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

Thank you. Thank you for standing by and welcome to the Kite Realty Group Trust Third 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 Communications. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Kite Realty Group's third 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, please visit the Kite Realty 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, reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group, our 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; Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw; and Vice President, Capital Markets and Investor Relations, Cooper Clark. Given the number of participants on the call, we ask that you limit yourself to 1 question and 1 follow-up. If you have additional questions, we ask that you please rejoin the queue. I'll now turn the call to John.

All right. Thank you, Brian. Good morning, everyone. Strong leasing this quarter underscored the earnings power of our core portfolio as Project Elevate nears completion. We signed more than 1.2 million square feet of leases, further strengthened the credit quality of our tenant base, improved our rent escalators, maintained the strength of our balance sheet, and upgraded our credit rating. During the quarter, we executed 160 new and renewal leases with blended comparable cash spreads of 14.6%. Renewal spreads were 33.7% and non-option renewal spreads were 18.3%, our strongest result of the year on both measures. Our retail lease rate increased 50 basis points sequentially to 95.3%, up 140 basis points year over year, led by 190 basis point improvement in our anchor lease rate. Our lease occupied spread widened 10 basis points in the third quarter and now stands at a record 360 basis points, which equates to $38.8 million of NOI. Roughly a quarter of that NOI is expected to commence in the fourth quarter, with approximately $24 million more coming online over the course of 2027. The quality of that leasing matters just as much as the volume. Over the past few years, our team has been highly selective in re-merchandising the space that we've recaptured. Since the start of 2024, we've executed 67 anchor leases with 38 different brands, 91% of them national tenants for a total of approximately 1.6 million square feet at comparable cash spreads of 31% and a 29% return on capital. Two recent Container Store backfills tell the story. LL Bean at 1 Loudoun and Our House at South Lake Town Square, together at a combined cash spread of more than 50%. In each case, we added a best-in-class operator that drives traffic to the entire center, higher credit, stronger annual bumps, and concepts that bring shoppers back repeatedly. While anchors have been a key focus in our re-merchandising efforts, small shops continue to see strong demand and leasing momentum. And that's where we see the most upside from here. Shop lease rate in the third quarter increased 40 basis points sequentially and 90 basis points year over year to 92.7%. Our exposure to shop space has increased 700 basis points as a percentage of ABR since the fourth quarter of 2022, accelerating our internal growth and de-risking our tenant credit profile. Additionally, our shop exposure commands average rents of nearly $38 a square foot, more than twice our average acre, while requiring less capital spent. Continuing to increase our exposure to shop tenants through selective capital recycling and pushing our existing shop occupancy higher is a top priority for our team and a meaningful lever for growth. We continue to make incredible progress on Project Elevate. Since the start of 2025, we've sold 22 non-core assets for over $1 billion and repurchased roughly 22 million shares for approximately $539 million at an average price of $24.46, well below consensus NAV. Through Project Elevate, we've exited more than 60 at-risk anchor locations and 5 watch list tenants have rolled off of our top 25 list, leaving us with a higher quality portfolio and a more durable and de-risked cash flow stream. That brings me to what matters the most, the core portfolio, and why we believe it positions KRG to deliver stronger organic growth with less risk over the long term. Compared with year-end 2022, power centers have gone from 19% of our ABR to 13%, while lifestyle and mixed use has grown from 21% to 28%. The centers we sold through Project Elevate averaged roughly $18.60 of base rent per square foot. That's about 20% below our portfolio today, carried embedded rent bumps more than 30 basis points below the retained portfolio. Our portfolio's cruising speed has reached 188 basis points, up 32 basis points since the start of 2024. And the vast majority of that improvement has come through leasing, not dispositions. We continue to see upside to current occupancy levels and expect our sign-not-open pipeline to remain elevated throughout 2026 and 2027. Our retail lease rate is still 80 basis points below our high water mark of 96.1%. We see a clear path to push small shops towards the 94% and anchors towards 98%. With 18 anchor spaces, roughly 485,000 square feet left to lease, and virtually no new supply, we believe there's plenty of runway left for occupancy gains. Finally, a word on the capital markets. We believe private real estate capital remains under-allocated to open-air retail, and that's beginning to change. But capital alone does not create value in this business. Leasing, merchandising, and operating execution do. Platforms with experienced leasing teams and deep tenant relationships uniquely positioned to benefit. Our partnership with GIC is clear evidence that sophisticated capital partners value what the KRG platform delivers. And that dynamic is creating real opportunities for operators who can execute. Simply put, the work of reshaping KRG is nearly complete. We have a higher quality portfolio, a stronger tenant base, a fortress balance sheet, and a platform built to grow. I'd like to thank the entire KRG team for their relentless effort in getting us here and continuing to push forward. I'd like to turn it to Heath.

Thank you and good morning. The third quarter results once again reflect the durability of our core portfolio and the discipline behind our capital allocation. We generated 52 cents of core FFO per share in the third quarter. Same property NOI grew 3.6% in the third quarter and 3.7% year to date. Same property NOI growth year-over-year was primarily driven by 183 basis points from embedded rent bumps, 115 basis points from rent spreads and occupancy gains, 25 basis points from lower bad debt, and 22 basis points from higher overage rent. Reflecting our strong year-to-date results, we are raising our 2026 core FFO and NAVI FFO guidance by a penny at the midpoint to a range of $2.08 to $2.12 per share. We are also raising our same property NOI growth outlook by 15 basis points at the midpoint to a range of 3.4% to 3.9%. Considering our updated core FFO guidance in the context of our accelerating same property assumptions and other items, it's important to refer to page 5 of our investor deck. On the transactional front, last quarter we anticipated $225 million of asset sales for the remainder of 2026. Yesterday, we closed in a $33 million sale of Carillon Medical Office Building in Largo, Maryland. In the very near term, we are expected to close on the sale of an additional asset for $19 million in gross proceeds. For the balance of the year, we anticipate closing on another 2 assets that will generate approximately $100 million in gross proceeds and an additional $70 million expected to close in the first quarter of 2027. The tax losses generated by the 2026 sales will be sufficient to cover the gains we generated earlier this year, and if completed, will thereby avoid the need for a special dividend. Last quarter we anticipated $110 million of 1031 acquisitions. In September, we acquired the fee interest in the land beneath our Pella Manor shopping plaza in the New York MSA for $52 million through a 1031 exchange. Pella Manor is a high-quality center in a supply-constrained market anchored by Lidl and 1 of the top-performing wholesale clubs in the country. Acquiring the ground lease fee interest gives the full ownership of the real estate, and we estimate it compresses the property's exit cap by 75 to 100 basis points. Based on our ability to avoid a special dividend through tax law sales, we elected not to pursue any additional 1031 acquisitions and rather use those dollars to acquire $63 million of our stock in the third quarter and approximate 8% FFO yield. When Project Elevate is complete, we expect sources to exceed uses by approximately $200 million. $130 million, which gives us real optionality. We could fund the majority of our 2027 maturities, including our $175 million of 75 basis point exchangeable notes due in April, repurchase shares when the math is compelling, or pursue acquisitions that beat our return thresholds. We also continue to evaluate opportunities to put our platform to work using alternative forms of capital at attractive returns. In the current environment, our bias remains toward balance sheet strength, and we will make those calls with the same return-focused discipline that has guided Project Elevate from the start. Our recent capital markets activity underscores the strength of our credit. Late in the second quarter, we priced $345 million of 3.25% exchangeable senior notes due 2032, which closed on July 2nd. The coupon is 75 basis points inside the 4% notes it helped retire and approximately 200 basis points inside where we could have issued conventional unsecured debt. The initial exchange price represents a 22.5% premium, and with a capped call, our effective exchange price is $41.91, a 45% premium to our share price at the time of the offering. In September, Fitch upgraded KRG to BBB Plus with a stable outlook. This reflects our sustained operational performance, our execution of Project Elevate, and the further optimization of our capital structure. Earning an upgrade in the middle of a transformation of this scale, recycling roughly $1.1 billion of assets, or about 14% of our enterprise value, speaks to the quality of the portfolio we retain and the discipline with which we did it. As of September 30th, our net debt to adjusted EBITDA was 5.2 times within our long-term range of low to mid-5 times. With no remaining 2026 debt maturities, nearly 90% of our NOI is unencumbered, and we have approximately $1.1 billion of total liquidity. Finally, we look forward to seeing many of you next month at the Navy Conference in Atlanta. We will outline the quality and earnings power of our core portfolio. Consider today a preview. We look forward to digging in further in Atlanta. Operator, this concludes our prepared remarks. Please open the line for questions.

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our first question comes from the line of Jamie Feldman from Wells Fargo. Your question, please.

Great, thanks for taking the question. Nice to hear that Cooper Clark name up in lights. Congratulations, Coop. I guess just going back to the, I'm sorry, go ahead.

Who said yes, it is good to hear that name in lights. Amen.

So I guess just, you know, we've heard from a lot of your peers about, you know, what's going on in the transaction market. Certainly, um, you know, whether it's opportunities to make capital infusions in certain parts of the capital stack, um, you know, some delays in deals getting done. Can you just talk generally about, you know, the stuff you're looking at and the stuff you're trying to sell? What is changing, if anything, in terms of, you know, how you're willing to underwrite and how maybe buyers are willing to underwrite and what's changing in their plans or their their Excel models.

I think the transactional markets in general are still very robust. I think on the quality spectrum, for lower quality deals, you're probably seeing it's harder to get it across the line. For high quality deals, you're still seeing pricing fairly maintained. On the 3 assets that we have left to sell this year, for example, 1 of them is hard that's going to close very soon. 2 of them, thankfully, and got those under contract after the rise in interest rates. So the market's still moving. We're still seeing product hit. So we haven't seen any wholesale changes happening right now in the transactional markets. However, I will say if these rates persist at where they are, perhaps there's some opportunity down the road. You know, with a partner like GIC, you know, we can get things and we're going to get them. Or unlevered, we can get assets at a better price, or it certainly could be some opportunity for us. So it's certainly starting to make its way into the into the markets, Jamie, but we're not seeing any vast changes right away.

Jamie, the only thing I would add to that is that, as you know, the vast majority of the assets that we and most of our peers own are quite high quality and the majority of that doesn't trade with debt as a primary metric to value the asset. I mean, obviously at some point in time, it's probably part of the analysis if you're going to finance something later, but the majority of these deals are done with cash, you know, certainly on the the higher end of the quality spectrum. As he said, at the lower end, certainly it gets moved around a little bit, but I would say it's actually remarkably stable considering the environment that we're in, not only from a rate perspective, but geopolitically, et cetera. So I'm quite impressed with how firm the market has been, frankly.

Okay, thank you for that. And then I guess just to frame if you're able to, like, you know, to the extent there ends up being a special dividend, how do we think about how large that might be or what needs to get done to not have one?

Yes, so if we get all these sales done again, we won't have to do a special dividend. And the 1 cent, which is imminent, which is hard, after that closes, the total remaining exposure is around $60 million. So it's not a terribly large number, and you know, it's worth saying that a special dividend's not the worst use of your capital. But again, we feel very confident. We've got to do it. These other 2 assets under contract and hope to close those before the end of the year.

Okay, great. Thank you.

Thanks. Thank you. And our next question comes from the line of Andrew Reale from Bank of America. Your question, please.

Hi, good morning. Thanks for taking my questions. Maybe just first on the guidance. Just curious, what were the recurring but unpredictable items within the raise this quarter? And then I know the new midpoint sort of implies a bit of an FFO step up in 4Q. Just curious, what's driving that and if it's anything that would sort of carry over into '27 as a run rate.

Yes, so the land sale that you see in the unpredictable item on page 5, that was actually anticipated. That was sales in 2 over 2s at our Loudoun project. But we also have in the guide an additional land sale that was not in the guide before, which is happening in the fourth quarter.

Okay, thanks. Um, maybe just to follow up on that. Just be curious, maybe Heath, if you could talk through some of the main puts and takes for '27. I guess that would sort of include, you know, full year impact from Elevate, some interest impact from, you know, your recent and and some upcoming refis and then I guess just help us think through anything else that's sort of.

Of a swing factor into next year. Thanks. I think, listen, the biggest tailwind obviously going next year is the organic growth associated with nearly $39 million of signed on open pipeline. Add that to the better embedded bumps that we keep building. You know, the watchlist exposure, which is where the sector is down, but in particularly down for Kite. So those are the great things that are happening for us going into the, into 2027. And then we've mentioned a couple of times, some of the headwinds, we still have about a 3 cent non-cash drag happening into 2027. 1 thing to be mindful of, which we've told people, is that we earned a lot of interest income this year because of our 1031 activity that's not going to repeat until next year. Those are really really the big big pieces that are moving around into 2027.

I mean, the only thing I would add to that is you always got the line item of, you know, unpredictable items that reoccur. So that's something that most likely is a little less next year as well, but hard to predict.

Yes, I mean in 2025 that number was $21 million. This year it's around $14 million. Past 4 years, it's averaging around $14 million. So we'll see. Yes, we'll see.

Thank you and our next question comes from the line of Craig Newman from Citi. Your question please.

Good morning, guys. Heath, maybe just going back to your comment on the $230 million of excess proceeds and the optionality you have there. I'm just kind of curious. I get the – the maybe interest in paying down that, that really low interest rate debt versus the buybacks. But from a kind of financial standpoint, I mean, what's the cost of the disposition proceeds and what ultimately is less dilutive? Putting it to work into the stock today or, you know, paying down that debt. You guys already at 5.2 times debt to EBITDA, so leverage is not really a too big.

I think it's a big of a consideration, I wouldn't think. Hey, Craig, I'll start, but let me just start and then Heath will take over. But I think as Heath said in his prepared remarks, I mean, what we're all about right now is having the most optionality as we go into the end of the year. And there's still some things that haven't occurred, such as these remaining sales. So I think it's important that we continue to kind of lean towards a little more conservatism in the near term. Obviously, if we pay down the debt with those proceeds, that's more dilutive than doing, you know, depending on where the stock is, than doing a buyback. But frankly, it's... as we've been doing this a long time and we're in a very volatile world. So we wanna be as strong as possible to take advantage of some opportunities that would likely occur if we did take a turn down, economically. That being said, we haven't made that decision, which is what we're saying is we're waiting to see how this plays out throughout the balance of the year. So I think I would say that we certainly lean to being a little more conservative right now. That's paid off for us in the past. Having dry powder and then taking advantage of opportunities. But that could change, right? So I think we're just going to be monitoring where things go over the next 2 months. Heath, you want to add to that?

No, I think that's a great answer. We're not getting those proceeds over time. We got $30 million yesterday, we'll give them about $20 million soon, another $100 million in December, another $75 million in the first quarter of 2017. So as John said, we've got time to figure out what to do. I will tell you, if you look at our capital allocation menu, acquisitions have become a little harder, as debt costs and the year-to-year on an asset that would actually be complementary to our portfolio sort of converged. That makes it a little more difficult. You know, that 75 basis point, convert that's that could be either a temporary or permanent de-levering. So again, we could we could pay that off and decide to lever back up later. So it's just good to be in the drivers, you know, driver side position here and look at our options as we go forward.

That's fair. Appreciate the commentary. Then, just John, you mentioned the path forward to 94% small shop, 90% anchor occupancy. What's the timeframe, particularly on that small shop, you think it would take to get there?

As you know, Craig, we don't kind of lay out leasing guidance, but if you just look at the path that we've had in the last year, it's picked up substantially. Some high end shops this quarter. So I think in the next year, as we continue to push forward, you know, that's what our goals are. And the shop environment maintains strength. And 1 thing I would say about the shops, it's not just shops. Is shops contained in very, very strong, anchored, great shopping centers, right? So I think there's a difference to saying people are just throwing the word shop around. They're not all created equal. And I think we're very, you know, we're feeling very good about our portfolio and about the demand that we see. And if you just look at, I mean, you know, we always point to the 1 metric that we think is the most important when it comes to leasing, which is our non-option renewal spreads. 18% is really tremendous. Um, and I I've kind of lost count of how long it we've been in the double-digit range. I don't know, 5 years, 4-plus years. Again, we're not going to set timelines, Craig, but we feel very good about the trajectory.

And, Craig, I mean, we obviously have some view into the fourth quarter, and we expect nice progress moving forward. So it feels pretty good.

Great. Thanks, guys. Thank you. Thank you. And our next question comes from the line of Connor Mitchell from UBS. Your question, please.

Hey, good morning. Thanks for taking my question. Um, I guess I'd just like to maybe stick on that at least a spread. thoughts. So, I mean, first, I just want to point out that, you know, you guys had some really good results this quarter, pretty much every every type of lease uh outperformed the prior quarter. But just curious, was there really anything within that deal mix that boosted it or gave it some outperformance, or is this really just representative of the current environment and the demand for Kite's portfolio in space? Yes.

Yes, I mean, I think it's broad-based, and we always try to make it clear that 1 quarter in leasing can be moved in any particular direction. But if you look at it over the past year and you look at the increase in the overall portfolio, that really shows you the strength. You know, our focus has been not only on, you know, rent bumps, but also the merchandising. And, you know, we pointed that out in our transcript, which was that, you know, we maybe have been a little more methodical than others about that. So perhaps it's why we're, you know, maybe catching up at this point in time, but that has really, is it going to pay significant dividends over time? Because the whole point of Project Elevate really isn't, it's not short-sighted, it's long-sighted in the sense that our portfolio is now going to grow at a much better embedded clip. Significantly reduced our risk. And over the past, say, year and a half, we've been very active in how we've wanted to prune the portfolio and position the portfolio. And so the point is that that's nearing the end. And so we should be able to take advantage of that over the next 3, 4 years. So, again, that's just a segue from your question, which is it is broad-based. The strength is broad-based. We mentioned how many retailers we've done deals with and the different brands.

And look, the supply continues to be extremely muted. So it's a very favorable leasing environment. And the only thing I would add to that is if you look at the new spreads, which obviously came in very well north of 33%, that as the quality of the portfolio continues to enhance, you know, we're able to get great spreads with people like Flower Child, Viori, Sephora. And, you know, as the quality improves, we're going to continue and expect to see that spread improve with it.