Feb 20, 2009
Kite Realty Group Trust (KRG)
Executives
Adam Chavers – Director of IR John Kite – Chairman and CEO Tom McGowan – President and COO Dan Sink – EVP and CFO
Analysts
Sloan Bohlen – Goldman Sachs Quentin Velleley – Citi Warren Klusinski [ph] – BMO Capital Market Dave Fick – Stifel Nicolaus RJ Milligan – Raymond James Rich Moore – RBC Capital Markets Alex Barron – Agency Trading Group Stephanie Krewson – Janney Montgomery Scott Ed Serbil [ph] – Brent Group [ph]
Operator
Good morning, ladies and gentlemen, and welcome to the fourth quarter 2008 Kite Realty Group Trust earnings conference call. My name is Emity and I'll be your coordinator for today.
At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference.
(Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. Adam Chavers, Director of Investor Relations.
Please proceed, sir.
Adam Chavers
Thank you, Emity. By now, you should have received a copy of the earnings press release.
If you have not received a copy, please call Kim Holland at 317-578-5151 and she will fax or e-mail you a copy. Our December 31, 2008 supplemental financial package was made available yesterday on the Corporate Profile page in the Investor Relations section of the company's website.
The filing has also been made with the SEC in the company's most recent Form 8-K. The company's remarks today will include certain forward-looking statements that are not historical facts and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the company to differ materially from historical results or from any results expressed or implied by such forward-looking statements, including without limitation, national and local economics, business, real estate and other market conditions; the competitive environment in which the company operates; financing risks, property management risks; the level and volatility of interest rates; financial stability of tenants; the company's ability to maintain its status as a REIT for federal income tax purposes; acquisition, disposition, development and joint venture risks; potential environmental and other liabilities; and other factors affecting the real estate industry in general. The company refers you to the documents filed by the company from time to time with the Securities and Exchange Commission which discusses these and other factors that could adversely affect the company's results.
On the call today from the company are John Kite, Tom McGowan, and Dan Sink. Now, I'd like to turn the call over to John Kite.
John?
John Kite
Thanks, Adam. Good afternoon and thank you for joining us for our fourth quarter and year-end conference call.
Our FFO was $0.24 for the fourth quarter and $1.17 per diluted share for the year. Excluding the impact of Circuit City, we would have beaten current annual consensus estimates by $0.01.
Obviously, these are tough economic times. We all understand the challenges of this economy and none of us know how long this will last.
In light of this uncertainty, we continue to be focused on our strategy to weather the storm no matter how long it takes, and position ourselves to take advantage of the future recovery. This strategy consists of three main objectives: First, maintaining a healthy cushion of liquidity.
Second, focusing on occupancy through leasing and tenant retention. And third, significantly limiting our development spend.
The cornerstone of our strategy as we mentioned throughout the year is capital preservation. Despite the extremely challenging environment, we ended the year with $90 million of cash and available credit.
Due in part to the success of our 2008 capital sourcing and our focus on continued capital preservation, we anticipate that we will maintain strong liquidity levels throughout 2009. We have $108 million of debt maturing in 2009 which consists of eight loans with an average balance of $13.5 million.
Only two of the maturing loans are CMBS loans; and in fact, we have only $50 million of total CMBS debts expiring over the next three years. The balance of our maturating debt over the next two years is construction related loans held on bank balance sheets.
While the capital markets obviously remain challenging, it’s been our recent experience that lenders are willing to make loans on the kind of assets and in the amounts that we were looking for. Given our strong relationship with local, regional, and national lenders, we are confident in our ability to refinance and extend the remaining 2009 indebtedness.
Like everyone else in the retail sector, diminished consumer spending is stressing our business. While we are feeling the impact in same-store results and general occupancy, we are comforted by the fact that we have Class A well-positioned assets with limited rollover in 2009.
In addition, over 40% of our properties have grocery stores as an anchor, and our remaining centers are generally anchored by tenants like Target and Wal-Mart, and value retailers such as Bed Bath and Beyond, TJ Maxx and PetSmart. We’ve always taken a proactive and aggressive approach to tenant management and are working with tenants on rent re-lease if it is being prudent.
As a reminder, our average lease term is seven years and we expect our tenants to meet their contractual obligations. However, after vigorous evaluation of their current economic situation, we may grant temporary deferrals with valuable lease concessions back to the landlords.
This group of tenants currently represents only 1% of our portfolio. Also, we anticipate recapturing the three Circuit City spaces in late March.
We are aggressively engaged in releasing these locations, and have received interests from high-quality tenants whose operations would enhance our centers. Our second objective is to focus on our operations including maximizing efficiencies, aggressively leasing and working with tenants to maintain occupancy levels.
Tom will discuss these efforts in more detail in a few minutes. The third aspect of our strategy is approaching our development business in a prudent manner.
The current pipeline consists of only of three projects: Eddy Street Commons at the University of Notre Dame, South Elgin and Cobblestone Plaza; all three of these projects are significantly pre-leased and under construction, utilizing fully committed construction loans. We remain aggressively engaged in pre-leasing the projects in our visible shadow pipeline.
As we’ve discussed in the past, we take a very conservative approach to funding vertical construction and we’ll not begin that construction without high levels of pre-leasing and third-party financing in place. We have stress tested the assumptions underlying our 2009 performance and have guided to an FFO range of $0.83 to $0.97 per diluted share.
And Dan will discuss this in greater detail later. Finally, as noted in the press release, the dividend for the first quarter has been established at $0.1525, approximately a 26% reduction from the fourth quarter.
Together with the Board, we will continue to evaluate the company’s distribution policy on a quarterly basis. Now, I’d like to turn it over to Tom.
Tom McGowan
Thank you. I'd like to follow-up on John's comments regarding our development and operational activities.
We have three projects remaining in our current development pipeline. All three are being built using fully committed construction loans.
Of the $90 million in total project cost, approximately $45 million remains to be spent, and the projects are approximately 73% pre-leased. Year-over-year, we have reduced the size of the current development pipeline by approximately 40% in transition, eight projects into the operating portfolio.
The largest project in our current development pipeline is Eddy Street Commons at the University of Notre Dame. We closed on the construction loan for Eddy Street Commons in the fourth quarter and are on track to deliver the initial phase of the project in the fall of 2009.
It’s currently 60% pre-lease and given the unique nature of this project, there’s active interest for the remaining retail and office spaces. The visible shadow pipeline consists of six projects.
We have commitments from all the anchors in each of the six projects and continue to work diligently on the remainder of lease out. As John mentioned, we will not move forward with vertical construction on any of the projects until we have secured appropriate pre-leasing levels and third-party financing.
The core part of our strategy is to maximize efficiencies throughout our operational platform while focusing on enhancing our leasing capabilities. We are evaluating all of our internal processes to streamline lease negotiations, tenant build-outs, and ultimately rent commencement.
We recently upgraded our software systems to better coordinate these tasks and are already seeing increased efficiencies. Again, our goal is to align all of our business units to better support our leasing efforts and maximize opportunities in this highly competitive environment.
Since less than 5% of our lease is expire in 2009, we are confident on meeting our leasing goals. We actively manage our G&A expenses and have always run a lean operation.
We reduced our gross G&A by nearly $4 million in 2008 and continue to aggressively work to reduce costs. At the same time, we will strategically redeploy our resources to support and improve our leasing department.
We continue to reach out to retailers and strengthen our relationships. What we’re finding, both from big box and small shop retailers, is that they remain focused on capital preservation and are being very deliberate about their expansion plans.
Today, retailers are only interested in the A-sites and attractive backfill opportunities. We welcome their flight to quality because we’re confident that our properties are very competitive in their individual markets.
Cedar Hill Plaza near Dallas is a good example of the dynamics that we’re seeing. We quickly signed a lease with the specialty grocer, Sprouts Farmers Market, in December to backfill the Barnes & Noble space and have high-quality tenants interested in junior box space recently vacated by Linens ‘N Things.
The reality of this market is that certain tenants will go out of business. However, we believe that the strength of our assets and the quality of our tenant portfolio both act to minimize that risk.
Since our IPO in 2004, we have primarily been known as a development company. While we believe that development is a strength of ours, it’s easy to overlook that we’ve been in this business for decades and have experienced managing operating assets in both good times and bad.
We’ve historically built value through ground-up development and acquisitions. We’ve also created value by efficiently managing and aggressively leasing our operating portfolio.
For example, last year alone, we decreased operating expenses at the property level over $1 million, which reduced our tenants’ operating cost and our cost of vacancy. We strongly believe that this skill set, combined with the fundamental quality of our real estate and our tenant base, will allow us to manage through what will certainly be another difficult year for the economy.
Dan will now summarize our operating results for the quarter.
Dan Sink
Good afternoon. As John mentioned, the FFO for the quarter was $0.24 and $1.17 per diluted share for the year.
Excluding the one-time charges related to the Circuit City liquidation, our FFO would’ve been $0.27 and $1.20, respectively. So excluding the Circuit City, the results for the year were at the midpoint of our revised 2008 full-year guidance range of $1.18 to $1.22.
I want to address a couple of items on the income statement for Q4 2008 compared to Q3 2008. Minimum rent decreased by approximately $1.5 million.
The decrease resulted primarily from non-cash straight-line and market rent write-offs related to Circuit City of approximately $1 million in Q4 and market rent income adjustment in Q3 of approximately $315,000. Real estate taxes and tenant reimbursements decreased approximately $1.2 million and $900,000, primarily due to the successful tax appeals at several properties.
Construction and service fee revenue includes the proceeds from the sale of Spring Mill II of $10.6 million and the cost of construction services includes $9.4 million or a net gain before tax of $1.2 million. And finally, as we anticipated on last quarter’s call, our property-related revenue decreased quarter-over-quarter due to lower transactional volume.
In the fourth quarter, we successfully recycled two of our operating assets, Silver Glen Crossing and Spring Mill Medical. We sold Silver Glen for a $7.5 million cap rate on current NOI and it generated loss of $2.1 million net of limited partner interest.
We sold Spring Mill for an $8.1 million cap rate and generated a $1.2 million gain net of partner interest. From this recycling activity, we generated approximately $24 million of net cash to pay down the line of credit and reduce debt.
Same-store NOI for the quarter decreased 1.2%, primarily due to a 200 basis point drop in occupancy but was flat for the full year. As a reminder, we have an annual same-store NOI base of approximately $60 million.
So 600,000 reduced the same store by 1%, so, we have relatively small numbers significantly impacting the results of this metric. By December 31, we had executed on all the loan commitments that we had outlined on the last call, thereby reducing our maturities through 2009 from $230 million to $108 million.
You can find a complete list of these refinancing activities on our press release. Also on page 17 of supplemental, we provided additional detail on our eight remaining 2009 maturities that total $108 million.
Recently, we received a bank commitment for a three-year loan on Eastgate Pavilion and our unencumbered pool. We are pursuing this loan in order to provide additional flexibility on our two CMBS loans that mature in the second half of 2009, if needed.
We provided our 2009 earnings guidance of $0.83 to $0.97 in last night’s press release. We provided various assumptions underlying the guidance including a decrease in same-store NOI ranging from 2% to 4%, transactional income range from $0.05 to $0.15 per diluted share, construction and service margin before tax of $1.5 million to $3 million, interest rates consistent with the forward curve for one-month LIBOR and the 10-year treasury and finally, the dilutive effect of our October 2008 equity offering.
Thanks for participating in today’s conference call and we’d like to open up the line for questions.
Operator
(Operator instructions) Your first question comes from the line of Sloan Bohlen with Goldman Sachs. Please proceed.
Sloan Bohlen – Goldman Sachs
Hi. Good afternoon, guys.
First question for Tom and maybe Dan, just with regard to the shadow pipeline. Could you guys give us an expectation of what you’re looking for in terms of CapEx for that pipeline over the course of the next year?
I know you’re going to be careful in doing starts, but I just wanted to get an idea of how much capital you’re going to deploy.
Dan Sink
This is Dan. As far as the spend that we anticipate on the visible pipeline, I think right now, as John mentioned, our primary objective is to work on the lease-up and the third-party financing.
So, our spend is going to be really relegated to the interest carry on these particular parcels as well as we move closer to starting construction, which we may be potentially looking at in the fourth quarter of this year. That’s when some additional spend will occur.
So, all in all though, we’re looking to definitely have clear direction on the leasing front and the financing front prior to spending dollars other than the required dollars for interest carried.
Tom McGowan
Yes, this is Tom. The nice part about the pipeline at this point is the properties are fully entitled, so that spend is really behind it at this point.
So we reached those metrics that Dan just talked about.
Sloan Bohlen – Goldman Sachs
Okay. I mean, are there certain projects in that pipeline that are – obviously, some are closer than others, but some of your competitors have gone through write-downs over the past quarter and they have taken their legs on a couple of the projects they've decided to cancel.
Are there certain projects in that pipeline that you would look to do that in the near-term or how should we think about that?
John Kite
This is John. No, that’s a completely different situation.
What we’re doing here is self-imposed raising of the bar in terms of the pre-leasing, Sloan. So it’s a little different with us.
If you go through the visible pipeline, you’ll see that we have anchor commitments and which we’ve made clear. We have anchor tenant commitments for all those projects.
It’s just that we are going to be very cautious around breaking ground on any of these. So we are significantly leased beyond the anchors as well.
So, this is really a situation where if we wanted to, we could move forward. We don’t want to in this environment without getting much further down the road on the small shops and the other junior box tenants beyond the anchors.
So, these are all projects that are moving forward and I think that’s why Dan said it’s possible towards the end of the year that you would see us spend some money. But we’re talking about very minimal spend here as it relates to total size of these projects because it’s likely that if we position to start these, there would be a minimal amount of spend in the fourth quarter, and then construction loans would close more likely into the first quarter over the next year.
So, it really is not – I think it’s apples and oranges as to what you were talking about.
Sloan Bohlen – Goldman Sachs
Okay, right. And then, switching gears, John, I was wondering if maybe you could elaborate a little bit on the comment you made about granting some tenants temporary deferrals.
I was wondering if you could give us a sense of what scope those deferrals could be or what shape they would take, and whether that’s included in your guidance for this year.
John Kite
Yes. First of all, we’re not talking about rent abatement.
We’re talking about rent deferral. That’s a big misconception in the marketplace that we would be abating rent and as I think I may have mentioned, we’re talking about a very small grouping of our tenants.
At this point, around 1% of our tenants in our portfolio would even have any rent deferral that we have granted. What we’re trying to say is, anything that we do, we’re going to get back.
And by the way, the other important thing here is if we do agree to any kind of rent deferral with a tenant, we typically get very, very favorable terms relative to how we would amend the lease as it relates to option periods, as it relates to our right to terminate, our right to relocate. So I think, again, it’s obviously a big thing that the industry’s talking about, but quite frankly, what you’re finding is when enough people read articles out there, everybody decides that they should call up and ask for rent abatement.
And as I was trying to make it clear, we have contractual obligations and on average they are seven years long, the high majority of our tenants are credit tenants, so ultimately we’re going to win. It just comes down to we want to be sensitive to the environment and that’s what we’re talking about.
It’s not really out of desperation. It’s out of us wanting to work with our customers.
Sloan Bohlen – Goldman Sachs
Okay. And then the last question, just on the transactional revenue embedded in the guidance for this year, can you talk about why this isn’t a “sell now” versus I think you guys backed off given the volatility in the market last year and maybe what changed in pricing for those sales you’ve seen over the last (inaudible)?
Dan Sink
Are you referring to the sales we did at the end of the year?
Sloan Bohlen – Goldman Sachs
No, just in terms of the parcel sales that you were talking about last year.
Dan Sink
Going forward?
Sloan Bohlen – Goldman Sachs
Yes, going forward.
Dan Sink
The $0.05 to $0.15 that we put into our guidance is – when we look at the land parcels and outlots and things in front of our centers, I think there’s still activity on those. So, we really reduced the transactional volume, but I mean we wanted to be clear that, I mean, we still think – because that’s been a part of our business since we’ve been public that there will be some of that still going on, but that the amount it for 2009 is obviously less.
John Kite
And just to clarify a little bit, what we’re really talking about is residual land parcels that we don’t want to retain, for one thing, because they’re residual to the property. And two, these would be larger parcels.
And then two, the outlot parcels that Dan was talking about is vis-à-vis tenant demand and/or user demand because in the environment we’re in today, many of the outlot users would prefer to buy than lease. So, we’re in a situation where we’re going to choose in a few instances to sell direct to the users, and then we’ll choose in a few instances to sell the ground leases.
That’s going to be less than what it’s been in the past and we mentioned that last year. There’ll still be the occasional sale of a ground lease, but remember, we’re talking about significantly bringing that down from where it was in the past because, obviously, we’re cautious around the capital markets.
Sloan Bohlen – Goldman Sachs
Okay. Thank you, guys.
John Kite
Thanks.
Operator
The next question comes from the line of Michael Billerman with Citi. Please proceed.
Quentin Velleley – Citi
Hi, it’s Quentin here with Michael. First question is just on the current development pipeline.
I was wondering if you could, on those projects, whether you could give us some development yield, expectations, and whether that’s changed over the last three to six months.
Tom McGowan
From a development yield standpoint, we’ve maintained our consistent range on these projects, in particular, on the development pipeline, which is, you heard earlier, only contains three projects with only 49 yet to complete. So, the range is basically running between 8% and 9% and that has been steady for the company for a period of time and we expect those to stay within the band.
Quentin Velleley – Citi
And that’s a stabilized development yield. Has that stabilization period extended out?
Tom McGowan
No. We typically draw [ph] our stabilization period based upon our percentage leased and typically, that would occur in a two-year period from a stabilization standpoint.
Quentin Velleley – Citi
Okay. And just in the sense of the visible shadow pipeline, I know you’ve spoken about, obviously, reducing your development spend and you also mentioned appropriate pre-leasing.
I’m just wondering what kind of percentage pre-leasing levels that would be on average and how that relates relative to how you would’ve commenced the development, maybe 12 or 9 months ago.
John Kite
Quent, it’s John. What we’re really saying there is each deal is – we look at each deal independently; and historically, developers have tended to be comfortable when they have their anchor tenants in place and then some very minor amount of leasing on the remaining space.
So I think what we’re saying is we’re intensifying the leasing on the remaining small shops space and/or some remaining box spaces. I am hesitant to give you numbers because it has a lot to do with each individual deal and we’re saying that in each of these, we want to make sure that there’s enough leasing down in the small shops that we can open and cash flow.
So, that might be 60%, that might be 50%, it just depends on the deal. It depends on the capital structure of the deal too.
But generally speaking, this is all internal that we’ve raised the bar. I mean, ultimately as far as third-party construction lending goes, it is very focused on projected DCRs and things like that.
Quentin Velleley – Citi
Okay. And just on your construction line coming due this year, I think you mentioned you’re comfortable with the loan-to-value ratio that you could achieve there.
I’m just wondering what those loan-to-value ratios would be and what valuation metrical or cap rate that they would be based on?
Dan Sink
Yes, I think when you look in it as far as the $108 million that’s maturing, when you look through those – and again that’s – a lot of that Quent when the banks are looking at it, it’s not so much a loan-to-value ratio but a debt service coverage. I think it’s almost – the debt service coverage is the first metric that they the back into the loan-to-value once they see that you can hit a 1.2 million to 1.25 times.
So that’s – I think everybody is uncomfortable to say, “Here’s what the cap rate is in the market.” I mean, I know that we’ve had a lot of appraisals down on construction loans that we’ve been – and three to five years loan that we’ve been entering into.
We have sold two properties but we’re more focused to be sure that when we enter into these loans, the debt service coverage is at least at 1.2 to 1.25 times. On these properties, we’re pretty comfortable where that falls in and that’s why we say that we have comfort around being able to extend or refinance the remaining 2009 maturities.
Quentin Velleley – Citi
All right. Thank you very much.
John Kite
Thank you.
Operator
Your next question comes from the line of Warren Klusinki [ph] with BMO Capital Market. Please proceed.
Warren Klusinski – BMO Capital Market
Hi. Good afternoon.
I was wondering, the deferrals that you were talking about before, are they in any particular market, weighted anywhere in your portfolio?
Dan Sink
Sorry, you were breaking up a little bit. You said, is there any particular market in terms of where the deferrals are being given?
Warren Klusinski – BMO Capital Market
Well, are they weighted in any particular market in your portfolio?
Dan Sink
No. I mean, generally speaking of the few that we’ve given, I think in each of the markets we’re operating, I think we’ve given a couple.
So it’s really spread across the portfolio and quite frankly, it’s not even concentrated in one particular type of retailer. And again, this is a decision that we’re making on someone that we view as a survivor and we want to help them be a survivor.
I mean, there certainly have been requests made to us that we have turned down. A great majority more we obviously turned down and once we give people the test that they have to go through in terms of what they need to give us, right there, that stops some of the conversations because as I said a lot of people are just asking to ask.
But for the ones that is legitimate, I mean we will obviously discuss it.
Warren Klusinski – BMO Capital Market
Okay. Thank you.
Operator
Your next question comes from the line of Nate Isbee with Stifel Nicolaus. Please proceed.
Dave Fick – Stifel Nicolaus
Hi. Actually it’s Dave Fick here with Nate.
John Kite
Hi, Dave.
Dave Fick – Stifel Nicolaus
A number of questions. Why would you even put out there a number without Circuit City?
That’s a normal course of business bankruptcy. You’re going to have more of that size and scope in the next year or two.
Why is that relevant?
John Kite
You’re talking about why we’ve put out the – what the FFO number would have been?
Dave Fick – Stifel Nicolaus
Yes.
John Kite
It’s relevant because it happened after the end of the year, so it’s an unexpected event as related to the end of the year and the guidance that we’ve already given. That’s why we believe it’s relevant.
Dave Fick – Stifel Nicolaus
Okay. Thank you.
John Kite
Sure.
Dave Fick – Stifel Nicolaus
The same-store NOI guidance, can you walk us through some of the assumptions on the underlying occupancy and rent rollover numbers?
Dan Sink
I think when you look at the same-store, obviously we – for the year, we were flat. For the previous quarter, we were 1.2% down.
And I think when you look at what we’re anticipating with the Circuit City being vacant for the majority of the year, I mean, we’ve got good activity. But obviously if they vacate in March, it’s going to take us a while to get a lease signed and the space ready for the next tenant.
So that is a factor, and part of the negative same-store would be the timing and the effect of the Circuit City liquidation. In addition, as we had gone through our budgeting process, we want to stress test some of the lease up that we anticipated on some properties and make sure that we had arranged, that we’re comfortable with this as we look out through this year.
And that’s what got us to the 2% to 4%.
Dave Fick – Stifel Nicolaus
Okay. When you talk about the spend on your pre-development projects, obviously that’s a cash number that you’ve got some load on carry.
You got $90 million sitting out there not doing anything. At what point would you make a decision to pull the plug and simply liquidate for land value and how do you evaluate that in the context of your current commitment to staffing in this area?
What is your G&A load that’s capitalized?
John Kite
Well, David, as it relates to how we look at it on a going forward basis, I mean obviously as I said, we have commitments or anchor tenants who are in the pre-leasing of the shops in the ancillary boxes. We’re in an extremely challenging environment.
So, obviously, we’ve to work harder to get to a place that we would have been earlier. As it relates to how do we value this and how do we determine whether or not this is something that we would sell for land value, I mean there’s just so much that goes into that.
And right now, we’re no way near that feeling because we’re still making progress in what’s probably the worst retail environment in 70 years. So I feel like we’re making real good progress.
I feel okay about it. We’re going to analyze that as we move through the year.
As it relates to staffing, as you know, like many companies, we do what we do. We have to make tough decisions and we’ve made those tough decisions and you can see that in our overall corporate overhead reduction.
You can see it in out G&A reduction. That’s something that we’re going to have to continue to deal with.
We moved in front of it. I mean, if you look back to the way we were talking a year ago, at this same time, we were making it very clear that the environment was turning negative and we would react to that and we did react to that which is why you see a fairly clean earnings report that we just put out relative to what else is going on in the world.
So we will continue to review that, Dave. It’s just tough to say how you make that decision right now in February.
Dave Fick – Stifel Nicolaus
I hear that, John. I don’t mean to be argumentative.
But all of these projects have been out there for quite some time on a pre-leasing basis.
John Kite
Right.
Dave Fick – Stifel Nicolaus
Environment is only getting worst from a leasing perspective. I’m just wondering how you can be seeing progress on pre-leasing at a time that tenants are running the other direction and not making new commitments.
Are you – you’re delaying by a period of month I assume on average at least six months now, the move forward; you’ve got the associated soft cost carry with that and the whole presumption that you’re going to get leasing done on an incremental basis at a time that people aren’t leasing.
John Kite
Yes. I guess, again, all I can do is come back and tell you how we’re doing on the – as it relates to here versus the whole world.
And yes, it’s a difficult environment. We’re reviewing it everyday.
Two of the projects in this pipeline have an opportunity to start at the end of the year. If we – as a matter of fact in our capital plan, even with the strong amount of liquidity that we’re projecting at the end of the year, we have associated capital going into this beyond just the carry cost.
So we believe that that may happen at the end of the year. But, again, I think when we talk about this again in the next quarter and the following quarter, we’ll continue to update you as to the progress we’re making but we feel like that these things are going to happen and we feel like the strength of the anchor tenants who have committed and quite frankly, are pushing us to get the co-tenancy in place, that gives us comfort that these things make sense.
Dave Fick – Stifel Nicolaus
Okay, thank you.
John Kite
Thanks.
Operator
Your next question comes from the line of RJ Milligan with Raymond James. Please proceed.
RJ Milligan – Raymond James
Good afternoon, guys. Majority of my questions have been asked and answered.
With regards to Circuit City progress, you guys mentioned that you’ve got a couple of good leads there. Just curious, who’s looking or what types of retailers are looking for big box spaces at the moment?
Tom McGowan
Hi, this is Tom. We have three locations that we’re working on right now: Coral Springs, Daytona, and then a location on Hurst, Texas.
So, we don’t think it’s appropriate to give any specific names because we’re obviously in the heat of the battle looking to attract people and there’s competition everywhere, as you know, but we are in a good situation in terms of the real estate. There are certain sectors that, in particular, we’re chasing and we hope to make good progress here in a very short time.
RJ Milligan – Raymond James
Okay. Thanks, guys.
Tom McGowan
Thanks.
Operator
(Operator instructions) Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.
Rich Moore – RBC Capital Markets
Hi. Good afternoon, guys.
John Kite
Hi, Rich.
Rich Moore – RBC Capital Markets
A question for you on the developments, the current pipeline. The six or seven boxes that you guys identified as anchors, I mean, are those pretty much set in stone?
Is everything going okay with all of those, so that they can’t really back out or probably won’t back out?
Tom McGowan
I think, as you know, nothing is set in stone until they actually open the stores, so it’d be a little presumptuous for us to say they’re set in stone. However, we do have executed documents with them.
We are working very closely with their predevelopment teams on layout, etc. As John mentioned, they are pushing us and we’re just being tough at this point in terms of setting that pre-leasing level, making sure the capital from a construction loan standpoint’s there.
So, the bottom line is, yes, we do have very, very strong anchor tenants. And I think back to Dave’s question earlier that John responded, that’s why we have the confidence that we’re going to be successful because the names behind each of these projects are very strong and are groups that draw all the balance of the leasing.
John Kite
Rich, it’s John. I think you’re also asking about the current pipeline, right?
Rich Moore – RBC Capital Markets
You are right, yes.
John Kite
Yes. And as it relates to the current pipeline, obviously, we’re under construction.
All the anchors are executed leases. Each one of these projects is a little different.
The environment that we’re in has, some of these have obviously been – the timing has been delayed, so that brings into play how each one of these individual leases is affected by timing. But we could tell you as we sit here right now all the anchor leases are executed.
Everything is the same as it relates to that and there are probably one or two situations where the delivery timing is off, so we’ll have to be discussing that with those guys as it relates to when their opening would occur. And whenever you have that situation, sometimes that’s going to move the needle around.
But at this point, we feel okay about it.
Rich Moore – RBC Capital Markets
Okay, good. Thank you, John.
And then, is there any break on development costs? I mean, with all this going on in the economy, are development costs getting any better?
Dan Sink
Well, if you take a look at construction cost indexes, which we obviously look at quite frequently – just to give an example, over the last 60 days, you’ve seen some nice drops in lumber and steel. You’ve seen labor stay relatively steady, so I think everything is looking in a positive direction as it relates to cost.
The fact that labor is stable. You can always have your inflationary impacts, but we like where we are much better than we were a year ago.
Rich Moore – RBC Capital Markets
And I assume the Ohio-based stuff is cheaper too.
Dan Sink
That is correct.
Rich Moore – RBC Capital Markets
Yes, okay. Okay, good.
Thank you. And then, I’m guessing that the dividend will be paid in cash.
Is that right?
Dan Sink
That’s correct.
Rich Moore – RBC Capital Markets
Okay. And what percent or what was taxable net income, Dan, for last year?
Or what roughly is the new $0.60 dividend as a percentage of taxable income?
Dan Sink
We had projected last year about 45% to 50% return of capital. And then, when it got to the end of the year, with some of the transactions that occurred that adjusted the return of capital to a little higher number in 2008, just as we reported.
I think if you look at 2009 and you look at what our taxable income projections are, I would say that it would range in the dividends of $0.25 to $0.30 would be enough for us to cover our taxable income projections. So, what I’m saying is based on the dividend of $0.61 to where we are at taxable income of $0.30, you’ve got room in that regard to meet the REIT test.
Rich Moore – RBC Capital Markets
Okay, good. How about asset sales?
Is that – you guys obviously have done some and are there more planned? Is there a thought that this is a good time to be looking to do that or not so great?
Dan Sink
Well, I mean, obviously, when you look at what we got done at the end of the year, Rich, I mean, I’d say November and December were pretty awful times to be selling and we were able to do two very effective and two very attractive sales as it relates to cap rates. So, I think when you see – certainly, when the stock is trading at a level that’s so crazy low like all the REIT stocks are right now, when you look at cost to capital, it’s got to be something you look at.
However, the environment is such that sales are few and far between, and we’re even moving more into a period where cap rates are very, very difficult to even put a handle on. And frankly, as you know, cap rates at the extreme are really driven by availability of capital, not cost to capital.
So, right now, we’re in the extreme negative. Much like when we were in the extreme positive, cap rates on both ends of that cycle don’t make sense.
So what I’m trying to tell you is, but for the fact that we find another two opportunities like we did at the end of the year, it’ll be tough, but we’re going to look at it because if we can recycle capital that way, it’s a much cheaper way to do it.
Rich Moore – RBC Capital Markets
Okay. I got you.
And then, by the same token, obviously, buyers got to find capital. What are you guys seeing on the depth front?
I mean, are you sensing that it’s getting a little better or is it about the same as it was? Or are we getting more worse?
Or what would you think?
John Kite
I think – look, we’ve been very successful in our ability to both refinance and place new debt on projects. And, as you can see, we did a great deal of that in a difficult period of time.
However, we are fortunate that the types of debt that we have, both the quality of the asset and the size of the asset are what remain attractive to debt providers, so that’s a way of saying we think it’s generally the same. It’s probably worse for the larger loans and it’s probably worse as it relates to CMBS, which is why it’s so important for us to reemphasize for a company with over $300 million of fixed rate debt to have only $50 million of CMBS debt rolling over in the next three years.
It’s very attractive. So, I think we feel very comfortable in our sweet spot, but that is somewhat of a niche as it relates to the rest of the capital market.
Rich Moore – RBC Capital Markets
Okay, I got you. Thank you, John.
And then, last thing, on Circuit City, Dan, does the loss of rent begin in second quarter? Do you get anything in the first quarter or does the bankruptcy preclude you from getting anything?
Dan Sink
As of right now, Rich, they are still occupying the space and paying rent and we’re anticipating that to occur through March, so the majority of the effects of the liquidation would occur in second quarter and beyond until we get the spaces leased.
Rich Moore – RBC Capital Markets
Okay, great. Thank you, guys.
John Kite
Thanks.
Operator
Your next question comes from the line of Alex Barron with Agency Trading Group. Please proceed.
Alex Barron – Agency Trading Group
Yes, thank you. I guess you’ve briefly answered one of the questions I wanted to ask on your assumptions on occupancy.
So excluding Circuit City, what assumptions are you making for the rest of the portfolio of what might happen in ’09?
Dan Sink
I think the assumptions are embedded in our same-store guidance of negative 2% to negative 4%, so I think when you look back through that, I think from a run rate perspective until the end of the year, we would anticipate being somewhere between 89% and 91%.
Alex Barron – Agency Trading Group
Okay, got it. My other question is just more generally, you talked a little bit about rent relief and having some test.
Can you just talk about the thought process and what the test involves when people come and ask you for rent relief?
Dan Sink
Well, I mean, the obvious thing here is that you look at the tenant’s health ratio. So basically, one of the many things we look at is what their health ratio is as it relates to our operating expenses, their sales to our operating expenses.
That’s one of the things that we look at. The other things we look at is, we determine how important the use is in that particular location.
We look at the history of their sales reports. We look at tax returns.
We look at the individuals guaranteeing the leases and we look at everything. So, as it relates to the mom-and-pops all the way to the nationals, we go through a very stringent process because once we begin to defer rent, we look at ourselves as a lender, so we treat it that way.
Alex Barron – Agency Trading Group
Okay, got it. Thank you.
Dan Sink
Yes.
Operator
Your next question comes from the line of Stephanie Krewson with Janney Montgomery Scott. Please proceed.
Stephanie Krewson – Janney Montgomery Scott
Hey, guys.
John Kite
Hey, Stephanie.
Stephanie Krewson – Janney Montgomery Scott
Three questions. I’ve got some small ones, but I’ll save them for offline and spare the listening public.
Number one, regarding your shadow pipeline, how long can you sit on that stuff before you have to do anything? In other words, is there a time when you have to do something to keep your variances current, like poor foundation or something?
I mean –
Tom McGowan
John Kite
Stephanie, the other thing is that as it relates to how long, I mean, again, I want to emphasize for everyone that these are decisions that we’re making to be prudent. If we wanted to start construction, we have enough anchor commitments in, say, at least three of these deals that we would be under construction right now.
As it relates to – for example, Delray Beach, we have both anchored tenants with executed leases. So, the question of why are we not moving forward, the reason we are not moving forward is because we’re being extremely prudent with capital and the effect of waiting another year, six months, 12 months is de minimis on our overall return.
So, that’s why we’re doing that. It’s not a situation where we have to in those cases; it’s a situation that we want to.
Stephanie Krewson – Janney Montgomery Scott
That’s helpful. I don’t think anyone asked this.
Forgive me if it’s a repeat, I did have step out for a minute. What were the exit cap rates on your Silver Glen Crossing and Spring Mill Medical buildings?
Dan Sink
The Silver Glen Crossing was a 7.5 cap on the current NOI and the Spring Mill Medical was an 8.1 cap.
Stephanie Krewson – Janney Montgomery Scott
And who were the buyers?
Dan Sink
The Medical deal was a REIT and the shopping center was a private real estate company that was affiliated with the anchor tenant.
Stephanie Krewson – Janney Montgomery Scott
Okay. Third question, can you provide the average occupancy for your redevelopment projects?
John Kite
We don’t have that right in front of us, Stephanie. Can we get you that afterwards?
Stephanie Krewson – Janney Montgomery Scott
Sure, sure. And that’s it for me, thanks.
John Kite
All right. Thanks, Stephanie.
Operator
(Operator instructions) Your next question comes from the line of Ed Serbil [ph] with Brent Group [ph]. Please proceed.
Ed Serbil – Brent Group
Thank you. I just had a question regarding – in the Circuit City and Linens ‘N Things replacement, do you expect those leases, if you replace them, to be roll-downs or at less than the rates that Circuit City and Linens ‘N Things were paying?
John Kite
Ed, it’s John. I think Dan and I both would like to talk about this.
And actually, as it relates to Circuit City, historically, the Circuit City and Best Buy and the electronics guys have been the higher rent payers. And we actually took a very conservative route in terms of how we treated the FAS and I’d like Dan to address that.
Dan Sink
Yes, Ed, on one of the spaces with Circuit City, we acquired it when the rent was roughly $16 and the reason we had a write-off in this quarter is we made a decision to write the rent down to just about $11, which – in that perspective, do we think we’re going to get the $16 rent that was in place? No, we do not, but we’ve accounted for that.
So, if we sign a new tenant to anywhere around $11, the net impact to our FFO will be negligible, if any. So, when we acquire a center, we try to go through that analysis.
Now, as far as how we’re going to do on the Circuit City and the rent, I think a lot of it is going to be related to what type of tenant improvements we put in, so I don’t know. It might be premature to give you an answer on what the net effect of rent is going to be once we complete the negotiations with these tenants.
Ed Serbil – Brent Group
But the probabilities are that it will be lower, not higher?
Dan Sink
John Kite
A lot will depend on the timing. Obviously, we’ve come right out of the box and re-lease two of them quickly, maybe that puts us in a position, the third one we might wait a little longer because in the end of the day, the roll downs on this rent are driven by how quickly you want to respond because this is a buyer’s market in the sense that the tenants have leverage.
So, it will depend on the timing as well but I would suggest that it would be a roll down because they’re an electronics guy basically.
Ed Serbil – Brent Group
What about Linens ‘N Things? That empty space?
John Kite
I think that’s probably a push. We already re-leased the former Barnes & Noble in there with a grocery store, so we brought in a grocery component.
So I think that enhances the value of that center. It’s a strong center to start with.
So that one is probably more of a push and it probably comes down to the TIs, Ed.
Ed Serbil – Brent Group
Okay. And just a general question and this maybe hard to answer, but if you were just looking back a year, what would be the difference in the asking rent that you might undertake for both of those situations?
In other words, how much would rents potentially have dropped over the past year?
John Kite
Well, I mean, it’s –
Ed Serbil – Brent Group
Same space – rather than when the seven-year terms are up and you re-lease those?
John Kite
It’s tough to say and in fact, you'd probably have to go back longer than a year because we’ve been talking about this environment for over a year. So I think, Ed, that’s tough to say.
Generally speaking, I’ll tell you that we constantly talk about, when we executed new lease, we are very careful to take the higher rent that could be available to us because of this very reason. So if you look across the board at our anchor rents and you look in our supplemental at our anchor rents, you’ll see they are reasonably priced.
So it’s tough to say. Two years ago, would there have been more of a frenzy around available space?
No question about it. Could you look to push the rents up even higher?
Sure, you could. What it has turned out to be is a mistake to the extent people did that.
And as Dan said, we have tried to be conservative around that.
Ed Serbil – Brent Group
Okay. Well, thank you.
John Kite
Thank you, Ed.
Operator
Your next question comes from the line of Stephanie Krewson with Janney Montgomery Scott. Please proceed.
Stephanie Krewson – Janney Montgomery Scott
Thanks. A quick follow-up, how is Office Depot doing?
John Kite
How is Office Depot doing?
Stephanie Krewson – Janney Montgomery Scott
Yes.
John Kite
From our perspective, they’re doing fine, in terms of the stores we have. However, we’re really cautious around making statements around individual tenants, as you can imagine; puts us in an awkward position.
Let’s just say that all of our big box tenants, we’re looking at them, stress testing them, thinking about who the other players would be. But as it relates to us, they are current on their rent and that’s how we look at it.
Stephanie Krewson – Janney Montgomery Scott
Okay. And then one more quick question for Dan just to clarify something that he said earlier.
Your guidance for ’09 is based on what occupancy you’re in Dan?
Dan Sink
We have a range. I think, right now, we have a range of between 89% and 91%.
That’s the range we use to stress test our guidance range.
Stephanie Krewson – Janney Montgomery Scott
Okay. Thanks very much.
John Kite
Thank you.
Operator
I will now turn the call over to Mr. John Kite for closing remarks.
John Kite
Thank you for taking the time to join us and I look forward to speaking next quarter.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Good day.