Kite Realty Group Trust (KRG) Earnings Call Transcript & Summary

Well, good afternoon. My name is Anthony Powell, and I'm the REIT analyst here at Barclays. We are here today with Kite Realty Group. Hello, John. How are you?

Good. How are you, Anthony?

If you guys could introduce yourself, that would be great.

Sure. I'm John Kite, CEO.

Heath Fear, CFO.

Jason Colton, SVP, Capital Markets.

I'm Matt Hunt, Manager of Capital Markets and Investor Relations.

Okay. Great. Thanks for joining us today. We much appreciate it. So as part of our research, we -- as we looked into the shopping center space, we were pretty surprised at how resilient the group was during COVID. And the entire space faced a huge stress test, and there are questions about the impact of online shopping and whatnot and COVID restrictions, given that your business is doing surprising well. You had good momentum and now you're seeing good rent growth. I'm just curious, what's your macro view on how your sector and how your company was able to get through the past 3 years to get to where you are now?

Well, I don't think we have enough time, Anthony, to tell you all the great stuff we think about that. But look, obviously, COVID was -- or is -- has been an interesting stress test to our business. But I think what's happened and the strength that we displayed kind of during the worst parts of COVID and all the way throughout has a lot to do with where we were prior to that. And the fact that when you look at Class A open-air retail space, which we believe we're a participant in, there's just been very little new construction or new supply growth over the last 10 years-plus. So that's a very important thing that is playing out as well, the fact that the supply continues to drop. So as we went into COVID, there was a lot of kind of maybe a concern with generalist investors, in particular, that physical retail was slowly dying or there was just no real home for physical retail, and that online retail would end up dominating. And it really is just not the case. And one of the things that we found is that physical retail actually improved, particularly our type, open-air strip center retail got much stronger because we had so many more people exposed to it vis-a-vis people having hybrid work schedules, being at home more, going into the office, but also being at home and gave people an outlet, both for necessities and entertainment, right? So we've really benefited for that. So long story short, we're extremely bullish on the supply-demand characteristics of the business. And we're also very bullish on the strength of the customer, the retailers that we work with. The ones that weren't going to make it and were hanging on and hanging on are now gone. And the ones that were strong, but caught up in this vortex of everybody thinking that there was no physical retail, have proven that to be false, have made a lot of money. Now they're investing and they're investing in technology and physical footprint. So without going into too much stuff there, Anthony, I think just generally, we're in a really good space right now.

Yes. And to that point, on the tenants that are strong, you signed 638,000 square feet of new leases in the second quarter. I think that was a recent high in terms of quarterly leasing volume. What kind of tenants specifically are you seeing driving this demand? And is there a shift in the type of tenants you're being able to attract to your centers?

The demand is quite broad-based and there might be a slight shift. So I'll get to that. But first of all, the demand is very broad-based. That's one of the benefits of the type of properties that we own. This open-air portfolio that has grocery-anchored centers in it, community grocery-anchored centers, some lifestyle, some mixed use, all these different things that we have. But predominantly, we would call ourselves community shopping centers, right, which are -- they have a grocery component, but they're a little bit bigger than a neighborhood center. That's probably 60% of our revenue comes from there. That is very appealing to a broad base of retailers, whereas if you're holed only in the grocery-anchored center business, for example, your retail community is a pretty small community. It's basically a grocery store and service-based retailers, which can be fine, but that's not where all the growth is. That's 1 segment of it. So I think that the base that we have has exposed us to people like, as I said, the grocery stores. But the Total Wines, which Total Wine is a tenant that does $25 million, $30 million a year in revenue, that was -- that we consider just like a grocery because of the daily trips associated with it. But then you have the off-price guys are doing extremely well. As you know, TJ Maxx and Ross and Marshalls and then their spin-offs, HomeGoods and HomeSense, and those guys have all done very, very well. The entertainment segment is actually -- entertainment, restaurant segment has come back strong coming off of COVID. The entertainment side pretty much is -- the only part of that that's still struggling a little bit is the theater part. But even there, you see unbelievable improvement in the last couple of weeks. I think I saw today that -- I think it was Disney, somebody said they're now only going to do theaters. They're going to go away from live stream at the same time with theaters, or in streaming and home. I think it was Disney, it could have been Paramount, one of those guys. So the point is it's a broad base, Anthony. And then the service players are doing extremely well as well. And that's, again, the thing that we love about these open-air centers. Essentially, we're within 3 miles of a lot of people pretty much in every property we own. So you can get to these things in 10, 15 minutes, 20 minutes max, right, regardless of whether you're in Orlando or Las Vegas or Indianapolis or Chicago or New York. I mean the stuff that we have is generally very close to the population.

Got it. And also cash lease spreads increased pretty nicely over the past couple of quarters, you're at 9.2% second quarter. So obviously a lot of pricing power there. Kind of what drove that pricing power improvement for you as we got through the pandemic?

I think it's what we already talked about, Anthony. What drives pricing pattern doesn't matter what industry you're in. It's supply and demand, right? So we could be selling widgets or selling space, and we got to have the right amount of supply and the right amount of demand. That's a very important characteristic. And I think it's really, really good right now for us, that supply-demand characteristics. So that drives rents. It's just -- if we have more people that want 1 space, then we're going to drive rents. If we only have 1 person that wants that 1 space, it's tougher to drive it. So I think that's the most important part. And it's just the consumer. Obviously, it's healthy. There's a lot of capital. There's a lot of money. So there's a lot of buying power. You just mix all these things together, and that's a really good recipe. And I would say the quality of the real estate is equally important, Anthony, the fact that we own very high-quality real estate in general.

So you talked about supply a few times. So what was the impediment to supply growth in the past? Was it just uncertainty regarding retail? And then what prevents supply growth from accelerating in the future given some of the strong trends you've talked about today?

Yes. That's a great question. I think what has generally allowed it to happen, this oversupply that happened in the early 2000s, really all the way to like 2007, first of all, there was easy credit. There was a lot of debt in the market. There were a lot of private developers who don't underwrite risk like a public company would underwrite risk. So there was a lot of kind of space developed over that period of time that was just not that logical. So you had a lot of product, retailers were growing. I think returns were a little higher, but they were not risk-adjusted returns. So the initial underwriting looked pretty good for a lot of these projects and it turned out not so good. So as these returns dropped, I think you had less people willing to do that, Anthony. And so right now, what prevents it is it's a much more disciplined marketplace. A lot of the private development, a lot of private retail developers, frankly, are out of business or switched to industrial or switched to apartments, whatever. There's been a little change in that. And then people underwrite risk better today. And you got to be really careful with the returns that you generate on these deals. And regardless of how strong the retail segment is, there's a kind of a cap on what rents these retailers are also willing to pay in most cases. So that's that recipe for what's the return looks like. And I think it's kept product down. Now could it change? It could change. I think it's already gone a lot longer than anybody would have predicted. And when you go back to '08, '09, people would talk about, well, there won't be any new development for the next 5 years. Well, we're way past that. So we'll see. I generally think there's already enough retail space. And what we see people doing is improving what they already have, which is a lower risk way of developing, which is redevelopment, right? So you're improving what you have, growing your cash flow, but yet you already have fully -- a full understanding of the dynamics of the property. So that's a much lower risk kind of return -- or whatever, endeavor.

Got it. So looking across your portfolio, in terms of weighted average to kind of the supply growth, what are you seeing for the next like year or 2 in terms of that? And how is that compared to maybe 2 years ago?

We just -- again, we just don't see a lot of supply growth over the -- across our entire portfolio. Has there been some selective development in maybe the Southeast, yes, that we've seen some new supply. But I got to tell you, nowhere close, Anthony. That used to be our biggest concern was what -- who's going to add product right around one of our properties. That was always a big worry. It isn't even on the table. It doesn't -- it just barely even gets talked about because it's so rare.

And also, basically, like John said, negligible new supply in our space. But I think retail as a whole, I would tell you that it's negative supply, right? And I think COVID is, again, a great accelerator of a lot of these C or B malls that we all knew we're going to live along for another 5, 7 or 10 years. I think that time line now is 1, 2 or 3 years. That's 1 piece of actually the removal of retail GLA. And the second thing, too, is if you think about a lot of the redevelopment that's happening among our pure set and the REITs, a lot of times, that involves removal of a retail portion, a reduction of your retail GLA and densifying with a different use. So I think those 2 things are more than offsetting this negligible new supply we're seeing in our space, like John talked about, in areas of the Southeast, et cetera. So I think the trend will be -- will continue to shrink.

Got it. Right. Couple of near-term questions here. Obviously, COVID has come back in a lot of markets. Any impact on traffic in your standard that you've seen, as you've seen COVID cases rise? And any change in your ability -- or your view of your ability to collect bad debt as COVID cases rise in certain markets?

At this point, the answer to that is no. There has been no -- we have seen no change really at all. And we're broad -- we have enough geography that we're in different parts of the country. So we've been going through this COVID increase over the last 6 weeks. And probably, we just haven't seen any traffic changes at all. If anything, traffic is picking up. And I made the comment earlier, just from a pragmatic perspective, if this was such a big concern, I don't think we would have seen the stadiums full that we saw this weekend on every NFL game across the country. So I think people are living with it. I mean that's the reality. It's not going away. My personal opinion, we're going to be living with it for a long time. And I think people are adjusting to that and everybody has their own way of living. But reality is our properties have continued to be extremely busy. And it doesn't matter where I am, and I traveled a lot in the last 2 months throughout the country, Anthony, at all these -- particularly with the pending merger, and everywhere was the same. A lot of people shopping.

Good to hear. I guess focusing on your market mix. You talked a lot about warmer and cheaper markets, some exposure, Raleigh, Charlotte, Florida, Texas, Vegas, we all know the cities and the market. Just what has driven your thesis in those markets? And how that thesis, I guess, played out in the past year or so in your portfolio?

I mean this is a thesis that has gone for -- we've been thinking this for probably the past 5 years that there's been -- there was always this bias towards coastal real estate. But we saw what was going on throughout the country in Texas and Florida, the Carolinas, as an example, not the only places, but as an example. Vegas, also Salt Lake. And we just kept seeing more and more movement into these cities. It's just an easier lifestyle in a lot of cases. It's obviously more effective on a cost basis. And you've seen in our investor presentation the math around what it looks like making a certain amount of money in a major city versus what would be deemed as a secondary city. So that was the thesis that was accelerated by SALT, that the SALT deduction accelerated it somewhat. Now we believe it's been accelerated by COVID. So there's a lot of fuel to that. All that being said, the other thing we've learned after being throughout the whole country here is that this is a very diverse, big country, and it doesn't move in 1 direction, right? It moves in multiple directions for multiple different reasons. So you've heard that there's a lot of terminology now about, for example, in New York City, okay, people may have left the actual city itself of Manhattan, but they didn't move to Florida. They moved to Westchester or they move to Long Island or they moved to New Jersey or they moved to Connecticut. And that was always happening. But that was accelerated, too. So I think when I look at our map today, and again, really excited about what this map looks like post merger, we feel like we have the perfect exposure across both of those themes, not just one of those themes. I think there's 2 big themes that we're exposed to that will be very important to open-air retail real estate.

Yes. And I mean, I actually agree with almost all of that. And I guess looking at cap rates, and I guess, it'll be great going to have validation on the cap rate side to see more private capital kind of buy into these markets? Have you seen that happen? Have you seen cap rates compress between coastal and -- coastal-oriented and Sunbelt shopping centers? And how do you expect that to trend?

Yes. We've absolutely seen that compression, Anthony. And I think, look, as we sit here today, the public market cap rates are way off from what private market cap rates are. And I don't know what the -- why sometimes it feels like public investors need to know what stuff's worth through the private market. It's the only industry I know that's like that, but it just is what it is. And there has been a couple of major transactions occurring in the last month that I think will open people's eyes to that. I mean most of them are starting to get out in the marketplace, but there was a portfolio that is trading. It's going to go to a private equity sponsor and it's a low 5 cap portfolio. It's large. It's $800 million. It's got power centers in it. It's got grocery anchored centers in it. It's in Texas, it's in Florida, it's in Chicago, it's in New York. So it's not that simple little map. It's a little more moved around the country. And I think the reason is pretty obvious. These guys raise $2 billion a month, and it has to get put somewhere. And I think they're kind of done by an industrial at a 2.5 to 3 cap, right? And you put a little leverage on this thing. The next thing you know, you've got a double-digit IRR with high-quality cash flow. And I think COVID clearly demonstrated the durability of this cash flow. And I think it's seen right now as a very, very good price of entry. I mean, we know of another portfolio that this one is grocery-anchored only. It is only in Southeast Florida, and it's a 4.6 or 7 cap is what we're hearing. And so I think it's slowly but surely the cap rates are being affirmed. And there are certainly 5s, maybe 4s to 5s. So it used to be maybe 5s and 6s, maybe those are 4s and 5s. So when we look at our implied value, we, of course, think, wow, this is -- this is way off, but it will take some time for that to catch up. And there will be some individual trades that maybe are higher cap rates for whatever particular reason. But overall, there's no doubt there's been cap rate compression and there's been a huge influx of interest, okay, in the retail space. And that eventually, that interest will play out into actual transactions.

Yes. What you just said resonates in that -- I'm talking to a lot of clients in the past couple of weeks. That came up a lot. It was like the valuation hasn't really -- you haven't seen multiples expand, or cap rate compressed for your space. While, as like I said before, the -- like the most weaker tenants were already out and you're starting to rebound. And so getting my math, low cap rate -- at high cap rate rather, when the rebound has still come in the last situation seems pretty attractive. To that point, you talked a lot about your anchor and shop lease-up opportunity more -- can you give us some more detail about that incremental NOI for you as you lease those spaces. The tenant demand for those spaces, can you achieve that NOI over what time frame? Obviously...

Right. Yes. As you know, we have a page in our investor deck that...

What page?

Page 5. If anybody is looking at the deck, Page 5 is a great page that kind of lays out what we hope to be able to achieve in NOI growth, which we say is 14% NOI growth. And we've got Q3 coming up in terms of us being able to report on Q3, and Q3 has kind of a very -- not surprising anybody, the dynamics continue to be good in lease-up, and we're continuing to lease up space with positive spreads and positive returns. So we feel very comfortable that that's achievable over the next, whatever, 18 months or so that we would generate those kind of NOI increases. And we think the capital that we're going to spend is kind of what we projected it to be and the returns are pretty, if not better, close to what we projected. So I feel like the dynamic, it just all comes back to the same theme that you pointed out right in the beginning, Anthony, which is there's a good supply-demand characteristic and we're driving rent growth because of it. And there's plenty of retailers that want this space, and there's just not that much quality space around. So I think that it is achievable, I think we'll -- we feel very good about that.

Got it. You're obviously like, I think, 92% roughly right now. Where can that go long term? And then where has it been historically? I'm just curious, where does that kind of...

Well, yes, I mean, when I look at historical, what we've always felt in the past is 95% to 96% occupied for the whole portfolio is pretty full. So we lost 500 basis points during COVID. We've obviously picked some of it back up already. Half of that loss came from Stein Mart, 1 box, which ended up being an awesome thing because their rent was very below market. So I think our goal is to get back to where we were, which is in that 95-plus percent range for the total portfolio.

Got it. And are there still any kind of remaining, let's say, off-trend tenants that have any meaningful exposure in your portfolio, like a Stein Mart for example, that -- and anything like that that's left, that could be a headwind at any given time in the next year...

No. I mean, look, when we look -- let's put it this way, when we look at our at-risk tenancy, that looks better than it ever has. I mean, even pre of -- pre-'08. Like we've been through 2 crisis in the last 12 years, okay? So I hope that's the last 2, okay, but we'll see. So when I think about those 2 big, big events, I don't even remember a time pre then when we didn't have more retailers that we were significantly concerned about. Now don't take that to say that we won't have people go out of business. Of course, we will. That is the business that we're in. It is a -- that's why we own the real estate and not the retailer. That's the beauty of our business is that we can move people in and out based on their performance and creditworthiness, and we can judge the value of their cash flow. So I'd say it's in really good shape. Maybe in the next couple of years, there will be another cycle that we'll go through and some of these other guys that have hung on a little longer than everybody thought. But even the guys that we thought were gone like the office supply business, they've radically shifted what they do, and they're surviving and kind of thriving, which is a little bit of a shocker. So we'll see. There's -- you look at the strength of some of the guys in the theater business from a balance sheet perspective, no one thought their balance sheets would be that good. So I think we're in a pretty good place.

Got it. I guess a couple of questions on trends for retailers. I mean, there's been a focus on buy online, pick up in store, return in store. Has that resulted in retailers needing more space or need incremental space? And just how is that kind of impacting how you're doing...

Yes, there hasn't been a huge change in the footprint of what these retailers want. Some of them have changed. So some of them are smaller. There's a few that have actually gotten a little bigger. But in general, like the percentage of floor area that's dedicated to retail sales, that probably drops a little bit in the percentage of floor area that's dedicated to the back of the house maybe by 5%. I mean that would be a big number, and that's anecdotal. That's not data, it's just anecdotal. And there has been very little change to the interiors, right, other than upgrading them and refreshing them and moving -- making the -- for example, you walk into an updated retail store today, you can see the whole store versus the old Bed Bath & Beyond stacked into the -- stack it to the truss, right? Well, that's dying because nobody wants to be in a room full of boxes except for Amazon. So I think that's gotten better and people are investing. So it's not tremendously different yet, Anthony. We had a lot of people asking us about that -- for a while, people were thinking, well, that would change the pricing of retail real estate, right, that it was more back of the house than front of the house. And obviously, as you just pointed out, rents are going up, they're not going down. So that hasn't happened.

Changed everyone realizing they needed physical real estate stuff.

Yes. I mean what Jason just said is a great point that it hasn't changed the footprint or the layouts, but they've certainly figured out through COVID that the only way to be successful in retail is to have a very significant physical presence supplemented by a very professional and well-executed online presence, right? So that is clear. Even Amazon would be the first to tell you. There is no way they will succeed in retail if they're online only. They know that. That's why they've leaned into physical retail, and I'm sure they're not done with it. There will be other things that they do physically. It won't just be the grocery business, in my personal opinion. So we'll see. But yes, I think that's a great point that these retailers have figured out. I've got to have physical retail space to execute a good retail distribution plan.

Yes, that's my next question. So I think there is a report or a rumor that they were looking to -- Amazon was looking to open up their partner stores in some other kind of format. I guess [indiscernible] country. I mean, obviously, I mean, in other sectors, we've seen Amazon become too big of a tenant and they've kind of -- you've seen companies try to shift away from that. I guess what's your view on them as a potential larger tenant longer term? Do you want them in your centers? Would you...

Yes, I mean...

Kind of [indiscernible] makers that's kind of...

it's a great question and it's a more complicated question than people probably think, right? You would probably think, "Oh, it's great credit. I'll take it." I mean one of the things that worries me about them is their tendency to experiment with stuff and then just stop. So I think, look, we will definitely be doing Amazon grocery transactions, both Whole Foods and Amazon Fresh that we will do. But I think we will be very eyes wide open and watch our exposure and be careful. I wouldn't want to be a landlord that, that was the biggest tenant I had. I just wouldn't want to do that. So -- and again, I think I'd do it with them, too. They play with the house's money all the time. It's free. So why not try something and see if it works.

Got it. Understood. No, it makes a ton of sense. I guess -- and also for the audience, if you have any questions, feel free to e-mail them to me via the interface or e-mail me directly. I guess with all this leasing, there comes increased CapEx. I guess, what's your leasing CapEx expected to be this year versus historical norms? Where does it go in future years? And how do you judge capital deployment versus your opportunity for leasing?

Sure. Well, I mean, our CapEx is obviously significantly greater in 2021 and 2022 than it was in 2017 and 2018 and 2019, probably because of the backfill leasing that we're doing. So we definitely have an elevated CapEx. That said, the returns are higher so far. The returns have been higher than what we projected. The cost to deliver these spaces has come in pretty much significantly under what we projected because we had -- we laid out in our investor presentation that we thought that the anchor leasing would be $100 a square foot, and I don't have it in front of me, but so far, it's been well below that, like $75 or...

It's been $40. That's the second quarter.

Okay. So it's well below the $100 that we projected. The returns are higher than what we thought. That's a great thing. But that -- the CapEx in anchor leasing, Anthony, is very subject to are we able to continue to lease these spaces to 1 user as opposed to splitting the spaces up. And so far, we've done great with very, very minimal activity in the splits. That could change as we move through the program over the next year. Right now, it feels very good. So elevated CapEx in terms of the historical but extremely high returns. And frankly, it's why we ramped down our development pipeline in 2016, '17, '18. We ramped it down knowing that we wanted to have fresh capital, knowing that 2019, we thought would be a very transitional year. And then 2020, we thought would be a tough year. We had, of course, no idea how tough, and we thought for different reasons, but we were planning to have a lot of cash in 2020, which is why we paid down over $0.5 billion of debt in '19. So I think that's a long way of me saying, this is absolutely per our game plan. And this is the best place to spend capital because it's the highest risk-adjusted returns as you lease up space. So that's '21 and '22. And then as we get through that, I think that we're much back to where we were historically, back to normal.

And I guess, normal, I mean, looking at, I guess, CapEx requirements, leasing costs on a normalized basis, assuming in this normal turnover. Any changes up or down in the industry as it's changed? Any expectation that you need to put in more capital over time as new retailers come in? Or is that -- should we get back to some kind of prior normal to stay there?

No, I don't think at all. I mean I think there's some -- obviously, we're also subject to the same supply constrained characteristics that are happening in every other industry. So construction costs have been impacted a little bit, but not really materially. Actually, surprisingly, have been very resilient and not gone up a lot. They've gone up incrementally. But it doesn't -- and if anything, a lot of these retailers are much more, what's the word, they're much better capitalized maybe than they were pre-COVID. So our cost of capital back to them is higher than their own cost of capital. So -- because we're looking to get -- generate returns, right? So some of these guys are now realizing that, hey, maybe I'll put a little more capital in, so you put less capital in, and maybe I get a little better rent deal, right? So I think there's a lot going on there, but right now, it feels very stable. And there's no reason to believe that there's some massive shift in what the cost to put a tenant is in a space from what it was historically.

Got it. Talking about redevelopment and how you kind of scaled that back a bit. I mean you did have 2 kind of in the legacy portfolio of Glendale and Eddy Street, maybe talk about those. And obviously, you have the pending merger, but just looking in the future, where does new development kind of fit into your overall capital allocation, I guess?

Sure. We -- yes, I mean, look, if we're choosing between redevelopment and ground-up development, we generally like to go with redevelop it first, ground-up just has more risk and it takes longer. And that said, ground up can be very, very wise and very profitable. So you look at them each individually. The couple of deals that you mentioned, Eddy Street, which is the large project that we have on the campus of Notre Dame and South Bend, that's a 10-year development that's been going on for the last 10 years, and we've just gotten to the finish line, just to give you an example of the magnitude of that deal. But it's office, retail, multifamily, single-family residential, hotel. It's basically everything. It's a little tiny -- it's become its own little sub city on the campus of Notre Dame. Very important to the school. Great partnership between us and the university. And a great success story, great returns. We limited our capital that we invested. It was a very smart deal. It's a great deal to analyze, but a very programmatic long-term thing, and we're pretty much Phase 3 was our last -- essentially is our last phase. And then Glendale is very different. Glendale is an existing asset that we owned for a very long time. We had redeveloped it a couple of different times. And the most current one is a good example of how we looked at risk and how we looked at underwriting risk because we have some opportunity to do multifamily there that a developer actually came to us suggesting that they're interested in the parcel for multifamily. We essentially took land that was a parking lot, underutilized land, and did 270 apartment units, and we contributed the land to the partnership and got like a 15% interest in the partnership, but we had no capital risk, none. And then we were able to generate a TIF off of this new activity for $8 million, $10 million, can't remember...

$8 million.

$8 million. And we took the entire TIF and invested it in redeveloping the retail because we had a Macy's department store that had hung on and hung on and hung on and finally went away, thank God. And we were able to backfill that with multiple national credit retailers. And we used that TIF to generate like a 27% return on cost. So there's a great example of what we do. On the Eddy Street side, that also had a TIF, but we control the majority of the asset. We own the majority of it. On this side, it made more sense to have the minority piece, right, because we didn't want to take undue risk in this part -- property. So we have this long history in development, which I think gives us a very -- just a mindful approach, right? I've always said development, just because you know how to do it, it doesn't mean that you should do it. So you have to look at everything individually, analyze every piece of risk and then you hopefully come to the right answer.

Got it. All right. I guess maybe last one, I don't know, further capital allocation. You're obviously doing a merger now, but in terms of additional or future acquisition targets, I mean, yes, it's a very incredible landscape, as you described earlier, with the cap rate compression going on. But I guess, looking down the road, any other areas or something you want to expand more into? And similarly, on the disposition side a bit, is there more to do in terms of selling assets? I mean, you clean up the portfolio pre-COVID, but any more work on that side also?

Well, sure. I mean when we think about the company post merger and now we're looking at an $8 billion balance sheet instead of a $3 billion balance sheet or $3.5 billion, whatever, I think you're in a much better place to kind of think more strategically about all those things that you talked about. And if it goes according to plan, and as it should, our cost of capital is going to drop significantly, both we believe our equity capital and our debt capital. So as that weighted average cost of capital significantly drops, which we think it should, then the game opens up a little more in that regard. And then also just a sense of the real estate that we own, can we strategically kind of reallocate some of that. I wouldn't say we're looking to do anything in the way at all, like a major recycling that we went through in 2019 or a major recycling that RPAI went through for 5 or 6 years, which is a very slow bleed, we don't want to do that at all, what happened there. And those both were frankly dilutive because they were balance sheet focused. Now we're not in that position because we have a very strong balance sheet. It's going to get even stronger. So we'll be much more thoughtful around how do we exchange assets for better assets with better growth profiles, better cash flow? And how do we do that accretively so that our shareholders benefit from that immediately? And then how do we look at the portfolio in terms of the strategic layout, the strategic geography? So we have opportunities there, too. So bottom line is the combined company has a ton of opportunities, both organically and externally, to really grow cash flow and earnings, right, while maintaining a very strong balance sheet, that we wouldn't get by ourselves. I mean, look, we have a lot of opportunity by ourselves. We have great upside right now, as we pointed out, vis-a-vis the lease-up. But that's over the next 2 years. We want to look out over the next 5, 6, 7, 10 years, right? And I think the combination is much better for that.

All right. On that note, we're running -- we're out of allotted time. So John, Heath, everyone, thanks a lot for your time. I appreciate it.

Great. Thanks, Anthony, and thanks, everybody, for listening in.

Thanks for having us. Thanks, Anthony.

Appreciate it.

Appreciate it.