Kite Realty Group Trust (KRG) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Kite Realty Group Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I’d now like to introduce your host for today’s conference Ms. Maggie Daniels of Investor Relations. Ms. 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 Web site for a reconciliation of these non-GAAP performance measures to our GAAP financial 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’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 path. While we’re very focused on asset quality, market and submarket 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’ve been laser focused on in 2015 and we will 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’re 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 tenant base of roughly 2,000. Building on our platform to scale in a personal way supports our operating efficiency as we had our 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. Industrial 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 3R pipeline, 14 of which remain in the operating portfolio. We will continue to provide additional detail including incremental returns and projected costs as construction commences. Leasing momentum continued throughout the year, improving our small shop lease percentage by 190 basis points to 87.6% 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 on 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 project specific loans to refinance up to the year 2020. We entered into our 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’ve 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 five cap range, which pushed net debt dispositions north of a $100 million since 2014. As a result of these sales, we’ve 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 to a 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 3R initiative, which contains approximately $135 million in identified projects. This quarter we added four new properties to the pipeline. We are 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% excluding redevelopment. 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 will sell another $50 million to $75 million in non-core operating assets. The environment we’re in today is rapidly changing as we’ve seen with the volatility in the market recently. As a result, we’ve crafted a three-year roadmap 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 cost 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 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 3R 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 initiatives 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’re ready for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Christy McElroy with Citi. Your line is open.

Hi, good morning everyone.

Good morning.

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 if you think about sort of the de-leasing of those assets and others that will sort of eventually be added to the in-process pipeline, what sort of drag should we expect on FFO from that de-leasing in 2016 specifically?

Well, let me start with the second part of that Christy, 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’ve 20, and of those 20, 14 remain in the operating portfolio. 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 is kind of two different things going on there, but I’d say that based on our estimates there is probably a couple of cents in there, in 2016 that’s pulling down, as we de-lease these projects. And then, I think we kind of 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 that will be moving into -- in the supplemental, that will be reflected in -- under construction in the next quarter. But generally that’s kind of why we lay that out that way is that you can track what’s in the pipeline, what we’re beginning to intentionally de-lease. If you wanted to be more aggressive, obviously in terms of same-store, we could pull more out more quickly. But I don’t think that’s representative of -- that’s part of our business. Part of our business is that we’re going to be disrupting these assets before they go under full construction and then once they’re under full construction we would generally remove them. So a long answer to a short question, but I would 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 were -- there were a net seller. And one thing that gives me an opportunity probably add to is that 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, $0.06, but it is a significant improvement in asset quality and also deleveraging. So 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 I think about that 2.5% to 3.5% forecast for 2016 in terms of basis points, how much would you say is a drag in there from that de-leasing? And then, as I think about that range what are sort of the greatest areas of uncertainty that would get you sort of towards the lower end versus the higher end of that range?

Well, you got the double loaded questions going today. So the first …

Sorry.

It’s good, I like it. The first part, efficiency, we’re all about efficiency. The first part is I’d say 50 to a 100 basis points. It has been our experience that over time, over a year period depending on how aggressively we’re 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 repurpose the asset. And then other ones are smaller, individual sections of the center that we’re going to knock down or reposition, so we might de-lease three or four 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 sort of the moving parts of same-store NOI growth that sort of get you towards the lower end or the higher end, the greatest areas of uncertainty?

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 and whenever you’re trying to guide for a full-year, especially when you see some tenants were struggling whether it’s maybe a sports authority or we’ve got -- these office supply guys working through their merger. So, I mean, you always want to have some conservatism on look out throughout the year and try to say, okay, what range should 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, etcetera, that would impact your same-store projections.

All right. Thank you so much.

Thank you.

Thank you. And our next question comes from the line of RJ Milligan with Baird. Your line is open.

Hey, good morning, guys.

Good morning.

Dan, I was wondering if you could talk about the balance sheet and sort of that plan, the next three-year plan through the end of ’18, and where you think leverage goes on a debt to EBITDA basis and what you are seeing in terms of the cost of debt today and whether or not credit spreads have gapped out, which is what we are hearing from some of the other sectors?

I think there is definitely when you look at through 2000 -- I think as John touched on, if you look up to 2020 and you look at the maturities that we’ve plus the other $100 million we have to draw on the seven-year term loan, we’re really in a -- really strong position RJ. It’s probably the best we ever have been relative to our staggered maturity schedule. So if you look at this year, there are 130 some odd maturities that we have in CMBS, $100 million of that’s already funded with 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 plans specifically is to refinance the 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 this -- and hopefully middle part of the year have that refinanced and I think that -- as you look at that that’s probably maybe a five to seven-year loan that we will 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 that’s the short-term plan we really work last year to really set ourselves up in a really good position up to 2020 and 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 seven. I mean, we’ve got some inherent with the developments that we will complete as well as the redevelopments we’ve 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. So, long-term we’re not exactly where we want to be, net debt to EBITDA, we’d like to see it closer to 6 and 6.25 than where it’s at today. That’s kind of 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, one 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 are looking at an environment today where as a Company you need to be positioned to absorb anything that might happen. And I think the -- in this kind of world of ever changing liquidity, we wanted to be sure that over the next four years that we really did if the economy got to a point where it significantly slowdown or there was a liquidity issue in the markets, 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’re going to address that, the fact that we’ve current liquidity today including the undrawn $100 million in excess of $400 million that exceeds all of these debt maturities that we’re talking about into 2020. So that was not an accident. That was very intentional. That’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 the 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. So 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 ’18, you said 12% to 16% growth and I was just trying to figure out how does that trend over ’16, ’17 and ’18 given the redevelopment that’s coming online or that you are going to take some properties out and redevelop those? And so how do we think about that growth to get to that 12% to 16% at the end of ’18? Is that more back end loaded into ’18? Is there still …

Yes, yes. Well, obviously if you look at the fact that we’re saying that ’16 it’s going to be in the approximate 3% range, it’s certainly going to be more back end loaded. And 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, the methodology that we use internally and trying to create value and assets that we own today. So, yes, to be clear, it’s probably certainly more loaded in ’17 and ’18 with ’16 where it is, but it’s kind of why I pointed out RJ, that we’re where we’re in ’16 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 got to look at it over the longer term, so that’s kind of how we get to that and I think it’s a reasonable thing to do, because we’re looking at NAV too. We are not just looking at earnings growth and balance sheet, right. You got to have all three of those, that’s your three legs. You got to be doing all three of those.

Okay, great. Thanks, guys.

Thank you.

Thank you. And our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

Hi, thanks. Good morning.

Good morning.

First question -- Good morning. Regarding the dispositions embedded in guidance of $50 million to $75 million, are these properties that you’ve identified already are -- and are in the process of selling or is that more of an assumption and they 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’re monitoring that we think are going to be lower growers that maybe the real estate isn’t what we want. So there is things that we do to judge what we think about selling. So those of the assets that they would in that camp, but it’s definitely stuff that we think we would be doing at the back half of the year. There is nothing under contract, there is nothing like that. But its -- at that level $50 million to $75 million, that’s one or two deals. So it’s not difficult for us to assume that that would happen, but yes it would be more back end loaded.

Okay, got it. And then, 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 sort of an appropriate range going forward beyond 2016 to also think about?

I think that’s fair. I think its 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 it in the most effective place, but I think yes that’s a reasonable assumption that we’d look to do that and as you know in 2016 what we’re doing with the $50 million to $75 million is we’re paying down debt. So it’s very simple. And I think when you have what we own 120 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 is a natural pruning that occurs with that. So yes, I think that’s a fair assessment.

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

You know yes. Right now as you can see we don’t assume that we’re going to do anything in guidance. I think we’d be opportunistic. For us it’s with the market I know people have been talking about where the market is, has it softened up on acquisitions, cap rates etcetera. And from my perspective it really hasn’t. I think we -- I think the market is still very competitive. In the last 30, 60 days, we track probably five deals that’s traded literally sub five cap. Good deals, but sub five caps. So I think it’s still competitive and tough. I think where our cost of capital is; I think you guys look at all these things. Most importantly that we’ve this embedded value that we want to unleash and that takes capital. So -- 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’s where it is today.

All right. That’s helpful. Thank you.

Thank you.

Thank you. And our next question comes from the line of Craig Schmidt with Bank of America. Your line is open.

Thank you. I’m looking through the portfolio, it looks like you’ve three Sports Authorities, but they’re 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 do you think your mark-to-market might be on those assets?

The big picture, we only have three. Quite frankly, one of the three is in an asset that we’ve been trying to get back, its in -- probably wont say which one, but one of the three is an asset that we would love to have back and a space that we’d love to have back, we’ve attempted to do and at this point have not wanted to give us back. And regarding the other two, yes, I mean I think you’re in a situation where one of the other two we’ve already kind of addressed. I think Tom and his group hit that early on and market rent was a little below where that rent was, so we renewed them as slightly below where it was before and that’s already obviously been impacted and are taken into our numbers. And then the third one is kind of average fine. Tom, you want to add to that any?

Yes, without question the third one landing a tradition is the 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’re 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 the average sales volume at the third. So we will continue to be proactive, stay in front of them and look for opportunities tied to the situation.

Fortunately, as you know Craig, its -- I mean, 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.

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

Yes, I think the environment is definitely healthy, because there is still reasonable business formation in the country. Not what it should be, but there is reasonable business formation. And I think we’ve talked about this before. I think the majority of our small shops is -- are basically national retailers and then franchise retailers. So the franchise players are kind of 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, they’re just less and less of that. We do it. If I look at all the deals we did this quarter in the small shops, its probably less than a third, probably 20% of the small shop deals we do are literal mom-and-pop. And I think every year that kind of declines, Craig, because -- 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’ve 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’ve been a huge benefit to what we’ve trying to accomplish in terms of leasing out the portfolio. But I agree with John, as it ties back to the traditional straight-line tenants.

Okay. Thank you.

Thank you.

Thank you. And our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Your line is open.

Oh, hey, good morning out there.

Good morning.

Good morning.

Hey, just a few questions. First, John, popular topic on this earnings season has obviously has been the markets 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 a 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 would you need to see where you would decide, you know what, let’s not put that center under redevelopment?

It’s a good question. I mean, that goes back to what I said earlier about the things that we’ve 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 will remember, before the last downturn we were way about that number, way too exposed to that number. So today we’re 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, that it is gold. It is what you -- it is the best way for us to do these things. So if we’ve $50 million to $60 million of free cash flow against a $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’d first answer the question that you to position the Company to be in a place where it isn’t dependent on outside financing to execute that, in a sense of the majority of that. And then the other thing is that 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 is enough demand. So all of those projects have those 20 projects that we’ve listed and the others that are actually under construction we feel very strong that the real estate is very attractive which is why there is more than one tenant interested. So I’d say it’s a combination of that. If the market -- if we were -- look there is a lot of prognostication that we’re 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%. So we have a situation where we already improved our assets enough than we’ve already -- we are generating enough free cash flow even if there is somewhat of a turndown, it doesn’t change dramatically. So again, little bit of a lengthy answer, but I think it’s more than just what’s going on with the retailers, its probably more about what’s going on within our Company, its more important.

Okay. And then you answered the FFO growth to an earlier analyst’s question that it’s sort of weighted toward ’17, ’18. And just you guys filed yesterday, an updated comp plan. And just looking at that, its total return based as well as a relative performance and then it looks like there is a callback for underperformance 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’re going up against the potential that growth this year and maybe even into early ’17, or into ’17 is going to be impeded by the redevelopment drag?

Well, I think first of all you are -- what you are referring to is our OPP plan, which frankly was -- is a plan that's just already in existence and it's been -- and gets renewed. So the return hurdles etcetera 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 shorter -- it’s over a one-year period instead of a year and half, but 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 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 jobs. Our job is to outperform. It’s very hard to do, but our job is to outperform under any -- under other -- under any scenario. So I think there wasn't a lot of conversation around what we might be doing over the next couple of years. And I think the board looks out over long periods of time, 3, 5, 7, 10. So hopefully we will perform. That's all I can say, is hopefully we'll do that. I mean these things don't happen. These are goals; they’re 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 we roughly have a $130 million, Alex, maturing in 2016. Out of that $130 million, we’ve already got a $100 million committed under the seven-year term loan that we will draw no later than June 30. So of the $130 million, $100 million is already taken care of and the other $30 million we will probably pay off the line shortly. So yes, it will all be unencumbered.

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

Yes, we’re prepaying to the extent that we can under the document. So sometimes you got 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.

Thank you.

Thank you. Our next question comes from the line of Collin Mings with Raymond James. Your line is open.

Hey, good morning.

Good morning.

Good 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 just really along those lines, maybe just touch on what you’re seeing in terms of like labor and material costs out there?

Yes, from -- in terms of the increase it really was a reflection of 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 then just as far as what you’re seeing out there in terms of construction costs, particularly labor and materials?

Yes, in terms of the cost this has constantly been changing. But there is no question that it’s gotten a little bit tighter from a market position. The number of people that -- 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, making sure we get the proper bit list, but its definitely in a tighter scenario right now and we’ve to work a little bit extra hard 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 what kind of in the current environment just what tenants are looking for on the TI front?

Yes, I think -- 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 TI. So we had two anchor tenants and if you pull those anchor tenants out it drops to more consistent range of roughly $30 a foot. When you’re looking at the renewal lease, the renewal lease is also, I mean, we didn’t footnote it specifically, but we also had a couple of tenants there that, a Publix as well as a Bath Body where we renewed those -- both of those leases and that’s incur -- it incur -- we incurred a significant amount of landlord work on those as well. So I probably should add that footnote. If I delete -- if I remove those two tenants from the renewals, it drops about $0.50 a foot. So, I mean, those are 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.

Yes, on a macro basis, I don’t think anything is really changed in terms of tenant cost in the last year. I mean, 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 and then a brand new small shop deal still kind of is maintaining the same cost it has for a while. So work letters, I guess, is a better way to say it, haven’t changed dramatically.

Okay. That’s helpful. Just one last one for me going back in to Todd’s question, recognize you don’t have anything under contract or specific plans, but -- yes, but just on the disposition front how should we be thinking about modeling that from a cap rate perspective, more mid five or would that maybe be a little bit higher just given the mix of stuff that you’re looking at selling?

Well, I think based on the fact that we haven’t determined which asset they’re going to be. There is a range of possibilities. So yes, it was a higher quality asset. You’re talking about in the mid five range, low six range. If it was a asset that we deemed was lower quality, probably in the high six 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] Our next question comes from the line of Chris Lucas with Capital One. Your line is open.

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

Well, again, I mean -- again, depending on start time. So assuming that the majority of those project start over the next 18 months. I think it’s going to -- there is going to be ranges depending on what we’re doing. So obviously the more complicated deals like a repurpose deal such as the Corner, which is a total tear down, we envision I would 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. I mean, that’s the generalization Chris, but that’s basically what it is. And 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’ve a very good opportunity in the first quarter to bring four, five projects in and then the second quarter we’ve 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 timeframe.

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. I mean, 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. So one was more of a lease with a promote and the other was more of a participation. So, it’s going to depend, Chris, where we’re. Quite frankly, both of those we feel like are exceptional real estate and very unique markets that would be extremely attractive to the residential side. So we would want to make sure that we got back in participation. We wouldn’t want to just get paid upfront. We would want to get some backend there too. But that’s how we look at it. I think it depends on the complexity; obviously we talked about it in the past Eddy Street. We looked at that, we had a lot of different things going on. That’s a mixed use project. There is still 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 then, 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 sort of 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 or what’s kind of -- is there something specific that’s driving sort of that diversions.

Dan you want to grab that?

Yes. Chris, on particular, I mean, the same-store is different than the 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 appeal process on those and that impacted that number probably would have been closer to 74% without that impact of that assessment. So we’re -- 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’s been a very big benefit for us. So we’re -- we will tackle that, hopefully have positive results from that action. But, look when you’re de-leasing a little bit and you got some with the same type of folks that you’re allocating G&A to property operating, there is a little drag on that, but its not something that you want to replace folks when its going to be a situation where you’re going to have that the NOI coming back on, so that’s going to be a short-term hit. But long-term we feel like we’re properly staffed as shown by our -- just our ratios over time and how our efficiencies are taking place.

Okay.

And I think as we look out of 2016, I mean our goal is to still be in that 74% range. And so that’s -- none of its 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 anyone of those metrics, but we do think it’s important. I mean, we think its important to everyone here recognizes that we operate a business in a efficient way and that is a big 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 revenues, 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 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 got engage and you got to actively run your business better, stronger and more efficient than your competition. So 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’d now like to turn the call back over to Mr. John Kite, for closing remarks.

Well, 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.