Q1 2022 Kite Realty Group Trust Earnings Call
Reminder, today's program May be recorded I would now like to introduce your host for today's program, Brian Mccarthy Senior Vice President corporate marketing and communications. Please go ahead.
Thank you and good morning, everyone welcome to Kite Realty group's first quarter earnings call. Some of today's comments contain forward looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties.
Actual results may differ materially from these statements.
For more information about the factors that can adversely affect the companys 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 yesterday's earnings press release available on our website for reconciliation of these non-GAAP performance measures to our.
<unk> financial results.
On the call with me today from Kite Realty Group are chairman and Chief Executive Officer, John cut President and Chief Operating Officer, Tom Mcgowan.
<unk>, 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 Colton.
I'll now turn the call over to John .
Alright, Thanks, a lot Brian .
And good morning, everyone.
As you can imagine our team has been counting down the days to yesterday's release and this morning's earnings call. We're eager to share details regarding our exceptional first quarter results and outperformance across the board.
2022 is shaping up to be a monumental year for <unk>.
It goes without saying that we have high quality real estate in high quality places.
But that really doesn't mean anything without a high performing team and communicate well and works in lock step towards our operational goals for.
For those of you that were concerned about how our ability to swiftly integrate post merger you can rest at ease.
As reported yesterday <unk> had <unk> <unk> per share of <unk> 46.
Beating consensus estimates by <unk> <unk> per share and representing a 35% increase per share over the comparable period last year, our same property NOI growth for the quarter was five 9% as compared to the same period in 2021.
Keith will give more details around the components of each metric, but suffice to say, we blew past expectations due to a combination of operational outperformance and lower bad debt.
As invigorating as this past quarter feels I'm, even more energized about the future based on our tremendous leasing results.
<unk> signed 182 leases representing over 1 million square feet this quarter, including nine anchor leases.
This strong leasing volume was bolstered by 16% blended cash spreads on comparable new and renewal leases.
These spreads were 3% higher than the blended spreads we achieved in the fourth quarter of 2021.
Going to speculate that once again these blended spreads will be amongst the highest if not the highest in the sector.
I'd also like to call out the cash spread on our first quarter comparable non option renewals was approximately 12% against the backdrop of a 90% retention ratio.
Again this is an important indicator of where market rents are headed for the <unk> portfolio.
<unk> is experiencing strong demand from a deep and diverse set of retailers across all of our open air products in fact, our national retailers, becoming increasingly agnostic to format type and more keenly focused on best in class real estate.
This dovetails nicely with our diverse set of high quality and well located properties.
Retailers are not only flexible with respect to format, but we're also willing to modify typical sizing that their space.
The current environment has led to some very long and productive lease approval meetings, where we're seeing multiple tenants vying for the same space or tenants that are willing to occupy spaces that have been persistently vacant.
We intend to we intend to ride these tailwind into historically high occupancy levels.
The portfolio has signed not open NOI of approximately $37 million, which will primarily come online during the back half of 2022 and the first half of 2023.
This is an increase of $4 million as compared to last quarter, which is a result of $11 million of new signed not open NOI, partially offset by $7 million of new NOI that came online this quarter.
The spread between leased and occupied for our retail operating portfolio has also grown to 320 basis points.
This bodes extremely well for our growth trajectory going into 2023 as the rents from those leases will be fully realized.
As a reminder, the $37 million of signed not open signed not open pipeline represents 7% of our projected future NOI growth as shown on page seven of our investor deck and as only a portion of the near term growth opportunity leasing our active developments and the.
Balance of the portfolio to pre pandemic levels, which is very achievable in the current environment.
Would equate to an additional $31 million of NOI coming online over the next several years.
We've also been busy on the capital allocation front, we acquired two attractive sunbelt assets for a total of $66 million. The first of which was pebble market pebble marketplace Smiths anchored center in the desirable Green Valley area of Las Vegas, We also acquired a sprouts in total wine there are literally attached.
Our Mcarthur crossing center in the Las Colinas area of the Dallas MSA.
We love adjacency acquisitions, especially when they can create a halo value by compressing the cap rate on the balance of the center.
Collectively these two assets feature a three mile population of over 116000 people and an average household income of $115000.
We've also made progress on the development front all of our active developments are coming along on time and or under budget.
As for the entitled Land Bank, we've unearth additional value propositions as promised and we are taking a bespoke approach to every single parcel over the course of 2022, we look forward to sharing our creative vision for maximizing value and minimizing risk the best thing about the entitled Land Bank is the inverse.
Community historically attributed very little value to the land and we certainly didn't put a price tag on it when we were underwriting the merger, but we see excellent opportunities ahead.
The culmination of all the great things I've discussed is allowing us to raise our 2022 <unk> as adjusted guidance to $1 77 per share at the midpoint.
We're also raising our 2022 same property NOI growth assumption to a range of $2 two 5% to 325%.
Before turning the call over to Keith I want to address some of the macro elements that are on the horizon.
Reits have historically outperformed broader market's turning inflationary periods.
As prices rise in sales increase it follows that the tenant occupancy costs should decline, allowing us to continue to drive rents.
As an open air shopping center owner, we have a healthy balance between the duration of our assets and liabilities.
Based on our embedded escalators and our ability to turn it over 10% to 15% of our leases every year, we feel well positioned to keep pace with inflation.
Likewise, our longer lease durations temper the impact of any potential recessionary environment.
On the supply chain front, we're acutely focused on ensuring all tenant build outs are on time and on budget.
Internally, we've been referring to 2022 as the year of the RCD, which stands for rent commencement date.
Like these are <unk> hands on management style shines.
Have very experienced tenant coordination and construction teams that not only ensure we deliver on time, but help tenants with any challenges they may experience.
Due to our tenacious and Deloitte approach, we're currently outperforming on deliveries.
Finally, I want to address the change to our share buyback program.
The primary purpose is to properly size. This critical capital allocation tool in light of our post merger market capitalization with that said we are keenly aware of the disconnect between our stock price and our underlying fundamentals.
We have great real estate, a best in class platform, and we will continue to outperform until that disconnect resolves itself.
Whether you are a value investor or growth Investor I can't think of a name in our space that screens more attractively.
As always thanks again to the entire <unk> team for their hard work and dedication.
<unk> is nothing without these amazing people.
Can't emphasize enough how proud I am of what we've accomplished as a team, but more importantly, what we will accomplish together in the future.
Now I'll turn the call over to Heath to provide more details.
Thanks to all of you for joining us today, what a great quarter and what a great sense of pride to see what our collective team has accomplished and will accomplish over the course of 2022, one team one focus.
As always our goal is to provide our investors with transparent and best in class disclosure.
It will be much easier on a go forward basis now that we've had our first full quarter of combined results, let's dive in.
For the first quarter <unk> generated 46 of <unk> per share both on a NAREIT and on an as adjusted basis as compared to NAREIT, our as adjusted <unk> results exclude the positive impact of $1 1 million of prior period collections.
Offset by a $900000 add back of merger related costs.
Our same property NOI growth for the first quarter is five 9% when excluding the impact of prior period collections.
Please note that unlike last quarter the same property pool for the first quarter includes both the <unk> and the RPI legacy assets.
500 basis points of this growth was driven by higher minimum rent and overage rents with the balance being attributed to lower bad debt. Please note that the first quarter same property NOI is elevated due to heightened reserves taken in the first quarter of 2021.
As you May recall, there was a lot of uncertainty in the first quarter of last year with Covid.
As the macro environment stabilized and collections returned to historical norms.
Many of those reserves were reversed in the second quarter. So what does this all mean, we expect our same store results to be muted in the second quarter and then accelerate to the second half of 2022 as we begin to receive some of the $37 million of signed not opened NOI pay.
Page eight of our Investor deck will help you understand the cadence of the rent commencement dates.
Hopefully this will help contextualize all of our full year same property NOI outlook.
As detailed on page 26 of our investor deck, our balance sheet and liquidity profile not only remained solid but continue to improve our net debt to EBITDA was five seven times down from six times last quarter, and a $37 million of signed not open NOI or net debt to EBITDA would be five four times.
We are in a great position to not only weather any storm, but to also take advantage of any opportunities that present themselves.
As John alluded to earlier, we are raising <unk> as adjusted guidance to $1 74 to $1 80 per share the variance from NAREIT <unk> is approximately <unk>, which represents our estimate of $4 million of nonrecurring merger related cost the.
<unk> <unk> increase at the midpoint is attributable to cash items with leasing outperformance overdressed termination fees and accelerated development fees at the midpoint of our <unk> as adjusted we lowered our bad debt assumption to 125% of revenues, while the current reserve is significantly higher than our historical bad debt.
Run rate is by no means represents any specific credit concerns rather it reflects our continuing conservatism with respect to macro uncertainty that is not within our control. It's important to note that despite our recent acquisition activity our guidance still assumes a net transactional impact will be neutral to earnings.
Before turning the call over to Q&A.
Wanted to address one additional macro item, which is the recent rise in interest rates.
We are in the business of owning and operating best in class real estate and we are by no means in the business of interest rate speculation, but.
Our primary tool we use to manage interest rate exposure is to maintain a well ladder maturity schedule that allows us to average our cost of debt over time.
In terms of our planned capital markets activity, we intend to be optimistic this year and when the time is right. We will start to retire our 2023 maturities.
Thank you to everyone for joining the call today.
Operator. This concludes our prepared remarks, please open the line for questions.
Certainly ladies and gentlemen, if you have any.
At this time. Please press Star then one our first question comes from the line of Michael Bilerman from Citi. Your question. Please.
Hey, John It's Michael I apologize I joined a little bit late but I was wondering John if you can sort of outlying capital recycling and I guess sort of your plans to acquire.
Acquire but try to dispose assets following the merger I'm sure a re look at.
At the portfolio could lead to incremental disposition can you just talk a little bit about what your plans are.
Sure.
Well as I.
As we said in the prepared remarks.
We've acquired two properties recently for $66 million and we had mentioned in the remarks that we still intend on.
All of our kind of acquisition disposition activity to be neutral to earnings. This year. So that's the intention.
As a matter of fact in terms of the two that we acquired.
We're assuming that we would be matched funding those with a couple of dispositions.
Candidly, one of which is under contract and other which is being negotiated so I think I think what I would say macro Michael is that look when you look at our results.
We obviously have a very good portfolio and produced.
Very good results and we're very happy with that portfolio that said, we're always looking to.
Do things on the margins, we're not looking to do massive.
Acquisition sales, we don't our balance sheet is in great position. So I would say what we do is going to be pretty strategic much like acquired these two properties that we like a lot.
Probably take advantage of the market as it is today and and match fund those down the road, but we.
We love the portfolio, we love the results we're getting.
So you don't feel a need.
Need to go deeper putting aside potential dilution, but just looking at the combined portfolio and taking a deeper cut about sort of where you want to be obviously.
You have a big sunbelt portfolio, but you weren't more coastal in northeast with the merger I just didn't know whether theres an opportunity to.
We cycled more linear.
Your portfolio more where you would want it to be.
Yes, I mean, I think I think I think as we move through the year.
We will when we're looking to do things it will probably be with those geographies in mind.
But that said I mean I've talked about this before when you look at some of the assets that we picked up vis vis the merger.
And Seattle and D C and in.
Along island.
We have some great property, so I don't know that it's so much about the <unk>.
Portfolio composition of <unk>.
What came in the merger and what we had before it's really going to be more what it's always been which is to say if we feel a piece of real estate has maximized its value.
<unk> has a declining value then we would look to dispose of that but it's really it's not going to be some massive thing that as a result of the merger.
And then just second question, John with ICSC coming up obviously is the big first.
And personally along with the combined company if they don't make December you had that much going yet.
Just talk a little bit about what the goals are going to be for the combined organization at the conference what sort of roster of meetings, you had and really what youre going to try to accomplish.
The convention a couple of weeks.
Sure I'll start with <unk>.
Tom dig into that but from.
From a macro perspective, I mean, we have great momentum great.
Great tailwind right now our portfolio is performing.
One of the highest levels in the business.
So we're just going to look to lean into that and continue to push relationships that we have and that we've grown into.
And when you look at our results from the past quarter and the size and the depth and breadth of the leasing that we did in the spreads that we generated from that that's what.
We will continue to do Michael So, it's really more and as I tried to say in my prepared remarks. This is an integrated one team one focused company.
The idea that we have any issues regarding that that's gone. So now it's leaning into that and really and expanding our relationships, but Tom you want to talk about some specifics maybe sure.
I think it's critical that we hit all of our property types and we have.
A more diverse base that will be comment.
<unk> Suisse, and it's going to be critical that we nurture our existing tenants, but really focus on a lot of these new relationships that were on.
We're seeing particularly in the lifestyle centers for we're doing.
Deals with some great tenants that haven't traditionally.
Looked at coming out people like the buckle Nike Aerie.
A whole host of those tenants that we want to continue and expand those relationships. So we have.
Diverse outline of our tenant base as possible. So we have we have a lot on our plate we have a we have.
Group coming and the rule is a fear out there you've got a full book so we're looking forward to.
Alright, great guys. Thanks for the time.
Thanks, Michael.
Thank you. Our next question comes from the line of Florida spun from Compass point Your question. Please.
Thanks for taking my question guys.
No.
Obviously results look.
Go ahead of expectations looks you took up your guide, but your guide sort of implies.
Lower cadence of <unk>.
That you had in the first quarter.
Is that are you guys being overly conservative.
I know you took your bad debt down.
Down a little bit, but it still seems pretty elevated at 125 basis points I mean, how much more room is there in your view.
In terms of earnings for this year.
Yes Floris.
Youre correct in how you outlined that but clearly the as we tried to say in our in our prepared remarks.
Look it's.
We're four months into the year basically so when you look at you look out at our projection you're going to still be prudent with some conservatism.
The one in a quarter.
Bad debt is the primary driver of that cadence that you referred to obviously in the first quarter, our bad debt was less than 1%. So.
If things were to continue on the path that we're on right now we would we would.
Expect to do quite well.
But.
It's early in the year and so that's why we've adjusted to the extent, we've adjusted that said I mean, we're extremely optimistic about what's out there right now and based on the leasing performance and based on the rent spreads that we're able to generate on a cash basis, we feel very good about it Keith do you want to add.
Yes, two more specific items floors that are have indicated sort of slow is.
We had term fees as this quarter our budget doesn't have any term fees in it whatsoever. So that's sort of item that is not.
Budgeted for the balance of the year, we outperformed on overage rent, which is great and G&A timing. So the G&A was light in the first quarter and then as we go through the balance of the back half of the year.
The JV pick up primarily due to some it projects that we're undertaking in the back half of the year. So that's why the cadence is in exactly the same.
Got it.
Just.
I know the <unk> pipeline.
Appears pretty.
Impressive.
Yes.
At.
At the at the levels that you guys have it.
Particularly it's almost the same size as one of your peers, who is a portfolio. That's twice the size, but maybe talk about some of the additional stuff that you guys.
<unk> here in terms of your additional potential lease up I think you said about $21 million of additional potential rental income or 4% of.
Of your.
Sure.
Yes.
NOI.
What is your.
What do you think it's possible you said you can get back to pre Covid occupancy can you remind us again, what that was particularly in the small shop space versus where we are today.
Do you see a scenario, where you could actually exceed pre COVID-19 levels.
Well pre COVID-19 and the small shops Floris, we were at 92, 5%, which was sector leading so.
We think we can get back there.
What we do we execute we have to go out and lease that space.
And then the anchors at pre Covid, where 98%. So do we think we can get back there we absolutely do does it happen just by saying it now you have to go out and execute.
And we feel confident in that ability but.
But yes, that's why we pointed out and if you look at our investor deck.
There is a great page page, seven which kind of highlights that makes it pretty easy to do the math and it makes it pretty easy to do the disconnect between current stock price.
Real values. So yes, we think we can get there we got to do we've got to do the work and that's what we're that's what we're going to do.
Thanks, maybe last last question for me, maybe talk about you talked about the match funding.
Would it be right to assume that some of your land holdings, which you estimate could.
We have a value of $125 million to $180 million.
Are those likely candidates for monetization.
Yes, I mean, I think I think we mentioned in our remarks florists that.
We are not only do we have the lease up to pre COVID-19 the SNL.
The active developments, which are in lease up right now in under construction and on pace.
We have the land holdings and one of the one of the beautiful things about that is that we certainly attributed no value to that and our analysis of the merger and knew that it was upside and so it gives us the opportunity and the luxury of taking our time on a case by case basis.
Which is what we mean by bespoke rate that we're going to take our time on each individual landholding and they vary they vary dramatically in terms of stages.
For example, since you know the DC market well one Loudoun is.
Spectacular.
Property. So we have a lot of Optionality is the word I would use so that's a long way of saying sure there is.
As a possibility that we would look to utilize.
Sales proceeds there in some form or another but there's also the possibility that we have a few assets that.
Or we could maximize the value and put that.
Recycle that capital into higher IRR. So thats, what we do we're always analyzing where is the highest IRR, we can get with the least amount of risk.
Our primary job.
So.
We're going to look at all of those things.
Thanks, Sean.
Thank you.
Thank you. Our next question comes from the line of RJ Milligan from Raymond James Your question. Please.
Yeah, Hey, guys. Good morning, I was just looking for a little bit more color on the leasing spreads and I know one specific quarter doesn't necessarily.
Make a trend because there could be one or two large leases that move it either in either direction, but I'm. Just curious I mean, the trend has been positive or increasing over the past couple of quarters. So I'm just curious.
Is there a specific.
If archetype, that's driving those higher rents or specific category thats driving those higher rents.
Well in this quarter.
You pointed out youre right to say each quarter is different.
But this particular quarter it was really interesting because of the number of deals and the breadth of them.
And Tom can talk about this a little too but bottom line is in terms of the new leasing we did a lot of leasing and some of the lifestyle deals that generated very very strong results.
And then but that's that's a microcosm because we did I don't know 24, new leases.
Then on the options and the renewals that was really interesting too because the non option renewal at 12% is spectacular.
And that was I think like 45 deals. So it was across the board, but Tom you want to talk about it a little more so when I when I mentioned about making sure we're expanding our tenant base.
Looking for new opportunities as we try to grow this portfolio one of the one of the big drivers for the simple fact that our lifestyle centers, we picked up new names to the company people like the Buffalo Nike Harry Hay day, I mean, they go on and on but we also had strong strong.
Furniture store comps in different areas, where we had a tactical so it was it was definitely spread out but these these higher end tenants that may not typically come to open air clearly drove us in the box side held up very strong even though there was only two comps in terms of that percentage as well.
Ill.
Okay, Great and then my second question is just how you how you were thinking about and I think John you made some comments earlier on.
Increase of the buyback program, which is reflective of the increased size of the overall company, but thinking about the balancing between leverage and buying back shares.
Given that the discount they are trading at so just how do you think about.
Utilizing that program over the course of the year.
Yes, I mean, I think I think it's exactly what we laid out our.
Jay which is that we wanted to make sure it was.
Sized appropriately so that's the first step youre right that whenever you look at this and you're and you're trying to determine capital allocation that.
You have to look at that your balance sheet in conjunction with what you might be doing on the capital front as Heath mentioned right now our balance sheet is extremely strong and trending even stronger.
And we we.
We produced Fabulous results this quarter.
We've got a lot going on we have a lot of upside so it needs to be there in the case that that disconnect isn't resolved naturally we think it will be.
I think in a couple of weeks when we see.
We see the first quarter results of shareholder buying and I think there's some really really great names that have come into into our name in some pretty smart investors pretty astute. So hopefully that helps as well, but bottom line, we're going to keep driving keep operating keep producing and we hope that that.
That takes care of it but if not that's an option that we need to have available to us.
So I guess in summary, not buying probably wouldn't be aggressively buying shares at this price today, but if the discount persists that's a potential for maybe the back half of the year.
Yeah, I don't want to speculate on timing of at RJ.
It's what I said I mean, we need to have this available to us we believe like many others that.
The current value doesn't reflect the value of the business.
There's a lot of different ways to squeeze that value out of that is just one of them.
But I think theres a lot of people who recognize this is a pretty damn good platform and has a lot of upside.
Great. Thanks, guys. Thank.
Thank you.
Thank you. Our next question comes from the line of Alexander Goldfarb from Piper Sandler Your question. Please.
Hey, good morning out there.
Two questions first on the signed but not yet open.
We've seen that.
In periods, where there is great pipelines of signed but not yet open but when we look at you would actually coming into earnings. It takes a long time and the gap between occupied versus that that side, but not yet open sort of persists.
So we don't get carried away on the on the modeling side.
Are there offsets to this or like are you more aggressively shaking out.
So that even though youre getting this $37 million of annualized and that's offset to some degree as you.
Readout weaker performing tenants and replace those so I'm just trying to get a sense for how much of it truly comes in to earnings versus as you got more actively pursue the portfolio because of the demand.
Yes that sort of gap persist longer than what we might.
Just by looking at the presentation.
Yes, so I think there's really probably two things that will offset.
That growth one is just bad debt right. So what's your NOI.
75 basis points.
Our revenues, which is a typical run rate year, that's 1% of NOI has been just that debt and then thats your natural explorations, but as John mentioned in his opening remarks.
We're sitting at 90% retention right now so that feels really good. So I think at the end of the day in order for us to realize about $37 million, we have to grow that occupancy right. We have to shrink the spread between leased and occupied I think youre going to see it be fairly elevated even through the course of the next quarter because the leasing velocity to date as it has been so great, but I don't see it closing anytime soon.
But in the meantime, we're opening up NOI now Jonathan remarks, we signed $11 million of new NOI in the first quarter.
And $7 million of it came on so thats why are signed but not opened only went up by $4 million. So again, yes. There are some natural offsets to it and the underlying assumption here is you have to grow your economic occupancy, which we intend to do so yes.
Yes, I mean personally Alex I look at it it's an extreme positive.
The offsets would be just whatever's happening naturally in the business.
And being at a 90% retention rate when we historically were in the <unk> mid.
Mid Eighty's I guess, that's a big deal and again, that's why I keep mentioning the non option renewal spread at 12% so assuming that things stay as they are.
I see it as a <unk>.
<unk> upside.
John don't get me wrong I agree I just.
Any thoughts.
It's getting in reality check so we don't.
Oh sure things.
And Thats, what Alex that's why we wanted to be clear about the timing right.
This is very back half 'twenty two weighted and then 23. So I think it's never easy from your chair to figure that part out but it's clearly.
A driver into 2023.
Yes, Okay and the second question is.
A lot of headlines recently decline in online sales.
<unk> physical store sales are rising obviously.
Collectively we all we all like that.
But ah lightened up Amazon shareholders on the line.
But when you think about that is it.
Reality that online sales truly are declining in physical stores are rising or are the tenants themselves starting to reallocate and say hey, it's not the point of purchase where we're going to flag at the point of where the fulfillment point. So if it's been curbside.
Or.
<unk> delivered from a store to someone's house, we're going to start crediting those store sales. So I'm trying to figure out how much is actual.
Three changes in online sales versus in store sales versus the tenants reallocating, where theyre, giving credit for those sales.
I can't really speak to the reallocation part of your question much.
Don't get the sense that that's what's driving this this macro trend I get the sense that candidly.
As we talked about quite a bit during COVID-19 .
Physical retail became very important to people at certain as Covid moved along and there is a bond I think that was built during that period, where a lot of physical retailers were able to really take care of their customer in a much more rapid way than even.
Online and at some point.
I can remember you writing notes about this.
Several quarters back that it was pretty clear that the <unk>.
Online penetration was slowing down so look in the end of the day. It's all it's all it's all interconnected.
There is really only one material online only and theyre not even really online only anymore, which would be Amazon and everything else kind of runs through our tenants and our customers.
And when you look at foot traffic also I mean, which we have a slide in our investor deck.
In the quarter were over 100 million visits this is only one company.
And the open air space.
And we did 100 million visits in the quarter. So it just shows clear clear traction right.
And it's why we have the results that we have.
So I feel very very good about that Alex said I think it is it is a positive trend in our direction and it shows one more indicator of the strength of physical retail and the importance of physical retail in the distribution channel.
Okay. Thank you John .
Thanks.
Thank you. Our next question comes from the line of Todd Thomas from Keybanc capital.
Your question please.
Hi, Thanks, Good morning, John you mentioned in your discussion about the leasing spreads.
During the quarter that the lifestyle segment was particularly strong.
And you picked up a number of lifestyle assets.
And assets with greater lifestyle tenant mix I guess with the RPI portfolio I'm curious if you could talk a little bit more about that how that product's performing and recovering at this point in the cycle.
Yes, I mean, as both Tom and I mentioned.
We had some very strong results.
From multiple properties that would kind of be in that segment and candidly for us there is theres kind of a merger of lifestyle and mixed use.
We basically see those products.
Very similar.
And it just comes down to a nuance of a definition.
But really I mean, when you look at the amount of deals we did in the quarter Todd.
It was very well balanced against all of our property segments.
Essentially kind of the grocery segment the power segment the lifestyle segment the mixed use segment.
Community Center segment and to our point and what Tom was mentioning I believe was this.
Just interplay amongst all of these products with the same retailers.
And these retailers are finding that they can do significant sales within our properties at lower cost Occupancies, which is producing more EBITDA for them. So I don't want to get too caught up.
Any particular genre of our products because they're all super strong right now, but yes, we were one of the things we said when we why we love the deal that we did is it did expose us to this other element.
Mixed use and lifestyle more so than we were before and we knew at that point in time, there was massive growth trajectory there.
Now we're seeing it and you continue to just see this idea that open air it's just a very very productive asset.
For most of the retailers we deal with.
I'm Super positive about it right now.
There is no doubt trends nationally.
People want to be together to live work play.
Turning to utilize speech on it yesterday of a thousand.
People without a one block is how you activate so all of these all of these lifestyle centers are providing that too to the properties. So it just allows us to kind of ride this wave of positive momentum.
I think the pent up demand for experiences and another reason why we.
Really like the lifestyle center sector and I think that's also part of the reason why Youre seeing Amazon sells tempers, because you can't sell them experience online right. So again, all good stuff and we really really appreciate that exposure to this new sector for us.
Are the occupancy gains and is the rent growth that you're experiencing in that segment is it outsized.
Today as you as you kind of look out over the next several quarters is it outsized relative to the community and neighborhood centers.
I mean, not particularly because youre when you look at the total when you look at the averages they kind of blend out Todd I mean sure is there is there a handful of deals in a particular for example, like at Southlake in Dallas, which is just <unk>.
Tackler property, yes, there is.
There is.
There's going to be some really large.
Opportunities for us there to drive rents, but there is also large opportunities for us to drive rents.
At a at a public center in Naples, So it's really just so demand driven right now and supply.
Is hasnt moved much in the last 10 plus years. So the dynamics are very simple economics are working in our favor and it looks like it will continue for a while and as Heath just said when you get this blend of necessity entertainment experience Youre just position smack Dab in the middle of whats going.
On in the economy.
And don't forget I mean, I know, there's a lot of there is for whatever reason, there's negativity in the air.
With the world that we live in but the reality is there is a lot of pent up capital to be spent yet and a lot of ways. So I think we're just positioned really well for that and as far as the mixed use goes.
Lifestyle mixed use Todd we're also getting a bigger exposure to the multifamily side right. So we've got some opportunities there as well.
Okay, and then in terms of tenant retention you mentioned that was about 90% in the quarter. How long do you think these elevated levels of.
Tenant retention could could persist.
Tough tough to call that.
Tough to call that.
Certainly as we sit here today, and we look at the upcoming quarter that we're actually in.
It feels very good and again Thats why we wanted to be clear that.
With our with our guidance, we felt very comfortable raising it but yet we still maintain some conservatism because of the macro world, but in terms of the micro that we live in every day.
We're in a great place and our portfolio was outstanding I think it stacks up against anybody.
And I think people are beginning to figure that out so we feel very good about continuing to push that but it's unpredictable.
One quarter could be different than another quarter. So I will look at the trends over years not quarters.
Supply is definitely tightening which is going to work to our advantage.
Okay.
That's helpful and just a last one if I could real quick on the investments completed in the quarter.
And after the quarter can you can you provide a cap rate I guess on.
Comparable marketplace and the two boxes at Mcarthur Center.
Well, we didn't put that didn't.
Didn't really release these Todd, but I would just say that they were they were market cap rates in the fives and we would be looking as I said, the recycle and frankly, probably at tighter lower cap rates than when we bought out.
Okay alright, thank you.
You.
Thank you. Our next question comes from the line of Chris Lucas from capital One your question. Please.
Hey, good morning, everybody just a couple of quick follow ups more definitional than anything.
As it relates to the retention rate for the quarter I guess, John just thinking historically.
That is good as you've seen has there been periods when it's been higher.
That's pretty damn good.
Chris.
I think 90 is pretty pretty good and I can't remember seeing it much higher than that.
And candidly, it's one of these things that it's not your primary focus when you are in a major kind of thinking about new leasing, but as our new leasing contracts, because we have less space as it becomes a bigger focus in.
It's been a really good place right now and it's super profitable.
Okay. So as we think about retention.
Like in the current environment, Youre thinking retention and tenant fallout is sort of the same thing, but that at some point down the road that those can diverge as you actually try to push.
Yes, I mean empire potentially lose tenants as a result.
Sure when you get to when you get back to where we were occupancy levels pre COVID-19 .
And you're at 98% and the anchors and $92 five in the shops, you start to really price dynamically right and you might let things rollover you might.
But again, that's why I wanted to come back to that non option renewals spread because it wasn't like we were renewing people at low spreads right. We were renewing them in fact, the non option renewal was almost I think the I think the option renewal spreads were probably six 5%. So that shows you right. There when we had a free.
Shot.
<unk>.
We were able to price it very dynamically. So so no I think as we lease up more and more we probably aren't as focused on that number because youre more focused on the marginal dollar at that point right, Chris just trying to drive that.
And the merchandising mix, we you can't lose sight of that too. So that's why I never good to just focus in on any one particular metric.
Other than we're driving we continue to drive more EBITDA more free cash flow more earnings.
Okay, great. Thank you for that and then just.
On the schedule I guess, just definitional, how do you arrive at sort of when that ran as expected is that based on construction and permitting expectations or is that based on our sort of contractual lease contractual date.
Set up well.
Our Christmas typically a formula and the leasing there is also a drop dead date. So they have to start paying rent after a certain period of time after that and open and have the delay being open whether it's their fault or falter.
Didn't happen they end up paying rent anyway. So again, it's a mixture of what you asked.
But again I mean look our partner yes.
Yes, Chris our primary goal there is really taking care of our customers as much as we possibly can so.
We obviously want to get the rent commencement date as soon as possible, but we want we want a successful.
Customer and happy customers, so, it's a balance and we drive it but.
Clearly right now, it's working pretty well and as John mentioned in his remarks, Chris.
Chris. So we are actually ahead of schedule in terms of our average weighted opening date. So the team has been doing a fantastic job in getting people over.
Yeah. So just so heath just on that let me just to understand so when you say ahead of the average expected opening date.
Is that based again on sort of like your expectations based on construction permitting and all of that or is it based on the drop dead date, because I'm just trying to see how much sort of think about how much.
Excess performance is sort of built into sort of the SMA scheduled generally on the opening day.
Generally on the opening day Chris.
Okay.
Okay.
Go ahead go ahead go ahead, sorry, sorry, Chris.
No no go ahead, if <unk> got more.
Yes, I was just saying that all of this really comes down to is what we are internally modeling and he's he's basically saying, we're beating the expectation of the opening dates in our model. So that's a positive thing.
Yes.
The numbers dates that we focus on twice a month in our meetings that is what we determine the opening date and Thats why our team. We've got a great team will do whatever it takes we will source whatever they need.
To make it happen.
That's our job and that's why we've got so much focus on it.
Okay. Thank you guys appreciate it thanks.
Thank you. Our next question comes from the line of Anthony Powell from Barclays. Your question. Please.
Hi, good morning.
Question on Kohl's, which looks like a top 20 tenant for you I think was seven stores looks.
Looks like they may be acquired by two mall owners I'm curious, what you think about that as potential issue if the TCE removal stores.
Stores out or otherwise.
Tough negotiators with rent increases overtime.
Well, let's just start with saying, we don't know anything that anybody else doesn't know so.
Coles is a great customer and we certainly wouldn't see any problems with that.
It's not it's not a huge tenant.
Tenant for us, but it's an important customer.
I think if something happens there.
That's great. We always we always look to work with whoever's.
Running the business, but.
We will see what happens.
Got it thanks, and maybe just one more on transactions and it seems like this year. You proceed sticking to match fund buys.
So dispositions, but I know after you close the deal and the hope was that capital go.
Go down it would be west requires I'm just curious what your view is on portfolio deals.
Maybe just being a bit more aggressive at some point and building out the portfolio overtime.
Yes, I mean look right now as you know Anthony.
The market is competitive.
And there is still a great deal of capital chasing.
High quality open air retail and frankly, that's a limited group Ltd.
To find so as I said, that's why we are very excited about the two acquisitions that we had and we won't we won't have much trouble.
Match funding that at attractive spreads to capital.
But in terms of portfolios versus individual assets.
Still at this point haven't seen any material difference there.
Anytime there is a high quality retail deal that is.
On the market or even if it's not on the market.
There's just.
There's more there's more capital than there is product I guess, that's putting it pretty simply.
And that continues to drive the cap rates that we're seeing which continue to be.
High fours to mid Fives, I mean, that's generally the market so I.
I know people think it is going to change in interest rates are volatile, but most of the stuff that we're doing and that we're interested in buying <unk> even product.
Would sell would be all cash buyers. So it's more of an unlevered IRR play right now.
Got it.
Maybe one more what do you think supply starts to become I guess, not an issue, but a bit more.
Something to watch out for and I know most of the centers still have bit more accuracy. The buildup. So that can maybe prevent it but I'm just curious with the strong fundamentals you have and others. It seems to me that at some point.
We're just not building so I'm curious what you are long long term outlook for suppliers.
Yes, I mean I think.
First of all it's not quite.
Quite difficult.
To build this product because you are talking about multi tenant retail that's much more complex than it is to say put up an industrial box for example.
So.
And generally in retail people don't build the stuff that we own speculatively theres a lot of pre leasing that goes into it.
There is.
Finding the right land. So I just think it's more difficult to do than people think.
And from a from a return perspective.
You really got to underwrite the risk associated with ground up development. So.
For the near term it continues to be moderated.
Not a lot of new construction and the high end.
Arena that we own and then when you look at the geography of the real estate and the fact that our real estate is so strong.
Again, it's just hard to find properties that you could build on without just spending way too much money right. So I feels like a pretty good balance right now for the next several years tough cost environment.
Sure. Thank you. Thank you thank.
Thank you.
Thank you. Our next question comes from the line of West Galloway from Baird. Your question. Please.
Hey, guys.
Comment that supply is tightening and it sounds like demand is very good at the moment when does this dynamic translate into a big acceleration in rent growth.
Well I think we just add one this quarter.
So.
16% blended cash rent spread that's what I meant what I said I think that's pretty darn good.
And then 12% spreads on non option renewals.
It is also very strong less so.
Boy.
I mean, where does it go from here hard to say and again, we don't get caught up in any one quarter too much but certainly.
<unk>.
Certainly the environment still feels very good and I think we can continue to move the needle.
And again like I said, Wes when you look at the total occupancy cost for these retailers.
Our our open air environment is quite quite cost effective so that helps us as well so.
Feels like it feels like a pretty good place.
Yes, I guess, what I'm trying to get at it seems like the market is still absorbing supply and youre still getting the Lisa So I'll sneak in maybe more like a hockey stick growth like growth that we haven't seen since maybe the early two thousands you think that dynamic is in play.
Yes, I mean, if we continue with the volume of leasing that we're doing then that dynamic will come into play.
At least when we leased 1 million square feet this quarter.
Q2 is stacking up pretty nicely.
Can continue to push those kind of lease.
That kind of lease momentum then yes, you start to get to that point, where we talked about youre highly highly leased and the marginal lease is going to be at a very good attractive rates, but also as we pointed out.
We are able now to leasing spaces that were kind of persistently vacant.
<unk> because of physical issues at a particular property like an elbow space or something that we're now able to lease those spaces. So that drives that incremental cash flow that we're so.
Focused on.
And so I think it's both of those things.
It sounds like there's.
Kind of a new high watermark for occupancy then I guess when we look at the individual markets that you're in does any one standout as <unk> earlier too that hockey stick potential moment.
When we look at the deals that for example in this quarter when we look at the spread of deals that we did in the quarter. It was very well spread out throughout the country.
Really each region that we're in produced.
Good results. So Fortunately again, because we have this really strong portfolio.
Feels like each each each segments performing quite well, so don't particularly see one beating the other right now.
Got it thanks for taking the questions. Thank you.
Thank you. Our next question comes from the line of Linda <unk> from Jefferies. Your question. Please.
Hi, good morning.
Purchasing adjacencies to your existing properties like you did with your Dallas Center do you track how many of these opportunities potentially exist in your portfolio and then what's the best way to think about the scalar margin you achieved when you buy these adjacencies.
Yes, I mean, we definitely havent have kind of an inventory of.
Of.
Of deals that we're interested in.
And we've done it we've done that a couple of times in the last six months.
We did this deal in.
Which was a very unique because this was actually.
Essentially attached to the balance of the center.
We essentially didn't own the sprouts box or the total wine box and now we do and so what happened there as you took a center that was non grocery anchored and not only did you essentially bring in one vis vis sprouts, but you brought in too because the total wine, which.
<unk> line will do $25 million to $30 million.
So the Halo effect, we referred to Linda as a significant cap rate compression I mean, it could be 100 basis points. It could be 7500. So that's how we track that and we look at that.
From a terminal value perspective, as well terminal IRR values.
But yes, and then we did for example, we did another one we're here in Indianapolis, We acquired two shop pad buildings out front that we didn't own when we acquired the center and now we own them and it gives us much more leasing leverage across the whole portfolio right. You don't have a built in competitor. So any place that we think that we could do.
That we would absolutely look to do it and it's just a it's a better it's generally going to be a better risk adjusted return on capital because we already know everything there is to know about the particular property right. So.
Love to do it.
And we will continue to where the opportunity presents itself.
Thanks for that and then back to the earlier exchange you had with Alex when you are opening your peers discussed occupancy costs changing since ecommerce has a halo effect of the physical store and it's helped helping retention rates.
How do you think landlords are trying to better understand the real sales productivity of a physical store the omni channel environment. So landlords can better capture the generated value.
Well, there's two things there one is in the case that.
If you can receive percentage rent you're extremely focused on it.
And two is just to understand the performance of the retailer as it relates to our ability to continue to price the space appropriately. So it is a big deal. It's hard it's hard to get to the bottom of right now I think over time, it'll become more and more natural.
I think it's clearly a big part of a retailer's success today is their ability to tap into the to the omnichannel that they all have tapped into but they also need us for that they need us to be.
Providing the right real estate where that works.
It's attractive enough for people to utilize the store and that distribution format and we're fortunate that we have that right.
I think I think stay tuned because I think it becomes more and more part of what we're doing but right. Now we're just happy that the retailers are performing so well and they are driving more and more traffic.
Great. Thank you.
As a reminder, ladies and gentlemen, if you have any questions. At this time. Please press Star then one our next question comes from the line of Craig Schmidt from Bank of America. Your question. Please.
Yeah. Thanks.
With April pretty much in the books and Ics SCE happening next month I, just wonder if the above average leasing activity will continue into the second quarter. I mean, how will you do relative to that $1 1 million you did.
Yes.
I mean, I am not exactly sure how we're going to do yet since it hasnt happened, but I think we're off to a good start Craig for sure.
ICSC is a nice there's a nice opportunity to get in front of a lot of people in a concentrated period of time, but that's just the cherry on the top I mean, we're always driving these relationships in these conversations and it feels it feels like the we use the word tailwind for <unk>.
We're very busy we're very active and there is no reason to believe that we can't keep pushing.
That leasing momentum Tom do you want to add anything I mean, Craig we track every day.
Our salesforce format exactly how many deals or through real estate Committee.
And more importantly, and lease draft. So I will tell you we feel very very good about that number in comparison to where we are today. So we're expecting we're expecting a very strong finish to the second quarter.
Great. Thanks, and then I just I see recently you lease to pop shelf.
Im wondering is this more attractive alternative to dollar general.
For your centers merchandise mix, it's more suburban focused.
I mean, it really depends on the particular property Craig.
We think top shelf is a pretty cool concept.
It's.
It's a pretty modern is clean it does a lot in a small space.
We don't particularly have a lot of dollar General's just straight up dollar generals.
I'm not I mean, I know, we have some dollar trees, but if we have I think maybe no dollar general's as I think about it on the top of my head. So we would be our portfolio would be much more.
And tuned to a top shelf deal, but yes, I mean, it's just another example, we said all of these other names you know and there is top shelf doing deals all over the place and.
Great credit so we feel like we have this really really good balance right now and we think that the.
The merger put us in a position to be in the exact right space is the exact right time across the genre of products that we own.
It's a significant variance to dollar tree dollar general stores they are impressive.
I encourage you to take a look at them.
Well.
My understanding is the demographic because younger wealthier and more suburban which would seem like I mean, I think the reason you don't have any doubt generals.
It's a lower customer it's more rural.
But just curious if this is an opportunity for you.
I mean, I guess 9000 square feet.
I think their space.
An opportunity for you.
Fill up some of that vacancy.
It is absolutely an opportunity and we will absolutely lean into it.
Okay. Thanks, a lot.
Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to John Kite for any further remarks.
Well I just want to take the opportunity to thank everybody for joining us today and again I want to thank our <unk> team and family who produced Fabulous results and we will continue to push and we look forward to talking to everyone. Soon thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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