Q3 2020 Kite Realty Group Trust Earnings Call
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The SVP of marketing. Please go ahead Sir.
Thank you and good afternoon, everyone welcome to Kite Realty group's third quarter earnings call. Some of todays 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.
More information about the factors that can adversely affect the companys results, please see our filings including.
Including our most recent 10-Q.
Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website. A reconciliation of these non-GAAP performance measures <unk> financial results.
On the call with me today from Kite Realty Group, our chairman and Chief Executive Officer John.
President and Chief operating officer.
Executive Vice President and Chief Financial Officer.
Yeah.
Senior Vice President and Chief Accounting Officer, Dave.
And senior Vice President capital markets and Investor Relations Jason.
I will now turn the call over to John.
Thanks, Brian and good afternoon, everyone.
Thank you for joining us today.
Cherokee family appreciate that continues to be challenging for everyone, including our investors.
Customers.
Understand employees and.
And we hope it does.
Oh finds you all doing well.
Coburn isn't it isn't a component that we respect that are not paralyzed.
Oh that is causing a significant dislocation in our society it will be separate.
Our scientific community continues to make progress as it relates to testing therapeutics and vaccines we.
We will find a way to stop this pandemic.
Hopefully sooner than later, but either way it will come to an end.
This is why even in the face of a spike in cases, it feels like we are closer to the event and we are just beginning to pin down it.
We are beginning to see the school is not reflected in our business.
Today I'd like to give you an update on our collection activity.
Some of the more common questions that we had been receiving from our investors.
As of today, we collected 92% of third quarter gross rent another 2% has been contractually deferred bringing the total of a dress third quarter rose to 94 point, 94%.
Currently October collections are tracking slightly ahead of September.
He's just gotta spend some time walking through our methodology, but suffice to say our collection numbers are straightforward and pure.
A question, we noticed that were unanimously asked by investors.
There's a wire collections have been so strong.
We believe our success as a product.
Threepi properties people and process.
In terms of our properties, 74% of our Hbr comes from centers with a grocery component.
These grocers together with other essential retailers continue to drive traffic to our centers, resulting in 97% of our tenants being open and operating as of today.
The average size of our centers is only a 141000 square feet, which translates into unparalleled ease and convenience for our customers.
With very limited capital investment, we were able to help our tenant successfully adopt and embraced the accelerating click and collect trend.
As we discussed last quarter online pick up in store swiftly, becoming a central part of operations for retailers.
Our open air centers are uniquely positioned to leverage this trend.
With 77% of our Hbr coming from the South and the west.
Our properties are located in areas that are benefiting from preexisting migration patterns that we believe will continue to accelerate post code.
We own assets, where state and local governments opened their economies earlier and are less likely to close them down again.
Furthermore, in a warmer markets. So this will continue to employ creative measures to ensure occurs survival of future success, such as temporary outdoor dining and fitness areas.
Bottom line, we own assets, where people increase that we want to live and shop.
It's not just about being in these markets. So it's about owning the best real estate in these markets and combining that product with our best in class operations.
Our people importance are the.
Processes at KRG.
We have some of the most talented people in the industry and this dislocation has allowed us to highlight their skills.
Copa hit in early March our team circled the wagons and went to work battening down the ashes.
Energy and preparing.
When the lock down as were lifted our team shifted to helping our tenants reestablish themselves and open as quickly and safely as possible.
As tenants began to get back on their feet, our focus turns to collections and ensuring successful tenants pays or what.
While continuously working with our most impacted.
Through each of these steps our team set up a variety of processes to organize all our data maximize our visibility into the business and tackle issues at the appropriate time.
The processes work and our people outperformed.
Thanks, its KRG team enough for their efforts during this trying time.
The next most frequent questions we get around the impacts of Covance on our business.
More specifically what.
What will be the extent of the permanent Oh why erosion.
The first thing that were quick to point out is the word permanent does a misnomer covalently temporary dislocation it's.
The fact that we're getting inventory back.
But our track record for releasing space at accretive returns speaks for itself.
Over a minute or two years, we were able to backfill 22 anchor boxes.
Representing 561000 square feet, while generating over 21% cash lease spreads and.
Over a 17% return on capital.
At the end of 2019, our shop space occupancy was that a sector high of 92.5% and we only had six vacant anchor tenants.
The second point is the sheer number of remaining on answered questions and confusion.
When will the new stimulus package get past, who will be the next president when will we learn the results how long will this latest spiking cases last what is the timing of adoption of disease treatments. Despite.
Despite all these unanswered questions, we feel the ground underneath us has begun to stabilize.
With eight months of Coke and under our belt.
In the spirit of trends the transparency. We included additional disclosure on page 17 of our supplemental.
Additional disclosure shows that recurring revenues in the third quarter or approximately 6% lower than in the first quarter.
This is a far cry from the dislocation that the industry initially projected in March and April even a further cry from the continued implied dislocation in our stock price.
Last question I'll address this about our path forward.
Many investors have asked when will care do you get back to pre Cove it at a why levels.
Well, we don't know exactly when that will occur.
I do know that internally, we are asking ourselves the boulder question.
When and how do we see three cove it had a wide levels.
Good news is that in 2019, we prepared the company for what we thought could be a disrupted point 20.
And ensure that we have one of the best balance sheets and liquidity profile in the sector.
Well, we couldn't have predicted a pandemic obviously.
But it is a huge advantage to start from a position of strength, but trying to get back to it ultimately surpassed pre covert levels.
[noise] guarantee is well positioned to take advantage of this disruption.
Priority, which is well under way is to fill vacated space during the pandemic.
And.
With the retailer bankruptcies that have occurred.
Our AB our exposure to retailers that have filed bankruptcy in 2020 is approximately 5% so.
It's important to realize that many retailers assumed leases at key locations. They continue to operate those stores when they emerge from bankruptcy.
As further detailed in our Investor presentation, two thirds of the at risk KBR is leased or in active discussions.
During the third quarter, we experienced a significant uptick in our leasing activity.
Executed 21, new leases and 57 renewal leases, representing 457000 square feet.
This marks the highest quarterly leasing volume over the past year.
We are further encouraged by the diversity of the new leases, which include two grocery stores off price retailers and a wide variety of small shops.
That's cool this quarter's comparable lease leases resulted in blended GAAP and cash leasing spreads of 14.7% and 6.7% respectively.
It's also important to note that the 28 non option renewals we did.
Which means that the tenants that have the ability to vacate at a blended GAAP and cash spreads of 26.8% and 11% respectively.
This clearly demonstrates the desire of our tends to stay in our shopping centers.
Additionally, let's remember certain vacancies provide opportunities the.
The Stein Mart locations may be a great example of our ability to unlock value and turn short term pain, it's a long term game.
Hi, Martin tens on clothing, all of their stores, including seven in the KRG portfolio.
Hi, Mark has been an unproductive retailer for a long time.
And brought limited value to our properties.
The average base rent for these seven locations is $8.21.
We plan on Backfilling these locations with high quality at much higher rents and strong returns on capital.
We've long maintained a risk adjusted basis filling empty boxes is one of the best uses of our capital.
We were highly successful with this with the Big box search we plan on doing that again.
In addition to leasing care. He is actively exploring ways to generate accretive returns by putting our strong balance sheet to work.
This past quarter phase three of them are of our Eddy Street Commons project became an active development Eddy Street Commons phase three will be anchored by a trader Joe's and will serve as the crown jewel of the mixed use development project. The net capital required by KRG will be $7.5 million.
And the project is estimated return between 8% and 9.5% yields on cost.
Tip, our cafs to Tom and the development team spearheaded this very successful development with University of Notre Dame over the past seven years.
This pandemic has been disruptive so many people and so many different ways.
Despite this disruption our people have risen to each and every challenge and will continue to.
I'll turn the call over to Heath now to discuss the balance sheet and our capital situation. Thank you.
Good job and good afternoon, everyone.
Prior to co, but whenever I heard the number 2020.
Who call the phrase 2020 hindsight.
And the ability to evaluate pass choices were clearly that's compared to the time of the choices are actually.
With that in mind, maybe it's no coincidence that we were facing a global pandemic.
And one of the most devices elections in recent history in the year 2020.
There is no doubt that we'll spend the next decade analyzing the choices, we're making right now and the choices we will make next week.
Regardless of what happens in the remainder of 2020 and it just went to 21.
Okay, RG is well positioned for all potential outcomes.
We continue to maintain a strong balance sheet and our cost remains cautious with a focus on capital preservation.
As John stated, we continue to feel incrementally more confident about the business.
Evidenced by our decision to reduce outstanding line of credit balance to $50 million.
From $300 million back in March.
As of September Thirtyth, our net debt to EBITDA is 6.9 times.
Lower than last quarter, but still elevated due to the impact of the covance as ever.
As I mentioned last quarter simply.
It's important to note that we calculated and the by Annualizing, our most recent quarter even though.
Therefore, the disruption caused by cold it will immediately impact r. and D. metric.
More importantly, though our liquidity position remains strong no debt maturing until 2022, only $15 million of output.
Outstanding capital commitments, and approximately $580 million liquidity available the K.R. J.
Our liquidity position continues to be bolstered by our strong collection results.
This quarter, we collected 92% of gross threats and deferred another 2%.
As John mentioned, our collection rate methodology is very straightforward and represents a simple percentage our total bill threats.
As detailed on page 17 of our supplemental our billings have decreased by only 1% for the first quarter and our net revenues were moving at any one time items have decreased 6.4% over the same timeframe.
Many of you may be tempted to use the 6.4% decrease as its future run rate, but I caution against making any sort of linear assumptions and what we feel will be a very not linear recovery.
As you know detractors to revenue are usually instantaneous well any additions take time to come online.
As previously discussed we are in the midst of releasing space in the financial impact that those deals will be a lagging indicator.
Most important take away is that the level of disruption implied in our stock price is nowhere close to the current decrease in our recurring revenues.
As a reminder, on bad debt, we estimate the quarterly reserves using the same process, we do every quarter.
Each outstanding balance tenant by tenant and determine who was at rest about paying their balances.
Due to the potential confusion with respect with respect to what amounts to a very simple exercising flexibility we have.
Made a conscious effort to provide as much transparency as possible.
Please refer to page 17 of our supplemental for a detailed breakdown of bad debt and accounts receivable.
At the end of the third quarter 5.9 million of our build right, what's outstanding of which approximately 3.1 million has been deemed uncollectible.
The 5.9 million that remains outstanding at the end of the third quarter as a vast improvement compared to the 15.1 billion at the end of the second quarter, a further indication of an improving situation.
We are pleased with the progress on all fronts, but we are far from out of this crisis and we remain guarded with our capital.
Well, we are actively looking for opportunities that may come out of this stress.
We would be hard pressed to pursue anything that would be detrimental to our strong capital and liquidity positions.
Our total committed capital to new development and redevelopment project stands at $15 million, which is just 2.6% of our current available liquidity.
Very manageable level, even in the midst of Atlanta.
Thank you to everyone for joining the call today operator. This concludes our prepared remarks. Please open the quants that line for questions.
Thank you as a reminder to ask a question. Please press Star then one on your Touchtone telephone switch on your question. Please press the pound <unk>. Our first question comes from changing Katy Mcconnell with Citi. Your line is now open.
Great. Thanks, Yeah. So scared bankruptcy exposure can you walk us through the portion space, that's already come back to date versus future fall out to get a better sense for how awesome team could trend going forward.
So the question. They think they're currently working on negotiation can you talk about how the replacement rents are trending so far on water tenants looking for flat capex commitments or other.
Oh, yes, good question I'm I'm on the backend some of them are still in the occupancy because they had an average after their leases.
At 930, and some of them will come out.
So again, we don't remove a tenet from occupancy until they actually start filling up.
So it's sort of a mixed bag. So can't give an exact number of what the percentage of bankrupt tenants that were out of occupancy at about 930, which ones will come out of occupancy, but post third quarter.
Okay, and then bought another one on bank collections update elsewhere kitchen collection stand to get a sense for what you've recovered since last update and then you had to revisit any previous deferral too cumbersome to update them.
Okay cute Q3, I think it was up to 83% of our Q2 I should say updating dthree. So there was another 3% collect I guess since since the second quarter.
Then what's the second part of that I'm sorry.
The second part was whether or not you've had to read digits previous deferral agreement to convert any of those surveyed.
No I mean, as we said before.
You know were really is a deferral business when it comes to those conversations were not the abatement business and that has really been less than like 1% of what we've done so it's de minimis.
It continues to be.
Okay, great. Thanks.
Thank you.
Thank you and our next question comes from sorry, Sandy of Compass point. Your line is now open.
Great. Thanks, guys.
Quick question for you guys on.
What you see I noticed your T.I.s were down it fits.
For your new leases.
Is that a sustainable trend in your view, particularly as you get some of the states back from bankruptcies or going forward.
Yeah for Us I mean, if you look at that.
That's a trend it's kind of been in the range of that.
The total number I think it was a 53 bucks on average.
That's really going to depend obviously on.
Whether we're doing a lot of small shop deals at a point in time or doing more box deals as we mentioned you know there's the Stein Mart out there.
This particular quarter, we just had a lot of shop activity.
Actually the majority of the deals on a deal by deal basis were shops, although when you look at square footage usually tilts towards acres. So I think that's a reasonable number but things haven't changed a lot there in the sense of if you're doing a box deal and you're not splitting it you know that number.
It's probably going to exceed the 53 dollar number on a case by case basis.
But you know box deals going to coming they can be quite wide in the range of costs.
The shop deals you know, we're just spending a lot less money there as you know and the great thing about renewals as we spend almost no money.
Tom you want to add anything that I would just say on honor standard big box tenants in terms of their standard package their packages that not change. So we're going to expect to see the same level.
And now that were related to I think the previous question, but.
Run rate to be fairly consistent.
But again to be clear I mean, $53 is is an average and it's a trailing average includes shops sandboxes right. So that number is good, especially a company our size.
Moved fairly significantly in a particular quarter, if it's weighted towards boxes for example.
Got it got it thanks, guys on the and would that be a reasonable assumption to make for the you know the 2.6% of unaddressed you know.
Bankruptcy tenants as you know that that's sort of spend required to get new tenants in there well.
Well, Yeah, I think when you look at the average because right now those bankruptcies tenets are tilted towards small shop tenants and handle a bought deal done there.
But once once we get back the Stein Mart spaces, and you're talking about several box deals that will probably occur in a couple of quarter period. So then that number would elevate up because you would be tilted more towards boxes.
Whereas the unaddressed bankruptcies right now are tilted towards guys like a seen a pure one and people like that.
But again are smaller spaces so I.
I didn't get the I just want to caution you not to.
Not to think about that and that is a static number 'cause it definitely moves around more specific I think the best way of getting a sense, where does this go look back over two and half years of our of our prior.
You know cost sublease space and you can see sometimes you got lumpy they'll come up and come down again, but just that it can be said of a volatile number but if you go back and look at what we did during the same box or we have a lot of boxes that particular quarter that they would get elevated we have mostly small shops would come down. So I think it just look back at that at our record.
I have a pretty good indicator was so looks like on a go forward basis.
Great. That's actually another question I have for you guys I mean, you've done it you've done a nice job with your with the balance sheet, obviously or how did you think about opportunities going forward, where do you think.
You're going to find you know potential acquisitions.
What kind of things would you be looking for and presumably they would be in your existing markets, but it is always the opportunity is going to come from Overlevered private owners is it going to be from banks, who control assets or where do you see things.
Things are shaking out in 21.
Yeah, I think you know again as he mentioned in his remarks, we're pretty focused on the fact that we have this very strong balance sheet is.
It is being it's a great thing that we do because it offers us against what's been occurring he did mention obviously that we will selectively look at things. So I think you got to break that down between two areas you talked about acquisitions, but when you look at the next year, we've got a couple of the redevelopment prop.
Parties that are still in play those would be as we pointed out before joint ventures that would be mixed use.
There will be some capital there as strong returns.
But very limited as he pointed out.
Secondly in terms of the acquisition side, you know I think right now based on our cost of capital. The reality will be that anything we do in the near term. There are we would need to be match funded. So you may see us do that makes you sell an asset or two in a geography that we believe.
He is it does it fit our long term objectives, and then move into a geography that does fit the warmer cheaper than.
The initiatives that we have that has been paying off came too late.
You know and dirty coal, but as you know so and by the way, it's not just dirty coal, but it's going to be it will be growing at a faster rate than markets that are losing people. So it's a really long term smart strategy in our view.
Got it thanks I appreciate it.
Thank you.
Thank you and our next question comes from Alexander Goldfarb Piper Stanley. Your line is now open.
Hey, good morning good.
Morning out there.
Or I guess its good afternoon.
So just a few questions here first there's been clearly an improvement in bad debt.
You already talked about side, Mark you talked about the 5.4% bankruptcies. The fact weve already backfilled about 65%, but at this point and you know call. It end of October do you guys feel pretty good about having handle on which of your tenants are going to make it and which are going to shake out meeting.
Right now can you sort of frame out how much more fall out there is going to be from tenants, who can't survive or you can't you don't have that level of clarity yet for you know at this point.
Yeah, I I think we certainly.
Have a have a feeling internally that we will have a lot of work to do we have work to do it's too early to say who.
Who won't make it I mean that the one thing about Cove. It is you know that it's kinda created an interesting situation where tenants that we thought were we going is it just sort of come out stronger and then there has been some that were stronger going into come out a week or so I think it's a little early to say, but we definitely try.
All of the tenants we track their health.
We look at the rents we you know we plan out over a three year period, what we think might happen. So that we're prepared and also Alps remember some of these tenants that people are talking about they're not going to close all their stores, but they may close some stores right. So we may get back a few stores.
First out of a retailer that we have multiple locations with and then we also made get as he pointed out some of the bankruptcy tenants or will you know, we'll keep their faces when they come out of bankruptcy.
So net net I think we have a pretty good handle on it and it's why we talked about the success that we had with the original big box search. So I guess, we're going to have to have a resurgent get this done and that's what we do.
I also see this kind of asking the question you're asking is really the same exercise we're doing.
But we're looking at Collectability who's going to survive.
And who's not.
As you can see you know last quarter. So folks that we did think we are going to pay they told folks we thought we were going to say.
Okay. So its dynamic it moves all the time and so to say that we have a tremendous amount of conviction outlets, we do our best job.
But at the end of the day listen it.
Walk us about kind of survivor, Bali, but thoughts about having the best real estate. So we feel confident either way and the way Weve Handicap. This endeavor has been discussion direct discussions with tenants probably in our history the scope and period. So we've learned a lot we understand what their pension points are there situations, where we can help but.
In terms of what Weve Handicap, I think we have a pretty good sense of where we're headed.
The only thing I'd add to that Alex you mentioned, the bad debt, our bad debt has obviously gotten better but the reality is it's.
The visibility is much better right now than it was last quarter and I think that's reflected in the sense that last quarter, we have $15 million of.
Building on paid rent.
It is down to less than 6 billion. This quarter. That's the story I mean, that's a massive change.
Which kind of shows that strengthening stability that we have so as we move into needing to lease. These boxes, we're doing it from a much stronger position. Unlike last time, we will take our time to do these deals and we said that before that the hits the hits come immediately.
And then it takes time to build expenses, that's just the way worse.
Right, but I guess I guess, putting it simplistically you guys have addressed 94% of your rent. So it's like 6% left I mean, it would seem like there's some but the thing is to say how does make it half don't so I mean, it seems like at Max you guys would potentially take that 6%.
From this hopefully it's not that far but I mean is that just a or is that too simplistic of a way to look at it that at most you can only support sort of 6% and price yeah.
No no I think it is oh I use the word is too simplistic. It's just a point in time, so as we sit here today, that's the math, but what we're pointing out and I think you've said that it's not linear because there will be other tenants that take us down the road I think thats widely known.
You mentioned, one which is Stein Mart and that's several several deals that will have to lease and so we'll take those hit I think what you should learn our take from that is that theres, a really stable base. Okay. The tenants that are in business that we know will continue in the business are paying rent. That's why I said, we went from 50.
Millions of less than 6 million now over the next couple of quarters. Some of these guys that have been hanging on both make it I think everybody knows that Alex but the team here is way past thinking about that it's already acting on that and that's what I mean by the hips.
You know immediately and then we backfill them, but higher returns on capital just like we did last time. So you know I just don't think investors should be thinking short term right now they shouldn't be thinking about whether you heads up on that FFO numbers, it's out there that I, even know wiped out there because.
Bad debt is a very very volatile moving piece that no. One can predict so the story is we have a super stable base in great markets with great property that we will absolutely lease whatever comes our way and I think we've proven that that's what we want investors to know is that.
We are the right team for these circumstances insurers how long the right property in the right location for the circumstance.
I mean, John agreed I mean, it it's evident in your results. So I think the hard work that you guys have done has shown off.
As far as that that's how I mean, we analysts need to have something that we can show so apologies on f. out it's just a fine all right on it.
Okay. Just a final question co bed I know you guys are all helping experts here in India. So it's sort of cobia capital for research, but when you look at your properties across the different markets now that you've had six months of experience you certainly have done a lot of leasing record levels. So have the spikes in.
Kobe or the waves and co but have you seen that translate to any impact from tenant leasing thoughts or customer shopping or these waves that come and go our sort of news headlines I won't say peak news, but our news headlines, but the reality is that the retailers and the shoppers.
Really pays them and they continue to get back to normal I'm, just trying to understand how how the headlines effect, what's going on at your properties.
Yeah, I mean, I think that's what what I meant when I said that we respect.
But but we will not let it paralyze us and that has played out at our properties, Alex and in the sense that we respect it. So weve done everything you can imagine at the property level to enable our customers are tenants to serve their customers in the most.
Efficient way, that's why we mentioned curbside pickup in.
Things of that nature, and the cleaning that goes into this and just the overall feeling of safety. So certainly the headlines are pretty dramatic but when you actually go like we do to the properties and your and we happen to benefit from the geography and the type.
Oh properties that we own we haven't seen that be a huge impact yet, but you know we're all so that's the part that's the respect part we respect that it can change we respect that people want to feel safe and in their endeavors, and we're helping them do that and so are our retailers and right now in this open.
And air platform quite frankly.
It makes people feel little more comfortable so I think I think so far that hasn't really played out where a particular spike for example, when we saw the spikes in the south.
Now that we saw in the summer we absolutely didn't see any material change in our tenant paying rent and the business that our tenant did but we help them and deal with it and we help them make sure that they were delivering a product that people have faith. So.
I think I think it's really.
Depends on.
Each particular location and we benefit as we said from our geography.
Lets show you started the question by making an apology on there. So I just want to put that the AFFO mess up a pretty that quotes.
Two cents this quarter just put in perspective, if we were to half of the bad debt reserve dollars instead of $3 million. We then.
The million and a half cost would've been 25% of our unpaid rents that would've been a two cents. So when we're reading some of the notes in saying that you don't have the headlines that we miss on two cents it feels it feels a little unfair.
The fact that we've we've collected 92% so the actual real erosion. We have we have the least amount of today. So yes, just want to say about that two cents based on what people are doing with bad debt, which by its very definition is a very subjective measure.
You know, we think that we had every metric in every market this past quarter.
Thank you. Thank you.
Yes.
Thank you and our next question comes from Todd Thomas of Keybanc Capital markets. Your line is now open.
Hi, Thanks. He first question and then sort of following up I guess on on the previous discussion a little bit and your comments that the change in revenue from one cuda threeq who's not going to be linear you know after taking into account the revenue that you've reserved against and sort of.
Offsetting that with leasing in the pipeline and schedule Commencements are you expecting that decline in recurring revenue to stabilize around these levels I presume the hits like Stein Mart are accounted for in those adjustments I'm. Just curious if you have any sense on how much more of a decline in recurring revenue.
You might expect in the near term.
I thought I I really hate to speculate and I said in my comments, you know that 6.4% certainly wasn't meant as some run rate that I want folks to start using our go forward. It was really just a data point to say okay. Here. We are we're at 6.4% we've got lots of questions John mentioned them.
So what's the next round of PDP coming who is going to be the president goods, but whats the composition of the Senate what are we going to find out what are the vaccines why do people want to adopt there's so many unknowns question I just would take or be irresponsible for me to take that 6.4% and draw any of our you know conclusions around it but I got a job.
You know that has happened a right away and the and the the lease up takes longer so it's not going to be something that's going to be very smooth line. When you look at the you know sort of where his thing settles out it's going to be.
The dynamic sector, yes, Todd to be clear you brought up Stein Mart I mean, it's less than 1% of our of our hbr, but there have been going out of business sales post.
Bankruptcy filing so they're still paying rent. So we'll take we'll feel some of that in the future, but it's less than 1% and we're leasing other spaces to absorb that and frankly, that's when I look at what's been going on you look at the last two quarters I mean for every 10 to go.
Going out of business, there's another tenant stepping up and you look at if you look at the retail landscape right now and you know just throwing out some names I mean, you look at what Dixon has done what bed Bath is doing what best buy is doing what Ross TJ. The grocery guide when you add up.
Your whole multitude, a grocery players that would be great prospects for those Stein Mart boxes that frankly pre co, but you don't want to spend the capital and now they're they're flush with capital. So I want the investment community to think a little longer term here, because we will ultimately.
Come out of this stronger Todd.
It will ultimately be an higher NPV for our properties because the guys that are going down are being replaced by much better long term retailers in a way. It's a good thing for us because we just couldn't you know with all due respect to.
Stock markets, we keep talking about him, but we couldn't we couldn't get them out of the locations for years and now we have this opportunity to bring in much better retailers and increase the any b property by property. So I.
I think if people think a little bit longer term here, especially with a company like ours with a super strong balance sheet and a strong foundation the reward will definitely come up.
No doubt in the as you look at Stein Mart, you hear about an eight dollar range.
Are you sure you're a tenant that generates very little traffic. So it is a huge opportunity in a situation like that the carrying someone much better better co tenancy. So we're actually looking forward to those.
[noise], what do you think in so Stein Mart at $8 in terms of that 64 spaces I guess, the 540 basis points.
Related to the bankrupt tenants.
What do you think based on what you have in negotiation and what you're working on what do you think that the potential.
You know mark looks like on on those those spaces as you as you work through them.
I think when you look at the whole thing Todd too hard to predict right now.
When you talk about Stein Mart since its eight bucks, it's pretty easy to predict that we're going to beat that.
You know I don't want to get into what on all 5% of those BK tenants, but you know the shop spaces are are very different than the box spaces right, so but certainly.
Our track record is very strong there so.
We would we would anticipate we do what we do.
Oh, okay.
Can you talk about the grocery demand that you're seeing across the portfolio and maybe you know in some of the various formats like I know you signed a lease with trader Joe's tanker phase three at Eddy Street, but just curious if you're seeing.
Demand across the portfolio at centers that you do not have a grocery component today and weather.
You know, we should expect to see maybe an increase in grocery lease deals in the coming quarters.
Yeah from my perspective, and then I'll turn.
Part of the time up from my perspective, and on a macro level. The difference today versus pre coated is this the specialty grocer component or section wherever you want to call. It has really strengthened a post into cobot crisis.
And the traditional brochure has.
Also strengthened but when you look at the real change I'd say, the real change would be in the specialty area guys like sprouts and fresh market, but also a little traditionally in the sense that someone like an albertsons is now putting up really strong numbers and you see winn Dixie looking to file an IDE.
Joe et cetera, so back row thought there's just a lot more going on but Tom why don't you get into the yeah. One of the one of the things we like about the space right. Now is just the diversity in square footage.
Trader Joe's scenario, where air's 13 to 15000, and then you have whole foods. All the you got some expansion Leedle sprouts. So we have a wide wide array of square footage is to look at which is always helpful. As we're trying to slough spaces.
These insights et cetera, but the conversations so that's improved without question there was more energy even some of the company, but struggled pretty pandemic are talking to us.
So we look good on that front and then on the on the box side, we feel like we got a strong stable.
You know the value the value you guys, even on some of the smaller spaces. The five belows being very active the total wine et cetera. So the inventories out there for us to react just like we did last time.
Okay, and and John you talked about some of the.
You know fulfillment and omni channel strategies that the retailers are employing you know in the.
The current environment here and sort of accelerating those those efforts.
You know you are you seeing any incremental investments by them in the stores and are they coming back looking at all to lock in term or exercise early options or anything like that.
I mean in terms of the omni channel in and what I've referenced there Todd I think thats really more me, saying or us saying that.
Our properties you know, particularly in the open air genre are very easily suited to adapting to what needs to be done and that we like many of our our brother in really quickly adapted our parking lots created signage and then also allow for areas to do.
[music] curbside pickup, which is not as easy to roll out in the sense that not every single one of the small shops guys are retailers can you know Pat curth side, but in the long run I think what it what we're saying is it's happening very quickly and.
And.
It has been adapted very quickly.
And it's just an whole nother law change for us so.
But as far as them coming to us and saying Hey, we want you to spend money hatteras ours to adapt them no. That's what's really happening is really what sign engine.
Right.
Seven.
Seven.
[noise] something all right great. Thank you.
Alexander Goldfarb mute.
Thank you and our next question comes from Craig Schmidt of Bank of America. Your line is now open.
Thank you.
The small shop occupancy.
So a little bit and third quarter I just wonder if this is the bottom or do you think it could go a little lower from this point going.
Craig I mean look at it it was a a significant drop in one quarter. So when you look at it it really it was actually when.
When you look at the last three quarters, particularly last two it's really centered around a couple of the major players like a scene.
Obviously, we had a lot of us we had a lot of it's seen as a pure one destination maternity. So I would say in terms of that much happening in one quarter I feel like a lot to me in one quarter from our previous experience.
But certainly you can never say never we also had significant pluses and minuses in the restaurant category, where we lost several restaurants, but also replace them.
So I don't know I think it's too early to say that that would be it couldn't be repeated but it was frankly quite a bit in a in one quarter and as I've said pretty pretty focused in on a couple national small shop retailers.
And Craig one other thing is we're as we're moving into November the time. It takes to do a deal get through a lease get through actual occupancy we're starting to put tenant physicians that they will be able to open in a much better situation. So that growth on the small shop and much easier forecasts for us.
Going forward.
Okay, but aside for some restaurants it sounds like the the local players that are pretty healthy.
That's true yeah, I mean, when you when you look at even the deals that we did in the quarter Interestingly enough I mean of the 78 total deals that we did in the quarter 64 of those were shops. So we did a lot of shop deals. So again, we took a hit because it was concentrated.
Good.
These national guys that have multiple locations.
But definitely demand in the small shop space and it is pretty wide.
In the sense of various types of retailers in the probably the most interesting thing that will come out of this when we get into 2021 is the rebirth of a lot of the smaller restaurants and fitness guides. For example that will you know they'll be new operators to step in and do different types of civil.
Older products, but different so I think the demand is out there and it's a pretty healthy environment and again I think we've seen that our economy everybody saw the print this morning, and GDP I mean, when you're open you know, we do business and that's an important element in all of this.
And Craig one thing I'll mention a function of the loss in our small shop occupancy is the fact that it was so high to begin with we were at 92.5% sector, leading at the end of the year. So that demonstrates that we are incredibly good at.
Filling or small shop space and my prediction is that we continue to make progress.
On a relative basis in that area.
Okay, and then just last how many how long is it going to take to refill some of that smaller national space, you get the newer tenants and with the higher rents.
Yeah, I mean, we can't tell you exactly we can only tell you that generally small shop leasing yeah.
From from vacancy to the next tenant paying rent is significantly less than what we see on the box side. So you know depending on the shop, depending on the location it could be as quick as three or four months. It could take nine to 12. It it really depends on the situation Greg Theres always fair.
Variability I would tell you at least on the small stop side you have a much better chance of a tenant stepping in and taking the space as is which means that our turnaround time could be three months, a certain that almost never happens in the box category right. So.
That's I think what Tom was just saying a second ago is that our ability to turn these spaces quicker is absolutely there I don't want to make a a a macro statement that we know that it will be X because it's just too much variability.
Okay. Thanks for the color guys.
Absolutely. Thank you.
Thank you and our next question comes from Barry Oxford of T.A. Davidson. Your line is now open.
Great John when we think or look at valuation in.
In the retail sector and at your property type.
Type level, well located assets and we look at pre Tobin post Kobe that I know, you're not an acquisition, but I'm sure you're looking at some of the stuff that is up for sale [noise].
My my gut is telling me that from properties like that the cap rate expansion, probably hasn't been as great as maybe some people think that it is.
Yeah, Barry we talked about this last quarter and I would tell you that the termed cap rate expansion. It just doesn't exist in the in the type of properties that we want to own and generally speaking the type of properties that we do have in fact, as we said last quarter. Your I think you will see some.
Some things trade I think it'll be very few and far between trades.
And once they do start to trade they would be probably at or below cap rates that you've seen in the past for high quality properties. You know we were going to go through this period, where we're very little trades, but.
But then all of a sudden I think a lot will trade. So my guess is as we get into 2021, you probably see a lot more activity just based on you know more capital flow Oh man cap.
Cap rates will be exactly where they were so when you look at properties like ours is kind of why we mentioned what we said I mean this dislocation that occurred the decline in these values. It's just stratospheric, we wrong and you know it it implies you know really.
The high cap rates it just doesnt make any sense.
Oh for.
For too many reasons, even mentioned right. So long story short yeah, I I don't see that happening there will be a handful a trade that you know strong.
Whatever word you want to use whatever attitude you want to use aggressive cap rates will be a handful of.
But in terms of the dislocation in cap rates going up on deal. That's just that's a whole nother sector is in a whole another part of retail and even in particularly weak or open air centers that they.
They might trade and then one of these services picks up picked it up in and there's this attribution to all of retail. It's just silly I mean, I think smart institutional investors know the stuff that we own it's very hard to come by the way I would have actually the stuff that we've got to like.
Obviously cap rates tighten up and dollar basis that they're going to have folks going in there and realizing there is some upside in the occupancy. So I think you know when you start seeing the transaction market open up again on a nominal basis, you're going to see some pretty.
Hi, opening cap rates and I think when you look at our Investor presentation page 12 of our Investor presentation highlights this a little bit frankly that the cap rates that we use there on applied cap rate, even the lowest one is probably too I believe.
So, but we're just trying to say this is this a silly.
Right right.
John just carrying through on that one.
What is the appetite for banks to do retail loans or look Barry you got to kind of bifurcate it.
Yeah, I I would say the latter I think I'd say, there's a bifurcation I'd say that you know banks insurance companies other institutional investors clearly.
During the summer, we're saying Whoa, you know we don't we don't.
What we don't know what's going on at retail and then you have the confusion of the mainstream media pounding away at a narrative that is a broad roche broad brush stroke on retail, but again make no sense. So I think that right now there's probably very.
Very little in the way of that activity, but when you look at the stuff that we own insurance companies banks, they're going to be getting the land in our lending against that high quality retail that has a grocery component neighborhood.
Neighborhood centers that are smaller and Roman remember tons of liquidity as we sit here today with 10 31 activity, maybe that even rolled heavy into the fourth quarter of people worried that that potentially at risk, but who knows so I I think that its a.
It's starting to trickle buried in there will be a lot more later.
Perfect. Thanks for the commentary guys.
Thank you.
Thank you and again, ladies and gentlemen, if he would like to ask a question at this time. Please press Star then one I have touched on telephone.
We do have a follow up question from Florida, San Diego Most Compass point. Your line is now open.
Hey, guys just a follow up question here on I something that that Heath you mentioned on your.
Renewal spreads on non auction or tenants of 11%, which seems pretty pretty healthy.
If I wanted to ask you guys. So if you were to Mark your portfolio to market. It is that sort of the delta or I mean.
Yep.
So what is the risk of rents going down in your opinion.
I would say worse have put it there, but that's the best barometer I think what's happening.
Folio because again when your goods.
Option renewal the levers as equal you know the tenant and the level of our CEREC across table. Each other we haven't set the right yet.
And.
Decide they'd like to stay in the space and.
And so we end up negotiating rent and last quarter. It was 12% and this quarter at 11%. So even in the teeth of the pandemic. We have tenants that were willing to protect her ran up so yeah I I think I made a broad brush review, what I think the total box market in the portfolio is because.
Let's go back to that fact, that's the best barometer because it doesn't have the ta dollars in there is really excellent your spreads and sometimes these tenants will actually look at alternatives to compare to our real estate and that that is consistently worked in our favor or people assess options.
This is this is where we want to be this was the center. This is the location. So I think all of those points towards positive trends for us.
Let's say floors in this particular quarter.
There were 28 up on which is a lot number one and number two they were all small shops. So you know I wouldn't I wouldn't try to there is no linear connects connection to anything there other than to say.
As he just said two quarters in a row of double digit non option renewal spreads indicate that we're in a pretty healthy business. Okay. That's the takeaway we get so focused on thousands of metrics that everybody wants to know what color stock world.
Gary today, but the reality is you know the business does it move quarter to quarter, you got to look at longer term trends.
Why we talked about you know I don't think people should really care right now quarter to quarter FF FFO on a quarter to quarter anything. The reality is we've gone through a huge shock to the system and are going through we are recovering from that are particular company.
He is very strong from a balance sheet and the stability perspective, and very well positioned to take advantage, but it takes a little bit of time to do that but from an investor's perspective. The stock is trading as though this is forever, which is really silly.
So I think we're now in this mode of Hey, we're moving forward man, we're not afraid of this thing we're dealing with this thing and that's the message. We want you guys to take away we're dealing with it we respect that we we did a lot of stuff really early but other people Didnt do which is why we're now doing what we're doing.
So without getting too much on the soapbox there I think I think we're really ready to move forward.
Thanks, Todd it's actually just.
Making making sure I understand it correctly. So that was the 11 times based it's all small shops that had no anchor boxes in there typically your some of your peers have said that the spreads that they get on their anchor boxes are typically much much larger is that is that your experience in the past as well well.
Well it just depends on the deal typically typical anchor deal.
Built in options right, there's very few anchor deals its occasional that you've just you know an anchor expires that you you youve. The options are gone right. So most anchor deals will have four or five five year option with automatic built in increases general.
Early you know two 3% every five years in that option periods, depending on the deal. So no I I think it's a very different analysis.
And I think Thats why we say this is really more an indication of the health of the overall industry because the if the shopping center was weak and was dying why would a small shop tend to be willing to pay 10 11, 12% more when they have to.
Opportunity to say to US Hey, guys were leaving so we're not going to pay the rent increase.
That's the point, we're trying to make is the industry itself.
Got some help than it otherwise we couldn't do that more particularly our properties. So yes. This particular quarter for us. It was all small shops there is no.
No anchors in this particular quarter, but when an anchor expires you might get a really big bomb. If it was a 30 year old lease it has run out of options and we had that happen too okay, but it's just not it's just much more rare.
Got it thanks on that that's right.
Thank you.
Xplores thing.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to John Kite CEO for any closing remarks.
Okay, well again, thank you everyone for dialing in today and we hope that you continue to.
Stay healthy thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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