Feb 8, 2008
Executives
Adam Chavers - IR Manager John Kite - President and CEO Tom McGowan - COO Dan Sink - CFO George McMannis - SVP of Financeand Capital Markets
Analysts
Ambika Goel - Citigroup Thomas Baldwin - Goldman Sachs Steven Rodriguez - LehmanBrothers Paul Puryear - Raymond James Philip Martin - Cantor Fitzgerald David Fick - Stifel Nicolaus Nat Isbee - Stifel Nicolaus
Operator
Good day, ladies and gentlemen,and welcome to the fourth quarter 2007 Kite Realty Group Trust earningsconference call. (Operator Instructions) I would now like to turn the callover to Mr.
Adam Chavers, Investor Relations Manager. Please proceed, sir.
Adam Chavers
Thank you, operator. By now, youshould have received the copy of the earnings press release.
If you have notreceived a copy, please call Kim Holland at 317-578-5151 and she will fax ore-mail you a copy. Our December 31, 2007 supplemental financial package was madeavailable yesterday on the corporate profile page in the Investor Relations sectionof the company's website at kiterealty.com.
The filing has also been made withthe SEC and the company's most recent Form 8-K. The company's remarks today willinclude certain forward-looking statements that are not historical facts andmay constitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995.
Such forward-looking statementsinvolve known and unknown risks, uncertainties and other factors, which maycause the actual results of the company to differ materially from historicalresults or from any results expressed or implied by such forward-lookingstatements, including without limitation national and local economics,business, real estate, and other market conditions; the competitive environmentin which the company operates; financing risks; property management risks; thelevel and volatility of interest rates; financial stability of tenants; the company'sability to maintain its status as a REIT for Federal income tax purposes;acquisitions, dispositions, development and joint venture risks; potentialenvironmental and other liability; and other factors affecting the real estateindustry in general. The company refers you to thedocuments filed by the company from time to time with the Securities andExchange Commission, which discusses these and other factors that couldadversely affect the company's results.
On the call today from the companyare John Kite, President and CEO; Tom McGowan, Chief Operating Officer; DanSink, Chief Financial Officer; and George McMannis, Senior Vice President ofFinance and Capital Markets. And now, I'd like to turn thecall over to the President and CEO, John Kite.
John Kite
Thanks, Adam, and thank you forjoining us this morning for our fourth quarter and yearend conference call. We finished the year strong withyear-over-year FFO growth of 8.6% on a per share basis.
Our financial metrics,including portfolio leasing percentage, G&A to revenue, earnings per shareand fixed charge coverage compared very favorably to our peer group and wereconsistent with our expectations. While we are pleased with our2007 results, we are focused on 2008 and beyond.
And as I've told you manytimes before, when it comes to committing capital, we see ourselves as riskmangers. This isn't a new policy initiative in reaction to the economy, this issimply how we have always done business.
Our focus on risk management isclear when you look at our disciplined development approach. Every project thatwe take on is put through a systematic process and must meet a series ofhurdles before we will commit capital.
As you know, we break out thepipeline into three components: the first being the current development andredevelopment pipeline, which is made up of 11 projects. All of the projectsare fully entitled and under construction.
These projects are 80% leased or committed,including all of the anchored tenants. It's important to note that only27% of the owned square footage is currently occupied.
This means that the leased but unoccupiedspace will be a source of growth towards the end of this year and into 2009.The pipeline is approximately 80% funded with the balance of the necessaryfunding available under in-place construction loans. As you can see, the vast majorityof the risk in the current development pipeline has been mitigated.
We are nowpositioned to realize the majority of the growth from this pipeline as westabilize the assets in 2008 and 2009. Next, we have the visible shadow pipelinethat consists of six projects.
We own the land at five of the six projects and haveacquired all of the land at market and below-market values. Majority of theprojects are fully entitled, and we are in the final stages of completinganchor leasing.
These are all well located landparcels that are generating strong tenant interests, and we remain confidentthat we will finalize anchor leasing entitlements and commence construction onthe majority of the projects throughout 2008. Finally, we have the shadow pipeline.The projects in this pipeline are subject to strict evaluations beforesignificant resources are committed.
In the fourth quarter, we tightened theparameters of our review process and cut the size of the shadow pipeline byfive projects, which resulted in an after-tax write-off of approximately$270,000. We elected to proactively dropthese projects in the predevelopment stage because the economics and riskprofile no longer had merit in the current environment.
Of the remaining fiveprojects in the shadow pipeline, all of which are in our core markets, we ownthe land for three and control the land for the other two. We will continue toactively monitor the viability of these projects before additional capital iscommitted.
As I have recently said inregards to capital, we were confident that we would aggressively manage ourcurrent and future debt maturities. We have already refinanced in excess of 80%of the debt originally scheduled to mature throughout 2008 and the remaining'08 maturities will not expire until the end of next year.
We have access to the capitalnecessary to carry out our strategic plan for 2008 and into 2009 via ourcurrent credit facility, construction loans, the Prudential joint venture, andcapital recycling. Recycling non-core assets to paydown debt or to redeploy in the core opportunities with upside potential is animportant part of this strategy.
For example, just last week, we completed alike-kind exchange in which we sold a single tenant operating property and usedthe proceeds to help acquire Rivers Edge Shopping Center on the north sideof Indianapolis. Rivers Edge was acquired from aprivate owner in an off-market transaction.
It's 80% leased and positionedwithin the strongest retail quarter in Indianapolisand presents an excellent opportunity to add value through redevelopment. In the current backdrop ofeconomic concern and potential recession, we see our operating portfolio as areal source of strength.
Our operating portfolio is well located with respectto income and population demographics. An average of 125,000 people live withina 5-mile radius of our shopping centers, and with average household incomes ofnearly $80,000, this target group of shoppers enjoys substantial purchasingpower.
In addition, our operatingportfolio has a low average age of approximately seven years. Accordingly, only4% of our annualized base rents roll this year and only 6% will roll in '09.The combination of these factors makes our operating portfolio even moreattractive in these uncertain economic times and helps insulate us against a potentialrecession.
Approximately 60% of ourannualized base rent is generated by anchor tenants and ground lease tenants,which we view as particularly stable because of the longer terms and thestrength of their credit. In addition, we have seen strong rent growth in the lasttwo quarters.
Although, this growth iscalculated in our small base of leases, it gives you some visibility of theimpact that we expect to see in 2010 through 2012 when the leases at ouryounger properties will begin to roll. Obviously, this lines up nicely to thetimeline of a potentially recovering economy.
As I have said before, we haveexcellent opportunities for growth in the current pipeline in late '08 and '09and through the visible shadow pipeline in late '09 into '10. The development pipelinesand increasing rollover in our operating portfolio will be a source of much ofour growth over the next five years.
And now, I'd like to turn thecall over to Tom to further discuss the development details.
Tom McGowan
As John mentioned, ourdevelopment process focuses on the systematic deployment of capital and riskmanagement. Three projects met our hurdle to advance through various stages ofthe process in the fourth quarter: Tarpon Springs, the second phase of SpringMill Medical and Eddy Street Commons.
Tarpon Springs is 100% leased andhas transitioned to the operating portfolio. Spring Mill Medical Phase II movedfrom the visible shadow pipeline to the current development pipeline, becausethe site is now fully entitled and the project is 100% leased.
We are on trackto deliver the 41,000 square foot expansion in December 2008. The first portion of Eddy StreetCommons at the University of Notre Dame, our $200 million mixed-use development,recently moved from the shadow pipeline to the visible shadow pipeline.
We moved the first component ofthe project, the retail, office and multifamily buildings, because we satisfiedthree important previously announced benchmarks. First, the 25-acre parcel hadto be fully entitled with a plan unit development designation.
This task hasbeen accomplished. Second, we needed to securesignificant public incentives.
I'm pleased to announce that we have receivedthe final approvals from the City of South Bendand the necessary oversight approvals from the State of Indianato proceed with the TIF. The specific details of the TIF will be announced oncethe bonds have been sold, which we anticipate will occur in the next 30 days.
Third, we've completednegotiations with the University of Notre Dame on the final deal structure. Bylimiting the outflow of capital until these benchmarks were accomplished, wehave effectively managed our risk on this project.
Another example of ourdisciplined approach is Delray Marketplace in Delray Beach, Florida. While all entitlements arecomplete, we've chosen to delay commencement of construction until we have bothanchor leases fully executed.
Frank Theatres recently a signed 55,000square foot lease for a 14-screen theater and an entertainment center. We arealso in late-stage lease negotiations with a high-quality grocery operator witha significant presence in Florida.We remain enthusiastic about the long-term prospects of this project.
In addition to our externalgrowth strategies, we continue to enhance internal growth initiatives byfocusing on improving efficiencies in our operating platform and have alreadyidentified $800,000 in operating expense savings. We remain focused on maximizingancillary income sources and anticipate that these opportunities will becomemore impactful over time.
We're also continuing to evaluate the portfolio forredevelopment opportunities such as Bolton Plaza in Florida and Four Corner Square in the State of Washington. At this point, I'll turn it overto Dan to summarize our financial results.
Dan Sink
Good morning. For the threemonths ended December 31, 2007,funds from operations were $0.34 per diluted share.
This is an increase of 6.3%over the $0.32 per diluted share for the fourth quarter of last year. For the year,FFO was $1.26 per diluted share or 8.6% increase over the prior year.
In the quarter, our same propertyNOI, which includes 49 properties, increased 1.4% over the same period in 2006.And for the year, same-store grew 1.5%, which is the midpoint of our previouslyprovided guidance of 1% to 2%. For the year, excluding proceedsfor the fourth quarter sale of a single tenant build-to-suit in Washington,construction and service fee revenue totaled $31.2 million with the margin ofapproximately $3.2 million before tax and that is in line with our budgetedexpectations.
G&A expense for the fourthquarter was approximately $1.5 million or 4.6% of total revenue. For the year,G&A expense was approximately $6.3 million, which was at the low end of ourexpectation and continues to compare favorably to our peers.
In total, for the quarter, wereceived approximately $800,000 from the settlement of Ultimate Electronics bankruptcy.Approximately $280,000 was the recovery of a previously written-off receivableand the remaining $520,000 was in other property related revenue. In addition to the recovery fromthe Ultimate Electronics, other property related revenue includes land sales ofapproximately $1.47 million and overage rent of approximately $943,000.
Cost of construction and servicesincludes a write-off of approximately $444,000 of predevelopment cost relatedto the termination of our shadow pipeline projects. The net effect to FFO after-taxwas approximately $270,000.
Summarizing some of the moresignificant financial metrics for December 31, our fixed charge coverage ratiowas approximately 2.9 times. Our floating rate debt was 26% of our total debtand approximately 14% of the total debt was in floating rate property-specificconstruction loans.
The FFO payout ratio was 60.1%and the AFFO payout ratio was higher this quarter as a result of the fact thatthe Indiana Supreme Court took possession of the space in our 30 South propertyand the majority of tenant improvement lease commissions were incurred in thefourth quarter. Now, I want to take thisopportunity to walk through our availability of capital to complete our 2008plan as well as our objectives to reduce leverage while continuing to maintaina healthy fixed charge coverage ratio.
At the end of the fourth quarter, we hadapproximately $50 million of availability on our line of credit beforeutilizing the accordion feature or negotiating additional opportunities withour lending group. We have approximately $1 billionof debt and equity capital available in the Prudential joint venture, and wehave the option to present several projects in our shadow pipeline toPrudential to further expand the relationship.
We also intend to analyzenon-core low-growth assets for recycling opportunities to pay down debt orredeploy into higher growth assets. Good prospects for this strategy are thesingle-tenant projects with limited rent growth opportunities, non-core medicaloffice and commercial buildings, and our continued focus on recycling landholdings.
In addition, we are in earlydiscussions with potential joint venture capital partners to seek market-drivenopportunities with private developers or assets with a value-added component.These fund relationships would allow us to sell assets into the fund whilemaintaining an ownership percentage and management responsibility. Also in the fourth quarter, wesold a single-tenant build-to-suit asset for a net gain of $1 million after-taxand our partners' 20% minority interest at a 6.2% cap rate.
And we sold a single-tenantoperating property for a net gain of $2 million at a 6.19% cap rate. Lastly, we are reaffirmingguidance in the range of $1.28 to $1.33 for the full year of 2008.
Thank you for participating intoday's conference call. And operator, we'd like to open up the line forquestions.
Operator
(Operator Instructions) And your first question comesfrom the line of Jonathan Litt with Citigroup. Please proceed.
Ambika Goel - Citigroup
Hi. This is Ambika with Jon.Could you give us some more color on the projects that were dropped from theshadow pipeline, just exactly what criteria did they not fit, and how has thatchanged their criteria that they are requiring for their new developmentproject?
John Kite
Ambika, it's John. Basically, theshadow pipeline projects that we said, that we dropped, the criteria isessentially the timelines that we see, the length of time that we think it'sgoing to take for lease up, the demand for tenants, kind of the cost structureassociated with that.
So really, there is a multitude of things we are lookingat there. But the bottom line is that we'vealways said that we have a very active shadow pipeline.
And obviously, we had10 projects in that pipeline, and we cut it in half. And also, there, we arelooking at kind of a market-driven approach too.
There is one particularproject in the pipeline that was in a new market that would have been amerchant building. It would have been merchant building with TRS.
And so that,at this point in time, didn't seem to make too much sense. So, I think it wasreally a combination of us wanting to be conservative, the returns that we'reseeing and the activity that we have going on in the current pipeline and inthe visible pipeline.
We obviously have enough going on there. But then also,some of these projects can be a distraction.
So, we tightened it up. We stillhave five projects there, they represent great opportunity.
And I think goingforward though it will be a real good thing for us.
Ambika Goel - Citigroup
And is this specifically relatedto specific tenants or is it just generally looking at the market and saying,let's pull back on this development and this project?
Tom McGowan
Ambika, this is Tom. The answerto the question is when we see compression in rents and unstable conditions inspecific markets, as John said, we have a very strong list of pipelines and wehave the ability to pull back when we need to, and this was simply a situation,it did not meet the risk parameters.
We saw some compression inside the rents.And at that point, it was an easy decision for us, based upon the keyparameters that we have established.
Ambika Goel - Citigroup
Okay, great. And my lastquestion.
Who are you seeing right now as the biggest retailers that areexpanding at this point? We've heard that Target, JCPenney, various big boxretailers have been reducing their store expansion plans.
So, I just wanted tosee where you are seeing the demand from at this point?
John Kite
Well, I think clearly, the largerbox guys you are talking about, Target, Wal-Mart and Kohl's, obviously they aretaking a more conservative look, but they are also still opening a lot ofstores. And I think, when you look at it on an impact basis, particularly whenwe're talking about our pipelines, I mean, again, remembering that our currentdevelopment pipeline and our visible shadow pipeline, those projects are goingto be delivering, as you know, into '09 and '10.
So, you really kind of movebeyond some of this. But in general, the junior box guys are still activelylooking for new opportunities, even the guys that have had disruption in theirspace, the Best Buy and the Circuit City,the Bed Bath, Linens 'N Things, Michael's, PetSmart, all those guys areessentially staying on plan.
I mean Circuit City has obviously had restructuring.But in general, the junior box guys will continue to look for opportunities andmay even see this in certain cases as an opportunity to get into deals thatthey otherwise couldn't have. So, I think in general, it's really more aboutthe larger users.
And again, for a company like usthat has 16 projects between the current construction pipeline and the visiblepipeline, we have enough going on there, that as we move through this period oftime over the next two years, it shouldn't be a massive impact. But clearly,there is caution.
So, that's why we're using caution as well.
Ambika Goel - Citigroup
Okay, great. Thank you.
John Kite
Thanks.
Operator
Your next question comes from theline of [Thomas Baldwin] with Goldman Sachs. Please proceed.
Thomas Baldwin - Goldman Sachs
Good morning, guys. How are youdoing?
John Kite
Good morning, Tom.
Thomas Baldwin - Goldman Sachs
Just following up, can youclarify how long it takes today to take a development from conception tocompletion versus how long it might have taken previously?
Tom McGowan
This is Tom. I would say theprocess as a whole takes approximately the same amount of time.
The issue thatties back to that process is how difficult a municipality or county may makethe entitlement process as a whole. There are certain areas of the country thatare pushing very hard on very restrictive entitlements that may tie back tomixed-use components, etcetera.
I'd say that the actual timeframe and thesequence is the same, it just becomes a bit more challenging as you go throughthat process, to make sure they end up with a plan and a return that ultimatelyworks for the company.
Thomas Baldwin - GoldmanSachs
Okay. So extended lease-up periods don't really factor into that,because we've been hearing from some of your competitors that the time to takea development from inception to stabilization has really lengthened, and that thatwas the result of longer lease-up periods.
Are you seeing any of that on yourend?
John Kite
Tom, I think that the bottom linethere is these projects have always kind of had that two to three year processfrom when we take down the ground to stabilization. And really as Tom said,it's more about the entitlement process, the leasing process.
That's why wespend so much time explaining that, that's why we have the visible shadowpipeline. That's our holding area for the pre-leasing requirements that wehave.
I think our pre-leasing requirements have always been maybe a little morestringent than some others. So, we are doing the leasing there, and that'salways taken some time, and that's kind of why the current pipeline is 80%leased.
So, we don't view it as a hugedifferential between now and what it was a year ago. Perhaps on the small shopspace, you might see a little bit of a lag there, but the bottom line is theanchors are the anchors and the time it takes to lease the anchors isessentially the same, either you have them or you don't.
Thomas Baldwin - GoldmanSachs
Okay. Thanks a lot guys.
I know you have spoken about this in thepast, but institutional demand, and I'm referring specifically to your jointventure, is that still as strong as it was, say early 2007, given thewidespread perception that cap rates may backup over the course of 2008?
John Kite
Well, I mean when you arereferring to our joint venture, you are referring to our current joint venturewith Prudential, and that's really a development joint venture or it'sorientated towards development. And that's not really a factor relative to that,because that's kind of a higher returning JV with the idea that we're going toget development returns.
In terms of us looking at newjoint ventures, which would be more orientated towards us ceding it with someassets and then using that to go out and acquire things that have redevelopmentopportunities or have re-tenanting opportunities, there is still strong demandthere. I think what you've got to realize and what everybody has got to realizeis that all this cap rate talk at this point is essentially conjecture.
Clearly, there has been movement,because of the capital disruption, but interest rates have moved downsignificantly over the last six months to nine months. So, there is a disparitythere between what originally started off this talk about rising cap rates wasrising interest rates.
While all those projections that in 10 year, it would beat 6 aren't quite correct right now. So, I think that disruption allows forthat talk, but the bottom line is we have good interest in our conversations aboutcreating a joint venture to do something like that.
So, there is still a lot ofliquidity. It's just a debt issue.
Quite frankly, the equity is greater todaythan it was six to nine months ago in terms of the total capital that's out onthe sidelines. It's just a debt disruption.
Thomas Baldwin - Goldman Sachs
Okay, great. Thanks a lot forthat, guys.
John Kite
Sure.
Operator
Your next question comes from theline of Steven Rodriguez with Lehman Brothers. Please proceed.
Steven Rodriguez - Lehman Brothers
Hi, good morning, guys. I waswondering if you can talk a little more in detail about the potential size ofjoint venture setup with these commercial and healthcare assets without gettingtoo specific, obviously.
John Kite
Steven, this is John. We are notgoing to get into too greater detail right now on that.
As Dan mentioned, weare in early discussions. I think we're going to continue to have thesediscussions to see where it goes, but let's just say that it would be verymeaningful for us.
I mean our objective is to have a meaningful pool of capitalthat we can go out and utilize and deploy. So, I think it's early to get intosize, but we kind of want to approach this cautiously and we are in earlydiscussions, however, it is very important for us to execute on thiseventually.
Steven Rodriguez - Lehman Brothers
Okay. And, Dan, regarding yourguidance, what kind of LIBOR assumptions did you make for '08?
Dan Sink
When we presented the '08guidance, we utilized the one-month forward curve for LIBOR. And as you look atthat, we put that together, end of December, early January.
And I think as youwork through and you are looking at the forward curve as compared to when wefinalized our guidance, I think there is interest rates and the economicenvironment, those kinds of things are items that you can't your arms aroundcompletely, because there is a lot of variables. So, that's primarily why wegive a range.
And I think that's where we sit today from a guidance standpoint.
Steven Rodriguez - Lehman Brothers
Okay, thanks. And my lastquestion regarding Circuit City,the lease term fee; have you guys provided or disclosed when that possibly willbe, what quarter?
Dan Sink
Yes, the Circuit City lease term fee will be in Q1of '08.
Steven Rodriguez - Lehman Brothers
'08? perfect.
Dan Sink
Yes.
Steven Rodriguez - Lehman Brothers
Thanks.
Dan Sink
Thanks.
Operator
(Operator Instructions) Your next question comes from theline of Paul Puryear with Raymond James. Pleaseproceed.
Paul Puryear - Raymond James
Hi, good morning, guys.
John Kite
Hi, Paul.
Tom McGowan
Good morning.
Paul Puryear - Raymond James
Could you update us on yourtenant watch list? Who do you have on the list, any anchor tenants botheringyou here?
John Kite
Paul, it's John. If you look atour top list of tenants, I think the one that we are paying the most attentionto and obviously with the recent lease term is Circuit City.
That's the one that we spendthe most time discussing. The thing that we're reasonably confident about thereis we terminated the one lease that we had with them, which was their oldformat store.
The remaining leases that we have with them are the newer format.So, we feel reasonably good about that. And frankly, the rents are reasonable.So, in that particular case, we feel pretty good.
Beyond that, we've got a prettystrong list of tenants. And as you know, no tenant exceeds 3% except for Lowes.And even in despite of the current residential debacle Lowes still remainsstrong, and they are talking to us about new deals.
So, in general, that wouldbe the one that has any material impact that we were watching.
Paul Puryear - Raymond James
So, are you getting anyindication from the small shops at this point? How are the leasing trends there?
John Kite
I mean small shops are generallysame. The good cursor there or the good thing to look at is when you see whatour rent growth was on a cash basis in the last two quarters.
Majority of thatcomes from small shops, and our rent growth has been firm and strong. Again, it's aproperty-by-property with us, Paul.
The Naplesproperties that we have, we still have tremendous demand from small shops andwe have good leasing spreads. The Indianapolisportfolio is strong.
So, in general, it's pretty good. Perhaps we'll see someof that as this plays out over the next few quarters, but we're at 95%occupancy.
And one of the things we refer back to is, we've been throughseveral cycles and this is the highest occupancy we've been at, going into anykind of tough cycle. So, I feel pretty good about that.
Paul Puryear - Raymond James
Alright. Thank you.
John Kite
Thanks a lot.
Operator
Your next question comes from theline of Philip Martin with Cantor Fitzgerald. Please proceed.
Philip Martin - Cantor Fitzgerald
Good morning, everybody.
John Kite
Good morning.
Philip Martin - Cantor Fitzgerald
First of all, Dan, could you giveus some sense of discussions you are having with your banking relationships,more specifically with respect to refinancings? And how they are now looking atthe whole underwriting process, underlying valuations?
Are they coming backwanting to -- how are they approaching valuation in this market versus lets saya year ago?
Dan Sink
Well, I think, Philip, we've beenvery fortunate as John talked about that we were able to refinance 82% of ourdebt that we had maturing in '08. We have listed a separate page in thesupplemental that references back to the subsequent refinancings after December31 of '07.
It's on page 17. And I think when you look through that list; Ithink we've been very fortunate.
George McMannis and his group have beenworking hard on these. And I think the key thing to look at when you look athow we were able to get these done so quickly, is I think it's a flight to bothrelationships and a flight to quality of assets.
And when you have got both ofthose things and we've been working with these banks for a long time. We'vealways done what we say we were going to do.
And that pays off in times likethis, when you need to get refinancing, get construction loans. So, we feelvery positive about those relationships and don't have any concerns about thatgoing in to future.
Now, that being said, I think ifthe economy stays as it is today, you might see some of the spreads on theconstruction loans widen a bit, but we still think there is opportunities forus to get that capital.
Philip Martin - Cantor Fitzgerald
And you are still dealing withmany of the same people within each one of these banking relationships thatwe've heard or at least anecdotally heard, many of the banks get rid of lot ofthe people that were underwriting, both residential and commercial real estate.But the relationships you have are still with many of the same people you'vehad for years.
Dan Sink
Yes, for the most part. We'veactually had some growth in relationships, because there has been some turnoverin some of the larger banks, and some of the people that we have had strongrelationships have branched off into new ventures with new banks.
So, it'sactually with the relationships we've had and how long we've been around, thenumber of growth versus shrinks. So, we've seen that from a very positivestandpoint.
John Kite
Philip, this is John. One of thethings that we've always done for the past 20 years, and you got to realize maybewe have an advantage here.
And that we were a private company doing businessfor a long time, depending on commercial banking relationships. And because ofthat we've always made it a priority to have relationships at the top of thebank.
And I have done that with Georgeand Dan over the past 15 to 20 years. We've always made sure that we didn'tfocus on one relationship manager, but that we knew the President of the bank,the Chief Lending Officer, the Chief Credit Officer.
So, these are deeprelationships. And frankly when you look at the schedule that Dan was referringto, you'll also see that they are unique relationships.
We aren’t just totallydependent on the large money center banks. We have relationships with regionalbanks.
We have relationships with local banks. And we feel that that's probablyone of our greatest strengths is having had to be a user of capital when weweren't a public company.
Those are deep, long relationships.
Philip Martin - Cantor Fitzgerald
Okay. Secondly, Tom, on theshadow pipeline, five properties were taken off here and we've talked aboutleasing compression, and that makes some sense certainly in this environment.But from a catalyst standpoint to get those projects kind of back in thepipeline, is it really tied just to leasing?
My guess is that a lot of theretailers are probably taking a step back here, reevaluating plans, etcetera,and that's probably slowing the leasing volume, which leads to rental rate compressionpotentially. Is that a fair characterization?
DanSinkJohn Kite
Phil, we'll both comment here.First of all, it's not just leasing. I mean --.
TomMcGowanPhilip Martin - Cantor Fitzgerald
It's several things.
JohnKiteDan Sink
And Tom mentioned compression inrents, and obviously when you look at that, you've got to take that intoconsideration, but it's also in the environment we are in today, it's the complexityof the deals. And some of the projects that wedropped were complex, mixed-use projects.
Frankly, could we have continued on?Absolutely, there is no question we can't continue on. And each one of them hadvarious levels of leasing interest.
So, we don't want to over-focus on that. I mean it's more of a fact thatwe have so much going on that we are fortunate, as Tom mentioned, that we havea very viable and active pipeline in the current pipeline and the visiblepipeline.
It was really more a decision onour part to refocus our efforts there and to execute there, which is I think whywe're 80% leased in the current pipeline. So, I don't want anyone to think thatto over play this, it really was just a matter of turning inward, as Tom said,and focusing on execution.
And having so much going on, I think that was agreat decision. And look how small the after-taxamount was.
It shows you how conservative we are on deploying capital there.
Tom McGowan
The other part of your questionreally ties back to the ability to then replenish the shadow pipeline, and wehave absolutely no concern of that. We have a very vibrant list of properties.What we need to focus on is securing A-sites and the best real estate possible.
Once you accomplish that, thenthe retailers will come. It's the issue of having site that may not attract thetype of rent growth that we need.
So, we're very well positioned in terms ofour future growth.
Philip Martin - Cantor Fitzgerald
Okay. So the shadow pipelinethroughout the year we would -- if we could expect to see a couple of moreprojects enter that shadow?
Tom McGowan
Absolutely, we will continue topursue our opportunities. We're going to pursue in a very conservative approachbased upon these very stringent parameters.
Philip Martin - Cantor Fitzgerald
Okay. Thanks for theclarification, guys.
Operator
Your next question comes from theline of David Fick with Stifel Nicolaus. Please proceed.
David Fick - Stifel Nicolaus
Hi, I'm also here with Nat Isbee.He has got a couple of questions. My question is, given that you've done a lotof leasing in your pipeline recently, just with reference to the currentpipeline, where do you stand in terms of anticipated yields?
Tom McGowan
David, this is Tom. From a yieldstandpoint, we feel very comfortable that we're going to maintain our currentband between that 8%, 9% overall return on cost parameter that we've talkedabout many times.
And as John mentioned, we have 16 to 17 properties betweenthe two pipelines. And as you look at those as a whole, that's a verycomfortable range for us.
David Fick - Stifel Nicolaus
Isn't it fair to say that half ofyour profit has just evaporated in cap rate shifts?
TomMcGowan Dan Sink
Half? What's your --?
David Fick - Stifel Nicolaus
If cap rates have moved up a 100bps, you just lost half your spread. That's a pretty tight current target for adevelopment pipeline.
It seems to me on a relative basis, your yields arepretty low?
TomMcGowan Dan Sink
I guess you are assuming caprates are, what, 7?
David Fick - Stifel Nicolaus
Yes, I think that's probablyreasonable. Maybe Florida Publix-anchored center is still closer to 6, butclearly up from the low 5s earlier last year.
TomMcGowan Dan Sink
Well, I mean, I guess, David, wewould obviously agree to differ there. We don't see cap rates right now at 7.
Imean if you look at any transactions of high-quality real estate, which webelieve we obviously have, when you look at our portfolio, you look at how newit is. We just go through a deal by deal and the demographics associated withit.
We still believe that our quality products is in the low 6s. And thatobviously -- who knows what it is right now based on the fact that the capitaldisruption exists.
But if you think…
David Fick - Stifel Nicolaus
Is 200 basis points enough orshouldn't you be, as the market has moved, changing your targets, increasingyour hurdles and perhaps going back on your development pipeline?
TomMcGowan Dan Sink
No, I think 200 basis points is agreat spread. I mean you also got to look at the margin percentage, which isanywhere from 20% to 40% margin depending on where that cap rate is.
And if youcompare our high point and the risk associated with our pipeline to otherproduct types who are much more dependant on speculative leasing, who havetraditionally depended on executed at that 100 to 150 basis points spread evenat the best of times, I think we compare very favorably to that. So, we have pulled back on thepipeline.
And so, the answer to the second part of your question, absolutely wepulled back. That's why we eliminated those five projects.
And the other thingto notice that we did is acquire the Center in the last quarter, which was anexcellent acquisition for us, using equity from a net lease project that's gota great upside in it and obviously has less risk associated with that. So, when you look atrisk-adjusted returns, I think we need to do both of these things.
But that isparticularly why we are looking at the pipeline very closely, and we stillthink that it's in a great place, but we are going to continue to monitor that.And if cap rates ultimately come out in the 7s as you suggest, then you got tolook at that even tighter.
David Fick - Stifel Nicolaus
Okay. Well, it would seem to me that you are having to makecommitments today for things that are going to be delivered three to four yearsout.
And certainly within the next two years, your current constructionpipeline, it would just seem that four, five years ago, we were talking aboutbuildings to double-digits and that it would seem reasonable to be pushing yourhurdles down dramatically given where things stand today. I think Nat has a couple ofquestions.
Tom McGowan
Let me follow-up on that beforeNat asks. David, when you make a comment like that, you assume everything isstatic.
And everything is not static, and we aren't really making newcommitments by buying land. That's why we terminated those five deals.
The land that we have in ourbalance sheet now and the land that we have in our pipelines are at attractivevalues relative to the spreads. If it truly does turn down as dramatic as somepeople wish that it will, ultimately this is a cycle and land values will reactto that turndown.
And as that happens, spreads willgo up, and I should say returns will go up. But the value spread is what we arefocusing on, as you know.
And if that value spread can stay within that 200basis point range, we have a great deal of comfort there. But if it really doesturn down, as people think it might, ultimately it will react, and landownersand developers will react to that.
So, we are not terribly worriedabout that future commitment. But that is why we declined to purchase sites inthis last quarter, and we dropped those sites.
You've got something, Nat?
Nat Isbee - Stifel Nicolaus
Yes. Hi, good morning.
Dan, whatis your '08 guidance assumed for construction fee income?
Dan Sink
Construction fee income, it's arange. We didn't give a revenue projection.
Construction service fee profitbefore tax was $3 to $5 million.
Nat Isbee - Stifel Nicolaus
Okay. Thanks.
And of the $70million cost for the Eddy Street Commons Phase 1, how much of that is in theretail and office portion that will be absorbed by Kite?
Tom McGowan
This is Tom, Nat. From a retailperspective, just using round numbers, it's about $25 million.
And then if youlook at the other two components, they would then combine to be somewherearound $50 million. So, we've got a good comfortable range between the threefrom a risk perspective.
Nat Isbee - Stifel Nicolaus
Okay. Thank you.
Operator: Your next questioncomes from the line of Rich Moore with RBC Capital Markets. Please proceed.
Rich Moore - RBC Capital Markets
Hi. Good morning, guys.
John Kite
Good morning.
Rich Moore - RBC Capital Markets
Dan, real quick, on therefinancing that you did, they are all variable rates, and I realized theconstruction loans are going to be variable rate, but I was looking likeIndiana State Motor Pool's variable rate used to be fixed. Is there some reasonthat you are doing variable rate on these?
Dan Sink
I think the primary reason, Rich,is to keep some flexibility. I think if you look through these new debtmaturities that we have in '09 and '11, we've really tried to stagger this.
And what we've been doing anddoing in the floating rate debt is we've used the opportunity to use hedgingand swap out the rate on a forward basis for a year, 18 months, two years. So,it really helps us with flexibility and gives us an opportunity to use thefloating rate while the rates are low with the opportunity to fix the projectedbalance sheet.
So, we're just doing it from a flexibility standpoint.
Rich Moore - RBC Capital Markets
Okay. So, some of this could behedged as I was just saying?
Dan Sink
Absolutely.
Rich Moore - RBC Capital Markets
Okay. And then on that sametopic, Dan, the other comprehensive income was down.
Is that got to do withhedging or what is that?
Dan Sink
Yes, that completely has to dowith hedging, because with where our hedges are, where we finalized with thehedges, the interest rates have gone down, which affects the OCI.
Rich Moore - RBC Capital Markets
Okay, good. Got you.
Thanks. Whenyou guys think about your out-parcel inventory, stuff that you might considerfor selling soon in the next year, how big is that?
John Kite
Well, in terms of the number ofthem, Rich, I think we typically average, we have around 60 or so that areeither available or have ground leases in place. And I think we've probablysold 7 or 8 of them a year in general.
But remember, we kind of keep that averagebased on the fact that the development pipelines generally have anywhere from 5to 10 out lots at each of our new developments. So, it's always going to bethere, and it remained fairly consistent.
So I would expect that to continue.
Rich Moore - RBC Capital Markets
Okay, very good. Thanks, John.And then on the Supreme Court build-out, when does that end again, so that wecan kind of readjust our CapEx spending?
John Kite
The Supreme Court took possessionof their space in December. So the majority of the TI and commissions havealready taken place in Q3 and Q4.
The only thing that we'll be leaking overwould be punchless-type items or small items that didn't get completed prior tothe end of the year.
Rich Moore - RBC Capital Markets
Okay, good. Thank you.
Got you.And then, you had two projects that kind of increased in cost. And going backto David's question for a second, do the return parameters at Delray and atBayport, do those change as the costs go up or is that just sort of like cost overrun,if you will?
JohnKite Tom McGowan
Well, as you tie back specific toBayport, we just had two small factors that really increased the cost about $13a square foot. One just tied back to the final design parameters as establishedby Hillsborough County,that's a fluid process as you go through the final approval set of drawings.
And then the second one ties backto a component that we don't know at the beginning of the project, which isreally how will the final TI package play out as part of the leasenegotiations. So, those are the two components of the cost increase in Bayport.
As it ties back to Delraymarketplace, that project is in the visible shadow pipeline for a reason. Wehave not finalized costs.
It's a never-changing figure as it ties back to totalcosts. And as we get closer along to the start date of the project, we have abetter handle on that, and then we'll move to the development pipeline.
So,that's a never-changing process until it moves through the next step.
John Kite
Rich, in general, when you got 17projects in various stages, it's a very, very comfortable range for us to saybetween 8 and 9. Obviously, deals may exceed that, deals may be slightly below.But that's why we give you that, and that really hasn't changed at all.
Andtypically, it's going to depend on geography as well. I mean, obviously the Floridaprojects costs more money.
But in some cases, they may be worth more. So, ingeneral, that's a very comfortable range.
And we're still very comfortable withthat kind of 200 basis point spread in each direction, and more importantly,kind of that 20% to 40% margin.
Rich Moore - RBC Capital Markets
Okay. Good.
Thank you, John. Andthen the last thing for me is did you guys talk at all about the cap rates on Puyallup.I don't have any idea how to say that one exactly and Rivers Edge?
DanSinkJohn Kite
That was close.
Rich Moore - RBC Capital Markets
That's right someone from Washington.
DanSinkJohn Kite
Yes, that was good.
DanSink
The single-tenant property thatwe sold in Washington that weused in like-kind exchange was at a 6.2 cap, and the Rivers Edge that weacquired was at north of a 7, like a 7.25.
John Kite
But the reason that that cap rateon Rivers Edge that we acquired was where it was is the anchored tenant expiresin less than two years, and the owner was not a sophisticated retail owner. So,that's why we got that there.
But both of the single tenant deals were 6.1,6.2. And those are flat rents.
So, that ought to give you an indication where caprates are. You've got two flat rent deals trading at 6.
So, that's our liveinformation.
Rich Moore - RBC Capital Markets
Well, that's good information.Thank you, John.
Operator
(Operator Instructions) Your next question is a follow-upfrom the line of Steven Rodriguez with Lehman Brothers. Please proceed.
Steven Rodriguez - Lehman Brothers
Hi, guys. I had afollow-up on therefinancing.
Really, five out of eight deals or soare atthe same rates? I waswondering is Eddy just one-year renewals or they areactually just complete one-year new contract.
DanSinkJohn Kite
They are one-year renewals.
Steven Rodriguez - Lehman Brothers
So, they had an option embedded?
DanSinkJohn Kite
They did not have an optionembedded.
Steven Rodriguez - Lehman Brothers
Okay.
DanSinkJohn Kite
We just renewed them and workedthrough with the banks to get an extension.
Tom McGowan
But remember that the philosophyhere is to renew these to buy the time that we think is appropriate for themarkets to stabilize. And as Dan said, we are also using it as a greatopportunity to take advantage of that steep yield curve with the hedges.
So, itreally makes sense for us to do that. And if you look at thematurities, we also have done a pretty good job of staggering those throughout'09.
So, I think we are really in a good position relative to stabilization ofthe credit market.
Steven Rodriguez - Lehman Brothers
Okay. Thanks.
Another question onthe redevelopment that you mentioned in your guidance on two assets that youare putting into the plan of redevelopment, can you talk about the timing ofthose two assets? At what points during the year are you going to take themoffline?
Tom McGowan
From a timing standpoint, one ofthem that was mentioned is Bolton Plaza.And Bolton Plaza,we are in that process right now of going through the specifics of the plan.But our hope would be to try to commence that sometime in the third or fourthquarter of this year. The second project that wasmentioned is Maple Valley,and that was really a part of the Four Corner Squareproject.
That's a project that may even have an opportunity to commence alittle bit early, possibly towards the end of the second quarter. So, these areboth very active projects, and we are pushing toward start dates as quickly aspossible.
Steven Rodriguez - Lehman Brothers
All right, thanks. And my lastquestion is, you've just mentioned regarding the acquisition, the anchoredtenant is expiring in less than two years.
What are your thoughts? Are you guysplanning on renegotiating with them or what's the upside there, is kind of myquestion?
TomMcGowanJohn Kite
Well, the bottomline upside is,first and foremost, the real estate is outstanding. This is located in Northern Indianapolis, in between the Fashion Mall and Castleton Square, towards Simons properties in the market,Fashion Mall being the highest producing shopping center in the state, and Castleton Square probably not far behind.
So, first and foremost, we lovedthe real estate. And as I said, the owner was not a particularly active retailowner, but the anchor is the opportunity.
The anchor is at slow market rent.So, that's where we have a great opportunity to come in and actually redevelopthe whole center by re-tenanting and kind of repositioning. So, that was our opportunity, andit gave us good current income for the next two years to establish that plan,so just an outstanding potential deal for us.
Steven Rodriguez - Lehman Brothers
Okay, great. Thanks.
Operator
(Operator Instructions) At this time, there are noadditional questions in the queue. I would now like to turn the call back overto Mr.
John Kite for the final remarks.
John Kite
Well, again, thank you forjoining us today, and we look forward to joining you next quarter. Thank you.
Operator
Thank you for joining in today'sconference. This concludes the presentation.
You may now disconnect and have agreat weekend.