Kite Realty Group Trust (KRG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kite Realty Group fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded. I would now like introduce your host for today's conference, Miss Maggie Daniels of Investor Relations. Miss Daniels you may begin.

Thank you and good morning everyone, welcome to Kite Realty Group's fourth-quarter 2015 earnings call. Some of today's comments may contain forward-looking statements that are based on assumptions and are subject to inherent risks and uncertainties.

Actual results may differ materially from these statements. For more information about the factors that can adversely affect the Company's results, please see our SEC filings, including our most recent 10-K.

Today's remarks may also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release, available on our website, for a reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from the Company, our Chief Executive Officer, John Kite; Chief Operating Officer, Tom McGowan; and Chief Financial Officer, Dan Sink.

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

Thanks a lot Maggie, good morning everyone.

2015 marked another exceptional year for our Company. Our press release walks through the details so I plan to use this call to highlight some of our key milestones and share where our focus is for 2016 and beyond.

In the REIT industry, specifically among strip center REITs, it's easy to become lost in the pack. While we are very focused on asset quality, market and sub market strength, we channel an incredible amount of energy on what I would refer to as the core of our business. To be clear, we're not referring to core properties or a subset of our portfolio when we use the word core. To us here at Kite, core describes our long-term, strategic objectives, which we have been laser focused on in 2015. And we'll be more explicit about, outlining for the years to come.

Core includes our unique Company culture, our expectation and deliverance of operational excellence. Our diligent path to achieve and maintain a resilient and flexible balance sheet, and lastly executing on these objectives and strategic initiatives to grow shareholder value over the long term. To start with who we are as a Company and our culture, most of you listening today know we operate the business with a lean corporate structure and an intense passion.

We continue to benefit from industry-leading operating efficiency metrics, which we define as a combined look at NOI margin and G&A to revenues. We are the only strip center REIT to consistently be in the top of both categories for 2015. We use the word tenant frequently, but we view our retailers as our customers. We monitor our relationships, which we call tenant touches, as we know this business is all about relationships. Each of these tenant touches is documented in our sales force software and shared with the entire team responsible for the relevant asset.

In 2015 we completed nearly 7,000 tenant touches on an average tenet base of roughly 2,000. Building our platform to scale in a personal way supports our operating efficiency as we had a retention ratio in excess of 90% this quarter, exceeding our goals for the period. Customer retention is the most cost-effective way to grow revenue and shareholder value.

At the start of the year, a lot of the feedback we received was regarding the merger. The investor and analyst community wanted to see the growth of the fully combined portfolio to better understand the future opportunities embedded with the assets we retained.

Which brings me to our next objective, operational excellence. Same property NOI, which represents approximately 93% of our operating properties, grew 3.4% for the quarter. This gain was largely driven by rental income, including occupancy gains, rent bumps, overage rent and specialty leasing, driving approximately 75% of the growth. Also, we hit the top end of our same-store guidance for the year, growing 3.5% and alleviating concerns about the growth of the Inland assets we retained.

Our 2015 growth is even more impressive when considering our redevelopment initiatives. As a reminder, we now have a total of 20 assets in our 3 R pipeline, 14 of which remain in the operating portfolio. We will continue to provide additional detail including incremental returns and projected cost as construction commences. Leasing momentum continued throughout the year, improving our small shop lease percentage by 190 basis points to 287.6%, progressing further to our goal of 90%.

The year's leasing activity has further upgraded our high-quality anchor and junior anchor tenant base, as well, by signing new locations for tenants such as TJ Maxx, DSW, Ross, Alta, Bed Bath, and many others. Comparable cash leasing spreads for the quarter were executed at a blended rate of 14.2%, including 21% cash spreads our new leases and an impressive 12.7% cash spreads on renewals.

Our balance sheet and capital position finished the year on a strong note. 2015 welcomed Kite's inaugural bond offering, among other major unsecured transactions outlined in our release and supplemental, which brought our unencumbered value well above 50% of total assets. We paid off our expensive preferred notes, which reduced our overall funding costs and continue to improve our fixed charge coverage, which remains in excess of three times.

We continue to stagger our debt maturities and have ample liquidity today to fund obligations out to 2020. In fact after funding the additional $100 million relating to the seven-year term loan coming this June, and excluding the line of credit, we have only approximately $110 million of CMBS debt and two projects specific loans to refinance up to the year 2020.

We entered into a forward starting swap on a $150 million of the $200 million seven-year term loan at a little over 3.2%, effective in June of this year. This transaction in part helped reduce floating rate debt exposure from 23% at the end of last year, down to 12% today. We remain committed to our investment-grade balance sheet and further strengthening our relationships with both Moody's and S&P.

In terms of cash, we reached our forecast of $50 million in free cash flow, while steadily increasing the dividend. To that end we have increased the dividend nearly 20% since 2013, while still maintaining very conservative payout ratios.

Lastly, the team's execution during 2015 was very impressive. During the fourth quarter we sold approximately $45 million of non-core assets in the Pacific Northwest in the mid-5 cap range, which pushed net debt dispositions north of $100 million since 2014. As a result of these sales, we have successfully exited six non-core states, including the pending sale of a final small asset in the Pacific Northwest.

Our three development projects continue to move forward toward stabilization in the later half of 2016, in aggregate approximately 89% pre-leased, with roughly 85% already funded. Gainesville Plaza and Cool Springs Marketplace are substantially complete and have moved back into the operating portfolio. Across these five development and redevelopment assets, we anticipate an incremental $9 million in cash NOI to come online over the next several quarters and fully captured in 2017.

In addition to these legacy projects we continue to expand our 3 R initiative, which contains approximately $135 million in identified projects. This quarter we added four new properties to the pipeline. We're excited about these opportunities and others on the horizon and the long-term value which we will create.

Turning to 2016, we introduced guidance for the full year -- for FFO as adjusted, of $2.02 to $2.08. Our earnings release details the underlying assumptions, including same-store NOI growth of 2.5% to 3.5% including redevelopments, sale of non-depreciated assets, such as Eddy Street's residential units and development land parcels of $1 million to $3 million, which compares to $5 million in 2015, and the expectation that we'll sell another $50 million to $75 million in non-core operating assets.

The environment we're in today is rapidly changing, as we have seen with the volatility in the market recently. As a result we've crafted a three-year road map, starting with year-end 2015 through year-end 2018, which focuses on the core of our business. We will refine these objectives and provide progress updates throughout the years to come, so our investors can track the value creation over the long-term.

Over the next three years through 2018, our goals are the following. Maintain top efficiency ratios as measured by NOI margin and G&A to revenue across the peer group; grow our AFFO per share by 15% to 20%; increase our FFO per share by approximately 12% to 16%; achieve and maintain small shop leasing of approximately 90%; maintain floating-rate debt exposure of 15% or less; reduce leverage to 6.25 times net debt plus preferred to EBITDA, all while continuing to grow our dividend by approximately 5% per year; and lastly, execute on our 3 R initiative and maintain our pipeline of approximately $100 million of redevelopment starts over every 18 months, with returns that average between 9% to 11%.

Whether the initiative stems from our culture, our operations, our resilient balance sheet or our execution, we believe that focusing on these initiatives will help us achieve our goals and unlock the embedded value within KRG.

Thanks, operator, we are ready for questions.

Thank you. (Operator Instructions)

Christy McElroy, Citi.

Good morning, everyone.

Morning.

Hey, just regarding the redevelopment, going back to that, the $130 million to $145 million, how much of that is currently in process right now, broken out by cost? And as you think about the de-leasing of those assets and others that will eventually be added to the in-process pipeline, what drag should we expect on FFO from that de-leasing in 2016 specifically?

Let me start with the second part of that, Christie, just in terms of the drag. And as you know, it's a little bit of a variable depending on the timing. But, as we look at those projects, as you know, we have 20. And of those 20, 14 remain in the operating portfolio.

Yes.

So that's obviously, those 14 are a drag in the sense of same-store NOI. But the whole portfolio is somewhat of a drag on FFO, so there's two different things going on there. I would say that based on our estimates there's probably a couple of cents in there in 2015 that's pulling down, as we de-lease these projects.

And then I think we made it clear that in terms of those projects are in the process of preparing for construction, so none of those are actually physically under construction, I think one of those 20 we've done some early shell works of mobilization and so will be moving into -- in the supplemental that will be reflected under construction in the next quarter. But generally that's why we lay that out that way is that you can track what's in the pipeline, what we are beginning to intentionally de-lease. If we wanted to be more aggressive, obviously in terms of same-store, we could pull more out more quickly, but I don't think that is representative of -- that's part of our business.

Part of our business is that we are going to be disrupting these assets before they go under full construction and then once they are under full construction we would generally remove them. So, a long answer to a short question, but I'd say there is a few pennies in there for sure in 2016, in addition to the other things we laid out which is the fact that we are a net seller.

And one thing this gives me an opportunity to probably add to, is if you look at where we were at the end of 2014, to where we're projecting to be in 2016, we're a net seller of $200 million of assets. When you look at that based on cap rates that we sold those at and interest that we're paying down, that's a significant drag, obviously to earnings.

Probably $0.055 to $0.06, but it is a significant improvement in asset quality and also deleveraging. So a lot of moving parts, but all good in the end.

And then just a follow-up on that, of the 14 that remain in the operating portfolio, you mentioned there is a drag on same-store NOI. If you think about that 2.5% to 3.5% forecast for 2016 in terms of basis point, how much would you say is a drag in there from that de-leasing? And then as I think about that range what are the greatest areas of uncertainty that would get you towards the lower end versus the higher end of that range?

Well, you've got the double-loaded questions going today. (laughter) So the first -- it's good I like it -- the first part, efficiency we are all about efficiency. The first part is I would say 50 to 100 basis points. It has been our experience that over time, over a year period, depending on how aggressively we are de-leasing these things, sometimes you might be de-leasing an entire project like a Courthouse Shadows, or the Corner Shopping Center in Indianapolis.

Those two are examples where we're literally trying to drive it down to completely empty so that we can completely re-purpose the asset. And then others ones are smaller, individual sections of the center that we're going to knock down or reposition so we might de-lease 3 or 4 spaces, not 15, 20 spaces. So that's going to range between 50 and 100 basis points.

In terms of the second part of the question, are you referring to more earnings in the second part of the question?

Yes just in terms of the moving parts of same-store NOI growth that get you towards the lower end or the higher end of the greatest areas?

I got lost in my answer, Dan why don't you handle that one?

Yes Christy, I think when you look at, as we did last year, 2015 guidance we were at 2.5% to 3.5%. Whenever you are trying to guide for full year, especially when you see some tenants are struggling whether it's maybe a Sports Authority or we've got these office supply guys working through their merger. So you always want to have some conservatism on lookout throughout the year and try to say, okay what range we put out with the goal of obviously being at the midpoint of that range.

So I think anytime you're doing that for a full year that's going to have some impact. You want to look at potential tenant closures, et cetera, that would impact your same-store projections.

Thanks so much.

Thank you.

RJ Milligan, Baird.

Good morning, guys., Dan I was wondering if you could talk about the balance sheet and that plan, the next three-year plan through the end of 2018 and where you think leverage goes on a debt to EBITDA basis and what you're seeing in terms of the cost of debt today and whether or not credit spreads have gapped out, which is what we're hearing from some of the other sectors?

I think there's definitely, when you look through 2000, I think as John touched on, if you look up to 2020 and you look at that maturities that we have plus the other $100 million we have to draw on the seven-term loan, we're really in a really strong position, RJ, probably the best we ever have been relative to our staggered maturity schedule.

So if you look at this year, the $130 million some odd maturities that we have in CMBS, $100 million of that is already funded through the seven-year term loan and then when you look out up to through 2019, we only have another roughly $110 million of CMBS debt to take care of. I think this year the action plan specifically is to refinance two construction loans, Parkside and Delray.

Parkside has a four year extension option on it and that can range probably in between LIBOR plus 165 to LIBOR plus 175 on that extension option. And then Delray, we're going to start working on that and hopefully middle part of the year have that re-financed and I think that, as you look at that's maybe a five- to seven-year loan that we'll look to do. That's a JV so we will do asset level financing and that's probably going to be in the range of LIBOR plus 175 to LIBOR plus 200.

So I think the short-term plan we really worked last year to really set ourselves up in a really good position up to 2020. That's the objective. And as far as net debt to EBITDA. I think when you look at -- net debt to EBITDA and net debt to EBITDA plus preferred, is the same number now which is slightly below 7%.

I'm in we've got some inherent, with the developments that we'll complete as well as the re-developments, we have obviously debt being funded prior to NOI commencing. So that's going to be a natural reduction of net debt to EBITDA. And then as John mentioned also in the script, selling some assets, the other $50 million to $75 million, the objective there is to pay down debt. Long-term we're not exactly where we want to be net debt to EBITDA, we would like to see it closer to 6% to 6.25% than where it's at today. That's the thought process, but we did a lot of wood chopping last year to set us up really in solid position through up to 2020.

And RJ the only thing I would add to that is what we've done here in laying out our debt maturity schedule over the next several years is something that we thought a lot about and really this was not an accident. We're looking at an environment today where as a Company you need to be positioned to absorb anything that might happen. And I think in this world of ever-changing liquidity, we wanted to be sure that over the next four years that if we really did, if the economy got to a point where it significantly slowed down or there was liquidity issue in the market, we could internally ride out the storm. And that's what we've done.

When you look at our debt maturity schedule and how we are going to address that, the fact that we have current liquidity today including the undrawn $100 million in excess of $400 million that exceeds all of these debt maturities that we are talking about into 2020. So that was not an accident. That was very intentional and it's why we talk about our maturity schedule in the same intensity that we talk about leverage.

Debt to EBITDA is an important thing, but it can't solve problems on its own. You have to also be addressing your maturity schedule and be thinking through that four years out. So I feel like it is not even close to an understatement to say this is the strongest position the Company has been in historically going into an uncertain environment. We feel very good about that.

Thanks, guys that's helpful. And just John on the FFO growth expectations as you laid out your three-year plan through the end of 2018, you said 12% to 16% growth and I was just trying to figure out how does that trend over 2016, 2017 and 2018 given the redevelopment that's coming online, or that you're going to take some properties out and redevelop those? So how do we think about that growth to get to that 12% to 16% of the end of 2018? Is that more back end loaded into 2018? Is there still -- (multiple speakers)

Obviously if you look at the fact that we're saying that 2016 is going to be in the approximate 3% range, it's certainly going to be more back end loaded. And then that was another point I wanted to make is that we really don't look at FFO growth in 12 month increments. We take a longer-term view because of our value creation methodology that we use internally in trying to create value in assets that we own today.

So, yes, to be clear it's probably certainly more loaded in 2017 and 2018, with 2016 where it is. But it's why I pointed out, RJ, that we are where we are in 2016 at 3% FFO growth after having sold $200 million net assets. And backing off land sale gains from where it was before.

So, if we added all that back in we'd be at 8% growth in 2016. So you've got to look at it over the longer-term, so that's how we get to that and I think it's a reasonable thing to do because we're looking at NAV too. We're not just looking at earnings growth.

And balance sheet, right, you got to have all three of those, that's your three legs you've got to be doing all three of those.

Okay, great. Thanks, guys.

Thank you. Todd Thomas, KeyBanc Capital Markets.

Hi, thanks, good morning.

Good morning.

Morning. First question regarding the dispositions embedded in guidance of $50 million to $75 million. Are these properties that you've identified already and are in the process of selling? Or is that more of an assumption and likely take place later in the year?

It's the latter, it's an assumption, we certainly have assets that we track. We have our assets that we are monitoring that we think are going to be lower growers that maybe the real estate isn't what we want. So there's things that we do to judge what we would think about selling. So those are the assets, that they would be in that camp, but it's definitely stuff that we think would be doing at the back half of the year.

There's nothing under contract, there's nothing like that. But at that level, $50 million to $75 million, that's one or two deals. So it's not difficult for us to assume that would happen, but yes it would be more back end loaded.

Okay, got it. And in terms of thinking about the three-year plan and some of the deleveraging goals, is it safe to assume for dispositions that, that's an appropriate range going forward beyond 2016 to also think about?

I think that's fair. I think it's going to depend on, it's so dependent on what we're doing in terms of our redevelopment assets as well. Because capital is fungible, we want to put in the most effective place but I think yes, Todd, that's a reasonable assumption that we would look to do that. As you know, in 2016 what we're doing that the $50 million to $75 million, is we are paying down debt so it's very simple.

And I think when you have, look, we own 1,20-plus properties you're always going to be looking at how to improve them number one, and number two what's dragging me down. You don't want to hold assets that are going to drag you down if you can't improve them. So there's a natural pruning that occurs with that, so yes I think that is a fair assessment.

And then in terms of acquisitions, there's nothing baked in the guidance for any new investments. Are acquisitions off the table or do you plan to just evaluate and be opportunistic throughout the year?

Yes, right now, as you can see, we don't assume that we're going to do anything in guidance. I think we would be opportunistic. For us with the market, I know people have been talking about where the market is, has it softened up on acquisitions, cap rates, et cetera.

From my perspective it really hasn't. I think the market is still very competitive, in the last 30, 60 days we've track probably five deals that's traded literally sub five cap. Good deals, but sub five cap. I think it still competitive and tough, I think where our cost of capital is, I think you've got to look at all these things.

Most importantly, that we have this embedded value that we want to unleash and that takes capital. Right now it's a better return for us. Would we sell something and redeploy if we felt like we were where we wanted to be from a leverage perspective?

Yes, we would, but it would be more like that, Todd, I think it would be more match funded than it would be us just going out right now. Now again, it's February. Things can change but that is where it is today.

All right, that's helpful. Thank you.

Thank you.

Craig Schmidt, Bank of America.

Thank you. I'm looking through the portfolio, it looks you have three Sports Authorities but they are all in 100% occupied, anchor occupied centers, I'm just wondering if Sports Authority were to go ahead and close 200 stores, do think these three would be impacted? And if they were what you think your mark to market might be on those assets?

Big picture we only have three. Quite frankly, one of the three is in an asset that we have been trying to get back, it's in -- I probably won't say which one, but one of the three is an asset that we would love to have back and a space that we would love to have back, we've attempted to do and at this point have not wanted to give us back.

Regarding the other two, I think you're in a situation where one of the other two we've already addressed. I think Tom and his group hit that early on and market ramp was a little below where that ramp was, so we renewed them. At slightly below where it was before and that's already obviously been impacted or taken into our numbers. And then the third one is average [fine].

Tom, do you want to add to that any?

Yes, without question the third one Landing at Tradition is an average store. We've been with the Sports Authority real estate team multiple times making sure we're working our way through the portfolio. And we're very comfortable with where we are at this point.

We've got the one we're dying to get back, the other one we've already renegotiated, and then we're in a position with average sales volumes at the third. So we'll continue to be proactive, stay in front of them and look for opportunities tied to the situation.

Fortunately, as you know, Craig, we're talking about less than 1% of our ABR. We had a couple more that we sold but thankfully we sold those so it's not a big impact.

Yes, definitely the anchor space for community in power centers is very healthy.

Yes indeed.

And then maybe switching to small shop. Your pickup in small shop occupancy, what percent would say are mom-and-pops, and do you think the, is the environment still going to remain friendly for mom-and-pops in 2016 do you think?

Yes, I think the environment is definitely healthy because there's still reasonable business formation in the country. Not what should be, but there's reasonable business formation and I think we've talked about this before. I think the majority of our small shops are basically national retailers and then franchised retailers.

So the franchise players are a combination of mom-and-pop with a national platform backing them, but in the pure sense of a mom-and-pop, a one-off store, there's just less and less of that. We do it. If I look at all the deals we did this quarter in the small shops, it's probably less than one-third, probably 20% of the small shop deals we do are literal mom-and-pop.

And I think every year that declines, Craig, just because of the franchise model is a much better model. And I think these mom-and-pop retailers benefit from the marketing.

I'd say the other key driver is just this continual surge in fast casual. They have done a huge help to small shops in our portfolio, they're great from the perspective that they have machines behind them. They drive traffic.

So they have been a huge benefit to what we've try to accomplish in terms of leasing up the portfolio. But I agree with John, that it ties back to the traditional straight-line tenants.

Okay, thank you.

Alexander Goldfarb, Sandler O'Neill.

Oh, hey, good morning. Just a few questions, first John, popular topic on this earnings season has obviously has been the market's volatility and the impact on tenants. So a two part, maybe just answer the tenant part on the prior question, but more on the redevelopment program.

Last cycle there were number of companies that rolled out redevelopment programs. Obviously no one knew how bad the credit crisis was going to get. But the lessons from that as you guys look at your redevelopment program right now, how much has any of the past six months impacted your thoughts on timing? And then what things which you need to see where you would decide, you know what, let's not put that center under redevelopment?

That's a good question, that goes back to what I said earlier about the things that we have done in this business to position ourselves have been extremely intentional. And one of the intentional things is that CIP for us is about 3% of our asset base. As you well remember, before the last downturn, we were way above that number, way too exposed to that number.

So today we are managing that in an extreme way and so we look at it in that way first of all, Alex, what can we do, how much do we have in this pool of assets. And then secondly we talk about our free cash flow and the reason we talk so much about it is that it is gold. It is what -- it is the best way for us to do these things. So if we have $50 million to $60 million of free cash flow against $130 million of redevelopment that's going to start over an 18 month period, you can see mathematically that we can do almost all of that with free cash flow.

So I would first answer the question that you have to position the Company to be in a place where it isn't dependent on outside financing to execute that. In the sense of the majority of that. And then the other thing as it relates to our tenants and how they are feeling about whether they would like to grow or not grow, again, that's the positive of being in a position that we're in, is that our real estate is strong enough that whatever might be happening in the retail landscape we can absorb. And there's enough demand.

So all of those projects, of those 20 projects that we have listed and the others that are actually under construction, we feel very strong that the real estate is very attractive which is why there's more than one tenant interested. So I'd say it's a combination of that.

If the market -- look there's a lot of prognostication that we are very close to entering a recession, which is not tough to say when your GDP growth rate is on the margin to start with. So we don't think that our business will change dramatically if we go from GDP growth of 1.5% to GDP growth of 0%.

We have a situation where we've already improved our assets enough and we're generating enough free cash flow, even if there is somewhat of a turn down it doesn't change dramatically. Again a little bit of a lengthy answer, but I think it's more than just what's going on with the retailers. Is probably more about what's going on within our Company that's more important.

Okay. And then you answered the FFO growth to an earlier analyst's question that it's weighted toward 2017, 2018. You guys filed yesterday, an updated comp plan. And just looking at that, it's total return-based as well as a relative performance and it looks like there's a clawback for under performance on the total on the relative side.

But given that you guys are about to undertake a pretty meaningful redevelopment program that's going to be a drag, how did you and the Board see it to lay out a total return and some pretty healthy measures, but at the same time you know that you are going up against the potential that growth this year and maybe even into early 2017, or into 2017 is going to be impeded by the redevelopment drag?

Well I think first of all what you are referring to is our OPP plan, which frankly is a plan that is just already in existence and gets renewed. So the return hurdles et cetera don't change, haven't changed. I think the amount is less in this current plan than the last plan because it's over a one-year period instead of a 1.5 year that I think the previous plan was.

To be quite candid there really isn't a lot of conversation around what. That plan is one of these things that it's simple, you've got to outperform to get paid and you don't take into account what you might be doing to improve the NAV of the business, it is what it is. That's our job. Our job is to outperform -- it's very hard to do, but our job is to outperform under any scenario.

So I think there wasn't a lot of conversation around what we might be doing over the next couple years. And I think the Board looks out over long periods of time, 3, 5, 7, 10 [years]. So hopefully we'll perform.

That's all can say, is hopefully we'll to that. These things don't happen, these are goals they are not going to happen without us busting our behinds and going out there and getting it done.

Okay. And then just finally, Dan, on the upcoming CMBS maturities, are all those assets you anticipate will be ultimately refinanced in an unsecured offering or would you re-encumber any of those assets individually?

So roughly have $130 million, Alex, maturing in 2016. Out of that $130 million we have already got $100 million committed under the seven-year term loan that we're draw no later than June 30. Of the $130 million, $100 million is already taken care of and the other $30 million will probably pay off the line shortly. So yes, it will be all unencumbered.

Okay, but you're not doing any prepays on these, you are letting them naturally expire?

We are prepaying to the extent that we can under the document. So sometimes you get a 60- to 90-day prepay window, but as far as incurring defeasance to pay them off early, that's not the plan.

Great. Thank you.

Thank you.

Collin Mings, Raymond James.

Hey, good morning.

Morning.

First question for me, just there was a slight increase in the expected yield within that redevelopment bucket, is that just what came in and out during the quarter? Or were some returns on some of the projects adjusted? And really along those lines, maybe just touch and what you're seeing in terms of labor and material costs out there?

In terms of the increase, it really was a reflection of the four deals that we brought in and this will constantly move as these 20 projects ebb and flow through the process of development. So this will likely occur each quarter, but we will monitor it closely. But the big impact really tied back to the four new deals added to the list.

Okay, and just as far as what you are seeing out there in terms of construction costs, particularly labor and materials?

In terms of cost this has constantly been changing. But there's no question it's gotten a little bit tighter from a market position. The number of people has decreased so we're definitely in a tighter construction market from where we were today.

So we work very hard in terms of the timing on which bits go out, we really try to assess the proper times of doing that and making sure we get the proper bid list. But it's definitely in a tighter scenario right now, and we have to work a little bit extra harder to get and secure the right numbers.

Okay. And then I recognize it can jump around a little bit, maybe just talk a little bit about the uptick in TIs during the quarter on the renewal site? I know you had the footnote and talked about the new leases, but just on the renewals. And just update us maybe what drove that and in the current environment what tenants are looking for on the TI front?

Collin this is Dan. When you look at the new leases as we footnoted, I think that two particular tenants drove the larger TIs related to the new tenants and it was landlord work and TIs. And so we have two anchor tenants, and if you pull those anchor tenants out it drops to more a consistent range of roughly $30 a foot.

When you are looking at the renewal leases, the renewal leases also, we didn't footnote it specifically but we also had a couple tenants there, a Publix as well as a Bath Body where we renewed both of those leases. We incurred a significant amount of landlord work on those as well. So I probably should have added that footnote. If I remove those two tenants from the renewals it drops about $0.50 a foot. So those of the two things that drive it, it's more tenant specific not a overarching theme that we're paying more for both new leases and renewals.

On a macro basis I don't think anything's really changed in terms of tenant cost in the last year. Deals are generally costing what they cost a year ago in terms of big-box deals and small shop deals. Obviously the renewals are incredibly profitable because we rarely put any money in and then a brand-new small shop deal still is maintaining the same cost as it has for a while. So work letters I guess is a better way of saying haven't changed dramatically.

Okay, that's helpful. Just one last one for me going back into Todd's question, recognize you don't have anything under contract or specific plans, but just on the disposition front how should we be thinking about modeling that from a cap rate perspective? More mid-5%s? Or would that maybe be a little bit higher just given the mix of stuff that you are looking at selling?

Well, I think based on the fact that we haven't determined which asset they are going to be, there's a range of possibilities, so yes, if it was a higher quality asset you're talking about in the mid-5% range low-6% range. If it was a asset that we deemed was lower quality, probably in the high 6% range. So I know that's a big range, but that's generally what the range is.

Okay. Thanks.

Thank you.

Thank you.

(Operator Instructions)

Chris Lucas, Capital One.

Good morning, guys. On the 3 Rs John, what's the sense of how far out in the future the stabilization would be expected on these projects?

Well, again, depending on start time, right, so assuming the majority of those projects start over the next 18 months. I think it's going -- there's going to be ranges depending on what we're doing.

Obviously the more complicated deals like a re-purposed deal such as the Corner, which is a total tear down, we envision I should say a total tear down and a total rebuild. That project can take a couple of years to stabilize.

So I'd say on the short end, you're talking nine months, on the long end you're talking two years. That's a generalization, Chris, but that's basically what it is.

Just to give you a little more color, Chris, as we look at the pipeline and the way the cadence will proceed moving forward, and we have a very good opportunity in the first quarter to bring four or five projects in and then second quarter we have nice cadence of maybe another four. Three in the third quarter, so that will continue on and as John talked about, that will then allow different stabilization periods through that time frame.

Okay, great. And then John you mentioned the re-purpose projects. Have you guys determined what your role will be as it relates to both the planning, construction and ultimately ownership and management?

Sure. As it relates to right now we just have a couple of those that we're thinking about that would change the use. So in the case of both of those if we had what we likely would have as a residential component, which is why we're considering that.

And what we would probably do something similar to what we did at Eddy Street Commons where we had residential partners. And we had two kinds of partners at Eddy Street, one was more of a lease with a promote and the other was more participation. So it's going to depend, Chris, where we are.

Quite frankly, both of those we feel like are exceptional real estate in very unique markets that would be extremely attractive to the residential side. So we'd want to make sure that we got backend participation. We wouldn't want to just get paid up front, we'd want to get some backend there too. But that's how we look at it

I think it depends on the complexity. Obviously we've talked about the past, Eddy Street, we looked at that, we had a lot of different things going on, that's a mixed-use project. There's still a potential there of another component, a potential hotel component which that's probably not something we want to take on our balance sheet, so we look to figure out a way to participate but not have the risk on our balance sheet.

Okay, that's very helpful. And John, in your prepared remarks you talked about focusing on operating efficiency and I guess I'm just trying to understand something that happened during the quarter. Which is at the total portfolio level, operating margin was down sequentially year over year as well as the recovery rate was down, but if you look at the same store pool, recovery rate was up. Is that delta totally related to the de-leasing of assets that were pulled out? What's -- is there something specific that's driving that diversions?

Dan, do you want to grab that?

Chris, in particular the same store is different than overall portfolio for a particular reason. A couple of the acquisition properties that when we acquired they were reassessed for taxes, so we're in the appeals process on those and that impacted that number, probably would've been closer to 74% without that impact of that assessment.

That's one of those things that after you acquire a property sometimes these jurisdictions hit you quickly, and then we've got an internal appeals process where we've got an expert on staff that handles that internally, which is great because that has been a very big benefit for us. So we'll tackle that, hopefully have positive results from that action.

But, look, when you're de-leasing a little bit and you've got the same type of folks that you're allocating G&A to property operating, there is a little drag on that but it's not something that you want to replace folks when there's going to be a situation where you're going to have that the NOI comes back on. So that's going to be a short-term hit, but long-term we feel like we're probably staffed as shown by, just our ratios over time and how our efficiencies have taken place.

I think as we look out at 2016 our goal is to still be in that 74% range. And so none of it is easy because you obviously sometimes do things to hurt yourself as you pointed out, in terms of bringing down the NOI in a project, but you're helping yourself in the end.

So you can't get too wed, Chris, to any one of those metrics, but we do think it's important. We think it's important that everyone here recognizes that we operate a business in an efficient way and that is a bit primary part of our core. And the reason we say that, it goes beyond just being able to say hey we're at 74%, and 5% G&A to revenue so we're awesome. It goes beyond that.

It really is, it's our culture to be as efficient as possible and I think it's very important that investors discern that as we go into these uncertain times because our business has changed. The retail world has matured and in a maturing business you've got to be efficient. You have to actively engage in that because if the business as a macro isn't going to reward you just by showing up, which is probably what happened in years past, you've got to engage, and you've got to actively run your business better, stronger and more efficient than your competition, it's a big deal here.

Okay, great, thank you very much.

Thank you.

Thank you. And, ladies and gentlemen, that does conclude our Q&A session for today. I would now like to turn the call back over to Mr. John Kite for closing remarks.

Again, I wanted to thank everybody for joining us. We look forward to talking to you on the next call, have a great weekend.

Ladies and gentlemen, thank you for participating in today's conference, this does conclude the program and you may now disconnect. Everyone, have a great day.