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

Welcome to Citi's 2026 Global Property CEO Conference. I'm Craig Mailman with Citi Research. I'm pleased to have with us today, Kite Realty and CEO, John Kite. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. So John, I'm going to turn it over to you to introduce your company and team provide any opening remarks. Tell the audience the top reasons that investors should buy your stock today, and then we can jump into Q&A.

Thanks, Craig. Good morning, everybody. Yes, we're Kite Realty Group. We own about 170 open-air shopping centers throughout the country in 24 states, predominantly in the Sunbelt, about 2/3 of our income comes from the Sunbelt, our 2 biggest states are Florida and Texas. So we clearly have a strategy regarding the Sunbelt. Also, about 80% of our ABR comes from properties with a grocery component. So we're focused on that. We're currently just finishing the year at 95% leased, which is a strong increase from the last couple of quarters and our average base rent right now has grown to $23, which is a significant increase over the last couple of years. So -- but basically, turning to the, I guess, the top 3 reasons from our perspective, it's pretty simple. It's really more categories. One is strategy; two is execution; and three, is value. And I would add balance sheet, so I'm going to go for ,so sorry. But let's talk about strategy. If you rewind the clock a year ago to this conference, Craig, when we were sitting here, you remember people talking about concern around us acquiring a really large asset, and it was weighing down. Why would we do that when we were trading where we're trading. And we were trying to explain that we were going to be prudent about how we would capitalize any large acquisition, and we ended up doing that with one of the best investors in the world and GIC as a partner. The deal was accretive. It made a lot of sense. And at that same time, we made it clear that, that was going to be part of a strategy of us pivoting away from a portion of the portfolio that we viewed as quality but lower growth, larger power centers. And in the year that's gone by we've done exactly that. And we've reduced our exposure to power centers by almost, I think, 500 basis points, if I'm right, guys? 400, 500 basis points. Our growth rate has gone up in 2 years from 135 or 1.35% bumps to 1.8%, I believe, today. So the reason I'm talking about this is we have a very clear strategy, and we're executing on that strategy. If you look at the reduction in watch list tenants that's come about, that's been significant. And as a product of all this activity, we bought back $300 million of stock in an accretive manner. So I think a lot of people talk about their frustrations and don't do anything about it. And I think that's part of the execution part that I brought up is, we are executing very clearly on that strategy. And I think we're going to continue to do that. And as we do that, the value proposition becomes more evident. And again, we didn't buy back the stock for some point in time spot exercise, we did it because of the strategy, right? It created that opportunity. So I think you'll see us continue to try to execute on that. And then from a value perspective, that kind of is what it is. I mean, right now, we're at a period of time where the -- when you look at the implied cap rate, you look at the NOI yield, you look at a lot of different metrics, it screens quite attractively. And again, I think that will take care of itself if we continue to stick to the strategy and execute. And of course, the balance sheet is sacrosanct in protecting it. So as you see us execute on that strategy, you should not expect us to pressure the balance sheet in a material way. We ran this business in '08 and '09. We remember what that was like, you always have to be prepared, and that's why we have the balance sheet that we have. So that's all. It's a lot of rambling, but it's pretty simple. We're going to execute on that strategy.

No. And that was a good intro and a lot to unpack there. I guess maybe starting on the balance sheet because you guys are the lowest levered in the peer group. And I've talked with Heath about this more recently. At some point, the optimal leverage level, it feels like you guys are running too efficiently or I guess, less efficient, if you want to look at it that way. And I understand the hesitancy post GFC to run at a higher leverage level, but you're competing against private folks, you can run with more leverage. So I'm just kind of curious the thoughts internally the back and forth on would you ever bring it up to 6x for a short period of time to get a deal done with a pathway to bring it back down? Or is it you guys are just dogmatic, never going above 5x, 5.5x debt to EBITDA because you don't want to go down that road again?

It's a great question, Craig. And listen, we've been very consistent on saying that we want to run between 5x and 5.5x. As of late, we've been actually been running under that. And as John said, part of the ability to execute on this strategy is because of the strength of the balance sheet because we have that conviction that allows us to take some risk. And it's a risky proposition to do. I don't think it's so simple to sell assets and buy back stock, but there's a whole timing perspective there, and you can get caught either way. But if you had a good balance sheet, it's okay. So I'm never going to see we're never going to run at above 5.5x. And if there was an instance where there was some compelling transaction that was going to temporarily drive us above it. We would do that, but I would also be able to articulate in a very clear manner exactly how it's going to get back down into the range. So the answer is yes. For a great opportunity, would we run it up a little bit? Sure. Would it stay there? Absolutely not.

I think there's a big difference between 6x and 5.5x, as an example. And I think 5.5x is you're at the top end of your -- of starting to lose flexibility. At 6x, I think you've lost flexibility because if you just -- things happen very fast. And everybody sits there and thinks they can unwind this back down. But when there's no liquidity, there's no liquidity. And so we're not going to put ourselves in that position. But I do think it's right that being where we are right now, even, again, executing on the strategy, maybe it goes up a little bit, maybe it goes up 20, 30 basis points over the next couple of quarters. You're still very low in the big scheme of things, and you still have flexibility. And that's why we -- if you go back to 2021, I mean, that's why we were able to be in a position to do the RPI merger, right? We're in the right place at the right time. So again, I think we're very comfortable with it. The other thing to think about, Craig, is that when you look at the yield curve and you look at how you price acquisitions, it's not -- there's not enough juice in there right now. And it's a very awkward, it's an interesting thing when you look out in the future, where the yield curve is right now. So you have to assume that I'm going to -- you're going to be acquiring assets if you're just out buying you're going to be acquiring assets and you're going to have pressure on it right away just because of the curve. So I think we'll be smart and deploy where we get the highest return.

We saw one of your peers price at like the tightest spread that they've ever done. I mean where do you think, given your leverage profile and credit profile from the rating agencies, where do you think you can raise 10-year debt today or 7-year debt? Like what's the spectrum of all-in costs?

I mean I think it's somewhere between 95 and 105 over, right? That's going to be the we saw PECO printed at 97 basis points, that's what you're referring to. So I think we can price at or inside of them. So that's the current marker.

You guys have been active on the disposition side. You've been buying back some stock here. You talked about maybe another $500 million that could be put out in the market and sold longer term. Where -- how is the market -- the receptivity of that -- those assets to the market? Is it similar pricing to what you got on the last slug? And does that continue to embolden you to do that to buy back more stock? And then I'll leave it there. I'll follow up after.

Well, look, I think the market is very liquid. There is a real bid for retail across the spectrum of different product types. So yes, I think we think that the market in terms of those particular type of assets is the same as it was a couple of months ago, if not better, just because there's more capital and less product, which is really what drives value. And so yes, I think that's out there. I'm not -- we're not so certain in terms of what will happen and what the sizes would be, and it's more opportunistic than that. So we'll see where that goes. But I think from a strategy perspective, as I keep saying, that is part of the strategy to position ourselves to have a portfolio that's generating a higher growth rate and you do that by sometimes selling the ones that are pulling down the portfolio because of the growth rate. So yes, that's a possibility. I don't know about that number, but that's a possibility.

I would add, Craig, we said when we started this whole thing that there's -- for us to do another pool, there would have to be market demand for the assets we want to sell, and we'd have to be able to put the proceeds to use logically in a way that was sort of flat or minimally dilutive or accretive to earnings. So we're still not through deploying the proceeds from the first round of sales, right? So before we can start considering the second round, we've got to get this finished and deployed. And then when we -- if we approach a second round, again, we've got to be able to have a clear path on how to deploy. So that's how we think about it. So it's kind of a -- you stair-step your way through this, which is why we did it in phases. So we don't want to get too stretched out as being a net seller. We don't want to get too stretched out and buying stock back that we haven't generated proceeds for yet. So it's a very methodical. We call it internally, it's threading a needle, so to speak, to get all this stuff done. So again, stay tuned on the second half of this.

Yes. It's a lot easier to be a seller than a buyer. I can tell you that.

And that's the thing, too, right? Like if you sell another pool, you have to kind of thread the needle, I guess, to use your phrase on maintaining as much proceeds as you can, right? You got -- you don't want to have to special it all out because that defeats the purpose versus being able to have the proceeds to buy back or kind of redeploy. So I mean, at this point, would you have enough uses to even outside of buybacks to make sense to do the next slug? Or as you said, I mean, could this be a '27 event as you guys work through the proceeds of the last round. I'm just trying to get a sense of expectations to management around everyone. We had talked about maybe doing the next pool, but could it be a longer period between this last one and maybe the next one?

Do you want to start?

Yes, listen, again, it's -- the period of time is all going to be driven by our ability to finish this first circuit out before we commence the next one. So again, it's a stair-step process. If we were to do a second pool, it would be a very similar exercise. It may not be the exact percentages in terms of buying back stock or doing 1031 acquisitions. But to your point, there would be gains associated with it. So we would have to be acquiring some assets. Listen, we're not completely opposed to a special dividend. It's a perfectly good use of capital, that would obviously be a dilutive event. But from an IRR perspective, it's better for investors if we're on a special dividend out earlier rather than later. So again, it's also market dependent, and we want to get through this first cycle first. And then we'll start thinking about the second piece.

One last one on this topic, then we'll move on my promise. But you guys talk about the impacts of the higher leverage. As you guys think about buybacks and the capacity or ultimate size of that, right, how do you think about the impacts on liquidity, the impact on where you are from an index weighting and what kind of pressure that could put on from the passes, like how -- what do you think the right number for buybacks is that's accretive. It shows that you guys have confidence in the company, but also doesn't trigger some technical issues that ultimately increase your cost of equity, which is counterproductive to what you guys are trying to do?

Well, I mean, I think at this point, we're not terribly concerned about that part of it in terms of the size. I mean we're not talking about half the business. So it's been relatively minor in terms of impact to liquidity and any availability to the indexes. So -- but of course, you have to think about that and certain investors frankly are very opposed to any shrinking of the company and certain investors are very engaged by the idea of you shrinking the company. So it's really, you can't please everybody all the time. And I think we just have to try to do the best we can to manage that. But it's really -- it's -- again, I don't want to keep coming back to it. We have a clear understanding of where we want to end up. And so this isn't random. This is a very clear understanding of where we want to end up, and we're well on the way to that. And if we do another -- something of that nature, it would be with that strategy in mind. If we don't, it means that we feel like we can do other things to get growth. So the whole agenda here is to get the company -- to get the portfolio positioned to generate the kind of annual return vis-a-vis earnings growth and dividends that an investor will say that's worth owning, that's it. I mean we've got to position ourselves to be that person to be one of those companies that this company gets it. They know -- they take the cues from the capital markets. They know when to do the kind of things that we just did and when not to. That really is what comes -- it's our most important job of us sitting up here is how we allocate capital by far.

So Craig, I'll just notice that we have not seen any decline in our average trading volume. So it's not impacting the liquidity of the stock. And actually, our enterprise value today is higher than it was by virtue of the expansion of our multiple. So we haven't shrunk from an enterprise value perspective as well.

And I misled you. The was a question coming in on buybacks, so I'll ask that, and then there's other questions that are not buyback really, I promise. It's just do stock buybacks still make sense after the rise in the stock price?

Sorry, what was the last part?

Do stock buybacks still make sense after the rise in the stock price?

Yes. I mean, as we said, we're still analyzing that and the needle moves all the time, but we can certainly -- we think if we transact where we think we would transact on something that it would still make sense.

Yes. I mean, FFO yield right now is 8% still at $26, and we would be trading at cap rates well inside of that.

And then a couple of other questions here. Do you see a market that is shrinking or expanding? For some years, we have seen B or C assets struggle. So is there only space for new A class assets or B and C improving?

Well, I don't know about these ratings B and C. I mean our business is a little -- it sounds like a mall thing. In terms of open air, there's a place for each product type in my mind. And there's a place for all kinds of different types of real estate in open air. You can see it vis-a-vis the occupancy growth that's happened, the rent growth. I mean if you just look at our -- the one metric that we think about the most in terms of leasing spreads is our non-option renewals, and those have been double digit for a long time now. And that's a real change in our business, which indicates strength. A B asset may not be desired by a publicly traded company, but it will absolutely be desired by the right capital stack. That's all about how are you -- what kind of discounted cash flow analysis are you doing against that risk-adjusted return? And that's why people want to own that stuff. It's pretty stable. It generates a nice yield and you've got positive arbitrage and leverage right now and a lot of liquidity. So I think it's a little different than like there's a cutoff somewhere.

And then to what, if any extent, will a desire to show accelerating earnings growth in 2027 factor into your capital allocation decisions in 2026?

We generally don't think that way. We generally don't short term think. We're trying to create a portfolio that has growth over the next 5 years, and I understand that we have a constituency of investors that do have to think that way. So we have to understand and respect and appreciate that. So we -- when we talk about the things that we're going to do, we always talk about it in terms of our goal in any sale and any distribution of those proceeds of that sale is always to do limited or no damage to that short-term growth rate. But if we think that it's increasing the value of the business in the long term, sometimes you do have to do that. And we have done that in the past. Fortunately, what we just did the actual transactions were accretive. It's the deployment of the capital that takes time that money -- time hurts you. So I think we continue to look to do whatever we do in an accretive manner. But if it's not, it would be very minimal in terms of dilution. That would be the goal. Do you want to add to that?

And then one more. Other than CPI built lease structure, are there any material opportunities to increase same-store NOI going forward, i.e., CapEx to improve quality, et cetera?

Second part of the question was what, Craig? Is there any meaningful opportunities to -- repeat the whole thing, sorry.

Other than CPI built lease structure, are there any material opportunities to increase same-store NOI going forward, i.e., CapEx to improve quality, et cetera.

Well, for us, it's been pushing on 4% bumps in our small shops and continuing to try to push on anchors. One opportunity for us is the continued conversion of our tenants to fixed CAM. Fixed CAM typically grows in excess of the base rent. So the more that we convert right now, we're at 60% or 65% leases, Tyler, at fixed CAM. So that's another opportunity for us to grow. There's another other income bucket, which we think is a real opportunity across Kite, especially as we're getting more scale in some of these higher touch assets like Legacy West and Southlake and having our Loudoun asset, having expansion come online. There's some real specialty leasing opportunities and sponsorship opportunities that we intend on taking advantage of. So there's a variety of levers other than just escalators to pull to help us grow our same-store NOI. But part of it is the escalator, right? What's the bump? And as John mentioned, we can all be hyper focused on our near-term growth, but for us, it's all about the long-term growth. And the fact that we moved our escalators by 25 basis points in 2 years and we're sitting at 180. We've been very public about trying to move that to 200. Once we're at 200, even now, we're one of the highest in the peer group in terms of those bumps. And that's your starting point. So your growth -- that's the fundamental base net of our growth in any particular year, especially on same store is where you're starting point is, which is your escalator. So that's one of the main drivers of this recycling activity that we spent so much time talking about earlier is to get that growth higher. And that's an exercise in addition by substraction. The assets we sold in the late fourth quarter of last year, those grew at 1.4%, right? And you saw that our same-store print in 2025 was assisted 30 basis points by getting rid of those assets, right? So again, this is simply a growth exercise for us.

What's the conversation with tenants? Listen, they've been able to push through some of the inflation to end consumers, but there's cost pressures on them as well. Like as you're putting forth these 3% to 4% escalators? Has there been any change more recently in the pushback on these? Or is it pretty similar to where it's been the last couple of years?

Well, I mean you've got 2 categories of tenants, right? You have anchor tenants and small shop tenants. I think Heath is referring to the small shop tenants when we're talking about that kind of growth. And the conversation is it's a supply and demand conversation. There's a lot of demand for the space. We want to make sure that the tenants that we're putting in are also accretive to the property, not just in rent, but in merchandising. We've got to merchandise these things. And that ultimately pays off long term versus making short-term decisions on who's going to pay the most rent. On the anchor side, the conversation is much more difficult. We need to do a better job, frankly, across the Board. And we are pushing on that, and we are very focused on that at our organization. I think, unfortunately, sometimes people just want to fill space and they want to eliminate downtime. Frankly, it takes a long time to backfill these anchor spaces. So this is why some people negotiate a renewal that is a negative renewal versus trying to say, look, my space is more valuable than that. So I think it's -- there's an art to this as well, and it takes the industry understanding that what we own is very valuable, and it has to be priced that way. And I think we got very conditioned as an industry just to fill space, fill space, don't have a vacancy. And we, on the other hand, felt very strongly that when these opportunities arise, when you do get back spaces vis-a-vis one of these bankruptcies, be very, very thoughtful about what you're doing, what the rents are going to be, who the merchandising is. So I think we, as an industry, just need to do better. I don't know how else to say that.

We had another question come in. Is it possible to charge additional CAM to tenants if actual CAM expense exceeds fixed CAM charges in a given year?

This doesn't sound like something that we should be answering.

It's called fixed CAM for a reason, so it's fixed. So listen, the good news on fixed CAM is, again, it's got a healthy growth rate typically associated with it, and it's only on things that we can control. So to the extent it's something an uncontrollable expense snow removal, for example, that's still on a pro rata basis. But things like power washing, striping, painting, those things that we control. So to the extent that we found ourselves at a particular property where actual expenses were looking like they may exceed the fixed CAM, we would just pull back. I mean COVID was a great example. And we actually learned some important lessons. In COVID, we were able to pull back some of these expenses. So rather than doing flowers 4 times a year, maybe you did them twice a year, right? So there's not a version, I think we're going to get stuck with fixed CAM and a fixed CAM -- from this point on, it's been a moneymaker for us.

I think said another way, fixed CAM obviously has a margin associated with it. But it is very productive for both sides. The retailers like to be able to know what the budget is. They like to be able to set the budget. The problem with doing triple-net deals that you come to the end of the year and then you spend the next 3 months figuring out what your actual expenses were, who owes who, that's just destructive to efficiency. So fixed CAM is quite efficient, and I think it's why it works, and we're way ahead of the game on that.

On tenant credit, any update on Container Store or any other tenants on the watch list, we should be -- or that are already embedded in guidance that is...

Yes. So on Container Store, and we stay very close with them. We're their largest landlords. So we have access to their management team and they've received some additional funding, and so we don't see them as any immediate risks. I will say that we have one of the container stores is rolling off the natural expiration this year, another one is rolling off the following year in 2027. So we see this currently as hopefully a natural wind down of the business. For better or for worse, there -- I think their business model is very dependent on the housing market, especially the existing housing product. We're seeing some improvements there. Predictions are sort of mid-single-digit growth in existing sales. So hopefully, that helps their business. But again, we've got 7 locations on a path to reduce that hopefully over time, and it's 70 basis points total of exposure on an ABR basis.

And then shifting, we're asking some AI questions that go around, get a better sense of kind of who the REITs are partnering with and the level of investments so far. So I'm just kind of curious, what is the mix of build by or partnering in AI within Kite?

So what's the mix of building it internally versus partnering? I mean, right now, this is obviously fluid. And we have been utilizing existing product, but we've also been doing a fairly deep dive around our own ideas about what we can create internally. What we want to be cautious of is overspending, particularly overspending on something that has become -- what's the right word, has been leapfrogged the month later, but we are definitely engaged in this heavily. We actually have someone internally who is solely focused on figuring out where we're going to land here. So I think it's a combination. I think for us, it's going to be a combination of things. But there's no question in our mind that there are lots of efficiencies that we can utilize, and there are also lots of opportunities for us to create revenue generators. So I think it's going to change our business. And frankly, in one sense, being in the fact that we're in the shopping center business, it might be good that we're a little bit analog as it relates to that, right? And so there's very -- it would be very difficult for AI to replicate what we do, but we want to utilize it, obviously, to make ourselves more efficient. Do you want to add to that?

No, I think -- it's a great question, Craig, because the current debate is, internally, do you wait for your existing providers to have solutions and rely on that [ SAS ] or do you build it yourself? I can tell you that if you dive in, it's very, very easy, as John mentioned, to have a spend -- create a product and what it's done, it's already obsolete. So the trick is just trying to make sure you're navigating it properly that you're looking at your spend, you have clear expectations on your return on your spend. So early innings, but obviously a huge conversation internally.

Is there one provider that you focus on more than others? Or?

Listen, we're a Salesforce shop, [ MRI Argus ] these are your typical providers that we rely heavily on to run our business, and they are all in various stages right now of improving their AI capabilities. So we'll see. We're a Microsoft shop as well. And so we've heavily leaned into Copilot, which obviously, there's wonderful things that can help with people's productivity there as well. So again, we're in the early innings, but it's an active live conversation. As John said, we appointed somebody internally to sort of shepherd this entire process. And so hopefully, we'll have some exciting things to talk about as the next few years unfold.

Do you -- as you guys anticipate, I mean, is this a head count reducer or just a productivity enhancer internally that, John, I know you mentioned it could be a revenue driver. I mean I assume you mean just by freeing up people's time to do more leasing or...

I mean, look, I think it's -- we don't know exactly where that's going to land. And I think ultimately, no one knows where that's going to land. And even some of the recent headlines in terms of staff reductions from some tech companies. I mean, when you go from 1,500 employees to 9,000 employees in 3 years, do you really know what you're doing, a separate topic. But I think as it relates to us, we're not afraid to say that if it's going to be able to enable us to do what we do better, that's -- and that's with less people, that's one thing. But I do think at this point, you probably have an opportunity to redistribute into more productive kind of endeavors. And I think that would be our goal.

And just in general, like how lean do you think you guys run over the last couple of years versus are there inefficiencies internally? We don't hear you guys talk about G&A a lot in terms of like need to cut it back. I'm just kind of curious from a headcount perspective?

Yes. I mean I think we talked about it a lot internally. I think we think we're very efficient. When you look at our G&A to revenue as a percentage compared to the peer group, we're at the lower end of that spectrum. When you look at our margins, more importantly, our NOI margin, our recovery ratios were at the highest levels. So operating efficiency doesn't get talked about enough, but it produces cash flow, so we should talk about it more. We're very focused on that. I think we can do better. I mean, I think there's no question that we can have a slightly sharper edge of the sword, but I think we're -- we've been very focused on that, and it seems like others don't talk about it much.

Any last questions before I move to rapid fires? All right. Same-store NOI for the retail group in 2027?

I don't know, 3.5.

And then more fewer the same amount of companies this time next year in the retail space?

Hopefully fewer.

Hopefully fewer. Perfect. Well, thank you guys so much.

Thank you.

Thanks, Craig. Have a great conference everybody.