Q2 2020 Kite Realty Group Trust Earnings Call
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question answer session.
To ask a question during this session you'll need to press Star then one on your telephone keypad.
Please be advised to today's conference maybe recorded.
If you acquire operator assistance. Please press Star then zero.
I'd now like to hand, the conference over to your hosts today Mr., Brian Mccarthy Senior Vice President marketing and Communications. Please go ahead.
Thank you and good morning, everyone welcome to pay real two groups second quarter earnings call.
Today's comments contain forward looking statements that are based on assumptions, a future events and are subject to inherent risks and uncertainties.
Actual results may differ materially from these statements.
More information about the factors that can adversely affect the company's results, we see our about Tc pipelines, including our most recent 10-Q.
Today's remarks also includes certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website for reconciliations 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.
President and Chief operating Officer, Tom again.
Executive Vice President and Chief Financial Officer Heath fear.
Senior Vice President and Chief Accounting Officer, Dave fuel.
And senior Vice President capital markets, and Investor Relations, Jason Cool.
I will now turn the call over to John.
Thanks, Brian and good morning, everyone.
Thank you for joining us today.
Guarantee family. Appreciate this continues to be a challenging time for everyone.
Including our investors tenants customers and vendors.
I hope this call find you all doing well.
With the global scientific community racing towards a variety of solutions to the Cobas 19 and Devon.
We're feeling incrementally more optimistic as compared to our last earnings call.
As always our goal is to provide as much transparency and color if it's possible within the context of the information we have today.
With that mine.
I'll spend some of the time today discussing short term dislocation and our rent collection activities during the second quarter and for July.
As for the long term impact of this pandemic the unknowns, especially as it relates to the timing of a solution still outweigh the notes.
We are starting to see some encouraging green shoots and emerging trends the present potential long term opportunities for our business.
Prior to the past March we could never imagined that environment, where monthly rent collection rates would serve as a proxy for portfolio quality and management team determination.
As of today, we've collected 80% of our second quarter gross rent, which grows to 82% when applying security deposits, an additional 9% of our second quarter gross rents have been contractually differ.
Therefore, we have 91%.
Second quarter gross rent addressed.
Which speaks volumes on how retailers view the necessity of staying in our real estate.
As for July we've collected 87% of gross rent today, along with another 2% in deferral agreements.
We're pleased with our sector, leading collection performance as a look through to the portfolio transformation that took place last year.
The tenacity of the care GE team and the depth of our tenant relationships.
With that might I can assure you we will continue to maximize collections.
As of today, 94% of RMB ours open and operating at some capacity up from approximately 51% in April.
With respect to the remaining 6% that are closed 3% have not been able to reopen due to local restrictions, including some of our Jim the theater attendance.
Approximately 3% of our tenants have chosen not to reopen in some instances the tenant is unable to higher back to staff or the tenant has made the determination.
On profitable to operate until such time is further regulations are lifted.
So what's the salt mean longer term prospects of our business.
As I mentioned earlier.
Too early to answer that question with any level of conviction.
We are however, beginning to see some silver linings that we think bode well for care GE and for the open air retail sector.
As the pandemic began to take hold in March predictably leasing came to a screeching halt.
As the quarter progressed in the world was able to grasp the weight of endemic leasing discussions restarted and successful retailers continued their request for additional and or better locations.
Second quarter. Despite the disruption, we signed 35 leases for 302000 square feet comparable leases, resulting in a blended cash and GAAP rent spreads of 19.9% and 29.3% respectively.
One key metric to consider is the spread on non option renewals, which is what tenants are willing to pay to stay in their current space.
In the second quarter, we signed 15 non option renewals for an average 12% cash rent spreads.
These tenants in the middle of a pandemic decided to pay 12% more rent to remain in their space. Another testament to owning properties, where retailers want to be located.
I'd like to now shift to what I believe will be for long term trends in retail real estate.
These changes had already been happening at the pandemic has accelerated the realization.
Each of these will be positive for high quality retail real estate, particularly in our opener portfolio.
First the demise of struggling retailers has accelerated.
As we've seen the bid demick is pushed some struggling retailers to close their doors.
While disruptive in the short term this is a positive in the long term.
It will allow for the replacement of zombie retailers with new active growing concepts.
Good real estate will benefit as new retailers flocked to fill vacancies left from failed retailers.
This is not new to retail real estate.
As new concepts have replaced old outdated retailers for decades.
Second retailers have ramped up their omni channel abilities. Many retailers that are already realized that omnichannel was the best way to accelerate sales, but the pandemic has made the majority of those not quite convinced realize they need to fully invested in their omni channel capabilities.
There are many reasons why retailers need both physical stores and an online presence to maximize their sales our investor presentation outlines these reasons in more detail.
Sure byline pickup in store has spiked during the pandemic.
Expanded to curbside pickup.
Larger retailers at already started to implement BOPUS as a more profitable way to sell goods.
There are no shipping cost reduced checkout cost and the opportunity for the customer to buy additional items during the visit.
One byproduct of our socially distance world is that many consumers have experienced focus and and the ease at which open air centers enable customers to quickly fulfill their purchases.
We believe the ability for customers to purchase items online drive up to the store and quickly get their goods is here to stay to that end KRG has created designated order pickup areas at most of our centers to assist retailers and their ability to fulfill buy online pickup in store and curbside orders.
Our tenants and turn have gotten increasingly creative by pushing the electronic advertisements and coupons.
To create additional sales while the customers in the center.
It's also important to note that this type of fulfillment is particularly suited for our opening a real estate.
This brings me to the final observation.
Going forward, we anticipate that the rosters of retailers looking for space in our centers will grow.
Based on conversations we've had with multiple large national retailers. There was renewed focus on speed and convenience as essential ingredients to successful omnichannel strategies.
These retailers are also focused on the additional foot traffic that would result in being in a conveniently located open air center, particularly well with the grocery component.
In addition to convenience, we're able to offer these retailers attractive rents in common area charges, thereby improving their margins.
This bid them its has been the most disruptive global event that I've witnessed.
Its ability to slowly grind way, our collective patients and generate unprecedented levels of personal and professional stress the second to none.
At KRG, we keep reminding ourselves at disruption breeds opportunity and amidst the chaos.
We've made a conscious effort to channel our short term frustrations.
Towards unlocking those long term opportunities.
I'll now call turn the call over to keep discussed the balance sheet in our current capital situation.
Thank you John.
Good morning, everyone.
As was the case last quarter KRG continues to maintain a strong balance sheet and our posture remains cautious with a focus on capital preservation.
That being said, we are feeling incrementally more confident about the business as evidenced by our decision to reduce our outstanding line of credit balance to $100 million.
As of June Thirtyth, our net debt to EBITDA was 7.1 times elevated due to the impact at the Coke and pandemic.
Please note that we calculate NVE by Annualizing, our most recent quarter of EBITDA.
Therefore, the disruption caused by coated will immediately Peter and our endearing NVE metric.
More importantly, though our liquidity position remained strong with no debt maturing until 2022.
Only $9.4 million committed to development projects and the big Bucks surge with approximately $584 million of liquidity available to care Jade.
Our capital allocation discipline is evident in our latest redevelopment disclosure.
As further detailed in the supplement this past quarter, we entered into a joint venture to pursue in multifamily opportunity at Glendale Town Center.
We are partnering with the local developer to build 267 apartment units on an unused parcel of land adjacent to the center.
And exchange with the contribution of land care to secure to 12% interest in the venture.
Yes part about this redevelopment is that our future capital contribution is limited to site preparation costs.
Given the recent dislocation we think it's important to provide clarity on the bad debt.
After examining all of our outstanding balances tenant by tenant we're reserving $6.6 million of accounts receivable for the second quarter.
Of that total number $4.9 million is related to second quarter billings than we are estimating are unlikely to be collected.
$870000 is related to balances outstanding at the end of the first quarter 70, now deem on collectible.
The remaining $880000 is related to noncash straight line rent reserves that have already been recognize income, but most likely will not be collected through contractual rent bumps going forward.
This is all detailed on page 17 of our supplemental.
As a reminder, primarily due to coated we took a $3.6 million bad debt charge in the first quarter.
We are far from out of this crisis.
And we remain very guarded with our capital.
We are actively looking for opportunities that may come out of this distress.
We would be hard pressed to pursue anything that would be detrimental to our strong capital and liquidity positions.
Thank you to everyone for joining the call today operator. This concludes our prepared remarks. Please open the line for questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press apparently.
Please standby week about Q and a roster.
Our first question comes from Alexander Goldfarb with Piper Sandler Your line is now open.
Hey, Mark burning up there.
So.
Yes.
Good morning that Powerpoint that you guys put out is has a lot of good stuff. So thank you for a for whoever spend time on that or weekend.
Appreciate it.
The other thing.
With that.
That said absolutely we thank Jason mostly for that.
Okay, Jason Thank you.
And then you everything that just continues to be a precedent in the fact that you're movie theaters last quarter in this quarter, even though they're all closed they are still like a good amount are paying rent, which is just really impressive but let me gets Mike My my questions.
First just big picture.
You guys had great rent collections you good rate balance sheet limited capex needs.
No you feel comfortable reducing your line of credit balance.
Where do you see it on the dividends and where do you think your taxable income will be this year relative to your need to restore the dividend.
This year.
Sure.
Well I think I think kind of like last quarter in our conversation Alex I mean, we're going to we're going to continue to see how the quarter plays out. So we will continue to see how the next two months evolve.
Before we make a decision on the third quarter.
That said, we as we as we mentioned we were incrementally more positive this quarter and we've been doing quite well with our initiatives. So.
We feel good about that but we still as we also pointed out we still can't really predict where this goes in the balance of this year. So we'll continue to maintain a conservative stance.
That said, we are working through our taxable income projections.
That is remains a key element of what we will ultimately do so too early to obviously say what it will be.
Right this minute, but when we discuss with the board in an upcoming board meeting, we'll be talking about all the things. We just laid out which are is our view of the health of our retailers the cash flow et cetera. So I think we feel good that decision we made less in the last quarter as it related to paying at least.
Small amount relative to our projected.
Have a portion of our projected taxable income that's going to adjust somewhat when we look at at the next two at this quarter in next quarter.
Okay, and then as far as the second wave cobot outbreaks that.
Actually came across a number you're sunbelt markets during the quarter and subsequent did you guys see any impact was there any like good good tenants slowdown leasing discussions where sales impacted where your centers impacted or as these waves went through some of your markets in Florida, Texas et cetera.
Your portfolio really didn't notice the difference.
Well I can't comment on.
Waves, because I'm not quite certain that I would I would suggest that it's way versus just an extension of what was already there but.
Initially there was a lot of focus and particularly media focus on Texas, and Florida, maybe three weeks ago.
But quite frankly.
The.
Massive strain on the hospital systems that was projected didnt materialize really from our view in a way that really really changed People's daily lives. So I think as a relos as it relates to particularly Florida, and Texas, which is where we were potentially most impacted we really did not see that.
And as people have become more custom.
Two going out about their daily routines, I think frankly in our particular locations.
People have taken fairly.
Robustly to wearing masks and feeling a little more comfortable and going out doing their daily thing and so we benefited from that so we really did not see significant pullback in any way certainly discussions about what did that happen.
But look it's early yet on that Thats why don't want to suggest that there. This was a wave that has now gone downtime reality is this will continue to.
With us for quite a while and we are thinking that are the strength of our real estate.
Really came to fruition here and the things that we did last year with project focus that's why we're doing well I mean, ultimately the strength of our real estate.
Has been way misunderstood and is why we're doing well in addition to the fact that we have.
A great group of people with great relationships that are intensely pursuing.
Collection quite candidly.
Thank you John.
Do you.
Our next question comes from Christy Mcelroy with Citi. Your line is open.
Hey, guys I'll Echo Alex's comment thanks for that God its break out at that Q2 build brands in collection.
Okay. That's helpful.
Im wondering if you could provide that's seen info for July I think John you said in your comments that on top of 87% you defer get another 2% is that right and then so obviously collections have improved.
Can you provide some more color on sort of the status of the unresolved sockets in terms of what's still like pursue persons what really unlikely to be collected and your color on your strategy for dealing with that unresolved bucket as it stands.
Sure I think we can all chip and on that I think as it relates to the strategy around that at the strategy exactly the same.
Christy as it's been since you know.
Really early March when we started to focusing heavily on this and created our Swat team that meets every day. So it's a bottoms up strategy.
Really in its continues to be a bucketed strategy, where we have different.
Approaches with the small mom and pop tenants and versus the large nationals and also as it relates to that we've done great in terms of.
The great majority of the large nationals have been very good to work with and we havent really gotten ourselves into.
Very difficult situations.
Our except maybe a couple of cases.
As it relates to we can't get that granular on July yet to.
Kind of per category, but suffice to say.
We think we think we're tracking to do better than we did in the quarter and I don't know Heath, if you want to give detail around those other buckets or not but I.
I think it's a little early to give too much detail there Christy just because we're still it's we're still actively.
Okay on that well have and we're still making progress in terms of negotiations with a variety of tenants I will say encouraging factors have right now.
Between tenants that are in plywood their lease and ones that we have you know.
Firmed deferral deals with.
It's over 90%. So we're really chipping away at these last sort of holdouts at.
That are not coming to the table yet with a reasonable.
Landlord and tenant friendly.
Scenario, so again, it's a Jonathan it's dynamic we're going to keep pushing at it.
And our July number I'm going to guess is going to keep getting bigger and as you know as we all know we can keep collecting rents and impurities. After a month is over and we'll keep okay. We'll keep doing it I think we're confident that what's built in and unpaid Christy we are still going to pursue and the majority of that will be paid so I think that's that's our.
Macro view there.
Okay. Thank you and then.
Think about your liquidity in your capital position today.
When the use of bank capital.
How do you think about taking advantage of any private market dislocation. If there is that need to buy assets. Given that you don't really have anything any anything committed and the value creation pipeline debt maturities look okay. What gives you comfortable with putting capital to work and acquisitions franchise.
Yes, I think great question and it's what we were trying to get to with our comments in that.
Usually in times of great chaos, Theres opportunity there and.
Frankly, this time around.
Versus OEM nine I think we're really well positioned to try and take advantage of that I do think it's a little early still and I know people keep saying that's a when is it not too early but.
It's a little early.
Just really early in the sense of the opportunities have really presented themselves.
That would be.
Real estate that we would want to own at a dislocated price. The couple transactions that we've seen frankly have gone off at very low cap rates and I think people to talk about cap rates.
My personal opinion, I believe that cap rates, if anything come down due to the fact that you've got reduced in Hawaii and more upside.
You've got the tenure at 50 basis points, who knows I mean are not predicting interest rates, but that's a long way of me, saying, we're we're actively like positioning ourselves to be there.
But haven't seen it yet Christie.
And who knows what happens with legislation around.
You've got this new legislation proposed in CMBS land et cetera, So we're hanging around the ramp.
Better way for me to say.
Thank you.
Thank you.
Our next question comes from Todd Thomas with Keybanc. Your line is now open.
Hey, guys. This is Rob is it down the line for Thomas If you guys are doing well.
Just wanted to ask a few questions about the run collection data.
Any comment on how they trended between a national versus local tenants.
For the second quarter.
Sure so our local tenants and this is truly the mom and Pops.
There are several X percent collections for the second quarter and 79% collections.
Towards a license actually very very strong.
For the up for the.
The mom and Pops and then the nationals were probably 3% to 4% higher for each of those periods. So Paul.
82 and 84.
On that.
Great.
And just about the restaurants I noticed that the rent collections for the quick service and the full sit downs are very similar and we've seen a larger delta between these two types across the sub sector can you offer any additional color.
I think the reason why you're seeing those be sort of similar in the in the full service restaurants, we don't have a lot of the white tablecloth fine dining, which I think is in the hardest hit so we've seen our full service folks really being creative in terms of takeout.
Having curbside pickup et cetera, so the folks that we do have it's not that very very hard fine dining we're seeing their numbers are willing to clients I think thats.
That's the reason why those numbers are fairly similar.
Okay.
Just one more on the on the Softgoods collection I notice that they're 99% open.
In August two Q collections are a little or no significant less than that for any other color flat is that why.
Is that because they opened up later within the quarter.
I mean on each each tenant has its own individual set of circumstances I Wouldnt paintbrush there the reality is.
We're in the very beginning the pandemic those guys were kind of disproportionately impacted as we've begun to open up everybody Theyre doing better. So we don't we don't foresee that not catching up overtime.
Okay generally with our overall collections.
So you expect that to grow in July in the future yes.
I mean, it I don't exactly when but we expected to grow underpinned the point I was making earlier is.
You know if we've already addressed 90% of our rent right in July we're doing pretty damn well. So we're going to improve we're going to we're going to improve things on the margins and that would be something that would be on the margins to improve.
Okay, great. Thanks, Sir Thanks for answering my questions. Thank you.
As a reminder, ladies and gentlemen that is star then one to ask a question.
Our next question comes from Craig Smith with Bank of America. Your line is now open.
Thank you.
I was wondering what's your expectation is for occupancy by year end versus 22.
Q 20, and that would be for small shops as well as total.
Well I mean at this point, Craig we're not going to give a number on a projection like that.
But because we just don't know.
So I think look we've we're trying to make a point that our real estate as a lot better than I think some people are perceived it. So we'll see what that means as it relates to occupancy. The one thing that will never do is we will never.
Try to preserve occupancy in a panicky way in other words, we will do deals that are deals that we think our destructive to long term value, which is why if you look at the quarter. It's why we were pretty proud of the way we performed in our leasing spreads in our leasing volume.
And Thats why I pointed out the non option renewals because with that the reason that's important is these tenants didnt have an option. So it was it was a free negotiation in other words and we got a 12% spreads. So I'm, who I think we're more focused as a team on that that we are weather.
Our occupancy is up up or down 100, or 200 basis points.
Okay and then just.
Wondering about.
The consumer traffic that pure Las Vegas properties, how are they doing.
I mean, we've done well in Las Vegas, they obviously.
Look a real early hit.
They are doing the best they can I think in the market to try to bring people back but bottom line is it's performed in line with the balance of our properties throughout the country and again I think people kind of speak about this in the wrong way as they're thinking about the market when you really need to be thinking about.
Now the individual real estate within the market and the tenets that occupy those spaces. So when you look at our community shopping centers that are great majority of which have the grocery component. The average size of our centers 140000 square feet. In this focus world that we talked about we own the right real.
We'll stay and Thats, what I want the message to be as we own the right real estate we're outperforming.
Right, now, but but who knows where this all goes.
The things that we did last year set us up and we love the market Vegas long run is a great market, but most important for people I think to think about is actually the individual micro.
Looking at the micro situation, so the macro like that.
Okay. Thank you thanks.
Our next question comes from Floris Van Dijkum with Compass point. Your line is now open.
Thanks.
Morning, guys or afternoon, I guess, depending on where you are.
Can you maybe comment on August trends and.
How much more of an improvement can you get from here.
Yes.
Floors in terms of August we can't give a lot of detail obviously, it's the first week, but so far we're on track as to where we've been.
So we we have Oh, we have a look let's put it this way we set goals on every one of these months and these goals continue to push up and that's our goal is to continue to push up.
So I think I think trend wise as long as we continue.
And this path that were on and the multiple markets that we are in as it relates to being open and tends be open for business. That's most important thing and everything else kind of a sideshow. So we feel good about that but it's kind of too early to say great greater detail.
Thanks, Jeremy and maybe some of your peers have been talking about.
The benefits of being.
Well capitalized during this pandemic and that they are starting to see that.
Play a bigger part with with their discussions with tenants as well maybe if you can comment on.
The position of Heights.
Your markets right now and relative to some of the you're correct. Your competitors. If you will and also maybe.
Touched upon the perception of of kite and be in the overall.
Right market as well as you see that changing going forward.
Kind of three things there I'll I'll talk a little bit about the importance of the company the strength of the company and maybe have Tom talk a little bit about how that parlays into our individual discussions with the retailers, but in terms of the overall I think for sure. The fact that the retailer knows they're dealing with.
With a strong company accompany this service is going to survive and thrive. It is a factor in how they make decisions relative to the real estate itself, but as I said in the beginning the real estate itself is a is a very important element, but you do need this second piece of it which is.
To say, here's a here's a read that has whatever approximately $600 million and liquidity.
You know and has plenty of capacity.
To help us and has capacity to be there to invest with us in the future. So Tom you want to talk about the retailers themselves and you have from from a retailer perspective on an individual basis. One of the things. We've really tried to do is we've tried to take a long perspective. This isn't the soon the spread.
That's a marathon so we're really dealing with our customers on a long perspective, a long view, knowing what's best for the real estate from a long term perspective. So we believe we've actually enhance relationships through this time period of working with and communication channels of it than even higher so we like.
We believe that we are putting ourselves actually.
Better positions with each and every one of these tenants as we move forward, but theres no doubt relationships and trust will play a huge part in this moving forward and then kind of relative to your question about our position.
Versus the peers.
Look I think all I can say there is.
The message, we're trying to get out there is that our real estate is quite quite.
What's the word is performing really well, we don't think the public markets have quite appreciated the strength of our real estate all the things we did last year, that's significantly improve the portfolio.
As it relates to you know the peer group I think look there's lots of great companies that have a lot of great.
Things going on but the reality is we when we look at the stock price and the discounts and I think the page 12 of the presentation that kind of ran you through how draconian. It devaluation is relative to what we're experiencing in our collections in our the strength of our real estate.
That's the point, we're trying to make even if you look at us versus say like the net lease group who were collecting.
At the basically at the same velocity that net lease group does and they trade at six seven times multiple to us. So long story short all we're going to keep doing floris is grinding and getting this done and on show in improving and pushing and working with our partners the retailers.
So we feel really good about that we cannot control. These other things that we certainly can't control the evolution of the pandemic, but everything we're seeing as it relates to that.
We feel better about and we feel very strongly in this company.
And we just want the investment community to kind of start looking at at that and realizing I missed this there is a great opportunity here in care G.
Thanks I appreciate it. Thank you thank you floors.
Our next question comes from Chris Lucas with capital One Securities. Your line is now open.
Hey, good afternoon, everybody on John just kind of following up on that I appreciate the comments and certainly the.
Trying to figure out sort of what.
Maybe leads to your out regulatory relative outperformance on rent question isn't sort of identifying anything to five years as it relates to sort of say tenants line of business exposure or.
We'll move on but I am wondering whether or not you feel like the fact that your portfolio relatively modest in size compared to some of your public peers that the conversation for tenants that you're trying to collect rent from are being add up the sea level rather than that's some more regional level do you think that has an impact in terms of your ability to correct.
I mean, I totally I totally get the question I think.
Size, it's interesting.
Thought because you could you could look at it two ways one.
Our size, which we believe is kind of.
Big enough to be important to the right retailers, maybe not so huge that we are personally involved and everything as it relates to Tom and myself and.
Greg poets are held leasing and Keith and lots of lots of people I mean, we have a group of people that get together every day and talk about how we're going to push the needle upbraided keep pushing so I don't I don't think that.
It really is that in the end, though I think it's the real estate and the people that the relationships that we have over the last 30 plus years, Chris that whether or not you on 500 centers or a 100 centers I don't know that that really matters, what matters is where they're located and as Tom said, how are we going about it.
And our we actively going after this in a way that we're right in front of these people all the time certainly the C. Suite of these retailers has got a lot to deal with and were empathetic to that but by the same token sort of wheat, and I think thats, where you get to the.
That's how you get to this compromise and I think that's why we've we've done what we've done.
Okay. Thanks for that and then a detailed question.
On the.
I just can you give us a sense as to the exposure of any of your exposure of tenants that have filed bankruptcy QQ that you guys have.
Sure. So for those types of filed bankruptcy in Q2, our total hbr exposure is 25%.
Okay, great. Thank you that's telling us that.
All right Chris take care.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. price for closing remarks.
Okay, well, thanks, everyone for joining us today, we appreciate it.
And we hope everyone stays.
They've been healthy and we will talk to use of.
Yep.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].