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

Thank you for standing by. Welcome to the Kite Realty Group's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Bryan McCarthy, Senior Vice President, Corporate Marketing and Communications. Please go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to Kite Realty Group's second quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent Form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to today's earnings press release available on our website for reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; President and Chief Financial Officer, Heath Fear; Senior Vice President and Chief Accounting Officer, Adam Jaworski; and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. [Operator Instructions] I'll now turn the call to John.

All right. Thanks, Bryan, and hello, everyone, and thanks for joining us today. Halfway through 2026, KRG's tenant demand remains healthy. Our signed-not-open pipeline remains elevated and the fundamentals underpinning our portfolio have never been more durable. The financial strength and flexibility we created has become one of our most valuable strategic assets. Over the past 18 months, our capital allocation initiatives, collectively referred to internally as Project Elevate, have focused on pruning lower growth noncore assets to enhance the quality, growth profile and resilience of our portfolio and cash flows. We have redeployed the resulting capital into higher conviction opportunities that offer the most attractive risk-adjusted returns, while also investing meaningfully in our organization through strategic additions across the platform, all aimed at improving our long-term growth. Since the start of 2025, we've sold 22 noncore assets for nearly $1 billion. With each disposition, we reduced our exposure to lower growth formats and at-risk anchors, while concentrating the portfolio in grocery-anchored lifestyle and mixed-use assets. As detailed on Page 6 of our investor presentation, we've grown our weighted ABR in lifestyle, mixed-use and neighborhood centers by 900 basis points since the start of 2023, matched by a 900-basis point reduction in power and large-format community centers during the same period. Our portfolio enhancement is reflected in our tenant base, which we have strengthened from both ends. Our top tenant roster is increasingly concentrated in durable high credit operators. Grocers now represent 1/3 of our top 15 tenant list. Just as telling, 4 watch list tenants have rolled off our top 25 list entirely. By virtue of the dispositions related to Project Elevate, we eliminated 58 at-risk tenant locations, representing over 1 million square feet and more than 200 basis points of ABR. Tenants like these carry a cost on both sides of the ledger. They put the consistency of our earnings at risk and each one is a potential claim on our capital. We've been equally disciplined about where we put our capital to use. During the quarter, we acquired 2 high-quality neighborhood centers, Founders Square in Naples and Chastain Market, a Trader Joe's-anchored center in Atlanta, for $136 million through 1031 exchanges. That brings our acquisition since the start of 2025 to approximately $612 million, all of it recycled into faster-growing assets. When our stock trades at a discount to net asset value, buying it back is among the most accretive uses of capital available to us. And we acted decisively during the quarter, purchasing approximately 2.8 million common shares at an average price of $27.48 per share for approximately $75 million. Across 2025 and 2026, we have now repurchased 19.6 million shares for approximately $475 million at an average price of $24.20, well inside consensus NAV. Our reshaped portfolio is performing. Same property NOI grew 3.7% in the second quarter. We executed 128 new and renewal leases totaling approximately 1 million square feet with blended cash spreads of 15.9%, including 28.4% on comparable new leases. Our lease rate reached 94.8%, up 150 basis points year-over-year, led by a 210 basis point improvement in our anchor lease rate. ABR per square foot climbed to $23.41, up 2.3% sequentially and 6.3% year-over-year. Our embedded rent growth climbed to 185 basis points, up nearly 30 basis points since the start of 2024. And our signed-not-open pipeline increased to approximately $37 million of NOI, representing a 350 basis point spread between our leased and occupied rates. We also continue to unlock embedded value across our mixed-use platform. This quarter, we commenced the second phase of luxury multifamily at One Loudoun, a 429-unit development within our existing residential joint venture that will begin delivering in 2029, the latest example of the self-funding growth built into our portfolio. Given the strength of the first half, we're raising our full year same property NOI guidance by 50 basis points at the midpoint to a range of 3% to 4%. We are maintaining our FFO guidance as we prioritize flexibility and optionality over the immediate redeployment of proceeds generated through Project Elevate. In the near term, our focus is on further strengthening and fortifying our balance sheet, reducing leverage, enhancing liquidity and maintaining dry powder for attractive investment opportunities. While the heavy lifting on Project Elevate is behind us, we still have some work to do. Our guidance continues to assume a meaningful amount of gross transactional activity remaining in 2026, split between the sale of noncore assets associated with tax losses and 1031 acquisitions, which Heath will detail in a moment. Simply put, KRG has never been in a stronger position. We have a higher quality portfolio, a more durable growth profile and one of the best balance sheets in the business and a team that executes with discipline and urgency. I want to thank the entire KRG team for getting us here and having the energy and conviction it takes to keep raising the bar. Turn it over to Heath.

Thank you, and good afternoon. Coming off an extraordinarily active quarter, KRG is on plan and operating from a position of strength. We generated $0.52 of core FFO per share and $0.53 of NAREIT FFO per share in the second quarter. Our same property NOI meaningfully outperformed our internal estimates in the first half of 2026, growing 3.7% in the second quarter and year-to-date. The outperformance was broad-based across better tenant retention, lower bad debt, higher overage rent and stronger net recoveries. At the same time, we are maintaining our full year core FFO and NAREIT FFO guidance of $2.06 to $2.12 per share. This guidance assumes a 2026 same property NOI growth range of 3% to 4%, which is a 50 basis point increase at the midpoint and reflects our year-to-date outperformance. We are assuming a bad debt reserve of 90 basis points of total revenues at the midpoint. As a reminder, our 90 basis point bad debt assumption applies to the full year and reflects a blend of actual bad debt incurred during the first half of the year and an assumed bad debt rate of 100 basis points of revenue for the second half of the year. We are further assuming interest expense, net of interest income, excluding unconsolidated joint ventures of $114.7 million at the midpoint. A nearly $7 million sequential decline is largely attributable to 2 factors: higher interest income generated from Project Elevate proceeds being held in 1031 accounts; and the deconsolidation of our One Loudoun Residential joint venture, which I'll address in a moment. As for the remaining transactional activity in 2026, we are assuming approximately $225 million of noncore tax loss sales assets and $110 million of 1031 acquisitions. When considering core FFO guidance in the context of our accelerating same property assumptions, it's important to refer to Page 5 of our investor deck. On the quarter-over-quarter FFO bridge, you'll see a $0.02 drag in the line labeled Change in Our Transaction Activity and Assumptions. That line item reflects our decision to capitalize on a constructive transaction environment by expanding Project Elevate to the second portfolio sale that occurred in the second quarter, while also pursuing the sale of additional tax loss assets. It's worth taking a step back to consider the context. Project Elevate contemplates recycling roughly 14% of our enterprise value, resulting in a platform transformation that an upgraded portfolio quality and improved the durability of our cash flow, while maintaining our fortress balance sheet and having remarkably little impact to our earnings. This was only made possible by our disciplined sources and uses capital allocation strategy. More specifically, since the start of 2025, we have generated approximately $1.1 billion of proceeds, including approximately $973 million from noncore dispositions and approximately $112 million from the sale of 48% interest in 3 of our operating assets. We currently expect an additional $225 million of noncore tax loss sales, which will bring total proceeds to approximately $1.3 billion. Against those sources, we have been disciplined and opportunistic with uses of capital. Since the start of 2025, we have repurchased approximately 476 million of common shares, funded $250 million for our share of equity for Legacy West, completed approximately $204 million of acquisitions and paid a $31 million special dividend. We also expect to complete approximately $110 million of additional 1031 acquisitions, which would bring total capital deployment to approximately $1.1 billion. When you roll all of that together, our expected sources exceed our uses by $240 million. We intend to be patient and flexible with that remaining capacity. We will continue to evaluate acquisitions, repurchases and other uses through the same return-focused lens we always have. But in the current environment, our preference is towards balance sheet strength. I want to spend a moment on the structure behind our new 429-unit luxury multifamily development in One Loudoun as it's a great example of capital efficiency we strive for. Through a tax-free recapitalization of the venture that owns the existing 378 multifamily unit development, we are reducing our ownership from 90% to 55%. The proceeds of that recapitalization, together with the contribution of land we already own, will fund the majority of our 55% equity interest in the new 429-unit development. Importantly, that step down in our ownership of the existing stabilized project occurs over time as the new building is constructed. At quarter end, our ownership stood at 77%. The $60 million gain you'll see in our financials relate to the recapitalization and deconsolidation of the existing joint venture and is entirely noncash. It is a modest transaction in the context of our enterprise, but reflects the creativity and discipline we bring to every dollar of capital we deploy. Our balance sheet remains one of the strongest in the sector. As of June 30, our net debt-to-EBITDA was 5.1x, near the low end of our long-term targeted range. During the quarter, we priced $345 million of 3.25% exchangeable senior notes due 2032, with proceeds funded on July 2. In connection with the notes, we entered into a capped call transaction that raised the effective conversion price to $41.91. We intend to use the majority of those proceeds to retire our $300 million of unsecured notes due October 2026. The remaining $100 million maturity coming due in September 2026 will be retired with cash on hand. We have access to over $1.2 billion in total liquidity, providing us with significant flexibility to continue pursuing value-enhancing opportunities. Thank you to the entire KRG team for their relentless effort in driving our results. Operator, this concludes our prepared remarks. Please open the line for questions.

[Operator Instructions] Our first question comes from the line of Todd Thompson from KeyBanc.

This is Sean Glass on for Todd. Can you speak to the impact or improvement on the same-store NOI outlook that can be attributed to the dispositions completed so far year-to-date? Like how much of the same-store NOI growth improvement is from dispositions versus operational upside?

Yes. The contribution from the elimination of those assets is pretty modest. It's only 3 basis points. So if you think about it, that pool was 98% leased, but it had several spaces that were -- it had some rent coming online. So for this particular period of time, they were not dilutive of same-store. But in general, a reminder, these assets have $18 of ABR. They grow slower. They have higher watch list concentration. So in the long run, they'd be detractors for same-store. But for this current year, they were only a small contribution, again, just 3 basis points.

Okay. That's helpful. And then you may have touched on this, but is there any expected capitalized interest related to the One Loudoun Residential project? Any notable impact that may have on interest expense as we think about 2027?

Yes, as we're heading into 2027, you will see the capitalized interest related to that project step up. So yes, you'll see some capitalized interest.

And our next question comes from the line of Andrew Reale from Bank of America.

Heath, you had some helpful color in your prepared remarks. But I guess, just going back to the guidance to confirm. Could you just maybe just walk through exactly what is driving the $0.02 of dilution this quarter in the guidance bridge? I mean, it sounds like a lot of that is just from the timing of the recycling. Just wondering if there might be any other moving pieces?

Andrew, you're exactly right. Listen, we led with the disposition. We had the largest disposition in the second quarter, and it takes time to put those proceeds to use. So over the course of the next 6 months, we'll do our best. And we've got another $110 million of assets to buy. We've got to sell another $225 million, and all of that, when you put into the mixture, the timing ends up being $0.02 dilutive into 2026.

Okay. And then maybe just for the 1031 recycling in the most recent quarter, what was the cap rate spread on those transactions?

Cap rate spread? You just mean what -- go ahead. I'm sorry, say that again.

Just cap rates on what you're buying versus what you're selling, just to give us a sense.

Yes. Yes. I think -- I mean, as we've said, obviously, we've been without specifics to each individual deal, the Project Elevate, in terms of selling the lower growth and larger format deals, have been kind of in the kind of low to mid-7% cap range and then the acquisitions have been closer in the lower 6% range. But it's really more about unlevered IRR that we're looking at because there's a lot of moving pieces in these deals. So we're still continuing to get between 8% and 9%. That's our goal in terms of unlevered IRRs.

And our next question comes from the line of Jamie Feldman from Wells Fargo.

So thinking about your economic occupancy at the end of 2Q, it is about 91.2%, which is about 250 basis points below your historic highs and many of your peers are at their historic highs. Can you talk about the opportunity set there longer term and how much the SNO pipeline may contribute to higher absolute occupancy levels in the second half of '26 and into '27 as we think about more regular wage churn going forward?

Sure. Jamie, I think, obviously, we're -- we've been very diligent in how we've gone about re-leasing the portfolio. We've kind of talked in the past about what led us to those lower lease rates versus the peer group going back to the COVID era. And now we're obviously getting very close to where we were. In fact, the small shops are basically right there, and we're a couple of hundred basis points under our high watermark on the anchor lease percentage. I think more importantly, it's kind of the composition of those tenants that we're focused on. And I think that's the whole point of this Elevate exercise. And I hope you take a minute to kind of study our top 25 tenant list and particularly our top 15 and compare that to where it was in the past. It's changed significantly for the good. And so I feel very good that we've done what we needed to do there, and now we're very focused on just executing the leasing platform. Demand remains strong. Supply is low, and our portfolio is better. So it's a real opportunity to push that.

Okay. And then given the progress on Elevate year-to-date and into the back half, what are your thoughts on how much longer it continues into '27? And if you've got the $0.02 drag on '26, do you think drags continue into next year?

No, I think as kind of Heath mentioned, I think, in his prepared remarks, and I did as well, I think we're -- the heavy lifting there is done. There's more transactional activity in the back half of '26, which is really more about harvesting some tax losses and doing some 1031s. But the composition of the portfolio that we have today, we feel very good about it. So as we move into '27, I think we're back to the historical kind of pairing a handful of sales and buys per year. The largescale stuff has pretty much worked its way through. And again, that's why we talk about the composition of our top tenant list and how it's changed so much. So I think the real issue on that kind of dilution, if you will, is the fact that we are sitting on $240 million of cash that we haven't deployed. We don't know how that will be deployed. We're going to be opportunistic in terms of what is the most highest return for us there. As Heath said in his remarks, that could be acquisitions, it could be buybacks. There's multiple things we could do or it could be a reduction of leverage depending on how we feel about the environment. Even as we sit here today, as we get to the end of the year, we'll likely be sub 5. So we're in a really good position, but we're not looking to continue any kind of dilution throughout remaining years from selling. That said, we've sold over $1 billion, and we've basically kind of remained flat, which is kind of unbelievable. So we'll build it from there.

And our next question comes from the line of Floris Van Dijkum from Ladenburg Thalmann.

I love your cruising speed continues to inch higher. You mentioned something about your -- the $225 million of additional noncore sales. Maybe if you could touch upon, are they more of the power center assets? You also still have, I believe, 2 big parcels of land that currently yield 0 that potentially could get sold. Maybe you can give us an update and potentially touch on some of your ground rent income as well as being a potential candidate for disposal going forward.

Sure. Well, in terms of the remaining sales, you should expect it, Floris, to be similar to what we've been selling. It's essentially just noncore. Obviously, we mentioned that there's some tax loss harvesting opportunities, which would indicate that the property is going to create -- it's going to generate a loss. So I think it's similar. Each deal is a little bit different in size, but similar to what we've been selling. In terms of land, that's not contemplated in that number. But as we've talked about before, we're always looking to maximize value on any kind of land parcel, and we're working on a couple of opportunities there. So in terms of -- you mentioned ground leases, I mean, again, nothing is really reflected in that number that would represent ground leases. We're always looking at that. We -- it's about -- I believe it's about 10% of our revenue. So it's a pretty substantial number. So it's always a possibility to utilize that in terms of cost effective capital. But right now, that is not contemplated in that $200-plus million of future sales. Heath, do you want to add anything to that?

No. I think you hit it perfectly, John.

And maybe my follow-up, if I may, on the acquisitions front. I know in the -- over the past quarter, there were a number of larger mixed-use type -- Legacy One type assets in the market. What is your appetite for doing additional transactions? And what is the appetite of your partner potentially if you were to use that in your JV structure?

Sure. Our appetite is it remains healthy and -- but that's paired against a very rigorous underwriting process. And the market is aggressive. But when you have an opportunity for a generational type asset, that's what happens. We're certainly aware of the properties that are in the market. We're always engaged. We would love to add other very, very high-quality assets like Legacy West and Southlake and Legacy East and One Loudoun, Downtown Crown, just a few, for example. We're always looking to add to that. As far as our partner that you referred to, we have a great relationship. They are also very interested in expanding that portfolio, but are like-minded in the way that we diligently underwrite.

And our next question comes from the line of Michael Mueller from JPMorgan.