine property portfolio, you had talked about that being roughly 7% cash cap rate at the time it was announced and highlighted that both the anchor and in-line rents were below market. I was just wondering now that the transaction has closed, Dan, I was just curious if you could talk about what the GAAP cap rate looks like for 2014 on that portfolio?

Todd, as we have integrated that in, I think we are right on top of the 7% cash cap rate and as we had projected, we analyzed the market rents and I think as we have projected the market rents probably bring the cap rate on that portfolio closer to 7.25% to 7.3%, in that range. So we have got some push on that to definitely increase it 25, 30 basis points.

Okay. And then, John, you mentioned that you are excited about some of the opportunities you've seen in that portfolio for REIT development or remerchandising a little bit. Are you able to sort of quantify or wrap your arms around how much you expect to spend on those properties over the next couple of years?

I think it is early to give a number of what we expect to spend, but we are going through a process right now, which internally we kind of refer to as deep dives on each asset and we have already been through two or three and rather than just having one global meeting, we are spending an entire day going through the asset and really getting into it. So actually it's been more than that. I forgot that, with all this other stuff going on, we have done several of them already. So bottom line is we see some real opportunity and as I mentioned before, we think we see tremendous opportunity in one of the large assets in Houston, Portofino, which is almost 400,000 square feet in the Woodlands. It's outstanding real estate. We continue to see good opportunity in Jacksonville at Lakewood, just to name a couple. So bottom line, we are going through that process right now, Todd. It's early to kind of give you a number, but no question we see the ability to not only add value there, but raise NOI.

Okay. And then just last question about the guidance on a standalone basis that you have provided. I was just questioning or looking at I guess the other property-related income, which, in the supplement, there is footnotes. It includes things like lease term fees, lease settlement fees and some of the gains on the sale of the residential units at Eddy Street. Your guidance calls for the $2 million to $4 million of transactional income. Are they one in the same or when you talk about the transaction income of $2 million to $4 million, I guess, what exactly are you including in that bucket?

Todd, it is $0.02 to $0.04 and I think it is really made up of land sales, lease term fees and the Eddy Street residential sales are part of that. So I think that bucket includes those three items for the current year.

Okay. And how much more in the residential sales at Eddy Street should we expect in 2014?

Net of tax, I think we are looking probably in the neighborhood of $0.005 to a little less, in that range, $500,000 to $700,000 as long as everything goes well. Those are -- that is a process where we aren't taking any risk because we don't buy the land until there's a contract, so that is one of those items we are just slowly moving through that inventory where we really don't have an inventory on our books. So that is the range.

Okay, great. Thank you.

Thank you.

Christy McElroy, Citi.

Hey, good afternoon, guys. Just looking at your occupancy range for 2014, it's a pretty wide range. What are sort of the biggest variables in the 100 basis point spread in terms of what you would need to happen to see the low end of the range? And where do you sort of see your occupancy peeking out?

Well, I guess we don't see the 100 basis points as that wide, but, at the beginning of the year, obviously, we are going to be reasonably conservative. And remember that the great majority, I mean almost exclusively is the gains come from small shop leasing. So in terms of peeking, look, I mean I think that's hard to say. I mean referring back to this morning, one of the things I mentioned is just this lack of supply of very high-quality property that is enabling us to lease up space like this. So I think there is no question that we want to push this higher and this is where we are kind of projecting, but we would love to push it to 97% and I think it's very possible, depending on moveouts and things like that. So I think that's kind of where it is.

Did you say where your commenced occupancy rate is today?

Yes, the commenced -- I mean it was about a 300 basis points spread between leased and occupied and I think the two variables -- everything is signed leases ready to open except primarily we have two dark anchor boxes. One is the Fox Lake Dominick's that we talked about on the last call that they have a lease term until 2027 and the other is a box that we have at Tarpon Springs. So other than those two boxes, it is pretty much leases that are waiting to be opened.

So where do see that spread going by year-end?

By year-end? I mean historically that has been more of a 200 basis point kind of range, 150, but, again, a lot is going to depend on what happens this year as we transition. So I think it's a little bit wide right now, but it's basically been in that range for the last couple years.

And I think, Christy, when you look at it, Tom and his team are working on the new assets, so it just kind of depends on if you are looking at a year-end number, there are some opportunities to re-tenant some anchor boxes and some of the new portfolio acquisitions we have just acquired. So I think it is going to be a timing issue, but I think we are always going to have some spread on that because we are working hard to re-tenant assets and it just depends on whether they have taken economic occupancy or not. So we have talked about that, what is normal. I mean we think that normal range is 150 basis points, but it seems that we keep -- we keep signing new leases and working the portfolio, but we hope to drive that down to where it's primarily seeing some tenants that are dark anchors and some other boxes that are waiting to move in.

Okay. And then you touched on this a little bit in the earlier call, but just sort of as you think about your redevelopment pipeline going forward, given that you will be in a larger asset base, sort of longer term more strategically, where do you see an ideal pace of redevelopment as a percentage of gross asset value when taking into account sort of the opportunities that exist within the portfolio, as well as sort of looking at your overall exposure and risk?

Yes, I mean I think, Christy, look, we've been pretty clear that we've worked this percentage down in terms of our development, redevelopment as a percentage of our total assets. And as you probably know, at one point, it was pretty significantly high and now we are in the mid-single digits on a percentage basis. So I think it's -- clearly, over the next few years, the majority of that activity will be redevelopment activity after our current developments that we have in the pipeline right now complete, which will take let's say the next 24 months that whole process happens. So we don't have the crystal ball as to when those opportunities arise. What we are really doing is saying we go through an asset intensification discussion on all of our assets and where we can find opportunity. I think the one thing I wanted to mention also is that some of these are large and some of these are small, which I mentioned this morning. So the only thing I guess I can say is, for the next few years, I would see the majority of that new activity coming through redevelopment.

Okay. And then just one last question, if I could. On the dispositions that you are assuming for this year, the $40 million to $50 million. Obviously, there is no acquisition assumption in guidance, so I was just wondering in terms of direct reinvestment of those proceeds, is that basically a paydown of debt assumption?

Yes, Christy, when we did the equity offering to acquire the nine property portfolio, we assumed we had about $30 million of proceeds from sales. Two of those assets were the Walgreens that we just sold for $8.6 million. The other is the Ridge Plaza asset that John mentioned in the script as under contract to sell. So I think those primarily are debt paydowns. The other two are unanchored strip center, as well as another Walgreens that is at the end of the year. So those two together are probably another $12 million that I think we are -- right now, we might need to do a like-kind exchange on the Walgreens, but right now we are utilizing it to pay down debt.

Okay. Is it possible that we could see more dispositions beyond what you have identified?

This year?

Yes.

I think we are pretty comfortable in the projection right now. Obviously, it is always possible, Christy, but I think this is a pretty reasonable projection.

Okay, great. Thank you.

(Operator Instructions). Carol Kemple, Hilliard Lyons.

Good afternoon.

Hi, Carol.

Hey, I noticed the real estate taxes, they seem to be up a decent amount from last year in third quarter. Was that just related to properties you all acquired in the fourth quarter and is this a good run rate if so?

Yes, the fourth quarter included the acquisition, as you know, of the nine property portfolio, so that is going to jump up this quarter compared to prior year. I mean if you look at next year's budget and try to get a decent run rate for the real estate tax expense, it is going to be right around $5 million-ish number. So that is probably a decent run rate quarter to quarter.

Okay, thanks.

Thank you.

Josh Paquin, BMO Capital.

Hi, good afternoon, guys. I was hoping you could give us a sense for how Delray and Holly Springs, some of the bigger development projects recently completed, are doing from a sales perspective, the tenants there.

Sure. I mean Delray would be the one that we could kind of comment on the sales perspective because it has been open long enough for us to get a sense of sales and I think sales there are strong. We've got -- obviously, it's kind of a -- it's a tenant that has a unique tenant mix with a theater and Publix and some softgoods mixed in with some restaurants. So anecdotally, I mean the restaurants are doing extremely well, very strong. The theater is doing extremely well and basically the in-line apparel is doing well, but we are still early in the process. And as a matter -- just as an example, the theater's already in percentage rent, so -- but it's early to kind of say per foot -- like to lock into a per square foot number, but we are feeling very good and frankly, as you probably saw, one of our challenges is parking and we continue -- we recently added 200 plus parking spaces and we are continuing to evaluate what we need to do there. So Tom, do you want to --?

Yes, I would just add that the seasonal traffic has been pretty amazing and that, obviously, is a huge driver to the center. So if our largest problem at this point is parking, we feel pretty good and we are addressing that property like John talked about. But I think, on whole, we feel very good about the center and we are really concentrating at this point making sure we get that final lease-up to come to fruition here in 2014.

And then as it relates to Holly Springs, Holly Springs we brought Holly Springs phase 1 over to the operating portfolio and the positive news on that project is it continues to trend up. It's somewhat of a regional power center and it has taken some time for people to get the traffic patterns in line, but we have been very encouraged as it continues to churn forward.

How long has it been open?

Holly Springs has been open a couple quarters, a little bit less.

Okay. And then on the rent roll, I note you are coming into a period of high small shop rent rollover. Can you give us a sense for geography, where that is and what your sense of market rents are relative to expiring rent?

Well, in terms of geography -- you are talking about the small shops?

Yes.

I mean in terms of the geography, that is spread out across the portfolio and so when you look at 2014, obviously, the rents are slightly below our average in terms of the shop rollover. But, again, I think we feel pretty good about that. I mean you have got 105 leases. So obviously, we are in a lot of different markets with that. But at the low 20s, that is not that high of a hurdle for us to achieve. So I think we feel pretty comfortable with it and even going into 2015, you're kind of in the same spot. So really the next few years are generally I wouldn't say wildly below market or anything, but reasonable.

Okay. And the tenants there on the small shops, are you tilting towards local tenants or nationals or --?

In terms of the expiration?

Yes.

As I said, I mean it is pretty spread out. Again, you look at that, think of the sampling. We are going to have national, you are going to have Starbucks in there and you are going to have nail salons in there. I mean it is a wide range, which I think is reflected in the rents.

Okay. So I guess the Inland transaction means you will be reporting these quarterly numbers dollars in thousands now?

Yes, we are going to have to work on that.

All right, thanks very much.

Thanks, Josh.

At this time, we have no further questions. I would now like to turn the call back over to Mr. John Kite for closing remarks. Please proceed.

Okay, well, thank you, everyone, for joining us again today and we really appreciate it and we promise we won't have another call this afternoon. Thank you.

This concludes today's conference. You may now disconnect. Have a great day.