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

We get started. This is the Kite Realty Roundtable. Happy to have Kite, CEO of the company; Heath Fear, CFO; Cooper Clark new addition, right? So with that let me turn it over to John with his opening remarks.

Okay. Thank you, Buddy. Good morning, everybody. Good afternoon. I'll be quick on the remarks. We've been very busy at Kite for the last 2 years. Most of you are familiar with our Project Elevate, which is the disposition of what we'd considered lower growth, larger format shopping centers. We've sold about $1 billion in the last few years, 22 properties. One of the main goals was to eliminate potential future credit risk. We eliminated 61 anchor tenants that we deemed at risk. 5 watch list tenants have come off our top 25. Through all this process, we bought back about $0.5 billion of stock during this period. Meanwhile, our operating platform is performing better than we expected. Same-store NOI is just under 4%, 3.7% in the first half of this year. Our sign-not-open pipeline is still very elevated at, I think, $37 million currently. The leasing environment is still strong. If you look at our last quarter, our leasing spreads still remain very good, particularly the one that we look at the most, which is our non-option renewals, which was at about 18% spread in the past quarter. All the while, we've maintained a very healthy balance sheet, which is always part of our strategy. Relative to this is that we did not want to be levering up to buy back stock. So our balance sheet is still very strong. In fact, we just recently were upgraded to BBB+ by Fitch, working on the others actually this week. So when you look at everything that's happening, I think we're very happy with the progress. The heavy lifting, I would say, of most of the asset sales, we believe, is near the end, not complete, but near the end. And we just have a much better portfolio in every respect than we did when we started Project Elevate. So with that, I'll turn it over to you guys.

The Project Elevate, you talked about the $1 billion, 22 assets -- is there another pricing, considering where pricing is today for that product?

Yes. We've been pretty consistent in saying that we're not going to enter into 2027 and say, Hey, guess what, Kite's got another $0.5 billion to sell. Right now, the portfolio is where we want it to be. Of course, on a go-forward basis, we'll be cycling out of 2 to 3 assets a year, which is just prudent portfolio management. But for now, we've deemphasized sort of the box here, larger format assets, lower growth. As John said, the tremendous amount of progress on getting our watch list to be sort of low to mid-pack in terms of total watchlist exposure. We've done a lot of work on getting our escalators up from 156 basis points to 185 basis points. So we feel like we're at a very, very good starting point. And again, no plans right now to further -- there's no Project Elevate 2, so to speak.

Yes. We have signaled though that we still have some tax loss sales that we need to harvest. So -- and then we have some 1031s still yet to execute. So there's another, I think, $225 million of tax loss potential sales that we have and another $110 million of 1031 acquisition. That's an important variable that is still yet to execute, but is in process. And frankly, that depending on the outcome of that would potentially maneuver a special dividend would be a potential if we weren't able to execute on the harvesting of the tax losses and the 1031s, but the goal is to not be in a position to have to do that.

So after those 2 variables, the tax loss sales, the 1031, I think around -- you expect around $240 million of excess funds to work. I guess what is your latest thinking on highest and best use? What are your options? How should we think about where that $240 million might go?

Yes. I mean I think there's -- it's all about the timing of where we are at that point in time. But assuming that we're at that $240 million-ish at the end of the year, we obviously have a couple of different avenues we could go down if we wanted to look at it from a pretty conservative stance as we indicated kind of where we were on our last earnings call, then you would think about potentially just retiring debt. That would be a very conservative stance. There's potential -- if the market changes and better acquisitions, make themselves available, so to speak, that's out there. Stock buyback is always out there. So why don't you jump in?

Yes, I think -- so on our call, we said that the stock price was over $29, and we said that our current bias was towards balance sheet conservatism. Fast forward, obviously, the stock is at a place where the math works better in terms of there being a positive arbitrage to redeploying those assets. But the world feels incrementally a little less better. So I'd probably say at this point in time, you've asked us if we had to spend it today, probably balance sheet conservatism would be the bias. But again, we -- let's get through midterms, let's get these extra $225 million sold. Let's get towards the end of the year. And the greatest thing is that we've got a great balance sheet, and we'll have the flexibility to make the best decision at that time.

I mean it's 3 to 4 months out, right? So a lot can happen, obviously.

Correct.

And with these asset sales, remind us kind of how to think about the core growth of the company, right? As we sit here today, think about the next 12 to 18 months, '27, even into '28 same-store NOI growth like -- I'm not asking for guidance, but just trying to understand how much better growth can be.

Yes. So we started out this year saying that we are -- I think our midpoint of our same-store guidance was 2.75%. We said we were going to sort of moderate to the first half, accelerate into the back half and then accelerate again into 2027 based on this snow pipeline and increasing occupancy. Good news is we actually outperformed in the first half. So while there's a small suggestion of a deceleration, still strong same-store growth into the back half of 2026 and continuing strong into 2027. So on the same-store line, feeling very, very good about next year.

And then on the flip side of that is CapEx as well, right?

Correct. Yes, CapEx will remain elevated. We said somewhere between $100 million and $125 million a year. That will happen this year. That will happen in 2027 and doesn't start to tail off until the end of 2028. But that's just lease-up capital currently, just to be clear.

So it's actually producing a really strong return.

Yes. And similarly, we said that our signed not open pipeline and the spread between our leased and occupied will remain elevated this year and probably into next year as well before it starts to skinny down.

Maybe back to the tenants. I mean, obviously, you mentioned Project Elevate, one of the key results of that has been the improved watchlist. So maybe talk about your watchlist as it stands today. Are there any categories you're still watching? Any category you still call a problem? How are you thinking about that, I guess, through the end of this year and into next?

Well, it's a watch list, so you're always watching, right?

No, I think the watch list, if you will, that was obviously a big part of the exercise. And the fact that we've been able to take off 5 names out of this top 25 that were a concern. It was really more about potential future capital spend, right? I mean you're talking about based on the fact that we eliminated 60 boxes in that category, you could be spending $100 million in capital in the future that we don't think we'll have to spend. In terms of how it sits today, it's just much stronger. If you look at the top 25 today versus the top 25 2 years ago, it's tremendously different. 5 of our top 15 are grocery stores. That's an improvement. In terms of the ones that you're worried about, that continues to be something that I think is -- we're cautious with giving people's names, of course, but we all know who the people are out there. They're stronger than they were. And so we feel much better. But we obviously wouldn't have gone through this exercise if we didn't think there was risk out there down the road. And we think there is risk out there, and so we try to get in front of it. That being said, today, we're in a much better place. Even with names like -- I will mention one name, even like a Container Store that was an outsized risk for us. I think we're down to, what, 4 or 3 of them, and we had 7 of them, right? So now it's very -- it's not de minimis, but it's very manageable. So yes, we're just in a lot better place and feel much more confident than we did before we began the exercise.

I just want to make sure -- has any questions. And what are you hearing from retailers? I mean, clearly, you have the macro, you have the noise out there. I mean anything on store opening plans for next year? I mean are they -- it seems like there's been no pullback. Is that kind of what you're seeing, too?

I mean it's obviously early in this whole process of elevated interest rates and continuing sticky inflation. But the most important metric from my personal perspective is the unemployment rate is still very low. And so there are spendable dollars in the economy. Most of these retailers have rightsized their operations and have become much more profitable than they were pre-COVID. So there continues to be that backdrop against no new supply. So there's good pricing pressure from that perspective. And I think tenants continue to want to expand and you also see relocations coming into play now. Maybe more so than a little bit in the past. So yes, still very healthy. We study our AR very closely on a monthly basis. That is still healthy. Small shops, which is where you would think it would kind of come up first, is still very good. I mean we still have very strong demand. And this is why when you look at our rent growth, if you look at our 185 basis points that we've talked about that is our embedded rent growth, it's 156 basis points, what, 2 years ago, 90% of that gain is actually through leasing, not through these sales. So it's really coming from the fact that we can get 3%, 3.5%, 4% growth on our Shop portfolio. When we do new leases, plus the fixed CAM is also a big component of that, which we're a leader in, in terms of the open-air sector. So it's been pretty good.

When you say 90% of that gain from leasing, that is going from the $156 million or whatever it was previously to $185 million...

Correct.

Okay. And then now, I guess that the bulk of that disposition activity is over, I think you said your long-term goal is 200. How long through leasing alone does it take to get to that?

I think we've said 2 years -- 2 to 3 years.

Yes. I mean if you -- it's hard to say, it depends on fallout too, right? But I would say a couple of years, 2 to 3 years is a good answer.

And what's the ceiling on small shop at this point? And how much more room is there? I mean you've clearly done the asset sales there too.

Well, I would tell the people in the leasing department that that's 100%. But look, we're at 92.3% I don't see any reason why we can't push Shops to like 94%-ish. I really don't. I think we should be able to do that. Whether we will or not, we'll see, but that should be a goal. And then the anchors are at 96.3%, 98% is a goal, right? So I think we still have room to run. And I think if you look at where we -- that's the benefit that we had that we -- in the sense we took a bigger hit 2 years ago, but the growth rate still exists just a straight up lease-up story. And that's why, obviously, why our capital has been elevated. So it's kind of part and parcel.

That's still -- we have 200 basis points. But as you kind of think about that, though, given again, the environment and maybe the pressure that the consumer is facing, do you sort of kind of still continue to push that, push rents? Or do you kind of...

Very good question in the sense that is it more important to get -- especially on the anchor side, I think that comes into play more so on the anchor side where you're signing a 10-year lease with a reasonably creditworthy tenant. So do you do that at a lower rent than you maybe would hold out for if you think that the consumer is going to turn? I mean I think that's part of our business that we have to manage and be thoughtful around. We also have to think about the rents in the small shop portfolio have grown substantially. And when you're growing those at 3%, 3.5%, 4% a year, you also have to think about what the end game is there. Is the retailer going to be healthy enough to pay that rent. So those are the nuances of the business that don't have a simple answer, but it's definitely something we consider.

But as you're going through negotiations today, it doesn't sound like you're...